e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2005
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission File Number:
001-32563
ORCHIDS PAPER PRODUCTS
COMPANY
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A Delaware
Corporation
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I.R.S. Employer
Identification
Number 23-2956944
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4826 Hunt Street
Pryor, Oklahoma 74361
Registrants telephone number, including area code:
(918) 825-0616
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Exchange on Which
Registered
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Common Stock, $0.001 Par Value
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American Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition accelerated filer and
large accelerated filer in
Rule 12b-2
of the Exchange Act. (Check One).
Large Accelerated
Filer o Accelerated
Filer o Non-accelerated
Filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The initial public offering of the registrants common
stock was effective on July 14, 2005, prior to which date
there was no public market in the registrants common
equity.
As of March 14, 2006, there were outstanding
4,156,250 shares of common stock, none of which are held in
treasury.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrants next
Annual Meeting of Stockholders to be held on June 13, 2006
are incorporated by reference into Part III of this
Form 10-K.
PART I
When we use the terms Orchids, we,
us, or the Company, we mean Orchids
Paper Products Company, a Delaware Corporation. Throughout this
Form 10-K
we incorporate by reference certain information in
parts of other documents filed with the Securities and Exchange
Commission (the SEC). The SEC allows us to disclose
important information by referring to it in that manner. Please
refer to such information.
In Item 1A., beginning on page 10, we discuss some of
the business risks and factors that could cause actual results
to differ materially from those stated in the forward-looking
statements and from our historical results.
Overview
of Our Business
We manufacture bulk tissue paper, known as parent rolls, and
convert parent rolls into a full line of tissue products,
including paper towels, bathroom tissue and paper napkins, for
the consumer, or at-home, market. We market our
products primarily to the private label segment of the consumer
tissue market and have focused on serving value retailers. By
value retailers, we mean retailers typically known as dollar
stores, which offer a limited selection across a broad range of
products at everyday low prices in a smaller store format. While
we have customers located throughout the United States, we
distribute most of our products primarily within an approximate
900-mile
radius of our Oklahoma facility. Our products are sold primarily
under our customers private labels and, to a lesser
extent, under our brand names such as
Colortex®
and
Velvet®.
In 2005, we generated revenue of $57.7 million, of which
56% came from paper towels, 35% came from bathroom tissue and 9%
came from paper napkins. In 2005, 81% of our revenue came from
six value retailers: Dollar General, Family Dollar, Freds,
Dollar Tree, Variety Wholesale, and Big Lots. The balance of
2005 revenue came from grocery stores, grocery wholesalers and
co-ops, and convenience stores. Dollar General is the largest
value retailer in the United States and our largest customer,
accounting for 54% of our 2005 revenue.
We manufacture parent rolls in our paper mill located in Pryor,
Oklahoma. Our facility manufactures parent rolls from recycled
waste paper using three paper machines. Parent rolls are
converted into finished tissue products at our converting
facility, which contains ten lines of converting equipment and
is located adjacent to our paper mill.
Our paper mill, which generally operates 24 hours per day,
362 days per year, typically produces between 26,000 and
27,000 tons of paper per year. In 2005, this represented
approximately two thirds of the current parent roll requirements
for our converting facility. We satisfy the remainder of our
parent roll needs through open market purchases of parent rolls
from third-party manufacturers. We are in the process of
purchasing and installing a new paper machine. We believe that
once the new paper machine is in operation, our paper making
capacity will increase, allowing us to reduce or eliminate our
need to purchase parent rolls.
History
We were formed in April 1998 to acquire our present facilities
located in Oklahoma out of a predecessor companys
bankruptcy and subsequently changed our name to Orchids Paper
Products Company.
In March 2004, Orchids Acquisition Group, Inc. acquired us for a
price of $21.6 million. Orchids Acquisition Group, Inc. was
formed by Taglich Brothers, Inc. and Weatherly Group, LLC
exclusively for the purpose of acquiring all of the outstanding
shares of Orchids Paper Products Company, and was subsequently
merged into us. The acquisition was financed by the sale of
$6.05 million of common stock, $2.15 million of
subordinated debentures with warrants to purchase common shares
and borrowings under our senior credit facility. These common
stock and subordinated debenture investments were made by
principals, employees and clients of Taglich Brothers, Inc. and
certain members of our management.
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In July 2005, we completed our initial public offering of
2,156,250 shares of common stock. Following the offering,
4,156,250 shares of common stock are outstanding. The
results of operations presented herein for all periods prior to
our acquisition by Orchids Acquisition Group, Inc. in March 2004
are referred to as the results of operations of the
predecessor. The results of operations presented
herein for all periods subsequent to the acquisition are
referred to as the results of operations of the
successor.
Our
Competitive Strengths
Focus on supplying value retailers. Since
1995, when our predecessor company developed a new business
plan, we have focused on supplying value retailers with private
label tissue products. We believe we were among the first
manufacturers to adopt this strategic focus. As a result of our
long-term commitment to these customers, we believe we have
developed a strong position as a reliable and responsive
supplier to value retailers and built our competitive position
in this market segment.
Proximity to key customers. We believe we are
well situated to serve our existing customer base, as well as
many prospective customers. We are one of the few paper mills
located in the south central United States. In addition, Pryor,
Oklahoma is situated in close proximity to three major
interstate highways and is close to regional transportation hubs
for several of the nations largest trucking companies. As
a result, many of the major population centers and our
customers distribution centers are within our
cost-effective shipping area.
Experienced management team and trained
workforce. Our senior management team of Michael
Sage and Keith Schroeder has a combined 41 years of
experience in the paper business. Mr. Sage has been
involved in operating our facility since 1985. The average
tenure of our hourly workers at the paper mill is 14 years
and the average tenure of our hourly workers at the converting
facility is seven years. We believe that this depth of
experience creates operational efficiencies and better enables
us to anticipate and plan for changes in our industry.
Low cost tissue manufacturers. Based on a
number of critical cost components, we believe we are one of the
lowest cost tissue producers in our market. We have an
advantageous local employment market and relatively low wage
rates. In addition, we qualify for special tax incentives under
the Internal Revenue Code as a result of our location on former
Indian land in Oklahoma, which further reduces our effective
cost of labor and increases our rate of depreciation for tax
purposes on new capital expenditures. This special tax incentive
effectively expired as of the end of 2005. Different versions of
an extension of this incentive through 2006 as well as other
amendments to the Internal Revenue Code have passed through the
House and Senate. The differences are currently being negotiated
in conference committee. We are located in an industrial park
that operates an onsite water treatment facility that offers
water at reasonable rates. As a result of our location, we also
have low property tax rates and access to electricity at
relatively low and stable rates.
Our
Strategy
Our goal is to be recognized as the supplier of choice of
private label tissue products for value retailers within our
geographic area. While the value retail channel is extremely
competitive and price sensitive and several of our competitors
are located in close proximity to our facility, we have targeted
the value retail channel of the consumer market because it is
experiencing rapid growth and follows a basic marketing strategy
of stocking a low number of high turnover stock keeping units,
or SKUs. The combination of a low number of SKUs and
consistent product movement enables us to operate our facilities
at a relatively low cost. Based on this target market, we have
sought to establish a low-cost manufacturing platform and
programs and practices necessary to provide outstanding customer
service to our value retail customers. We believe significant
opportunities exist to continue to increase our revenue and
profitability by:
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decreasing our reliance on third-party parent rolls;
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leveraging our existing customer relationships in the value
retail channel; and
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selectively expanding our customer base in other retail channels.
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Decreasing Our Reliance on Third-Party Parent
Rolls. We believe that replacing two of our three
existing paper machines with a new modern crescent former paper
machine will allow us to improve our cost structure by reducing
or eliminating our need to purchase parent rolls from
third-party suppliers and reducing our cost of internally
produced paper. We currently are a net buyer of
parent rolls, meaning we convert more tons of parent rolls into
finished goods than we have the capacity to produce at our paper
mill. This results in our need to purchase parent rolls from
third-party suppliers, where costs are typically much higher
than internally produced paper. In 2005, our average cost of
internally produced parent rolls was approximately $740 per
ton, while our average cost of parent rolls purchased from third
parties was approximately $1,024 per ton. The market price
of parent rolls can significantly fluctuate and, in certain
periods, we may be unable to purchase sufficient quantities of
parent rolls to meet our converting needs. In addition, our
paper machines are 1950s vintage machines which operate at much
slower speeds than modern paper machines. We applied the
proceeds from the July 2005 initial public offering toward the
purchase of a new, highly efficient paper machine to replace two
of our smaller paper machines. The estimated cost of this
project is $30.5 million. We expect the new paper machine
to start production by the end of the second quarter of 2006 and
to be fully operational by the early part of the fourth quarter
of 2006, at which time our parent roll production capacity will
increase by an estimated 70%. We believe our investment in a new
paper machine will position us to reduce or eliminate purchases
of parent rolls from third parties and lower our average
production costs for those parent rolls we produce in-house. In
addition, by providing the converting equipment a consistent
source of paper with similar characteristics, we believe we will
increase efficiency and decrease waste in the converting plant.
Based on current operating costs, our estimated cost of
production on our current three machines is approximately
$790 per ton. Once our new paper machine is fully
operational, primarily as a result of faster operating speeds on
our new paper machine, we expect to produce parent rolls on our
new paper machine and one current machine at an average cost of
approximately $685 per ton, using the same cost assumptions.
Leveraging Our Existing Customer Relationships in the Value
Retail Channel. The value retail channel has
experienced rapid growth over the past several years and we
believe it continues to offer an attractive opportunity in the
private label tissue market. As a whole, the value retail
channel is projected to continue growing, with the two largest
value retailers projecting new store openings of approximately
1,200 stores in 2006.
We have developed key customers in the value retail channel by
capitalizing on our full line of products, focusing on value
retailers and improving our low-cost manufacturing capabilities.
As a result, we believe we are among the suppliers of choice for
customers who seek value tissue products. As a result of the
lower costs that can be achieved through the addition of the new
paper machine, we believe we have an opportunity to increase
sales to our existing customers by expanding the number of
distribution centers that we supply. We have identified two
distribution centers of our existing customers that are located
in our geographic region that we are not currently supplying. In
addition, we are looking to expand our product offering at two
distribution centers where we currently do not supply the
complete value private label product line. The ability to
produce all or substantially all of our own paper at lower costs
will allow us to compete more effectively to supply these
distribution centers. We also have opportunities to serve new
distribution centers that may be opened by our customers in our
cost-effective shipping area.
Selectively Expanding Our Customer Base in Other Retail
Channels. In addition to the preceding growth
opportunities identified with several of our key customers, we
believe we have growth opportunities with certain grocery
stores, grocery wholesalers and cooperatives, and various other
merchandisers. We intend to penetrate these other important
retail channels by replicating the model we used to successfully
establish our value retail business.
Product
Overview
We offer our customers an array of private label products,
including bathroom tissue, paper towels and paper napkins. In
2005, 56% of our revenues were derived from paper towels, 35%
from bathroom tissue and 9% from paper napkins. Of our products
sold in 2005, 79% were packaged as private label products in
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accordance with our customers specifications. The
remaining 21% were packaged under our brands
Velvet®,
Colortex®,
Ultra
Valu®,
Dry-Mop®
and Soft &
Fluffy®.
We do not actively promote our brand names and do not believe
our brand names have significant market recognition. Our branded
products are primarily sold to smaller customers, which use them
as their in-store labels.
Customers
Our customers include value retailers, grocery stores, grocery
wholesalers and cooperatives, specialty stores and convenience
stores. Our recent growth has come from serving customers in the
growing value retail channel. We were among the first to focus
on serving this retail channel and we have benefited from their
increased emphasis on consumables, like tissue products, as part
of their merchandising strategies. By seeking to provide
consistently low prices, superior customer service, and improved
product quality, we believe we have differentiated ourselves
from our competitors and generated momentum with value
retailers. In 2005, approximately 81% of our revenues were
derived from sales to the value retail channel.
Our ability to increase revenue depends significantly upon the
growth of our largest customers, our ability to take market
share from our competitors and our ability to increase business
in the grocery and other retail chains. Our largest customers
have grown over the past several years and anticipate continuing
to grow their operations in the future. We are attempting to
diversify our customers by implementing private label programs
with several regional supermarket chains, but it is likely our
business will remain concentrated among value retailers for the
foreseeable future.
We service the value retail channel primarily by supplying
distribution centers within our cost-effective shipping area.
Freight is a significant cost component which limits the
competitive geography of a given manufacturing facility. We
consider our current cost-effective shipping area to be within
an approximate
900-mile
radius of our facility. We supply a portion of or substantially
all of the value private label products to over half of the
value retail distribution centers located within our
cost-effective shipping area.
The following several paragraphs provide additional detail
regarding our largest customers.
Dollar General. Dollar General is our largest
customer, accounting for 54% of our sales in 2005. With over
7,900 stores in 31 states, Dollar General is the largest
value retailer. According to its press release dated
March 21, 2006, Dollar General increased its net number of
stores by 609 and 620 during fiscal 2005 and 2004, respectively
and plans 800 new store openings in fiscal 2006. We currently
supply substantially all of the low-end private label tissue
products for three of Dollar Generals eight distribution
centers. We believe we have a good relationship with Dollar
General.
Family Dollar. Family Dollar is our second
largest customer, accounting for approximately 15% of our sales
in 2005. Family Dollar has become one of the leading value
retailers in the industry with nearly 6,000 stores in
44 states. In its most recent Annual Report on
Form 10-K
for the fiscal year ended August 27, 2005, the
company reported that it plans to open approximately 400 stores
during fiscal 2006. We anticipate that many of these new stores
will be in our current cost-effective shipping area. Family
Dollar currently has eight distribution centers. We currently
supply substantially all of the value private label tissue
products to two of the distribution centers and supply
approximately half of the value private label tissue products to
two other distribution centers.
Other Customers. Our other key customers
include Freds, Variety Wholesale, Big Lots, and Dollar
Tree. In 2005, each of these customers represented less than 5%
of our revenue.
Sales and
Marketing Team
We have attracted and retained an experienced sales staff and
have established a network of independent brokers. Our sales
staff and broker network are instrumental in establishing and
maintaining strong relationships with our customers.
The sales staff directly services five customers representing
approximately 24% of our sales in 2005. We also use a network of
approximately 30 brokers. Our management team recognizes that
these brokers have
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relationships with many of our customers and we work with these
brokers in an effort to increase our business with these
accounts. Our sales and marketing organization seeks to partner
with our brokers to leverage these relationships. With each of
our main customers, however, our senior management team
participates with the independent brokers in all critical
customer meetings to establish direct customer relationships.
A majority of brokers provide marketing support to their retail
accounts which includes shelf placement of products and in-store
merchandising activities to support our product distribution. We
generally pay our brokers commissions ranging from 1% to 3% of
revenue. Sales through our largest volume broker accounted for
slightly more than half of our revenue for 2005 and 2004. Total
commissions paid in the twelve months ended December 31,
2005 and 2004, were $879,000 and $788,000, respectively.
Manufacturing
We own and operate a paper mill and converting facility at our
headquarters in Pryor, Oklahoma. Our 120,000 square-foot
paper mill produces parent rolls that are then converted into
tissue products at our adjacent converting facility. The paper
mill facility includes three paper machines that produce paper
made entirely from preconsumer solid bleached sulfate paper, or
SBS paper.
The mill operates 24 hours a day, 362 days a year,
with a three-day annual planned maintenance shutdown, at a high
level of efficiency. However, the paper mill is not able to
fully satisfy our parent roll demand and we purchase our
remaining parent roll needs from other mills. The following
table sets forth our volume of parent rolls manufactured,
purchased and converted for each of the past five years:
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2005
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2004
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2003
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2002
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2001
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(Tons)
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Manufactured
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26,051
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26,382
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26,701
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25,683
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26,332
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Purchased
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12,153
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5,017
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3,349
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10,363
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8,825
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Converted
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38,204
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31,399
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30,050
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36,046
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35,157
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In order to expand our capacity and reduce our production costs,
we are in the process of installing a new paper machine in a new
building adjacent to our present mill. We expect to initially
discontinue production on two of our existing three paper
machines once the new machine begins production. When fully
operational, we expect the new configuration (one new paper
machine and one current machine) will increase our output of
parent rolls by approximately 70% over the amount produced in
2005 and reduce our per ton production costs by approximately
13%. This additional capacity should allow us to eliminate
purchases of parent rolls from third parties and reduce the cost
of internally produced parent rolls. Once the new machine is
fully operational, we will evaluate our capability and the
market needs to determine the viability of running one or both
of the two remaining paper machines.
We convert parent rolls into finished tissue products at our
converting facility. The converting process, which varies
slightly by product category, generally includes embossing,
laminating, and perforating or cutting the parent rolls as they
are unrolled; pressing two or more plies together in the case of
multiple-ply products; printing designs in certain cases and
cutting into rolls or stacks; wrapping in polyethylene film and
packing in corrugated boxes for shipment.
Our 300,000 square-foot converting facility has the
capacity to produce approximately 7.0 million cases of
retail tissue products a year. To meet current demand of
approximately 5.8 million cases a year, we operate the
converting facility on a 24 hour a day, five day a week
schedule, supplemented by certain lines operating over the
weekend. We designed the ten production lines in the plant to
enhance capacity and maximize efficiency. Our converting
operation utilizes relatively modern equipment and our recently
purchased towel line, originally acquired under an operating
lease in 2001, is high speed and offers four-color and process
printing capabilities. One of the key advantages of our
converting plant is its flexible manufacturing capabilities
which enables us to provide our customers with a variety of
package sizes and format options, which allows our customers to
fit products into particular price categories. We believe our
converting facility, together with our low direct labor costs
and overhead, combine to produce low overall operating costs,
substantially offsetting our currently high parent roll costs.
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Distribution
Our products are delivered to our customers in truck-load
quantities. Most of our customers arrange for transportation of
our products to their distribution centers. We have established
a
drop-and-hook
program where the customer returns its empty trailer to our
warehouse and departs with a full, preloaded trailer. This
provides a means for several key customers to minimize freight
costs. For our remaining customers, we arrange for third-party
freight companies to deliver the products.
Raw
Materials and Energy
The principal raw materials used to manufacture our parent rolls
are recycled waste paper and water. Recycled waste paper
accounts for 100% of the fiber requirement for our parent rolls.
The de-inking process at the paper mill is currently configured
to process a particular class of recycled waste paper known as
SBS paper. We source the majority of our SBS paper from two
paper brokers. If we were unable to purchase a sufficient
quantity of SBS paper or if prices materially increased, we
could reconfigure the de-inking process to process other forms
of waste paper or use an alternative type of waste paper with
our existing de-inking process. Reconfiguring our de-inking
plant would require additional capital expenditures, which could
be substantial. Alternative types of waste paper could result in
higher costs. We also seek to assure adequate supplies of SBS
paper by maintaining approximately a three-week inventory.
