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, 2006
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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
(State or other jurisdiction of
incorporation or organization)
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23-2956944
(I.R.S. Employer
Identification Number)
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4826 Hunt Street
Pryor, Oklahoma 74361
(Address of principal executive offices)
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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of 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 aggregate market value of the registrants common
equity held by non-affiliates was $52.0 million as of June 30,
2006.
As of March 1, 2007, there were outstanding 6,234,346 shares of
common stock, none of which are held in treasury.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrants 2007
Annual Meeting of Stockholders are incorporated by reference
into Part III of this Form 10-K.
PART I
Throughout this
Form 10-K
report we incorporate by reference certain
information from 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 9, 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 the discount retail
market. Our primary concentration within this market is the
value retailers or dollar stores. We focus on the discount
retail market because of the consistent order patterns and low
number of stock keeping units or SKUs in this market. 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 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 2006, we generated revenue of $60.2 million, of which
52% came from paper towels, 39% came from bathroom tissue and 9%
came from paper napkins. In 2006, 75% of our revenue came from
six value retailers: Dollar General, Family Dollar, Freds,
Dollar Tree, Variety Wholesale and Big Lots. The balance of 2006
revenue came from other discount retailers, grocery stores,
grocery wholesalers and cooperatives, and convenience stores.
Dollar General is the largest value retailer in the United
States and our largest customer, accounting for 38% of our 2006
revenue.
We manufacture parent rolls in our paper mill located in Pryor,
Oklahoma. Our facility manufactures parent rolls from recycled
waste paper using four 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.
In June 2006, we started up the new paper machine with a rated
capacity of 33,000 tons per year. Prior to adding the new paper
machine, our paper mill generally operated 24 hours per
day, 362 days per year and typically produced between
26,000 and 27,000 tons of paper per year. Our total papermaking
capacity from our new machine and a combination of the old
machines is expected to be approximately 47,000 tons per year.
Soon after
start-up, we
were able to eliminate open market purchases of parent rolls,
except for limited special purpose applications. During the last
four months of 2006, we sold 1,191 tons of parent rolls on the
open market and we anticipate further open market sales during
2007.
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.
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 were outstanding. In July
2006, we effected a
3-for-2
stock split resulting in outstanding shares of 6,234,346. 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.
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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 43 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 13 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. In December 2006, this
special tax incentive was extended through 2007. 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 the discount retail market,
especially 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 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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successfully operating our new paper machine;
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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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Installation and Operation of the New Paper
Machine. During 2006, we completed the
installation and
start-up of
our new paper machine with a rated production capacity of 33,000
tons per year. This facility enabled us to essentially cease the
purchase of parent rolls on the open market and to sell 1,191
tons of parent rolls on the open market during the last few
months of 2006. We purchased 6,970 and 12,153 tons of parent
rolls on the open market in 2006 and 2005, respectively, at an
average cost of $1,062 and $1,024 per ton, respectively. We
anticipate being in a surplus parent roll situation during 2007.
Furthermore, our average costs of producing paper, exclusive of
depreciation, have declined from $760 per ton and
$777 per ton in the first two quarters of 2006,
respectively, to $703 per ton and $710 per ton in the
final two quarters of 2006, respectively.
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
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the private label tissue market. Overall, the value retail
channel is projected to continue growing, however, our largest
customer is executing a strategic rationalization of its store
base in 2007, which could result in slower growth in the near
term.
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
retailers who seek value tissue products. With the lower costs
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 and expanding our product offering at distribution
centers where we do not currently supply the complete private
label 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 discount
retailers, 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.
Competitive
Conditions
We believe the principal competitive factors in our market
segments are price and service, and that our competitive
strengths with respect to other private label manufacturers
include long-standing relationships with value retailers, a full
line of products and flexible converting capabilities, which
enables us to produce tissue products in a variety of sizes,
packs and weights. This flexibility allows us to meet the
particular demands of individual retailers.
Competition in the value-end of the market is significantly
impacted by geographic location, as freight costs represent a
material portion of end product costs. We believe it is
generally economically feasible to ship within approximately a
900-mile
radius of the production site. In Oklahoma and the immediately
surrounding area, we believe that Georgia-Pacifics
Muskogee, Oklahoma plant and Cascades Memphis, Tennessee
plant are the only competitors plants in this region.
However, we face greater competition in the Southeast and
Midwest regions of the U.S. Georgia-Pacific has additional
plants in Georgia and Wisconsin and Cascades has plants in
Pennsylvania and Wisconsin. We also face competition from other
suppliers who have facilities in the Southwest, upper Midwest
and Southeast regions of the United States.
We believe the number of competitors in private label segments
will not significantly increase in the near future because of
the large capital expenditures required to establish a paper
mill and difficulties in obtaining environmental and local
permits for tissue manufacturing facilities.
Product
Overview
We offer our customers an array of private label products,
including bathroom tissue, paper towels and paper napkins. In
2006, 52% of our finished case shipments were paper towels, 39%
were bathroom tissue and 9% were paper napkins. Of our products
sold in 2006, 81% were packaged as private label products in
accordance with our customers specifications. The
remaining 19% were packaged under our brands
Velvet®,
Colortex®,
Ultra
Valu®,
Dri-Mop®,
Big Mopper
®
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, who use them
as their in-store labels.
Customers
Our customers include value retailers, grocery stores, grocery
wholesalers and cooperatives, and convenience stores. Our recent
growth has come from serving customers in the 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
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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 2006, approximately 75% of our revenue was 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
with other discount retailers, and in the grocery 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 38% of our sales in 2006. With more
than 8,000 stores in 35 states, Dollar General is the
largest value retailer. According to its press release dated
February 8, 2007, Dollar General increased its net number
of stores by 380 during fiscal 2006. On November 29, 2006,
Dollar General announced that it plans to close 400 stores and
to open 300 stores during fiscal 2007. We currently supply
substantially all of the value 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 22% of our sales
in 2006. Family Dollar has become one of the leading value
retailers in the industry with more than 6,200 stores in
44 states. In a press release dated September 28,
2006, Family Dollar reported that it plans to open 400 stores
during the fiscal year ending September 1, 2007. 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, Wal-Mart, Dollar Tree
and Big Lots. In 2006, 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 32% of our sales in 2006. We also use a network of
approximately 38 brokers. Our management team recognizes that
these brokers have 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
nearly two-fifths of our revenue for 2006 and slightly more than
half of our revenue in 2005. Total commissions paid in the
twelve months ended December 31, 2006 and 2005, were
$840,000 and $879,000, respectively.
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Manufacturing
We own and operate a paper manufacturing mill with two
facilities and a converting facility at our headquarters in
Pryor, Oklahoma. Our two paper mill facilities, which total
162,000 square feet, produce parent rolls that are then
converted into tissue products at our adjacent converting
facility. The paper mill facilities include four 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. 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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2006
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2005
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2004
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2003
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2002
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(Tons)
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Manufactured
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31,662
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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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Purchased
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6,970
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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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Converted
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38,632
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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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In order to expand our capacity and reduce our production costs,
we have installed a new paper machine in a new building adjacent
to our existing mill. Our new paper machine and a combination of
the older machines will produce approximately 47,000 tons of
paper per year or an increase of 80% over the amount produced
prior to adding the new machine. This additional capacity
allowed us to eliminate purchases of recycled parent rolls from
third parties beginning in the third quarter of 2006, and to
reduce the cost of internally produced parent rolls.
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 6.2 million cases a year, we operate the
converting facility on a 24 hour a day,
seven-day-a-week
schedule. 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 and enables 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.
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
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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 electricity costs during 2006. We source our
electricity from the Grand River Dam Authority. As part of our
new paper machine project, we installed a boiler to supply our
own steam. We do not have any fixed price contracts or hedges in
place with natural gas suppliers. We purchase our natural gas
through a broker. Our broker purchases natural 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.
Typically, we have a backlog of approximately two weeks of
sales. As of December 31, 2006, our backlog of customer
orders was 260,000 cases of finished converted products and 60
tons of parent rolls or approximately $2.9 million. As of
December 31, 2005 our backlog 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, who use them as their in-store labels.
Employee
and Labor Relations
As of December 31, 2006, we had approximately 310 full time
employees of whom 265 were union hourly employees and 45 were
non-union salaried employees. Of our employees, approximately
285 were engaged in manufacturing and production, 23 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.
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.
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We have been notified by the operator of the industrial park in
which we operate, Oklahoma Ordinance Works Authority
(OOWA), that the level of biological oxygen demand
(BOD) and total suspended solids (TSS)
we are allowed to send to the OOWA following pre-treatment at
our facility, may be reduced. The OOWA holds the waste water
permit that covers our facility. The amount of any reduction to
our BOD and TSS has not been determined. Any reduction in the
permitted level of BOD and TSS will likely result in a need to
expand our pre-treatment facility. Because the level of
reduction has not been firmly established, estimates of the cost
to expand our pre-treatment facility to meet the stricter
standards are difficult and subject to a higher degree of
uncertainty. Based upon the best information available, we
currently estimate a cost of $3 million to expand our
pre-treatment facility, which will be likely be incurred within
the next two years.
Executive Officers and Key Employees
Set forth below is the name, age as of March 1, 2007,
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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60
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Chief Executive Officer and
President, Director
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Keith R. Schroeder
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51
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Chief Financial Officer
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Michael
P. Sage, 60, 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, 51, 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 SEC. You may read and copy any document we
file with the SEC at the SECs public reference room at
450 Fifth Street, NW, 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 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.
We operate in a changing environment that involves numerous
known and unknown risks and uncertainties that could materially
affect our operations. The risks, uncertainties and other
factors set forth below may cause our actual results,
performances or achievements to be materially different from
those expressed or implied by our forward-looking statements. If
any of these risks or events occur, our business, financial
condition or results of operations may be adversely affected. We
may amend or supplement the risk factors described below from
time to time in other reports we file with the SEC in the future.
9
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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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 38% of our
revenue in 2006. Our second largest customer, Family Dollar,
accounted for approximately 22% of our revenues in 2006. We
currently supply substantially all of the value private label
tissue products at three of Dollar Generals eight
distribution centers, substantially all of the value private
label tissue products at two of Family Dollars eight
distribution centers and approximately half of the value private
label tissue 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 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
have significant indebtedness which limits our free cash flow
and subjects us to restrictive covenants relating to the
operation of our business.
During 2006 we borrowed $15.0 million pursuant to our
construction loan facility to finance our new paper machine. As
a result, our total indebtedness increased from
$18.6 million as of December 31, 2005 to
$33.8 million as of December 31, 2006. To refinance
the outstanding debt under our current credit agreement, which
expires on April 30, 2007, we have negotiated a commitment
letter with our current agent bank for a new credit facility
with revised terms. Due to the increased borrowings described
above and based on the terms of our proposed new credit
agreement, we anticipate our annual interest costs in 2007 to
increase to approximately $2.7 million from the
$1.6 million, including capitalized interest of $411,000,
incurred in 2005. We anticipate our principal payments in 2007
to approximate $2.3 million, considering the effects of our
proposed credit facility. Our principal payments in the year
2006 totaled $1.6 million. 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
10
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 and proposed
credit 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 and our lenders could also accelerate the maturity of
our debt 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 2006, our consumption of both natural gas and electricity
increased substantially following the
start-up of
our new paper machine. During the twelve months ending
December 31, 2006, we consumed 313,000 MMBTU of
natural gas at a total cost of $2.4 million. During the
same period of 2005 we consumed 263,500 MMBTU at a total
cost of $2.0 million. During 2006 our electric supplier
instituted a rate increase. Our usage increased from
35.1 million kilowatt hours in 2005 to 44.0 million
kilowatt hours in 2006. The total cost of electricity rose from
$1.5 million in the twelve months ending December 31,
2005 to $2.2 million for the same period in 2006. If our
energy costs increase, our cost of sales will increase, and our
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 revolving credit and term loan
agreements accrues interest at a variable rate. During 2006, our
bank debt interest rates rose from 8.44% at the start of the
year to a weighted average of 9.36% 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. 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 increase in the 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 2006, we purchased approximately
41,500 tons of SBS paper at a total cost of $8.7 million
compared to 34,000 tons of SBS paper at a total cost of
$6.7 million in 2005. The additional waste paper
requirements necessitated by the
start-up of
our new paper machine have resulted in additional demand on the
SBS waste paper market and could
11
have an effect on the market prices of this commodity. We
purchase all of our SBS paper from 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. In addition, the market price of SBS waste paper can
also be influenced by market swings in the price of virgin pulp
and other waste paper grades. If either the available supply of
SBS paper diminishes or the demand for SBS paper increases, it
could result in any of the following effects; substantially
increase the cost of SBS paper; require us to purchase alternate
waste paper grades at increased costs; cause a production
slow-down or stoppage until we are able to identify new sources
of SBS paper; or cause us to reconfigure our de-inking
facilities 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.
