##### 



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2004
 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from          to
 Commission file number 333-40067 PLIANT CORPORATION  Utah
    
    87-0496065(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 1475 Woodfield Road, Suite 700
Schaumburg, IL 60173
(847) 969-3300
(Address of principal executive offices and telephone number) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date. On November 4, 2004, there
were 571,711 outstanding shares of the registrants Common Stock.




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##### 



PLIANT CORPORATION AND SUBSIDIARIES TABLE OF CONTENTS PART I. FINANCIAL INFORMATION
    
    
    3ITEM 1. FINANCIAL STATEMENTS
    
    
    3CONDENSED CONSOLIDATED BALANCE SHEETS
    
    
    3CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
    
    
    4CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    5CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
    
    
    6NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
    
    
    7ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    20ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    29ITEM 4. CONTROLS AND PROCEDURES
    
    
    29PART II. OTHER INFORMATION
    
    
    30ITEM 1. LEGAL PROCEEDINGS
    
    
    30ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    30ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    30ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    30ITEM 5. OTHER INFORMATION
    
    
    30ITEM 6. EXHIBITS
    
    
    30SIGNATURES
    
    
    30
  2




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##### 



PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS PLIANT CORPORATION AND SUBSIDIARIES 
 
 September 30, 2004
    
    December 31, 2003ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    5,787
    
    
    $
    3,308Receivables, net of allowances of $4,602 and $4,736 respectively
    
    
    129,295
    
    
    
    107,742Inventories (Note 2)
    
    
    84,640
    
    
    
    84,125Prepaid expenses and other
    
    
    5,426
    
    
    
    3,809Income taxes receivable, net
    
    
    
    
    
    
    1,436Deferred income taxes
    
    
    9,008
    
    
    
    9,417Discontinued current assets
    
    
    
    
    
    
    15,294Total current assets
    
    
    234,156
    
    
    
    225,131PLANT AND EQUIPMENT, net
    
    
    296,529
    
    
    
    315,420GOODWILL
    
    
    182,218
    
    
    
    182,162INTANGIBLE ASSETS, net
    
    
    17,464
    
    
    
    19,252OTHER ASSETS
    
    
    37,903
    
    
    
    40,172DISCONTINUED NONCURRENT ASSETS
    
    
    
    
    
    
    4,649TOTAL ASSETS
    
    $
    768,270
    
    
    $
    786,786LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIES:Trade accounts payable
    
    $
    107,840
    
    
    $
    89,800Accrued liabilities:Interest payable
    
    
    17,510
    
    
    
    19,775Customer rebates
    
    
    7,267
    
    
    
    7,924Other
    
    
    39,517
    
    
    
    35,947Current portion of long-term debt
    
    
    1,443
    
    
    
    1,033Total current liabilities
    
    
    173,577
    
    
    
    154,479LONG-TERM DEBT, net of current portion
    
    
    804,640
    
    
    
    782,624OTHER LIABILITIES
    
    
    24,281
    
    
    
    27,493DEFERRED INCOME TAXES
    
    
    29,107
    
    
    
    27,792SHARES SUBJECT TO MANDATORY REDEMPTION (Note 11)
    
    
    220,621
    
    
    
    Total Liabilities
    
    
    1,252,226
    
    
    
    992,388MINORITY INTEREST
    
    
    55
    
    
    
    291REDEEMABLE PREFERRED STOCKSeries A  167,000 shares authorized, no par value, redemption
and liquidation value of $1,000 per share; 140,973 shares
outstanding at December 31, 2003
    
    
    
    
    
    
    188,223Series B
 720 shares authorized, no par value, 704 shares
outstanding at September 30, 2004
    
    
    114
    
    
    
    REDEEMABLE COMMON STOCK  no par value; 60,000 shares authorized;
10,873 shares outstanding as of September 30, 2004 and 29,073 shares
outstanding as of December 31, 2003, net of related stockholders
notes receivable of $1,827 at September 30, 2004 and $4,258 at
December 31, 2003
    
    
    6,645
    
    
    
    13,008STOCKHOLDERS DEFICIT:Common stock
 no par value; 10,000,000 shares authorized,
542,638 shares outstanding at September 30, 2004 and December
31, 2003
    
    
    103,376
    
    
    
    103,376Warrants to purchase common stock
    
    
    39,133
    
    
    
    39,133Accumulated deficit
    
    
    (621,336
    )
    
    
    (537,052
    )Stockholders notes receivable
    
    
    (660
    )
    
    
    (660
    )Accumulated other comprehensive loss
    
    
    (11,283
    )
    
    
    (11,921
    )Total stockholders deficit
    
    
    (490,770
    )
    
    
    (407,124
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    768,270
    
    
    $
    786,786
 See notes to condensed consolidated financial statements. 3




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##### 



PLIANT CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (IN THOUSANDS) (UNAUDITED) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003NET SALES
    
    $
    243,160
    
    
    $
    227,587
    
    
    $
    715,144
    
    
    $
    677,141COST OF SALES
    
    
    206,941
    
    
    
    189,668
    
    
    
    603,265
    
    
    
    562,073Gross profit
    
    
    36,219
    
    
    
    37,919
    
    
    
    111,879
    
    
    
    115,068OPERATING EXPENSES:Sales, General and Administrative
    
    
    19,345
    
    
    
    22,343
    
    
    
    59,729
    
    
    
    62,528Research and Development
    
    
    1,467
    
    
    
    1,681
    
    
    
    4,731
    
    
    
    4,438Restructuring and Other Costs (Note 3)
    
    
    2,166
    
    
    
    3,323
    
    
    
    2,166
    
    
    
    9,325Total operating expenses
    
    
    22,978
    
    
    
    27,347
    
    
    
    66,626
    
    
    
    76,291OPERATING INCOME
    
    
    13,241
    
    
    
    10,572
    
    
    
    45,253
    
    
    
    38,777INTEREST EXPENSE-Current and Long-term debt (Note 5, 9)
    
    
    (25,098
    )
    
    
    (23,507
    )
    
    
    (84,261
    )
    
    
    (70,734
    )INTEREST EXPENSE-Dividends and accretion on Redeemable
Preferred Stock (note 11)
    
    
    (9,003
    )
    
    
    
    
    
    
    (26,036
    )
    
    
    OTHER INCOME(EXPENSE)  Net
    
    
    (15
    )
    
    
    (125
    )
    
    
    (66
    )
    
    
    1,559LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    

    
    (20,875
    )
    
    
    (13,060
    )
    
    
    (65,110
    )
    
    
    (30,398
    )INCOME TAX EXPENSE (BENEFIT)
    
    
    933
    
    
    
    1,637
    
    
    
    3,293
    
    
    
    6,503LOSS FROM CONTINUING OPERATIONS
    
    
    (21,808
    )
    
    
    (14,697
    )
    
    
    (68,403
    )
    
    
    (36,901
    )DISCONTINUED OPERATIONSLoss from discontinued operations
    
    
    (1,862
    )
    
    
    (5,404
    )
    
    
    (7,395
    )
    
    
    (9,444
    )Loss on sale of discontinued operations
    
    
    (8,486
    )
    
    
    
    
    
    
    (8,486
    )
    
    
    LOSS ON DISCONTINUED OPERATIONS
    
    
    (10,348
    )
    
    
    (5,404
    )
    
    
    (15,881
    )
    
    
    (9,444
    )NET LOSS
    
    $
    (32,156
    )
    
    $
    (20,101
    )
    
    $
    (84,284
    )
    
    $
    (46,345
    )
 See notes to condensed consolidated financial statements. 4




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##### 



PLIANT CORPORATION AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (IN THOUSANDS) (UNAUDITED) 2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (84,284
    )
    
    $
    (46,345
    )Adjustments to reconcile net income (loss) to net cash (used in)/ provided by operating activities:Depreciation and amortization
    
    
    31,090
    
    
    
    35,254Amortization of deferred financing costs and accretion of debt discount
    
    
    27,320
    
    
    
    8,658Deferred dividends and accretion on preferred shares
    
    
    26,036
    
    
    
    Deferred income taxes
    
    
    1,486
    
    
    
    (1,067
    )Provision for losses on accounts receivable
    
    
    286
    
    
    
    416Non-cash plant closing costs
    
    
    1,960
    
    
    
    3,260Loss from discontinued operations
    
    
    11,886
    
    
    
    9,444Write-down of impaired assets from discontinued operations
    
    
    3,995
    
    
    
    Gain or loss on disposal of assets
    
    
    (131
    )
    
    
    4,749Changes in assets and liabilities:Receivables
    
    
    (21,792
    )
    
    
    (9,669
    )Inventories
    
    
    (365
    )
    
    
    (1,635
    )Prepaid expenses and other
    
    
    (1,865
    )
    
    
    (449
    )Income taxes payable/receivable
    
    
    2,565
    
    
    
    2,291Other assets
    
    
    2,739
    
    
    
    (282
    )Trade accounts payable
    
    
    20,088
    
    
    
    (17,135
    )Accrued liabilities
    
    
    2,746
    
    
    
    3,630Other liabilities
    
    
    (3,268
    )
    
    
    (598
    )Other
    
    
    (236
    )
    
    
    183Net cash (used in) / provided by operating activities from continuing operations
    
    
    20,256
    
    
    
    (9,295
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of Solutions assets
    
    
    6,450
    
    
    
    Capital expenditures for plant and equipment
    
    
    (14,974
    )
    
    
    (14,409
    )Net cash used in investing activities
    
    
    (8,524
    )
    
    
    (14,409
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of preferred stock
    
    
    
    
    
    
    9,532Net proceeds from issuance of senior secured discount notes
    
    
    225,299
    
    
    
    Proceeds from issuance of senior subordinated debt
    
    
    
    
    
    
    250,000Payment of financing fees
    
    
    (9,354
    )
    
    
    (10,472
    )Repayments/Payments of term debt and revolver
    
    
    (219,575
    )
    
    
    (252,500
    )Repayment of capital leases and other, net
    
    
    34
    
    
    
    (1,215
    )Proceeds
from revolving debt - net
    
    
    
    
    
    
    51,465Cash used in discontinued operations
    
    
    (5,838
    )
    
    
    (16,516
    )Net cash provided by/(used in) financing activities
    
    
    (9,434
    )
    
    
    30,294EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
    
    
    181
    
    
    
    1,778NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    2,479
    
    
    
    8,368CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
    
    
    3,308
    
    
    
    1,635CASH AND CASH EQUIVALENTS, END OF THE PERIOD
    
    $
    5,787
    
    
    $
    10,003SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid (received) during the period for:Interest
    
    $
    57,504
    
    
    $
    49,089Income taxes
    
    
    1,571
    
    
    
    5,123Other non-cash disclosure:Preferred Stock dividends accrued but not paid
    
    $
    24,579
    
    
    $
    19,635
 See notes to condensed consolidated financial statements. 5




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##### 



PLIANT CORPORATION AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (IN THOUSANDS) (UNAUDITED) AccumulatedCommon Stock
    
    Warrants
    
    
    
    
    
    Stockholders
    
    OtherTo Purchase
    
    Accumulated
    
    Notes
    
    ComprehensiveShares
    
    Amount
    
    Common Stock
    
    Deficit
    
    Receivable
    
    Loss
    
    TotalBALANCE, DECEMBER
31, 2003
    
    
    543
    
    
    $
    103,376
    
    
    $
    39,133
    
    
    $
    (537,052
    )
    
    $
    (660
    )
    
    $
    (11,921
    )
    
    $
    (407,124
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (84,284
    )
    
    
    
    
    
    
    
    
    
    
    (84,284
    )Accumulated fair
value change in
interest rate
derivatives charged
to interest
expense, net of
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,102
    
    
    
    2,102Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,464
    )
    
    
    (1,464
    )BALANCE, SEPTEMBER
30, 2004
    
    
    543
    
    
    $
    103,376
    
    
    $
    39,133
    
    
    $
    (621,336
    )
    
    $
    (660
    )
    
    $
    (11,283
    )
    
    $
    (490,770
    )
 See notes to condensed consolidated financial statements. 6




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##### 



PLIANT CORPORATION AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  1.
    
    BASIS OF PRESENTATIONThe accompanying condensed consolidated financial statements have been
prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and pursuant to the rules and regulations
of the Securities and Exchange Commission. The information reflects all
normal recurring adjustments that, in the opinion of management, are
necessary for a fair presentation of the financial position, results of
operations and cash flows of Pliant Corporation and its subsidiaries
(Pliant, the Company or we) as of the dates and for the periods
presented. Results of operations for the periods ended September 30, 2004
are not necessarily indicative of results of operations to be expected for
the full fiscal year.Certain information in footnote disclosures normally included in financial
statements presented in accordance with U.S. generally accepted accounting
principles has been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. These statements
should be read in conjunction with the Companys Annual Report on Form 10-K
for the year ended December 31, 2003 and the Companys Registration
Statement on Form S-4, as amended (File No 333-114608) filed on April 20,
2004. Certain reclassifications have been made to the condensed consolidated
financial statements for the periods ended September 30, 2003 for
comparative purposes.2.
    
