OMEGA PROTEIN CORP - FORM 10-Q

OMEGA PROTEIN CORP - FORM 10-Q - August 5, 2010

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EX-32.1 - SECTION 906 CEO CERTIFICATION - OMEGA PROTEIN CORP	dex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - OMEGA PROTEIN CORP	dex311.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - OMEGA PROTEIN CORP	dex322.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - OMEGA PROTEIN CORP	dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to .

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 incorporation or organization)		(I.R.S. Employer Identification No.)

2105 City West Blvd., Suite 500 Houston, Texas		77042-2838
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (713) 623-0060

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the Registrant is a shell company (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 August 2, 2010: 18,819,278.

OMEGA PROTEIN CORPORATION

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Condensed Consolidated Balance Sheet as of June 30, 2010 and December 31, 2009	3

	Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the three months and six months ended June 30, 2010 and 2009	4

	Unaudited Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2010 and 2009	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4.	Controls and Procedures	37

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	38

Item 1A.	Risk Factors	38

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	40

Item 4.	Removed and Reserved	40

Item 5.	Other Information	40

Item 6.	Exhibits	40

Signatures		42

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in thousands)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements and Notes


	June 30, 2010			December 31, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	8,546		$	2,177
Receivables, net		12,394			11,225
Inventories		71,994			63,826
Deferred tax asset, net		4,400			3,426
Prepaid expenses and other current assets		3,657			3,235

Total current assets		100,991			83,889
Other assets, net		3,652			3,301
Energy swap asset, net of current portion		71			229
Property, plant and equipment, net		111,379			110,625


Total assets	$	216,093		$	198,044


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	2,859		$	2,380
Current portion of capital lease obligation		406			369
Accounts payable		3,257			2,392
Accrued liabilities		20,789			16,952

Total current liabilities		27,311			22,093
Long-term debt, net of current maturities		31,606			23,540
Capital lease obligation, net of current portion		1,057			1,265
Interest rate swap liability, net of current portion		316			395
Deferred tax liability, net		6,783			4,540
Pension liabilities, net		8,168			9,185


Total liabilities		75,241			61,018


Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value; 10,000,000 authorized shares; none issued		—			—
Common Stock, $0.01 par value; 80,000,000 authorized shares; 18,819,278 and 18,727,446 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively		188			187
Capital in excess of par value		115,902			114,772
Retained earnings		32,775			29,813
Accumulated other comprehensive loss		(8,013	)		(7,746	)


Total stockholders’ equity		140,852			137,026


Total liabilities and stockholders’ equity	$	216,093		$	198,044

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenues	$	36,285		$	41,755		$	68,557		$	71,908
Cost of sales		27,417			42,257			53,719			66,589

Gross profit (loss)		8,868			(502	)		14,838			5,319

Selling, general, and administrative expense		3,955			3,107			7,222			6,513
Research and development expense		499			325			934			682
Losses resulting from Gulf of Mexico oil spill disaster		587			—			587			—
(Other proceeds) loss resulting from natural disaster, net – 2008 storms		(117	)		(14	)		(234	)		393
(Other proceeds) relating to natural disaster, net – 2005 storms		—			—			—			(2,656	)
Loss (gain) on disposal of assets		152			16			268			(2	)

Operating income (loss)		3,792			(3,936	)		6,061			389
Interest income		4			49			6			132
Interest expense		(612	)		(878	)		(1,258	)		(1,777	)
Other expense, net		(89	)		(120	)		(178	)		(214	)

Income (loss) before income taxes		3,095			(4,885	)		4,631			(1,470	)

Provision (benefit) for income taxes		1,112			(1,593	)		1,669			(277	)

Net income (loss)		1,983			(3,292	)		2,962			(1,193	)

Other comprehensive income (loss):
Foreign currency translation adjustment, net of tax expense of $0, $13, $0 and $13, respectively		—			25			—			25

Energy swap adjustment, net of tax (benefit) expense of ($165), $405, ($333) and $282, respectively		(319	)		788			(646	)		548
Interest rate swap adjustment, net of tax expense of $0, $101, $0 and $141, respectively		—			194			—			274
Pension benefits adjustment, net of tax expense of $98, $104, $195 and $208, respectively		190			201			379			404

Comprehensive income (loss)	$	1,854		$	(2,084	)	$	2,695		$	58

Basic earnings (loss) per share	$	0.11		$	(0.18	)	$	0.16		$	(0.06	)

Weighted average common shares outstanding		18,818			18,712			18,779			18,712


Diluted earnings (loss) per share	$	0.11		$	(0.18	)	$	0.16		$	(0.06	)

Weighted average common shares and potential common share equivalents outstanding		18,877			18,712			18,816			18,712

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands, except per share amounts)


	Six Months Ended June 30,
	2010			2009
Cash flow provided by (used in) operating activities:
Net income (loss)	$	2,962		$	(1,193	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		7,178			6,630
Losses resulting from Gulf of Mexico oil spill disaster		587			—
(Other proceeds) loss resulting from natural disaster, net – 2008 storms		(234	)		273
Insurance recoveries and other proceeds relating to natural disaster, net – 2005 storms		—			(2,656	)
Loss (gain) on disposal of assets		268			(2	)
Provisions for losses on receivables		25			24
Share based compensation		765			305
Deferred income taxes		1,603			(105	)
Changes in assets and liabilities:
Receivables		(687	)		7,904
Inventories		(8,755	)		6,229
Prepaid expenses and other current assets		(1,633	)		(2,044	)
Other assets		(1,016	)		315
Accounts payable		865			(332	)
Accrued liabilities		3,758			3,360
Pension liability, net		(638	)		422

Total adjustments		2,086			20,323

Net cash provided by operating activities		5,048			19,130

Cash flow (used in) provided by investing activities:
Proceeds from insurance companies and grants, hurricanes		117			10,156
Proceeds from disposition of assets		34			39
Capital expenditures		(7,570	)		(12,675	)

Net cash used in investing activities		(7,419	)		(2,480	)

Cash flow provided by (used in) financing activities:
Principal payments of long-term debt		(1,455	)		(4,174	)
Principal payments of capital lease obligation		(171	)		(139	)
Proceeds from long term debt		10,000			—
Proceeds from stock options exercised		307			—
Tax effect of stock options exercised		59			—

Net cash provided by (used in) financing activities		8,740			(4,313	)

Effect of exchange rate changes on cash and cash equivalents		—			25

Net increase in cash and cash equivalents		6,369			12,362
Cash and cash equivalents at beginning of year		2,177			13,995

Cash and cash equivalents at end of period	$	8,546		$	26,357

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.

Significant Accounting Policies

Summary of Operations and Basis of Presentation

Business Description

Omega Protein Corporation (“Omega” or the “Company”) produces and markets a variety of products produced from menhaden (a herring-like species of fish found in commercial quantities in the U.S. coastal waters of the Atlantic Ocean and Gulf of Mexico), including regular grade and value-added specialty fish meals, crude and refined fish oils and fish solubles. The Company’s fish meal products are primarily used as a protein ingredient in animal feed for swine, cattle, aquaculture and household pets. Fish oil is utilized for animal and aquaculture feeds, industrial applications, as well as for additives to human food products and dietary supplements. 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 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. Accordingly, certain information and footnote disclosures normally provided have been omitted. The interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

In the opinion of management the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s consolidated financial position as of June 30, 2010, and the results of its operations for the three and six month periods ended June 30, 2010 and 2009 and its cash flows for the six month periods ended June 30, 2010 and 2009. Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.

Consolidation

The consolidated financial statements include the accounts of Omega and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Financial Statement Preparation

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 Company’s financial statements and the accompanying notes and the reported amounts of revenues and expenses during the reporting period. Actual amounts, when available, could differ from those estimates and those differences could have a material affect on the financial statements.

The Company has reclassified certain amounts previously reported to conform with the presentation at June 30, 2010.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Gulf of Mexico Oil Spill Disaster

In response to the oil spill caused by the Deepwater Horizon oil rig explosion in the Gulf of Mexico in April 2010 and the subsequent temporary and intermittent closures of certain commercial and recreational fishing grounds by the Louisiana Department of Fisheries and Wildlife, the Mississippi Department of Marine Resources and the National Oceanic and Atmospheric Administration (“NOAA”), the Company relocated its nine Moss Point, Mississippi fishing vessels and three carry vessels to fishing grounds on the west side of the Mississippi River Delta in an attempt to minimize vessel downtime and business interruptions. The docking and re-supply areas for the Moss Point fleet were temporarily relocated from the Company’s Moss Point facility to the Company’s Morgan City, Louisiana facility. The Company’s Abbeville, Louisiana facility was also available to provide support as needed. The recent expansions of the closed fishing grounds have required the Company to temporarily redeploy its vessels among its various Gulf facility locations to avoid the restricted areas. The oil spill and fishing ground closures have resulted in the temporary interruption of fish processing at the Moss Point, Mississippi facility. See Note 12 – Gulf of Mexico Oil Spill Disaster for a description of costs incurred by the Company related to the oil spill.

Subsequent to June 30, 2010, the Company filed a claim for damages with BP and also met with BP’s third party claims adjuster. The Company is seeking reimbursement from BP for damages related to lost fish meal and fish oil production as a result of the limitations the Company has experienced in its fishing efforts, including the intermittent closure of fishing grounds, and for additional costs incurred by the Company to mitigate lost fish meal and fish oil production and test its products for possible contamination resulting from the oil spill. To date, the Company has not received any reimbursement or recorded any receivables related to its claim against BP.

Hurricane Losses, Insurance Recoveries and Other Proceeds

2008 Hurricane Activity

On February 4, 2010, the Company received a grant of $0.1 million from the State of Louisiana Hurricane Gustav and Ike Fisheries Recovery Program which represented approximately 50% of the total grant. The grant provides assistance for commercial fishing owners impacted by Hurricanes Gustav and Ike in 2008. The remaining $0.1 million was deposited in July 2010. The grant proceeds were recognized as “(Other proceeds) loss resulting from natural disaster, net – 2008 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income in the amounts of $0.1 million and $0.2 million for the three and six months ended June 30, 2010, respectively.

2005 Hurricane Activity

During the six month period ended June 30, 2009, the Company received a grant of $2.7 million, net of fees and expenses, from the State of Mississippi. The grant provided assistance for commercial fishing owners impacted by Hurricane Katrina in 2005. The Mississippi grant was recognized as “(Other proceeds) relating to natural disasters, net – 2005 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the six months ended June 30, 2009.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Hurricanes Rita and Katrina. The Company’s lawsuit against Aon alleges negligent procurement, negligent misrepresentation, breach of contract and violations of Texas insurance and consumer protection laws. Trial for this matter is scheduled for October 2010.

Inventories

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.

Any costs incurred during abnormal downtime related to activity at the Company’s plants are charged to expense as incurred. Such costs were incurred during the three and six month periods ended June 30, 2010 as a consequence of the Deepwater Horizon oil rig explosion and the resulting oil spill in the Gulf of Mexico in April 2010, which costs are explained more fully in Note 12 - Gulf of Mexico Oil Spill Disaster.

Insurance

There have been no material insurance policy changes from those previously disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2009. Prior to the 2010 fishing season, the Company had maintained business interruption insurance in immaterial amounts. The Company’s insurance coverage for 2010 does not include business interruption insurance.

