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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 September 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 X No__.
Number of shares outstanding of the Registrant's Common Stock, par value
$0.01 per share, on October 30, 2002: 23,969,562
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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 September 30, 2002
and December 31, 2001 ................................................. 3
Unaudited Condensed Consolidated Statement of Operations for the
three months and nine months ended September 30, 2002 and 2001 ........ 4
Unaudited Condensed Consolidated Statement of Cash Flows for the
nine months ended September 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
Item 4. Controls and Procedures .................................................. 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ........................................................ 24
Item 2. Changes in Securities and Use of Proceeds ................................ 25
Item 3. Defaults Upon Senior Securities .......................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ...................... 25
Item 5. Other Information ........................................................ 25
Item 6. Exhibits and Reports on Form 8-K ......................................... 25
Signatures ........................................................................ 26
Certifications .................................................................... 27
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
September 30, December 31,
2002 2001
------------------- ------------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 29,155 $ 21,813
Receivables, net ...................................................... 14,187 7,636
Inventories ........................................................... 45,373 37,670
Deferred tax assets, net .............................................. 1,418 2,062
Prepaid expenses and other current assets ............................. 1,590 1,256
--------- ---------
Total current assets ........................................... 91,723 70,437
Other assets .............................................................. 6,129 7,107
Deferred tax assets, net .................................................. 1,130 5,653
Property and equipment, net ............................................... 81,757 82,030
--------- ---------
Total assets .............................................. $ 180,739 $ 165,227
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .................................. $ 1,250 $ 1,296
Accounts payable ...................................................... 2,218 1,518
Accrued liabilities ................................................... 20,030 13,407
--------- ---------
Total current liabilities ......................................... 23,498 16,221
Long-term debt ............................................................ 14,565 15,510
Other long-term liabilities ............................................... 5,717 6,051
--------- ---------
Total liabilities ........................................................ 43,780 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;
24,377,996 shares and 24,362,415 shares issued and outstanding,
respectively....................................................... 244 244
Capital in excess of par value ........................................ 112,003 111,959
Retained earnings ..................................................... 30,520 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 ........................................ 136,959 127,445
--------- ---------
Total liabilities and stockholders' equity ............... $ 180,739 $ 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 Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
-------- -------- -------- --------
(in thousands, except per share amounts)
Revenues ................................................... $ 34,992 $ 36,838 $ 85,708 $ 74,853
Cost of sales .............................................. 27,259 31,069 64,514 66,093
-------- -------- -------- --------
Gross profit ............................................... 7,733 5,769 21,194 8,760
Selling, general, and administrative expense ............... 2,029 1,807 6,258 5,948
-------- -------- -------- --------
Operating income ........................................... 5,704 3,962 14,936 2,812
Interest expense, net ...................................... (163) (69) (474) (320)
Other expense, net ......................................... (65) (56) (161) (66)
-------- -------- -------- --------
Income before income taxes ................................. 5,476 3,837 14,301 2,426
Provision for income taxes ................................. 1,876 827 5,051 320
-------- -------- -------- --------
Net income ................................................. $ 3,600 $ 3,010 $ 9,250 $ 2,106
======== ======== ======== ========
Basic earnings per share ................................... $ 0.15 $ 0.13 $ 0.38 $ 0.09
======== ======== ======== ========
Average common shares outstanding .......................... 23,965 23,942 23,959 23,934
======== ======== ======== ========
Diluted earnings per share ................................. $ 0.14 $ 0.13 $ 0.37 $ 0.09
======== ======== ======== ========
Average common shares and common share equivalents
outstanding ............................................. 25,261 23,982 25,074 23,968
======== ======== ======== ========
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
Nine Months Ended
September 30,
--------------------------------
2002 2001
-------- --------
(in thousands)
Cash flows provided by (used in) operating activities:
Net income ...................................................... $ 9,250 $ 2,106
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on disposal of assets, net ............................. (8) (150)
Provision for losses on receivables ......................... 406 989
Depreciation and amortization ............................... 7,690 7,273
Deferred income taxes ....................................... 5,167 694
Changes in assets and liabilities:
Receivables ............................................. (6,574) (9,331)
Inventories ............................................. (7,703) (79)
Accounts payable and accrued liabilities ................ 7,323 7,256
Other, net .............................................. (1,575) (55)
-------- --------
Total adjustments .................................. 4,726 6,597
-------- --------
Net cash provided by operating activities .......... 13,976 8,703
-------- --------
Cash flows provided by (used in) investing activities:
Proceeds from sale of assets, net ............................... 23 387
Capital expenditures ............................................ (5,666) (1,013)
-------- --------
Net cash used in investing activities .............. (5,643) (626)
-------- --------
Cash flows provided by (used in) financing activities:
Principal payments of short and long-term debt obligations ...... (991) (918)
Proceeds from borrowings ........................................ -- 72
-------- --------
Net cash used in financing activities ............................... (991) (846)
-------- --------
Net increase in cash and cash equivalents ........................... 7,342 7,231
Cash and cash equivalents at beginning of year ...................... 21,813 7,403
-------- --------
Cash and cash equivalents at end of period .......................... $ 29,155 $ 14,634
======== ========
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 the Far East 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 attractants
for aquaculture 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 September 30, 2002, and the results of its operations
and its cash flows for the nine-month periods ended September 30, 2002 and 2001.
