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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[U] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-14003
OMEGA PROTEIN CORPORATION
(Exact name of Registrant as specified in its charter)
State of Nevada 76-0562134
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1717 St. James Place, Suite 550
Houston, Texas 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 623-0060
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes Y No__.
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes __ No X .
Number of shares outstanding of the Registrant's Common Stock, par value
$0.01 per share, on October 22, 2003: 24,379,449
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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, 2003
and December 31, 2002........................................................3
Unaudited Condensed Consolidated Statement of Operations for the three months
and nine months ended September 30, 2003 and 2002............................4
Unaudited Condensed Consolidated Statement of Cash Flows for the
nine months ended September 30, 2003 and 2002...............................5
Notes to Unaudited Condensed Consolidated Financial Statements.................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................21
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........35
Item 4. Controls and Procedures..............................................35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................36
Item 2. Changes in Securities and Use of Proceeds............................36
Item 3. Defaults Upon Senior Securities......................................36
Item 4. Submission of Matters to a Vote of Security Holders..................36
Item 5. Other Information....................................................37
Item 6. Exhibits and Reports on Form 8-K.....................................37
Signatures ...................................................................38
2
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands, except per share amounts)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
September 30, December 31,
2003 2002
------------------- ------------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 25,028 $ 33,450
Receivables, net........................................................ 20,931 13,029
Amounts due from majority owner......................................... 106 3
Inventories............................................................. 50,064 41,939
Deferred tax assets, net................................................ 326 1,315
Prepaid expenses and other current assets............................... 1,436 884
------------------ ------------------
Total current assets............................................. 97,891 90,620
Other assets................................................................ 3,339 4,579
Deferred tax assets, net.................................................... 1,443 3,115
Property and equipment, net................................................. 83,777 80,713
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Total assets..................................................... $ 186,450 $ 179,027
------------------ ------------------
------------------ ------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt.................................... $ 1,351 $ 1,270
Accounts payable........................................................ 1,691 2,619
Accrued liabilities..................................................... 17,526 14,880
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Total current liabilities......................................... 20,568 18,769
Long-term debt.............................................................. 13,262 14,239
Pension liabilities......................................................... 10,645 10,983
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Total liabilities.......................................................... 44,475 43,991
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Commitments and contingencies Stockholders' equity:
Preferred stock, $0.01 par value; authorized 10,000,000 shares; none
- -
issued..............................................................
Common stock, $0.01 par value; authorized 80,000,000 shares;
24,791,088 shares and 24,382,662 shares issued and outstanding,
respectively............................................................... 248 244
Capital in excess of par value.......................................... 113,214 112,025
Retained earnings....................................................... 39,206 33,439
Accumulated other comprehensive loss.................................... (8,658) (8,637)
Common stock in treasury, at cost - 413,100 shares...................... (2,035) (2,035)
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Total stockholders' equity.......................................... 141,975 135,036
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Total liabilities and stockholders' equity................. $ 186,450 $ 179,027
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------------------ ------------------
The accompanying notes are an integral part of the unaudited condensed
consolidated financial statements.
3
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ---------------------
2003 2002 2003 2002
------- ------- ------- -------
(in thousands, except per share amount)
Revenues.................................................................. $32,151 $34,992 $84,544 $85,708
Cost of sales............................................................. 28,553 27,259 68,346 64,514
------- ------- ------- -------
Gross profit.............................................................. 3,598 7,733 16,198 21,194
Selling, general, and administrative expense.............................. 2,232 2,029 6,711 6,258
------- ------- ------- -------
Operating income.......................................................... 1,366 5,704 9,487 14,936
Interest expense, net..................................................... (178) (163) (497) (474)
Other expense, net........................................................ (12) (65) (42) (161)
-------- -------- -------- -------
Income before income taxes................................................ 1,176 5,476 8,948 14,301
Provision for income taxes................................................ 436 1,876 3,181 5,051
-------- -------- -------- -------
Net income................................................................ $ 740 $ 3,600 $ 5,767 $ 9,250
-------- -------- -------- -------
-------- -------- -------- -------
Basic earnings per share.................................................. $ 0.03 $ 0.15 $ 0.24 $ 0.39
-------- -------- -------- -------
-------- -------- -------- -------
Average common shares outstanding......................................... 24,279 23,965 24,129 23,959
-------- -------- -------- -------
-------- -------- -------- -------
Diluted earnings per share................................................ $ 0.03 $ 0.14 $ 0.22 $ 0.37
-------- -------- -------- -------
-------- -------- -------- -------
Average common shares and
common share equivalents outstanding.................................... 25,982 25,261 25,692 25,074
-------- -------- -------- -------
-------- -------- -------- -------
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
(Dollars in thousands, except per share amounts)
Nine Months Ended
September 30,
--------------------------------
2003 2002
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(in thousands)
Cash flows provided by operating activities:
Net income............................................................ $ 5,767 $ 9,250
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on disposal of assets, net................................... (137) (8)
Provision for losses on receivables............................... 38 406
Depreciation and amortization..................................... 10,144 7,690
Deferred income taxes............................................. 2,661 5,167
Changes in assets and liabilities:
Receivables................................................... (7,925) (6,574)
Amounts due from majority owner............................... (103) -
Inventories................................................... (8,125) (7,703)
Accounts payable and accrued liabilities...................... 1,718 7,323
Other, net.................................................... (2,610) (1,575)
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Total adjustments........................................ (4,339) 4,726
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Net cash provided by operating activities................ 1,428 13,976
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Cash flows provided by (used in) investing activities:
Proceeds from sale of assets, net.................................... 180 23
Capital expenditures.................................................. (10,294) (5,666)
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Net cash used in investing activities.................... (10,114) (5,643)
-------------- --------------
Cash flows provided by (used in) financing activities:
Principal payments of short and long-term debt obligations............ (948) (991)
Proceeds from borrowing............................................... 52 -
Proceeds from stock options exercised................................. 1,139 -
-------------- --------------
Net cash provided by (used in) financing activities...... 243 (991)
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Effect of exchange rate changes on cash and cash equivalents............ 21 -
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Net increase (decrease) in cash and cash equivalents...................... (8,422) 7,342
Cash and cash equivalents at beginning of year............................ 33,450 21,813
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Cash and cash equivalents at end of period....................... $ 25,028 $ 29,155
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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
(Dollars in thousands, except per share amounts)
NOTE 1. Significant Accounting Policies
Summary Of Operations And Basis Of Presentation
Business Description
Omega Protein Corporation ("Omega" or the "Company") produces and markets a
variety of products produced from menhaden (a herring-like species of fish found
in commercial quantities in the U.S. coastal waters of the Atlantic Ocean and
Gulf of Mexico), including regular grade and value-added specialty fish meals,
crude and refined fish oils and regular and value-added fish solubles. The
Company's fish meal products are primarily used as a protein ingredient in
animal feed for swine, cattle, aquaculture and household pets. Fish oil is
utilized for animal and aquaculture feeds, industrial applications, as well as
for additives to human food products. The Company's fish solubles are sold
primarily to livestock feed manufacturers, aquaculture feed manufacturers and
for use as an organic fertilizer.
Basis of Presentation
These interim financial statements of Omega Protein Corporation have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information, the instructions to
Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. The interim
financial statements should be read in conjunction with our Annual Report on
Form 10-K for the year ended December 31, 2002. Accordingly, certain information
and footnote disclosures normally provided have been omitted since such items
are disclosed therein.
In the opinion of management the accompanying unaudited condensed
consolidated financial statements reflect all adjustments (including normal
recurring adjustments) necessary to present fairly the Company's consolidated
financial position as of September 30, 2003, and the results of its operations
and its cash flows for the nine-month periods ended September 30, 2003 and 2002.
Operating results for the three and nine-month periods ended September 30, 2003
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
Consolidation
The consolidated financial statements include the accounts of Omega and its
wholly and majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. We have reclassified
certain amounts previously reported to conform with the presentation at
September 30, 2003.
Revenue Recognition
The Company recognizes revenue for the sale of its products when title and
rewards of ownership to its products are transferred to the customer, which
typically occurs upon shipment.
6
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Cash and Cash Equivalents
The Company considers cash in banks and short-term investments with
original maturities of three months or less as cash and cash equivalents.
Inventories
Inventory is stated at the lower of cost or market. The Company's fishing
season runs from mid-April to the first of November in the Gulf of Mexico and
from the beginning of May into December in the Atlantic. Government regulations
generally preclude the Company from fishing during the off-seasons.
The Company's inventory cost system considers all costs associated with an
annual fish catch and its processing, both variable and fixed, including both
costs incurred during the off-season and during the fishing season. The
Company's costing system allocates cost to inventory quantities on a per unit
basis as calculated by a formula that considers total estimated inventoriable
costs for a fishing season (including off-season costs) to total estimated fish
catch and the relative fair market value of the individual products produced.
The Company adjusts the cost of sales, off-season costs and inventory balances
at the end of each quarter based on revised estimates of total inventoriable
costs and fish catch. The Company's lower of cost or market value analyses at
year-end and at interim periods compare the total estimated per unit production
cost of the Company's expected production to the projected per unit market
prices of the products. The impairment analyses involve estimates of, among
other things, future fish catches and related costs, and expected commodity
prices for the fish products. These estimates, which management believes are
reasonable and supportable, involve estimates of future activities and events
which are inherently imprecise and from which actual results may differ
materially.
