Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking statements in this Form 10-Q, future filings by the Company with
the Securities and Exchange Commission (the "Commission"), the Company's press
releases and oral statements by authorized officers of the Company are intended
to be subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that all forward-looking statements
involve risks and uncertainty, including without limitation, the risks set forth
under the caption "Risk Factors and Significant Factors that May Affect
Forward-Looking Statements" appearing in Item 2. "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company believes
that forward-looking statements made by it are based on reasonable expectations;
however, no assurances can be given that actual results will not differ
materially from those contained in such forward-looking statements.
Forward-looking statements involve statements that are predictive in nature,
which depend upon or refer to future events or conditions, or which include the
words "estimate," "project," "anticipate," "expect," "predict," "assume,"
"believe," "could," "would," "hope," "may," and similar expressions.
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OMEGA PROTEIN CORPORATION
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 at 1717 St. James Place, Suite 550, Houston,
Texas 77056 (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 is not genetically modified or genetically
enhanced. The Company processes several grades of fish meal (regular or "FAQ"
meal and specialty meals), as well as fish oil and fish solubles. The Company's
fish meal products are primarily used as a protein ingredient in animal feed for
swine, cattle, aquaculture and household pets. Fish oil is utilized for animal
and aquaculture feeds, industrial applications, and additives to human food
products. The Company's fish solubles are sold primarily to livestock feed
manufacturers, aquaculture feed manufacturers and for use as an organic
fertilizer. All of the Company's products contain healthy long-chain Omega-3
fatty acids. Omega-3 fatty acids are commonly referred to as "essential fatty
acids" because the body does 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 the "bad fats" that create or aggravate health
conditions through long-term consumption. Scientific research suggest 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 patented production process, the Company produces
OmegaPureTM , a taste-free, odorless refined fish oil that is the only marine
source of long-chain Omega-3's directly affirmed by the U.S. Food and Drug
Administration ("FDA") as a food ingredient which is Generally Recognized as
Safe ("GRAS"). See "-Products" in Part I Item 1 and 2 of the Company's Form 10-K
Annual Report for the year ended December 31, 2003.
The Company operates four menhaden processing plants: two in Louisiana, one in
Mississippi and one in Virginia, as well as a fish oil processing facility also
located in Virginia. The four plants have an aggregate annual processing
capacity as of December 31, 2003 of 950,000 tons of fish. The Company is also
currently constructing a new 100-metric ton per day fish oil processing facility
in Reedville, Virginia that is expected to be completed in mid-2004 and will
replace its existing oil processing facility.
The Company operates through three material subsidiaries: Omega Protein, Inc.,
Omega Shipyard, Inc. and Omega Protein Mexico, S. de R.L. de C.V. ("Omega
Mexico"). Omega Protein, Inc. is the Company's principal operating subsidiary
for its menhaden processing business and is the successor to a business
conducted since 1913. Omega Shipyard, Inc. owns a drydock facility in Moss
Point, Mississippi, which is used to provide shoreside maintenance for the
Company's fishing fleet and, subject to outside demand and excess capacity,
third-party vessels. Revenues from shipyard work for third-party vessels for the
three months ended March 31, 2004 were not material. Omega Mexico is a new
subsidiary formed in 2002 for the Company's meal and oil sales and purchases in
Mexico. The Company also has a number of other immaterial direct and indirect
subsidiaries. Three former subsidiaries, Protein Operating Company, Protein USA
Company and Protein Securities Company, were merged into Omega Protein, Inc. in
2003.
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OMEGA PROTEIN CORPORATION
Until April 1998, the Company, including its predecessors, was a wholly-owned
subsidiary of Zapata Corporation ("Zapata"). In April 1998, the Company
completed an initial public offering of its common stock. Zapata currently owns
approximately 59% of the Company's outstanding common stock.
The Company files annual, quarterly and current reports and other information
with the Securities and Exchange Commission ("SEC"). The Company's annual
reports on Form 10-K, quarterly reports on Form 10-Q, 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 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. The Company's website is not
incorporated by reference in 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 450 Fifth Street, NW.,
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 an
Internet site 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
Committee and Scientific Committee, are available at the Company's website.
These Guidelines, Codes and Charters are not incorporated by reference in this
report. The Company will provide a copy of these documents to stockholders upon
request.
