##### 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 September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE 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
  þ o
 o þ
 o þ




---



ORCHIDS PAPER PRODUCTS COMPANY
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
 PagePART I. FINANCIAL INFORMATIONITEM 1.
    
    Financial StatementsBalance Sheets as of September 30, 2005 (Unaudited) and December 31, 2004
    
    3Statements of Income for the three months ended September 30, 2005 and 2004 (Unaudited), the
nine months ended September 30, 2005 (Unaudited), the two months
ended February 29, 2004 and the seven months ended September 30, 2004 (Unaudited)
    
    4Statements of Cash Flows for the nine months ended September 30, 2005 (Unaudited), the two
months ended February 29, 2004 and the seven months ended September 30, 2004 (Unaudited)
    
    5Notes to Unaudited Interim Financial Statements
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    10ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    24ITEM 4.
    
    Controls and Procedures
    
    24PART II. OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    25ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    25ITEM 3.
    
    Defaults Upon Senior Securities
    
    26ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    26ITEM 5.
    
    Other Information
    
    26ITEM 6.
    
    Exhibits
    
    26Signatures
    
    27Certification of CEOCertification of CFOCertification of CEOCertification of CFO
  -2-




---



##### Table of Contents



PART 1. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 ORCHIDS
PAPER PRODUCTS COMPANY
 
 BALANCE SHEETS
 As ofSeptember 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)Current assets:Cash
    
    $
    5,351
    
    
    $
    485,406Accounts receivable, net of allowance of $136,161
in 2005 and $90,000 in 2004
    
    
    4,867,873
    
    
    
    3,608,623Inventories, net
    
    
    3,956,135
    
    
    
    3,047,788Investments
    
    
    9,997,715
    
    
    
    750,000Income taxes receivable
    
    
    0
    
    
    
    281,715Prepaid expenses
    
    
    321,580
    
    
    
    329,916Deferred income taxes
    
    
    191,000
    
    
    
    136,000Total current assets
    
    
    19,339,654
    
    
    
    8,639,448Property, plant and equipment
    
    
    37,308,790
    
    
    
    25,780,635Accumulated depreciation
    
    
    (2,415,939
    )
    
    
    (1,288,305
    )Net property, plant and equipment
    
    
    34,892,851
    
    
    
    24,492,330Deferred debt issuance costs, net of accumulated
amortization of $175,963 in 2005 and $42,129 in 2004
    
    
    304,485
    
    
    
    275,270Total assets
    
    $
    54,536,990
    
    
    $
    33,407,048Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    2,980,244
    
    
    $
    2,179,847Accrued liabilities
    
    
    5,351,592
    
    
    
    1,248,742Unrealized loss on forward currency exchange contracts
    
    
    366,831
    
    
    
    Current portion of long-term debt
    
    
    1,894,183
    
    
    
    1,812,348Total current liabilities
    
    
    10,592,850
    
    
    
    5,240,937Long-term debt (net of unamortized discount of $107,371
in 2005 and $125,382 in 2004)
    
    
    14,529,419
    
    
    
    15,144,971Deferred income taxes
    
    
    6,192,000
    
    
    
    6,080,000Stockholders equity:Common stock, $.001 par value, 10,000,000 shares
authorized, 4,156,250 issued and outstanding in 2005 and
2,000,0000 issued and outstanding in 2004
    
    
    4,156
    
    
    
    2,000Additional paid-in capital
    
    
    20,844,371
    
    
    
    5,504,604Common stock warrants
    
    
    140,609
    
    
    
    140,609Retained earnings
    
    
    2,233,585
    
    
    
    1,293,927Total stockholders equity
    
    
    23,222,721
    
    
    
    6,941,140Total liabilities and stockholders equity
    
    $
    54,536,990
    
    
    $
    33,407,048
  -3-




---



##### Table of Contents



ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF INCOME
 Successor
    
    
    Successor
    
    
    Predecessor
    
    
    SuccessorTwo Months
    
    
    Seven MonthsNine Months Ended
    
    
    Ended
    
    
    EndedThree Months Ended September 30,
    
    
    September 30,
    
    
    February 29,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2004(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)
    
    
    
    
    