During the off-seasons, in connection with the upcoming fishing seasons,
the Company incurs costs (i.e., plant and vessel related labor, utilities, rent,
repairs, and depreciation) that are directly related to the Company's
infrastructure. These costs accumulate in inventory and are applied as elements
of the cost of production of the Company's products throughout the fishing
season ratably based on the Company's monthly fish catch and the expected total
fish catch for the season.
Insurance
The Company carries insurance for certain losses relating to its vessels
and Jones Act liabilities for employees aboard its vessels. The Company provides
reserves for those portions of the annual aggregate deductible for which the
Company remains responsible by using an estimation process that considers
Company-specific and industry data as well as management's experience,
assumptions and consultation with outside counsel. Management's current
estimated range of liabilities related to such cases is based on claims for
which management can estimate the amount and range of loss. The Company has
recorded the minimum estimated liability related to those claims, where there is
a range of loss. As additional information becomes available, the Company will
assess the potential liability related to its pending litigation and revise its
estimates. Such revisions in estimates of the potential liability could
materially impact the Company's results of operations and financial position.
7
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Advertising Costs
The costs of advertising are expensed as incurred in accordance with
Statement of Position 93-7 "Reporting on Advertising Costs."
Accounting for the Impairment of Long-Lived Assets
The Company evaluates at each balance sheet date for continued
appropriateness of the carrying value of its long-lived assets including its
long-term receivables and property, plant and equipment in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposals of Long-Lived Assets." This
review is based on management projections of anticipated undiscounted future
cash flows of the related asset or asset grouping. If indicators of impairment
are present, management would evaluate the undiscounted cash flows estimated to
be generated by those assets compared to the carrying amount of those items. The
net carrying value of assets not recoverable is reduced to fair value. The
Company considers continued operating losses, or significant and long-term
changes in business conditions, to be its primary indictors of potential
impairment. In measuring impairment, the Company looks to quoted market prices,
if available, or the best information available in the circumstances.
Income Taxes
The Company utilizes the liability method to account for income taxes. This
method requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of existing temporary differences between the
financial reporting and tax reporting basis of assets and liabilities, and
operating loss and tax credits carryforwards for tax purposes.
Property, Equipment and Depreciation
Property and equipment additions are recorded at cost. Depreciation of
property and equipment is computed by the straight-line method at rates expected
to amortize the cost of property and equipment, net of salvage value, over their
estimated useful lives. Estimated useful lives of assets acquired new,
determined as of the date of acquisition are as follows:
Useful Lives
(years)
------------
Fishing vessels and fish processing plants................ 15-20
Furniture and fixtures and other........................... 3-10
Replacements and major improvements are capitalized; maintenance and
repairs are charged to expense as incurred. Upon sale or retirement, the costs
and related accumulated depreciation are eliminated from the accounts. Any
resulting gains or losses are included in the statement of operations.
8
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Pension Plans
Annual costs of pension plans are determined actuarially based on SFAS No.
87, "Employers' Accounting for Pensions." The Company's policy is to fund U.S.
pension plans at amounts not less than the minimum requirements of the Employee
Retirement Income Security Act of 1974 ("ERISA"). The Company applies SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits"
disclosure requirements for its pensions and other postretirement benefit plans
to the extent practicable.
In 2002, the Board of Directors authorized a plan to freeze the Company's
pension plan in accordance with ERISA rules and regulations so that new
employees, after July 31, 2002, will not be eligible to participate in the
pension plan and further benefits will no longer accrue for existing
participants. The freezing of the pension plan had the effect of vesting all
existing participants in their pension benefits in the plan.
Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income," establishes a standard for
reporting and displaying comprehensive income (loss) and its components within
the financial statements. Comprehensive income (loss) includes charges and
credits to equity that are not the result of transactions with shareholders.
Comprehensive income (loss) is composed of two subsets - net income and other
comprehensive income (loss). Included in other comprehensive income (loss) for
the Company are minimum pension liability adjustments and foreign currency
translations. These adjustments are accumulated within the Statement of
Stockholders' Equity under the caption Accumulated Other Comprehensive Loss. As
of September 30, 2003, accumulated other comprehensive (loss), net of taxes, as
reflected in the Consolidated Statement of Stockholders' Equity, was $8,658,000.
Foreign Currency Translation
For the Company's Mexican operations, the functional currency is the local
currency. Assets and liabilities of those operations are translated into U.S.
dollars using period-end exchange rates; income and expenses are translated
using the average exchange rates for the reporting period. Translation
adjustments are deferred in accumulated other comprehensive income (loss), a
separate component of stockholders' equity.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company's customer base generally remains consistent from year
to year. The Company performs ongoing credit evaluations of its customers and
generally does not require material collateral. The Company maintains reserves
for potential credit losses and such losses have historically been within
management's expectations.
At September 30, 2003 and December 31, 2002, the Company had cash deposits
concentrated primarily in one major bank. In addition, the Company had
Certificates of Deposit and commercial quality grade A2P2 rated or better with
companies and financial institutions. As a result of the foregoing, the Company
believes that credit risk in such investments is minimal.
9
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Earnings per Share
Basic earnings per common share was computed by dividing net earnings by
the weighted average number of common shares outstanding during each period.
Diluted earnings per common share was computed by dividing net earnings by the
sum of the weighted average number of common shares outstanding plus the number
of additional common shares that would have been outstanding if the dilutive
potential common shares (in this case, exercise of the Company's employee stock
options) had been issued during each period as discussed in Note 11.
Recently Issued Accounting Standards
In June 2001, the FASB issued SFAS No. 143 ("SFAS 143"), "Accounting for
Asset Retirement Obligations." SFAS 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 143 were adopted
by the Company in January 2003. The adoption of this statement did not have a
material impact on the Company's financial position, results of operations or
cash flows.
In June 2002, the FASB issued SFAS No. 146 ("SFAS 146"), "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS 146 requires recording
costs associated with exit or disposal activities at their fair values when a
liability has been incurred. Under previous guidance, certain exit costs were
accrued upon management's commitment to an exit plan, which is generally before
an actual liability has been incurred. The requirements of SFAS 146 are
effective prospectively for exit or disposal activities initiated after December
31, 2002. The adoption of SFAS 146 had no impact on the Company's financial
condition, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN
45 clarifies the requirements of FASB Statement No. 5, "Accounting for
Contingencies" relating to a guarantor's accounting for, and disclosure of, the
issuance of certain types of guarantees. The disclosure provisions of FIN 45 are
effective for financial statements of interim or annual periods that end after
December 15, 2002; however, the provisions for initial recognition and
measurement are effective on a prospective basis for guarantees that are issued
or modified after December 31, 2002, irrespective of a guarantor's year-end. The
Company has determined that it is subject to the disclosure provisions of FIN 45
and has included the required disclosures in Note 10. The initial adoption of
FIN 45 did not have a material impact on the Company's financial condition,
results of operations or cash flows.
10
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
In January 2003, the FASB issued FIN No. 46 ("FIN 46"), "Consolidated of
Variable Interest Entities." This standard clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements", and
addresses consolidation by business enterprises of variable interest entities
(more commonly known as Special Purpose Entities or SPE's). FIN 46 requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risk among the
parties involved. FIN 46 also enhances the disclosure requirements related to
variable interest entities. This statement is effective for variable interest
entities created or in which an enterprise obtains an interest after January 31,
2003. FIN 46 will be effective for the Company beginning December 15, 2003 for
all interests in variable interest entities acquired before February 1, 2003.
The adoption of FIN 46 is not expected to have a material impact on the
Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." This statement is effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. In addition, all provisions of this statement should be applied
prospectively. The provisions of this statement that relate to SFAS 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003, should continue to be applied in accordance with their
respective effective dates. The adoption of this statement is not expected to
have a material impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. This statement is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The Company is in the process of determining what
impact, if any, the adoption of this statement will have upon its financial
condition or results of operations.
Stock-Based Compensation
The Company has a stock-based employee compensation plan, which is
described in more detail in Note 11. The Company accounts for this plan under
the recognition and measurement principles of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" and has
adopted the disclosure-only provisions of SFAS No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB Statement No.
123." No stock-based employee compensation cost is reflected in net earnings,
because all options granted under this plan had an exercise price equal to or
greater than the market value of the underlying common stock on the grant date.
11
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
The following table illustrates the pro forma effect on net earnings and
net earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation using the
Black-Scholes option pricing methodology.
