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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 March 31, 2006
 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
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 4826 Hunt Street
Pryor, Oklahoma 74361
 (918) 825-0616
 þ o
 
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ORCHIDS PAPER PRODUCTS COMPANY
TABLE OF CONTENTS
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2006
 PagePART I. FINANCIAL INFORMATIONITEM 1.
    
    Financial StatementsBalance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005
    
    
    3Statements of Income for the three months ended March 31, 2006 and
2005 (Unaudited)
    
    
    4Statements of Cash Flows for the three months ended March 31, 2006
and 2005 (Unaudited)
    
    
    5Notes to Unaudited Interim Financial Statements
    
    
    6ITEM 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    9ITEM 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    18ITEM 4.
    
    Controls and Procedures
    
    
    18PART II. OTHER INFORMATIONITEM 1.
    
    Legal Proceedings
    
    
    18ITEM 1A.
    
    Risk Factors
    
    
    19ITEM 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19ITEM 3.
    
    Defaults Upon Senior Securities
    
    
    19ITEM 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19ITEM 5.
    
    Other Information
    
    
    19ITEM 6.
    
    Exhibits
    
    
    19Signatures
    
    
    20302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
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##### Table of Contents



PART 1  FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 ORCHIDS PAPER PRODUCTS COMPANY
 
 BALANCE SHEETS
 As ofMarch 31,
    
    
    December 31,2006
    
    
    2005(unaudited)(Dollars in thousands)ASSETSCurrent assets:Cash
    
    $
    4
    
    
    $
    378Accounts receivable, net of allowance of
$140 in 2006 and $125 in 2005
    
    
    3,719
    
    
    
    4,180Inventories, net
    
    
    6,149
    
    
    
    4,420Restricted
certificate of deposit
    
    
    1,500
    
    
    
    1,500Income taxes receivable
    
    
    65
    
    
    
    94Prepaid expenses
    
    
    324
    
    
    
    458Deferred income taxes
    
    
    200
    
    
    
    200Total current assets
    
    
    11,961
    
    
    
    11,230Property, plant and equipment
    
    
    53,759
    
    
    
    44,983Accumulated depreciation
    
    
    (3,182
    )
    
    
    (2,789
    )Net property, plant and equipment
    
    
    50,577
    
    
    
    42,194Deferred debt issuance costs, net of accumulated
amortization of $279 in 2006 and $232 in 2005
    
    
    239
    
    
    
    286Total assets
    
    $
    62,777
    
    
    $
    53,710LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,263
    
    
    $
    2,877Accrued liabilities
    
    
    2,201
    
    
    
    2,137Unrealized loss on forward currency exchange contracts
    
    
    61
    
    
    
    74Current portion of long-term debt
    
    
    1,663
    
    
    
    1,628Total current liabilities
    
    
    7,188
    
    
    
    6,716Long-term debt, net of unamortized discount of $94 in 2006 and $101 in 2005
    
    
    25,332
    
    
    
    17,002Deferred income taxes
    
    
    6,304
    
    
    
    6,280Stockholders equity:Common stock, $.001 par value, 10,000,000 shares
authorized, 4,156,250 shares issued and outstanding
in 2006 and 2005
    
    
    4
    
    
    
    4Additional paid-in capital
    
    
    20,940
    
    
    
    20,881Common stock warrants
    
    
    141
    
    
    
    141Retained earnings
    
    
    2,868
    
    
    
    2,686Total stockholders equity
    
    
    23,953
    
    
    
    23,712Total liabilities and stockholders equity
    
    $
    62,777
    
    
    $
    53,710
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ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF INCOME
 Three Months Ended March 31,2006
    
    
    2005(unaudited)
    
    
    (unaudited)(Dollars in thousands, exceptshare and per share data)Net sales
    
    $
    14,099
    
    
    $
    12,542Cost of sales
    
    
    12,536
    
    
    
    10,725Gross profit
    
    
    1,563
    
    
    
    1,817Selling, general and administrative expenses
    
    
    1,248
    
    
    
    959Operating income
    
    
    315
    
    
    
    858Interest expense
    
    
    47
    
    
    
    369Other (income) expense, net
    
    
    (12
    )
    
    
    (5
    )Income before income taxes
    
    
    280
    
    
    
    494Provision for income taxes:Current
    
    
    74
    
    
    
    92Deferred
    
    
    24
    
    
    
    5698
    
    
    
