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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[U] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter period ended June 30, 2003
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
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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 Y No__.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes __ or No X.
Number of shares outstanding of the Registrant's Common Stock, par value
$0.01 per share, on July 30, 2003: 24,209,688
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OMEGA PROTEIN CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of June 30, 2003
and December 31, 2002.......................................................3
Unaudited Condensed Consolidated Statement of Operations for the
three months and six months ended June 30, 2003 and 2002....................4
Unaudited Condensed Consolidated Statement of Cash Flows for the
six months ended June 30, 2003 and 2002.....................................5
Notes to Unaudited Condensed Consolidated Financial Statements................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................21
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........35
Item 4. Controls and Procedures..............................................35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................36
Item 2. Changes in Securities and Use of Proceeds............................36
Item 3. Defaults Upon Senior Securities......................................36
Item 4. Submission of Matters to a Vote of Security Holders..................36
Item 5. Other Information....................................................38
Item 6. Exhibits and Reports on Form 8-K.....................................38
Signatures....................................................................39
1
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
June 30, December 31,
2003 2002
------------------- ------------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 33,201 $ 33,450
Receivables, net........................................................ 16,447 13,029
Amounts due from majority owner......................................... 1 3
Inventories............................................................. 46,156 41,939
Deferred tax assets, net................................................ 434 1,315
Prepaid expenses and other current assets............................... 1,955 884
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Total current assets............................................. 98,194 90,620
Other assets................................................................ 3,657 4,579
Deferred tax assets, net.................................................... 1,251 3,115
Property and equipment, net................................................. 83,213 80,713
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Total assets..................................................... $ 186,315 $ 179,027
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------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................... $ 1,312 $ 1,270
Accounts payable........................................................ 3,441 2,619
Accrued liabilities..................................................... 15,701 14,880
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Total current liabilities........................................ 20,454 18,769
Long-term debt.............................................................. 13,573 14,239
Pension liabilities......................................................... 11,596 10,983
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Total liabilities.......................................................... 45,623 43,991
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Commitments and contingencies 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;
24,588,704 shares and 24,382,662 shares issued and outstanding,
respectively........................................................ 246 244
Capital in excess of par value.......................................... 112,636 112,025
Retained earnings....................................................... 38,466 33,439
Accumulated other comprehensive loss.................................... (8,621) (8,637)
Common stock in treasury, at cost - 413,100 shares...................... (2,035) (2,035)
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Total stockholders' equity.......................................... 140,692 135,036
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Total liabilities and stockholders' equity................. $ 186,315 $ 179,027
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The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
2
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
(in thousands, except per share amount)
Revenues...................................................................... $27,292 $27,237 $52,393 $50,716
Cost of sales................................................................. 21,114 20,331 39,793 37,255
------- ------ ------ ------
Gross profit.................................................................. 6,178 6,906 12,600 13,461
Selling, general, and administrative expense.................................. 2,283 2,161 4,479 4,229
------- ------ ------ ------
Operating income.............................................................. 3,895 4,745 8,121 9,232
Interest expense, net......................................................... (165) (144) (319) (311)
Other expense, net............................................................ (51) (44) (30) (96)
------- ------- ------ ------
Income before income taxes.................................................... 3,679 4,557 7,772 8,825
Provision for income taxes.................................................... 1,299 1,640 2,745 3,175
------- ------- ------ ------
Net income.................................................................... $ 2,380 $ 2,917 $ 5,027 $ 5,650
------- ------- ------ ------
Basic earnings per share...................................................... $ 0.10 $ 0.12 $ 0.21 $ 0.23
------- ------- ------ ------
------- ------- ------ ------
Average common shares outstanding............................................. 24,122 23,959 24,053 23,956
------- ------- ------ ------
------- ------- ------ ------
Diluted earnings per share.................................................... $ 0.09 $ 0.12 $ 0.20 $ 0.23
------- ------- ------ ------
Average common shares and ------- ------- ------ ------
common share equivalents outstanding........................................ 25,655 25,108 25,545 24,979
------- ------- ------ ------
------- ------- ------ ------
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands, except per share amounts)
Six Months Ended
June 30,
-----------------------------------------
2003 2002
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(in thousands)
Cash flows provided by (used in) operating activities:
Net income............................................................ $ 5,027 $ 5,650
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on disposal of assets, net................................... (77) (8)
Provision for losses on receivables............................... 55 383
Depreciation and amortization..................................... 5,927 5,017
Deferred income taxes............................................. 2,745 3,789
Changes in assets and liabilities:
Receivables................................................... (3,433) (6,042)
Amounts due from majority owner............................... 2 -
Inventories................................................... (4,217) (1,890)
Accounts payable and accrued liabilities...................... 1,643 4,999
Other, net.................................................... (689) (1,700)
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Total adjustments........................................ 1,956 4,548
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Net cash provided by operating activities............... 6,983 10,198
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Cash flows provided by (used in) investing activities:
Proceeds from sale of assets, net.................................... 83 23
Capital expenditures.................................................. (7,265) (4,248)
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Net cash used in investing activities.................... (7,182) (4,225)
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Cash flows provided by (used in) financing activities:
Principal payments of short and long-term debt obligations............ (624) (691)
Proceeds from stock options exercised................................. 574 -
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Net cash used in financial activities.................... (50) (691)
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Net increase (decrease) in cash and cash equivalents...................... (249) 5,282
Cash and cash equivalents at beginning of year............................ 33,450 21,813
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Cash and cash equivalents at end of period................................ $ 33,201 $ 27,095
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The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
4
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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 herring-like species of fish found
in commercial quantities in the U.S. coastal waters of the Atlantic Ocean and
Gulf of Mexico), including regular grade and value-added specialty fish meals,
crude and refined fish oils and fish solubles. The Company's fish meal products
are primarily used as a protein ingredient in animal feed for swine, cattle,
aquaculture and household pets. Fish oil is utilized for animal and aquaculture
feeds, industrial applications, as well as for additives to human food products.
The Company's fish solubles are sold primarily to livestock feed manufacturers,
aquaculture feed manufacturers and for use as an organic fertilizer.
Basis of Presentation
These interim financial statements of Omega Protein Corporation have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information, the instructions to
Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. The interim
financial statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2002. Accordingly, certain information
and footnote disclosures normally provided have been omitted since such items
are disclosed therein.
In the opinion of management the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (including normal
recurring adjustments) necessary to present fairly the Company's consolidated
financial position as of June 30, 2003, and the results of its operations and
its cash flows for the six-month periods ended June 30, 2003 and 2002. Operating
results for the three and six-month periods ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003.
Consolidation
The consolidated financial statements include the accounts of Omega and its
wholly and majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. We have reclassified
certain amounts previously reported to conform with the presentation at June 30,
2003.
Revenue Recognition
The Company recognizes revenue for the sale of its products when title and
rewards of ownership to its products are transferred to the customer, which
occurs upon shipment.
5
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
Cash and Cash Equivalents
The Company considers cash in banks and short-term investments with
original maturities of three months or less as cash and cash equivalents.
Inventories
Inventory is stated at the lower of cost or market. The Company's fishing
season runs from mid-April to the first of November in the Gulf of Mexico and
from the beginning of May into December in the Atlantic. Government regulations
generally preclude the Company from fishing during the off-seasons.
The Company's inventory cost system considers all costs associated with an
annual fish catch and its processing, both variable and fixed, including both
costs incurred during the off-season and during the fishing season. 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. The Company's lower-of-cost-or-market-value analyses at
year-end and at interim periods compare the total estimated per unit production
cost of the Company's expected production to the projected per unit market
prices of the products. The impairment analyses involve estimates of, among
other things, future fish catches and related costs, and expected commodity
prices for the fish products. These estimates, which management believes are
reasonable and supportable, involve estimates of future activities and events
which are inherently imprecise and from which actual results may differ
materially.
During the off-seasons, in connection with the upcoming fishing seasons,
the Company incurs costs (i.e., plant and vessel related labor, utilities, rent,
repairs, and depreciation) that are directly related to the Company's
infrastructure. These costs accumulate in inventory and are applied as elements
of the cost of production of the Company's products throughout the fishing
season ratably based on the Company's monthly fish catch and the expected total
fish catch for the season.