Interest Rate Swap Agreements

The Company does not enter into financial instruments for trading or speculative purposes. The Company entered into interest rate swap agreements to manage its cash flow exposure to interest rate changes with notional amounts as indicated below that are scheduled to mature through March 2012. As originally established, the swaps effectively converted all the Company’s variable rate debt under the Term Loan to a fixed rate, without exchanging the notional principal amounts. Prior to September 30, 2009, these agreements were designated as a cash flow hedge and reflected at fair value in the Company’s Unaudited Condensed Consolidated Balance Sheet as a component of total liabilities, and the related gains or losses were deferred in stockholders’ equity as a component of accumulated other comprehensive loss.


Date of Contract	Original Notional Amount		Contracted Interest Rate		Notional Amount as of June 30, 2010		Total Asset (Liability) as of June 30, 2010
April 4, 2007	$	19,950,000	5.16	%	$	12,469,000	$	(721,500	)
February 7, 2008		10,237,500	3.36	%		6,562,000		(222,000	)
March 19, 2008		4,436,250	2.96	%		2,844,000		(81,000	)

					$	21,875,000	$	(1,024,500	)

On September 24, 2009, the Company paid $16.6 million of the borrowings outstanding under the Term Loan using the Company’s existing cash balances. Additionally, on October 21, 2009, the Company entered into a Loan Agreement with Wells Fargo Bank N.A. which replaced the Senior Credit Facility. The details are described more fully in Note 6 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2009. As a consequence of the debt prepayment and refinancing, the Company determined that the forecasted interest payments associated with the interest rate swaps would not occur. As a result, hedge accounting

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

relating to the interest rate swaps was discontinued and all amounts previously recognized in accumulated other comprehensive loss were reclassified to earnings during 2009. The total interest expense associated with the interest rate swap transactions for the three and six months ended June 30, 2010 and 2009 was $89,500, $230,700, $274,400 and $450,900, respectively. The interest rate swap agreements remained outstanding as of June 30, 2010.

As of June 30, 2010 and December 31, 2009, the Company has recorded a long-term liability of $315,700 and $394,600, respectively, net of the current portion, in accrued liabilities of $708,800 and $856,100, respectively, to recognize the fair value of interest rate derivatives.

The following table illustrates the changes recorded, net of tax, in accumulated other comprehensive loss resulting from the interest rate swap agreements (in thousands).


	Three Months Ended June 30,					Six Months Ended June 30,
	2010		2009			2010		2009
Beginning balance	$	—	$	(1,146	)	$	—	$	(1,226	)

Net loss, net of tax, reclassified into earnings		—		(152	)		—		(298	)
Net change associated with current period swap transactions, net of tax		—		346			—		572


Ending balance	$	—	$	(952	)	$	—	$	(952	)

Energy Swap Agreements

The Company does not enter into financial instruments for trading or speculative purposes. The Company has entered into energy swap agreements to manage its cash flow exposure related to the volatility of natural gas, diesel and Bunker C energy prices. The swaps effectively fix pricing for the quantities listed below during the consumption periods.


Energy Swap	Consumption Period	Quantity	Price Per Unit		Energy Swap Asset (Liability) as of June 30, 2010			Deferred Tax (Asset) Liability as of June 30, 2010
Diesel - NYMEX Heating Oil Swap	July – November, 2010	1,362,000 Gallons	$	1.86	$	301,000		$	(102,300	)
Natural Gas - NYMEX Natural Gas Swap	July – October, 2010	221,500 MMBTUs	$	6.29		(400,900	)		136,300
Bunker C - Platts Calendar Avg NY Swap	July - November, 2010	1,113,000 Gallons	$	1.52		215,000			(73,100	)
Diesel - NYMEX Heating Oil Swap	April - October, 2011	1,714,000 Gallons	$	2.12		110,100			(37,400	)
Natural Gas – NYMEX Natural Gas Swap	April - October, 2011	134,000 MMBTUs	$	6.18		(85,400	)		29,000
Bunker C – Platts Calendar Avg NY Swap	June – November, 2011	672,000 Gallons	$	1.77		46,200			(15,700	)

					$	186,000		$	(63,200	)

As of June 30, 2010 and December 31, 2009, the Company has recorded a long-term asset of $71,000 and $228,800, respectively, net of the current portion included in prepaid expenses and other current assets of $115,000 and $936,900, respectively, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax liability of $63,200 and $396,300, respectively, associated therewith. The effective portion of the change in fair

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

value from inception to June 30, 2010 is recorded in “accumulated other comprehensive income (loss)” in the Company’s consolidated financial statements. The following table illustrates the changes recorded, net of tax, in accumulated other comprehensive income (loss) resulting from the energy swap agreements (in thousands).


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Beginning balance	$	442		$	(240	)	$	769		$	—

Net loss, net of tax, reclassified to unallocated inventory cost pool		157			—			157			—
Net change associated with current period swap transactions, net of tax		(476	)		788			(803	)		548


Ending balance	$	123		$	548		$	123		$	548

The $122,700 reported in accumulated other comprehensive loss as of June 30, 2010 will be reclassified to the unallocated inventory cost pool in the period when the energy consumption takes place. The amount to be reclassified, net of taxes, during the next 12 months is expected to be approximately $75,900.

If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the Company’s energy usage or underlying hedge agreements, the fair value of the portion of the energy swaps determined to be ineffective will be recognized as gain or loss in “cost of sales” in the consolidated statement of operations for the applicable period. See Note 14 – Fair Value Disclosures for additional information.

Accumulated Comprehensive Loss

The components of accumulated other comprehensive loss included in shareholders’ equity are as follows:


	June 30, 2010			December 31, 2009
	(in thousands)

Fair Value of Energy Swaps, net of tax expense of $63 as of June 30, 2010 and $396 as of December 31, 2009	$	123		$	769
Pension Benefits Adjustments, net of tax benefit of $4,192 as of June 30, 2010 and $4,387 as of December 31, 2009		(8,136	)		(8,515	)


Accumulated Other Comprehensive Loss	$	(8,013	)	$	(7,746	)

Recently Issued Accounting Standards

In June 2009, the FASB issued FASB ASC 860-10, “Transfers and Servicing”. The standard will require additional information about transfers of financial assets, including securitization transactions, and enhanced disclosures when companies have continuing exposure to the risks related to transferred financial assets. In addition, it eliminates the concept of a qualifying special-purpose entity. This statement is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, which corresponds to the Company’s fiscal year beginning January 1, 2010. The Company’s adoption of FASB ASC 860-10 effective January 1, 2010 did not have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

In June 2009, the FASB issued guidance to FASB ASC 810, “Consolidation”. This guidance amends the consolidation guidance for variable interest entities. Also, it will require additional disclosures about involvement

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

with variable interest entities and any significant changes in risk exposure due to that involvement. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, which corresponds to the Company’s fiscal year beginning January 1, 2010. The Company’s adoption of FASB ASC 810 effective January 1, 2010 did not have a material impact on the Company’s consolidated results of operations, financial position and related disclosures.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, which requires additional fair value disclosures. This guidance requires reporting entities to disclose transfers in and out of Levels 1 and 2 and requires gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements related to Level 3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company’s adoption of FASB ASU No. 2010-06 effective January 1, 2010 did not have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

In February 2010, the FASB issued ASU No. 2010-09 regarding subsequent events disclosure. This guidance clarifies that an entity that is a Securities and Exchange Commission filer is not required to disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance, and the Company adopted the provisions effective with the preparation of its audited consolidated financial statements for the year ended December 31, 2009.

Stock-Based Compensation

The Company has a stock-based compensation plan, which is described in more detail in Note 11 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2009. Net income (loss) for the three and six months ended June 30, 2010 and 2009 includes $0.4 million, $0.2 million, $0.8 million, and $0.3 million ($0.3 million, $0.1 million, $0.5 million and $0.2 million after-tax), respectively, of share-based compensation costs which are included in selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive income. As of June 30, 2010, there was $3.3 million ($2.2 million after-tax) of total unrecognized compensation costs related to nonvested share-based compensation that is expected to be recognized over a weighted-average period of 2.2 years, of which $0.9 million ($0.6 million after-tax) of total share-based compensation is expected to be recognized during the remainder of fiscal year 2010.

Shareholder Rights Plan

Note 2. Receivables, net

Receivables as of June 30, 2010 and December 31, 2009 are summarized as follows:


	June 30, 2010			December 31, 2009
	(in thousands)
Trade	$	11,209		$	10,202
Insurance		170			137
State of Louisiana Hurricanes Gustav and Ike Grant		117			—
Income tax		1,023			1,013
Other		64			52

Total receivables		12,583			11,404
Less: allowance for doubtful accounts		(189	)		(179	)

Receivables, net	$	12,394		$	11,225

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Note 3. Inventory

The major classes of inventory as of June 30, 2010 and December 31, 2009 are summarized as follows:


	June 30, 2010		December 31, 2009
	(in thousands)
Fish meal	$	23,323	$	27,851
Fish oil		10,926		16,753
Fish solubles		1,314		2,617
Unallocated inventory cost pool (including off-season costs)		29,481		7,362
Other materials & supplies		6,950		9,243

Total inventory	$	71,994	$	63,826

Inventory at June 30, 2010 and December 31, 2009 is stated at the lower of cost or market. The elements of unallocated inventory cost pool include plant and vessel related labor, utilities, rent, repairs and depreciation, to be allocated to inventories produced through the remainder of the 2010 fishing season.

As a result of the oil spill caused by the Deepwater Horizon oil rig explosion in the Gulf of Mexico in April 2010 and the subsequent temporary and intermittent closures of certain commercial and recreational fishing grounds by the Louisiana Department of Fisheries and Wildlife, the Mississippi Department of Marine Resources and the National Oceanic and Atmospheric Administration (“NOAA”), the Company has temporarily deployed its vessels among its various Gulf facility locations to avoid the restricted areas. The oil spill and fishing ground closures have resulted in the temporary interruption of fish processing at the Moss Point, Mississippi facility. As a result of this interruption, intermittent fishing grounds closures and the oil spill’s estimated impact on the Company’s 2010 Gulf of Mexico fishing season, the Company has recognized losses of $0.6 million for the three and six month periods ended June 30, 2010 representing costs incurred that were not able to be allocated to production. See Note 12 - Gulf of Mexico Oil Spill Disaster.

As a result of Hurricane Ike in 2008, the Company sustained additional previously unrecognized damage to its Cameron, Louisiana materials and supplies inventory. The Company recognized $0 and $33,000 material and supply inventory write-offs for the three and six months ended June 30, 2009, respectively. See Note 13 – Hurricane Losses, Insurance Recoveries and Other Proceeds.

Note 4. Other Assets

Other assets as of June 30, 2010 and December 31, 2009 are summarized as follows:


	June 30, 2010		December 31, 2009
	(in thousands)
Fish nets, net of accumulated amortization of $1,621 and $1,059	$	1,718	$	1,292
Insurance receivable, net of allowance for doubtful accounts		1,221		1,292
Title XI loan origination fee		333		285
Other debt issuance costs⁽¹⁾		314		383
Deposits and other		66		49

Total other assets, net	$	3,652	$	3,301

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

⁽¹⁾

On October 21, 2009, the Company entered into a Loan Agreement with Wells Fargo Bank N.A., and the remaining outstanding balance under the prior Senior Credit Facility was paid in full. See Note 6 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2009 for more detail. Consequently, the unamortized balance of “Other debt issuance costs” incurred in conjunction with the prior Senior Credit Facility on March 26, 2007 was recorded as “Loss resulting from debt refinancing” in the Consolidated Statement of Operations for the year ending December 31, 2009. The deferred debt issuance costs incurred relating to the Loan Agreement with Wells Fargo Bank N.A. was $0.4 million and will be amortized over the term of the agreement.