    
    (Unaudited)Net sales
    
    $
    15,434,614
    
    
    $
    13,142,739
    
    
    $
    41,657,721
    
    
    $
    7,191,039
    
    
    $
    25,840,737Cost of sales
    
    
    13,172,065
    
    
    
    10,802,470
    
    
    
    35,596,754
    
    
    
    6,155,905
    
    
    
    21,567,843Gross profit
    
    
    2,262,549
    
    
    
    2,340,269
    
    
    
    6,060,967
    
    
    
    1,035,134
    
    
    
    4,272,894Selling, general and administrative expenses
    
    
    1,233,690
    
    
    
    1,022,561
    
    
    
    3,400,744
    
    
    
    1,196,698
    
    
    
    2,251,522Operating income (loss)
    
    
    1,028,859
    
    
    
    1,317,708
    
    
    
    2,660,223
    
    
    
    (161,564
    )
    
    
    2,021,372Interest expense
    
    
    343,096
    
    
    
    323,419
    
    
    
    1,086,381
    
    
    
    45,421
    
    
    
    717,051Other (income) expense, net
    
    
    (59,433
    )
    
    
    (583
    )
    
    
    89,347
    
    
    
    (311
    )
    
    
    (1,346
    )Income (loss) before income taxes
    
    
    745,196
    
    
    
    994,872
    
    
    
    1,484,495
    
    
    
    (206,674
    )
    
    
    1,305,667Provision (benefit) for income taxes:Current
    
    
    271,742
    
    
    
    241,707
    
    
    
    487,837
    
    
    
    (46,280
    )
    
    
    342,269Deferred
    
    
    (7,000
    )
    
    
    88,254
    
    
    
    57,000
    
    
    
    111,977
    
    
    
    124,972264,742
    
    
    
    329,961
    
    
    
    544,837
    
    
    
    65,697
    
    
    
    467,241Net income (loss)
    
    $
    480,454
    
    
    $
    664,911
    
    
    $
    939,658
    
    
    
    ($272,371
    )
    
    $
    838,426Net income (loss) per share:Basic
    
    $
    0.13
    
    
    $
    0.33
    
    
    $
    0.37
    
    
    
    
    
    
    $
    0.42Diluted
    
    $
    0.13
    
    
    $
    0.32
    
    
    $
    0.35
    
    
    
    
    
    
    $
    0.41Shares used in calculating net income (loss) per share:Basic
    
    
    3,687,500
    
    
    
    2,000,000
    
    
    
    2,568,681
    
    
    
    
    
    
    
    2,000,000Diluted
    
    
    3,798,121
    
    
    
    2,052,538
    
    
    
    2,657,431
    
    
    
    
    
    
    
    2,052,538
  -4-




---



##### Table of Contents



ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF CASH FLOWS
 Successor
    
    
    Predecessor
    
    
    SuccessorNine Months
    
    
    Two Months
    
    
    Seven MonthsEnded
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    February 29,
    
    
    September 30,2005
    
    
    2004
    
    
    2004(Unaudited)
    
    
    
    
    
    (Unaudited)Cash Flows From Operating ActivitiesNet income (loss)
    
    $
    939,658
    
    
    $
    (272,371
    )
    
    $
    838,426Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,272,520
    
    
    
    385,612
    
    
    
    906,003Provision for doubtful accounts
    
    
    46,161
    
    
    
    5,000
    
    
    
    21,607Deferred income taxes
    
    
    57,000
    
    
    
    111,977
    
    
    
    124,972Employee stock compensation
    
    
    
    
    
    
    
    
    
    
    103,106Stock option plan expense
    
    
    321,292
    
    
    
    
    
    
    
    Foreign
currency transaction gain
    
    
    (187,379
    )
    
    
    
    
    
    
    Unrealized loss on foreign exchange contracts
    
    
    366,831
    
    
    
    
    
    
    
    Changes in cash due to changes in operating assets
and liabilities; net of acquisition:Accounts receivable, net
    
    
    (1,305,411
    )
    
    
    (347,626
    )
    
    
    422,258Inventories
    
    
    (908,347
    )
    
    
    344,106
    
    
    
    442,820Prepaid expenses
    
    
    8,336
    
    
    
    49,495
    
    
    
    (132,956
    )Income taxes receivable
    
    
    281,715
    
    
    
    (49,057
    )
    
    
    (175,208
    )Accounts payable
    
    
    800,397
    
    
    
