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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-14003
OMEGA PROTEIN CORPORATION
(Exact name of Registrant as specified in its charter)
State of Nevada 76-0562134
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1717 St. James Place, Suite 550 77056
Houston, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (713) 623-0060
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class Which registered
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Common Stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X]
Indicate by check mark whether Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant was approximately $25,364,000 as of June
30, 2002 (computed by reference to the quoted closing price of the registrant's
common stock on the New York Stock Exchange on June 28, 2002). Shares of common
stock held by each officer and director and by each person who owns 5% or more
of the outstanding stock have been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes. On March 6,
2003, there were outstanding 23,973,298 shares of the Company's Common Stock,
$0.01 par value.
Documents incorporated by reference: Portions of the registrant's definitive
proxy statement for its combined 2003 annual meeting of stockholders, which
will be filed with the Securities and Exchange Commission within 120 days after
December 31, 2002, are incorporated by reference to the extent set forth in
Part III.
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Forward-looking statements in this Annual Report on Form 10K, future filings
by the Company with the Securities and Exchange Commission (the "Commission"),
the Company's press releases and oral statements by authorized officers of the
Company are intended to be subject to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Investors are cautioned that all
forward-looking statements involve risks and uncertainty, including without
limitation, the risks set forth under the caption "Significant Factors That May
Affect Forward-Looking Statements" appearing in Item 7 "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," "believe",
"could," "would," "may" and similar expressions.
PART I
Item 1 and 2. Business and Properties
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's marine operations involve the production and sale of a variety
of protein and oil products derived from menhaden, a species of wild
herring-like fish found along the Gulf of Mexico and Atlantic coasts. The fish
is not genetically modified or genetically enhanced. The Company processes
several grades of fish meal (regular or "FAQ" meal and specialty meals), as
well as fish oil and fish solubles. The Company's fish meal products are
primarily used as a protein ingredient in animal feed for swine, cattle,
aquaculture and household pets. Fish oil is utilized for animal and aquaculture
feeds, industrial applications, and for additives to human food products. The
Company's fish solubles are sold primarily to livestock feed manufacturers,
aquaculture feed manufacturers and for use as an organic fertilizer.
All of the Company's products contain Omega-3 fatty acids. The Omega-3 fatty
acids are commonly referred to as "essential fatty acids" because the human
body does not produce them. Instead, essential fatty acids must be obtained
from outside sources, such as food or special supplements. Omega-3s are also
commonly referred to as a "good fat" for their health benefits, as opposed to
the "bad fats" that create or aggravate health conditions through long-term
consumption. See "--Products."
The Company operates through five material subsidiaries: Omega Protein,
Inc., Omega Shipyard, Inc., Protein Operating Company, Protein Securities
Company and Omega Protein Mexico, S. de R. L. de C. V. ("Omega Mexico"). Omega
Protein, Inc. is the Company's principal operating subsidiary for its menhaden
processing business and is the successor to a business conducted since 1913.
Omega Shipyard, Inc. owns a drydock facility in Moss Point, Mississippi, which
is used to provide shoreside maintenance for the Company's fishing fleet and,
subject to outside demand and excess capacity, third-party vessels. Revenues
from shipyard work for third-party vessels in 2002 were not material. Protein
Operating Company holds title to the Company's property containing its
60,000-square foot meal storage warehouse in St. Louis, Missouri. Protein
Securities Company holds title to the Company's property containing its 10,000
metric ton meal storage warehouse, oil storage tanks with a 4,000 metric ton
capacity and other property in Morgan City, Louisiana. Omega Mexico is a new
subsidiary formed in 2002 for the Company's meal and oil purchases in Mexico
and resales in Mexico. The Company also has a number of other immaterial direct
and indirect subsidiaries.
1
Until April 1998, the Company, including its predecessors, was a
wholly-owned subsidiary of Zapata Corporation ("Zapata"). In April 1998, the
Company completed an initial public offering of its common stock. Zapata
currently owns approximately 60% of the Company's outstanding common stock.
The Company files annual, quarterly and current reports and other
information with the Securities and Exchange Commission ("SEC"). The Company's
annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports
on Form 8-K, along with any amendments to those reports, are available free of
charge at the Company's corporate website at http://www.omegaproteininc.com and
are posted within three business days after they are filed with the SEC.
Geographic Information
The Company operates within one industry segment, menhaden fishing, for the
production and sale of fish meal, fish solubles and fish oil. Export sales of
fish oil and fish meal were approximately $44.0 million, $35.7 million and
$21.7 million in 2002, 2001 and 2000, respectively. Such sales were made
primarily to European and Asian markets. In 2002, 2001 and 2000, sales to one
customer were approximately $10.5 million, $7.9 million and $6.3 million,
respectively. This customer differed from year to year.
The following table shows the geographical distribution of revenues (in
thousands) based on location of customers:
Years Ended December 31,
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2002 2001 2000
--------------- --------------- ---------------
Revenues Percent Revenues Percent Revenues Percent
-------- ------- -------- ------- -------- -------
U.S... $ 73,050 62.4% $63,063 63.9% $63,713 75.8%
Europe 6,517 5.6% 15,438 15.6% 5,661 6.7%
Asia.. 13,336 11.4% 8,651 8.8% 2,441 2.9%
Mexico 2,586 2.2% 1,924 1.9% 6,557 7.8%
Canada 12,898 11.0% 4,741 4.8% 3,385 4.0%
Other. 8,621 7.4% 4,935 5.0% 2,285 2.8%
-------- ----- ------- ----- ------- -----
Total. $117,008 100.0% $98,752 100.0% $84,042 100.0%
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Company Overview
Omega is the nation's largest producer of protein rich fish meal and fish
oil. The Company's products are produced from menhaden (a herring-like fish
found in commercial quantities), and includes regular grade and value-added
specialty fish meals, crude and refined fish oils and fish solubles.
Fishing. During 2002, the Company owned a fleet of 66 fishing vessels and
33 spotter aircraft for use in its fishing operations and also leased
additional aircraft where necessary to facilitate operations. During the 2002
fishing season in the Gulf of Mexico, which runs from mid-April through
October, the Company operated 31 fishing vessels and 26 spotter aircraft. The
fishing area in the Gulf is generally located along the Gulf Coast, with a
concentration off the Louisiana and Mississippi coasts. The fishing season
along the Atlantic coast begins in early May and usually extends into December.
The Company operated 10 fishing vessels and 7 spotter aircraft along the
Mid-Atlantic coast, concentrated primarily in and around Virginia and North
Carolina. The remaining fleet of fishing vessels and spotter aircraft are not
routinely operated during the fishing season and are back-up to the active
fleet, used for other transportation purposes or may be in the process of
refurbishment in the Company's shipyard. Subsequent to the 1999 fishing season,
the Company embarked on a program of cost-cutting measures which included,
among other items, utilization of carry vessels and a reduction in the number
of fishing vessels and spotter planes deployed. Since 1999, the deployment of
fishing vessels and spotter planes has been reduced by 12 vessels and 8 planes.
Additionally, since 1999, the Company has been able to increase its fish catch
per fishing vessel employed by 11% as a result of such efforts.
2
Menhaden usually school in large, tight clusters and are commonly found in
warm, shallow waters. Spotter aircraft locate the schools and direct the
fishing vessels to them. The principal fishing vessels transport two 40-foot
purse boats, each carrying several fishermen and one end of a 1,500-foot net.
The purse boats encircle the school and capture the fish in the net. The fish
are then pumped from the net into refrigerated holds of the fishing vessel or
onto a carry vessel, and then are unloaded at the Company's processing plants.
Processing. During 2002, the Company operated four processing plants, two
in Louisiana, one in Mississippi and one in Virginia, where the menhaden are
processed into three general product types: fish meal, fish oil and fish
solubles. The fish are unloaded from the fishing vessels into storage boxes and
then conveyed into steam cookers. The fish are then passed through presses to
remove most of the oil and water. The solid portions of the fish are dried and
ground into fish meal. The liquid that is produced in the cooking and pressing
operations contains oil, water, dissolved protein and some fish solids. This
liquid is decanted to remove the solids and is put through a centrifugal oil
and water separation process. The separated fish oil is a finished product. The
separated water and protein mixture is further processed through evaporators to
recover the soluble protein, which can be sold as a finished product or added
to the solid portions of the fish for processing into fish meal.
Products. The Company sells three general types of products: fish meal,
fish oil and fish solubles.