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 pre-existing paper machines are approximately 50 years
old. 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.
Expansion or replacement of existing facilities or equipment may
require substantial capital expenditures. We will likely need to
acquire an additional converting line to meet the additional
parent roll capacity from our new paper machine project and
allow access to new markets, which we currently estimate would
cost approximately $6 million. In addition, we may be
required to build a water treatment facility costing
approximately $3 million to reduce biological oxygen demand
and total suspended solids from our effluent stream. The timing
and amount of this expenditure is uncertain as the amount and
timing of any requirement to reduce BOD and TSS levels have not
12
been determined. 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.
We may
not be able to refinance our bank debt on terms acceptable to
us.
Our bank debt totaling $31.8 million at December 31,
2006 will mature on April 30, 2007. If we are unable to
complete the refinancing of this indebtedness, we would face an
immediate cash flow deficiency. We may not be able to negotiate
final terms and conditions under a new credit agreement that are
as favorable as our current terms and conditions. Although we
have obtained a commitment letter from our current agent bank
and we fully intend to complete the refinancing before the
April 30, 2007 deadline, we have no assurances that we can
complete the re-financing or obtain the terms in the commitment
letter.
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 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.
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 control 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 only
limited guidance on how to document financial processes and to
measure compliance adequacy. The Securities and Exchange
Commission and the Public Company Accounting Oversight Board are
currently considering additional guidance and auditing
procedures and making the rules better fit the circumstances of
smaller public companies. 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.
13
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 foreseeable future. Instead, we intend to reduce our debt
and 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.
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 the
3-for-2
stock split effected in July 2006, the average daily trading
volume of our common stock has been approximately
2,800 shares. The market price for our common stock is
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
14
securities litigation, if instituted against us, could result in
substantial costs and a diversion of our management resources,
which could significantly harm our business.
Our
directors have limited personal liability and rights of
indemnification from us for their actions as
directors.
Our 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 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. Parent roll production is housed in two
facilities. The older facility comprises approximately
135,000 square feet and houses three paper machines and
related processing equipment. The newer facility housing the new
paper machine comprises approximately 27,000 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 three
machines
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14,000 tons
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135,000
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Paper making new
machine
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33,000 tons
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27,000
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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 adequate to
serve our present and near term operating requirements.
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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.
15
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Item 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of stockholders, through the
solicitation of proxies or otherwise, during the fourth quarter
of the fiscal year ended December 31, 2006.
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. Prices have been adjusted for the
3-for-2
stock split that was effected in July 2006.
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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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6.97
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$
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5.67
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Fourth Quarter
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$
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7.03
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$
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6.43
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Year Ended December 31,
2006:
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First Quarter
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$
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9.31
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$
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6.70
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Second Quarter
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$
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10.53
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$
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9.00
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Third Quarter
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$
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11.36
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$
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8.99
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Fourth Quarter
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$
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9.34
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$
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8.20
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As of March 1, 2007, there were approximately 900
beneficial owners of our common stock. On March 1, 2007,
the last reported sale price of our common stock on the American
Stock Exchange was $8.21.
16
The following Performance Graph and related information shall
not be deemed soliciting material or to be
filed with the Securities and Exchange Commission,
nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933 or Securities
Exchange Act of 1934, each as amended, except to the extent that
we specifically incorporate it by reference into such filing.
Performance
Graph
The following graph compares the cumulative total stockholder
return on our Common Stock since the first day of trading
following our initial public offering on July 14, 2005,
with the cumulative total return of the Standard &
Poors Small Cap Price Index, the Standard &
Poors Paper and Paper Products Index and our selected peer
group comprised of Potlatch, Wausau Paper, and Cascades. These
comparisons assume the investment of $100 on July 15, 2005,
and the reinvestment of dividends.
These indices are included only for comparative purposes as
required by the SEC and do not necessarily reflect
managements opinion that such indices are an appropriate
measure of the relative performance of the Common Stock. They
are not intended to forecast possible future performance of the
common stock.
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July 15,
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2005
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December 31, 2005
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December 31, 2006
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Orchids Paper Products Company
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$
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100
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$
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120.59
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$
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150.53
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Peer Group
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$
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100
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$
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93.94
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$
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120.31
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S & P Small Cap
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$
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100
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$
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101.76
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$
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115.61
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S & P Composite 1500
Paper Products
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$
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100
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$
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115.11
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$
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117.95
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Dividends
Since January 2003, we have not paid cash dividends on our
capital stock. We anticipate that we will retain any earnings to
support operations, reduce our debt 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.
17
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, 2006.
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
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
Form 10-K.
The following tables set forth selected financial data as of and
for the years ended December 31, 2006 and 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 and 2002 . The
selected financial data as of and for the years ended
December 31, 2006 and 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, 2006 and 2005, and for each of the three years
in the period ended December 31, 2006, are included below
under Item 8 of
18
this
Form 10-K.
The historical results are not necessarily indicative of the
operating results to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten-Months
|
|
|
Two-Months
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except Tons and per Ton data)
|
|
|
Net Sales
|
|
$
|
60,190
|
|
|
$
|
57,700
|
|
|
$
|
39,736
|
|
|
$
|
7,191
|
|
|
$
|
46,927
|
|
|
$
|
44,524
|
|
|
$
|
53,202
|
|
Cost of Sales
|
|
|
53,205
|
|
|
|
49,769
|
|
|
|
33,390
|
|
|
|
6,156
|
|
|
|
39,546
|
|
|
|
36,673
|
|
|
|
44,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
6,985
|
|
|
|
7,931
|
|
|
|
6,346
|
|
|
|
1,035
|
|
|
|
7,381
|
|
|
|
7,851
|
|
|
|
8,941
|
|
Selling, General and Administrative
Expenses
|
|
|
4,936
|
|
|
|
4,629
|
|
|
|
3,363
|
|
|
|
1,196
|
|
|
|
4,559
|
|
|
|
4,069
|
|
|
|
4,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
2,049
|
|
|
|
3,302
|
|
|
|
2,983
|
|
|
|
(161
|
)
|
|
|
2,822
|
|
|
|
3,782
|
|
|
|
4,318
|
|
Interest Expense
|
|
|
1,980
|
|
|
|
1,213
|
|
|
|
1,052
|
|
|
|
45
|
|
|
|
1,097
|
|
|
|
347
|
|
|
|
574
|
|
Other (Income) Expense, net
|
|
|
(99
|
)
|
|
|
(102
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
19
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
168
|
|
|
|
2,191
|
|
|
|
1,936
|
|
|
|
(206
|
)
|
|
|
1,730
|
|
|
|
3,416
|
|
|
|
3,424
|
|
Provision (Benefit) for Income Taxes
|
|
|
(564
|
)
|
|
|
799
|
|
|
|
642
|
|
|
|
66
|
|
|
|
708
|
|
|
|
1,367
|
|
|
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
732
|
|
|
$
|
1,392
|
|
|
$
|
1,294
|
|
|
$
|
(272
|
)
|
|
$
|
1,022
|
|
|
$
|
2,049
|
|
|
$
|
2,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons Shipped
|
|
|
39,823
|
|
|
|
38,204
|
|
|
|
27,769
|
|
|
|
4,575
|
|
|
|
32,344
|
|
|
|
29,960
|
|
|
|
36,046
|
|
Net Selling Price per Ton
|
|
$
|
1,511
|
|
|
$
|
1,510
|
|
|
$
|
1,431
|
|
|
$
|
1,572
|
|
|
$
|
1,451
|
|
|
$
|
1,486
|
|
|
$
|
1,476
|
|
Total Paper Usage Tons
|
|
|
38,632
|
|
|
|
38,204
|
|
|
|
26,824
|
|
|
|
4,575
|
|
|
|
31,399
|
|
|
|
30,050
|
|
|
|
36,046
|
|
Total Paper Cost per Ton
|
|
$
|
788
|
|
|
$
|
822
|
|
|
$
|
710
|
|
|
$
|
671
|
|
|
$
|
705
|
|
|
$
|
690
|
|
|
$
|
701
|
|
Total Paper Cost
|
|
$
|
31,381
|
|
|
$
|
31,420
|
|
|
$
|
19,050
|
|
|
$
|
3,071
|
|
|
$
|
22,121
|
|
|
$
|
20,729
|
|
|
$
|
25,260
|
|
Cash Flow Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Provided by (Used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
2,607
|
|
|
$
|
2,644
|
|
|
$
|
4,722
|
|
|
$
|
847
|
|
|
$
|
5,569
|
|
|
$
|
3,846
|
|
|
$
|
6,796
|
|
Investing Activities
|
|
$
|
(18,133
|
)
|
|
$
|
(19,238
|
)
|
|
$
|
(19,794
|
)
|
|
$
|
(112
|
)
|
|
$
|
(19,906
|
)
|
|
$
|
(619
|
)
|
|
$
|
(966
|
)
|
Financing Activities
|
|
$
|
15,151
|
|
|
$
|
16,487
|
|
|
$
|
15,067
|
|
|
$
|
(445
|
)
|
|
$
|
14,622
|
|
|
$
|
(3,247
|
)
|
|
$
|
(5,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
Working Capital
|
|
$
|
5,025
|
|
|
$
|
4,514
|
|
|
$
|
3,399
|
|
|
$
|
3,194
|
|
|
$
|
2,349
|
|
Net Property, Plant and Equipment
|
|
$
|
58,039
|
|
|
$
|
42,194
|
|
|
$
|
24,492
|
|
|
$
|
14,335
|
|
|
$
|
15,701
|
|
Total Assets
|
|
$
|
71,028
|
|
|
$
|
53,710
|
|
|
$
|
33,407
|
|
|
$
|
22,960
|
|
|
$
|
23,805
|
|
Long-Term Debt, net of current
portion
|
|
$
|
31,575
|
|
|
$
|
17,002
|
|
|
$
|
15,145
|
|
|
$
|
4,846
|
|
|
$
|
7,657
|
|
Total Stockholders Equity
|
|
$
|
24,704
|
|
|
$
|
23,712
|
|
|
$
|
6,941
|
|
|
$
|
10,050
|
|
|
$
|
8,001
|
|
|
|
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
Form 10-K.
This discussion contains forward-looking statements that involve
risks and uncertainties. You should specifically
19
consider the various risk factors identified in this filing that
could cause actual results to differ materially from those
anticipated in these forward-looking statements.
Executive
Overview
What were
our key 2006 financial results?
|
|
|
|
|
Our net sales were $60.2 million in 2006, up 4% from
$57.7 million in 2005.
|
|
|
|
We generated operating income of $2.0 million in 2006, down
38% from operating income of $3.3 million in 2005.
|
|
|
|
Our earnings per diluted share were $0.11 per diluted
common share in 2006 compared with $0.30 per diluted common
share in 2005.
|
|
|
|
We generated $2.6 million in positive operating cash flow
in 2006 and have generated positive operating cash flow each of
the last six years.
|
What did
we focus on in 2006?
