##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 001-32563
 Orchids Paper Products Company
  Delaware
    
    23-2956944(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer
Identification No.)
 4826 Hunt Street
Pryor, Oklahoma 74361
 (918) 825-0616
 o þ
 o þ
 o þ




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##### Table of Contents



ORCHIDS
PAPER PRODUCTS COMPANY
 TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 2005
 PagePART I. FINANCIAL INFORMATIONITEM 1.
    
    Financial StatementsBalance Sheets as of June 30, 2005 (Unaudited) and December 31, 2004
    
    
    3Statements of Income for the three months ended June 30, 2005 and 2004 (Unaudited), the six months ended June 30, 2005 (Unaudited), the two months ended February 29, 2004 and the four months ended June 30, 2004 (Unaudited)
    
    
    4Statements of Cash Flow for the six months ended June 30, 2005 (Unaudited), the two months ended February 29, 2004 and the four months ended June 30, 2004 (Unaudited)
    
    
    5Notes to Unaudited Interim Financial Statements
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    10ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    25ITEM 4.
    
    Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    26ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    27ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    27ITEM 5.
    
    Other Information
    
    
    27ITEM 6.
    
    Exhibits
    
    
    27Signatures
    
    
    28CertificationCertificationCertificationCertification
 2




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##### Table of Contents



PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ORCHIDS PAPER PRODUCTS COMPANY
 
 BALANCE SHEETS
 As ofJune 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)Current assets:Cash
    
    $
    20,143
    
    
    $
    485,406Accounts receivable, net of allowance of $121,161
in 2005 and $90,000 in 2004
    
    
    3,787,724
    
    
    
    3,608,623Inventories, net
    
    
    4,383,665
    
    
    
    3,047,788Investments
    
    
    
    
    
    
    750,000Income taxes receivable
    
    
    180,742
    
    
    
    281,715Prepaid expenses
    
    
    544,967
    
    
    
    329,916Deferred income taxes
    
    
    191,000
    
    
    
    136,000Total current assets
    
    
    9,108,241
    
    
    
    8,639,448Property, plant and equipment
    
    
    33,703,726
    
    
    
    25,780,635Accumulated depreciation
    
    
    (2,042,269
    )
    
    
    (1,288,305
    )Net property, plant and equipment
    
    
    31,661,457
    
    
    
    24,492,330Deferred debt issuance costs, net of accumulated
amortization of $64,370 in 2005 and $42,129 in 2004
    
    
    189,310
    
    
    
    275,270Total assets
    
    $
    40,959,008
    
    
    $
    33,407,048Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    2,286,348
    
    
    $
    2,179,847Accrued liabilities
    
    
    5,569,430
    
    
    
    1,248,742Unrealized loss on forward currency exchange contracts
    
    
    373,554
    
    
    
    Current portion of long-term debt
    
    
    1,862,106
    
    
    
    1,812,348Total current liabilities
    
    
    10,091,438
    
    
    
    5,240,937Long-term debt (net of unamortized discount of $112,997
in 2005 and $125,382 in 2004)
    
    
    17,026,172
    
    
    
    15,144,971Deferred income taxes
    
    
    6,199,000
    
    
    
    6,080,000Stockholders equity:Common stock, $.001 par value, 10,000,000 shares
authorized, 2,000,0000 issued and outstanding
    
    
    2,000
    
    
    
    2,000Additional paid-in capital
    
    
    5,746,659
    
    
    
    5,504,604Common stock warrants
    
    
    140,609
    
    
    
    140,609Retained earnings
    
    
    1,753,130
    
    
    
    1,293,927Total stockholders equity
    
    
    7,642,398
    
    
    
    6,941,140Total liabilities and stockholders equity
    
    $
    40,959,008
    
    
    $
    33,407,048
  3




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##### Table of Contents



ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF INCOME
 Successor
    
    
    Successor
    
    
    Predecessor
    
    
    SuccessorTwo Months
    
    
    Four MonthsSix Months Ended
    
    
    Ended
    
    
    EndedThree Months Ended June 30,
    
    
    June 30,
    
    
    February 29,
    
    
    June 30,2004
    
    
    2004
    
    
    2005
    
    
    2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    
    
    
    