Amortization expense for fishing nets amounted to approximately $0.3 million, $0.3 million, $0.6 million and $0.6 million for the three and six months ended June 30, 2010 and 2009, respectively.

As of June 30, 2010 and December 31, 2009, the allowance for doubtful insurance receivable accounts was $0.2 million.

Note 5. Property and Equipment

Property and equipment at June 30, 2010 and December 31, 2009 are summarized as follows:


	June 30, 2010			December 31, 2009
	(in thousands)
Land	$	7,690		$	7,690
Plant assets		122,270			111,401
Fishing vessels		102,860			102,125
Furniture and fixtures		5,827			5,755
Construction in progress		5,001			13,012

Total property and equipment		243,648			239,983
Less: accumulated depreciation		(132,269	)		(129,358	)

Property, plant and equipment, net	$	111,379		$	110,625

Depreciation expense for the three and six months ended June 30, 2010 and 2009 was $3.4 million, $3.0 million, $6.5 million and $6.0 million, respectively.

The Company capitalizes interest as part of the acquisition cost of a qualifying asset. Interest is capitalized only during the period of time required to complete and prepare the asset for its intended use. For the three and six month periods ended June 30, 2010 and 2009, the Company capitalized interest of approximately $26,300, $156,100, $84,100 and $314,600, respectively.

As a result of Hurricane Ike in 2008, the Company sustained damage to its property and equipment at its Abbeville and Cameron, Louisiana fish processing facilities. The Company recognized a $14,000 gain and $273,000 loss on the involuntary conversion of damaged property and equipment related to plant assets in the three and six month periods ended June 30, 2009, respectively. See Note 13 – Hurricane Losses, Insurance Recovery and Other Proceeds.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Note 6. Notes Payable and Long-Term Debt

At June 30, 2010 and December 31, 2009, the Company’s long-term debt consisted of the following:


	June 30, 2010			December 31, 2009
	(in thousands)
U.S. government guaranteed obligations (Title XI loans) collateralized by a first lien on certain vessels and certain plant assets:
Amounts due in installments through 2025, interest from 5.73% to 7.60%	$	34,290		$	25,725

Amounts due in installments through 2014, interest at Eurodollar rates plus 0.45% (0.74% and 0.73% at June 30, 2010 and December 31, 2009, respectively)		175			195

Total debt		34,465			25,920
Less current maturities		(2,859	)		(2,380	)

Long-term debt	$	31,606		$	23,540

On December 1, 2005, pursuant to the Title XI program, the United States Department of Commerce Fisheries Finance Program (the “FFP”) approved a second financing application made by the Company in the amount of $16.4 million (the “Second Approval Letter”). In May 2006, the Company submitted a $6.3 million financing request under the Second Approval Letter. The Company closed on the $6.3 million FFP loan in the first quarter of 2007. In September 2009, the Company submitted a $10.0 million financing request under the remaining Second Approval Letter. The Company closed on the $10.0 million financing request on June 1, 2010. Proceeds from the loan will be used to reimburse the Company for prior expenditures for fishing vessel refurbishments and improvements to the Company’s shore-side marine assets. The loan has a term of 15 years, bears an interest rate at 5.73% per year and is secured by first liens on a Company fishing vessel and certain assets located at the Company’s Reedville, Virginia facility. As of June 30, 2010, the Company had approximately $34.5 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

As of June 30, 2010 and December 31, 2009, the Company had no amounts outstanding under the $35 million revolving credit facility with Wells Fargo Bank, N.A. and approximately $3.0 million in letters of credit issued primarily in support of worker’s compensation insurance programs. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit. Additionally, as of June 30, 2010 the Company was in compliance with all covenants under the Loan Agreement.

Note 7. Capital Lease Obligation

On May 29, 2008 and July 10, 2008, the Company entered into capital lease agreements to lease barges for a period of 5 years. Following is a summary of future minimum payments under the capitalized lease agreements (in thousands):


Remainder of 2010	$	284
2011		578
2012		609
2013		291

Total minimum lease payments		1,762
Less amount representing interest		(299	)

Present value of minimum payments		1,463
Less current portion of capital lease obligation		(406	)

Long-term capital lease obligation	$	1,057

As of June 30, 2010 and December 31, 2009, assets recorded under capital lease obligations are included in property, plant and equipment, net as follows (in thousands):


	June 30, 2010			December 31 2009
Fishing vessels and marine equipment, at cost	$	2,076		$	2,076
Less accumulated depreciation		(848	)		(640	)

Property, plant and equipment, net	$	1,228		$	1,436

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Note 8. Accrued Liabilities

Accrued liabilities as of June 30, 2010 and December 31, 2009 are summarized as follows:


	June 30, 2010		December 31, 2009
	(in thousands)
Salary and benefits	$	6,272	$	3,791
Insurance		7,885		7,726
Taxes, other than income tax		922		76
Trade creditors		4,016		3,099
Fair market value of interest rate swap, current portion		709		856
Deferred revenue		687		985
Accrued interest		115		227
Federal Tax Payable		54		—
Other		129		192

Total accrued liabilities	$	20,789	$	16,952

Note 9. Commitments and Contingencies

Contract Commitments

As of June 30, 2010, the Company has entered into purchase commitments of approximately $0.2 million related to natural gas basis contracts that will be delivered in quantities expected to be used in the normal course of business during the remaining 2010 fishing season.


	Volume	Contract Price		Total Commitment
Natural gas (per MMBTU)	443,404	$	0.37	$	164,059

Litigation

In April 2010, the Company received a request for information pursuant to Section 308 of the Federal Water Pollution Control Act (Clean Water Act) from Region 3 of the United States Environmental Protection Agency (the “EPA”) concerning the Company’s wastewater practices used in its fishing operations at its Reedville, Virginia facility. The Company is cooperating fully in responding to the request. The Company cannot predict the outcome of the EPA’s review.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Note 10. Reconciliation of Basic and Diluted Per Share Data (in thousands except per share data)


	Earnings (Numerator)			Shares (Denominator)	Per Share Data
Three Months Ended June 30, 2010
Net earnings	$	1,983		—


Basic earnings per common share:
Earnings available to common shareholders	$	1,983		18,818	$	0.11


Effect of dilutive securities:
Stock options assumed exercised		—		59


Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised	$	1,983		18,877	$	0.11


	Earnings (Numerator)			Shares (Denominator)	Per Share Data
Three Months Ended June 30, 2009
Net loss	$	(3,292	)	—


Basic loss per common share:
Loss available to common shareholders	$	(3,292	)	18,712	$	(0.18	)


Effect of dilutive securities:
Stock options assumed exercised		—		—


Diluted loss per common share:
Loss available to common shareholders plus stock options assumed exercised	$	(3,292	)	18,712	$	(0.18	)


	Earnings (Numerator)			Shares (Denominator)	Per Share Data
Six Months Ended June 30, 2010
Net earnings	$	2,962		—


Basic earnings per common share:
Earnings available to common shareholders	$	2,962		18,779	$	0.16


Effect of dilutive securities:
Stock options assumed exercised		—		37


Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised	$	2,962		18,816	$	0.16


	Earnings (Numerator)			Shares (Denominator)	Per Share Data
Six Months Ended June 30, 2009
Net loss	$	(1,193	)	—


Basic loss per common share:
Loss available to common shareholders	$	(1,193	)	18,712	$	(0.06	)


Effect of dilutive securities:
Stock options assumed exercised		—		—


Diluted loss per common share:
Loss available to common shareholders plus stock options assumed exercised	$	(1,193	)	18,712	$	(0.06	)

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Options to purchase 1,470,702 and 2,092,402 shares of common stock at exercise prices ranging from $4.19 to $15.88 per share and $4.00 to $15.88 per share were outstanding during the three and six months ended June 30, 2010, respectively, but were not included in the computation of diluted earnings per share because the adjusted exercise prices of the options based upon the assumed proceeds were greater than the average market price of the shares during that period.

Options to purchase 1,284,918 shares of common stock at exercise prices ranging from $1.65 to $15.88 per share were outstanding during the three and six months ended June 30, 2009, but were not included in the computation of diluted earnings per share because inclusion of these shares would have been antidilutive.

Note 11. Components of Net Periodic Benefit Cost


	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
	(in thousands)						(in thousands)
Service cost	$	—		$	—		$	—		$	—

Interest cost		340			363			679			726
Expected return on plan assets		(285	)		(253	)		(570	)		(506	)
Amortization of prior service costs		—			—			—			—
Amortization of net loss		287			306			574			612

Net periodic pension cost	$	342		$	416		$	683		$	832

For the six months ended June 30, 2010 and 2009, the Company contributed approximately $1.1 million and $0.2 million, respectively, to the Company’s pension plan. The Company expects to make contributions of $0.7 million to the pension plan during the remainder of 2010.

Note 12. Gulf of Mexico Oil Spill Disaster

In response to the oil spill caused by the Deepwater Horizon oil rig explosion in the Gulf of Mexico in April 2010 and the subsequent temporary and intermittent closures of certain commercial and recreational fishing grounds by the Louisiana Department of Fisheries and Wildlife, the Mississippi Department of Marine Resources and the National Oceanic and Atmospheric Administration (“NOAA”), the Company relocated its nine Moss Point, Mississippi fishing vessels and three carry vessels to fishing grounds on the west side of the Mississippi River Delta in an attempt to minimize vessel downtime and business interruptions. The docking and re-supply areas for the Moss Point fleet were temporarily relocated from the Company’s Moss Point facility to the Company’s Morgan City, Louisiana facility. The Company’s Abbeville, Louisiana facility was also available to provide support as needed. The recent expansions of the closed fishing grounds have required the Company to temporarily redeploy its vessels among its various Gulf facility locations to avoid the restricted areas. The oil spill and fishing ground closures have resulted in the temporary interruption of fish processing at the Moss Point, Mississippi facility. The Company cannot predict how long the interruption will last.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

As a result of this interruption and the oil spill’s estimated impact on the Company’s 2010 Gulf of Mexico fishing season, the Company has recognized losses in the amount of $587,000 for the three and six month periods ended June 30, 2010. The losses were recognized as “Losses resulting from Gulf of Mexico oil spill disaster” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income.

Note 13. Hurricane Losses, Insurance Recoveries and Other Proceeds

2008 Hurricane

On September 13, 2008, the Company’s Abbeville and Cameron, Louisiana fish processing facilities were damaged by Hurricane Ike. For the three and six month periods ending June 30, 2010 and 2009, the following amounts were recognized in the Company’s statement of operations:


	Three Months Ended			Six Months Ended
	June 30, 2010
	(in thousands)
State of Louisiana Hurricanes Gustav and Ike Grant	$	(117	)	$	(234	)

(Other proceeds) loss resulting from natural disaster, net – 2008 storms	$	(117	)	$	(234	)


	Three Months Ended			Six Months Ended
	June 30, 2009
	(in thousands)
Write-off of other materials and supplies	$	—		$	33
Involuntary conversion of property and equipment		(14	)		273
Clean-up costs incurred		—			87

(Other proceeds )loss resulting from natural disaster, net – 2008 storms	$	(14	)	$	393

Not included in the amounts listed in the above table are the replacement capital costs of property and equipment, which did not have any book basis and were destroyed in the hurricane.