Our focus in 2006 was on two major initiatives. The first
initiative was related to our strategy to eliminate our reliance
on third-party parent rolls and reduce our production costs by
installing and starting up a new paper machine. Our recent
business growth increased our converting requirements beyond the
paper-making capacity of our older paper machines. In the first
six months of 2006 and in the year 2005, approximately 32% of
our converting requirements were met through purchases of parent
rolls from third parties which were at costs well above our
internal cost of production. In addition to providing adequate
paper-making capacity to meet our current converting
requirements, the new paper machine will produce paper at a
lower overall cost per ton than our older machines due to its
high operating speeds and modern technology, thereby reducing
our total paper costs per ton. Our goal of a successful on-time
start-up and
ramp-up of
our new paper machine was achieved by working with our project
management engineering firm. The official
start-up
date of June 9, 2006 was within 30 days of our
targeted
start-up
date set in 2004 and we achieved rated speeds on bathroom tissue
by November and achieved 90% of rated speeds on towel paper by
the end of 2006.
Our second initiative was to continue to profitably grow the
business. Our goal was to attain a level of converted product
business that would consume our total paper-making capacity. By
the fourth quarter of 2006, we had attained a level of converted
product business that consumed approximately 82% of our total
paper-making capacity.
What
challenges and opportunities did our business face in
2006?
Our new paper machine initiative which included an on-time
completion, a successful
start-up and
meeting the planned
ramp-up
period was a major challenge for our management. Achieving these
objectives consumed a significant amount of management
attention. We experienced some operational difficulties during
the project which affected our waste paper mix and paper machine
yield during the first and second quarters of 2006 due to new
equipment installation and process changes. These issues were
resolved in the third and fourth quarters.
We experienced cost pressures during the year in our waste paper
prices, energy rates and packaging costs. Our waste paper prices
increased approximately 24% during the third and fourth quarters
of 2006 compared to the prices paid in the first quarter of
2006. Our electrical rates increased approximately 33% beginning
in the third quarter of 2006. Prices paid for packaging
increased approximately 8% during the year.
Focusing
on 2007
In 2007, we will continue to pursue profitable growth of our
converted product business to sell out our remaining
paper-making capacity. We will pursue this strategy through a
combination of increased business with existing customers and
new business in grocery and drug store retail channels. Any
paper-making capacity that is not consumed by the converting
business will be sold as parent rolls in the third-party market.
20
Optimizing the operation of our new paper machine and other
assets is a major focus for 2007. Now that the paper machine
start-up is
completed, management attention can be fully focused on
improving our overall operating efficiency. Continuous
improvement of our operations will be critical in helping combat
cost pressures.
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 discount retail market, primarily the dollar stores, 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.
Our profitability depends on several key factors, including:
|
|
|
|
|
the market price of our product;
|
|
|
|
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.
|
The private label segment of the tissue industry is highly
competitive, and discount retail customers are extremely price
sensitive. As a result, it is difficult to effect price
increases. We expect these competitive conditions to continue.
In June 2006, we began operating a new paper machine with an
annual capacity of approximately 33,000 tons. The capacity of
the new machine in addition to the capacity of a combination of
our older machines increased our total production capacity to
approximately 47,000 tons per year. As a result, beginning in
the third quarter of 2006, we were able to eliminate the
requirement to purchase parent rolls on the open market. Prior
to the third quarter of 2006, we had purchased parent rolls on
the open market since 1998 because our own parent roll
production had not adequately supplied the requirements of our
converting facility. We purchased approximately 6,970, 12,200
and 5,000 tons of paper on the open market in 2006, 2005 and
2004, respectively, to supplement our paper-making capacity.
Parent rolls are a commodity product and thus are subject to
market price and availability. We experienced significantly
higher parent roll prices beginning in early 2004, as well as
limited availability, which negatively affected our
profitability. We anticipate that the parent roll market will
remain tight for the foreseeable future, resulting in a
continuation of the high prices and limited availability.
Comparative
Years Ended December 31, 2006, 2005 and 2004
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
|
(In thousands, except average price per ton and tons)
|
|
|
Net sales
|
|
$
|
60,190
|
|
|
$
|
57,700
|
|
|
$
|
39,736
|
|
|
$
|
7,191
|
|
|
$
|
46,927
|
|
Total tons shipped
|
|
|
39,823
|
|
|
|
38,204
|
|
|
|
27,769
|
|
|
|
4,575
|
|
|
|
32,344
|
|
Average price per ton
|
|
$
|
1,511
|
|
|
$
|
1,510
|
|
|
$
|
1,431
|
|
|
$
|
1,572
|
|
|
$
|
1,451
|
|
Net sales increased $2.5 million, or 4.3%, to
$60.2 million for the year ended December 31, 2006,
compared to $57.7 million for the year ended
December 31, 2005. Net sales figures include gross selling
price, including freight, less discounts and pricing allowances.
The increase in net sales experienced in 2006 was due primarily
to higher sales of both converted products and parent rolls. For
the twelve months ended December 31, 2006, net sales of
21
converted products increased approximately 2.4% as compared to
the same period in 2005, the result of higher selling prices and
increased shipments. The increase in net selling prices is
primarily due to sales price increases implemented in the first
and second quarters of 2005. On a per ton basis, selling prices
increased 1.4% in the twelve months ended December 31,
2006, compared to the same period in 2005. Tons of converted
product shipped in the 2006 period increased approximately 1%
compared to the 2005 period. In addition, we shipped
approximately 1,200 tons of parent rolls to third parties in the
2006 period following the mid-year 2006
start-up of
our new paper machine and we did not ship any parent rolls in
the 2005 period.
Net sales increased $10.8 million, or 23.0%, to
$57.7 million for the year ended December 31, 2005,
compared to $46.9 million for the year ended
December 31, 2004. 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. Our net
selling price per ton in the year ended December 31, 2005,
was $1,510 compared with $1,451 per ton in the same period
of 2004. This increase in price per ton was primarily due to
price increases implemented in the first and second quarters of
2005 and to a lesser extent, the price received for parent roll
sales in the 2004 period.
Cost of
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
|
(In thousands, except gross profit margin %)
|
|
|
Cost of paper
|
|
$
|
31,381
|
|
|
$
|
31,420
|
|
|
$
|
19,050
|
|
|
$
|
3,071
|
|
|
$
|
22,121
|
|
Non-paper materials, labor,
supplies, etc.
|
|
|
19,570
|
|
|
|
16,848
|
|
|
|
13,052
|
|
|
|
2,701
|
|
|
|
15,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
50,951
|
|
|
|
48,268
|
|
|
|
32,102
|
|
|
|
5,772
|
|
|
|
37,874
|
|
Depreciation
|
|
|
2,254
|
|
|
|
1,501
|
|
|
|
1,288
|
|
|
|
384
|
|
|
|
1,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
53,205
|
|
|
$
|
49,769
|
|
|
$
|
33,390
|
|
|
$
|
6,156
|
|
|
$
|
39,546
|
|
Gross Profit
|
|
$
|
6,985
|
|
|
$
|
7,931
|
|
|
$
|
6,346
|
|
|
$
|
1,035
|
|
|
$
|
7,381
|
|
Gross Profit Margin %
|
|
|
11.6
|
%
|
|
|
13.7
|
%
|
|
|
16.0
|
%
|
|
|
14.4
|
%
|
|
|
15.7
|
%
|
Major components of cost of sales are the cost of internally
produced paper, parent rolls purchased from third parties, raw
materials, direct labor and benefits, freight on products
shipped to customers, insurance, repairs and maintenance,
energy, utilities and depreciation.
Cost of sales increased approximately $3.4 million, or
6.9%, to $53.2 million for the year ended December 31,
2006, compared to $49.8 million for the same period in
2005. As a percentage of net sales, cost of sales increased to
88.4% in the 2006 period compared to 86.3% in the 2005 period.
Cost of sales as a percentage of net sales in the year ended
December 31, 2006, was unfavorably affected by higher
converting labor costs, depreciation, an unfavorable sales mix
and higher costs of packaging materials, which were partially
offset by lower overall paper costs. The unfavorable mix is the
result of an increase in bathroom tissue shipments as compared
to towel shipments. A change in the level of overall business
with certain large customers is the primary reason for the mix
swing. Depreciation for the year ended December 31, 2006
increased approximately $753,000 to $2.3 million as a
result of the
start-up of
the $34.6 million paper machine project in June 2006.
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
22
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.
The following chart depicts the major factors that influence our
paper costs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
Paper usage
(tons)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted-internal
|
|
|
31,662
|
|
|
|
26,051
|
|
|
|
21,976
|
|
|
|
4,406
|
|
|
|
26,382
|
|
Converted-purchased
|
|
|
6,970
|
|
|
|
12,153
|
|
|
|
4,848
|
|
|
|
169
|
|
|
|
5,017
|
|
Total converted
|
|
|
38,632
|
|
|
|
38,204
|
|
|
|
26,824
|
|
|
|
4,575
|
|
|
|
31,399
|
|
Third-party parent roll sales
|
|
|
1,191
|
|
|
|
|
|
|
|
945
|
|
|
|
|
|
|
|
945
|
|
Paper costs per
ton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost per ton produced internally
|
|
$
|
730
|
|
|
$
|
729
|
|
|
$
|
661
|
|
|
$
|
667
|
|
|
$
|
662
|
|
Cost per ton purchased from third
parties
|
|
$
|
1,062
|
|
|
$
|
1,024
|
|
|
$
|
933
|
|
|
$
|
781
|
|
|
$
|
928
|
|
Total cost per ton
|
|
$
|
788
|
|
|
$
|
822
|
|
|
$
|
710
|
|
|
$
|
671
|
|
|
$
|
705
|
|
Total paper costs (in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of internally produced paper
|
|
$
|
23,979
|
|
|
$
|
18,979
|
|
|
$
|
14,526
|
|
|
$
|
2,939
|
|
|
$
|
17,465
|
|
Cost of paper purchased from third
parties
|
|
|
7,402
|
|
|
|
12,441
|
|
|
|
4,524
|
|
|
|
132
|
|
|
|
4,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paper costs
|
|
$
|
31,381
|
|
|
$
|
31,420
|
|
|
$
|
19,050
|
|
|
$
|
3,071
|
|
|
$
|
22,121
|
|
Our overall cost of paper was $788 per ton in the twelve
months ended December 31, 2006, compared to $822 per
ton in the year ended December 31, 2005. The reduction in
our overall per ton cost of paper is due to an increase in the
consumption of internally produced paper in the last half of
2006, following the
start-up of
our new paper machine. For the year ended December 31,
2006, approximately 82% of the paper consumed in our converting
operation was internally produced compared to 68% for the same
period in 2005. Beginning in the third quarter of 2006, parent
roll production from our new paper machine eliminated the need
to purchase recycled parent rolls from third parties and allowed
us to sell approximately 1,200 tons of parent rolls during the
last four months of 2006. We expect our overall parent roll
production in 2007 to exceed our requirements for recycled
converted product and we intend to sell our excess recycled
parent rolls. For the twelve months ended December 31,
2006, our internal cost of paper production, excluding
depreciation, was $730 per ton which was slightly higher than
the $729 per ton experienced in the same period of 2006.
Increased waste paper and electrical costs were mostly offset by
lower per ton costs of fixed and semi-variable costs. An
increase in waste paper costs experienced during the 2006
period, primarily in the third and fourth quarters, and lower
yields in the first three quarters of the 2006 period during the
final construction and
start-up
period of our new paper machine resulted in an 8% increase per
ton in this component of our paper costs.
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-
23
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 $729 per ton for the year ended December 31, 2005,
compared to $662 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.
Gross
Profit
Gross profit decreased by $946,000, or 11.9%, to
$7.0 million for the year ended December 31, 2006,
compared to $7.9 million for the year ended
December 31, 2005. As a percent of net sales, gross profit
dropped to 11.6% in 2006 compared to 13.7% in 2005. The major
reasons for the reduction in gross profit as a percentage of net
sales were the previously discussed higher cost of converting
labor, increased level of depreciation, unfavorable sales mix
and higher packaging costs being partially offset by a lower
overall cost of parent rolls.
