OMEGA PROTEIN CORP - FORM 10-Q

OMEGA PROTEIN CORP - FORM 10-Q - November 3, 2009

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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2009

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

For the Transition Period From to .

Commission file number: 001-14003

OMEGA PROTEIN CORPORATION

(Exact name of Registrant as specified in its charter)

State of Nevada

76-0562134

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

2105 City West Blvd., Suite 500

Houston, Texas

77042-2838

(Address of principal executive offices)

(Zip Code)

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

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

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

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x.

Number of shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, on October 29, 2009: 18,727,446.

OMEGA PROTEIN CORPORATION

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

	Unaudited Condensed Consolidated Balance Sheet as of September 30, 2009 and December 31, 2008	3
	Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the three months and nine months ended September 30, 2009 and 2008	4
	Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2009 and 2008	5
	Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2009	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29

Item 3. Quantitative and Qualitative Disclosures About Market Risk		50

Item 4. Controls and Procedures		50

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		51

Item 1A. Risk Factors		51

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		59

Item 3. Defaults Upon Senior Securities		59

Item 4. Submission of Matters to a Vote of Security Holders		59

Item 5. Other Information		59

Item 6. Exhibits		59

Signatures		62

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(Dollars in thousands, except per share amounts)

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements and Notes


	September 30, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	11,908		$	13,995
Receivables, net		14,289			33,455
Inventories		75,641			74,676
Deferred tax asset, net		2,054			101
Prepaid expenses and other current assets		3,043			1,438

Total current assets		106,935			123,665
Other assets, net		3,120			2,735
Energy swap asset, net of current portion		46			—
Property, plant and equipment, net		111,865			106,181


Total assets	$	221,966		$	232,581


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	2,304		$	7,697
Current portion of capital lease obligation		351			302
Accounts payable		3,251			2,507
Accrued liabilities		27,301			16,347

Total current liabilities		33,207			26,853
Long-term debt, net of current maturities		35,528			51,312
Capital lease obligation, net of current portion		1,366			1,634
Interest rate swap liability, net of current portion		514			959
Deferred tax liability, net		3,887			3,005
Pension liabilities, net		9,187			9,261


Total liabilities		83,689			93,024


Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value; 10,000,000 authorized shares; none issued		—			—
Common Stock, $0.01 par value; 80,000,000 authorized shares; 18,712,096 shares issued and outstanding at September 30, 2009 and December 31, 2008		187			187
Capital in excess of par value		114,556			114,008
Retained earnings		31,998			36,011
Accumulated other comprehensive loss		(8,464	)		(10,649	)


Total stockholders’ equity		138,277			139,557


Total liabilities and stockholders’ equity	$	221,966		$	232,581

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

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Revenues	$	49,940		$	54,507		$	121,848		$	137,744
Cost of sales		48,678			43,923			115,267			102,976

Gross profit		1,262			10,584			6,581			34,768

Selling, general, and administrative expense		3,041			4,211			9,554			11,874
Research and development expense		365			630			1,047			1,280
(Gain) loss resulting from natural disaster, net – 2008 storms		(1	)		1,025			392			1,025
Insurance recoveries and other proceeds relating to natural disaster, net – 2005 storms		—			(1,150	)		(2,656	)		(1,150	)
Loss on disposal of assets		100			548			98			733

Operating (loss) income		(2,243	)		5,320			(1,854	)		21,006
Interest income		36			128			168			427

Interest expense		(2,269	)		(1,106	)		(4,046	)		(3,303	)
Other (expense) income, net		(82	)		107			(296	)		(17	)

(Loss) income before income taxes		(4,558	)		4,449			(6,028	)		18,113
(Benefit) provision for income taxes		(1,738	)		1,335			(2,015	)		6,377

Net (loss) income		(2,820	)		3,114			(4,013	)		11,736

Other comprehensive (loss) income:

Foreign currency translation adjustment, net of tax expense of $0, $0, $13 and $0, respectively		—			—			25			—
Energy swap adjustment, net of tax benefit (expense) of $113, $0, ($169) and $0, respectively		(220	)		—			328			—
Interest rate swap adjustment, net of tax benefit (expense) of ($490), $25, ($632), and ($57), respectively		952			(50	)		1,226			110
Pension benefits adjustment, net of tax expense of $104, $67, $313, and $199, respectively		202			129			606			384

Comprehensive (loss) income	$	(1,886	)	$	3,193		$	(1,828	)	$	12,230

Basic (loss) earnings per share	$	(0.15	)	$	0.17		$	(0.21	)	$	0.65

Weighted average common shares outstanding		18,712			18,624			18,712			18,160


Diluted (loss) earnings per share	$	(0.15	)	$	0.16		$	(0.21	)	$	0.63

Weighted average common shares and potential common share equivalents outstanding		18,712			18,875			18,712			18,541

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

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Dollars in thousands, except per share amounts)


	Nine Months Ended September 30,
	2009			2008
Cash flow provided by (used in) operating activities:
Net (loss) income	$	(4,013	)	$	11,736
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization		10,057			9,692
Loss resulting from natural disaster, net – 2008 storms		273			3,206
Insurance recoveries and other proceeds relating to natural disaster, net – 2005 storms		(2,656	)		(1,150	)
Loss on disposal of assets, net		98			733
Provisions for losses on receivables		36			36
Share based compensation		548			290
Deferred income taxes		(1,872	)		1,875
Changes in assets and liabilities:
Receivables		11,630			(29,488	)
Inventories		(965	)		(7,391	)
Prepaid expenses and other current assets		(1,154	)		98
Other assets		(1,348	)		(1,279	)
Accounts payable		744			(864	)
Accrued liabilities		12,367			17,419
Pension liability, net		532			(1,163	)

Total adjustments		28,290			(7,986	)

Net cash provided by operating activities		24,277			3,750

Cash flow provided by (used in) investing activities:
Proceeds from disposition of assets		49			149
Proceeds from insurance companies and grant, hurricanes		10,156			1,150
Capital expenditures		(15,198	)		(16,579	)

Net cash used in investing activities		(4,993	)		(15,280	)

Cash flow provided by (used in) financing activities:
Principal payments of long-term debt		(21,177	)		(4,728	)
Principal payments of capital lease obligation		(219	)		(72	)
Proceeds from stock options exercised		—			9,358
Tax effect of stock options exercised		—			2,894

Net cash (used in) provided by financing activities		(21,396	)		7,452

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

Net decrease in cash and cash equivalents		(2,087	)		(4,078	)
Cash and cash equivalents at beginning of year		13,995			19,292

Cash and cash equivalents at end of period	$	11,908		$	15,214

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

OMEGA PROTEIN CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars and shares in thousands)


	Common Stock			Capital Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
	Shares	Amount		Capital Excess of Par Value		Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity

Balance at December 31, 2008	18,712	$	187	$	114,008	$	36,011		$	(10,649	)	$	139,557
Share based compensation expense	—		—		548		—			—			548
Comprehensive income:
Net loss	—		—		—		(4,013	)		—			(4,013	)
Other comprehensive income (loss):
Foreign Currency Translation adjustment, net of tax expense of $13	—		—		—		—			25			25
Energy swap adjustment, net of tax expense of $169	—		—		—		—			328			328
Interest rate swap adjustment, net of tax expense of $632	—		—		—		—			1,226			1,226
Pension benefits adjustment, net of tax expense of $313	—		—		—		—			606			606


Total comprehensive (loss) income							(4,013	)		2,185			(1,828	)


Balance at September 30, 2009	18,712	$	187	$	114,556	$	31,998		$	(8,464	)	$	138,277

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

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Significant Accounting Policies

Summary Of Operations And Basis Of Presentation

Business Description

Omega Protein Corporation (“Omega” or the “Company”) produces and markets a variety of products produced from menhaden (a herring-like species of fish found in commercial quantities in the U.S. coastal waters of the Atlantic Ocean and Gulf of Mexico), including regular grade and value-added specialty fish meals, crude and refined fish oils and fish solubles. The Company’s fish meal products are primarily used as a protein ingredient in animal feed for swine, cattle, aquaculture and household pets. Fish oil is utilized for animal and aquaculture feeds, industrial applications, as well as for additives to human food products and dietary supplements. The Company’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer.

Basis of Presentation

These interim financial statements of Omega have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally provided have been omitted. The interim financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

In the opinion of management the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the Company’s consolidated financial position as of September 30, 2009, and the results of its operations for the three and nine month periods ended September 30, 2009 and 2008 and its cash flows for the nine month periods ended September 30, 2009 and 2008. Operating results are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

Consolidation

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

Financial Statement Preparation

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Company’s financial statements and the accompanying notes and the reported amounts of revenues and expenses during the reporting period. Actual amounts, when available, could differ from those estimates and those differences could have a material affect on the financial statements.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Hurricane Losses, Insurance Recoveries and Other Proceeds

2008 Hurricane Activity

On September 13, 2008, the Company’s Abbeville and Cameron, Louisiana fish processing facilities were damaged by Hurricane Ike. Both of these facilities were non-operational immediately after the hurricane. Operations at the Abbeville fish processing facility were restored to full capacity on September 22, 2008. The Cameron fish processing facility was restored to full capacity prior to the beginning of its 2009 fishing season.

The direct impact of Hurricane Ike upon the Company was a loss of physical inventories and physical damage to the plants. The interruption of processing capabilities caused the Company to address the impact of abnormal downtime of its processing facilities, which resulted in the immediate recognition of costs which would ordinarily have been captured as inventory costs. The amounts of these losses are more fully described in Notes 2, 3, 5 and 12.

The Company maintains insurance coverage for a variety of these damages, most notably property, inventory, vessel and business interruption insurance. The nature and extent of the insurance coverage varies by line of policy. The Company received $10.2 million related to Hurricane Ike from these various policies as of September 30, 2009.

2005 Hurricane Activity

On August 29, 2005, the Company’s Moss Point, Mississippi fish processing facility and adjacent shipyard were severely damaged by Hurricane Katrina. On September 25, 2005, the Company’s Abbeville and Cameron, Louisiana fish processing facilities were also severely damaged by Hurricane Rita.

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

During 2008, the Company received a grant of $1.3 million, net of fees and expenses, from the Louisiana Department of Wildlife and Fisheries which was recognized as “Insurance recoveries and other proceeds related to natural disaster, net – 2005” in the Consolidated Statement of Operations for the year ended December 31, 2008. The grant provides assistance for commercial fishing owners impacted by Hurricanes Katrina and Rita in 2005. During the nine month period ended September 30, 2009, the Company received a similar grant related to the impact of Hurricane Katrina of $2.7 million, net of fees and expenses, from the State of Mississippi. The Mississippi grant was recognized as “Insurance recoveries and other proceeds relating to natural disaster, net – 2005” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the nine months ended September 30, 2009.

Revenue Recognition

The Company generates revenue principally from the sales of a variety of protein and oil products derived from menhaden. The Company recognizes revenue for the sale of its products when title and rewards of ownership to its products are transferred to the customer.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Cash and Cash Equivalents

The Company considers cash in banks and short-term investments with original maturities of three months or less as cash and cash equivalents.

Allowances for Doubtful Accounts

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company considers the following factors when determining if collection is reasonably assured: customer credit worthiness, past transaction history with the customer, and changes in customer payment terms. If the Company has no previous experience with the customer, the Company typically obtains reports from credit organizations to ensure that the customer has a history of paying its creditors. The Company may also request financial information, including financial statements or other documents (e.g., bank statements), or may obtain a letter of credit from the customer to ensure that the customer has the means of making payment. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required.

Inventories

Inventory is stated at the lower of cost or market. The Company’s fishing season runs from mid-April to the first of November in the Gulf of Mexico and from the beginning of May into December in the Atlantic. Government regulations generally preclude the Company from fishing during the off-seasons.

The Company’s inventory cost system considers all costs associated with an annual fish catch and its processing, both variable and fixed, including both costs incurred during the off-season and during the fishing season. The Company’s costing system allocates cost to inventory quantities on a per unit basis as calculated by a formula that considers total estimated inventoriable costs for a fishing season (including off-season costs) to total estimated fish catch and the relative fair market value of the individual products produced. The Company adjusts the cost of sales, off-season costs and inventory balances at the end of each quarter based on revised estimates of total inventoriable costs and fish catch. The Company’s lower-of-cost-or-market-value analyses at year-end and at interim periods compare the total estimated per unit production cost of the Company’s expected production to the projected per unit market prices of the products. The impairment analyses involve estimates of, among other things, future fish catches and related costs, and expected commodity prices for the fish products as well as projected purchase commitments from customers. These estimates, which management believes are reasonable and supportable, involve estimates of future activities and events which are inherently imprecise and from which actual results may differ materially.

During the off-seasons, in connection with the upcoming fishing seasons, the Company incurs costs (i.e., plant and vessel related labor, utilities, rent, repairs, and depreciation) that are directly related to the Company’s infrastructure. These costs accumulate in inventory and are applied as elements of the cost of production of the Company’s products throughout the fishing season ratably based on the Company’s monthly fish catch and the expected total fish catch for the season.

Any costs incurred during abnormal downtime related to activity at the Company’s plants are charged to expense as incurred.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Insurance

The Company carries insurance for certain losses relating to its vessels and Jones Act liabilities for employees aboard its vessels. The Company provides reserves for those portions of the annual aggregate deductible for which the Company remains responsible by using an estimation process that considers Company-specific and industry data as well as management’s experience, assumptions and consultation with counsel, as these reserves include estimated settlement costs. 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. For those claims where there may be a range of loss, the Company has recorded an estimated liability inside that range, based on management’s experience, assumptions and consultation with counsel. The process of estimating and establishing reserves for these claims is inherently uncertain and the actual ultimate net cost of a claim may vary materially from the estimated amount reserved. There is some degree of inherent variability in assessing the ultimate amount of losses associated with these claims due to the extended period of time that transpires between when the claim might occur and the full settlement of such claims. This variability is generally greater for Jones Act claims by vessel employees. The Company continually evaluates loss estimates associated with claims and losses as additional information becomes available and revises its estimates. Although management believes estimated reserves related to these claims are adequately recorded, it is possible that actual results could significantly differ from the recorded reserves, which could materially impact the Company’s results of operations, financial position and cash flow.

The Company is primarily self-insured for health insurance. The Company purchases individual stop loss coverage with a large deductible. As a result, the Company is primarily self-insured for claims and associated costs up to the amount of the deductible, with claims in excess of the deductible amount being covered by insurance. Expected claims estimates are based on health care rate trends and historical claims data; actual claims may differ from those estimates. The Company evaluates its claims experience related to this coverage with information obtained from its risk management consultants.

Assumptions used in preparing these insurance estimates are based on factors such as claims settlement patterns, claim development trends, claim frequency and severity patterns, inflationary trends and data reasonableness. Together these factors will generally affect the analysis and determination of the “best estimate” of the projected ultimate claim losses. The results of these evaluations are used to both analyze and adjust the Company’s insurance loss reserves.

In addition to the above insurance policies, the Company maintains insurance coverage for property, inventory and business interruption insurance. The nature and extent of the insurance coverage varies by line of policy.

Advertising Costs

The costs of advertising are expensed as incurred in accordance with FASB ASC 720-35.

Research and Development

Costs incurred in research and development activities are expensed as incurred.

Call Options

The Company does not enter into financial instruments for trading or speculative purposes. The Company purchased natural gas call options in March 2008 for $67,000 to manage its exposure to rising natural gas prices. The call options gave the Company the right to purchase natural gas at a price of $10.50 per MMBTU between April 1, 2008 and June 30, 2008.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

For the three and nine months ended September 30, 2008, the Company recorded gains of $0 and $29,000, respectively, related to the change in fair value of the call options in its unallocated inventory cost pool. The Company did not purchase any natural gas call options during the nine months ended September 30, 2009. See Note 13 – Fair Value Disclosures for additional information.

Interest Rate Swap Agreements

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


Date of Contract	Original Notional Amount		Contracted Interest Rate		Total Swap Liability as of September 30, 2009			Total Deferred Tax Asset as of September 30, 2009		Notional Amount as of September 30, 2009
April 4, 2007	$	19,950,000	5.16	%	$	(1,046,700	)	$	—	$	15,212,000
February 7, 2008		10,237,500	3.36	%		(291,900	)		—		8,006,000
March 19, 2008		4,436,250	2.96	%		(101,600	)		—		3,469,000

					$	(1,440,200	)	$	—	$	26,687,000

As of September 30, 2009 and December 31, 2008, the Company has recorded a long-term liability of $513,900 and $958,700, respectively, net of the current portion of $926,300 and $899,700, respectively, to recognize the fair value of interest rate derivatives, and has also recorded a deferred tax asset of $0 and $631,800, respectively associated therewith. Prior to the quarter ended September 30, 2009, the changes in fair value of the agreements were recorded in “accumulated other comprehensive loss” in the Company’s consolidated financial statements.