    (Unaudited)Net sales
    
    $
    13,680,847
    
    
    $
    9,843,637
    
    
    $
    26,223,107
    
    
    $
    7,191,039
    
    
    $
    12,697,999Cost of sales
    
    
    11,699,423
    
    
    
    8,359,676
    
    
    
    22,424,689
    
    
    
    6,155,905
    
    
    
    10,765,373Gross profit
    
    
    1,981,424
    
    
    
    1,483,961
    
    
    
    3,798,418
    
    
    
    1,035,134
    
    
    
    1,932,626Selling, general and administrative expenses
    
    
    1,207,992
    
    
    
    802,078
    
    
    
    2,167,054
    
    
    
    1,196,698
    
    
    
    1,228,962Operating income (loss)
    
    
    773,432
    
    
    
    681,883
    
    
    
    1,631,364
    
    
    
    (161,564
    )
    
    
    703,664Interest expense
    
    
    373,710
    
    
    
    297,146
    
    
    
    743,285
    
    
    
    45,421
    
    
    
    393,631Other (income) expense, net
    
    
    154,122
    
    
    
    (448
    )
    
    
    148,780
    
    
    
    (311
    )
    
    
    (763
    )Income (loss) before income taxes
    
    
    245,600
    
    
    
    385,185
    
    
    
    739,299
    
    
    
    (206,674
    )
    
    
    310,796Provision (benefit) for income taxes:Current
    
    
    124,267
    
    
    
    93,581
    
    
    
    216,095
    
    
    
    (46,280
    )
    
    
    100,562Deferred
    
    
    7,718
    
    
    
    34,169
    
    
    
    64,000
    
    
    
    111,977
    
    
    
    36,718131,985
    
    
    
    127,750
    
    
    
    280,095
    
    
    
    65,697
    
    
    
    137,280Net income (loss)
    
    $
    113,615
    
    
    $
    257,435
    
    
    $
    459,204
    
    
    ($
    272,371
    )
    
    $
    173,516Net income (loss) per share:Basic
    
    $
    0.06
    
    
    $
    0.13
    
    
    $
    0.23
    
    
    
    
    
    
    $
    0.09Diluted
    
    $
    0.05
    
    
    $
    0.13
    
    
    $
    0.22
    
    
    
    
    
    
    $
    0.08Shares used in calculating net income (loss) per
share:Basic
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    
    
    
    
    2,000,000Diluted
    
    
    2,102,978
    
    
    
    2,052,538
    
    
    
    2,077,897
    
    
    
    
    
    
    
    2,052,538
  4




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ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF CASH FLOWS
 Successor
    
    
    Predecessor
    
    
    SuccessorSix Months
    
    
    Two Months
    
    
    Four MonthsEnded
    
    
    Ended
    
    
    EndedJune 30,
    
    
    February 29,
    
    
    June 30,2005
    
    
    2004
    
    
    2004(Unaudited)
    
    
    
    
    
    
    (Unaudited)Cash Flows From Operating ActivitiesNet income (loss)
    
    $
    459,204
    
    
    $
    (272,371
    )
    
    $
    173,516Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    839,472
    
    
    
    385,612
    
    
    
    478,005Provision for doubtful accounts
    
    
    31,161
    
    
    
    5,000
    
    
    
    1,935Deferred income taxes
    
    
    64,000
    
    
    
    111,977
    
    
    
    36,718Employee stock compensation
    
    
    
    
    
    
    
    
    
    
    103,106Stock option plan expense
    
    
    242,054Unrealized loss on foreign exchange contracts
    
    
    373,554
    
    
    
    
    
    
    
    Changes in cash due to changes in operating assets
and liabilities; net of acquisition:Accounts receivable, net
    
    
    (210,262
    )
    
    
    (347,626
    )
    
    
    907,007Escrow funds receivable
    
    
    