Three Months Nine Months
Ended Ended
September 30, September 30,
-------------------- --------------------
(in thousands) (in thousands)
2003 2002 2003 2002
------- ------- ------- -------
Net earnings $ 740 $ 3,600 $ 5,767 $ 9,250
Total stock-based employee compensation
determined under fair value-based method, net (63) (24) (345) (439)
------- ------- ------- -------
Pro forma net earnings $ 677 $ 3,576 $ 5,422 $ 8,811
------- ------- ------- -------
------- ------- ------- -------
Net earnings per common share:
Basic - as reported $ 0.03 $ 0.15 $ 0.24 $ 0.39
------- ------- ------- -------
------- ------- ------- -------
Basic - pro forma $ 0.03 $ 0.15 $ 0.22 $ 0.37
------- ------- ------- -------
------- ------- ------- -------
Net earnings per common share:
Diluted - as reported $ 0.03 $ 0.14 $ 0.22 $ 0.37
------- ------- ------- -------
------- ------- ------- -------
Diluted - pro forma $ 0.03 $ 0.14 $ 0.21 $ 0.35
------- ------- ------- -------
------- ------- ------- -------
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as 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, 2003 and December 31, 2002 are
summarized as follows:
September 30, December 31,
2003 2002
------------------ -----------------
(in thousands)
Trade..................................................... $ 17,752 $ 11,853
Insurance................................................. 2,550 755
Employee.................................................. 72 45
Income tax................................................ 818 650
Other..................................................... 291 255
------------------ -----------------
Total accounts receivable ................................ 21,483 13,558
Less: allowance for doubtful accounts..................... (552) (529)
------------------ -----------------
Receivables, net.......................................... $ 20,931 $ 13,029
------------------ -----------------
------------------ -----------------
12
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Note 3. Inventory
The major classes of inventory as of September 30, 2003 and December 31,
2002 are summarized as follows:
September 30, December 31,
2003 2002
------------------ -----------------
(in thousands)
Fish meal................................................. $ 32,292 $ 21,564
Fish oil.................................................. 11,007 9,583
Fish solubles............................................. 857 843
Off season cost........................................... 1,681 5,464
Other materials & supplies................................ 4,227 4,485
------------------ -----------------
Total inventory........................................... $ 50,064 $ 41,939
------------------ -----------------
------------------ -----------------
Inventory at September 30, 2003 and December 31, 2002 is stated at the
lower of cost or market. The elements of cost include plant and vessel related
labor, utilities, rent, repairs and depreciation.
Note 4. Other Assets
Other assets as of September 30, 2003 and December 31, 2002 are summarized
as follows:
September 30, December 31,
2003 2002
------------------ -----------------
(in thousands)
Fishing nets.............................................................. $ 1,184 $ 1,216
Insurance receivable...................................................... 3,171 4,341
Title XI loan origination fee............................................. 283 275
Note receivable........................................................... 378 409
Deposits.................................................................. 131 131
------------------ -----------------
Total other assets........................................................ $ 5,147 $ 6,372
Less: allowance for doubtful accounts.................................... (1,808) (1,793)
------------------ -----------------
Other assets, net......................................................... $ 3,339 $ 4,579
------------------ -----------------
------------------ -----------------
Amortization expense for fishing nets amounted to approximately $681,000
and $552,000 for the nine months ended September 30, 2003 and September 30,
2002, respectively.
The Company carries insurance for certain losses relating to its vessels
and Jones Act liability for employees aboard its vessels (collectively, "Vessel
Claims Insurance"). The typical Vessel Claims Insurance policy contains an
annual aggregate deductible ("AAD") for which the Company remains responsible,
while the insurance carrier is responsible for all applicable amounts which
exceed the AAD. It is the Company's policy to accrue current amounts due and
record amounts paid out on each claim. Once payments exceed the AAD, the Company
records an insurance receivable for a given policy year.
13
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Note 5. Property and Equipment
Property and equipment at September 30, 2003 and December 31, 2002 are
summarized as follows:
September 30, December 31,
2003 2002
------------------ -----------------
(in thousands)
Land...................................................... $ 6,261 $ 6,261
Plant assets.............................................. 72,910 72,444
Fishing vessels........................................... 77,836 75,153
Furniture and fixtures.................................... 1,820 1,825
Construction in progress.................................. 10,294 3,292
------------------ ------------------
Total property and equipment.............................. 169,121 158,975
Less: accumulated depreciation and impairment............. (85,344) (78,262)
------------------ ------------------
Property and equipment, net............................... $ 83,777 $ 80,713
------------------ ------------------
------------------ ------------------
Depreciation expense for the nine months ended September 30, 2003 and
September 30, 2002 was $7.2 million and $5.9 million, respectively.
Note 6. Notes Payable and Long-Term Debt
At September 30, 2003 and December 31, 2002, the Company's long-term debt
consisted of the following:
September 30, December 31,
2003 2002
--------------- ---------------
(in thousands)
U.S. government guaranteed obligations (Title XI loan) collateralized by
a first lien on certain vessels and certain plant assets:
Amounts due in installments through 2016, interest from 6.6% to 7.6%....... $ 13,659 $ 14,531
Amounts due in installments through 2014, interest at Eurodollar rates of
1.6% and 2.3% at September 30, 2003 and December 31, 2002,
respectively, plus 4.5%.................................................. 874 933
Other debt at 6.3% to 8.0% at September 30, 2003 and December 31, 2002,
respectively............................................................. 80 45
--------------- ---------------
Total debt...................................................................... 14,613 15,509
Less current maturities.......................................... (1,351) (1,270)
--------------- ---------------
Long-term debt.................................................................. $ 13,262 $ 14,239
--------------- ---------------
--------------- ---------------
At September 30, 2003 and December 31, 2002, the estimated fair value of
debt obligations approximated book value.
Originally, the Company was authorized to receive up to $20.6 million in
loans under the Title XI program, and has used the entire amount authorized
under such program. The Title XI loans are secured by liens on certain of the
Company's fishing vessels and mortgages on the Company's Reedville, Virginia and
Abbeville, Louisiana plants. Loans are now available under similar terms
pursuant to the Title XI program without intervening lenders.
14
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
On October 1, 2003, pursuant to the Title XI program, the United States
Department of Commerce approved the fiscal 2003 financing application made by
the Company in the amount of $5.3 million. The Company expects to close the $5.3
million Title XI loan during the fourth quarter of fiscal 2003.
On December 20, 2000 the Company entered into a three-year $20 million
revolving credit agreement with Bank of America, N.A. (the "Credit Facility").
Borrowings under this facility may be used for working capital and capital
expenditures. On May 19, 2003, the Company amended the existing Credit Facility
and among other things, these amendments extended the maturity until December
20, 2006, deleted certain existing financial covenants and added certain
affirmative covenants such as, a Leverage Ratio covenant not to exceed 3.0 to 1
at any time and a Fixed Charge Coverage Ratio covenant not to be less than 1.0
to 1 as of the end of each month, measured for the twelve-month period then
ended. The Company shall only be required to comply with the financial covenants
from and after the last day of any month in which the Credit Facility's
availability is less than $3,000,000 on any date, or the Credit Facility's
availability averages less than $6,000,000 for any calendar month. A commitment
fee of 50 basis points per annum is payable on the unused portion of the Credit
Facility. If at any time the Company's loan outstanding under the Credit
Facility is $5,000,000 or greater, the commitment fee shall be 25 basis points
per annum. Applicable interest is payable at alternative rates of LIBOR plus
2.25% or Prime plus 0%. Applicable interest shall be adjusted (up or down)
prospectively on a quarterly basis as determined by the Company's Fixed Charge
Coverage Ratio from LIBOR plus 2.25% to LIBOR plus 2.75% or at the Company's
option Prime plus 0% to Prime plus 0.25% depending upon the Fixed Charge
Coverage Ratio being greater than 2.5 times to less than or equal to 1.5 times.
The Credit Facility is collateralized by all of the Company's trade receivables,
inventory and equipment. In addition, the Credit Facility does not allow for the
payment of cash dividends or stock repurchases and also limits capital
expenditures and investments. The Company is in compliance with the Credit
Facility covenants at September 30, 2003. As of September 30, 2003 the Company
had no borrowings outstanding under the Credit Facility. At September 30, 2003
and December 31, 2002, the Company had outstanding letters of credit totaling
approximately $2.6 million and $2.1 million, respectively, issued primarily in
support of worker's compensation insurance programs.
Note 7. Accrued Liabilities
Accrued liabilities as of September 30, 2003 and December 31, 2002 are
summarized as follows:
September 30, December 31,
2003 2002
---------------- ---------------
(in thousands)
Salary and benefits....................................... $ 9,199 $ 6,242
Insurance................................................. 4,599 5,625
Taxes, other than income tax.............................. 1,147 443
Trade creditors........................................... 2,519 2,513
Other..................................................... 62 57
---------------- ---------------
Total accrued liabilities................................. $ 17,526 $ 14,880
---------------- ---------------
---------------- ---------------
15
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Note 8. Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- --------------------
2003 2002 2003 2002
------- ------- ------- -------
(in thousands) (in thousands)
Net income..................................................................... $ 740 $3,600 $5,767 $9,250
Foreign translation adjustment, net of tax..................................... (37) - (21) -
Minimum pension liability adjustment, net of tax............................... - - - 220
------- ------- ------- --------
$ 703 $3,600 $5,746 $9,470
Total comprehensive income..................................................... ------- ------- ------- --------
------- ------- ------- --------
Note 9. Commitments and Contingencies
Capital Commitments
The Company has committed approximately $16 million to build a new 100 -
metric ton per day fish oil processing facility at its Reedville, Virginia
location. The commitments covered by this agreement aggregate approximately $6
million and $10 million for 2003 and 2004, respectively. As of September 30,
2003 the Company has incurred $2.8 million related to its Reedville processing
facility.
Litigation
The Company is defending various claims and litigation arising from its
operations. In the opinion of management, uninsured losses, if any, resulting
from these matters will not have a material adverse effect on the Company's
results of operations, cash flows or financial position.
Insurance
The Company carries insurance with coverages and coverage limits that it
believes to be adequate. Although there can be no assurance that such insurance
is sufficient to protect the Company against all contingencies, management
believes that its insurance protection is reasonable in view of the nature and
scope of the Company's operations.
