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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-14003
OMEGA PROTEIN CORPORATION
(Exact name of Registrant as specified in its charter)
State of Nevada 76-0562134
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1717 St. James Place, Suite 550
Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 623-0060
_________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes Y No .
--- ---
Number of shares outstanding of the Registrant's Common Stock, par value
$0.01 per share, on July 30, 2002: 23,964,896
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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, 2002
and December 31, 2001 ................................................................. 3
Unaudited Condensed Consolidated Statement of Operations for the
three months and six months ended June 30, 2002 and 2001 .............................. 4
Unaudited Condensed Consolidated Statement of Cash Flows for the
six months ended June 30, 2002 and 2001 ............................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements ........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............................. 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................ 24
Item 2. Changes in Securities and Use of Proceeds ................................................ 24
Item 3. Defaults Upon Senior Securities .......................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 24
Item 5. Other Information ........................................................................ 25
Item 6. Exhibits and Reports on Form 8-K ......................................................... 25
Signatures ........................................................................................ 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
June 30, December 31,
2002 2001
------------ --------------
(in thousands)
ASSETS
------
Current assets:
Cash and cash equivalents ................................................. $ 27,095 $ 21,813
Receivables, net .......................................................... 13,663 7,636
Inventories ............................................................... 39,560 37,670
Deferred tax assets, net .................................................. 2,975 2,062
Prepaid expenses and other current assets ................................. 1,963 1,256
-------- ---------
Total current assets ............................................... 85,256 70,437
Other assets .................................................................. 6,584 7,107
Deferred tax assets, net ...................................................... 951 5,653
Property and equipment, net ................................................... 82,313 82,030
-------- ---------
Total assets .................................................. $175,104 $ 165,227
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt ...................................... $ 1,231 $ 1,296
Accounts payable .......................................................... 3,435 1,518
Accrued liabilities ....................................................... 16,489 13,407
-------- ---------
Total current liabilities ............................................. 21,155 16,221
Long-term debt ................................................................ 14,884 15,510
Other long-term liabilities ................................................... 5,717 6,051
-------- ---------
Total liabilities ............................................................ 41,756 37,782
-------- ---------
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; 24,375,436
shares and 24,362,415 shares issued and outstanding, respectively ..... 244 244
Capital in excess of par value ............................................ 111,992 111,959
Retained earnings ......................................................... 26,920 21,270
Accumulated other comprehensive loss ...................................... (3,773) (3,993)
Common stock in treasury, at cost - 413,100 shares ........................ (2,035) (2,035)
-------- ---------
Total stockholders' equity ............................................ 133,348 127,445
-------- ---------
Total liabilities and stockholders' equity ................... $175,104 $ 165,227
======== =========
The accompanying notes are an integral part of the unaudited
condensed consolidated statements.
3
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- --------------
(in thousands, except per share amounts)
Revenues .................................................... $27,237 $18,992 $50,716 $38,015
Cost of sales ............................................... 20,331 17,011 37,255 35,024
------- ------- ------- -------
Gross profit ................................................ 6,906 1,981 13,461 2,991
Selling, general, and administrative expense ................ 2,161 2,633 4,229 4,141
------- ------- ------- -------
Operating income (loss) ..................................... 4,745 (652) 9,232 (1,150)
Interest income (expense), net .............................. (144) (120) (311) (251)
Other (expense), net ........................................ (44) (50) (96) (10)
------- ------- ------- -------
Income (loss) before income taxes ........................... 4,557 (822) 8,825 (1,411)
Provision (benefit) for income taxes ........................ 1,640 (295) 3,175 (507)
------- ------- ------- -------
Net income (loss) ........................................... $ 2,917 $ (527) $ 5,650 $ (904)
======= ======= ======= =======
Basic earnings (loss) per share ............................. $ 0.12 $ (0.02) $ 0.23 $ (0.04)
======= ======= ======= =======
Average common shares outstanding ........................... 23,959 23,934 23,956 23,930
======= ======= ======= =======
Diluted earnings (loss) per share ........................... $ 0.12 $ (0.02) $ 0.23 $ (0.04)
======= ======= ======= =======
Average common shares and common share equivalents
outstanding .............................................. 25,108 23,934 24,979 23,930
======= ======= ======= =======
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
4
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
June 30,
-----------------------------------
2002 2001
---------------- ----------------
(in thousands)
Cash flows provided by (used in) operating activities:
Net income (loss) .................................................... $ 5,650 $ (904)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Gain on disposal of assets, net .................................. (8) (132)
Provision for losses on receivables .............................. 383 871
Depreciation and amortization .................................... 5,017 4,926
Deferred income taxes ............................................ 3,789 (508)
Changes in assets and liabilities:
Receivables .................................................. (6,042) 592
Inventories .................................................. (1,890) 1,341
Accounts payable and accrued liabilities ..................... 4,999 2,869
Other, net ................................................... (1,700) 247
------- -------
Total adjustments ....................................... 4,548 10,206