Energy is a key cost factor and we experienced significant
increases in both natural gas and electricity during 2005. We
source our electricity from the Grand River Dam Authority. Our
steam supply is purchased from an adjacent steam generation
facility. As part of our new paper machine project, we are
installing a boiler to supply our own steam as either a primary
or backup source of steam. We do not have any fixed price
contracts or hedges in place with gas suppliers. We purchase our
gas through a broker. Our broker purchases gas using a
combination of fixed price contracts, options, spot purchases
and other means to reduce our risk.
Backlog
Our tissue products generally require short production times. We
manufacture on a purchase order basis with a two-week lead time.
Typically, we have a backlog of approximately two weeks of
sales. As of December 31, 2005, our backlog of customer
orders was 206,000 cases or approximately $2.2 million.
Trademarks
and Trade Names
Our price/value consumer tissue products are sold under various
brand names, including
Colortex®,
Velvet®,
Ultra
Valu®,
Dri-Mop®,
Big
Mopper®
and Soft &
Fluffy®.
We intend to renew our registered trademarks prior to
expiration. We do not believe these trademarks are significant
corporate assets. Our branded products are primarily sold to
smaller customers, which use them as their in-store labels.
Employee
and Labor Relations
As of December 31, 2005, we had approximately 264 full time
employees of whom 224 were union hourly employees and 40 were
non-union salaried employees. Of our employees, approximately
243 were engaged in manufacturing and production, 19 were
engaged in sales, clerical and administration, and two were
engaged in engineering. Our hourly employees are represented
under collective bargaining agreements with the United Steel,
Paper and Forestry, Rubber, Manufacturing, Energy, Allied
Industrial & Service Workers International Union Local
5-930 and Local 5-1480 at the mill and converting facilities,
respectively. The current contract with our hourly employees at
the mill facility expires February 2, 2008, while the
contract with our hourly employees at the converting facility
expires June 23, 2007. We have not experienced a work
stoppage or request for arbitration in the last ten years and no
requests for arbitration, grievance proceedings, labor disputes,
strikes or labor disturbances are currently pending or
threatened against us. We believe we have good relations with
our union employees at each of our facilities.
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Environmental,
Health and Safety Matters
Our operations are subject to various environmental, health and
safety laws and regulations promulgated by federal, state and
local governments. These laws and regulations impose stringent
standards on us regarding, among other things, air emissions,
water discharges, use and handling of hazardous materials, use,
handling and disposal of waste, and remediation of environmental
contamination. Since our products are made from SBS paper, we do
not make extensive use of chemicals.
The U.S. Environmental Protection Agency (the
EPA) has required that certain pulp and paper mills
meet stringent air emissions and revised wastewater discharge
standards for toxic and hazardous pollutants. These proposed
standards are commonly known as the Cluster Rules.
Our operations are not subject to further control as a result of
the current Cluster Rules and therefore, no related
capital expenditures are anticipated.
We believe our manufacturing facilities are in compliance in all
material respects with all existing federal, state and local
environmental regulations, but we cannot predict whether more
stringent air, water and solid waste disposal requirements will
be imposed by government authorities in the future. Pursuant to
the requirements of applicable federal, state and local statutes
and regulations, we believe that we, or the industrial park in
which we are located, possess all of the environmental permits
and approvals necessary for the operation of our facilities.
Executive
Officers
Set forth below is the name, age as of March 14, 2006,
position and a brief account of the business experience of each
of our executive officers.
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Name
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Age
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Position
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Michael P. Sage
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59
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Chief Executive Officer and
President, Director
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Keith R. Schroeder
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50
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Chief Financial Officer
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Michael
P. Sage, 59, Chief Executive Officer and President,
Director
Mr. Sage has been our Chief Executive Officer and President
since April 1998. From 1985 to 1998, Mr. Sage served in a
number of management positions with our predecessor company,
including Executive Vice President
(1995-1998),
Vice President of Mill Operations responsible for tissue mills
in Oklahoma, Arizona and Oregon
(1991-1995),
and Manager of Paper Manufacturing
(1985-1989).
From 1989 to 1991, he was Vice President of Operations for
Pentairs Niagara Division. From 1969 to 1985, he held a
number of manufacturing positions with Procter &
Gamble. Mr. Sage holds a BS degree in Chemical Engineering
from Montana State University.
Keith
R. Schroeder, 50, Chief Financial Officer
Mr. Schroeder has been our Chief Financial Officer since
January 2002. Prior to joining us, he served as Corporate
Finance Director for Kruger Inc.s tissue operations from
October 2000 to December 2001 and as Vice President of Finance
and Treasurer of Global Tissue from 1996 to October 2000. Global
Tissue was acquired by Kruger Inc. in 1999. Prior to joining
Global Tissue, Mr. Schroeder held a number of finance and
accounting positions with Cummins Engine Company
(1989-1996)
and Atlas Van Lines
(1978-1989).
Mr. Schroeder is a certified public accountant and holds a
BS degree in Business Administration with an accounting major
from the University of Evansville.
Available
Information
We file annual, quarterly and current reports and other
information with the Securities and Exchange Commission (the
SEC). You may read and copy any document we file
with the SEC at the SECs public reference room at
100 F Street, N.E., Washington, DC 20549. Please call the
SEC at
1-800-SEC-0330
for information on the public reference room. The SEC maintains
an internet site that contains annual, quarterly
9
and current reports, proxy and information statements and other
information that issuers (including Orchids Paper Products
Company) file electronically with the SEC. The SECs
internet site is www.sec.gov.
Set forth below and elsewhere in this Annual Report on
Form 10-K
and in other documents we file with the SEC are some of the
principal risks and uncertainties that could cause our actual
business results to differ materially from historical results or
any forward-looking statements or other projections contained in
this Report. These risk factors should be considered in addition
to our cautionary comments concerning forward-looking statements
in this Report.
Risks
Related To Our Business
We
face intense competition and if we cannot successfully compete
in the marketplace, our business, financial condition and
operating results may be materially adversely
affected.
The consumer market for private label tissue products is highly
competitive. Many of our competitors have greater financial,
managerial, sales and marketing and capital resources than we
do, which may allow them to respond more quickly to new
opportunities or changes in customer requirements. These
competitors may also be larger in size or scope than us, which
may allow them to achieve greater economies of scale or allow
them to better withstand periods of declining prices and adverse
operating conditions.
Our ability to compete successfully depends upon a variety of
factors, including:
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the availability, quality and cost of parent rolls purchased
from third parties;
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aggressive pricing by competitors, which may force us to
decrease prices in order to maintain market share;
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our ability to maintain and improve plant efficiencies and
operating rates and lower manufacturing costs;
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the availability, quality and cost of raw materials,
particularly recycled waste paper and labor; and
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the cost of energy.
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Our paper products are commodity products, and if we do not
maintain competitive prices, we may lose significant market
share. Our ability to keep our prices at competitive levels
depends in large part on our ability to control our costs. In
addition, consolidation among retailers in the value retail
channel may put additional pressure on us to reduce our prices
in order to maintain market share. If we are unable to
effectively adjust our cost structure to address such increased
competitive pressures, our sales level and profitability could
be harmed and our operations could be materially adversely
affected.
A
substantial percentage of our revenues are attributable to two
large customers, which may decrease or cease purchases at any
time.
Our largest customer, Dollar General, accounted for slightly
more than half of our revenue in 2005. Our second largest
customer, Family Dollar, accounted for approximately 15% of our
revenues in 2005. We currently supply substantially all of the
value private label products at three of Dollar Generals
eight distribution centers, substantially all of the value
private label products at two of Family Dollars eight
distribution centers and approximately half of the value private
label products at two other Family Dollar distribution centers.
We expect that sales to a limited number of customers will
continue to account for a substantial portion of our revenues
for the foreseeable future. Sales to these customers are made
pursuant to purchase orders and not supply agreements. We may
not be able to keep our key customers or these customers may
cancel purchase orders or reschedule or decrease their level of
purchases from us. Any substantial decrease or delay in sales to
one or more of our key customers would harm our sales and
financial results. In particular, the loss of sales to one or
more distribution centers would result in a sudden and
significant
10
decrease in sales. If sales to current key customers cease or
are reduced, we may not obtain sufficient orders from other
customers necessary to offset any such losses or reductions.
We may
experience cost overruns in and delays in the start up of our
project to expand our paper mill.
It is possible that we may experience cost overruns in and
delays in the start up of our project to expand our paper mill.
We have arranged a construction loan facility based on the total
projected costs of the project. If our actual costs exceed our
projections significantly, we may need to seek additional
sources of capital to complete the project. If we are unable to
secure such additional capital on reasonable terms or at all,
and consequently the project is delayed or abandoned, we may
experience a material adverse effect on our business. The new
paper machine project is very large in scope with a significant
number of variables, many of which are not within our control.
We have hired an engineering firm to act as project manager to
maximize our ability to start up the new paper machine per the
project schedule, which is currently estimated to be between
late May and the middle of June, 2006. Any number of variables
could cause the paper machine project to be delayed in its start
up, which would extend our dependence on parent rolls purchased
from third parties and subject our results of operations to the
continued high costs and uncertain availability of these parent
rolls.
We
have significant indebtedness which limits our free cash flow
and subjects us to restrictive covenants relating to the
operation of our business.
In addition to the proceeds of the July 2005 public offering, as
of February 28, 2006, we had borrowed approximately
$3.6 million pursuant to our existing construction loan
facility to fund the expansion of our paper mill. We anticipate
borrowing an additional $9.8 million to complete the
project which will bring total borrowings under the construction
loan facility to approximately $13.4 million. As a result,
our total indebtedness will increase considerably from
$18.6 million at year-end 2005 to approximately
$29.2 million in the third quarter of 2006. Accordingly,
our annual interest costs will increase substantially from the
$1.6 million (includes capitalized interest on the new
paper machine project of $411,000) incurred in 2005.
Furthermore, after the new mill project is certified as complete
and the construction loan is refinanced, we expect that our
required principal repayments will increase to approximately
$210,000 per month from $140,000 per month. Also, our
term loan agreement with our bank group requires an annual
excess cash flow recapture payment starting in 2007. Operating
with this substantial amount of leverage requires us to direct a
significant portion of our cash flow from operations to make
payments on our debt, which reduces the funds otherwise
available for operations, capital expenditures, future business
opportunities and other purposes. It also limits our flexibility
in planning for, or reacting to, changes in our business and our
industry and impairs our ability to obtain additional financing.
The terms of our existing term loan agreement require us to meet
specified financial ratios and other financial and operating
covenants which restrict our ability to incur additional debt or
place liens on our assets, make capital expenditures, effect
mergers or acquisitions, dispose of assets or pay dividends in
certain circumstances. If we fail to meet those financial ratios
and covenants and our lenders do not waive them, we will be
required to pay fees and penalties. Our lenders could also
accelerate the maturity of our debt if we fail to meet those
financial ratios and covenants and proceed against any pledged
collateral, which would force us to seek alternative financing.
If this were to happen, we may be unable to obtain additional
financing or it may not be available on terms acceptable to us.
The
availability of and prices for energy will significantly impact
our business.
All of the energy necessary to produce our paper products is
purchased on the open market and, as a result, the price and
other terms of those purchases are subject to change based on
factors such as worldwide supply and demand and government
regulation. We rely primarily on electric energy and natural
gas. In particular, natural gas prices are highly volatile.
During the year 2005, our price of natural gas increased from an
average price of $6.38 per MMBTU in the first quarter of
2005 to an average price of $10.48 in the fourth quarter of
2005. In 2005, we consumed 263,500 MMBTU of natural gas at
an average price of $7.76 per MMBTU for a total cost of
$2,045,000. If our energy costs increase, our cost of sales will
increase, and our
11
operating results may be materially adversely affected.
Furthermore, we may not be able to pass increased energy costs
on to our customers if the market does not allow us to raise the
prices of our finished products. If price adjustments
significantly trail the increase in energy costs or if we cannot
effectively hedge against price increases, our operating results
may be materially adversely affected.
Our
exposure to variable interest rates may affect our financial
health.
Debt incurred under our existing term loan agreements accrues
interest at a variable rate. During 2005, our term debt interest
rates rose from 6.78% at the start of the year to 8.44% at
year-end. Any further increase in the interest rates on our debt
would result in a higher interest expense which would require us
to dedicate more of our cash flow from operations to make
payments on our debt and reduce funds available to us for our
operations and future business opportunities which could have a
material adverse effect on our results of operations. For more
information on our liquidity, see Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital
Resources.
We
depend on our management team to operate the Company and execute
our business plan.
We are highly dependent on the principal members of our
management staff, in particular Michael Sage, our Chief
Executive Officer, and Keith Schroeder, our Chief Financial
Officer. We have entered into employment agreements with Michael
Sage and Keith Schroeder that expire in 2009. As of
December 31, 2005, we did not maintain key person insurance
with respect to our executive officers, although we intend to
purchase a key man life insurance policy on Mike Sage in 2006.
The loss of any of the executive officers or our inability to
attract and retain other qualified personnel could harm our
business and our ability to compete.
We
exclusively use preconsumer solid bleached sulfate paper, or SBS
paper, to produce parent rolls and any disruption in our supply
or cost of preconsumer SBS paper could disrupt our production
and harm our ability to produce tissue at competitive
prices.
We do not produce any of the waste paper we use to produce our
parent rolls. We depend heavily on access to sufficient,
reasonably-priced quantities of waste paper to manufacture our
tissue products. Our paper mill is configured to convert waste
paper, specifically SBS paper, into paper pulp for use in our
paper production lines. In 2005, we purchased approximately
$6.7 million of SBS paper, or 34,000 tons. We purchase all
of our SBS paper from third parties with about three-fourths
supplied by two paper brokers. These brokers in turn source SBS
paper from numerous producers of preconsumer SBS paper. We
purchase our SBS paper on a purchase order basis and do not have
a contractual right to an adequate supply, quality or acceptable
pricing on a long-term basis.
Prices for SBS paper have fluctuated significantly in the past
and will likely continue to fluctuate significantly in the
future, principally due to market imbalances between supply and
demand. If either the available supply of SBS paper diminishes
or the demand for SBS paper increases, it could substantially
increase the cost of SBS paper or cause a production slow-down
or stoppage until we are able to identify new sources of SBS
paper or reconfigure our machines to process other available
forms of waste paper or other sources of paper fiber. We could
experience a material adverse effect on our business, financial
condition and results of operations should the price or supply
of SBS paper be disrupted.
We
purchase parent rolls on the open market and any disruption in
supply or increase in cost of parent rolls could harm our
ability to produce tissue at competitive prices.
We have purchased parent rolls on the open market since 1998
because our own parent roll production has not adequately
supplied the requirements of our converting facility. We
purchased approximately 12,200, 5,000 and 3,300 tons of paper on
the open market in 2005, 2004 and 2003, respectively, to
supplement our paper-making capacity. Parent rolls are a
commodity product and thus are subject to market price and
availability. We have experienced significantly higher parent
roll prices in recent periods, as well as limited availability,
which has negatively affected our profitability. We anticipate
that the trend toward higher prices will continue for the
foreseeable future. We intend to reduce or eliminate purchases
of parent rolls by
12
purchasing a new paper machine, which project is underway and is
expected to be fully operational by October 2006. Until the
paper machine is operational, we will continue to be subject to
price volatility and limited availability of parent rolls. Any
increase in parent roll prices or decrease in parent roll
availability could have an adverse effect on our business or
operations.
Labor
interruptions would adversely affect our business.
All of our hourly paid employees are represented by the United
Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied
Industrial & Service Workers International Union. The
collective bargaining agreement with Local 5-930, which
represents the paper mill workers, will expire on
February 2, 2008, and the collective bargaining agreement
with Local 5-1480, which represents the converting facility
workers, will expire on June 23, 2007. Negotiations of new
collective bargaining agreements may result in significant
increases in the cost of labor or could breakdown and result in
a strike or other disruption of our operations. If any of the
preceding were to occur, it could impair our ability to
manufacture our products and result in increased costs
and/or
decreased operating results. In addition, some of our key
customers and suppliers are also unionized. Disruption in their
labor relations could also have an adverse effect on our
business.
Our
paper mill may experience shutdowns adversely affecting our
financial position and results of operations.
We currently manufacture and process our paper at a single
facility in Pryor, Oklahoma. Any natural disaster or other
serious disruption to this facility due to tornado, fire or any
other calamity could damage our capital equipment or supporting
infrastructure and materially impair our ability to manufacture
and process paper. Even a short-term disruption in our
production output could damage relations with our customers,
causing them to reduce or eliminate the amount of finished
products they purchase from us. Any such disruption could result
in lost revenues, increased costs and reduced profits.
Our existing paper machines are approximately 50 years old.
To meet demand, all three machines operate continuously.
Unexpected production disruptions could cause us to shut down
our paper mill. Those disruptions could occur due to any number
of circumstances, including shortages of raw materials,
disruptions in the availability of transportation, labor
disputes and mechanical or process failures.
If our mill is shut down, it may experience a prolonged start up
period, regardless of the reason for the shutdown. Those start
up periods could range from several days to several months,
depending on the reason for the shutdown and other factors. The
shutdown of our mill for a substantial period of time for any
reason could have a material adverse effect on our financial
position and results of operations.
Our
operations require substantial capital, and we may not have
adequate capital resources to provide for all of our cash
requirements.
Our operations require substantial capital. Expansion or
replacement of existing facilities or equipment may require
substantial capital expenditures. For example, our new paper
machine project is estimated to cost $30.5 million. In
addition, we will likely need to acquire an additional
converting line to meet the additional parent roll capacity from
our new paper machine project, which we currently estimate would
cost approximately $5.0 million. Our capital resources may
not be sufficient for these purposes. If our capital resources
are inadequate to provide for our operating needs, capital
expenditures and other cash requirements, this shortfall could
have a material adverse effect on our business and liquidity.
Our
business is subject to extensive governmental regulations and
any imposition of new regulations or failure to comply with
existing regulations could involve significant additional
expense.
Our operations are subject to various environmental, health and
safety laws and regulations promulgated by federal, state and
local governments. These laws and regulations impose stringent
standards on us regarding, among other things, air emissions,
water discharges, use and handling of hazardous materials, use,
handling and disposal of waste, and remediation of environmental
contamination. Any failure to comply with applicable
environmental laws, regulations or permit requirements may
result in civil or criminal fines or
13
penalties or enforcement actions. These may include regulatory
or judicial orders enjoining or curtailing operations or
requiring corrective measures, installing pollution control
equipment or remedial actions, any of which could involve
significant expenditures. Future development of such laws and
regulations may require capital expenditures to ensure
compliance. We may discover currently unknown environmental
problems or conditions in relation to our past or present
operations, or we may face unforeseen environmental liabilities
in the future. These conditions and liabilities may require site
remediation or other costs to maintain compliance or correct
violations of environmental laws and regulations; or result in
governmental or private claims for damage to person, property or
the environment, either of which could have a material adverse
effect on our financial condition and results of operations. In
addition, we may be subject to strict liability and, under
specific circumstances, joint and several liability for the
investigation and remediation of the contamination of soil,
surface and ground water, including contamination caused by
other parties, at properties that we own or operate and at
properties where we or our predecessors arranged for the
disposal of regulated materials.