16
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Tax Assessment
The Company had been previously notified by representatives from the
Vermillion and St. Mary Parish tax authorities in Louisiana of deficiencies in
parish sales and use taxes for the Company's 1997 to 2000 tax years. In August
2003, the Company received assessments from the parish tax authorities, which
claimed additional parish sales and use taxes including penalties and interest.
The Company was able to settle the 1997 to 2000 tax assessment for $409,000. The
provision that the Company had previously recorded in fiscal 2002 was adequate
to cover these assessments.
Environmental Matters
The Company may be subject to various possible claims and lawsuits
regarding environmental matters from time to time. Management believes that
costs, if any, related to these matters will not have a material adverse effect
on the results of operations, cash flows or financial position of the Company.
Note 10. Guarantees
The Company's obligations under its $20 million revolving credit agreement
(the "Credit Facility") with Bank of America, N.A. (the "Bank") are guaranteed
by all of the Company's existing and future direct and indirect subsidiaries
formed under the laws of the United States, any state thereof or the District of
Columbia, except for specified excluded subsidiaries (referred to collectively
as "Guarantors"). The Credit Facility Guarantors have entered into an
unconditional guaranty in favor of the Bank to which the Guarantors guaranteed
to the Bank the payment of all obligations of the Borrowers to the Bank however
arising, including, without limitation, amounts due under the Credit Facility.
The Guarantors have entered into a Security Agreement in favor of the Bank
pursuant to which the Guarantors granted to the Bank a security interest in all
assets of each Guarantor in order to secure such Guarantor's obligations under
the Guaranty and the Company's obligation under the Credit Facility. For
additional information regarding the Credit Facility, see Note 6 and the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2002.
The Company's Articles of Incorporation and By-Laws limit the liability of
the Company's officers and directors to the fullest extent permitted by Nevada
law. Nevada provides that directors of Nevada corporations may be relieved of
monetary liabilities for breach of their fiduciary duties as directors, except
under certain circumstances, including (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law or (ii) the willful
or grossly negligent payment of unlawful distributions.
The Company's Articles of Incorporation and By-Laws generally require the
Company to indemnify its directors and officers to the fullest extent permitted
by Nevada law. The Company's Articles of Incorporation and By-Laws also require
the Company to advance expenses to its directors and its officers to the fullest
extent permitted by Nevada law upon receipt of an undertaking by or on behalf of
such director or officer to repay such amount if it should be ultimately
determined that they are not entitled to indemnification by the Company. The
Company also has entered into indemnification agreements with all of its
directors and certain of its officers which provides for the indemnification and
17
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
advancement of expenses by the Company. The Company also maintains director
and officer liability insurance with respect to liabilities arising out of
certain matters, including matters arising under the securities laws. This
insurance is subject to limitations, conditions and deductibles set forth in the
respective insurance policy.
There is no pending litigation or proceeding involving any director or
officer of the Company as to which indemnification is being sought, (other than
the litigation described in Part II, Item 1. Legal Proceedings) nor is the
Company aware of any threatened litigation that may result in claims for
indemnification.
As of September 30, 2003, the Company had $14.5 million in U.S. government
guaranteed obligations (Title XI loan). The Company has provided security for
the guarantee in the form of the Company's Promissory Notes to the United States
of America, a Ship Mortgage, a Deed of Trust and a perfected Security Agreement
collateralized by a first lien on certain vessels and certain plant assets of
the Company at its Reedville, Virginia and Abbeville, Louisiana locations.
18
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Note 11. Reconciliation of Basic and Diluted Per Share Data (in thousands
except per share data)
Earnings Shares Per Share
(Numerator) (Denominator) Data
------------ -------------- ------------
Three Months Ended September 30, 2003
Net earnings $ 740
------------
------------
Basic earnings per common share:
Earnings available to common shareholders $ 740 24,279 $ 0.03
------------
Effect of dilutive securities:
Stock options assumed exercised - 1,703
------------ --------------
Diluted earnings per common share:
Earnings available to common shareholders plus
stock options assumed exercised $ 740 25,982 $ 0.03
------------ -------------- ------------
------------ -------------- ------------
Earnings Shares Per Share
(Numerator) (Denominator) Data
------------- --------------- ------------
Three Months Ended September 30, 2002
Net Earnings $ 3,600
-------------
-------------
Basic earnings per common share:
Earnings available to common shareholders $ 3,600 23,965 $ 0.15
------------
Effect of dilutive securities:
Stock options assumed exercised - 1,296
------------- ---------------
Diluted earnings per common share:
Earnings available to common shareholders plus
stock options assumed exercised $ 3,600 25,261 $ 0.14
------------- --------------- -------------
------------- --------------- -------------
19
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Earnings Shares Per Share
(Numerator) (Denominator) Data
------------- --------------- -------------
Nine Months Ended September 30, 2003
Net earnings $ 5,767
-------------
-------------
Basic earnings per common share:
Earnings available to common shareholders $ 5,767 24,129 $ 0.24
-------------
Effect of dilutive securities:
Stock options assumed exercised - 1,563
------------- --------------
Diluted earnings per common share:
Earnings available to common shareholders plus
stock options assumed exercised $ 5,767 25,692 $ 0.22
------------- -------------- --------------
------------- -------------- --------------
Earnings Shares Per Share
(Numerator) (Denominator) Data
------------- --------------- --------------
Nine Months Ended September 30, 2002
Net Earnings $ 9,250
-------------
-------------
Basic earnings per common share:
Earnings available to common shareholders $ 9,250 23,959 $ 0.39
---------------
Effect of dilutive securities:
Stock options assumed exercised - 1,115
------------- --------------
Diluted earnings per common share:
Earnings available to common shareholders plus
stock options assumed exercised $ 9,250 25,074 $ 0.37
-------------- -------------- ---------------
-------------- -------------- ---------------
Options to purchase 2,204,800 and 2,274,800 shares of common stock at
prices ranging from $6.44 to $17.25 and $5.03 to $17.25 per share were
outstanding during the three and nine months ended September 30, 2003,
respectively, but were not included in the computation of diluted earnings per
share because the exercise prices of the options were greater than the average
market price of the shares during that period.
Options to purchase 3,064,250 and 3,079,250 shares of common stock at
prices ranging from $3.50 to $17.25 and were outstanding during the three and
nine months ended September 30, 2002 respectively, but were not included in the
computation of diluted earnings per share because the exercise prices of the
options were greater than the average market price of the shares during that
period.
20
OMEGA PROTEIN CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(continued) (Dollars in thousands, except per share amounts)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Forward-looking statements in this Form 10-Q, future filings by the Company
with the Securities and Exchange Commission (the "Commission"), the Company's
press releases and oral statements by authorized officers of the Company are
intended to be subject to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Investors are cautioned that all forward-looking
statements involve risks and uncertainty, including without limitation, the
risks set forth under the caption "Significant Factors that May Affect
Forward-Looking Statements" appearing in Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company believes
that forward-looking statements made by it are based on reasonable expectations;
however, no assurances can be given that actual results will not differ
materially from those contained in such forward-looking statements.
Forward-looking statements involve statements that are predictive in nature,
which depend upon or refer to future events or conditions, or which include the
words "estimate," "project," "anticipate," "expect," "predict," "assume,"
"believe," "could," "would," "may," and similar expressions.
21
OMEGA PROTEIN CORPORATION
General
Omega Protein Corporation is the largest producer, marketer and distributor
of fish meal and fish oil products in the United States. As used herein, the
term "Omega" or the "Company" refers to Omega Protein Corporation or to Omega
Protein Corporation and its consolidated subsidiaries, as applicable. The
Company's principal executive offices are at 1717 St. James Place, Suite 550,
Houston, Texas 77056 (Telephone: (713) 623-0060).
The Company's marine operations involve the production and sale of a
variety of protein and oil products derived from menhaden, a species of wild
herring-like fish found along the Gulf of Mexico and Atlantic coasts. The fish
is not genetically modified or genetically enhanced. The Company processes
several grades of fish meal (regular or "FAQ" meal and specialty meals), as well
as fish oil and fish solubles. The Company's fish meal products are primarily
used as a protein ingredient in animal feed for swine, cattle, aquaculture and
household pets. Fish oil is utilized for animal and aquaculture feeds,
industrial applications, and for additives to human food products. The Company's
fish solubles are sold primarily to livestock feed manufacturers, aquaculture
feed manufacturers and for use as an organic fertilizer.
All of the Company's products contain Omega-3 fatty acids. The Omega-3
fatty acids are commonly referred to as "essential fatty acids" because the
human body does not produce them. Instead, essential fatty acids must be
obtained from outside sources, such as food or special supplements. Omega-3s are
also commonly referred to as a "good fat" for their health benefits, as opposed
to the "bad fats" that create or aggravate health conditions through long-term
consumption. See "--Products" in Part I Item 1 and 2 of the Company's Form 10-K
Annual Report for the year ended December 31, 2002.
The Company operates through five material subsidiaries: Omega Protein,
Inc., Omega Shipyard, Inc., Protein Operating Company, Protein Securities
Company and Omega Protein Mexico, S. de R. L. de C. V. ("Omega Mexico"). Omega
Protein, Inc. is the Company's principal operating subsidiary for its menhaden
processing business and is the successor to a business conducted since 1913.
