UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-14003
OMEGA PROTEIN CORPORATION
(Exact name of Registrant as specified in its charter)
STATE OF NEVADA 76-0562134
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1717 ST. JAMES PLACE, SUITE 550
HOUSTON, TEXAS 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 623-0060
_________________
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO[_].
NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, PAR VALUE
$0.01 PER SHARE, ON MAY 11, 1999: 23,890,954
OMEGA PROTEIN CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheet as of March 31, 1999
and December 31, 1998.............................................. 3
Unaudited Condensed Consolidated Statement of Operations for the
three months ended March 31, 1999 and 1998......................... 4
Unaudited Condensed Consolidated Statement of Cash Flows for the
three months ended March 31, 1999 and 1998.......................... 5
Notes to Unaudited Condensed Consolidated Financial Statements........ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.................................................. 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................... 22
ITEM 2. CHANGES IN SECURITIES................................................ 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..................................... 24
SIGNATURES..................................................................... 25
EXHIBIT INDEX.................................................................. 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
March 31, December 31,
1999 1998
----------- ------------
(in thousands)
ASSETS
------
Current assets:
Cash and cash equivalents............................................. $ 45,400 $ 44,828
Receivables, net...................................................... 7,537 8,902
Inventories........................................................... 42,134 43,351
Prepaid expenses and other current assets............................. 597 1,039
----------- ------------
Total current assets................................................ 95,668 98,120
----------- ------------
Other assets............................................................ 5,372 5,665
----------- ------------
Property and equipment, net............................................. 89,618 86,068
Total assets........................................................ $ 190,658 $ 189,853
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt.................................. $ 877 $ 997
Accounts payable...................................................... 697 1,672
Accrued liabilities................................................... 12,430 11,858
Amounts due to (from) parent.......................................... (19) 36
----------- ------------
Total current liabilities........................................... 13,985 14,563
----------- ------------
Long-term debt.......................................................... 11,020 11,205
----------- ------------
Deferred income taxes................................................... 2,860 2,860
----------- ------------
Other liabilities....................................................... 375 375
----------- ------------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock, $0.01 par value: authorized 10,000,000 shares: none
issued............................................................... - -
Common stock, $0.01 par value; authorized 80,000,000 shares:
24,277,954 shares and 24,276,812 shares issued and outstanding,
respectively....................................................... 243 243
Capital in excess of par value........................................ 111,722 111,722
Reinvested earnings, from October 1, 1990............................. 51,945 48,885
Common stock in treasury, at cost - 307,900 shares.................... (1,492) -
----------- ------------
Total stockholders' equity.......................................... 162,418 160,850
----------- ------------
Total liabilities and stockholders' equity........................ $ 190,658 $ 189,853
=========== ============
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
------------------------------
1999 1998
---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues............................................................ $22,155 $30,041
Cost of Sales....................................................... 15,486 17,460
------- -------
Gross profit........................................................ 6,669 12,581
Selling, general, and administrative expense........................ 2,188 1,447
------- -------
Operating income.................................................... 4,481 11,134
Interest income (expense), net...................................... 385 (604)
Other income (expense), net......................................... (88) (66)
------- -------
Income before income taxes.......................................... 4,778 10,464
Provision for income taxes.......................................... 1,718 3,890
------- -------
Net income.......................................................... $ 3,060 $ 6,574
======= =======
Earnings per share (basic).......................................... $ 0.13 $ 0.33
======= =======
Average common shares outstanding................................... 24,211 19,676
======= =======
Earnings per share (diluted)........................................ $ 0.13 $ 0.33
======= =======
Average common shares and common share equivalents outstanding....... 24,211 19,676
======= =======
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
4
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
------------------------------------
1999 1998
---------- ----------
(IN THOUSANDS)
Cash flows provided by operating activities:
Net income.................................................................. $ 3,060 $ 6,574
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
(Gain) on disposal of assets, net........................................ - (134)
Depreciation and amortization............................................ 2,219 1,781
Deferred income taxes.................................................... - 1,445
Changes in assets and liabilities:
Receivables............................................................ 1,365 (1,403)
Inventories............................................................ 1,217 2,078
Accounts payable and accrued liabilities............................... (403) 48
Amounts due to parent.................................................. (55) (2,044)
Other, net............................................................. 485 (363)
---------- ----------
Total adjustments.................................................... 4,828 1,408
---------- ----------
Net cash provided by operating activities........................... 7,888 7,892
---------- ----------
Cash flows (used in) provided by investing activities:
Proceeds from sale of assets, net............................................. - 438
Capital expenditures.......................................................... (5,519) (3,560)
---------- ----------
Net cash (used in) investing activities.............................. (5,519) (3,122)
---------- ----------
Cash flows (used in) provided by financing activities:
Principal payments of short and long-term debt obligations.................... (305) (391)
Purchase of Treasury Stock.................................................... (1,492) -
---------- ----------
Net cash (used in) financing activities................................. (1,797) (391)
---------- ----------
Net increase in cash and cash equivalents....................................... 572 4,469
Cash and cash equivalents at beginning of year.................................. 44,828 10,258
---------- ----------
Cash and cash equivalents at end of period...................................... $ 45,400 $ 14,727
========== ==========
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
5
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION
Business Description
Omega Protein Corporation ("Omega" or the "Company"), produces and
markets a variety of products produced from menhaden (a fish found in
commercial quantities), including regular grade and value added specialty fish
meals, crude and refined fish oils and fish solubles. The Company's fish meal
products are used as nutritional feed additives by animal feed manufacturers
and by commercial livestock producers. The Company's crude fish oil is sold to
food producers in Europe, and its refined fish oil products are used in
aquaculture feeds and certain industrial applications. Fish solubles are sold
as protein additives for animal feed and as organic fertilizers.