Insurance
The Company carries insurance for certain losses relating to its vessels
and Jones Act liabilities for employees aboard its vessels. The Company provides
reserves for those portions of the annual aggregate deductible for which the
Company remains responsible by using an estimation process that considers
Company-specific and industry data as well as management's experience,
assumptions and consultation with outside counsel. Management's current
estimated range of liabilities related to such cases is based on claims for
which management can estimate the amount and range of loss. The Company has
recorded the minimum estimated liability related to those claims, where there is
a range of loss. As additional information becomes available, the Company will
assess the potential liability related to its pending litigation and revise its
estimates. Such revisions in estimates of the potential liability could
materially impact the Company's results of operations and financial position.
6
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
Advertising Costs
The costs of advertising are expensed as incurred in accordance with
Statement of Position 93-7 "Reporting on Advertising Costs."
Accounting for the Impairment of Long-Lived Assets
The Company evaluates at each balance sheet date for continued
appropriateness of the carrying value of its long-lived assets including its
long-term receivables and property, plant and equipment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposals of Long-Lived Assets." This
review is based on management projections of anticipated undiscounted future
cash flows of the related asset or asset grouping. If indicators of impairment
are present, management would evaluate the undiscounted cash flows estimated to
be generated by those assets compared to the carrying amount of those items. The
net carrying value of assets not recoverable is reduced to fair value. The
Company considers continued operating losses, or significant and long-term
changes in business conditions, to be its primary indictors of potential
impairment. In measuring impairment, the Company looks to quoted market prices,
if available, or the best information available in the circumstances.
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 credits carryforwards for tax purposes.
Property, Equipment and Depreciation
Property and equipment additions are recorded at cost. 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 and other.......................... 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.
7
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
Pension Plans
Annual costs of pension plans are determined actuarially based on SFAS No.
87, "Employers' Accounting for Pensions." The Company's policy is to fund U.S.
pension plans at amounts not less than the minimum requirements of the Employee
Retirement Income Security Act of 1974 ("ERISA"). The Company applies SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
disclosure requirements for its pensions and other postretirement benefit plans
to the extent practicable.
In 2002 the Board of Directors authorized a plan to freeze the Company's
pension plan in accordance with ERISA rules and regulations so that new
employees, after July 31, 2002, will not be eligible to participate in the
pension plan and further benefits will no longer accrue for existing
participants. The freezing of the pension plan had the effect of vesting all
existing participants in their pension benefits in the plan.
Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income," establishes a standard for
reporting and displaying comprehensive income (loss) and its components within
the financial statements. Comprehensive income (loss) includes charges and
credits to equity that are not the result of transactions with shareholders.
Comprehensive income (loss) is composed of two subsets - net income and other
comprehensive income (loss). Included in other comprehensive income (loss) for
the Company are minimum pension liability adjustments and foreign currency
translations. These adjustments are accumulated within the Statement of
Stockholders' Equity under the caption Accumulated Other Comprehensive Loss. As
of June 30, 2003, accumulated other comprehensive (loss), net of taxes, as
reflected in the Consolidated Statement of Stockholders' Equity, was $8,621,000.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations 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 June 30, 2003 and December 31, 2002, the Company had cash deposits
concentrated primarily in one major bank. In addition, the Company had
Certificates of Deposit and commercial quality grade A2P2 rated or better 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 common share was computed by dividing net earnings by
the weighted average number of commons shares outstanding during each period.
Diluted earnings per common share was computed by dividing net earnings by the
sum of the weighted average number of common shares outstanding plus the number
of additional common shares that would have been outstanding if the dilutive
potential common shares (in this case, exercise of the Company's employee stock
options) had been issued during each period as discussed in Note 11.
8
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
Recently Issued Accounting Standards
In May 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and
Technical Corrections as of April 2002." This Statement rescinds FASB Statement
No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an
amendment to that Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions. SFAS
No. 145 is effective for financial statements issued for years beginning after
May 15, 2002. SFAS No. 145 had no impact on the Company's existing results of
operations, liquidity or financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. The requirements of SFAS No. 146 are
effective prospectively for exit or disposal activities initiated after December
31, 2002. The adoption of SFAS No. 146 had no impact on the Company's financial
condition, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN
45 clarifies the requirements of FASB Statement No. 5, "Accounting for
Contingencies" relating a guarantor's accounting for, and disclosure of, the
issuance of certain types of guarantees. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods that end after
December 15, 2002; however, the provisions for initial recognition and
measurement are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002, irrespective of a guarantor's year-end. The
Company has determined that it is subject to the disclosure provisions of FIN 45
and has included the required disclosures in Note 10. The initial adoption of
FIN 45 did not have a material impact on the Company's financial condition,
results of operations or cash flows.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that obligations associated with
the retirement of a tangible long-lived asset be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The provisions of SFAS No. 143 were
adopted by the Company in January 2003. The adoption of this statement did not
have a material impact on the Company's financial position, results of
operations or cash flows.
9
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
In January 2003, the FASB issued FIN No. 46, "Consolidated of Variable
Interest Entities." This standard clarifies the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," and addresses
consolidation by business enterprises of variable interest entities (more
commonly known as Special Purpose Entities or SPE's). FIN No. 46 requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risk among the
parties involved. FIN No. 46 also enhances the disclosure requirements related
to variable interest entities. This statement is effective for variable interest
entities created or in which an enterprise obtains an interest after January 31,
2003. FIN No. 46 will be effective for the Company beginning September 1, 2003
for all interests in variable interest entities acquired before February 1,
2003. The adoption of FIN No. 46 is not expected to have a material impact on
the Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. In addition,
all provisions of this statement should be applied prospectively. The provisions
of this statement that relate to SFAS No. 133 implementation issues that have
been effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective dates. The
adoption of this statement is not expected to have a material impact on the
Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within it scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company is in the process of determining what
impact, if any, the adoption of this statement will have upon its financial
condition or results of operations.
Stock-Based Compensation
The Company has a stock-based employee compensation plan, which is
described in more detail in Note 11. The Company accounts for this plan under
the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123." No stock-based employee compensation cost is reflected in net earnings,
because all options granted under this plan had an exercise price equal to or
greater than the market value of the underlying
10
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
common stock on the grant date. The following table illustrates the pro
forma effect on net earnings and net earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation using the Black-Scholes option pricing methodology.
Three Months Six Months Ended
Ended June 30, June 30,
---------------------- ---------------------
(in thousands) (in thousands)
2003 2002 2003 2002
-------- -------- -------- --------
Net earnings $ 2,380 $ 2,917 $ 5,027 $ 5,650
Total stock-based employee
determined under fair value-based (90) (212) (282) (415)
-------- -------- -------- --------
Pro forma net earnings $ 2,290 $ 2,705 $ 4,745 $ 5,235
-------- -------- -------- --------
-------- -------- -------- --------
Net earnings per common share:
Basic - as reported $ 0.10 $ 0.12 $ 0.21 $ 0.23
-------- -------- -------- --------
-------- -------- -------- --------
Basic - pro forma $ 0.09 $ 0.11 $ 0.19 $ 0.22
-------- -------- -------- --------
-------- -------- -------- --------
Net earnings per common share:
Diluted - as reported $ 0.09 $ 0.12 $ 0.20 $ 0.23
-------- -------- -------- --------
-------- -------- -------- --------
Diluted - pro forma $ 0.09 $ 0.11 $ 0.19 $ 0.21
-------- -------- -------- --------
-------- -------- -------- --------
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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, as well as and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Note 2. Accounts Receivable
Accounts receivable as of June 30, 2003 and December 31, 2002 are
summarized as follows:
June 30, December 31,
2003 2002
------------------ -------------------
(in thousands)
Trade..................................................... $ 13,580 $ 11,853
Insurance................................................. 2,258 755
Employee.................................................. 93 45
Income tax................................................ 761 650
Other..................................................... 305 255
------------------ -------------------
Total accounts receivable ................................ 16,997 13,558
Less: allowance for doubtful accounts..................... (550) (529)
------------------ -------------------
Receivables, net.......................................... $ 16,447 $ 13,029
------------------ -------------------
------------------ -------------------
11
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
Note 3. Inventory
The major classes of inventory as of June 30, 2003 and December 31, 2002
are summarized as follows:
June 30, December 31,
2003 2002
------------------ ------------------
(in thousands)
Fish meal................................................. $ 16,664 $ 21,564
Fish oil.................................................. 5,575 9,583
Fish solubles............................................. 651 843
Off season cost........................................... 19,142 5,464
Other materials & supplies................................ 4,124 4,485
------------------ ------------------
Total inventory........................................... $ 46,156 $ 41,939
------------------ ------------------
------------------ ------------------
Inventory at June 30, 2003 and December 31, 2002 is stated at the lower of
cost or market. The elements of cost include plant and vessel related labor,
utilities, rent, repairs and depreciation.