On September 24, 2009, the Company paid $16.6 million of the borrowing outstanding under the Term Loan using the Company’s existing cash balances. Additionally, on October 21, 2009, the Company entered into a Loan Agreement with Wells Fargo Bank N.A. which replaced the Senior Credit Facility. See Note 6—Notes Payable and Long-Term Debt for additional information. As a consequence of the debt prepayment and refinancing, the Company determined that the forecasted interest payments associated with the interest rate swaps were probably unlikely to occur. As a result, hedge accounting relating to the interest rate swaps was discontinued and all amounts previously recognized in accumulated other comprehensive loss were reclassified to earnings as of September 30, 2009. For the three and nine months ended September 30, 2009, $1.4 million was recognized as interest expense in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income. The interest rate swap agreements remained outstanding as of September 30, 2009.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
				(in thousands)
Beginning balance	$	(952	)	$	(282	)	$	(1,226	)	$	(442	)
Net gain (loss), net of tax, reclassified into earnings		(176	)		(84	)		(474	)		(169	)
Net change associated with current period swap transactions, net of tax		178			34			750			279
Ineffective portion of swaps, net of tax, reclassified into earnings		950			—			950			—

Ending balance	$	—		$	(332	)	$	—		$	(332	)

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Energy Swap Agreements

The Company does not enter into financial instruments for trading or speculative purposes. The Company has entered into energy swap agreements, during the nine months ended September 30, 2009, to manage its cash flow exposure related to the volatility of natural gas, diesel and Bunker C energy prices. The swaps effectively fix pricing for the quantities listed below during the consumption periods.


Energy Swap	Consumption Period	Quantity	Price Per Unit		Energy Swap Asset/(Liability) as of September 30, 2009			Deferred Tax (Asset) Liability as of September 30, 2009
Diesel - NYMEX Heating Oil Swap	April – October, 2010	2,158,000 Gallons	$	1.86	$	320,100		$	108,800

Natural Gas - NYMEX Natural Gas Swap	April – October, 2010	336,000 MMBTUs	$	6.29		(57,700	)		(19,600	)

Bunker C - Platts Calendar Avg NY Swap	June – November, 2010	1,281,000 Gallons	$	1.52		336,600			114,400

Diesel - NYMEX Heating Oil Swap	April – October, 2011	1,079,000 Gallons	$	2.01		145,300			49,400

Natural Gas - NYMEX Natural Gas Swap	April – October, 2011	67,000 MMBTUs	$	6.46		10,200			3,500

Bunker C - Platts Calendar Avg NY Swap	June – November, 2011	672,000 Gallons	$	1.77		(257,200	)		(87,400	)


					$	497,300		$	169,100

As of September 30, 2009 and December 31, 2008, the Company has recorded a long-term asset of $46,300 and $0, respectively, net of the current portion of $451,000 and $0, to recognize the fair value of energy swap derivatives, and has also recorded a deferred tax liability of $169,100 and $0, respectively, associated therewith. The effective portion of the change in fair value from inception to September 30, 2009 is recorded in “accumulated other comprehensive loss” in the Company’s consolidated financial statements. The following table illustrates the changes recorded, net of tax, in accumulated other comprehensive loss resulting from the energy swap agreements.


	Three Months Ended			Nine Months Ended
	September 30, 2009
	(in thousands)
Beginning balance	$	548		$	—
Net gain (loss), net of tax, reclassified to earnings		—			—
Net change associated with current period swap transactions, net of tax		(220	)		328

Ending balance	$	328		$	328

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

The $328,200 reported in accumulated other comprehensive loss as of September 30, 2009 will be reclassified to “inventory” in the period when the energy consumption takes place. The amount to be reclassified to inventory, net of taxes, during the next 12 months is expected to be approximately $297,600.

If, at any time, the swaps are determined to be ineffective, in whole or in part, due to changes in the Company’s energy usage or underlying hedge agreements, the fair value of the portion of the energy swaps determined to be ineffective will be recognized as gain or loss in “cost of sales” in the statement of operations for the applicable period. See Note 13 – Fair Value Disclosures for additional information.

Accounting for the Impairment of Long-Lived Assets

The Company evaluates at each balance sheet date the continued appropriateness of the carrying value of its long-lived assets, including its long-term receivables and property, plant and equipment. The Company reviews long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of any such assets or grouping of assets may not be recoverable. The Company has grouped certain assets together (primarily marine vessels) for impairment testing on a fleet basis. If indicators of impairment are present, management evaluates the undiscounted cash flows estimated to be generated by those assets or grouping of assets compared to the carrying amount of those items. The net carrying value of assets or grouping of assets not recoverable is reduced to fair value. The Company considers continued operating losses, or significant and long-term changes in business conditions, to be its primary indicators of potential impairment.

Income Taxes

The Company utilizes the liability method to account for income taxes. This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of existing temporary differences between the financial reporting and tax reporting basis of assets and liabilities, and operating loss and tax credits carryforwards for tax purposes. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. The Company believes that the deferred tax assets recorded as of September 30, 2009 are realizable through future reversals of existing taxable temporary differences and future taxable income. If the Company were to subsequently determine that it would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to deferred tax assets would increase earnings for the period in which such determination was made. The Company will continue to assess the adequacy of the valuation allowance on a quarterly basis. Any changes to the estimated valuation allowance could be material to the consolidated financial condition and results of operations.

Property, Equipment and Depreciation

Property and equipment additions are recorded at cost. Depreciation of property and equipment is computed by the straight-line method at rates expected to amortize the cost of property and equipment, net of salvage value, over their estimated useful lives. Estimated useful lives, determined at the date of acquisition, of new assets acquired are based primarily on the review of existing property and equipment. Estimated useful lives are as follows:


		Useful Lives (years)

Fishing vessels and fish processing plants		15-20
Machinery, equipment, furniture and fixtures and other		3-10

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Replacements and major improvements are capitalized and amortized over a period of 5 to 15 years or the remaining useful life of the asset if shorter, and maintenance and repairs are charged to expense as incurred. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from the accounts. Any resulting gains or losses are included in the statement of operations. The Company capitalizes interest as part of the acquisition cost of a qualifying asset.

Interest is capitalized only during the period of time required to complete and prepare the asset for its intended use. For the three and nine month periods ended September 30, 2009 and 2008, the Company capitalized interest of approximately $180,500, $31,800, $495,200 and $160,000, respectively.

Pension Plans

The Company records the overfunded or underfunded status of defined benefit pension and postretirement plans as an asset or liability in its statement of financial position and changes in that funded status in the year in which the changes occur through other comprehensive income. The Company also measures the funded status of a plan as of the date of its year-end statement of financial position. The Company’s policy is to fund U.S. pension plans at amounts not less than the minimum requirements of the Employee Retirement Income Security Act of 1974 and generally for obligations under its foreign plans to deposit funds with trustees under insurance policies.

In 2002, the Board of Directors authorized a plan to freeze the Company’s pension plan in accordance with ERISA rules and regulations so that new employees, hired after July 31, 2002, will not be eligible to participate in the pension plan and further benefits will no longer accrue for existing participants. The freezing of the pension plan had the effect of vesting all existing participants in their pension benefits in the plan.

Comprehensive Income (Loss)

Comprehensive income (loss) is defined as change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources, including foreign currency translation adjustments, changes in the value of derivative contracts and pension benefits adjustments, including recognition of actuarial losses. The Company presents comprehensive income (loss) in its consolidated statements of operations and comprehensive income and of stockholders’ equity.

Accumulated Comprehensive Loss

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


	September 30, 2009			December 31, 2008
	(in thousands)
Cumulative Translation Adjustments, net of tax benefit of $0 and $13 as of September 30, 2009 and December 31, 2008	$	—		$	(25	)

Fair Value of Energy Swaps, net of tax expense of $169 as of September 30, 2009 and $0 as of December 31, 2008		328			—

Fair Value of Interest Rate Swaps, net of tax benefit of $0 as of September 30, 2009 and $632 as of December 31, 2008		—			(1,226	)
Pension Benefits Adjustments, net of tax benefit of $4,529 as of September 30, 2009 and $4,842 as of December 31, 2008		(8,792	)		(9,398	)

Accumulated Other Comprehensive Loss	$	(8,464	)	$	(10,649	)

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company’s customer base generally remains consistent from year to year. The Company performs ongoing credit evaluations of its customers and generally does not require material collateral. The Company maintains reserves for potential credit losses and such losses have historically been within management’s expectations.

At September 30, 2009 and December 31, 2008, the Company had cash deposits concentrated primarily in one major bank. In addition, the Company had commercial quality grade investments A2P2 rated or better with companies and financial institutions. The Company believes that credit risk in such investments is minimal.

Earnings per Share

Basic earnings per common share (EPS) were computed by dividing net earnings by the weighted average number of common shares outstanding during the reporting period. Diluted EPS reflects the dilution that could occur if securities or contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted earnings per common share was computed by dividing net earnings by the sum of the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if the dilutive potential common shares (in this case, exercise of the Company’s employee stock options) had been issued during each period as discussed in Note 10.

Purchase and Retirement of Common Stock

The Company accounts for the retirement of treasury shares under the par value method. Under this method, the excess of the cost of treasury stock over its par value is charged to retained earnings.

Recently Issued Accounting Standards

In September 2006, the FASB (Financial Accounting Standards Board) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (superseded by FASB ASC 820-10 on September 15, 2009). FASB ASC 820-10 establishes a common definition for fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. FASB ASC 820-10 is effective for financial assets and financial liabilities for fiscal years beginning after November 15, 2007. Under FASB ASC 820-10, the effective date was deferred for all nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008.

The implementation of FASB ASC 820-10 for financial assets and financial liabilities, effective January 1, 2008, did not have a material impact on the Company’s consolidated financial position and results of operations. The implementation of FASB ASC 820-10 for nonfinancial assets and nonfinancial liabilities, effective January 1, 2009, did not require any new fair value measurements and, therefore, did not have a material impact on the Company’s consolidated financial position and results of operations.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (superseded by FASB ASC 805-10 on September 15, 2009). FASB ASC 805-10 states that all business combinations, whether full, partial, or step acquisitions, will result in all assets and liabilities of an acquired business being recorded at their fair values at the acquisition date. In subsequent periods, contingent liabilities will be measured at the higher of their acquisition date fair value or the estimated amounts to be realized. FASB ASC 805-10 applies to all transactions or other events in which an entity obtains control of one or more businesses. This standard is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. The implementation of FASB ASC 805-10 effective January 1, 2009, did not have an impact on the Company’s consolidated results of operations, financial position and related disclosures.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (superseded by FASB ASC 815-10 on September 15, 2009). FASB ASC 815-10 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company’s adoption of FASB ASC 815-10, effective January 1, 2009, required additional disclosures but did not impact its consolidated results of operations, financial position and related disclosures.

In December 2008, FASB Staff Position No. SFAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” was issued (superseded by FASB ASC 715-20-65 on September 15, 2009). FASB ASC 715-20-65 requires additional disclosures about plan assets of a defined benefit pension or other postretirement plan, how investment allocation decisions are made, and the fair value of each major category of plan assets as of each annual reporting date for which a statement of financial position is presented. Additionally, FASB ASC 715-20-65 requires disclosures about significant concentrations of risk in plan assets. FASB ASC 715-20-65 is effective for fiscal years ending after December 15, 2009. The Company is currently evaluating the impact, if any, the adoption of FASB ASC 715-20-65 will have on its disclosures.

In April 2009, FASB Staff Position No. SFAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” was issued (superseded by FASB ASC 825-10-65 on September 15, 2009). FASB ASC 825-10-65 requires companies to disclose the fair value of financial instruments within interim financial statements, adding to the current requirement to provide those disclosures annually. This FASB ASC is effective for interim reporting periods ending after June 15, 2009. The Company’s adoption of FASB ASC 825-10-65, effective April 1, 2009, did not have a material impact on the Company’s consolidated results of operations, financial position and related disclosures. See Note 13 – Fair Value Disclosures for additional information.

In May 2009, FASB issued SFAS No. 165, “Subsequent Events” (superseded by FASB ASC 855-10 on September 15, 2009). This statement does not apply to subsequent events or transactions that are within the scope of other applicable generally accepted accounting principles that provide different guidance on the accounting treatment for subsequent events or transactions. FASB ASC 855-10 applies to both interim and annual financial statements ending after June 15, 2009. FASB ASC 855-10 introduces the concept of financial statements being available to be issued. It requires the disclosure of the date through which a Company has evaluated subsequent events and the basis for that date and whether that date represents the date the financial statements were issued or were available to be issued. FASB ASC 855-10 should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. The Company’s adoption of FASB ASC 855-10, effective April 1, 2009, did not have a material impact on the Company’s consolidated results of operations, financial position and related disclosures. The Company has assessed and disclosed reportable subsequent events, if any, as of November 3, 2009 with the issuance of its Unaudited Condensed Consolidated Financial Statements for the quarterly period ended September 30, 2009.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

In June 2009, FASB issued SFAS No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (superseded by FASB ASC 105-10 on September 15, 2009). The FASB Accounting Standards Codification (“the Codification”) has become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Effective for financial statements issued for interim and annual periods ending after September 15, 2009, the Codification supersedes all then-existing non-SEC accounting and reporting standards. While the Codification does not change GAAP, it introduces a new structure—one that is organized in an easily accessible, online research system. The Company adopted the Codification on September 15, 2009. The adoption of the Codification did not have a material impact on the Company’s consolidated financial statements.

Stock-Based Compensation

The Company has a stock-based compensation plan, which is described in more detail in Note 12 to the consolidated financial statements of the Company’s Form 10-K for the fiscal year ended December 31, 2008. Net loss for the three and nine months ended September 30, 2009 and 2008 includes $243,000, $225,000, $548,000 and $439,000 ($160,000, $149,000, $362,000 and $290,000 after-tax), respectively, of share-based compensation costs which are included in selling, general and administrative expenses in the condensed consolidated statement of operations and comprehensive income. As of September 30, 2009, there was $1,382,200 ($912,200 after-tax) of total unrecognized compensation costs related to nonvested share-based compensation that is expected to be recognized over a weighted-average period of 2.3 years, of which $217,300 ($143,400 after-tax) of total share-based compensation is expected to be recognized during the remainder of fiscal year 2009.

Note 2. Receivables, net

Receivables as of September 30, 2009 and December 31, 2008 are summarized as follows:


	September 30, 2009			December 31, 2008
	(in thousands)
Trade	$	13,148		$	22,802
Insurance		96			8,139
Employee		59			11
Income tax		1,070			2,653
Other		88			15

Total receivables		14,461			33,620
Less: allowance for doubtful accounts		(172	)		(165	)

Receivables, net	$	14,289		$	33,455

As a result of Hurricane Ike (see Note 12 – Hurricane Losses, Insurance Recoveries and Other Proceeds), the Company sustained damage to its Abbeville and Cameron, Louisiana fish processing facilities. During 2008, the Company recorded a hurricane related insurance receivable of $10.0 million, of which $7.5 million was receivable as of December 31, 2008. During the nine month period ended September 30, 2009, the Company received the remaining $7.5 million in settlement of the claim.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Note 3. Inventory

The major classes of inventory as of September 30, 2009 and December 31, 2008 are summarized as follows:


	September 30, 2009		December 31, 2008
	(in thousands)
Fish meal	$	47,619	$	38,115
Fish oil		16,398		22,927
Fish solubles		2,930		1,073
Unallocated inventory cost pool (including off-season costs)		1,888		6,407
Other materials & supplies		6,806		6,154

Total inventory	$	75,641	$	74,676

Inventory at September 30, 2009 and December 31, 2008 is stated at the lower of cost or market. The elements of unallocated inventory cost pool include plant and vessel related labor, utilities, rent, repairs and depreciation, to be allocated to inventories produced through the remainder of the 2009 fishing season.

As a result of Hurricane Ike, the Company sustained additional previously unrecognized damage to its Cameron, Louisiana materials and supplies inventory. The Company recognized $0 and $33,000 material and supply write-offs for the three and nine months ended September 30, 2009, respectively. See Note 12 – Hurricane Losses, Insurance Recoveries and Other Proceeds.