Fish Meal. Fish meal, the principal product made from menhaden, is sold
primarily as a high-protein feed ingredient. It is used as a protein supplement
in feed formulated for pigs and other livestock, aquaculture and household
pets. Each use requires certain standards to be met regarding quality and
protein content, which are determined by the freshness of the fish and by
processing conditions such as speed and temperatures. The Company produces fish
meal of several different types:
Special Select(TM). Special Select(TM) is a premium grade low
temperature processed fish meal. The quality control guidelines are very
stringent, producing a higher protein level and higher digestibility and a
lower total volatile nitrogen (TVN) and histamine count. These guidelines
require that only the freshest fish and the most gentle drying process be
used. Special Select(TM) is targeted for monogastrics, including baby pigs,
turkey poults, mink, shrimp and trout.
Sea-Lac(TM). Sea-Lac(TM) is similar to Special Select(TM) in its
freshness (low TVN) and gentle drying (high digestibility). During the
processing however, the Company removes most of the soluble protein. This
step allows the amount of rumen undegradable protein to be maximized while
still maintaining excellent digestibility. This product is made specifically
for dairy and beef cattle, sheep, goats and other ruminants requiring bypass
protein.
FAQ Meal. FAQ (Fair Average Quality) Meal, the Company's commodity grade
fish meal, guarantees a protein content of at least 60%. This product
typically is used in protein blends for poultry, catfish, pets and other
animals.
Fish Oil. The Company produces two basic types of fish oil: crude unrefined
fish oil and refined fish oil.
Unrefined Fish Oil. Unrefined fish oil (also referred to as crude fish
oil) is the Company's basic fish oil product. This grade of fish oil has not
undergone any portion of the refining process. The Company's markets for
crude fish oil have changed over the past decade. In the early 1990's, the
Company main crude fish oil market, which accounted for greater than 90% of
the Company's production, was utilized by manufacturers of hydrogenated oils
for human consumption such as margarine and shortening. In 2002, the Company
estimates that approximately 60% of its crude fish oil was sold as a feed
ingredient to the aquaculture industry. The growth of the worldwide
aquaculture industry has resulted in increasing demand for fish oils in
order to improve feed efficiency, survivability and health of farm-raised
fish species.
Refined Fish Oil. The Company's refined fish oils come in three basic
grades:
Feed Grade Oils. Feed grade menhaden oil is processed and refined to
offer a high Omega-3 oil for use in premium pet, aquaculture and
livestock feeds, as well as agricultural and attractant
3
applications. The processing reduces oxidation while enhancing stable
Omega-3 fatty acids for incorporation in the final feed to enhance skin
and coat conditioning, reproductive performance, and increasing
immunity. Both kosher and organic products are available.
Food Grade Oils. Food grade menhaden oil has been fully refined to
remove flavor, odor, and pro-oxidants and offer a naturally high
long-chain Omega-3 content. Omega-3 fatty acids come in two types:
long-chain and short-chain. Short-chain Omega-3's are generally found in
canola oil, soy beans and flaxseed, and generally require five to ten
times as much concentration to approach the same benefit levels as
long-chain Omega-3's.
Scientific studies have linked consumption of Omega-3 rich oil to a number
of nutritional and health benefits, such as heart health, treatment of
arthritis and other inflammatory diseases, improving brain and eye function and
treatment of depression. The Company's main product in this grade is
OmegaPure/TM/. Applications for OmegaPure/TM/ are designed to deliver a stable,
odorless, flavorless source of Omega-3 fatty acids to enhance human nutrition.
These applications include mainstream consumer foods, medical care foods and
dietary supplements. OmegaPure/TM/ also is kosher-certified and organic.
OmegaPure/TM/ currently is the only marine source of long-chain Omega-3's
directly affirmed by the U.S. Food and Drug Administration ("FDA") as a
Generally Recognized As Safe (or "GRAS") food ingredient for direct human
consumption. The FDA has approved OmegaPure/TM/ use in margarine, salad
dressings, condiments, yogurt, ice cream, cheese, prepared meats, sauces,
soups, crackers, cookies, cereals, bakery products and other categories. In
February 2002, the FDA posted for final comment a proposed regulation that
would add 23 additional food categories to the list of food categories already
approved for the inclusion of Omega-3 rich menhaden oil. In addition, the
National Academies of Sciences published a report in September, 2002 on 11
macronutrients, including Omega-3's, which states that human diets can include
110-160 milligrams of long-chain Omega-3's per day for a healthy diet. Omega
believes these developments could benefit its OmegaPure/TM/ sales efforts.
Industrial Grade Oils. Industrial grade menhaden oil is refined and
processed to enhance the unique fatty acid range, making it desirable for a
number of drying and lubricating applications including coolant transfer,
chemical raw material, drying and rustproofing paints, drilling fluids and
leather treatment chemicals.
Fish Solubles. Fish solubles are a liquid protein product used as an
additive in fish meal and are also marketed as an independent product to animal
feed formulators and the fertilizer industry. The Company's soluble-based
products are:
Neptune(TM) Fish Concentrate. This aqua grade liquid protein is composed
of low molecular weight, water-soluble compounds such as free amino acids,
peptides and nucleotides that are attractants for a variety of aquaculture
feeds. The product is utilized in both shrimp and finfish diets to improve
attractability and thus consumption and conversion. Neptune(TM) Fish
Concentrate also can be added directly to grow-out ponds as a fertilizer to
help feed plankton and other natural food sources.
OmegaGrow(TM). OmegaGrow(TM) is a liquid soil or foliar-applied
fertilizer for plant nutrition. OmegaGrow(TM) is approved for organic uses
by the Organic Materials Review Institute ("OMRI"). OmegaGrow(TM) is a
free-flowing product that has been filtered through an 80-mesh screen and
can be applied by sprayers or through irrigation systems.
OmegaGrow Plus(TM). OmegaGrow Plus(TM) is a liquid foliar-applied
fertilizer for plant nutrition that also helps to control insect and fungus
problems. This product has additional oil content of 25 to 30% which is
greater than the 7% to 10% oil content typically found in OmegaGrow/TM/.
These higher levels are detrimental to soft-bodied insects, as well as
fungal diseases in citrus and vegetable crops. OmegaGrow Plus(TM) can be
used as a replacement for petroleum-based oil sprays.
4
Distribution System. The Company's distribution system of warehouses, tank
storage facilities, vessel loading facilities, trucks, barges and railcars
allows the Company to service customers throughout the United States and also
foreign locations. The Company owns and leases warehouses and tank storage
space for storage of its products, generally at terminals along the Mississippi
River and Tennessee River. See "--Properties." The Company generally contracts
with third-party trucking, vessel, barge and railcar companies to transport its
products to and from warehouses and tank storage facilities and directly to its
customers.
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. 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 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.
Customers and Marketing. Most of the Company's marine protein products are
sold directly to about 400 customers by the Company's marketing department,
while a smaller amount is sold through independent sales agents. Product
inventory was $32.0 million as of December 31, 2002 versus $29.1 million on
December 31, 2001.
The Company's fish meal is sold primarily to domestic feed producers for
utilization as a high-protein ingredient for the swine, aquaculture, dairy and
pet food industries. Fish oil sales primarily involve export markets where the
fish oil is used for aquaculture feeds and is refined for use as an edible oil.
The Company's products are sold both in the U.S. and internationally.
International sales consist mainly of fish oil sales to Canada, Japan, Chile,
Norway and the Netherlands. The Company's sales in these foreign markets are
denominated in U.S. dollars and not directly affected by currency fluctuations.
Such sales could be adversely affected by changes in demand resulting from
fluctuations in currency exchange rates.
A number of countries in which the Company currently sells products impose
various tariffs and duties, none of which have a significant impact on the
Company's foreign sales. Certain of these duties are being reduced annually for
certain countries under the North American Free Trade Agreement and the Uruguay
Round Agreement of the General Agreement on Tariffs and Trade. In all cases,
the Company's products are shipped to its customers either by F.O.B. shipping
point or CIF terms, and therefore, the customer is responsible for any tariffs,
duties or other levies imposed on the Company's products sold into these
markets.
During the off season, the Company fills purchase orders from the inventory
it has accumulated during the fishing season. Prices for the Company's products
tend to be lower during the fishing season when product is more abundant than
in the off season. Throughout the entire year, prices are often significantly
influenced by supply and demand in world markets for competing products,
primarily other global sources of fish meal and oil and also soybean meal for
its fish meal products and vegetable oils for its fish oil products when used
as an alternative to vegetable oils.
Quality Control. The Company believes that maintaining high standards of
quality in all aspects of its manufacturing operations play an important part
in its ability to attract and retain customers and maintain its competitive
position. To that end, the Company has adopted strict quality control systems
and procedures designed to test the quality aspects of its products, such as
protein content and digestibility. The Company regularly reviews, updates and
modifies these systems and procedures as appropriate.