------- -------
Net cash provided by operating activities ............... 10,198 9,302
------- -------
Cash flows used in investing activities:
Proceeds from sale of assets, net ................................... 23 290
Capital expenditures ................................................ (4,248) (460)
------- -------
Net cash used in investing activities ................... (4,225) (170)
------- -------
Cash flows used in financing activities:
Principal payments of short and long-term debt obligations ........... (691) (605)
Proceeds from borrowings ............................................. - 72
------- -------
Net cash used in financing activities .................................... (691) (533)
------- -------
Net increase in cash and cash equivalents ................................ 5,282 8,599
Cash and cash equivalents at beginning of year ........................... 21,813 7,403
------- -------
Cash and cash equivalents at end of period ............................... $27,095 $16,002
======= =======
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
5
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Summary of Operations and Basis of Presentation
Business Description
Omega Protein Corporation ("Omega" or the "Company") produces and markets a
variety of products produced from menhaden (herring-like 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
used as nutritional feed additives by animal feed manufacturers and by
commercial livestock producers. Omega operates its own fleet of fishing vessels
as well as four processing plants. The Company's crude fish oil is sold
primarily to food producers in Europe, and its refined fish oil products, which
are high in nutritionally desirable Omega-3 fatty acids, are used in a variety
of foods for human consumption, as well as in aquaculture feeds and certain
industrial applications. Fish solubles are sold as protein additives for animal
feed and as organic fertilizers.
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 and should be
read in conjunction with our Annual Report on Form 10-K for the year ended
December 31, 2001. 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, 2002, and the results of its operations and
its cash flows for the six-month periods ended June 30, 2002 and 2001. Operating
results for the six-month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002.
Consolidation
The consolidated financial statements include the accounts of Omega and its
wholly and majority owned subsidiaries. Investments in affiliated companies and
joint ventures representing a 20% to 50% voting interest are accounted for using
the equity method. All significant intercompany accounts and transactions have
been eliminated in consolidation.
On April 5, 2000, the Company acquired for a nominal amount an additional
1% equity interest in a partially owned subsidiary previously accounted for
under the equity method. As a result of the transaction, the Company owned 51%
of the investment and began consolidating its operations which were not material
to the Company's financial results. On November 1, 2001, the Company sold all of
its interest in this subsidiary. The Company's gain on this sale was not
material. As a result of the sale, the Company is totally divested of the
investment.
6
Revenue Recognition
The Company recognizes revenue for the sale of its products when title and
the risk and rewards of ownership are transferred to the customer, which occurs
upon shipment.
Cash and Cash Equivalents
The Company considers cash in banks and short-term investments with
original maturities of three months or less as 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
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, and 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, deferred costs (the majority of which are
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
compares 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 for which actual results may differ.
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.
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
Effective January 1, 2002 the Company accounts for impairment of long-lived
assets in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which
was issued in October 2001. SFAS No. 144 supercedes SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". There was no impact on the Company's financial results from the adoption of
SFAS No. 144. SFAS No. 144 requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the book
value of the asset may not be recoverable. The Company evaluates at each balance
7
sheet date whether events and circumstances have occurred that indicate possible
operational impairment. In accordance with SFAS No. 144, the Company uses an
estimate of the future undiscounted net cash flows of the related asset or asset
grouping over the remaining life in measuring whether its operating assets are
recoverable. An impairment is recognized when future undiscounted cash flows of
assets are estimated to be insufficient to recover their related carrying value.
The Company considers continued operating losses, or significant and long-term
changes in business conditions, to be its primary indicators 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 credit carry forwards for tax purposes. A valuation
allowance is provided for deferred tax assets if it is more likely than not
these items will either expire before the Company is able to realize the
benefits, or that future deductibility is uncertain.
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, fixtures and other ............................. 3-10
Replacements and major improvements are capitalized; maintenance and
repairs are charged to expense as incurred. Upon sale or retirement of an asset,
the costs and related accumulated depreciation are eliminated from the accounts.
Any resulting gains or losses are included in the statement of operations.
Pension Plans
The Company has a pension plan covering substantially all employees. 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. In Fiscal 1999, the Company adopted SFAS
No. 132, "Employers' Disclosures about Pensions and Other Post-Retirement
Benefits." SFAS No. 132 revised and standardized the disclosure requirements for
pensions and other post-retirement benefit plans to the extent practicable. It
does not change the measurement or recognition of these plans.
On April 10, 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. When this plan is fully implemented, it will have the effect of
vesting all existing participants in their pension benefits in the plan.
8
Employee 401(k) Plan
On April 10, 2002, the Board of Directors authorized the reinstatement of
the Company's matching cash contribution to its 401(k) Plan, effective January
1, 2002, at levels previously in place prior to the suspension of the match in
2001.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," establishes a standard for
reporting and displaying comprehensive income and its components within the
financial statements. Comprehensive income includes charges and credits to
equity that are not the result of transactions with shareholders. Comprehensive
income is composed of two subsets -- net income and other comprehensive income.