    
    
    
    
    
    
    
    (616,593
    )Inventories
    
    
    (1,335,877
    )
    
    
    344,106
    
    
    
    262,698Prepaid expenses
    
    
    (215,051
    )
    
    
    49,495
    
    
    
    112,602Income taxes receivable
    
    
    100,973
    
    
    
    (49,057
    )
    
    
    (271,915
    )Accounts payable
    
    
    106,501
    
    
    
    133,589
    
    
    
    131,957Accrued liabilities
    
    
    (185,390
    )
    
    
    486,356
    
    
    
    (209,421
    )Net cash provided by operating activities
    
    
    270,339
    
    
    
    847,081
    
    
    
    1,109,615Cash Flows From Investing ActivitiesAcquisition of business, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (14,506,073
    )Proceeds from the sale of investment securities
    
    
    750,000
    
    
    
    
    
    
    
    Purchases of property, plant and equipment
    
    
    (3,416,561
    )
    
    
    (112,054
    )
    
    
    (83,332
    )Net cash used in investing activities
    
    
    (2,666,561
    )
    
    
    (112,054
    )
    
    
    (14,589,405
    )Cash Flows From Financing ActivitiesProceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    6,050,000Cost of common stock and warrants issued
    
    
    
    
    
    
    
    
    
    
    (646,502
    )Proceeds from issuance of subordinated debt and
common stock warrants
    
    
    
    
    
    
    
    
    
    
    2,150,000Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    13,500,000Principal payments on long-term debt
    
    
    (835,669
    )
    
    
    (445,142
    )
    
    
    (7,486,734
    )Borrowings on line of credit
    
    
    2,766,628
    
    
    
    
    
    
    
    Deferred debt issuance cost
    
    
    
    
    
    
    
    
    
    
    (317,399
    )Net cash provided by (used in) financing activities
    
    
    1,930,959
    
    
    
    (445,142
    )
    
    
    13,249,365Net increase (decrease) in cash
    
    
    (465,263
    )
    
    
    289,885
    
    
    
    (230,425
    )Cash, beginning
    
    
    485,406
    
    
    
    199,791
    
    
    
    489,676Cash, ending
    
    $
    20,143
    
    
    $
    489,676
    
    
    $
    259,251Supplemental Disclosure:Interest paid
    
    $
    674,606
    
    
    $
    48,156
    
    
    $
    298,172Income taxes paid
    
    $
    115,122
    
    
    $
    
    
    
    $
    499,700Supplemental Disclosure of Non-Cash Investing and
Financing Activities:Contractual obligation for purchase of paper machine
    
    $
    4,506,530
    
    
    $
    
    
    
    $
    
  5




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ORCHIDS PAPER PRODUCTS COMPANY
 
 NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
 Note 1
 Basis of Presentation, Business
 Basis of Presentation
   Note 2
 Purchase Commitment and Foreign Currency Derivatives
   6




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Note 3
 Credit Agreements
     Note 4
 Stock Split
  Note 5
 Earnings per Share
  7




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Three
    
    
    Three
    
    
    Six
    
    
    FourMonths
    
    
    Months
    
    
    Months
    
    
    MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    June 30,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net Income (loss)
    
    $
    113,615
    
    
    $
    257,435
    
    
    $
    459,204
    
    
    $
    173,516Weighted average shares
outstanding
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    2,000,000Effect of Stock Options
    
    
    50,440
    
    
    
    
    
    
    
    25,359
    
    
    
    Effect of dilutive warrants
    
    
    52,538
    
    
    
    52,538
    
    
    
    52,538
    
    
    
    52,538Weighted average shares
outstanding  assuming
dilution
    
    
    2,102,978
    
    
    
    2,052,538
    
    
    
    2,077,897
    
    
    
