May 18, 2005
via U.S. Mail
Michael P. Sage
Chief Executive Officer
Orchids Paper Products Company
4826 Hunt Street
Pryor, Oklahoma 74361
Re: Orchids Paper Products Company
Form S-1 filed April 19, 2005
File No. 333-124173
Dear Mr. Sage:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form S-1
General
1. Where comments on a section also relate to disclosure in
another
section, please make parallel changes to all affected disclosure.
This will eliminate the need for us to repeat similar comments.
2. Please monitor your need to update your financial statements,
as
required by Regulation S-X, Rule 3-12. Additionally, please
provide updated consents from your independent accountants in the
next amendment.
3. We will need time to review all new disclosure, any additional
proposed artwork or graphics and all omitted exhibits, including
the
opinion of counsel. You can expedite the review process by
providing
all this information and all these documents promptly. We may
have
additional comments.
4. Provide updated disclosure in each amendment. For example,
include any new information relating to the construction loan
commitment letter, the proposed listing by the American Stock
Exchange, any developments related to Rule 2720 and any review
being
conducted by the NASD, and supply the omitted estimates under Item
13
in Part II. Also, eliminate the suggestion at page i that the
disclosure is current "only as of" the date of the prospectus.
5. Please provide disclosure regarding quantitative and
qualitative
exposure to market risk as required by Item 305 of Regulation S-K.
Table of Contents, page i
Market and Industry Data, page i
6. You include similar disclaimer language at page 64. First,
this
information should not appear prior to the Risk Factors section.
Second, because you are responsible for both the accuracy and
completeness of the disclosure that appears in your document, any
suggestion or implication to the contrary is inappropriate.
Finally,
the reader is entitled to rely upon all disclosure you provide.
Revise all related disclosure accordingly.
Prospectus Summary, page 1
7. Revise to provide a summary that is balanced. For example, it
appears incomplete without mentioning that your biggest competitor
also has a plant in your distribution area, that it will take you
an
estimated 18 months to put into operation the new paper machine -
the
financing of which has not yet been obtained - and that in 2003
you
lost a material customer and another reduced the number of
distribution centers you service.
8. Provide us with objective supplemental support for the
statements
you make regarding your relative market share, your status as a
"leader" and your status as one of the lowest cost issue producers
in
your market. We note the disclosure in that regard at various
places
in your document, including at page 36.
9. You state that in 2004 you generated "pro-forma net income of
$1.0
million." Please explain to us and disclose in the document why
you
have used pro-forma income as compared to actual income. Explain
how
you define pro-forma net income.
10. We note you have presented the financial information within
the
prospectus and throughout your financial statements as
predecessor/successor as a result of the acquisition by Orchids
Acquisition Group, Inc. in March 2004. Please explain to us why
you
concluded it was appropriate to discuss and present your financial
statements based on a predecessor/successor presentation. Please
include any applicable literature to support your response.
11. Additionally, please explain to us why you determined it was
appropriate to apply purchase accounting to the acquisition by
Orchids Acquisition Group. Please include any applicable
literature
to support your response.
Risk Factors, page 7
12. Rather than indicating that you cannot "be certain," "assure"
or
"predict" a particular outcome, disclose the risk plainly and
identify the potential harm that could result in the event the
risk
is realized. Similarly, eliminate language that mitigates the
risk
you present, including clauses that begin "although" or "while."
"We have significant indebtedness", page 8
13. Consider moving to a new risk factor under an appropriately
descriptive caption, the risks related to your exposure to
fluctuating interest rates. We note the disclosure you provide in
the last paragraph in that regard.
"The availability of and prices for energy", page 9
14. Tailor the risk factor discussion to your particular
circumstances, and make clear how energy prices impact your
financial
condition. Consider, for example, highlighting more recent
periods
in which you may be experiencing higher prices and more price and
supply volatility relative to prior periods.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations, page 21
Comparative Years Ended December 31, 2002, 2003 and 2004, page 21
15. One of the objectives of MD&A is to provide readers with an
explanation of prior results as well as the potential variability
of
earnings and cash flows, so the reader can ascertain the
likelihood
that past performance is indicative of future performance. Please
provide a discussion of specific factors management is aware of
that
could positively or negatively affect the amount of sales and
expense
items identified in MD&A. Refer to FRC Section 501.12 for further
guidance.
Liquidity and Capital Resources, page 25
16. In your discussion regarding cash provided by operating
activities you refer to a deferred tax expense primarily related
to
book versus tax depreciation. Please be aware that pursuant to
Regulation S-K Item 303, the liquidity and capital resource
discussion should focus on material sources and uses of cash. As
such, please remove such disclosure or explain to us why you feel
it
is appropriate to include a discussion of deferred tax items
within
this section.