Note 4. Other Assets

Other assets as of September 30, 2009 and December 31, 2008 are summarized as follows:


	September 30, 2009		December 31, 2008
	(in thousands)
Fish nets, net of accumulated amortization of $767 and $1,022	$	1,552	$	1,192
Insurance receivable, net of allowance for doubtful accounts		816		640
Title XI loan origination fee		292		316
Other debt issuance costs⁽¹⁾		383		510
Deposits and other		77		77

Total other assets, net	$	3,120	$	2,735

⁽¹⁾

On October 21, 2009, the Company entered into a Loan Agreement with Wells Fargo Bank N.A., and the remaining outstanding balance under the Senior Credit Facility was paid in full. See Note 6—Notes Payable and Long-Term Debt for additional information. Consequently, the unamortized balance of “Other debt issuance costs” incurred in conjunction with the Senior Credit Facility on March 26, 2007 will be recorded as “Loss resulting from debt refinancing” in the Consolidated Statement of Operations for the year ending December 31, 2009. The Company anticipates the deferred debt issuance costs incurred relating to the Loan Agreement with Wells Fargo Bank N.A. to be approximately $0.4 million and will be amortized over the term of the agreement.

Amortization expense for fishing nets amounted to approximately $259,000, $271,000, $812,000 and $771,000 for the three and nine months ended September 30, 2009 and 2008, respectively.

The Company carries insurance for certain losses relating to its vessels and Jones Act liability for employees aboard its vessels (collectively, “Vessel Claims Insurance”). The typical Vessel Claims Insurance policy contains an annual aggregate deductible (“AAD”) for which the Company remains responsible, while the insurance carrier is responsible for all applicable amounts which exceed the AAD. It is the Company’s policy to accrue current

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

amounts due and record amounts paid out on each claim. Once payments exceed the AAD, the Company records an insurance receivable for a given policy year, net of allowance for doubtful accounts. As of September 30, 2009 and December 31, 2008, the allowance for doubtful insurance receivable accounts was $0.2 million and $2.0 million, respectively.

Note 5. Property, Plant and Equipment, net

Property, plant and equipment, net at September 30, 2009 and December 31, 2008 are summarized as follows:


	September 30, 2009			December 31, 2008
	(in thousands)
Land	$	7,690		$	7,690
Plant assets		109,474			105,150
Fishing vessels		106,777			99,655
Furniture and fixtures		5,709			5,643
Construction in progress		15,014			12,662

Total property and equipment		244,664			230,800
Less: accumulated depreciation and impairment		(132,799	)		(124,619	)

Property, plant and equipment, net	$	111,865		$	106,181

Depreciation expense for the three and nine months ended September 30, 2009 and 2008 was $3.1 million, $2.9 million, $9.1 million and $8.7 million, respectively.

As a result of Hurricane Ike, the Company sustained additional previously unrecognized damage to its property and equipment at its Abbeville and Cameron, Louisiana fish processing facilities. The Company recognized a $0 and $273,000 loss on the involuntary conversion of damaged property and equipment related to plant assets in the three and nine month periods ended September 30, 2009, respectively. See Note 12 – Hurricane Losses, Insurance Recovery and Other Proceeds.

Note 6. Notes Payable and Long-Term Debt

At September 30, 2009 and December 31, 2008, the Company’s long-term debt consisted of the following:


	September 30, 2009			December 31, 2008
	(in thousands)
U.S. government guaranteed obligations (Title XI loans) collateralized by a first lien on certain vessels and certain plant assets:
Amounts due in installments through 2022, interest from 6.49% to 7.60%	$	26,252		$	28,148
Amounts due in installments through 2014, interest at Eurodollar rates plus 0.45% (1.05% and 4.21% at September 30, 2009 and December 31, 2008, respectively)		205			236
Bank of America term loan, quarterly principal payments as defined, interest payable quarterly based on LIBOR plus an applicable rate (2.28% and 3.46% as of September 30, 2009 and December 31, 2008, respectively) maturing March 2012		11,375			30,625

Total debt		37,832			59,009
Less current maturities		(2,304	)		(7,697	)

Long-term debt	$	35,528		$	51,312

The Title XI loans are secured by liens on certain of the Company’s fishing vessels and mortgages on the Company’s Reedville, Virginia and Abbeville, Louisiana plants. Loans are now available under similar terms pursuant to the Title XI program without intervening lenders.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

In September 2004, pursuant to the Title XI program, the United States Department of Commerce Fisheries Finance Program (the “FFP”) approved the Company’s financing application in an amount not to exceed $14 million (the “Approval Letter”). Borrowings under the Approval Letter are to be used to finance and/or refinance approximately 73% of the actual depreciable cost of the Company’s future fishing vessel refurbishments and capital expenditures relating to shore-side fishing assets for a term not to exceed 15 years from inception at interest rates determined by the U.S. Treasury. Final approval for all such future projects requires individual approval through the Secretary of Commerce, National Oceanic and Atmospheric Administration, and National Marine Fisheries Service (“National Marine Fisheries Service”). Borrowings under the FFP are required to be evidenced by security agreements, undertakings, and other documents deemed in the sole discretion of the National Marine Fisheries Service as necessary to accomplish the intent and purpose of the Approval Letter. The Company is required to comply with customary National Marine Fisheries Service covenants as well as certain special covenants. In December 2004, the Company submitted a $4.9 million financing request against the $14 million approval, and subsequently amended that request to include the entire $14 million. The Company closed on the $14 million FFP loan on October 17, 2005.

On December 1, 2005, pursuant to the Title XI program, the FFP approved a second financing application made by the Company in the amount of $16.4 million (the “Second Approval Letter”). In May 2006, the Company submitted a $6.3 million financing request under the Second Approval Letter. The Company closed on the $6.3 million FFP loan in the first quarter of 2007. In September 2009, the Company submitted a $10.0 million financing request under the remaining Second Approval Letter which it anticipates closing in the fourth quarter of 2009. As of September 30, 2009, the Company had approximately $26.5 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

On March 26, 2007 (the “Closing Date”), the Company entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, lender, swing line lender and letter of credit issuer, Regions Bank, Compass Bank and Farm Credit Bank of Texas (collectively, the “Lenders”). The Credit Agreement provides the Company with a $55 million senior credit facility (the “Senior Credit Facility”) consisting of (i) a 5-year revolving credit facility (the “Revolving Credit Facility”) of up to $20 million, including a $7.5 million sub-limit for the issuance of standby letters of credit and a $2.5 million sub-limit for swing line loans and (ii) a 5-year term loan (the “Term Loan”) of $35 million. The Senior Credit Facility replaced the Company’s prior credit facility, under which, as of the Closing Date, $28.7 million in principal was outstanding under a term loan and $6.5 million in principal was outstanding under revolving loans, and approximately $3.3 million in letters of credit were issued, primarily in support of worker’s compensation insurance programs. On the Closing Date, the Company drew down $35 million under the Term Loan and approximately $2.0 million under the Revolving Credit Facility, and had approximately $3.1 million issued in standby letters of credit, primarily in support of worker’s compensation insurance programs. The Senior Credit Facility is secured by a first priority lien on all of the Company’s assets, other than vessels, real estate and other assets pledged to secure loans made to the Company under the FFP. On September 29, 2008, the Credit Agreement was amended to increase the limit in the Consolidated Capital Expenditures Covenant from $15 million to $21 million for the fiscal year ended 2008 with the limit returning to $15 million for any year thereafter.

On September 24, 2009, the Company paid $16.6 million of the borrowings outstanding under the Term Loan. As of September 30, 2009, the Company had $11.4 million outstanding under the Term Loan and $2.8 million in letters of credit issued primarily in support of worker’s compensation insurance programs. The Company however, was not in compliance with the Consolidated Fixed Charge Coverage Ratio as of September 30, 2009. This covenant violation did not impact the Company’s financial position given that the Senior Credit Facility was replaced with the Loan Agreement, as described below.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

On October 21, 2009, the Company entered into a loan agreement with Wells Fargo Bank N.A. (“the Loan Agreement”). The Loan Agreement provides the Company with a senior secured credit facility consisting of a 3-year revolving credit facility of up to $35 million, including a $7.5 million sub-limit for the issuance of standby letters of credit, and is secured by substantially all of the Company’s assets except for those already pledged in connection with existing federal Fisheries Finance Program loans. The Loan Agreement replaces the Company’s Senior Credit Facility, under which, just prior to the closing date, $11.4 million was outstanding under the Term Loan and $2.8 million was outstanding under letters of credit. The Company repaid the Term Loan at closing and the letters of credit were transferred to Wells Fargo Bank.

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

•

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

•

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

•

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

•

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

In connection with the termination of the Senior Credit Facility, the Company recognized approximately $1.4 million in interest expense due to interest rate swaps which became ineffective as a result of the debt prepayment in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the quarter ended September 30, 2009. In addition, the Company expects to incur approximately $0.4 million in the fourth quarter of 2009 related to the write-off of loan origination costs associated with the Senior Credit Facility. The Company anticipates the new deferred debt issuance costs incurred relating to the Loan Agreement to be approximately $0.4 million and will be amortized over the term of the agreement.

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Note 7. Capital Lease Obligation

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


Remainder of 2009	$	135
2010		551
2011		578
2012		609
2013		291

Total minimum lease payments		2,164
Less amount representing interest		(447	)

Present value of minimum payments		1,717
Less current portion of capital lease obligation		(351	)

Long-term capital lease obligation	$	1,366

As of September 30, 2009 and December 31, 2008, assets recorded under capital lease obligations are included in Property, Plant and Equipment, net as follows (in thousands):


	September 30, 2009			December 31 2008
Fishing vessels and marine equipment, at cost	$	2,076		$	2,076
Less accumulated depreciation		(536	)		(225	)

Property, plant and equipment, net	$	1,540		$	1,851

Note 8. Accrued Liabilities

Accrued liabilities as of September 30, 2009 and December 31, 2008 are summarized as follows:


	September 30, 2009		December 31, 2008
	(in thousands)
Salary and benefits	$	10,140	$	3,628
Insurance		6,708		4,831
Taxes, other than income tax		1,359		177
Trade creditors		5,939		5,942
Fair market value of interest rate swap, current portion		926		899
Other		2,229		870

Total accrued liabilities	$	27,301	$	16,347

Note 9. Commitments and Contingencies

Contract Commitments

As of September 30, 2009, the Company has entered into normal purchase commitments of physical deliveries of approximately $2.9 million to purchase energy for a portion of the remaining 2009 fishing season.


	Volume	Contract Price		Total Commitment
Natural gas (per MMBTU)	56,725	$	8.93	$	506,500
Bunker C (per gallon)	420,000	$	1.37		573,300
Diesel (per gallon)	626,358	$	2.93		1,837,300

Total				$	2,917,100

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Litigation

The Company is defending various claims and litigation arising from its operations which arise in the ordinary course of the Company’s business. In the opinion of management, and based on advice of legal counsel, it is believed that any existing litigation involving the Company will not materially affect its financial condition, cash flows or future results of operations.

Insurance

The Company carries insurance with coverages and coverage limits that it believes to be appropriate for the business. Although there can be no assurance that such insurance is sufficient to protect the Company against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of the Company’s operations. Should the Company’s insurers become insolvent, the Company is responsible for payment of all outstanding claims associated with the insurer’s policies.

Environmental Matters

The Company is subject to various possible claims and lawsuits regarding environmental matters. Management believes that costs, if any, related to these matters will not have a material adverse effect on the results of operations, cash flows or financial position of the Company.

Indemnification

The Company’s Articles of Incorporation and By-Laws limit the liability of the Company’s officers and directors to the fullest extent permitted by Nevada law. Nevada provides that directors of Nevada corporations may be relieved of monetary liabilities for breach of their fiduciary duties as directors, except under certain circumstances, including (i) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law or (ii) the willful or grossly negligent payment of unlawful distributions.

The Company’s Articles of Incorporation and By-Laws generally require the Company to indemnify its directors and officers to the fullest extent permitted by Nevada law. The Company’s Articles of Incorporation and By-Laws also require the Company to advance expenses to its directors and its officers to the fullest extent permitted by Nevada law upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it should be ultimately determined that they are not entitled to indemnification by the Company. The Company also has entered into indemnification agreements with all of its directors and certain of its officers which provides for the indemnification and advancement of expenses by the Company. The Company also maintains director and officer liability insurance with respect to liabilities arising out of certain matters, including matters arising under the securities laws. This insurance is subject to limitations, conditions and deductibles set forth in the respective insurance policy.

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


	Earnings (Numerator)			Shares (Denominator)	Per Share Data
Three Months Ended September 30, 2009
Net loss	$	(2,820	)	—

Basic loss per common share:
Earnings available to common shareholders	$	(2,820	)	18,712	$	(0.15	)


Effect of dilutive securities:
Stock options assumed exercised		—		—


Diluted loss per common share:
Earnings available to common shareholders plus stock options assumed exercised	$	(2,820	)	18,712	$	(0.15	)

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)


	Earnings (Numerator)			Shares (Denominator)	Per Share Data
Three Months Ended September 30, 2008
Net earnings	$	3,114		—


Basic earnings per common share:
Earnings available to common shareholders	$	3,114		18,624	$	0.17


Effect of dilutive securities:
Stock options assumed exercised		—		251


Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised	$	3,114		18,875	$	0.16


	Earnings (Numerator)			Shares (Denominator)	Per Share Data
Nine Months Ended September 30, 2009
Net loss	$	(4,013	)	—

Basic loss per common share:
Earnings available to common shareholders	$	(4,013	)	18,712	$	(0.21	)


Effect of dilutive securities:
Stock options assumed exercised		—		—


Diluted loss per common share:
Earnings available to common shareholders plus stock options assumed exercised	$	(4,013	)	18,712	$	(0.21	)


	Earnings (Numerator)			Shares (Denominator)	Per Share Data
Nine Months Ended September 30, 2008
Net earnings	$	11,736		—


Basic earnings per common share:
Earnings available to common shareholders	$	11,736		18,160	$	0.65


Effect of dilutive securities:
Stock options assumed exercised		—		381


Diluted earnings per common share:
Earnings available to common shareholders plus stock options assumed exercised	$	11,736		18,541	$	0.63

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Options to purchase 1,304,251 shares of common stock at exercise prices ranging from $1.65 to $15.88 per share were outstanding during the three and nine months ended September 30, 2009 but were not included in the computation of diluted earnings per share because inclusion of these shares would have been antidilutive.

Options to purchase 98,000 and 1,121,000 shares of common stock at exercise prices ranging from $13.27 to $15.88 and $12.75 to $17.25 per share were outstanding during the three and nine months ended September 30, 2008, respectively, but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the shares during that period.

Note 11. Components of Net Periodic Benefit Cost


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
	(in thousands)
Service cost	$	—		$	—		$	—		$	—
Interest cost		363			376			1,089			1,128
Expected return on plan assets		(253	)		(401	)		(758	)		(1,203	)
Amortization of prior service costs		—			—			—			—
Amortization of net loss		306			196			918			583

Net periodic pension cost	$	416		$	171		$	1,249		$	508

For the nine months ended September 30, 2009 and 2008, the Company made approximately $0.4 million and $1.5 million, respectively, in contributions to the Company’s pension plan. The Company does not expect to make additional contributions to the pension plan during the remainder of 2009.

Note 12. Hurricane Losses, Insurance Recoveries and Other Proceeds

2008 Hurricane

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009		2008
	(in thousands)
Damaged fish meal inventory	$	—		$	1,576		$	—	$	1,576
Write-off of other materials and supplies		—			287			33		287
Write-off of unallocated inventory cost pool		—			5,436			—		5,436
Involuntary conversion of property and equipment		—			3,206			273		3,206
Idle plant costs recognized as period expense		—			270			—		270
Clean-up costs incurred		(1	)		250			86		250
Insurance recoveries		—			(10,000	)		—		(10,000	)

(Gain) Loss resulting from natural disaster, net – 2008 storms	$	(1	)	$	1,025		$	392	$	1,025

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

See Note 13 in the Form 10-K for fiscal year ended December 31, 2008 for additional information.