    2,052,538Earnings per common share:Basic
    
    $
    .06
    
    
    $
    .13
    
    
    $
    .23
    
    
    $
    .09Diluted
    
    $
    .05
    
    
    $
    .13
    
    
    $
    .22
    
    
    $
    .08
 Note 6
 Stock Incentive Plan
    WeightedWeighted
    
    
    Average FairAverage
    
    
    Value ofExercise
    
    
    OptionsNumber
    
    
    Price
    
    
    GrantedBalance, December 31, 2004
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    270,000
    
    
    $
    8.00
    
    
    $
    3.58Balance, June 30, 2005
    
    
    270,000
    
    
    $
    8.00
    
    
    
    Exercisable at June 30, 2005
    
    
    54,000
    
    
    
    
    
    
    
    Exercisable at June 30, 2006
    
    
    108,000
    
    
    
    
    
    
    
    Exercisable at June 30, 2007
    
    
    162,000
    
    
    
    
    
    
    
    Exercisable at June 30, 2008
    
    
    216,000
    
    
    
    
    
    
    
    Exercisable at June 30, 2009
    
    
    270,000
    
    
    
    
    
    
    
    
 8




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Note 7
 Subsequent Event
  Note 8
 New Accounting Standards
    9




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Information
  .
    
    our business strategy;.
    
    our value proposition;.
    
    the market opportunity for our products, including expected demand for our products;.
    
    our estimates regarding our capital requirements; and.
    
    any of our other plans, objectives, and intentions contained in this report that are not
historical facts.
   .
    
    we face intense competition in our market and our profitability would be reduced if
aggressive pricing by our competitors forces us to decrease our prices;.
    
    a substantial portion of our revenues are attributable to two large customers which may
decrease or cease purchases at any time;.
    
    our new paper machine will not become fully operational until October of 2006, yet we will
incur significant indebtedness during the construction period;.
    
    because of our customer concentration and the competitive, price-driven nature of our
business, we have experienced material decreases in our revenue in the past as a result of losing
supply arrangements with certain customers and with certain distribution centers of certain
customers and we are at risk of experiencing such losses again in the future;.
    
    impairment of ability to meet our obligations and restrictions on future operations due to
our substantial debt;
 10




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.
    
    cost overruns in connection with our project to expand our paper mill through the purchase
of a new paper machine;.
    
    the loss of key personnel;.
    
    disruption in supply or cost of waste paper;.
    
    availability and price of energy;.
    
    labor interruptions;.
    
    natural disaster or other disruption to our facility;.
    
    ability to finance the capital requirements of our business;.
    
    cost to comply with government regulations;.
    
    increased expenses and administrative workload associated with being a public company; and.
    
    failure to maintain an effective system of internal controls necessary to accurately report
our financial results and prevent fraud.
  Overview
    11




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Comparative Three-Month Periods Ended June 30, 2005 and 2004
 Net Sales
 Three Months Ended June 30,2005
    
    
    2004(in thousands, except Average Price per Case)Net Sales
    
    $
    13,681
    
    
    $
    9,844Cases shipped
    
    
    1,267
    
    
    
    851Average Price per Case
    
    $
    10.80
    
    
    $
    11.57
  Cost of Sales
 Three Months Ended June 30,2005
    
    
    2004(in thousands, except Gross Profit %)Cost of Paper
    
    $
    6,929
    
    
    $
    3,991Non-paper materials, labor supplies, etc.
    
    
    4,337
    
    
    
    3,840Operating lease payments
    
    
    
    
    
    
    193Sub-total
    
    
    11,266
    
    
    
    8,024Depreciation
    
    
    433
    
    
    
    336Cost of Sales
    
    $
    11,699
    
    
    $
    8,360Gross Profit
    
    $
    1,982
    
    
    $
    1,484Gross Profit Margin %
    
    
    14.5
    %
    
    
    15.1
    %
 12




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Three Months Ended June 30,2005
    
    
    2004Paper usage (tons)Manufactured
    
    
    6,723
    
    
    
    5,843Purchased
    
    
    1,903
    
    
    
    0Converted
    
    
    8,626
    
    
    