    INVENTORIESInventories are valued at the lower of cost (using the first-in, first-out
method) or market value. Inventories as of September 30, 2004 and December
31, 2003 consisted of the following (in thousands): September 30, 2004
    
    December 31, 2003Finished goods
    
    $
    46,334
    
    
    $
    49,880Raw materials
    
    
    28,347
    
    
    
    27,066Work-in-process
    
    
    9,959
    
    
    
    7,179Total
    
    $
    84,640
    
    
    $
    84,125
 3. RESTRUCTURING AND OTHER COSTS  Restructuring and other costs include plant closing costs (including costs
related to relocation of manufacturing equipment), office closing costs and
other costs related to workforce reductions.  The following table summarizes restructuring and other costs for the three
and nine months ended September 30 (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Plant closing costs:Severance
    
    $
    133
    
    
    $
    55
    
    
    $
    133
    
    
    $
    114Relocation of production lines
    
    
    
    
    
    
    431
    
    
    
    
    
    
    
    1,452Other plant closure costs
    
    
    139
    
    
    
    464
    
    
    
    139
    
    
    
    3,472272
    
    
    
    950
    
    
    
    272
    
    
    
    5,038Office closing and workforce reduction costs:Severance
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    586Leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,357
    
    
    
    29
    
    
    
    
    
    
    
    1,943Subtotal Plant & Office closing
    
    
    272
    
    
    
    979
    
    
    
    272
    
    
    
    6,981Long term asset impairments related to plant closing
    
    
    1,894
    
    
    
    2,344
    
    
    
    1,894
    
    
    
    2,344Total Restructuring and other costs
    
    $
    2,166
    
    
    $
    3,323
    
    
    $
    2,166
    
    
    $
    9,325
 7




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##### 



2003 Accruals: Plant Closing CostsDuring the first half of 2003, we continued to incur
costs related to: the closure of our facilities in Merced, California and
Shelbyville, Indiana; partial closure of our facility in Toronto, Canada; and
the relocation of certain lines from our Merced plant and Fort Edward, New York
plant to other facilities. Office Closing and
 Workforce Reduction Costs In connection with a
restructuring undertaken in 2001, we vacated and subleased two facilities.
During the first quarter of 2003, the sub-lessees of these facilities defaulted
on the subleases. During the first half of 2003, we accrued the present value
of the future lease payments on these facilities. The following table summarizes the roll-forward of the reserve from
December 31, 2003 to September 30, 2004: Accruals for the nine months ended September 30, 200412/31/2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    9/30/04Relocated
    
    
    
    
    
    Plant# Employees
    
    Accrual
    
    Additional
    
    
    
    
    
    Production
    
    
    
    
    
    Closure
    
    
    
    Payments /
    
    # Employees
    
    AccrualTerminated
    
    Balance
    
    Employees
    
    Severance
    
    Lines
    
    Leases
    
    Costs
    
    Total
    
    Charges
    
    Terminated
    
    BalancePlant Closing Costs:Merced
    
    
    54
    
    
    $
    1,235
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (226
    )
    
    
    54
    
    
    $
    1,009Shelbyville
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    Toronto
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    Pliant Solutions
    
    
    148
    
    
    
    541
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (541
    )
    
    
    165
    
    
    
    Mexico
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Leases
    
    
    
    
    
    
    2,004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (267
    )
    
    
    
    
    
    
    1,737Rhode Island
    
    
    
    
    
    
    
    
    
    
    49
    
    
    
    133
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    272
    
    
    
    (206
    )
    
    
    49
    
    
    
    66231
    
    
    $
    3,780
    
    
    
    49
    
    
    $
    133
    
    
    
    
    
    
    
    
    
    
    $
    139
    
    
    $
    272
    
    
    $
    (1,240
    )
    
    
    280
    
    
    $
    2,812Office Closing and
Workforce Reduction
Costs:Leases
    
    
    
    
    
    $
    1,129
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    (425
    )
    
    
    
    
    
    $
    704Severance
    
    
    114
    
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (153
    )
    
    
    114
    
    
    
    84Singapore
    
    
    
    
    
    
    152
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )
    
    
    
    
    
    
    129114
    
    
    $
    1,518
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    (601
    )
    
    
    114
    
    
    $
    917Total Plant &
Office closing
    
    
    345
    
    
    $
    5,298
    
    
    
    49
    
    
    
    133
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    $
    272
    
    
    $
    (1,841
    )
    
    
    394
    
    
    $
    3,729Fixed Asset
Impairments related
to Plant Closing
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,894
    
    
    
    
    
    
    
    
    
    
    $
    TOTAL
    
    
    345
    
    
    $
    5,298
    
    
    
    49
    
    
    $
    133
    
    
    
    
    
    
    
    
    
    
    $
    139
    
    
    $
    2,166
    
    
    $
    (1,841
    )
    
    
    394
    
    
    $
    3,729
 2004 accruals Plant Closing Costs and Workforce Reduction Costs-During the third
quarter of 2004, we closed our Harrisville, Rhode Island facility and moved its
production to more modern and efficient facilities. It is anticipated that this
restructuring plan will result in a workforce reduction of 49 positions, 41 of
which were effective by November 12, 2004. All restructuring plan costs are
attributable to our Pliant US segment and are anticipated to total $3.2
million, consisting primarily of fixed asset impairment charges of $1.9
million, equipment relocation costs of $0.4 million, severance and other
personnel related costs of $ 0.3 million and other costs of $0.3 million.  4.
    
    DISCONTINUED OPERATIONS On September 30, 2004, we sold substantially all of the assets of our
wholly-owned subsidiary, Pliant Solutions Corporation. Pliant Solutions,
previously reported as a separate operating segment, manufactured decorative
and surface coverings through the conversion of various films into consumer
packaged goods. These products were sold through retailers to consumers for a
wide range of applications, including shelf-lining, decorative accents, glass
coverings, surface repair, resurfacing and arts and crafts projects. In accordance with SFAS No. 144, Accounting for the Impairment of
Long-Lived Assets, Pliant Solutions is being accounted for as a discontinued
operation and, accordingly, its assets are segregated from continuing
operations in the accompanying condensed consolidated balance sheet, and its
operating results are segmented and reported as discontinued operations in the
accompanying condensed consolidated statement of operations. Net sales for the
three month periods ended September 30, 2004 and 2003 were $7.7 million and
$11.1 million, respectively. Net sales for the nine months ended September 30,
2004 and 2003 were $22.6 million and $28.7 million, respectively. No tax
benefits were recorded on the losses from discontinued operations or the loss
on sale of discontinued operations as realization of these tax benefits is not
certain. 8




---



##### 



The assets of Pliant Solutions were sold for $10 million, of which $6.5
million was paid in cash at closing, and $3.5 million will be paid in equal
monthly installments over a 3-year period. We recognized a loss on the sale of
$8.5 million.  5.
    
    INTEREST EXPENSE  Current and Long-term debt Interest expense  current and long-term debt in the statement of
operations for the three and nine months ended September 30, 2004 and 2003 is
as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Interest expense accrued, net
    
    $
    23,973
    
    
    $
    21,267
    
    
    $
    70,789
    
    
    $
    59,462Recurring amortization of financing fees
    
    
    1,125
    
    
    
    1,266
    
    
    
    3,354
    
    
    
    3,966Write-off of previously capitalized
financing fees and interest rate
derivatives costs(a)
    
    
    
    
    
    
    974
    
    
    
    10,118
    
    
    
    7,306TOTAL
    
    $
    25,098
    
    
    $
    23,507
    
    
    $
    84,261
    
    
    $
    70,734Cash interest payments
    
    $
    14,334
    
    
    $
    12,460
    
    
    $
    57,504
    
    
    $
    49,089
   (a) This write-off resulted from the repayment of our previous credit
facilities in February 2004, from the net proceeds from the issuance of the
senior secured discount notes and borrowings under our revolving credit
facility. In May 2003, a portion of the financing fees capitalized in
connection with our then existing credit facilities was written off in
connection with the amendment to those agreements.  6.
    
    EQUITY Stock Option Plans During the three and nine months ended September 30, 2004, options to
purchase 948 and 9,763 shares, respectively, of our common stock were cancelled
in connection with employee terminations. We apply Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for stock-based compensation
plans as they relate to employees and directors. We did not have compensation
expense related to stock options for the three and nine month periods ended
September 30, 2004 and September 30, 2003. Had the compensation cost for all
the outstanding options been determined in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, our net income (loss) for the three
and nine month periods ended September 30, 2004 and 2003 would have been the
following pro forma amounts (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003As reported
    
    $
    (32,156
    )
    
    $
    (20,101
    )
    
    $
    (84,284
    )
    
    $
    (46,345
    )Pro forma stock compensation expense
    
    
    (200
    )
    
    
    (178
    )
    
    
    (600
    )
    
    
    (534
    )Pro forma
    
    $
    (32,356
    )
    
    $
    (20,279
    )
    
    $
    (84,884
    )
    
    $
    (46,879
    )
 9




---



##### 



Restricted Stock On September 24, 2004, we adopted a 2004 Restricted Stock Incentive Plan,
pursuant to which we sold to our President and Chief Executive Officer and
selected additional officers of the Company, 704 shares of a total of 720
shares of a newly-created, non-voting Series B Redeemable Preferred Stock for a
cash purchase price of $162 per share. These shares were issued in private
transactions with officers of the Company and therefore were exempt from the
registration requirements of the Securities Act of 1933. The Series B
Preferred Stock will be automatically converted into common equity of the
Company upon the consummation of an underwritten public offering registered
under the Securities Act of shares of capital stock of the Company resulting in
aggregate proceeds (net of underwriters discounts and commissions) to the
Company of not less than $100 million.  7.
    
    INCOME TAXES For the three months ended September 30, 2004, income tax expense was $0.9
million on pretax losses from continuing operations of $20.9 million
compared to income tax expense of $1.6 million on pretax loss from continuing
operations of $13.1 million for the three months ended September 30, 2003. For
the nine months ended September 30, 2004, income tax expense was $3.3 million
on pretax loss from continuing operations of $65.1 million compared to income
tax expense of $6.5 million on pretax loss from continuing operations of $30.4
million for the nine months ended September 30, 2003. Income tax benefits
related to net operating losses in the United States are offset by a valuation
allowance as the realization of these tax benefits is not certain. Therefore,
the income tax expense in the statements of operations primarily reflects
foreign income taxes. No income taxes are included in the loss from
discontinued operations of $15.9 million for the nine months ended September
30, 2004.  8.
    
    COMPREHENSIVE LOSS Other comprehensive loss for the three months ended September 30, 2004 and
2003 was ($32.2) million and ($19.0) million, respectively. Other comprehensive
loss for the nine months ended September 30, 2004 and 2003 was ($83.6) million
and ($40.6) million, respectively. The components of other comprehensive loss
are net income (loss), the change in cumulative unrealized losses on
derivatives recorded in accordance with Statement of Financial Accounting
Standards No. 133 and foreign currency translation.  9.
    