See Note 12 in the Company’s Form 10-K for the fiscal year ended December 31, 2009 for additional information.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

2005 Hurricanes


	Three Months Ended		Six Months Ended
	June 30, 2009
	(in thousands)
(Other proceeds) relating to natural disasters, net – 2005 storms	$	—	$	(2,656	)

Note 14. Fair Value Disclosures

The following disclosures of the estimated fair value of financial instruments are made in accordance with the requirements of FASB ASC 825-10-50, Disclosure About Fair Value of Financial Instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies and are described in the following paragraphs.

Fair value estimates are subject to certain inherent limitations. Estimates of fair value are made at a specific point in time, based on relevant market information and information about the financial instrument. The estimated fair values of financial instruments presented below are not necessarily indicative of amounts the Company might realize in actual market transactions. Estimates of fair value are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable, and accrued expenses approximate fair value because of the short maturity of these items. The carrying amounts of notes payable outstanding under the Company’s loan agreement approximate fair value because the interest rates on these instruments change with market interest rates. At June 30, 2010 and December 31, 2009, the Company had no borrowings under its bank credit facility except for $3.0 million in letters of credit support obligations.

The carrying values and respective fair market values of the Company’s long-term debt are presented below (in thousands). The fair value of the Company’s long-term debt is estimated based on the quoted market prices available to the Company for issuance of similar debt with similar terms at June 30, 2010.


	June 30, 2010		December 31, 2009
Long-term Debt:

Carrying Value	$	34,465	$	25,920
Estimated Fair Market Value	$	35,829	$	26,755

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2010 and December 31, 2009. As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	June 30, 2010
	Fair Value Measurements Using							Assets
	Level 1		Level 2		Level 3			(Liabilities) at Fair Value
Assets (Liabilities) (in thousands)
Energy swap asset	$	—	$	186	$	—		$	186
Interest rate swap liability		—		—		(1,025	)		(1,025	)

Total Assets (Liabilities)	$	—	$	186	$	(1,025	)	$	(839	)


	December 31, 2009
	Fair Value Measurements Using							Assets
	Level 1		Level 2		Level 3			(Liabilities) at Fair Value
Assets (Liabilities) (in thousands)
Energy swap asset	$	—	$	1,166	$	—		$	1,166
Interest rate swap liability		—		—		(1,251	)		(1,251	)

Total Assets (Liabilities)	$	—	$	1,166	$	(1,251	)	$	(85	)

The determination of the fair values above incorporates various factors required under FASB ASC 820-10. These factors include not only the credit standing of the counterparties involved and the impact of credit enhancements (such as cash deposits, letters of credit and priority interests), but also the impact of the Company’s nonperformance risk on its liabilities.

The fair value of the interest rate swap liability is determined using an income valuation model based on the present value of expected future cash flows as determined by comparing the Company’s rate to the Euro-dollar futures curve. This model includes inputs or significant value drivers which might not be observable in or corroborated by the market. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3.

The fair value of the diesel, Bunker C, and natural gas energy swaps is derived from the underlying market price of similar instruments at a specific valuation date. The underlying market price for the diesel and natural gas swaps is based upon the NYMEX Futures Curve. The underlying market price for the Bunker C swap is based upon the Platts Forward Curve HP 0.3%. These methods rely upon quoted prices for similar instruments in active markets. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 2.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

The following table provides a reconciliation of all assets and liabilities measured at fair value on a recurring basis which use Level 3, or significant unobservable inputs or significant value drivers for the three and six months ended June 30, 2010 and 2009 (in thousands):


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3 Inputs)
	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Beginning balance	$	(1,177	)	$	(1,738	)	$	(1,251	)	$	(1,858	)

Net loss reclassified into interest expense related to interest rate swap transactions unrealized		(89	)		(231	)		(274	)		(451	)
Net change associated with current period interest rate swap transactions realized		241			527			500			867


Ending balance	$	(1,025	)	$	(1,442	)	$	(1,025	)	$	(1,442	)

Note 15. Shareholder Rights Plan

In June 2010, the Company’s Board of Directors adopted a Shareholder Rights Plan. The Plan is designed to protect the Company from unfair or coercive takeover tactics and to prevent an acquirer from gaining control of the Company without offering a fair price to all shareholders. Pursuant to the Plan, the Board declared a dividend of one Right for each outstanding share of the Company’s Common Stock. Each Right will entitle the holder (except for the 15% acquirer described below) to buy a share of Company Common Stock (or an equivalent) at a 50% discount.

The Rights will trade with the Company’s Common Stock until exercisable. The Rights will not be exercisable until ten days following a public announcement that a person or group has acquired 15% of the Company’s Common Stock or until ten business days after a person or group begins a tender offer that would result in ownership of 15% of the Company’s Common Stock, subject to certain extensions by the Board. In the event that an acquirer becomes a 15% beneficial owner of Common Stock, the Rights “flip in” and become Rights to buy the Company’s Common Stock at a 50% discount, and Rights owned by that acquirer become void.

In the event that the Company is merged and its Common Stock is exchanged or converted, or if 50% or more of the Company’s assets or earnings power is sold or transferred, the Rights “flip over” and entitle the holders to buy shares of the acquiror’s common stock at a 50% discount. A tender or exchange offer for all outstanding shares of the Company’s Common Stock at a price and on terms determined to be fair and otherwise in the best interests of the Company and its shareholders by a majority of the Company’s independent directors will not trigger either the “flip-in” or “flip-over” provisions.

The Rights may be redeemed by the Company for $0.01 per right at any time until ten days following the first public announcement that an acquirer has acquired the level of ownership that triggers the Rights Plan. The Rights extend for 10 years and will expire on June 30, 2020. The distribution of the Rights was made to shareholders of record on July 12, 2010.

OMEGA PROTEIN CORPORATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Company’s MD&A and Risk Factors contained in the Form 10-K for the fiscal year ended December 31, 2009 (the “2009 Form 10-K”), and in conjunction with the consolidated financial statements included in this report and in the 2009 Form 10-K.

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. 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 include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include the words “estimate,” “project,” “anticipate,” “expect,” “predict,” “assume,” “believe,” “could,” “would,” “hope,” “may,” or similar expressions.

General

Omega Protein Corporation is the largest processor, 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 located at 2105 City West Boulevard, Suite 500, Houston, Texas 77042-2838 (Telephone: (713) 623-0060).

The Company produces and sells 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 are not genetically modified or enhanced. The Company processes several grades of fish meal, 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, additives to human food products and as dietary supplements. 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 healthy long-chain Omega-3 fatty acids. Omega-3 fatty acids are commonly referred to as “essential fatty acids” because human and animal bodies do not produce them. Instead, essential fatty acids must be obtained from outside sources, such as food or special supplements. Long-chain Omega-3s are also commonly referred to as a “good fat” for their health benefits, as opposed to “bad fats” that create or aggravate health conditions through long-term consumption. Scientific research suggests that long-chain Omega-3s as part of a balanced diet may provide significant benefits for health issues such as cardiovascular disease, inflammatory conditions and other ailments.

Under its production process, the Company produces OmegaPure^®, a taste-free, odorless refined fish oil which is the only marine source of long-chain Omega-3s directly affirmed (as opposed to self affirmed) by the U.S. Food and Drug Administration (“FDA”) as a food ingredient that is Generally Recognized as Safe (“GRAS”).

The Company operates four menhaden processing plants: two in Louisiana, one in Mississippi and one in Virginia. The Company also operates a Health and Science Center in Reedville, Virginia, which provides 100-metric tons per day fish oil processing capacity for the Company’s food, industrial and feed grade oils. The Company’s technical center in Houston, Texas, the OmegaPure Technology and Innovation Center, has food science application labs as well as analytical, sensory, lipids research and pilot plant capabilities.

OMEGA PROTEIN CORPORATION

The Company operates through two primary subsidiaries: Omega Protein, Inc. and Omega Shipyard, Inc. 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, occasionally for third-party vessels. Revenues from shipyard work for third-party vessels for the three and six month periods ended June 30, 2010 and 2009 were not material. The Company also has a number of other immaterial direct and indirect subsidiaries.

Company Overview

2010 Fishing Information. At June 30, 2010, the Company owned a fleet of 50 fishing vessels and 34 spotter aircraft for use in its fishing operations and also leased additional aircraft where necessary to facilitate operations. During the 2010 fishing season in the Gulf of Mexico, which runs from mid-April through October, the Company is operating 29 fishing and carry vessels and 29 spotter aircraft. The fishing area in the Gulf is generally located along the Gulf Coast, with a concentration off the Louisiana and Mississippi coasts. The fishing season along the Atlantic coast begins in early May and usually extends into December. During the 2010 season, the Company is operating 10 fishing vessels and 8 spotter aircraft along the Mid-Atlantic coast, concentrated primarily in and around Virginia and North Carolina. The remaining fleet of fishing vessels and spotter aircraft are not routinely operated during the fishing season and are back-up to the active fleet, used for other transportation purposes, inactive or in the process of refurbishment in the Company’s shipyard. Historical fish catch results at the end of the second quarter for the past five years are as follows:


	2010	2009	2008	2007	2006
Fish Catch in Tons as of June 30,	166,552	139,136	149,275	155,311	170,985

Fish catch in July 2010 has been materially worse than the fish catch in May and June 2010, due largely to the increase in restricted fishing areas being closed by state and federal regulators. As of August 2, 2010, the Company’s total fish catch (Gulf of Mexico plus Atlantic) was at approximately 75% of the Company’s total 2010 fish catch plan. However, the Company’s Gulf of Mexico fish catch was 46% behind its Gulf of Mexico 2010 fish catch plan. In response to this fish catch shortfall, the Company expects to increase third party purchases of fish meal and oil during the remainder of 2010. To the extent that the Company effects these purchases and fulfills existing forward sales contracts, its revenues will be generally unaffected but the profit margins on those contracts will be substantially reduced or possibly eliminated, resulting in losses. See “- Liquidity and Capital Resources – Use of Capital: Fish Meal and Oil Purchases”.

The Company cautions that, because of the volatility of fish catch generally and the unpredictability of future effects of the oil spill specifically (see below), no projections or extrapolations for the 2010 fishing season or other future fishing season should be made from this data. The Company has historically not reported fish catch data, but is doing so because of the uniqueness of the situation created by the oil spill.

Gulf of Mexico Oil Spill Disaster. In response to the oil spill caused by the Deepwater Horizon oil rig explosion in the Gulf of Mexico in April 2010 and the subsequent temporary and intermittent closures of certain commercial and recreational fishing grounds by the Louisiana Department of Fisheries and Wildlife, the Mississippi Department of Marine Resources and the National Oceanic and Atmospheric Administration (“NOAA”), the Company relocated its nine Moss Point, Mississippi fishing vessels and three carry vessels to fishing grounds on the west side of the Mississippi River Delta in an attempt to minimize vessel downtime and

OMEGA PROTEIN CORPORATION

business interruptions. The docking and re-supply areas for the Moss Point fleet were temporarily relocated from the Company’s Moss Point facility to the Company’s Morgan City, Louisiana facility. The Company’s Abbeville, Louisiana facility was also available to provide support as needed. The recent expansions of the closed fishing grounds have forced the Company to temporarily redeploy its vessels among its various Gulf facility locations to avoid the restricted areas. The oil spill and fishing ground closures have resulted in the temporary interruption of fish processing at the Moss Point, Mississippi facility. The Company cannot predict how long the interruption will last.