We
incur significant costs as a result of operating as a public
company.
As a public company, we are incurring significant legal,
accounting and other expenses that we did not incur as a private
company. In addition, the Sarbanes-Oxley Act of 2002, as well as
new requirements applicable to listing on the American Stock
Exchange, have required changes in corporate governance
practices of public companies. These new regulations and
requirements have increased our legal and financial compliance
costs and make some activities more time-consuming and costly.
For example, as a result of being a public company, we were
required to create additional board committees. We have incurred
additional costs associated with our public company reporting
requirements and will continue to do so in the future. An
example is the directors and officer liability insurance we
obtained as a result of becoming a public company. If we are
unable to effectively adjust our cost structure to address a
significant increase in our legal, accounting and other
expenses, our sales level and profitability could be harmed and
our operations could be materially adversely affected.
If we
fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results or
prevent fraud and, as a result, our business could be harmed and
current and potential stockholders could lose confidence in us,
which could cause our stock price to fall.
We will be evaluating our internal controls systems to allow
management to report on, and our independent auditors to attest
to, our internal controls. We will be performing the system and
process evaluation and testing (and any necessary remediation)
required to comply with the management certification and auditor
attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. As a result, we expect to incur
substantial additional expenses and diversion of
managements time. We cannot be certain as to the timing of
completion of our evaluation, testing and remediation actions or
their effect on our operations since there is presently no
precedent available by which to measure compliance adequacy. If
we are not able to implement the requirements of
Section 404 in a timely manner or with adequate compliance,
we may not be able to accurately report our financial results or
prevent fraud and might be subject to sanctions or investigation
by regulatory authorities such as the SEC or the American Stock
Exchange. Any such action could harm our business or
investors confidence in us, and could cause our stock
price to fall.
Risks
Related To Our Common Stock
We do
not pay cash dividends on our capital stock, and we do not
anticipate paying any cash dividends in the
future.
Since January 2003, we have not paid cash dividends on our
capital stock and we do not anticipate paying any cash dividends
in the future. Instead, we intend to retain our future earnings
to fund the development and growth of our business. In addition,
the terms of our loan agreement prohibit us from declaring
dividends without the prior consent of our lender.
14
Our
certificate of incorporation and bylaws, and Delaware law
contain provisions that could discourage a
takeover.
Our certificate of incorporation and bylaws and Delaware law
contain provisions that might enable our management to resist a
takeover. These provisions may:
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discourage, delay or prevent a change in the control of our
company or a change in our management;
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adversely affect the voting power of holders of common
stock; and
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limit the price that investors might be willing to pay in the
future for shares of our common stock.
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Our
future operating results may be below securities analysts
or investors expectations, which could cause our stock
price to decline.
Our revenue and income potential depends on expanding our
production capacity and finding buyers for our additional
production, and we may be unable to generate significant
revenues or grow at the rate expected by securities analysts or
investors. In addition, our costs may be higher than we,
securities analysts or investors expect. If we fail to generate
sufficient revenues or our costs are higher than we expect, our
results of operations will suffer, which in turn could cause our
stock price to decline. Our results of operations will depend
upon numerous factors, including:
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our ability to reduce production costs;
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demand for our products; and
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our ability to develop sales and marketing capabilities.
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Our operating results in any particular period may not be a
reliable indication of our future performance. In some future
quarters, our operating results may be below the expectations of
securities analysts or investors. If this occurs, the price of
our common stock will likely decline.
Our
common stock has only been publicly traded for a short period of
time, and we expect that the price of our common stock could
fluctuate substantially, possibly resulting in class action
securities litigation.
Before our initial public offering on July 15, 2005, there
was no public market for shares of our common stock. Since our
initial public offering, the average daily trading volume of our
common stock has been approximately 3,300 shares. The
market price for our common stock subsequent to the offering and
in the future will be affected by a number of factors, including:
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actual or anticipated variations in our results of operations or
those of our competitors;
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changes in earnings estimates or recommendations by securities
analysts or our failure to achieve analysts earnings
estimates; and
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developments in our industry.
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The stock prices of many companies in the paper products
industry have experienced wide fluctuations that have often been
unrelated to the operating performance of these companies.
Because of the low trading volume, our stock price is subject to
greater volatility. Following periods of volatility in the
market price of a companys securities, stockholders have
often instituted class action securities litigation against
those companies. Class action securities litigation, if
instituted against us, could result in substantial costs and a
diversion of our management resources, which could significantly
harm our business.
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Our
directors have limited personal liability and rights of
indemnification from us for their actions as
directors.
Our amended and restated certificate of incorporation limits the
liability of directors to the maximum extent permitted by
Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except
liability for:
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any breach of their duty of loyalty to the corporation or its
stockholders;
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acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
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unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
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any transaction from which the director derived an improper
personal benefit.
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This limitation of liability does not apply to liabilities
arising under the federal securities laws and does not affect
the availability of equitable remedies such as injunctive relief
or rescission.
Our amended and restated certificate of incorporation and bylaws
provide that we will indemnify our directors and executive
officers and other officers and employees and agents to the
fullest extent permitted by law.
We entered into separate indemnification agreements with each of
our directors and officers which are broader than the specific
indemnification provision under Delaware law. Under these
agreements, we are required to indemnify them against all
expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred, in connection with any actual,
or any threatened, proceeding if any of them may be made a party
because he or she is or was one of our directors or officers.
If any litigation or proceeding were pursued against any of our
directors, officers, employees or agents where indemnification
is required or permitted, we could incur significant legal
expenses and be responsible for any resulting settlement or
judgment.
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Item 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
We own a
36-acre
property in Pryor, Oklahoma and conduct all of our business from
that location. Our paper mill comprises approximately
120,000 square feet and houses three paper machines and
related processing equipment. The facility housing the new paper
mill was substantially complete at January 31, 2006, and
comprises approximately 60,000 square feet. Adjacent to our
paper mill, we have a converting facility which has ten lines of
converting equipment and comprises approximately
300,000 square feet.
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Annual
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Facility
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Capacity
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Sq. Ft.
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Paper
making existing machines
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27,000 tons
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120,000
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Paper making new
machine
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35,000 tons
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60,000
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Converting
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7,000,000 cases
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300,000
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We believe our facilities are well maintained and, with the
addition of the facility to house our new paper machine,
adequate to serve our present and near term operating
requirements. The replacement of two existing paper machines
with the new one will net an additional 18,000 tons of annual
papermaking capacity, which should enable us to meet our near
term parent roll requirements for the converting lines without
purchasing third-party parent rolls.
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Item 3.
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LEGAL
PROCEEDINGS
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From time to time, we are involved in litigation relating to
claims arising out of our operations in the normal course of
business. As of the date of this report, we were not engaged in
any legal proceedings which are expected, individually or in the
aggregate, to have a material adverse effect on us.
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Item 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
PART II
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Item 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
Information
Our common stock has been traded on the American Stock Exchange
under the symbol TIS since July 15, 2005. The
following table sets forth the high and low closing prices of
our common stock for the periods indicated and reported by the
American Stock Exchange.
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High
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Low
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Year Ended December 31,
2005:
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July 15, 2005 to
September 30, 2005
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$
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10.45
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$
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8.50
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Fourth Quarter
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$
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10.55
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$
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9.65
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As of February 28, 2006, there were approximately 90
stockholders of record of our common stock, although we believe
that there are a significantly larger number of beneficial
owners of our common stock. On March 14, 2006, the last
reported sale price of our common stock on the American Stock
Exchange was $13.70.
Dividends
Since January 2003, we have not paid cash dividends on our
capital stock and we do not anticipate paying any cash dividends
in the future. We anticipate that we will retain any earnings to
support operations and to finance the growth and development of
our business. Additionally, under our credit facilities, we are
prohibited from declaring dividends without the prior consent of
our lender. Therefore, we do not expect to pay cash dividends in
the foreseeable future. Any future determination relating to our
dividend policy will be made at the discretion of our board of
directors and will depend on a number of factors, including
future earnings, capital requirements, financial conditions,
future prospects and other factors that the board of directors
may deem relevant.
Recent
Sales of Unregistered Securities
None.
Initial
Public Offering and Use of Proceeds from Recent Securities
Offerings
See Liquidity and Capital Resources Overview
discussion under Item 7 of this report.
Repurchase
of Equity Securities
We do not have any programs to repurchase shares of our common
stock and no such repurchases were made during the quarter ended
December 31, 2005.
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Item 6.
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SELECTED
FINANCIAL DATA
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The following selected financial data should be read in
conjunction with Managements Discussion and Analysis
of Financial Condition and Results of Operations following
this section and our financial statements and related notes
included in Item 8 of this report. The following tables set
forth selected financial data as of and for the year ended
December 31, 2005, the period from March 1, 2004
through December 31, 2004, the period from January 1,
2004, through February 29, 2004, and the years ending
December 31, 2003, 2002 and 2001. The selected financial
data as of and for the year ended December 31, 2005, the
period from March 1, 2004 through December 31, 2004,
the period from January 1, 2004 through February 29,
2004, and as of and for the years ended December 31, 2003,
2002 and 2001, were derived from our and the Predecessors
audited financial statements. Orchids, as it existed prior to
its acquisition by Orchids Acquisition Group, Inc., is referred
to as predecessor. The consolidated financial
information of Orchids and Orchids Acquisition Group, Inc. as it
existed on and after March 1, 2004 is referred to as
successor. Our audited financial statements as of
December 31, 2005 and 2004, and for each of the three years
in the period ended December 31, 2005 are included below
under Item 8 of this
Form 10-K.
The historical results are not necessarily indicative of the
operating results to be expected in any future period.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten-Months
|
|
|
Two-Months
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands, except per case,
tons and per ton data)
|
|
|
Net Sales
|
|
$
|
57,700
|
|
|
$
|
39,736
|
|
|
$
|
7,191
|
|
|
$
|
46,927
|
|
|
$
|
44,524
|
|
|
$
|
53,202
|
|
|
$
|
51,304
|
|
Cost of Sales
|
|
|
49,769
|
|
|
|
33,390
|
|
|
|
6,156
|
|
|
|
39,546
|
|
|
|
36,673
|
|
|
|
44,261
|
|
|
|
42,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
7,931
|
|
|
|
6,346
|
|
|
|
1,035
|
|
|
|
7,381
|
|
|
|
7,851
|
|
|
|
8,941
|
|
|
|
8,382
|
|
Selling, General and Administrative
Expenses
|
|
|
4,629
|
|
|
|
3,363
|
|
|
|
1,196
|
|
|
|
4,559
|
|
|
|
4,069
|
|
|
|
4,623
|
|
|
|
4,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
3,302
|
|
|
|
2,983
|
|
|
|
(161
|
)
|
|
|
2,822
|
|
|
|
3,782
|
|
|
|
4,318
|
|
|
|
4,338
|
|
Interest Expense
|
|
|
1,213
|
|
|
|
1,052
|
|
|
|
45
|
|
|
|
1,097
|
|
|
|
347
|
|
|
|
574
|
|
|
|
1,220
|
|
Other (Income) Expense, net
|
|
|
(102
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
19
|
|
|
|
320
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
2,191
|
|
|
|
1,936
|
|
|
|
(206
|
)
|
|
|
1,730
|
|
|
|
3,416
|
|
|
|
3,424
|
|
|
|
3,136
|
|
Provision for Income Taxes
|
|
|
799
|
|
|
|
642
|
|
|
|
66
|
|
|
|
708
|
|
|
|
1,367
|
|
|
|
1,026
|
|
|
|
1,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
1,392
|
|
|
$
|
1,294
|
|
|
$
|
(272
|
)
|
|
$
|
1,022
|
|
|
$
|
2,049
|
|
|
$
|
2,398
|
|
|
$
|
1,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cases Shipped
|
|
|
5,305
|
|
|
|
3,645
|
|
|
|
641
|
|
|
|
4,286
|
|
|
|
4,040
|
|
|
|
4,746
|
|
|
|
4,516
|
|
Net Selling Price per Case
|
|
$
|
10.88
|
|
|
$
|
10.90
|
|
|
$
|
11.22
|
|
|
$
|
10.95
|
|
|
$
|
11.02
|
|
|
$
|
11.21
|
|
|
$
|
11.36
|
|
Total Paper
Usage Tons
|
|
|
38,204
|
|
|
|
26,824
|
|
|
|
4,575
|
|
|
|
31,399
|
|
|
|
30,050
|
|
|
|
36,046
|
|
|
|
35,157
|
|
Total Paper Cost per Ton
|
|
$
|
830
|
|
|
$
|
718
|
|
|
$
|
706
|
|
|
$
|
716
|
|
|
$
|
690
|
|
|
$
|
701
|
|
|
$
|
703
|
|
Total Paper Cost
|
|
$
|
31,719
|
|
|
$
|
19,248
|
|
|
$
|
3,229
|
|
|
$
|
22,477
|
|
|
$
|
20,729
|
|
|
$
|
25,260
|
|
|
$
|
24,710
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Provided by (Used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
2,644
|
|
|
$
|
4,722
|
|
|
$
|
847
|
|
|
$
|
5,569
|
|
|
$
|
3,846
|
|
|
$
|
6,796
|
|
|
$
|
3,638
|
|
Investing Activities
|
|
$
|
(19,238
|
)
|
|
$
|
(19,794
|
)
|
|
$
|
(112
|
)
|
|
$
|
(19,906
|
)
|
|
$
|
(619
|
)
|
|
$
|
(966
|
)
|
|
$
|
(736
|
)
|
Financing Activities
|
|
$
|
16,487
|
|
|
$
|
15,067
|
|
|
$
|
(445
|
)
|
|
$
|
14,622
|
|
|
$
|
(3,247
|
)
|
|
$
|
(5,622
|
)
|
|
$
|
(2,902
|
)
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Working Capital
|
|
$
|
4,514
|
|
|
$
|
3,399
|
|
|
$
|
3,194
|
|
|
$
|
2,349
|
|
|
$
|
4,394
|
|
Net Property, Plant and Equipment
|
|
$
|
42,194
|
|
|
$
|
24,492
|
|
|
$
|
14,335
|
|
|
$
|
15,701
|
|
|
$
|
16,863
|
|
Total Assets
|
|
$
|
53,710
|
|
|
$
|
33,407
|
|
|
$
|
22,960
|
|
|
$
|
23,805
|
|
|
$
|
25,991
|
|
Long-Term Debt, net of current
portion
|
|
$
|
17,002
|
|
|
$
|
15,145
|
|
|
$
|
4,846
|
|
|
$
|
7,657
|
|
|
$
|
7,388
|
|
Total Stockholders Equity
|
|
$
|
23,712
|
|
|
$
|
6,941
|
|
|
$
|
10,050
|
|
|
$
|
8,001
|
|
|
$
|
12,446
|
|
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion of our financial
condition and results of operations in conjunction with the
audited financial statements and the notes to those statements
included elsewhere in this filing. This discussion contains
forward-looking statements that involve risks and uncertainties.
You should specifically consider the various risk factors
identified in this prospectus that could cause actual results to
differ materially from those anticipated in these
forward-looking statements.
Executive
Overview
What were
our key 2005 financial results?
|
|
|
|
|
Our net sales were $57.7 million in 2005, up 23% from
$46.9 million in 2004.
|
|
|
|
We generated operating income of $3.3 million in 2005,
compared to operating income of $2.8 million in 2004.
|
|
|
|
Our earnings per diluted share were $.45 per common share
in 2005.
|
|
|
|
We generated $2.6 million in positive operating cash flow
and have generated positive operating cash flow each of the last
five years.
|
What did
we focus on in 2005?
In 2005, we focused on three major initiatives. The first two
initiatives relate to our strategy to eliminate our reliance on
third-party parent rolls by constructing a new paper machine.
Due to our continued business growth, our total parent roll
requirements have increased beyond our parent roll production
capacity resulting in the need to purchase the shortfall from
third parties. In 2005, 32% of our parent roll requirements were
met through purchases from third parties at costs well above our
internal cost of production. We intend to reduce or eliminate
our reliance on parent rolls purchased from third parties by
building a new paper machine, thereby increasing our total
production capacity.
The first initiative was to raise funds through a public
offering of stock which, when combined with additional bank
financing, would allow us to fund our new paper machine project.
In July 2005, we successfully completed our initial public
offering of 2,156,250 shares at an offering price of
$8.00 per share, which raised net proceeds of
$15.0 million dollars.
Our second initiative was to begin a major capital project to
build a new paper machine. In early 2005, we finalized the
engineering on the project and placed orders for the paper
machine and major components. Building construction began in the
third quarter of 2005. The project is expected to be completed
and initial production to begin by the end of the second quarter
of 2006. The new paper machine should achieve full production
rates by the beginning of the fourth quarter of 2006.
Our third major initiative for 2005 was to continue to
profitably grow the business. By exploring and capitalizing on
new business opportunities with existing customers and entering
into business with new customers, we intend to increase our
business levels to the point where the added capacity from our
new paper machine will be substantially sold out by the time the
new paper machine reaches full production levels.
19
During 2005, our net sales increased by 23% over the prior year.
We recognize that prior to realizing the additional capacity
from our new paper machine, our business growth will be
supported by additional purchases of parent rolls from third
parties. As a result, our profit margins on a percentage basis
will be negatively affected until such time as our new paper
machine is fully operational.
What
challenges and opportunities did our business face in
2005?
Our higher business levels in 2005 resulted in a requirement to
purchase more parent rolls from third-party suppliers. The
parent roll market continues to be very tight, which constricts
supply and increases costs. Our average cost per ton of parent
rolls purchased from third parties increased 10% to $1,024 per
ton in 2005 compared to $928 in 2004. The combination of the
higher cost per ton and increased quantity of tons purchased
negatively affected our operating margins.
Our energy costs increased significantly in the latter half of
2005, particularly in the cost of natural gas. In 2005, we
consumed 263,500 MMBTU of natural gas. Our average cost per
MMBTU increased from $6.38 in the first quarter of 2005 to
$10.48 in the fourth quarter of 2005. We experienced increased
costs of electricity in 2005 due to increased rates and
contractual changes. Our electricity costs increased
approximately 15% in 2005 compared to 2004. Increased natural
gas and electricity costs increased the cost of our internally
produced parent rolls in 2005 by approximately $30 per ton
over the 2004 period.
Focusing
on 2006
In 2006, we will continue to pursue profitable growth through a
combination of increased business with existing customers and
new business in grocery and drug store retail channels. As
previously stated, our new business goal is to substantially
sell out the capacity being added by the new paper
machine by the end of the third quarter of 2006.
A successful, on-time
start-up of
our new paper machine is the key component of our goal to reduce
or eliminate our reliance on third party parent rolls. In the
first half of 2006, we will be working closely with our project
manager engineering firm to ensure an on-time and successful
start-up.
Training of our employees on the new equipment is vital and we
will be providing appropriate training classes to ensure we are
properly prepared to efficiently run our new paper machine.