Omega is the largest U.S. producer of protein-rich meal and oil derived from
marine sources. The Company's products are produced from menhaden (a
herring-like fish found in commercial quantities), and include FAQ grade and
value-added specialty fish meals, crude and refined fish oils and regular and
value-added fish solubles. The Company's fish meal products are used as
nutritional feed additives by animal feed manufacturers and by commercial
livestock producers. The Company's crude fish oil is sold to food producers and
feed manufacturers and its refined fish oil products are used in food production
and certain industrial applications. Fish solubles are sold as protein additives
for animal feed and as fertilizers.
The fish catch is processed into FAQ grade fish meal, specialty fish meals, fish
oils and fish solubles at the Company's four operating plants located in
Virginia, Mississippi and Louisiana. The Company utilized 38 fishing vessels, 2
carry vessels and 34 spotter craft in the harvesting operations during 2003.
Menhaden are harvested offshore the U.S. mid-Atlantic and Gulf of Mexico coasts.
In 2000, the Company converted several of its fishing vessels to "carry vessels"
that do not engage in active fishing but instead carry fish from the Company's
offshore fishing vessels to its plants. Utilization of carry vessels increases
the amount of time that certain of the Company's fishing vessels remain offshore
fishing productive waters and therefore increases the Company's fish catch per
vessel employed. The carry vessels have reduced crews and crew expenses and
incur less maintenance cost than the actual fishing vessels.
The Company's harvesting season generally extends from May through December on
the mid-Atlantic coast and from April through October on the Gulf coast. During
the off-season and the first few months of each fishing season, the Company
fills purchase orders from the inventory it has accumulated during the previous
fishing season. Prices for the Company's products tend to be lower during the
fishing season when product is more abundant than in the off-season. Throughout
the entire year, prices are significantly influenced by supply and demand in
world markets for competing products, particularly other globally produced fish
meal and fish oil as
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well as other animal proteins and soybean meal for its fish meal products and
vegetable fats and oils for its fish oil products when used as an alternative to
vegetable fats and oils.
During 2003, the Company experienced a poor fish catch (approximately 11% below
expectations and a similar reduction from 2002), combined with poor oil yields.
The reduced fish catch was primarily attributable to adverse weather conditions
and the poor oil yields due to the reduced fat content of the fish. As a result
of the poor fish catch and reduced yields, the Company experienced significantly
higher per unit product costs (approximately 15% increase) during 2003 compared
to 2002. The impact of higher cost inventories and fewer volumes available for
sale will be carried forward and will adversely affect the Company's earnings
through the first and second quarter of 2004.
During 1999 and continuing through 2000, world grain and oilseed markets were
burdened by excess supplies relative to demand which, in turn, resulted in
prices for most major commodities being sharply lower than in previous years.
Correspondingly, the Company's product prices were adversely impacted during
these periods, resulting in decreased gross margins. During 1999 and again
during 2000, the Company determined that the costs of its fish meal and fish oil
product inventories were in excess of those products' realization value by
approximately $18.2 million and $18.1 million, respectively. This realization
was due mainly to the continuing depressed market values of world protein
markets and particularly, animal and oilseed oil markets. The average prices
received for the Company's fish meal and fish oil products were approximately
28.1% and 48.2% lower, respectively, during 1999 as compared to 1998. Price
decreases continued during 2000 and fish meal and fish oil prices were
approximately 7.3% and 20%, respectively, lower than 1999 average prices. Also
impacting 2000 and contributing to the write-down of inventories was the reduced
crude fish oil production yields (approximately 38% lower yields compared to
1999) experienced during the majority of the 2000 fishing season in the Gulf of
Mexico. These reduced yields were primarily a result of the reduced fat content
in the fish.
The depressed pricing conditions of years 1999 and 2000 continued into the early
months of 2001 before making significant improvements late in 2001 and
continuing throughout 2002 and 2003. These price increases were the result of
diminished global fish meal and fish oil inventories as opposed to a weaker
world demand for other competing products. Management believes that it is
possible that these price increases have reached a plateau and stabilized at
this time. Future product price volatility will depend upon the perceived
international availability of fish meal and fish oil inventories. Accordingly,
gross profit margins may vary in the future.