On January 26, 1998, Marine Genetics Corporation ("Marine Genetics")
merged into Omega, a Nevada corporation, wholly-owned by Zapata Corporation
("Zapata"), with Omega being the surviving entity. The common control merger
was accounted for at historical cost in a manner similar to that in a pooling
of interests accounting. In connection with the merger, Marine Genetics
outstanding Common Stock was converted into Omega Common Stock at the rate of
one share for 19,676 shares of Omega Common Stock and Omega's pre-merger
outstanding Common Stock was canceled and treated as treasury stock.
On April 8, 1998, the Company completed an initial public offering
of 8,500,000 of its common stock at a gross price of $16.00 per share. On May
7, 1998, the Underwriters exercised their option to acquire 1,275,000
additional shares at the same gross price. Of the 9,775,000 total shares sold
in the offering, the Company issued and sold 4,600,000 shares, and Zapata sold
5,175,000 shares. Immediately following the offering Zapata owned
approximately 59.7% of the shares of the Company's outstanding common stock.
Change in Fiscal Year
On December 1, 1998 the Company's Board of Directors approved a
change in the Company's fiscal year end from September 30 to December 31,
effective beginning January 1, 1999.
Consolidation
The consolidated financial statements include the accounts of Omega
and its wholly and majority owned subsidiaries. Investments in affiliated
companies and joint ventures representing a 20% to 50% voting interest are
accounted for using the equity method. All significant intercompany accounts
and transactions have been eliminated in consolidation.
6
The unaudited condensed consolidated financial statements included
herein have been prepared by Omega, without audit, pursuant to the rules and
regulations of the Securities Exchange Commission. The financial statements
reflect all adjustments that are, in the opinion of management, necessary to
fairly present such information. All such adjustments are of a normal
recurring nature. Although Omega believes that the disclosures are adequate to
make the information presented not misleading, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been condensed
or omitted pursuant to such rules and regulations. These unaudited condensed
consolidated financial statements should be read in conjunction with the
financial statements and the notes thereto included in Omega's Annual Report
on Form 10-K for the fiscal year ended September 30, 1998, filed with the
Securities and Exchange Commission on December 14, 1998. The results of
operations for the fiscal quarter ended March 31, 1999 are not necessarily
indicative of the results to be expected for any subsequent quarter or the 12
months ending December 31, 1999.
Revenue Recognition
The Company recognizes revenue for the sale of its products when
title to its products is transferred to the customer.
Inventories
The Company's fishing season runs from mid-April to the end of
October in the Gulf Coast and from the beginning of May to the end of December
in the Atlantic Coast. Government regulations preclude the Company from
fishing during the off-seasons. During the off-seasons, the Company incurs
costs (i.e., plant and vessel-related labor, utilities, rent and depreciation)
that are directly related to the Company's infrastructure that will be used in
the upcoming fishing season. Costs that are incurred subsequent to a fish
catch are deferred until the next season and are included with inventory.
Fishing product inventories and materials, parts and supplies are stated at
the lower of cost (average cost) or market.
The Company's inventory cost system considers all costs, both
variable and fixed, associated with an annual fish catch and its' processing.
The Company's costing system allocates cost to inventory quantities on a per
unit basis as calculated by a formula that considers total estimated
inventoriable costs for a fishing season (including off-season costs) to total
estimated fish catch and the relative fair market value of the individual
products produced. The Company adjusts the cost of sales, off-season costs and
inventory balances at the end of each quarter based on revised estimates of
total inventoriable costs and fish catch.
Income Taxes
The Company utilizes the liability method to account for income
taxes. This method requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of existing temporary
differences between the financial reporting and tax reporting basis of assets
and liabilities, and operating loss and tax credit carryforwards for tax
purposes. Prior to the completion of the Company's public offering in April
1998, the
7
Company was included in Zapata's consolidated U.S. federal income tax return
and its income tax effects reflected on a separate basis for financial
reporting purposes.
Property, Equipment and Depreciation
Property and equipment are initially recorded at cost except as
adjusted by the quasi-reorganization as of October 1, 1990. Because of the
quasi-reorganization, the carrying value of the assets was reduced to
estimated fair value.
Depreciation of property and equipment is computed by the straight-
line method at rates expected to amortize the cost of property and equipment,
net of salvage value, over their estimated useful lives. Estimated useful
lives of assets acquired new, determined as of the date of acquisition are as
follows:
USEFUL LIVES
(YEARS)
------------
Fishing vessels and fish processing plants.............. 15-20
Furniture and fixtures.................................. 3-10
Replacements and major improvements are capitalized; maintenance and
repairs are charged to expense as incurred. Upon sale or retirement, the costs
and related accumulated depreciation are eliminated from the accounts. Any
resulting gains or losses are included in the statement of operations. The
Company periodically evaluates its long-lived assets for impairment if events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of cash and trade accounts
receivable. The Company's customer base generally remains consistent from year
to year. The Company performs ongoing credit evaluations of its customers and
generally does not require material collateral. The Company maintains reserves
for potential credit losses and such losses have historically been within
management's expectations.