Included in other comprehensive income for the Company are minimum pension
liability adjustments. These adjustments are accumulated within Stockholders'
Equity under the caption Accumulated Other Comprehensive Loss.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist principally of cash and trade accounts receivable. The
Company's customer base generally remains consistent from year to year. The
Company performs ongoing credit evaluations of its customers and generally does
not require material collateral. The Company maintains reserves for potential
credit losses and such losses have historically been within management's
expectations.
At June 30, 2002 and December 31, 2001, 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
securities paper with companies and financial institutions. As a result of the
foregoing, the Company believes that credit risk in such investments is minimal.
Earnings Per Share
Basic earnings per share were computed by dividing net income (loss) by the
weighted average number of common shares outstanding. Diluted earnings per share
were computed by dividing net income (loss) by the sum of the weighted average
number of common shares outstanding and the effect of any dilutive stock
options.
Recently Issued Accounting Standards
In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities that are currently accounted for pursuant to the
guidance that the Emerging Issues Task Force ("EITF") has set forth in EITF
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." The scope of SFAS No. 146 also includes (1) costs related to
terminating a contract that is not a capital lease and (2) termination benefits
that employees who are involuntarily terminated receive under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. SFAS No. 146 will be effective for
exit or disposal activities that are initiated after December 31, 2002.
9
In June 2001, the FASB approved SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supercedes
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," to
prohibit use of the pooling-of-interest (pooling) method of accounting for
business combinations initiated after the issuance date of the final Statement.
SFAS No. 142 supercedes APB Opinion No. 17; "Intangible Assets," by stating that
goodwill will no longer be amortized, but will be tested for impairment in a
manner different from the way other assets are tested for impairment. SFAS No.
142 also establishes a new method of testing goodwill for impairment. The
provisions of SFAS No. 141 and SFAS No. 142 are effective for fiscal years
beginning after December 15, 2001. The Company's adoption of the provisions of
SFAS No. 141 and No. 142 on January 1, 2002, did not have an impact on the
Company's existing operations.
At the end of 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 will be
required to be adopted by the Company in Fiscal 2003. The Company has not
determined what impact, if any, this statement will have on the Company's
operations.
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 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, 2002 and December 31, 2001 are
summarized as follows:
June 30, December 31,
2002 2001
---------- --------------
(in thousands)
Trade ................................................. $11,723 $ 6,265
Insurance ............................................. 327 290
Employee .............................................. 112 37
Income tax ............................................ 1,473 973
Other ................................................. 303 331
-------- --------
Total accounts receivable ............................. 13,938 7,896
Less: allowance for doubtful accounts ................. (275) (260)
-------- --------
Receivables, net ...................................... $13,663 $ 7,636
======== ========
10
Note 3. Inventory
The major classes of inventory as of June 30, 2002 and December 31,
2001 are summarized as follows:
June 30, December 31,
2002 2001
------------------- -------------------
(in thousands)
Fish meal ..................................... $ 11,021 $ 19,221
Fish oil ...................................... 4,961 9,128
Fish solubles ................................. 276 789
Deferred inventory costs ...................... 19,338 4,127
Other materials & supplies .................... 3,964 4,405
---------- ---------
Total inventory ............................... $ 39,560 $ 37,670
========== =========
Note 4. Other Assets
Other assets as of June 30, 2002 and December 31, 2001 are summarized as
follows:
June 30, December 31,
2002 2001
------------------ ------------------
(in thousands)
Fishing nets ................................................... $1,591 $ 835
Prepaid pension cost ........................................... 2,424 3,123
Insurance receivable, net of allowance for doubtful accounts ... 1,707 1,590
Title XI loan origination fee .................................. 318 357
Note receivable ................................................ 413 471
Deposits ....................................................... 131 731
------- -------
Total other assets ............................................. $6,584 $7,107
======= =======
Amortization expense for fishing nets amounted to approximately $257,000
and $475,000 for the quarters ended June 30, 2002 and June 30, 2001,
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.
For the period from October 1, 1998 to March 31, 2000, the Company placed
its Vessel Claims Insurance coverage with HIH Casualty and General Insurance,
Ltd., an insurance company that is part of HIH Insurance Limited, the second
largest insurance company in Australia ("HIH"). In April 2001, HIH petitioned a
court in Australia to place it in provisional liquidation. The Company
estimates, based on previous payments made by the Company and its existing
reserves for open claims for the period covered by HIH, that HIH owes
approximately $2.0 million either to the Company or on the Company's behalf.
This amount could be adjusted upward or downward as additional claims and their
corresponding reserves become finalized.