Note 4. Other Assets
Other assets as of June 30, 2003 and December 31, 2002 are summarized as
follows:
June 30, December 31,
2003 2002
------------------ ------------------
(in thousands)
Fishing nets..................................................... $ 1,424 $ 1,216
Insurance receivable............................................. 3,258 4,341
Title XI loan origination fee.................................... 297 275
Note receivable.................................................. 380 409
Deposits......................................................... 131 131
------------------ ------------------
Total other assets............................................... $ 5,490 $ 6,372
Less: allowance for doubtful accounts............................ (1,833) (1,793)
------------------ ------------------
Other assets, net................................................ $ 3,657 $ 4,579
------------------ ------------------
------------------ ------------------
Amortization expense for fishing nets amounted to approximately $431,000
and $257,000 for the six months ended June 30, 2003 and June 30, 2002,
respectively.
The Company carries insurance for certain losses relating to its vessels
and Jones Act liability for employees aboard its vessels (collectively, "Vessel
Claims Insurance"). The typical Vessel Claims Insurance policy contains an
annual aggregate deductible ("AAD") for which the Company remains responsible,
while the insurance carrier is responsible for all applicable amounts which
exceed the AAD. It is the Company's policy to accrue current amounts due and
record amounts paid out on each claim. Once payments exceed the AAD the Company
records an insurance receivable for a given policy year.
12
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
Note 5. Property and Equipment
Property and equipment at June 30, 2003 and December 31, 2002 are
summarized as follows:
June 30, December 31,
2003 2002
------------------- -------------------
(in thousands)
Land...................................................... $ 6,261 $ 6,261
Plant assets.............................................. 72,912 72,444
Fishing vessels........................................... 77,956 75,153
Furniture and fixtures.................................... 1,820 1,825
Other..................................................... 7,265 3,292
------------------- -------------------
Total property and equipment.............................. 166,214 158,975
Less: accumulated depreciation and impairment............. (83,001) (78,262)
------------------- -------------------
Property and equipment, net............................... $ 83,213 $ 80,713
------------------- -------------------
------------------- -------------------
Depreciation expense for the six months ended June 30, 2003 and June 30,
2002 was $4.8 million and $4.0 million, respectively.
Note 6. Notes Payable and Long-Term Debt
At June 30, 2003 and December 31, 2002, the Company's long-term debt
consisted of the following:
June 30, December 31,
2003 2002
------------------ -----------------
(in thousands)
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 2016, interest from 6.63% to 7.6%.... $ 13,955 $ 14,531
Amounts due in installments through 2014, interest at Eurodollar rates of
1.74% and 2.26% at June 30, 2003 and December 31, 2002,
respectively, plus 4.5%................................................. 893 933
Other debt at 7.9% to 8.0% at June 30, 2003 and December 31, 2002,
respectively............................................................ 37 45
------------------ -----------------
Total debt................................................................... 14,885 15,509
Less current maturities.......................................... (1,312) (1,270)
------------------ -----------------
Long-term debt............................................................... $ 13,573 $ 14,239
------------------ -----------------
------------------ -----------------
At June 30, 2003 and December 31, 2002, the estimated fair value of debt
obligations approximated book value.
Originally, the Company was authorized to receive up to $20.6 million in
loans under the Title XI program, and has used the entire amount authorized
under such program. The Title XI loans are secured by liens on certain of the
Company's fishing vessels and mortgages on the Company's Reedville, Virginia and
Abbeville, Louisiana plants. Loans are now available under similar terms
pursuant to the Title XI program without intervening lenders.
13
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
The Company has made an application for approximately $4.9 million in loans
under the Title XI program in the current year and expects closing to occur in
the third quarter of 2003.
On December 20, 2000 the Company entered into a three-year $20 million
revolving credit agreement with Bank of America, N.A. (the "Credit Facility").
Borrowings under this facility may be used for working capital and capital
expenditures. On May 19, 2003, the Company amended the existing Credit Facility
and among other things, these amendments extended the maturity until December
20, 2006, deleted existing financial covenants and added certain affirmative
covenants such as, a Leverage Ratio covenant not to exceed 3.0 to 1 at any time
and a Fixed Charge Coverage Ratio covenant not to be less than 1.0 to 1 as of
the end of the month, measured for the twelve-month period then ended. The
Company shall only be required to comply with the financial covenants from and
after the last day of any month in which the Credit Facility's availability is
less than $3,000,000 on any date, or the Credit Facility's availability averages
less than $6,000,000 for any calendar month. A commitment fee of 50 basis points
per annum is payable on the unused portion of the Credit Facility fees. If at
any time the Company's loan outstanding under the Credit Facility is $5,000,000
or greater, the commitment fee shall be 25 basis points per annum. Applicable
interest is payable at alternative rates of LIBOR plus 2.25% or Prime plus 0%.
Applicable interest shall be adjusted (up or down) prospectively on a quarterly
basis as determined by the Company's Fixed Charge Coverage Ratio from LIBOR plus
2.25% to LIBOR plus 2.75% or at the Company's option Prime plus 0% to Prime plus
..25% depending upon the Fixed Charge Coverage Ratio being greater than 2.5 times
to less than or equal to 1.5 times. The Credit Facility is collateralized by all
of the Company's trade receivables, inventory and equipment. In addition, the
Credit Facility does not allow for the payment of cash dividends or stock
repurchases and also limits capital expenditures and investments. The Company is
in compliance with the Credit Facility covenants at June 30, 2003. As of June
30, 2003, the Company had no borrowings outstanding under the Credit Facility.
At June 30, 2003 and December 31, 2002, the Company had outstanding letters of
credit totaling approximately $2.6 million and $2.1 million, respectively,
issued primarily in support of worker's compensation insurance programs.
Note 7. Accrued Liabilities
Accrued liabilities as of June 30, 2003 and December 31, 2002 are
summarized as follows:
June 30, December 31,
2003 2002
------------------ -------------------
(in thousands)
Salary and benefits....................................... $ 6,929 $ 6,242
Insurance................................................. 5,023 5,625
Taxes, other than income tax.............................. 1,182 443
Trade creditors........................................... 2,506 2,513
Other..................................................... 61 57
------------------ -------------------
Total accrued liabilities................................. $ 15,701 $ 14,880
------------------ -------------------
------------------ -------------------
14
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Note 8. Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- --------------------
2003 2002 2003 2002
------ ------ ------ ------
(in thousands) (in thousands)
Net income.............................................................. $2,380 $2,917 $5,027 $5,650
Foreign translation adjustment.......................................... 16 - 16 -
Minimum pension liability adjustment,
net of tax.............................................................. - (11) - 220
------ ------ ------ ------
Total comprehensive income............................................. $2,396 $2,906 $5,043 $5,870
------ ------ ------ ------
------ ------ ------ ------
Note 9. Commitments and Contingencies
Capital Commitments
The Company has committed approximately $16 million to build a new 100 -
metric ton per day fish oil processing facility at its Reedville, Virginia
location. The commitments covered by this agreement aggregate approximately $12
million and $4 million for 2003 and 2004, respectively.
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.
Insurance
The Company carries insurance with coverages and coverage limits that it
believes to be adequate. Although there can be no assurance that such insurance
is sufficient to protect the Company against all contingencies, management
believes that its insurance protection is reasonable in view of the nature and
scope of the Company's operations.
15
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
Tax Assessment
The Company has informally been notified by representatives from the
Vermillion Parish and St. Mary Parish tax authorities in Louisiana of undefined
deficiencies in parish sales and use taxes for the Company's 1997 to 2000 tax
years. As of June 30, 2003, the proposed adjustments to the parish sales and use
tax returns for the calendar years 1997 through 2000 have not yet been assessed.
The Company expects the proposed adjustments will claim additional tax,
including penalties and interest through June 30, 2003 and has recorded a
provision that management believes is adequate to cover these adjustments. The
Company intends to contest the proposed adjustments vigorously.
Environmental Matters
The Company may be subject to various possible claims and lawsuits
regarding environmental matters from time to time. 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.