At March 31, 1999 and December 31, 1998, the Company had cash
deposits concentrated primarily in two major banks. In addition, the Company
had Certificates of Deposit and commercial quality grade A2P2 rated or better
securities paper with companies and financial institutions. As a result of the
foregoing, the Company believes that credit risk in such investments is
minimal.
Earnings Per Share
Basic earnings per share were computed by dividing income by the
weighted average number of common shares outstanding. Diluted earnings per
share were computed by dividing income by the sum of the weighted average
number of common shares outstanding and the effect of any dilutive stock
options.
8
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Quasi-Reorganization
In connection with the comprehensive restructuring accomplished in
1991, the Company, in conjunction with Zapata, implemented, for accounting
purposes, a "quasi-reorganization," an elective accounting procedure that
permits a company that has emerged from previous financial difficulty to
restate its accounts and establish a fresh start in an accounting sense. After
implementation of the accounting quasi-reorganization, the Company's assets
and liabilities were revalued and its deficit in reinvested earnings was
charged to capital in excess of par value. The Company effected the accounting
quasi-reorganization as of October 1, 1990.
NOTE 2. ASSET ACQUISITIONS
On November 3, 1997, the Company acquired the fishing and processing assets
of American Protein, Inc. ("American Protein"), which operated ten fishing
vessels and a menhaden processing plant in the Chesapeake Bay area, for $14.5
million in cash (the "American Protein Acquisition").
Additionally, on November 25, 1997, the Company purchased the fishing and
processing assets of Gulf Protein, Inc. ("Gulf Protein"), which included six
fishing vessels, five spotter planes and the processing equipment located at
the Gulf Protein Plant near Morgan City, Louisiana for $13.6 million in cash
and the assumption of $883,000 in liabilities (the "Gulf Protein Acquisition"
together with the "American Protein Acquisition" the "Acquisitions").
These acquisitions were financed by a $28.1 million intercompany loan from
Zapata. Interest on this loan was accrued at the rate of 8.5% per annum and
was repayable in quarterly installments beginning May 1, 1998. The loan, which
was to mature on August 1, 2002, was prepaid in May 1998 with a portion of the
proceeds from the Company's initial public offering described in Note 1.
9
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable as of March 31, 1999 and December 31, 1998 are
summarized as follows:
MARCH DECEMBER
1999 1998
-------- ---------
(IN THOUSANDS)
Trade............................................. $ 6,500 $ 8,230
Insurance......................................... 290 304
Employee.......................................... 152 102
Current note receivable........................... 391 -
Other............................................. 404 458
--------- ---------
Total accounts receivable ........................ 7,737 9,094
Less allowance for doubtful accounts.............. (200) (192)
--------- ---------
Receivables, net.................................. $ 7,537 $ 8,902
========= =========
NOTE 4. INVENTORY
Inventory as of March 31, 1999 and December 31, 1998 is summarized as
follows:
MARCH DECEMBER
1999 1998
------- --------
(IN THOUSANDS)
Fish meal........................................ $ 9,702 $ 19,025
Fish oil......................................... 7,192 12,456
Fish solubles.................................... 476 906
Off-season cost.................................. 19,159 5,973
Materials & supplies............................. 5,628 5,019
Other............................................ 79 74
Less oil inventory reserve....................... (102) (102)
--------- ---------
Total inventory.................................. $ 42,134 $ 43,351
========= =========
NOTE 5. OTHER ASSETS
Other assets as of March 31, 1999 and December 31, 1998 are summarized as
follows:
MARCH DECEMBER
1999 1998
------- --------
(IN THOUSANDS)
Fishing nets..................................... $ 1,429 $ 1,263
Prepaid pension cost............................. 2,890 2,890
Title XI loan origination fee.................... 377 399
Note receivable.................................. - 384
Deposits......................................... 117 116
Investments in unconsolidated affiliates......... 78 78
Miscellaneous.................................... 481 535
--------- ---------
Total other assets............................... $ 5,372 $ 5,665
========= =========
Amortization expense for fishing nets amounted to $200,000 and $228,000 for
the quarters ended March 31, 1999 and 1998, respectively.
10
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 1999 and December 31, 1998 are
summarized as follows:
MARCH DECEMBER
1999 1998
------- --------
(IN THOUSANDS)
Land.......................................... $ 5,390 $ 5,390
Plant assets.................................. 58,565 53,696
Fishing vessels............................... 63,208 60,879
Furniture and fixtures........................ 1,595 1,552
Other......................................... 5,519 7,240
--------- ---------
Total property and equipment.................. 134,277 128,757
Less accumulated depreciation and impairment.. (44,659) (42,689)
--------- ---------
Property and equipment, net................... $ 89,618 $ 86,068
========= =========
Depreciation expense for the quarters ended March 31, 1999 and 1998 was
$2.0 million and $1.6 million, respectively.