    148Net income
    
    $
    182
    
    
    $
    346Net income per share:Basic
    
    $
    0.04
    
    
    $
    0.17Diluted
    
    $
    0.04
    
    
    $
    0.17Shares used in calculating net income per share:Basic
    
    
    4,156,250
    
    
    
    2,000,000Diluted
    
    
    4,318,051
    
    
    
    2,052,538
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ORCHIDS PAPER PRODUCTS COMPANY
 
 STATEMENTS OF CASH FLOWS
 Three Months Ended March 31,2006
    
    
    2005(unaudited)
    
    
    (unaudited)(Dollars in thousands)Cash Flows From Operating ActivitiesNet income
    
    $
    182
    
    
    $
    346Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    440
    
    
    
    364Provision for doubtful accounts
    
    
    15
    
    
    
    15Deferred income taxes
    
    
    24
    
    
    
    56Stock option plan expense
    
    
    59
    
    
    
    Foreign currency transaction loss
    
    
    18
    
    
    
    Unrealized gain on foreign exchange contracts
    
    
    (13
    )
    
    
    Changes in cash due to changes in operating assets
and liabilities:Accounts receivable, net
    
    
    446
    
    
    
    452Inventories
    
    
    (1,729
    )
    
    
    (1,982
    )Prepaid expenses
    
    
    134
    
    
    
    (275
    )Income taxes receivable
    
    
    29
    
    
    
    92Accounts payable
    
    
    386
    
    
    
    120Accrued liabilities
    
    
    46
    
    
    
    (327
    )Net cash provided by (used in) operating activities
    
    
    37
    
    
    
    (1,139
    )Cash Flows From Investing ActivitiesPurchases of property, plant and equipment
    
    
    (8,776
    )
    
    
    (1,555
    )Purchases of investments
    
    
    
    
    
    
    (1
    )Net cash used in investing activities
    
    
    (8,776
    )
    
    
    (1,556
    )Cash Flows From Financing ActivitiesPrincipal payments on long-term debt
    
    
    (380
    )
    
    
    (427
    )Net borrowings on revolving credit line
    
    
    610
    
    
    
    2,642Borrowings under construction loan
    
    
    8,135
    
    
    
    Net cash provided by financing activities
    
    
    8,365
    
    
    
    2,215Net decrease in cash
    
    
    (374
    )
    
    
    (480
    )Cash, beginning
    
    
    378
    
    
    
    485Cash, ending
    
    $
    4
    
    
    $
    5Supplemental Disclosure:Interest paid
    
    $
    417
    
    
    $
    397Income taxes paid
    
    $
    45
    
    
    $
    35Supplemental Disclosure of Non-Cash Investing and Financing Activities:Contractual obligation for purchase of paper machine
    
    $
    698
    
    
    $
    
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ORCHIDS PAPER PRODUCTS COMPANY
 
 NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS
 Note 1  Basis of Presentation
    Note 2  Purchase Commitment and Foreign Currency Derivatives
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Note 3  Construction-in-Process and Capitalized Interest
  Note 4  Credit Agreements
   Note 5  Stock Split
  Note 6  Earnings per Share
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Three Months Ended March 31,2006
    
    
    2005Net income ($ thousands)
    
    $
    182
    
    
    $
    346Weighted average shares outstanding
    
    
    4,156,250
    
    
    
    2,000,000Effect of stock options
    
    
    80,690
    
    
    
    Effect of dilutive warrants
    
    
    81,111
    
    
    
    52,538Weighted average shares outstanding  assuming dilution
    
    
    4,318,051
    
    
    
    2,052,538Earnings per common share: (2005 restated to
to reflect 2.744 for 1 stock split)Basic
    
    $
    0.04
    
    
    $
    0.17Diluted
    
    $
    0.04
    
    
    $
    0.17
 Note 7  Stock Incentive Plan
     Note 8  Major Customers and Concentration of Credit Risk
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Note 9  New Accounting Standards
  
 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 percentage of our revenues are attributable to two large customers which may
decrease or cease purchases at any time;
    
    we may experience cost overruns in and delays in the start up of our project to expand our paper mill;
    
    we have significant indebtedness which limits our free cash flow and subjects us to restrictive covenants relating to the
operation of our business;
    
    the availability of and prices for energy will significantly affect our business;
    
    our exposure to variable interest rates may affect our financial health;
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
    
    the loss of key personnel;
    
    the disruption in supply or cost of waste paper;
    
    the disruption in availability or cost of parent rolls;
    