Pricing for the Company's products has been volatile in the past several years
and is attributable mainly to the international availability, or the perceived
international availability, of fish meal and fish oil inventories. In an effort
to reduce price volatility and to generate higher, more consistent profit
margins, in fiscal 2000 the Company embarked on a quality control program
designed to increase its capability of producing higher quality fish meal
products and, in conjunction therewith, enhanced it sales efforts to penetrate
premium product markets. Since 2000, the Company's sales volumes of specialty
meal products have increased approximately 17.5%. Future volumetric growth in
specialty meal sales will be dependant upon increased harvesting efforts and
market demand. Additionally, the Company is attempting to introduce its refined
fish oil into the food market. The Company has made sales, which to date have
not been material, of its refined fish oil, trademarked OmegaPureTM, to food
manufacturers in the United States and Canada at prices that provide
substantially improved margins over the margins that can be obtained from
selling non-refined crude fish oil. The Company cannot estimate, however, the
size of the actual domestic or international markets for Omega PureTM or how
long it may take to develop these markets.
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During 2002, the Company developed a business plan to expand its purchase and
resale of other manufacturers' fish meal and fish oil products and engaged a
full-time consultant to implement the Company's business plan which focused
initially on the purchase and resale of Mexican fish meal and fish oil. In 2002,
revenues generated from these types of transactions represented less than 1% of
total Company revenues. During 2003, the Company's fish catch and resultant
product inventories were reduced, primarily due to adverse weather conditions.
The Company supplemented its inventories and subsequent sales by purchasing
other fish meal products (primarily Panamanian fish meal, Mexican fish meal and
oil and U.S. menhaden 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 where the Company has not historically had a
presence. The Company purchased products totaling approximately 3,100 and 12,500
tons, or approximately 7% and 5% of total volume sales for the quarter ending
March 31, 2004 and the fiscal year ended December 31, 2003, respectively.
Historically, approximately 35% to 40% of Omega's FAQ grade fish meal was sold
on a two-to-twelve-month forward contract basis. The balance of FAQ grade fish
meal and other products was substantially sold on a spot basis through purchase
orders. In 2002, the Company began a similar forward sales program for its
specialty grade meals and crude fish oil due to increasing demand for these
products. During 2003, approximately 50% of its specialty meals and crude fish
oil had been sold on a forward contract basis and the Company expects similar
volumes to be forward sold in 2004. The Company's annual revenues are highly
dependent on both annual fish catch and inventories and, in addition, inventory
is generally carried over from one year to the next year. The Company determines
the level of inventory to be carried over based on prevailing market prices of
the products, and sales volumes that will fluctuate from quarter to quarter and
year to year. The Company's fish meal products have a useable life of
approximately one year from date of production; however, the Company typically
attempts to empty its warehouses of the previous season's meal products by the
second or third month of the new fishing season. The Company's crude fish oil
products do not lose efficacy unless exposed to oxygen and, therefore, their
storage life typically is longer than that of fish meal.
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 March 31,
2004 2003
Revenues Percent Revenues Percent
Regular Grade $ 4.3 17.1 % $ 3.5 14.0 %
Special Select 9.4 37.5 9.6 38.2
Sea-Lac 3.9 15.5 3.4 13.5
Crude Oil 6.0 23.9 7.2 28.7
Refined Oil 1.0 4.0 0.8 3.2
Fish Solubles 0.5 2.0 0.6 2.4
Total $ 25.1 100.0 % $ 25.1 100.0 %
The marine protein and oil business is subject to significant competition from
producers of vegetable and other animal protein products and oil products such
as Archer Daniels Midland and Cargill. In addition, the Company competes with
smaller domestic privately-owned menhaden fishing companies and international
marine protein and oil producers, including Scandinavian herring processors and
South American anchovy and sardine processors. Many of these competitors have
greater financial resources and more extensive operations than 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
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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 palm oil, from
time to time.
Fish meal prices have historically borne a relationship to prevailing soybean
meal prices, while prices for fish oil are generally influenced by prices for
vegetable fats and oils, such as 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.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources have been cash
flows from operations, bank credit facilities and term loans from various
lenders provided pursuant to the National Marine Fisheries Finance Program under
Title XI of the Marine Act of 1936 ("Title XI"). These sources of cash flows
have been used for capital expenditures and payment of long-term debt. The
Company expects to finance future expenditures through internally generated cash
flows and, if necessary, through funds available from the Credit Facility and/or
Title XI facilities described below.