Sales Contracts. The Company sells a sizeable portion of its products on a two-to-twelve-month forward contract basis with the balance sold on a spot basis through purchase orders. During 2007, 2008 and 2009 approximately 50%, 65% and 50%, respectively, of the Company’s fish meals and crude fish oil had been sold on a forward contract basis prior to those years’ respective fishing season. Prior to the beginning of the Company’s 2010 Gulf of Mexico fishing season on April 19, 2010, approximately 86% and 32% of the Company’s 2010 forecasted fish meal and crude fish oil sales volumes, respectively, had either been sold or sold forward on a contract basis. Due to the Gulf of Mexico oil spill, the Company expects to have a shortfall of the fish meal and oil necessary to fulfill these contracts. Although the Company’s sales contracts generally contain force majeure provisions, the Company expects to purchase fish meal and oil from third parties to supplement its production and seek reimbursement from, or prepayment by, BP for any additional costs associated with those purchases. The Company cannot presently estimate the amount of this shortfall or what prices the Company may be required to pay to purchase such additional fish meal and oil, although it is likely such prices will be higher than the Company’s sales price under its existing forward sales contracts. Historically, the percentage of fish meal and crude fish oil sold on a forward contract basis have fluctuated from year to year based upon perceived market availability and forward price expectations. See “- Liquidity and Capital Resources – Use of Capital: Fish Meal and Oil Purchases”.

The Company’s annual revenues are highly dependent on pricing, annual fish catch, production yields and inventories and, in addition, inventory is generally carried over from one year to the next year. The Company determines the level of inventory to be carried over based on existing contracts, prevailing market prices of the products and anticipated customer usage and demand during the off-season. Thus, production volume does not necessarily correlate with sales volume in the same year and sales volumes will fluctuate from quarter to quarter. The Company’s fish meal products have a useable life of approximately one year from date of production. Practically, however, the Company 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.

OMEGA PROTEIN CORPORATION

Revenues by Product. The following table sets forth the Company’s revenues by product (in millions) and the approximate percentage of total revenues represented thereby, for the indicated periods:


	Three Months Ended June 30,								Six Months Ended June 30,
	2010				2009				2010				2009
	Revenues		Percent		Revenues		Percent		Revenues		Percent		Revenues		Percent

Regular Grade	$	6.8	18.8	%	$	5.5	12.9	%	$	12.5	18.2	%	$	11.3	15.7	%
Special Select		13.8	38.0			18.5	44.4			27.7	40.4			28.9	40.2
Sea-Lac		2.5	6.9			1.9	4.6			4.8	7.0			4.5	6.3
Crude Oil		8.5	23.4			9.3	22.3			13.8	20.1			14.1	19.6
Refined Oil		3.2	8.8			4.5	10.8			6.5	9.5			9.5	13.2
Fish Solubles		1.5	4.1			2.1	5.0			3.3	4.8			3.6	5.0

Total	$	36.3	100.0	%	$	41.8	100.0	%	$	68.6	100.0	%	$	71.9	100.0	%

Customers and Marketing. Most of the Company’s marine protein products are sold directly to approximately 250 customers by the Company’s agriproducts sales department, while a smaller amount is sold through independent sales agents. Product inventory was $35.6 million as of June 30, 2010 versus $47.2 million as of December 31, 2009.

A number of countries in which the Company currently sells products impose various tariffs and duties, none of which have a significant impact on the Company’s foreign sales. Certain of these duties have been reduced in recent years for certain countries under the North American Free Trade Agreement and the Uruguay Round Agreement of the General Agreement on Tariffs and Trade. In all cases, the Company’s products are shipped to its customers either by FOB shipping point or CIF terms, and therefore, the customer is responsible for any tariffs, duties or other levies imposed on the Company’s products sold into these markets.

During the off season, the Company fills purchase orders from the inventory it has accumulated during the fishing season or in some cases, by re-selling meal and oil purchased from other suppliers. Prices for the Company’s products tend to be lower during the fishing season when product is more abundant than in the off season. Throughout the entire year, prices are often significantly influenced by supply and demand in world markets for competing products, primarily other global sources of fish meal and oil, and also soybean meal for its fish meal products, and vegetable oils for its fish oil products when used as an alternative.

Purchases and Sales of Third-Party Meal and Oils. The Company has from time to time purchased fish meal and fish oil from other domestic and international manufacturers. These purchase and resale transactions have to date been ancillary to the Company’s base manufacturing and sales business.

Occasionally the Company’s fish catch and resultant product inventories are reduced, primarily due to adverse weather conditions, and the Company further expands its purchase and resale of other fish meals and oils (primarily Panamanian, Peruvian and Mexican fish meal and U.S. menhaden fish meal and oil). Although operating margins from these activities are less than the margins typically generated from the Company’s base domestic production, these operations provide the Company with a source of fish meal and oil to sell into other markets, some of which, the Company has not historically had a presence. During 2007, the Company purchased fish oil totaling approximately 5,500 tons, or approximately 9.1% of fish oil sales volume for 2007. The Company did not purchase any fish meal or fish oil during 2008. During 2009, the Company purchased approximately 11,000 tons of menhaden fish meal, or approximately 7.6% of fish meal sales volumes for 2009. During the six months ended June 30, 2010 and 2009, the Company purchased 0 tons and approximately 2,900 tons of fish meal, or 0% and approximately 5.1% of fish meal sales volumes for the same period, respectively.

Due to the Gulf of Mexico oil spill disaster, the Company anticipates that it will purchase fish meal and oil from third parties to supplement its production shortfalls. The Company intends to seek reimbursement from, or prepayment by, BP for any additional costs associated with these purchases. See “- Liquidity and Capital Resources – Use of Capital: Fish Meal and Oil Purchases”.

OMEGA PROTEIN CORPORATION

Hurricane Activity and Damages.

2008 Hurricane Activity

2005 Hurricane Activity

During the first quarter 2009, the Company received a grant related to the impact of Hurricane Katrina of $2.7 million, net of fees and expenses, from the State of Mississippi. The Mississippi grant was recognized as “(Other proceeds) relating to natural disasters, net – 2005 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the six months ended June 30, 2009.

On August 31, 2007, the Company filed a lawsuit in the District Court of Harris, Texas 295th Judicial District, against its prior insurance broker, Aon Risk Services of Texas, who procured the Company’s property insurance policies for the 2005/2006 policy year, which were the subject of prior litigation as a result of claims relating to Hurricanes Rita and Katrina. The Company’s lawsuit against Aon alleges negligent procurement, negligent misrepresentation, breach of contract and violations of Texas insurance and consumer protection laws. Trial for this matter is scheduled in October 2010.

Competition. The Company competes with a smaller domestic privately-owned menhaden fishing company and with international marine protein and oil producers, including Mexican sardine processors and South American anchovy and mackerel processors. In addition, but to a lesser extent, the Company’s marine protein and oil business is also subject to significant competition from producers of vegetable and other animal protein products and oil products such as Archer Daniels Midland and Cargill. Many of these competitors have significantly greater financial resources and more extensive and diversified operations than those of the Company.

Omega competes on price, quality and performance characteristics of its products, such as protein level and amino acid profile in the case of fish meal. The principal competition for the Company’s fish meal and fish solubles is from other global production of marine proteins as well as other protein sources such as soybean meal and other vegetable or animal protein products. The Company believes, however, that these other non-marine sources are not complete substitutes because fish meal offers nutritional values not contained in such other sources. Other globally produced fish oils provide the primary market competition for the Company’s fish oil, as well as soybean and rapeseed oil.

Fish meal prices have historically borne a relationship to prevailing soybean meal prices (more weakly correlated in recent years), while prices for fish oil are generally influenced by prices for vegetable oils, such as rapeseed, soybean and palm oils. Thus, the prices for the Company’s products are established by worldwide supply and demand relationships over which the Company has no control and tend to fluctuate significantly over the course of a year and from year to year. For example, during 2008, the Company experienced fish oil price increases of approximately 73.4% when compared to 2007, whereas palm oil and soy oil prices rose 35% and 43%, respectively. Beginning in the third quarter of 2008, pricing in the agricultural commodity markets began to decrease. Spot fish oil prices followed these general trends during the second half of 2008 and throughout 2009.

OMEGA PROTEIN CORPORATION

During the first half of 2010, the ratio of fish meal prices to soybean meal prices increased due to higher fish meal prices caused by a tight supply of fish meal globally. It is possible that this ratio could return to a normal range in the second half of 2010.

Price List. The Company posts its latest internally generated price list for its various products on its Company website, omegaproteininc.com. The Company expects to post updates to the price list as they become available, which may occur as frequently as weekly. The Company may elect to discontinue this disclosure at any time without prior notice. Pricing and product availability information disclosed in the price list are subject to change without prior notice, and the Company undertakes no obligation to update such information. Information on the Company’s website is not incorporated by reference into this report and does not constitute part of this report.

Regulation. The Company’s operations are subject to federal, state and local laws and regulations relating to the locations and periods in which fishing may be conducted as well as environmental and safety matters. At the state and local level, certain state and local government agencies have enacted legislation or regulations which prohibit, restrict or regulate menhaden fishing within their jurisdictional waters.

The Company’s menhaden fishing operations are also subject to regulation by two interstate compact commissions created by federal law: the Atlantic States Marine Fisheries Commission (“ASMFC”) which consists of 15 states along the Atlantic Coast, and the Gulf States Marine Fisheries Commission which consists of 5 states along the Gulf of Mexico. In 2005, the ASMFC recommended precautionary restrictions on the Chesapeake Bay menhaden harvest, despite its finding that menhaden are not overfished and that overfishing is not occurring on a coast wide basis, in order to determine whether localized depletion was occurring in Chesapeake Bay.

The ASMFC conserves and manages the menhaden fishery throughout the stock’s coast-wide range. According to federal and ASMFC technical experts, the menhaden population is not over-fished and over-fishing is not occurring throughout its range. The Company supports the ASMFC’s goal of maintaining healthy populations of menhaden and the current research program designed to answer ecological questions regarding menhaden in the Chesapeake Bay and coast-wide. The Chesapeake Bay cap was established as a precautionary measure while research is conducted to address, among other things, the question whether the menhaden harvest in the Bay could cause what is being termed “localized depletion” of menhaden there. No evidence of such localized depletion has yet been produced.

Because the research regarding menhaden is on-going, in 2009 the ASMFC and Virginia approved an extension of the existing Chesapeake Bay cap for an additional three years (2011-2013) beyond its currently scheduled expiration date in 2010.

The Company monitors regulations which affect fish meal and fish oil in the United States and in those foreign jurisdictions where it sells its products. To date, such regulations have not had a material adverse effect on the Company’s business, but it is possible they may do so in the future.

Critical Accounting Policies and Estimates

The methods, estimates and judgments used in applying the Company’s critical accounting policies has a significant impact on the results reported in the Consolidated Financial Statements. The SEC has defined the

OMEGA PROTEIN CORPORATION

critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and operating results, and requires the Company to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are highly uncertain at the time of estimation. Based on this definition, most critical policies include: valuation of inventory (Notes 1 and 3 in the Company’s most recent Form 10-K), valuation of losses related to Jones Act and worker’s compensation insurance claims (Note 1 in the Company’s most recent Form 10-K), valuation of income and deferred taxes (Notes 1 and 9 in the Company’s most recent Form 10-K), and valuation of pension plan obligations (Notes 1 and 11 in the Company’s most recent Form 10-K).