5
Purchases and Sales of Third-Party Meal and Oils. Omega has from time to
time purchased fish meal and fish oil from other domestic and international
manufacturers. Omega has generally resold those products to international
customers. These purchase and resale transactions have been ancillary to the
Company's base manufacturing and sales business and revenues resulting from
these activities have historically not been material.
During 2002, the Company developed a business plan to expand its purchase
and resale of other manufacturers' fish meal and fish oil products. In 2002,
the Company engaged a full-time consultant to implement the Company's business
plan which will focus initially on the purchase and resale of Mexican fish meal
and fish oil. In 2002, revenues generated from these types of transactions
represented less than 1% of total Company revenues. The Company expects that
although operating margins from these activities will be less than the margins
generated from the Company's base domestic production, its Mexican operations
will provide it with a source of fish meal and oil to sell into other markets
where the Company has not historically had a presence. The Company's goal is to
expand these purchases of other manufacturers' fish meal and fish oil to an
annual volume of 10,000 to 20,000 metric tons.
Insurance. 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. 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. Depending on the
magnitude of the increase in insurance premiums, the Company may elect 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.
Competition. 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, but to a
lesser extent, 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.
Regulation. The Company's operations are subject to federal, state and
local laws and regulations relating to the locations and periods in which
fishing may be conducted as well as environmental and safety matters. At the
state and local level, certain state and local government agencies have either
enacted legislation and
6
regulations or have the authority to enact legislation and regulations to
prohibit, restrict or regulate menhaden fishing within their jurisdictional
waters. In January 2002, the State of New Jersey enacted legislation which
extended an existing 1.2 mile no-fishing zone for menhaden an additional 1.8
miles offshore. Omega historically has caught an immaterial amount of its fish
catch in the newly closed area and believes that this restriction will have no
material effect on the Company's operations or financial results. Omega remains
able to conduct its fishing operations off the New Jersey coast outside this
new three-mile limit.
In September 2002, two of the three coastal counties in Mississippi
submitted resolutions to the Mississippi Marine Resources Commission seeking to
extend the menhaden no-fishing zone from one mile to two miles from shore. In
September 2002, the Mississippi Marine Resources Commission voted to take no
action on the resolutions and remanded the resolutions back to the counties for
additional clarification. One of the counties subsequently rescinded its
resolution. Since that time, no action has been taken by the Commission and the
Company believes that the matter has been resolved.
The Company, through its operation of fishing vessels, is subject to the
jurisdiction of the U.S. Coast Guard, the National Transportation Safety Board
and the U.S. Customs Service. The U.S. Coast Guard and the National
Transportation Safety Board set safety standards and are authorized to
investigate vessel accidents and recommend improved safety standards. The U.S.
Customs Service is authorized to inspect vessels at will.
The Company's operations are subject to federal, state and local laws and
regulations relating to the protection of the environment, including the
federal Clean Water Act, which imposes strict controls against the discharge of
pollutants in reportable quantities, and along with the Oil Pollution Act,
imposes substantial liability for the costs of oil removal, remediation and
damages. The Company's operations also are subject to the federal Clean Air
Act, as amended; the federal Comprehensive Environmental Response,
Compensation, and Liability Act, which imposes liability, without regard to
fault, on certain classes of persons that contributed to the release of any
"hazardous substances" into the environment; and the federal Occupational
Safety and Health Act ("OSHA"). The implementation of continuing safety and
environmental regulations from these authorities could result in additional
requirements and procedures for the Company and it is possible that the costs
of these requirements and procedures could be material.
The OSHA hazard communications standard, the Environmental Protection Agency
community right-to-know regulations under Title III of the federal Superfund
Amendment and Reauthorization Act and similar state statutes require the
Company to organize information about hazardous materials used or produced in
its operations. Certain of this information must be provided to employees,
state and local governmental authorities and local citizens. Numerous other
environmental laws and regulations, along with similar state laws, also apply
to the operations of the Company, and all such laws and regulations are subject
to change.
The Company has made, and anticipates that it will make in the future,
expenditures in the ordinary course of its business in connection with
environmental matters. Such expenditures have not been material in the past and
are not expected to be material in the future. However, there is no assurance
that environmental laws and regulations enacted in the future will not require
material expenditures or otherwise adversely affect the Company's operations.
The Company's harvesting operations are subject to the Shipping Act of 1916
and the regulations promulgated thereunder by the Department of Transportation,
Maritime Administration which require, among other things, that the Company be
incorporated under the laws of the U.S. or a state, the Company's chief
executive officer be a U.S. citizen, no more of the Company's directors be
non-citizens than a minority of the number necessary to constitute a quorum and
at least 75% of the Company's outstanding capital stock (including a majority
of the Company's voting capital stock) be owned by U.S. citizens. If the
Company fails to observe any of these requirements, it will not be eligible to
conduct its harvesting activities in U.S. jurisdictional waters. Such a loss of
eligibility would have a material adverse effect on the Company's business,
results of operations and financial condition.
7
To protect against such loss of eligibility, the Company's Articles of
Incorporation (i) contain provisions limiting the aggregate percentage
ownership by non-citizens of each class of the Company's capital stock to no
more than 25% of the outstanding shares of each such class (the "Permitted
Percentage") so that any purported transfer to non-citizens of shares in excess
of the Permitted Percentage will be ineffective as against the Company for all
purposes (including for purposes of voting, dividends and any other
distribution, upon liquidation or otherwise), (ii) provide for a dual stock
certificate system to determine such ownership pursuant to which certificates
representing shares of Company Common Stock bear legends that designate such
certificates as either "citizen" or "non-citizen" depending on the citizenship
of the owner, and (iii) permit the Company's Board of Directors to make such
determinations as may reasonably be necessary to ascertain such ownership and
implement restrictive limitations on those shares that exceed the Permitted
Percentage (the "Excess Shares"). For example, the Company's Board is
authorized, among other things, to redeem for cash (upon written notice) any
Excess Shares in order to reduce the aggregate ownership by non-citizens to the
Permitted Percentage.
The Company believes that during the past five years it has substantially
complied with all material statutes and regulations applicable to its
operations, the failure to comply with which would have had a material adverse
impact on its operations.
Employees
At December 31, 2002, during the Company's off-season, the Company employed
approximately 500 persons. At August 31, 2002, during the peak of the Company's
2002 fishing season, the Company employed approximately 976 persons.
Approximately 130 employees at the Company's Virginia facility are represented
by an affiliate of the United Food and Commercial Workers Union. During the
past five years Omega has not experienced any strike or work stoppage which has
had a material impact on its operations. The Company considers its employee
relations to be generally satisfactory.
Executive Officers of the Registrant
The names, ages and current offices of the executive officers of the Company
are set forth below. Also indicated is the date when each such person commenced
serving as an executive officer of the Company.
Date Became
Name and Age Office Executive Officer
------------ ------ -----------------
Joseph L. von Rosenberg III (44) Chief Executive Officer, President and Director July 1997
Robert W. Stockton (52)......... Executive Vice President, Chief Financial Officer July 1997
John D. Held (40)............... Senior Vice President, General Counsel and Secretary January 2002
Bernard H. White (55)........... Corporate Vice President March 1998
Michael E. Wilson (52).......... Vice President--Marine Operations and President of July 1998
Omega Shipyard, Inc.
Thomas R. Wittmann (53)......... Vice President--Operations October 2002
Kenneth Robichau (50)........... Vice President--Tax and Director of Internal Audit September 2002
J. Scott Herbert (37)........... Vice President--Agriproducts September 2002
Albert A. Riley (54)............ Vice President--Refined Oils September 2002
Clark A. Haner (46)............. Vice President--Administration and Controller September 1997
A description of the business experience during the past five years for each
of the executive officers of Omega is set forth below.
Joseph L. von Rosenberg III has served as President, Chief Executive Officer
and a Director of the Company since July 1997. Mr. von Rosenberg also served
from November 1995 until April 1998 as Executive Vice President of Zapata
which, at that time, was a holding company with interests in marine protein
operations, natural gas transmission and oil and gas.
8
Robert W. Stockton has served as Executive Vice President and Chief
Financial Officer of the Company since July 1997. He has also served as
Secretary from January 2000 to September 2002.