Omega Shipyard, Inc. owns a drydock facility in Moss Point, Mississippi, which
is used to provide shoreside maintenance for the Company's fishing fleet and,
subject to outside demand and excess capacity, third-party vessels. Revenues
from shipyard work for third-party vessels in 2002 were not material. Protein
Operating Company holds title to the Company's property containing its
60,000-square foot meal storage warehouse in St. Louis, Missouri. Protein
Securities Company holds title to the Company's property containing its 10,000
metric ton meal storage warehouse, oil storage tanks with a 4,000 metric ton
capacity and other property in Morgan City, Louisiana. Omega Mexico is a new
subsidiary formed in 2002 for the Company's meal and oil purchases in Mexico and
resales in Mexico. The Company also has a number of other immaterial direct and
indirect subsidiaries.
Until April 1998, the Company, including its predecessors, was a
wholly-owned subsidiary of Zapata Corporation ("Zapata"). In April 1998, the
Company completed an initial public offering of its common stock. Zapata
currently owns approximately 60% of the Company's outstanding common stock.
22
OMEGA PROTEIN CORPORATION
The Company files annual, quarterly and current reports and other
information with the Securities and Exchange Commission ("SEC"). The Company's
annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K, along with any amendments to those reports, are available free of
charge at the Company's corporate website at http://www.omegaproteininc.com and
are posted within three business days after they are filed with the SEC.
Omega is the largest U.S. producer of protein-rich meal and Omega-3 rich
oil derived from marine sources. The Company's products are produced from
menhaden (a herring-like fish found in commercial quantities), and include FAQ
grade and value-added specialty fish meals, crude and refined fish oils and
regular and value-added fish solubles. The Company's fish meal products are used
as nutritional feed additives by animal feed manufacturers and by commercial
livestock producers. The Company's crude fish oil is sold to food producers and
aquaculture feed manufacturers in Europe and Asia and its refined fish oil
products are used in food production and certain industrial applications. Fish
solubles are sold as protein additives for animal feed and as fertilizers.
The fish catch is processed into FAQ grade fish meal, specialty fish meals,
fish oils and fish solubles at the Company's four operating plants located in
Virginia, Mississippi and Louisiana. Menhaden are harvested offshore the U.S.
mid-Atlantic and Gulf of Mexico coasts. In 2000, the Company converted several
of its fishing vessels to "carry vessels" which do not engage in active fishing
but instead carry fish from the Company's offshore fishing vessels to its
plants. Utilization of carry vessels increases the amount of time that certain
of the Company's fishing vessels remain offshore fishing productive waters and
therefore increases the Company's fish catch per vessel employed. The carry
vessels have reduced crews and crew expenses and incur less maintenance cost
than the actual fishing vessels.
The Company's harvesting season generally extends from May through December
on the mid-Atlantic coast and from April through October on the Gulf coast.
During the off-season and the first few months of each fishing season, the
Company fills purchase orders from the inventory it has accumulated during the
previous fishing season. Prices for the Company's products tend to be lower
during the fishing season when product is more abundant than in the off-season.
Throughout the entire year, prices are significantly influenced by supply and
demand in world markets for competing products, particularly other globally
produced fish meal, as well as soybean meal for its fish meal products and
vegetable fats and oils for its fish oil products.
During 1999 and continuing through 2000, world grain and oilseed markets
were burdened by excess supplies relative to demand which, in turn, resulted in
prices for most major commodities being sharply lower than in previous years.
Correspondingly, the Company's product prices were adversely impacted during
these periods, resulting in decreased gross margins. During 1999 and again
during 2000, the Company determined that the costs of its fish meal and fish oil
product inventories were in excess of those products' realization value by
approximately $18.2 million and $18.1 million, respectively. This realization
was due mainly to the continuing depressed market values of world protein
markets and particularly, animal and oilseed oil markets. The average prices
received for the Company's fish meal and fish oil products were approximately
28.1% and 48.2% lower, respectively, during 1999 as compared to 1998. Price
decreases continued during 2000 and fish meal and fish oil prices were
approximately 7.3% and 20%, respectively, lower than 1999 average prices. Also
impacting 2000 and contributing to the write-down of inventories was the reduced
crude fish oil production yields (approximately 38% lower yields compared to
1999) experienced during the majority of the 2000 fishing season in the Gulf of
Mexico. These reduced yields were primarily a result of the reduced fat content
in the fish, which was believed to be a result of poor nutritional conditions.
23
OMEGA PROTEIN CORPORATION
The depressed pricing conditions in worldwide markets in 1999 and 2000 for
protein, particularly animal and oilseed oil, continued into the early months of
2001 before making significant improvements late in 2001 and continuing
throughout most of 2002. The price increases stabilized in late 2002 and have
been relatively stable since then, with the exception of crude fish oil prices.
Pricing for crude fish oil swiftly declined approximately 20% early in the
second quarter of fiscal 2003 before rising mildly by the end of the same
quarter.
At September 30, 2003, the Company determined that its 2003 estimated
product inventory quantities would be less than its original estimates. Such
reduced estimated inventory quantities results in higher cost inventories and
correspondingly higher cost of sales, as well as less available product for
sale. The estimated reduced inventories were due to lower Company fish catch
brought about by adverse weather conditions along the Atlantic Coast and the
Gulf of Mexico, combined with lower oil yields from the Gulf of Mexico fish. The
impact of the higher cost inventories and fewer volumes available for sale will
be carried forward which will adversely affect Company earnings in the fourth
quarter of fiscal 2003 as well as the first and second quarters of fiscal 2004.
Pricing for the Company's products has been volatile in the past several
years and is attributable mainly to the international availability, or the
perceived international availability, of fish meal and fish oil inventories. In
an effort to reduce price volatility and to generate higher, more consistent
profit margins, in fiscal 2000 the Company embarked on a quality control program
designed to increase its capability of producing higher quality fish meal
products and, in conjunction therewith, enhanced its sales efforts to penetrate
premium product markets. Since 2000, the Company's sales volumes of specialty
meal products have increased approximately 18%. Future volumetric growth in
specialty meal sales will be dependant upon increased harvesting efforts.
Additionally, the Company is attempting to introduce its refined fish oil into
the food market. The Company has made sales, which to date have not been
material, of its refined fish oil, trademarked OmegaPure(TM), to food
manufacturers in the United States and Canada at prices that provide
substantially improved margins over the margins that can be obtained from
selling non-refined crude fish oil. The Company cannot estimate, however, the
size of the actual domestic or international markets for OmegaPure(TM) or how
long it may take to develop these markets.
During 2002, the Company developed a business plan to expand its purchase
and resale of other manufacturers' fish meal and fish oil products. In 2002, the
Company engaged a full-time consultant to implement the Company's business plan
which will focus initially on the purchase and resale of Mexican fish meal and
fish oil. Revenues generated from these types of transactions represented less
than 1% of total Company revenues during 2002. The Company expects that although
operating margins from these activities will be less than the margins generated
from the Company's base domestic production, its Mexican operations will provide
it with a source of fish meal and oil to sell into other markets where the
Company has not historically had a presence. Revenues generated from these
activities for the nine months ended September 30, 2003 were approximately $2.5
million, with no contribution to net income. The Company believes that, with
additional volumetric activity, these purchase and resale activities will become
profitable.
Historically, approximately 35% to 40% of Omega's FAQ fish meal was sold on
a two-to-twelve-month forward contract basis. The balance of regular grade and
other products was substantially sold on a spot basis through purchase orders.
The Company undertook a similar forward sales program for its specialty grade
meals and crude fish oil for 2002 and has continued this program for 2003. The
Company's annual revenues are highly dependent on both annual fish catch and
inventories and, in addition, inventory is generally carried over from one year
to another year. The Company determines the level of inventory to be carried
over based on prevailing market prices of the products and anticipated customer
usage and demand during the off-season. Thus,production volume does not
24
OMEGA PROTEIN CORPORATION
necessarily correlate with sales volume in the same year, and sales volumes
will fluctuate from quarter to quarter. The Company's fish meal products have a
useable life of approximately one year from date of production. Practically,
however, the Company typically attempts to empty its warehouses of the previous
season's products by the second or third month of the new fishing season. The
Company's crude fish oil products do not lose efficacy unless exposed to oxygen,
and therefore, their storage life typically is longer than that of fish meal.
The following table sets forth the Company's revenues by product (in
millions) and the approximate percentage of total revenues represented thereby,
for the indicated periods:
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------------------- -----------------------------------------------------
2003 2002 2003 2002
----------------------- ------------------------ ------------------------ ------------------------
Revenues Percent Revenues Percent Revenues Percent Revenues Percent
---------- --------- ---------- --------- ---------- ---------- --------- ----------
Regular Grade $ 7.2 22.4% $ 8.1 23.1% $ 16.0 19.0% $ 14.4 16.8%
Special Select 10.0 31.1 12.7 36.3 29.5 34.9 32.7 38.2
Sea-Lac 2.9 9.0 4.3 12.3 11.0 13.0 9.1 10.6
Crude Oil 10.7 33.2 8.0 22.9 23.6 27.9 24.1 28.1
Refined Oil 1.0 3.1 1.3 3.7 2.8 3.3 3.2 3.7
Fish Solubles 0.4 1.2 0.6 1.7 1.6 1.9 2.2 2.6
---------- --------- ---------- --------- ---------- ---------- --------- ----------
Total $ 32.2 100.0% $ 35.0 100.0% $ 84.5 100.0% $ 85.7 100.0%
---------- --------- ---------- --------- ---------- ---------- --------- ----------
---------- --------- ---------- --------- ---------- ---------- --------- ----------
25
OMEGA PROTEIN CORPORATION
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources have been
cash flows from operations, bank credit facilities and term loans from various
lenders provided pursuant to the National Marine Fisheries Finance Program under
Title XI of the Marine Act of 1936 ("Title XI"). These sources of cash flows
have been used for capital expenditures and payment of long-term debt. The
Company expects to finance future expenditures through internally generated cash
flows and, if necessary, through funds available from the Credit Facility and/or
Title XI facilities described below.