Business
Overview
We are a manufacturer and converter of tissue paper for the
private label segment of the value retail consumer tissue
market. We have focused our product design and manufacturing on
the value, or dollar store, retailers due to their consistent
order patterns, limited number of stock keeping units, or SKUs,
offered and the growth being experienced in this channel of the
retail market. All of our revenue is derived pursuant to truck
load purchase orders from our customers. We do not have supply
contracts with any of our customers. Revenue is recognized when
title passes to the customer. Because our product is a daily
consumable item, the order stream from our customer base is
fairly consistent with no significant seasonal fluctuations.
Changes in the national economy, in general, do not materially
affect the market for our products. Large dollar store customers
usually allocate business for a range of SKUs by distribution
center, and customarily award such business on an annual basis.
Our profitability depends on several key factors, including:
|
|
|
|
|
the market price of our product;
|
|
|
|
the cost of parent rolls purchased on the open market to meet
our converting requirements;
|
|
|
|
the cost of recycled waste paper used in producing paper;
|
|
|
|
the efficiency of operations in both our paper mill and
converting plant; and
|
|
|
|
energy costs.
|
20
The private label segment of the tissue industry is highly
competitive, and value retail customers are extremely price
sensitive. As a result, it is difficult to effect price
increases. We expect these competitive conditions to continue.
We have purchased parent rolls on the open market since 1998
because our own parent roll production has not adequately
supplied the requirements of our converting facility. We
purchased approximately 12,200, 5,000 and 3,300 tons of paper on
the open market in 2005, 2004 and 2003, respectively, to
supplement our paper-making capacity. Parent rolls are a
commodity product and thus are subject to market price and
availability. We have experienced significantly higher parent
roll prices in recent periods, as well as limited availability,
which has negatively affected our profitability. We anticipate
that the trend toward higher prices will continue for the
foreseeable future.
Comparative
Years Ended December 31, 2005, 2004 and 2003
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except average
price per case)
|
|
|
Net Sales
|
|
$
|
57,700
|
|
|
$
|
39,736
|
|
|
$
|
7,191
|
|
|
$
|
46,927
|
|
|
$
|
44,524
|
|
Cases shipped
|
|
|
5,305
|
|
|
|
3,645
|
|
|
|
641
|
|
|
|
4,286
|
|
|
|
4,040
|
|
Average Price per Case
|
|
$
|
10.88
|
|
|
$
|
10.90
|
|
|
$
|
11.22
|
|
|
$
|
10.95
|
|
|
$
|
11.02
|
|
Net sales increased $10.8 million, or 22.8%, to
$57.7 million for the year ended December 31, 2005
compared to $46.9 million for the year ended
December 31, 2004. Net sales figures include gross selling
price, including freight, less discounts and pricing allowances.
The increase in net sales experienced in 2005 was due primarily
to servicing an additional distribution center at one of our
large value retail customers, higher overall business with our
larger value retail customers and to a lesser extent fill-in
business to one large customers distribution center to
remedy supply chain interruptions following Hurricane Katrina.
This fill-in business ceased in the fourth quarter of 2005. We
gained the additional distribution center in the latter part of
the second quarter of 2004. Finished goods shipments are
measured in cases and we only ship our products in full truck
load quantities. Shipments increased 1.0 million cases, or
23.8%, to 5.3 million cases of finished product for the
year ended December 31, 2005, compared to the same period
in 2004. Our net selling price per case in the year ended
December 31, 2005, was $10.88 compared with $10.95 per
case in the same period of 2004. This decrease in price per case
is primarily due to an increase in the percentage of business
where the customer takes delivery at our facility and assumes
responsibility for the transportation, which reduces the selling
price to the customer by an amount generally equal to the cost
of the freight.
Net sales increased $2.4 million, or 5.4%, to
$46.9 million for the year ended December 31, 2004
compared to $44.5 million for the year ended
December 31, 2003. The increase in net sales experienced in
2004 was due primarily to the continued growth, particularly in
same-store sales, of our existing customers. The net number of
distribution centers of large value retailers we supplied was
relatively unchanged from 2003. Finished goods shipments
increased 246,000 cases, or 6.1%, to 4.3 million cases of
finished product in 2004 compared to 2003. Competitive pressures
experienced beginning in late 2003 and continuing into early
2004 resulted in a lower average net selling price per case of
$10.95 in 2004 compared to $11.02 in 2003. During the middle of
2004, the availability of paper in the market began to tighten,
which provided the opportunity for price increases to be
implemented by the major brand producers. However, it is
customary to honor prices negotiated with our major value retail
customers until the next annual sourcing period and, as a
result, we were unable to effect any material price increases.
21
Cost of
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except gross
profit %)
|
|
|
Cost of Paper
|
|
$
|
31,719
|
|
|
$
|
19,248
|
|
|
$
|
3,229
|
|
|
$
|
22,477
|
|
|
$
|
20,729
|
|
Non-paper materials, labor,
supplies, etc.
|
|
|
16,549
|
|
|
|
12,470
|
|
|
|
2,350
|
|
|
|
14,820
|
|
|
|
12,577
|
|
Operating lease payments
|
|
|
|
|
|
|
384
|
|
|
|
193
|
|
|
|
577
|
|
|
|
1,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
48,268
|
|
|
|
32,102
|
|
|
|
5,772
|
|
|
|
37,874
|
|
|
|
34,453
|
|
Depreciation
|
|
|
1,501
|
|
|
|
1,288
|
|
|
|
384
|
|
|
|
1,672
|
|
|
|
2,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
$
|
49,769
|
|
|
$
|
33,390
|
|
|
$
|
6,156
|
|
|
$
|
39,546
|
|
|
$
|
36,673
|
|
Gross Profit
|
|
$
|
7,931
|
|
|
$
|
6,346
|
|
|
$
|
1,035
|
|
|
$
|
7,381
|
|
|
$
|
7,851
|
|
Gross Profit Margin %
|
|
|
13.7
|
%
|
|
|
16.0
|
%
|
|
|
14.4
|
%
|
|
|
15.7
|
%
|
|
|
17.6
|
%
|
Major components of cost of sales are the cost of internally
produced paper, the cost of parent rolls purchased from third
parties, raw materials, direct labor and benefits, freight costs
on products shipped to customers, insurance, repairs and
maintenance, energy, utilities and depreciation.
Cost of sales increased approximately $10.3 million, or
25.9%, to $49.8 million for the year ended
December 31, 2005 compared to $39.5 million for the
same period in 2004. As a percentage of net sales, cost of sales
increased to 86.3% in 2005 compared to 84.3% in 2004. Cost of
sales as a percentage of net sales in the year ended
December 31, 2005 was unfavorably affected by an increased
quantity of parent rolls purchased from third parties, higher
average cost of parent rolls and packaging materials, partially
offset by reduced sheet counts on some finished products and
lower operating lease payments. In the first quarter of 2005, we
implemented sheet count reductions on certain finished products
to several large customers. The sheet count reduction was
implemented in lieu of an increase in selling prices.
In July 2004, we purchased a towel converting line that was
leased in 2001 under an operating lease by exercising an early
buyout option. The purchase price for the early buyout was
approximately $4.0 million. Prior to the buyout, the
$1.15 million annual payment made pursuant to the operating
lease was reflected in cost of sales. The converting line has an
estimated remaining useful life of, and is being depreciated
over, 15 years. This transaction had the effect of reducing
other cost of sales by $577,000 and increasing depreciation
expense by $134,000, or a net reduction in cost of sales of
$443,000 in 2005 compared to 2004.
22
The following chart depicts the major factors that influence our
paper costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
Paper usage
(tons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufactured
|
|
|
26,051
|
|
|
|
21,976
|
|
|
|
4,406
|
|
|
|
26,382
|
|
|
|
26,701
|
|
Purchased
|
|
|
12,153
|
|
|
|
4,848
|
|
|
|
169
|
|
|
|
5,017
|
|
|
|
3,349
|
|
Converted
|
|
|
38,204
|
|
|
|
26,824
|
|
|
|
4,575
|
|
|
|
31,399
|
|
|
|
30,050
|
|
Paper Costs per
ton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost per ton produced internally
|
|
$
|
740
|
|
|
$
|
670
|
|
|
$
|
703
|
|
|
$
|
675
|
|
|
$
|
677
|
|
Cost per ton purchased from third
parties
|
|
$
|
1,024
|
|
|
$
|
933
|
|
|
$
|
781
|
|
|
$
|
928
|
|
|
$
|
792
|
|
Total cost per ton consumed
|
|
$
|
830
|
|
|
$
|
718
|
|
|
$
|
706
|
|
|
$
|
716
|
|
|
$
|
690
|
|
Total paper costs (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of internally produced paper
|
|
$
|
19,278
|
|
|
$
|
14,724
|
|
|
$
|
3,097
|
|
|
$
|
17,821
|
|
|
$
|
18,077
|
|
Cost of paper purchased from third
parties
|
|
|
12,441
|
|
|
|
4,524
|
|
|
|
132
|
|
|
|
4,656
|
|
|
|
2,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paper costs
|
|
$
|
31,719
|
|
|
$
|
19,248
|
|
|
$
|
3,229
|
|
|
$
|
22,477
|
|
|
$
|
20,729
|
|
The increase in cases shipped in the year ended
December 31, 2005 compared to 2004 required us to increase
purchases of paper from third-party suppliers by 7,136 tons to
12,153 tons or approximately 32% of total tons consumed. The
cost per ton of parent rolls purchased was higher in 2005 as the
parent roll market continued to experience shortages and also
due to increasing energy costs. Our average cost of parent rolls
purchased from third-party suppliers increased to
$1,024 per ton in the year ended December 31, 2005,
compared to $928 per ton in 2004. Our cost of internally
produced paper also increased in the year over year period. The
cost of internally produced paper was $740 per ton for the
year ended December 31, 2005, compared to $675 per ton
in 2004. Energy costs were the primary reason for the increased
cost as we experienced a $30 per ton increase in 2005
compared with 2004.
Cost of sales increased approximately $2.9 million, or
7.8%, to $39.5 million for the year ended December 31,
2004, compared to $36.7 million for 2003. As a percentage
of net sales, cost of sales increased to 84.3% in 2004 compared
to 82.4% in 2003. The primary reason for the increase in cost of
sales as a percentage of net sales in 2004 was increased paper
costs, which partially offset the effects of purchasing a
converting line off an operating lease, and reduced depreciation
expense in the last ten months of 2004. Depreciation decreased
in the last ten months of 2004 because the effect of the
increase in cost of equipment from the March 1 purchase
price allocation and the purchase price of the converting line
was more than offset by reduced depreciation expense from
re-evaluating the estimated useful lives of depreciable assets.
The primary reason for the increase in cost of sales as a
percentage of sales in 2004 was both the quantity and per ton
cost of parent rolls purchased from third-party suppliers. Our
purchases from third parties increased by 49.8% to 5,017 tons in
2004 compared to 3,349 tons purchased in 2003. The cost of the
parent rolls purchased from third parties is substantially
higher than those produced internally. In addition, the average
price paid for parent rolls purchased from third parties
increased by 17.2% to $928 per ton in 2004 compared to
$792 per ton in 2003, due to an acute market shortage of
available parent rolls, especially in the second half of the
year. The combination of these two items increased our average
cost of parent rolls by $26 per ton, or 3.8%, to
$716 per ton in 2004 compared to $690 per ton in 2003.
The previously discussed purchase of an operating lease in July
2004 had the effect of reducing other cost of sales by $577,000
and increasing depreciation expense by $134,000, or a net
reduction in cost of sales of $443,000 in 2004 compared to 2003.
Depreciation expense fell by an additional $400,000 in 2004 due
to the re-evaluation of the useful lives used for depreciation
following the acquisition of the company in March
23
2004. The effect of this change in estimate is reflected in our
results for the ten-month period ending December 31, 2004.
Gross
Profit
Gross profit increased by $550,000, or 7.5%, to
$7.9 million for the year ended December 31, 2005,
compared to $7.4 million for the year ended
December 31, 2004. As a percent of net sales, gross profit
dropped to 13.7% in 2005 compared to 15.7% in 2004. The major
reasons for the reduction in gross profit as a percentage of net
sales were the previously discussed increase in both the
quantity and cost per ton of parent rolls purchased from
third-party suppliers and higher cost of internally produced
paper being partially offset by reduced sheet counts on certain
finished case items and lower operating lease payments.
Gross profit decreased by $470,000, or 6.0%, to
$7.4 million for the year ended December 31, 2004,
compared to $7.9 million for the year ended
December 31, 2003. As a percent of net sales, gross profit
dropped to 15.7% in 2004 compared to 17.6% in 2003. The major
reasons for the reduction in gross profit as a percentage of net
sales were the previously discussed decrease in average net
selling price per case and increase in both the quantity and per
ton cost of parent rolls purchased from third parties which was
partially offset by lower rental expense and depreciation.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except SG&A
as a % of net sales)
|
|
|
Recurring S,G&A Expenses
|
|
$
|
3,750
|
|
|
$
|
2,702
|
|
|
$
|
444
|
|
|
$
|
3,146
|
|
|
$
|
3,297
|
|
Commission Expense
|
|
|
879
|
|
|
|
661
|
|
|
|
127
|
|
|
|
788
|
|
|
|
772
|
|
Management Incentive Payments
|
|
|
|
|
|
|
|
|
|
|
625
|
|
|
|
625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General & Adm Exp
|
|
$
|
4,629
|
|
|
$
|
3,363
|
|
|
$
|
1,196
|
|
|
$
|
4,559
|
|
|
$
|
4,069
|
|
SG&A as a % of net sales
|
|
|
8.0
|
%
|
|
|
8.5
|
%
|
|
|
16.6
|
%
|
|
|
9.7
|
%
|
|
|
9.1
|
%
|
Selling, general and administrative expenses include salaries,
commissions to brokers and other miscellaneous expenses.
Selling, general and administrative expenses were relatively
flat in the year ended December 31, 2005, increasing
$70,000, or 1.5%, to $4.6 million. In the year ended
December 31, 2005, we recognized $368,000 in stock-based
compensation expense, a $150,000 lump sum payment made as part
of an amendment to the management services agreement and higher
broker commissions, which were partially offset by the
non-recurrence of $625,000 in payments made under the management
incentive plan in 2004 and lower ongoing fees under our
management services agreement. In April 2005, the 2005 Stock
Incentive Plan was approved by the board of directors and
stockholders. In April 2005, options for an aggregate of
270,000 shares of common stock were awarded to certain
members of management and in September 2005, options for an
aggregate of 7,500 shares were approved for grant to
certain directors. The management options vest 20% on date of
grant and 20% ratably over the next four years. The board
options vest 100% on date of grant. We have elected early
adoption of SFAS No. 123(R) Share-Based
Payments and will expense the cost of options granted over
the vesting period based on the grant-date fair value of the
award. Quarterly charges for the stock options granted in the
second quarter will approximate $47,000 through the vesting
period ending in the first quarter of 2009. All of the fair
value of the options granted to certain members of the board in
September 2005 was recognized in the third quarter, which
totaled $31,000. The amended management services agreement
reduced the annual management fee from $325,000 to $125,000 in
exchange for the $150,000 lump sum payment. Commission expense
increased at a rate lower than the net sales increase due to
increased sales to customers where we do not utilize a broker.
24
Selling, general and administrative expenses increased $490,000,
or 12.0%, to $4.6 million for the year ended
December 31, 2004, compared to $4.1 million for the
year ended December 31, 2003. The increase in 2004 was
primarily attributable to a $625,000 bonus paid to certain
members of management. The management bonus payment was granted
pursuant to a management incentive plan, which was triggered by
the acquisition of the company in March 2004. These increases
were partially offset by a reduction in bad debt expense, the
absence of fees paid to an investment banking firm hired to
solicit offers for our acquisition in 2003, and lower overall
administrative expenses.
Operating
Income
As a result of the foregoing factors, operating income for the
twelve months ended December 31, 2005, 2004 and 2003 was
$3.3 million, $2.8 million, and $3.8 million,
respectively.
Interest
and Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Interest Expense
|
|
$
|
1,213
|
|
|
$
|
1,052
|
|
|
$
|
45
|
|
|
$
|
1,097
|
|
|
$
|
347
|
|
Other (Income) Expense, net
|
|
|
(102
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
19
|
|
Income before income taxes
|
|
$
|
2,191
|
|
|
$
|
1,936
|
|
|
$
|
(206
|
)
|
|
$
|
1,730
|
|
|
$
|
3,416
|
|
Interest expense includes interest paid and accrued on all debt
and amortization of both deferred debt financing costs and of
the discount on our subordinated debt related to warrants issued
with the debt. See Liquidity and Capital Resources.
Interest expense increased $116,000 to $1.2 million in the
year ended December 31, 2005, compared to $1.1 million
for the year ended December 31, 2004. In the year ended
December 31, 2005, we capitalized $411,000 of interest
under the requirements of SFAS No. 34
Capitalization of Interest Cost in relation to our
new paper machine project. The increase in interest expense is
primarily due to the additional debt we incurred in March 2004
as part of the acquisition of the Company, borrowings under a
new term loan to finance the previously discussed purchase of a
towel converting line in July 2004 and the rise in interest
rates during the comparative periods. Our acquisition of the
Company was financed with $6.1 million of proceeds from the
sale of common stock and a net increase in borrowings of
approximately $11.0 million.
Interest expense increased $750,000 to $1.1 million in the
year ended December 31, 2004, compared to $347,000 for the
year ended December 31, 2003. This increase was the result
of previously discussed additional debt we incurred in 2004 and,
to a lesser extent, the rise in interest rates experienced
during the period.
Other income increased $97,000 to $102,000 for the year ended
December 31, 2005, compared to $5,000 in the year ended
December 31, 2004. The increase is due to income of
$138,000 earned from the investment of our unused net proceeds
from our initial public offering being partially offset by a net
foreign currency exchange loss of $39,000. The net proceeds of
our initial public offering are being used to help fund the
monthly construction costs of our new paper machine project. The
unused net proceeds are being invested in short-term instruments
such as high-grade commercial paper and bank certificates of
deposits until such time as they are required for construction
funding. As of December 31, 2005, the remaining unused net
proceeds totaled $373,000. We have entered into certain purchase
agreements related to our new paper machine project. One of
these purchase agreements is denominated in Euros. We entered
into foreign currency exchange contracts in the second quarter
of 2005 to fix the price of this purchase agreement. At
December 31, 2005, our outstanding foreign exchange
contracts totaled $760,000. The exchange contracts are carried
at fair value and any adjustments to fair value affect net
income. In the year ended December 31, 2005, we recorded a
loss in our exchange contracts of $74,000. Our minimum unpaid
obligation under this purchase agreement as of
25
December 31, 2005, was $681,000 and has been accrued in
accrued liabilities. Adjusting the obligation to the
December 31, 2005, exchange rate resulted in a foreign
currency transaction gain of $35,000.