    REVOLVING CREDIT FACILITY AND ISSUANCE OF SENIOR SECURED DISCOUNT NOTES
DUE 2009 Long-term debt as of September 30, 2004 and December 31, 2003 consists of
the following (in thousands): September 30,
    
    December 31,2004
    
    2003Credit Facilities:Revolving credit facility
    
    $
    
    
    
    $
    Tranche A and B term loans under old credit facilities
    
    
    
    
    
    
    219,575Senior secured discount notes at 11 1/8%, net of unamortized issue discount
    
    
    241,129
    
    
    
    Senior secured notes, interest at 11 1/8%
    
    
    250,000
    
    
    
    250,000Senior subordinated notes, interest at 13.0% (net of unamortized issue
discount, premium and discount related to warrants)
    
    
    313,002
    
    
    
    312,402Obligations under capital leases
    
    
    706
    
    
    
    856Insurance financing
    
    
    1,246
    
    
    
    824Total
    
    
    806,083
    
    
    
    783,657Less current portion
    
    
    (1,443
    )
    
    
    (1,033
    )Long-term portion
    
    $
    804,640
    
    
    $
    782,624
 On
February 17, 2004 we repaid the balance outstanding on the
revolving credit
facility and term loans that existed on that date from the proceeds of the issuance of
Senior Secured Discount Notes (discussed below) and the revolving credit
facility (discussed below). Revolving Credit Facility On February 17, 2004, we entered into a revolving credit facility
providing up to $100 million (subject to the borrowing base and other
limitations described below). The revolving credit facility includes a $15
million letter of credit sub-facility, with letters of credit reducing
availability under the revolving credit facility. The revolving credit facility is secured by a first priority security
interest in substantially all our domestic inventory, receivables and 10




---



##### 



deposit accounts, 100% of the capital stock of, or other equity interests
in, our existing and future domestic subsidiaries and foreign subsidiaries that
are note guarantors, 65% of the capital stock of, or other equity interests in,
our existing and future first-tier foreign subsidiaries, investment property
and certain other assets of the Company and the note guarantors (the Second -
Priority Collateral) and a second-priority security interest in our real
property, fixtures, equipment, intellectual property and other assets (First -
Priority Collateral). The revolving credit facility matures on February 17, 2009. The interest
rates are at LIBOR plus 2.5% to 2.75% or ABR plus 1.5% to 1.75%. The average
rate on borrowings outstanding during the third quarter of 2004 was 6.2%. The
commitment fee for the unused portion of the revolving credit facility is 0.50%
per annum. Borrowings under the revolving credit facility are limited as follows: if
our fixed charge coverage ratio (as defined in the revolving credit facility), as
reported at the end of a quarter, is less than 1.1/1.0, our borrowings are
limited to 75% of the lesser of the total commitment under the facility and the
borrowing base. The borrowing base consists of the sum of eligible accounts
receivable and eligible inventory. As of September 30, 2004, our fixed
coverage ratio was 1.0/1.0, and our borrowing base was $101 million.
Accordingly, funds available for borrowings under the revolving credit facility
as of that date were $75 million. This amount was further reduced to $68.3
million, after taking into account $6.7 million of letters of credit
outstanding. Issuance of 11 1/8% Senior Secured Discount Notes due 2009 On February 17, 2004 we completed the sale of $306 million ($225.3 million
of proceeds) principal amount at maturity of 11 1/8% Senior Secured Discount
Notes due 2009. The proceeds of this offering and the borrowing under the new
revolving credit facility (discussed above) were used to repay and terminate
the revolving credit facility and term loans that existed at December 31, 2003. The Senior Secured Discount Notes are secured by a first priority security
interest in the First - Priority Collateral and a second priority security
interest in the Second - Priority Collateral. Unless we elect to pay cash interest as described below, and except under
certain limited circumstances, the notes will accrete from the date of issuance
at the rate of 11 1/8% until December 15, 2006, compounded semiannually on each
June 15 and December 15, commencing June 15, 2004, to an aggregate principal
amount of $1,000 per note ($306.0 million in the aggregate assuming no
redemption or other repayments). Commencing on December 15, 2006, interest on
the notes will accrue at the rate of 11 1/8% per annum and will be payable in
cash semiannually on June 15 and December 15, commencing on June 15, 2007. On any interest payment date prior to December 15, 2006, we may elect to
commence paying cash interest (from and after such interest payment date) in
which case (i) we will be obligated to pay cash interest on each subsequent
interest payment date, (ii) the notes will cease to accrete after such interest
payment date and (iii) the outstanding principal amount at the stated maturity
of each note will equal the accreted value of such note as of such interest
payment date. On or after June 15, 2007, we may redeem some or all of the notes at the
following redemption prices (expressed as a percentage of principal amount),
plus accrued and unpaid interest: 105.563% if redeemed prior to June 15, 2008;
102.781% if redeemed prior to June 15, 2009; and 100% if redeemed on or after
June 15, 2009. Prior to such date, we may not redeem the notes except as
described in the following paragraph. At any time prior to June 15, 2007, we may redeem up to 35% of the
accreted value of the notes with the net cash proceeds of certain equity
offerings by us at a redemption price equal to 111.125% of the accreted value
thereof plus accrued interest, so long as (i) at least 65% of the accreted
value of the notes remains outstanding after such redemption and (ii) any such
redemption by us is made within 120 days after such equity offering.  10.
    
    OPERATING SEGMENTS As a result of the sale of the Pliant Solutions business, formerly a
separate operating segment, the Company now has three operating segments:
Pliant U.S., Pliant Flexible Packaging and Pliant International. Segment
information for 2003 has been restated to reflect this change in operating
segments. Sales and transfers between our segments are eliminated in
consolidation. We evaluate the performance of our operating segments based
on net sales (excluding intercompany sales) and segment profit. The segment
profit reflects income before interest expense, income taxes, depreciation,
amortization, restructuring charges, discontinued operations and other non-cash charges and net
adjustments for certain unusual items. 11




---



##### 



Segment profit and segment assets as of and for the periods ended
September 30, 2004 and 2003 are presented in the following table (in
thousands). Certain reclassifications have been made to the prior year amounts
to be consistent with the 2004 presentation. PliantPliant
    
    Flexible
    
    Pliant
    
    Corporate /U.S.
    
    Packaging
    
    International
    
    Other
    
    TotalThree months ended September
30, 2004Net sales to customers
    
    $
    158,981
    
    
    $
    57,995
    
    
    $
    26,184
    
    
    $
    
    
    
    $
    243,160Intersegment sales
    
    
    5,129
    
    
    
    1,045
    
    
    
    3,217
    
    
    
    (9,391
    )
    
    
    Total net sales
    
    
    164,110
    
    
    
    59,040
    
    
    
    29,401
    
    
    
    (9,391
    )
    
    
    243,160Depreciation and amortization
    
    
    5,819
    
    
    
    1,963
    
    
    
    1,990
    
    
    
    89
    
    
    
    9,861Interest expense
    
    
    (12
    )
    
    
    11
    
    
    
    1,389
    
    
    
    32,713
    
    
    
    34,101Segment profit
    
    
    20,586
    
    
    
    7,406
    
    
    
    1,941
    
    
    
    (4,680
    )
    
    
    25,253Capital expenditures
    
    
    3,602
    
    
    
    253
    
    
    
    203
    
    
    
    5
    
    
    
    4,063Three months ended September
30, 2003Net sales to customers
    
    $
    143,520
    
    
    $
    57,529
    
    
    $
    26,538
    
    
    $
    
    
    
    $
    227,587Intersegment sales
    
    
    2,866
    
    
    
    973
    
    
    
    1,319
    
    
    
    (5,158
    )
    
    
    Total net sales
    
    
    146,386
    
    
    
    58,502
    
    
    
    27,857
    
    
    
    (5,158
    )
    
    
    227,587Depreciation and amortization
    
    
    4,837
    
    
    
    2,028
    
    
    
    1,796
    
    
    
    2,774
    
    
    
    11,435Interest expense
    
    
    13
    
    
    
    16
    
    
    
    634
    
    
    
    22,844
    
    
    
    23,507Segment profit
    
    
    22,012
    
    
    
    8,817
    
    
    
    1,002
    
    
    
    (6,245
    )
    
    
    25,586Capital expenditures
    
    
    955
    
    
    
    883
    
    
    
    1,355
    
    
    
    230
    
    
    
    3,423
 PliantPliant
    
    Flexible
    
    Pliant
    
    Corporate /U.S.
    
    Packaging
    
    International
    
    Other
    
    TotalNine months ended September 30,
2004Net sales to customers
    
    $
    462,895
    
    
    $
    172,708
    
    
    $
    79,541
    
    
    $
    
    
    
    $
    715,144Intersegment sales
    
    
    11,981
    
    
    
    2,325
    
    
    
    7,854
    
    
    
    (22,160
    )
    
    
    Total net sales
    
    
    474,876
    
    
    
    175,033
    
    
    
    87,395
    
    
    
    (22,160
    )
    
    
    715,144Depreciation and amortization
    
    
    18,959
    
    
    
    5,761
    
    
    
    5,838
    
    
    
    532
    
    
    
    31,090Interest expense
    
    
    (16
    )
    
    
    23
    
    
    
    3,629
    
    
    
    106,661
    
    
    
    110,297Segment profit
    
    
    65,108
    
    
    
    23, 377

    
    
    
    5, 142
    
    
    
    (15,184
    )
    
    
    78,443Segment total assets
    
    
    466,069
    
    
    
    136,176
    
    
    
    83,333
    
    
    
    82,692
    
    
    
    768,270Capital expenditures
    
    
    8,559
    
    
    
    726
    
    
    
    5,080
    
    
    
    609
    
    
    
    14,974Nine months ended September 30,
2003Net sales to customers
    
    $
    432,060
    
    
    $
    162,852
    
    
    $
    82,229
    
    
    $
    
    
    
    $
    677,141Intersegment sales
    
    
    9,105
    
    
    
    2,974
    
    
    
    8,674
    
    
    
    (20,753
    )
    
    
    Total net sales
    
    
    441,165
    
    
    
    165,826
    
    
    
    90,903
    
    
    
    (20,753
    )
    
    
    677,141Depreciation and amortization
    
    
    15,234
    
    
    
    6,015
    
    
    
    5,345
    
    
    
    8,660
    
    
    
    35,254Interest expense
    
    
    7
    
    
    
    48
    
    
    
    1,844
    
    
    
    68,835
    
    
    
    70,734Segment profit
    
    
    69,068
    
    
    
    23,727
    
    
    
    7,331
    
    
    
    (13,785
    )
    
    
    86,341Segment total assets
    
    
    497,562
    
    
    
    153,125
    
    
    
    104,333
    
    
    
    101,961
    
    
    
    856,981Capital expenditures
    
    
    4,487
    
    
    
    5,025
    
    
    
    3,873
    
    
    
    1,024
    
    
    
    14,409
 12




---



##### 



A reconciliation of the totals reported for the operating segments to the
totals reported in the consolidated financial statements as of and for the
three and nine months ended September 30, 2004 and 2003 is as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Profit or LossTotal segment profit
    
    $
    25,253
    
    
    $
    25,586
    
    
    $
    78,443
    
    
    $
    86,341Depreciation and amortization
    
    
    (9,861
    )
    
    
    (11,435
    )
    
    
    (31,090
    )
    
    
    (35,254
    )Restructuring and other costs
    
    
    (2,166
    )
    
    
    (3,323
    )
    
    
    (2,166
    )
    
    
    (9,325
    )Interest expense
    
    
    (34,101
    )
    
    
    (23,507
    )
    
    
    (110,297
    )
    
    
    (70,734
    )Other expenses and adjustments for non-cash charges and
certain adjustments defined by our credit agreement
    
    
    
    
    
    
    (381
    )
    
    
    
    
    
    
    (1,426
    )Income (loss) from continuing operations before income
taxes
    
    $
    (20,875
    )
    
    $
    (13,060
    )
    
    $
    (65,110
    )
    
    $
    (30,398

    )AssetsTotal assets for reportable segments
    
    
    
    
    
    
    
    
    
    
    685,578
    
    
    
    755,020Other unallocated assets
    
    
    
    
    
    
    
    
    
    
    82,692
    
    
    
    70,478Assets from Discontinued Operations (see footnote 4)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,483Total consolidated assets
    
    
    
    
    
    
    
    
    
    $
    768,270
    
    
    $
    856,981
  11.
    
    SHARES SUBJECT TO MANDATORY REDEMPTION The Company adopted Statement of Financial Accounting Standard No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity, effective January 1, 2004. As a result, our
Series A redeemable preferred stock, which has an unconditional mandatory redemption
feature, was recorded as a liability on the date of adoption at fair market
value. Fair market value was determined using the value of the securities on
the date of issuance plus accretion of discount from the date of issuance
through December 31, 2003 and the cumulative unpaid dividends from the date of
issuance through December 31, 2003. In addition, effective January 1, 2004, the
dividends and accretion on the preferred shares are included as a part of
interest expense in the statement of operations. In addition, as a result of adopting SFAS 150, the Companys redeemable
common shares that have been put for redemption by a shareholder were recorded
as a liability at fair value. The fair value was computed using the agreed upon
price of the redemption times the number of shares put by the shareholder. As
required by SFAS 150, prior periods were not restated. The shares subject to mandatory redemption are as follow (in thousands): As ofAs of January 1,
    
    September 30,2004
    
    2004Redeemable Preferred Shares 167,000 shares
authorized, 140,973 shares outstanding as
of September 30, 2004, designated as Series
A, no par value with a redemption value of
$1,000 per share plus accumulated
dividends
    
    $
    188,223
    
    
    $
    214,25918,200 Redeemable Common Shares that have
been put for redemption by a shareholder,
net of a shareholder note of $2,431
    
    
    6,362
    
    
    
    6,362Total shares subject to mandatory redemption
    
    $
    194,585
    
    
    $
    220,621
 The maximum cash settlement at the redemption date of June 1, 2011
(assuming no cash dividends are paid through the redemption date) is $ 680.6
million for the redeemable preferred shares and $ 6.4 million (net of the note
receivable of $ 2.4 million) for the redeemable common shares that have been
put for redemption by the shareholder.  12.
    
