NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1.
Significant Accounting Policies
Summary Of Operations And Basis Of Presentation
Business Description
Omega Protein Corporation (“Omega” or
the “Company”) produces and markets a variety of products produced from menhaden (a herring-like species of fish found in commercial quantities in the U.S. coastal waters of the Atlantic Ocean and Gulf of Mexico), including regular grade
and value-added specialty fish meals, crude and refined fish oils and fish solubles. The Company’s fish meal products are primarily used as a protein ingredient in animal feed for swine, cattle, aquaculture and household pets. Fish oil is
utilized for animal and aquaculture feeds, industrial applications, as well as for additives to human food products. The Company’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as
an organic fertilizer.
Basis of Presentation
These interim financial statements of Omega Protein Corporation have been
prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. The interim financial
statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2003. Accordingly, certain information and footnote disclosures normally provided have been omitted since such items are disclosed therein.
In the opinion of management the accompanying unaudited
condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly the Company’s consolidated financial position as of September 30, 2004, and the results of its operations
and its cash flows for the nine month periods ended September 30, 2004 and 2003. Operating results for the three and nine months periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2004.
Consolidation
The consolidated financial statements include the accounts of Omega and its
wholly and majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company has reclassified certain amounts previously reported to conform with the presentation at September 30,
2004.
Revenue Recognition
The Company recognizes revenue for the sale of its products when title and
rewards of ownership to its products are transferred to the customer, which typically occurs upon shipment.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
Cash and Cash Equivalents
The Company considers cash in banks and highly liquid investments with
original maturities of three months or less as cash and cash equivalents.
Inventories
Inventory is stated at the
lower-of-cost-or-market. The Company’s fishing season runs from mid-April to the first of November in the Gulf of Mexico and from the beginning of May into December in the Atlantic. Government regulations generally preclude the Company from
fishing during the off-seasons.
The Company’s inventory
cost system considers all costs associated with an annual fish catch and its processing, both variable and fixed, including both costs incurred during the off-season and during the fishing season. The Company’s costing system allocates cost to
inventory quantities on a per unit basis as calculated by a formula that considers total estimated inventoriable costs for a fishing season (including off-season costs) to total estimated fish catch and the relative fair market value of the
individual products produced. The Company adjusts the cost of sales, off-season costs and inventory balances at the end of each quarter based on revised estimates of total inventoriable costs and fish catch. The Company’s
lower-of-cost-or-market-value analyses at year-end and at interim periods compare the total estimated per unit production cost of the Company’s expected production to the projected per unit market prices of the products. The impairment analyses
involve estimates of, among other things, future fish catches and related costs, and expected commodity prices for the fish products. These estimates, which management believes are reasonable and supportable, involve estimates of future activities
and events which are inherently imprecise and from which actual results may differ materially.
During the off-seasons, in connection with the upcoming fishing seasons, the Company incurs costs (i.e., plant and vessel related labor, utilities, rent, repairs, and depreciation) that are directly related to the
Company’s infrastructure. These costs accumulate in inventory and are applied as elements of the cost of production of the Company’s products throughout the fishing season ratably based on the Company’s monthly fish catch and the
expected total fish catch for the season.
Insurance
The Company carries insurance for certain losses relating to its vessels and
Jones Act liabilities for employees aboard its vessels. The Company provides reserves for those portions of the Annual Aggregate Deductible for which the Company remains responsible by using an estimation process that considers Company-specific and
industry data as well as management’s experience, assumptions and consultation with outside counsel. Management’s current estimated range of liabilities related to such cases is based on claims for which management can estimate the amount
and range of loss. The Company has recorded the minimum estimated liability related to those claims, where there is a range of loss. As additional information becomes available, the Company will assess the potential liability related to its pending
litigation and revise its estimates. Such revisions in estimates of the potential liability could materially impact the Company’s results of operations, financial position or cash flows.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
Advertising Costs
The costs of advertising are expensed as incurred in accordance with
Statement of Position 93-7 “Reporting on Advertising Costs.”
Accounting for the Impairment of Long-Lived Assets
The Company evaluates at each balance sheet date for continued appropriateness the carrying value of its long-lived assets including its long-term receivables and property, plant and equipment in accordance with SFAS No. 144,
“Accounting for the Impairment or Disposals of Long-Lived Assets.” This review is based on management projections of anticipated undiscounted future cash flows of the related asset or asset grouping. If indicators of impairment are
present, management would evaluate the undiscounted cash flows estimated to be generated by those assets compared to the carrying amount of those items. The net carrying value of assets not recoverable is reduced to fair value. The Company considers
continued operating losses, or significant and long-term changes in business conditions, to be its primary indictors of potential impairment. In measuring impairment, the Company looks to quoted market prices, if available, or the best information
available in the circumstances.