Note 10. Guarantees
The Company's obligations under its $20 million revolving credit agreement
(the "Credit Facility") with Bank of America, N.A. (the "Bank") are guaranteed
by all of the Company's existing and future direct and indirect subsidiaries
formed under the laws of the United States, any state thereof or the District of
Columbia, except for specified excluded subsidiaries (referred to collectively
as "Guarantors"). The Credit Facility Guarantors have entered into an
unconditional guaranty in favor of the Bank to which the Guarantors guaranteed
to the Bank the payment of all obligations of the Borrowers to the Bank however
arising, including, without limitation, amounts due under the Credit Facility.
The Guarantors have entered into a Security Agreement in favor of the Bank
pursuant to which the Guarantors granted to the Bank a security interest in all
assets of each Guarantor in order to secure such Guarantor's obligations under
the Guaranty and the Company's obligation under the Credit Facility. For
additional information regarding the Credit Facility, see Note 6 and the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
The Company's Articles of Incorporation and By-Laws limit the liability of
the Company's officers and directors to the fullest extent permitted by Nevada
law. Nevada provides that directors of Nevada corporations may be relieved of
monetary liabilities for breach of their fiduciary duties as directors, except
under certain circumstances, including (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law or (ii) the willful
or grossly negligent payment of unlawful distributions.
The Company's Articles of Incorporation and By-Laws generally require the
Company to indemnify its directors and officers to the fullest extent permitted
by Nevada law. The Company's Articles of Incorporation and By-Laws also require
the Company to advance expenses to its directors and its officers to the fullest
extent permitted by Nevada law upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it should be ultimately
determined that they are not entitled to indemnification by the Company. The
Company also has entered into indemnification agreements with all
16
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
of its directors and certain of its officers which provide for the
indemnification and advancement of expenses by the Company. The Company also
maintains director and officer liability insurance with respect to liabilities
arising out of certain matters, including matters arising under the securities
laws. This insurance is subject to limitations, conditions and deductibles set
forth in the respective insurance policy.
There is no pending litigation or proceeding involving any director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any threatened litigation that may result in claims for
indemnification.
As of June 30, 2003, the Company has $14.8 million in U.S. government
guaranteed obligations (Title XI loan). The Company has provided security for
the guarantee in the form of the Company's Promissory Notes to the United States
of America, a Ship Mortgage, a Deed of Trust and a perfected Security Agreement
collateralized by a first lien on certain vessels and certain plant assets of
the Company at its Reedville, Virginia and Abbeville, Louisiana locations.
17
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
Note 11. Reconciliation of Basic and Diluted Per Share Data (in thousands
except per share data)
Earnings Shares Per Share
(Numerator) (Denominator) Data
------------- --------------- -------------
Three Months Ended June 30, 2003
Net earnings $ 2,380
-------------
-------------
Basic earnings per common share:
Earnings available to common shareholders $ 2,380 24,122 $ 0.10
-------------
Effect of dilutive securities:
Stock options assumed exercised - 1,533
------------- ---------------
Diluted earnings per common share:
Earnings available to common shareholders plus
stock options assumed exercised $ 2,380 25,655 $ 0.09
------------- --------------- --------------
------------- --------------- --------------
Earnings Shares Per Share
(Numerator) (Denominator) Data
------------- --------------- --------------
Three Months Ended June 30, 2002
Net Earnings $ 2,917
-------------
-------------
Basic earnings per common share:
Earnings available to common shareholders $ 2,917 23,959 $ 0.12
--------------
Effect of dilutive securities:
Stock options assumed exercised - 1,149
------------- --------------
Diluted earnings per common share:
Earnings available to common shareholders plus
stock options assumed exercised $ 2,917 25,108 $ 0.12
------------- -------------- ---------------
------------- -------------- ---------------
18
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
Earnings Shares Per Share
(Numerator) (Denominator) Data
------------ -------------- -------------
Six Months Ended June 30, 2003
Net earnings $ 5,027
------------
------------
Basic earnings per common share:
Earnings available to common shareholders $ 5,027 24,053 $ 0.21
-------------
Effect of dilutive securities:
Stock options assumed exercised - 1,492
------------ --------------
Diluted earnings per common share:
Earnings available to common shareholders plus
stock options assumed exercised $ 5,027 25,545 $ 0.20
------------ -------------- -------------
------------ -------------- -------------
Earnings Shares Per Share
(Numerator) (Denominator) Data
------------ -------------- -------------
Six Months Ended June 30, 2002
Net Earnings $ 5,650
------------
------------
Basic earnings per common share:
Earnings available to common shareholders $ 5,650 23,956 $ 0.23
-------------
Effect of dilutive securities:
Stock options assumed exercised - 1,023
------------ --------------
Diluted earnings per common share:
Earnings available to common shareholders plus
stock options assumed exercised $ 5,650 24,979 $ 0.23
------------ -------------- -------------
------------ -------------- -------------
Options to purchase 2,214,800 and 2,254,800 shares of common stock at
prices ranging from $5.61 to $17.25 and $5.03 to $17.25 per share were
outstanding during the three and six months ended June 30, 2003, respectively,
but were not included in the computation of diluted earnings per share because
the exercise prices of the options were greater than the average market price of
the shares during that period.
Options to purchase 3,044,250 shares of common stock at prices ranging from
$3.50 to $17.25 per share were outstanding during both the three and six months
ended June 30, 2002, but were not included in the computation of diluted
earnings per share because the exercise prices of the options were greater than
the average market price of the shares during that period.
19
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (continued)
(Dollars in thousands, except per share amounts)
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, or which include the
words "estimate," "project," "anticipate," "expect," "predict," "assume,"
"believe," "could," "would," "may," and similar expressions.
20
OMEGA PROTEIN CORPORATION
General
Omega Protein Corporation is the largest producer, marketer and distributor
of fish meal and fish oil products in the United States. As used herein, the
term "Omega" or the "Company" refers to Omega Protein Corporation or to Omega
Protein Corporation and its consolidated subsidiaries, as applicable. The
Company's principal executive offices are at 1717 St. James Place, Suite 550,
Houston, Texas 77056 (Telephone: (713) 623-0060).
The Company's marine operations involve the production and sale of a
variety of protein and oil products derived from menhaden, a species of wild
herring-like fish found along the Gulf of Mexico and Atlantic coasts. The fish
is not genetically modified or genetically enhanced. The Company processes
several grades of fish meal (regular or "FAQ" meal and specialty meals), as well
as fish oil and fish solubles. The Company's fish meal products are primarily
used as a protein ingredient in animal feed for swine, cattle, aquaculture and
household pets. Fish oil is utilized for animal and aquaculture feeds,
industrial applications, and for additives to human food products. The Company's
fish solubles are sold primarily to livestock feed manufacturers, aquaculture
feed manufacturers and for use as an organic fertilizer.
All of the Company's products contain Omega-3 fatty acids. The Omega-3
fatty acids are commonly referred to as "essential fatty acids" because the
human body does not produce them. Instead, essential fatty acids must be
obtained from outside sources, such as food or special supplements. Omega-3s are
also commonly referred to as a "good fat" for their health benefits, as opposed
to the "bad fats" that create or aggravate health conditions through long-term
consumption. See "--Products" in Part I Item 1 and 2 of the Company's Form 10-K
Annual Report for the year ended December 31, 2002.
The Company operates through five material subsidiaries: Omega Protein,
Inc., Omega Shipyard, Inc., Protein Operating Company, Protein Securities
Company and Omega Protein Mexico, S. de R. L. de C. V. ("Omega Mexico"). Omega
Protein, Inc. is the Company's principal operating subsidiary for its menhaden
processing business and is the successor to a business conducted since 1913.
Omega Shipyard, Inc. owns a drydock facility in Moss Point, Mississippi, which
is used to provide shoreside maintenance for the Company's fishing fleet and,
subject to outside demand and excess capacity, third-party vessels. Revenues
from shipyard work for third-party vessels in 2002 were not material. Protein
Operating Company holds title to the Company's property containing its
60,000-square foot meal storage warehouse in St. Louis, Missouri. Protein
Securities Company holds title to the Company's property containing its 10,000
metric ton meal storage warehouse, oil storage tanks with a 4,000 metric ton
capacity and other property in Morgan City, Louisiana. Omega Mexico is a new
subsidiary formed in 2002 for the Company's meal and oil purchases in Mexico and
resales in Mexico. The Company also has a number of other immaterial direct and
indirect subsidiaries.
Until April 1998, the Company, including its predecessors, was a
wholly-owned subsidiary of Zapata Corporation ("Zapata"). In April 1998, the
Company completed an initial public offering of its common stock. Zapata
currently owns approximately 60% of the Company's outstanding common stock.