Under a program offered through National Marine Fisheries Services ("NMFS")
pursuant to Title XI, the Company has secured loans through lenders with terms
generally ranging between 12 and 20 years at interest rates between 6% and 8%
per annum which are enhanced with a government guaranty to the lender for up to
80% of the financing. The Company's current Title XI borrowings are secured by
liens on 17 fishing vessels and mortgages on the Company's Reedville, Virginia
and Abbeville, Louisiana plants. In 1996, Title XI borrowing was modified to
permit use of proceeds from borrowings obtained through this program for
shoreside construction. The Company used the entire $20.6 million amount
originally authorized under the program. Loans are now available under similar
terms pursuant to the Title XI program without intervening lenders. The Company
borrowed $1.9 million under this new program during 2001 and closed an
additional $5.3 million Title XI loan on December 30, 2003.
The Company announced in April, 2003, that it had committed to build a new
100-metric ton per day fish oil processing facility at its Reedville, Virginia
location. Construction on the project began in June 2003, with projected
completion in the summer of 2004 and will cost approximately $17 million. The
Company currently anticipates that it will fund the project through its
available cash balances.
Omega had an unrestricted cash balance of $47.1 million at March 31, 2004, up
$11.7 million from December 31, 2003. This increase was due primarily to
operating profits as a result of increased selling prices for the Company's
products and changes in working capital balances. The Company's liquidity is
greatly influenced by the selling prices received for its products. Should the
Company experience decreased pricing in the future, as it experienced in 1999
and 2000, liquidity would decline and the Company would possibly have to utilize
its working capital credit facility. The Company's long-term debt at March 31,
2004 and December 31, 2003 was $17.2 million and $17.6 million, respectively.
Current maturities attributable to the Company's long-term debt were $1.6
million at both March 31, 2004 and December 31, 2003. The Company did not
utilize its working capital credit facility during the first three months of
2004 or 2003 other than for $2.7 million and $2.6 million, respectively, in
standby letters of credit. As of March 31, 2004, the Company
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had $17.3 million available under its working capital credit facility. The
Company has no off-balance sheet arrangements other than normal operating leases
and standby letters of credit.
The following tables aggregate information about the Company's contractual cash
obligations and other commercial commitments (in thousands) as of March 31,
2004:
Payments Due by Period
Less
than 1 1 to 3 4 to 5 After 5
Contractual Cash Obligations Total year years years years
Long Term Debt $ 18,799 $ 1,603 $ 3,392 $ 3,853 $ 9,951
Operating Leases 1,263 478 367 189 229
Minimum Pension Liability 8,917 - - - 8,917
Total Contractual Cash Obligations $ 28,979 $ 2,081 $ 3,759 $ 4,042 $ 19,097
Amount of Commitment Expiration Per Period
Less
than 1 1 to 3 4 to 5 After 5
Other Commercial Commitments Total year years years years
Credit Facility (1) $ 17,283 $ - $ - $ - $ -
Standby Letters of Credit 2,717 2,717 - - -
Construction Commitment (2) 8,500 8,500 - - -
Total Commercial Commitments $ 28,500 $ 11,217 $ - $ - $ -
(1) As of March 31, 2004, the Company had no outstanding
borrowings outstanding under the $20 million Credit Facility
other than $2.7 million in stand-by letters of credit.
(2) The Company announced on April 15, 2003 that it had committed to
build a new 100-metric ton per day fish oil processing facility
at its Reedville, Virginia location. Construction on the project
began in June 2003, with projected completion in summer of 2004
and a projected cost of approximately $17 million. The Company
currently anticipates that it will fund the project through its
available cash balances. As of March 31, 2004 the Company had
incurred $8.5 million related to its Reedville processing
facility.
Investing activities used $4.3 million and $3.4 million for the quarters ended
March 31, 2004 and 2003 respectively. The Company's investing activities
consists mainly of capital expenditures for equipment purchases, replacements,
and vessel refurbishments and a fish oil processing facility. The Company
anticipates making approximately $20.7 million in capital expenditures in 2004,
of which approximately $10.8 million will be dedicated to the new fish oil
processing facility and the remainder will be used to refurbished vessels and
plant assets and to repair certain equipment.
Net, financing activities used $311,000 and $99,000 during the quarters ended
March 31, 2004 and 2003, respectively. The exercise of stock options provided
proceeds of $61,000 and $210,000 for the quarters ended March 31, 2004 and 2003,
respectively.