The Company has put the trustees in the Australian liquidation proceedings
on notice of its claims under its insurance policy. However, the Company
believes that the ultimate outcome of the recovery against HIH cannot be assured
at this time and that it is probable that a portion of these receivables will
not be collectible. Accordingly, at June 30, 2002, the allowance for doubtful
accounts applicable to the HIH receivable was $1.7 million.
11
On December 27, 2001 the Company entered into a purchase agreement to
purchase a 60,000 square foot material storage facility in St. Louis, Missouri
which it had previously leased. As part of the agreement, the Company deposited
the $600,000 purchase price pending receipt of the Deed of Trust. The Deed of
Trust was executed and delivered and the Company took title to the property in
February 2002.
Note 5. Property and Equipment
Property and equipment at June 30, 2002 and December 31, 2001 are
summarized as follows:
June 30, December 31,
2002 2001
------------------- -------------------
(in thousands)
Land .............................................. $ 5,390 $ 5,390
Plant assets ...................................... 69,656 69,674
Fishing vessels ................................... 73,183 73,183
Furniture and fixtures ............................ 1,753 1,837
Other ............................................. 5,475 1,227
---------- ---------
Total property and equipment ...................... 155,457 151,311
Less: accumulated depreciation and impairment ..... (73,144) (69,281)
---------- ---------
Property and equipment, net ....................... $ 82,313 $ 82,030
========== =========
Depreciation expense for the quarters ended June 30, 2002 and June 30, 2001
was $4.0 million and $4.2 million, respectively.
Note 6. Notes Payable and Long-Term Debt
At June 30, 2002 and December 31, 2001, the Company's long-term debt
consisted of the following:
June 30, December 31,
2002 2001
--------------- -----------------
(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% .......... $ 15,088 $15,627
Amounts due in installments through 2014, interest at Eurodollar rates of
2.49% and 3.05% at June 30, 2002 and December 31, 2001,
respectively, plus 4.5% ...................................................... 973 1,013
Other debt at 7.9% to 8.0% at June 30, 2002 and December 31, 2001, respectively ...... 54 166
-------- --------
Total debt ........................................................................... 16,115 16,806
Less current maturities .............................................. (1,231) (1,296)
-------- --------
Long-term debt ....................................................................... $ 14,884 $15,510
======== =======
At June 30, 2002 and December 31, 2001, 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. On November 6,
2001, the Company closed on its application for an additional loan of $1.9
million under the new program for qualified projects.
On December 20, 2000 the Company entered into a three-year $20.0 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
12
expenditures. Borrowings under the Credit Facility bears interest at a rate
equal to (i) LIBOR plus 250 basis points or (ii) at the Company's option, the
Bank's prime rate. The Credit Facility requires a per annum commitment fee of
one-half of a percent (0.5%) on the daily average unused portion of the
commitment of the Lender. The Credit Facility is collateralized by all of the
Company's trade receivables, inventory and equipment. The Company and its
subsidiaries are required to comply with certain financial covenants, including
maintenance of a minimum tangible net worth and minimum EBITDA. In addition, the
Credit Facility does not allow for the payment of cash dividends or stock
repurchases and also limits capital expenditures and investments. Borrowings
available from the Credit Facility are limited to the lesser of $20.0 million or
a defined borrowing base. At June 30, 2002 and December 31, 2001, total
available borrowings were limited to the defined borrowing base which was $16.3
million and $14.4 million, respectively. The borrowing base is further reduced
by any outstanding letters of credit issued on the Company's behalf. At June 30,
2002 and December 31, 2001, the Company had outstanding letters of credit
totaling approximately $2.6 million and $1.9 million, respectively, issued
primarily in support of worker's compensation insurance programs. The Company is
in compliance with the Credit Facility covenants at June 30, 2002. As of June
30, 2002 the Company had no cash borrowings outstanding under the Credit
Facility. The Credit Facility expires on December 20, 2003.
Note 7. Accrued Liabilities
Accrued liabilities as of June 30, 2002 and December 31, 2001 are
summarized as follows:
June 30, December 31,
2002 2001
------------------- ------------------
(in thousands)
Salary and benefits ........................... $ 7,479 $ 4,985
Insurance ..................................... 5,856 6,863
Taxes, other than income tax .................. 1,049 93
Trade creditors ............................... 2,002 1,375
Other ......................................... 103 91
---------- --------
Total accrued liabilities ..................... $ 16,489 $ 13,407
========== ========
Note 8. Comprehensive Income (Loss)
The components of comprehensive income (loss) are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -----------------------------------
2002 2001 2002 2001
---------------- --------------- --------- ------------
(in thousands) (in thousands)
Net income (loss) ...................... $ 2,917 $ (527) $ 5,650 $ (904)
Minimum pension liability
adjustment, net of tax .............. (11) - 220 -
--------- -------- ------- --------
Total comprehensive income (loss) ...... $ 2,906 $ (527) $ 5,870 $ (904)
========= ======== ======= ========
13
Note 9. Commitments and Contingencies
Litigation
The Company is defending various claims and litigation arising from its
operations. In the opinion of management, uninsured losses, if any (including
those losses that may become uninsured due to the insolvency of HIH as described
in Note 4) resulting from these matters will not have a material adverse effect
on the Company's results of operations, cash flows or financial position.