21
OMEGA PROTEIN CORPORATION
The Company files annual, quarterly and current reports and other
information with the Securities and Exchange Commission ("SEC"). The Company's
annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K, along with any amendments to those reports, are available free of
charge at the Company's corporate website at http://www.omegaproteininc.com and
are posted within three business days after they are filed with the SEC.
Omega is the largest U.S. producer of protein-rich meal and Omega-3 rich
oil derived from marine sources. The Company's products are produced from
menhaden (a herring-like fish found in commercial quantities), and include FAQ
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 and aquaculture feed
manufacturers in Europe and Asia and its refined fish oil products are used in
food production and certain industrial applications. Fish solubles are sold as
protein additives for animal feed and as fertilizers.
The fish catch is processed into FAQ grade fish meal, specialty fish meals,
fish oils and fish solubles at the Company's four operating plants located in
Virginia, Mississippi and Louisiana. Menhaden are harvested offshore the U.S.
mid-Atlantic and Gulf of Mexico coasts. In 2000, the Company converted several
of its fishing vessels to "carry vessels" which do not engage in active fishing
but instead carry fish from the Company's offshore fishing vessels to its
plants. Utilization of carry vessels increases the amount of time that certain
of the Company's fishing vessels remain offshore fishing productive waters and
therefore increases the Company's fish catch per vessel employed. Since 1999,
the Company's fish catch per vessel has increased 11%. The carry vessels have
reduced crews and crew expenses and incur less maintenance cost than the actual
fishing vessels.
The Company's harvesting season generally extends from May through December
on the mid-Atlantic coast and from April through October on the Gulf coast.
During the off-season and the first few months of each fishing season, the
Company fills purchase orders from the inventory it has accumulated during the
previous fishing season. Prices for the Company's products tend to be lower
during the fishing season when product is more abundant than in the off-season.
Throughout the entire year, prices are significantly influenced by supply and
demand in world markets for competing products, particularly other globally
produced fish meal as well as soybean meal for its fish meal products and
vegetable fats and oils for its fish oil products when used as an alternative to
vegetable fats and oils.
During 1999 and continuing through 2000, world grain and oilseed markets
were burdened by excess supplies relative to demand which, in turn, resulted in
prices for most major commodities being sharply lower than in previous years.
Correspondingly, the Company's product prices were adversely impacted during
these periods, resulting in decreased gross margins. During 1999 and again
during 2000, the Company determined that the costs of its fish meal and fish oil
product inventories were in excess of those products' realization value by
approximately $18.2 million and $18.1 million, respectively. This realization
was due mainly to the continuing depressed market values of world protein
markets and particularly, animal and oilseed oil markets. The average prices
received for the Company's fish meal and fish oil products were approximately
28.1% and 48.2% lower, respectively, during 1999 as compared to 1998. Price
decreases continued during 2000, and fish meal and fish oil prices were
approximately 7.3% and 20%, respectively, lower than 1999 average prices. Also
impacting 2000 and contributing to the write-down of inventories was the reduced
crude fish oil production yields (approximately 38% lower yields compared to
1999) experienced during the majority of the 2000 fishing season in the Gulf of
Mexico. These reduced yields were primarily a result of the reduced fat content
in the fish, which was a result of poor nutritional conditions caused by the
extreme drought conditions in the Gulf of Mexico region during late 1999 and
early 2000.
22
OMEGA PROTEIN CORPORATION
The depressed pricing conditions in worldwide markets in 1999 and 2000 for
protein, particularly animal and oilseed oil, continued into the early months of
2001 before making significant improvements late in 2001 and continuing
throughout most of 2002. The price increases stabilized in late 2002 and have
been relatively stable since then, with the exception of crude fish oil prices.
Pricing for crude fish oil swiftly declined approximately 20% early in the
second quarter of Fiscal 2003 before rising mildly by the end of the same
quarter. The Company deferred sales of its crude oil inventory in that volatile
market period which resulted in reduced crude oil sales during the three month
period ending June 30, 2003.
Pricing for the Company's products has been volatile in the past several
years and is attributable mainly to the international availability, or the
perceived international availability, of fish meal and fish oil inventories.
Accordingly, gross profit margins may also vary in the future.
In an effort to reduce price volatility and to generate higher, more
consistent profit margins, in fiscal 2000 the Company embarked on a quality
control program designed to increase its capability of producing higher quality
fish meal products and, in conjunction therewith, enhanced its sales efforts to
penetrate premium product markets. Since 2000, the Company's sales volumes of
specialty meal products have increased approximately 26%. Future volumetric
growth in specialty meal sales will be dependant upon increased harvesting
efforts. Additionally, the Company is attempting to introduce its refined fish
oil into the food market. The Company has had some success selling its refined
fish oil, trademarked OmegaPure(TM), to food manufacturers in the United States
and Canada at prices that provide substantially improved margins over the
margins that can be obtained from selling non-refined crude fish oil. The
Company cannot estimate, however, the size of the actual domestic market for
OmegaPure(TM) or how long it may take to develop this market.
During 2002, the Company developed a business plan to expand its purchase
and resale of other manufacturers' fish meal and fish oil products. In 2002, the
Company engaged a full-time consultant to implement the Company's business plan,
which will focus initially on the purchase and resale of Mexican fish meal and
fish oil. Revenues generated from these types of transactions represented less
than 1% of total Company revenues during 2002. The Company expects that although
operating margins from these activities will be less than the margins generated
from the Company's base domestic production, its Mexican operations will provide
it with a source of fish meal and oil to sell into other markets where the
Company has not historically had a presence. Revenues generated from these
activities for the six months ended June 30, 2003 were approximately $1.4
million, with no contribution to net income. The Company believes that, with
additional volumetric activity, these purchase and resale activities will become
profitable.
Historically, approximately 35% to 40% of Omega's FAQ fish meal was sold on
a two-to-twelve-month forward contract basis. The balance of regular grade and
other products was substantially sold on a spot basis through purchase orders.
The Company undertook a similar forward sales program for its specialty grade
meals and crude fish oil for 2002 and has continued this program for 2003. The
Company's annual revenues are highly dependent on both annual fish catch and
inventories and, in addition, inventory is generally carried over from one year
to another year. The Company determines the level of inventory to be carried
over based on prevailing market prices of the products and anticipated customer
usage and demand during the off-season.
23
OMEGA PROTEIN CORPORATION
Thus, production volume does not necessarily correlate with sales volume in
the same year, and sales volumes will fluctuate from quarter to quarter. The
Company's fish meal products have a useable life of approximately one year from
date of production. Practically, however, the Company typically attempts to
empty its warehouses of the previous season's products by the second or third
month of the new fishing season. The Company's crude fish oil products do not
lose efficacy unless exposed to oxygen, and therefore, their storage life
typically is longer than that of fish meal.
The following table sets forth the Company's revenues by product (in
millions) and the approximate percentage of total revenues represented thereby,
for the indicated periods:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------------------- -----------------------------------------------------
2003 2002 2003 2002
------------------------ ------------------------ ----------------------- -------------------------
Revenues Percent Revenues Percent Revenues Percent Revenues Percent
---------- --------- ---------- --------- ---------- ---------- --------- ----------
Regular Grade $ 5.3 19.4% $ 3.6 13.2% $ 8.8 16.8% $ 6.4 12.6%
Special Select 9.9 36.3 11.3 41.5 19.5 37.2 20.0 39.4
Sea-Lac 4.7 17.2 2.6 9.6 8.1 15.5 4.7 9.3
Crude Oil 5.8 21.2 7.7 28.3 13.0 24.8 16.1 31.8
Refined Oil 1.0 3.7 1.0 3.7 1.8 3.4 1.9 3.7
Fish Solubles 0.6 2.2 1.0 3.7 1.2 2.3 1.6 3.2
---------- --------- ---------- --------- ---------- ---------- --------- ----------
Total $ 27.3 100.0% $ 27.2 100.0% $ 52.4 100.0% $ 50.7 100.0%
---------- --------- ---------- --------- ---------- ---------- --------- ----------
---------- --------- ---------- --------- ---------- ---------- --------- ----------
24
OMEGA PROTEIN CORPORATION
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources have been
cash flows from operations, bank credit facilities and term loans from various
lenders provided pursuant to the National Marine Fisheries Finance Program under
Title XI of the Marine Act of 1936 ("Title XI"). These sources of cash flows
have been used for capital expenditures and payment of long-term debt. The
Company expects to finance future expenditures through internally generated cash
flows and, if necessary, through funds available from the Credit Facility and/or
Title XI facilities described below.