Income Taxes
The Company utilizes the liability method to account for income
taxes. This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of existing temporary differences between the financial reporting and tax reporting basis of assets and liabilities, and
operating loss and tax credits carryforwards for tax purposes.
Property,
Equipment and Depreciation
Property and equipment
additions are recorded at cost. Depreciation of property and equipment is computed by the straight-line method at rates expected to amortize the cost of property and equipment, net of salvage value, over their estimated useful lives. Estimated
useful lives of assets acquired new, determined as of the date of acquisition are as follows:
Useful Lives
(years)
Fishing vessels and fish processing plants
15-20
Machinery, equipment, furniture, fixtures and other
3-10
Replacements and major
improvements are capitalized; maintenance and repairs are charged to expense as incurred. The Company capitalizes interest cost incurred on funds used to construct property, plant, and equipment projects when construction requires a period of time
to prepare assets for their intended use. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. Upon sale or retirement, the costs and related accumulated
depreciation are eliminated from the accounts. Any resulting gains or losses are included in the statement of operations.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
Pension Plans
Annual costs of the Company’s pension plan are determined actuarially
based on SFAS No. 87, “Employers’ Accounting for Pensions.” The Company’s policy is to fund the pension plan at amounts not less than the minimum requirements of the Employee Retirement Income Security Act of 1974. The Company
applies SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” disclosure requirements for its pensions and other postretirement benefit plans to the extent practicable.
In 2002, the Board of Directors authorized a plan to freeze the
Company’s pension plan in accordance with ERISA rules and regulations so that new employees, after July 31, 2002, will not be eligible to participate in the pension plan and further benefits will no longer accrue for existing participants. The
freezing of the pension plan had the effect of vesting all existing participants in their pension benefits in the plan.
Comprehensive Income (Loss)
The components of other comprehensive loss, net of tax, included in stockholder’s equity are as follows:
September 30,
2004
December 31,
2003
(in thousands)
Cumulative Translation Adjustments
$
(50
)
$
(38
)
Minimum Pension Liability Adjustments
(5,885
)
(5,885
)
Accumulated Other Comprehensive Loss
$
(5,935
)
$
(5,923
)
Foreign Currency Translation
For the Company’s Mexican operations, the
functional currency is the local currency. Assets and liabilities of those operations are translated into U.S. dollars using period-end exchange rates; income and expenses are translated using the average exchange rates for the reporting period.
Translation adjustments are deferred in accumulated other comprehensive income (loss), a separate component of stockholders’ equity.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The
Company’s customer base generally remains consistent from year to year. The Company performs ongoing credit evaluations of its customers and generally does not require material collateral. The Company maintains an allowance for doubtful
accounts for potential credit losses and such losses have historically been within management’s expectations.
At September 30, 2004 and December 31, 2003, the Company had cash deposits concentrated primarily in one major bank. In addition, the Company had
Certificates of Deposit and commercial quality grade investments A2P2 rated or better with companies and financial institutions. As a result of the foregoing, the Company believes that credit risk in such investments is minimal.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
Earnings per Share
Basic earnings per common share was computed by dividing net earnings by the
weighted average number of common shares outstanding during each period. Diluted earnings per common share was computed by dividing net earnings by the sum of the weighted average number of common shares outstanding plus the number of additional
common shares that would have been outstanding if the dilutive potential common shares (in this case, exercise of the Company’s employee stock options) had been issued during each period as discussed in Note 10.
Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”),
“Consolidation of Variable Interest Entities, and Interpretation of Accounting Research Bulletin (“ARB”) No. 51.” This interpretation clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to
certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from
other parties. The initial adoption of FIN No. 46 did not have a material impact on the Company’s financial condition, results of operations or cash flows.
In December 2003, the FASB revised Interpretation No. 46 (“Interpretation No. 46R,” or “FIN No. 46R”). FIN No. 46R,
“Consolidation of Variable Interest Entities,” applies at different dates to different types of enterprises and entities, and special provisions apply to enterprises that have fully or partially applied Interpretation No. 46 prior to
issuance of Interpretation No. 46R. Application of Interpretation No. 46 or Interpretation No. 46R is required in financial statements of public entities that have interest in variable interest entities or potential variable interest entities
commonly referred to as special-purpose entities for periods ending after December 15, 2003. The initial adoption of FIN No. 46R did not have a material impact on the Company’s financial condition, results of operations or cash flow.