2005 Hurricanes

On August 29, 2005, the Company’s Moss Point, Mississippi fish processing facility and adjacent shipyard were severely damaged by Hurricane Katrina. On September 24, 2005, the Company’s Cameron, Louisiana and the Abbeville, Louisiana fish processing facilities were also severely damaged by Hurricane Rita. For the three and nine month periods ended September 30, 2009 and 2008, the following amounts have been recognized in the Company’s statement of operations (in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,
	2009		2008			2009			2008
Insurance recoveries and other proceeds relating to natural disaster, net – 2005 storms	$	—	$	(1,150	)	$	(2,656	)	$	(1,150	)

Note 13. Fair Value Disclosures

The following disclosures of the estimated fair value of financial instruments are made in accordance with the requirements of SFAS No. 107, Disclosure About Fair Value of Financial Instruments (superseded by FASB ASC 825-10-50 on September 15, 2009). The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies and are described in the following paragraphs.

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

The carrying amounts of cash and cash equivalents, accounts receivables, accounts payable, and accrued expenses approximate fair value because of the short maturity of these items. The carrying amounts of notes payable outstanding under the Company’s Term Loan approximate fair value because the interest rates on these instruments change with market interest rates. At September 30, 2009, the Company had no borrowings under its Revolving Credit Facility except for $2.8 million in letters of credit support obligations.

The carrying values and respective fair market values of the Company’s long-term debt are presented below (in thousands). The fair value of the Company’s long-term debt is estimated based on the quoted market prices available to the Company for issuance of similar debt with similar terms at September 30, 2009.


	September 30, 2009		December 31, 2008
Long-term Debt:

Carrying Value	$	37,832	$	59,009
Estimated Fair Market Value	$	38,352	$	58,930

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

Effective January 1, 2008, the Company adopted FASB ASC 820-10 as discussed in Note 1, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value.

The standard defines fair value, provides a consistent framework for measuring fair value under accounting principles generally accepted in the United States and expands fair value financial statement disclosure requirements. FASB ASC 820-10 does not require any new fair value measurements. It only applies to accounting pronouncements that already require or permit fair value measures, except for standards that relate to share-based payments and to lease accounting.

The FASB’s prescribed valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. The standard classifies these inputs into the following hierarchy:

Level 1 Inputs– Quoted prices for identical instruments in active markets.

Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs– Instruments with primarily unobservable value drivers.

The following tables set forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2009 and December 31, 2008. As required by FASB ASC 820-10, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.


	September 30, 2009
	Fair Value Measurements Using							Assets
	Level 1		Level 2		Level 3			(Liabilities) at Fair Value
Assets (Liabilities) (in thousands)
Energy swap asset	$	—	$	497	$	—		$	497
Interest rate swap liability		—		—		(1,440	)		(1,440	)

Total Assets (Liabilities)	$	—	$	497	$	(1,440	)	$	(943	)


	December 31, 2008
	Fair Value Measurements Using							Liabilities at
	Level 1		Level 2		Level 3			Fair Value
Liabilities (in thousands)
Interest rate swap liability	$	—	$	—	$	(1,858	)	$	(1,858	)

Total Liabilities	$	—	$	—	$	(1,858	)	$	(1,858	)

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

OMEGA PROTEIN CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)

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

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

The following table provides a reconciliation of all assets and liabilities measured at fair value on a recurring basis which use Level 3, or significant unobservable inputs or significant value drivers for the three and nine months ended September 30, 2009 and 2008 (in thousands):


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3 Inputs)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Beginning balance	$	(1,442	)	$	(429	)	$	(1,858	)	$	(670	)

Net gain included in earnings related to expiration of certain natural gas call options		—			—			—			29
Net change associated with current period natural gas call options activity		—			—			—			(29	)
Net loss reclassified into interest expense related to interest rate swap transactions		(267	)		(127	)		(718	)		(256	)

Net change associated with current period interest rate swap transactions		269			53			1,136			423

Ending balance	$	(1,440	)	$	(503	)	$	(1,440	)	$	(503	)

OMEGA PROTEIN CORPORATION

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking statements in this Form 10-Q, future filings by the Company with the Securities and Exchange Commission (the “Commission”), the Company’s press releases and oral statements by authorized officers of the Company are intended to be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainty, including without limitation, the risks set forth under the caption “Risk Factors and Significant Factors that May Affect Forward-Looking Statements” appearing in Item 1A. “Risk Factors.” The Company believes that forward-looking statements made by it are based on reasonable expectations; however, no assurances can be given that actual results will not differ materially from those contained in such forward-looking statements. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include the words “estimate,” “project,” “anticipate,” “expect,” “predict,” “assume,” “believe,” “could,” “would,” “hope,” “may,” and similar expressions.

General

Omega Protein Corporation is the largest processor, marketer and distributor of fish meal and fish oil products in the United States. As used herein, the term “Omega” or the “Company” refers to Omega Protein Corporation or to Omega Protein Corporation and its consolidated subsidiaries, as applicable. The Company’s principal executive offices are located at 2105 City West Boulevard, Suite 500, Houston, Texas 77042-2838 (Telephone: (713) 623-0060).

The Company produces and sells a variety of protein and oil products derived from menhaden, a species of wild herring-like fish found along the Gulf of Mexico and Atlantic coasts. The fish are not genetically modified or genetically enhanced. The Company processes several grades of fish meal, as well as fish oil and fish solubles. The Company’s fish meal products are primarily used as a protein ingredient in animal feed for swine, cattle, aquaculture and household pets. Fish oil is utilized for animal and aquaculture feeds, industrial applications, additives to human food products and as dietary supplements. The Company’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer.

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

In September 2008, the Company sustained damage to property, plant and equipment at its Abbeville and Cameron, Louisiana facilities due to Hurricane Ike. The Abbeville facility was fully operational two weeks after Hurricane Ike and the Cameron facility was fully operational at the beginning of the 2009 fishing season. Total processing capacity, post-hurricane, was temporarily reduced from 850,000 tons to 625,000 tons for the remainder of the 2008 fishing season. The temporary decrease in processing capacity had no effect on the Company’s processing ability.

In late 2005, the Company sustained damage to property, plant and equipment at each of its Gulf of Mexico facilities due to Hurricanes Katrina and Rita. The Moss Point and Abbeville facilities were fully operational at the start of the 2006 season and the Cameron facility became fully operational towards the end of the 2006 season. Total processing capacity, post-hurricanes, was reduced from 950,000 tons to 850,000 tons. The decrease in annual processing capacity had no effect on the Company’s future processing ability because the Company has historically operated at levels substantially below maximum capacity.

OMEGA PROTEIN CORPORATION

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

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

The Company operates through two primary subsidiaries: Omega Protein, Inc. and Omega Shipyard, Inc. Omega Protein, Inc. is the Company’s principal operating subsidiary for its menhaden processing business and is the successor to a business conducted since 1913. Omega Shipyard, Inc. owns a drydock facility in Moss Point, Mississippi, which is used to provide shoreside maintenance for the Company’s fishing fleet and, subject to outside demand and excess capacity, occasionally for third-party vessels. Revenues from shipyard work for third-party vessels for the three and nine month periods ended September 30, 2009 and 2008 were not material. The Company also has a number of other immaterial direct and indirect subsidiaries.

Company Overview

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 regular grade and value-added specialty fish meals, crude and refined fish oils and fish solubles.

Fishing. During the third quarter of 2009, the Company owned a fleet of 58 fishing vessels and 32 spotter aircraft for use in its fishing operations and also leased additional aircraft where necessary to facilitate operations. During the 2009 fishing season in the Gulf of Mexico, which runs from mid-April through October, the Company is operating 31 fishing and carry vessels and 28 spotter aircraft. The fishing area in the Gulf is generally located along the Gulf Coast, with a concentration off the Louisiana and Mississippi coasts. The fishing season along the Atlantic coast begins in early May and usually extends into December. During the 2009 season, the Company is operating 10 fishing vessels and 8 spotter aircraft along the Mid-Atlantic coast, concentrated primarily in and around Virginia and North Carolina. The remaining fleet of fishing vessels and spotter aircraft are not routinely operated during the fishing season and are back-up to the active fleet, used for other transportation purposes, inactive or in the process of refurbishment in the Company’s shipyard.

On September 13, 2008, the Company’s Abbeville and Cameron, Louisiana fish processing facilities were damaged by Hurricane Ike. Both of these facilities were non-operational immediately after the hurricane. Operations at the Abbeville fish processing facility were restored to full capacity on September 22, 2008. The Cameron fish processing facility was fully functional prior to the beginning of the 2009 fishing season.

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. “Carry vessels” do not engage in active fishing but instead carry fish from the Company’s offshore fishing vessels to its plants. Utilization of carry

OMEGA PROTEIN CORPORATION

vessels increases the amount of time that certain of the Company’s fishing vessels remain offshore fishing productive waters and therefore increases the Company’s fish catch per vessel employed. The carry vessels have reduced crews and crew expenses and incur less maintenance cost than the actual fishing vessels.

The Company’s principal raw material is menhaden, a species of fish that inhabits coastal and inland tidal waters in the United States. Certain state agencies, as well as interstate compacts, impose resource depletion restrictions on menhaden pursuant to fisheries management legislation or regulations and may impose additional legislation or regulations in the future. For example, in February 2007, the Commonwealth of Virginia established an annual cap for a five year period beginning in 2006 on the Company’s menhaden landings from the Chesapeake Bay in an amount equal to 109,020 metric tons. The Virginia restrictions also allow the Company a credit whereby any under-harvest in a particular year below the 109,020 metric ton cap would be added to increase the cap for the following year, up to a maximum of 122,740 metric tons per year. In April 2008, the State of Texas enacted regulations which limited the annual menhaden catch to 31.5 million pounds. The regulation also allows a 10% underage or overage in each year which is credited or deducted, as applicable, to the total allowable catch in the following year. This regulation was effective commencing with the 2009 fishing season. 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.

During 2008, the Company experienced higher costs of production and below average fish catch. The higher costs of production were primarily attributed to increased energy, labor and repair costs. The reduced fish catch was primarily attributable to adverse weather conditions mainly associated with hurricane activity (the amount of hurricane losses were substantial and are more fully described in Notes 2, 3, 5 and 12 of Notes to Unaudited Condensed Consolidated Financial Statements). As a result of the higher costs of production and below average fish catch, the Company experienced significantly higher per unit product costs (approximately 27.3% increase as compared to the 2007 fishing season) which adversely affected the Company’s earnings for 2008. The impacts of higher cost inventories were carried forward and adversely affected the Company’s cost of sales and, along with decreased sales prices, gross profit through the second quarter of 2009. In addition, the lost fishing days resulted in lower 2008 product volumes available for sale. These higher cost product inventories carried forward from the 2008 fishing season were largely sold as of June 30, 2009. Third quarter ended fish catch results for the past five years are as follows:


	2009	2008	2007	2006	2005
Fish Catch in Tons as of September 30,	417,712	388,935	475,566	475,667	463,841

Meal and Oil Processing Plants. The Company operates four meal and oil 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 Company’s processing plants are located in coastal areas near the Company’s fishing fleet. Annual volume processed varies depending upon menhaden catch. Each plant maintains a dedicated dock to unload fish, fish processing equipment and storage facilities. 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 called crude oil. 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.

Shipyard. The Company owns a 49.4 acre shipyard facility in Moss Point, Mississippi which includes two dry docks, each with a capacity of 1,300 tons. The shipyard is used for routine maintenance and vessel refurbishment on the Company’s fishing vessels and occasionally for shoreside maintenance services to third-party vessels if excess capacity exists.

OMEGA PROTEIN CORPORATION

Health and Science Center. The Company’s Health and Science Center provides 100-metric tons per day fish oil processing capacity and is located adjacent to the Company’s Reedville, Virginia processing plant. The food-grade facility includes state-of-the-art processing equipment and controls that allows the Company to refine, bleach, fractionate and deodorize its menhaden fish oil and has more than tripled the Company’s previous refined fish oil production capacity for food, industrial and feed grade oils. The facility also provides the Company with automated packaging and on-site frozen storage capacity and has a lipids analytical laboratory to enhance the development of Omega-3 oils and food products.

OmegaPure Technology and Innovation Center. In January 2007, the Company opened its new OmegaPure Technology and Innovation Center located in Houston, Texas to further develop its OmegaPure^® food grade Omega-3 product line. The facility has food science application labs, as well as analytical, sensory and pilot plant capabilities. The facility also has a lipids research lab where the Company plans to continue to develop new Omega-3 products that have improved functionality and technical characteristics.

Hurricane Damages.

2008 Hurricane Activity

On September 13, 2008, the Company’s Abbeville and Cameron, Louisiana fish processing facilities were damaged by Hurricane Ike. Both of these facilities were non-operational immediately after the hurricane. Operations at the Abbeville fish processing facility were restored to full capacity on September 22, 2008. The Cameron fish processing facility was fully functional prior to the beginning of the 2009 fishing season.

Because of the damages to the Company’s Cameron, Louisiana facility caused by Hurricane Ike, the Company redeployed all of its ten Cameron vessels to its Abbeville, Louisiana and Moss Point, Mississippi facilities. Although these two facilities had adequate processing capacity, the Company’s fishing efforts were diminished because increased unloading time due to additional vessels reduced the number of vessels on the fishing grounds during the most optimal fishing times. The 10 Cameron fishing vessels were redeployed to the Cameron facility for the beginning of the 2009 fishing season.

The Company maintains insurance coverage for a variety of these damages, most notably property, inventory, vessel and business interruption insurance. The nature and extent of the insurance coverage varies by line of policy and the Company had recorded insurance recoveries as accounts receivable based on preliminary estimates and discussions with its insurers and adjusters. During the fourth quarter of 2008, the Company received an advance of $2.5 million from its primary insurance carrier and during the first quarter of 2009, a final settlement payment of $7.5 million was received which represented the limits of the insurance policy.

OMEGA PROTEIN CORPORATION

2005 Hurricane Activity

On August 29, 2005, the Company’s Moss Point, Mississippi fish processing facility and adjacent shipyard were severely damaged by Hurricane Katrina. On September 25, 2005, the Company’s Cameron and Abbeville, Louisiana fish processing facilities were also severely damaged by Hurricane Rita.

During 2008, the Company received a grant of $1.3 million, net of fees and expenses, from the Louisiana Department of Wildlife and Fisheries which was recognized as “Insurance recoveries and other proceeds related to natural disaster, net – 2005” in the Consolidated Statement of Operations for the year ended December 31, 2008. The grant provides assistance for commercial fishing owners impacted by Hurricanes Katrina and Rita in 2005. During the first quarter of 2009, the Company received a similar grant related to the impact of Hurricane Katrina of $2.7 million, net of fees and expenses, from the State of Mississippi. The Mississippi grant was recognized as “Insurance recoveries and other proceeds related to natural disaster, net – 2005 storms” in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the nine months ended September 30, 2009.

Distribution System. The Company’s distribution system of warehouses and tank storage facilities allow for transportation via trucks, barges, containers and railcars to service the Company’s 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. The Company generally contracts with third-party trucking, vessel, barge, container and railcar companies to transport its products to and from warehouses and tank storage facilities and directly to its customers.

The Company sells a portion of its products on a two-to-twelve-month forward contract basis with the balance sold on a spot basis through purchase orders. During 2006, 2007 and 2008 approximately 70%, 50% and 65%, respectively, of the Company’s fish meals and crude fish oil had been sold on a forward contract basis prior to those years’ respective fishing season. Prior to the beginning of the Company’s 2009 fishing season, approximately 52% and 39% of the Company’s 2009 forecasted fish meal and crude fish oil, respectively, had either been sold or sold forward on a contract basis. The percentage of fish meal and crude fish oil sold on a forward contract basis will fluctuate from year to year based upon perceived market availability and forward price expectations.

The Company’s annual revenues are highly dependent on pricing, annual fish catch, production yields and inventories and, in addition, inventory is generally carried over from one year to the next year. The Company determines the level of inventory to be carried over based on existing contracts, prevailing market prices of the products and anticipated customer usage and demand during the off-season. Thus, production volume does not necessarily correlate with sales volume in the same year and sales volumes will fluctuate from quarter to quarter. The Company’s fish meal products have a useable life of approximately one year from date of production. Practically, however, the Company attempts to empty its warehouses of the previous season’s products by the second or third month of the new fishing season. The Company’s crude fish oil products do not lose efficacy unless exposed to oxygen and, therefore, their storage life typically is longer than that of fish meal.