Under a program offered through National Marine Fisheries Services ("NMFS")
pursuant to Title XI, the Company has secured loans through lenders with terms
generally ranging between 12 and 20 years at interest rates between 6% and 8%
per annum which are enhanced with a government guaranty to the lender for up to
80% of the financing. The Company's current Title XI borrowings are secured by
liens on 17 fishing vessels and mortgages on the Company's Reedville, Virginia
and Abbeville, Louisiana plants. In 1996, Title XI borrowing was modified to
permit use of proceeds from borrowings obtained through this program for
shoreside construction. The Company used the entire $20.6 million amount
originally authorized under the program. Loans are now available under similar
terms pursuant to the Title XI program without intervening lenders. The Company
borrowed $1.9 million under this new program during 2001, and has not borrowed
under the program in 2002 or the nine months ended September 30, 2003. Under the
current Title XI Loan program, the United States Department of Commerce has
approved the financing application made by the Company in the amount of $5.3
million. The Company expects to close on the $5.3 million loan in the fourth
quarter of 2003.
The Company announced in April, 2003, that it had committed to build a new
100-metric ton per day fish oil processing facility at its Reedville, Virginia
location. Construction on the project began in June 2003, with projected
completion in the summer of 2004 and will cost approximately $16 million. The
Company currently anticipates that it will fund the project through its
available cash balances.
Omega had an unrestricted cash balance of $25.0 million at September 30,
2003, down $8.4 million from December 31, 2002. This decrease was due primarily
to decreases in operating cash flows and increases in capital expenditures. The
Company's liquidity is greatly influenced by the selling prices received for its
products. Should the Company experience decreased pricing in the future, as it
experienced in 1999 and 2000, liquidity would decline and the Company would
possibly have to utilize its working capital credit facility. The Company's
long-term debt at September 30, 2003 and December 31, 2002 was $13.3 million and
$14.2 million, respectively. Current maturities attributable to the Company's
long-term debt was $1.4 and $1.3 million at September 30, 2003 and December 31,
2002, respectively. The Company did not utilize its working capital credit
facility during the first nine months of 2003 and fiscal year 2002 other than
for $2.6 million and $2.1 million in standby letters of credit outstanding as of
September 30, 2003 and December 31, 2002, respectively. As of September 30,
2003, the Company had $20 million available under its working capital credit
facility. The Company has no off-balance sheet arrangements other than normal
operating leases and standby letters of credit.
26
OMEGA PROTEIN CORPORATION
The following tables aggregate information about the Company's contractual
cash obligations and other commercial commitments (in thousands) as of September
30, 2003:
Payments Due by Period
----------------------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
Contractual Cash Obligations Total 1 year years years years
- -------------------------------------------- ----------- ------------- ------------- ------------- -------------
Long Term Debt $ 14,613 $ 1,351 $ 2,948 $ 3,317 $ 6,997
Operating Leases 1,417 454 529 196 238
Minimum Pension Liability 10,645 -- -- -- 10,645
----------- ------------- ------------- ------------- -------------
Total Contractual Cash Obligations $ 26,675 $ 1,805 $ 3,477 $ 3,513 $ 17,880
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
Amount of Commitment Expiration Per Period
----------------------------------------------------------------------------------
Less than 1 to 3 4 to 5 After 5
Other Commercial Commitments Total 1 year years years years
- -------------------------------------------- ----------- ------------- ------------- ------------- -------------
Credit Facility (1) $ 17,400 $ -- $ -- $ -- $ --
Standby Letters of Credit 2,600 2,600 -- -- --
Construction Commitment (2) 13,200 13,200 -- -- --
----------- ------------- ------------- ------------- -------------
Total Commercial Commitments $ 33,200 $ 15,800 $ -- $ -- $ --
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
(1) As of September 30, 2003, the Company had no outstanding borrowings
outstanding under the $20.0 million Credit Facility.
(2) The Company announced on April 15, 2003 that it had committed to build
a new 100-metric ton per day fish oil processing facility at its Reedville,
Virginia location. Construction on the project began in June 2003, with
projected completion in summer of 2004 and will cost approximately $16 million.
The Company currently anticipates that it will fund the project through its
available cash balances. As of September 30, 2003 the Company has incurred $2.8
million related to its Reedville processing facility.
Investing activities used $10.1 million and $5.6 million for the nine month
periods ending September 30, 2003 and 2002, respectively. The Company's
investing activities consisted mainly of capital expenditures for equipment
purchases, replacements and vessel refurbishments. The Company anticipates
making approximately $14 million of capital expenditures in 2003 (in addition to
$16.0 million for the oil processing facility discussed above), a significant
portion of which will be used to refurbish vessels and plant assets and to
repair certain equipment.
Financing activities provided $243,000 during the nine months the ended
September 30, 2003 and used $991,000 to repay debt obligations during the nine
month periods ended September 30, 2002. During the nine month period ended
September 30, 2003, exercise of stock options provided proceeds of $1.1 million.
27
OMEGA PROTEIN CORPORATION
On December 20, 2000 the Company entered into a three-year $20 million
revolving credit agreement with Bank of America, N.A. (the "Credit Facility").
Borrowings under this facility may be used for working capital and capital
expenditures. On May 19, 2003, the Company amended the existing Credit Facility
and among other things, these amendments extended the maturity until December
20, 2006, deleted certain existing financial covenants and added certain
affirmative covenants such as, a Leverage Ratio covenant not to exceed 3.0 to 1
at any time and a Fixed Charge Coverage Ratio covenant not to be less than 1.0
to 1 as of the end of each month, measured for the twelve-month period then
ended. The Company shall only be required to comply with the financial covenants
from and after the last day of any month in which the Credit Facility's
availability is less than $3,000,000 on any date, or the Credit Facility's
availability averages less than $6,000,000 for any calendar month. A commitment
fee of 50 basis points per annum is payable on the unused portion of the Credit
Facility. If at any time the Company's loan outstanding under the Credit
Facility is $5,000,000 or greater, the commitment fee shall be 25 basis points
per annum. Applicable interest is payable at alternative rates of LIBOR plus
2.25% or Prime plus 0%. Applicable interest shall be adjusted (up or down)
prospectively on a quarterly basis as determined by the Company's Fixed Charge
Coverage Ratio from LIBOR plus 2.25% to LIBOR plus 2.75% or at the Company's
option Prime plus 0% to Prime plus 0.25% depending upon the Fixed Charge
Coverage Ratio being greater than 2.5 times to less than or equal to 1.5 times.
The Credit Facility is collateralized by all of the Company's trade receivables,
inventory and equipment. In addition, the Credit Facility does not allow for the
payment of cash dividends or stock repurchases and also limits capital
expenditures and investments. The Company is in compliance with the Credit
Facility covenants at September 30, 2003. As of September 30, 2003 the Company
had no borrowings outstanding under the Credit Facility. At September 30, 2003
and December 31, 2002, the Company had outstanding letters of credit totaling
approximately $2.6 million and $2.1 million, respectively, issued primarily in
support of worker's compensation insurance programs.
The Company's principal raw material is menhaden, a species of fish that
inhabits coastal and inland tidal waters in the United States. Menhaden are
undesirable for direct human consumption due to their small size, prominent
bones and high oil content. Certain state agencies impose resource depletion
restrictions on menhaden pursuant to fisheries management legislation or
regulations. To date, the Company has not experienced any material adverse
impact on its fish catch or results of operations as a result of these
restrictions.
The Company from time to time considers potential transactions including,
but not limited to, enhancement of physical facilities to improve production
capabilities and the acquisition of other businesses. Certain of the potential
transactions reviewed by the Company would, if completed, result in its entering
new lines of business (generally including certain businesses to which the
Company sells its products such as pet food manufacturers, aquaculture feed
manufacturers, fertilizer companies and organic foods distributors) although
historically, reviewed opportunities have been generally related in some manner
to the Company's existing operations. Although the Company does not, as of the
date hereof, have any commitment with respect to a material acquisition or
transaction (other than the previously announced fish oil processing facility in
Reedville, Virginia), it could enter into such agreement in the future.
The Company carries insurance for certain losses relating to its vessels
and Jones Act liability for employees aboard its vessels (collectively, "Vessel
Claims Insurance"). The typical Vessel Claims Insurance policy contains an
annual aggregate deductible ("AAD") for which the Company remains responsible,
while the insurance carrier is responsible for all applicable amounts which
exceed the AAD. It is the Company's policy to accrue current amounts due and
record amounts paid out on each claim. Once payments exceed the AAD, the Company
records an insurance receivable for a given policy year.