Under a program offered through National Marine Fisheries Services ("NMFS")
pursuant to Title XI, the Company has secured loans through lenders with terms
generally ranging between 12 and 20 years at interest rates 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 17 fishing vessels and mortgages on the Company's Reedville, Virginia
and Abbeville, Louisiana plants. In 1996, Title XI borrowing was modified to
permit use of proceeds from borrowings obtained through this program for
shoreside construction. The Company used the entire $20.6 million amount
originally authorized under the program. Loans are now available under similar
terms pursuant to the Title XI program without intervening lenders. The Company
borrowed $1.9 million under this new program during 2001. The Company has made
an application for approximately $4.9 million in loans under the Title XI
program in the current year and expects closing to occur in 2004.
The Company announced in April, 2003, that it had committed to build a new
100-metric ton per day fish oil processing facility at its Reedville, Virginia
location. Construction on the project began in June 2003, with projected
completion in May 2004 and will cost approximately $16 million. The Company
currently anticipates that it will fund the project through its available cash
balances.
Omega had an unrestricted cash balance of $33.2 million at June 30, 2003,
down $249,000 from December 31, 2002. This decrease was due primarily to
decreases in operating cash flows and increases in capital expenditures. The
Company's liquidity is greatly influenced by the selling prices received for its
products. Should the Company experience decreased pricing in the future, as it
experienced in 1999 and 2000, liquidity would decline and the Company would
possibly have to utilize its working capital credit facility. The Company's
long-term debt at June 30, 2003 and December 31, 2002 was $13.6 million and
$14.2 million, respectively. Current maturities attributable to the Company's
long-term debt was $1.3 million both at June 30, 2003 and December 31, 2002. The
Company did not utilize its working capital credit facility during the first six
months of 2003 and fiscal year 2002 other than for $2.6 million and $2.1 million
in standby letters of credit outstanding as of June 30, 2003 and December 31,
2002, respectively. As of June 30, 2003, the Company had $17.4 million available
under its working capital credit facility. The Company has no off-balance sheet
arrangements other than normal operating leases and standby letters of credit.
25
OMEGA PROTEIN CORPORATION
The following tables aggregate information about the Company's contractual
cash obligations and other commercial commitments (in thousands) as of June 30,
2003:
Payments Due by Period
----------------------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
Contractual Cash Obligations Total 1 year years years years
- -------------------------------------------- ----------- ------------- ------------- ------------- -------------
Long Term Debt $ 14,885 $ 1,312 $ 2,875 $ 3,262 $ 7,436
Operating Leases 1,363 427 575 137 224
Minimum Pension Liability 13,087 -- -- -- 13,087
----------- ------------- ------------- ------------- -------------
Total Contractual Cash Obligations $ 29,335 $ 1,739 $ 3,450 $ 3,399 $ 20,747
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
Amount of Commitment Expiration Per Period
----------------------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
Other Commercial Commitments Total 1 year years years years
- -------------------------------------------- ----------- ------------- ------------- ------------- -------------
Credit Facility (1) $ 17,400 $ -- $ -- $ -- $ --
Standby Letters of Credit 2,600 2,600 -- -- --
Construction Commitment (2) 16,000 12,000 4,000 -- --
----------- ------------- ------------- ------------- -------------
Total Commercial Commitments $ 36,000 $ 14,600 $ 4,000 $ -- $ --
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
(1) As of June 30, 2003, the Company had no outstanding borrowings
outstanding under the $20.0 million Credit Facility.
(2) The Company announced on April 15, 2003 that it had committed to build
a new 100-metric ton per day fish oil processing facility at its Reedville,
Virginia location. Construction on the project is scheduled to begin in May
2003, with projected completion in May 2004 and will cost approximately $16
million. The Company currently anticipates that it will fund the project through
its available cash balances.
Investing activities used $7.2 million and $4.2 million for the six month
periods ending June 30, 2003 and 2002, respectively. The Company's investing
activities consisted mainly of capital expenditures for equipment purchases,
replacements and vessel refurbishments. The Company anticipates making
approximately $8 million of capital expenditures in 2003 (in addition to the
$16.0 million oil processing facility discussed above), a significant portion of
which will be used to refurbish vessels and plant assets and to repair certain
equipment.
Financing activities used $624,000 and $691,000 to repay debt obligations
during the six month periods ended June 30, 2003 and 2002, respectively, and
during the six month period ended June 30, 2003 and provided $574,000 from
proceeds of stock options exercised.
26
OMEGA PROTEIN CORPORATION
On December 20, 2000 the Company entered into a three-year $20 million
revolving credit agreement with Bank of America, N.A. (the "Credit Facility").
Borrowings under this facility may be used for working capital and capital
expenditures. On May 19, 2003, the Company amended the existing Credit Facility
and among other things, these amendments extended the maturity until December
20, 2006, deleted existing financial covenants and added certain affirmative
covenants such as, a Leverage Ratio covenant not to exceed 3.0 to 1 at any time
and a Fixed Charge Coverage Ratio covenant not to be less than 1.0 to 1 as of
the end of the month, measured for the twelve-month period then ended. The
Company shall only be required to comply with the financial covenants from and
after the last day of any month in which the Credit Facility's availability is
less than $3,000,000 on any date, or Credit Facility's availability averages
less than $6,000,000 for any calendar month. A commitment fee of 50 basis points
per annum is payable on the unused portion of the Credit Facility fees. If at
any time the Company's loan outstanding under the Credit Facility is $5,000,000
or greater, the commitment fee shall be 25 basis points per annum. Applicable
interest is payable at alternative rates of LIBOR plus 2.25 % or Prime plus 0%.
Applicable interest shall be adjusted (up or down) prospectively on a quarterly
basis as determined by the Company's Fixed Charge Coverage Ratio from LIBOR plus
2.25% to LIBOR plus 2.75% or at the Company's option Prime plus 0% to Prime plus
..25% depending upon the Fixed Charge Coverage Ratio being greater than 2.5 times
to less than or equal to 1.5 times. The Credit Facility is collateralized by all
of the Company's trade receivables, inventory and equipment. In addition, the
Credit Facility does not allow for the payment of cash dividends or stock
repurchases and also limits capital expenditures and investments. The Company is
in compliance with the Credit facility covenants at June 30, 2003. As of June
30, 2003 the Company had no borrowings outstanding under the Credit Facility. At
June 30, 2003 and December 31, 2002, the Company had outstanding letters of
credit totaling approximately $2.6 million and $2.1 million, respectively,
issued primarily in support of worker's compensation insurance programs.
The Company's principal raw material is menhaden, a species of fish that
inhabits coastal and inland tidal waters in the United States. Menhaden are
undesirable for direct human consumption due to their small size, prominent
bones and high oil content. Certain state agencies impose resource depletion
restrictions on menhaden pursuant to fisheries management legislation or
regulations. To date, the Company has not experienced any material adverse
impact on its fish catch or results of operations as a result of these
restrictions.
The Company from time to time considers potential transactions including,
but not limited to, enhancement of physical facilities to improve production
capabilities and the acquisition of other businesses. Certain of the potential
transactions reviewed by the Company would, if completed, result in its entering
new lines of business (generally including certain businesses to which the
Company sells its products such as pet food manufacturers, aquaculture feed
manufacturers, fertilizer companies and organic foods distributors) although
historically, reviewed opportunities have been generally related in some manner
to the Company's existing operations. Although the Company does not, as of the
date hereof, have any commitment with respect to a material acquisition or
transaction (other than the previously announced fish oil processing facility in
Reedville, Virginia), it could enter into such agreement in the future.
The Company carries insurance for certain losses relating to its vessels
and Jones Act liability for employees aboard its vessels (collectively, "Vessel
Claims Insurance"). The typical Vessel Claims Insurance policy contains an
annual aggregate deductible ("AAD") for which the Company remains responsible,
while the insurance carrier is responsible for all applicable amounts which
exceed the AAD. It is the Company's policy to accrue current amounts due and
record amounts paid out on each claim. Once payments exceed the AAD, the Company
records an insurance receivable for a given policy year.
27
OMEGA PROTEIN CORPORATION
A general hardening of the world insurance markets in recent years has made
the Company's insurance more costly and is likely to continue to do so as
various lines of insurance come up for renewal throughout 2003. Depending on the
magnitude of the increase in insurance premiums, the Company may elect to
increase its deductibles and self-retentions in order to achieve lower insurance
premium costs. These higher deductibles and self-retentions will expose the
Company to greater risk of loss if claims occur.