John D. Held has served as the Company's General Counsel since March 2000,
as Vice President of the Company from April 2002 to September 2002, and as
Senior Vice President and Secretary since September 2002. Mr. Held also served
as a consultant to the Company from December 1999 to February 2000. From March
1996 until October 1999, Mr. Held was Senior Vice President, General Counsel
and Secretary of American Residential Services, Inc., a then publicly traded
residential and commercial heating, air conditioning, plumbing and electrical
services company. Prior thereto, Mr. Held practiced with a large law firm in
Houston, Texas.
Bernard H. White has served as Corporate Vice President since March 1998.
From 1994 to March 1998, Mr. White worked as a Public Affairs and Investor
Relations Consultant. Prior to that time Mr. White served as Vice
President--Corporate Affairs of Zapata.
Michael E. Wilson has served as President of the Company's wholly-owned
subsidiary, Omega Shipyard, Inc., since June 1997. Since July 1998, he has also
served as the Company's Vice President--Marine Operations and prior thereto,
served as the Company's Coordinator of Marine Engineering & Maintenance. Mr.
Wilson joined the Company in 1985 and served in various operating capacities
until 1996.
Thomas R. Wittmann has served as Vice President--Operations since October
2002. Prior thereto, Mr. Wittmann served as the General Manager of the
Company's Abbeville, Louisiana facility since 1997 and served in various other
Company positions since 1985.
Kenneth Robichau has served as Vice President--Tax since September 1998 (in
a part-time capacity until September 2002) and as Director of Internal Audit
since September 2002. From March 1998 until September 1998, Mr. Robichau also
worked in a part-time capacity as a tax consultant for the Company. Prior to
March 1998, Mr. Robichau served as Vice President--Tax and Treasurer of Zapata.
J. Scott Herbert has served as Vice President--Agriproducts of the Company
since September 2002. Prior thereto, Mr. Herbert served as Vice President--Feed
Ingredient Marketing of the Company's principal subsidiary, Omega Protein,
Inc., since March 1998, and as Director of Fish Meal Sales and in various other
sales capacities with the Company since 1992.
Albert A. Riley has served as Vice President--Refined Oils of the Company
since September 2002. Prior thereto, Mr. Riley served as Vice
President--Refined Oils of the Company's principal subsidiary, Omega Protein,
Inc., since May 2000 and as Business Development Manager--Industrial Oils of
Omega Protein, Inc., from September 1999 to April 2000. From July 1999 to
September 1999, Mr. Riley served as a consultant to the Company. Prior thereto,
Mr. Riley was a financial planner with Lincoln Financial.
Clark A. Haner has served as Vice President--Administration and Controller
of the Company since December 1999. From September 1997 to December 1999, Mr.
Haner served as the Company's Controller and Assistant Treasurer and prior
thereto, served as the Company's Accounting Manager. Mr. Haner joined the
Company in September 1995.
Properties
The Company owns the Reedville, Virginia; Moss Point, Mississippi; and
Abbeville, Louisiana plants and the real estate on which they are located
(except for a small leased parcel comprising a portion of the Abbeville
facility). The Company leases from unaffiliated third parties the real estate
on which the Cameron, Louisiana plant is located. The Cameron plant lease
provides for a 10 year term ending on June 30, 2012 (with one 10-year option)
and annual rent of $64,000. The Company exercised its purchase option on its
formerly leased Morgan City, Louisiana property for $656,000 in November 2002.
9
As of December 31, 2002, the Company's four active processing plants had an
aggregate capacity to process approximately 950,000 tons of fish annually. The
Company's processing plants are located in coastal areas near the Company's
fishing fleet. Annual volume processed varies depending upon menhaden catch and
demand. Each plant maintains a dedicated dock to unload fish, fish processing
equipment and storage capacity. The Reedville, Virginia facility is also the
site for the Company's oil refining plant.
The Company also leases from unaffiliated third parties warehouses and tank
space for storage of its products, generally at terminals located along the
Mississippi River and Tennessee River. The Company's material storage
facilities are located at:
Location Approximate Capacity
-------- --------------------
Guntersville, Alabama..... 10,000 short tons
St. Louis, Missouri....... 10,000 short tons
East Dubuque, Illinois.... 11,000 short tons
Avondale, Louisiana....... 25,000 metric tons
Norfolk, Virginia......... 2,500 metric tons
In February 2002, the Company purchased the above storage facility in St.
Louis, Missouri for approximately $600,000.
The Company owns two dry docks, each with a capacity of 1,300 tons, and a
49.4 acre shipyard facility in Moss Point, Mississippi, which is used for
routine maintenance and vessel refurbishment on its fishing vessels and for
shoreside maintenance services to third-party vessels if excess capacity exists.
The Company leases office space in Hammond, Louisiana for its administrative
offices, and also subleases office space in Houston, Texas for its executive
offices pursuant to a sublease with Zapata that the Company believes is at a
market rate. The Company believes its facilities are adequate and suitable for
its current level of operations. The Company maintains customary workers'
compensation insurance, as well as liability, property and marine insurance for
all of its operations.
Item 3. Legal Proceedings
The Company is defending various claims and litigation arising from
operations which arise in the ordinary course of the Company's business. In the
opinion of management, any losses resulting from these matters will not have a
material adverse affect on the Company's results of operations, cash flows or
financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of Omega's stockholders during the fourth
quarter of 2002.
10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Omega's common stock is listed on the New York Stock Exchange ("NYSE") under
the symbol "OME". The high and low sales prices for the common stock, as
reported in the consolidated transactions reporting system, as well as the
amounts per share of dividends declared during 2002 and 2001, for each
quarterly period, are shown in the following table.
Dec. 31, Sep. 30, Jun. 30, Mar. 31, Dec. 31, Sep. 30, Jun. 30, Mar. 31,
2002 2002 2002 2002 2001 2001 2001 2001
-------- -------- -------- -------- -------- -------- -------- --------
High sales price $4.45 $4.90 $4.80 $3.94 $3.55 $2.20 $2.45 $2.05
Low sales price. 3.75 3.79 3.03 2.60 1.85 1.75 1.60 1.34
Dividends....... -- -- -- -- -- -- -- --
On March 3, 2003, the closing price of Omega's common stock, as reported by
the NYSE, was $4.74 per share. As of March 3, 2003, there were approximately 40
holders of record of Omega's common stock. This number does not include any
beneficial owners for whom shares may be held in a "nominee" or "street" name.
Omega has never declared any dividends since it became a public company in
April 1998. Omega intends to retain earnings, if any, and does not anticipate
declaring or paying dividends on its common stock in the foreseeable future.
Any future determination as to payment of dividends will be made at the
discretion of the Board of Directors of Omega and will depend upon the
Company's operating results, financial condition, capital requirements, general
business conditions and such other factors that the Board of Directors deems
relevant. In addition, the payment of cash dividends is not permitted by the
terms of the Company's revolving credit agreement with Bank of America, N.A.
(the "Credit Facility"). See "Item 7--Management's Discussion and Analysis of
Financial Conditional and Results of Operations--Liquidity and Capital
Resources."
The following table sets forth information as of December 31, 2002, with
respect to compensation plans under which equity securities of the Company are
authorized for issuance:
(c)
(a) Number of securities
Number of securities (b) remaining available for future
to be issued upon Weighted-average issuance under equity
exercise of outstanding exercise price of compensation plans (excluding
options, warrants and outstanding options, securities reflected in column
Plan category rights (in thousands) warrants and rights (a)) (in thousands)
------------- ----------------------- -------------------- ------------------------------
Equity compensation plans approved by
security holders.................... 5,470 $6.38 522
Equity compensation plans not approved
by security holders................. -- -- --
----- ----- ---
Total.............................. 5,470 $6.38 522
===== ===== ===
11
Item 6. Selected Financial Data
The following table sets forth certain selected historical consolidated
financial information for the periods presented and should be read in
conjunction with the Consolidated Financial Statements of the Company included
in Item 8 of this Report and the related notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7 of the Report.