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.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
|
(In thousands, except SG&A as a % of net sales)
|
|
|
Commission expense
|
|
$
|
840
|
|
|
$
|
879
|
|
|
$
|
661
|
|
|
$
|
127
|
|
|
$
|
788
|
|
Management incentive payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
625
|
|
|
|
625
|
|
Other S,G&A expenses
|
|
|
4,096
|
|
|
|
3,750
|
|
|
|
2,702
|
|
|
|
444
|
|
|
|
3,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General & Adm exp
|
|
$
|
4,936
|
|
|
$
|
4,629
|
|
|
$
|
3,363
|
|
|
$
|
1,196
|
|
|
$
|
4,559
|
|
SG&A as a % of net sales
|
|
|
8.2
|
%
|
|
|
8.0
|
%
|
|
|
8.5
|
%
|
|
|
16.6
|
%
|
|
|
9.7
|
%
|
Selling, general and administrative expenses include salaries,
commissions to brokers and other miscellaneous expenses.
Selling, general and administrative expenses for the year ended
December 31, 2006, increased $307,000, or 6.6%, to
$4.9 million, compared to $4.6 million in the same
period in 2005. As a percentage of net sales, selling, general
and administrative expenses increased to 8.2% for the year ended
December 31, 2006, compared to 8.0% in the same period in
2005. An increase in costs directly related to being a public
company and higher artwork-related expenditures were partially
offset by lower costs related to a management services agreement
and a lower level of stock option expense. Public company
expenses were approximately $624,000 in the year ended
December 31, 2006, compared with $152,000 in the same
period in 2005. Public company expenses were lower in 2005
because we were a privately-held company until July 2005.
Artwork-related expenditures increased approximately $118,000 in
the 2006 period compared to the 2005 period due to a higher than
normal number of packaging changes by existing customers and
packing development with new customer accounts. Costs related to
our management services agreement were lower in the twelve
months ended December 31, 2006, by $250,000 as compared to
the same period in 2005 due to a $150,000 lump sum payment made
in 2005 which reduced our annual costs under the agreement from
$325,000 to $125,000. The management services agreement has been
terminated effective March 2, 2007. In the twelve months
ended December 31, 2006, we recognized approximately
$260,000 of stock option expense, including $186,000 of ongoing
expense for options issued to management in April 2005 and
$74,000 for options issued to certain members of the board of
directors in February 2006, June 2006 and December 2006. In the
twelve months ended December 31, 2005, we recognized
approximately $368,000 in stock option expense, including
$337,000 for options issued to management and $31,000 for
options issued to certain members of the board of directors in
September 2005 and December 2005. In April 2005, the 2005 Stock
Incentive Plan was approved by the board of directors and
stockholders and in April 2005, options for an aggregate of
24
405,000 shares of common stock were awarded to certain
members of management. The management options vested 20% on the
date of grant and 20% on each anniversary of the grant over the
succeeding four years. The board options vested 100% on the date
of the grant. Quarterly charges for the management stock options
will approximate $47,000 through the vesting period ending in
the first quarter of 2009.
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 compared to the prior
year. 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 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.
Operating
Income
As a result of the foregoing factors, operating income for the
twelve months ended December 31, 2006, 2005 and 2004 was
$2.0 million, $3.3 million, and $2.8 million,
respectively.
Interest
and Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Interest expense
|
|
$
|
1,980
|
|
|
$
|
1,213
|
|
|
$
|
1,052
|
|
|
$
|
45
|
|
|
$
|
1,097
|
|
Other (income) expense, net
|
|
$
|
(99
|
)
|
|
$
|
(102
|
)
|
|
$
|
(5
|
)
|
|
$
|
|
|
|
$
|
(5
|
)
|
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
below. Interest expense for the twelve months ended
December 31, 2006, was $2.0 million, net of $992,000
of capitalized interest, compared to interest expense in the
2005 period of $1.2 million, net of $411,000 of capitalized
interest. Including the capitalized interest, total interest
cost, including amortization, increased $1.4 million, to
$3.0 million in the 2006 period compared to
$1.6 million in the 2005 period. Gross interest expense
increased as a result of borrowings in 2006 under our
construction loan to fund our new paper machine, higher average
borrowings under our revolving credit agreement, and higher
interest rates. During 2006 we borrowed $15.0 million on
the construction loan, the full amount available under the loan
agreement. We capitalized interest under the requirements of
SFAS No. 34 Capitalization of Interest
Cost in relation to our new paper machine project.
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. The increase in
interest expense is primarily due to the additional debt we
incurred in March 2004 as part of the acquisition of the
predecessor 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 predecessor 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.
Other income was $99,000 in the twelve months ended
December 31, 2006, compared to $102,000 in the same period
of 2005. Other income in the 2006 period was mainly comprised of
$66,000 in interest income earned from a restricted certificate
of deposit with our lending institution and a $39,000 foreign
currency transaction gain. Other income in the 2005 period was
mainly comprised of $138,000 of income earned from the
investment of our unused proceeds from our initial public
offering which was partially offset by a net foreign currency
exchange loss of $39,000. In 2004 we entered into certain
purchase agreements related to our new paper machine project.
One of
25
these purchase agreements was denominated in Euros. We entered
into foreign currency exchange contracts in the second quarter
of 2005 to fix the price of this purchase agreement. We made the
final payment under the exchange contract and on the purchase
order in the second quarter of 2006. The exchange contracts were
carried at fair value and any adjustments to fair value affected
net income. In the 2005 period, the net proceeds of our initial
public offering were used to fund the monthly construction costs
of our new paper machine project. The unused proceeds were
invested in short-term instruments such as high-grade commercial
paper and bank certificates of deposit until such time as they
were required for construction funding. As of December 31,
2005, the remaining unused net proceeds totaled $373,000, which
were consumed in January 2006.
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. At December 31,
2005, our outstanding foreign exchange contracts totaled
$760,000. The exchange contracts were carried at fair value and
any adjustments to fair value affected 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 December 31, 2005, was $681,000
and was 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
decreased $2.0 million to $168,000 for the year ended
December 31, 2006, compared to $2.2 million for the
year ended December 31, 2005. Income before income taxes
increased by $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
Tax Provision (Benefit)
For the year ended December 31, 2006, the income tax
benefit amounted to $564,000, resulting in an effective tax rate
of a negative 336%. The primary reason for the benefit was the
Oklahoma Investment Tax Credit (OITC) associated with our
investment in a new paper machine. Also benefiting the tax
provision was the federal Indian Employment Credit (IEC), which
was reinstated in December 2006. The law authorizing the IEC had
effectively lapsed at year-end 2005. Accordingly, the Company
was not able to recognize the IEC in its tax provisions during
the first three quarters of 2006. Partially offsetting these
benefits was the effect of the previously discussed
non-deductible stock option expense. The current tax benefit of
$1.0 million primarily results from the carryback of net
operating losses for tax purposes to tax years 2005 and 2004.
The deferred provision of $483,000 is the result of substantial
tax depreciation in excess of financial depreciation, partially
offset by the recognition of investment, employment and other
tax carryforwards for financial reporting purposes. The law
extending the IEC also reinstated accelerated depreciation
deductions, the most important of which was a four year tax life
on investments in machinery and equipment placed in service on
former Indian lands in Oklahoma. Accelerated depreciation will
continue to benefit our current tax position for the next few
years, as will the OITC, which is earned ratably over five
years. We expect to claim $720,000 in OITC in each of the next
four years.
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 non-deductible
stock option expense being partially offset by the utilization
of federal Indian employment credits.
For the year ended December 31, 2004, income tax expense
was $708,000 resulting from an effective tax rate of 41%. Our
income tax expense was higher than the federal statutory rate in
2004 due to adjustment of amounts previously claimed for federal
Indian employment credits. For the ten-month period ended
December 31, 2004, state income taxes were fully offset by
investment and employment credits.
26
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 was funded through the net
proceeds of our initial public offering, additional bank
financing and cash flows from operations. The total cost of the
paper machine project was $34.6 million, exclusive of
capitalized interest.
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 333-124173),
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, were outstanding. In July, 2006 we
effected a
3-for-2
stock split increasing the shares of common stock outstanding to
6,234,346 shares 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); and
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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 $375,000 during 2006 to $3,000 at
December 31, 2006. The decrease was attributable to the
application of remaining funds from the public offering to the
paper machine project.
The Company has recorded a current income tax receivable at
December 31, 2006 in the amount of $1.2 million to
recover federal income taxes paid in 2006, 2005 and 2004. This
asset should be realized during 2007. This is the result of net
operating losses (NOL) for tax purposes due largely to
accelerated depreciation deductions for the new paper machine.
Furthermore, the Company estimates NOL carryforwards of
$1.1 million (federal) and $2.0 million (state) which
are available to offset future taxable income. In addition, the
Company plans to claim $1.1 million in Oklahoma Investment
Tax Credit (OITC) carryforward as of December 31, 2006,
which is available to offset future Oklahoma income tax
liability. The OITC carryforward is expected to grow over the
next four years as it is earned ratably over five years at two
percent per year on qualified investments. We expect to claim
$720,000 in OITC in each of the next four years. The combination
of accelerated depreciation deductions and the OITC will likely
eliminate all Oklahoma income tax liability for the next few
years.
Cash decreased by $107,000 during 2005 to $378,000 at
December 31, 2005. In addition to the cash balances, we
maintained $1.5 million of short-term investments in
certificates of deposit at December 31, 2006 and 2005. The
$1.5 million is restricted under the provisions of our term
loan agreement until April 30, 2007, the term date of our
existing credit agreement. We anticipate that the
$1.5 million will be used to reduce the principal amount of
our bank debt.
27
The following table summarizes key cash flow information for the
years ended December 31, 2006 and 2005, the ten-month
period ended December 31, 2004 and the two-month period
ended February 29, 2004.
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Successor
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Predecessor
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Period from
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Period from
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Combined
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March 1 -
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January 1 -
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Year Ended
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Year Ended December 31,
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December 31,
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February 29,
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December 31,
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2006
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2005
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2004
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2004
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2004
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(In thousands)
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Cash Flow Data
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Cash flow provided by (used in):
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Operating activities
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$
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2,607
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$
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2,644
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$
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4,722
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$
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847
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$
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5,569
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Investing activities
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$
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(18,133
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)
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$
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(19,238
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)
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$
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(19,794
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)
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$
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(112
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)
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$
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(19,906
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)
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Financing activities
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$
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15,151
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$
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16,487
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$
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15,067
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$
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(445
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)
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$
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14,622
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Cash provided by operations totaled $2.6 million in the
year ended December 31, 2006, essentially level with the
same period in 2005. An increase in income taxes receivable in
2006 was mainly attributable to accelerated depreciation on the
new paper machine. The recently extended tax benefits for
property placed in service on former Indian lands added to the
net operating loss for tax purposes. This increase was largely
offset by the absence of the inventory increase incurred during
2005. The absence was due to a scarcity of third party parent
rolls available on the open market at year-end 2004. Accounts
receivable increased during the year ended December 31,
2006, reflecting higher sales volumes. Accounts payable
increased during the year ended December 31, 2006,
reflecting higher levels of purchasing.
Cash used in investing activities was $18.1 million, mostly
related to the new paper machine project. Capital expenditures
for the new machine amounted to $17.5 million in 2006,
inclusive of capitalized interest of $992,000. The
start-up
date for the project was June 9, 2006. Annual maintenance
capital expenditures are estimated to be approximately
$750,000 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 purchasing an additional
converting equipment line in 2007 or 2008 at an estimated
capital cost of $6 million. We also may be required to
build a wastewater pre-treatment facility at an estimated cost
of $3 million, probably some time after 2007. Funding for
these expenditures is expected to come from a combination of
additional borrowings from lenders and operating cash flow.
Cash provided from financing activities amounted to
$15.2 million in the year ended December 31, 2006,
mainly attributable to borrowings under a construction loan
agreement with established bank creditors. Cash provided from
financing activities decreased from $16.5 million in the
year ended December 31, 2005 due to the absence of the
proceeds from the initial public offering and reduced borrowing
under the revolving credit line. Principal payments on the bank
debt remained level at $1.6 million in each period.
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 $18.3 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.
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
28
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.