Income
Before Income Taxes
As a result of the foregoing factors, income before income taxes
increased $461,000 to $2.2 million for the year ended
December 31, 2005, compared to $1.7 million for the
year ended December 31, 2004. Income before income taxes
decreased by $1.7 million to $1.7 million for the year
ended December 31, 2004 compared to $3.4 million for
the year ended December 31, 2003.
Income
Tax Provision
For the year ended December 31, 2005, income tax expense
was $799,000 resulting from an effective tax rate of 36.5%. It
is higher than the statutory rate because of the previously
discussed non-deductible stock option expense being partially
offset by the utilization of Indian employment credits.
For the year ended December 31, 2004, income tax expense
was $708,000 resulting from an effective tax rate of 41%,
compared to 40% effective rate incurred in 2003. Our income tax
expense was higher than the federal statutory rate in 2004 due
to adjustment of amounts previously claimed for Indian
employment credits. For the ten-month period ended
December 31, 2004, state income taxes were eliminated by
investment and employment credits. In 2003, the effective tax
rate exceeded the federal statutory rate due to state income tax.
LIQUIDITY
AND CAPITAL RESOURCES
Overview
Liquidity refers to the liquid financial assets available to
fund our business operations and pay for near-term obligations.
These liquid financial assets consist of cash as well as
short-term investments. Our cash requirements have historically
been satisfied through a combination of cash flows from
operations and debt financings. Our strategy to eliminate the
need to purchase paper from third-party suppliers through the
purchase of a new paper machine is expected to be funded through
the net proceeds of our initial public offering, additional bank
financing and, if necessary, cash reserves and cash flows from
operations. We estimate the total cost of our new paper machine
project to be $30.5 million.
On July 20, 2005, we completed our initial public offering
of 2,156,250 shares of common stock, which included the
exercise in full of the underwriters option to purchase
281,250 shares of common stock to cover overallotments. The
shares were registered on
Form S-1
(file number
001-32563),
which the SEC declared effective on July 14, 2005. The
public offering price of the shares was $8.00. Following the
offering, 4,156,250 shares of common stock, par value
$.001 per share, are outstanding. Net proceeds from the
offering were $15.0 million with gross proceeds totaling
$17.25 million and with costs related to offering totaling
$2.25 million as follows:
|
|
|
|
|
underwriting discount of 8% or $1.4 million (charged
against additional
paid-in-capital);
|
|
|
|
direct expenses of $859,000 (charged against additional paid-in
capital), including legal fees, printing costs, accounting fees,
qualified independent underwriter fees and other miscellaneous
direct expenses.
|
As of December 31, 2005, all but $373,000 of the net
proceeds had been used to fund expenditures for our new paper
machine project. The remaining funds were invested in short-term
investment grade, interest-bearing instruments. In January 2006,
we expended the remaining $373,000 on the paper machine project
and we began to draw on the construction loan facility at that
time.
Cash decreased by $107,000 during 2005 to $378,000 at
December 31, 2005. This balance includes the $373,000 in
remaining net proceeds from the initial public offering. In
addition to the cash balances, we maintained $1,500,000 of
short-term investments in certificates of deposit at
December 31, 2005. The $1,500,000 was restricted under the
provisions of our term loan agreement until a date which is
seven months after the completion of our new paper machine
project. At that time, the $1,500,000 will be used to reduce the
principal amount of our term loans.
26
The following table summarizes key cash flow information for the
year ended December 31, 2005, the ten-month period ended
December 31, 2004, the two-month period ended
February 29, 2004, and the year ended December 31,
2003.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Provided (Used) by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
2,644
|
|
|
$
|
4,722
|
|
|
$
|
847
|
|
|
$
|
5,569
|
|
|
$
|
3,846
|
|
Investing Activities
|
|
$
|
(19,238
|
)
|
|
$
|
(19,794
|
)
|
|
$
|
(112
|
)
|
|
$
|
(19,906
|
)
|
|
$
|
(619
|
)
|
Financing Activities
|
|
$
|
16,487
|
|
|
$
|
15,067
|
|
|
$
|
(445
|
)
|
|
$
|
14,622
|
|
|
$
|
(3,247
|
)
|
Cash provided by operations decreased $3.0 million to
$2.6 million for the year ended December 31, 2005,
compared to $5.6 million for the year ended
December 31, 2004. The primary cause for the decrease was
an investment in inventories and higher accounts receivable
balances which were somewhat offset by higher earnings. The
inventory increase was primarily in parent roll and finished
case inventory. Year-end 2004 inventories were at below normal
levels due to a lack of adequate availability of parent rolls in
the fourth quarter of 2004 which affected production of finished
goods and parent roll inventory levels. Accounts receivable also
increased substantially in 2005 due to higher year over year
sales volumes.
Cash used in investing activities was $19.2 million in the
year ended December 31, 2005. The amount was due to capital
expenditures of $18.5 million, of which $17.6 million
were expenditures on our new paper machine project. Cash used in
investing activities also included a net purchase of investment
securities of $750,000 resulting from the initial investment of
our net proceeds from our initial public offering and the
subsequent sale of substantially all of those securities and
$750,000 of short-term investments held at December 31,
2004, to fund capital expenditures on our new paper machine
project. We expect to spend an additional $13.8 million in
2006 to complete our new paper machine project. Funding for the
remaining expenditures will be provided by a construction loan
from our current bank group. Annual maintenance capital
expenditures are estimated to be approximately $600,000 per
year over the next several years which we expect to fund from
operating cash flow. In order to increase our converting
capacity, we anticipate the need to purchase an additional
converting equipment line in 2006 or 2007 at an estimated
capital cost of $5 million. Funding for this expenditure is
expected to come from a combination of additional borrowings
from lenders and operating cash flow.
Cash provided by financing activities increased
$1.9 million, or 13%, to $16.5 million in the year
ended December 31, 2005, compared to $14.6 million in
the same period in 2004. In 2005, the cash provided was
primarily a result of the $15.0 million in net proceeds
from our initial public offering and borrowings under the
revolving credit agreement, partially offset by
$1.6 million in term loan principal payments.
Cash provided by operations in the year ended December 31,
2004, increased $1.8 million to $5.6 million compared
to $3.8 million for the year ended December 31, 2003.
The increase was attributable to a reduction in working capital
partially offset by lower earnings. The reduction in working
capital was primarily attributable to the previously discussed
inventory reduction which totaled $740,000, a $340,000 reduction
in accounts receivable, and an $885,000 increase in accounts
payable. Accounts receivable were primarily reduced by a change
in payment terms with our largest customer. Accounts payable and
accrued liabilities rose in 2004 due to the timing of bills and
remittances.
Investing activities for the year ended December 31, 2004,
included capital expenditures of $4.6 million compared to
capital expenditures of $854,000 in 2003. The increase in
capital expenditures was primarily attributable to the
previously discussed $4.0 million purchase of a towel
converting line.
27
Cash flows from financing activities was a net source of
$14.6 million for the year ended December 31, 2004,
compared to a $3.2 million net use of cash for the same
period in 2003. In 2004, the previously discussed acquisition of
the Company was funded by the sale of common stock in the amount
of $6.1 million, bank loan borrowings of $16.0 million
and subordinated debt borrowings of $2.2 million. Term
loans in the amount of $7.1 million were paid off as part
of the acquisition. In addition, in July 2004, we entered into a
$3.9 million term loan to finance the purchase of a towel
converting line. Principal payments for 2004 were
$2.9 million exclusive of the $7.1 million paid off at
closing of the acquisition. This reduction in principal balance
was the result of normal monthly debt payments due on our term
loans and a principal paydown of $1.2 million resulting
from the return of funds from an escrow account established
during the acquisition of the Company.
Cash used in investing activities for the year ended
December 31, 2003, was $619,000, driven primarily by
ordinary course additions to property, plant and equipment.
Cash flows used in financing activities was $3.2 million
for the year ended December 31, 2003, which was almost
entirely comprised of the scheduled principal reduction of our
term loans.
We entered into an amended and restated agented credit agreement
with a bank group headed by the Bank of Oklahoma in June 2005,
to allow for the establishment of a construction loan needed to
fund our new paper machine project. Under this amended
agreement, we maintain:
|
|
|
|
|
a $5.0 million revolving credit facility which matures on
April 30, 2007, of which there was $2.4 million
outstanding as of December 31, 2005, on an eligible
borrowing base of $4.6 million. For reporting purposes, as
of December 31, 2005, $901,000 of bank overdrafts were
included in the Long-term debt section of the balance sheet;
|
|
|
|
a $14.1 million term loan which matures on April 30,
2007, of which there was $13.3 million outstanding as of
December 31, 2005; and
|
|
|
|
a $15.0 million construction loan which matures
April 30, 2007 pursuant to which we will receive advances
which will be used in connection with our new paper machine
project. As of December 31, 2005, there were no amounts
outstanding under this loan.
|
Amounts outstanding under the revolving line of credit, term
loan and construction loan bear interest at our election at the
prime rate or LIBOR plus a margin based on the ratio of funded
debt to EBITDA less income taxes paid. The margin is set
quarterly and ranges from negative 50 basis points to 150
basis points for prime rate loans and from 225 to 425 basis
points for LIBOR-based loans. At December 31, 2005, our
borrowing rate was 8.44%. As of December 31, 2005, our
interest rate margin was prime plus 150 basis points or
LIBOR plus 425 basis points.
The construction loan is an interest only loan which converts to
a term loan after completion of the project, but no later than
October 31, 2006. The term loan carries a ten-year
amortization with a termination date of April 30, 2007.
Pursuant to the credit agreement, we are required to maintain a
balance of at least $1.5 million in a separate interest
reserve account until the date which is seven months after the
date the certificate of completion related to the project is
issued, at which time these funds will be released and applied
to reduce the principal amounts of the term loan, provided
certain conditions are met. All conditions required for initial
funding under the construction loan were fulfilled as of
December 31, 2005.
Borrowings under the revolving credit agreement are limited to a
borrowing base, which is calculated on a percentage of eligible
accounts receivable and inventory. The term loan has a
three-year term and a seven-year amortization. Our credit
facility includes covenants that, among other things, require us
to maintain, on a quarterly basis, a specific ratio of funded
debt to EBITDA, a minimum level of tangible net worth, a
specific debt service coverage ratio and limits our capital
expenditures. Until a date which is seven months after the date
the certificate of completion related to the new paper machine
project is issued, all debt service directly related to the
paper machine project is excluded from the covenant
calculations. As of December 31, 2005, we were in
compliance with all financial covenants. The loan facility
includes an excess cash flow recapture provision. The revolving
credit facility and term loan agreement are secured by
substantially all of our assets.
28
Our revolving credit facility may be used for general corporate
purposes, including working capital and equipment purchases.
On March 1, 2004, Orchids Acquisition Group, Inc., which
subsequently merged with and into us, sold units consisting of
$2.2 million principal amount of subordinated debentures
and common stock warrants to help finance our acquisition. The
subordinated debentures were sold in units of $1,000 bearing
interest at 12% per year, payable quarterly, with each note
including a warrant to purchase 38 shares of common stock
at an exercise price of $3.64 per share.
Contractual
Obligations
As of December 31, 2005, our contractual cash obligations
consisted of our long-term debt, purchase commitments on capital
expenditures and management fees. We do not have any leasing
commitments or debt guarantees outstanding as of
December 31, 2005. We do not have any defined benefit
pension plans nor do we have any obligation to fund any
postretirement benefit obligations for our work force.
Maturities of these contractual obligations consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Years
|
|
Contractual Cash
Obligations
|
|
Total
|
|
|
1
|
|
|
2 and 3
|
|
|
4 and 5
|
|
|
After 5
|
|
|
|
($ thousands)
|
|
|
Long-term debt(1)
|
|
$
|
18,630
|
|
|
$
|
1,628
|
|
|
$
|
14,953
|
|
|
$
|
2,049
|
|
|
$
|
|
|
Interest payments(2)(3)
|
|
$
|
2,523
|
|
|
$
|
1,589
|
|
|
$
|
891
|
|
|
$
|
43
|
|
|
$
|
|
|
Capital expenditures
|
|
$
|
4,688
|
|
|
$
|
4,688
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Management services agreement
|
|
$
|
396
|
|
|
$
|
125
|
|
|
$
|
250
|
|
|
$
|
21
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,237
|
|
|
$
|
8,030
|
|
|
$
|
16,094
|
|
|
$
|
2,113
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Under Orchids revolving credit and term loan agreement,
the maturity of outstanding debt could be accelerated if we do
not maintain certain financial covenants. At December 31,
2005, we were in compliance with our loan covenants. |
|
(2) |
|
These amounts assume interest payments at the year-end borrowing
amount and rate for our revolving credit facility. The amount
borrowed in future years is dependent on our free cash flow from
time-to-time. |
|
(3) |
|
Interest payments on the term loan outstanding under our term
loan agreement have been calculated based on the interest rate
as of December 31, 2005. |
Critical
Accounting Policies and Estimates
The preparation of our financial statements and related
disclosures in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and judgments that affect our reported amounts of
assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates and assumptions based upon
historical experience and various other factors and
circumstances. Management believes that our estimates and
assumptions are reasonable under the circumstances; however,
actual results may vary from these estimates and assumptions
under different future circumstances. We have identified the
following critical accounting policies that affect the more
significant judgments and estimates used in the preparation of
our financial statements.
Accounts Receivable. Accounts receivable
consist of amounts due to us from normal business activities.
Our management must make estimates of accounts receivable that
will not be collected. We perform ongoing credit evaluations of
our customers and adjust credit limits based upon payment
history and the customers creditworthiness as determined
by our review of their current credit information. We
continuously monitor collections and payments from our customers
and maintain a provision for estimated losses based on
historical experience and specific customer collection issues
that we have identified. Trade receivables are written-off when
all reasonable collection efforts have been exhausted,
including, but not limited to, external third party
29
collection efforts and litigation. While such credit losses have
historically been within managements expectations and the
provisions established, there can be no assurance that we will
continue to experience the same credit loss rates as in the
past. Accounts receivable balances that have been written-off in
the years ended December 31, 2005, 2004, and 2003 were
$11,000, $38,000, and $80,000, respectively.
Inventory. Our inventory consists of converted
finished goods, bulk paper rolls and raw materials and is based
on standard cost, specific identification, or FIFO
(first-in,
first-out). Standard costs approximate actual costs on a
first-in,
first-out basis. Material, labor and factory overhead necessary
to produce the inventories are included in the standard cost.
Our management regularly reviews inventory quantities on hand
and records a provision for excess and obsolete inventory based
on the age of the inventory and forecasts of product demand. A
significant decrease in demand could result in an increase in
the amount of excess inventory quantities on hand. As a result
of our efforts to sell or discard excess and obsolete inventory
during 2005, we reduced the inventory valuation reserve by
$15,000. During the years ended December 31, 2004 and 2003,
we increased the inventory valuation reserve by $12,000 each
year.
New
Accounting Pronouncements
The Financial Accounting Standards Board (FASB)
periodically issues new accounting standards in a continuing
effort to improve standards of financial accounting and
reporting. We have reviewed the recently issued pronouncements
and concluded that the following new accounting standards are
applicable to us.
In November 2004, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 151,
Inventory Costs, which revised Accounting Research
Bulletin (ARB) No. 43, relating to inventory
costs. This revision is to clarify the accounting for abnormal
amounts of idle facility expense, handling cost and wasted
material (spoilage). This statement requires that these items be
recognized as a current period charge regardless of whether they
meet the criterion specified in ARB No. 43. In addition,
the statement requires that the allocation of fixed production
overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not
believe the adoption of this standard will have a material
impact on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets An
Amendment of Accounting Principles Board, or APB, Opinion
No. 29. SFAS No. 153 amends APB Opinion 29
to eliminate the exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS No. 153 is
to be applied prospectively for nonmonetary exchanges occurring
in fiscal years beginning after June 15, 2005. The adoption
of SFAS No. 153 is not expected to have a material
impact on the Companys financial position or results of
operations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections which
replaces APB Opinion No. 20, Accounting Changes
and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements. This statement changes the
requirements for accounting and reporting a change in accounting
principle. This statement applies to all voluntary changes in
accounting principles. It also would apply to changes required
by an accounting pronouncement in the event that the
pronouncement does not include specific transition provisions.
This statement requires voluntary changes in accounting
principles to be recognized retrospectively to prior
periods financial statements, rather than being recognized
in the net income of the current period. Retrospective
application requires restatements of prior period financial
statements as if that accounting principle had always been used.
SFAS No. 154 carries forward without change the
guidance contained in APB No. 20 for reporting the
correction of an error in previously issued financial statements
and a change in accounting estimate. The provisions of
SFAS No. 154 are effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005.
Non-GAAP Discussion
In addition to our GAAP results, we also consider non-GAAP
measures of our performance for a number of purposes. We use
EBITDA as a supplemental measure of our performance that is not
required by, or presented in accordance with, GAAP. EBITDA is
not a measurement of our financial performance under
30
GAAP and should not be considered as an alternative to net
income, operating income or any other performance measure
derived in accordance with GAAP, or as an alternative to cash
flow from operating activities or a measure of our liquidity.
EBITDA represents net income before net interest expense, income
tax expense, depreciation and amortization.
We believe EBITDA facilitates operating performance comparisons
from period to period and company to company by backing out
potential differences caused by variations in capital structures
(affecting relative interest expense), tax positions (such as
the impact on periods or companies of changes in effective tax
rates or net operating losses) and the age and book depreciation
of facilities and equipment (affecting relative depreciation
expense).
EBITDA has limitations as an analytical tool, and you should not
consider it in isolation, or as a substitute for analysis of our
results as reported under GAAP. Some of these limitations are:
|
|
|
|
|
it does not reflect our cash expenditures for capital
expenditures;
|
|
|
|
it does not reflect changes in, or cash requirements for, our
working capital requirements;
|
|
|
|
it does not reflect the interest expense, or the cash
requirements necessary to service interest or principal payments
on our indebtedness;
|
|
|
|
although depreciation and amortization are non-cash charges, the
assets being depreciated and amortized will often have to be
replaced in the future, and EBITDA does not reflect cash
requirements for such replacements; and
|
|
|
|
other companies, including other companies in our industry, may
calculate these measures differently than we do, limiting their
usefulness as a comparative measure.
|
Because of these limitations, EBITDA should not be considered as
a measure of discretionary cash available to us to invest in the
growth of our business or to reduce our indebtedness. We
compensate for these limitations by relying primarily on our
GAAP results and using EBITDA only supplementally.