Critical Accounting Policies and Estimates, page 28
17. We note you have identified revenue recognition as an area of
accounting you regard as critical due to the estimates and
assumptions involved in the application of these accounting
policies.
Your current disclosure appears to be more descriptive of general
accounting policies utilized, rather than any specific
uncertainties
underlying your specific estimates and assumptions.
Please revise your disclosures to address the following:
* why you consider the item to be critical to your company,
* the material estimates and assumptions made by management
underlying the critical accounting policies,
* an analysis of the uncertainties involved in applying the policy
and the variability that is reasonably likely to result from its
application,
* an analysis of how you arrived at the measure and how accurate
the
estimate or underlying assumptions have been in the past, and
* an analysis of your specific sensitivity to change based on
outcomes that are reasonably likely to occur and have a material
effect.
You should provide quantitative as well as qualitative disclosure
when quantitative information is reasonably available and will
provide material information for investors. In addition, identify
instances where you have changed assumptions and estimates in the
past and indicate how these changes impacted your financial
statements. Please refer to FRC Section 501.14 for further
guidance.
Please also revise your discussion included in the notes to
financial
statements, Note 1 - Summary of Significant Accounting Policies,
included on page F-8, to include the accounting estimates,
assumptions and circumstances specific to your revenue recognition
policy.
Non-GAAP Discussion, page 29
18. We note you present Adjusted EBITDA as a non-GAAP performance
measure. As indicated at Item 10(e)(ii)(B) of Regulation S-K, you
may not adjust non-GAAP performance measures to eliminate or
smooth
items identified as non-recurring, infrequent or unusual, when the
nature of the charge or gain is such that it is reasonably likely
to
recur within two years or there was a similar charge or gain
within
the prior two years. In this regard, we note you adjust this
measure
to exclude payments on operating leases and management incentive
payments. Please revise your non-GAAP performance measure to no
longer adjust for these recurring items. To the extent you
believe
what we have identified as recurring are actually non-recurring,
provide detailed evidence to support your position.
Under certain limited circumstances a non-GAAP performance measure
may be adjusted for recurring items; however, companies must meet
the
burden of demonstrating the usefulness of any measure that
excludes
recurring items. Refer to Question 8 of the Frequently Asked
Questions Regarding the Use of Non-GAAP Financial Measures.
Please
note that it is under limited circumstances when we would allow
the
presentation of a non-GAAP performance measure that has been
adjusted
for recurring items.
Business, page 34
History, page 34
19. We note on page F-7 that Orchids Acquisition Group, Inc. was
formed in 2003 for the purpose of acquiring the Company. It is
not
apparent however, why the formation of Orchids Acquisition Group,
Inc. factored into the overall business strategy of the Company
and
the decision to go public. On a supplemental basis, please
provide
information, in the form of a diagram or otherwise, that
delineates
the ownership structure and share ownership of the Company and
Orchids Acquisition Group, Inc. pre- merger. Further, please
inform
us of the reasons for the formation of Orchids Acquisition Group,
Inc. and why such formation was necessary to the Company`s overall
business strategy.
20. With a view toward disclosure, explain to us in necessary
detail
how the acquisition came about. Discuss the fees and compensation
arrangements - including the terms of any securities issuances,
explain how it originated, describe any negotiations and clarify
who
participated and in what capacity. For example, where members of
the
board also had interests in the other party or in an affiliated
party, make clear on whose behalf each was acting. We may have
further comments.
Environmental, Health and Safety Matters, page 41
21. Consistent with the requirements of Item 101(c)(1)(xii) of
Regulation S-K, provide expanded disclosure regarding the
environmental regulations to which your operations are subject.
In
this regard, we note the disclosure in the risk factor section of
the
prospectus references what appears to be a variety of regulations
that impact your operations. Please ensure the discussion on page
41
supplements the information referenced in the risk factor. If you
have been identified as a potentially responsible party for state
or
federal environmental purposes, disclose the particulars.
Management, page 42
Board Committees, page 43
22. We note you include a discussion of and the various functions
carried out by your audit committee. Please note that Regulation
S-
X, Rule 2-01(c)(7)(i) requires all audit and non-audit services
performed by the auditor be pre-approved by the audit committee.
In
this regard, an audit committee is required to establish a pre-
approval policy regarding the services performed by the
independent
auditor. If applicable, please disclose that your audit committee
does have an established and followed pre-approval policy, or
explain
to us and disclose why no such policy has been established.
23. Expand your disclosure for Messrs. Schroeder, McFall and
Arnold
to provide complete five year biographical sketches without gaps
or
ambiguities with regard to time or the capacities in which the
individuals served the identified entities.