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


	Three Months Ended September 30,								Nine Months Ended September 30,
	2009				2008				2009				2008
	Revenues		Percent		Revenues		Percent		Revenues		Percent		Revenues		Percent
Regular Grade	$	5.2	10.4	%	$	5.9	10.8	%	$	16.4	13.5	%	$	17.1	12.4	%
Special Select		29.2	58.5			26.5	48.6			58.2	47.7			57.0	41.4
Sea-Lac		1.5	3.0			2.6	4.8			6.0	4.9			9.8	7.1
Crude Oil		9.2	18.5			13.9	25.5			23.3	19.2			35.7	25.9
Refined Oil		3.4	6.8			4.8	8.8			13.0	10.7			15.0	10.9
Fish Solubles		1.4	2.8			0.8	1.5			4.9	4.0			3.1	2.3
Other		—	—			—	—			—	—			—	—

Total	$	49.9	100.0	%	$	54.5	100.0	%	$	121.8	100.0	%	$	137.7	100.0	%

OMEGA PROTEIN CORPORATION

Customers and Marketing. Most of the Company’s marine protein products are sold directly to approximately 600 customers by the Company’s agriproducts sales department, while a smaller amount is sold through independent sales agents. Product inventory was $66.9 million as of September 30, 2009 versus $62.1 million as of December 31, 2008.

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. Crude fish oil sales primarily involve export markets where the fish oil is used for aquaculture feeds. Over the past decade, increasing percentages of the Company’s fish meal and oil products have been sold into the aquaculture industry. The growth of the worldwide aquaculture industry has resulted in increasing demand for fish oils and meals to improve feed efficiency, nutritional value and health of farm-raised fish species.

The Company’s products are sold both in the U.S. and internationally. International sales consist of both fish meal and fish oil and are primarily to Norway, Canada, Chile, China and Japan. The Company’s sales in these foreign markets are denominated in U.S. dollars and are 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 have been reduced in recent years for certain countries under the North American Free Trade Agreement and the Uruguay Round Agreement of the General Agreement on Tariffs and Trade. In all cases, the Company’s products are shipped to its customers either by FOB shipping point or CIF terms, and therefore, the customer is responsible for any tariffs, duties or other levies imposed on the Company’s products sold into these markets.

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

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.

OMEGA PROTEIN CORPORATION

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. These purchase and resale transactions have to date been ancillary to the Company’s base manufacturing and sales business.

During 2005, 2006 and 2008, the Company’s fish catch and resultant product inventories were reduced, primarily due to adverse weather conditions, and the Company further expanded its purchase and resale of other fish meals and oils (primarily Panamanian, Peruvian and Mexican fish meal and U.S. menhaden oil). Although operating margins from these activities are less than the margins typically generated from the Company’s base domestic production, these operations provide the Company with a source of fish meal and oil to sell into other markets, some of which the Company has not historically had a presence. During 2006, the Company purchased products totaling approximately 14,600 tons, or approximately 7% of total volume 2006 sales. During 2007, the Company purchased fish oil totaling approximately 5,500 tons, or approximately 9.1% of fish oil sales volumes for 2007. The Company did not purchase any fish meal or fish oil during 2008. During the nine months ended September 30, 2009, the Company purchased approximately 10,600 tons of fish meal, or approximately 10.3% of fish meal sales volumes for the same period.

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, annual aggregates 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. Over recent years, the Company has elected to increase its deductibles and self-retentions in order to achieve lower insurance premium costs. These higher deductibles and self-retentions have resulted in greater costs to the Company in the cases of Hurricanes Katrina, Rita and Ike and will expose the Company to greater risk of loss if additional future claims occur. In addition, the Company’s cost of insurance for property damage has increased materially and may further increase materially in future years as insurers recoup losses paid and to be paid out in connection with Hurricanes Katrina, Rita and Ike by charging higher premiums.

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

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

Fish meal prices have historically borne a relationship to prevailing soybean meal prices (more weakly correlated in recent years), while prices for fish oil are generally influenced by prices for vegetable oils, such as

OMEGA PROTEIN CORPORATION

rapeseed, soybean and palm oils. Thus, the prices for the Company’s products are established by worldwide supply and demand relationships over which the Company has no control and tend to fluctuate significantly over the course of a year and from year to year. For example, during 2008, the Company experienced fish oil price increases of approximately 73.4% when compared to 2007, whereas palm oil and soy oil prices rose 35% and 43%, respectively. Beginning in the third quarter of 2008, pricing in the agricultural commodity markets began to decrease materially. Spot fish oil and fish meal prices have followed these general trends during the second half of 2008 and the first three quarters of 2009.

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

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

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

In February 2007 the Commonwealth of Virginia declined to adopt an ASMFC recommended plan but instead adopted its own restrictions whereby the Company’s Chesapeake Bay menhaden harvest was capped at 109,020 metric tons per year. The Virginia restrictions also allow for a credit whereby any under-harvest in a particular year below the 109,020 metric ton cap would be added to increase the cap for the following year, up to a maximum of 122,740 metric tons per year. The Company supported Virginia’s proposal and voluntarily complied with its limitations in 2006. This compliance had no effect on the Company’s Chesapeake Bay harvest in 2007 and 2008 and is not expected to have any material adverse effect on its Chesapeake Bay harvest in 2009. As a result of the underharvest in 2008, the 2009 Chesapeake Bay catch limit will be 122,740 metric tons.

The cap was established as a precautionary measure while research is conducted to address, among other things, the question whether the menhaden harvest in the Bay could cause what is being termed “localized depletion” of menhaden there. No evidence of such localized depletion has yet been uncovered.

The ASMFC, an interstate compact commission sanctioned by federal law, conserves and manages the menhaden fishery throughout the stock’s coast-wide range. According to federal and ASMFC technical experts, the menhaden population is not over-fished and over-fishing is not occurring throughout its range. The Company supports the ASMFC’s goal of maintaining healthy populations of menhaden and the current research program designed to answer important ecological questions regarding menhaden in the Chesapeake Bay and coast-wide.

Because the research regarding menhaden is on-going, the ASMFC’s Atlantic Menhaden Management Board (“Board”) on May 5, 2009 approved a proposed three year extension of the existing cap through the initiation of an

OMEGA PROTEIN CORPORATION

addendum to the interstate Fishery Management Plan for Atlantic Menhaden. The Draft Addendum proposes to extend the previously enacted Chesapeake Bay reduction fishery harvest cap at the same level, for an additional three years (2011-2013) beyond its currently scheduled expiration date in 2010.

On August 19, 2009, the Board was presented with a draft addendum to extend the harvest cap. The Board voted to accept the draft addendum and permit public hearings on the harvest cap extension. Three states (Maine, Maryland, and Virginia) held hearings in order to receive comments on the addendum from the public. The Board’s final vote on this addendum will be held on November 3, 2009 at the ASMFC’s Annual Meeting.

If this addendum is fully adopted by the ASMFC as proposed, it will be necessary for the Virginia General Assembly to also adopt the extension of the Chesapeake Bay reduction fishery harvest cap, for an additional three years (2011-2013). The Virginia General Assembly is scheduled to begin its legislative session in January 2010.

Even though no evidence of localized depletion has been uncovered, ASMFC findings that menhaden are not over-fished and over-fishing is not occurring, the Company is supporting the proposed Addendum as a way to maintain the status quo while research on these matters continues.

On March 27, 2008, the Texas Parks and Wildlife Commission adopted regulations related to the menhaden reduction fishery in Texas waters which limits the Total Allowable Catch (“TAC”) to 31.5 million pounds annually. The regulations also allow for a 10% underage or overage in each year which is credited or deducted, as applicable, to the TAC in the following year.

The Company’s menhaden fish catch in Texas in 2008 was reported by the National Marine Fisheries Service to be 25.5 million pounds (approximately 11,600 metric tons), or approximately 2.8% of the Company’s total 2008 fish catch. The limitation is not expected to have a material adverse effect on the Company’s business, results of operation or financial condition. The Texas regulations were effective at the beginning of the 2009 fishing season.

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.

OMEGA PROTEIN CORPORATION

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

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.

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.

Available Information

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

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

OMEGA PROTEIN CORPORATION

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

Critical Accounting Policies and Estimates

For information on critical accounting policies and estimates, see Note 1 to the unaudited condensed consolidated financial statements included in Item 1 – Financial Statements.

Results of Operations

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	97.5		80.6		94.6		74.8

Gross profit	2.5		19.4		5.4		25.2
Selling, general and administrative expense	6.1		7.6		7.8		8.6
Research and development expense	0.7		1.2		0.9		0.9
Loss resulting from natural disaster, net—2008	—		1.9		0.3		0.7
Insurance recoveries and other proceeds—2005	—		(2.1	)	(2.2	)	(0.8	)
(Gain) loss on disposal of assets	0.2		1.0		0.1		0.5

Operating (loss) income	(4.5	)	9.8		(1.5	)	15.3
Interest income	0.1		0.2		0.1		0.2
Interest expense	(4.5	)	(2.0	)	(3.3	)	(2.4	)
Other (expense) income, net	(0.2	)	0.2		(0.2	)	—

(Loss) income before income taxes	(9.1	)	8.2		(4.9	)	13.1
(Benefit) provision for income taxes	(3.5	)	2.5		(1.7	)	4.6

Net (loss) income	(5.6	)%	5.7	%	(3.2	)%	8.5	%

Interim Results for the Third Quarters ended September 30, 2009 and September 30, 2008

Revenues. Revenues decreased $4.6 million, or 8.4%, from $54.5 million for the three months ended September 30, 2008 to $49.9 million for the three months ended September 30, 2009. The decrease in revenues was due to lower sales prices of 5.1% and 50.4% for the Company’s fish meal and fish oil, respectively, which was partially offset by higher sales volumes of 7.9% and 37.0%, respectively. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $12.4 million decrease in revenues due to the material decline in sales prices and a $7.8 million increase in revenue caused by increased sales volumes, when comparing the three months ended September 30, 2009 to the three months ended September 30, 2008. The decrease in fish meal and fish oil prices is consistent with the general decline in pricing in the agricultural commodities markets globally.

OMEGA PROTEIN CORPORATION

Cost of sales. Cost of sales, including depreciation and amortization, for the quarter ended September 30, 2009 was $48.7 million, a $4.8 million increase, or 10.8%, as compared to the quarter ended September 30, 2008. Cost of sales as a percentage of revenues was 97.5% for the quarter ended September 30, 2009 as compared to 80.6% for the quarter ended September 30, 2008. The increase in cost of sales as a percentage of revenue was primarily due to the material decline in fish meal and fish oil sales prices as mentioned above, partially offset by a decrease in per unit production costs due to decreased energy and repair costs and slightly increased fish catch in the 2009 fishing season as compared to the 2008 fishing season.

Gross profit. Gross profit decreased $9.3 million, or 88.1%, from $10.6 million for the quarter ended September 30, 2008 to $1.3 million for the quarter ended September 30, 2009. Gross profit as a percentage of revenue was 2.5% for the quarter ended September 30, 2009 as compared to 19.4% for the quarter ended September 30, 2008. The decrease in gross profit as a percentage of revenue was primarily due to materially decreased sales prices for the Company’s fish meal and fish oil, partially offset by lower costs of production and slightly increased fish catch, as discussed above.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased $1.2 million, or 27.8%, from $4.2 million for the quarter ended September 30, 2008 to $3.0 million for the quarter ended September 30, 2009. The decrease was primarily due to decreased employee bonus accruals and reduced miscellaneous consulting costs incurred during the quarter ended September 30, 2009 as compared to the quarter ended September 30, 2008.

Research and development expenses. Research and development expenses decreased from approximately $0.6 million for the three months ended September 30, 2008 to approximately $0.4 million for the three months ended September 30, 2009. The decrease relates to costs of a specific project that took place during the quarter ended September 30, 2008 which had no costs during the current quarter ended.

(Gain) loss resulting from natural disaster, net—2008 storms. For the quarter ended September 30, 2008, the Company incurred losses, net of insurance receivable, of $1.0 million relating to damages incurred at its Abbeville and Cameron, Louisiana, fish processing facilities related to Hurricane Ike. The gains recognized during the current quarter ended September 30, 2009 were insignificant.

Insurance recoveries and other proceeds, net – 2005 storms. During the quarter ended September 30, 2008, the Company received a federal hurricane assistance grant of $1.2 million, net of fees, related to the impact of Hurricane Rita on the Company. There were no amounts recognized during the current quarter ended September 30, 2009.

Loss on disposal of assets. The loss on disposal of assets was $0.1 million for the three months ended September 30, 2009 as compared to a loss on disposal of assets of $0.5 million for the three months ended September 30, 2008. The losses were the result of disposals of miscellaneous assets in the ordinary course of business.

Operating (loss) income. As a result of the factors discussed above, the Company’s operating (loss) income decreased $7.5 million from operating income of $5.3 million for the quarter ended September 30, 2008 to an operating loss of $2.2 million for the quarter ended September 30, 2009. As a percentage of revenues, operating (loss) income decreased from an operating income percentage of 9.8% for the quarter ended September 30, 2008 to an operating loss percentage of 4.5% for the quarter ended September 30, 2009.

Interest income. Interest income decreased by $92,000 from $128,000 for the three months ended September 30, 2008 to $36,000 for the three months ended September 30, 2009. The decrease was primarily due to decreased interest rates experienced during the quarter ended September 30, 2009 as compared to the quarter ended September 30, 2008.

OMEGA PROTEIN CORPORATION

Interest expense. Interest expense increased $1.2 million, or 105.2%, from $1.1 million for the quarter ended September 30, 2008 to $2.3 million for the quarter ended September 30, 2009. The increase in interest expense is primarily due to the Company’s cash flow interest rate hedges becoming ineffective as the result of early debt repayments made during the quarter and debt refinancing subsequent to September 30, 2009 which resulted in $1.4 million of additional interest expense. This increase was partially offset by decreased interest expense as a result of decreased debt balances during the quarter ended September 30, 2009 as compared to the quarter ended September 30, 2008 and an increase in capitalized interest, which is netted against interest expense, for the current quarter which was greater than the prior year quarter due to increased spending on a particular capital project.

Other (expense) income, net. Other (expense) income, net increased by $189,000 from a net income of $107,000 for the quarter ended September 30, 2008 to a net expense of $82,000 for the quarter ended September 30, 2009. The increase was primarily due to an enterprise zone grant awarded to the Company by the Commonwealth of Virginia in the amount of $159,000 for the quarter ended September 30, 2008.

(Benefit) provision for income taxes. The Company recorded a $1.7 million benefit for income taxes for the quarter ended September 30, 2009 representing an effective tax rate of 38.1% for income taxes compared to 30.0% for the quarter ended September 30, 2008. The increase in the effective tax rate is primarily a result of the impact of certain nondeductible items and the reduced level of expected book income. The Company believes that it is more probable than not that the recorded estimated deferred tax asset benefits and state operating loss carry-forwards will be realized except for the amount for which a valuation allowance has been provided. The statutory tax rate of 34% for U.S. federal taxes was in effect for the three month periods ended September 30, 2009 and 2008.

Interim Results for the Nine Months ended September 30, 2009 and September 30, 2008

Revenues. Revenues decreased $15.9 million, or 11.5%, from $137.7 million for the nine month period ended September 30, 2008 to $121.8 million for the nine month period ended September 30, 2009. The decrease in revenues was due to lower sales prices of 3.5% and 35.1% for the Company’s fish meal and fish oil, respectively, and lower sales volumes of 0.5% for the Company’s fish meal, partially offset by increased sales volumes of 10.3% for the Company’s fish oil. Considering fish meal, fish oil and fish solubles sales activities in total, the Company experienced a $19.4 million decrease in revenues due to materially decreased sales prices and a $3.5 million increase in revenue caused by increased sales volumes, when comparing the nine month period ended September 30, 2009 to the nine month period ended September 30, 2008.

Cost of sales. Cost of sales, including depreciation and amortization, for the nine month period ended September 30, 2009 was $115.3 million, a $12.3 million increase, or 11.9%, as compared to the nine month period ended September 30, 2008. Cost of sales as a percentage of revenues was 94.6% for the nine month period ended September 30, 2009 as compared to 74.8% for the nine month period ended September 30, 2008. The increase in cost of sales as a percentage of revenue was primarily due to (1) increased 2008 per unit production costs realized from January 2009 to June 2009 due to increased energy, labor and repair costs and below average fish catch attributable to adverse weather conditions mainly associated with hurricane activity during the 2008 fishing season and (2) the material decline in fish oil sales prices.