NOTE 7. NOTES PAYABLE AND LONG-TERM DEBT
At March 31, 1999 and December 31, 1998, the Company's long-term debt
consisted of the following:
MARCH DECEMBER
1999 1998
----- --------
U.S. government guaranteed obligations (Title XI loan) collateralized by
a first lien on certain vessels and certain plant assets:
Amounts due in installments through 2013, interest from 6.63% to 8.25%...... $ 10,587 $ 10,872
Amounts due in installments through 2014, interest at Eurodollar rates
Plus .45%; 5.74% and 5.77% at March 31, 1999 and December 31, 1998,
respectively.............................................................. 1,230 1,250
Other debt at 4% at March 31, 1999 and December 31, 1998....................... 80 80
-------- --------
Total debt..................................................................... 11,897 12,202
Less current maturities................................................... (877) (997)
-------- --------
Long-term debt................................................................. $ 11,020 $ 11,205
======== ========
At March 31, 1999 and December 31, 1998, the estimated fair value of debt
obligations approximated book value.
The Company is currently authorized to receive up to $20.6 million in loans
under the Title XI program. To date the Company has used $15.0 million of the
authorized Title XI funds. At March 31, 1999 and December 31, 1998, the Company
was in compliance with all restrictive covenants, the Company was required to
maintain a current ratio of at least 1.25:1 and maintain a debt to equity ratio
of not more than 2:1. Covenants also limit capital expenditures and investments.
11
On August 11, 1998 the Company entered into a two year $20.0 million
revolving credit agreement with SunTrust Bank, South Florida, N.A. (the
"Credit Facility"). Under the Credit Facility the Company may make borrowings
in a principal amount not to exceed $20.0 million at any time. Borrowings
under this facility may be used for working capital and capital expenditures.
Interest accrues on borrowings that will be outstanding under the Credit
Facility at the Company's election, either (i) the bank's prime rate less 75
basis points, or (ii) LIBOR plus a margin based on the Company's financial
performance. The revolving credit agreement requires a per annum commitment
fee of one-eighth of a percent (0.125%) on the average daily unused portion of
the commitment of the Lender. The Credit Facility is collateralized by all of
the Company's trade receivables, inventory and specific computer equipment.
The Company and its subsidiaries are required to comply with certain financial
covenants, including maintenance of a minimum tangible net worth, debt to
tangible net worth ratio, funded debt to cash flow ratio and fixed charges
ratio, and certain other covenants. As of March 31, 1999 and December 31,
1998, the Company had no borrowings outstanding under the Credit Facility.
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities as of March 31, 1999 and December 31, 1998 are
summarized as follows:
MARCH DECEMBER
1999 1998
------- --------
(IN THOUSANDS)
Salary and benefits........................................ $ 2,390 $ 2,826
Insurance.................................................. 3,291 3,598
Taxes, other than income tax............................... 845 868
Federal and state income taxes............................. 3,393 1,674
Trade creditors............................................ 2,443 2,865
Other...................................................... 68 27
------- -------
Total accrued liabilities.................................. $12,430 $11,858
======= =======
NOTE 9. CERTAIN TRANSACTIONS AND ARRANGEMENTS BETWEEN THE COMPANY AND ZAPATA
The Company provided to Zapata payroll and certain administrative services
billed at their approximate cost. During the three-month periods ended March
31, 1999 and March 31, 1998 fees for these services totaled $58,666 and
$7,500 respectively. The cost of such services were based on the estimated
percentage of time that employees spent working on the other party's matters
as a percent of total time worked. The Company's management deemed this
allocation method to be reasonable.
Upon completion of the Company's initial public offering in April 1998, the
Company and Zapata entered into certain agreements that include the
Separation, Sublease, Registration Rights, Tax Indemnity and Administrative
Services Agreements. The Separation Agreement required the Company to repay
$33.3 million of indebtedness owed by the Company to Zapata contemporaneously
with the consummation of the Company's initial public offering and also
prohibits Zapata from competing with the Company for a
12
period of five years. The Sublease Agreement provides for the Company to
lease its principal corporate offices in Houston, Texas from Zapata and
provides for the Company to utilize certain shared office equipment for no
additional charge. The Registration Rights Agreement sets forth the rights
and responsibilities of each party concerning certain registration filings
and provides for the sharing of fees and expenses related to such filings.
The Tax Indemnity Agreement requires the Company to be responsible for
federal, state and local income taxes from its operations and the
Administrative Services Agreement allows the Company to provide certain
administrative services to Zapata at the Company's estimated cost.
NOTE 10. STOCKHOLDERS' EQUITY
Treasury Stock
During the three-months ended March 31, 1999, the Company acquired 307,900
shares of its Common Stock in connection with its stock repurchase program.
That program authorizes the Company to purchase up to 4.0 million common
shares from time to time on the open market at price levels the Company deems
attractive.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is defending various claims and litigation arising from its
operations. In the opinion of management, uninsured losses, if any, resulting
from these matters will not have a material adverse effect on the Company's
results of operations, cash flows or financial position.