28
OMEGA PROTEIN CORPORATION
A general hardening of the world insurance markets in recent years has made
the Company's insurance more costly in recent years and may to continue to do so
as various lines of insurance come up for renewal in 2004. The Company has
elected in some cases to increase its deductibles and self-retentions in order
to achieve lower insurance premium costs. These higher deductibles and
self-retentions will expose the Company to greater risk of loss if claims occur.
The Company believes that the existing cash, cash equivalents, short-term
investments and funds available through its Credit Facility will be sufficient
to meet its working capital and capital expenditure requirements through at
least the end of 2003.
Overview of Critical Accounting Policies
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and assumptions discussed herein and in the
consolidated financial statements in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2002. The following estimates and assumptions are
both most important to the portrayal of our financial condition and results of
operations and require management's most difficult, subjective or complex
judgment.
Inventories
Inventory is stated at the lower of cost or market. The Company's fishing
season runs from mid-April to the first of November in the Gulf of Mexico and
from the beginning of May into December in the Atlantic. Government regulations
generally preclude the Company from fishing during the off-seasons.
The Company's inventory cost system considers all costs associated with an
annual fish catch and its processing, both variable and fixed, including both
costs incurred during the off-season and during the fishing season. The
Company's costing system allocates cost to inventory quantities on a per unit
basis as calculated by a formula that considers total estimated inventoriable
costs for a fishing season (including off-season costs) to total estimated fish
catch and the relative fair market value of the individual products produced.
The Company adjusts the cost of sales, off-season costs and inventory balances
at the end of each quarter based on revised estimates of total inventoriable
costs and fish catch. The Company's lower of cost or market value analyses at
year-end and at interim periods compare to total estimated per unit production
cost of the Company's expected production to the projected per unit market
prices of the products. The impairment analyses involve estimates of, among
other things, future fish catches and related costs, and expected commodity
prices for the fish products.
The estimates, which management believes are reasonable and supportable,
involve estimates of future activities and events which are inherently imprecise
and from which actual results may differ materially. Revisions in such estimates
or actual results could materially impact the Company's results of operation and
financial position.
During the off-seasons, in connection with the upcoming fishing seasons,
the Company incurs costs (i.e., plant and vessel related labor, utilities, rent,
repairs and depreciation) that are directly related to the Company's
infrastructure. These costs accumulate in inventory and are applied as elements
of the cost of production of the Company's products throughout the fishing
season ratably based on the Company's monthly fish catch and the expected total
fish catch for the season.
29
OMEGA PROTEIN CORPORATION
Insurance
As mentioned previously, the Company carries insurance for certain losses
relating to its vessels and Jones Act liabilities for employees aboard its
vessels. The Company provides reserves for those portions of the AAD for which
the Company remains responsible by using an estimation process that considers
Company-specific and industry data as well as management's experience,
assumptions and consultation with outside counsel. Management's current
estimated range of liabilities related to such cases is based on claims for
which management can estimate the amount and range of loss. The Company has
recorded the minimum estimated liability related to those claims, where there is
a range of loss. As additional information becomes available, the Company
assesses the potential liability related to its pending litigation and revises
its estimates. Such revisions in estimates for potential liability could
materially impact the Company's results of operation and financial position.
Results of Operations
The following table sets forth as a percentage of revenues certain items of
the Company's operations for each of the indicated periods.
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- --------
Revenues.................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales............................... 88.8 77.9 80.8 75.3
--------- --------- --------- --------
Gross profit................................ 11.2 22.1 19.2 24.7
Selling, general and administrative expense. 6.9 5.8 7.9 7.3
--------- --------- --------- --------
Operating income............................ 4.3 16.3 11.3 17.4
Interest expense, net....................... (0.6) (0.5) (0.6) (0.6)
Other expense, net.......................... - (0.2) - (0.1)
--------- --------- --------- --------
Income before income taxes.................. 3.7 15.6 10.7 16.7
Provision for income taxes.................. 1.4 5.4 3.8 5.9
--------- --------- --------- --------
Net income.................................. 2.3 10.2 6.9 10.8
--------- --------- --------- --------
--------- --------- --------- --------
30
OMEGA PROTEIN CORPORATION
Interim Results for the Third Quarters ended September 30, 2003 and
September 30, 2002
Revenues. For the quarter ended September 30, 2003, revenues decreased $2.8
million from $35.0 million in the quarter ended September 30, 2002 to $32.2
million. Prices for the Company's fish meal increased 8.2%, while fish oil
prices decreased 4.4% during the third quarter. The Company attributes the
higher fish meal prices to lower available world supplies of fish meal. The
revenue decrease was primarily due to lower sales volumes of 29.9% for the
Company's fish meal and lower fish oil prices. The Company's Mexican fish meal
and fish oil sales increased $455,000 or 49% for the third quarter. The lower
fish meal volumes were primarily attributable to the Company's reduced fish
catch, weakening demand in the swine markets and fewer export sales.
Cost of Sales. Cost of sales, including depreciation and amortization, for
the current quarter ended September 30, 2003 was $28.6 million, a 4.8% increase
from $27.3 million for the quarter ended September 30, 2002. Cost of sales as a
percentage of revenues increased 10.9% to 88.8% for the quarter ended September
30, 2003 as compared to the corresponding period in 2002. The increase in cost
of sales as a percentage of revenues was primarily due to higher fiscal 2003
costs of production due to reduced fish catch, brought about by adverse weather
conditions along the Atlantic Coast and Gulf of Mexico, combined with lower oil
yields for the Gulf of Mexico fish.
Gross Profit. Gross profit decreased 53.8% from a $7.8 million gross profit
in the quarter ended September 30, 2002 to $3.6 million in the quarter ended
September 30, 2003. The decrease in gross profit was primarily due to lower
sales volumes and higher fiscal 2003 cost inventories.
Selling, general and administrative expenses. Selling, general, and
administrative expenses increased $203,000 from $2.0 million in the quarter
ended September 30, 2002 to $2.2 million in the current quarter ended September
30, 2003. This increase was attributable primarily to increases in
employee-related costs and expenses and increased marketing expenses.
Operating income. As a result of the factors discussed above, the Company's
operating income decreased $4.3 million, or 75.4% from an operating income of
$5.7 million for the quarter ended September 30, 2002 to an operating income of
$1.4 million for the quarter ended September 30, 2003. As a percentage of
revenues, operating income decreased 12% for the current quarter ended September
30, 2003.
Interest expense, net. Interest expense, net increased by $15,000 in the
quarter ended September 30, 2003 as compared to the quarter ended September 30,
2002. The increase in interest expense, net was primarily due to a decrease in
the average interest rate the Company earned on its investments during the
quarter ended September 30, 2003 as compared to the quarter ended September 30,
2002.
Other expense, net. Other expense, net decreased by $53,000 in the current
quarter ended September 30, 2003 as compared to the quarter ended September 30,
2002. The decrease in other expense, net was primarily due to a gain on the
disposal of a spotter aircraft.
Provision for income taxes. The Company recorded a $436,000 provision for
income taxes for the third quarter of 2003, representing an effective tax rate
of 37.0% for income taxes. The provision for income taxes for the corresponding
period in 2002 reflected an effective tax rate of 34.0%. The increased effective
tax rate for 2003 is due to the Company not recognizing any extraterritorial
income tax benefit due to Congressional discussions aimed towards eliminating
the benefit. The Company believes its current year effective tax rate
31
OMEGA PROTEIN CORPORATION
will be similar to last year if the tax law allows the Company to continue
to utilize tax benefits similar to last year for the entire year. The Company
believes that it is more probable than not that the recorded estimated deferred
tax asset benefits and state operating loss carry-forwards will be realized. The
statutory tax rate of 34% for U.S. federal taxes was in effect for the
respective periods.
Interim Results for the Nine Months ended September 30, 2003 and September
30, 2002
Revenues. For the nine months ended September 30, 2003, revenues decreased
$1.2 million or 1.4% from $85.7 million for the nine months ended September 30,
2002 to $84.5 million for the nine months ended September 30, 2003. The revenue
decrease was primarily due to lower sales volumes of 11.0% and 7.2% for the
Company's fish meal and fish oil, respectively. The Company's fish meal prices
increased 8.8% while the Company's fish oil prices increased by 2.2% for the
nine months ended September 30, 2003. The Company attributes the higher fish
meal prices to lower available world supplies of fish meal. The lower sales
volumes were primarily attributable to weakening demand in both the crude fish
oil spot markets and fish meal spot markets and reduced fish catch due to
adverse weather conditions along the Atlantic Coast and in the Gulf of Mexico
during the third quarter.
Cost of Sales. Cost of sales, including depreciation and amortization, for
the nine months ended September 30, 2003 was $68.3 million, a $3.8 million or a
5.9% increase from $64.5 million for the comparable nine month period ending
September 30, 2002. Cost of sales as a percentage of revenues was 80.8% and
75.3% for the nine months ended September 30, 2003 and September 30, 2002,
respectively. The increase in cost of sales as a percentage of revenues was
primarily due to higher fiscal 2003 cost of production due to reduced fish
catch, brought about by adverse weather conditions along the Atlantic Coast and
Gulf of Mexico, combined with lower oil yields for the Gulf of Mexico fish.