Environmental Matters
The Company 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.
Tax Assessment
The Company has informally been notified by representatives from the
Vermillion Parish and St. Mary Parish tax authorities of undefined deficiencies
in parish sales and use taxes for the Company's 1997 to 2000 tax years. As of
July 30, 2002, the proposed adjustments to the parish sales and use tax returns
for the calendar years ending 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, 2002 and has recorded a provision
adequate to cover these adjustments. The Company intends to contest the proposed
adjustments vigorously.
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.
General
Omega Protein Corporation is a Nevada corporation organized in 1998. As
used herein, the term "Omega" or the "Company" refers to Omega Protein
Corporation and its consolidated subsidiaries, as applicable. All references
herein to a "Fiscal" year mean the twelve month period ended December 31 of such
year. The Company's principal executive offices are located at 1717 St. James
Place, Suite 550, Houston, Texas 77056, Telephone: (713) 623-0060.
Omega is the nation's largest producer of protein rich fish meal and fish
oil. The Company's products are produced from menhaden (a herring-like fish
found in commercial quantities), and includes regular grade and value-added
specialty fish meals, crude and refined fish oils and fish solubles. The
Company's fish meal products are used as high-protein feed additives by animal
feed manufacturers and by commercial livestock and poultry farmers. The
14
Company's crude fish oil is sold to food producers in Europe and its refined
fish oil products, which are high in nutritionally desirable Omega-3 fatty
acids, are used in a variety of foods for human consumption, as well as in
aquaculture feeds and certain industrial applications. Fish solubles are sold as
protein additives for animal feed and as organic fertilizers.
The fish catch is processed into regular grade fish meal, specialty fish
meals, fish oils and fish solubles at the Company's four operating plants
located in Virginia, Mississippi and Louisiana. The Company owns 65 fishing
vessels (41 of which are directly involved in the harvesting operations during
Fiscal 2002) and owns 32 and leases 8 spotter aircraft (of which 34 are directly
involved in the harvesting operations during fiscal 2002) that are used to
harvest menhaden in coastal waters along 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. The carry vessels have reduced crews
and crew expenses and incur less maintenance cost than the actual fishing
vessels. Additionally, the Company elected to cease its in-line processing
operations at its Morgan City, Louisiana plant location prior to the Fiscal 2000
fishing season, and did not reopen the plant for the 2001 nor 2002 fishing
seasons. Certain damaged processing equipment at this facility has been removed
and scrapped. The closure of this plant did not impact the Company's continuing
ability to process all its Gulf Coast production, even though fishing efforts
were not reduced, since the Company had excess production capacity at its
remaining three Gulf Coast plants. Warehousing operations are being conducted at
the Morgan City facility until market conditions improve or other opportunities
develop for the property.
The Company's harvesting season generally extends from May through December
on the mid-Atlantic coast and from April through the first of November on the
Gulf coast. During the off season, the Company fills purchase orders from the
inventory it has accumulated during the fishing season. Prices for the Company's
products tend to be lower during the fishing season when product is more
abundant than in the off season. Throughout the entire year, prices are often
significantly influenced by supply and demand in world markets for competing
products, particularly soybean meal for its fish meal products and vegetable
oils and fats for its fish oil products when used as an alternative to vegetable
oils and fats.
During Fiscal 1999 and continuing through Fiscal 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. The
depressed pricing conditions of Fiscal Years 1999 and 2000 continued into the
early months of Fiscal 2001 before making modest reversals. These price
increases continued throughout the remainder of Fiscal 2001 and were the result
of diminished global fish meal and fish oil inventories as opposed to a stronger
world demand for other competing products. Management believes that it is
possible that these price increases have reached a plateau and stabilized at
this time. Future product price volatility will depend upon the perceived
international availability of fish meal and fish oil inventories. Accordingly,
gross profit margins may vary in the future.
In an effort to reduce price volatility and to generate higher, more
consistent profit margins, the Company is continuing its efforts towards the
production and marketing of specialty meal products, which generally have higher
margins than the Company's regular grade meal product. Additionally, the Company
is attempting to introduce its refined fish oil into the food market. The
Company has had some success selling its refined fish oil, trademarked
OmegaPureTM, 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 OmegaPureTM or how long it
may take to develop this market.
15
Historically, approximately 35% to 40% of Omega's regular grade fish meal
was sold on a two-to-six-month forward contract basis. The balance of regular
grade and other products was substantially sold on a spot basis through purchase
orders. The Company began a similar forward sales program for its specialty
grade meals and crude fish oil for Fiscal 2002 due to increasing demand for
these products. 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 fiscal year to another fiscal year. The Company determines
the level of inventory to be carried over based on prevailing market prices of
the products and sales volume in the same fiscal 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.