The following table reconciles EBITDA to net income for the
years ended December 31, 2005, December 31, 2004 and
December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except percent of
net sales)
|
|
|
Net Income (Loss)
|
|
$
|
1,392
|
|
|
$
|
1,294
|
|
|
$
|
(272
|
)
|
|
$
|
1,022
|
|
|
$
|
2,049
|
|
Plus: Interest expense, net
|
|
|
1,213
|
|
|
|
1,052
|
|
|
|
45
|
|
|
|
1,097
|
|
|
|
347
|
|
Plus: Income tax expense
|
|
|
799
|
|
|
|
642
|
|
|
|
66
|
|
|
|
708
|
|
|
|
1,367
|
|
Plus: Depreciation
|
|
|
1,501
|
|
|
|
1,288
|
|
|
|
384
|
|
|
|
1,672
|
|
|
|
2,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
4,905
|
|
|
$
|
4,276
|
|
|
$
|
223
|
|
|
$
|
4,499
|
|
|
$
|
5,983
|
|
Percent of net sales
|
|
|
8.5
|
%
|
|
|
10.8
|
%
|
|
|
3.1
|
%
|
|
|
9.6
|
%
|
|
|
13.4
|
%
|
EBITDA increased $406,000 to $4.9 million, or 8.5% of net
sales, for the year ended December 31, 2005 compared to
$4.5 million, or 9.6% of net sales, for the year ended
December 31, 2004. The foregoing factors discussed in the
net sales, cost of sales and selling, general and administrative
expenses sections are the reasons for the change. However, the
largest single cause for the decrease in EBITDA as a percentage
of sales was higher paper costs.
EBITDA decreased $1.5 million to $4.5 million, or 9.6%
of net sales, for the year ended December 31, 2004 compared
to $6.0 million, or 13.4% of net sales, for year ended
December 31, 2003. The foregoing factors discussed in the
net sales, cost of sales and selling, general and administrative
expenses sections are
31
the reasons for the change. However, the largest single cause
for the decrease in both EBITDA and EBITDA as a percentage of
sales was higher paper costs.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Form 10-K,
including the sections entitled The Business,
Risk Factors and Managements Discussion
and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements. These
statements relate to, among other things:
|
|
|
|
|
our business strategy;
|
|
|
|
our value proposition;
|
|
|
|
the market opportunity for our products, including expected
demand for our products;
|
|
|
|
our estimates regarding our capital requirements; and
|
|
|
|
any of our other plans, objectives, expectations and intentions
contained in this prospectus that are not historical facts.
|
These statements relate to future events or future financial
performance, and involve known and unknown risks, uncertainties
and other factors that may cause our actual results, levels of
activity, performance or achievement to be materially different
from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking
statements. In some cases, you can identify forward-looking
statements by terminology such as may,
should, could, expects,
plans, intends, anticipates,
believes, estimates,
predicts, potential or
continue or the negative of such terms or other
comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. These statements are only
predictions.
Factors that may cause our actual results to differ materially
from our forward-looking statements include, among others;
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|
|
|
|
competition in our industry;
|
|
|
|
adverse developments in our relationships with key customers,
particularly Dollar General;
|
|
|
|
impairment of ability to meet our obligations and restrictions
on future operations due to our substantial debt;
|
|
|
|
the inability to obtain additional financing in connection with
our project to expand our paper mill;
|
|
|
|
cost overruns and delays in start up in connection with our
project to expand our paper mill;
|
|
|
|
the loss of key personnel;
|
|
|
|
disruption in supply or cost of SBS paper;
|
|
|
|
availability and price of energy;
|
|
|
|
labor interruptions;
|
|
|
|
natural disaster or other disruption to our facility;
|
|
|
|
ability to finance the capital requirements of our business;
|
|
|
|
cost to comply with government regulations;
|
|
|
|
increased expenses and administrative workload associated with
being a public company; and
|
|
|
|
failure to maintain an effective system of internal controls
necessary to accurately report our financial results and prevent
fraud.
|
32
You should read this
Form 10-K
completely and with the understanding that our actual results
may be materially different from what we expect. We undertake no
duty to update these forward-looking statements after the date
of this
Form 10-K,
even though our situation may change in the future. We qualify
all of our forward-looking statements by these cautionary
statements.
|
|
Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Our market risks relate primarily to changes in interest rates.
Our revolving line of credit, our term loan and our construction
loan carry a variable interest rate that is tied to market
indices and, therefore, our statement of income and our cash
flows will be exposed to changes in interest rates. As of
December 31, 2005, we had borrowings of $16.6 million.
Outstanding balances under our line of credit and term loan bear
interest at the prime rate or LIBOR, plus a margin based upon
the debt service coverage ratio. We considered the historical
volatility of short-term interest rates and determined that it
would be reasonably possible that an adverse change of
100 basis points could be experienced in the near term.
Based on the current borrowing, a 100 basis point increase in
interest rates would result in a pre-tax $166,000 increase to
our annual interest expense.
33
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
FINANCIAL STATEMENTS
34
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Orchids Paper Products Company
We have audited the accompanying balance sheets of Orchids Paper
Products Company as of December 31, 2005 and 2004, and the
related statements of income, changes in stockholders
equity and cash flows for the year and the ten-month period,
respectively, then ended. We have audited the accompanying
statements of income, changes in stockholders equity and
cash flows of the Companys Predecessor for the two-month
period ended February 29, 2004 and for the year ended
December 31, 2003. Our audits also included the financial
statement schedule listed in Item 15(a)(2). These financial
statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the Company as of December 31, 2005 and 2004, and the
results of its operations and its cash flows for the year and
the ten-month period then ended for the Company and for the
two-month period ended February 29, 2004 and the year ended
December 31, 2003, for the Predecessor in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements, taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
March 3, 2006
35
ORCHIDS
PAPER PRODUCTS COMPANY
December 31, 2005 and 2004
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
378
|
|
|
$
|
485
|
|
Accounts receivable, net of
allowance of $125 in 2005 and $90 in 2004
|
|
|
4,180
|
|
|
|
3,609
|
|
Inventories, net
|
|
|
4,420
|
|
|
|
3,048
|
|
Investments
|
|
|
|
|
|
|
750
|
|
Restricted certificate of deposit
|
|
|
1,500
|
|
|
|
|
|
Income taxes receivable
|
|
|
94
|
|
|
|
282
|
|
Prepaid expenses
|
|
|
458
|
|
|
|
330
|
|
Deferred income taxes
|
|
|
200
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
11,230
|
|
|
|
8,640
|
|
Property, plant and equipment
|
|
|
44,983
|
|
|
|
25,780
|
|
Accumulated depreciation
|
|
|
(2,789
|
)
|
|
|
(1,288
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
42,194
|
|
|
|
24,492
|
|
Deferred debt issuance costs, net
of accumulated amortization of $232 in 2005 and $42 in 2004
|
|
|
286
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
53,710
|
|
|
$
|
33,407
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,877
|
|
|
$
|
2,180
|
|
Accrued liabilities
|
|
|
2,137
|
|
|
|
1,249
|
|
Unrealized loss on forward
currency exchange contracts
|
|
|
74
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
1,628
|
|
|
|
1,812
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,716
|
|
|
|
5,241
|
|
Long-term debt (net of unamortized
discount of $101 in 2005 and $125 in 2004)
|
|
|
17,002
|
|
|
|
15,145
|
|
Deferred income taxes
|
|
|
6,280
|
|
|
|
6,080
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par
value, 10,000,000 shares authorized, 4,156,250 shares
issued and outstanding in 2005 and 2,000,000 shares issued
and outstanding in 2004
|
|
|
4
|
|
|
|
2
|
|
Additional paid-in capital
|
|
|
20,881
|
|
|
|
5,504
|
|
Common stock warrants
|
|
|
141
|
|
|
|
141
|
|
Retained earnings
|
|
|
2,686
|
|
|
|
1,294
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
23,712
|
|
|
|
6,941
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
53,710
|
|
|
$
|
33,407
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
36
ORCHIDS
PAPER PRODUCTS COMPANY
STATEMENTS OF INCOME
Year ended December 31, 2005, the Ten-Month Period
ended December 31, 2004, the
Two-Month Period ended February 29, 2004, and the Year
ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
Ten-Months
|
|
|
Two-Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except
share and per share data)
|
|
|
Net sales
|
|
$
|
57,700
|
|
|
$
|
39,736
|
|
|
$
|
7,191
|
|
|
$
|
44,524
|
|
Cost of sales
|
|
|
49,769
|
|
|
|
33,390
|
|
|
|
6,156
|
|
|
|
36,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,931
|
|
|
|
6,346
|
|
|
|
1,035
|
|
|
|
7,851
|
|
Selling, general and
administrative expenses
|
|
|
4,629
|
|
|
|
3,363
|
|
|
|
1,196
|
|
|
|
4,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
3,302
|
|
|
|
2,983
|
|
|
|
(161
|
)
|
|
|
3,782
|
|
Interest expense
|
|
|
1,213
|
|
|
|
1,052
|
|
|
|
45
|
|
|
|
347
|
|
Other (income) expense, net
|
|
|
(102
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
2,191
|
|
|
|
1,936
|
|
|
|
(206
|
)
|
|
|
3,416
|
|
Provision (benefit) for income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
663
|
|
|
|
470
|
|
|
|
(46
|
)
|
|
|
1,042
|
|
Deferred
|
|
|
136
|
|
|
|
172
|
|
|
|
112
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
799
|
|
|
|
642
|
|
|
|
66
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,392
|
|
|
$
|
1,294
|
|
|
$
|
(272
|
)
|
|
$
|
2,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.47
|
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.45
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
Shares used in calculating net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,968,836
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
3,062,941
|
|
|
|
2,052,538
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
37
ORCHIDS
PAPER PRODUCTS COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY
Year ended December 31, 2005, the Ten-Month Period
ended December 31, 2004, the
Two-Month Period ended February 29, 2004, and the Year
ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
Paid-In
|
|
|
Warrants
|
|
|
Retained
|
|
|
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Value
|
|
|
Earnings
|
|
|
Total
|
|
|
|
(Dollars in thousands, except
share amounts)
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2003
|
|
|
100
|
|
|
$
|
|
|
|
$
|
8,001
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,001
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,049
|
|
|
|
2,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
100
|
|
|
|
|
|
|
|
8,001
|
|
|
|
|
|
|
|
|
|
|
|
2,049
|
|
|
|
10,050
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(272
|
)
|
|
|
(272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 29, 2004
|
|
|
100
|
|
|
$
|
|
|
|
$
|
8,001
|
|
|
|
|
|
|
$
|
|
|
|
$
|
1,777
|
|
|
$
|
9,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Stock
|
|
|
728,751
|
|
|
$
|
1
|
|
|
$
|
6,049
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,050
|
|
Valuation of Warrants issued with
Subordinated Debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,607
|
|
|
|
141
|
|
|
|
|
|
|
|
141
|
|
Valuation of management shares
issued
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
Cost of common stock and warrants
issued
|
|
|
|
|
|
|
|
|
|
|
(647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(647
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,294
|
|
|
|
1,294
|
|
Effect of 2.744 for 1 stock split
|
|
|
1,271,249
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
2,000,000
|
|
|
|
2
|
|
|
|
5,504
|
|
|
|
82,607
|
|
|
|
141
|
|
|
|
1,294
|
|
|
|
6,941
|
|
Issuance of Common Stock , net of
offering expenses of $2,239
|
|
|
2,156,250
|
|
|
|
2
|
|
|
|
15,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,011
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
368
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,392
|
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
4,156,250
|
|
|
$
|
4
|
|
|
$
|
20,881
|
|
|
|
82,607
|
|
|
$
|
141
|
|
|
$
|
2,686
|
|
|
$
|
23,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
38
ORCHIDS
PAPER PRODUCTS COMPANY
STATEMENTS OF CASH FLOWS
Year ended December 31, 2005, the Ten-Month Period
ended December 31, 2004, the
Two-Month Period ended February 29, 2004, and the Year
ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Year
|
|
|
Ten Months
|
|
|
Two Months
|
|
|
Year
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Cash Flows From Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,392
|
|
|
$
|
1,294
|
|
|
$
|
(272
|
)
|
|
$
|
2,049
|
|
Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,688
|
|
|
|
1,372
|
|
|
|
386
|
|
|
|
2,230
|
|
Provision for doubtful accounts
|
|
|
46
|
|
|
|
23
|
|
|
|
5
|
|
|
|
182
|
|
Deferred income taxes
|
|
|
136
|
|
|
|
172
|
|
|
|
112
|
|
|
|
325
|
|
Employee stock compensation
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
|
|
Stock option plan expense
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency transaction gain
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on foreign exchange
contracts
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in cash due to changes in
operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(617
|
)
|
|
|
688
|
|
|
|
(347
|
)
|
|
|
(299
|
)
|
Inventories
|
|
|
(1,372
|
)
|
|
|
396
|
|
|
|
344
|
|
|
|
(806
|
)
|
Prepaid expenses
|
|
|
(128
|
)
|
|
|
112
|
|
|
|
49
|
|
|
|
20
|
|
Income taxes receivable
|
|
|
188
|
|
|
|
(167
|
)
|
|
|
(49
|
)
|
|
|
43
|
|
Accounts payable
|
|
|
697
|
|
|
|
751
|
|
|
|
133
|
|
|
|
237
|
|
Accrued liabilities
|
|
|
207
|
|
|
|
(22
|
)
|
|
|
486
|
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
2,644
|
|
|
|
4,722
|
|
|
|
847
|
|
|
|
3,846
|
|
Cash Flows From Investing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of business, net of
cash acquired
|
|
|
|
|
|
|
(14,506
|
)
|
|
|
|
|
|
|
|
|
Purchases of investment securities
and restricted certificate of deposit
|
|
|
(17,259
|
)
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
|
Proceeds from the sale of
investment securities
|
|
|
16,509
|
|
|
|
|
|
|
|
|
|
|
|
235
|
|
Purchases of property, plant and
equipment
|
|
|
(18,488
|
)
|
|
|
(4,538
|
)
|
|
|
(112
|
)
|
|
|
(854
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(19,238
|
)
|
|
|
(19,794
|
)
|
|
|
(112
|
)
|
|
|
(619
|
)
|
Cash Flows From Financing
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common
stock
|
|
|
17,250
|
|
|
|
6,050
|
|
|
|
|
|
|
|
|
|
Cost of common stock and warrants
issued
|
|
|
(2,239
|
)
|
|
|
(647
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
subordinated debt and common stock warrants
|
|
|
|
|
|
|
2,150
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term
debt
|
|
|
|
|
|
|
17,399
|
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(1,643
|
)
|
|
|
(9,568
|
)
|
|
|
(445
|
)
|
|
|
(2,612
|
)
|
Change in line of credit
|
|
|
3,293
|
|
|
|
|
|
|
|
|
|
|
|
(623
|
)
|
Deferred debt issuance costs
|
|
|
(174
|
)
|
|
|
(317
|
)
|
|
|
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
16,487
|
|
|
|
15,067
|
|
|
|
(445
|
)
|
|
|
(3,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(107
|
)
|
|
|
(5
|
)
|
|
|
290
|
|
|
|
(20
|
)
|
Cash, beginning
|
|
|
485
|
|
|
|
490
|
|
|
|
200
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, ending
|
|
$
|
378
|
|
|
$
|
485
|
|
|
$
|
490
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
1,445
|
|
|
$
|
884
|
|
|
$
|
48
|
|
|
$
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
475
|
|
|
$
|
765
|
|
|
$
|
|
|
|
$
|
879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligation for purchase
of paper machine
|
|
$
|
681
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
39
ORCHIDS
PAPER PRODUCTS COMPANY
December 31, 2005, 2004 and 2003
Note 1 Summary
of Significant Accounting Policies
Basis
of Presentation
Orchids Paper Products Company (Orchids or the
Company) was formed in 1998 to acquire and operate
the paper manufacturing facility, built in 1976, in Pryor,
Oklahoma. Orchids Acquisition Group, Inc. (Orchids
Acquisition) was established in November 2003, for the
purpose of acquiring the common stock of Orchids. Orchids
Acquisition closed the sale of its equity and debt securities on
March 1, 2004, and immediately thereafter closed the
acquisition of Orchids. On April 19, 2005, Orchids
Acquisition merged with and into Orchids, with Orchids as the
surviving entity. The accompanying financial statements of
Orchids prior to March 1, 2004, are labeled
Predecessor. The consolidated financial statements
of Orchids Acquisition and Orchids as of March 1, 2004, and
thereafter are labeled Successor.
Business
Orchids operates a paper mill and converting plant used to
produce a full range of paper tissue products. The mill produces
bulk rolls of paper from recycled paper stock. The bulk rolls
are transferred to the converting plant for further processing.
Tissue products produced in the converting plant include paper
towels, napkins, and bathroom tissue, which the Company
primarily markets to domestic value retailers.
Summary
of Significant Accounting Policies
Fair
value of financial instruments
The carrying amounts of the Companys financial
instruments, cash, accounts receivable, investments, accounts
payable and accrued liabilities approximate fair value due to
their short maturity. The fair value of the Companys
long-term debt is estimated by management to approximate fair
value based on the obligations characteristics, including
floating interest rate, credit ratings, maturity and collateral.
Accounts
receivable
Accounts receivable are carried at original invoice amount less
an estimate made for doubtful receivables based on a review of
all outstanding amounts. A trade receivable is considered to be
past due if it is outstanding for more than five days past
terms. Management determines the allowance for doubtful accounts
by regularly evaluating individual customer receivables and
considering a customers financial condition, credit
history, and current economic conditions. Receivables are
written-off when deemed uncollectible. Recoveries of receivables
previously written-off are recorded when received. The Company
does not typically charge interest on trade receivables.
Inventories
Inventories are stated at the lower of cost or market. The
Companys cost is based on standard cost, specific
identification, or FIFO
(first-in,
first-out). Standard costs approximate actual costs on a
first-in,
first-out basis. Material, labor, and factory overhead necessary
to produce the inventories are included in the standard cost.
Investments
and restricted certificate of deposit
As more fully described in Note 6 to these financial
statements, the Company is required to maintain $1,500,000 in a
separate interest reserve account until a date which is seven
months after completion of its new paper machine project and the
satisfaction of certain conditions. In December 2005, the
Company
40
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
purchased $1,500,000 in a certificate of deposit to satisfy this
requirement. This investment is carried at cost, which
approximates market value.
Property,
plant and equipment
Property, plant and equipment are stated at cost. Depreciation
of property, plant and equipment is computed using the
straight-line method over the estimated useful lives of the
assets. The Company expenses normal maintenance and repair costs
as incurred.
Impairment
of long-lived assets
The Company reviews its long-lived assets, primarily property,
plant and equipment, for impairment whenever events or changes
in circumstances indicate that the carrying values may not be
recoverable. Impairment evaluation is based on estimates of
remaining useful lives and the current and expected future
profitability and cash flows. The Company had no impairment of
long-lived assets during the year ended December 31, 2005,
the period ended December 31, 2004, the period ended
February 29, 2004, or the year ended December 31, 2003.
Income
taxes
Deferred income taxes are computed using the liability method
and are provided on all temporary differences between the
financial basis and the tax basis of the Companys assets
and liabilities. Future tax benefits are recognized to the
extent that realization of those benefits is considered to be
more likely than not. A valuation allowance is provided for
deferred tax assets for which realization is not assured.