In May 2003, the FASB issued SFAS No. 150, “Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. These effective dates are not applicable to the provisions of paragraph 9 and 10 of SFAS
No. 150 as they apply to mandatory redeemable non-controlling interests, as the FASB has delayed these provisions. The adoption of SFAS No. 150 did not have a material impact upon the Company’s financial condition, results of operations or cash
flows.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
The Company applies revised SFAS
No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” It does not change the measurement or recognition of pension and other postretirement benefit plans. It requires additional disclosures to those in
the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. It also requires disclosure of the components of net periodic benefit
cost in interim financial statements. The revised disclosure requirements are required for financial statements with fiscal years ending after December 15, 2003 and the interim-period requirements are effective for interim periods beginning after
December 15, 2003. See Note 11 to our unaudited condensed consolidated financial statements for the required disclosures about our pension plans and postretirement benefits.
Stock-Based Compensation
The Company has a stock-based employee compensation plan. The Company accounts for this plan under the recognition and measurement principles of
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and has adopted the disclosure-only provisions of SFAS No. 123 (“SFAS 123”), “Accounting for Stock-Based
Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FASB Statement No. 123.” No stock-based employee compensation cost is reflected in net earnings, because
all options granted under this plan had an exercise price equal to or greater than the market value of the underlying common stock on the grant date.
The following table illustrates the effect on net earnings and net earnings per common share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation.
Three Months
Ended September 30,
Nine Months
Ended September 30,
(in thousands)
(in thousands)
2004
2003
2004
2003
Net earnings
$
1,816
$
740
$
4,289
$
5,767
Total stock-based employee compensation determined under fair value-based method, net tax
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and those differences could have a material affect on the statements.
Note 2. Accounts Receivable
Accounts receivable as of September 30, 2004 and December 31, 2003 are summarized as follows:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
Note 3. Inventory
The major classes of inventory as of September 30, 2004 and December 31,
2003 are summarized as follows:
September 30,
2004
December 31,
2003
(in thousands)
Fish meal
$
24,222
$
21,963
Fish oil
12,186
7,666
Fish solubles
505
600
Unallocated inventory cost pool (including off-season costs)
3,592
5,348
Other materials & supplies
4,972
4,828
Total inventory
$
45,477
$
40,405
Inventory at September
30, 2004 and December 31, 2003 is stated at the lower-of-cost-or-market. The elements of the 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 2004 season.
Note 4. Other Assets
Other assets as of September 30, 2004 and December 31, 2003 are summarized
as follows:
September 30,
2004
December 31,
2003
(in thousands)
Fish nets
$
870
$
877
Insurance receivable, net of allowance for doubtful accounts
766
1,394
Title XI loan origination fee
344
312
Note receivable
—
376
Deposits
128
128
Total other assets, net
$
2,108
$
3,087
Amortization expense
for fishing nets amounted to approximately $143,000, $250,000, $724,000 and $681,000 for the three months ended and nine months ended September 30, 2004 and 2003, respectively.
The Company carries insurance for certain losses relating to its vessels and Jones Act liability for employees aboard its
vessels (collectively, “Vessel Claims Insurance”). The typical Vessel Claims Insurance policy contains an annual aggregate deductible (“AAD”) for which the Company remains responsible, while the insurance carrier is responsible
for all applicable amounts which exceed the AAD. It is the Company’s policy to accrue current amounts due and record amounts paid out on each claim. Once payments exceed the AAD, the Company records an insurance receivable for a given policy
year, net of allowance for doubtful accounts. As of September 30, 2004 and December 31, 2003, the allowance for doubtful insurance receivable accounts was $2.0 million.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
Note 5. Property and Equipment
Property and equipment at September 30, 2004 and December 31, 2003 are
summarized as follows:
September 30,
2004
December 31,
2003
(in thousands)
Land
$
6,302
$
6,302
Plant assets
70,840
70,534
Fishing vessels
83,181
82,573
Furniture and fixtures
1,913
1,913
Construction in progress
26,063
7,884
Total property and equipment
188,299
169,206
Less: accumulated depreciation and impairment
(91,270
)
(83,975
)
Property and equipment, net
$
97,029
$
85,231
Depreciation expense
amounted to $2.5 million, $2.4 million, $7.5 million and $7.2 million for the three months ended and nine months ended September 30, 2004 and 2003, respectively. The Company capitalized interest in the amount of $263,000 associated with the
construction of the Company’s fish oil processing facility.