Liquidity and Capital Resources
The Company's primary resources of liquidity and capital resources have
been cash flows from operations, bank credit facilities and term loans from
various lenders provided pursuant to 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 Fiscal 2001.
Omega had an unrestricted cash balance of $27.1 million at June 30, 2002,
up $5.3 million from December 31, 2001. This increase was due primarily to
operating profits as a result of higher selling prices for the Company's
products, further enhanced by reduced harvesting costs. 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
Fiscal 1999 and Fiscal 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, 2002 and December 31, 2001 was $14.9 million and
$15.5 million, respectively. Current maturities attributable to the Company's
long-term debt were $1.2 million at June 30, 2002 and $1.3 million at December
31, 2001, respectively. The Company has not utilized its working capital credit
facility other than for standby letters of credit.
16
The following tables aggregate information about the Company's contractual
cash obligations and other commercial commitments (in thousands) as of June 30,
2002:
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 .......................... $16,115 $1,231 $2,710 $3,054 $ 9,120
Operating Leases ........................ 1,811 473 756 230 352
Minimum Pension Liability ............... 5,717 - - - 5,717
------- ------ ------ ------ -------
Total Contractual Cash Obligations ...... $23,643 $1,704 $3,466 $3,284 $15,189
======= ====== ====== ====== =======
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) ..................... $13,749 $ - $ - $ - $ -
Standby Letters of Credit ............... 2,560 2,560 - - -
------- ------ ------- ------- -------
Total Commercial Commitments ............ $16,309 $2,560 $ - $ - $ -
======= ====== ======= ======= =======
(1) As of June 30, 2002, the Company had no borrowings outstanding under the
$20.0 million Credit Facility. The $20.0 million Credit Facility was
limited to its defined borrowing base of $16.3 million, further reduced by
outstanding standby letters of credit totaling $2.6 million.
Investing activities used $4.2 million and $170,000 during the six month
periods ending June 30, 2002 and 2001, respectively. The Company's investing
activities consisted mainly of capital expenditures for equipment purchases and
replacements in the six month periods ended June 30, 2002 and 2001. The Company
anticipates making approximately $8.0 million of capital expenditures in Fiscal
2002, a significant portion of which will be used to refurbish vessels and plant
assets and to repair certain equipment.
If the Company elects to re-establish normal production at its Morgan City
plant operations for fish meal, fish oil and fish solubles, then various
components of the in-line processing equipment will have to be upgraded or
replaced. Such equipment would include the driers, cookers and presses. It is
estimated that replacement of this equipment would cost $2.0 to $3.0 million.
Net financing activities used $691,000 and $533,000 to repay debt
obligations during the six month periods ended June 30, 2002 and 2001,
respectively.
On December 20, 2000, the Company entered into a $20.0 million revolving
credit agreement with Bank of America, N.A. (the "Credit Facility"). Under the
Credit Facility the Company may make borrowings in a principal amount not to
exceed $20.0 million at any time. Borrowings under this facility may be used to
finance ongoing working capital needs, to make acquisitions, and to issue
standby or commercial letters of credit. Interest accrues on borrowings that
will be outstanding under the Credit Facility at either (i) LIBOR plus 250 basis
points or (ii) at the Company's option, the Bank's prime rate. The Credit
Facility is collateralized by all of the Company's trade receivables, inventory
and equipment. The Company and its subsidiaries are required to comply with
certain financial covenants, including maintenance of a minimum tangible net
worth and maintenance of minimum EBITDA. Borrowings available from the Credit
Facility are limited to the lesser of $20.0 million or a defined borrowing base.
At June 30, 2002 and December 31, 2001, total available borrowings were limited
to the defined borrowing base of $16.3 million and $14.4 million, respectively.
17
The borrowing base is further reduced by any outstanding letters of credit
issued on the Company's behalf. In addition, the Credit Facility does not allow
for the payment of cash dividends or stock repurchases and also limits capital
expenditures and investments. Through June 30, 2002, the Company had made no
borrowings under the Credit Facility other than for $2.6 million in standby
letters of credit. The Credit Facility expires on December 20, 2003.
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 human consumption, as a whole fish, 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, 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, it could enter into such agreement in the
future.
In January 2002, the United States Supreme Court ruled that, in addition to
the United States Coast Guard, the Occupational Safety and Health Administration
has the authority to regulate working conditions aboard certain types of vessels
which include the Company's fishing vessels. The eventual implementation of this
ruling (which is expected to occur over a period of years) is expected to result
in additional safety requirements and procedures for the Company's vessels. It
is possible that the costs of these requirements and procedures could be
material.
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.
During Fiscal 2001, the Company's vessel claims insurance carrier for the
policy period October 1, 1998 through March 31, 2000 filed for bankruptcy
protection. This bankruptcy filing caused the Company to provide an allowance
for doubtful accounts for a significant portion of the amounts due to the
Company from the insurance carrier.