The Company also has other key accounting policies and accounting estimates relating to allowance of doubtful accounts (Note 1 in the Company’s most recent Form 10-K), valuation of shares-based compensation (Note 11 in the Company’s most recent Form 10-K) and interest and energy swap valuations (Notes 1 and 15 in the Company’s most recent Form 10-K). The Company believes that these key accounting policies and accounting estimates either do not generally require us to make estimates and judgments that are as difficult or as subjective as its critical accounting policies, or it is less likely that they would have a material impact on our reported results of operations for a given period.

For all financial statement periods presented, there have been no material modifications to the application of these critical accounting policies.

Results of Operations

The following table sets forth as a percentage of revenues, certain items of the Company’s results of operations for each of the indicated periods.


	Three Months Ended June 30,				Six Months Ended June 30,
	2010		2009		2010		2009
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	75.6		101.2		78.4		92.6

Gross profit (loss)	24.4		(1.2	)	21.6		7.4
Selling, general and administrative expense	10.9		7.4		10.5		9.1
Research and development expense	1.4		0.8		1.4		0.9
Losses resulting from Gulf of Mexico oil spill disaster	1.6		—		0.9		—
(Other proceeds) loss resulting from natural disaster, net – 2008 storms	(0.3	)	—		(0.3	)	0.5
(Other proceeds) relating to natural disaster, net – 2005 storms	—		—		—		(3.7	)
Loss (gain) on disposal of assets	0.4		—		0.3		—

Operating income (loss)	10.4		(9.4	)	8.8		0.6
Interest income	—		0.1		—		0.2
Interest expense	(1.7	)	(2.1	)	(1.8	)	(2.5	)
Other expense, net	(0.1	)	(0.3	)	(0.3	)	(0.3	)

Income (loss) before income taxes	8.6		(11.7	)	6.7		(2.0	)
Provision (benefit) for income taxes	3.2		(3.8	)	2.3		(0.4	)

Net income (loss)	5.4	%	(7.9	%)	4.4	%	(1.6	%)

Interim Results for the Second Quarters ended June 30, 2010 and June 30, 2009

Revenues. Revenues decreased $5.5 million, or 13.1%, from $41.8 million for the three months ended June 30, 2009 to $36.3 million for the three months ended June 30, 2010. The decrease in revenues was due to

OMEGA PROTEIN CORPORATION

lower sales volumes of 38.4% and 23.0% for the Company’s fish meal and fish oil, respectively, which was partially offset by higher sales prices of 45.3% and 9.5% for the Company’s fish meal and fish oil, respectively. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $15.7 million decrease in revenues due to the decline in sales volumes and a $10.2 million increase in revenue caused by increased sales prices, when comparing the three months ended June 30, 2010 to the three months ended June 30, 2009. The decrease in sales volumes from the second quarter of 2009 is partially due to the Company beginning 2010 with less fish meal and fish oil inventory as compared to the beginning of 2009. The increase in fish meal prices in the second quarter of 2010 is due to a global tightening of fish meal availability experienced during the first half of 2010.

Cost of sales. Cost of sales, including depreciation and amortization, for the quarter ended June 30, 2010 was $27.4 million, a $14.8 million decrease, or 35.1%, when compared to the quarter ended June 30, 2009. Cost of sales as a percentage of revenues was 75.6% for the quarter ended June 30, 2010 as compared to 101.2% for the quarter ended June 30, 2009. The decrease in cost of sales as a percentage of revenue was primarily due to the increase in fish meal and fish oil sales prices.

Gross profit (loss). Gross profit increased $9.4 million from a gross loss of $0.5 million for the quarter ended June 30, 2009 to a gross profit $8.9 million for the quarter ended June 30, 2010. Gross profit (loss) as a percentage of revenue was 24.4% for the quarter ended June 30, 2010 as compared to (1.2%) for the quarter ended June 30, 2009. The increase in gross profit as a percentage of revenue was primarily due the increase in fish meal and fish oil sales prices, as discussed above. The Company’s expected shortfall of fish oil and meal necessary to fulfill existing forward-sale contracts due to the oil spill may require the Company to purchase such fish oil and meal from third parties, which may substantially reduce or possibly eliminate the Company’s margins, resulting in losses. See “- Liquidity and Capital Resources – Use of Capital: Fish meal and oil purchases”.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $0.9 million, or 27.3%, from $3.1 million for the quarter ended June 30, 2009 to $4.0 million for the quarter ended June 30, 2010. The increase in selling, general and administrative expenses is mainly due to increased costs associated with employee compensation. Specifically, share based compensation in the current quarter increased $0.3 million as compared to the prior year quarter due to 2010 stock option grants.

Research and development expenses. Research and development expenses were $0.5 million and $0.3 million for the quarters ended June 30, 2010 and 2009, respectively.

Losses resulting from Gulf of Mexico oil spill disaster. During the quarter ended June 30, 2010, the Company incurred losses to its unallocated inventory cost pool of $0.6 million due to costs incurred that were not able to be allocated to production as a result of intermittent plant and fishing grounds closures. No such losses occurred during the quarter ended June 30, 2009.

(Other proceeds) loss resulting from natural disaster, net—2008 storms. For the three months ended June 30, 2009, the Company incurred a gain of $14,000 relating to damages incurred at its Abbeville and Cameron, Louisiana, fish processing facilities related to Hurricane Ike. For the three months ended June 30, 2010, the Company recognized a gain of $117,000 related to a grant from the State of Louisiana Hurricane Gustav and Ike Fisheries Recovery Program. This amount represents the second half of the total grant received in 2010.

Loss (gain) on disposal of assets. The loss on disposal of assets was $152,000 and $16,000 for the three months ended June 30, 2010 and 2009, respectively. The losses relates to the disposal of miscellaneous plant assets in the ordinary course of business.

OMEGA PROTEIN CORPORATION

Operating income (loss). As a result of the factors discussed above, the Company’s operating income increased $7.7 million from an operating loss of $3.9 million for the quarter ended June 30, 2009 to operating income of $3.8 million for the quarter ended June 30, 2010. As a percentage of revenues, operating income (loss) increased from a loss of 9.4% for the quarter ended June 30, 2009 to income of 10.4% for the quarter ended June 30, 2010.

Interest income. Interest income decreased by $45,000 from $49,000 for the three months ended June 30, 2009 to $4,000 for the three months ended June 30, 2010. The decrease was primarily due to the decreased cash balance upon which interest is earned during the quarter ended June 30, 2010 as compared to the quarter ended June 30, 2009.

Interest expense. Interest expense decreased $0.3 million, or 30.3%, from $0.9 million for the quarter ended June 30, 2009 to $0.6 million for the quarter ended June 30, 2010. The decrease in interest expense is primarily due to the decreased debt balance associated with the Company repaying its term loan in September and October 2009. This decrease was partially offset by a decrease in capitalized interest, which is netted against interest expense, for the current quarter which was less than the prior year quarter due to the completion of certain capital projects.

Other expense, net. Other expense, net was $0.1 million for the quarters ended June 30, 2010 and 2009.

Provision (benefit) for income taxes. The Company recorded a $1.1 million provision for income taxes for the quarter ended June 30, 2010 representing an effective tax rate of 35.9% for income taxes compared to 32.6% for the quarter ended June 30, 2009. The increase in the effective tax rate is primarily a result of the impact of certain nondeductible items and the increased level of expected book income. 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 except for the amount for which a valuation allowance has been provided. The statutory tax rate of 34% for U.S. federal taxes was in effect for the three month periods ended June 30, 2010 and 2009.

Interim Results for the Six Months ended June 30, 2010 and June 30, 2009

Revenues. Revenues decreased $3.3 million, or 4.7%, from $71.9 million for the six months ended June 30, 2009 to $68.6 million for the six months ended June 30, 2010. The decrease in revenues was due to lower sales volumes of 23.9% and 2.8% for the Company’s fish meal and fish oil, respectively, and lower sales prices of 11.7% for the Company’s fish oil which was partially offset by higher sales prices of 32.3% for the Company’s fish meal. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $13.7 million decrease in revenues due to the decline in sales volumes and a $10.4 million increase in revenue caused by increased sales prices, when comparing the six months ended June 30, 2010 to the six months ended June 30, 2009. The decrease in sales volumes from the first six months of 2009 is partially due to the Company beginning 2010 with less fish meal and fish oil inventory as compared to the beginning of 2009. The increase in fish meal prices in the first six months of 2010 is due to a global tightening of fish meal availability experienced during the first half of 2010.

Cost of sales. Cost of sales, including depreciation and amortization, for the six months ended June 30, 2010 was $53.7 million, a $12.9 million decrease, or 19.3%, as compared to the six months ended June 30, 2009. Cost of sales as a percentage of revenues was 78.4% for the six months ended June 30, 2010 as compared to 92.6% for the six months ended June 30, 2009. The decrease in cost of sales as a percentage of revenue was primarily due to the increase in fish meal sales prices.

OMEGA PROTEIN CORPORATION

Gross profit (loss). Gross profit increased $9.5 million from $5.3 million for the six months ended June 30, 2009 to $14.8 million for the six months ended June 30, 2010. Gross profit as a percentage of revenue was 21.6% for the six months ended June 30, 2010 as compared to 7.4% for the six months ended June 30, 2009. The increase in gross profit as a percentage of revenue was primarily due the increase in fish meal sales prices, as discussed above. The Company’s expected shortfall of fish oil and meal necessary to fulfill existing forward-sale contracts due to the oil spill may require the Company to purchase such fish oil and meal from third parties, which may substantially reduce or possibly eliminate the Company’s margins, resulting in losses. See “- Liquidity and Capital Resources – Use of Capital: Fish meal and oil purchases”.

Selling, general and administrative expenses. Selling, general and administrative expenses increased $0.7 million, or 10.9%, from $6.5 million for the six months ended June 30, 2009 to $7.2 million for the six months ended June 30, 2010. The increase in selling, general and administrative expenses is primarily due to increased costs associated with employee compensation. Specifically, share based compensation for the six months ended June 30, 2010 increased $0.5 million as compared to the six months ended June 30, 2009 due to 2010 stock option grants.

Research and development expenses. Research and development expenses were $0.9 million and $0.7 million for the quarters ended June 30, 2010 and 2009, respectively.

Losses resulting from Gulf of Mexico oil spill disaster. During the six months ended June 30, 2010, the Company incurred losses to its unallocated inventory cost pool of $0.6 million due to costs incurred that were not able to be allocated to production as a result of intermittent plant and fishing grounds closures. No such losses occurred during the six months ended June 30, 2009.

(Other proceeds) loss resulting from natural disaster, net—2008 storms. For the six months ended June 30, 2009, the Company incurred a loss of $0.4 million related to damages incurred at its Abbeville and Cameron, Louisiana, fish processing facilities related to Hurricane Ike. The losses relate to clean up costs incurred and changes in estimated impairment costs of damaged fixed assets during the six month period ended June 30, 2009. For the six months ended June 30, 2010, the Company recognized a gain of $0.2 million related to a grant from the State of Louisiana Hurricane Gustav and Ike Fisheries Recovery Program. This amount represents the total grant expected to be received in 2010.

(Other proceeds) relating to natural disaster, net —2005 storms. For the six months ended June 30, 2009, the Company received a federal hurricane assistance grant of $2.7 million from the State of Mississippi, net of fees, related to the impact of Hurricane Katrina on the Company.