Operating results for the nine-month period ended September 30, 2002 are not
necessarily indicative of the results that may be expected for the fiscal 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 September 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 by the
weighted average number of common shares outstanding. Diluted earnings per share
were computed by dividing net income 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 September 30, 2002 and December 31, 2001 are
summarized as follows:
September 30, December 31,
2002 2001
------------------- -------------------
(in thousands)
Trade $ 12,733 $ 6,265
Insurance 444 290
Employee 88 37
Income tax 935 973
Other 270 331
------------------- -------------------
Total accounts receivable 14,470 7,896
Less: allowance for doubtful accounts (283) (260)
------------------- -------------------
Receivables, net $ 14,187 $ 7,636
=================== ===================
10
Note 3. Inventory
The major classes of inventory as of September 30, 2002 and December 31,
2001 are summarized as follows:
September 30, December 31,
2002 2001
------------------ ------------------
(in thousands)
Fish meal $ 25,476 $ 19,221
Fish oil 14,194 9,128
Fish solubles 564 789
Deferred inventory costs 1,707 4,127
Other materials & supplies 3,432 4,405
------------------ ------------------
Total inventory $ 45,373 $ 37,670
================== ==================
Note 4. Other Assets
Other assets as of September 30, 2002 and December 31, 2001 are summarized
as follows:
September 30, December 31,
2002 2001
------------------ ------------------
(in thousands)
Fishing nets $ 1,323 $ 835
Prepaid pension cost 2,075 3,123
Insurance receivable, net of allowance for doubtful accounts 1,890 1,590
Title XI loan origination fee 299 357
Note receivable 411 471
Deposits 131 731
------------------ ------------------
Total other assets $ 6,129 $ 7,107
================== ==================
Amortization expense for fishing nets amounted to approximately $552,000
and $603,000 for the nine months ended September 30, 2002 and September 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 September 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 September 30, 2002 and December 31, 2001 are
summarized as follows:
September 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 6,893 1,227
------------------- -------------------
Total property and equipment 156,875 151,311
Less: accumulated depreciation and impairment (75,118) (69,281)
------------------- -------------------
Property and equipment, net $ 81,757 $ 82,030
=================== ===================
Depreciation expense for the nine months ended September 30, 2002 and
September 30, 2001 was approximately $5.9 million and $6.3 million,
respectively.
Note 6. Notes Payable and Long-Term Debt
At September 30, 2002 and December 31, 2001, the Company's long-term debt
consisted of the following:
September 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% $ 14,812 $ 15,627
Amounts due in installments through 2014, interest at Eurodollar rates of
2.31% and 3.05% at September 30, 2002 and December 31, 2001,
respectively, plus 4.5% 954 1,013
Other debt at 7.9% to 8.0% at September 30, 2002 and December 31, 2001, respectively 49 166
------------------- -----------------
Total debt 15,815 16,806
Less current maturities (1,250) (1,296)
------------------- -----------------
Long-term debt $ 14,565 $ 15,510
=================== =================
At September 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.