Note 6. Notes
Payable and Long-Term Debt
At September 30, 2004 and December
31, 2003, the Company’s long-term debt consisted of the following:
September 30,
2004
December 31,
2003
(in thousands)
U.S. government guaranteed obligations (Title XI loan) collateralized by a first lien on certain vessels and certain plant
assets:
Amounts due in installments through 2016, interest from 5.7% to 7.6%
$
17,552
$
18,658
Amounts due in installments through 2014, interest at Eurodollar rates of 2.03% and 1.6% at September 30, 2004 and December 31, 2003,
respectively, plus 4.5%
420
441
Other debt at 7.9% and 7.9% at September 30, 2004 and December 31, 2003, respectively
44
72
Total debt
18,016
19,171
Less current maturities
(1,649
)
(1,566
)
Long-term debt
$
16,367
$
17,605
At September 30, 2004
and December 31, 2003, the estimated fair value of debt obligations approximated book value.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
On October 1, 2003, pursuant to the
Title XI program, the United States Department of Commerce approved the fiscal 2003 financing application made by the Company in the amount of $5.3 million. The Company closed on the $5.3 million Title XI loan on December 30, 2003.
On September 2, 2004, pursuant to the Title XI program, the United States
Department of Commerce approved a financing application made by the Company in the amount of $14 million (the “Approval Letter”). The Company had no borrowings or financing requests outstanding under the Approval Letter at September 30,
2004. Borrowings under this Title XI program may be used for refurbishment of the Company’s fishing vessels and capital expenditures relating to the Company’s shore-side fishing assets. The Title XI loans are secured by liens on certain of
the Company’s fishing vessels and mortgages on the Company’s Reedville, Virginia and Abbeville and Cameron, Louisiana plants.
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 as of the end of each
month, 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 million on any date or
the Credit Facility’s availability averages less than $6 million for any calendar month. The Company is in compliance with its financial covenants as of September 30, 2004. 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 note will be adjusted (up or down) prospectively on a quarter 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. As of September 30, 2004 the Company had no borrowings outstanding under the Credit
Facility. At September 30, 2004 and December 31, 2003, the Company had outstanding letters of credit totaling approximately $2.7 million and $2.6 million, respectively, issued primarily in support of worker’s compensation insurance programs.
Note 7. Accrued Liabilities
Accrued liabilities as of September 30, 2004 and December 31, 2003 are
summarized as follows:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
Note 8. Comprehensive Income
The components of comprehensive income are as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2004
2003
2004
2003
(in thousands)
(in thousands)
Net income
$
1,816
$
740
$
4,289
$
5,767
Foreign translation adjustment, net of tax
3
(37
)
(12
)
(21
)
Total comprehensive income
$
1,819
$
703
$
4,277
$
5,746
Note 9. Commitments and Contingencies
Capital Commitments
The Company has committed approximately $18 million to build a new 100
– metric ton per day fish oil processing facility at its Reedville, Virginia location. The commitments covered by this agreement aggregate approximately $7 million and $11 million for 2003 and 2004, respectively. As of September 30, 2004 the
Company has incurred approximately $18.3 million related to its Reedville fish oil processing facility placed in operations during October 2004.
Litigation
The Company is defending various claims and litigation arising from its operations. In the opinion of management, uninsured losses, if any, resulting from
these matters will not have a material adverse effect on the Company’s results of operations, cash flows or financial position.
Insurance
The Company carries insurance with coverages and coverage limits that it believes to be adequate. Although there can be no assurance that such insurance
is sufficient to protect the Company against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of the Company’s operations. Should the Company’s insurers become insolvent,
the Company would be responsible for payment of all outstanding claims associated with the insurer’s policies.
Environmental Matters
The Company may be subject to various possible claims and lawsuits regarding environmental matters from time to time. Management believes that costs, if
any, related to these matters will not have a material adverse effect on the results of operations, cash flows or financial position of the Company.
Indemnification
The Company’s Articles of Incorporation and By-Laws limit the liability of the Company’s officers and directors to the fullest extent permitted
by Nevada law. Nevada provides that directors of Nevada corporations may be relieved of monetary liabilities for breach of their fiduciary duties as directors, except under certain circumstances, including (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law or (ii) the willful or grossly negligent payment of unlawful distributions.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
The Company’s Articles of
Incorporation and By-Laws generally require the Company to indemnify its directors and officers to the fullest extent permitted by Nevada law. The Company’s Articles of Incorporation and By-Laws also require the Company to advance expenses to
its directors and its officers to the fullest extent permitted by Nevada law upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it should be ultimately determined that they are not entitled to
indemnification by the Company. The Company also has entered into indemnification agreements with all of its directors and certain of its officers which provides for the indemnification and advancement of expenses by the Company. The Company also
maintains director and officer liability insurance with respect to liabilities arising out of certain matters, including matters arising under the securities laws. This insurance is subject to limitations, conditions and deductibles set forth in the
respective insurance policy.