Gross Profit. Gross profit margins decreased $5 million or 23.6% from a
$21.2 million gross profit for the nine months ended September 30, 2002 to $16.2
million for the nine months ended September 30, 2003. The decrease in gross
profit was primarily due to lower sales volumes and higher cost inventories
carried forward from fiscal 2002.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses increased $453,000 or 7.2% from $6.3 million for the
nine months ended September 30, 2002 to $6.7 million for the nine months ended
September 30, 2003. This increase was attributable to increases in
employee-related costs and expenses and increased marketing expenses.
Operating income. As a result of the factors discussed, the Company's
operating income decreased $5.4 million or 36.2% from an operating income of
$14.9 million for the nine months ended September 30, 2002 to $9.5 million for
the nine months ended September 30, 2003. As a percentage of revenues, operating
income decreased 6.1% for the nine months ended September 30, 2003.
Interest expense, net. Interest expense, net increased by $23,000 for the
nine months ended September 30, 2003 as compared to the nine months ended
September 30, 2002. The increase in interest expense, net was primarily due to a
decrease in the average interest rate the Company earned on its investments
during the nine months ended September 30, 2003 as compared to the nine months
ended September 30, 2002.
Other expense, net. Other expense, net decreased by $119,000 for the nine
months ended September 30, 2003 as compared to the nine months ended September
30, 2002. The decrease in other expense, net was primarily due to a gain on the
disposal of an aircraft.
32
OMEGA PROTEIN CORPORATION
Provision for income taxes. The Company recorded a $3.2 million provision
for income taxes for the nine months ended September 30, 2003 representing an
effective tax rate of 36.0% for income taxes. The increased effective tax rate
for 2003 is due to the Company not recognizing any extraterritorial income tax
benefit due to Congressional discussions aimed towards eliminating the benefit.
The Company believes its current year effective tax rate will be similar to last
year if the tax law allows the Company to continue to utilize tax benefits
similar to last year for the entire year. The Company believes that it is more
probable than not that the recorded estimated deferred tax asset benefits and
state operating loss carry-forwards will be realized. The statutory tax rate of
34.0% for U.S. federal taxes was in effect 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. Prices during the fishing season tend to be
lower than during the off-season. As a result, the Company's quarterly operating
results have fluctuated in the past and may fluctuate in the future. In
addition, from time to time the Company defers sales of inventory based on
worldwide prices for competing products that affect prices for the Company's
products which may affect comparable period comparisons.
Significant Factors That May Affect Forward-Looking Statements
The Company wishes to caution investors that the following significant
factors, and those factors described elsewhere in this Report, other filings by
the Company with the SEC from time to time and press releases issued by the
Company, could affect the Company's actual results which may differ materially
from those expressed in any forward-looking statements made by or on behalf of
the Company:
1. The Company's ability to meet its raw material requirements through its
annual menhaden harvest, which is subject to fluctuation due to natural
conditions over which the Company has no control, such as varying fish
population, fish oil yields, adverse weather conditions and disease.
2. The impact on the Company if its spotter aircraft are prohibited or
restricted from operating in their normal manner during the Company's fishing
season. For example, as a direct result of the September 11, 2001 terrorist
attacks, the Secretary of Transportation issued a federal ground stop order that
grounded certain aircraft (including the Company's fish-spotting aircraft) for
approximately nine days. This loss of spotter aircraft coverage severely
hampered the Company's ability to locate menhaden fish during this nine-day
period and thereby reduced its amount of saleable product.
3. The impact on the prices for the Company's products of worldwide supply
and demand relationships over which the Company has no control and which tend to
fluctuate to a significant extent over the course of a year and from year to
year. The products that influence the supply and demand relationship are world
supplies of fish meal made from other fish species, palm oil, soy meal and oil,
and other edible oils.
4. The impact of a violation by the Company of federal, state and local
laws or regulations relating to menhaden fishing, environmental protection or
the health and safety of its employees, or of the adoption of new laws or
regulations at federal, state, local or foreign government levels that restrict
or prohibit menhaden or purse-seine fishing, or that lower permissible levels of
various contaminants or compounds which may be present in fish meals or fish
33
OMEGA PROTEIN CORPORATION
oils to levels to which the Company cannot comply, or which make the
Company's products more expensive to produce.
5. The impact on the Company if it cannot harvest menhaden in U.S.
jurisdictional waters if the Company fails to comply with U.S. citizenship
ownership requirements.
6. Risks inherent in the Company's attempt to expand into sales of refined,
food grade fish oils for consumption in the U.S., including the unproven market
for this product.
7. Fluctuations in the Company's quarterly operating results due to the
seasonality of the Company's business and the Company's deferral of sales of
inventory based on worldwide prices for competing products.
8. The ability of the Company to retain and recruit key officers and
qualified personnel, vessel captains and crewmembers.
9. Risks associated with the strength of local currencies of the countries
in which its products are sold, changes in social, political and economic
conditions inherent in foreign operations and international trade, including
changes in the law and policies that govern foreign investment and international
trade in such countries, changes in U.S. laws and regulations relating to
foreign investment and trade, changes in tax or other laws, partial or total
expatriation, currency exchange rate fluctuations and restrictions on currency
repatriation, the disruption of labor, political disturbances, insurrection or
war and the effect of requirements of partial local ownership of operations in
certain countries.
10. Risks related to unanticipated material adverse outcomes in any pending
litigation or any other unfavorable outcomes or settlements. There can be no
assurance that the Company will prevail in any pending litigation and to the
extent that the Company sustains losses growing out of any pending litigation
which are not presently reserved or otherwise provided for or insured against,
its business, results of operation and financial condition could be adversely
affected.
34
OMEGA PROTEIN CORPORATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the financial condition of the Company is
exposed to minimal market risk associated with interest rate movements on the
Company's borrowings. A one percent increase or decrease in the levels of
interest rates on variable rate debt would not result in a material change to
the Company's results of operations.
Although the Company sells products in foreign countries, all of the
Company's revenues are billed and paid for in US dollars. As a result,
management does not believe that the Company is exposed to any significant
foreign country currency exchange risk, and the Company does not utilize market
risk sensitive instruments to manage its exposure to this risk.
Item 4. Controls and Procedures
(a) Within the 90-day time period prior to filing this report, we conducted
an evaluation of the effectiveness of our "disclosure controls and procedures,"
as that phrase is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934. The evaluation was carried out under the supervision and
with the participation of management, including our Chief Executive Officer
("CEO") and Chief Financial Officer ("CFO").
Based on and as of the date of that evaluation, our CEO and CFO have
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be disclosed in the reports we
file with or submit to the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934, and in ensuring that the information required
to be disclosed in those filings is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms.
Notwithstanding the foregoing, there can be no assurance that the Company's
disclosure controls and procedures will detect or uncover all failures of
persons within the Company and its consolidated subsidiaries to disclose
material information otherwise required to be set forth in the Company's
periodic reports. There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide
reasonable, not absolute, assurance of achieving their control objectives.
(b) Subsequent to the date of the evaluation, there were no significant
changes in our internal controls or in other factors that could significantly
affect the internal controls, including any corrective actions taken with regard
to significant deficiencies and material weaknesses.
35
OMEGA PROTEIN CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and each of its directors were named as defendants in a lawsuit
instituted on September 19, 2003 in the 280th District Court of Harris County,
Texas by purported stockholder Joseph Chaput. The lawsuit was served on the
Company on October 10, 2003. The plaintiff brought the action individually and
as a putative class action on behalf of all Company stockholders. No class
period has been identified and no monetary damages have been specified.
The plaintiff claims that the Company directors and the Company breached
their fiduciary duties to the Company's stockholders by not properly considering
a $9.50 per share offer (the "Acquisition Proposal") sent to the Company by
Ferrari Investments, an Argentine entity. The plaintiff seeks to direct the
defendants to act in the interests of the Company's stockholders, including
negotiating in good faith with Ferrari Investments, and seeks costs and
attorneys' fees.
Upon its receipt of the Acquisition Proposal, the Company had requested
additional information from Ferrari Investments in order to assist the Company's
Board of Directors in assessing the proposal, including financial statements,
source of cash for the transaction, biographical information on principals,
compliance with the Department of Homeland Security's requirements on U.S.
citizenship for ownership of fishing vessels in U.S. waters, and banking
references.
Ferrari Investments never responded to the Company's request with any
answers that could be independently verified. As the Company disclosed in its
September 5, 2003 press release, the Company was unable to obtain any
information that supported the credibility of the Acquisition Proposal. The
Board of Directors of the Company concluded that the Acquisition Proposal did
not represent a credible proposal.
The Company believes that the claims in the lawsuit are without merit and
intends to vigorously defend the lawsuit.
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
36
OMEGA PROTEIN CORPORATION
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description of Exhibit
31.1 Rule 13a-14(a)/15(d)-14(a) Certification for Chief Executive Officer.
31.2 Rule 13a-14(a)/15(d)-14(a) Certification for Chief Financial Officer.
32 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K:
Form 8-K dated August 5, 2003 (reporting financial results for the second
quarter of 2003)
Form 8-K dated September 3, 2003 (reporting an unsolicited letter proposal
for acquisition of the Company's outstanding shares received from Ferrari
Investments)
37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
OMEGA PROTEIN CORPORATION
(Registrant)
October 30, 2003 By: /s/ ROBERT W. STOCKTON
(Executive Vice President,
Chief Financial Officer)
38