    DEFINED BENEFIT PLANS The company sponsors three noncontributory defined benefit pension plans
(the United States Plans) covering domestic employees with 1,000 or more
hours of service. The company funds these in accordance with the funding
requirements of the 13




---



##### 



Employee Retirement Income Security Act of 1974. Contributions are
intended to not only provide for benefits attributed to service to date but
also for those expected to be earned in the future. We also sponsor a defined
benefit plan in Germany (the Germany Plan). For information on the Germany
Plan please refer to the Companys Form 10-K for the year ended December 31,
2003. In the second quarter of 2004, the Company redesigned its retirement
programs which led to the curtailment and freeze of the pension plan for U.S.
salaried employees effective June 30, 2004. As a result, a curtailment benefit
of $1.6 million was recognized as income during the quarter ended June 30,
2004. The consolidated accrued net pension expense for the three and nine months
ended September 30, 2004 and 2003 includes the following components (in
thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003United States PlansService cost-benefits earned during the period
    
    $
    62
    
    
    $
    1,119
    
    
    $
    2,440
    
    
    $
    3,357Interest cost on projected benefit obligation
    
    
    1,105
    
    
    
    1,289
    
    
    
    3,853
    
    
    
    3,867Expected return on assets
    
    
    (1,164
    )
    
    
    (869
    )
    
    
    (3,374
    )
    
    
    (2,607
    )Curtailment gain
    
    
    
    
    
    
    
    
    
    
    (1,563
    )
    
    
    Other
    
    
    21
    
    
    
    130
    
    
    
    389
    
    
    
    390Total accrued pension expense
    
    $
    24
    
    
    $
    1,669
    
    
    $
    1,745
    
    
    $
    5,007Employer Contributions (a)2004 Expected to plan trusts
    
    $
    7,261
  (a)
    
    Disclosed due to the change from Form 10-K for the year ended December
31, 2003 as a result of the minimum funding changes made under the Pension
Funding Equity Act.  13.
    
    CONTINGENCIES LitigationWe are involved in various litigation matters from time to
time in the ordinary course of our business, including matters described in
previous filings. In our opinion, none of such litigation is material to our
financial condition or results of operations.  14.
    
    CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The following condensed consolidating financial statements present, in
separate columns, financial information for:  i.
    
    Pliant Corporation (on a parent only basis) with its investment in
its subsidiaries recorded under the equity method;ii.
    
    guarantor subsidiaries (as specified in the Indenture dated May 31,
2000 (the 2000 Indenture) relating to Pliants $220 million senior
subordinated notes due 2010 (the 2000 Notes), the Indenture dated
April 10, 2002 (the 2002 Indenture) relating to Pliants $100
million senior subordinated notes due 2010 (the 2002 Notes), the
Indenture dated May 30, 2003 (the  2003 Indenture) relating to
Pliants $ 250 million senior secured notes due 2009 (the 2003
Notes) and the Indenture dated February 17, 2004 ( the 2004 Indenture
and, together with the 2000 Indenture, the 2002 Indenture and the
2003 Indenture, the Indentures) relating to Pliants $306 million
senior secured discount notes due 2009 (the 2004 Notes and, together
with the 2000 Notes, the 2002 Notes and the 2003 Notes, the Notes))
on a combined basis, with any investments in non-guarantor
subsidiaries specified in the Indentures recorded under the equity
method;iii.
    
    direct and indirect non-guarantor subsidiaries on a
combined basis;iv.
    
    the eliminations necessary to arrive at the information
for Pliant Corporation and its subsidiaries on a consolidated
basis; andv.
    
    Pliant Corporation on a consolidated basis, in each case
as of September 30, 2004 and December 31, 2003 and for the nine
months ended September 30, 2004 and 2003. The Notes are fully and unconditionally guaranteed on a joint and several
basis by each guarantor subsidiary and each guarantor subsidiary is wholly
owned, directly or indirectly, by Pliant Corporation. There are no contractual
restrictions limiting transfers of cash from guarantor and non-guarantor
subsidiaries to Pliant Corporation, except from our Alliant joint venture.
Alliant is a limited liability company in which we and Supreme Plastics Ltd., a
company based in the United Kingdom, each hold a 50% interest. The agreement
governing the limited liability company prohibits distributions to the members
of the company before July 27, 2004, other than annual distributions sufficient
to pay taxes imposed upon the members as a result of the attribution to the
members of income of the joint venture. The condensed consolidating financial
statements are presented herein, rather than separate financial 14




---



##### 



statements for each of the guarantor subsidiaries, because management
believes that separate financial statements relating to the guarantor
subsidiaries are not material to investors In
2004, one of our subsidiaries in Canada, Uniplast Industries Co., became
a guarantor subsidiary. As a result, all periods presented include Uniplast
Industries Co. as a guarantor subsidiary. PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2004 (IN THOUSANDS) (UNAUDITED) Pliant
    
    Combined
    
    Combined
    
    
    
    
    
    ConsolidatedCorporation
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Pliant(Parent Only)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    CorporationASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    3,241
    
    
    $
    550
    
    
    $
    1,996
    
    
    $
    
    
    
    $
    5,787Receivables  net
    
    
    96,995
    
    
    
    12,011
    
    
    
    20,289
    
    
    
    
    
    
    
    129,295Inventories
    
    
    65,563
    
    
    
    7,637
    
    
    
    11,440
    
    
    
    
    
    
    
    84,640Prepaid expenses and other
    
    
    2,580
    
    
    
    572
    
    
    
    2,274
    
    
    
    
    
    
    
    5,426Income taxes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    9,984
    
    
    
    
    
    
    
    (976
    )
    
    
    
    
    
    
    9,008Total current assets
    
    
    178,363
    
    
    
    20,770
    
    
    
    35,023
    
    
    
    
    
    
    
    234,156PLANT AND EQUIPMENT  Net
    
    
    240,344
    
    
    
    17,090
    
    
    
    39,095
    
    
    
    
    
    
    
    296,529INTANGIBLE ASSETS  Net
    
    
    173,279
    
    
    
    25,086
    
    
    
    1,317
    
    
    
    
    
    
    
    199,682INVESTMENT IN SUBSIDIARIES
    
    
    (20,246
    )
    
    
    
    
    
    
    
    
    
    
    20,246
    
    
    
    OTHER ASSETS
    
    
    34,061
    
    
    
    526
    
    
    
    3,316
    
    
    
    
    
    
    
    37,903TOTAL ASSETS
    
    $
    605,801
    
    
    $
    63,472
    
    
    $
    78,751
    
    
    $
    20,246
    
    
    $
    768,270LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    1,443
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,443Trade accounts payable
    
    
    88,068
    
    
    
    7,526
    
    
    
    12,246
    
    
    
    
    
    
    
    107,840Accrued liabilities
    
    
    51,406
    
    
    
    5,943
    
    
    
    6,945
    
    
    
    
    
    
    
    64,294Due to (from) affiliates
    
    
    (119,715
    )
    
    
    73,256
    
    
    
    46,459
    
    
    
    
    
    
    
    Total current liabilities
    
    
    21,202
    
    
    
    86,725
    
    
    
    65,650
    
    
    
    
    
    
    
    173,577LONG-TERM DEBT  Net of current portion
    
    
    804,640
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    804,640OTHER LIABILITIES
    
    
    21,416
    
    
    
    
    
    
    
    2,865
    
    
    
    
    
    
    
    24,281DEFERRED INCOME TAXES
    
    
    21,933
    
    
    
    3,563
    
    
    
    3,611
    
    
    
    
    
    
    
    29,107SHARES SUBJECT TO MANDATORY REDEMPTION
    
    
    220,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220,621Total Liabilities
    
    
    1,089,812
    
    
    
    90,288
    
    
    
    72,126
    
    
    
    
    
    
    
    1,252,226MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    55
    
    
    
    
    
    
    
    55REDEEMABLE PREFERRED STOCK
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114REDEEMABLE COMMON STOCK
    
    
    6,645
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,645STOCKHOLDERS EQUITY (DEFICIT):Common stock
    
    
    103,376
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    103,376Additional paid-in capital
    
    
    
    
    
    
    14,020
    
    
    
    29,302
    
    
    
    (43,322
    )
    
    
    Warrants
    
    
    39,133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,133Retained earnings accumulated (deficit)
    
    
    (621,336
    )
    
    
    (42,081
    )
    
    
    (14,283
    )
    
    
    56,364
    
    
    
    (621,336
    )Stockholders note receivable
    
    
    (660
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (660
    )Accumulated other comprehensive loss
    
    
    (11,283
    )
    
    
    1,245
    
    
    
    (8,449
    )
    
    
    7,204
    
    
    
    (11,283
    )Total stockholders equity (deficit)
    
    
    (490,770
    )
    
    
    (26,816
    )
    
    
    6,570
    
    
    
    20,246
    
    
    
    (490,770
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)
    
    $
    605,801
    
    
    $
    63,472
    
    
    $
    78,751
    
    
    $
    20,246
    
    
    $
    768,270
 15




---



##### 



PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003 (IN THOUSANDS) (UNAUDITED) Pliant
    
    
    
    
    
    
    
    
    
    
    
    
    
    ConsolidatedCorporation
    
    Combined
    
    Combined
    
    
    
    
    
    PliantParent Only
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    CorporationASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    
    
    
    $
    1,192
    
    
    $
    2,116
    
    
    $
    
    
    
    $
    3,308Receivables  net
    
    
    79,685
    
    
    
    9,871
    
    
    
    18,186
    
    
    
    
    
    
    
    107,742Inventories
    
    
    63,954
    
    
    
    8,473
    
    
    
    11,698
    
    
    
    
    
    
    
    84,125Prepaid expenses and other
    
    
    2,626
    
    
    
    460
    
    
    
    723
    
    
    
    
    
    
    
    3,809Income taxes receivable
    
    
    167
    
    
    
    806
    
    
    
    463
    
    
    
    
    
    
    
    1,436Deferred income taxes
    
    
    10,934
    
    
    
    (1,521
    )
    
    
    4
    
    
    
    
    
    
    
    9,417Discontinued current assets
    
    
    
    
    
    
    15,294
    
    
    
    
    
    
    
    
    
    
    
    15,294Total current assets
    
    
    157,366
    
    
    
    34,575
    
    
    
    33,190
    
    
    
    
    
    
    
    225,131PLANT AND EQUIPMENT, Net
    
    
    253,601
    
    
    
    20,427
    
    
    
    41,392
    
    
    
    
    
    
    
    315,420GOODWILL
    
    
    182,162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182,162INTANGIBLE ASSETS, Net
    
    
    19,252
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,252INVESTMENT IN SUBSIDIARIES
    
    
    (916
    )
    
    
    (1,062
    )
    
    
    1,062
    
    
    
    916
    
    
    
    OTHER ASSETS
    
    
    36,125
    
    
    
    
    
    
    
    4,047
    
    
    
    
    
    
    
    40,172DISCONTINUED NONCURRENT ASSETS
    
    
    500
    
    
    
    4,149
    
    
    
    
    
    
    
    
    
    
    
    4,649TOTAL ASSETS
    
    $
    648,090
    
    
    $
    58,089
    
    
    $
    79,691
    
    
    $
    916
    
    
    $
    786,786LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Trade accounts payable
    
    $
    66,839
    
    
    $
    8,520
    
    
    $
    14,441
    
    
    $
    
    
    
    $
    89,800Accrued liabilities
    
    
    53,714
    
    
    
    4,790
    
    
    
    5,142
    
    
    
    
    
    
    
    63,646Current portion of long-term debt
    
    
    1,033
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,033Due to (from) affiliates
    
    
    (72,692
    )
    
    
    56,423
    
    
    
    16,269
    
    
    
    
    
    
    
    Total current liabilities
    
    
    48,894
    
    
    
    69,733
    
    
    
    35,852
    
    
    
    
    
    
    
    154,479LONG-TERM DEBT, Net of current portion
    
    
    758,461
    
    
    
    
    
    
    
    24,163
    
    
    
    
    
    
    
    782,624OTHER LIABILITIES
    
    
    24,952
    
    
    
    
    
    
    
    2,541
    
    
    
    
    
    
    
    27,493DEFERRED INCOME TAXES
    
    
    21,676
    
    
    
    2,502
    
    
    
    3,614
    
    
    
    
    
    
    
    27,792Total liabilities
    
    
    853,983
    
    
    
    72,235
    
    
    
    66,170
    
    
    
    
    
    
    
    992,388MINORITY INTEREST
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    
    
    
    
    291REDEEMABLE STOCK:Preferred stock
    
    
    188,223
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    
    188,223Common stock
    
    
    13,008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,008Total redeemable stock
    
    
    201,231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    201,231STOCKHOLDERS (DEFICIT):Common stock
    
    
    103,376
    
    
    
    14,020
    
    
    
    29,302
    
    
    
    (43,322
    )
    
    
    103,376Warrants to purchase common stock
    
    
    39,133
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,133Retained earnings (deficit)
    