Environmental Matters
The Company is subject to various possible claims and lawsuits regarding
environmental matters. Management believes that costs, if any, related to
these matters will not have a material adverse effect on the results of
operations, cash flows or financial position of the Company.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-looking statements in this Form 10-Q, future filings by the Company
with the Securities and Exchange Commission (the "Commission"), the Company's
press releases and oral statements by authorized officers of the Company are
intended to be subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that all forward-
looking statements involve risks and uncertainty, including without
limitation, the risks set forth under the caption "Significant Factors that
May Affect Forward Looking Statements" appearing in Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company believes that forward-looking statements made by it are based on
reasonable expectations. However, no assurances can be given that actual
results will not differ materially from those contained in such forward-
looking statements. Forward-looking statements involve statements that are
predictive in nature, which depend upon or refer to future events or
conditions, which include the words "estimate," "project," "anticipate,"
"expect," "predict," and "believe" and similar expressions as well as the
Company's statements concerning the state of the Company's Year 2000
readiness. The Company assumes no obligation to update forward-looking
statements.
GENERAL
As used herein, the term "Omega" or the "Company" refers to Omega Protein
Corporation and its consolidated subsidiaries, as applicable. All references
herein to a "fiscal" year mean the 12-month period ended December 31 of such
year. The Company's principal executive offices are located at 1717 St. James
Place, Suite 550, Houston, Texas 77056 (Telephone: (713) 623-0060).
Omega is the largest producer of protein-rich meal and oil derived from
marine sources. The Company's products are produced from menhaden (a fish
found in commercial quantities), including regular grade and value added
specialty fish meals, crude and refined fish oils and fish solubles. The
Company's fish meal products are used as nutritional feed additives by animal
feed manufacturers and by commercial livestock and producers. The Company's
crude fish oil is sold to food producers in Europe and its refined fish oil
products are used in aquaculture feeds and certain industrial applications.
Fish solubles are sold as protein additives for animal feed and as organic
fertilizers.
The Company owns 66 fishing vessels (50 of which were directly involved in
the harvesting operations during fiscal 1998) and owns 33 and leases 11
aircraft (of which 41 were directly involved in the harvesting operations)
that are used to harvest menhaden in coastal waters along the U.S. mid-
Atlantic and Gulf of Mexico coasts. The fish catch is processed into regular
grade fish meal, specialty fish meals, fish oils and fish solubles at the
Company's five processing plants located in Virginia, Mississippi and
Louisiana.
14
The Company closed the American Protein Acquisition on November 3, 1997 and
the Gulf Protein Acquisition on November 25, 1997. See Part I Financial
Information Note 2 to Financial Statements. Both Acquisitions were accounted
for as purchases and, therefore, their results of operations were included in
the Company's Statement of Operations as of the closing dates for each
Acquisition.
The Company completed its initial public offering on April 8, 1998.
Subsequent to the offering, the Underwriters elected to purchase over-
allotment options. These issuance's generated net proceeds of approximately
$68.0 million (after deducting underwriting discounts and commissions and
offering expenses). Of these proceeds, the Company used approximately $33.3
million to repay indebtedness to Zapata and $2.1 million to repay bank
indebtedness. Of the $33.3 million indebtedness owed to Zapata, $28.1 million
was incurred to fund the cash portion of the purchase price for the
Acquisitions and the balance was primarily incurred to pay the Company's
federal income taxes. The Company has invested the remaining net proceeds in
short-term government securities and interest bearing cash equivalents pending
their use. The Company intends to use these proceeds to fund possible
acquisitions and other capital expenditures as well as for general corporate
purposes.
The Company's harvesting season generally extends from May through December
in the mid-Atlantic coast and from April through October in the Gulf coast.
During the off-season, the Company fills purchase orders from the inventory it
has accumulated during the fishing season. Prices for the Company's products
historically have been lower during the fishing season when product is more
abundant than in the off-season. Throughout the entire year, and from year to
year, prices are significantly influenced by supply and demand in world
markets for competing products, particularly soybean meal for its fish meal
products and vegetable oils and fats for its fish oil products when used as an
alternative to vegetable oils and fats. In an effort to reduce price
volatility and to generate higher, more consistent profit margin, the Company
has concentrated on the production and marketing of specialty meal products,
which generally have higher margins than the Company's regular grade meal
product. Additionally, the Company is attempting to introduce its refined fish
oil into the U.S. food market where initial marketing efforts have indicated
significantly increased margin opportunities and more stable demand
requirements over the Company's traditional crude fish oil markets.
LIQUIDITY AND CAPITAL RESOURCES
Prior to Omega's initial public offering in April 1998, Zapata, as the sole
stockholder of Omega, caused cash to be moved between Omega and Zapata as each
company had cash needs. As a result of the offering, Omega and Zapata are now
separate public companies and each entity's capital resources and liquidity is
legally independent of the other and dedicated to its own operations. As a
result, the historical liquidity and capital resources of the Company may not
be indicative of the Company's future liquidity and capital resources.
The Company's primary sources of liquidity and capital resources have been
cash flows from operations, proceeds from initial public offering, pre-initial
public offering borrowings from Zapata, bank credit facilities and term loans
from various lenders provided pursuant to
15
the Title XI of the Marine Act of 1936 ("Title XI"). These sources of cash
flows have been used for capital expenditures (including acquisitions) and
payment of long-term debt. The Company expects to finance future expenditures
through existing cash balances, internally generated cash flows and, if
necessary, through funds available from its $20.0 million credit facility
and/or Title XI facilities described below.
