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, 2007
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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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company þ
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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 $32.0 million as of
June 30, 2007.
As of February 29, 2008, there were outstanding
6,328,986 shares of common stock, none of which are held in
treasury.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrants 2008
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., 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 2007, we generated revenue of $74.6 million, of which
44% came from paper towels, 36% came from bathroom tissue, 8%
came from paper napkins and 12% came from parent rolls. In 2007,
69% of our converted product revenue came from six value
retailers: Dollar General, Family Dollar, Freds, Dollar
Tree, Variety Wholesale and Big Lots and 12% came from Wal-Mart.
The balance of 2007 converted product revenue came from other
discount retailers, grocery stores, grocery wholesalers and
cooperatives, and convenience stores.
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 a new paper machine with a rated
capacity of 33,000 tons per year. Our total papermaking capacity
from our new machine and the three older machines is
approximately 54,000 tons per year. Prior to June 2006, we made
open market purchases of parent rolls to supply our converting
facility. Soon after
start-up, we
were able to eliminate open market purchases of parent rolls,
except for limited special purpose applications. The additional
paper making capacity has exceeded the current demands of our
converting operation and, as a result, we sold 10,277 tons of
parent rolls on the open market during 2007 and 1,191 tons in
the last four months of 2006.
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 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.
3
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 Robert
Snyder and Keith Schroeder has a combined 52 years of
experience in the paper business. The average tenure of our
hourly workers at the paper mill is eleven 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. Whether this
incentive will once again be extended is uncertain at this point
in time. We are located in an industrial park that operates an
onsite water treatment facility that offers water at reasonable
rates. 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 and to
increase our presence in the grocery store market. 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 a growing retail
channel 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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increasing the efficiency of our operating assets;
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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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Increasing the efficiency of our operating
assets. 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. The
start-up of
the new machine went according to plan during 2006. The new
paper machine produced approximately 29,000 tons in 2007 and we
expect to further increase production in 2008. This facility
enabled us to essentially cease the purchase of parent rolls on
the open market, which were previously required to support our
converting operations and to sell 10,277 tons of parent rolls on
the open market in 2007 and 1,191 tons in 2006. We purchased
1,675, 6,970, and 12,153 tons of parent rolls on the open market
in 2007, 2006 and 2005, respectively, at an average cost of
$1,162, $1,062 and $1,024 per ton, respectively. We anticipate
having parent roll capacity that exceeds our internal converting
needs during 2008. In 2007, we added depth to our operating team
particularly in the areas of engineering and reliability
maintenance. We believe this additional depth will help to
further increase the efficiency of our paper making and
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converting operations. In addition, we initiated a
$4.75 million automation project in our converting
operation which will lower our operating costs by replacing
manual operations with automated processes. Following the
completion of the project in the fourth quarter of 2008, we
expect annualized net cash savings to approximate
$2 million.
Leveraging Our Existing Customer Relationships in the Value
Retail Channel. The value retail channel has
experienced growth over the past several years and we believe it
continues to offer an attractive opportunity in the private
label tissue market. Overall, the value retail channel is
projected to continue growing.
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 opportunities 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 of our own paper at lower
costs allows 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. This model
is based on customers that require a limited number of SKUs and
sell high volumes of those products.
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
affected 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
2007, 50% of our finished case shipments were paper towels, 41%
were bathroom tissue and 9% were paper napkins. Of our converted
products sold in 2007, 82% were packaged as private label
products in accordance with our customers specifications.
The remaining 18% were packaged under our brands
Velvet®,
Colortex®,
Ultra
Valu®,
Dri-Mop®,
Big Mopper
®,
Soft &
Fluffy®
and Tackle
®.
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.
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Customers
Our customers include discount retailers, primarily value
retailers or dollar stores, 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 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 2007, approximately 69% of our
converted product revenue was derived from sales to the value
retail channel.
Our ability to increase revenue depends significantly upon our
ability to increase business with other discount retailers,
increase business in the grocery chain market, our ability to
take market share from our competitors and the growth of our
largest customers. We are attempting to diversify our customers
and reduce customer concentration by implementing private label
programs with new discount retail customers and 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 private label products to over
half of the value retail distribution centers located within our
cost-effective shipping area.
Our largest retail customers are Dollar General, Family Dollar
and Wal-Mart, representing 64% of our converted product sales in
2007.
The following provides additional details regarding our
relationships with our largest customers.
Dollar General. Dollar General is our largest
customer, accounting for approximately 31% of our converted
product sales in 2007. With annual revenue of $9.2 billion
and more than 8,000 stores, Dollar General is the largest value
retailer. We currently supply substantially all of the value
private label tissue products for three of Dollar Generals
nine distribution centers. We believe we have a good
relationship with Dollar General.
Family Dollar. Family Dollar is our second
largest customer, accounting for approximately 21% of our
converted product sales in 2007. Family Dollar has become one of
the leading value retailers in the industry with more than 6,400
stores in 44 states. Family Dollar currently has nine
distribution centers. We currently supply substantially all of
the value private label tissue products to three of the
distribution centers and supply approximately half of the value
private label tissue products to two other distribution centers.
Wal-Mart. Wal-Mart is our third largest
customer, accounting for approximately 12% of our converted
product sales in 2007. Shipments to Wal-Mart commenced in
September 2006. We currently serve 19 distribution centers with
bath tissue and, to a lesser extent, paper towels. Wal-Mart is
the largest discount retailer in the United States.
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 four customers representing
approximately 33% of our sales in 2007. We also use a network of
approximately 40 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 key customers, however, our senior management
team participates with the independent brokers in all critical
customer meetings to establish direct customer relationships.
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A majority of our 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 one-third of our converted product
revenue for 2007. Total commissions paid in the twelve months
ended December 31, 2007 and 2006, were $959,000 and
$840,000, respectively.
Manufacturing
We own and operate a paper mill and 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 or are sold to other converters. 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. 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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2007
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2006
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2005
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2004
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2003
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(Tons)
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Manufactured Total
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49,264
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32,853
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26,051
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27,327
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26,701
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Less Third Party Sales
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(10,277
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(1,191
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(945
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Purchased Parent Rolls
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1,442
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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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Converted Total
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40,429
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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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In order to expand our capacity and eliminate our need to
purchase third-party parent rolls to meet the requirements of
our converting plant, in 2006 we constructed and installed a new
paper machine in a new building adjacent to our existing mill.
Our new paper machine and the older machines have the capacity
to produce approximately 54,000 tons of paper per year or an
increase of approximately 100% 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 produce and sell
parent rolls on the open market. The mill operated at less than
rated capacity during 2007 due to the
ramp-up
curve associated with the
start-up of
our new paper machine and the decision not to operate one of the
older machines during the first half of 2007.
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 for certain products 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 7.7 million cases of
retail tissue products a year. To meet our current demand of
approximately 6.7 million cases a year, we operate the
converting facility on a 24 hour a day,
362-day-a-year
schedule. We designed the ten production lines in the plant to
enhance capacity and maximize efficiency. Our converting
operation utilizes relatively modern equipment and one of our
towel lines, 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 relatively low overall operating costs. In addition,
the previously discussed automation project in the converting
facility will allow us to lower our labor costs by replacing
manual operations with automated processes.
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
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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. Prior to 2008, we sourced the majority of our SBS
paper from two paper brokers. On February 20, 2008, we
signed an exclusive supply agreement with Dixie Pulp and Paper,
Inc. to supply all of our waste paper needs. This agreement is
effective beginning April 1, 2008 and carries a five-year
term. We entered into the agreement to help ensure our long-term
supply of quality waste paper. If we were unable to purchase a
sufficient quantity of SBS paper or if prices materially
increased, we could reconfigure the de-inking process to process
other forms of waste paper or use an alternative type of waste
paper with our existing de-inking process. Reconfiguring our
de-inking plant would require additional capital expenditures,
which could be substantial. Alternative types of waste paper
could result in higher costs. We also seek to assure adequate
supplies of SBS paper by maintaining approximately a three-week
inventory.
Energy is a key cost factor. While we experienced significant
increases in electricity rates during the second half of 2006,
our electrical rates decreased somewhat during 2007. 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. Our natural gas is purchased through a broker. We
do not have any fixed price contracts or hedges in place with
natural gas suppliers. 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, 2007, our backlog of customer
orders was 150,000 cases of finished converted products and
1,267 tons of parent rolls or approximately $3.0 million.
As of December 31, 2006, our backlog was approximately
$2.9 million.
Trademarks
and Trade Names
Our tissue products are sold under various brand names,
including
Colortex®,
Velvet®,
Ultra
Valu®,
Dri-Mop®,
Big
Mopper®,
Soft &
Fluffy®
and
Tackle®.
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, 2007, we had approximately 345 full time
employees of whom 293 were union hourly employees and 52 were
non-union salaried employees. Of our employees, approximately
322 were engaged in manufacturing and production, 19 were
engaged in sales, clerical and administration, and four 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, 2011, while the
contract with our hourly employees at the converting facility
expires June 23, 2010. We have not experienced a work
stoppage or request for arbitration in the last ten years and no
requests for arbitration, grievance proceedings, labor disputes,
strikes or labor disturbances are currently pending or
threatened against us. We believe we have good relations with
our union employees at each of our facilities.
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Environmental,
Health and Safety Matters
Our operations are subject to various environmental, health and
safety laws and regulations promulgated by federal, state and
local governments. These laws and regulations impose stringent
standards on us regarding, among other things, air emissions,
water discharges, use and handling of hazardous materials, use,
handling and disposal of waste, and remediation of environmental
contamination. Since our products are made from SBS paper, we do
not make extensive use of chemicals.
The U.S. Environmental Protection Agency (the
EPA) requires that certain pulp and paper mills meet
stringent air emissions and wastewater discharge standards for
toxic and hazardous pollutants. These 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, we do not anticipate
any need for related capital expenditures.
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 possess, either directly or
through the Oklahoma Ordinance Works Authority
(OOWA) all of the environmental permits and
approvals necessary for the operation of our facilities.
OOWA, the operator of the industrial park in which we operate,
holds the waste water permit that covers our facility and
controls, among other things, 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. The OOWA has reduced our BOD and
TSS limits effective with a permit issued effective
August 1, 2007. Under the terms of the permit, we are
required to meet the lower limits by August 1, 2009. As a
result, we will be required to expand our pre-treatment facility
to meet the stricter standards. The expansion project is in the
pre-engineering phase and is expected to cost approximately
$3 million.