    
    (537,052
    )
    
    
    (28,155
    )
    
    
    (9,845
    )
    
    
    38,000
    
    
    
    (537,052
    )Stockholders notes receivable
    
    
    (660
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (660
    )Accumulated other comprehensive loss
    
    
    (11,921
    )
    
    
    (11
    )
    
    
    (6,227
    )
    
    
    6,238
    
    
    
    (11,921
    )TOTAL STOCKHOLDERS EQUITY (DEFICIT)
    
    
    (407,124
    )
    
    
    (14,146
    )
    
    
    13,230
    
    
    
    916
    
    
    
    (407,124
    )Total liabilities and stockholders (deficit)
    
    $
    648,090
    
    
    $
    58,089
    
    
    $
    79,691
    
    
    $
    916
    
    
    $
    786,786
 16




---



##### 



PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (IN THOUSANDS) (UNAUDITED) Pliant
    
    Combined
    
    Combined
    
    
    
    
    
    ConsolidatedCorporation
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Pliant(Parent Only)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    CorporationSALES , Net
    
    $
    588,571
    
    
    $
    58,251
    
    
    $
    90,482
    
    
    $
    (22,160
    )
    
    $
    715,144COST OF SALES
    
    
    490,199
    
    
    
    50,952
    
    
    
    84,274
    
    
    
    (22,160
    )
    
    
    603,265GROSS PROFIT
    
    
    98,372
    
    
    
    7,299
    
    
    
    6,208
    
    
    
    
    
    
    
    111,879OPERATING EXPENSES
    
    
    56,708
    
    
    
    3,588
    
    
    
    6,330
    
    
    
    
    
    
    
    66,626OPERATING INCOME
    
    
    41,664
    
    
    
    3,711
    
    
    
    (122
    )
    
    
    
    
    
    
    45,253INTEREST EXPENSE
    
    
    (106,669
    )
    
    
    (471
    )
    
    
    (3,157
    )
    
    
    
    
    
    
    (110,297
    )EQUITY IN EARNINGS OF
SUBSIDIARIES
    
    
    (16,764
    )
    
    
    
    
    
    
    
    
    
    
    16,764
    
    
    
    OTHER INCOME (EXPENSE), Net
    
    
    (412
    )
    
    
    (121
    )
    
    
    467
    
    
    
    
    
    
    
    (66
    )NET INCOME (LOSS) BEFORE
INCOME TAXES
    
    
    (82,181
    )
    
    
    3,119
    
    
    
    (2,812
    )
    
    
    16,764
    
    
    
    (65,110
    )INCOME TAX PROVISION
    
    
    503
    
    
    
    1,164
    
    
    
    1,626
    
    
    
    
    
    
    
    3,293INCOME (LOSS) FROM
CONTINUING OPERATIONS
    
    
    (82,684
    )
    
    
    1,955
    
    
    
    (4,438
    )
    
    
    16,764
    
    
    
    (68,403
    )LOSS FROM DISCONTINUED
OPERATIONS
    
    
    
    
    
    
    (15,881
    )
    
    
    
    
    
    
    
    
    
    
    (15,881
    )NET INCOME (LOSS)
    
    $
    (82,684
    )
    
    $
    (13,926
    )
    
    $
    (4,438
    )
    
    $
    16,764
    
    
    $
    (84,284
    )
 CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 (IN THOUSANDS) (UNAUDITED) Pliant
    
    Combined
    
    Combined
    
    
    
    
    
    ConsolidatedCorporation
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Pliant(Parent Only)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    CorporationSALES , Net
    
    $
    553,077
    
    
    $
    57,976
    
    
    $
    86,841
    
    
    $
    (20,753
    )
    
    $
    677,141COST OF SALES
    
    
    455,033
    
    
    
    50,220
    
    
    
    77,573
    
    
    
    (20,753
    )
    
    
    562,073GROSS PROFIT
    
    
    98,044
    
    
    
    7,756
    
    
    
    9,268
    
    
    
    
    
    
    
    115,068OPERATING EXPENSES
    
    
    64,320
    
    
    
    2,486
    
    
    
    9,485
    
    
    
    
    
    
    
    76,291OPERATING INCOME
    
    
    33,724
    
    
    
    5,270
    
    
    
    (217
    )
    
    
    
    
    
    
    38,777INTEREST EXPENSE
    
    
    (68,848
    )
    
    
    (445
    )
    
    
    (1,441
    )
    
    
    
    
    
    
    (70,734
    )EQUITY IN EARNINGS OF
SUBSIDIARIES
    
    
    (9,113
    )
    
    
    
    
    
    
    
    
    
    
    9,113
    
    
    
    OTHER INCOME (EXPENSE), Net
    
    
    (175
    )
    
    
    (157
    )
    
    
    1,891
    
    
    
    
    
    
    
    1,559INCOME (LOSS) BEFORE INCOME
TAXES
    
    
    (44,412
    )
    
    
    4,668
    
    
    
    233
    
    
    
    9,113
    
    
    
    (30,398
    )INCOME TAX PROVISION
(BENEFIT)
    
    
    (672
    )
    
    
    6,392
    
    
    
    783
    
    
    
    
    
    
    
    6,503INCOME (LOSS) FROM
CONTINUING OPERATIONS
    
    
    (43,740
    )
    
    
    (1,724
    )
    
    
    (550
    )
    
    
    9,113
    
    
    
    (36,901
    )LOSS ON DISCONTINUED
OPERATIONS
    
    
    (2,605
    )
    
    
    (6,839
    )
    
    
    
    
    
    
    
    
    
    
    (9,444
    )NET INCOME (LOSS)
    
    $
    (46,345
    )
    
    $
    (8,563
    )
    
    $
    (550
    )
    
    $
    9,113
    
    
    $
    (46,345
    )
 17




---



##### 



PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (IN THOUSANDS) (UNAUDITED) Pliant
    
    Combined
    
    Combined
    
    
    
    
    
    ConsolidatedCorporation
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    PliantTable be updated
    
    (Parent Only)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    CorporationCASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES
    
    $
    (10,228
    )
    
    $
    2,737
    
    
    $
    27,747
    
    
    $
    
    
    
    $
    20,256CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sale of Solutions assets
    
    
    6,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,450Capital expenditures for plant and
equipment
    
    
    (9,210
    )
    
    
    (299
    )
    
    
    (5,465
    )
    
    
    
    
    
    
    (14,974
    )Net cash used in investing activities
    
    
    (2,760
    )
    
    
    (299
    )
    
    
    (5,465
    )
    
    
    
    
    
    
    (8,524
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of senior
secured discount notes
    
    
    225,299
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    225,299Payment of financing fees
    
    
    (9,354
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,354
    )Repayment of term debt and revolver
    
    
    (195,412
    )
    
    
    
    
    
    
    (24,163
    )
    
    
    
    
    
    
    (219,575
    )Repayment of capital leases and other, net
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34Proceeds from revolving debt, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Proceeds from issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash to discontinued operations
    
    
    (3,952
    )
    
    
    (1,886
    )
    
    
    
    
    
    
    
    
    
    
    (5,838
    )Net cash provided by (used in)
financing activities
    
    
    16,615
    
    
    
    (1,886
    )
    
    
    (24,163
    )
    
    
    
    
    
    
    (9,434
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS
    
    
    (386
    )
    
    
    (1,194
    )
    
    
    1,761
    
    
    
    
    
    
    
    181NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    3,241
    
    
    
    (642
    )
    
    
    (120
    )
    
    
    
    
    
    
    2,479CASH AND CASH EQUIVALENTS AT BEGINNING OF
THE PERIOD
    
    
    
    
    
    
    1,192
    
    
    
    2,116
    
    
    
    
    
    
    
    3,308CASH AND CASH EQUIVALENTS AT END OF THE
PERIOD
    
    $
    3,241
    
    
    $
    550
    
    
    $
    1,996
    
    
    $
    
    
    
    $
    5,787
 18




---



##### 



PLIANT CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 (IN THOUSANDS) (UNAUDITED) Pliant
    
    Combined
    
    Combined
    
    
    
    
    
    ConsolidatedCorporation
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    Pliant(Parent Only)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    CorporationCASH FLOWS PROVIDED BY (USED IN) OPERATING
ACTIVITIES
    
    $
    (34,768
    )
    
    $
    (10,982
    )
    
    $
    7,643
    
    
    $
    
    
    
    $
    (38,107
    )CASH FLOWS FROM INVESTING ACTIVITIES:Capital expenditures for plant and equipment
    
    
    (7,559
    )
    
    
    (1,163
    )
    
    
    (5,687
    )
    
    
    
    
    
    
    (14,409
    )Net cash used in investing activities
    
    
    (7,559
    )
    
    
    (1,163
    )
    
    
    (5,687
    )
    
    
    
    
    
    
    (14,409
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of preferred
stock
    
    
    9,532
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,532Payment of financing fees
    
    
    (10,472
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,472
    )(Payment) receipt of dividends
    
    
    2,499
    
    
    
    
    
    
    
    (2,499
    )
    
    
    
    
    
    
    Proceeds from issuance of senior
subordinated debt
    
    
    250,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000Borrowings under revolver
    
    
    50,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,250Repayment of term debt and revolver
    
    
    (251,871
    )
    
    
    
    
    
    
    (629
    )
    
    
    
    
    
    
    (252, 500
    )Cash to discontinued operations
    
    
    
    
    
    
    16,516
    
    
    
    
    
    
    
    
    
    
    
    16,516Net cash provided by (used in)
financing activities
    
    
    49,938
    
    
    
    16,516
    
    
    
    (3,128
    )
    
    
    
    
    
    
    63,326EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS
    
    
    404
    
    
    
    (4,104
    )
    
    
    1,258
    
    
    
    
    
    
    
    (2,442
    )NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    8,015
    
    
    
    267
    
    
    
    86
    
    
    
    
    
    
    
    8,368CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD
    
    
    
    
    
    
    (21
    )
    
    
    1,656
    
    
    
    
    
    
    
    1,635CASH AND CASH EQUIVALENTS AT END OF THE PERIOD
    
    $
    8,015
    
    
    $
    246
    
    
    $
    1,742
    
    
    $
    
    
    
    $
    10,003
 19




---



##### 



ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The purpose of this section is to discuss and analyze our consolidated
financial condition, liquidity and capital resources and results of operations.
This analysis should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the year ended December 31, 2003 (the 2003
10-K) and our Registration Statement on Form S-4, as amended (file No.
333-114608) filed on April 20, 2004. This section contains certain
forward-looking statements within the meaning of federal securities laws that
involve risks and uncertainties, including statements regarding our plans,
objectives, goals, strategies and financial performance. Our actual results
could differ materially from the results anticipated in these forward-looking
statements as a result of factors set forth under Cautionary Statement for
Forward-Looking Information below and elsewhere in this report. General We generate our revenues, earnings and cash flows from the sale of film
and flexible packaging products throughout the world. We manufacture these
products at 24 facilities located in the United States, Australia, Canada,
Germany and Mexico. Our sales have grown primarily as a result of strategic
acquisitions made over the past several years, increased levels of production
at acquired facilities, return on capital expenditures and the overall growth
in the markets for film and flexible packaging products. Third Quarter Highlights We recorded sales of $243.2 million in the third quarter of 2004. This is
a 6.8% increase from sales of $227.6 million in the third quarter of 2003,
stated on a comparable basis excluding the results of the Pliant Solutions
segment (which was sold during the third quarter of 2004 and accounted for as a
discontinued operation) for both periods. On a year-to-date basis, sales
increased by 5.6%, from $677.1 million in the third quarter of 2003 to $715.1
million in the third quarter of 2004. Third quarter 2004 sales measured in
pounds were 221 million, which represents a 3.1% increase from the third
quarter of 2003. Pounds sold on a year-to-date basis increased by 2.9% from
641.4 million in 2003 to 660.2 million in 2004. Total segment profit was $25.3 million for the third quarter of 2004,
compared to $25.6 million for the third quarter of 2003, presented on a
comparable basis excluding the results of the Pliant Solutions segment (which
was sold during the third quarter of 2004 and accounted for as a discontinued
operation) for both periods. Segment profit is defined as income before
interest expense, income taxes, depreciation, amortization, restructuring
charges, discontinued operations, and other non-cash charges and net
adjustments for certain unusual items. The primary reason for the reduction in
segment profit was the increased costs of raw materials described below. In the 3rd quarter:  
    
    Our marquee account approach to the market began to show results, as
we attained record sales levels in both dollars and pounds on a
year-to-date basis;  
    
    Operational excellence programs continued to yield significant cost
savings in waste, quality returns, and cash conversion costs;  
    
    The Pliant Solutions segment was sold for a total consideration of
$10 million, eliminating the recurring losses we have suffered from that
non-core business; $6.5 million in cash proceeds were received on
September 30 and were used to pay down the balance on our revolving
credit facility.  
    