Three Months
Ended Year Ended
Years Ended December 31, December 31, September 30,
--------------------------------------- ------------ -------------
2002 2001 2000 1999 1998 1998
-------- -------- -------- -------- ------------ -------------
(in thousands, except per share amounts)
INCOME STATEMENT
DATA:
Revenues.................... $117,008 $ 98,752 $ 84,042 $ 93,636 $ 25,759 $133,555
Operating income (loss)..... 18,663 5,661 (25,541)(4) (23,273)(2,3) 6,272 38,118
Net income (loss)........... 12,169 3,885 (16,744) (14,756) 4,252 24,207
Per share income (loss)
basic..................... 0.51 0.16 (0.70) (0.62) 0.18 1.11
Per share income (loss)
diluted................... 0.48 0.16 (0.70) (0.62) 0.18 1.10
CASH FLOW DATA:
Capital expenditures........ 7,765 1,921 6,977 15,145 3,030 21,540
Acquisitions of property
and equipment............. -- -- -- -- -- 28,116
BALANCE SHEET DATA (end of period):
Working capital............. $ 71,851 $ 54,216 $ 40,254 $ 63,724 $ 83,557 $ 80,498
Property and equipment,
net....................... 80,713 82,030 88,872 90,368 86,068 84,798
Total assets................ 181,131 165,227 160,484 176,148 189,853 193,421
Current maturities of long-
term debt................. 1,270 1,296 1,227 1,146 997 1,114
Long-term debt.............. 14,239 15,510 14,827 16,069 11,205 11,408
Stockholders' equity........ 135,036 127,445 127,477 144,172 160,850 156,598(1)
- --------
(1) The Company's initial public offering closed in April 1998 which resulted
in net proceeds to the Company of $68.0 million, of which $33.3 million was
used to repay indebtedness.
(2) During the quarters ended September 30, 1999 and December 31, 1999, the
Company recorded inventory write-downs of $14.5 million and $3.7 million,
respectively, for market declines in the inventory values of the Company's
fish meal and fish oil.
(3) Includes a pre-tax charge of $2.3 million during the quarter ended December
31, 1999, for the write-down of certain impaired Morgan City, Louisiana
plant in-line processing assets.
(4) During the quarters ended September 30, 2000 and December 31, 2000, the
Company recorded inventory write-downs of $13.7 million and $4.4 million,
respectively, for market declines in the inventory values of the Company's
fish meal and fish oil.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is a discussion of the Company's financial condition and
results of operations. This discussion should be read in conjunction with the
Consolidated Financial Statements of the Company appearing under Item 8 herein.
Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do
not affect earnings or stockholders' equity.
General
Business. 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 fish
solubles. The Company's fish meal products are used as nutritional feed
additives by animal feed manufacturers and by commercial livestock producers.
The Company's crude fish oil is sold to food producers and aquaculture feed
manufacturers in Europe and Asia and its refined fish oil products are used in
food production and certain industrial applications. Fish solubles are sold as
protein additives for animal feed and as fertilizers.
The fish catch is processed into FAQ grade fish meal, specialty fish meals,
fish oils and fish solubles at the Company's four operating plants located in
Virginia, Mississippi and Louisiana. The Company utilized 41 fishing vessels
and 33 spotter craft in the harvesting operations during 2002. Menhaden are
harvested offshore the U.S. mid-Atlantic and Gulf of Mexico coasts. In 2000,
the Company converted several of its fishing vessels to "carry vessels" which
do not engage in active fishing but instead carry fish from the Company's
offshore fishing vessels to its plants. Utilization of carry vessels increases
the amount of time that certain of the Company's fishing vessels remain
offshore fishing productive waters and therefore increases the Company's fish
catch per vessel employed. Since 1999, the Company's fish catch per vessel has
increased 11%. The carry vessels have reduced crews and crew expenses and incur
less maintenance cost than the actual fishing vessels.
Harvesting and Production. The following table summarizes the Company's
harvesting and production for the indicated periods:
Years Ended December 31,
-----------------------
2002 2001 2000
------- ------- -------
Fish catch (tons) (1)............. 607,221 627,623 620,655
Production (tons):
Fish meal
Regular grade.............. 34,661 57,833 88,190
Special Select............. 96,657 74,905 49,297
Sea-Lac.................... 25,483 24,144 24,970
Silver Herring............. -- -- 1,060
Oil
Crude...................... 68,616 91,127 58,809
Refined.................... 6,232 4,418 5,371
Solubles....................... 10,323 11,094 8,855
------- ------- -------
Total Production........ 241,972 263,521 236,552
======= ======= =======
- --------
(1) Fish catch has been converted to tons using the National Marine Fisheries
Service ("NMFS") fish catch conversion ratio of 670 pounds per 1,000 fish.
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
13
season. Prices for the Company's products tend to be lower during the fishing
season when product is more abundant than in the off season. Throughout the
entire year, prices are significantly influenced by supply and demand in world
markets for competing products, particularly other globally produced fish meal
as well as soybean meal for its fish meal products and vegetable fats and oils
for its fish oil products when used as an alternative to vegetable fats and
oils.
During 1999 and continuing through 2000, world grain and oilseed markets
were burdened by excess supplies relative to demand which, in turn, resulted in
prices for most major commodities being sharply lower than in previous years.
Correspondingly, the Company's product prices were adversely impacted during
these periods, resulting in decreased gross margins. During 1999 and again
during 2000, the Company determined that the costs of its fish meal and fish
oil product inventories were in excess of those products' realization value by
approximately $18.2 million and $18.1 million, respectively. This realization
was due mainly to the continuing depressed market values of world protein
markets and particularly, animal and oilseed oil markets. The average prices
received for the Company's fish meal and fish oil products were approximately
28.1% and 48.2% lower, respectively, during 1999 as compared to 1998. Price
decreases continued during 2000 and fish meal and fish oil prices were
approximately 7.3% and 20%, respectively, lower than 1999 average prices. Also
impacting 2000 and contributing to the write-down of inventories was the
reduced crude fish oil production yields (approximately 38% lower yields
compared to 1999) experienced during the majority of the 2000 fishing season in
the Gulf of Mexico. These reduced yields were primarily a result of the reduced
fat content in the fish, which was a result of poor nutritional conditions
caused by the extreme drought conditions suffered by the Gulf of Mexico region
during late 1999 and early 2000.
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. 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.
In an effort to reduce price volatility and to generate higher, more
consistent profit margins, the Company is continuing its efforts towards the
production and marketing of specialty meal products, which generally have
higher margins than the Company's FAQ meal product. Since 2000, the Company's
sales volumes of specialty meal products has increased approximately 26%.
Additionally, the Company is attempting to introduce its refined fish oil into
the food market. The Company has had some success selling its refined fish oil,
trademarked OmegaPure(TM), to food manufacturers in the United States and
Canada at prices that provide substantially improved margins over the margins
that can be obtained from selling non-refined crude fish oil. The Company
cannot estimate, however, the size of the actual domestic market for
OmegaPure(TM) or how long it may take to develop this market.
Historically, approximately 35% to 40% of Omega's FAQ fish meal was sold on
a two-to-twelve-month forward contract basis. The balance of regular grade and
other products was substantially sold on a spot basis through purchase orders.
The Company began a similar forward sales program for its specialty grade meals
and crude fish oil for 2002 and will continue this program for 2003. The
Company's annual revenues are highly dependent on both annual fish catch and
inventories and, in addition, inventory is generally carried over from one year
to another year. The Company determines the level of inventory to be carried
over based on prevailing market prices of the products and anticipated customer
usage and demand during the off season. Thus, production volume does not
necessarily correlate with sales volume in the same year and sales volumes will
fluctuate from quarter to quarter. The Company's fish meal products have a
useable life of approximately one year from date of production. Practically,
however, the Company typically attempts to empty its warehouses of the previous
season's products by the second or third month of the new fishing season. The
Company's crude fish oil products do not lose efficacy unless exposed to oxygen
and therefore, their storage life typically is longer than that of fish meal.
14
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:
Years Ended December 31,
-------------------------------------------------
2002 2001 2000
--------------- --------------- ---------------
Revenues Percent Revenues Percent Revenues Percent
-------- ------- -------- ------- -------- -------
Regular Grade. $ 19.3 16.5% $20.6 20.9% $30.0 35.7%
Special Select 43.0 36.8 33.6 34.0 25.7 30.6
Sea-Lac....... 12.4 10.6 10.4 10.5 8.5 10.1
Crude Oil..... 35.5 30.3 28.4 28.7 12.1 14.4
Refined Oil... 4.2 3.6 2.5 2.5 2.4 2.9
Fish Solubles. 2.6 2.2 2.5 2.5 2.3 2.7
Nets and Other - - 0.8 0.9 3.0 3.6
------ ----- ----- ----- ----- -----
Total......... $117.0 100.0% $98.8 100.0% $84.0 100.0%
====== ===== ===== ===== ===== =====
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.
Omega had an unrestricted cash balance of $33.5 million at December 31,
2002, up $11.7 million from December 31, 2001. This increase was due primarily
to operating profits as a result of increased selling prices for the Company's
products. 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 December 31, 2002 and 2001 was $14.2 million and
$15.5 million, respectively. Current maturities attributable to the Company's
long-term debt was $1.3 million both at December 31, 2002 and 2001. The Company
did not utilize its working capital credit facility during 2002 and 2001 other
than for $2.1 million and $1.9 million in standby letters of credit as of
December 31, 2002 and 2001, respectively. As of December 31, 2002, the Company
had $17.9 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.