Executive Officers and Key Employees
Set forth below is the name, age as of February 29, 2008,
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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Robert A. Snyder
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59
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Chief Executive Officer and President, Director
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Keith R. Schroeder
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52
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Chief Financial Officer
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Robert
A. Snyder, 59, Chief Executive Officer and President,
Director
Mr. Snyder has been our Chief Executive Officer and
President since August 2007. Prior to his current appointment,
Mr. Snyder was General Manager of KTG USA, an integrated
paper manufacturer and a subsidiary of Kruger, Inc. He was
responsible for a premium grade tissue mill from October 2005 to
July 2007 and a newsprint mill, timberlands and power company
where he served as Vice-President and general manager from
October 2002 to October 2005. Prior to his tenure at KTG USA,
Snyder served in various capacities with Kruger, Inc., Great
Northern Paper, Inc., Alliance Forest Products
U.S. Corporation and Bear Island Paper Company, including
as a mill manager for most of 2002, a general manager of a paper
business unit from 1999 to 2002, a Vice-President and general
manager from 1992 to 1999 and a production manager from 1985 to
1992. Mr. Snyder holds a BS degree in Paper Science and
Engineering from the State University of New York at Syracuse
University.
Keith
R. Schroeder, 52, 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 and Atlas Van
Lines. Mr. Schroeder is a certified public accountant and
holds a BS degree in Business Administration with an accounting
major from the University of Evansville.
9
Available
Information
We file annual, quarterly and current reports and other
information with the Securities and Exchange Commission (the
SEC). You may read and copy any document we file
with the SEC at the SECs public reference room at
100 F Street, NE, 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.
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 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 converted product revenues are
attributable to three large retail customers, which may decrease
or cease purchases at any time.
Our largest customer, Dollar General, accounted for 31% of our
converted product revenue in 2007. Family Dollar and Wal-Mart,
accounted for approximately 21% and 12%, respectively of our
converted product revenue in 2007. 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
three of Family Dollars nine distribution centers and
approximately half of the value private label tissue products at
two other Family Dollar distribution centers. We served 19 of
Wal-Marts distribution centers with bath tissue and, to a
lesser extent, paper towels during 2007. 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
10
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.
At December 31, 2007, we had $25.6 million of
indebtedness. In 2008, we anticipate making principal payments
of approximately $2.4 million and interest payments of
approximately $1.8 million. Operating with this amount of
leverage requires us to direct a significant portion of our cash
flow from operations to make payments on our debt, which reduces
the funds otherwise available for operations, capital
expenditures, future business opportunities and other purposes.
It also limits our flexibility in planning for, or reacting to,
changes in our business and our industry and impairs our ability
to obtain additional financing.
The terms of our loan agreements 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 natural gas and electric
energy. In particular, natural gas prices are highly volatile.
Our consumption of both natural gas and electricity increased
substantially following the
start-up of
our new paper machine in mid-2006. During the twelve months
ending December 31, 2007, we consumed 515,000 MMBTU of
natural gas at a total cost of $3.9 million and
59.5 million kilowatt hours of electricity at a total cost
of $2.6 million. 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 2007, our
weighted average bank debt interest rate decreased to 7.46%
compared to a weighted average of 9.36% at year-end 2006. Any
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
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
11
2007, we purchased approximately 60,600 tons of SBS paper at a
total cost of $15.6 million compared to 41,500 tons of SBS
paper at a total cost of $8.7 million in 2006. 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 have an effect on the market
prices of this commodity. During 2007 we purchased all of our
SBS paper from two paper brokers and, to a lesser extent,
directly from a SBS paper converter. The brokers in turn source
SBS paper from numerous producers of preconsumer SBS paper. In
February 2008, we entered into an exclusive waste paper supply
agreement with Dixie Pulp and Paper, Inc., effective
April 1, 2008, to supply 100% of our waste paper supply.
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 substantially increase the cost of SBS paper, require us
to purchase alternate waste paper grades at increased costs, or
cause a production slow-down or stoppage until we are able to
identify new sources of SBS paper or 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.
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, in particular Robert Snyder, our President and Chief
Executive Officer, and Keith Schroeder, our Chief Financial
Officer. We have entered into employment agreements with Robert
Snyder and Keith Schroeder that expire in 2012 and 2009,
respectively. Mr. Snyder was recently appointed President
and Chief Executive Officer following the retirement of Michael
Sage in July 2007. While Mr. Snyder has extensive
management experience in the paper industry, this is his first
appointment as chief executive officer and he has no prior
experience at the Company. If we are unable to retain
Mr. Snyder and Mr. Schroeder or to attract and retain
other qualified personnel, our business and our ability to
compete could be significantly harmed.
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 in February 2011,
and the collective bargaining agreement with Local 5-1480, which
represents the converting facility workers, will expire in June
2010. 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.
Three of our four 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.
12
If our mill is shut down, it may experience a prolonged start up
period, regardless of the reason for the shutdown. Those start
up periods could range from several days to several months,
depending on the reason for the shutdown and other factors. The
shutdown of our mill for a substantial period of time for any
reason could have a material adverse effect on our financial
position and results of operations.
Our
operations require substantial capital, and we may not have
adequate capital resources to provide for all of our cash
requirements.
Our operations require substantial capital. Expansion or
replacement of existing facilities or equipment may require
substantial capital expenditures. For example, under new
environmental standards we are required to build a water
treatment facility costing approximately $3 million to
reduce biological oxygen demand and total suspended solids from
our discharge water. In addition, we plan to install equipment
that automates certain portions of our converting plant
processes at a cost of $4.75 million in 2008. We may also
need to acquire additional converting equipment to utilize our
excess parent roll capacity and to supply new customers, which
we currently estimate would cost $10 million to
$15 million. If our capital resources are inadequate to
provide for our operating needs, capital expenditures and other
cash requirements, this shortfall could have a material adverse
effect on our business and liquidity.
Our
business is subject to extensive governmental regulations and
any imposition of new regulations or failure to comply with
existing regulations could involve significant additional
expense.
Our operations are subject to various environmental, health and
safety laws and regulations promulgated by federal, state and
local governments. These laws and regulations impose stringent
standards on us regarding, among other things, air emissions,
water discharges, use and handling of hazardous materials, use,
handling and disposal of waste, and remediation of environmental
contamination. Any failure to comply with applicable
environmental laws, regulations or permit requirements may
result in civil or criminal fines or 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 have recently completed an evaluation of our internal control
systems to allow management to report on, and our independent
auditors to attest to, our internal controls over financial
reporting in compliance with the management assessment and
auditor attestation requirements of Section 404 of the
Sarbanes-Oxley Act of 2002. In our report under Section 404
which is included in Item 9A. of this report, we have
concluded that our internal control over financial reporting is
effective.
A material weakness or deficiency in internal controls over
financial reporting could materially impact our reported
financial results and the market price of our stock could
significantly decline. Additionally, adverse publicity related
to the disclosure of a material weakness or deficiency in
internal controls could have a negative impact on our
reputation, business and stock price. Although the
managements assessment and auditors attestation may
provide some level of comfort to the investing public, even the
best designed and executed systems of internal controls can only
provide reasonable assurance against misreported results and the
prevention of fraud.
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 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 low average trading volume, 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
3,500 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 parent roll production facilities, 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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21,000 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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7,700,000 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, 2007.
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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Year Ended December 31, 2007:
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First Quarter
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$
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8.65
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$
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6.67
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Second Quarter
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$
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7.08
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$
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5.01
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Third Quarter
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$
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8.78
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$
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5.25
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Fourth Quarter
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$
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9.85
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$
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7.25
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As of February 29, 2008, there were approximately 1,000
beneficial owners of our common stock. On February 29,
2008, the last reported sale price of our common stock on the
American Stock Exchange was $7.71.
16
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 $100 on July 15, 2005,
and the reinvestment of dividends.
These indices are included only for comparative purposes as
required by the SEC and do not necessarily reflect
managements opinion that such indices are an appropriate
measure of the relative performance of the common stock. They
are not intended to forecast possible future performance of the
common stock.
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July 15,
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December 31,
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December 31,
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December 31,
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2005
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2005
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2006
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2007
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Orchids Paper Products Company
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$
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100
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120.59
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150.53
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|
|
|
160.59
|
|
Peer Group
|
|
|
$
|
100
|
|
|
|
|
93.94
|
|
|
|
|
120.31
|
|
|
|
|
76.13
|
|
S & P Small Cap
|
|
|
$
|
100
|
|
|
|
|
101.76
|
|
|
|
|
115.61
|
|
|
|
|
117.34
|
|
S & P Composite 1500 Paper Products
|
|
|
$
|
100
|
|
|
|
|
115.11
|
|
|
|
|
117.95
|
|
|
|
|
119.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Dilution
The Company has outstanding options to purchase shares of its
common stock which, once fully vested, represent approximately
7% of the outstanding shares. As of December 31, 2007 the
Company had options outstanding to purchase 460,000 shares
of its common stock at an exercise price ranging from $5.33 to
$9.23. The options expire on various dates from 2015 to 2018.
In addition, the Company has warrants outstanding to purchase
342,573 shares of its common stock, representing
approximately 5% of the outstanding shares. The underwriters
received 225,000 shares at an exercise price of $6.40 in
connection with our initial public offering, which warrants
expire on July 14, 2010. The remaining warrants were issued
in connection with our 12% subordinated debentures and have
an exercise price of $2.53. As of February 29, 2008 117,573
warrants are outstanding. While the debentures were retired in
December 2008, the warrants remain outstanding until
March 1, 2009.
17
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 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.
Repurchase
of Equity Securities
We do not have any programs to repurchase shares of our common
stock, however, in connection with the exercise of stock options
by our former president and chief executive officer, we
purchased 51,198 shares of stock owned by Mr. Sage at
the date of exercise. We paid Mr. Sage $405,000 or $7.91
per share, the market price on the date he exercised his option.
No other repurchases were made during the quarter ended
December 31, 2007.
|
|
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, 2007, 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 year ending December 31, 2003. The selected
financial data as of and for the years ended December 31,
2007, 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 year ended
December 31, 2003, 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, 2007 and 2006, and
for each of the
18
three years in the period ended December 31, 2007, are
included below under Item 8 of this
Form 10-K.