On December 20, 2000 the Company entered into a three-year $20 million revolving
credit agreement with Bank of America, N.A. (the "Credit Facility"). Borrowings
under this facility may be used for working capital and capital expenditures. On
May 19, 2003, the Company amended the existing Credit Facility and among other
things, these amendments extended the maturity until December 20, 2006, deleted
certain existing financial covenants and added certain affirmative covenants
such as, a Leverage Ratio covenant not to exceed 3 to 1 at any time and a Fixed
Charge Coverage Ratio covenant not to be less than 1 to 1 as of the end of each
month,
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measured for the twelve-month period then ended. The Company is required to
comply with the financial covenants from and after the last day of any month in
which the Credit Facility's availability is less than $3,000,000 on any date, or
the Credit Facility's availability averages less than $6,000,000 for any
calendar month. A commitment fee of 50 basis points per annum is payable on the
unused portion of the Credit Facility. If at any time the Company's loan
outstanding under the Credit Facility is $5 million or greater, the commitment
fee on the unused portion shall be 25 basis points per annum. Applicable
interest is payable at alternative rates of LIBOR plus 2.25% or Prime plus 0%.
The applicable interest rate shall be adjusted (up or down) prospectively on a
quarterly basis from LIBOR plus 2.25% to LIBOR plus 2.75% or, at the Company's
option, Prime plus 0% to Prime plus 0.25%, depending upon the Fixed Charge
Coverage Ratio being greater than 2.5 times to less than or equal to 1.5 times,
respectively. The Credit Facility is collateralized by all of the Company's
trade receivables, inventory and equipment. In addition, the Credit Facility
does not allow for the payment of cash dividends or stock repurchases and also
limits capital expenditures and investments. The Company was in compliance with
the Credit Facility covenants at March 31, 2004. As of March 31, 2004, the
Company had no cash borrowings outstanding under the Credit Facility other than
$2.7 million in stand-by letters of credit.
The Company's principal raw material is menhaden, a species of fish that
inhabits coastal and inland tidal waters in the United States. Menhaden are
undesirable for direct human consumption due to their small size, prominent
bones and high oil content. Certain state agencies impose resource depletion
restrictions on menhaden pursuant to fisheries management legislation or
regulations. To date, the Company has not experienced any material adverse
impact on its fish catch or results of operations as a result of these
restrictions.
The Company from time to time considers potential transactions including, but
not limited to, enhancement of physical facilities to improve production
capabilities and the acquisition of other businesses. Certain of the potential
transactions reviewed by the Company would, if completed, result in its entering
new lines of business (generally including certain businesses to which the
Company sells its products such as pet food manufacturers, aquaculture feed
manufacturers, fertilizer companies and organic foods distributors) although
historically, reviewed opportunities have been generally related in some manner
to the Company's existing operations. Although the Company does not, as of the
date hereof, have any commitment with respect to a material acquisition, it
could enter into such agreement in the future.
The Company maintains insurance against physical loss and damage to its assets,
coverage against liabilities to third parties it may incur in the course of its
operations, as well as workers' compensation, United States Longshoremen's and
Harbor Workers' Compensation Act and Jones Act coverage. Assets are insured at
replacement cost, market value or assessed earning power. The Company's limits
for liability coverage are statutory or $50 million. The $50 million limit is
comprised of several excess liability policies, which are subject to
deductibles, underlying limits and exclusions. The Company believes its
insurance coverage to be in such form, against such risks, for such amounts and
subject to such deductibles and self-retentions as are prudent and normal for
its operations. The Company does not carry insurance against terrorist attacks,
or against business interruption, in large part because of the high costs of
such insurance.
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The Company carries insurance for certain losses relating to its vessels and
Jones Act liability for employees aboard its vessels (collectively, "Vessel
Claims Insurance"). The typical Vessel Claims Insurance policy contains an
annual aggregate deductible ("AAD") for which the Company remains responsible,
while the insurance carrier is responsible for all applicable amounts which
exceed the AAD. It is the Company's policy to accrue current amounts due and
record amounts paid out on each claim. Once payments exceed the AAD, the Company
records an insurance receivable for a given policy year.
In 2001, the Company's Vessel Claims Insurance carrier for the policy period
October 1, 1998 through March 31, 2000 filed for bankruptcy protection. This
bankruptcy filing caused the Company to provide an allowance for doubtful
accounts for a significant portion of the amounts due to the Company from the
insurance carrier.