    133,589
    
    
    
    1,005,913Accrued liabilities
    
    
    (47,369
    )
    
    
    486,356
    
    
    
    45,691Net cash provided by operating activities
    
    
    1,645,404
    
    
    
    847,081
    
    
    
    3,602,632Cash Flows From Investing ActivitiesAcquisition of business, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (14,506,073
    )Purchases of investment securities
    
    
    (15,759,000
    )Proceeds from the sale of investment securities
    
    
    6,511,285
    
    
    
    
    
    
    
    Purchases of property, plant and equipment
    
    
    (7,190,557
    )
    
    
    (112,054
    )
    
    
    (4,108,457
    )Net cash used in investing activities
    
    
    (16,438,272
    )
    
    
    (112,054
    )
    
    
    (18,614,530
    )Cash Flows From Financing ActivitiesProceeds from issuance of common stock
    
    
    17,250,000
    
    
    
    
    
    
    
    6,050,000Cost of common stock and warrants issued
    
    
    (2,229,369
    )
    
    
    
    
    
    
    (646,502
    )Proceeds from issuance of subordinated debt and
common stock warrants
    
    
    
    
    
    
    
    
    
    
    2,150,000Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    17,398,852Principal payments on long-term debt
    
    
    (1,231,592
    )
    
    
    (445,142
    )
    
    
    (9,127,542
    )Borrowings on line of credit
    
    
    697,875
    
    
    
    
    
    
    
    Deferred debt issuance cost
    
    
    (174,101
    )
    
    
    
    
    
    
    (317,399
    )Net cash provided by (used in) financing activities
    
    
    14,312,813
    
    
    
    (445,142
    )
    
    
    15,507,409Net increase (decrease) in cash
    
    
    (480,055
    )
    
    
    289,885
    
    
    
    495,511Cash, beginning
    
    
    485,406
    
    
    
    199,791
    
    
    
    489,676Cash, ending
    
    $
    5,351
    
    
    $
    489,676
    
    
    $
    985,187Supplemental Disclosure:Interest paid
    
    $
    1,059,815
    
    
    $
    48,156
    
    
    $
    684,943Income taxes paid
    
    $
    231,122
    
    
    $
    
    
    
    $
    644,700Supplemental Disclosure of Non-Cash Investing and Financing Activities:Contractual obligation for purchase of paper machine
    
    $
    4,150,219
    
    
    $
    
    
    
    $
    
  -5-




---



##### Table of Contents



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-




---



##### Table of Contents



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




---



##### Table of Contents



Three Months
    
    Three Months
    
    Nine Months
    
    Seven MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    September 30,
    
    September 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net Income (loss)
    
    $
    480,454
    
    
    $
    664,911
    
    
    $
    939,658
    
    
    $
    838,426Weighted average shares
outstanding
    
    
    3,687,500
    
    
    
    2,000,000
    
    
    
    2,568,681
    
    
    
    2,000,000Effect of stock options
    
    
    53,673
    
    
    
    
    
    
    
    34,766
    
    
    
    Effect of dilutive warrants
    
    
    56,948
    
    
    
    52,538
    
    
    
    53,984
    
    
    
    52,538Weighted average shares
outstanding  assuming
dilution
    
    
    3,798,121
    
    
    
    2,052,538
    
    
    
    2,657,431
    
    
    
    2,052,538Earnings per common share:Basic
    
    $
    .13
    
    
    $
    .33
    
    
    $
    .37
    
    
    $
    .42Diluted
    
    $
    .13
    
    
    $
    .32
    
    
    $
    .35
    
    
    $
    .41
 Note 6
 Stock Incentive Plan
     Weighted
    
    WeightedWeighted
    
    Average Fair
    
    AverageAverage
    
    Value of
    
    RemainingExercise
    
    Options
    
    ContractualNumber
    
    Price
    
    Granted
    
    LifeBalance, December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    277,500
    
    
    $
    8.05
    
    
    $
    3.30
    
    
    
    Forfeited and expired
    
    
    8,000
    
    
    $
    8.00
    
    
    
    
    
    
    
    Balance, September 30, 2005
    
    
    269,500
    
    
    $
    8.05
    
    
    
    
    
    
    