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 September 30, 2004
Net earnings
$
1,816
Basic earnings per common share:
Earnings available to common shareholders
$
1,816
24,517
$
0.07
Effect of dilutive securities:
Stock options assumed exercised
—
1,949
Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised
$
1,816
26,466
$
0.07
Earnings
(Numerator)
Shares
(Denominator)
Per Share
Data
Three Months Ended September 30, 2003
Net Earnings
$
740
Basic earnings per common share:
Earnings available to common shareholders
$
740
24,279
$
0.03
Effect of dilutive securities:
Stock options assumed exercised
—
1,703
Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
Earnings
(Numerator)
Shares
(Denominator)
Per Share
Data
Nine Months Ended September 30, 2004
Net earnings
$
4,289
Basic earnings per common share:
Earnings available to common shareholders
$
4,289
24,451
$
0.18
Effect of dilutive securities:
Stock options assumed exercised
—
1,988
Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised
$
4,289
26,439
$
0.16
Earnings
(Numerator)
Shares
(Denominator)
Per Share
Data
Nine Months Ended September 30, 2003
Net Earnings
$
5,767
Basic earnings per common share:
Earnings available to common shareholders
$
5,767
24,129
$
0.24
Effect of dilutive securities:
Stock options assumed exercised
—
1,563
Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised
$
5,767
25,692
$
0.22
Options to purchase
2,062,800 shares of common stock at prices ranging from $9.06 to $17.25 per share were outstanding during the three and nine months ended September 30, 2004, but were not included in the computation of diluted earnings per share because the exercise
prices of the options were greater than the average market price of the shares during that period.
Options to purchase 2,204,800 and 2,274,800 shares of common stock at prices ranging from $6.44 to $17.25 and $5.03 to $17.25 per share were outstanding
during the three and nine months ended September 30, 2003, respectively, but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the shares
during that period.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
NOTE 11. Components of Net Periodic Pension Cost
Three Months Ended
September 30,
Nine Months Ended
September 30,
2004
2003
2004
2003
Service cost
$
—
$
—
$
—
$
—
Interest cost
367
403
1,101
1,209
Expected return on plan assets
(354
)
(288
)
(1,062
)
(864
)
Amortization of prior service costs
—
—
—
—
Amortization of net loss
161
248
483
744
Net periodic pension cost
$
174
$
363
$
522
$
1,089
The Company previously
disclosed in its financial statements for the year ended December 31, 2003 that it expected to contribute $939,000 to its pension plan in 2004. As of September 30, 2004, no contributions have been made. As of September 30, 2004 the Company
anticipates that the 2004 fiscal year contribution will be zero due to the passage of the Pension Funding Equity Act of 2004.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(Dollars in thousands,
except per share amounts)
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements in this Form 10-Q, future filings by the Company with the Securities and Exchange Commission (the “Commission”),
the Company’s press releases and oral statements by authorized officers of the Company are intended to be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without limitation, the risks set forth under the caption “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.
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 rich in EPA (eicosapentaenoic acid) and DHA (docosahexaenoic acid). 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 OmegaPure
®
, a taste-free, odorless refined fish oil that is the only marine source of long-chain
Omega-3s directly affirmed by the U.S. Food and Drug Administration (“FDA”) as a food ingredient which is Generally Recognized as Safe (“GRAS”). In September 2004, the FDA announced that scientific evidence indicates that
long-chain Omega-3 fatty acids containing both EPA and DHA may be beneficial in reducing coronary heart disease. 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 of 950,000 tons of fish. The Company also completed a new
100-metric ton per day fish oil processing facility in Reedville, Virginia in October 2004, which replaced its existing fish 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 nine months
ended September 30, 2004 were not material. Omega Mexico is a 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.
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 human food and animal feed 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. For its 2004 season, the Company added one additional fishing vessel to its
operations. 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 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.
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 11.0%. 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 OmegaPure
®
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 fish oil. The Company cannot estimate, however, the
size of the actual domestic or international markets for OmegaPure
®
or how long it may
take to develop these markets.
During 2002, the Company
developed a business plan to expand its purchase and resale of other manufacturers’ fish meal and fish oil products 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 and oil products. 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 16,900 and 12,500 tons, or approximately 4.3% and 5% of total volume sales for the nine months ending September 30, 2004 and the fiscal year ended December 31, 2003, respectively.
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 has
been carried forward and has adversely affected the Company’s earnings through the first two quarters of 2004.
During 2004, the Company’s fishing efforts in the Gulf of Mexico were hampered by numerous hurricanes which resulted in lower fish catches than
predicted. As a result, the Company’s per unit product costs were higher than anticipated and were comparable to the 2003 season. Such reduced fish catch quantities results in higher cost inventories and correspondingly higher cost of sales, as
well as less available product for sale. The impact of the higher cost inventories and fewer volumes available for sale will be carried forward which will adversely affect Company earnings in the fourth quarter of fiscal 2004 as well as the first
and second quarters of fiscal 2005.