In 2003, the Company's Vessel Claims Insurance carrier for the period October 1,
1997 through September 30, 1998, and for 80% of the Company's Jones Act claims
for the period October 1, 1998 through March 31, 2000 was declared insolvent by
a state insurance regulator. The Company had previously provided an allowance
for doubtful accounts for all the amount due to the Company from the insurance
carrier.
A general hardening of the world insurance markets in recent years has made the
Company's insurance more costly in recent years and is likely to continue to
increase the Company's cost of insurance. In response, the Company has elected
to increase its deductibles and self-retentions in order to achieve lower
insurance premium costs. These higher deductibles and self-retentions will
expose the Company to greater risk of loss if claims occur.
The Company believes that the existing cash, cash equivalents, short-term
investments and funds available through its Credit Facility will be sufficient
to meet its working capital and capital expenditure requirements through at
least the end of 2004.
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Overview of Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, which require us
to make estimates and assumptions discussed herein and in the consolidated
financial statements in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2003. The following estimates and assumptions are both most
important to the portrayal of our financial condition and results of operations
and require management's most difficult, subjective or complex judgment.
The preparation of financial statements requires management to make estimates
and assumptions that affect amounts reported therein, including estimates about
the effects of matters or future events that are inherently uncertain. The most
significant of these requiring difficult or complex judgments in any particular
period involve the costing of inventory, including inventory
lower-of-cost-or-market analyses and the Company's accounting for various losses
on self-insurance retentions. The estimates and assumptions, which management
believes are reasonable and supportable, involve estimates of future activities
and events which are inherently imprecise and from which actual results may
differ materially. Revisions in such estimates or actual results could
materially impact the Company's results of operation and financial position.
Inventories
Inventory is stated at the lower of cost or market. The Company's fishing season
runs from mid-April to the first of November in the Gulf of Mexico and from the
beginning of May into December in the Atlantic. Government regulations generally
preclude the Company from fishing during the off-seasons.
The Company's inventory cost system considers all costs associated with an
annual fish catch and its processing, both variable and fixed and includes both
costs incurred during the off-season and during the fishing season. The
Company's costing system allocates cost to inventory quantities on a per unit
basis as calculated by a formula that considers total estimated inventoriable
costs for a fishing season (including costs) to total estimated fish catch and
the relative fair market value of the individual products produced. The Company
adjusts the cost of sales, costs and inventory balances at the end of each
quarter based on revised estimates of total inventoriable costs and fish catch.
The Company's lower-of-cost-or-market-value analyses at year-end and at interim
periods compares to total estimated per unit production cost of the Company's
expected production to the projected per unit market prices of the products. The
impairment analyses involve estimates of, among other things, future fish
catches and related costs, and expected commodity prices for the fish products.
These estimates, which management believes are reasonable and supportable,
involve estimates of future activities and events which are inherently imprecise
and from which actual results may differ materially. Revisions in such estimates
or actual results could materially impact the Company's results of operation and
financial position.
During the off-seasons, in connection with the upcoming fishing seasons, the
Company incurs costs (i.e., plant and vessel related labor, utilities, rent,
repairs and depreciation) that are directly related to the Company's
infrastructure. These costs accumulate in inventory and are applied as elements
of the cost of production of the Company's products throughout the fishing
season ratably based on the Company's monthly fish catch and the expected total
fish catch for the season.
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Insurance
As mentioned previously, the Company carries insurance for certain losses
relating to its vessels and Jones Act liabilities for employees aboard its
vessels. The Company provides reserves for those portions of the AAD for which
the Company remains responsible by using an estimation process that considers
Company-specific and industry data as well as management's experience,
assumptions and consultation with outside counsel. Management's current
estimated range of liabilities related to such cases is based on claims for
which management can estimate the amount and range of loss. The Company has
recorded the minimum estimated liability related to those claims, where there is
a range of loss. As additional information becomes available, the Company
assesses the potential liability related to its pending litigation and revises
its estimates. Such revisions in estimates for potential liability could
materially impact the Company's results of operation, financial position or cash
flows.