The Company believes that the 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 2003.
Overview of Critical Accounting Policies
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and assumptions discussed herein and in the
consolidated financial statements in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2002. The following estimates and assumptions are
both most important to the portrayal of our financial condition and results of
operations and require management's most difficult, subjective or complex
judgment.
Inventories
Inventory is stated at the lower of cost or market. The Company's fishing
season runs from mid-April to the first of November in the Gulf of Mexico and
from the beginning of May into December in the Atlantic. Government regulations
generally preclude the Company from fishing during the off-seasons.
The Company's inventory cost system considers all costs associated with an
annual fish catch and its processing, both variable and fixed, including both
costs incurred during the off-season and during the fishing season. 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. The Company's lower-of-cost-or-market-value analyses at
year-end and at interim periods compare total estimated per unit production cost
of the Company's expected production to the projected per unit market prices of
the products. The impairment analyses involve estimates of, among other things,
future fish catches and related costs, and expected commodity prices for the
fish products.
The estimates, which management believes are reasonable and supportable,
involve estimates of future activities and events which are inherently imprecise
and from which actual results may differ materially. Revisions in such estimates
or actual results could materially impact the Company's results of operation and
financial position.
During the off-seasons, in connection with the upcoming fishing seasons,
the Company incurs costs (i.e., plant and vessel related labor, utilities, rent,
repairs and depreciation) that are directly related to the Company's
infrastructure. These costs accumulate in inventory and are applied as elements
of the cost of production of the Company's products throughout the fishing
season ratably based on the Company's monthly fish catch and the expected total
fish catch for the season.
28
OMEGA PROTEIN CORPORATION
Insurance
As mentioned previously, the Company carries insurance for certain losses
relating to its vessels and Jones Act liabilities for employees aboard its
vessels. The Company provides reserves for those portions of the AAD for which
the Company remains responsible by using an estimation process that considers
Company-specific and industry data as well as management's experience,
assumptions and consultation with outside counsel. Management's current
estimated range of liabilities related to such cases is based on claims for
which management can estimate the amount and range of loss. The Company has
recorded the minimum estimated liability related to those claims, where there is
a range of loss. As additional information becomes available, the Company
assesses the potential liability related to its pending litigation and revises
its estimates. Such revisions in estimates for potential liability could
materially impact the Company's results of operation and financial position.
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 Six Months Ended
June 30, June 30,
-------------------- -------------------
2003 2002 2003 2002
------ ------ ------ ------
Revenues.................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 77.4 74.6 76.0 73.5
------ ------ ------ ------
Gross profit................................ 22.6 25.4 24.0 26.5
Selling, general and administrative expense. 8.4 7.9 8.6 8.3
------ ------ ------ ------
Operating income............................ 14.2 17.5 15.4 18.2
Interest expense, net....................... (0.6) (0.5) (0.6) (0.6)
Other expense, net.......................... (0.2) (0.2) (0.1) (0.2)
------ ------ ------ ------
Income before income taxes.................. 13.4 16.8 14.7 17.4
Provision for income taxes.................. 4.8 6.1 5.2 6.3
------ ------ ------ ------
Net income.................................. 8.6 10.7 9.5 11.1
------ ------ ------ ------
------ ------ ------ ------
29
OMEGA PROTEIN CORPORATION
Interim Results for the Second Quarters ended June 30, 2003 and June 30,
2002
Revenues. For the quarter ended June 30, 2003, revenues increased $55,000
from $27.2 million in the quarter ended June 30, 2002 to $27.3 million. The
revenue increase was primarily due to higher sales prices of 9.6% and 6.0% for
the Company's fish meal and fish oil, respectively. The Company's fish meal
volumes increased 2.7% while the Company's fish oil volumes decreased by 28.7%.
The Company attributes the higher fish meal and fish oil prices to strong
worldwide demand for fish meal and oil. The lower fish oil volumes were
primarily attributable to the Company's withdrawal from the crude fish oil spot
markets during the quarter.
Cost of Sales. Cost of sales, including depreciation and amortization, for
the current quarter ended June 30, 2003 was $21.1 million, a 3.9% increase from
$20.3 million for the quarter ended June 30, 2002. Cost of sales as a percentage
of revenues increased 2.8% to 77.4% for the quarter ended June 30, 2003 as
compared to the corresponding period in 2002. The increase in cost of sales as a
percentage of revenues was primarily due to higher cost inventories carried
forward from 2002 as compared to the cost of inventories carried forward from
2001.
Gross Profit. Gross profit decreased 10.5% from a $6.9 million gross profit
in the quarter ended June 30, 2002 to $6.2 million in the quarter ended June 30,
2003. The decrease in gross profit was primarily due to the higher cost
inventories carried forward from fiscal 2002.
Selling, general and administrative expenses. Selling, general, and
administrative expenses increased $122,000 from $2.2 million in the quarter
ended June 30, 2002 to $2.3 million in the current quarter ended June 30, 2003.
This increase was attributable to increases in employee-related costs and
professional services related to the Company's marketing effort.
Operating income. As a result of the factors discussed above, the Company's
operating income decreased $850,000, or 17.9% from an operating income of $4.7
million for the quarter ended June 30, 2002 to an operating income of $3.9
million for the quarter ended June 30, 2003. As a percentage of revenues,
operating income decreased 3.3% for the current quarter ended June 30, 2003.
Interest expense, net. Interest expense, net increased by $21,000 in the
quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002. The
increase in interest expense, net was primarily due to a decrease in the average
interest rate the Company earned on its investments during the quarter ended
June 30, 2003 as compared to the quarter ended June 30, 2002.
Other expense, net. Other expense, net increased by $7,000 in the current
quarter ended June 30, 2003 as compared to the quarter ended June 30, 2002. This
increase in other expense, net was the result of a gain on the disposal of
miscellaneous assets recognized during the quarter ended June 30, 2002.
Provision for income taxes. The Company recorded a $1.3 million provision
for income taxes for the second quarter of 2003, representing an effective tax
rate of 35% for income taxes. The provision for income taxes for the
corresponding period in 2002 reflected an effective tax rate of 36%. The Company
believes that it is more probable than not that the recorded estimated deferred
tax asset benefits and state operating loss carry-forwards will be realized. The
statutory tax rate of 34% for U.S. federal taxes was in effect for the
respective periods.
30
OMEGA PROTEIN CORPORATION
Interim Results for the Six Months ended June 30, 2003 and June 30, 2002
Revenues. For the six months ended June 30, 2003, revenues increased $1.7
million or 3.3% from $50.7 million for the six months ended June 30, 2002 to
$52.4 million for the six months ended June 30, 2003. The revenue increase was
primarily due to higher sales prices of 9.0% and 4.0% for the Company's fish
meal and fish oil, respectively. The Company's fish meal volumes increased 5.6%
while the Company's fish oil volumes decreased by 21.4% for the six months ended
June 30, 2003 as compared to the corresponding period in 2002. The Company
attributes the higher fish meal and fish oil prices to strong worldwide demand
for fish meal and fish oil. The lower fish oil volumes were primarily
attributable to the Company's withdrawal from the spot markets during the second
quarter.
Cost of Sales. Cost of sales, including depreciation and amortization, for
the six months ended June 30, 2003 was $39.8 million, a $2.5 million or a 6.8%
increase from $37.3 million for the comparable six month period ending June 30,
2002. Cost of sales as a percentage of revenues was 76.0% and 73.5% for the six
months ended June 30, 2003 and June 30, 2002, respectively. The increase in cost
of sales as a percentage of revenues was primarily due to higher cost
inventories carried forward from 2002 as compared to the cost of inventories
carried forward from 2001.
Gross Profit. Gross profit margins decreased $861,000 or 6.4% from a $13.5
million gross profit for the six months ended June 30, 2002 to $12.6 million for
the six months ended June 30, 2003. The decrease in gross profit was primarily
due to higher cost inventories carried forward from fiscal 2002.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses increased $250,000 or 5.9% from $4.2 million for the six
months ended June 30, 2002 to $4.5 million for the six months ended June 30,
2003. This increase was attributable to increases in employee-related costs and
professional services related to the Company's marketing efforts.
Operating income. As a result of the factors discussed, the Company's
operating income decreased $1.1 million or 12.0% from an operating income of
$9.2 million for the six months ended June 30, 2002 to $8.1 million for the six
months ended June 30, 2003. As a percentage of revenues, operating income
decreased 2.8% for the six months ended June 30, 2003.