15
The following tables aggregate information about the Company's contractual
cash obligations and other commercial commitments (in thousands) as of December
31, 2002:
Payments Due by Period
---------------------------------------
Less than 1 to 3 4 to 5 After 5
Contractual Cash Obligations Total 1 year years years years
---------------------------- ------- --------- ------ ------ -------
Long Term Debt.................... $15,509 $1,270 $2,790 $3,157 $ 8,292
Operating Leases.................. 1,202 378 690 134 --
Minimum Pension Liability......... 13,087 -- -- -- 13,087
------- ------ ------ ------ -------
Total Contractual Cash Obligations $29,798 $1,648 $3,480 $3,291 $21,379
======= ====== ====== ====== =======
Amount of Commitment Expiration Per Period
---------------------------------------
Less than 1 to 3 4 to 5 After 5
Other Commercial Commitments Total 1 year years years years
---------------------------- ------- --------- ------ ------ -------
Credit Facility (1)......... $17,908 $ -- $ -- $ -- $ --
Standby Letters of Credit... 2,092 2,092 -- -- --
------- ------ ----- ----- -----
Total Commercial Commitments $20,000 $2,092 $ -- $ -- $ --
======= ====== ===== ===== =====
- --------
(1) As of December 31, 2002, the Company had no outstanding borrowings
outstanding under the $20.0 million Credit Facility.
Investing activities used $7.7 million in 2002 while using $1.5 million and
$6.9 million during 2001, and 2000, respectively. The Company's investing
activities in 2002, 2001 and 2000 consisted mainly of capital expenditures for
equipment purchases, replacements and vessel refurbishments. The Company
anticipates making approximately $8.0 million of capital expenditures in 2003,
a significant portion of which will be used to refurbish vessels and plant
assets and to repair certain equipment.
Financing activities used $1.3 million in 2002 and $1.2 million during 2000,
respectively, to repay debt. Due to $2.0 million in proceeds from Title XI
borrowings, net financing activities in 2001 provided $752,000.
On December 20, 2000, the Company entered into a $20.0 million revolving
credit agreement with Bank of America, N.A. (the "Credit Facility"). Under the
Credit Facility the Company may make borrowings in a principal amount not to
exceed $20.0 million at any time. Borrowings under this facility may be used to
finance ongoing working capital needs, to make acquisitions, and to issue
standby or commercial letters of credit. Interest accrues on borrowings that
will be outstanding under the Credit Facility at either (i) LIBOR plus 250
basis points or (ii) at the Company's option, the Bank's prime rate. The Credit
Facility is collateralized by all of the Company's trade receivables, inventory
and equipment. The Company and its subsidiaries are required to comply with
certain financial covenants, including maintenance of a minimum tangible net
worth and maintenance of minimum EBITDA. In addition, the Credit Facility does
not allow for the payment of cash dividends or stock repurchases and also
limits capital expenditures and investments. Through December 31, 2002, the
Company had made no borrowings under the Credit Facility other than for standby
letters of credit of which $2.1 million were outstanding as of December 31,
2002. The current Credit Facility expires on December 20, 2003.
The Company's principal raw material is menhaden, a species of fish that
inhabits coastal and inland tidal waters in the United States. Menhaden are
undesirable for human consumption 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
16
(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.
In January 2002, the United States Supreme Court ruled that, in addition to
the United States Coast Guard, the Occupational Safety and Health
Administration has the authority to regulate working conditions aboard certain
types of vessels which include the Company's fishing vessels. The eventual
implementation of this ruling (which is expected to occur over a period of
years) is expected to result in additional safety requirements and procedures
for the Company's vessels. It is possible that the costs of these requirements
and procedures could be material.
The Company carries insurance for certain losses relating to its vessels and
Jones Act liability for employees aboard its vessels (collectively, "Vessel
Claims Insurance"). The typical Vessel Claims Insurance policy contains an
annual aggregate deductible ("AAD") for which the Company remains responsible,
while the insurance carrier is responsible for all applicable amounts which
exceed the AAD. It is the Company's policy to accrue current amounts due and
record amounts paid out on each claim. Once payments exceed the AAD, the
Company records an insurance receivable for a given policy year.
During 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.
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 do so as
various lines of insurance come up for renewal in 2003. Depending on the
magnitude of the increase in insurance premiums, the Company may elect to
increase its deductibles and self-retentions in order to achieve lower
insurance premium costs. These higher deductibles and self-retentions will
expose the Company to greater risk of loss if claims occur.
The Company believes that the existing cash, cash equivalents, short-term
investments and funds available through its Credit Facility will be sufficient
to meet its working capital and capital expenditure requirements through at
least the end of 2003.
Significant Accounting Policies
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported therein, including
estimates about the effects of matters or future events that are inherently
uncertain. The most significant of these 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.
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 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
17
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
vessel. The Company provides reserves for those portions of the AAD for which
the Company remains responsible by using an estimation process that considers
Company-specific and industry data as well as management's experience,
assumptions and consultation with outside counsel. Management's current
estimated range of liabilities related to such cases is based on claims for
which management can estimate the amount and range of loss. The Company has
recorded the minimum estimated liability related to those claims, where there
is a range of loss. As additional information becomes available, the Company
will assess the potential liability related to its pending litigation and
revise its estimates. Such revisions in estimates of the potential liability
could materially impact the Company's results of operation and financial
position.
Results of Operations
The following table sets forth as a percentage of revenues, certain items of
the Company's operations for each of the indicated periods.
Years Ended December 31,
-----------------------
2002 2001 2000
----- ----- -----
Revenues.................................... 100.0% 100.0% 100.0%
Cost of sales............................... 76.3 85.8 99.7
Inventory write-down........................ -- -- 21.6
----- ----- -----
Gross profit (loss)......................... 23.7 14.2 (21.3)
Selling, general and administrative expenses 7.7 8.5 9.1
----- ----- -----
Operating income (loss)..................... 16.0 5.7 (30.4)
Interest expense, net....................... (0.5) (0.5) (0.3)
Other expenses, net......................... (0.2) (0.2) (0.4)
----- ----- -----
Income (loss) before income taxes........... 15.3 5.0 (31.1)
Provision (benefit) for income taxes........ 4.9 1.2 (11.2)
----- ----- -----
Net income (loss)........................... 10.4 3.8 (19.9)
===== ===== =====
2002-2001
Revenues. 2002 revenues increased $18.3 million, or 18.5%, from $98.7
million in 2001 to $117.0 million in 2002. The increase in revenues was
primarily due to higher selling prices of 14.6% and 41.4% for the company's
fish meal and fish oil, respectively. The Company attributes the higher fish
meal and oil prices to strong worldwide demand for fish meal and competing fish
oil markets rebounding from historic low levels.
18
Cost of Sales. Cost of sales, for 2002 was $89.3 million, a $4.6 million
increase, or 5.5%, from $84.7 million in 2001. Cost of sales as a percentage of
revenues was 76.3% for 2002 as compared to 85.8% in 2001. The 9.5% decrease in
cost of sales as a percentage of revenues was due primarily to a 14.6% and
41.4% increase in the selling price of the Company's fish meal and fish oil
products, respectively.
Gross Profit. Gross profit increased $13.6 million or 96.9%, from $14.1
million in 2001 to $27.7 million in 2002. As a percentage of revenues the
Company's gross profit margin increased 9.5% in 2002 as compared to 2001. The
increase in gross profit was due primarily to a 14.6% and 41.4% increase in the
selling price of the Company's fish meal and fish oil products.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses increased $631,000 or 7.5% from $8.4 million in 2001 to
$9.0 million in 2002. The increase was due to increased employee related costs
attributable to health care and retirement programs, partially offset by
reduced insurance receivables writeoffs.
Operating income. As a result of the factors discussed above, the Company's
operating income increased $13.0 million from $5.7 million in 2001 to $18.7
million in 2002. As a percentage of revenues, operating income increased 10.3%
from 5.7% in 2001 to 16.0% in 2002.
Interest expense, net. Interest expense, net increased by $110,000 from
interest expense of $485,000 in 2001 to $595,000 in 2002. The increase in net
interest expense was primarily due to a reduction of interest income as a
result of lower returns on investments.
Other expense, net. Other expense, net increased by $71,000 from $151,000
in 2001 to $222,000 in 2002. The increase in other expense, net was the result
of a gain on the disposal of miscellaneous assets recognized during 2001.