Deferred
debt issuance costs
Costs incurred in obtaining debt funding are deferred and
amortized on an effective interest method over the terms of the
loans. Debt issuance costs of $518,000 relating to the
renegotiated bank debt (including the revolving credit
agreement), the subordinated debentures entered into in March
2004 and the new construction loan and extensions of the term
loan and revolving credit line in 2005 are being amortized over
the terms of the debt. Amortization expense for 2005, 2004 and
2003 was $163,000, $32,000 and $10,000, respectively, and has
been classified with interest expense in the income statement.
Discount
on debt securities issued
Discount on Subordinated Debt issued of $141,000 is being
amortized over the term of the debt using the effective interest
method.
Stock
split
On April 14, 2005, the Companys and Orchids
Acquisitions boards of directors approved the merger of
Orchids Acquisition into Orchids with Orchids as the surviving
entity. The number of authorized common shares was increased to
10,000,000 and the number of common shares outstanding was split
on a 2.744 for 1 basis. All common and per share amounts of the
Successor have been restated to reflect a 2.744 for 1 stock
split.
Stock
option expense
The Company has elected to adopt the provisions of
SFAS No. 123(R) in connection with its stock option
plan. Grant-date option costs are being recognized on a
straight-line basis over the vesting periods of the options.
41
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
Revenue
recognition
Revenues for products loaded on customer trailers are recognized
when the customer has accepted custody and left the
Companys dock. Revenues for products shipped to customers
are recognized when title passes upon shipment. Customer
discounts and pricing allowances are included in net sales.
Shipping
and handling costs
Costs incurred to ship raw materials to the Companys
facilities are included in inventory and cost of sales. Costs
incurred to ship finished goods to customer locations of
$993,000 for the year ended 2005, $1,098,000 for the ten-month
period ended December 31, 2004, $279,000 for the two-month
period ended February 29, 2004, and $1,273,000 for the year
ended 2003 are included in cost of sales.
Advertising
costs
Advertising costs are expensed when incurred and totaled
$121,000 for the year ended 2005, $156,000 for the ten-month
period ended December 31, 2004, $1,000 for the two-month
period ended February 29, 2004, and $182,000 for the year
ended 2003 and are included in selling, general and
administrative expenses.
Use of
estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
New
pronouncements
The Financial Accounting Standards Board (FASB)
periodically issues new accounting standards in a continuing
effort to improve standards of financial accounting and
reporting. Orchids has reviewed the recently issued
pronouncements and concluded that the following new accounting
standards are applicable to the Company.
In November 2004, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 151,
Inventory Costs, which revised Accounting Research
Bulletin (ARB) No. 43, relating to inventory
costs. This revision is to clarify the accounting for abnormal
amounts of idle facility expense, handling cost and wasted
material (spoilage). This statement requires that these items be
recognized as a current period charge regardless of whether they
meet the criterion specified in ARB No. 43. In addition,
the statement requires that the allocation of fixed production
overheads to the costs of conversion be based on the normal
capacity of the production facilities. SFAS No. 151 is
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not
believe the adoption of this standard will have a material
impact on its financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets An
Amendment of Accounting Principles Board, or APB, Opinion
No. 29. SFAS No. 153 amends APB Opinion 29
to eliminate the exception for exchanges of nonmonetary assets
that do not have commercial substance. SFAS No. 153 is
to be applied prospectively for nonmonetary exchanges occurring
in fiscal years beginning after June 15, 2005. The adoption
of SFAS No. 153 is not expected to have a material
impact on the Companys financial position or results of
operations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections which
replaces APB Opinion No. 20, Accounting Changes
and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements. This statement changes the
requirements for accounting and reporting a change in accounting
principle. This statement applies to all voluntary changes in
accounting principles. It also would
42
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
apply to changes required by an accounting pronouncement in the
event that the pronouncement does not include specific
transition provisions. This statement requires voluntary changes
in accounting principles to be recognized retrospectively to
prior periods financial statements, rather than being
recognized in the net income of the current period.
Retrospective application requires restatements of prior period
financial statements as if that accounting principle had always
been used. SFAS No. 154 carries forward without change
the guidance contained in APB No. 20 for reporting the
correction of an error in previously issued financial statements
and a change in accounting estimate. The provisions of
SFAS 154 are effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005.
|
|
Note 2
|
Acquisition
of Orchids Paper Products Company
|
On March 1, 2004, Orchids Acquisition completed the
acquisition of all of the outstanding shares of capital stock of
Orchids. The adjusted purchase price of $21,598,000 was paid in
cash and assumed debt of $7,092,000. Orchids Acquisition
financed the purchase by sale of its common stock for $6,050,000
and units consisting of subordinated debentures and warrants to
purchase the Companys common stock for $2,150,000, and
debt proceeds. The cost of the acquisition included an advisory
fee of $750,000 paid to the founders of Orchids Acquisition. It
was determined through the Companys due diligence
procedures that, with the exception of inventory and certain
plant equipment, the book value of the assets and liabilities of
Orchids approximated fair value. The purchase price was
allocated to raw materials and bulk paper rolls on the basis of
estimated replacement cost. The purchase price was allocated to
finished goods at estimated selling price, less costs of
disposal and a reasonable profit allowance for the selling
effort. After allocation of the purchase price to all assets and
liabilities other than machinery and equipment, the remaining
purchase price to be allocated was $15,811,000. The fair value
of machinery and equipment, determined by an independent
appraisal in 2002, plus the cost of subsequent additions
aggregated $18,067,000. Because the physical condition of the
machinery and equipment had not changed substantially, and
economic factors affecting fair value of the Companys
machinery and equipment had not changed substantially since
2002, management allocated all of the remaining $15,811,000
purchase price to machinery and equipment. The Company does not
have long-term contracts with customers, and the majority of its
products are produced as privately owned brands. Consequently,
the Company did not allocate any portion of the purchase price
to trademarks or customer relationships. In connection with the
common stock purchase, the Company retains its basis of assets
and liabilities for income tax purposes. Deferred income taxes
were computed on the difference between the carryover tax basis
and the adjusted financial basis of assets and liabilities.
The following table summarizes the allocation of the purchase
price to the assets and liabilities at March 1, 2004:
|
|
|
|
|
|
|
($ thousands)
|
|
|
Assets
|
|
|
|
|
Current assets
|
|
$
|
8,886
|
|
Property, plant and equipment
|
|
|
21,243
|
|
|
|
|
|
|
Total assets
|
|
|
30,129
|
|
|
Liabilities
|
Current liabilities
|
|
|
2,683
|
|
Long-term debt
|
|
|
7,092
|
|
Deferred taxes
|
|
|
5,848
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,623
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
14,506
|
|
|
|
|
|
|
43
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following table sets forth the unaudited pro forma results
of operations of the Company for the years ended
December 31, 2004 and 2003, respectively. The unaudited pro
forma financial information summarizes the results of operations
for the periods indicated as if the Orchids acquisition had
occurred at the beginning of each of the annual periods
presented. The results prior to the acquisition date are
adjusted to include the pro forma impact of: increase in
depreciation expense for the
step-up in
basis and the adjustment of estimated depreciable lives of plant
equipment and interest expense on the bank debt and the
subordinated debentures used to fund the acquisition. These pro
forma amounts do not purport to be indicative of the results
that would have actually been obtained if the acquisition
occurred as of the beginning of each of the periods presented or
that may be obtained in the future.
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
|
Net income ($ thousands)
|
|
$
|
1,028
|
|
|
$
|
1,900
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.51
|
|
|
$
|
0.95
|
|
Diluted
|
|
$
|
0.50
|
|
|
$
|
0.93
|
|
|
|
Note 3
|
Purchase
Commitment and Foreign Currency Derivatives
|
During 2005, the Company entered into purchase agreements
totaling $8,700,000 with suppliers to construct a new paper
machine. Down payments were required to these vendors with
remaining periodic payments through the first quarter of 2006.
One of these agreements is denominated in Euros. One of the
purchase agreements contains a cancellation agreement, which
limits the Companys liability to the suppliers
out-of-pocket
expenditures and committed liabilities. The Companys
minimum unpaid obligation under these agreements of $681,000 has
been accrued at December 31, 2005, and included in accrued
liabilities.
The Company entered into foreign currency exchange contracts to
purchase Euros at a fixed price in conjunction with the foreign
currency portion of its obligations for the acquisition of its
new paper machine. At December 31, 2005, the Company had
one outstanding foreign exchange contract to exchange
U.S. Dollars for Euros totaling $760,000 for the final
payment due on the equipment. The exchange contract is carried
at fair value on the balance sheet. The exchange contracts were
not identified as cash flow hedges as defined in
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133
requires the Company to recognize all derivatives as either
assets or liabilities on the balance sheet and to measure those
instruments at fair value. Further, since the transaction is not
considered a hedged transaction, fair value adjustments affect
the Companys periodic net income.
The net foreign currency transaction loss resulting from the
Companys Euro denominated obligations and Euro exchange
contracts for the year ended December 31, 2005, of $39,000
is included in other (income) expense, net.
Inventories at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
($ thousands)
|
|
|
Raw materials
|
|
$
|
1,669
|
|
|
$
|
1,454
|
|
Bulk paper rolls
|
|
|
1,396
|
|
|
|
519
|
|
Converted finished goods
|
|
|
1,355
|
|
|
|
1,075
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,420
|
|
|
$
|
3,048
|
|
|
|
|
|
|
|
|
|
|
44
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
Note 5
|
Property,
Plant and Equipment
|
The principal categories and estimated useful lives of property,
plant and equipment at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
|
2005
|
|
|
2004
|
|
|
Lives
|
|
|
|
($ thousands)
|
|
|
|
|
|
Land
|
|
$
|
379
|
|
|
$
|
308
|
|
|
|
|
|
Buildings
|
|
|
3,571
|
|
|
|
3,276
|
|
|
|
40
|
|
Machinery and equipment
|
|
|
20,624
|
|
|
|
20,062
|
|
|
|
5 to 25
|
|
Vehicles
|
|
|
131
|
|
|
|
103
|
|
|
|
5
|
|
Nondepreciable machinery and
equipment (parts and spares)
|
|
|
1,751
|
|
|
|
1,619
|
|
|
|
|
|
Construction-in-process
|
|
|
18,527
|
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
44,983
|
|
|
$
|
25,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
construction-in-process
above at December 31, 2005, is $411,000 of capitalized
interest for the new paper machine. Interest was capitalized
based on the weighted average borrowing rate incurred on the
Companys long-term debt of 7.97%.
Long-term debt at December 31 consists of:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
($ thousands)
|
|
|
Revolving line of credit
|
|
$
|
3,293
|
|
|
$
|
|
|
Term note, due in monthly
installments of $225,000, including interest
|
|
|
13,288
|
|
|
|
14,925
|
|
Subordinated debentures at face
value less unamortized discount of $101,000 and $125,000 at
December 31, 2005 and 2004, respectively
|
|
|
2,049
|
|
|
|
2,025
|
|
Other
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,630
|
|
|
|
16,957
|
|
Less current portion
|
|
|
1,628
|
|
|
|
1,812
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,002
|
|
|
$
|
15,145
|
|
|
|
|
|
|
|
|
|
|
The annual maturities of all debt are as follows:
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
Year
|
|
Amount
|
|
|
|
($ thousands)
|
|
|
2006
|
|
$
|
1,628
|
|
2007
|
|
|
14,953
|
|
2008
|
|
|
|
|
2009 (Net of unamortized discount)
|
|
|
2,049
|
|
|
|
|
|
|
|
|
$
|
18,630
|
|
|
|
|
|
|
On June 24, 2005, the Company entered into an amended and
restated credit agreement among Bank of Oklahoma, N.A.,
Bancfirst and Commerce Bank, with Bank of Oklahoma acting as
agent. Under this agreement, the Company maintains a
$5.0 million revolving credit line which matures on
April 30, 2007, of
45
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
which there was a $2.4 million outstanding balance at
December 31, 2005. For reporting purposes, as of
December 31, 2005, $901,000 of bank overdrafts were
included in the Long-term debt section of the balance sheet. The
borrowing base is determined by adding qualifying receivables
and inventory. At December 31, 2005, the borrowing base was
limited to $4.6 million.
In addition, the Company maintains a term loan and construction
loan under this agreement. These loans mature in April 2007. At
December 31, 2005, there was $13.3 million outstanding
under the term loan and no amounts were outstanding under the
construction loan. The construction loan facility is for
borrowings up to $15 million. Amounts outstanding under the
revolving credit agreement, the term loan and construction loan
bear interest (8.44% at December 31, 2005) at the
Companys election at the prime rate or LIBOR, plus a
margin based on the ratio of funded debt to EBITDA less income
taxes paid. The margin ranges from negative 50 basis points
to 150 basis points for prime rate loans and ranges from
225 to 425 basis points for LIBOR-based loans. In addition,
the Company is required to reduce the outstanding principal
amount of the term loans annually by an amount equal to 40% of
excess cash flow, as defined in the agreement. Obligations under
the revolving credit facility and the term loans are secured by
substantially all of the Companys assets.
The agreement contains restrictive covenants that include
requirements to maintain certain financial ratios, restricts
capital expenditures and the payment of dividends. The Company
was in compliance with all covenants at December 31, 2005.
As a condition of funding the construction loan, the agreement
requires the Company to invest at least $10 million in its
paper mill expansion project and establish an interest reserve
account of at least $1.5 million. The interest reserve
account must be maintained until a date which is seven months
after the certificate of completion is issued, at which time the
funds will be used to reduce the principal balance of the term
loan. Both of these conditions were satisfied as of
December 31, 2005.
As a part of the financing for the Orchids acquisition, Orchids
Acquisition sold 2,000,000 shares of common stock and 2,150
Units. Each Unit was comprised of (1) a subordinated
debenture in the principal amount of $1,000, bearing interest
payable quarterly at 12% per annum, due March 1, 2009,
and (2) a warrant to purchase 38 shares of the
Companys common stock at $3.64 per share, exercisable
at the option of the holder for a period of five years. The
debentures stipulate that principal payments are subordinated to
the prior payment in full of the debt obligations to Bank of
Oklahoma, N.A. The debentures and warrants were recorded at
their pro rata fair values in relation to the proceeds received.
As a result, the warrants were valued at $141,000. The
difference between pro rata fair value and face value of the
Subordinated Debentures is being amortized over the life of the
debentures utilizing the effective interest rate of 14.6%. The
Company recorded $24,000 and $15,000 as interest expense related
to amortization of the discount during the year ended
December 31, 2005 and the ten-month period ended
December 31, 2004, respectively.
The fair value of the warrants was estimated on the date of
issuance using the Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate
of 4%; expected dividend yield of 0%; expected lives of
5 years; and estimated volatility of 48%.
Orchids Acquisition sold its common stock for $3.64 per
share, except for shares issued to Founders who paid
$.14 per share. The Companys management was allowed
to participate as Founders. The difference between
$3.64 per share and $.14 per share paid by management,
totaling $103,000, is reported as compensation expense in the
ten-month period ended December 31, 2004. The share and per
share data have been restated to reflect the
2.744-for-1
stock split.
The Company leased equipment from a third party under an
operating lease expiring in 2006. In July 2004, the Company
elected to terminate the lease by paying to the lessor
$3,994,000, the amount specified in the lease.
46
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
Rental expense was $0 for the year ended December 31, 2005,
$384,000 for the ten-month period ended December 31, 2004,
$193,000 for the two-month period ended February 29, 2004,
and $1,147,000 for the year ended December 31, 2003.
Significant components of the Companys deferred income tax
assets and liabilities at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
($ thousands)
|
|
|
Deferred income
taxes current
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
118
|
|
|
$
|
92
|
|
Prepaid expenses
|
|
|
(72
|
)
|
|
|
(74
|
)
|
Accounts receivable
|
|
|
48
|
|
|
|
34
|
|
Accrued vacation
|
|
|
91
|
|
|
|
84
|
|
Foreign exchange loss
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax
assets current
|
|
$
|
200
|
|
|
$
|
136
|
|
|
|
|
|
|
|
|
|
|
Deferred income
taxes noncurrent
|
|
|
|
|
|
|
|
|
Plant and equipment
|
|
$
|
(6,280
|
)
|
|
$
|
(6,080
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income tax
liabilities noncurrent
|
|
$
|
(6,280
|
)
|
|
$
|
(6,080
|
)
|
|
|
|
|
|
|
|
|
|
The following table summarizes the differences between the
U.S. federal statutory rate and the Companys
effective tax rate for financial statement purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Months
|
|
|
Two Months
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
Statutory tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
(34.0
|
)%
|
|
|
34.0
|
%
|
State income taxes, net of
U.S. federal tax benefit
|
|
|
1.2
|
%
|
|
|
|
|
|
|
0.9
|
%
|
|
|
6.1
|
%
|
Indian employment credits
|
|
|
(5.7
|
)%
|
|
|
(3.0
|
)%
|
|
|
68.6
|
%
|
|
|
(1.3
|
)%
|
Employee stock compensation
|
|
|
6.9
|
%
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
Other
|
|
|
0.1
|
%
|
|
|
0.3
|
%
|
|
|
(3.7
|
)%
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36.5
|
%
|
|
|
33.2
|
%
|
|
|
31.8
|
%
|
|
|
40.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of an examination by the Internal Revenue Service,
the Company adjusted amounts previously claimed for Indian
employment credits. The adjustment affected the amounts
available for carryover for which a deferred tax asset had been
provided at December 31, 2003. The adjustment resulted in a
decrease in available credits of $211,000. The related deferred
tax asset was adjusted during the two-month period ended
February 29, 2004.
47
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
Note 9
|
Earnings
per Share
|
The computation of basic and diluted net income per share for
the year ended December 31, 2005, and the ten-month period
ended December 31, 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Ten Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income ($ thousands)
|
|
$
|
1,392
|
|
|
$
|
1,294
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
2,968,836
|
|
|
|
2,000,000
|
|
Effect of Stock Options
|
|
|
41,627
|
|
|
|
|
|
Effect of dilutive warrants
|
|
|
52,478
|
|
|
|
52,538
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding assuming dilution
|
|
|
3,062,941
|
|
|
|
2,052,538
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: (2004
restated to reflect 2.744 for 1 stock split)
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.47
|
|
|
$
|
0.65
|
|
Diluted
|
|
$
|
0.45
|
|
|
$
|
0.63
|
|
|
|
Note 10
|
Stock
Incentive Plan
|
In April 2005, the board of directors and the stockholders
approved the 2005 Stock Incentive Plan (the Plan).
The Plan provides for the granting of incentive stock options to
employees selected by the boards compensation committee.
The Plan authorizes up to 465,000 shares to be issued. The
compensation committee subsequently awarded options for
270,000 shares to officers of the Company at an exercise
price of $8.00, which was equal to the initial public offering
price of the stock. The options vest 20% on the date of grant
and then ratably 20% over the next four years and have a
ten-year term.
In September 2005, the board of directors authorized options
totaling 7,500 shares of stock pursuant to the Plan to
certain directors of the Company at an exercise price of $9.80,
which was equal to the closing price of the Companys stock
on the date of the grant. The options have a ten-year term and
were fully vested on the date of grant.