24. If the underwriters will engage in an electronic offer, sale
or
distribution of the shares, please describe their procedures to us
supplementally.
25. We note the disclosure on page 12 in the risk factor
discussion
regarding the Taglich Brothers, Inc.`s ability, in its sole
discretion, to release parties that will be subject to the lock-up
"at any time or from time to time without notice" and that there
are
"no pre-established conditions to waiving the terms of the lock-
up."
Please advise us whether there are any agreements, understandings
or
intentions, tacit or explicit, to release any of the shares from
the
lock-ups prior to the expiration of the corresponding period. We
may
have further comments.
Certain Material U.S. Federal Income, page 58
26. The reader is entitled to rely on the disclosure you provide.
It
is inappropriate to suggest on page 60 that the disclosure is "for
general information only" and that the reader "should consult"
with
its own advisors. You may recommend that course of action,
however.
Exhibits
27. Advise us whether Exhibit 10.8 references the two purchase
agreements disclosed on page 28. Ensure that you file as exhibits
and describe in necessary detail all material contracts and please
file such agreements with your next amendment.
Statements of Income, page F-4
28. We note you have included the basic and diluted Net Income
(loss)
per share for the Successor`s ten-month period ended December 31,
2004 on the face of the financial statements as well as in the
notes
to financial statements, Note 8 - Earnings per Share, included on
page F-15. Please explain to us why you have presented the
calculation for this period only. Include any applicable
accounting
literature to support your response.
Statements of Changes in Stockholders` Equity, page F-5
29. We note a reduction to Additional Paid-In Capital during 2004
identified as a cost of common stock and warrants issued of
$646,502.
Please explain to us the nature of the transactions to which this
adjustment relates and the accounting literature you followed to
support the treatment of the cost.
Notes to Financial Statements, page F-7
Note 4 - Property, Plant and Equipment, page F-11
30. We note the inclusion of non-depreciable machinery and
equipment
identified as parts and spares as property, plant and equipment.
Please explain to us why you consider these items to be property
as
compared to inventory. Include any applicable accounting
literature
to support your response.
Please also explain to us the methodology you use to determine if
an
impairment related to these items has occurred.
Note 5 - Long Term Debt, page F-12
31. In your discussion regarding shares issued to "Founders" for
$.39
per share you state that Orchids Acquisition sold its common stock
for $10 per share. Please explain to us how Orchids Acquisition
determined a value of $10 per share was appropriate. Include any
applicable literature utilized to support your response.
32. We note your disclosure that the difference between $10 per
share
and $.39 per share was reported as compensation expense for the
ten-
month period ended December 31, 2004 totaling $103,106. This
seems
to imply that there were only 10,729 ($103,106/$9.61) shares
purchased by "Founders". However within your discussion of
Certain
Relationships and Related Party Transactions on page 49, you
disclose
that Orchids Acquisition Group issued 353,345 shares of founders
stock at a purchase price of $.14 per share. Please explain to us
and disclose the following:
* The difference between the implied number of shares and the
amount
disclosed on page 49, and
* The difference between the purchase price disclosed in Note 5 of
$.39 per share and the $.19 per share disclosed on page 49.
Include any applicable accounting literature you used to
support
your response.
Note 7 - Income Taxes, page F-14
33. Please disclose the significant components of income tax
expense
attributable to continuing operations for each year presented.
Such information should include the amount of current and deferred
tax expense or benefit, tax credits or carryforwards and other
applicable information. Refer to FAS 109 paragraph 45 for further
guidance.
Closing Comments
As appropriate, please respond to this letter within 10
business
days or tell us when you will provide us with a response.
Detailed
cover letters greatly facilitate our review. Please file your
cover
letter on EDGAR. Please understand that we may have additional
comments after reviewing your response to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert this action as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
Please direct all accounting questions to Mark Wojciechowski,
at
202-942-1928 or in his absence to, April Sifford, Accounting
Branch
Chief at (202) 942-2983. Please direct all other questions to
Mellissa Campbell Duru, at (202) 942-1930, or in her absence, to
Timothy Levenberg, Special Counsel at (202) 942-1896. Direct all
correspondence to the following ZIP code: 20549-0405.
Sincerely,
H. Roger Schwall
Assistant Director
cc: via facsimile
Donald Figliulo, Esq.
Bryan Cave LLP
(312) 602-5050 (fax)
H. Schwall
M. Wojciechowski
M. Duru
A. Sifford
T. Levenberg
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Orchids Paper Products Company
May 18, 2005
page 9
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0405
DIVISION OF
CORPORATION FINANCE