12
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
expenditures. Borrowings under the Credit Facility bear 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 September 30, 2002 and December 31, 2001, total available
borrowings were limited to the defined borrowing base which was $19.2 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 September 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 September 30, 2002. As of
September 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 September 30, 2002 and December 31, 2001 are
summarized as follows:
September 30, December 31,
2002 2001
------------------- ------------------
(in thousands)
Salary and benefits $ 11,458 $ 4,985
Insurance 5,300 6,863
Taxes, other than income tax 1,517 93
Trade creditors 1,582 1,375
Other 173 91
------------------- ------------------
Total accrued liabilities $ 20,030 $ 13,407
=================== ==================
Note 8. Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------------- --------------------------------------------
2002 2001 2002 2001
--------------------- -------------------- -------------------- --------------------
(in thousands) (in thousands)
Net income $ 3,600 $ 3,010 $ 9,250 $ 2,106
Minimum pension liability
adjustment, net of tax - - 220 -
--------------------- -------------------- -------------------- --------------------
Total comprehensive income $ 3,600 $ 3,010 $ 9,470 $ 2,106
===================== ==================== ==================== ====================
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
October 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 September 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.
14
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 aquaculture growers. The
Company's crude fish oil is sold to food producers in Europe and the Far East
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 attractants for aquaculture 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 and 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.
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 fish meal 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 volumes will fluctuate from quarter to quarter and year
to year. The Company's fish meal products have a useable life of approximately
one year from date of production. However, the Company typically attempts to
empty its warehouses of the previous season's meal 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.
15
Omega has, from time to time, purchased fish meal and fish oil from other
domestic and international manufacturers. Omega has generally resold those
products to international customers. These purchase and resale transactions have
been ancillary to the Company's base manufacturing and sales business and
revenues resulting from these activities have historically not been material.
During Fiscal 2002, the Company developed a business plan to expand its
purchase and resale of other manufacturers' fish meal and fish oil products. In
the third quarter, 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. Through September 30, 2002, revenues generated
from these types of transactions represented less than 1% of total Company
revenues. The Company expects that operating margins from these activities will
be less than margins generated from the Company's base domestic production. The
Company's goal is to expand these purchases of other manufacturers' fish meal
and fish oil to an annual volume of 10,000 to 20,000 metric tons.
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
first half 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. Fiscal 2002 prices have remained
relatively stable throughout the year and management believes that it is
possible that these price levels have reached a plateau and stabilized. 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.
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
16
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 $29.2 million at September 30,
2002, up $7.4 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 September 30, 2002 and December 31, 2001 was $14.6 million and
$15.5 million, respectively. Current maturities attributable to the Company's
long-term debt were $1.3 million at both September 30, 2002 and December 31,
2001. The Company has not utilized its working capital credit facility other
than for standby letters of credit.
The following tables aggregate information about the Company's contractual
cash obligations and other commercial commitments (in thousands) as of September
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 $ 15,815 $ 1,250 $ 2,751 $ 3,105 $ 8,709
Operating Leases 1,661 418 755 153 335
Minimum Pension Liability 5,717 - - - 5,717
----------- ----------- ------------ ----------- ------------
Total Contractual Cash Obligations $ 23,193 $ 1,668 $ 3,506 $ 3,258 $ 14,761
=========== =========== ============ =========== ============
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) $ 16,592 $ - $ - $ - $ -
Standby Letters of Credit 2,607 2,607 - - -
----------- ----------- ------------ ----------- ------------
Total Commercial Commitments $ 19,199 $ 2,607 $ - $ - $ -
=========== =========== ============ =========== ============
(1) As of September 30, 2002, the Company had no cash borrowings outstanding
under the $20.0 million Credit Facility. The $20.0 million Credit Facility
was limited to its defined borrowing base of $19.2 million, further reduced
by outstanding standby letters of credit totaling $2.6 million.
Investing activities used $5.6 million and $626,000 during the nine month
periods ending September 30, 2002 and 2001, respectively. The Company's
investing activities consisted mainly of capital expenditures for equipment
purchases and replacements in the nine month periods ended September 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 invest in plant and equipment, all made in the normal
course of business.