The Company has adopted SFAS No. 123(R)
Share-Based Payments and expenses the cost of
options granted over the vesting period of the option based on
the grant-date fair value of the award. For the year ended
December 31, 2005, the Company recognized an expense of
$368,000 related to options granted under the Plan.
48
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following table summarizes information concerning the Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Weighted Average
|
|
|
Fair Value of
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Number
|
|
|
Exercise Price
|
|
|
Options Granted
|
|
|
Contractual Life
|
|
|
Value
|
|
|
Balance, December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
277,500
|
|
|
$
|
8.05
|
|
|
$
|
3.60
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
8,000
|
|
|
$
|
8.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
269,500
|
|
|
$
|
8.05
|
|
|
|
|
|
|
|
9.25 years
|
|
|
$
|
593,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2005
|
|
|
61,500
|
|
|
|
|
|
|
|
|
|
|
|
9.2 5 years
|
|
|
$
|
125,000
|
|
Exercisable at December 31,
2006
|
|
|
113,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2007
|
|
|
165,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2008
|
|
|
217,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2009
|
|
|
269,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair values were estimated at the date of grant of the options
using the Black-Scholes option valuation model with the
following assumptions: risk-free interest rate of 3.92% for the
employee grant and 4.03% for the board grant, volatility factor
of the expected market price of the Companys common stock
of 40% for the employee grant and 42% for the board grant, no
dividend yield on the Companys common stock, and weighted
average expected life of the options of 6 years for the
employee grant and 5 years for the board grant. The
Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility.
As of December 31, 2005, there was $618,000 of total
unrecognized compensation expense related to nonvested
share-based compensation arrangements under the Plan. That cost
is expected to be recognized on a straight-line basis over a
period of 3.25 years.
|
|
Note 11
|
Major
Customers and Concentration of Credit Risk
|
Credit risk for the Company is concentrated in two major
customers, each of whom operates discount retail stores located
throughout the United States. During the year ended
December 31, 2005, the periods ended December 31, 2004
and February 29, 2004, and the year ended December 31,
2003 sales to the two significant customers accounted for
approximately 69%, 66%, 63%, and 63% of the Companys total
sales, respectively. At December 31, 2005, and 2004,
respectively, approximately $3,112,000 (75%) and $2,740,000
(74%) of accounts receivable was due from the two significant
customers. No other customers of the Company accounted for more
than 10% of sales during these periods. The Company generally
does not require collateral from its customers and has not
incurred any significant losses on uncollectible accounts
receivable.
At one bank, the Company maintains several accounts, which are
insured by the Federal Deposit Insurance Corporation (FDIC) up
to $100,000. Deposits at the institution in excess of the FDIC
limit totaled $1,926,000 and $1,119,000 at December 31,
2005 and 2004, respectively.
49
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
Note 12
|
Employee
Incentive Bonus and Retirement Plans
|
Effective September 1, 1999, Orchids Board of
Directors approved an incentive bonus plan which provided for
incentive compensation payable to key employees in the event of
a sale of the business. The bonus was payable in cash or the
Companys common stock, at the Companys option, in an
amount not to exceed
91/2%
of the stockholders profit on the Companys sale. As
a result of the sale of 100% of the Companys common stock
in 2004, $624,000 was accrued as compensation in the two-month
period ended February 29, 2004.
The Company sponsors three separate defined contribution plans
covering substantially all employees. Company contributions are
based on either a percentage of participant contributions or as
required by collective bargaining agreements. The participant
vesting period varies across the three plans. Contributions to
the plans by the Company were $212,000, $135,000, $50,000, and
$161,000 for the year ended December 31, 2005, the
ten-month period ended December 31, 2004, the two-month
period ended February 29, 2004, and the year ended
December 31, 2003, respectively.
|
|
Note 13
|
Related
Party Transactions
|
In March 2004, the Company entered into a management services
agreement with the founders of Orchids Acquisition. Under the
agreement, these parties agreed to provide advisory and
management services to the Company in consideration of an annual
management fee of $325,000 and additional fees, based on a
formula if the Company engages in certain major transactions.
The agreement expires February 28, 2009. During 2004, the
Company paid $270,833 under this agreement. In 2005, the
agreement was amended to reduce the annual fee to $125,000, in
consideration of a $150,000 lump sum payment.
|
|
Note 14
|
Selected
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
(Dollars in thousands, except
per share data)
|
|
|
Sales
|
|
$
|
12,542
|
|
|
$
|
13,681
|
|
|
$
|
15,435
|
|
|
$
|
16,042
|
|
Gross Profit
|
|
$
|
1,817
|
|
|
$
|
1,981
|
|
|
$
|
2,263
|
|
|
$
|
1,870
|
|
Operating Income
|
|
$
|
858
|
|
|
$
|
773
|
|
|
$
|
1,029
|
|
|
$
|
642
|
|
Net Income
|
|
$
|
346
|
|
|
$
|
114
|
|
|
$
|
480
|
|
|
$
|
452
|
|
Basic Earnings per share
|
|
$
|
0.17
|
|
|
$
|
0.06
|
|
|
$
|
0.13
|
|
|
$
|
0.11
|
|
Diluted Earnings per share
|
|
$
|
0.17
|
|
|
$
|
0.05
|
|
|
$
|
0.13
|
|
|
$
|
0.10
|
|
Price per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
10.45
|
|
|
$
|
10.55
|
|
Low
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
8.50
|
|
|
$
|
9.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
First Quarter(1)
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
(Dollars in thousands, except
per share data)
|
|
|
Sales
|
|
$
|
10,045
|
|
|
$
|
9,844
|
|
|
$
|
13,143
|
|
|
$
|
13,895
|
|
Gross Profit
|
|
$
|
1,484
|
|
|
$
|
1,484
|
|
|
$
|
2,340
|
|
|
$
|
2,073
|
|
Operating Income
|
|
$
|
(140
|
)
|
|
$
|
682
|
|
|
$
|
1,318
|
|
|
$
|
962
|
|
Net Income
|
|
$
|
(356
|
)
|
|
$
|
257
|
|
|
$
|
665
|
|
|
$
|
456
|
|
Basic Earnings per share
|
|
$
|
(0.04
|
)
|
|
$
|
0.13
|
|
|
$
|
0.33
|
|
|
$
|
0.23
|
|
Diluted Earnings per share
|
|
$
|
(0.04
|
)
|
|
$
|
0.13
|
|
|
$
|
0.32
|
|
|
$
|
0.22
|
|
|
|
|
(1) |
|
Combined results of two months ended February 29, 2004 of
predecessor and one month ended March 31, 2004 of
successor, with the exception of earnings per share data which
only includes the net loss of $84 of successor for the one-month
period ended March 31, 2004. |
50
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
(a) Disclosure
Controls and Procedures:
Our management, under the supervision of and with the
participation of our principal executive officer and principal
financial officer, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended, (the
Exchange Act)), as of December 31, 2005. Any
controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving
desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on such evaluation, our
principal executive officer and principal financial officer have
concluded that, as of the end of such period, our disclosure
controls and procedures provided reasonable assurance that the
disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis,
information required to be disclosed by us in the report that is
filed or submitted under the Exchange Act.
(b) Internal
Control Over Financial Reporting
Our management, with the participation of our principal
executive officer and principal financial officer, also
conducted an evaluation of our internal control over financial
reporting to determine whether any changes occurred during the
quarter ended December 31, 2005, that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting. Based on that
evaluation, there has been no such change during such quarter.
|
|
Item 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
Item 10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
Information concerning directors of the registrant is contained
in the Companys Proxy Statement under the caption
ELECTION OF DIRECTORS, which information is
incorporated herein by reference.
Information concerning executive officers of the registrant is
contained in this report under Item 1,
BUSINESS-Executive Officers, which information is
incorporated herein by reference.
The information required by Item 405 of
Regulation S-K
is contained in the Companys Proxy Statement to be issued
in connection with its Annual Meeting of Stockholders under the
caption Section 16(a) Beneficial Ownership Reporting
Compliance.
Our Board of Directors adopted a Business Conduct Policy for all
of our directors, officers and employees effective June 22,
2005. We have posted our Business Conduct Policy on our website
(www.orchidspaper.com). In addition, stockholders may
request a free copy of our Business Conduct Policy from our
Chief Financial Officer as follows:
Orchids Paper Products Company
Attention: Keith R. Schroeder
4826 Hunt Street
Pryor, Oklahoma 74361
(918) 825-0616
To the extent required by law or the rules of the American Stock
Exchange, any amendments to, or waivers from, any provision of
the Business Conduct Policy will be promptly disclosed publicly.
To the extent permitted by such requirements, we intend to make
such public disclosure by posting the relevant material on our
website in accordance with SEC rules.
51
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
Information concerning executive compensation is contained in
the Companys Proxy Statement under the caption
EXECUTIVE COMPENSATION, which information is
incorporated herein by reference.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information concerning security ownership of certain beneficial
owners and management is contained in the Companys Proxy
Statement under the caption ELECTION OF
DIRECTORS Information Relating to Directors,
Nominees and Executive Officers and SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, which information
is incorporated herein by reference.
Securities
Authorized for Issuance Under Equity Compensation Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
|
|
|
|
|
|
|
|
|
|
Future Issuance Under
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average
|
|
|
Equity Compensation
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Plans (Excluding
|
|
|
|
of Outstanding Options
|
|
|
Outstanding Options,
|
|
|
Securities Reflected in
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Column (a)
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
269,500
|
|
|
$
|
8.05
|
|
|
|
187,500
|
|
Equity compensation plans not
approved by security holders
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
419,500
|
|
|
|
|
|
|
|
187,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
Information concerning certain relationships and related
transactions is contained in the Companys Proxy Statement
under the caption EXECUTIVE COMPENSATION, which
information is incorporated herein by reference.
|
|
Item 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information concerning accountant fees and services is contained
in the Companys Proxy Statement under the caption
FEES PAID TO INDEPENDENT AUDITORS, which information
is incorporated herein by reference.
PART IV
|
|
Item 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
(a)(1) Financial Statements.
The information required by this item is included in Item 8
of Part II of the
Form 10-K.
(a)(2) Financial Statement Schedules.
Schedule II Valuation and Qualifying
Accounts is included below. The rest of the schedules required
by this item have been omitted as they are not required, not
applicable or are included in Item 8 of Part II of
this report.
52
Orchids
Paper Products Company
Schedule II Valuation and Qualifying
Accounts
Year ended December 31, 2005, the Ten-month Period ended
December 31, 2004, the Two-month Period ended
February 29, 2004, and the Year ended December 31,
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Deductions
|
|
|
Balance at
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Describe(1)(2)
|
|
|
End of Period
|
|
|
|
(In thousands)
|
|
|
Accounts Receivable
Reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad Debt Reserve
|
|
$
|
90
|
|
|
$
|
46
|
|
|
$
|
11
|
|
|
$
|
125
|
|
Ten-month period ended
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad Debt Reserve
|
|
$
|
105
|
|
|
$
|
23
|
|
|
$
|
38
|
|
|
$
|
90
|
|
Two-month period ended
February 29, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad Debt Reserve
|
|
$
|
100
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
105
|
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad Debt Reserve
|
|
$
|
35
|
|
|
$
|
145
|
|
|
$
|
80
|
|
|
$
|
100
|
|
Inventory Valuation
Reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Valuation Reserve
|
|
$
|
39
|
|
|
$
|
|
|
|
$
|
15
|
|
|
$
|
24
|
|
Ten-month period ended
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Valuation Reserve
|
|
$
|
27
|
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
39
|
|
Two-month period ended
February 29, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Valuation Reserve
|
|
$
|
27
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27
|
|
Year ended December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Valuation Reserve
|
|
$
|
15
|
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
27
|
|
|
|
|
(1) |
|
Write-off of uncollectible accounts |
|
(2) |
|
Write-off of obsolete inventory and physical inventory
adjustments |
(a)(3) Exhibits
The exhibits listed below in the Exhibit Index are filed or
incorporated by reference as part of this report.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ORCHIDS PAPER PRODUCTS COMPANY
Michael P. Sage
Chief Executive Officer
|
|
|
|
By:
|
/s/ Keith R. Schroeder
|
Keith R. Schroeder
Chief Financial Officer
Date: March 28, 2006
POWER OF
ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Michael P. Sage and Keith R. Schroeder, and
each of them, his or her true and lawful
attorneys-in-fact
and agents, with full power of substitution, to sign any
amendments to this Annual Report on
Form 10-K
and to file such amendments and any related documents with the
Securities and Exchange Commission, and ratifies and confirms
the actions that any such
attorney-in-fact
and agents, or their substitutes, may lawfully do or cause to be
done under this power of attorney.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signatures
|
|
Title
|
|
Date
|
|
/s/ Douglas E.
Hailey
Douglas
E. Hailey
|
|
Chairman of the Board of Directors
|
|
March 28, 2006
|
|
|
|
|
|
/s/ Michael P. Sage
Michael
P. Sage
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
March 28, 2006
|
|
|
|
|
|
/s/ Gary P. Arnold
Gary
P. Arnold
|
|
Director
|
|
March 28, 2006
|
|
|
|
|
|
/s/ Steven Berlin
Steven
Berlin
|
|
Director
|
|
March 28, 2006
|
|
|
|
|
|
/s/ John G. Guttilla
John
G. Guttilla
|
|
Director
|
|
March 28, 2006
|
|
|
|
|
|
/s/ Keith R.
Schroeder
Keith
R. Schroeder
|
|
Chief Financial Officer
(Principal Financial and
Accounting Officer)
|
|
March 28, 2006
|
54
Exhibit Index
(c) EXHIBITS
|
|
|
|
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation of the Registrant, incorporated by reference to
Orchids Paper Products Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 3.1.
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the
Registrant, incorporated by reference to Orchids Paper Products
Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 3.2.
|
|
4
|
.1
|
|
Specimen Stock Certificate,
incorporated by reference to Orchids Paper Products Company
Form S-1
(File No.
333-124173)
dated June 24, 2005, exhibit 4.1.
|
|
4
|
.2
|
|
Agented Revolving Credit and Term
Loan Agreement, dated as of October 15, 2002 among the
Registrant, Bank of Oklahoma, N.A. and Local Oklahoma Bank,
N.A., incorporated by reference to Orchids Paper Products
Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 4.2.
|
|
4
|
.3
|
|
Amendment One to Agented Revolving
Credit and Term Loan Agreement dated October 14, 2003 among
the Registrant, Bank of Oklahoma, N.A. and Local Oklahoma Bank,
N.A., incorporated by reference to Orchids Paper Products
Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 4.3.
|
|
4
|
.4
|
|
Amendment Two to Agented Revolving
Credit and Term Loan Agreement dated January 14, 2004 among
the Registrant, Bank of Oklahoma, N.A. and Local Oklahoma Bank,
N.A., incorporated by reference to Orchids Paper Products
Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 4.4.
|
|
4
|
.5
|
|
Amendment Three to Agented
Revolving Credit and Term Loan Agreement dated March 1,
2004 among the Registrant, Bank of Oklahoma, N.A. and Local
Oklahoma Bank, N.A., incorporated by reference to Orchids Paper
Products Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 4.5.
|
|
4
|
.6
|
|
Amendment Four to Agented
Revolving Credit and Term Loan Agreement dated July 19,
2004 among the Registrant, Bank of Oklahoma, N.A. and
International Bank of Commerce (f/k/a Oklahoma Bank, N.A.).,
incorporated by reference to Orchids Paper Products Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 4.6.
|
|
4
|
.7
|
|
Amendment Five to Agented
Revolving Credit and Term Loan Agreement dated February 28,
2005 among the Registrant, Bank of Oklahoma, N.A. and
International Bank of Commerce (f/k/a Local Oklahoma Bank,
N.A.), incorporated by reference to Orchids Paper Products
Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 4.7.
|
|
4
|
.8
|
|
Form of Subordinated Debenture,
incorporated by reference to Orchids Paper Products Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 4.8.
|
|
4
|
.9
|
|
Amended and Restated Agented
Credit Agreement, dated as of June 24, 2005, among the
Registrant, Bank of Oklahoma, N.A., BancFirst and Commerce Bank,
N.A., incorporated by reference to Orchids Paper Products
Company
Form S-1
(File
No. 333-124173)
dated June 24, 2005, exhibit 4.9.
|
|
10
|
.1
|
|
Amended and Restated Management
Services Agreement, dated April 19, 2005, between Weatherly
Group, LLC, Taglich Brothers, Inc. and the Registrant,
incorporated by reference to Orchids Paper Products Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 10.1.
|
|
10
|
.2#
|
|
2005 Stock Incentive Plan,
incorporated by reference to Orchids Paper Products Company
Form S-1
(File No.
333-124173)
dated April 19, 2005, exhibit 10.2.
|
|
10
|
.3#
|
|
Employment Agreement dated
March 1, 2004, between Michael P. Sage and the Registrant,
incorporated by reference to Orchids Paper Products Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 10.3.
|
|
10
|
.4#
|
|
Employment Agreement dated
March 1, 2004, between Keith R. Schroeder and the
Registrant, incorporated by reference to Orchids Paper Products
Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 10.4.
|
|
10
|
.5#
|
|
Form of Identification Agreement
between Registrant and each of its Directors and Officers,
incorporated by reference to Orchids Paper Products Company
Form S-1/A
(File
No. 333-124173)
dated June 1, 2005, exhibit 10.5.
|
55
|
|
|
|
|
|
10
|
.6
|
|
Form of Warrant issued by Orchids
Acquisition Group, Inc. in connection with the acquisition of
Orchards Paper Products Company, incorporated by reference to
Orchids Paper Products Company
Form S-1
(File No.
333-124173)
dated April 19, 2005, exhibit 10.6.
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10
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.7
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Form of Warrant issuable to
designees of the Underwriter, incorporated by reference to
Orchids Paper Products Company
Form S-1/A
(File No.
333-124173)
dated June 1, 2005, exhibit 10.7.
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10
|
.8
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Purchasing documents for tissue
machine, incorporated by reference to Orchids Paper Products
Company
Form S-1
(File
No. 333-124173)
dated April 19, 2005, exhibit 10.8.
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10
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.9
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Commitment Letter, dated as of
May 9, 2005, among the Registrant, Bank of Oklahoma and
BancFirst, incorporated by reference to Orchids Paper Products
Company
Form S-1/A
(File
No. 333-124173)
dated June 1, 2005, exhibit 10.9.
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10
|
.10
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Engagement Letter, dated as of
March 15, 2005, among the Registrant, Taglich Brothers,
Inc. and Sanders Morris Harris Inc., incorporated by reference
to Orchids Paper Products Company
Form S-1/A
(File No.
333-124173)
dated July 15, 2005, exhibit 10.10.
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21
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Subsidiaries of the Company.
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23
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.1
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Consent of Independent Registered
Public Accounting Firm Tullius Taylor
Sartain & Sartain LLP.
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# |
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Indicates management contract or compensatory plan |
56