The historical results are not necessarily indicative of the
operating results to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten-Months
|
|
|
Two-Months
|
|
|
Combined
|
|
|
Predecessor
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
February 29,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2004
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except Tons and per Ton data)
|
|
|
Net Sales
|
|
$
|
74,648
|
|
|
$
|
60,190
|
|
|
$
|
57,700
|
|
|
$
|
39,736
|
|
|
$
|
7,191
|
|
|
$
|
46,927
|
|
|
$
|
44,524
|
|
Cost of Sales
|
|
|
63,717
|
|
|
|
53,988
|
(1)
|
|
|
50,385
|
(1)
|
|
|
33,873
|
(1)
|
|
|
6,253
|
(1)
|
|
|
40,126
|
(1)
|
|
|
37,215
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
10,931
|
|
|
|
6,202
|
(1)
|
|
|
7,315
|
(1)
|
|
|
5,863
|
(1)
|
|
|
938
|
(1)
|
|
|
6,801
|
(1)
|
|
|
7,309
|
(1)
|
Selling, General and Administrative Expenses
|
|
|
5,234
|
|
|
|
4,153
|
(1)
|
|
|
4,013
|
(1)
|
|
|
2,880
|
(1)
|
|
|
1,099
|
(1)
|
|
|
3,979
|
(1)
|
|
|
3,527
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss)
|
|
|
5,697
|
|
|
|
2,049
|
|
|
|
3,302
|
|
|
|
2,983
|
|
|
|
(161
|
)
|
|
|
2,822
|
|
|
|
3,782
|
|
Interest Expense
|
|
|
2,828
|
|
|
|
1,980
|
|
|
|
1,213
|
|
|
|
1,052
|
|
|
|
45
|
|
|
|
1,097
|
|
|
|
347
|
|
Other (Income) Expense, net
|
|
|
(36
|
)
|
|
|
(99
|
)
|
|
|
(102
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) Before Income Taxes
|
|
|
2,905
|
|
|
|
168
|
|
|
|
2,191
|
|
|
|
1,936
|
|
|
|
(206
|
)
|
|
|
1,730
|
|
|
|
3,416
|
|
Provision (Benefit) for Income Taxes
|
|
|
307
|
|
|
|
(564
|
)
|
|
|
799
|
|
|
|
642
|
|
|
|
66
|
|
|
|
708
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
$
|
2,598
|
|
|
$
|
732
|
|
|
$
|
1,392
|
|
|
$
|
1,294
|
|
|
$
|
(272
|
)
|
|
$
|
1,022
|
|
|
$
|
2,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tons Shipped
|
|
|
50,706
|
|
|
|
39,823
|
|
|
|
38,204
|
|
|
|
27,769
|
|
|
|
4,575
|
|
|
|
32,344
|
|
|
|
29,960
|
|
Net Selling Price per Ton
|
|
$
|
1,472
|
|
|
$
|
1,511
|
|
|
$
|
1,10
|
|
|
$
|
1,431
|
|
|
$
|
1,572
|
|
|
$
|
1,451
|
|
|
$
|
1,486
|
|
Total Paper Usage Tons
|
|
|
40,429
|
|
|
|
38,632
|
|
|
|
38,204
|
|
|
|
26,824
|
|
|
|
4,575
|
|
|
|
31,399
|
|
|
|
30,050
|
|
Total Paper Cost per Ton
|
|
$
|
753
|
|
|
$
|
788
|
|
|
$
|
822
|
|
|
$
|
710
|
|
|
$
|
671
|
|
|
$
|
705
|
|
|
$
|
690
|
|
Total Paper Cost
|
|
$
|
38,181
|
|
|
$
|
31,381
|
|
|
$
|
31,420
|
|
|
$
|
19,050
|
|
|
$
|
3,071
|
|
|
$
|
22,121
|
|
|
$
|
20,729
|
|
Cash Flow Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Provided by (Used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
$
|
8,382
|
|
|
$
|
2,607
|
|
|
$
|
2,644
|
|
|
$
|
4,722
|
|
|
$
|
847
|
|
|
$
|
5,569
|
|
|
$
|
3,846
|
|
Investing Activities
|
|
$
|
(318
|
)
|
|
$
|
(18,133
|
)
|
|
$
|
(19,238
|
)
|
|
$
|
(19,794
|
)
|
|
$
|
(112
|
)
|
|
$
|
(19,906
|
)
|
|
$
|
(619
|
)
|
Financing Activities
|
|
$
|
(8,064
|
)
|
|
$
|
15,151
|
|
|
$
|
16,487
|
|
|
$
|
15,067
|
|
|
$
|
(445
|
)
|
|
$
|
14,622
|
|
|
$
|
(3,247
|
)
|
|
|
|
(1) |
|
Cost of sales, Gross profit and SG&A have been restated to
conform with the 2007 reclassification of certain costs from
SG&A to Cost of sales. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
Successor
|
|
|
Predecessor
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Working Capital
|
|
$
|
1,714
|
|
|
$
|
5,025
|
|
|
$
|
4,514
|
|
|
$
|
3,399
|
|
|
$
|
3,194
|
|
Net Property, Plant and Equipment
|
|
$
|
56,856
|
|
|
$
|
58,039
|
|
|
$
|
42,194
|
|
|
$
|
24,492
|
|
|
$
|
14,335
|
|
Total Assets
|
|
$
|
68,303
|
|
|
$
|
71,028
|
|
|
$
|
53,710
|
|
|
$
|
33,407
|
|
|
$
|
22,960
|
|
Long-Term Debt, net of current portion
|
|
$
|
23,264
|
|
|
$
|
31,575
|
|
|
$
|
17,002
|
|
|
$
|
15,145
|
|
|
$
|
4,846
|
|
Total Stockholders Equity
|
|
$
|
28,042
|
|
|
$
|
24,704
|
|
|
$
|
23,712
|
|
|
$
|
6,941
|
|
|
$
|
10,050
|
|
|
|
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 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.
19
Executive
Overview
What were
our key 2007 financial results?
|
|
|
|
|
Our net sales were $74.6 million in 2007, up 24% from
$60.2 million in 2006.
|
|
|
|
We generated operating income of $5.7 million in 2007, up
178% from operating income of $2.0 million in 2006.
|
|
|
|
Our earnings per diluted share were $0.40 per diluted common
share in 2007 compared with $0.11 per diluted common share in
2006.
|
|
|
|
We generated $8.4 million in positive operating cash flow
in 2007 compared with $2.6 million in each of the preceding
two years. We have generated positive operating cash flow each
of the last seven years.
|
What did
we focus on in 2007?
Our focus in 2007 was on increasing efficiency and productivity
of our operating assets and increasing sales of converted
product. As a result, we produced more tons of parent rolls and
converted products in 2007 than in any previous year. We
benefited from previous years strategies to reduce
reliance on open market purchases of parent rolls by installing
and starting up our new paper machine. In addition, in May 2007
we began operating all of our older paper machines on a
full-time basis to take advantage of a tight parent roll market
and selling excess parent rolls on the open market at increasing
selling prices. We are confident in our ability to sell
converted products, so much of our focus has been on increasing
throughput from the converting facility. Mr. Mike Sage, our
former president and chief executive officer elected to retire
July 15, 2007. Mr. Robert Snyder was appointed
president and chief executive officer effective August 22,
2007. In late 2007, we began the process of increasing the depth
and talent level of our operating management team to aid in our
continued quest to improve the efficiencies of our operating
assets.
Our second initiative was to continue to profitably grow the
business. We were able to achieve significant growth in our
converted product business during 2007. In addition, running all
of our older machines on a full-time basis beginning in May 2007
allowed us to take advantage of higher parent roll sales prices.
Our goal is to attain a level of converted product business that
consumes our total paper-making capacity.
What
challenges and opportunities did our business face in
2007?
We experienced significant cost pressures during the year,
primarily in the cost of our waste paper. The price of waste
paper increased approximately 23% in 2007 over the 2006 period.
What will
we focus on in 2008?
In 2008, we will continue to pursue profitable growth of our
converted product business by utilizing internally more of our
paper-making capacity. We will pursue this strategy through a
combination of increased sales to existing customers and sales
to new customers 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 market.
Optimizing the operation of our new paper machine and other
assets is another major focus for 2008. We expect the changes
and additions to the operating management team that began in
late 2007 to aid in our operations improvement efforts.
Continuous improvement of our operations will be critical in
helping combat cost pressures. We intend to improve the
efficiency of our converting operations, thereby increasing
sales opportunities and lowering production costs. We intend to
further lower our labor costs in our converting facility through
the automation of certain processes. In this project we will
purchase and install case packers, conveyors and unitizing
equipment at a cost of approximately $4.75 million.
Installation of the equipment is expected to begin in the second
quarter of 2008 and be finalized and fully operational by the
fourth quarter of 2008.
20
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 a
rated annual capacity of approximately 33,000 tons. The capacity
of the new machine in addition to the capacity of our older
paper machines increased our total production capacity to
approximately 54,000 tons per year. As a result, beginning in
the third quarter of 2006, we were able to eliminate the
requirement to purchase recycled parent rolls on the open market
and commenced the sale of 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 1,675, 6,970 and
12,200 tons of paper on the open market in 2007, 2006 and 2005,
respectively, to supplement our paper-making capacity. Beginning
in the third quarter of 2006, essentially all of our third party
purchases were of virgin pulp fiber required for a premium towel
line we produce for one of our customers. 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.
Comparative
Years Ended December 31, 2007, 2006 and 2005
Net
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except price per ton and tons)
|
|
|
Net sales
|
|
$
|
74,648
|
|
|
$
|
60,190
|
|
|
$
|
57,700
|
|
Total tons shipped
|
|
|
50,706
|
|
|
|
39,823
|
|
|
|
38,204
|
|
Average price per ton
|
|
$
|
1,472
|
|
|
$
|
1,511
|
|
|
$
|
1,510
|
|
Net sales increased $14.5 million, or 24%, to
$74.6 million for the year ended December 31, 2007,
compared to $60.2 million for the year ended
December 31, 2006. Net sales figures include gross selling
price, including freight, less discounts and pricing allowances.
The increase in net sales was attributable primarily to
increased volumes of parent rolls sold to third parties and an
11% increase in net sales of converted products, resulting from
both higher prices and increased shipment volumes. For the
twelve months ended December 31, 2007, the volume of parent
rolls sold to third parties increased by approximately 9,100
tons. The net sales prices per ton for converted product
shipments for the twelve months ended December 31, 2007
increased 6% over the same period of 2006 while converted
product shipments volumes increased 5% in the year over year
comparison.
21
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. 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 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.
Cost of
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except gross profit margin%)
|
|
|
Cost of paper
|
|
$
|
38,181
|
|
|
$
|
31,381
|
|
|
$
|
31,420
|
|
Non-paper materials, labor, supplies, etc.
|
|
|
22,535
|
|
|
|
20,353
|
|
|
|
17,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
$
|
60,716
|
|
|
$
|
51,734
|
|
|
$
|
48,884
|
|
Depreciation
|
|
|
3,001
|
|
|
|
2,254
|
|
|
|
1,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
63,717
|
|
|
$
|
53,988
|
|
|
$
|
50,385
|
|
Gross Profit
|
|
$
|
10,931
|
|
|
$
|
6,202
|
|
|
$
|
7,315
|
|
Gross Profit Margin%
|
|
|
14.6
|
%
|
|
|
10.3
|
%
|
|
|
12.7
|
%
|
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 $9.7 million, or 18%,
to $63.7 million for the year ended December 31, 2007,
compared to $54.0 million for the same period in 2006. Cost
of sales as a percentage of net sales declined to 85.4% in the
2007 period compared with 89.7% in the 2006 period. Cost of
sales as a percentage of net sales was favorably affected by the
higher sales volume and prices discussed above as well as a
lower overall cost of paper, excluding depreciation. Partly
offsetting these factors was higher depreciation expense and
higher converting labor costs. Depreciation for the year ended
December 31, 2007 increased $747,000 to $3.0 million,
primarily the result of recognizing a full year of depreciation
on the $34.6 million paper machine project
started-up
in June 2006.