17
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 $991,000 and $846,000 to repay debt
obligations during the nine month periods ended September 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 September 30, 2002 and December 31, 2001, total available borrowings were
limited to the defined borrowing base of $19.2 million and $14.4 million,
respectively. 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 September 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.
In September 2002, two of the three coastal counties in Mississippi
submitted resolutions to the Mississippi Marine Resources Commission seeking to
extend the menhaden no-fishing zone from one mile to two miles from shore. The
third county submitted a resolution to the Commission opposing the resolutions.
In September 2002, the Mississippi Marine Resources Commission voted to take no
action on the resolutions at the current time and remanded the resolutions back
to the counties for additional clarification. If the Commission were to extend
the no-menhaden-fishing zone in Mississippi, that action could have a material
adverse effect on the Company's results of operations.
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.
18
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.
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
19
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.
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 Nine Months Ended
September 30, September 30,
------------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 77.9 84.3 75.3 88.3
------------- ------------- ------------- -------------
Gross profit 22.1 15.7 24.7 11.7
Selling, general and administrative expense 5.8 4.9 7.3 8.0
------------- ------------- ------------- -------------
Operating income (loss) 16.3 10.8 17.4 3.7
Interest income (expense), net (0.5) (0.2) (0.6) (0.4)
Other income (expense), net (0.2) (0.2) (0.1) (0.1)
------------- ------------- ------------- -------------
Income (loss) before income taxes 15.6 10.4 16.7 3.2
Provision (benefit) for income taxes 5.4 2.2 5.9 0.4
------------- ------------- ------------- -------------
Net income (loss) 10.2 8.2 10.8 2.8
============= ============= ============= =============
Interim Results for the Third Quarters ended September 30, 2002 and September
30, 2001
Revenues. For the quarter ended September 30, 2002, revenues decreased $1.8
million from $36.8 million in the quarter ended September 30, 2001 to $35.0
million. The decrease in revenues was primarily due to lower sales volumes of
49.4% for the Company's fish oil products. This decrease was partially offset by
higher sales prices of 13.7% and 43.2% for the Company's fish meal and fish oil,
respectively. 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 due to timing of shipments. Production of oil volumes between years
has been relatively constant.
Cost of Sales. Cost of sales, including depreciation and amortization, for
the current quarter ended September 30, 2002 was $27.3 million, a 12.2% decrease
from $31.1 million in the quarter ended September 30, 2001. Cost of sales as a
percentage of revenues was 77.9% and 84.3% in the quarters ended September
20
30, 2002 and 2001, respectively. The decrease in cost of sales as a percentage
of revenues was primarily due to higher sales prices of 13.7% and 43.2% for the
Company's fish meal and fish oil, respectively.
Gross Profit. Gross Profit increased $1.9 million or 34.0% from $5.8
million in the quarter ended September 30, 2001 to $7.7 million in the current
quarter ended September 30, 2002. As a percentage of revenues, the Company's
gross profit margin increased 6.4% in the third quarter ended September 30, 2002
as compared to the third 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 increased $222,000 or 12.3% from $1.8 million in the
three month period ended September 30, 2001 as compared to $2.0 million in the
current quarter ended September 30, 2002. The increase is due to increased
employee related costs attributable to health-care and retirement programs in
the current quarter ended September 30, 2002 as compared to the previous quarter
ended September 30, 2001.
Operating income. As a result of the factors discussed above, the Company's
operating income in the third quarter of 2002 was $1.7 million greater than
operating income of $4.0 million in the quarter ended September 30, 2001. As a
percentage of revenues, operating income increased 5.5% for the current quarter
ended September 30, 2002 from the comparable quarter in the prior fiscal year.
Interest expense, net. Interest expense, net increased by $94,000 in the
quarter ended September 30, 2002 as compared to the quarter ended September 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
September 30, 2002 as compared to the quarter ended September 30, 2001.
Provision for income taxes. The Company recorded a $1.9 million provision
for income taxes for the quarter ended September 30, 2002. This represents an
effective tax rate of 35% on $5.5 million of income for the quarter ended
September 30, 2002 compared to an $827,000 provision for income taxes for the
quarter ended September 30, 2001. The provision for income taxes for the nine
months ended September 30, 2001 included a deferred state tax benefit of
$750,000.