Provision for income taxes. The Company recorded a $5.7 million provision
for income taxes in 2002 representing an effective tax rate of 32% for income
taxes. The effective tax rate for 2002 was reduced below the statutory rate due
mainly to the partial exclusion of income on foreign sales. The provision for
income taxes for 2001 reflected a year to date deferred state tax benefit of
approximately $750,000, based on the Company successfully completing several
years of state income tax audits, which resulted in the Company having an
effective tax rate of 23% for 2001. The Company believes that it is more
probable than not that the recorded estimated deferred tax asset benefits and
state net operating loss carry-forwards will be realized. The statutory tax
rate of 34% for U.S. federal taxes was in effect for 2001 and 2002.
2001-2000
Revenues. 2001 revenues increased $14.7 million, or 17.5%, from $84.0
million in 2000 to $98.7 million in 2001. The increase in revenues was
attributable to higher selling prices of the Company's fish meal and fish oil,
along with a 43.8% increase in sales volumes of the Company's fish oil as
compared to 2000. Selling prices for the Company's fish meal and fish oil
products increased by 17.5% and 37.7% respectively in 2001 as compared to 2000.
The higher sales volumes of the Company's fish oil products were due primarily
to a 48.5% increase in oil yields from the 2001 fishing effort as compared to
the previous year. The Company attributes the higher fish meal and fish oil
selling prices to diminished global fish meal and fish oil inventories as
opposed to a general strengthening in world markets for other competing
products.
Cost of sales. Cost of sales, including depreciation and amortization for
2001, was $84.7 million, a $857,000 increase, or 1.0%, from $83.8 million
(excluding the $18.1 million inventory write-down) in 2000. Cost of sales as a
percentage of revenues was 85.8% for 2001 as compared to 99.7% in 2000. The
13.9% decrease in cost of sales as a percentage of revenues was due primarily
to a 17.5% and 37.7% increase in the selling price of the Company's fish meal
and fish oil products, respectively, along with a 43.8% increase in sales
volume of the Company's fish oil.
19
Gross profit (loss). Gross profit increased $32.0 million, or 178.6%, from
a gross loss of $17.9 million in 2000 to a gross profit of $14.1 million in
2001. As a percentage of revenues, the Company's gross profit margin increased
35.5% in 2001 as compared to 2000. The increase in gross profit was due
primarily to a 17.5% and 37.7% increase in the selling price of the Company's
fish meal and fish oil products, respectively, along with a 43.8% increase in
sales volume of the Company's fish oil and the $18.1 million inventory
write-down affecting 2000.
Selling, general, and administrative expenses. Selling, general, and
administrative expenses increased $768,000, or 10.1%, from $7.6 million in 2000
to $8.4 million in 2001. This increase was primarily due to the recognition of
$1.4 million of receivables due from an insurance company as uncollectible due
to their bankruptcy filing, partially offset by a reduction in staffing and
related employee costs.
Operating income (loss). As a result of the factors discussed above, the
Company's operating income increased $31.2 million from an operating loss of
$25.5 million in 2000 to an operating income of $5.7 million in 2001. As a
percentage of revenues, operating income increased 36.1% from a loss of 30.4%
in 2000 to income of 5.7% in 2001.
Interest expense, net. Interest expense, net increased by $192,000 from
interest expense of $293,000 in 2000 to $485,000 in 2001. The increase in net
interest expense was primarily due to a reduction of interest income as a
result of lower returns on investments.
Other expense, net. Other expense, net decreased by $178,000 from $329,000
in 2000 to $151,000 in 2001. The decrease in other expense, net was primarily
due to the disposal of assets which were netted against other expenses.
Provision (benefit) for income taxes. The Company recorded a $1.1 million
provision for income taxes in 2001. The provision for income taxes for 2001
reflects a year to date deferred state tax benefit of approximately $750,000.
During 2001, the Company successfully completed several years of state income
tax audits. Based on the results of the audits and the filing of the 2000
returns, the Company revised its estimates of state taxes. The Company has
recorded deferred tax assets for state net operating loss carryforwards and
believes that it is more probable than not that the estimated tax benefits of
the state net operating losses will be realized. The effective tax rate of 34%
for U.S. federal taxes remains unchanged between the periods.
Recently Issued Accounting Standards
In May 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Nos. 4, 44, and 64, Amendment of FASB 13, and Technical Corrections as of
April 2002." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment to that Statement, FASB
Statement No. 64 "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. SFAS No. 145 is
effective for financial statements issued for years beginning after May 15,
2002. SFAS No. 145 will have no impact on the Company's results of operations,
liquidity or financial position upon adoption.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS 146 requires recording costs associated
with exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally before an actual
liability has been incurred. The requirements of SFAS No. 146 are effective
prospectively for exit or disposal activities initiated after December 31,
2002; however, early application is encouraged. The Company does not expect the
adoption of SFAS No. 146 to have a material effect on its financial position,
results of operations, or cash flows.
20
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions--An Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." The provision of this statement related to the
application of the purchase method of accounting is effective for acquisitions
for which the date of acquisition is on or after October 1, 2002. The
provisions related to accounting for the impairment or disposal of certain
long-term customer-relationship intangible assets are effective on October 1,
2002. Transition provisions for previously recognized unidentifiable intangible
assets are effective on October 1, 2002, with earlier application permitted.
The adoption of SFAS No. 147 did not have any impact on the Company's financial
position, results of operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-- Transition and Disclosure." SFAS No. 148 amends SFAS No. 123
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for years beginning after December 15, 2002.
The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December
15, 2002. The Company does not expect the adoption of SFAS 148 to have a
material effect on its financial position, results of operations or cash flows.
On November 25, 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34."
FIN 45 clarifies the requirements of FASB Statement No.5, "Accounting for
Contingencies" ("FAS 5"), relating to a guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. The disclosure
provisions of FIN 45 are effective for financial statements of interim or
annual periods that end after December 15, 2002. However, the provisions for
initial recognition and measurement are effective on a prospective basis for
guarantees that are issued or modified after December 31, 2002, irrespective of
a guarantor's year-end. The adoption of FIN 45 for the year ended December 31,
2002 did not have an impact on the Company's financial position, results of
operations or cash flows.
On January 17, 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." FIN 46 clarifies the application
of Accounting Research Bulletin 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. FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It applies in the
first year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 applies to public enterprises as of
the beginning of the applicable interim or annual period. The Company is in the
process of determining what impact, if any, the adoption of the provisions of
FIN 46 will have upon its financial condition, results of operations or cash
flows.
In June 2001, the FASB approved SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets," SFAS No. 141 supersedes
Accounting Principles Board ("APB") Opinion No. 16. "Business Combinations," to
prohibit use of the pooling-of-interest (pooling) method of accounting for
business combinations initiated after the issuance date of the final Statement.
SFAS No. 142 supersedes APB Opinion No. 17, "Intangible Assets," by stating
that goodwill will no longer be amortized, but will be tested for impairment in
a manner different from the way other assets are tested for impairment. SFAS
No. 142 also establishes a new method of testing goodwill for impairment. The
provisions of SFAS No. 141 and SFAS No. 142 are effective for years beginning
after December 15, 2001. The Company's implementation of the provisions of SFAS
No. 141 and No. 142 did not have an impact on the Company's financial position,
results of operations or cash flows.
21
At the end of June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that obligations associated with
the retirement of a tangible long-lived asset be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related asset. Upon settlement
of the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. The provisions of SFAS No. 143
will be required to be adopted by the Company in 2003. The Company does not
believe the adoption of this statement will have a material impact on the
Company's financial position, results of operations or cash flows.
In October 2001 the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which established accounting and reporting
standards for the impairment or disposal of long-lived assets and supercedes
SFAS No. 121 and the accounting and reporting provisions of APB Opinion No. 30.
This new standard requires that companies test certain long-lived assets for
impairment and write down assets that are considered impaired. SFAS No. 144
differs from SFAS No. 121 by clarifying impairment testing and excluding
goodwill. The effective date of the statement was for years beginning after
December 14, 2001. The Company's implementation of the provisions of SFAS No.
144 did not have an impact on the Company's financial position, results of
operations or cash flows.
Seasonal and Quarterly Results
The Company's menhaden harvesting and processing business is seasonal in
nature. The Company generally has higher sales during the menhaden harvesting
season (which includes the second and third quarter of each year) due to
increased product availability, but prices during the fishing season tend to be
lower than during the off-season. 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. Quarterly financial
data contained in Note 16 to the Company's Consolidated Financial Statements
included in Item 8 of this Report are incorporated herein by reference.
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, palm oil, soy meal and oil, and other edible oils.