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. This agreement expires on
April 30, 2007. We intend to refinance these obligations on
a long-term basis prior to the expiration of the agreement. We
have received a commitment letter from a bank group headed by
the Bank of Oklahoma to refinance the credit facility as
described later in this document. Under the current amended
agreement, we maintain:
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a $5.0 million revolving credit facility, of which there
was $3.3 million outstanding as of December 31, 2006,
on an eligible borrowing base of $5.3 million, which was
limited to $5.0 million per the terms of the agreement. For
reporting purposes, as of December 31, 2006,
$1.8 million of bank overdrafts were included in the
Long-term debt section of the balance sheet;
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a $14.1 million term loan, with a seven-year amortization
period, of which there was $11.8 million outstanding as of
December 31, 2006; and
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a $15.0 million term loan, with a ten-year amortization
period, of which there was $14.9 million outstanding as of
December 31, 2006.
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Amounts outstanding under the revolving line of credit and the
$14.1 million term 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, 2006, our
borrowing rate on these loans was 9.61%. As of December 31,
2006, our interest rate margin was prime plus 150 basis
points or LIBOR plus 425 basis points. The
$15.0 million term loan bears interest at our election at a
floating rate of either 100 basis points over prime or 375
basis points over LIBOR. At December 31, 2006 our borrowing
rate on this loan was 9.11%. LIBOR elections are made
for 30, 60 or 90 days periods.
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 April 2007 or until the agreement is
re-financed, at which time these funds will be released.
Borrowings under the revolving credit agreement are limited to a
borrowing base, which is calculated on a percentage of eligible
accounts receivable and inventory. Our revolving credit facility
may be used for general corporate purposes, including working
capital and equipment purchases.
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. We amended our credit agreement in June 2006 and
October 2006 to increase the funded debt to EBITDA ratio and
lower the debt service coverage ratio in order to avoid
non-compliance with the covenants for each quarter end. In the
October 2006 amendment, we increased the funded debt to EBITDA
ratio to
4.5-to-1 for
the quarter ended September 30, 2006, and reverted the
ratio to
4.0-to-1 for
the remainder of the term of the agreement and decreased the
debt service coverage ratio to
1.20-to-1
for the quarter ended September 30, 2006, and
1.05-to-1
for the quarter ended December 31, 2006. The debt service
coverage ratio reverts to the original
1.25-to-1
for the remainder of the term of the agreement. Until April
2007, effects of the $15 million term loan, which directly
related to the paper machine project, are excluded from the
covenant calculations. As of December 31, 2006, 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.
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 57 shares of common stock
at an exercise price of $2.43 per share.
29
On March 9, 2007, we received a commitment letter from the
Bank of Oklahoma, NA. to re-finance our existing credit
facility. We intend to move forward with a re-financing of the
credit facility under the following terms and expect to complete
the re-financing prior to the April 30, 2007 expiration
date of our current credit facility. The proposed credit
facility in the commitment letter consists of the following:
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a $6.0 million revolving credit facility with a
3-year term;
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a $10.0 million term loan A with a ten-year term and
twenty-year amortization;
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a $16.5 million term loan B with a four year-term and
six-year amortization; and
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a $3.0 million capital expenditures facility with a
four-year term and a five-year amortization.
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Under the terms of the commitment letter, amounts outstanding
under the revolving credit facility will bear interest at our
election at the prime rate or LIBOR plus a margin and amounts
outstanding under Term Loan B and the capital expenditures
facility will bear interest at LIBOR plus a margin, which is set
quarterly and based on the ratio of funded debt to EBITDA less
income taxes paid. Amounts outstanding under Term Loan A
will bear interest at LIBOR plus 180 basis points. For the
revolving credit facility, the margin ranges from a negative
50 basis points to 150 basis points for prime rate
loans and 200 to 375 basis points for LIBOR-based loans.
For term loan B, the margin ranges from 200 basis
points to 300 basis points over LIBOR. For the capital
expenditures facility, the margin ranges from 150 basis
points to 250 basis points over LIBOR.
The credit facility will contain covenants that will, among
other things, require us to maintain a specific funded debt to
EBITDA ratio, debt service coverage ratio and an annual limit on
un-financed capital expenditures. The current $1.5 million
restricted certificate of deposit will be released and applied
to the revolving credit facility.
Contractual
Obligations
As of December 31, 2006, our contractual cash obligations
were limited to our long-term debt. We do not have any leasing
commitments or debt guarantees outstanding as of
December 31, 2006. We do not have any defined benefit
pension plans nor do we have any obligation to fund any
postretirement benefit obligations for our work force.
Maturities of these contractual obligations consist of the
following:
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Payments Due by Period
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Years
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Contractual Cash Obligations
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Total
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1
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2 and 3
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4 and 5
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After 5
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($ thousands)
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Long-term debt(1)
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|
$
|
33,838
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$
|
31,762
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|
|
$
|
2,076
|
|
|
$
|
|
|
|
$
|
|
|
Interest payments(2)(3)
|
|
$
|
1,487
|
|
|
$
|
1,186
|
|
|
$
|
301
|
|
|
$
|
|
|
|
$
|
|
|
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|
|
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Total
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$
|
35,325
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|
|
$
|
32,948
|
|
|
$
|
2,377
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
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|
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(1) |
|
This schedule has been prepared based on our existing credit
facility, which expires on April 30, 2007. A commitment
letter was received on March 9, 2007 from the Bank of
Oklahoma, N.A. to
re-finance
our existing credit facility, and we expect to close the
agreement later in March or early in April of 2007.
Re-financing
our existing credit facility will extend the
Long-term
debt payments shown in the above table. See
Note 6
Long-Term
Debt and Note 14 Subsequent
Event to the financial statements in Item 8 in this
Form 10-K
for further discussion. 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, 2006, we were in compliance with our loan
covenants, as amended. |
|
(2) |
|
These amounts assume interest payments at the year-end borrowing
amount and rate for our revolving credit facility. The amount
borrowed in future periods is dependent on our free cash flow
from
time-to-time. |
|
(3) |
|
Interest payments on the term loans have been calculated based
on the interest rate in effect as of December 31, 2006. |
30
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 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, 2006, 2005, and 2004 were
$11,000, $11,000, and $38,000, 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. During the
year ended December 31, 2006, we increased the inventory
valuation reserve by $1,000. During the year ended
December 31, 2005, we decreased the inventory valuation
reserve by $15,000. During the year ended December 31,
2004, we increased the inventory valuation reserve by $12,000.
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 February 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 155
Accounting for Certain Hybrid Financial Instruments
amending SFAS No. 133 and SFAS No. 140.
SFAS No. 155 eliminates the exemption from applying
SFAS No. 133 to securitized financial assets. The
provisions of SFAS No. 155 are to be applied to
financial instruments issued or acquired during fiscal periods
beginning after September 15, 2006. The adoption of
SFAS No. 155 is not expected to have a material impact
on our financial position or results of operations.
FASB Interpretation No. 48 Accounting for Uncertainty
in Income Taxes (FIN 48) was issued in June
2006. It clarifies recognition and derecognition criteria for
tax positions taken in a return that may be subject to challenge
upon audit. If it is more likely than not, that the
tax position will be sustained upon examination, the benefit is
to be recognized in the financial statements. Conversely, if the
position is less likely than not to be sustained, the benefit
should not be recognized. The recognition/derecognition decision
should be reflected in the first interim period when the status
changes and not deferred to a future settlement upon audit.
General tax reserves to cover aggressive positions taken in
filed returns are no longer allowable. Each issue must be judged
on its own merits and a recognition/derecognition decision
recorded in the financial statements. FIN 48 is effective
for fiscal years beginning after December 15, 2006. Because
the Company knowingly takes no aggressive positions in its tax
31
returns and, accordingly, carries no income tax
reserves on its books, this interpretation is not
expected to have a material effect on our financial position or
results of operations in future periods.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements which amends and puts in one
place guidance on the use of fair value measurements which had
been spread through four APB Opinions and 37 FASB Standards. No
extensions of the use of fair value measurements are contained
in this new pronouncement and, with some special industry
exceptions (e.g., broker-dealers), no significant changes in
practice should ensue. The standard is to be applied to
financial statements beginning after November 15, 2007. The
adoption of SFAS No. 157 is not expected to have a
material impact on our financial position or results of
operations.
Also in September 2006, the FASB issued SFAS No. 158
Employers Accounting for Defined Benefit Pension
Plans and Other Postretirement Plans an amendment of
FASB Statements No. 87, 88, 106 and
132®.
This standard requires recognition in the balance sheet of the
funded status of pension plans, rather than footnote disclosure
which has been current practice. Publicly traded companies are
to reflect the new standard in financial statements ending after
December 15, 2006, and non-public companies are to apply it
in statements ending after June 15, 2007. Because we do not
maintain a defined benefit pension plan and have no plans to do
so, this standard should not have any impact on our financial
position or results of operations.
In February 2007, the FASB issued SFAS No. 159
Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB Statement
No. 115. This standard permits the use of fair value
measurement of financial assets and liabilities in the balance
sheet with the net change in fair value recognized in periodic
net income. The Standard is effective for fiscal years beginning
after November 15, 2007. The adoption of this standard is
not expected to have a material effect on the Companys
financial position or results of operations because the majority
of its debts and investment assets are variable rate and thus
fair value approximates recorded value.
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 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:
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it does not reflect our cash expenditures for capital
expenditures;
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|
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.
|
32
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, 2006, 2005 and, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
Period from
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
March 1 -
|
|
|
January 1 -
|
|
|
Year Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
|
(In thousands, except % of net sales)
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
732
|
|
|
$
|
1,392
|
|
|
$
|
1,294
|
|
|
$
|
(272
|
)
|
|
$
|
1,022
|
|
Plus: Interest expense, net
|
|
|
1,980
|
|
|
|
1,213
|
|
|
|
1,052
|
|
|
|
45
|
|
|
|
1,097
|
|
Plus: Income tax expense (benefit)
|
|
|
(564
|
)
|
|
|
799
|
|
|
|
642
|
|
|
|
66
|
|
|
|
708
|
|
Plus: Depreciation
|
|
|
2,254
|
|
|
|
1,501
|
|
|
|
1,288
|
|
|
|
384
|
|
|
|
1,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
4,402
|
|
|
$
|
4,905
|
|
|
$
|
4,276
|
|
|
$
|
223
|
|
|
$
|
4,499
|
|
% of net sales
|
|
|
7.3
|
%
|
|
|
8.5
|
%
|
|
|
10.8
|
%
|
|
|
3.1
|
%
|
|
|
9.6
|
%
|
EBITDA decreased $503,000 to $4.4 million, or 7.3% of net
sales, for the year ended December 31, 2006, compared to
$4.9 million, or 8.5% of net sales, for the year ended
December 31, 2005. The foregoing factors discussed in the
net sales, cost of sales and selling, general and administrative
expenses sections are the reasons for the change.
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.
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
Form 10-K
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.
33
Factors that may cause our actual results to differ materially
from our forward-looking statements include, among others;
|
|
|
|
|
competition in our industry;
|
|
|
|
adverse developments in our relationships with key customers;
|
|
|
|
impairment of ability to meet our obligations and restrictions
on future operations due to our substantial debt;
|
|
|
|
availability and price of energy;
|
|
|
|
variable interest rate exposure;
|
|
|
|
the loss of key personnel;
|
|
|
|
disruption in supply or cost of SBS paper;
|
|
|
|
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; and
|
|
|
|
failure to maintain an effective system of internal controls
necessary to accurately report our financial results and prevent
fraud.
|
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 and our term loans 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, 2006, we had
floating-rate borrowings of $30.0 million, excluding bank
overdrafts, which are classified with bank debt in the balance
sheet, but which bear no interest. Outstanding balances under
our line of credit and term loans 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 $300,000 increase to our annual
interest expense.