    5,843Paper Costs per tonCost per ton produced internally
    
    $
    730
    
    
    $
    683Cost per ton purchased from third parties
    
    $
    1,062
    
    
    $
    Total cost per ton consumed
    
    $
    803
    
    
    $
    683Total paper costs (in thousands)Cost of internally produced paper
    
    $
    4,908
    
    
    $
    3,991Cost of paper purchased by third parties
    
    
    2,021
    
    
    
    Total paper costs
    
    $
    6,929
    
    
    $
    3,991
  Gross Profit
  13




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Selling, General and Administrative Expenses
 Three Months Ended June 30,2005
    
    
    2004(in thousands, except SG&A as a % of net sales)Selling, General and Adm Exp
    
    $
    1,208
    
    
    $
    802SG&A as a % of net sales
    
    
    8.8
    %
    
    
    8.1
    %
  Operating Income
  Interest and Other Expense
 Three Months Ended June 30,2005
    
    
    2004(in thousands)Interest Expense
    
    $
    374
    
    
    $
    297Other Expense (Income)
    
    
    154
    
    
    
    
   14




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Income Before Income Taxes
  Income Tax Provision
  Comparative Six-Month Periods Ended June 30, 2005 and 2004
 Net Sales
 Successor
    
    
    Predecessor
    
    
    Successor
    
    
    CombinedSix Months
    
    
    Two Months
    
    
    Four Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    February 29,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2004
    
    
    2004(in thousands, except Average Price per Case)Net Sales
    
    $
    26,223
    
    
    $
    7,191
    
    
    $
    12,698
    
    
    $
    19,889Cases shipped
    
    
    2,410
    
    
    
    641
    
    
    
    1,100
    
    
    
    1,741Average Price per Case
    
    $
    10.88
    
    
    $
    11.22
    
    
    $
    11.54
    
    
    $
    11.42
  15




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Cost of Sales
 Successor
    
    
    Predecessor
    
    
    Successor
    
    
    CombinedSix Months
    
    
    Two Months
    
    
    Four Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    February 29,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2004
    
    
    2004(in thousands, except Gross Profit %)Cost of Paper
    
    $
    13,994
    
    
    $
    3,229
    
    
    $
    5,542
    
    
    $
    8,771Non-paper materials, labor supplies, etc.
    
    
    7,677
    
    
    
    2,350
    
    
    
    4,393
    
    
    
    6,743Operating lease payments
    
    
    
    
    
    
    193
    
    
    
    383
    
    
    
    576Sub-total
    
    
    21,671
    
    
    
    5,772
    
    
    
    10,318
    
    
    
    16,090Depreciation
    
    
    754
    
    
    
    384
    
    
    
    447
    
    
    
    831Cost of Sales
    
    $
    22,425
    
    
    $
    6,156
    
    
    $
    10,765
    
    
    $
    16,921Gross Profit
    
    $
    3,798
    
    
    $
    1,035
    
    
    $
    1,933
    
    
    $
    2,968Gross Profit Margin %
    
    
    14.5
    %
    
    
    14.4
    %
    
    
    15.2
    %
    
    
    14.9
    %
  Successor
    
    
    Predecessor
    
    
    Successor
    
    
    CombinedSix Months
    
    
    Two Months
    
    
    Four Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    February 29,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2004
    
    
    2004Paper usage (tons)Manufactured
    
    
    12,393
    
    
    
    4,406
    
    
    
    7,940
    
    
    
    12,346Purchased
    
    
    4,815
    
    
    
    169
    
    
    
    122
    
    
    
    291Converted
    
    
    17,208
    
    
    
    4,575
    
    
    
    8,062
    
    
    
    12,637Paper Costs per tonCost per ton produced internally
    
    $
    727
    
    
    $
    703
    
    
    $
    686
    
    
    $
    692Cost per ton purchased from third parties
    
    $
    1,035
    
    
    $
    781
    
    
    $
    782
    
    
    $
    781Total cost per ton consumed
    
    $
    813
    
    
    $
    706
    
    
    $
    687
    
    
    $
    694Total paper costs (in thousands)Cost of internally produced paper
    
    $
    9,010
    
    
    $
    3,097
    
    
    $
    5,447
    
    
    $
    8,544Cost of paper purchased by third parties
    
    
    4,984
    
    
    