Pension
The Company estimates income or expense related to the pension plan based on
actuarial assumptions, including assumptions regarding discount rates and
expected returns on plan assets. The Company determines the discount rates of
return on high-quality fixed-income investments currently available and expected
to be available during the period to maturity of its pension obligations. Based
on historical data and discussions with its actuary, Omega determines its
expected return on plan assets based on the expected long-term rate of return on
its plan assets and the market-related value of its plan assets. Changes in
these assumptions can result in significant changes in estimated pension income
or expense. The Company will revise its assumptions on an annual basis based
upon changes in current interest rates, return on plan assets and the underlying
demographics of the workforce. These assumptions are reasonably likely to change
in future periods and may have a material impact on future earnings.
Results of Operations
The following table sets forth as a percentage of revenues certain items of the
Company's operations for each of the indicated periods.
Three Months
Ended
March 31,
2004 2003
Revenues 100.0 % 100.0 %
Cost of sales 85.3 74.4
Gross profit 14.7 25.6
Selling, general and administrative expense 9.9 8.8
Operating income 4.8 16.8
Interest expense, net (0.7 ) (0.6 )
Other expense, net (0.2 ) 0.1
Income before income taxes 3.9 16.3
Provision for income taxes 1.3 5.8
Net income 2.6 % 10.5 %
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Interim Results for the First Quarters ended March 31, 2004 and March 31, 2003
Revenues. Revenues decreased $45,000 for the quarter ended March 31, 2004 as
compared to the quarter ended March 31, 2003. Prices for the Company's fish meal
and fish oil increased 3.4% and 4.9%, respectively. The Company attributes the
higher fish meal and fish oil prices to lower available world supplies of fish
meal and oil and significant price increases in the global protein and fat
markets. The increase in prices was partially offset by lower sales volumes of
17.7% for the Company's fish oil. The lower fish oil volumes were primarily
attributable to reduced fish catch and production in the prior fiscal year.
Cost of Sales. Cost of sales, including depreciation and amortization, for the
current quarter ended March 31, 2004 was $21.4 million, a 14.4% increase from
$18.7 million for the quarter ended March 31, 2003. Cost of sales as a
percentage of revenues increased 10.9% to 85.3% for the quarter ended March 31,
2004 as compared to the corresponding period in 2003. The increase in cost of
sales as a percentage of revenues was primarily due to higher fiscal 2003 costs
of production due to reduced fish catch, brought about by adverse weather
conditions along the Atlantic Coast and Gulf of Mexico, combined with lower oil
yields for the Gulf of Mexico fish.
Gross Profit. Gross profit margins decreased 42.2% from a $6.4 million gross
profit in the quarter ended March 31, 2003 as compared to $3.7 million in the
current quarter ended March 31, 2004. The decrease in gross profit margins was
primarily due to higher cost inventories carried forward from fiscal 2003.
Selling, general and administrative expenses. Selling, general, and
administrative expenses increased $266,000 from $2.2 million in the first
quarter ended March 31, 2003 compared to $2.5 million for the current quarter
ended March 31, 2004. This increase was attributable primarily to increased
consulting expenditures related to the Company's governmental relations program
and increased marketing expenditures.
Operating income. As a result of the factors discussed above, the Company's
operating income decreased $3.0 million or 71.4% from an operating income $4.2
million for the quarter ended March 31, 2003 to an operating income of $1.2
million for the quarter ended March 31, 2004. As a percentage of revenues,
operating income decreased 12% for the current quarter ended March 31, 2004.
Interest expense, net. Interest expense, net increased $33,000 for the current
quarter ended March 31, 2004 as compared to the quarter ended March 31, 2003.
The increase in interest expense, net was primarily due to interest expense on
additional Title XI loans secured by the Company and in effect during the
current quarter ended March 31, 2004 as compared to the quarter ended March 31,
2003.
Other expense, net. Other expense, net increased $77,000 in the current quarter
ended March 31, 2004 as compared to the quarter ended March 31, 2003. The
increase was primarily due to gains on the disposal of Company assets that
offset other expenses in the quarter ended March 31, 2003.
Provision for income taxes. The Company recorded a $323,000 provision for income
taxes for the first quarter of 2004, representing an effective tax rate of 33%
for income taxes. The effective tax rate for 2004 was reduced below the
statutory rate due mainly to the partial exclusion of income on foreign sales.
The provision for income taxes for the corresponding period reflected an
effective tax rate of 36%. The increased effective tax rate for the 2003 period
is due to the Company not recognizing any extraterritorial income tax benefit
due to the then congressional discussions aimed towards eliminating the benefit.