    The Rhode Island manufacturing facility was closed, and we transferred production to more efficient plants;  
    
    The Mexico operation has made significant improvements and recorded a positive segment profit in the third quarter; and  
    
    We were awarded government research and development contracts worth
$5.1 million for leading edge food packaging solutions. Raw Material Costs The primary raw materials used in the manufacture of most of our products
are polyethylene resin and polypropylene resin. Prices for these
commodities have risen dramatically in recent months, due to the
increasing global demand for petrochemical feedstocks, as well as the
rising costs of natural gas liquids and crude oil, and these prices are expected to continue to rise in the fourth quarter of 2004
and beyond. Average industry prices for polyethylene were approximately 19%
higher during the third quarter of 2004 than in the same period of 2003. We
have not historically hedged our exposure to raw material increases, but we are
working to improve our ability to pass through any cost increases in raw
materials to our customers. However, price increases are only partially effective, within a
given period, in offsetting the impact of resin cost increases, which increases
may have an adverse effect on our profitability, working capital and cash
flows. Raw material costs as a percentage of sales increased to 51.4% for the
third quarter of 2004, from 48.8% for the comparable period of 2003, and to
51.0% for the first nine months of 2004, from 47.3% for the comparable period
of 2003. 20




---



##### 



Results of Operations The following table sets forth net sales, operating expenses, and
operating income, and such amounts as a percentage of net sales, for the three
and nine months ended September 30, 2004 and 2003 (dollars in millions). Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003% of
    
    
    
    
    
    % of
    
    
    
    
    
    % of
    
    
    
    
    
    % of$
    
    Sales
    
    $
    
    Sales
    
    $
    
    Sales
    
    $
    
    SalesNet sales
    
    $
    243.2
    
    
    
    100.0
    %
    
    $
    227.6
    
    
    
    100.0
    %
    
    $
    715.1
    
    
    
    100.0
    %
    
    $
    677.1
    
    
    
    100.0
    %Cost of sales
    
    
    207.0
    
    
    
    85.1
    
    
    
    189.7
    
    
    
    83.3
    
    
    
    603.2
    
    
    
    84.4
    
    
    
    562.0
    
    
    
    83.0Gross profit
    
    
    36.2
    
    
    
    14.9
    
    
    
    37.9
    
    
    
    16.7
    
    
    
    111.9
    
    
    
    15.6
    
    
    
    115.1
    
    
    
    17.0Operating expenses before
restructuring and other
costs
    
    
    20.8
    
    
    
    8.6
    
    
    
    24.0
    
    
    
    10.5
    
    
    
    64.4
    
    
    
    9.0
    
    
    
    67.0
    
    
    
    9.9Restructuring and other costs
    
    
    2.2
    
    
    
    0.9
    
    
    
    3.3
    
    
    
    1.5
    
    
    
    2.2
    
    
    
    0.3
    
    
    
    9.3
    
    
    
    1.4Total operating expenses
    
    
    23.0
    
    
    
    9.5
    
    
    
    27.3
    
    
    
    12.0
    
    
    
    66.6
    
    
    
    9.3
    
    
    
    76.3
    
    
    
    11.3Operating income
    
    $
    13.2
    
    
    
    5.4
    %
    
    $
    10.6
    
    
    
    4.7
    %
    
    $
    45.3
    
    
    
    6.3
    %
    
    $
    38.8
    
    
    
    5.7
    %
 Three Months Ended September 30, 2004 Compared with the Three Months Ended
September 30, 2003 Net Sales Net sales increased by $15.6 million, or 6.8%, to $243.2 million for the
third quarter of 2004, from $227.6 million for the three months ended September
30, 2003. The increase consisted of a 3.1% increase in sales volumes,
attributable to our Pliant U.S. segment, and a 3.6% increase in our average
selling prices. See Operating Segment Review below for a detailed discussion
of sales volumes and selling prices by segment and division. Gross Profit Gross profit decreased by $1.7 million, or 4.5%, to $36.2 million for the
third quarter of 2004, from $37.9 million for the third quarter of 2003. This
decrease was primarily due to selling prices increasing at rates that were
insufficient to compensate for increased resin prices. See Operating Segment
Review below for a detailed discussion of the margin variances by segment. Total Operating Expenses before Restructuring and Other Costs Total operating expenses before restructuring and other costs decreased
$3.2 million, or 13.3%, to $20.8 million for the third quarter of 2004, from
$24.0 million for the third quarter of 2003. This decrease was attributable to
a $1.5 million decrease in depreciation expense in 2004 and a $0.5 million
decrease in selling and administrative expenses in our international locations.
In addition, the costs incurred in 2003 included $1.1 million of severance
costs related to organizational changes. Restructuring and Other Costs Restructuring and other costs were $2.2 million for the third quarter of
2004, compared to $3.3 million for the third quarter of 2003. The costs for the
third quarter of 2004 included $0.3 million for plant closure costs and $1.9
million in fixed asset impairment charges related to the closure of our
Harrisville, Rhode Island plant. The costs for the third quarter of 2003
included $1.6 million in fixed asset impairment charges related to the
closure of our plant in Shelbyville, Indiana, $0.7 million related to the
closure of our facility in Brazil, consisting primarily of fixed asset
impairment charges, and costs related to the consolidation of two plants in
Mexico. Operating Income Operating income increased by $ 2.6 million, to $13.2 million for the
third quarter of 2004, from $10.6 million for the third quarter of 2003, due
to the factors discussed above. Interest Expense Interest expense on current and long-term debt increased by $1.6 million,
or 6.8%, to $25.1 million for the third quarter of 2004, from $23.5 million for
the third quarter of 2003. This increase was principally due to the higher
interest costs resulting from the issuance of an additional $250 million of
senior secured notes in May 2003 and accretion of the issue discount associated
with the $225.3 million in net 21




---



##### 



proceeds of senior secured discount notes issued in
February 2004. The proceeds from the issuance of these notes were used to repay
bank debt that carried a lower interest rate. Interest expense on preferred stock for the third quarter of 2004 of $9.0
million reflects the dividends and accretion on our redeemable
preferred stock that are classified as interest expense pursuant to SFAS 150,
effective January 1, 2004. Income Tax Expense Income tax expense for the third quarter of 2004 was $0.9 million on
pretax losses of $20.9 million, compared to income tax expense of $1.6 million
on pretax losses of $13.1 million for the same period in 2003. Income tax
benefits related to net operating losses in the United States were offset by a
valuation allowance as the realization of these tax benefits is not certain.
The income tax expense in the statements of operations primarily reflects
foreign income taxes. Loss from Continuing Operations Loss from continuing operations increased by $7.1 million to $21.8 million
for the third quarter of 2004, from $14.7 million for the third quarter of
2003, due to the factors discussed above, most notably the $9.0 million of
non-cash accrued dividends and accretion related to our preferred stock and
classified as interest expense pursuant to SFAS 150, effective January 1, 2004. Discontinued Operations On September 30, 2004, we sold substantially all of the assets of our
wholly-owned subsidiary, Pliant Solutions Corporation, for approximately $10
million, of which $6.5 million was paid in cash at closing and $3.5 million
will be paid in equal monthly installments over a 3-year period, and recorded a
loss on sale of these assets of $8.5 million. Operating losses from these
discontinued operations for the three months ended September 30, 2004 were $1.9
million, compared to $ 5.4 million in 2003. Nine Months Ended September 30, 2004 Compared with the Nine Months Ended
September 30, 2003 Net Sales Net sales increased by $38.0 million, or 5.6%, to $715.1 million for the
nine months ended September 30, 2004, from $677.1 million for the nine months
ended September 30, 2003. The increase consisted of a 2.9% increase in sales
volumes and a 2.6% increase in our average selling price resulting primarily
from the pass through of increases in our raw material costs to customers. See
Operating Segment Review below for a detailed discussion of sales volumes and
selling prices by segment and division. Gross Profit Gross profit decreased by $3.2 million, or 2.8%, to $111.9 million for the
nine months ended September 30, 2004, from $115.1 million for the nine months
ended September 30, 2003. This decrease was primarily due to the effect of
lower margins partially offset by the effect of higher sales volumes. See
Operating Segment Review below for a detailed discussion of the margin
variances by segment. Total Operating Expenses before Restructuring and Other Costs Total operating expenses before restructuring and other costs decreased
$2.6 million, or 3.9 %, to $64.4 million for the nine months ended September
30, 2004, from $67.0 million for the nine months ended September 30, 2003. This
decrease was primarily related to a $3.2 million decrease in depreciation
expense in 2004 as a result of the completion of the depreciation of
a major computer system, offset by
$0.5 million in higher legal costs. Restructuring and Other Costs Restructuring and other costs were $2.2 million for the nine months ended
September 30, 2004, compared to $9.3 million for the nine months ended
September 30, 2003. The costs for the nine months ended September 30,2004
included $0.3 million for plant closure costs and $1.9 million in fixed asset
impairment charges related to the closure of our Harrisville, Rhode Island
plant. The costs for the nine months ended September 30,2003 included $1.6
million in fixed asset impairment charges related to the closure of our
facility in Shelbyville, $0.7 million related to the closure of our facility in
Brazil, consisting primarily of fixed asset impairment charges, $1.2 million
relate to the consolidation of two plants in Mexico, $1.3 million related to
the closure and transfer of production from our Merced facility and other costs
related to the closure of our Shelbyville facility. 22




---



##### 



Operating Income Operating income increased by $ 6.5 million, or 16.8 %, to $45.3 million
for the nine months ended September 30, 2004, from $38.8 million for the nine
months ended September 30, 2003, due to the factors discussed above, as well as
a gain of $1.6 million related to the curtailment of the U.S. salaried pension
plan recorded in the first nine months of 2004. (See Note 12 to the condensed
consolidated financial statements). Interest Expense Interest expense on current and long-term debt increased by $13.5 million,
or 19.1%, to $84.2 million for the nine months ended September 30, 2004, from
$70.7 million for the nine months ended September 30, 2003. This increase was
principally due to a full nine months worth of higher interest costs resulting
from the issuance of an additional $250 million of senior secured notes in May
2003 and to the accretion of the issue discount associated with the $225.3
million senior secured discount notes issued in February 2004. The proceeds
from the issuance of these notes were used to repay bank debt that carried a
lower interest rate. In addition, first quarter 2004 interest expense included
a charge for the write-off of previously capitalized financing fees and losses
related to interest rate derivatives totaling $ 10.1 million. Partially
offsetting these increases was a charge of $5.4 million taken in the second
quarter of 2003 for the write-off of previously capitalized financing fees. Interest expense on preferred stock for the nine months ended September
30, 2004 of $26.0 million reflects the dividends and accretion on the
redeemable preferred stock of the Company that is classified as interest
expense after adoption of SFAS 150, effective January 1, 2004. Other Income (Expense) Other expense was $0.1 million for the nine months ended September 30,
2004, compared to other income of $ 1.6 million for the nine months ended
September 30, 2003. The other income for the nine months ended September 30,
2003 included primarily $0.5 million of currency gains, $0.2 million of royalty
income and $0.2 million of rental income. Income Tax Expense Income tax expense for the nine months ended September 30, 2004 was $3.3
million on pretax losses of $65.1 million, compared to $6.5 million on pretax
losses of $30.4 million for the same period in 2003. Income tax benefits
related to net operating losses in the United States were offset by a valuation
allowance as the realization of these tax benefits is not certain. Therefore,
the income tax expense in the statements of operations primarily reflects
foreign income taxes. Loss from Continuing Operations Loss from continuing operations increased $31.5 million to $68.4 million
for the nine months ended September 30,2004, from $36.9 million for the nine
months ended September 30,2003 due to the factors discussed above, most notably
interest expense of $39.5 million, which included $26.0 million in interest
expense related to preferred stock after adoption of SFAS 150, effective
January 1, 2004. Discontinued Operations On September 30, 2004, we sold substantially all of the assets of our
wholly-owned subsidiary, Pliant Solutions Corporation, for approximately $10
million, of which $6.5 million was paid in cash at closing and $3.5 million
will be paid in equal monthly installments over a 3-year period, and we
recognized a loss on the sale of $8.5 million. Operating losses from these
discontinued operations for the nine months ended September 30, 2004 were $7.4
million compared to $9.4 million in 2003. Operating Segment Review General We evaluate the performance of our operating segments based on net sales
(excluding inter-company sales) and segment profit. The segment profit
reflects income before interest expense, income taxes, depreciation,
amortization, restructuring charges, discontinued operations and other non-cash charges and net
adjustments for certain unusual items. For more information on our operating
segments, including a reconciliation of segment profit to income before taxes,
see Note 10 to the condensed consolidated financial statements included
elsewhere in this report. 23




---



##### 



We have three reporting segments: Pliant U.S., Pliant Flexible Packaging,
and Pliant International.
     Summary of segment information (in millions of dollars): UnallocatedPliant
    
    Pliant Flexible
    
    Pliant
    
    CorporateU.S.
    