    132
    
    
    
    95
    
    
    
    227Total paper costs
    
    $
    13,994
    
    
    $
    3,229
    
    
    $
    5,542
    
    
    $
    8,771
  16




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##### Table of Contents



Gross Profit
  Selling, General and Administrative Expenses
 Successor
    
    
    Predecessor
    
    
    Successor
    
    
    CombinedSix Months
    
    
    Two Months
    
    
    Four Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    February 29,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2004
    
    
    2004(in thousands, except SG&A as a % of net sales)Recurring S,G&A Expenses
    
    $
    2,167
    
    
    $
    571
    
    
    $
    1,229
    
    
    $
    1,800Management Incentive Payments
    
    
    
    
    
    
    625
    
    
    
    
    
    
    
    625Selling, General & Adm Exp
    
    $
    2,167
    
    
    $
    1,196
    
    
    $
    1,229
    
    
    $
    2,425SG&A as a % of net sales
    
    
    8.3
    %
    
    
    16.6
    %
    
    
    9.7
    %
    
    
    12.2
    %
  Operating Income
  Interest and Other Expense
 Successor
    
    
    Predecessor
    
    
    Successor
    
    
    CombinedSix Months
    
    
    Two Months
    
    
    Four Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    February 29,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2004
    
    
    2004(in thousands)Interest Expense
    
    $
    743
    
    
    $
    45
    
    
    $
    394
    
    
    $
    439Other Expense (Income)
    
    
    149
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
 17




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##### Table of Contents



Income Before Income Taxes
  Income Tax Provision
  Liquidity and Capital Resources
     18




---



##### Table of Contents



Successor
    
    
    Predecessor
    
    
    Successor
    
    
    CombinedSix Months
    
    
    Two Months
    
    
    Four Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    February 29,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2004
    
    
    2004(in thousands)Cash Flow Data:Cash Flow Provided (Used) by :Operating Activities
    
    $
    270
    
    
    $
    847
    
    
    $
    1,110
    
    
    $
    1,957Investing Activities
    
    $
    (2,666
    )
    
    $
    (112
    )
    
    $
    (14,589
    )
    
    $
    (14,701
    )Financing Activities
    
    $
    1,931
    
    
    $
    (445
    )
    
    $
    13,249
    
    
    $
    12,804
        .
    
    a $5.0 million revolving credit facility which matures on April 30, 2007, of which there was an
outstanding balance as of June 30, 2005 of $2.8 million,
 19




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##### Table of Contents



including a bank overdraft balance of
$339,000 and an eligible borrowing base of $4.0 million as of June 30, 2005;.
    
    a $14.1 million term loan which is outstanding and matures on April 30, 2007; and.
    
    a $15.0 million construction loan which matures on April 30, 2007 pursuant to which we will
receive advances which will be used in connection with the project to purchase a new paper machine.
     .
    
    the occurrence of a change in management such that Michael P. Sage is no longer our chief
executive office without the prior written consent of the banks, which consent may not be
unreasonably withheld, conditioned or delayed;.
    
    the failure to complete the new paper machine project by October 31, 2006, provided that the
agent shall not unreasonably withhold its consent to extend this date if it receives (i) a copy of
a written extension agreement of the construction contract, (ii) there is no other default under
the credit agreement and (iii) we execute any related amendments to the credit agreement or related
documents which are reasonably requested by the agent; and
 20




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##### Table of Contents



.
    
    a material variance from the plans submitted to the banks in connection with the expansion
of the paper machine facility or any work stoppage for a period of five consecutive business days,
unless the work stoppage is a result of a cause we are unable to prevent or overcome.
   Subsequent Event
    .
    
    underwriting discount of 8% or $1.4 million (charged against additional paid-in-capital);.
    