Loss (gain) on disposal of assets. The loss on disposal of assets was $0.3 million for the six months ended June 30, 2010. The loss primarily relates to two decommissioned fishing vessels which were sold as scrap. For the six months ended June 30, 2009, the Company recognized a gain of $2,000 relating to the disposal of miscellaneous plant assets in the ordinary course of business.

Operating income (loss). As a result of the factors discussed above, the Company’s operating income increased $5.7 million from $0.4 million for the six months ended June 30, 2009 to $6.1 million for the six months ended June 30, 2010. As a percentage of revenues, operating income increased from 0.6% for the six months ended June 30, 2009 to 8.8% for the six months ended June 30, 2010.

Interest income. Interest income decreased by $126,000 from $132,000 for the six months ended June 30, 2009 to $6,000 for the six months ended June 30, 2010. The decrease was primarily due to the decreased cash balance upon which interest is earned during the six months ended June 30, 2010 as compared to the six months ended June 30, 2009.

OMEGA PROTEIN CORPORATION

Interest expense. Interest expense decreased $0.5 million, or 29.2%, from $1.8 million for the six months ended June 30, 2009 to $1.3 million for the six months ended June 30, 2010. The decrease in interest expense is primarily due to the decreased debt balance associated with the Company repaying its bank term loan in September and October 2009. This decrease was partially offset by a decrease in capitalized interest, which is netted against interest expense, for the current six month period which was less than the prior year six month period due to the completion of certain capital projects.

Other expense, net. Other expense, net was $0.2 million for the six months ended June 30, 2010 and 2009.

Provision (benefit) for income taxes. The Company recorded a $1.7 million provision for income taxes for the six months ended June 30, 2010 representing an effective tax rate of 36.0% for income taxes compared to 18.9% for the six months ended June 30, 2009. The increase in the effective tax rate is primarily a result of the impact of certain nondeductible items and the increased level of expected book income. 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 except for the amount for which a valuation allowance has been provided. The statutory tax rate of 34% for U.S. federal taxes was in effect for the six month periods ended June 30, 2010 and 2009.

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 year) due to increased product availability, but prices during the fishing season tend to be lower than during the off-season. Additionally, due to differences in gross profit margins for the Company’s various products, any variation in the mix of product sales between quarters may result in significant variations of total gross profit margins. 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.

Liquidity and Capital Resources

Historically, 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 U.S. Maritime Administration’s Fisheries Finance Program (“FFP”), which is offered through National Marine Fisheries Services (“NMFS”) under Title XI of the Marine Act of 1936 (“Title XI”). These sources of cash flows have been used for operations, capital expenditures, payment of long-term debt and the purchase and retirement of shares of the Company’s common stock in 2006.

At June 30, 2010, the Company had an unrestricted cash balance of $8.5 million, up $6.3 million from December 31, 2009. This increase was primarily due to operations and proceeds from a Title XI term loan of $10 million, partially offset by debt payments, capital spending and spending related to the 2010 fishing season. The Company’s annual revenues and its resulting liquidity are highly dependent on annual fish catch, production yields, selling prices for its products and inventories available for sale. The Company’s selling prices for its products increased 16.2% for the six months ended June 30, 2010 as compared to fiscal year 2009.

OMEGA PROTEIN CORPORATION

The aggregate amount of the Company’s outstanding indebtedness at June 30, 2010 was approximately $34.5 million compared to approximately $25.9 million at December 31, 2009. The Company has an increasingly leveraged financial structure which could limit its financial flexibility. In particular, the Company will be required to use a portion of its cash flows to pay principal and interest on its debt, which will reduce the amount of money the Company has for operations, capital expenditures, expansion, acquisitions or general corporate or other business activities. In addition, the covenants contained in the Company’s debt agreements limit its ability to borrow money in the future for acquisitions, capital expenditures or to meet the Company’s operating expenses or other general corporate obligations. See “Risk Factors - The Company has a moderate amount of indebtedness, which may adversely affect its ability to operate its business, remain in compliance with debt covenants and make payments on its debt” in the Company’s 2009 Form 10-K

Source of Capital: Operations

Net cash flow provided by operating activities decreased from approximately $19.1 million for the six month period ended June 30, 2009 to $5.0 million for the six month period ended June 30, 2010. The decrease in operating cash flow is primarily attributable to changes in inventory, receivables, and accrued liabilities. Specifically, the decrease in operating cash flow related to changes in receivables is due to a large amount of export sales that were classified as receivables as of December 31, 2008 and subsequently collected during the six months ended June 30, 2009. Additionally, sales volumes of inventory were greater for the six months ended June 30, 2009 as compared to June 30, 2010 which resulted in decreased cash flow provided by operations for 2010 as compared to 2009.

Source of Capital: Debt

Net financing activities provided (used) cash of $8.7 million and ($4.3) million during the six month periods ended June 30, 2010 and 2009, respectively. The six month period ended June 30, 2010 included $10.0 million in proceeds from a Title XI term loan, $1.6 million in debt and capital lease principal payments and $0.4 million in proceeds and tax effects received from stock options exercised. The six month period ended June 30, 2009 included $4.3 million in debt and capital lease principal payments.

On March 26, 2007 the Company entered into a credit agreement with Bank of America, N.A. (as administrative agent, lender, swing line lender and letter of credit issuer), Regions Bank, Compass Bank and Farm Credit Bank of Texas which provided the Company with a $55 million senior credit facility (the “Senior Credit Facility”) consisting of (i) a 5-year revolving credit facility of up to $20 million, including a $7.5 million sub-limit for the issuance of standby letters of credit and a $2.5 million sub-limit for swing line loans and (ii) a 5-year term loan (the “Term Loan”) of $35 million.

On October 21, 2009, the Company entered into a Loan Agreement with Wells Fargo Bank N.A. (“the Loan Agreement”) which replaced the prior Senior Credit Facility. The Loan Agreement with Wells Fargo Bank

OMEGA PROTEIN CORPORATION

provides the Company with a senior secured credit facility consisting of a 3-year revolving credit facility of up to $35 million, including a $7.5 million sub-limit for the issuance of standby letters of credit, and is secured by substantially all of the Company’s assets except for those already pledged in connection with existing federal Fisheries Finance Program loans. The Loan Agreement replaced the prior Senior Credit Facility, under which, just prior to closing, $11.4 million was outstanding under the Term Loan and $2.8 million was outstanding under letters of credit. In connection with the closing of the Loan Agreement, the Company repaid the Term Loan at closing and the letters of credit were transferred to Wells Fargo Bank. As of December 31, 2009, the Company recognized $0.4 million in deferred debt issuance costs associated with the Loan Agreement on the Consolidated Balance Sheet. Additionally, the Company recognized a $0.4 million charge in the Consolidated Statement of Operations related to unamortized deferred debt issuance costs associated with the Senior Credit Facility.

As of June 30, 2010, the Company had no amounts outstanding under the Loan Agreement and approximately $3.0 million in letters of credit issued primarily in support of worker’s compensation insurance programs. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit.

The Loan Agreement bears interest at LIBOR plus an applicable margin. In addition, the Company is required to comply with various affirmative and negative covenants affecting its business and financial operations, as well as the following financial covenants:

•

The Company is required to maintain on a consolidated basis a ratio of Total Liabilities (as defined in the Loan Agreement) excluding the non-current portion of Subordinated Liabilities (as defined in the Loan Agreement) to Tangible Net Worth (as defined in the Loan Agreement) not exceeding 1.00 to 1.00.

•

The Company is required to maintain on a consolidated basis Tangible Net Worth equal to at least the sum of the following: (a) $130,000,000, plus (b) 50% of net income (if positive, with no deduction for losses) earned in each quarterly accounting period commencing after December 31, 2009, plus (c) 100% of the net proceeds from any Equity Interests (as defined in the Loan Agreement) issued after the date of the Loan Agreement, plus (d) 100% of any increase in stockholders’ equity resulting from the conversion of debt securities to equity interests after the closing date.

•

The Company is required to maintain on a consolidated basis an Asset Coverage Ratio (as defined in the Loan Agreement) of at least 2.50 to 1.00.

•

The Company (a) may not incur on a consolidated basis a net loss before taxes and extraordinary items in any two consecutive quarterly accounting periods, commencing with the fiscal quarter ending September 30, 2010, and (b) may not incur on a consolidated basis a net loss before taxes and extraordinary items for any annual accounting period, commencing with the fiscal year ending December 31, 2010.

As of June 30, 2010, the Company was in compliance with all covenants under the Loan Agreement. For a more detailed description of the Loan Agreement, see the Company’s current report on Form 8-K filed with the SEC on October 23, 2009.

OMEGA PROTEIN CORPORATION

Use of Capital: Operations

Net investing activities used cash of $7.4 million and $2.5 million for the six month periods ended June 30, 2010 and 2009, respectively. The Company’s investing activities consist mainly of capital expenditures for equipment purchases, replacements, vessel refurbishments, and fish oil refining processes. The Company made capital expenditures of approximately $7.5 million and $12.7 million, for the six month periods ended June 30, 2010 and 2009, respectively. The Company anticipates making an additional $7.5 million in capital expenditures during the remainder of 2010 primarily for the refurbishment of vessels and plant assets and for the repair of certain equipment. Investing activities for the six month period ended June 30, 2010 also includes the receipt of a grant of $0.1 million from the State of Louisiana related to the impacts of Hurricanes Gustav and Ike. Investing activities for the six month period ended June 30, 2009 also includes the receipt of a grant of $2.7 million, net of fees and expenses, related to the impact of Hurricane Katrina, from the State of Mississippi, and the receipt of $7.5 million in proceeds from insurance companies relating to Hurricane Ike.

Use of Capital: Acquisitions

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 manufacturers and distributors), although historically, reviewed opportunities have been generally related in some manner to the Company’s existing operations or which would have added new protein products to the Company’s product lines. Although the Company does not budget for acquisitions and, as of the date hereof, does not have any commitment with respect to a material acquisition, it could enter into such agreement in the future. Depending on the size of the acquisition, the Company would expect to finance the transaction using internally generated cash flows and its current credit agreements, or, if necessary, equity or debt financings. The Company cannot assure that such financings will be available on acceptable terms, if at all.

Use of Capital: Contractual Obligations

The following tables aggregate information about the Company’s contractual cash obligations and other commercial commitments (in thousands) as of June 30, 2010:


	Payments Due by Period
Contractual Cash Obligations	Total		Less than 1 year		1 to 3 years		4 to 5 years		After 5 years

Long Term Debt	$	34,465	$	2,859	$	6,137	$	5,936	$	19,533
Capital lease obligation		1,463		406		1,049		8		—
Interest on long term debt and capital lease obligation		14,154		2,364		3,821		2,864		5,105
Operating lease obligations		8,641		2,116		3,826		2,337		362
Pension Funding		12,035		1,550		3,768		3,585		3,132
Energy Commitments ⁽¹⁾		164		164		—		—		—

Total Contractual Cash Obligations	$	70,922	$	9,459	$	18,601	$	14,730	$	28,132

⁽¹⁾	As of June 30, 2010, the Company has entered into purchase commitments of approximately $0.2 million related to natural gas basis contracts that will be delivered in quantities expected to be used in the normal course of business during the remainder of the 2010 fishing season.

OMEGA PROTEIN CORPORATION

There have been no significant changes to the Company’s contractual cash obligations during the quarterly period ending June 30, 2010.