Cost of sales increased approximately $3.6 million, or 7%,
to $54.0 million for the year ended December 31, 2006,
compared to $50.4 million for the same period in 2005. As a
percentage of net sales, cost of sales increased to 89.7% in the
2006 period compared to 87.3% 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.
The following chart depicts the major factors that influence our
paper costs.
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Paper usage (tons)
|
|
|
|
|
|
|
|
|
|
|
|
|
Converted-internal
|
|
|
38,987
|
|
|
|
31,662
|
|
|
|
26,051
|
|
Converted-purchased
|
|
|
1,442
|
|
|
|
6,970
|
|
|
|
12,153
|
|
Total converted
|
|
|
40,429
|
|
|
|
38,632
|
|
|
|
38,204
|
|
Third-party parent roll sales
|
|
|
10,277
|
|
|
|
1,191
|
|
|
|
|
|
Paper costs per ton
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost per ton produced internally
|
|
$
|
741
|
|
|
$
|
730
|
|
|
$
|
729
|
|
Cost per ton purchased from third parties
|
|
$
|
1,162
|
|
|
$
|
1,062
|
|
|
$
|
1,024
|
|
Total cost per ton consumed
|
|
$
|
753
|
|
|
$
|
788
|
|
|
$
|
822
|
|
Total paper costs (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of internally produced paper
|
|
$
|
36,505
|
|
|
$
|
23,979
|
|
|
$
|
18,979
|
|
Cost of paper purchased from third parties
|
|
|
1,676
|
|
|
|
7,402
|
|
|
|
12,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paper costs
|
|
$
|
38,181
|
|
|
$
|
31,381
|
|
|
$
|
31,420
|
|
Our overall cost of paper was $753 per ton for the twelve months
ended December 31, 2007, compared to $788 per ton in the
same period of 2006. Reduced purchases of parent rolls on the
open market, attributable to the successful
start-up and
ramp-up of
our new paper machine in the second half of 2006, partially
offset by higher costs of internally produced paper were the
reasons for the decrease in overall cost per ton. For the year
ended December 31, 2007, approximately 96% of the paper
consumed in our converting operation was internally produced
compared to 82% in the same period in 2006. The cost per ton of
paper produced internally was $741 in 2007 compared to $730 in
the same period of 2006. Higher waste paper costs were partially
offset by lower per ton costs of fixed and semi-variable costs.
Waste paper prices began to increase in the third and fourth
quarters of 2006 and experienced a more rapid increase during
the first and second quarters of 2007. Waste paper prices were
generally level in the last half of 2007. Overall, the price
paid for waste paper increased 23% in the 2007 period compared
to the same period in 2006.
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. 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.
Gross
Profit
Gross profit increased by $4.7 million to
$10.9 million in the twelve months ended December 31,
2007, compared to $6.2 million in the prior year. As a
percentage of net sales, gross profit increased to 14.6% in 2007
compared to 10.3% in 2006. The major reasons for the increase in
gross profit as a percentage of net sales is the lower overall
cost of paper and higher selling prices for converted products
being partially offset by higher depreciation expense and higher
converting labor costs.
Gross profit decreased by $1.1 million, or 15.2%, to
$6.2 million for the year ended December 31, 2006,
compared to $7.3 million for the year ended
December 31, 2005. As a percent of net sales, gross profit
dropped to
23
10.3% in 2006 compared to 12.7% 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.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except SG&A as a% of net sales)
|
|
|
Commission expense
|
|
$
|
959
|
|
|
$
|
840
|
|
|
$
|
879
|
|
Other S,G&A expenses
|
|
|
4,275
|
|
|
|
3,313
|
|
|
|
3,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, General & Adm exp
|
|
$
|
5,234
|
|
|
$
|
4,153
|
|
|
$
|
4,013
|
|
SG&A as a% of net sales
|
|
|
7.0
|
%
|
|
|
6.9
|
%
|
|
|
7.0
|
%
|
Selling, general and administrative expenses include salaries,
commissions to brokers and other miscellaneous expenses.
Selling, general and administrative expenses increased by 26% to
$5.2 million in the twelve months ended December 31,
2007, compared to $4.2 million in the prior year. Costs
related to the hiring of our new chief executive officer, other
additions to our senior management team, increased costs related
to our first-year implementation of Section 404 of the
Sarbanes Oxley Act of 2002, and higher director fees and
expenses were the major reasons for the increase. Nonrecurring
selling, general and administrative costs incurred in 2007
included the first year stock option expense and recruitment and
relocation costs associated with the hiring of our new chief
executive officer, as well as recruitment and relocation costs
associated with other additions to the senior management team
totaling $430,000. Our costs to complete our first year
implementation of Section 404 of the Sarbanes Oxley Act of
2002 increased our fees paid to our external auditors and
outside consultants that assisted in the management assessment
process by $240,000.
Selling, general and administrative expenses for the year ended
December 31, 2006, increased $140,000, or 3.5%, to
$4.2 million, compared to $4.0 million in the same
period in 2005. As a percentage of net sales, selling, general
and administrative expenses were essentially flat at 6.9% of net
sales for the year ended December 31, 2006, compared with
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 was
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 options for an aggregate of 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.
24
Operating
Income
As a result of the foregoing factors, operating income for the
twelve months ended December 31, 2007, 2006 and 2005 was
$5.7 million, $2.0 million, and $3.3 million,
respectively.
Interest
and Other Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Interest expense
|
|
$
|
2,828
|
|
|
$
|
1,980
|
|
|
$
|
1,213
|
|
Other (income) expense, net
|
|
$
|
(36
|
)
|
|
$
|
(99
|
)
|
|
$
|
(102
|
)
|
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, 2007 was $2.8 million, an increase of
$848,000 compared to the same period in 2006. This increase
resulted primarily from the absence of interest capitalization
in 2007 compared to interest capitalization of $992,000 in 2006
in connection with the new paper machine. Including the
capitalized interest in 2006, total interest costs in the 2007
period decreased $144,000, or 5%, compared with the same period
of 2006. Lower LIBOR interest rates during 2007 and reduced
margins over LIBOR following the April 2007 refinancing all
contributed to the lower interest costs. Partly offsetting these
factors was a 6% increase in average bank borrowings in the 2007
period reflecting the drawdown of the construction loan during
the first half of 2006.
Interest expense for the year 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.
Other income was $36,000 in the twelve months ended
December 31, 2007, compared to $99,000 in the same period
of 2006. The decrease reflects the absence of a $39,000 net
currency transaction gain recorded in 2006 and lower interest
income as a result of eliminating the restricted certificate of
deposit after the bank debt refinancing in April 2007, which was
used to pay down amounts outstanding under the revolving credit
agreement.
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 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.
25
Income
Before Income Taxes
As a result of the foregoing factors, income before income taxes
increased $2.7 million to $2.9 million for the year
ended December 31, 2007, compared to $168,000 for the year
ended December 31, 2006. Income before income taxes
decreased by $2.0 million for the year ended
December 31, 2006 compared to $2.2 million for the
year ended December 31, 2005.
Income
Tax Provision (Benefit)
For the year ended December 31, 2007, income tax expense
amounted to $307,000, resulting in an effective tax rate of
10.6%. The largest contributor to the reduced tax burden was
Oklahoma Investment Tax Credits (OITC) associated
with our 2006 investment in a new paper machine. The federal
Indian Employment Credit (IEC), which was reinstated
in December 2006 and extended through year-end 2007, contributed
to the reduced tax burden. Also benefiting the 2007 tax
provision was the recognition of tax benefits associated with
management and directors stock options not qualifying as
Incentive Stock Options under the Internal Revenue Code. In
accordance with SFAS 123R, the Company has established a
deferred tax asset to account for the future deductibility of
the value of these grants upon exercise by the holder.
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 current tax benefit of $1.0 million
primarily resulted from the carryback of net operating losses
for tax purposes to tax years 2005 and 2004. The deferred
provision of $483,000 was 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.
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.
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
|
|
|
|
|
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.
|
26
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.
The Company estimates NOL carryforwards of $6.2 million
(federal) and $6.6 million (state) which are available to
offset future taxable income. In addition, the Company plans to
claim $1.9 million in Oklahoma Investment Tax Credit (OITC)
carryforward as of December 31, 2007, which is available to
offset future Oklahoma income tax liability. The OITC
carryforward is expected to grow over the next three 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 three years related to the new paper machine.
The combination of accelerated depreciation deductions and the
OITC will likely eliminate all Oklahoma income tax liability for
the next few years.
Cash was level at $3,000 from December 31, 2006 to
December 31, 2007. We generated sufficient cash during the
first three quarters of 2007 to pay off all amounts outstanding
under our revolving credit agreement. We used a cash
build-up in
the fourth quarter and borrowings under our revolving credit
line to retire all of our outstanding 12% subordinated
debentures in December 2007 totaling $2.15 million.
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.
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 was restricted under the provisions of our
term loan agreement until April 30, 2007, the term date of
our existing credit agreement during those periods. The
$1.5 million was applied to our revolving credit when the
bank debt was refinanced in April 2007.
The following table summarizes key cash flow information for the
years ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cash flow provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
8,382
|
|
|
$
|
2,607
|
|
|
$
|
2,644
|
|
Investing activities
|
|
$
|
(318
|
)
|
|
$
|
(18,133
|
)
|
|
$
|
(19,238
|
)
|
Financing activities
|
|
$
|
(8,064
|
)
|
|
$
|
15,151
|
|
|
$
|
16,487
|
|
Cash flow from operating activities increased by
$5.8 million, to $8.4 million, more than three times
the amount reported for 2006. Stronger earnings before non-cash
charges for depreciation, deferred taxes and stock option
expense was the primary reason for the increase. The realization
of $1.2 million in carryback claims for federal taxes paid
in 2005 and 2004 also contributed to the increased cash flow. An
increase in the level of business activity resulted in higher
accounts payable and accrued liabilities, partially offset by
increases in inventory and accounts receivable.
Cash flow used in investing activities was for capital
expenditures, mainly of maintenance projects. Offsetting these
outflows was the release of the $1.5 million restricted
certificate of deposit in connection with the April 2007
refinancing of our bank debt. Annual maintenance capital
expenditures are estimated to be $1.5 million per year over
the next several years which we expect to fund from operating
cash flow. In order to improve our operating costs, we plan to
purchase equipment during 2008 to automate certain portions of
our converting facility at a cost of approximately
$4.75 million. Expenditures for this project will begin in
the first quarter of 2008 and continue through the fourth
quarter. Following the completion of the project in the fourth
quarter of 2008, we expect annualized net cash savings to
approximate $2 million. In either 2008 or 2009, per the
terms of our wastewater pretreatment agreement with the OOWA, we
are required to expand our wastewater pre-treatment facility at
an estimated cost of $3 million. Funding for the converting
automation equipment is expected to come from a combination of
borrowings under our revolving loan facility and operating cash
flow, while funding for the pretreatment expansion is
contemplated in the current debt facility in an amount up to
$3 million.