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 Fiscal 2003.
18
Significant Accounting Policies
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported therein, including
estimates about the effects of matters or future events that are inherently
uncertain. The most significant of these involving difficult or complex
judgments in any particular period involve the costing of inventory including
inventory lower-of-cost or market-value analyses and the Company's accounting
for various losses on self-insurance retentions.
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
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 and 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, deferred costs (the majority of which are
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
compares 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 for which actual results may differ.
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.
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 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.
19
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,
------------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues ......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales .................................... 74.6 89.6 73.5 92.1
----- ----- ----- -----
Gross profit ..................................... 25.4 10.4 26.5 7.9
Selling, general and administrative expense ...... 7.9 13.8 8.3 10.9
----- ----- ----- -----
Operating income (loss) .......................... 17.5 (3.4) 18.2 (3.0)
Interest income (expense), net ................... (0.5) (0.6) (0.6) (0.7)
Other income (expense), net ...................... (0.2) (0.3) (0.2) (0.0)
----- ----- ----- -----
Income (loss) before income taxes ................ 16.8 (4.3) 17.4 (3.7)
Provision (benefit) for income taxes ............. 6.1 (1.5) 6.3 (1.3)
----- ----- ----- -----
Net income (loss) ................................ 10.7 (2.8) 11.1 (2.4)
===== ===== ===== =====
Interim Results for the Second Quarters ended June 30, 2002 and June 30, 2001
Revenues. For the quarter ended June 30, 2002, revenues increased $8.2
million from $19.0 million in the quarter ended June 30, 2001 to $27.2 million.
The revenue increase was primarily due to higher sales prices of 35.7% and 56.6%
for the Company's fish meal and fish oil, respectively, along with a 29.4%
increase in fish oil volume sold. The Company attributes the higher fish meal
prices, fish oil prices and fish oil volumes to strong worldwide demand for fish
meal and competing oil markets rebounding from historic low levels.
Cost of Sales. Cost of sales, including depreciation and amortization, for
the current quarter ended June 30, 2002 was $20.3 million, a 19.5% increase from
$17.0 million in the previous quarter ended June 30, 2001. Cost of sales as a
percentage of revenues was 74.6% and 89.6% in the quarters ended June 30, 2002
and 2001, respectively. The decrease in cost of sales as a percentage of
revenues was primarily due to higher sales prices of 35.7% and 56.6% for the
Company's fish meal and fish oil, respectively.
Gross Profit. Gross profit increased $4.9 million or 248.6% from $2.0
million in the quarter ended June 30, 2001 to $6.9 million in the current
quarter ended June 30, 2002. As a percentage of revenues, the Company's gross
profit margin increased 15.0% in the second quarter ended June 30, 2002 as
compared to the second quarter of the prior fiscal year. The increase in gross
profit margin was primarily due to the higher selling prices the Company
received for its fish meal and fish oil compared to the same period in the prior
fiscal year.
Selling, general and administrative expenses. Selling, general, and
administrative expenses decreased $472,000 or 17.9% from $2.6 million in the
three month period ended June 30, 2001 as compared to $2.2 million in the
current quarter ended June 30, 2002. This decrease was primarily attributable to
a $634,000 decrease in the provision for uncollectible insurance accounts
receivables, offset by higher advertising and employee related costs in the
current quarter ended June 30, 2002 as compared to the previous quarter ended
June 30, 2001.
20
Operating income (loss). As a result of the factors discussed above, the
Company's operating income increased $5.4 million from an operating loss of
$652,000 in the quarter ended June 30, 2001. As a percentage of revenues,
operating income increased 20.9% for the current quarter ended June 30, 2002.
Interest expense, net. Interest expense, net increased by $24,000 in the
quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001. The
increase in interest expense, net was due to a decrease in the average interest
rate the Company earned on its investments during the quarter ended June 30,
2002 as compared to the quarter ended June 30, 2001.
Provision (benefit) for income taxes. The Company recorded a $1.6 million
provision for income taxes for the quarter ended June 30, 2002. This represents
an effective tax rate of 36.0% on $4.6 million of income for the quarter ended
June 30, 2002 compared to a $295,000 tax benefit for income tax in the quarter
ended June 30, 2001, representing an effective tax rate of 36.0%. The effective
tax rate approximates the applicable combined state and federal statutory tax
rates for the respective periods.
Interim Results for the Six Months ended June 30, 2002 and June 30, 2001
Revenues. For the six months ended June 30, 2002, revenues increased $12.7
million or 33.4% from $38.0 million for the six months ended June 30, 2001 to
$50.7 million for the six months ended June 30, 2002. The revenue increase was
primarily due to higher sales prices of 18.0% and 67.6% for the Company's fish
meal and fish oil respectively, along with a 15.5% increase in fish oil volume
sold. The Company attributes the higher fish meal prices, fish oil prices and
fish oil volumes to strong worldwide demand for fish meal and competing oil
markets rebounding from historic low levels.