The Company believes that it is more probable than not that the recorded
estimated deferred tax asset benefits and state operating loss carry-forwards
will be realized. The statutory tax rate of 34% for U.S. federal taxes was in
effect for the current quarter ended March 31, 2004 and 2003.
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Seasonal and Quarterly Results
The Company's menhaden harvesting and processing business is seasonal in nature.
The Company generally has higher sales during the menhaden harvesting season
(which includes the second and third quarter of each fiscal year) due to
increased product availability. Prices during the fishing season tend to be
lower than during the. 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.
Risk Factors and Significant Factors That May Affect Forward-Looking Statements
The Company wishes to caution investors that the following significant factors,
and those factors described elsewhere in this Report, other filings by the
Company with the SEC from time to time and press releases issued by the Company,
could affect the Company's actual results which may differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company:
1. The Company's ability to meet its raw material requirements
through its annual menhaden harvest, which is subject to
fluctuation due to natural conditions over which the Company has
no control, such as varying fish population, adverse weather
conditions and disease.
2. The impact on the Company if its spotter aircraft are prohibited
or restricted from operating in their normal manner during the
Company's fishing season. For example, as a direct result of the
September 11, 2001 terrorist attacks, the Secretary of
Transportation issued a federal ground stop order that grounded
certain aircraft (including the Company's fish-spotting aircraft)
for approximately nine days. This loss of spotter aircraft
coverage severely hampered the Company's ability to locate
menhaden fish during this nine-day period and thereby reduced its
amount of saleable product.
3. The impact on the prices for the Company's products of worldwide
supply and demand relationships over which the Company has no
control and which tend to fluctuate to a significant extent over
the course of a year and from year to year. The products that
influence the supply and demand relationship are world supplies
of fish meal made from other fish species, animal proteins and
fats, palm oil, soy meal and oil, and other edible oils.
4. The impact of a violation by the Company of federal, state and
local laws and regulations relating to menhaden fishing and the
protection of the environment and the health and safety of its
employees or of the adoption of new laws or regulations at
federal, state or local levels that restrict or prohibit menhaden
or purse-seine fishing, or stricter interpretations of existing
laws or regulations that materially adversely affect the Company's
business.
5. The impact of the enactment of increasingly stringent regulations
regarding contaminants in fish meal or fish oil by foreign
countries or the United States. More stringent regulations may
result in: (a) the Company's incurrence of additional capital
expenditures on contaminant reduction technology in order to meet
the requirements of those jurisdictions, and possibly higher
production costs for Company's products, or (b) the Company's
withdrawal from marketing its products in those jurisdictions.
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6. The impact on the Company if it cannot harvest menhaden in U.S.
jurisdictional waters if the Company fails to comply with U.S.
citizenship ownership requirements.
7. Risks inherent in the Company's attempt to expand into sales
of refined, food grade fish oils for consumption in the U.S.,
including the unproven market for this product.
8. Fluctuations in the Company's quarterly operating results due to
the seasonality of the Company's business and the Company's
deferral of sales of inventory based on worldwide prices for
competing products.
9. The ability of the Company to retain and recruit key officers
and qualified personnel, vessel captains and crewmembers.
10. Risks associated with the strength of local currencies of the
countries in which its products are sold, changes in social,
political and economic conditions inherent in foreign
operations and international trade, including changes in the
law and policies that govern foreign investment and
international trade in such countries, changes in U.S. laws
and regulations relating to foreign investment and trade,
changes in tax or other laws, partial or total expatriation,
currency exchange rate fluctuations and restrictions on
currency repatriation, the disruption of labor, political
disturbances, insurrection or war and the effect of
requirements of partial local ownership of operations in
certain countries.
11. In the future the Company may undertake acquisitions,
although there is no assurance this will occur. Further,
there can be no assurance that the Company will be able to
profitably manage future businesses it may acquire or
successfully integrate future businesses it may acquire into
the Company without substantial costs, delays or other
problems which could have a material adverse effect on the
Company's business, results of operations and financial
condition.
12. A general hardening of the world insurance markets in recent
years has made the Company's insurance more costly and is
likely to continue to increase the Company's cost of insurance.
The Company has elected to increase its deductibles and
self-retentions in order to achieve lower insurance premium
costs. These higher deductibles and self-retentions will expose
the Company to greater risk of loss if claims occur.
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