27
Cash flows used in financing activities was $8.1 million,
primarily attributable to a $4.3 million reduction in
amounts outstanding under our revolving credit facility,
$2.5 million in normally scheduled principal payments on
our bank term loans and the retirement of all of our
12% subordinated debentures at a cost of
$2.15 million. Our April 2007 refinancing of our credit
facility resulted in a net increase in borrowings of $634,000.
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 in the year ended
December 31, 2006, 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.
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 borrowings
under the revolving credit line. Principal payments on the bank
debt remained level at $1.6 million in each period.
On April 9, 2007, we re-financed our existing credit
facility with the existing bank group. On March 6, 2008, we
amended the facility to increase the revolving credit facility
and capital expenditures limits for 2008. Following the
amendment, the credit facility consists of the following:
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|
|
|
|
a $8.0 million revolving credit facility with a
3-year term
($791,000 outstanding at December 31, 2007, including
$498,000 of bank overdrafts);
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|
|
|
a $10.0 million Term Loan A with a ten-year term, no
principal repayments for the first 24 months and then will
be amortized as if it had an
18-year life
($10.0 million outstanding at December 31, 2007);
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|
|
|
a $16.5 million Term Loan B with a four year-term and is
being amortized as if it had a six-year life ($14.9 million
outstanding at December 31, 2007); and
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|
|
|
a $3.0 million capital expenditures facility with a
four-year term that will be amortized as if it had a five-year
life ($0 outstanding at December 31, 2007).
|
Under the terms of the agreement, amounts outstanding under the
revolving credit facility 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 agreement contains covenants that, 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. In connection with the
re-financing, the $1.5 million restricted certificate of
deposit was released and applied to the revolving credit
facility. The amount available under the revolving credit line
may be reduced in the event that our borrowing base, which is
based upon our qualified receivables and qualified inventory, is
less than $8.0 million. Obligations under the amended and
restated credit agreement are secured by substantially all of
our assets. The agreement contains representations and
warranties, and affirmative and negative covenants customary for
financings of this type, including, but not limited to, a
covenant prohibiting us from declaring or paying dividends. The
financial covenants in the agreement require us to maintain
specific ratios of funded debt to EBITDA and debt
28
service coverage which are tested as of the end of each quarter
and places a limit on the amount of annual non-financed capital
expenditures. The maximum allowable funded debt to EBITDA ratio
is 4.0-to-1.0 and the minimum allowable debt service coverage
ratio is 1.25-to-1.0. Following the March 2008 amendment, our
annual expenditures for non-financed capital equipment are
limited to $6.25 million for the fiscal year 2008 and
$1.5 million per fiscal year thereafter. The increased
capital expenditures limit in 2008 will be used to complete the
previously discussed automation project in our converting
facility.
The capital expenditures facility is intended to fund an
expansion of our wastewater pre-treatment. A new water discharge
permit was issued effective August 1, 2007 which requires
us to expand our existing pre-treatment facility to reduce
biological oxygen demand and total suspended solids from our
effluent stream. Under the new permit, we are required to
complete the expansion and make operational our pre-treatment
facility by August 1, 2009. The project is in the
pre-engineering phase and is expected to cost approximately
$3 million.
If an event of default occurs, the agent may declare the
banks obligation to make loans terminated and all
outstanding indebtedness, and all other amounts payable under
the credit agreement, due and payable.
Contractual
Obligations
As of December 31, 2007, our contractual cash obligations
were limited to our long-term debt. We do not have any leasing
commitments or debt guarantees outstanding as of
December 31, 2007. We do not have any defined benefit
pension plans nor do we have any obligation to fund any
postretirement benefit obligations for our work force.
Maturities of these contractual obligations consist of the
following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Years
|
|
Contractual Cash Obligations
|
|
Total
|
|
|
1
|
|
|
2 and 3
|
|
|
4 and 5
|
|
|
after 5
|
|
|
|
($ thousands)
|
|
|
Long-term debt(1)
|
|
$
|
25,655
|
|
|
$
|
2,391
|
|
|
$
|
6,619
|
|
|
$
|
7,796
|
|
|
$
|
8,849
|
|
Interest payments(2)(3)
|
|
$
|
7,226
|
|
|
$
|
1,783
|
|
|
$
|
2,915
|
|
|
$
|
1,237
|
|
|
$
|
1,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
32,881
|
|
|
$
|
4,174
|
|
|
$
|
9,534
|
|
|
$
|
9,033
|
|
|
$
|
10,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Under our revolving credit and term loan agreements, the
maturity of outstanding debt could be accelerated if we do not
maintain certain financial covenants. At December 31, 2007,
we were in compliance with our loan covenants. |
|
(2) |
|
These amounts assume interest payments at the year-end borrowing
amount and rate for our revolving credit facility. The amount
borrowed in future years is dependent on our free cash flow from
time-to-time. |
|
(3) |
|
Interest payments on the term loans have been calculated based
on the interest rate in effect as of December 31, 2007. |
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
29
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, net of recoveries, in the
years ended December 31, 2007, 2006, and 2005 were $0,
$6,000, and $11,000, 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
years ended December 31, 2007 and 2006, we increased the
inventory valuation reserve by $7,000 and $1,000, respectively.
During the year ended December 31, 2005, we decreased the
inventory valuation reserve by $15,000.
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 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.
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.
In December 2007, the FASB revised SFAS No. 141
Business Combinations to clarify certain issues
regarding business combinations. The major impact on Orchids
could be the requirement to write-off certain costs of
completing an acquisition as incurred. The standard is effective
for periods beginning after December 15, 2008.
Also in December 2007, the FASB issued SFAS No. 160
Non-controlling Interests in Consolidated Financial
Statements. At present this standard is inapplicable to
Orchids as we have no subsidiaries. The standard is effective
for minority interest accounting for periods beginning after
December 15, 2008.
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.
30
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;
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|
it does not reflect the interest expense, or the cash
requirements necessary to service interest or principal payments
on our indebtedness;
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|
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
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other companies, including other companies in our industry, may
calculate these measures differently than we do, limiting their
usefulness as a comparative measure.
|
Because of these limitations, EBITDA should not be considered as
a measure of discretionary cash available to us to invest in the
growth of our business or to reduce our indebtedness. We
compensate for these limitations by relying primarily on our
GAAP results and using EBITDA only supplementally.
The following table reconciles EBITDA to net income for the
years ended December 31, 2007, 2006 and, 2005:
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|
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|
|
|
|
|
|
|
|
Twelve Months Ended December 31,
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|
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2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except% of net sales)
|
|
|
Net income
|
|
$
|
2,598
|
|
|
$
|
732
|
|
|
$
|
1,392
|
|
Plus: Interest expense, net
|
|
|
2,828
|
|
|
|
1,980
|
|
|
|
1,213
|
|
Plus: Income tax (benefit) expense
|
|
|
307
|
|
|
|
(564
|
)
|
|
|
799
|
|
Plus: Depreciation
|
|
|
3,001
|
|
|
|
2,254
|
|
|
|
1,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
8,734
|
|
|
$
|
4,402
|
|
|
$
|
4,905
|
|
% of net sales
|
|
|
11.7
|
%
|
|
|
7.3
|
%
|
|
|
8.5
|
%
|
EBITDA increased $4.3 million to $8.7 million for the
year ended December 31, 2007, compared to $4.4 million
in the same period in 2006. EBITDA as a percent of net sales
increased from 7.3% in 2006 to 11.7% in 2007. 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 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.
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:
31
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the market opportunity for our products, including expected
demand for our products;
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our estimates regarding our capital requirements; and
|
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|
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.
Factors that may cause our actual results to differ materially
from our forward-looking statements include, among others:
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|
competition in our industry;
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|
|
adverse developments in our relationships with key customers;
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|
|
impairment of ability to meet our obligations and restrictions
on future operations due to our substantial debt;
|
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|
|
availability and price of energy;
|
|
|
|
variable interest rate exposure;
|
|
|
|
disruption in supply or cost of SBS paper;
|
|
|
|
the loss of key personnel;
|
|
|
|
labor interruptions;
|
|
|
|
natural disaster or other disruption to our facility;
|
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|
|
ability to finance the capital requirements of our business;
|
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|
cost to comply with government regulations; and
|
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|
|
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.
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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, 2007, we had
floating-rate borrowings of $25.2 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 $252,000 increase to our annual
interest expense.