Under the Title XI program offered through National Marine Fisheries
Service, the Company has the ability to secure loans for fishing vessels and
shoreside capital expenditures and maintenance through lenders with terms
generally ranging between 12 and 20 years at an interest rate between 6% and
8% per annum which are enhanced with a government guaranty to the lender for
up to 80% of the financing. The Company's current Title XI borrowings are
secured by liens on 14 fishing vessels and mortgages on the Company's
Reedville, Virginia and Abbeville, Louisiana plants. The Company is currently
authorized to receive up to $20.6 million in loans under this program. To
date, the Company has used $15.0 million of these funds.
On September 17, 1998 the Company's Board of Directors authorized the
repurchase of up to 4.0 million shares of the Company common stock from time
to time, depending on market conditions. No time limit has been placed on the
duration of the program and no minimum number or value of shares to be
repurchased has been fixed. Subject to applicable securities laws, shares may
be repurchased from time to time in the open market or private transactions.
Purchases are subject to availability of shares at prices deemed appropriate
by the Company's management and other corporate considerations. Repurchased
shares will be held as treasury shares available for general corporate
purposes. During the quarter ended March 31, 1999, the Company repurchased
307,900 shares for a total cost of $1.5 million or an average cost of $4.79.
To the extent that additional shares are repurchased under the program the
Company's liquidity and working capital will be correspondingly reduced.
Omega had an unrestricted cash balance of $45.4 million at March 31, 1999,
up $0.6 million from December 31, 1998. This increase was due to a $7.9
million increase in cash provided by operating activities (which was mainly
attributable to net income and decreases in inventory and trade receivables
balances), which more than offset net cash used in investing and financing
activities.
Investing activities used $5.5 million in the quarter ended March 31, 1999
and $3.1 million during the quarter ended March 31, 1998. The Company's
investing activities consisted mainly of capital expenditures for equipment
purchases and equipment replacements in the three-month periods ended March
31, 1999 and 1998.
Net financing activities used $305,000 to repay debt obligations and $1.5
million to repurchase stock during the period ended March 31, 1999 compared
with $0.4 million used by net financing activities during the quarter ended
March 31, 1998.
The Company believes that its existing cash, cash equivalents, short-term
investments and funds available through its credit facility will be sufficient
to meet its working capital and capital expenditure requirements through at
least the end of 2000.
16
RESULTS OF OPERATIONS
The following table sets forth as a percentage of revenues certain
items of the Company's operations for each of the indicated periods:
THREE MONTHS ENDED MARCH 31,
---------------------------
1999 1998
-------- --------
Revenues.................................... 100.0% 100.0%
Cost of sales............................... 69.9 58.1
----- -----
Gross profit......................... 30.1 41.9
Selling, general and administrative......... 9.8 4.8
----- -----
Operating income............................ 20.3 37.1
Interest income (expense)................... 1.7 (2.0)
Other (expense) income...................... (.4) (.2)
----- -----
Income before income taxes.................. 21.6 34.9
(Provision) for income taxes................ (7.8) (12.9)
----- -----
Net income.................................. 13.8 22.0
===== =====
INTERIM RESULTS FOR THE FIRST QUARTER ENDED MARCH 31, 1999 AND 1998
REVENUES. For the three-months ended March 31, 1999 revenues
decreased $7.9 million, or 26.3% from $30.0 million in the quarter ended March
31, 1998. The decrease was attributable to lower sales volumes of the
Company's fish oil and lower prices for the Company's fish meal. Sales volumes
declined by 39.0% in the period ended March 31, 1999 as compared to the
comparable period ended March 31, 1998. This was due to management's decision
to defer crude oil sales during the current quarter as a result of lower
prices. Crude fish oil prices decreased approximately 11.8% over the same
period in the prior year quarter. Fish meal sales volumes for the current
quarter were relatively unchanged from the comparable period during the prior
year. However, the average selling prices for fish meal during the current
quarter decreased 12.9% compared to the three-months ended March 31, 1998.
COST OF SALES. Cost of sales, including depreciation and
amortization, for the quarter ended March 31, 1999 was $15.5 million, a $2.0
million decrease from $17.5 million in the quarter ended March 31, 1998. As a
percent of revenues, cost of sales was 69.9% in the quarter ended March 31,
1999 as compared to 58.1% in the quarter ended March 31, 1998. Per ton cost of
sales were higher in the quarter ended March 31, 1999 as compared to the
quarter ended March 31, 1998, due mainly to higher cost inventories carried
forward from fiscal 1998. During August and September of 1998, fishing
operations were hampered by a series of hurricanes and tropical storms that
disrupted fishing operations, resulting in higher cost inventory.
GROSS PROFIT. Gross Profit decreased $5.9 million or 47.0% from
$12.6 million in the quarter ended March 31, 1998 to $6.7 million in the
quarter ended March 31, 1999. As a percentage of revenues, the Company's gross
profit margin decreased 11.8% in the three-month period ended March 31, 1999
compared to the same period in the prior fiscal year.