Use of Capital: Fish Meal and Oil Purchases

Due to the Gulf of Mexico oil spill, the Company expects to have a shortfall of the fish oil and meal necessary to fulfill its existing forward-sale contracts, as well as other possible customer demands. The Company cannot estimate the amount of this shortfall or what prices the Company may be required to pay to purchase such additional fish meal and oil, although it is likely such prices will be higher than the Company’s sales price under its existing forward sales contracts. The Company expects to purchase fish meal and oil from third parties to supplement its production and seek reimbursement from, or prepayment by, BP for any additional costs associated with those purchases. To the extent that the Company effects these purchases and fulfills existing forward sales contracts, its revenues will be generally unaffected but the profit margins on those contracts will be substantially reduced or possibly eliminated, resulting in losses.

The Company has met with BP representatives regarding its need to purchase additional fish meal and fish oil but cannot predict how the timing of the resolution of this issue will affect the Company’s liquidity. If BP were to make advance payments in sufficient amounts to the Company, or were to fund the Company’s fish meal and oil purchases directly, then the Company’s liquidity position would likely be materially unaffected. However, if the Company were to have to utilize its own cash on hand or its credit facility to fund these purchases, its cash on hand and liquidity would decrease and its leverage would increase. This lower liquidity and increased leverage position would likely continue until the issue of BP’s reimbursement had been resolved. The Company cautions that the amount, if any, of any reimbursements by BP are uncertain, and the timing of any such reimbursements are also uncertain.

Available Information

The Company files annual, quarterly and current reports and other information with the SEC. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed under the Securities and Exchange Act of 1934 (“Exchange Act”), as well as Section 16 filings by officers and directors, are available free of charge at the Company’s website at www.omegaproteininc.com or at the SEC’s website at www.sec.gov and are posted as soon as reasonably practicable after they are filed with the SEC. The Company will provide a copy of these documents to stockholders upon request. Information on the Company’s website or any other website is not incorporated by reference into this report and does not constitute part of this report.

In addition, the public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

The Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Financial Professionals, as well as the Charters for the Board’s Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee and Scientific Committee, are available at the Company’s website. These Guidelines, Codes and Charters are not incorporated by reference into this report and do not constitute part of this report. The Company will provide a copy of these documents to stockholders upon request.

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. In the past, to mitigate this risk, the Company has entered into interest rate swap agreements to effectively lock-in the LIBOR component of certain debt instruments. 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. However, as a result of entering into the Loan Agreement with Wells Fargo Bank, N.A. in October 2009, the interest rate swap agreements became ineffective and the Company is again subject to interest rate fluctuations resulting from the LIBOR component for the Loan Agreement.

The Company is also exposed to market risk associated with natural gas and diesel prices. To partially mitigate this risk, the Company has forward purchased a portion of its expected natural gas, diesel and Bunker C usage for 2010 and 2011. The Company is currently exposed to market risk associated with increases in natural gas, Bunker C, and diesel prices related to the portion not covered by swaps for 2010 and 2011.

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.

There have been no significant changes to the Company’s exposure to market risk since the Company’s most recent Form 10-K.

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company conducted an evaluation of the effectiveness of its “disclosure controls and procedures,” as that phrase is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. The evaluation was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”).

Based on and as of the date of that evaluation, the Company’s CEO and CFO have concluded that (i) the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure, and (ii) that the Company’s disclosure controls and procedures are effective.

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.

OMEGA PROTEIN CORPORATION

(b) Changes in Internal Controls

There were no changes in the Company’s internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company is defending various claims and litigation arising from operations which arise in the ordinary course of the Company’s business. In the opinion of management, any losses resulting from these matters will not have a material adverse affect on the Company’s results of operations, cash flows or financial position.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s Form 10-K for the fiscal year ended December 31, 2009 except as follows.

Risks Relating to the Company’s Business and Industry:

The Company’s operations are geographically concentrated in the Gulf of Mexico where they are susceptible to oil spills from offshore drilling, production and transportation activities. Three of the Company’s four operating plants are located in the Gulf of Mexico (two in Louisiana and one in Mississippi), a region which has historically had a high concentration of oil and gas infrastructure. If this infrastructure were to be become damaged due to natural or other disasters, then it is possible that environmental damages to the area and ecosystem could result.

For example, in response to the oil spill caused by the Deepwater Horizon oil rig explosion in the Gulf of Mexico in April 2010 and the subsequent temporary and intermittent closures of certain commercial and recreational fishing grounds by the Louisiana Department of Fisheries and Wildlife, the Mississippi Department of Marine Resources and the National Oceanic and Atmospheric Administration (“NOAA”), the Company relocated its nine Moss Point, Mississippi fishing vessels and three carry vessels to fishing grounds on the west side of the Mississippi River Delta in an attempt to minimize vessel downtime and business interruptions. The docking and re-supply areas for the Moss Point fleet were temporarily relocated

OMEGA PROTEIN CORPORATION

from the Company’s Moss Point facility to the Company’s Morgan City, Louisiana facility. The Company’s Abbeville, Louisiana facility was also available to provide support as needed. More recent expansions of fishing grounds that have been temporarily closed have forced the Company to temporarily redeploy its vessels among its various Gulf facility locations to avoid the restricted areas. The oil spill and fishing ground closures have also resulted in the temporary interruption of fish processing at the Moss Point, Mississippi facility.

The Company cannot predict what effect the oil spill, the Company’s response plan or the fisheries partial closure, will have on its fish catch, processing efficiency or customer perceptions about its products. The Company’s present concentration of operations in Louisiana and the reduction from three operating plants to two may also temporarily make the Company more susceptible to the risk of hurricanes and other adverse weather conditions.

The Company cannot predict with any certainty: (1) the possibility that the oil spill or its effects may worsen materially, causing further restrictions on commercial fishing to be implemented, (2) the effect of the oil spill on the Company’s business operations and fish-catch, both short-term and long-term, (3) the effect of government intervention in connection with the oil spill, including without limitation, any restrictions that may be imposed on fishing, navigation and access to the Company’s facilities or restrictions on the sale of marine proteins produced from the Gulf of Mexico, (4) the disruption and inefficiencies caused by the Company’s response plan on its operations, (5) the effect of the oil spill, short-term and long-term, on the menhaden fishery or ecosystem supporting that fishery, (6) customer perceptions about marine products from the Gulf of Mexico or the United States due to concerns about contamination or availability, and (7) the amount of any reimbursement from BP for damages caused by the Deepwater Horizon oil spill that is ultimately received by the Company.

Provisions of the Company’s Articles of Incorporation and Bylaws, as well as Nevada and federal law and the Company’s Shareholder Rights Plan could delay or prevent corporate takeovers and could prevent stockholders from realizing a premium on their investment. Certain provisions of the Company’s Articles of Incorporation, Bylaws, the Company’s Shareholder Rights Plan, as well as the Nevada Corporation Law, could delay or frustrate the removal of incumbent directors and could make difficult a merger, tender offer or proxy contest involving the Company, even if such events could be viewed as beneficial by its stockholders. The Company’s Board of Directors is empowered to issue preferred stock in one or more series without stockholder action and did so in connection with the implementation of the Shareholder Rights Plan described below. Any issuance of this blank-check preferred stock could materially limit the rights of holders of the Company’s common stock and render more difficult or discourage an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest or otherwise. In addition, the Articles of Incorporation and Bylaws contain a number of provisions which could impede a takeover or change in control of the Company, including, among other things, staggered terms for members of its Board of Directors, the requiring of two-thirds vote of stockholders to amend certain provisions of the Articles of Incorporation or the inability to take action by written consent or to call special stockholder meetings. Certain provisions of the Nevada Corporation Law could also discourage takeover attempts that have not been approved by the Company’s Board of Directors. In addition, federal law requires that at least 75% of the Company’s outstanding capital stock be owned by U.S. citizens which will discourage takeover attempts by potential foreign purchasers.

In June 2010, the Company’s Board of Directors adopted a Shareholder Rights Plan, pursuant to which rights were distributed to our stockholders at a rate of one right for each share of common stock held of record as of July 12, 2010. The Shareholder Rights Plan is designed to enhance the Board’s ability to prevent an acquirer from depriving stockholders of the long-term value of their investment and to protect

OMEGA PROTEIN CORPORATION

stockholders against attempts to acquire the Company by means of unfair or abusive takeover tactics. However, the existence of the Shareholder Rights Plan may impede a takeover not supported by the Board, including a takeover that may be desired by a majority of the Company’s stockholders or involving a premium over the prevailing stock price.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Removed and Reserved

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.		Description of Exhibit

4.1		Rights Agreement dated as of June 30, 2010 between Omega Protein Corporation and American Stock Transfer & Trust Company, LLC, as Rights Agent, which includes as Exhibit A the form of Certificate of Designations of Series A Junior Participating Preferred Stock setting forth the terms of the Preferred Stock, as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Preferred Stock. Pursuant to the Rights Agreement, Rights Certificates will not be mailed until after the Distribution Date (as defined in the Rights Agreement) (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed with the SEC on July 1, 2010).

10.1		Letter Agreement between Omega Protein Corporation and Bret Scholtes dated April 15, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on April 30, 2010).

10.2		Approval Letter dated as of November 5, 2009 by Omega Protein, Inc., Omega Protein Corporation and United States Department of Commerce, acting by National Oceanic and Atmospheric Administration, National Marine Fisheries Service (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on June 1, 2010).

10.3		Correction Deed of Trust made by Omega Protein, Inc. dated March 11, 2010 for the benefit of the United States of America (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with the SEC on June 1, 2010).

OMEGA PROTEIN CORPORATION


10.4		Corrected Promissory Note of Omega Protein, Inc. to the United States of America dated May 25, 2010 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed with the SEC on June 1, 2010).

10.5		Security Agreement dated March 9, 2010 between Omega Protein, Inc. and the United States of America (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed with the SEC on June 1, 2010).

10.6		Title XI Financial Agreement dated May 25, 2010 between Omega Protein, Inc., Omega Protein Corporation and the United States of America (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed with the SEC on June 1, 2010).

10.7		Guaranty Agreement dated May 25, 2010 of Omega Protein, Inc. in favor of the United States of America (incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K filed with the SEC on June 1, 2010).

10.8		Certification and Indemnification Agreement Regarding Environmental Matters dated May 25, 2010 between Omega Protein, Inc. and the United States of America (incorporated by reference to Exhibit 10.7 to the Company’s Form 8-K filed with the SEC on June 1, 2010).

10.9		Preferred Ship Mortgage dated May 25, 2010 by Omega Protein, Inc., in favor of the United States of America (incorporated by reference to Exhibit 10.8 to the Company’s Form 8-K filed with the SEC on June 1, 2010).

10.10		Subordination Agreement dated March 11, 2010 between Wells Fargo Bank, N.A., and the United States of America (incorporated by reference to Exhibit 10.9 to the Company’s Form 8-K filed with the SEC on June 1, 2010).

31.1		Rule 13a-14(a)/15d-14(a) Certification for Chief Executive Officer.

31.2		Rule 13a-14(a)/15d-14(a) Certification for Chief Financial Officer.

32.1		Section 1350 Certification for Chief Executive Officer.

32.2		Section 1350 Certification for Chief Financial Officer.

OMEGA PROTEIN CORPORATION

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)

August 5, 2010	By:	/s/ ROBERT W. STOCKTON
		(Executive Vice President, Chief Financial Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Small reporting company