34
|
|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
FINANCIAL STATEMENTS
35
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, 2006 and 2005, and the
related statements of income, changes in stockholders
equity and cash flows for the years 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. 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 years and
the ten-month period then ended for the Company and for the
two-month period ended February 29, 2004, 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 16, 2007
36
ORCHIDS
PAPER PRODUCTS COMPANY
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands,
|
|
|
|
except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3
|
|
|
$
|
378
|
|
Accounts receivable, net of
allowance of $100 in 2006 and $125 in 2005
|
|
|
5,089
|
|
|
|
4,180
|
|
Inventories, net
|
|
|
4,379
|
|
|
|
4,420
|
|
Restricted certificate of deposit
|
|
|
1,500
|
|
|
|
1,500
|
|
Income taxes receivable
|
|
|
1,242
|
|
|
|
94
|
|
Prepaid expenses
|
|
|
306
|
|
|
|
458
|
|
Deferred income taxes
|
|
|
346
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
12,865
|
|
|
|
11,230
|
|
Property, plant and equipment
|
|
|
63,081
|
|
|
|
44,983
|
|
Accumulated depreciation
|
|
|
(5,042
|
)
|
|
|
(2,789
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
58,039
|
|
|
|
42,194
|
|
Deferred debt issuance costs, net
of accumulated amortization of $424 in 2006 and $232 in2005
|
|
|
124
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
71,028
|
|
|
$
|
53,710
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,772
|
|
|
$
|
2,877
|
|
Accrued liabilities
|
|
|
1,805
|
|
|
|
2,137
|
|
Unrealized loss on forward
currency exchange contracts
|
|
|
|
|
|
|
74
|
|
Current portion of long-term debt
|
|
|
2,263
|
|
|
|
1,628
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,840
|
|
|
|
6,716
|
|
Long-term debt, net of unamortized
discount of $74 in 2006 and $101 in 2005
|
|
|
31,575
|
|
|
|
17,002
|
|
Deferred income taxes
|
|
|
6,909
|
|
|
|
6,280
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par
value, 10,000,000 shares authorized, 6,234,346 shares
issued and outstanding in 2006 and 2005
|
|
|
6
|
|
|
|
6
|
|
Additional paid-in capital
|
|
|
21,139
|
|
|
|
20,879
|
|
Common stock warrants
|
|
|
141
|
|
|
|
141
|
|
Retained earnings
|
|
|
3,418
|
|
|
|
2,686
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
24,704
|
|
|
|
23,712
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
71,028
|
|
|
$
|
53,710
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
37
ORCHIDS
PAPER PRODUCTS COMPANY
STATEMENTS
OF INCOME
Years ended December 31, 2006 and 2005, the Ten-Month
Period ended December 31, 2004,
and the Two-Month Period ended February 29, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
Ten-Months
|
|
|
Two-Months
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
(Dollars in thousands, except share and per share data)
|
|
|
Net sales
|
|
$
|
60,190
|
|
|
$
|
57,700
|
|
|
$
|
39,736
|
|
|
$
|
7,191
|
|
Cost of sales
|
|
|
53,205
|
|
|
|
49,769
|
|
|
|
33,390
|
|
|
|
6,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
6,985
|
|
|
|
7,931
|
|
|
|
6,346
|
|
|
|
1,035
|
|
Selling, general and
administrative expenses
|
|
|
4,936
|
|
|
|
4,629
|
|
|
|
3,363
|
|
|
|
1,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
2,049
|
|
|
|
3,302
|
|
|
|
2,983
|
|
|
|
(161
|
)
|
Interest expense
|
|
|
1,980
|
|
|
|
1,213
|
|
|
|
1,052
|
|
|
|
45
|
|
Other (income) expense, net
|
|
|
(99
|
)
|
|
|
(102
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
168
|
|
|
|
2,191
|
|
|
|
1,936
|
|
|
|
(206
|
)
|
Provision (benefit) for income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(1,047
|
)
|
|
|
663
|
|
|
|
470
|
|
|
|
(46
|
)
|
Deferred
|
|
|
483
|
|
|
|
136
|
|
|
|
172
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(564
|
)
|
|
|
799
|
|
|
|
642
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
732
|
|
|
$
|
1,392
|
|
|
$
|
1,294
|
|
|
$
|
(272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.12
|
|
|
$
|
0.31
|
|
|
$
|
0.43
|
|
|
|
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.30
|
|
|
$
|
0.42
|
|
|
|
|
|
Shares used in calculating net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,234,346
|
|
|
|
4,453,254
|
|
|
|
3,000,000
|
|
|
|
|
|
Diluted
|
|
|
6,558,454
|
|
|
|
4,594,412
|
|
|
|
3,078,807
|
|
|
|
|
|
See notes to financial statements
38
ORCHIDS
PAPER PRODUCTS COMPANY
STATEMENTS
OF CHANGES IN STOCKHOLDERS EQUITY
Years ended December 31, 2005 and 2006, the Ten-Month
Period ended December 31, 2004,
and the Two-Month Period ended February 29, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Common Stock Warrants
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Shares
|
|
|
Value
|
|
|
Earnings
|
|
|
Total
|
|
|
|
(Dollars in thousands, except share amounts)
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Effect of
3-for-2
stock split
|
|
|
2,078,096
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
732
|
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
6,234,346
|
|
|
$
|
6
|
|
|
$
|
21,139
|
|
|
|
82,607
|
|
|
$
|
141
|
|
|
$
|
3,418
|
|
|
$
|
24,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
39
ORCHIDS
PAPER PRODUCTS COMPANY
STATEMENTS
OF CASH FLOWS
Years ended December 31, 2006 and 2005, the Ten-Month
Period ended December 31, 2004,
and the Two-Month Period ended February 29, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
Year
|
|
|
Year
|
|
|
Ten Months
|
|
|
Two Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Cash Flows From Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
732
|
|
|
$
|
1,392
|
|
|
$
|
1,294
|
|
|
$
|
(272
|
)
|
Adjustments to reconcile net income
(loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,472
|
|
|
|
1,688
|
|
|
|
1,372
|
|
|
|
386
|
|
Provision for doubtful accounts
|
|
|
(19
|
)
|
|
|
46
|
|
|
|
23
|
|
|
|
5
|
|
Deferred income taxes
|
|
|
483
|
|
|
|
136
|
|
|
|
172
|
|
|
|
112
|
|
Stock based compensation
|
|
|
260
|
|
|
|
368
|
|
|
|
103
|
|
|
|
|
|
Foreign currency transaction gain
|
|
|
35
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
Unrealized loss on foreign exchange
contracts
|
|
|
(74
|
)
|
|
|
74
|
|
|
|
|
|
|
|
|
|
Changes in cash due to changes in
operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(890
|
)
|
|
|
(617
|
)
|
|
|
688
|
|
|
|
(347
|
)
|
Inventories
|
|
|
41
|
|
|
|
(1,372
|
)
|
|
|
396
|
|
|
|
344
|
|
Prepaid expenses
|
|
|
152
|
|
|
|
(128
|
)
|
|
|
112
|
|
|
|
49
|
|
Income taxes receivable
|
|
|
(1,148
|
)
|
|
|
188
|
|
|
|
(167
|
)
|
|
|
(49
|
)
|
Accounts payable
|
|
|
895
|
|
|
|
697
|
|
|
|
751
|
|
|
|
133
|
|
Accrued liabilities
|
|
|
(332
|
)
|
|
|
207
|
|
|
|
(22
|
)
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
2,607
|
|
|
|
2,644
|
|
|
|
4,722
|
|
|
|
847
|
|
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
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and
equipment
|
|
|
(18,133
|
)
|
|
|
(18,488
|
)
|
|
|
(4,538
|
)
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(18,133
|
)
|
|
|
(19,238
|
)
|
|
|
(19,794
|
)
|
|
|
(112
|
)
|
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
|
|
|
|
|
|
Borrowings under construction loan
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on bank debt
|
|
|
(1,586
|
)
|
|
|
(1,643
|
)
|
|
|
(9,568
|
)
|
|
|
(445
|
)
|
Net borrowings on revolving credit
line
|
|
|
1,767
|
|
|
|
3,293
|
|
|
|
|
|
|
|
|
|
Deferred debt issuance costs
|
|
|
(30
|
)
|
|
|
(174
|
)
|
|
|
(317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
15,151
|
|
|
|
16,487
|
|
|
|
15,067
|
|
|
|
(445
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(375
|
)
|
|
|
(107
|
)
|
|
|
(5
|
)
|
|
|
290
|
|
Cash, beginning
|
|
|
378
|
|
|
|
485
|
|
|
|
490
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, ending
|
|
$
|
3
|
|
|
$
|
378
|
|
|
$
|
485
|
|
|
$
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,615
|
|
|
$
|
1,445
|
|
|
$
|
884
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
221
|
|
|
$
|
475
|
|
|
$
|
765
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of
Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligation for purchase
of paper machine
|
|
$
|
|
|
|
$
|
681
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
40
ORCHIDS
PAPER PRODUCTS COMPANY
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
December 31, 2006, 2005 and 2004
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, referred to as parent rolls, from recycled
paper stock. The parent rolls are transferred to the converting
plant for further processing. Tissue products produced in the
converting plant include paper towels, bathroom tissue, and
napkins, 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 purchased $1,500,000 in a certificate of deposit to
satisfy this requirement. This investment is carried at cost,
which approximates market value.
41
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
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, 2006,
the year ended December 31, 2005, the period ended
December 31, 2004, or the period ended February 29,
2004.
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 would be provided
for deferred tax assets for which realization is not likely.
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 which expire April 30, 2007. Debt issuance costs of
$548,000 relating to the renegotiated bank debt (including the
revolving credit agreement), the subordinated debentures entered
into in March 2004, the new construction loan and extensions of
the term loan and revolving credit line in 2005, and covenant
waivers in 2006 are being amortized over the terms of the debt.
Amortization expense for 2006, 2005 and 2004 was $219,000,
$163,000 and $32,000, 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
splits
On July 21, 2006, the Company effected a
3-for-2
stock dividend, pursuant to a resolution of the board of
directors. All common and per share amounts of the Company have
been restated to reflect this 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 adopted the provisions of SFAS No. 123
®
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.
42
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
$1,455,000 for the year ended December 31, 2006, $993,000
for the year ended December 31, 2005, $1,098,000 for the
ten-month period ended December 31, 2004 and $279,000 for
the two-month period ended February 29, 2004 are included
in cost of sales.
Advertising
costs
Advertising costs are expensed when incurred and totaled
$231,000 for the year ended December 31, 2006, $121,000 for
the year ended December 31, 2005, $156,000 for the
ten-month period ended December 31, 2004 and $1,000 for the
two-month period ended February 29, 2004, 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 February 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 155
Accounting for Certain Hybrid Financial Instruments
amending SFAS No. 133 and SFAS No. 140.
SFAS No. 155 eliminates the exemption from applying
SFAS No. 133 to securitized financial assets. The
provisions of SFAS No. 155 are to be applied to
financial instruments issued or acquired during fiscal periods
beginning after September 15, 2006. The adoption of
SFAS No. 155 is not expected to have a material impact
on the Companys financial position or results of
operations.
FASB Interpretation No. 48 Accounting for Uncertainty
in Income Taxes (FIN 48) was issued in June
2006. It clarifies recognition and derecognition criteria for
tax positions taken in a return that may be subject to challenge
upon audit. If it is more likely than not, that the
tax position will be sustained upon examination, the benefit is
to be recognized in the financial statements. Conversely, if the
position is less likely than not to be sustained, the benefit
should not be recognized. The recognition/derecognition decision
should be reflected in the first interim period when the status
changes and not deferred to a future settlement upon audit.
General tax reserves to cover aggressive positions taken in
filed returns are no longer allowable. Each issue must be judged
on its own merits and a recognition/derecognition decision
recorded in the financial statements. FIN 48 is effective
for fiscal years beginning after December 15, 2006. Because
the Company knowingly takes no aggressive positions in its tax
returns and accordingly, carries no income tax
reserves on its books, this Interpretation is not
expected to have a material effect on the Companys
financial position or results of operations in future periods.
In September 2006, the FASB issued SFAS No. 157
Fair Value Measurements which amends and puts in one
place guidance on the use of fair value measurements which had
been spread through four APB Opinions and 37
43
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
FASB Standards. No extensions of the use of fair value
measurements are contained in this new pronouncement, and with
some special industry exceptions (e.g., broker-dealers), no
significant changes in practice should ensue. The standard is to
be applied to financial statements beginning after
November 15, 2007. The adoption of SFAS No. 157
is not expected to have a material impact on Orchids
financial position or results of operations.
Also in September 2006, the FASB issued SFAS No. 158
Employers Accounting for Defined Benefit Pension
Plans and Other Postretirement Plans an amendment of
FASB Statements No. 87, 88, 106 and
132®.