Interim Results for the Nine Months ended September 30, 2002 and September 30,
2001
Revenues. For the nine months ended September 30, 2002, revenues increased
$10.8 million or 14.5% from $74.9 million for the nine months ended September
30, 2001 to $85.7 million for the nine months ended September 30, 2002. The
revenue increase was primarily due to higher sales prices of 16.2% and 51.7% for
the Company's fish meal and fish oil respectively. The Company attributes the
higher fish meal and oil prices to strong worldwide demand for fish meal and
competing fish oil markets rebounding from historic low levels.
Cost of Sales. Cost of sales, including depreciation and amortization, for
the nine months ended September 30, 2002 was $64.5 million, a $1.6 million or a
2.4% decrease from $66.1 million for the comparable nine month period ending
September 30, 2001. Cost of sales as a percentage of revenues was 75.3% and
88.3% for the nine months ended September 30, 2002 and September 30, 2001,
respectively. The decrease in cost of sales as a percentage of revenues was
primarily due to higher sales prices of 16.2% and 51.7% for the Company's fish
meal and oil, respectively.
Gross Profit. Gross profit increased $12.4 million or 141.9% from $8.8
million for the nine months ended September 30, 2001 to $21.2 million for the
nine months ended September 30, 2002. As a percentage of
21
revenues, the Company's gross profit margin increased 13.0% in the current nine
month period ended September 30, 2002 as compared to the nine month period ended
September 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 $310,000 or 5.2% from $5.9 million for the
nine months ended September 30, 2001 as compared to $6.2 million for the current
nine months ended September 30, 2002. This increase was attributable to
increased employee related costs attributable to health-care and retirement
programs.
Operating income. As a result of the factors discussed above, the Company's
operating income in the current nine month period was $12.1 million greater than
operating income of $2.8 million for the nine months ended September 30, 2001.
As a percentage of revenues, operating income increased 13.7% for the nine
months ended September 30, 2002.
Interest expense net. Interest expense, net increased by $154,000 for the
nine months ended September 30, 2002 as compared to the nine months ended
September 30, 2001. The increase in interest expense was due to a decrease in
the average interest rate the Company earned on its investments during the nine
months ended September 30, 2002 as compared to the comparable period in fiscal
2001.
Other expense net. Other expense, net increased $95,000 for the nine months
ended September 30, 2002 as compared to the nine months ended September 30,
2001. The increase in other expense, net was the result of a gain on the
disposal of miscellaneous assets recognized during the previous nine months
ended September 30, 2001.
Provision for income taxes. The Company recorded a $5.1 million provision
for income taxes for the nine months ended September 30, 2002. This represents
an effective tax rate of 35% on $14.3 million of income for the nine months
ended September 30, 2002 compared to a $320,000 provision for income taxes for
the nine months ended September 30, 2001. The provision for income taxes for the
nine months ended September 30, 2001 included a deferred state tax benefit of
$750,000.
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:
22
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 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.
23
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.
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.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's period SEC filings.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.
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.
24
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
None
Item 5. Other Information
Effective October 1, 2002, the Board of Directors promoted Thomas R.
Wittmann to become the Company's Vice President - Operations. Mr. Wittmann had
been the General Manager of the Company's Abbeville, Louisiana facility since
1997 and had served in various other Company positions since 1985.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 -- Change of Control Agreement dated as of September 1, 2000 between Omega
Protein Corporation and Scott Herbert.
10.2 -- Employment Agreement dated as of October 1, 2002 between Omega Protein
Corporation and Thomas R. Wittmann.
99.1 -- Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
(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)
October 30, 2002 By: /s/ ROBERT W. STOCKTON
-------------------------------------
(Executive Vice President and Chief
Financial Officer)
26
CERTIFICATIONS
I, Joseph L. von Rosenberg III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Omega Protein
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 30, 2002 By: /s/ Joseph L. von Rosenberg III
--------------------------------------
Name: Joseph L. von Rosenberg III
Title: President and Chief Executive
Officer
27
I, Robert W. Stockton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Omega Protein
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: October 30, 2002 By: /s/ Robert W. Stockton
--------------------------------
Name: Robert W. Stockton
Title: Executive Vice President and
Chief Financial Officer
28