32
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|
Item 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
FINANCIAL STATEMENTS
33
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To 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, 2007 and 2006, and the
related statements of income, stockholders equity and cash
flows for each of the years in the three-year period ended
December 31, 2007. We also have audited Orchids Paper
Products Companys internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Orchids Paper Products
Companys management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting included in the
accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on these financial statements and an opinion on the
Companys internal control over financial reporting 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 audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Orchids Paper Products Company as of December 31, 2007
and 2006, and the results of its operations and its cash flows
for each of the years in the three-year period ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, Orchids Paper Products Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
/s/ TULLIUS TAYLOR SARTAIN & SARTAIN, LLP
Tulsa, Oklahoma
March 17, 2008
34
ORCHIDS
PAPER PRODUCTS COMPANY
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|
|
|
|
|
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands,
|
|
|
|
except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3
|
|
|
$
|
3
|
|
Accounts receivable, net of allowance of $100 in 2007 and 2006
|
|
|
5,527
|
|
|
|
5,089
|
|
Inventories, net
|
|
|
4,874
|
|
|
|
4,379
|
|
Restricted certificate of deposit
|
|
|
|
|
|
|
1,500
|
|
Income taxes receivable
|
|
|
24
|
|
|
|
1,242
|
|
Prepaid expenses
|
|
|
381
|
|
|
|
306
|
|
Deferred income taxes
|
|
|
516
|
|
|
|
346
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
11,325
|
|
|
|
12,865
|
|
Property, plant and equipment
|
|
|
64,899
|
|
|
|
63,081
|
|
Accumulated depreciation
|
|
|
(8,043
|
)
|
|
|
(5,042
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
56,856
|
|
|
|
58,039
|
|
Deferred debt issuance costs, net of accumulated amortization of
$570 in 2007 and $424 in 2006
|
|
|
122
|
|
|
|
124
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
68,303
|
|
|
$
|
71,028
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,760
|
|
|
$
|
3,772
|
|
Accrued liabilities
|
|
|
2,460
|
|
|
|
1,805
|
|
Current portion of long-term debt
|
|
|
2,391
|
|
|
|
2,263
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
9,611
|
|
|
|
7,840
|
|
Long-term debt, net of unamortized discount of $0 in 2007 and
$74 in 2006
|
|
|
23,264
|
|
|
|
31,575
|
|
Deferred income taxes
|
|
|
7,386
|
|
|
|
6,909
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 25,000,000 and
10,000,000 shares authorized in 2007 and 2006,
respectively, 6,322,648 and 6,234,346 shares issued and
outstanding in 2007 and 2006, respectively
|
|
|
6
|
|
|
|
6
|
|
Additional paid-in capital
|
|
|
21,879
|
|
|
|
21,139
|
|
Common stock warrants
|
|
|
141
|
|
|
|
141
|
|
Retained earnings
|
|
|
6,016
|
|
|
|
3,418
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
28,042
|
|
|
|
24,704
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
68,303
|
|
|
$
|
71,028
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
35
ORCHIDS
PAPER PRODUCTS COMPANY
Years
Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except share and per share data)
|
|
|
Net sales
|
|
$
|
74,648
|
|
|
$
|
60,190
|
|
|
$
|
57,700
|
|
Cost of sales
|
|
|
63,717
|
|
|
|
53,988
|
|
|
|
50,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
10,931
|
|
|
|
6,202
|
|
|
|
7,315
|
|
Selling, general and administrative expenses
|
|
|
5,234
|
|
|
|
4,153
|
|
|
|
4,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,697
|
|
|
|
2,049
|
|
|
|
3,302
|
|
Interest expense
|
|
|
2,828
|
|
|
|
1,980
|
|
|
|
1,213
|
|
Other (income) expense, net
|
|
|
(36
|
)
|
|
|
(99
|
)
|
|
|
(102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
2,905
|
|
|
|
168
|
|
|
|
2,191
|
|
Provision (benefit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
(1,047
|
)
|
|
|
663
|
|
Deferred
|
|
|
307
|
|
|
|
483
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
307
|
|
|
|
(564
|
)
|
|
|
799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,598
|
|
|
$
|
732
|
|
|
$
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
|
$
|
0.12
|
|
|
$
|
0.31
|
|
Diluted
|
|
$
|
0.40
|
|
|
$
|
0.11
|
|
|
$
|
0.30
|
|
Shares used in calculating net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
6,255,877
|
|
|
|
6,234,346
|
|
|
|
4,453,254
|
|
Diluted
|
|
|
6,464,863
|
|
|
|
6,558,454
|
|
|
|
4,594,412
|
|
See notes to financial statements.
36
ORCHIDS
PAPER PRODUCTS COMPANY
STATEMENTS
OF CHANGES IN STOCKHOLDERS EQUITY
Years
ended December 31, 2005, 2006 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Warrants
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Shares
|
|
|
Value
|
|
|
Earnings
|
|
|
Total
|
|
|
|
(Dollars in thousands, except share amounts)
|
|
|
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
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
402
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,598
|
|
|
|
2,598
|
|
Purchase of Common Stock by former CEO
|
|
|
139,500
|
|
|
|
|
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
743
|
|
Purchase by the Company of shares from former CEO
|
|
|
(51,198
|
)
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
6,322,648
|
|
|
$
|
6
|
|
|
$
|
21,879
|
|
|
|
82,607
|
|
|
$
|
141
|
|
|
$
|
6,016
|
|
|
$
|
28,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
37
ORCHIDS
PAPER PRODUCTS COMPANY
Years
ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,598
|
|
|
$
|
732
|
|
|
$
|
1,392
|
|
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,222
|
|
|
|
2,472
|
|
|
|
1,688
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
|
|
|
|
(19
|
)
|
|
|
46
|
|
|
|
|
|
Deferred income taxes
|
|
|
307
|
|
|
|
483
|
|
|
|
136
|
|
|
|
|
|
Stock option plan expense
|
|
|
402
|
|
|
|
260
|
|
|
|
368
|
|
|
|
|
|
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
|
|
|
(438
|
)
|
|
|
(890
|
)
|
|
|
(617
|
)
|
|
|
|
|
Inventories
|
|
|
(495
|
)
|
|
|
41
|
|
|
|
(1,372
|
)
|
|
|
|
|
Income taxes receivable
|
|
|
1,218
|
|
|
|
(1,148
|
)
|
|
|
188
|
|
|
|
|
|
Prepaid expenses
|
|
|
(75
|
)
|
|
|
152
|
|
|
|
(128
|
)
|
|
|
|
|
Accounts payable
|
|
|
988
|
|
|
|
895
|
|
|
|
697
|
|
|
|
|
|
Accrued liabilities
|
|
|
655
|
|
|
|
(332
|
)
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
8,382
|
|
|
|
2,607
|
|
|
|
2,644
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investment securities and restricted certificate of
deposit
|
|
|
|
|
|
|
|
|
|
|
(17,259
|
)
|
|
|
|
|
Proceeds from the sale of investment securities and restricted
certificate of deposit
|
|
|
1,500
|
|
|
|
|
|
|
|
16,509
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
|
(1,818
|
)
|
|
|
(18,133
|
)
|
|
|
(18,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(318
|
)
|
|
|
(18,133
|
)
|
|
|
(19,238
|
)
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
17,250
|
|
|
|
|
|
Cost of common stock and warrants issued
|
|
|
|
|
|
|
|
|
|
|
(2,239
|
)
|
|
|
|
|
New borrowings on long-term debt
|
|
|
26,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of borrowings on long-term debt
|
|
|
(25,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under construction loan
|
|
|
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
Principal payments on long-term debt
|
|
|
(2,472
|
)
|
|
|
(1,586
|
)
|
|
|
(1,643
|
)
|
|
|
|
|
Retirement of subordinated debentures
|
|
|
(2,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) on revolving credit line
|
|
|
(4,270
|
)
|
|
|
1,767
|
|
|
|
3,293
|
|
|
|
|
|
Purchase of common stock by former CEO, pursuant to vested stock
options
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase by the Company of common stock from former CEO
|
|
|
(405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred debt issuance costs
|
|
|
(144
|
)
|
|
|
(30
|
)
|
|
|
(174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(8,064
|
)
|
|
|
15,151
|
|
|
|
16,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
|
|
|
|
(375
|
)
|
|
|
(107
|
)
|
|
|
|
|
Cash, beginning
|
|
|
3
|
|
|
|
378
|
|
|
|
485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, ending
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,788
|
|
|
$
|
2,615
|
|
|
$
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
|
|
|
$
|
221
|
|
|
$
|
475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing and Financing
Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligation for purchase of paper machine
|
|
$
|
|
|
|
$
|
|
|
|
$
|
681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to financial statements.
38
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS
December 31,
2007, 2006 and 2005
|
|
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.
Business
Orchids operates a paper mill and converting plant used to
produce a full range of paper tissue products. The mill produces
bulk rolls of paper from recycled paper stock. The bulk rolls
are transferred to the converting plant for further processing.
Tissue products produced in the converting plant include paper
towels, 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.
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
39
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 years ended
December 31, 2007, 2006, or 2005.
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. Amortization expense for 2007, 2006 and 2005 was
$222,000, $219,000 and $163,000, 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 was being
amortized over the term of the debt using the effective interest
method, up to December 28, 2007 when the debt was retired.
Remaining unamortized discount at that time was charged to
amortization expense.
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 Company have been
restated to reflect the 2.744-for-1 stock split.
Stock
option expense
The Company adopted the provisions of SFAS No. 123 (R)
in connection with its stock option plan. Grant-date option
costs are being recognized on a straight-line basis over the
vesting periods of the options.
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
$2,336,000, $1,455,000 and $993,000 for the years ended
December 31, 2007, 2006 and 2005, respectively, are
included in cost of sales.
Advertising
costs
Advertising costs are expensed when incurred and totaled
$134,000, $231,000 and $121,000 for the years ended
December 31, 2007, 2006 and 2005, respectively, are
included in selling, general and administrative expenses.
40
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
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.
Reclassification
For income statement purposes, the Company reclassified certain
expenses from selling, general and administrative expenses to
cost of sales at year-end 2007. All prior period income
statements have been restated to conform to the revised
classification.
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 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 thirty-seven 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.
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.
In December 2007, the FASB revised SFAS No. 141
Business Combinations to clarify certain issues
regarding business combinations. The major impact on Orchids
could be the requirement to write-off certain costs of
completing an acquisition as incurred. The standard is effective
for periods beginning after December 15, 2008.
Also in December 2007, the FASB issued SFAS No. 160
Non-controlling Interests in Consolidated Financial
Statements. At present this standard is inapplicable to
Orchids as the Company has no subsidiaries. The standard is
effective for minority interest accounting for periods beginning
after December 15, 2008.
|
|
Note 2
|
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 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,
41
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
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.
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 $39,000 for the year ended
December 31, 2005 are included in other (income) expense,
net.
Inventories at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ thousands)
|
|
|
Raw materials
|
|
$
|
1,652
|
|
|
$
|
1,577
|
|
Bulk paper rolls
|
|
|
631
|
|
|
|
536
|
|
Converted finished goods
|
|
|
2,591
|
|
|
|
2,266
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,874
|
|
|
$
|
4,379
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4
|
Property,
Plant and Equipment
|
The principal categories and estimated useful lives of property,
plant and equipment at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful
|
|
|
2007
|
|
|
2006
|
|
|
Lives
|
|
|
|
|
|
($ thousands)
|
|
Land
|
|
$
|
379
|
|
|
$
|
379
|
|
|
|
Buildings
|
|
|
10,394
|
|
|
|
10,394
|
|
|
40
|
Machinery and equipment
|
|
|
50,271
|
|
|
|
49,979
|
|
|
5 to 30
|
Vehicles
|
|
|
314
|
|
|
|
295
|
|
|
5
|
Nondepreciable machinery and equipment (parts and spares)
|
|
|
2,357
|
|
|
|
1,965
|
|
|
|
Construction-in-process
|
|
|
1,184
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,899
|
|
|
$
|
63,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in machinery and equipment and buildings above at
December 31, 2006, is $1,403,000 of capitalized interest
for the new paper machine.