    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
 ® ®
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
    
    the market price of our product;
    
    the cost of parent rolls purchased on the open market to meet our converting needs;
    
    the successful start-up and operation of our new paper machine;
    
    the cost of recycled paper used in producing paper;
    
    the efficiency of operations in both our paper mill and converting plant; and
    
    energy costs.
 Comparative Three-Month Periods Ended March 31, 2006 and 2005
 Net Sales
 Three Months Ended March 31,2006
    
    2005(in thousands, except average price per case)Net sales
    
    $
    14,099
    
    
    $
    12,542Cases shipped
    
    
    1,253
    
    
    
    1,144Average price per case
    
    $
    11.25
    
    
    $
    10.96
  Cost of Sales
 Three Months Ended March 31,2006
    
    
    2005(in thousands, except gross profit margin %)Cost of paper
    
    $
    7,991
    
    
    $
    6,811Non-paper materials, labor, supplies, etc.
    
    
    4,152
    
    
    
    3,593Sub-total
    
    
    12,143
    
    
    
    10,404Depreciation
    
    
    393
    
    
    
    321Cost of sales
    
    $
    12,536
    
    
    $
    10,725Gross Profit
    
    $
    1,563
    
    
    $
    1,817Gross Profit Margin %
    
    
    11.1
    %
    
    
    14.5
    %
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Three Months Ended March 31,2006
    
    
    2005Paper usage (tons)Manufactured
    
    
    5,875
    
    
    
    5,470Purchased
    
    
    3,343
    
    
    
    2,801Converted
    
    
    9,218
    
    
    
    8,271Paper costs per tonCost per ton produced internally
    
    $
    773
    
    
    $
    724Cost per ton purchased from third parties
    
    $
    1,032
    
    
    $
    1,018Total cost per ton consumed
    
    $
    867
    
    
    $
    824Total paper costs (in thousands)Cost of internally produced paper
    
    $
    4,541
    
    
    $
    3,960Cost of paper purchased from third parties
    
    
    3,450
    
    
    
    2,851Total paper costs
    
    $
    7,991
    
    
    $
    6,811
  Gross Profit
  Selling, General and Administrative Expenses
 Three Months Ended March 31,2006
    
    
    2005(In thousands, except SG&A as a % of net sales)Commission expense
    
    $
    199
    
    
    $
    212Other S,G&A expenses
    
    
    1,049
    
    
    
    747Selling, General & Adm exp
    
    $
    1,248
    
    
    $
    959SG&A as a % of net sales
    
    
    8.9
    %
    
    
    7.6
    %
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Operating Income
  Interest and Other Expense
 Three Months Ended March 31,2006
    
    2005(In thousands)Interest expense
    
    $
    47
    
    
    $
    369Other (income) expense, net
    
    $
    (12
    )
    
    $
    (5
    )
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Income Before Income Taxes
  Income Tax Provision
  Liquidity and Capital Resources
     Cash Flow Data:
 Three Months Ended March 31,2006
    
    2005(in thousands)Cash flow provided by (used in):Operating activities
    
    $
    37
    
    
    $
    (1,139
    )Investing activities
    
    $
    (8,776
    )
    
    $
    (1,556
    )Financing activities
    
    $
    8,365
    
    
    $
    2,215
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
    
    the occurrence of a change in management such that Michael P. Sage is no longer our chief
executive officer 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
  Accounts Receivable
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Inventory.
 New Accounting Pronouncements
  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.
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Three Months Ended March 31,2006
    
    
    2005(In thousands, except % of net sales)Net income
    
    $
    182
    
    
    $
    346Plus: Interest expense, net
    
    
    47
    
    
    
    369Plus: Income tax expense
    
    
    98
    
    
    
    148Plus: Depreciation
    
    
    393
    
    
    
    321EBITDA
    
    $
    720
    
    
    $
    1,184% of net sales
    
    
    5.1
    %
    
    
    9.4
    %
  
 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
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ITEM 1A. Risk Factors
  
 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
   (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
  
 ITEM 6. Exhibits
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SIGNATURES
  ORCHIDS PAPER PRODUCTS COMPANY
 Date: May 11, 2006
    
    By:
    
    /s/ Keith R. SchroederKeith R. SchroederChief Financial Officer(On behalf of the registrant and as Chief Accounting Officer)
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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 Chief Executive Officer Pursuant to Section 302.31.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302.32.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 906.32.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 906.
 21