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 and 2004, approximately 50% of the Company’s specialty meals and crude fish oil had been sold on a forward contract basis. 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 September 30,
Nine Months Ended September 30,
2004
2003
2004
2003
Revenues
Percent
Revenues
Percent
Revenues
Percent
Revenues
Percent
Regular Grade
$
6.9
16.6
%
$
7.2
22.4
%
$
16.6
17.8
%
$
16.0
19.0
%
Special Select
19.0
45.8
10.0
31.1
39.5
42.5
29.5
34.9
Sea-Lac
4.9
11.8
2.9
9.0
13.1
14.1
11.0
13.0
Crude Oil
9.2
22.2
10.7
33.2
18.8
20.2
23.6
27.9
Refined Oil
1.1
2.6
1.0
3.1
3.5
3.8
2.8
3.3
Fish Solubles
0.4
1.0
0.4
1.2
1.5
1.6
1.6
1.9
Total
$
41.5
100.0
%
$
32.2
100.0
%
$
93.0
100.0
%
$
84.5
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 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.
On
September 2, 2004, pursuant to the Title XI program, the United States Department of Commerce approved a financing application made by the Company in the amount of $14 million (the “Approval Letter”). The Company had no borrowings or
financing requests outstanding under the Approval Letter at September 30, 2004. Borrowings under this Title XI program may be used for refurbishment of the Company’s fishing vessels and capital expenditures relating to the Company’s
shore-side fishing assets. The Title XI loans are secured by liens on certain of the Company’s fishing vessels and mortgages on the Company’s Reedville, Virginia and Abbeville and Cameron, Louisiana plants.
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 and was completed in October 2004. The cost of the project was approximately $18.3 million. The Company funded
the project through its available cash balances.
Omega had an
unrestricted cash balance of $33.9 million at September 30, 2004. The Company’s liquidity is greatly influenced by the selling prices received for its products. Should the Company experience decreased pricing in the future, as it experienced in
1999 and 2000, liquidity would decline and the Company would possibly have to utilize its working capital credit facility. The Company’s long-term debt at September 30, 2004 and December 31, 2003 was $16.4 million and $17.6 million,
respectively. Current maturities attributable to the Company’s long-term debt were $1.6 million at both September 30, 2004 and December 31, 2003. The Company did not utilize its working capital credit facility during the first nine months of
2004 or 2003 other than for $2.7 million and $2.6 million, respectively, in standby letters of credit. As of September 30, 2004, the Company 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 September 30, 2004:
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
$
18,016
$
1,649
$
3,562
$
3,625
$
9,180
Operating Leases
1,009
449
230
174
156
Minimum Pension Liability
8,917
—
—
—
8,917
Total Contractual Cash Obligations
$
27,942
$
2,098
$
3,792
$
3,799
$
18,253
Amount of Commitment Expiration Per Period
Other Commercial Commitments
Total
Less than
1 year
1 to 3
years
4 to 5
years
After 5
years
Credit Facility (1)
$
17,283
$
—
$
—
$
—
$
—
Fisheries Finance Program (4)
14,000
3,000
11,000
—
—
Standby Letters of Credit
2,717
2,717
—
—
—
Construction Commitment (2)
—
—
—
—
—
Energy Commitments (3)
225
225
—
—
—
Total Commercial Commitments
$
34,225
$
5,942
$
11,000
$
—
$
—
(1)
As of September 30, 2004, the Company had no outstanding borrowings under the $20 million Credit Facility other than $2.7 million in stand-by letters of credit.
(2)
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 and was completed in October 2004. The project cost was approximately $18 million. The Company currently anticipates that it will fund the project through its available cash balances. As of September 30, 2004 the Company
had incurred $18.3 million related to its Reedville processing facility.
(3)
As of September 30, 2004, the Company had normal purchase commitments for energy usage of approximately $225,000, that will be delivered in quantities expected to be used in the
normal course of business during the 2004 fishing season.
(4)
On September 2, 2004 the United States Department of Commerce Fisheries Finance Program approved a $14 million financing application (“Approval Letter”) made by the
Company. As of September 30, 2004 the Company had no outstanding borrowings under the $14 million Approval Letter.
Investing activities used $19.3 million and $10.1 million for the nine months ended September 30, 2004 and 2003 respectively. The Company’s investing
activities consists mainly of capital expenditures for equipment purchases, replacements, vessel refurbishments and a fish oil processing facility. The Company anticipates making approximately $21.7 million in capital expenditures in 2004, of which
approximately $11.9 million was dedicated to the new fish oil processing facility and the remainder will be used to refurbish vessels and plant assets and to repair certain equipment.