Gross profit. Gross profit decreased $28.2 million, or 81.1%, from $34.8 million for the nine month period ended September 30, 2008 to $6.6 million for the nine month period ended September 30, 2009. Gross profit as a

OMEGA PROTEIN CORPORATION

percentage of revenue was 5.4% for the nine month period ended September 30, 2009 as compared to 25.2% for the nine month period ended September 30, 2008. The decrease in gross profit as a percentage of revenue for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008 was primarily due to materially decreased sales prices for the Company’s fish meal and fish oil and higher costs of production and below average fish catch associated with the 2008 fishing season realized from January 2009 to June 2009, as discussed above.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased $2.3 million, or 19.5%, from $11.9 million for the nine month period ended September 30, 2008 to $9.6 million for the nine month period ended September 30, 2009. The decrease was primarily due to decreased employee bonus accruals and reduced miscellaneous consulting costs incurred during the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008.

Research and development expenses. Research and development expenses decreased from approximately $1.3 million for the nine month period ended September 30, 2008 to approximately $1.0 million for the nine month period ended September 30, 2009. The decrease is due to a certain research project during the nine month period ended September 30, 2008 that was not present during the nine month period ended September 30, 2009.

Loss resulting from natural disaster, net—2008 storms. For the nine months ended September 30, 2009, the Company incurred losses, net of insurance receivable, of $0.4 million as compared to $1.0 million for the nine months ended September 30, 2008, relating to damages incurred at its Abbeville and Cameron, Louisiana, fish processing facilities related to Hurricane Ike in 2008. The losses recognized during the nine months ended September 30, 2009 relate to clean up costs incurred and changes in estimated impairment costs of damaged fixed assets.

Insurance recoveries and other proceeds, net —2005 storms. For the nine month periods ended September 30, 2009 and 2008, the Company received federal hurricane assistance grants of $2.7 million and $1.2 million, net of fees, from the State of Mississippi and the State of Louisiana, respectively, related to the impact of Hurricanes Katrina and Rita on the Company.

Loss on disposal of assets. A loss of $0.1 million and a loss of $0.7 million on disposal of assets were recognized for the nine month periods ended September 30, 2009 and 2008, respectively. The losses were the result of disposals of miscellaneous assets in the ordinary course of business.

Operating (loss) income. As a result of the factors discussed above, the Company’s operating (loss) income decreased $22.9 million from an operating income of $21.0 million for the nine month period ended September 30, 2008 to an operating loss of $1.9 million for the nine month period ended September 30, 2009. As a percentage of revenues, operating (loss) income decreased from an operating income percentage of 15.3% for the nine month period ended September 30, 2008 to an operating loss percentage 1.5% for the nine month period ended September 30, 2009.

Interest income. Interest income decreased by $0.3 million from $0.4 million for the nine month period ended September 30, 2008 to $0.1 million for the nine month period ended September 30, 2009. The decrease was primarily due to decreased interest rates experienced during the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008.

Interest expense. Interest expense increased $0.7 million, or 22.5%, from $3.3 million for the nine month period ended September 30, 2008 to $4.0 million for the nine month period ended September 30, 2009. The increase in interest expense is primarily due to the Company’s cash flow interest rate hedges becoming ineffective

OMEGA PROTEIN CORPORATION

as the result of early debt repayments made during the current nine month period and debt refinancing subsequent to the nine month period ended September 30, 2009 which resulted in $1.4 million of additional interest expense. This increase was partially offset by decreased interest expense as a result of decreased debt balances during the nine month period ended September 30, 2009 as compared to the nine month period ended September 30, 2008 and an increase in capitalized interest, which is netted against interest expense, for the current nine month period which was greater than the prior year nine month period due to increased spending on a particular capital project.

Other (expense) income, net. Other expense, net increased by $279,000 from $17,000 for the nine month period ended September 30, 2008 to $296,000 for the nine month period ended September 30, 2009. The increase was primarily due to an enterprise zone grant awarded to the Company by the Commonwealth of Virginia in the amount of $159,000 for the nine months ended September 30, 2008 which was not recognized during the nine month ended September 30, 2009 and an increase in fees paid to the Company’s bank and related lenders.

(Benefit) provision for income taxes. The Company recorded a $2.0 million benefit for income taxes for the nine month period ended September 30, 2009 representing an effective tax rate of 33.4 % for income taxes compared to 35.2% for the nine month period ended September 30, 2008. The decrease in the effective tax rate is primarily a result of the impact of certain nondeductible items and the reduced level of expected book income. The Company believes that it is more probable than not that the recorded estimated deferred tax asset benefits and state operating loss carry-forwards will be realized except for the amount for which a valuation allowance has been provided. The statutory tax rate of 34% for U.S. federal taxes was in effect for the nine month periods ended September 30, 2009 and 2008.

Seasonal and Quarterly Results

The Company’s menhaden harvesting and processing business is seasonal in nature. The Company generally has higher sales during the menhaden harvesting season (which includes the second and third quarter of each year) due to increased product availability, but prices during the fishing season tend to be lower than during the off-season. Additionally, due to the sharp increase in spot fish oil prices during the first half of 2008 and subsequent decrease in spot fish oil prices during the second half of 2008 and first nine months of 2009, and the resultant decrease in gross profit margins for those products, any variation in the mix of product sales between quarters may result in significant variations of total gross profit margins. As a result, the Company’s quarterly operating results have fluctuated in the past and may fluctuate in the future. In addition, from time to time the Company may limit sales of inventory based on worldwide prices for competing products that affect prices for the Company’s products which may affect comparable period comparisons.

Liquidity and Capital Resources

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

At September 30, 2009, the Company had an unrestricted cash balance of $11.9 million, down $2.1 million from December 31, 2008. This decrease was primarily due to capital expenditures of $15.2 million, costs incurred related to the beginning of the 2009 fishing season, and the repayment of debt of $21.2 million (including the prepayment of $16.6 million of the Senior Credit Facility on September 24, 2009), offset by (1) collection of insurance proceeds of $7.5 million received during the nine month period ended September 30, 2009 relating to

OMEGA PROTEIN CORPORATION

Hurricane Ike, (2) proceeds from a grant of $2.7 million, net of fees and expenses, received from the State of Mississippi related to Hurricane Katrina and (3) a significant collection and decrease in the accounts receivables balance as of September 30, 2009 versus December 31, 2008. The Company’s annual revenues and its resulting liquidity are highly dependent on annual fish catch, production yields, selling prices for its products and inventories available for sale. While the Company’s selling prices for its products increased in 2008 over 2007 and 2006, those increases were partially offset by higher energy, labor and repair costs and below average fish catch attributable to adverse weather conditions mainly associated with hurricane activity experienced during the 2008 fishing season, which resulted in significantly higher per unit inventory costs. The significantly higher per unit inventory costs related to the 2008 fishing season were carried forward into 2009 and adversely affected the Company’s first and second quarter 2009 cost of sales and gross profit. Although 2009 energy and repair production costs have decreased from the high levels of the 2008 fishing season and the 2009 harvest is slightly improved as compared to the 2008 fishing season, gross profits continue to be impacted by materially reduced sales prices which could impact future quarterly results.

The aggregate amount of the Company’s outstanding indebtedness at September 30, 2009 was approximately $37.8 million compared to approximately $59.0 million at December 31, 2008. This decrease was primarily due to the prepayment of $16.6 million of the Senior Credit Facility on September 24, 2009. The Company has a moderately leveraged financial structure, limiting its financial flexibility. In particular, the Company will be required to use a portion of its cash flows to pay principal and interest on its debt, which will reduce the amount of money the Company has for operations, capital expenditures, expansion, acquisitions or general corporate or other business activities. In addition, the covenants contained in the Company’s debt agreements limit its ability to borrow money in the future for acquisitions, capital expenditures or to meet the Company’s operating expenses or other general corporate obligations. See “Risk Factors—The Company has a substantial amount of indebtedness, which may adversely affect its ability to operate its business, remain in compliance with debt covenants and make payments on its debt.”

Capital and Credit Market Crisis

It is possible that the recent unprecedented volatility in capital and credit markets may create additional risks in the upcoming months and possibly years.

•

Liquidity in the capital and credit markets—The Company believes that it has sufficient liquidity despite the disruption of the capital and credit markets. While not significant to the Company to date, the disruptions in capital and credit markets may result in increased borrowing costs associated with short-term and long-term debt.

•

Counterparty creditworthiness—The Company is subject to credit risk, which relates to the ability of its customers to meet their contractual payment obligations or the potential non-performance of counterparties to deliver contracted energy.

•

Value of Investments—The Company sponsors a defined benefit pension plans for its employees. The market value of the investments within the employee pension plan declined by approximately 24.9% during the year ended December 31, 2008. The benefit plan assets and obligations of the Company are measured annually using a December 31 measurement date. Reductions in plan assets from investment losses resulted in an increase to the plans’ unfunded status and a decrease in shareholders’ equity upon actuarial revaluation of the plan on January 1, 2009. Changes in the value of plan assets will not have an impact on the income statement for 2009; however, reduced benefit plan assets will result in increased benefit costs in future years and may increase the amount and accelerate the timing of required future funding contributions. Depending upon market conditions, such increases could be material.

OMEGA PROTEIN CORPORATION

•

Macroeconomic conditions—The recent capital and credit market crisis is adversely affecting the U.S. and global economies. This could have several adverse effects on the Company’s markets should the effects of the downturn be experienced for an extended period of time. Potential long-term decline of global economies could lead to lower demand for fishmeal and oil which could result in a decline of the Company’s sales prices and related revenue. Lower demand for fishmeal and oil could also lead to lower margins for the Company. In addition, customers may not be able to pay, or may delay payment of, accounts receivable that are owed to the Company.

Source of Capital: Operations

Net cash flow provided by operating activities increased from approximately $3.8 million for the nine month period ended September 30, 2008 to $24.3 million for the nine month period ended September 30, 2009. The increase in operating cash flow is primarily attributable to changes in receivables and inventories.

Source of Capital: Debt

Net financing activities (used) provided cash of ($21.4) million and $7.5 million during the nine month periods ended September 30, 2009 and 2008, respectively. The nine month period ended September 30, 2009 included $21.4 million in debt and capital lease principal payments, including a prepayment of $16.6 million of the Senior Credit Facility. The nine month period ended September 30, 2008 included $4.8 million in debt and capital lease principal payments and $12.3 million in proceeds and tax effects received from stock options exercised.

Under Title XI, as administered under the FFP, 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 certain 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 shore-side construction.

In September 2004, the FFP approved the Company’s financing application in an amount not to exceed $14.0 million (the “Approval Letter”). Borrowings under the Approval Letter are required to be used to finance and/or refinance approximately 73% of the actual depreciable cost of the Company’s future fishing vessel refurbishments and capital expenditures relating to shore-side fishing assets, for a term not to exceed 15 years from inception at interest rates determined by the U.S. Treasury. Final approval for all such future projects requires individual approval through the Secretary of Commerce, National Oceanic and Atmospheric Administration, and NMFS. Borrowings under the FFP are required to be evidenced by security agreements, undertakings, and other documents deemed in the sole discretion of the NMFS as necessary to accomplish the intent and purpose of the Approval Letter. The Company is required to comply with customary NMFS covenants as well as certain special covenants. The Company closed on a $14.0 million FFP loan on October 17, 2005.

On December 1, 2005, pursuant to the Title XI program, the FFP approved a second financing application made by the Company in the amount of $16.4 million (the “Second Approval Letter”). In May 2006, the Company submitted a $6.3 million financing request under the Second Approval Letter. The Company closed on the $6.3 million financing in the first quarter of 2007. In September 2009, the Company submitted a $10.0 million financing request under the remaining Second Approval Letter which it anticipates closing in the fourth quarter of 2009. As of September 30, 2009, the Company had approximately $26.5 million of borrowings outstanding under Title XI and was in compliance with all of the covenants contained therein.

OMEGA PROTEIN CORPORATION

On March 26, 2007 (the “Closing Date”), the Company entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., as administrative agent, lender, swing line lender and letter of credit issuer, Regions Bank, Compass Bank and Farm Credit Bank of Texas (collectively, the “Lenders”). The Credit Agreement provides the Company with a $55 million senior credit facility (the “Senior Credit Facility”) consisting of (i) a 5-year revolving credit facility (the “Revolving Credit Facility”) of up to $20 million, including a $7.5 million sub-limit for the issuance of standby letters of credit and a $2.5 million sub-limit for swing line loans and (ii) a 5-year term loan (the “Term Loan”) of $35 million. The Senior Credit Facility replaced the Company’s Financing Facility, under which, as of the Closing Date, $28.7 million in principal was outstanding under a term loan, $6.5 million in principal was outstanding under revolving loans, and approximately $3.3 million in letters of credit were issued, primarily in support of worker’s compensation insurance programs. On the Closing Date, the Company drew down $35 million under the Term Loan and approximately $2.0 million under the Revolving Credit Facility, and had approximately $3.1 million issued in standby letters of credit, primarily in support of worker’s compensation insurance programs. The Senior Credit Facility is secured by a first priority lien on all of the Company’s assets, other than vessels, real estate and other assets pledged to secure loans made to the Company under the FFP. On September 29, 2008, the Credit Agreement was amended to increase the limit in the Consolidated Capital Expenditures Financial Covenant from $15 million to $21 million for the fiscal year ended 2008 with the limit returning to $15 million for any fiscal year thereafter.

Aggregate amounts outstanding under the Revolving Credit Facility (including standby letters of credit and swing line loans) are limited to an amount not to exceed the lesser of (i) $20 million and (ii) an amount equal to the sum of (a) 80% of Eligible Accounts Receivable (as defined in the Credit Agreement) plus (b) 50% of net book value of Eligible Inventory (as defined in the Credit Agreement), provided that Eligible Inventory shall not comprise more than 50% of the total of (a) and (b). Standby letters of credit will be issued by, and swing line loans will be made available by, Bank of America, N.A. and each Lender will purchase an irrevocable and unconditional participation in each standby letters of credit and swing line loan, subject to certain conditions. Swing line loans will be made available on a same day basis in minimum amounts of $100,000, subject to certain conditions.

Any loan (other than swing line loans) under the Senior Credit Facility bears interest at a rate equal to the Applicable Margin, as determined in accordance with the pricing grid set forth below, plus one of the following indexes: (i) Eurodollar and (ii) the Base Rate (defined as the higher of (a) the Federal Funds Rate plus 0.50% and (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate”). Each swing line loan bears interest at the Base Rate plus the Applicable Margin for Base Rate loans.


Consolidated Leverage Ratio of the Company and its Subsidiaries	Applicable Commitment Fee		Letters of Credit Fee		Applicable Margin for Eurodollar Loans		Applicable Margin for Base Rate Loans
Less than 2.0x	0.40	%	2.00	%	2.00	%	0.50	%
Less than 2.50x but greater than or equal to 2.0x	0.40	%	2.25	%	2.25	%	0.75	%
Less than 3.0x but greater than or equal to 2.5x	0.40	%	2.38	%	2.38	%	1.00	%
Less than 3.5x but greater than or equal to 3.0x	0.40	%	2.50	%	2.50	%	1.25	%
Greater than or equal to 3.5x	0.50	%	2.75	%	2.75	%	1.50	%

All borrowings made on the Closing Date were made as Base Rate loans. These Base Rate loans were converted to Eurodollar loans three days after the Closing Date.

OMEGA PROTEIN CORPORATION

The Company entered into interest rate swap agreements with a notional amount as indicated below that are scheduled to mature in March 2012. Under these agreements, the Company receives a floating rate based on the LIBOR interest rate, and pays a fixed rate as indicated below on the various notional amounts.


Date of Contract	Original Notional Amount		Contracted Interest Rate		Total Liability as of September 30, 2009			Total Deferred Tax Asset as of September 30, 2009		Notional Amount as of September 30, 2009
April 4, 2007	$	19,950,000	5.16	%	$	(1,046,700	)	$	—	$	15,212,000
February 7, 2008		10,237,500	3.36	%		(291,900	)		—		8,006,000
March 19, 2008		4,436,250	2.96	%		(101,600	)		—		3,469,000

					$	(1,440,200	)	$	—	$	26,687,000

On September 24, 2009, the Company paid $16.6 million of the borrowing outstanding under the Term Loan. On October 21, 2009, the Company entered into a Loan Agreement with Wells Fargo Bank N.A. (“the Loan Agreement”) which replaced the Senior Credit Facility. As a consequence of the debt prepayment and refinancing, the Company determined that the forecasted interest payments associated with the interest rate swaps were probably unlikely to occur. As a result, hedge accounting relating to the interest rate swaps was discontinued and all amounts previously recognized in accumulated other comprehensive loss were reclassified to earnings as of September 30, 2009. For the three and nine months ended September 30, 2009, $1.4 million was recognized as interest expense in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income. The interest rate swap agreements remained outstanding as of September 30, 2009.