    Packaging
    
    International
    
    Expenses
    
    TotalThree months ended
September 30, 2004Net sales
    
    $
    159.0
    
    
    $
    58.0
    
    
    $
    26.2
    
    
    $
    
    
    
    $
    $243.2Segment profit (loss)
    
    $
    20.6
    
    
    
    7.4
    
    
    
    1.9
    
    
    
    (4.6
    )
    
    
    25.3Three months ended
September 30, 2003Net sales
    
    $
    143.6
    
    
    
    57.5
    
    
    
    26.5
    
    
    
    
    
    
    
    227.6Segment profit (loss)
    
    $
    22.0
    
    
    
    8.8
    
    
    
    1.0
    
    
    
    (6.2
    )
    
    
    25.6Nine months ended
September 30, 2004Net sales
    
    $
    462.9
    
    
    
    172.7
    
    
    
    79.5
    
    
    
    
    
    
    
    715.1Segment profit (loss)
    
    $
    65.1
    
    
    
    23.4
    
    
    
    5.1
    
    
    
    (15.2
    )
    
    
    78.4Nine months ended
September 30, 2003Net sales
    
    $
    432.0
    
    
    
    162.9
    
    
    
    82.2
    
    
    
    
    
    
    
    677.1Segment profit (loss)
    
    $
    69.1
    
    
    
    23.7
    
    
    
    7.3
    
    
    
    (13.8
    )
    
    
    86.3
 Three Months Ended September 30, 2004 Compared with the Three Months Ended
September 30, 2003 Pliant U.S. Net sales.Net sales of our Pliant U.S. segment increased $15.4 million,
or 10.7%, to $159.0 million for the third quarter of 2004, from $143.6 million
for the third quarter of 2003. This increase consisted of an increase in sales
volumes of 4.8% and an increase of 5.7% in average selling prices. The
increase in sales volumes is discussed for each Pliant U.S. division below. Net sales in our Industrial Films division increased $6.4 million, or
13.8%, to $53.0 million for the third quarter of 2004, from $46.6 million for
the third quarter of 2003. This increase consisted of an increase in sales
volumes of 1.9 million pounds or 3.2% and an increase in average selling
prices of 8.2 cents per pound or 10.2 %. The increase in sales volume was
primarily due to higher sales from our new Revolution stretch film products
and 1.2 million pounds of initial sales on a 16 million pound contract recently
received from a new major customer. Net sales in our Specialty Films division
increased $3.0 million, or 6.5%, to $49.8 million for the third quarter of
2004, from $46.8 million for the third quarter of 2003. This increase
consisted of an increase in sales volume of 1.8 million pounds, or 4.2%,
primarily from the California and Florida agricultural films markets where
weve improved market share and from low gel film market sales to Asian markets,
and an increase in average selling prices of 2.2%. Net sales in our
Converter Films division increased $6.0 million, or 11.9%, to $56.2 million for
the third quarter of 2004, from $50.2 million for the third quarter of 2003.
This increase consisted of an increase in sales volumes of 3.6 million
pounds, or 7.2%, and an increase in average selling prices of 4.4%. The
increase in sales volumes was principally due to expansion of our business to
new customers and increased sales to existing customers, through more
focused marketing efforts in the industrial products market, expanded
demand in the agricultural film
markets and product innovations in the custom films
markets. Segment profit. Pliant U.S. segment profit decreased $1.4 million to
$20.6 million for the third quarter of 2004, compared to $22.0 million for the
third quarter of 2003, principally due to lower volumes and gross margins in our
Converter Films division, partially offset by higher sales volume in our
Industrial and Specialty Films divisions. The decrease in our Converter Films
division gross margins was principally due to selling prices increasing at
rates that were insufficient to compensate for increases in resin prices. Pliant Flexible Packaging Net sales.Net sales of our Pliant Flexible Packaging segment increased
$0.5 million, or 0.9%, to $58.0 million for the third quarter of 2004, from
$57.5 million for the third quarter of 2003. This increase consisted of an
increase in average selling prices of 2.8%, offset by a decrease in sales
volume of 1.9%, related primarily to two customers in the barrier
films
market. Segment profit. Pliant Flexible Packaging segment profit decreased $1.4
million to $7.4 million for the third quarter of 2004, from $8.8 million for
the third quarter of 2003. This decrease in segment profit was
principally due
to a decline in sales volume in the barrier films market, primarily
attributable to two large customers; one time severance, recruiting and other
costs related to centralizing 24




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##### 



customer service function; and increased freight cost from more expedited
shipping by our printed plants. Pliant International Net sales.Net sales of our Pliant International segment decreased $0.3
million, or 1.3%, to $26.2 million for the third quarter of 2004, from $26.5
million for the third quarter of 2003. This decrease consisted of a decrease
in average selling prices of 2.1%, primarily at our Mexico operations,
partially offset by an increase in sales volumes of 0.8%. Average selling prices
in Mexico decreased principally due to the deterioration of the Mexican peso
and a shift in our sales mix. Segment profit. Pliant International segment profit increased $0.9
million to $1.9 million for the third quarter of 2004, from $1.0 million for
the third quarter of 2003. This increase was due principally to the
improvements in the operating results of our plant in Mexico. Management
changes at this location have resulted in increased sales volume and improved
operating results. Unallocated Corporate Expenses Unallocated corporate expenses decreased $1.6 million to $4.6 million for
the third quarter of 2004, compared to $6.2 million for the third quarter of
2003. This decrease was primarily due to a $0.7 million decrease in legal costs
and to $1.1 million of severance related costs recorded in the third quarter of
2003 related to organizational changes. Nine Months Ended September 30, 2004 Compared with the Nine Months Ended September
30, 2003 Pliant U.S. Net sales.Net sales of our Pliant U.S. segment increased $30.9 million,
or 7.2%, to $462.9 million for the nine months ended September 30, 2004 from
$432.0 million for the nine months ended September 30, 2003. This increase
consisted of an increase in sales volumes of 4.1% and an increase in average
selling prices of 2.9%. The increase in sales volumes is discussed for each
Pliant U.S. division below. Net sales in our Industrial Films division increased $14.3 million, or
10.5%, to $150.9 million for the nine months ended September 30, 2004, from
$136.6 million for the same period in 2003. This increase consisted of an
increase in sales volumes of 3.4% and an increase in average selling prices
of 6.8%. The increase in sales volumes was primarily due to higher sales from
our new Revolution stretch film products and additional PVC sales from
relocated lines now in operation. Net sales in our Specialty Films division
increased $3.4 million, or 2.4%, to $145.4 million for the nine months ended
September 30, 2004, from $142.0 million for the same period in 2003. This
increase consisted of an increase in our sales volumes of 3.8 million pounds,
primarily in the agricultural, low gel and custom films markets, and an
increase in average selling prices of 0.3%. The increase in sales volume in
the agricultural films market was in California where weve strengthened our
broker network. Net sales in our Converter Films division increased $13.0
million, or 8.1%, to $174.3 million for the nine months ended September 30,
2004, from $161.3 million for the same period in 2003. This increase consisted
of an increase in sales volumes of 5.8% and an increase in average selling
prices of 1.6 %. The sales volume increased due to expanded agricultural film
products production and to new customer sales in the industrial products and
engineered films markets. Segment profit. Pliant U.S. segment profit decreased $4.0 million to
$65.1 million for the nine months ended September 30, 2004, compared to $69.1
million for the same period in 2003, principally due to lower gross margins
partially offset by the increase in net sales discussed above. The decrease in
gross margins was principally due to selling prices increasing at rates
insufficient to compensate for increased prices of resin. Pliant Flexible Packaging Net sales.Net sales of our Pliant Flexible Packaging segment increased
$9.8 million, or 6.0% to $172.7 million for the nine months ended September 30,
2004, from $162.9 million for the same period in 2003. This increase consisted
of an increase in sales volumes of 2.6 million pounds, or 2.4%, and an
increase in average selling prices of 3.6%. The sales volumes increased
principally due to additional sales to existing customers, primarily from the
bakery and barrier films markets. Segment profit. Pliant Flexible Packaging segment profit decreased $0.3
million to $23.4 million for nine months ended September 30, 2004, from $23.7
million for the same period in 2003. This decrease was
primarily due to the effect of higher direct and indirect manufacturing costs,
partially offset by the increase in net sales. 25




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##### 



Pliant International Net sales.Net sales of our Pliant International segment decreased $2.7
million, or 3.3%, to $79.5 million for the nine months
ended September 30, 2004, from $82.2 million for the same period in 2003. This
decrease consisted of a 2.9% decrease in sales volumes and a slight decrease in
average selling prices. Our sales volumes were adversely affected by a
reduction in sales at our plant in Mexico due to the loss of certain customers
and products. Segment profit. Pliant International segment profit decreased $2.2
million to $5.1 million for the nine months ended September 30, 2004, from $7.3
million for the same period in 2003. The decrease was due principally to the
operating losses in our plant in Mexico, which was affected by
operating issues and the resulting loss of customers and products. Management
changes made at this location have begun to result in increases in
sales volumes
and improved operating results. Unallocated Corporate Expenses Unallocated corporate expenses increased $1.4 million to $15.2 million for
the nine months ended September 30, 2004, compared to $13.8 million for the
same period in 2003. This increase is primarily due to a $1.2 million increase
in payroll related costs. Liquidity and Capital Resources Sources of capital Our principal sources of funds are cash generated by our operations and
borrowings under our revolving credit facility. As of September 30, 2004, our
outstanding long-term debt consisted of: no outstanding amounts under our
revolving credit facility ($14.5 million was outstanding as of November 10,
2004); $313.0 million of our 13% Senior Subordinated Notes; $250.0 million of
our 11 1/8% Senior Secured Notes; and $241.1 million of our 11 1/8% Senior
Secured Discount Notes. All of the term and revolving debt under the credit facilities that
existed at December 31, 2003 carried variable rates of interest, so payment of
the term loans with the proceeds of our 11 1/8% Senior Secured Discount Notes
and borrowings under our revolving credit facility substantially reduced our
exposure to interest rate risk. Although our revolving credit facility
is at a variable rate of interest, it contains substantially fewer financial
covenants than our credit facilities that existed at December 31, 2003, which
substantially reduced our exposure to covenant default risk. While the
effective interest rate on the Senior Secured Discount Notes is higher than the
term loans retired from the proceeds of the February 2004 offering, we have
realized greater short-term liquidity and flexibility in our debt structure
resulting from the elimination of a number of the financial and other covenants
in our then existing credit facilities and the deferral of cash interest on the
Senior Secured Discount Notes during the period in which they accrete. Revolving Credit Facility On February 17, 2004, we entered into a revolving credit facility
providing up to $100 million (subject to the borrowing base and other
limitations described below). The revolving credit facility includes a $15
million letter of credit sub-facility, with letters of credit reducing
availability under the revolving credit facility. The revolving credit facility is secured by a first priority security
interest in substantially all our inventory, receivables and deposit accounts,
100% of the capital stock of, or other equity interests in, our existing and
future domestic subsidiaries and foreign subsidiaries that are note guarantors,
65% of the capital stock of, or other equity interests in, our other existing and
future first-tier foreign subsidiaries, investment property and certain other
assets of the Company and the note guarantors (the
Second - Priority
Collateral) and a second-priority security interest in our real property,
fixtures, equipment, intellectual property and other assets
(First - Priority
Collateral). The revolving credit facility matures on February 17, 2009. The interest
rates are at LIBOR plus 2.5% to 2.75% or ABR plus 1.5% to 1.75%. The average
rate on borrowings outstanding during the third quarter of 2004 was 6.2%. The
commitment fee for the unused portion of the revolving credit facility is 0.50%
per annum. Borrowings under the revolving credit facility are limited as follows: if
our fixed charge coverage ratio (as defined in the revolving credit facility), as
reported at the end of a quarter, is less than 1.1/1.0, our borrowings are
limited to 75% of the lesser of the total commitment under the facility and the
borrowing base. The borrowing base consists of the sum of eligible accounts
receivable and eligible inventory. As of September 30, 2004, our fixed charge
coverage ratio was 1.0/1.0, and our borrowing base was $101 million.
Accordingly, funds available for borrowings under the revolving credit facility
as of that date were $75 million. This amount was further reduced to $68.3
million, after taking into account $6.7 million of letters of credit
outstanding. 26