17
The decline in gross profit was the result of both a decrease in revenues and
higher cost of sales due to the higher cost of inventories carried forward
from fiscal 1998, resulting in a lower gross profit margin during the first
quarter of fiscal 1999 compared to the three-months ended March 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $741,000 or 51.2% from $1.4 million in the
quarter ended March 31, 1998 compared to $2.2 million in the period ended
March 31, 1999. The increase in expense was due primarily to increased
personnel and marketing costs associated with the Company's efforts to enter
the U.S. food market with its refined menhaden oil.
OPERATING INCOME. As a result of the factors discussed above, the
Company's operating income decreased from $11.1 million in the quarter ended
March 31, 1998 to $4.5 million for the period ended March 31, 1999. As a
percentage of revenue, operating income decreased from 37.1% in the quarter
ended March 31, 1998 to 20.3% in the period ended March 31, 1999.
INTEREST INCOME (EXPENSE), NET. Interest expense decreased by
$989,000 from net interest expense in the quarter ended March 31, 1998 to net
interest income during the current quarter. The decrease in net interest
expense was due to the Company's repayment of $33.3 million intercompany to
Zapata in April 1998 with a portion of the proceeds from the Company's initial
public offering and the investment of the approximately $40.0 million in
remaining net proceeds from the offering.
OTHER INCOME (EXPENSE), NET. Other expense increased $22,000 in the
period ended March 31, 1999 due to the amortization of a non-compete
obligation to the Company.
PROVISION FOR INCOME TAXES. The Company recorded a $1.7 million
provision for income tax for the period ended March 31, 1999. This represents
an effective tax rate of 36.0% in comparison to a $3.9 million tax provision
in the quarter ended March 31, 1998, representing an effective tax rate of
37.2%. The effective tax rate approximates the applicable combined state and
federal statutory tax rates for the respective periods.
SEASONAL AND QUARTERLY RESULTS
The Company's menhaden harvesting and processing business is
seasonal in nature. The Company generally has higher sales during the menhaden
harvesting season (which includes the three-month periods ending June 30 and
September 30) due to increased product availability, but prices during the
fishing season tend to be lower than during the off-season. As a result, the
Company's quarterly operating results have fluctuated in the past and may
fluctuate in the future. In addition, from time to time the Company defers
sales of inventory based on worldwide prices for competing products that
affect prices for the Company's products which may affect comparable period
comparisons.
18
YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs using
a two-digit format, as opposed to four digits, to indicate the year. Some
computer systems will be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, leading to disruptions
in operations.
The Company is aware of the issues surrounding the Y2K and the
problems that may occur. In 1997 the Company developed a program for Y2K
compliance. Since 1997 the Company has converted all of its computer
information systems to enable proper processing of critical management
information systems ("MIS") related to the Y2K issue and beyond. Critical MIS
systems consist of software programs such as the operating system,
spreadsheets, accounting and financial programs. Testing methodology involved
changing the date on the system being tested to be in the year 2000 and then
exercising all relevant applications to verify Y2K compliance. The Company's
current estimates indicate that the costs of addressing potential problems are
not expected to have a material impact upon the Company's financial position,
result of operations or cash flows in future periods. To date, the cost of the
Company's Y2K Compliance program (including software conversion) has been
immaterial.
The Company continues to evaluate its non-critical MIS systems and
expects that they will be compliant prior to the year 2000. Non-critical MIS
systems refer to embedded technology such as micro controllers found in
computers and other hardware systems that the Company has identified as non-
critical MIS systems. Non-critical MIS systems are those that would not cause
a disruption in any harvesting or manufacturing application involved in
producing product.
Internal systems are not the only ones that may have a material
effect on the Company. External relationships to the Company, such as vendors
and customers may also impact the Company by their inability to deliver goods
and services required by the Company to operate. Customers could impact the
Company by their inability to operate, reducing the sale of product, or their
inability to pay the Company for products purchased. The Company has decided
to address this issue in fiscal 1999 by identifying major vendors and
customers and sending surveys to discover their level of Y2K compliance. Major
vendors are defined as those that provide critical goods or services to the
Company or those that provide critical components to the Company (such as fuel
suppliers and financial institutions). Major customers are identified as those
customers that are at the greatest risk of being impacted by the Y2K problem
(mainly large domestic and foreign industrial and commercial customers). The
projected completion date of system surveys of external parties is June 30,
1999. There can be no guarantee that the systems of other companies on which
Omega's systems rely will be timely converted or that a failure to convert by
another company or that a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
19
At this point in time, management has not engaged any firm, nor does
it plan to engage any firm, to perform an independent verification and
validation of the Company's Y2K compliance.
At present, the Company does not have a contingency plan in place to
specifically cover the Y2K issues. However, the Company's management continues
to evaluate its systems and those of its vendors and customers and expects
that all of its systems will be compliant prior to the year 2000.
SIGNIFICANT FACTORS THAT MAY AFFECT FORWARD-LOOKING STATEMENTS
The Company wishes to caution investors that the following
significant factors, and those factors described elsewhere in this Report,
other filings by the Company with the SEC from time to time and press releases
issued by the Company, could affect the Company's actual results causing such
results to differ materially from those expressed in any forward-looking
statements made by or on behalf of the Company:
1. The Company's ability to meet its raw material requirements through
its annual menhaden harvest, which is subject to fluctuation due to
natural conditions over which the Company has no control, such as
varying fish population, adverse weather conditions and disease.