The Credit Agreement requires the Company comply with various affirmative and negative covenants affecting its business and operations. In addition, the Company is required to comply with the following financial covenants:

•

The Company is required to maintain Consolidated Net Worth (as defined in the Credit Agreement) of at least $85,000,000, which is increased on a cumulative basis as of the end of each fiscal quarter (commencing June 30, 2007) by an amount equal to 75% of Consolidated Net Income (as defined in the Credit Agreement) (to the extent positive) for the fiscal quarter then ended plus 100% of the amount of certain equity issuances after the Closing Date that increase consolidated shareholders’ equity.

•

The Company is required to maintain, as of the end of each fiscal quarter (commenced March 31, 2007), a Consolidated Leverage Ratio (as defined in the Credit Agreement) of 4.0 to 1.0, which will be reduced to (i) 3.75 to 1.0 on September 30, 2007, (ii) 3.25 to 1.0 on December 31, 2007, (iii) 3.0 to 1.0 on December 31, 2008, (iv) 2.75 to 1.0 on December 31, 2009 and (iv) 2.5 to 1.0 on December 31, 2010 for thereafter.

•

The Company is required to maintain, as of the end of each fiscal quarter (commenced March 31, 2007), a Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of at least 1.1 to 1.0.

•

The Company is required to maintain, at the end of each fiscal quarter (commenced March 31, 2007), a Consolidated Asset Coverage Ratio (as defined in the Credit Agreement) of 1.5 to 1.0, which will be increased to 2.0 to 1.0 on December 31, 2008 for thereafter.

•

The Company is not permitted to have Consolidated Capital Expenditures (as defined in the Credit Agreement) in excess of $21 million for fiscal year 2008 (as amended on September 29, 2008) and $15 million for all subsequent fiscal years.

In addition to the above listed financial covenants, the Credit Agreement contains specific definitions of events which could constitute default. One such definition relates to a “cross-default” provision wherein if the Company was to default on any other credit agreement, such as Title XI debt, the Senior Credit Facility could also be considered in default.

OMEGA PROTEIN CORPORATION

As of September 30, 2009, the Company was not in compliance with the Consolidated Fixed Charge Coverage Ratio. This covenant violation did not impact the Company’s financial position given that the Senior Credit Facility was replaced with the Loan Agreement, as described below.

The Senior Credit Facility, originally scheduled to terminate on March 26, 2012 (the “Maturity Date”), was paid in full on October 21, 2009. For a more detailed description of the terms and conditions of the Credit Agreement, see the Company’s Current Report on Form 8-K filed with the SEC on March 30, 2007.

As of September 30, 2009, the Company had $11.4 million outstanding under the Term Loan and approximately $2.8 million in letters of credit issued primarily in support of worker’s compensation insurance programs. The Company has no off-balance sheet arrangements other than normal operating leases and standby letters of credit.

On October 21, 2009, the Company entered into the Loan Agreement with Wells Fargo Bank which provides the Company with a senior secured credit facility consisting of a 3-year revolving credit facility of up to $35 million, including a $7.5 million sub-limit for the issuance of standby letters of credit, and is secured by substantially all of the Company’s assets except for those already pledged in connection with existing federal Fisheries Finance Program loans. The Loan Agreement replaces the Company’s Senior Credit Facility, under which, just prior to closing, $11.4 million was outstanding under the Term Loan and $2.8 million was outstanding under letters of credit. The Company repaid the Term Loan at closing and the letters of credit were transferred to Wells Fargo Bank.

•

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

•

OMEGA PROTEIN CORPORATION

In connection with the termination of the Senior Credit Facility, the Company realized approximately $1.4 million in interest expense due to interest rate swaps which became ineffective as a result of the debt prepayment in the Unaudited Condensed Consolidated Statement of Operations and Comprehensive Income for the quarter ended September 30, 2009. In addition, the Company expects to incur approximately $0.4 million in the fourth quarter of 2009 related to the write-off of loan origination costs associated with the Senior Credit Facility.

Use of Capital: Operations

Net investing activities used cash of $5.0 million and $15.3 million for the nine month periods ended September 30, 2009 and 2008, respectively. The Company’s investing activities consist mainly of capital expenditures for equipment purchases, replacements, vessel refurbishments, and fish oil refining processes. The Company made capital expenditures of approximately $15.2 million and $16.6 million, for the nine month periods ended September 30, 2009 and 2008, respectively. The Company anticipates making approximately $1.5 million in additional capital expenditures during the remainder of 2009 primarily for the refurbishment of vessels and plant assets and for the repair of certain equipment. Investing activities also includes the receipt of a grant of $2.7 million, net of fees and expenses, related to the impact of Hurricane Katrina, from the State of Mississippi, and the receipt of $7.5 million in proceeds from insurance companies relating to Hurricane Ike, for the nine month period ended September 30, 2009. For the nine month period ended September 30, 2008, investing activities also included the receipt of $0.1 million related to proceeds from disposition of assets and $1.2 million in proceeds related to federal hurricane recovery grant.

The Company believes that the existing cash, cash equivalents, short-term investments, cash flow from operations and funds available through the Loan Agreement and/or Title XI indebtedness described above will be sufficient to meet its working capital and capital expenditure requirements through at least the next twelve months.

Use of Capital: Acquisitions

The Company from time to time considers potential transactions including, but not limited to, enhancement of physical facilities to improve production capabilities and the acquisition of other businesses. Certain of the potential transactions reviewed by the Company would, if completed, result in its entering new lines of business (generally including certain businesses to which the Company sells its products such as pet food manufacturers, aquaculture feed manufacturers, fertilizer companies and organic foods manufacturers and distributors), although historically, reviewed opportunities have been generally related in some manner to the Company’s existing operations or which would have added new protein products to the Company’s product lines. Although the Company does not explicitly budget for acquisitions and, as of the date hereof, does not have any commitment with respect to a material acquisition, it could enter into such agreement in the future. Depending on the size of the acquisition, the Company would expect to finance the transaction using internally generated cash flows and its current credit agreements, or, if necessary, equity or debt financings. The Company cannot assure that such financings will be available on acceptable terms, if at all.

OMEGA PROTEIN CORPORATION

Use of Capital: Contractual Obligations

The following tables aggregate information about the Company’s contractual cash obligations and other commercial commitments (in thousands) as of September 30, 2009:


	Payments Due by Period
Contractual Cash Obligations	Total		Less than 1 year		1 to 3 years		4 to 5 years		After 5 years
Long Term Debt ⁽¹⁾	$	37,832	$	2,304	$	16,426	$	5,135	$	13,967
Capital lease obligation		1,717		351		940		426		—
Interest on long term debt and capital lease obligation		12,603		2,677		4,598		2,247		3,081
Operating lease obligations		10,326		2,393		3,978		3,246		709
Pension Funding		11,382		202		6,750		3,520		910
Energy Commitments ⁽²⁾		2,917		2,917		—		—		—

Total Contractual Cash Obligations	$	76,777	$	10,844	$	32,692	$	14,574	$	18,667

(1)	The Company prepaid $11.4 million of Term Loan debt on October 21, 2009 which is included as part of the $16.4 million (1 to 3 years) in the table above.

(2)	As of September 30, 2009, the Company had normal purchase commitments for energy usage of approximately $2.9 million that will be delivered in quantities expected to be used in the normal course of business during the remaining 2009 fishing season.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

In the normal course of business, the financial condition of the Company is exposed to minimal market risk associated with interest rate movements on the Company’s borrowings. To mitigate this risk, the Company has entered into interest rate swap agreements to effectively lock-in the LIBOR component of certain debt instruments. A one percent increase or decrease in the levels of interest rates on variable rate debt would not result in a material change to the Company’s results of operations.

The Company is also exposed to market risk associated with natural gas and diesel prices. To partially mitigate this risk, the Company forward purchased a portion of its expected natural gas, Bunker C, and diesel usage for 2009. Additionally, during the nine months ended September 30, 2009, the Company purchased natural gas and heating oil swaps related to a portion of its expected natural gas, Bunker C, and diesel usage for 2010 and 2011. The Company is currently exposed to market risk associated with increases in natural gas, Bunker C, and diesel prices related to the portion not forward-purchased for 2009 and not covered by swaps for 2010 and 2011.

Although the Company sells products in foreign countries, all of the Company’s revenues are billed and paid for in US dollars. As a result, management does not believe that the Company is exposed to any significant foreign country currency exchange risk, and the Company does not utilize market risk sensitive instruments to manage its exposure to this risk.

Item 4.

Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

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

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

OMEGA PROTEIN CORPORATION

Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in the Company’s periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.

(b) Changes in Internal Controls

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

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

Risk Factors and Significant Factors That May Affect Forward-Looking Statements

The Company cautions investors that the following risk 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 could differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

The risks described below are not the only ones facing the Company. The Company’s business is also subject to other risks and uncertainties that affect many other companies, such as competition, technological obsolescence, labor relations (including risks of strikes), general economic conditions and geopolitical events. Additional risks not currently known to the Company or risks that the Company currently believes are immaterial may also impair the Company’s business, results of operations and financial results.

Risks Relating to the Company’s Business and Industry:

The Company is dependent on a single natural resource and may not be able to catch the amount of menhaden that it requires to operate profitably. The Company’s primary raw material is menhaden. The

OMEGA PROTEIN CORPORATION

Company’s business is totally dependent on its annual menhaden harvest in ocean waters along the U.S. Atlantic and Gulf coasts. The Company’s ability to meet its raw material requirements through its annual menhaden harvest fluctuates from year to year and month to month, due to natural conditions over which the Company has no control. These natural conditions, which include varying fish population, adverse weather conditions and fish disease, may prevent the Company from catching the amount of menhaden required to operate profitably. In 2008, the Company experienced below average fish catch primarily due to adverse weather conditions relating to hurricane activity, which, in conjunction with increased cost of production, increased per unit costs that adversely impacted earnings in 2008 and the first three quarters of 2009.

The Company’s operations are geographically concentrated in the Gulf of Mexico where they are susceptible to regional adverse weather patterns such as hurricanes. Three of the Company’s four operating plants are located in the Gulf of Mexico (two in Louisiana and one in Mississippi), a region which has historically been subject to a late summer/early fall hurricane season. The Company’s Virginia facility has in the past also at times been adversely affected by hurricanes. In September 2008, the Company’s Abbeville and Cameron, Louisiana fish processing facilities were damaged by Hurricane Ike and were non-operational immediately after the hurricane. Operations at the Abbeville fish processing facility were restored to full capacity within two weeks, and the Cameron fish processing facility was fully functional prior to the beginning of the 2009 fishing season. In addition, all three of the Company’s Gulf of Mexico plants were severely damaged within a one-month span by Hurricanes Katrina and Rita in August and September 2005. Immediately after the second hurricane, approximately 70% of the Company’s 2004 production capacity was impaired and the Company’s business, results of operations and financial condition were materially adversely affected. Additional future weather related disruptions could, if they occur, also have a material adverse effect on the Company’s business, results of operations and financial condition. In addition, the Company’s costs of insurance for property damage have increased as insurers recoup losses paid and to be paid out in connection with the Katrina, Rita and Ike hurricanes by charging higher premiums.

The costs of energy may materially impact the Company’s business. The Company has experienced substantially higher costs for energy in recent years. The Company’s business is materially dependent on diesel fuel for its vessels and natural gas for its operating facilities. The costs of these commodities, which are beyond the Company’s control, may have an adverse material impact on the Company’s business, results of operations and financial condition.

Fluctuation in “oil yields” derived from the Company’s fish catch could impact the Company’s ability to operate profitably. The “oil yield,” or the percentage of oil derived from the menhaden fish, while it is relatively high compared to many species of fish, has fluctuated over the years and from month to month due to natural conditions relating to fish biology over which the Company has no control. For example, the Company’s oil yields for the 2006 fishing season were lower by 28% compared to those in the 2005 fishing season and were lower by 24% compared to the Company’s 10 year oil yield average. The Company believes that the causes of lower fish oil yields relate to fish diet, weather and water temperature but such causes are not generally well understood. Poor oil yields result in significantly higher per unit inventory costs and fewer volumes available for future sale and, as a result, have at times materially impacted the amount of fish oil that the Company has been able to produce from its available fish catch. Oil yields for the nine months ended September 30, 2009 have been consistent with those experienced over the last several years. It is possible that oil yields in the future could adversely impact the Company’s ability to operate profitably.

Laws or regulations that restrict or prohibit menhaden or purse seine fishing operations could adversely affect the Company’s ability to operate. The adoption of new laws or regulations at federal, regional, state or local levels that restrict or prohibit menhaden or purse seine fishing operations, or stricter interpretations of existing laws or regulations, could materially adversely affect the Company’s business,

OMEGA PROTEIN CORPORATION

results of operations and financial condition. In addition, the impact of a violation by the Company of federal, regional, state or local law or regulation relating to its fishing operations, the protection of the environment or the health and safety of its employees could have a material adverse affect on the Company’s business, results of operations and financial condition.

One example of potentially restrictive regulation is an addendum to a fisheries management plan recommended by a regional regulatory commission, the Atlantic States Marine Fisheries Commission (“ASMFC”), in August 2005. The Commonwealth of Virginia has declined to adopt the regulatory commission’s recommended plan but has instead adopted its own restrictions whereby the Company’s Chesapeake Bay menhaden harvest are capped for a five year period at 109,020 metric tons per year. The Virginia restrictions also allow for a credit whereby any under-harvest in a particular year below the 109,020 metric ton cap would be added to increase the cap for the following year, up to a maximum of 122,740 metric tons per year. The Company supported Virginia’s proposal and voluntarily complied with its limitations in 2006. This restriction had no effect on the Company’s Chesapeake Bay harvest in 2007 and 2008 and is not expected to have a material adverse effect on the Chesapeake Bay harvest in 2009. As a result of the 2008 Chesapeake Bay’s underharvest, the 2009 Chesapeake Bay catch limit will be 122,740 metric tons. The ASMFC has currently proposed to extend the cap for another three year period. See “Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operation – Regulation”.

Another example is regulations adopted by the Texas Parks and Wildlife Commission related to the menhaden reduction fishery in Texas waters which limits the Total Allowable Catch (“TAC”) to 31.5 million pounds annually. The regulations also allow for a 10% underage or overage in each year which is credited or deducted, as applicable, to the TAC in the following year.

Another example is two bills that would have banned commercial menhaden fishing introduced in October 2007 in the U.S. House of Representatives (H.R. 3840 and H.R. 3841) by two congressmen representing portions of New Jersey and Maryland, areas where the Company has no operations. The bills were never moved out of committee, but the enactment of either of the bills, or any restrictions similar to those described in the bills, would have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company’s fish catch may be impacted by restrictions on its spotter aircraft. If the Company’s spotter aircraft are prohibited or restricted from operating in their normal manner during the Company’s fishing season, the Company’s business, results of operations and financial condition could be adversely affected. 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.

Worldwide supply and demand relationships, which are beyond the Company’s control, influence the prices that the Company receives for many of its products and may from time to time result in low prices for many of the Company’s products. Prices for many of the Company’s products are subject to, or influenced by, 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. For example, during 2008, the Company experienced fish oil price increases of approximately 73.4% when compared to 2007. Beginning in the third quarter of 2008, pricing in the agricultural commodity markets began to decrease. Spot fish oil and fish meal prices have followed these general trends by decreasing during the second half of 2008 and into the first three quarters of 2009. For the first nine months of 2009, the Company’s fish oil prices have

OMEGA PROTEIN CORPORATION

declined approximately 35.1% as compared to 2008. The factors that influence these supply and demand relationships are world supplies of fish meal made from other fish species, animal proteins and fats, palm oil, rapeseed oil, soy meal and oil, and other edible oils.

New laws or regulation regarding contaminants in fish oil or fish meal may increase the Company’s cost of production or cause the Company to lose business. It is possible that future enactment of increasingly stringent regulations regarding contaminants in fish meal or fish oil by foreign countries or the United States may adversely affect the Company’s business, results of operations and financial condition. More stringent regulations could result in: (i) the Company’s incurrence of additional capital expenditures on contaminant reduction technology in order to meet the requirements of those jurisdictions, and possibly higher production costs for Company’s products, or (ii) the Company’s withdrawal from marketing its products in those jurisdictions.