Financing activities used $550,000 and provided $243,000 during the nine months ended September 30, 2004 and 2003,
respectively. The exercise of stock options provided proceeds of $605,000 and $1.1 million for the nine months ended September 30, 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 the Credit 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, 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 September 30, 2004. As of September 30, 2004, the Company had no cash borrowings outstanding under the Credit Facility other than $2.7 million
in stand-by letters of credit.
On September 2, 2004 the United
States Department of Commerce Fisheries Finance Program approved the Company’s financing application in an amount not to exceed $14 million (the “Approval Letter”). Borrowings under the Approval Letter may be used to finance and/or
refinance 73% of the depreciated actual cost of the Company’s future projects not to exceed 15 years from inception at interest rates determined by the U.S. Treasury rate. Final approval for all such future projects requires individual approval
through the Secretary of Commerce, National Oceanic and Atmospheric Administration, National Marine Fisheries Service (“National Marine Fisheries Service”). Security for the note shall be such security agreements, undertakings, and other
documents of whatsoever mature deemed by the National Marine Fisheries Service sole discretion, as necessary to accomplish the intent and purpose of the Approval Letter. The Company is required to comply with customary National Marine Fisheries
Service covenants as well as certain special covenants. As of September 30, 2004, the Company had no borrowings or financing requests outstanding under the Approval Letter.
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, intra-state and federal 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, although it is possible that it may do so in the
future.
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.
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 that 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. 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 and Approval Letter
will be sufficient to meet its working capital and capital expenditure requirements through at least the next twelve months.
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 off-season costs) to total estimated fish catch and the relative fair market value of the individual products produced. The Company adjusts
the cost of sales, off-season costs and inventory balances at the end of each quarter based on revised estimates of total inventoriable costs and fish catch. The Company’s lower-of-cost-or-market-value analyses at year-end and at interim
periods 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.
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.
Interim Results for the Third Quarters ended September 30, 2004 and September 30, 2003
Revenues.
Revenues increased $9.3 million or 28.9% from $32.2 million
for the quarter ended September 30, 2003 to $41.5 million for the quarter ended September 30, 2004. This increase in revenue was attributable to increased prices for the Company’s fish meal and fish oil of 7.5% and 24.1%, respectively, as well
as a 43.9% increase in the sales volume of the Company’s fish meal.
Cost of Sales.
Cost of Sales, including depreciation and amortization, increased $7.8 million or 27.3% from $28.6 million for the quarter ended September 30, 2003 to $36.4 million for the quarter ended
September 30, 2004. Cost of sales as a percentage of revenues decreased 1.1%. Cost of sales for each of the periods presented were higher than historical averages due primarily to weather related events in both periods which resulted in reduced fish
catches, causing higher per unit cost of inventory.
Gross
Profit.
Gross profit margins increased $1.5 million or 41.7% from a $3.6 million gross profit for the quarter ended September 30, 2003 to a $5.1 million gross profit for the quarter ended September 30, 2004. Gross profit as a percentage of
revenues increased 1.1% to 12.3% for the quarter ended September 30, 2004 as compared to the previous quarter. The increase in gross profit was primarily due to increased prices for the Company’s fish meal and fish oil of 7.5% and 24.1%,
respectively, as well as a 43.9% increase in the sales volume of the Company’s fish meal.
Selling, general and administrative expenses.
Selling, general, and administrative expenses increased $193,000 or 9.1% from $2.2 million for the quarter ended September 30, 2003 as compared to $2.4 million for
the current quarter ended September 30, 2004. This increase was attributable primarily to increased consulting expenditures related to the Company’s governmental relations program and the Company’s Sarbanes-Oxley 404 compliance efforts.
Operating income.
As a result of the factors discussed
above, the Company’s operating income increased $1.3 million or 92.9% from an operating income of $1.4 million for the quarter ended September 30, 2003 to an operating income of $2.7 million for the quarter ended September 30, 2004. As a
percentage of revenues operating income increased 2.2% for the current quarter ended September 30, 2004.
Interest income (expense), net.
Interest expense, net decreased $260,000 for the current quarter ended September 30, 2004 to interest income, net
of $82,000, as compared to interest expense, net of $178,000 for the quarter ended September 30, 2003. The decrease in interest expense, net was primarily due to the Company’s capitalization of interest of $263,000 associated with the
construction of the Company’s new fish oil processing facility.
Other expense, net.
Other expense, net increased $43,000 in the current quarter ended September 30, 2004 as compared to the quarter ended September 30, 2003. The increase was primarily due to fees paid to the Company’s banking
institution and a reduction in gains on asset disposals.
Provision for income taxes.