Interest expense, net. Interest expense, net increased by $8,000 for the
six months ended June 30, 2003 as compared to the six months ended June 30,
2002. The increase in interest expense, net was primarily due to a decrease in
the average interest rate the Company earned on its investments during the six
months ended June 30, 2003 as compared to the six months ended June 30, 2002.
Other expense, net. Other expense, net decreased by $66,000 for the six
months ended June 30, 2003 as compared to the six months ended June 30, 2002.
The decrease in other expense, net was primarily due to a gain on the disposal
of non-material miscellaneous assets recognized during the current six months
ended June 30, 2003.
Provision for income taxes. The Company recorded a $2.7 million provision
for income taxes for the six months ended June 30, 2003 representing an
effective tax rate of 35% for income taxes. The provision for income taxes for
the six months ended June 30, 2002 reflected an effective tax rate of 36%. The
Company believes that it is more probable than not that the recorded estimated
deferred tax asset benefits and state operating loss carry-forwards will be
realized. The statutory tax rate of 34% for U.S. federal taxes was in effect for
the respective periods.
31
OMEGA PROTEIN CORPORATION
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 second and third quarter of each Fiscal year) due to
increased product availability. 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.
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 which may 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, fish oil yields, adverse weather conditions and disease.
2. The impact on the Company if its spotter aircraft are prohibited or
restricted from operating in their normal manner during the Company's fishing
season. For example, as a direct result of the September 11, 2001 terrorist
attacks, the Secretary of Transportation issued a federal ground stop order that
grounded certain aircraft (including the Company's fish-spotting aircraft) for
approximately nine days. This loss of spotter aircraft coverage severely
hampered the Company's ability to locate menhaden fish during this nine-day
period and thereby reduced its amount of saleable product.
3. 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. The products that influence the supply and demand relationship are world
supplies of fish meal made from other fish species, palm oil, soy meal and oil,
and other edible oils.
4. 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 at federal, state or local levels that restrict or prohibit
menhaden or purse-seine fishing, or stricter interpretations of existing laws or
regulations that materially adversely affect the Company's business.
5. The impact on the Company if it cannot harvest menhaden in U.S.
jurisdictional waters if the Company fails to comply with U.S. citizenship
ownership requirements.
6. Risks inherent in the Company's attempt to expand into sales of refined,
food grade fish oils for consumption in the U.S., including the unproven market
for this product.
32
OMEGA PROTEIN CORPORATION
7. 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.
8. The ability of the Company to retain and recruit key officers and
qualified personnel, vessel captains and crewmembers.
9. 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 operations and international trade, including
changes in the law and policies that govern foreign investment and international
trade in such countries, changes in U.S. laws and regulations relating to
foreign investment and trade, changes in 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.
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
affected.
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.
12. A general hardening of the world insurance markets in recent years has
made the Company's insurance more costly and is likely to continue to increase
the Company's cost of insurance. Depending on the magnitude of the increase in
insurance premiums, the Company may elect to increase its deductibles and
self-retentions in order to achieve lower insurance premium costs. These higher
deductibles and self-retentions will expose the Company to greater risk of loss
if claims occur.
33
OMEGA PROTEIN CORPORATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the financial condition of the Company is
exposed to minimal market risk associated with interest rate movements on the
Company's borrowings. A one percent increase or decrease in the levels of
interest rates on variable rate debt would not result in a material change to
the Company's results of operations.
Although the Company sells products in foreign countries, all of the
Company's revenues are billed and paid for in US dollars. As a result,
management does not believe that the Company is exposed to any significant
foreign country currency exchange risk, and the Company does not utilize market
risk sensitive instruments to manage its exposure to this risk.
Item 4. Controls and Procedures
(a) Within the 90-day time period prior to filing this report, we conducted
an evaluation of the effectiveness of our "disclosure controls and procedures,"
as that phrase is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934. The evaluation was carried out under the supervision and
with the participation of management, including our Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO").
Based on and as of the date of that evaluation, our CEO and CFO have
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be disclosed in the reports we
file with or submit to the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934, and in ensuring that the information required
to be disclosed in those filings is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.
(b) Subsequent to the date of the evaluation, there were no significant
changes in our internal controls or in other factors that could significantly
affect the internal controls, including any corrective actions taken with regard
to significant deficiencies and material weaknesses.
34
OMEGA PROTEIN CORPORATION
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.
The Company, the Company's directors and the Company's majority
stockholder, Zapata Corporation ("Zapata"), were named as defendants in a
putative class action lawsuit instituted on March 10, 2003 in the District Court
of Clark County, Nevada. Plaintiff alleged that the individual defendants and
Zapata breached their fiduciary duties to the Company's stockholders by not
properly considering an alleged offer sent via e-mail to Zapata by
Hollingsworth, Rothwell & Roxford ("HRR").
The Company and the individual defendants filed a motion for summary
judgment to have themselves removed from the case. On May 19, 2003, the District
Court granted that motion for summary judgment in its entirety, thereby
dismissing these defendants from the litigation. The litigation is now concluded
with out any damages having been paid by the Company or the individual
defendants.
The complaint alleged that the alleged offer was to acquire all of Zapata's
shares and all of the Company's shares, in each case for $45.00 per share.
However, the Company is not aware of any communications by HRR to the Company or
any of its directors or any offer for the purchase of Company shares. Plaintiff
claimed that Zapata and the individual defendants breached their duties to the
Company's stockholders by rejecting the purported offer and that the Company's
stockholders have been damaged by being prevented from receiving a fair price
for their stock. Plaintiff sought an order directing the defendants to carry out
their fiduciary duties to the Company's stockholders, to refrain from breaching
their duties, and awarding plaintiff unspecified compensatory damages and costs
and expenses incurred in the action.
The Company and the individual defendants filed a motion for summary
judgment to have themselves removed from the case. On May 19, 2003, the District
Court granted that motion for summary judgment in its entirety, thereby
dismissing these defendants from the litigation. The litigation is now concluded
without any damages having been paid by the Company or the individual
defendants, and without any injunctive relief being granted.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On June 19, 2003, the Company held its 2003 Annual Meeting of Stockholders.
The matters voted on at the meeting and the results of the meeting were as
follows:
A. Election of Class II Directors.
35
Stockholders elected Avram A. Glazer and Darcie S. Glazer as Class II
Directors, with 22,256,007 shares voted for and 1,782,121 shares that withheld
authority for Avram A. Glazer, and 22,294,207 shares voted for and 1,743,921
shares that withheld authority for Darcie Glazer. There were no broker
non-votes. The Class II Directors term expires at the 2006 Annual Meeting of
Stockholders.
The Class I Directors, whose terms expire at the 2005 Annual Meeting of
Stockholders, are Dr. Gary L. Allee and Dr. William E. M. Lands. The Class III
Directors whose terms expire at the 2004 Annual Meeting of Stockholders are Paul
M. Kearns and Joseph L. von Rosenberg III.
B. Ratification of Appointment of Independent Public Accountants.
Stockholders ratified the appointment of PricewaterhouseCoopers, LLP as the
Company's independent public accountants for the fiscal year ending December 31,
2003, with 23,924,381 shares voted for and 98,801 shares voted against. There
were no broker non-votes.
36
OMEGA PROTEIN CORPORATION
Item 5. Other Information
In May 2003, the Company directly assumed obligations under a lease with a
third party for its corporate office space in Houston, Texas. The Company had
formerly subleased this office space from a subsidiary of Zapata which in turn
leased the space from the third party landlord. The lease obligations assumed by
the Company were identical to its sublease obligations to Zapata, and the
transaction had no material effect on the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description of Exhibit
10.1 Exhibit 10.1 - Assignment and Assumption of Lease dated as May 30,
2003 by and between Zapata Corporation of Texas, Inc. and Omega Protein
Corporation.
31.1 Rule 13a-14(a)/15(d)-14(a) Certification for Chief Executive Officer.
31.2 Rule 13a-14(a)/15(d)-14(a) Certification for Chief Financial Officer.
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K:
Form 8-K dated April 15, 2003 (reporting commitment for new fish oil
processing facility)
Form 8-K dated May 1, 2003 (reporting financial results for the first
quarter of 2003)
Form 8-K dated May 19, 2003 (reporting new credit facility)
37
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)
Date: July 30, 2003 By: /s/ ROBERT W. STOCKTON
(Executive Vice President,
Chief Financial Officer)
38