    estimated expenses of $800,000 (charged against additional paid-in-capital), including legal
fees, printing costs, accounting fees, qualified independent underwriter fees and other
miscellaneous direct expenses.
 Critical Accounting Policies and Estimates
  21




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##### Table of Contents



Accounts Receivable
 Inventory.
 New Accounting Pronouncements
     22




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##### Table of Contents



Non-GAAP Discussion
    .
    
    it does not reflect our cash expenditures for capital expenditures;.
    
    it does not reflect changes in, or cash requirements for, our working capital requirements;.
    
    it does not reflect the interest expense, or the cash requirements necessary to service interest
or principal payments on our indebtedness;.
    
    although depreciation and amortization are non-cash charges, the assets being depreciated and
amortized will often have to be replaced in the future, and EBITDA does not reflect cash
requirements for such replacements; and
 23




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##### Table of Contents



.
    
    other companies, including other companies in our industry, may calculate these measure
differently than we do, limiting their usefulness as a comparative measure.
   Three Months Ended June 30,2005
    
    
    2004(in thousands)Net Income (Loss)
    
    $
    114
    
    
    $
    257Plus: Interest expense, net
    
    
    374
    
    
    
    297Plus: Income tax expense
    
    
    132
    
    
    
    128Plus: Depreciation
    
    
    433
    
    
    
    336EBITDA
    
    $
    1,053
    
    
    $
    1,018Percent of net sales
    
    
    7.7
    %
    
    
    10.3
    %
   Successor
    
    
    Predecessor
    
    
    Successor
    
    
    CombinedSix Months
    
    
    Two Months
    
    
    Four Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedJune 30,
    
    
    February 29,
    
    
    June 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2004
    
    
    2004(in thousands)Net Income (Loss)
    
    $
    459
    
    
    $
    (272
    )
    
    $
    174
    
    
    $
    (98
    )Plus: Interest expense, net
    
    
    743
    
    
    
    45
    
    
    
    394
    
    
    
    439Plus: Income tax expense
    
    
    280
    
    
    
    66
    
    
    
    137
    
    
    
    203Plus: Depreciation
    
    
    754
    
    
    
    384
    
    
    
    447
    
    
    
    831EBITDA
    
    $
    2,236
    
    
    $
    223
    
    
    $
    1,152
    
    
    $
    1,375Percent of net sales
    
    
    8.5
    %
    
    
    3.1
    %
    
    
    9.1
    %
    
    
    6.9
    %
  24




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
  25




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 (a) Unregistered Sales of Equity Securities
  (b) Initial Public Offering and Use of Proceeds from the Sale of Registered Securities
   Underwriting discounts and commissions:
    
    $
    1,380,000Underwriters expenses:
    
    $
    0Other expenses:
    
    $
    725,000Total expenses
    
    $
    2,105,000
   26




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##### Table of Contents



(c) Repurchases of Equity Securities.
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
 April 2005 Written Consents
  
 Item 5. Other Information
 th
 
 Item 6. Exhibits
  27




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##### Table of Contents



SIGNATURES
  ORCHIDS PAPER PRODUCTS COMPANYDate: August 26, 2005
    
    
    
    By:
    
    /s/ Keith R. Schroeder.Keith R. SchroederChief Financial Officer(On behalf of the registrant and as Chief Accounting Officer)
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##### Table of Contents



Exhibit Index
 Exhibit
    
    Description3.1
    
    Amended and Restated Certificate of Incorporation of the
Registrant. Incorporated by reference to Exhibit 3.1 to the
Registrants Registration Statement on Form S-1 (File No.
333-124173) filed with the Securities and Exchange Commission on
April 19, 2005.3.2
    
    Amended and Restated Bylaws of the Registrant. Incorporated by
reference to Exhibit 3.2 to the Registrants Registration
Statement on Form S-1 (File No. 333-124173) filed with the
Securities and Exchange Commission on April 19, 2005.31.1
    
    Certification of Principal Executive Officer Pursuant to Rule
13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant to Rule
13a-15(e) or 15d-15(e) of the Exchange Act, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 29