    9.5Exercisable at September 30, 2005
    
    
    61,500
    
    
    
    
    
    
    
    
    
    
    
    9.5Exercisable at September 30, 2006
    
    
    113,500
    
    
    
    
    
    
    
    
    
    
    
    Exercisable at September 30, 2007
    
    
    165,500
    
    
    
    
    
    
    
    
    
    
    
    Exercisable at September 30, 2008
    
    
    217,500
    
    
    
    
    
    
    
    
    
    
    
    Exercisable at September 30, 2009
    
    
    269,500
    
    
    
    
    
    
    
    
    
    
    
    
 -8-




---



##### Table of Contents



Note 7
 New Accounting Standards
    -9-




---



##### Table of Contents



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 our ability to meet our obligations and restrictions on future operations due
to our substantial debt;.
    
    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;
 -10-




---



##### Table of Contents



.
    
    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-




---



##### Table of Contents



Comparative Three-Month Periods Ended September 30, 2005 and 2004
 Net Sales
 Three Months Ended September 30,2005
    
    
    2004(in thousands, except Average Price per Case)Net Sales
    
    $
    15,435
    
    
    $
    13,143Cases shipped
    
    
    1,441
    
    
    
    1,260Average Price per Case
    
    $
    10.71
    
    
    $
    10.43
  Cost of Sales
 Three Months Ended September 30,2005
    
    
    2004(in thousands, except Gross Profit %)Cost of Paper
    
    $
    7,953
    
    
    $
    6,278Non-paper materials, labor supplies, etc.
    
    
    4,845
    
    
    
    4,104Sub-total
    
    
    12,798
    
    
    
    10,382Depreciation
    
    
    374
    
    
    
    420Cost of Sales
    
    $
    13,172
    
    
    $
    10,802Gross Profit
    
    $
    2,263
    
    
    $
    2,341Gross Profit Margin %
    
    
    14.7
    %
    
    
    17.8
    %
   -12-




---



##### Table of Contents



Three Months Ended September 30,2005
    
    
    2004Paper usage (tons)Manufactured
    
    
    6,910
    
    
    
    7,829Purchased
    
    
    2,953
    
    
    
    1,184Converted
    
    
    9,863
    
    
    
    9,013Paper Costs per tonCost per ton produced internally
    
    $
    727
    
    
    $
    662Cost per ton purchased from third parties
    
    $
    992
    
    
    $
    925Total cost per ton consumed
    
    $
    806
    
    
    $
    697Total paper costs (in thousands)Cost of internally produced paper
    
    $
    5,024
    
    
    $
    5,183Cost of paper purchased from third parties
    
    
    2,929
    
    
    
    1,095Total paper costs
    
    $
    7,953
    
    
    $
    6,278
  Gross Profit
  Selling, General and Administrative Expenses
 Three Months Ended September 30,2005
    
    2004(in thousands, except SG&A as a % of net sales)Selling, General and Adm Exp
    
    $
    1,234
    
    
    $
    1,023SG&A as a % of net sales
    
    
    8.0
    %
    
    
    7.8
    %
  -13-




---



##### Table of Contents



Operating Income
  Interest and Other Expense
 Three Months Ended September 30,2005
    
    2004(in thousands)Interest Expense
    
    $
    343
    
    
    $
    323Other Expense (Income)
    
    
    (59
    )
    
    
    
   Income Before Income Taxes
  Income Tax Provision
  -14-




---



##### Table of Contents



Comparative Nine-Month Periods Ended September 30, 2005 and 2004
 Net Sales
 Successor
    
    Predecessor
    
    Successor
    
    CombinedNine Months
    
    Two Months
    
    Seven Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    February 29,
    
    September 30,
    
    September 30,2005
    
    2004
    
    2004
    
    2004(in thousands, except Average Price per Case)Net Sales
    
    $
    41,658
    
    
    $
    7,191
    
    
    $
    25,841
    
    
    $
    33,032Cases shipped
    
    
    3,852
    
    
    
    641
    
    
    
    2,360
    
    
    
    3,001Average Price per Case
    
    $
    10.82
    
    
    $
    11.22
    
    
    $
    10.95
    
    
    $
    11.01
  Cost of Sales
 Successor
    
    
    Predecessor
    
    
    Successor
    
    
    CombinedNine Months
    
    
    Two Months
    
    
    Seven Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    February 29,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2004
    
    
    2004(in thousands, except Gross Profit %)Cost of Paper
    
    $
    22,033
    
    
    $
    3,229
    
    
    $
    11,568
    
    
    $
    14,797Non-paper materials,
labor supplies, etc.
    