Cost of Sales. Cost of sales, including depreciation and amortization, for
the six months ended June 30, 2002 was $37.3 million, a $2.2 million or a 6.4%
increase from $35.0 million for the comparable six month period ending June 30,
2001. Cost of sales as a percentage of revenues was 73.5% and 92.1% for the six
months ended June 30, 2002 and June 30, 2001, respectively. The decrease in cost
of sales as a percentage of revenues was primarily due to higher sales prices of
18.0% and 67.6% for the Company's fish meal and oil, respectively.
Gross Profit. Gross profit increased $10.5 million or 350.0% from $2.9
million for the six months ended June 30, 2001 to $13.5 million for the six
months ended June 30, 2002. As a percentage of revenues the Company's gross
profit margin increased 18.6% in the current six month period ended June 30,
2002 as compared to the six month period ended June 30, 2001. The increase in
gross profit margin was primarily due to the higher selling prices the Company
received for its fish meal and fish oil compared to the same period in the prior
fiscal year.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses increased $88,000 or 2.1% from $4.1 million for the six
months ended June 30, 2001 as compared to $4.2 million for the current six
months ended June 30, 2002. This increase was attributable to increased
advertising expenses and employee-related costs.
Operating income (loss). As a result of the factors discussed above, the
Company's operating income increased $10.4 million from an operating loss of
$1.2 million for the six months ended June 30, 2001. As a percentage of
revenues, operating income increased 21.2% for the six months ended June 30,
2002.
Interest income (expense), net. Interest income (expense), net increased by
$60,000 for the six months ended June 30, 2002 as compared to the six months
ended June 30, 2001. The increase in interest expense was due to a decrease in
21
the average interest rate the Company earned on its investments during the six
months ended June 30, 2002 as compared to the prior period.
Other income (expense), net. Other income (expense), net increased $86,000
for the six months ended June 30, 2002 as compared to the six months ended June
30, 2001. This increase in other expense was the result of a gain on the
disposal of miscellaneous assets recognized during the previous six months ended
June 30, 2001.
Provision (benefit) for income taxes. The Company recorded a $3.2 million
provision for income taxes for the six months ended June 30, 2002. This
represents an effective tax rate of 36% on $8.8 million of income for the six
months ended June 30, 2002 compared to $507,000 benefit for income tax for the
six months ended June 30, 2001, representing an effective tax rate of 36%. The
effective tax rate approximates the applicable combined state and federal
statutory tax rates for the respective periods.
Seasonal and Quarterly Results
The Company's menhaden harvesting and processing business is seasonal in
nature. The Company generally has higher sales during the menhaden harvesting
season (which includes the second and third quarter of each Fiscal year) due to
increased product availability, but prices during the fishing season tend to be
lower than during the off-season. As a result, the Company's quarterly operating
results have fluctuated in the past and may fluctuate in the future. In
addition, from time to time the Company defers sales of inventory based on
worldwide prices for competing products that affect prices for the Company's
products which may affect comparable period comparisons.
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, 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
22
of the adoption of new laws and regulations, 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 venture into the sale of refined,
non-hydrogenated menhaden oil for consumption in the U.S., including
the unproven market for this product.
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
operations 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.
23
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 U.S. 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.
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. See also Note 4 to Consolidated
Financial Statements in Part I - Item 1.
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 25, 2002, the Company held its 2002 Annual Meeting of Stockholders.
The matters voted on at the meeting and the results of the meeting were as
follows:
A. Election of Class I Directors.
Stockholders elected Dr. Gary L. Allee and Dr. William E. M. Lands as
Class I Directors, in each case with 23,853,912 shares voted for and
40,400 shares that withheld authority for each individual. There were
no broker non-votes. The Class I Directors term expires at the 2005
Annual Meeting of Stockholders.
The Class II Directors, whose terms expire at the 2003 Annual Meeting
of Stockholders, are Avram A. Glazer and Darcie S. Glazer. 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.
24
Stockholders ratified the appointment of PricewaterhouseCoopers, LLP as the
Company's independent public accountants for the fiscal year ending
December 31, 2002, with 23,882,307 shares voted for and 8,316 shares voted
against. There were no broker non-votes.
Item 5. Other Information
In April 2002, Malcolm I. Glazer resigned as a director of the Company. On
April 10, 2002, the Board of Directors elected Darcie Glazer, 33, of New
York City, as a Class II Director of the Company. The Class II term expires
in 2003. Ms. Glazer is the daughter of Malcolm I. Glazer and the sister of
Avram Glazer, the Company's Chairman of the Board.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
None
25
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)
July 31, 2002 By: /s/ ROBERT W. STOCKTON
-------------------------------------
(Executive Vice President,
Chief Financial Officer and
Corporate Secretary)