The Company recorded a $911,000 provision for income taxes for the third quarter of 2004 representing an effective tax rate of 33% for income taxes. The provision for income taxes for the corresponding tax
period of 2003 reflected an effective tax rate of 37% for income taxes. 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 third quarter of 2004.
Interim Results for the Nine Months ended September 30, 2004 and September 30, 2003
Revenues.
For the nine months ended September 30, 2004, revenues
increased $8.5 million or 10.1% from $84.5 million for the nine months ended September 30, 2003 to $93 million for the nine months ended September 30, 2004. The increase in revenues is attributable to a 5.5% and 13.2% increase in the prices for the
Company’s fish meal and fish oil, respectively along with a 16.2% increase in sales volume of the Company’s fish meal.
Cost of Sales.
Cost of sales, including depreciation and amortization, for the nine months ended September 30, 2004, was $78.8 million, a $10.5
million or 15.4% increase from $68.3 million for the nine months ended September 30, 2003. Cost of sales as a percentage of revenues increased 3.9% to 84.7% for the nine months ended September 30, 2004 as compared to the nine months ended September
30, 2003. The increase in cost of sales was primarily due to higher fiscal 2003 inventory costs carried forward into 2004, combined with the 2004 reduced fish catch brought about by adverse weather conditions in the Gulf of Mexico.
Gross Profit.
Gross profit margins decreased $2 million or 12.3% from
a $16.2 million gross profit for the nine months ended September 30, 2003 to a $14.2 million gross profit for the nine months ended September 30, 2004. Gross profit as a percentage of revenues decreased 3.9% to 15.3% for the nine months ended
September 30, 2004 as compared to the nine months ended September 30, 2003. The decrease in gross profit was primarily due to higher cost inventories carried forward from fiscal 2003 along with a reduced fish catch.
Selling, general, and administrative expenses.
Selling, general, and
administrative expenses increased $594,000 or 9% from $6.7 million for the nine months ended September 30, 2003 as compared to $7.3 million for the nine months ended September 30, 2004. This increase was attributable primarily to increased
consulting expenditures related to the Company’s governmental relations program and the Company’s Sarbanes-Oxley 404 compliance efforts.
Operating income.
As a result of the factors discussed above, the Company’s operating income decreased $2.6 million or 27.4% from an operating
income of $9.5 million for the nine months ended September 30, 2003 to $6.9 million for the nine months ended September 30, 2004. As a percentage of revenues operating income decreased 3.9% for the nine months ended September 30, 2004.
Interest income (expense), net.
Interest expense, net decreased
$208,000 for the nine months ended September 30, 2004 to interest income, net of $289,000 as compared to interest expense, net of $497,000 for the nine months ended September 30, 2003. The decrease in interest expense, net was primarily due to the
Company’s capitalization of interest of $263,000 associated with the construction of the Company’s new fish oil processing facility.
Other expense, net.
Other expense, net increased $119,000 in the current nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003. The increase was primarily due to gains on disposal of Company assets for the nine months ended September 30, 2003.
Provision for income taxes.
The Company recorded a $2.1 million provision for income taxes for the nine months ended September 30, 2004
representing an effective tax rate of 33% for income taxes. The provision for income taxes for the corresponding tax period of 2003 reflected an effective tax rate of 36% for income taxes. 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 third quarter of 2004.
The Company’s menhaden harvesting and processing business is seasonal in nature. The Company generally has higher sales during the menhaden
harvesting season (which includes the second and third quarter of each fiscal year) due to increased product availability. Prices during the fishing season tend to be lower than during the off-season. As a result, the Company’s quarterly
operating results have fluctuated in the past and may fluctuate in the future. In addition, from time to time the Company defers sales of inventory based on worldwide prices for competing products that affect prices for the Company’s products
which may affect comparable period comparisons.
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, intra-state and local laws and regulations relating to menhaden fishing or of the adoption of new laws or regulations at
federal, state, intra-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.
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. 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, the financial condition of the Company is exposed to minimal market risk associated with interest rate movements on the Company’s borrowings. A one percent increase or decrease
in the levels of interest rates on variable rate debt would not result in a material change to the Company’s results of operations.
Although the Company sells products in foreign countries, substantially all of the Company’s revenues are billed and paid for in US dollars. As a
result, management does not believe that the Company is exposed to any significant foreign country currency exchange risk, and the Company does not utilize market risk sensitive instruments to manage its exposure to this risk.
Item 4. Controls and Procedures.
(a)
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 Rule 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 the Company’s disclosure in the
reports that the Company files or submits to the Securities and Exchange Commission (“SEC”) 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.
Notwithstanding the foregoing, there can be no assurance
that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in the Company’s
periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.
(b)
Changes in Internal Controls
There were no significant 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.
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