2. The impact on the prices for the Company's products of worldwide
supply and demand relationships over which the Company has no control
and which tend to fluctuate to a significant extent over the course
of a year and from year to year.
3. The impact of a violation by the Company of federal, state and local
laws and regulations relating to menhaden fishing and the protection
of the environment and the health and safety of its employees or of
the adoption of new laws and regulations, or stricter interpretations
of existing laws or regulations that materially adversely affect the
Company's business.
4. The impact if the Company cannot harvest menhaden in U.S.
jurisdictional waters if the Company fails to comply with the U.S.
citizenship ownership requirements.
5. Risks inherent with the Company's venture into the sale of refined,
non-hydrogenated menhaden oil for consumption in the U.S., including
the unproven market for this product.
6. Fluctuations in the Company's quarterly operating results due to the
seasonality of the Company's business and the Company's deferral of
sales of inventory based on worldwide prices for competing products.
7. The ability of the Company to retain and recruit key officers and
qualified personnel, vessel captains and crew members.
20
8. Risks associated with the strength of local currencies of the
countries in which its products are sold, changes in social,
political and economic conditions inherent in foreign investment and
international trade in such countries, changes in U.S. laws and
regulations relating to foreign investment and trade, changes of tax
or other laws, partial or total expatriation, currency exchange rate
fluctuations and restrictions on currency repatriation, the
disruption of labor, political disturbances, insurrection or war and
the effect of requirements of partial local ownership of operations
in certain countries.
9. The unanticipated impact of Y2K issues, including the Company's
ability to address Y2K compliance and to develop information
technology and management information systems to support strategic
goals while continuing to control costs and expenses and counter-
party issues.
10. Risks related to unanticipated material adverse outcomes in any
pending litigation or any other unfavorable outcomes or settlements.
There can be no assurance that the Company will prevail in any
pending litigation and to the extent that the Company sustains losses
growing out of any pending litigation which are not presently
reserved or otherwise provided for or insured against, its business,
results of operation and financial condition could be adversely
effected.
11. In the future the Company may undertake acquisitions, although there
is no assurance this will occur. Further, there can be no assurance
that the Company will be able to profitably manage future businesses
it may acquire or successfully integrate future businesses it may
acquire into the Company without substantial costs, delays or other
problems which could have a material adverse effect on the Company's
business, results of operations and financial condition.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various claims and disputes arising in the
normal course of business, including claims made by employees under the Jones
Act which generally are covered by the Company's insurance. The Company
believes that it has adequate insurance coverage for all existing matters and
that the outcome of all pending proceedings, individually and in the
aggregate, will not have a material adverse effect upon the Company's
business, results of operations, cash flows or financial position.
ITEM 2. CHANGES IN SECURITIES
(a) None.
(b) In April and May 1998, the Company sold 4,600,000 shares of its
common stock for an aggregate offering price of $73.6 million. Also
pursuant to the Registration Statement, Zapata, as a selling
stockholder, sold 5,175,000 shares of common stock of the Company
for an aggregate offering price of $82.8 million. The net offering
proceeds to the Company and Zapata, as selling stockholder, after
underwriting discounts and commissions expenses was $68.0 million
and $77.2 million, respectively. All disbursements from the
aggregate proceeds of the offering (including expenses) were direct
or indirect payments to non-related parties. On April 8, 1998, the
Company used approximately $33.3 million of its net proceeds from
the offering to repay an acquisition loan and certain other
indebtedness owed Zapata and approximately $2.1 million to repay a
bank loan. The Company anticipates using the balance of the net
proceeds for capital expenditures (including possible acquisitions),
working capital and general corporate purposes. All unused net
proceeds have been invested in cash, cash equivalents and short-term
investments. The use of the proceeds from the offering to date does
not represent a material change in the use of the proceeds described
in the prospectus included in the Registration Statement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on January 8,
1999 for the purpose of electing Class I directors and approving the
ratification of auditors.
22
All of management's nominees for directors as listed in the proxy
statement were elected with the following vote:
Number of Shares/Votes
Nominee For Authority Withheld
------- ---------- ------------------
Gary L. Allee 20,759,060 13,667
William Lands 20,759,060 13,667
There were no broker non-votes. The terms of the Company's Class II
directors, Avram A. Glazer, Malcolm I. Glazer and Joseph L. von Rosenberg,
continued.
The ratification of PriceWaterhouseCoopers LLP as Public Accountant
for the fiscal year 1999 was approved with the following vote: For 20,771,022
Against 1,600 Abstain 0 Broker non-votes 105.
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 - Financial Data Schedule
(b) Reports on Form 8-K:
Omega filed the following Current Report on Form 8-K with the
Securities and Exchange Commission:
(1) Date of Earliest Event Reported: December 15, 1998
Item Reported: Change in Fiscal Year
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OMEGA PROTEIN CORPORATION
(Registrant)
May 11, 1999 By: /s/ ERIC T. FUREY
---------------------------------------------
(Vice President, General Counsel and
Corporate Secretary)
May 11, 1999 By: /s/ ROBERT W. STOCKTON
--------------------------------------------
(Executive Vice President and Chief
Financial Officer)
25
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27.1 - Financial Data Schedule
26