Risks Relating to the Company’s Ongoing Operations:

The Company has a substantial amount of indebtedness, which may adversely affect its ability to operate its business, remain in compliance with debt covenants and make payments on its debt. As of September 30, 2009, the aggregate amount of the Company’s outstanding indebtedness under its Senior Credit Facility and its loan agreements under the Title XI Fisheries Finance Program was approximately $37.8 million. The Company’s outstanding indebtedness could have important consequences for you, including the following:

•

the Company’s ability to meet its expenses and debt obligations will depend on its future performance, which will be affected by financial, business, economic, regulatory and other factors. The Company will not be able to control many of these factors, such as economic conditions and governmental regulation. The Company cannot be certain that its earnings will be sufficient to allow it to pay the principal and interest on its existing or future debt and meet its other obligations. If the Company does not have enough money to service its existing or future debt, it may be required to refinance all or part of its existing or future debt, sell assets, borrow more money or raise equity. The Company may not be able to refinance its existing or future debt, sell assets, borrow more money or raise equity on terms acceptable to it, if at all. As of September 30, 2009, given the recent economic conditions the Company is facing such as materially reduced fish oil sales prices and increased costs of sales related to the 2008 fishing season inventory, the Company was not in compliance with the Consolidated Fixed Charge Coverage Ratio under its Senior Credit Facility. This covenant violation did not impact the Company’s financial position given that the Senior Credit Facility was terminated and replaced with the Loan Agreement. The Loan Agreement entered into on October 21, 2009 with Wells Fargo Bank N.A., requires the Company remain in compliance with certain financial covenants for the remainder of its term.

•

it may be more difficult for the Company to satisfy its obligations with respect to the Loan Agreement and its loan agreements under the Title XI Fisheries Finance Program, and any failure to comply with the obligations of any of the agreements governing such indebtedness, including financial and other restrictive covenants, could result in an event of default under such agreements;

•

the covenants contained in the Company’s debt agreements limit its ability to borrow money in the future for acquisitions, capital expenditures or to meet its operating expenses or other general corporate obligations;

•

the amount of the Company’s interest expense may increase because certain of its borrowings are at variable rates of interest, which, if interest rates increase, could result in higher interest expense;

OMEGA PROTEIN CORPORATION

•

the Company will need to use a portion of its cash flows to pay principal and interest on its debt, which will reduce the amount of money the Company has for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other business activities;

•

the Company may have a higher level of debt than some of its competitors, which could put it at a competitive disadvantage;

•

the Company may be more vulnerable to economic downturns and adverse developments in its industry or the economy in general; and

•

the Company’s debt level could limit its flexibility in planning for, or reacting to, changes in its business and the industry in which it operates.

The Company’s strategy to expand into the functional food grade oils market may be unsuccessful. The Company’s attempts to expand its fish oil sales into the market for refined, functional food grade fish oils for human consumption may not be successful. The Company’s expectations regarding future demand for Omega-3 fatty acids may prove to be incorrect or, if future demand does meet the Company’s expectations, it is possible that purchasers could utilize Omega-3 sources other than the Company’s products.

The Company’s quarterly operating results will fluctuate as its business is seasonal in nature. The Company’s menhaden harvesting and processing business is seasonal in nature. The Company generally has higher sales during the menhaden harvesting season (which includes the second and third quarter of each fiscal year) due to increased product availability, 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 its products, which may affect comparable period comparisons.

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

The Company’s foreign customers are subject to disruption typical to foreign countries. The Company’s sales of its products in foreign countries are subject to risks associated with foreign countries such as changes in social, political and economic conditions inherent in foreign operations, including:

•

Changes in the law and policies that govern foreign investment and international trade in foreign countries;

•

Changes in U.S. laws and regulations relating to foreign investment and trade;

•

Changes in tax or other laws;

•

Partial or total expropriation;

•

Current exchange rate fluctuations;

•

Restrictions on current repatriation; or

•

Political disturbances, insurrection or war.

OMEGA PROTEIN CORPORATION

In addition, it is possible that the Company, at any one time, could have a significant amount of its revenues generated by sales in a particular country which would concentrate the Company’s susceptibility to adverse events in that country.

The Company may undertake acquisitions that are unsuccessful and the Company’s inability to control the inherent risks of acquiring businesses could adversely affect its business, results of operations and financial condition operations. In the future the Company may undertake acquisitions of other businesses, located either in the United States or in other countries, although there can be no assurances that this will occur. There can be no assurance that the Company will be able (i) to identify and acquire acceptable acquisition candidates on favorable terms, (ii) to profitably manage future businesses it may acquire, or (iii) to successfully integrate future businesses it may acquire without substantial costs, delays or other problems. Any of these outcomes could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company’s failure to comply with federal U.S. citizenship ownership requirements may prevent it from harvesting menhaden in the U.S. jurisdictional waters. 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 a number necessary to constitute a quorum and at least 75% of the Company’s outstanding capital stock (including a majority of its voting capital stock) be owned by U.S. citizens. If the Company fails to observe any of these requirements, the Company will not be eligible to conduct its harvesting activities in U.S. jurisdictional waters which would have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company may not be able to recruit, train and retain qualified marine personnel in sufficient numbers. The Company’s business is dependent on its ability to recruit, train and retain qualified marine personnel in sufficient numbers such as vessel captains, vessel engineers and other crewmembers. The Company has experienced difficulty in recent years in recruiting its optimal number of employees. To the extent that the Company is not successful in recruiting, training and retaining employees in sufficient numbers, its productivity may suffer. If the Company were unable to secure a sufficient number of workers during periods of peak employment, the lack of personnel could have an adverse effect on the Company’s business, results of operations and financial condition. The impact of Hurricanes Katrina, Rita and Ike has exacerbated the difficulties of recruiting and retaining qualified marine personnel in the Gulf Coast area.

The Company has historically participated in the United States H2B Visa Program whereby foreign nationals are permitted to enter the United States temporarily and engage in seasonal, non-agricultural employment. The Company utilizes its H2B Visa workers for a portion of its fishing vessel crews and plant personnel. Changes in the H2B Visa Program, the termination of that program, or caps on the number of workers available under that program, could have a material adverse effect upon the Company’s ability to secure a sufficient number of workers during periods of peak employment or cause the Company to bear additional costs to secure domestic workers in a tight job market.

The U.S. Congress has not re-authorized the Save Our Small and Seasonal Business Act amendment to the H2B visa program which would allow returning H2B workers from certain prior years from being counted against the H2B visa program’s annual 66,000 visa cap. Because of the relatively low visa cap number, the Company has not received its historical allotment of H2B workers for the 2009 fishing season. Accordingly,

OMEGA PROTEIN CORPORATION

the Company is utilizing all domestic workers for its 2009 fishing season. The Company has changed its recruiting programs to replace H2B workers, including raising certain wage scales, implementing sign-on bonuses for certain positions, offering referral fees for qualified workers, and other benefits, all of which have resulted in additional costs for the Company. In addition, some of the newly hired domestic workers have not worked in the menhaden fishing business prior to working for the Company, unlike many H2B workers who typically return year after year with the benefits of their training and experience. These newer inexperienced workers have resulted in increased training costs and will likely lower productivity for the Company’s operations.

The Company’s Loan Agreement and other Fisheries Finance Program loan agreements contain covenants and restrictions that may limit the Company’s financial flexibility. The Company’s Loan Agreement and the Company’s loan agreements under the Title XI Fisheries Finance Program contain various covenants and restrictions such as prohibitions on dividends and stock repurchases without the lender’s consent. The Loan Agreement also contains various financial covenants that the Company must comply with.

Investment Risks. Investment risks specifically related to the Company’s common stock include:

The current financial crisis and deteriorating economic conditions may have material adverse impacts on our business and financial condition that we currently cannot predict. As widely reported, economic conditions in the United States and globally have been deteriorating. Financial markets in the United States, Europe and Asia have been experiencing a period of unprecedented turmoil and upheaval characterized by extreme volatility and declines in security prices, severely diminished liquidity and credit availability, inability to access capital markets, the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government and other governments. Unemployment has risen while business and consumer confidence have declined and there are fears of a prolonged recession. Although we cannot predict the impacts on us of the deteriorating economic conditions, they could materially adversely affect our business and financial condition.

For example:

•

we may not be able to obtain modifications to the financial covenants under the Loan Agreement, if necessary, on acceptable terms, if at all;

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the demand for fishmeal and oil may decline due to the deteriorating economic conditions which could negatively impact the revenues, margins and profitability of our business;

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we may be unable to obtain adequate funding under the Loan Agreement or future credit agreements due to lending counterparties being unwilling or unable to meet their funding obligations;

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the tightening of credit or lack of credit availability to our customers could adversely affect our ability to collect our trade receivables;

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our ability to access the capital markets may be restricted at a time when we would like, or need, to raise capital for our business including for capital expenditures or acquisitions;

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changes in the value of plan assets for our defined benefit plan may result in increased benefit costs and may increase the amount and accelerate the timing of required future contributions; or

OMEGA PROTEIN CORPORATION

•

our commodity hedging arrangements could become ineffective if our counterparties are unable to perform their obligations or seek bankruptcy protection.

The limited liquidity for the Company’s common stock could affect your ability to sell your shares at a satisfactory price. The Company’s common stock is relatively illiquid. As of September 30, 2009, the Company had approximately 18.7 million shares of common stock outstanding. The average daily trading volume in the common stock during the prior 60 calendar days ending on that date was approximately 150,000 shares. A more active public market for the Company’s common stock, however, may not develop, which would continue to adversely affect the trading price and liquidity of the common stock. Moreover, a thin trading market for the common stock causes the market price for the common stock to fluctuate significantly more than the stock market as a whole. Without a large float, the Company’s common stock is less liquid than the stock of companies with broader public ownership and, as a result, the trading prices of the common stock may be more volatile. In addition, in the absence of an active public trading market, you may be unable to liquidate your investment in the Company at a satisfactory price.

Issuance of shares in connection with financing transactions or under stock incentive plans will dilute current stockholders. Pursuant to the Company’s stock incentive plans, the Company’s management is authorized to grant stock awards to its employees, directors and consultants. You will incur dilution upon exercise of any outstanding stock awards. In addition, if the Company raises additional funds by issuing additional common stock, or securities convertible into or exchangeable or exercisable for common stock, further dilution to its existing stockholders will result, and new investors could have rights superior to existing stockholders.

The number of shares of the Company’s common stock eligible for future sale could adversely affect the market price of its stock. The Company had outstanding options to purchase approximately 1.3 million shares of its common stock with a weighted average exercise price of $5.44 per share as of September 30, 2009. These shares of common stock are registered for resale on currently effective registration statements. Certain of the Company’s officers and directors have, from time to time, entered into Rule 10b5-1 sales plans with brokers unaffiliated with the Company whereby they have committed to sell automatically and without discretion a predetermined number of shares of the Company’s common stock over a period of time according to their own individual criteria. The issuance of a significant number of shares of common stock upon the exercise of stock options, or the availability for sale, or sale, of a substantial number of the shares of common stock eligible for future sale under effective registration statements, under Rule 144 or otherwise, could adversely affect the market price of the common stock.

The Company’s Articles of Incorporation and Bylaws have provisions that discourage corporate takeovers and could prevent stockholders from realizing a premium on their investment. Certain provisions of the Company’s Articles of Incorporation and Bylaws, as well as the Nevada Corporation Law, to which the Company is subject, could delay or frustrate the removal of incumbent directors and could make difficult a merger, tender offer or proxy contest involving the Company, even if such events could be viewed as beneficial by its stockholders. The Company’s Board of Directors is empowered to issue preferred stock in one or more series without stockholder action. Any issuance of this blank-check preferred stock could materially limit the rights of holders of the Company’s common stock and render more difficult or discourage an attempt to obtain control of the Company by means of a tender offer, merger, proxy contest or otherwise. In addition, the Articles of Incorporation and Bylaws contain a number of provisions which could impede a takeover or change in control of the Company, including, among other things, staggered terms for members of its Board of Directors, the requiring of two-thirds vote of stockholders to amend certain provisions of the

OMEGA PROTEIN CORPORATION

Articles of Incorporation or the inability to take action by written consent or to call special stockholder meetings. Certain provisions of the Nevada Corporation Law could also discourage takeover attempts that have not been approved by the Company’s Board of Directors. In addition, federal law requires that at least 75% of the Company’s outstanding capital stock be owned by U.S. citizens which will discourage takeover attempts by potential foreign purchasers.

The Company has not paid dividends and does not expect to pay dividends in the near future. The Company has never declared or paid any cash dividends on its common stock since it became a public company in April 1998 and has no intention to do so in the near future. Any determination as to payment of dividends will be made at the discretion of the Company’s Board of Directors 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 Loan Agreement.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders

None

Item 5.

Other Information

None.

Item 6.

Exhibits


Exhibit No.		Description of Exhibit

10.1*		Letter Agreement between the Company and Dr. Mark E. Griffin dated June 12, 2009 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 15, 2009).

10.2*		Loan Agreement dated as of October 21, 2009 by and among Omega Protein Corporation, Omega Protein, Inc., and Wells Fargo Bank, National Association (“Wells Fargo”) (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009).

10.3*		Revolving Note dated as of October 21, 2009 executed by Omega Protein Corporation and Omega Protein, Inc. and made payable to Wells Fargo (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009).

10.4*		Guaranty Agreement dated as of October 21, 2009 by Protein Finance Company, Omega International Marketing Company, Omega International Distribution

OMEGA PROTEIN CORPORATION


		Company, Omega Shipyard, Inc., and Protein Industries, Inc. (collectively, the “Guarantors”) in favor of Wells Fargo (incorporated by reference to Exhibit 10.3 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009).

10.5*		Security and Pledge Agreement dated as of October 21, 2009 among Omega Protein Corporation, Omega Protein, Inc., the Guarantors and Wells Fargo (incorporated by reference to Exhibit 10.4 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009).

10.6*		First Preferred Fleet Mortgage dated as of October 21, 2009 given by Omega Protein, Inc. to Wells Fargo (incorporated by reference to Exhibit 10.5 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009) .

10.7*		Aircraft Security Agreement dated as of October 21, 2009 among Omega Protein Corporation, Omega Protein, Inc., the Guarantors and Wells Fargo (incorporated by reference to Exhibit 10.6 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009).

10.8*		Multiple Indebtedness Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated as of October 21, 2009 executed by Omega Protein, Inc., in favor of Wells Fargo (St. Mary Parish, Louisiana) (incorporated by reference to Exhibit 10.7 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009).

10.9*		Deed of Trust, Assignment of Lease and Rents, Security Agreement and Fixture Filing dated as of October 21, 2009 executed by Omega Protein, Inc. in favor of Victor N. Tekell, as Trustee, and Wells Fargo (Jackson County, Mississippi) (incorporated by reference to Exhibit 10.8 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009).

10.10*		Deed of Trust, Assignment of Lease and Rents, Security Agreement and Fixture Filing dated as of October 21, 2009 executed by Omega Protein, Inc. in favor of American Securities Company of Missouri, a Missouri corporation, as Trustee, and Wells Fargo (City of St. Louis, Missouri) (incorporated by reference to Exhibit 10.9 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009).

10.11*		Deed of Trust, Assignment of Lease and Rents, Security Agreement and Fixture Filing dated October 21, 2009 executed by Omega Protein, Inc. in favor of Richard Lowndes Burke and Jenny P. Jones, residents of Virginia, as Trustee, and Wells Fargo (Northumberland County, Virginia) (incorporated by reference to Exhibit 10.10 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009).

10.12*		Amendment to Letter Agreement dated October 21, 2009, between Omega Protein Corporation and Joseph E. Kadi (incorporated by reference to Exhibit 10.11 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009).

OMEGA PROTEIN CORPORATION


10.13*		Amendment to Letter Agreement dated October 21, 2009, between Omega Protein Corporation and Dr. Mark E. Griffin (incorporated by reference to Exhibit 10.12 to the Company’s current report on Form 8-K filed with the SEC on October 23, 2009).

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

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

32.1		Section 1350 Certification for Chief Executive Officer.

32.2		Section 1350 Certification for Chief Financial Officer.

*	Incorporated by reference

OMEGA PROTEIN CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	OMEGA PROTEIN CORPORATION
	(Registrant)

November 3, 2009	By:	/S/ ROBERT W. STOCKTON
		(Executive Vice President, Chief Financial Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company