---



##### 



Senior Secured Discount Notes due 2009 The Senior Secured Discount Notes are secured by a first-priority security
interest in the First-Priority Collateral and a second-priority security
interest in the Second-Priority Collateral. The Senior Secured Discount Notes
are guaranteed by our existing and future domestic restricted subsidiaries and
certain foreign subsidiaries. Unless we elect to pay cash interest as described below, and except under
certain limited circumstances, the Senior Secured Discount Notes will accrete
from the date of issuance at the rate of 11 1/8% until December 15, 2006,
compounded semiannually on each June 15 and December 15 commencing June 15,
2004, to an aggregate principal amount of $1,000 per note ($306.0 million in
the aggregate assuming no redemption or other repayments). Commencing on
December 15, 2006, interest on the Senior Secured Discount Notes will accrue at
the rate of 11 1/8% per annum and will be payable in cash semiannually on June
15 and December 15, commencing on June 15, 2007. On any interest payment date prior to December 15, 2006, we may elect to
commence paying cash interest (from and after such interest payment date) in
which case (i) we will be obligated to pay cash interest on each subsequent
interest payment date, (ii) the notes will cease to accrete after such interest
payment date and (iii) the outstanding principal amount at the stated maturity
of each note will equal the accreted value of such note as of such interest
payment date. 11 1/8% Senior Secured Notes due 2009 The 11 1/8% Senior Secured Notes due 2009 rank equally with our existing
and future senior debt and rank senior to our existing and future subordinated
indebtedness, including the 13% Senior Subordinated Notes due 2010. The 11 1/8%
Senior Secured Notes due 2009 are secured, on a second-priority lien basis, by
a substantial portion of our assets. Due to this second-priority status, the 11
1/8% Senior Secured Notes due 2009 effectively rank junior to our obligations
secured by a first-priority lien on the collateral securing the 11 1/8% Senior
Secured Notes due 2009 to the extent of the value of such collateral. The
obligations secured by first-priority liens include our new revolving credit
facility with respect to Second-Priority Collateral and the Senior Secured
Discount Notes due 2009 with respect to First-Priority Collateral. In addition,
the 11 1/8% Senior Secured Notes due 2009 effectively rank junior to any of our
obligations that are secured by a lien on assets that are not part of the
collateral securing the 11 1/8% Senior Secured Notes due 2009, to the extent of
the value of such assets. The 11 1/8% Senior Secured Notes due 2009 are
guaranteed by some of our subsidiaries. 13% Senior Subordinated Notes due 2010 The 13% Senior Subordinated Notes due 2010 are subordinated to all of our
existing and future senior debt, rank equally with any future senior
subordinated debt, and rank senior to any future subordinated debt. The 13%
Senior Subordinated Notes due 2010 are unsecured and guaranteed by some of our
subsidiaries. Preferred stock We have approximately $214.3 million of Series A Cumulative Exchangeable
Redeemable Preferred Stock outstanding. The Series A preferred stock accrues
dividends at the rate of 14% per annum; however, our board of directors has
never declared or paid any dividends on the Series A preferred stock. Unpaid
dividends accumulate and are added to the liquidation amount of the Series A
preferred stock. After May 31, 2005 the annual dividend rate increases to 16%
unless we pay dividends in cash. The dividend rate also increases to 16% if we
fail to comply with certain of our obligations or upon certain events of
bankruptcy. The Series A preferred stock is mandatorily redeemable on May 31,
2011. On September 24, 2004, we adopted a 2004 Restricted Stock Incentive Plan,
pursuant to which we sold to our President and Chief Executive Officer and
selected additional officers of the Company, 704 shares of a total of 720
shares of a newly-created, non-voting Series B Redeemable Preferred Stock for a
cash purchase price of $162 per share. These shares were issued in private
transactions with officers of the Company and therefore were exempt from the
registration requirements of the Securities Act of 1933. The Series B
Preferred Stock will be automatically converted into common equity of the
Company upon the consummation of an underwritten public offering registered
under the Securities Act of shares of capital stock of the Company resulting in
aggregate proceeds (net of underwriters discounts and commissions) to the
Company of not less than $100 million. Net Cash Provided by/Used in Operating Activities Net cash provided by operating activities was $20.3 million for the nine
months ended September 30, 2004, an increase of $29.6 million, compared to net
cash used in operating activities of $9.3 million for the same period in 2003.
This increase was due primarily to reductions in working capital items of $25.2
million. Net Cash Used in Investing Activities Net cash used in investing activities decreased $5.9 million to $8.5
million for the nine months ended September 30, 2004, from $14.4 million for
the nine months ended September 30, 2003 due to $6.5 million in proceeds from
the sale of Solutions assets. Cash outflows of $15.0 million in 2004 were
incurred for capital expenditures primarily related to maintenance projects
that extend the useful life of equipment. 27




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##### 



Net Cash Provided by/Used in Financing Activities Net cash used in financing activities was $9.4 million for the nine months
ended September 30, 2004, compared to net cash
provided by financing activities of $30.3 million for the nine months
ended September 30, 2003. The amounts for the first nine months of 2004
included the net proceeds from the issuance of senior secured discount notes of
$225.3 million net of $9.3 million of financing fees, the repayment of our
previous credit facilities of $ 219.6 million and cash provided to discontinued
operations of $5.8 million. The amounts in the nine months of 2003 included the
issuance of $ 9.5 million of redeemable preferred shares, $51.5 million in
borrowings under our then existing revolver agreement and net proceeds of $250
million from issuance of senior secured notes to repay term debt of $252.5
million, $10.5 million in financing fees for a related amendment to our credit
facility and the preferred stock issuance, $1.2 million in capital leases and
cash provided to discontinued operations of $16.5 million. Liquidity As of September 30, 2004, we had $62.8 million of working capital
excluding current maturities of long term debt. As of September 30, 2004 we
had $68.3 million available for borrowings under our revolving credit facility,
with no outstanding borrowings under this agreement and approximately $6.7
million of letters of credit issued under our revolving credit facility. On
September 30, 2004, we temporarily paid off the revolving credit facility due
to short-term fluctuations in working capital and the Pliant Solutions sale
proceeds of $6.5 million. Borrowings outstanding under the revolving credit
facility averaged $21.4 million during the third quarter. As of November 10,
2004, we had $14.5 million of outstanding borrowings against the available
amount of our revolving credit facility. Our outstanding borrowings under our
revolving credit facility fluctuate significantly during each quarter as a
result of the timing of payments for raw materials, capital and interest, as
well as the timing of customer collections. As of September 30, 2004, we had approximately $5.8 million in cash and
cash equivalents. A portion of this amount was held by our foreign
subsidiaries. Repatriation tax rates may limit our ability to access cash and
cash equivalents generated by our foreign operations for use in our U.S.
operations, including to pay principal and interest on outstanding borrowings. We expect that our total capital expenditures will be approximately $20
million in 2004, and $20-$35 million in 2005 depending on market and liquidity
considerations. These expenditures will support maintenance, cost reductions,
product innovation, research and development, and capacity expansion.. Our revolving credit facility and the indentures relating to our
outstanding Notes impose certain restrictions on us, including restrictions on
our ability to incur indebtedness, pay dividends, make investments, grant
liens, sell our assets and engage in certain other activities. In an attempt to manage our liquidity needs, we and our affiliates are
analyzing and formulating potential strategic alternatives to reduce our
leverage. In this regard, we or our affiliates may repurchase all or a portion
of our Notes, through an exchange offer, a tender offer or open-market or
privately-negotiated purchases, or through a combination of any of these or
other alternatives. The funds for any such repurchases may be raised by selling
additional equity, seeking additional capital contributions from our existing
equity holders or by other means. There can be no assurance that any plan to
reduce our indebtedness, if commenced, would be successfully completed. Based on anticipated sales volumes and current working capital dynamics,
we believe that cash flow from operations and available cash, together with
available borrowings under our revolving credit facility, will be adequate to
meet liquidity needs and fund planned capital expenditures for the next 12
months. We may, however, need to refinance all or a portion of the principal
amount of our long-term debt and/or revolving credit facility borrowings, on or
prior to maturity, to meet liquidity needs in later years. If it is determined
that refinancing is necessary, and we are unable to secure such financing on
acceptable terms, we may have insufficient liquidity to carry on our operations
and meet our obligations at such time. Cautionary Statement for Forward-Looking Information Certain information set forth in this report contains forward-looking
statements within the meaning of federal securities laws. Forward-looking
statements include statements concerning our plans, objectives, goals,
strategies, future events, future revenues or performance, capital
expenditures, financing needs, plans or intentions relating to acquisitions,
business trends, and other information that is not historical information.
When used in this report, the words estimates, expects, anticipates,
forecasts, plans, intends, believes and variations of such words or
similar expressions are intended to identify forward-looking statements. We
may 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 cautionary statements. All forward-looking statements, including, without limitation,
managements examination of historical operating trends, are based upon our
current expectations and various assumptions. Our expectations, beliefs and
projections are expressed in good faith and we believe there is a reasonable
basis for them. But, there can be no assurance that managements expectations,
beliefs and projections will result or be achieved. All forward-looking
statements apply only as of the date made. We undertake no obligation to 28




---



##### 



publicly update or revise forward-looking statements which may be made to
reflect events or circumstances after the date made or to reflect the
occurrence of unanticipated events. There are a number of risks and uncertainties that could cause our actual
results to differ materially from the forward-looking statements contained in
or contemplated by this report. These risks include, but are not limited to:
general economic and business conditions, particularly an economic downturn;
industry trends; increases in our leverage; interest rate increases; changes in
our ownership structure; raw material costs and availability, particularly
resin; competition; the loss of any of our significant customers; changes in
the demand for our products; new technologies; changes in distribution channels
or competitive conditions in the markets or countries in which we operate;
costs of integrating any future acquisitions; loss of our intellectual property
rights; operational difficulties at any of our plants; foreign currency
fluctuations and devaluations and political instability in our foreign markets;
changes in our business strategy or development plans; availability, terms and
deployment of capital; availability of qualified personnel; and increases in
the cost of compliance with laws and regulations, including environmental laws
and regulations. Each of these risks and certain other uncertainties are
discussed in more detail in the 2003 Form 10-K and in our Registration
Statement on Form S-4 (file no. 333-114608), as amended, filed with the
Securities and Exchange Commission on April 20, 2004. There may be other
factors, including those discussed elsewhere in this report that may cause our
actual results to differ materially from the forward-looking statements. Any
forward-looking statements should be considered in light of these factors. 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Prices for our principal raw materials, polyethylene resin and
polypropylene resin, have risen dramatically in recent months, and these prices
are expected to continue to rise in the fourth quarter of 2004 and beyond.
Average industry prices for polyethylene were approximately 19% higher during
the third quarter of 2004 than in the same period of 2003. We have not
historically hedged our exposure to raw material increases, but we are working
to improve our ability to pass through any cost increases in raw
materials to our customers.
However, price increases are only partially effective, within a given period,
in offsetting the impact of resin cost increases, which increases may have an
adverse effect on our profitability, working capital and cash flows. Since the repayment of $219.6 million of variable rate term debt with the
proceeds of our Senior Secured Discount Notes and borrowings under our new
revolving credit facility on February 17, 2004 our interest rate risk has
decreased substantially. Our revolving credit facility is at a variable rate of interest. An
increase of 1% in interest rates would result in an additional $100,000 of
annual interest expense for each $10.0 million in borrowings under our
revolving credit facility. We will thus continue to be exposed to interest
rate risk to the extent of our borrowings under the revolving credit facility. 
 ITEM 4. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in our filings under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
periods specified in the rules and forms of the Securities and Exchange
Commission. This information is accumulated and communicated to our
management, including our principal executive officer and our principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Our management, including our principal executive officer and our
principal financial officer, recognizes that any set of controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures as of the end
of the period covered by this report. Based on this evaluation, our principal
executive officer and principal financial officer concluded that our disclosure
controls and procedures are effective in alerting them on a timely basis to
material information required to be disclosed in our periodic filings. Changes in Internal Controls There were no significant changes in our internal controls during the
quarter or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in the foregoing paragraph. 29




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##### 



PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS None. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS We sold 704 shares of newly-created Series B Preferred Stock during the
quarter to our Chief Executive and certain other officers in private
transactions at a purchase price of $162 per share. The Series B Preferred
Stock has not been registered under the Securities Act of 1933, is restricted
against transfer and was sold in reliance on the exemption from registration
provided under Section 4(2) of the Securities Act. 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES None 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 ITEM 5. OTHER INFORMATION None 
 ITEM 6. EXHIBITS  (a)
    
    The following exhibits are filed with this report.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer furnished pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.32.2
    
    Certification of Chief Financial Officer furnished pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. PLIANT CORPORATION/s/ JAMES IDEJAMES IDEExecutive Vice President andChief Financial Officer(Authorized Signatory andPrincipal Financial and Accounting Officer)
 Date: November 10, 2004 30




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##### 



INDEX TO EXHIBITS Exhibits31.1
    
    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.
 31