42
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
Long-term debt at December 31 consists of:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ thousands)
|
|
|
Revolving line of credit, maturing on April 9, 2010
|
|
$
|
791
|
|
|
$
|
5,060
|
|
Term Loan B, maturing on April 9, 2011, due in monthly
installments of $292,000, including interest
|
|
|
14,864
|
|
|
|
|
|
Term Loan A, maturing on April 9, 2017, due in monthly
installments of $83,000, including interest, beginning in May
2009
|
|
|
10,000
|
|
|
|
|
|
Term note, due in monthly installments of $224,000, including
interest
|
|
|
|
|
|
|
11,779
|
|
Construction loan, converted to term note, due in monthly
installments of $192,000, including interest
|
|
|
|
|
|
|
14,923
|
|
Subordinated debentures, retired in 2007
|
|
|
|
|
|
|
2,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,655
|
|
|
|
33,838
|
|
Less current portion
|
|
|
2,391
|
|
|
|
2,263
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,264
|
|
|
$
|
31,575
|
|
|
|
|
|
|
|
|
|
|
The annual maturities of all debt are as follows:
|
|
|
|
|
|
|
Annual
|
|
|
|
Payment
|
|
Year
|
|
Amount
|
|
|
|
($ thousands)
|
|
|
2008
|
|
|
2,391
|
|
2009
|
|
|
2,757
|
|
2010
|
|
|
3,862
|
|
2011
|
|
|
7,451
|
|
2012
|
|
|
345
|
|
after 2012
|
|
|
8,849
|
|
|
|
|
|
|
|
|
$
|
25,655
|
|
|
|
|
|
|
On April 9, 2007, the Company re-financed its existing
credit facility with the existing bank group. The credit
facility consists of the following:
a $6.0 million revolving credit facility with a
3-year term
($791,000 outstanding at December 31, 2007, including
$498,000 of bank overdrafts);
a $10.0 million Term Loan A with a ten-year term, no
principal repayments for the first 24 months and then will
be amortized as if it had an
18-year life
($10.0 million outstanding at December 31, 2007);
a $16.5 million Term Loan B with a four year-term and is
being amortized as if it had a six-year life ($14.9 million
outstanding at December 31, 2007); and
a $3.0 million capital expenditures facility with a
four-year term that will be amortized as if it had a five-year
life ($0 outstanding at December 31, 2007).
Under the terms of the credit agreement, amounts outstanding
under the revolving credit facility 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 bear interest at LIBOR plus a margin. The
margin is set quarterly and based on the ratio of funded debt to
EBITDA less income taxes paid. Amounts outstanding under Term
Loan A bear interest at LIBOR
43
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
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 weighted average interest rate on the
revolving credit and term loans was 7.46% at December 31,
2007.
The credit agreement contains restrictive covenants that include
requirements to maintain certain financial ratios, restricts
capital expenditures and the payment of dividends. Under the
credit agreement effective April 9, 2007, the Company is
required to maintain a Funded Debt to EBITDA ratio no greater
than 4.0-to-1.0 and a Debt Service Coverage Ratio of at least
1.25-to-1.0. On March 6, 2008, the credit facility was
amended to increase the revolving credit facility to
$8.0 million and to increase the capital expenditures limit
for 2008 to $6.25 million. The limit on unfinanced annual
capital expenditures reverts to $1.5 million in 2009 and
subsequent periods.
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 through March 1, 2009. 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
was amortized over the life of the debentures utilizing the
effective interest rate of 14.6%. The Company recorded $74,000,
$27,000 and $24,000 as interest expense related to amortization
of the discount during the years ended December 31, 2007,
2006 and 2005, respectively. The debentures were retired in
December 2007, but the warrants remain outstanding.
The fair value of the warrants was estimated on the date of
issuance using the Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate
of 4%; expected dividend yield of 0%; expected lives of
5 years; and estimated volatility of 48%.
Significant components of the Companys deferred income tax
assets and liabilities at December 31 were:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ thousands)
|
|
|
Deferred income taxes current Inventories
|
|
$
|
419
|
|
|
$
|
311
|
|
Prepaid expenses
|
|
|
(133
|
)
|
|
|
(125
|
)
|
Accounts receivable
|
|
|
38
|
|
|
|
38
|
|
Accrued vacation
|
|
|
192
|
|
|
|
122
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets current
|
|
$
|
516
|
|
|
$
|
346
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes noncurrent Plant and equipment
|
|
$
|
(12,289
|
)
|
|
$
|
(8,810
|
)
|
Federal NOL Carryforward
|
|
|
2,031
|
|
|
|
367
|
|
State NOL Carryforward, net of Federal tax effect
|
|
|
271
|
|
|
|
81
|
|
State Investment Tax Credit Carryforward, net of Federal tax
effect
|
|
|
1,234
|
|
|
|
730
|
|
Indian Employment Credit Carryforward
|
|
|
917
|
|
|
|
647
|
|
Alternative Minimum Tax Credit Carryforward
|
|
|
151
|
|
|
|
76
|
|
Non-qualified Stock Option Benefits
|
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities noncurrent
|
|
$
|
(7,386
|
)
|
|
$
|
(6,909
|
)
|
|
|
|
|
|
|
|
|
|
44
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
The Company has a federal net operating loss carryforward of
$6,199,000 for regular tax purposes ($6,631,000 for purposes of
the Alternative Minimum Tax) as of December 31, 2007. 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 ($6,620,000) and for the Oklahoma
Investment Tax Credit ($1,871,000), mostly associated with the
Companys $36 million 2006 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 has an Indian Employment Credit (IEC) carryforward
dating back to 2004. 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 $917,000 at December 31,
2007.
The following table summarizes the differences between the
U.S. federal statutory rate and the Companys
effective tax rate for financial statement purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State income taxes, net of U.S. federal tax benefit
|
|
|
4.1
|
%
|
|
|
11.9
|
%
|
|
|
1.2
|
%
|
Indian employment credits
|
|
|
(5.6
|
)%
|
|
|
(87.5
|
)%
|
|
|
(5.7
|
)%
|
Employee and board stock compensation
|
|
|
(6.6
|
)%
|
|
|
52.4
|
%
|
|
|
6.9
|
%
|
State investment tax credits
|
|
|
(16.4
|
)%
|
|
|
(351.8
|
)%
|
|
|
0.0
|
%
|
Other
|
|
|
1.1
|
%
|
|
|
5.3
|
%
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.6
|
%
|
|
|
(335.7
|
)%
|
|
|
36.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7
|
Earnings
per Share
|
The computation of basic and diluted net income per share for
the years ended December 31, 2007, 2006 and 2005, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income ($ thousands)
|
|
$
|
2,598
|
|
|
$
|
732
|
|
|
$
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
6,255,877
|
|
|
|
6,234,346
|
|
|
|
4,453,254
|
|
Effect of Stock Options
|
|
|
98,475
|
|
|
|
166,527
|
|
|
|
62,441
|
|
Effect of dilutive warrants
|
|
|
110,511
|
|
|
|
157,581
|
|
|
|
78,717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding assuming dilution
|
|
|
6,464,863
|
|
|
|
6,558,454
|
|
|
|
4,594,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
|
$
|
0.12
|
|
|
$
|
0.31
|
|
Diluted
|
|
$
|
0.40
|
|
|
$
|
0.11
|
|
|
$
|
0.30
|
|
Stock Options not considered above because they were
anti-dilutive
|
|
|
33,750
|
|
|
|
11,250
|
|
|
|
|
|
45
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
Note 8
|
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.
In connection with the approval of the Plan, the Company adopted
SFAS No. 123 (R) Share-Based Payments and
expenses the cost of options granted over the vesting period of
the option based on the grant-date fair value of the award. For
the years ended December 31, 2007, 2006 and 2005, the
Company recognized an expense of $402,000, $260,000 and
$368,000, respectively.
The following table summarizes information concerning the Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Fair Value of
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Number
|
|
|
Price
|
|
|
Options
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
18,750
|
|
|
$
|
9.23
|
|
|
$
|
3.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
423,000
|
|
|
$
|
5.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
272,500
|
|
|
$
|
6.73
|
|
|
$
|
3.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(139,500
|
)
|
|
$
|
5.33
|
|
|
$
|
2.39
|
|
|
|
|
|
|
$
|
360,000
|
|
Forfeited
|
|
|
(96,000
|
)
|
|
$
|
5.33
|
|
|
$
|
2.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
460,000
|
|
|
$
|
6.35
|
|
|
$
|
2.87
|
|
|
|
8.60 years
|
|
|
$
|
1,265,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
205,000
|
|
|
$
|
6.16
|
|
|
$
|
2.72
|
|
|
|
8.28 years
|
|
|
$
|
603,000
|
|
The following table details the options granted to certain
members of the board of directors and management during 2005,
2006 and 2007 and the assumptions used in the Black-Scholes
option valuation model for those grants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant
|
|
Number
|
|
|
Exercise
|
|
|
Risk-Free
|
|
|
Estimated
|
|
|
Dividend
|
|
|
Forfeiture
|
|
|
Expected
|
|
Date
|
|
of Shares
|
|
|
Price
|
|
|
Interest Rate
|
|
|
Volatility
|
|
|
Yield
|
|
|
Rate
|
|
|
Life
|
|
|
Apr-05
|
|
|
405,000
|
|
|
$
|
5.33
|
|
|
|
3.92
|
%
|
|
|
40
|
%
|
|
|
None
|
|
|
|
0
|
%
|
|
|
5-7 years
|
|
Sep-05
|
|
|
11,250
|
|
|
$
|
6.53
|
|
|
|
4.03
|
%
|
|
|
42
|
%
|
|
|
None
|
|
|
|
0
|
%
|
|
|
5 years
|
|
Feb-06
|
|
|
3,750
|
|
|
$
|
7.61
|
|
|
|
4.56
|
%
|
|
|
41
|
%
|
|
|
None
|
|
|
|
0
|
%
|
|
|
5 years
|
|
Jun-06
|
|
|
11,250
|
|
|
$
|
10.05
|
|
|
|
4.97
|
%
|
|
|
40
|
%
|
|
|
None
|
|
|
|
0
|
%
|
|
|
5 years
|
|
Dec-06
|
|
|
3,750
|
|
|
$
|
8.37
|
|
|
|
4.49
|
%
|
|
|
40
|
%
|
|
|
None
|
|
|
|
0
|
%
|
|
|
5 years
|
|
Feb-07
|
|
|
3,750
|
|
|
$
|
8.58
|
|
|
|
4.83
|
%
|
|
|
40
|
%
|
|
|
None
|
|
|
|
0
|
%
|
|
|
5 years
|
|
Jun-07
|
|
|
28,750
|
|
|
$
|
5.18
|
|
|
|
5.09
|
%
|
|
|
38
|
%
|
|
|
None
|
|
|
|
0
|
%
|
|
|
5 years
|
|
Aug-07
|
|
|
225,000
|
|
|
$
|
6.81
|
|
|
|
4.63
|
%
|
|
|
40
|
%
|
|
|
None
|
|
|
|
0
|
%
|
|
|
5-7 years
|
|
Oct-07
|
|
|
15,000
|
|
|
$
|
8.05
|
|
|
|
4.47
|
%
|
|
|
41
|
%
|
|
|
None
|
|
|
|
0
|
%
|
|
|
5-7 years
|
|
46
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
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, 2007, there was $64,000 of unrecognized
compensation expense related to non-vested share-based
compensation arrangements under the Plan for the management
grants in 2005. That cost is expected to be recognized on a
straight-line basis over a period of 1.25 years. In
addition, as of December 31, 2007 there was $560,000 of
unrecognized compensation expense related to non-vested
share-based compensation for the 2007 management grants. That
cost is expected to be recognized on a straight-line basis over
a period of 3.67 years.
|
|
Note 9
|
Major
Customers and Concentration of Credit Risk
|
Credit risk for the Company is concentrated in three major
converted product customers, each of whom operates discount
retail stores located throughout the United States and one
customer who accounts for most of the Companys third-party
sales of parent rolls. During the years ended December 31,
2007, 2006 and 2005, sales to the four significant customers
accounted for approximately 68%, 65% and 69% of the
Companys total sales, respectively. At December 31,
2007, and 2006, approximately $4,047,000 (72%) and $3,742,000
(72%), respectively, of accounts receivable was due from the
four 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.