This standard requires recognition in the balance sheet of the
funded status of pension plans, rather than footnote disclosure
which has been current practice. Publicly traded companies are
to reflect the new standard in financial statements ending after
December 15, 2006, and non-public companies are to apply it
in statements ending after June 15, 2007. Because Orchids
does not maintain a defined benefit pension plan and has no
plans to do so, this standard should not have any impact on the
Companys financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159
Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB Statement
No. 115. This standard permits the use of fair value
measurement of financial assets and liabilities in the balance
sheet with the net change in fair value recognized in periodic
net income. The Standard is effective for fiscal years beginning
after November 15, 2007. The adoption of this standard is
not expected to have a material effect on the Companys
financial position or results of operations because the majority
of its debts and investment assets are variable rate and thus
fair value approximates recorded value.
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 $15,811,000
purchase price to machinery and equipment. The Company does not
have long-term contracts with customers, and the majority of its
products are produced as privately owned brands. Consequently,
the Company did not allocate any portion of the purchase price
to trademarks or customer relationships. In connection with the
common stock purchase, the Company retains its basis of assets
and liabilities for income tax purposes. Deferred income taxes
were computed on the difference between the carryover tax basis
and the adjusted financial basis of assets and liabilities.
44
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
The following table summarizes the allocation of the purchase
price to the assets and liabilities at March 1, 2004:
|
|
|
|
|
|
|
($ 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
|
|
|
|
|
|
|
The following table sets forth the unaudited pro forma results
of operations of the Company for the year ended
December 31, 2004. The unaudited pro forma financial
information summarizes the results of operations as if the
Orchids acquisition had occurred at the beginning of 2004. 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 2004 or that may be obtained in
the future.
|
|
|
|
|
|
|
2004
|
|
|
Net income ($ thousands)
|
|
$
|
1,028
|
|
Earnings per share:
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
Diluted
|
|
$
|
0.33
|
|
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 was denominated in Euros. One of the
purchase agreements contained a cancellation agreement, which
limited the Companys liability to the suppliers
out-of-pocket
expenditures and committed liabilities. The Companys
minimum unpaid obligation under these agreements of $681,000 was
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 was 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 was
not considered a hedged transaction, fair value adjustments
affected the Companys periodic net income.
45
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
The net foreign currency gain resulting from the Companys
Euro denominated obligations and Euro exchange contracts for the
year ended December 31, 2006, of $39,000 and the net
foreign currency loss of $39,000 for the year ended
December 31, 2005 are included in other (income) expense,
net.
Note 4
Inventories
Inventories at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ thousands)
|
|
|
Raw materials
|
|
$
|
1,577
|
|
|
$
|
1,669
|
|
Bulk paper rolls
|
|
|
536
|
|
|
|
1,396
|
|
Converted finished goods
|
|
|
2,266
|
|
|
|
1,355
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,379
|
|
|
$
|
4,420
|
|
|
|
|
|
|
|
|
|
|
Note 5
Property, Plant and Equipment
The principal categories and estimated useful lives of property,
plant and equipment at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful
|
|
|
2006
|
|
|
2005
|
|
|
Lives
|
|
|
($ thousands)
|
|
|
|
|
Land
|
|
$
|
379
|
|
|
$
|
379
|
|
|
|
Buildings
|
|
|
10,394
|
|
|
|
3,571
|
|
|
40
|
Machinery and equipment
|
|
|
49,979
|
|
|
|
20,624
|
|
|
5to30
|
Vehicles
|
|
|
295
|
|
|
|
131
|
|
|
5
|
Nondepreciable machinery and
equipment (parts and spares)
|
|
|
1,965
|
|
|
|
1,751
|
|
|
|
Construction-in-process
|
|
|
69
|
|
|
|
18,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
63,081
|
|
|
$
|
44,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in machinery and equipment and buildings above at
December 31, 2006, is $1,403,000 of capitalized interest
for the new paper machine. All interest incurred from
January 1, 2006, through start up on June 8, 2006, was
capitalized because cumulative spending on the project exceeded
outstanding debt. Included in
construction-in-process
above at December 31, 2005, is $411,000 of capitalized
interest for the new paper machine. Interest was capitalized
based on the weighted average borrowing rate incurred on the
Companys long-term debt of 7.97% applied to cumulative
project spending.
46
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
Note 6
Long-Term Debt
Long-term debt at December 31 consists of:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ thousands)
|
|
|
Revolving line of credit
|
|
$
|
5,060
|
|
|
$
|
3,293
|
|
Term note, due in monthly
installments of $224,000, including interest
|
|
|
11,779
|
|
|
|
13,288
|
|
Construction loan, converted to
term note, due in monthly installments of $192,000, including
interest
|
|
|
14,923
|
|
|
|
|
|
Subordinated debentures at face
value less unamortized discount of $74,000 and $101,000 at
December 31, 2006 and 2005, respectively
|
|
|
2,076
|
|
|
|
2,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,838
|
|
|
|
18,630
|
|
Less current portion
|
|
|
2,263
|
|
|
|
1,628
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31,575
|
|
|
$
|
17,002
|
|
|
|
|
|
|
|
|
|
|
The following is a description of the Companys credit
agreement which matures on April 30, 2007. The
classification and reported scheduled debt maturities are based
on the refinancing described in Note 14, Subsequent
Event.
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 maintained a
$5.0 million revolving credit line which matures on
April 30, 2007, of which there was a $3.3 million
outstanding balance at December 31, 2006. For reporting
purposes, as of December 31, 2006, $1,793,000 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, 2006,
the borrowing base for the revolving credit line was
$5.3 million, which was limited by the credit facility to
$5.0 million.
In addition, under this agreement the Company maintains a term
loan and construction loan which was converted to a new term
loan in October 2006. These loans mature in April 2007. At
December 31, 2006, there was $11.8 million outstanding
under the term loan and $14.9 million outstanding under the
former construction loan. Amounts outstanding under the
revolving credit agreement and the term loan bear interest
(9.61% at December 31, 2006) 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. The margin for
the former construction loan is set at 375 basis points
above the LIBOR rate resulting in an interest rate of 9.11% at
December 31, 2006. 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. In October
2006, the Company amended its credit agreement to change the
Funded Debt to EBITDA and Debt Service Coverage Ratio covenant
limits for the quarter ended September 30, 2006, to
4.5-to-1 and
1.20-to-1,
respectively, and for the Debt Service Coverage Ratio for the
quarter ended December 31, 2006, to
1.05-to-1
from the previous limits of
4.0-to-1 and
to
1.25-to-1,
respectively. The covenant limits revert to the
4.0-to-1 for
Funded Debt to EBITDA and
1.25-to-1
for Debt Service Coverage Ratio for all future quarterly
measurement periods for the remainder of the credit agreement
term. The Company was in compliance with all covenants, as
amended, at December 31, 2006. As a condition of funding
the construction loan, the agreement required the Company to
establish an interest reserve account of at least
$1.5 million.
47
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 57 shares of the
Companys common stock at $2.43 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 $27,000, $24,000 and $15,000 as interest
expense related to amortization of the discount during the years
ended December 31, 2006 and 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 $2.43 per
share, except for shares issued to Founders who paid
$.09 per share. The Companys management was allowed
to participate as Founders. The difference between
$2.43 per share and $.09 per share paid by management,
totaling $103,000, is reported as compensation expense in the
ten-month period ended December 31, 2004. The share and per
share data have been restated to reflect the
3-for-2
stock split effected in July 2006.
After completion of the bank debt refinancing discussed in
Note 14 Subsequent Event, estimated scheduled
maturities are as follows:
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
Year
|
|
Amount
|
|
|
|
($ thousands)
|
|
|
2007
|
|
$
|
2,263
|
|
2008
|
|
|
2,348
|
|
2009
|
|
|
4,907
|
|
2010
|
|
|
6,338
|
|
2011
|
|
|
7,499
|
|
after 2011
|
|
|
9,194
|
|
|
|
|
|
|
|
|
$
|
32,549
|
|
|
|
|
|
|
Note 7
Leases
The Company leased equipment from a third party under an
operating lease which expired in 2006. In July 2004, the Company
elected to terminate the lease and purchase the leased assets by
paying the lessor $3,994,000, the amount specified in the lease.
Rental expense was $0 for the years ended December 31, 2006
and 2005, $384,000 for the ten-month period ended
December 31, 2004, and $193,000 for the two-month period
ended February 29, 2004.
48
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
Note 8
Income Taxes
Significant components of the Companys deferred income tax
assets and liabilities at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ thousands)
|
|
|
Deferred income taxes
current Inventories
|
|
$
|
311
|
|
|
$
|
118
|
|
Prepaid expenses
|
|
|
(125
|
)
|
|
|
(72
|
)
|
Accounts receivable
|
|
|
38
|
|
|
|
48
|
|
Accrued vacation
|
|
|
122
|
|
|
|
91
|
|
Foreign exchange loss
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax
assets current
|
|
$
|
346
|
|
|
$
|
200
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
noncurrent Plant and equipment
|
|
$
|
(8,810
|
)
|
|
$
|
(6,280
|
)
|
Federal NOL Carryforward
|
|
|
367
|
|
|
|
|
|
State NOL Carryforward, net of
Federal tax effect
|
|
|
81
|
|
|
|
|
|
State Investment Tax Credit
Carryforward, net of Federal tax effect
|
|
|
730
|
|
|
|
|
|
Indian Employment Credit
Carryforward
|
|
|
647
|
|
|
|
|
|
Alternative Minimum Tax Credit
Carryforward
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax
liabilities noncurrent
|
|
$
|
(6,909
|
)
|
|
$
|
(6,280
|
)
|
|
|
|
|
|
|
|
|
|
The Company has a federal net operating loss carryforward of
$1,079,000 for regular tax purposes ($1,515,000 for purposes of
the Alternative Minimum Tax). These are available to offset
future taxable income through 2026. Because the Company believes
that its future income will be sufficient to realize the
benefits of these carryforwards, a deferred tax asset has been
recognized at the appropriate tax rate.
The Company also has significant carryforwards for State of
Oklahoma net operating losses ($2,035,000) and for the Oklahoma
Investment Tax Credit ($1,105,000), mostly associated with the
Companys investment in a new paper machine. The Company
believes that its future state taxable income will be sufficient
to allow realization within the 20 year carryforward
period. Accordingly, deferred tax assets have been recognized,
net of the federal tax effects of reduced deductions for state
income taxes.
The Company will be required to adjust Indian Employment Credits
(IEC) previously recorded in 2004 and 2005, because it will be
using net operating loss carrybacks to recover taxes paid in
those years. The Company projects profitable operations during
the 20 year carryforward period for the IEC and,
accordingly, it has recognized a deferred tax asset for the IEC
carryforward, which amounted to $647,000 at December 31,
2006.
49
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
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
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
Statutory tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
(34.0
|
)%
|
State income taxes, net of
U.S. federal tax benefit
|
|
|
11.9
|
%
|
|
|
1.2
|
%
|
|
|
0.0
|
%
|
|
|
0.9
|
%
|
Indian employment credits
|
|
|
(87.5
|
)%
|
|
|
(5.7
|
)%
|
|
|
(3.0
|
)%
|
|
|
68.6
|
%
|
Employee and board stock
compensation
|
|
|
52.4
|
%
|
|
|
6.9
|
%
|
|
|
1.9
|
%
|
|
|
0.0
|
%
|
State investment tax credits
|
|
|
(351.8
|
)%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Other
|
|
|
5.3
|
%
|
|
|
0.1
|
%
|
|
|
0.3
|
%
|
|
|
(3.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(335.7
|
)%
|
|
|
36.5
|
%
|
|
|
33.2
|
%
|
|
|
31.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of an examination by the Internal Revenue Service,
the Company adjusted amounts previously claimed for IEC. 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 $211,000. The related deferred tax asset
was adjusted during the two-month period ended February 29,
2004.