    
    12,436
    
    
    
    2,350
    
    
    
    8,749
    
    
    
    11,099Operating lease
payments
    
    
    
    
    
    
    193
    
    
    
    384
    
    
    
    577Sub-total
    
    
    34,469
    
    
    
    5,772
    
    
    
    20,701
    
    
    
    26,473Depreciation
    
    
    1,128
    
    
    
    384
    
    
    
    867
    
    
    
    1,251Cost of Sales
    
    $
    35,597
    
    
    $
    6,156
    
    
    $
    21,568
    
    
    $
    27,724Gross Profit
    
    $
    6,061
    
    
    $
    1,035
    
    
    $
    4,273
    
    
    $
    5,308Gross Profit Margin %
    
    
    14.5
    %
    
    
    14.4
    %
    
    
    16.5
    %
    
    
    16.1
    %
  -15-




---



##### Table of Contents



Successor
    
    
    Predecessor
    
    
    Successor
    
    
    CombinedNine Months
    
    
    Two Months
    
    
    Seven Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    February 29,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2004
    
    
    2004Paper usage (tons)Manufactured
    
    
    19,311
    
    
    
    4,406
    
    
    
    15,769
    
    
    
    20,175Purchased
    
    
    7,845
    
    
    
    169
    
    
    
    1,306
    
    
    
    1,475Converted
    
    
    27,156
    
    
    
    4,575
    
    
    
    17,075
    
    
    
    21,650Paper Costs per tonCost per ton produced internally
    
    $
    727
    
    
    $
    703
    
    
    $
    657
    
    
    $
    667Cost per ton purchased from third parties
    
    $
    1,019
    
    
    $
    781
    
    
    $
    925
    
    
    $
    909Total cost per ton consumed
    
    $
    811
    
    
    $
    706
    
    
    $
    677
    
    
    $
    683Total paper costs (in thousands)Cost of internally produced paper
    
    $
    14,039
    
    
    $
    3,097
    
    
    $
    10,360
    
    
    $
    13,457Cost of paper purchased from third parties
    
    
    7,994
    
    
    
    132
    
    
    
    1,208
    
    
    
    1,340Total paper costs
    
    $
    22,033
    
    
    $
    3,229
    
    
    $
    11,568
    
    
    $
    14,797
   Gross Profit
  -16-




---



##### Table of Contents



Selling, General and Administrative Expenses
 Successor
    
    
    Predecessor
    
    
    Successor
    
    
    CombinedNine Months
    
    
    Two Months
    
    
    Seven Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    February 29,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2004
    
    
    2004(in thousands, except
SG&A as a % of net sales)Recurring S, G&A
Expenses
    
    $
    3,401
    
    
    $
    571
    
    
    $
    2,252
    
    
    $
    2,823Management Incentive
Payments
    
    
    
    
    
    
    625
    
    
    
    
    
    
    
    625Selling, General & Adm Exp
    
    $
    3,401
    
    
    $
    1,196
    
    
    $
    2,252
    
    
    $
    3,448SG&A as a % of net sales
    
    
    8.2
    %
    
    
    16.6
    %
    
    
    8.7
    %
    
    
    10.4
    %
  Operating Income
  Interest and Other Expense
 Successor
    
    Predecessor
    
    Successor
    
    CombinedNine Months
    
    Two Months
    
    Seven Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    February 29,
    
    September 30,
    
    September 30,2005
    
    2004
    
    2004
    
    2004(in thousands)Interest Expense
    
    $
    1,086
    
    
    $
    45
    
    
    $
    717
    
    
    $
    762Other Expense (Income)
    
    
    89
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
   Income Before Income Taxes
  Income Tax Provision
  -17-




---



##### Table of Contents



Liquidity and Capital Resources
   .
    
    underwriting discount of 8% or $1.4 million (charged against additional paid-in-capital);.
    
    direct expenses of $849,000 (charged against additional paid-in capital), including legal
fees, printing costs, accounting fees, qualified independent underwriter fees and other
miscellaneous direct expenses.
    Successor
    