22
4. The impact of a violation by the Company of federal, state and local
laws and regulations relating to menhaden fishing and the protection of
the environment and the health and safety of its employees or of the
adoption of new laws and regulations 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 on the Company if it cannot harvest menhaden in U.S.
jurisdictional waters if the Company fails to comply with U.S.
citizenship ownership requirements.
6. Risks inherent in the Company's attempt to expand into sales of refined,
food grade fish oils for consumption in the U.S., including the unproven
market for this product.
7. Fluctuations in the Company's quarterly operating results due to the
seasonality of the Company's business and the Company's deferral of
sales of inventory based on worldwide prices for competing products.
8. The ability of the Company to retain and recruit key officers and
qualified personnel, vessel captains and crewmembers.
9. Risks associated with the strength of local currencies of the countries
in which its products are sold, changes in social, political and
economic conditions inherent in foreign operations and international
trade, including changes in the law and policies that govern foreign
investment and international trade in such countries, changes in U.S
laws and regulations relating to foreign investment and trade, changes
in tax or other laws, partial or total expatriation, currency exchange
rate fluctuations and restrictions on currency repatriation, the
disruption of labor, political disturbances, insurrection or war and the
effect of requirements of partial local ownership of operations in
certain countries.
10. Risks related to unanticipated material adverse outcomes in any pending
litigation or any other unfavorable outcomes or settlements. There can
be no assurance that the Company will prevail in any pending litigation
and to the extent that the Company sustains losses growing out of any
pending litigation which are not presently reserved or otherwise
provided for or insured against, its business, results of operation and
financial condition could be adversely affected.
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. Depending on the magnitude of
the increase in insurance premiums, the Company may elect 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 7.A Quantitative and Qualitative Disclosure About Market Risk.
In the normal course of business, the financial condition of the Company is
exposed to minimal market risk associated with interest rate movements on the
Company's borrowings. A one percent increase or decrease in the levels of
interest rates on variable rate debt would not result in a material change to
the Company's results of operations.
Although the Company sells products in foreign countries, all of the
Company's revenues are billed and paid for in US dollars. As a result,
management does not believe that the Company is exposed to any significant
foreign country currency exchange risk, and the Company does not utilize market
risk sensitive instruments to manage its exposure to this risk.
Item 8. Financial Statements and Supplementary Data
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Omega Protein Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows and stockholders' equity
present fairly, in all material respects, the financial position of Omega
Protein Corporation and its subsidiaries (the "Company") at December 31, 2002
and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
New Orleans, Louisiana
February 14, 2003
24
OMEGA PROTEIN CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2002 2001
------------ ------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 33,450 $ 21,813
Receivables, net............................................................ 13,029 7,636
Amounts due from majority owner............................................. 3 --
Inventories................................................................. 41,939 37,670
Deferred tax assets......................................................... 1,315 2,062
Prepaid expenses and other current assets................................... 884 1,256
-------- --------
Total current assets.................................................... 90,620 70,437
Other assets................................................................... 6,683 7,107
Deferred tax assets, net....................................................... 3,115 5,653
Property and equipment, net.................................................... 80,713 82,030
-------- --------
Total assets............................................................ $181,131 $165,227
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt........................................ $ 1,270 $ 1,296
Accounts payable............................................................ 2,619 1,518
Accrued liabilities......................................................... 14,880 13,407
-------- --------
Total current liabilities............................................... 18,769 16,221
Long-term debt................................................................. 14,239 15,510
Pension liabilities............................................................ 13,087 6,051
-------- --------
Total liabilities....................................................... 46,095 37,782
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; authorized 10,000,000 shares; none issued. -- --
Common Stock, $0.01 par value; authorized 80,000,000 shares; 24,382,662 and
24,362,415 shares issued and outstanding, respectively.................... 244 244
Capital in excess of par value.............................................. 112,025 111,959
Retained earnings........................................................... 33,439 21,270
Accumulated other comprehensive loss........................................ (8,637) (3,993)
Common stock in treasury, at cost--413,100 shares........................... (2,035) (2,035)
-------- --------
Total stockholders' equity.............................................. 135,036 127,445
-------- --------
Total liabilities and stockholders' equity........................... $181,131 $165,227
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
25
OMEGA PROTEIN CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------------------
2002 2001 2000
-------- ------- --------
(in thousands, except per share amounts)
Revenues...................................................... $117,008 $98,752 $ 84,042
Cost of sales................................................. 89,305 84,682 83,825
Inventory write-down.......................................... -- -- 18,117
-------- ------- --------
Gross profit (loss)........................................... 27,703 14,070 (17,900)
Selling, general and administrative expenses.................. 9,040 8,409 7,641
-------- ------- --------
Operating income (loss)....................................... 18,663 5,661 (25,541)
Interest expense, net......................................... (595) (485) (293)
Other expenses, net........................................... (222) (151) (329)
-------- ------- --------
Income (loss) before income taxes............................. 17,846 5,025 (26,163)
Provision (benefit) for income taxes.......................... 5,677 1,140 (9,419)
-------- ------- --------
Net income (loss)............................................. $ 12,169 $ 3,885 $(16,744)
======== ======= ========
Earnings (loss) per share (basic)............................. $ 0.51 $ 0.16 $ (0.70)
======== ======= ========
Average common shares outstanding............................. 23,962 23,938 23,903
======== ======= ========
Earnings (loss) per share (diluted)........................... $ 0.48 $ 0.16 $ (0.70)
======== ======= ========
Average common shares and common share equivalents outstanding 25,106 24,094 23,903
======== ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
26
OMEGA PROTEIN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
--------------------------
2002 2001 2000
------- ------- --------
(in thousands)
Cash flow provided by (used in) operating activities:
Net income (loss)..................................................... $12,169 $ 3,885 $(16,744)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
(Gain) loss on disposal of assets, net................................ (6) (146) 84
Provisions for losses on receivables.................................. 707 1,473 30
Depreciation and amortization......................................... 10,996 9,714 9,211
Deferred income taxes................................................. 5,677 1,185 (7,426)
Changes in assets and liabilities:
Receivables....................................................... (5,662) 1,816 6,391
Amounts due from majority owner................................... (3) - (5)
Inventories, net of write-downs................................... (4,269) (638) 9,080
Accounts payable and accrued liabilities.......................... 2,574 (1,987) 3,114
Other, net........................................................ (1,503) (158) (3,922)
------- ------- --------
Total adjustments.............................................. 8,511 11,259 16,557
------- ------- --------
Net cash provided by (used in) operating activities............ 20,680 15,144 (187)
------- ------- --------
Cash flow provided by (used in) investing activities:
Proceeds from sale of assets, net..................................... 19 435 55
Capital expenditures.................................................. (7,765) (1,921) (6,977)
------- ------- --------
Net cash used in investing activities.......................... (7,746) (1,486) (6,922)
------- ------- --------
Cash flow provided by (used in) financing activities:
Proceeds from borrowings.............................................. - 1,989 -
Principal payments on borrowings...................................... (1,297) (1,237) (1,161)
------- ------- --------
Net cash provided by (used in) financing activities............ (1,297) 752 (1,161)
------- ------- --------
Net increase (decrease) in cash and cash equivalents..................... 11,637 14,410 (8,270)
Cash and cash equivalents at beginning of period......................... 21,813 7,403 15,673
------- ------- --------
Cash and cash equivalents at end of period............................... $33,450 $21,813 $ 7,403
======= ======= ========
The accompanying notes are an integral part of the consolidated financial
statements.
27
OMEGA PROTEIN CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital Accumulated Treasury Total
Common Stock Excess of Retained Other Stock Stockholders'
Shares Amount Par Value Earnings Comprehensive Amount Equity
------ ------ --------- -------- Loss -------- -------------
(in thousands)
Balance at December 31, 1999..... 24,302 $243 $111,835 $ 34,129 $ -- $(2,035) $144,172
Issuance of common stock...... 28 -- 49 -- -- 49
Net loss...................... -- -- -- (16,744) -- -- (16,744)
------ ---- -------- -------- ------- ------- --------
Balance at December 31, 2000..... 24,330 243 111,884 17,385 -- (2,035) 127,477
Issuance of common stock...... 32 1 75 -- -- -- 76
Comprehensive loss:
Net income.................... -- -- -- 3,885 -- -- 3,885
Other comprehensive loss:
Minimum pension liability net
of tax benefit of $2,058.... -- -- -- -- (3,993) -- (3,993)
------ ---- -------- -------- ------- ------- --------
Total comprehensive loss......... -- -- -- 3,885 (3,993) -- (108)
------ ---- -------- -------- ------- ------- -