Note 9
Earnings per Share
The computation of basic and diluted net income per share for
the years ended December 31, 2006 and 2005, and the
ten-month period ended December 31, 2004, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ten Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income ($ thousands)
|
|
$
|
732
|
|
|
$
|
1,392
|
|
|
$
|
1,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
6,234,346
|
|
|
|
4,453,254
|
|
|
|
3,000,000
|
|
Effect of Stock Options
|
|
|
166,527
|
|
|
|
62,441
|
|
|
|
|
|
Effect of dilutive warrants
|
|
|
157,581
|
|
|
|
78,717
|
|
|
|
78,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding assuming dilution
|
|
|
6,558,454
|
|
|
|
4,594,412
|
|
|
|
3,078,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: (2005
and 2004 restated to reflect
3-for-2
stock split) Basic
|
|
$
|
0.12
|
|
|
$
|
0.31
|
|
|
$
|
0.43
|
|
Diluted
|
|
$
|
0.11
|
|
|
$
|
0.30
|
|
|
$
|
0.42
|
|
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 697,500 shares to be issued. The
compensation committee subsequently awarded options for
405,000 shares to officers of the Company at an exercise
price of $5.33, which was equal to the initial public offering
price of the stock. The options vested 20% on the date of grant
and then ratably 20% over the following four years and have a
ten-year term.
50
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
In December 2006, the board of directors authorized the issuance
of options for 3,750 shares of stock pursuant to the Plan
to a new member of the board of directors at an exercise price
of $8.37, the current market price on the date of the grant. In
June 2006, the board of directors authorized the issuance of
options totaling 11,250 shares of stock to certain
directors of the Company at an exercise price of $10.05, which
was equal to the current market price of the Companys
stock on the date of the grant. In February 2006, the board of
directors authorized the issuance of options for
3,750 shares of stock to a new member of the board of
directors at an exercise price of $7.61, the current market
price on the date of the grant. In September 2005, the board of
directors authorized the issuance of options totaling
11,250 shares of stock to certain directors of the Company
at an exercise price of $6.53, the current market price on the
date of the grant. All of the board options have a ten-year term
and were fully vested on the date of grant.
In connection with the approval of the Plan, the Company adopted
SFAS No. 123
®
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 years ended
December 31, 2006 and 2005, the Company recognized an
expense of $260,000 and $368,000, respectively.
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
|
|
|
416,250
|
|
|
$
|
5.37
|
|
|
$
|
2.40
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
12,000
|
|
|
$
|
5.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
404,250
|
|
|
$
|
5.37
|
|
|
|
|
|
|
|
9.25 years
|
|
|
$
|
593,000
|
|
Granted
|
|
|
18,750
|
|
|
$
|
9.23
|
|
|
$
|
3.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
423,000
|
|
|
$
|
5.53
|
|
|
|
|
|
|
|
8.39 years
|
|
|
$
|
1,269,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2006
|
|
|
189,000
|
|
|
|
|
|
|
|
|
|
|
|
8.47 years
|
|
|
$
|
535,000
|
|
Exercisable at December 31,
2007
|
|
|
267,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2008
|
|
|
345,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31,
2009
|
|
|
423,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 4.03% for the 2005 board grant. The weighted
average interest rate for the 2006 board grants was 4.79%,
volatility factor of the expected market price of the
Companys common stock of 40% for the employee grant, 42%
for the 2005 board grant and a weighted average of 40% for the
2006 board grants, 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
2005 and 2006 board grants. 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, 2006, there was $430,000 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 2.25 years.
51
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 years ended
December 31, 2006 and 2005, the period ended
December 31, 2004 and the period ended February 29,
2004, sales to the two significant customers accounted for
approximately 61%, 69%, 66% and 63% of the Companys total
sales, respectively. At December 31, 2006, and 2005,
approximately $3,210,000 (62%) and $3,112,000 (75%),
respectively, 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 $1,538,000 and $1,926,000 at December 31,
2006 and 2005, respectively.
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 $232,000, $212,000, $135,000 and
$50,000 for the years ended December 31, 2006 and 2005, the
ten-month period ended December 31, 2004, and the two-month
period ended February 29, 2004, 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. In 2005, the
agreement was amended to reduce the annual fee to $125,000, in
consideration of a $150,000 lump sum payment. During 2006, 2005
and 2004, the Company paid $125,000, $375,000 and $271,000,
respectively, under this agreement. Pursuant to a resolution of
the Companys Board of Directors, this agreement was
terminated effective March 2, 2007.
In February 2007, the Company entered into a management services
arrangement with Jay Shuster, a new member of the board of
directors. The arrangement calls for a fee of $70,000 per
annum, payable monthly. The term of Mr. Shusters
contract is unspecified.
Note 14
Subsequent Event
On March 9, 2007, Orchids received a commitment letter from
the Bank of Oklahoma, N.A. to re-finance its existing credit
facility. Orchids intends to move forward with a re-financing of
the credit facility under the following terms and expect to
complete the re-financing prior to the April 30, 2007
expiration date of its current credit facility. The proposed
credit facility in the commitment letter consists of the
following:
|
|
|
|
|
a $6.0 million revolving credit facility with a
3-year term;
|
|
|
|
a $10.0 million term loan A with a ten-year term and
twenty-year amortization;
|
52
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
a $16.5 million term loan B with a four year-term and
six-year amortization; and
|
|
|
|
a $3.0 million capital expenditures facility with a
four-year term and a five-year amortization.
|
Under the terms of the commitment letter, amounts outstanding
under the revolving credit facility will bear interest at
Orchids election at the prime rate or LIBOR plus a margin
and amounts outstanding under Term Loan B and the capital
expenditures facility will bear interest at LIBOR plus a margin,
which is set quarterly and based on the ratio of funded debt to
EBITDA less income taxes paid. Amounts outstanding under Term
Loan A will bear interest at LIBOR plus 180 basis
points. For the revolving credit facility, the margin ranges
from a negative 50 basis points to 150 basis points
for prime rate loans and 200 to 375 basis points for
LIBOR-based loans. For term loan B, the margin ranges from
200 basis points to 300 basis points over LIBOR. For
the capital expenditures facility, the margin ranges from
150 basis points to 250 basis points over LIBOR.
The credit facility will contain covenants that will, among
other things, require Orchids to maintain a specific funded debt
to EBITDA ratio, debt service coverage ratio and an annual limit
on un-financed capital expenditures. The current
$1.5 million restricted certificate of deposit will be
released and applied to the revolving credit facility.
Note 15
Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Sales
|
|
$
|
14,099
|
|
|
$
|
13,675
|
|
|
$
|
15,154
|
|
|
$
|
17,262
|
|
Gross Profit
|
|
$
|
1,563
|
|
|
$
|
1,006
|
|
|
$
|
1,857
|
|
|
$
|
2,559
|
|
Operating Income (Loss)
|
|
$
|
315
|
|
|
$
|
(275
|
)
|
|
$
|
733
|
|
|
$
|
1,276
|
|
Net Income (Loss)
|
|
$
|
182
|
|
|
$
|
(293
|
)
|
|
$
|
(151
|
)
|
|
$
|
994
|
|
Basic Earnings (Loss) per share
|
|
$
|
0.03
|
*
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.16
|
|
Diluted Earnings (Loss) per share
|
|
$
|
0.03
|
*
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.15
|
|
Price per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
9.31
|
*
|
|
$
|
10.53
|
|
|
$
|
11.36
|
|
|
$
|
9.34
|
|
Low
|
|
$
|
6.70
|
*
|
|
$
|
9.00
|
|
|
$
|
8.99
|
|
|
$
|
8.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
0.11
|
*
|
|
$
|
0.04
|
*
|
|
$
|
0.09
|
*
|
|
$
|
0.07
|
*
|
Diluted Earnings per share
|
|
$
|
0.11
|
*
|
|
$
|
0.04
|
*
|
|
$
|
0.09
|
*
|
|
$
|
0.06
|
*
|
Price per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
6.97
|
*
|
|
$
|
7.03
|
*
|
Low
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
5.67
|
*
|
|
$
|
6.43
|
*
|
|
|
|
* |
|
Earnings per share and Price per common share have been restated
to reflect the
3-for-2
stock split effected in July 2006. |
53
|
|
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, 2006. 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, 2006, 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,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information concerning directors of the registrant is contained
in the Companys Proxy Statement to be issued in connection
with its Annual Meeting of Stockholders 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 and Key Employees, 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
54
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.
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
Information concerning executive compensation is contained in
the Companys Proxy Statement to be issued in connection
with its Annual Meeting of Stockholders 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 to be issued in connection with its Annual Meeting of
Stockholders 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
|
|
|
Oustanding Options,
|
|
|
Securities Reflected in
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Column (a)
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
423,000
|
|
|
$
|
5.54
|
|
|
|
274,500
|
|
Equity compensation plans not
approved by security holders
|
|
|
225,000
|
|
|
$
|
6.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
648,000
|
|
|
|
|
|
|
|
274,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information concerning certain relationships and related
transactions required by Item 404 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 CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, which information is incorporated herein by
reference.
Information concerning director independence required by
Item 407(a) 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 ELECTION OF DIRECTORS, 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 to be issued in connection
with its Annual Meeting of Stockholders under the caption
FEES PAID TO INDEPENDENT AUDITORS, which information
is incorporated herein by reference.
55
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.
56
Orchids
Paper Products Company
Schedule II Valuation and Qualifying
Accounts
Years ended December 31, 2006 and 2005, the Ten-month
Period ended
December 31, 2004, and the Two-month Period ended
February 29, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
(Credited) to
|
|
|
Deductions
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Describe
|
|
|
End of
|
|
|
|
Period
|
|
|
Expenses
|
|
|
(1)(2)
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Accounts Receivable
Reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad Debt Reserve
|
|
$
|
125
|
|
|
$
|
(19
|
)
|
|
$
|
6
|
|
|
$
|
100
|
|
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
|
|
Inventory Valuation
Reserve:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory Valuation Reserve
|
|
$
|
24
|
|
|
$
|
45
|
|
|
$
|
44
|
|
|
$
|
25
|
|
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
|
|
|
|
|
(1) |
|
Write-off of uncollectible accounts, net of recoveries |
|
(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.
57
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 19, 2007
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 19, 2007
|
|
|
|
|
|
/s/ Michael
P. Sage
Michael
P. Sage
|
|
Chief Executive Officer and
Director
(Principal Executive Officer)
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Gary
P. Arnold
Gary
P. Arnold
|
|
Director
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Steven
Berlin
Steven
Berlin
|
|
Director
|
|
March 19, 2007
|
|
|
|
|
|
/s/ John
G. Guttilla
John
G. Guttilla
|
|
Director
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Jeff
Schoen
Jeff
Schoen
|
|
Director
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Jay
Shuster
Jay
Shuster
|
|
Director
|
|
March 19, 2007
|
|
|
|
|
|
/s/ Keith
R. Schroeder
Keith
R. Schroeder
|
|
Chief Financial Officer
(Principal Financial and
Accounting Officer)
|
|
March 19, 2007
|
58
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
|
|
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.
|
|
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 Indemnification 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.
|
|
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.
|
|
10
|
.7
|
|
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.
|
|
10
|
.8
|
|
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.
|
|
10
|
.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
|
.10
|
|
Amendment One to Amended and
Restated Agented Credit Agreement dated June 30, 2006,
among the Registrant, Bank of Oklahoma, N.A., BancFirst and
Commerce Bank, N.A., incorporated by reference to Orchids Paper
Products Company
Form 10-Q
(File No. 001-32563) dated August 4, 2006, exhibit 4.1.
|
|
10
|
.11
|
|
Amendment Two to Amended and
Restated Agented Credit Agreement dated June 30, 2006,
among the Registrant, Bank of Oklahoma, N.A., BancFirst and
Commerce Bank, N.A., incorporated by reference to Orchids Paper
Products Company
Form 10-Q
(File No. 001-32563) dated November 3, 2006,
exhibit 4.1.
|
|
21
|
|
|
Subsidiaries of the Company.
|
|
23
|
.1
|
|
Consent of Independent Registered
Public Accounting Firm Tullius Taylor
Sartain & Sartain LLP.
|
|
31
|
.1
|
|
Certification pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
Certification pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002.
|
|
32
|
|
|
Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
# |
|
Indicates management contract or compensatory plan |
59