    Predecessor
    
    Successor
    
    CombinedNine Months
    
    Two Months
    
    Seven Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    EndedSeptember 30,
    
    February 29,
    
    September 30,
    
    September 30,2005
    
    2004
    
    2004
    
    2004(in thousands)Cash Flow Data:Cash Flow Provided
(used) by:Operating Activities
    
    $
    1,645
    
    
    $
    847
    
    
    $
    3,603
    
    
    $
    4,450Investing Activities
    
    $
    (16,438
    )
    
    $
    (112
    )
    
    $
    (18,615
    )
    
    $
    (18,727
    )Financing Activities
    
    $
    14,313
    
    
    $
    (445
    )
    
    $
    15,507
    
    
    $
    15,062
  -18-




---



##### Table of Contents



.
    
    a $5.0 million revolving credit facility which matures on April 30, 2007, under which, for
reporting purposes, there was an outstanding balance as of September 30, 2005 of $698,000, which
was entirely comprised of a bank overdraft balance of $698,000 and an eligible borrowing base of
$4.9 million as of September 30, 2005;.
    
    a $13.7 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.
As of September 30, 2005, no amounts were outstanding under this loan.
  -19-




---



##### Table of Contents



.
    
    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.
    
    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.
   Critical Accounting Policies and Estimates
  -20-




---



##### Table of Contents



Accounts Receivable
 Inventory.
 New Accounting Pronouncements
      -21-




---



##### Table of Contents



Non-GAAP Discussion
    .
    
    it does not reflect our cash expenditures for capital assets;.
    
    it does not reflect changes in, or cash requirements for, our working capital requirements;.
    
    it does not reflect the interest expense, or the cash requirements necessary to service interest
or principal payments on our indebtedness;.
    
    although depreciation and amortization are non-cash charges, the assets being depreciated and
amortized will often have to be replaced in the future, and EBITDA does not reflect cash
requirements for such replacements; and.
    
    other companies, including other companies in our industry, may calculate these measures
differently than we do, limiting their usefulness as a comparative measure.
  -22-




---



##### Table of Contents



Three Months Ended September 30,2005
    
    
    2004(in thousands)Net Income (Loss)
    
    $
    480
    
    
    $
    665Plus: Interest expense, net
    
    
    343
    
    
    
    323Plus: Income tax expense
    
    
    265
    
    
    
    330Plus: Depreciation
    
    
    374
    
    
    
    420EBITDA
    
    $
    1,462
    
    
    $
    1,738Percent of net sales
    
    
    9.5
    %
    
    
    13.2
    %
   Successor
    
    
    Predecessor
    
    
    Successor
    
    
    CombinedNine Months
    
    
    Two Months
    
    
    Seven Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 30,
    
    
    February 29,
    
    
    September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2004
    
    
    2004(in thousands)Net Income (Loss)
    
    $
    940
    
    
    $
    (272
    )
    
    $
    838
    
    
    $
    566Plus: Interest expense, net
    
    
    1,086
    
    
    
    45
    
    
    
    717
    
    
    
    762Plus: Income tax expense
    
    
    545
    
    
    
    66
    
    
    
    467
    
    
    
    533Plus: Depreciation
    
    
    1,128
    
    
    
    384
    
    
    
    867
    
    
    
    1,251EBITDA
    
    $
    3,699
    
    
    $
    223
    
    
    $
    2,889
    
    
    $
    3,112Percent of net sales
    
    
    8.9
    %
    
    
    3.1
    %
    
    
    11.2
    %
    
    
    9.4
    %
  -23-




---



##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
  -24-




---



##### 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:
    
    $
    849,369Total expenses
    
    $
    2,229,369
   -25-




---



##### 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
  
 Item 5. Other Information
 Retirement of Vice-President of Sales and Marketing
 th
 Option Grant to Non-employee Directors
   
 Item 6. Exhibits
  -26-




---



##### Table of Contents



SIGNATURES
  ORCHIDS PAPER PRODUCTS COMPANYDate: November 9, 2005
    By:
    /s/ Keith R. SchroederKeith R. SchroederChief Financial Officer
(On behalf of the registrant and as Chief
Accounting Officer) -27-




---



##### 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.
 -28-