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
$816,000 and $1,538,000 December 31, 2007 and 2006,
respectively.
|
|
Note 10
|
Employee
Incentive Bonus and Retirement Plans
|
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 $244,000, $232,000 and $212,000
for the years ended December 31, 2007, 2006 and 2005,
respectively.
|
|
Note 11
|
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 and
2005, the Company paid $125,000 and $375,000, 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 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.
47
ORCHIDS
PAPER PRODUCTS COMPANY
NOTES TO
FINANCIAL STATEMENTS (Continued)
|
|
Note 12
|
Selected
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Sales
|
|
$
|
16,637
|
|
|
$
|
18,515
|
|
|
$
|
19,218
|
|
|
$
|
20,278
|
|
Gross Profit
|
|
$
|
1,732
|
(1)
|
|
$
|
2,753
|
(1)
|
|
$
|
3,221
|
(1)
|
|
$
|
3,225
|
|
Operating Income
|
|
$
|
673
|
|
|
$
|
1,583
|
|
|
$
|
1,925
|
|
|
$
|
1,516
|
|
Net Income (Loss)
|
|
$
|
(131
|
)
|
|
$
|
743
|
|
|
$
|
1,136
|
|
|
$
|
850
|
|
Basic Earnings (Loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.12
|
|
|
$
|
0.18
|
|
|
$
|
0.14
|
|
Diluted Earnings (Loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
0.12
|
|
|
$
|
0.17
|
|
|
$
|
0.13
|
|
Price per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
8.65
|
|
|
$
|
7.08
|
|
|
$
|
8.78
|
|
|
$
|
9.85
|
|
Low
|
|
$
|
6.67
|
|
|
$
|
5.01
|
|
|
$
|
5.25
|
|
|
$
|
7.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
1,351
|
(1)
|
|
$
|
788
|
(1)
|
|
$
|
1,670
|
(1)
|
|
$
|
2,392
|
(1)
|
Operating Income (Loss)
|
|
$
|
315
|
|
|
$
|
(275
|
)
|
|
$
|
733
|
|
|
$
|
1,276
|
|
Net Income (Loss)
|
|
$
|
182
|
|
|
$
|
(293
|
)
|
|
$
|
(151
|
)
|
|
$
|
994
|
|
Basic Earnings (Loss) per share
|
|
$
|
0.03
|
(2)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.16
|
|
Diluted Earnings (Loss) per share
|
|
$
|
0.03
|
(2)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.15
|
|
Price per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
9.31
|
(2)
|
|
$
|
10.53
|
|
|
$
|
11.36
|
|
|
$
|
9.34
|
|
Low
|
|
$
|
6.70
|
(2)
|
|
$
|
9.00
|
|
|
$
|
8.99
|
|
|
$
|
8.20
|
|
|
|
|
(1) |
|
Gross Profit has been restated to reflect reclassification of
certain costs from SG&A to Cost of Sales. |
|
(2) |
|
Earnings per share and Price per common share have been restated
to reflect the
3-for-2
stock split effected in July 2006. |
48
|
|
Item 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
Item 9A.
|
CONTROLS
AND PROCEDURES
|
|
|
(a)
|
Evaluation
of Disclosure Controls and Procedures:
|
We maintain disclosure controls and procedures, as
such term is defined in
Rule 13a-15(e)
and
Rule 15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange
Act), that are designed to ensure that information
required to be disclosed in reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange
Commission rules and forms, and that such information is
collected and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. In
designing and evaluating our disclosure controls and procedures,
management recognized that no matter how well conceived and
operated, disclosure controls and procedures can provide only
reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Our disclosure
controls and procedures have been designed, and management
believes that they meet, reasonable assurance standards. Based
on their evaluation as of the end of the period covered by this
Annual Report on
Form 10-K,
the Chief Executive Officer and the Chief Financial Officer have
concluded that, subject to the limitations noted above, our
disclosure controls and procedures were effective.
|
|
(b)
|
Managements
Report on Internal Control Over Financial
Reporting
|
The management of Orchids Paper Products Company is responsible
for establishing and maintaining adequate internal control over
financial reporting. Our internal control system was designed to
provide reasonable assurance to our management and board of
directors regarding the preparation and fair presentation of
published financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2007.
In making this assessment, we used the criteria set forth in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our assessment, we believe that, as of
December 31, 2007, the companys internal control over
financial reporting was effective based on those criteria.
The effectiveness of our internal control over financial
reporting as of December 31, 2007 has been audited by
Tullius, Taylor, Sartain and Sartain, LLP, an independent
registered public accounting firm, as stated in their report
which is included in this
Form 10-K.
|
|
(c)
|
Changes
in Internal Control Over Financial Reporting
|
As of the quarter ended December 31, 2007, there were no
changes in our internal control over financial reporting (as
defined in
Rule 13a-15(f)
under the Exchange Act) that have materially affected, or are
reasonably likely to affect, our internal control over financial
reporting.
|
|
Item 9B.
|
OTHER
INFORMATION
|
None.
49
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
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.
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Item 11.
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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.
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Item 12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
Information concerning security ownership of certain beneficial
owners and management is contained in the Companys Proxy
Statement under the caption SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS, which information is incorporated
herein by reference.
Securities
Authorized for Issuance Under Equity Compensation Plan
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Number of Securities
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Remaining Available for
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Future Issuance Under
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Number of Securities to
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Weighted-Average
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Equity Compensation
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be Issued Upon Exercise
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Exercise Price of
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Plans (Excluding
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of Outstanding Options
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Outstanding Options,
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Securities Reflected in
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Warrants and Rights
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Warrants and Rights
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Column (a)
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Plan Category
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(a)
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(b)
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(c)
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Equity compensation Plans approved by security holders
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460,000
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$
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6.35
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98,000
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Equity compensation plans not approved by security holders
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225,000
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$
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6.40
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|
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Total
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685,000
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98,000
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50
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Item 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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Information concerning certain relationships and related
transactions 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.
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Item 14.
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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
Registered Public Accounting Firm, which information
is incorporated herein by reference.
PART IV
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Item 15.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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(a)(1) Financial Statements
The information required by this item is included in Item 8
of Part II of this report.
(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.
51
Orchids
Paper Products Company
Schedule II Valuation and Qualifying
Accounts
Years ended December 31, 2007, 2006 and 2005
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Balance at
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Additions Charged
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Deductions
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Balance at
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Beginning of
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(Credited) to Costs
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Describe
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End of
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Period
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and Expenses
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(1)(2)
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Period
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(In thousands)
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Accounts Receivable Reserve:
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Year ended December 31, 2007
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Bad Debt Reserve
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$
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100
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$
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$
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$
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100
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Year ended December 31, 2006
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Bad Debt Reserve
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$
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125
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$
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(19
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)
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$
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6
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$
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100
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Year ended December 31, 2005
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|
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|
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Bad Debt Reserve
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$
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90
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$
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46
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$
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11
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$
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125
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Inventory Valuation Reserve:
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Year ended December 31, 2007
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Inventory Valuation Reserve
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$
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25
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$
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33
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$
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26
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$
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32
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|
Year ended December 31, 2006
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Inventory Valuation Reserve
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$
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24
|
|
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$
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45
|
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$
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44
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$
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25
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Year ended December 31, 2005
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|
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Inventory Valuation Reserve
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$
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39
|
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$
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$
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15
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$
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24
|
|
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(1) |
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Write-off of uncollectible accounts, net of recoveries |
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(2) |
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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.
52
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
Robert A. Snyder
Chief Executive Officer
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By:
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/s/ Keith
R. Schroeder
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Keith R. Schroeder
Chief Financial Officer
Date: March 18, 2008
POWER OF
ATTORNEY
Each person whose signature appears below hereby constitutes and
appoints Robert A Snyder 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.
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Signatures
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Title
|
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Date
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|
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/s/ Jay
Shuster
Jay
Shuster
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Chairman of the Board of Directors
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March 18, 2008
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/s/ Robert
A. Snyder
Robert
A. Snyder
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Chief Executive Officer
(Principal Executive Officer)
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March 18, 2008
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/s/ Gary
P. Arnold
Gary
P. Arnold
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Director
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March 18, 2008
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/s/ Steven
Berlin
Steven
Berlin
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Director
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March 18, 2008
|
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/s/ John
G. Guttilla
John
G. Guttilla
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Director
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March 18, 2008
|
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/s/ Douglas
E. Hailey
Douglas
E. Hailey
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Director
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March 18, 2008
|
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/s/ Jeff
Schoen
Jeff
Schoen
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Director
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|
March 18, 2008
|
|
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/s/ Keith
R. Schroeder
Keith
R. Schroeder
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|
Chief Financial Officer
(Principal Financial and
Accounting Officer)
|
|
March 18, 2008
|
53
Exhibit Index
(c) EXHIBITS
|
|
|
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|
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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.
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|
3
|
.1.1
|
|
Certificate of Amendment to Amended and Restated Certificate of
Incorporation of the Registrant, incorporated by reference to
Orchids Paper Products Company
Form 10-Q
(File
No. 001-32563)
dated August 14, 2007, exhibit 3.1.1.
|
|
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 October 31, 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.
|
|
10
|
.12
|
|
Second Amended and Restated Agented Credit Agreement, dated as
of April 9, 2007, among the Registrant, Bank of Oklahoma,
N.A., BancFirst and Commerce Bank, N.A., incorporated by
reference to Orchids Paper Products Company
Form 8-K
(File
No. 001-32563)
dated April 23, 2007, exhibit 10.1.
|
|
10
|
.13
|
|
Amendment One to Second Amended and Restated Agented Credit
Agreement dated October 25, 2007 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 5, 2007, exhibit 10.2.
|
|
10
|
.14#
|
|
Employment Agreement dated August 20, 2007, between Robert
A. Snyder and the Registrant, incorporated by reference to
Orchids Paper Products Company
Form 8-K
(File
No. 001-32563)
dated August 22, 2007, exhibit 10.1.
|
|
10
|
.15
|
|
Amendment Two to Second Amended and Restated Agented Credit
Agreement dated March 6, 2008 among the Registrant, Bank of
Oklahoma, N.A., BancFirst and Commerce Bank, N.A., incorporated
by reference to Orchids Paper Products Company
Form 8-K
(File
No. 001-32563)
dated March 11, 2008, exhibit 10.1.
|
|
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 |
54