| OMEGA PROTEIN CORP Item 1A Risk Factors 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 Company’s business is totally dependent on its annual menhaden harvest in ocean waters along the US 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 even at times 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 disease, may prevent the Company from catching the amount of menhaden required to operate profitability |
| 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 |
| 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 70prca 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 will likely increase materially in future years as insurers recoup losses paid and to be paid out in connection with the Katrina and Rita hurricanes by charging higher premiums |
| It is possible that Hurricanes Katrina and Rita may have adversely affected Gulf Coast waters by causing increased pollution or debris in shallow waters where the Company historically has operated and these adverse effects if they occur could adversely affect the Company’s ability to catch menhaden |
| The costs of energy may materially impact the Company’s business |
| The Company has experienced substantially higher costs for energy in recent years, particularly in 2005 and expects these higher costs to 16 ______________________________________________________________________ [17]Index to Financial Statements continue into 2006 |
| 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 |
| The oil yield has at times materially impacted the amount of fish oil that the Company has been able to produce from its available fish catch and it is possible that oil yields in the future could also 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, 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 involves an addendum to a fisheries management plan recommended by a regional regulatory board in August 2005 which, if it were to be adopted by the Commonwealth of Virginia, could limit for a five-year period the annual amount commercial menhaden catch in the Chesapeake Bay to the Company’s 5-year average Bay catch |
| There is also the possibility, which the Company does not believe is likely, that if the US Secretary of Commerce were to find the Commonwealth of Virginia out of compliance with the management plan, that he could declare a moratorium on all commercial harvesting of menhaden in Virginia waters unless Virginia were to comply with the restriction |
| Business and Properties—Company Overview—Regulation” for more information |
| 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 |
| 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, 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 |
| 17 ______________________________________________________________________ [18]Index to Financial Statements Risks Relating to the Company’s Ongoing Operations: Three of the Company’s four operating plants were severely damaged by Hurricanes Katrina and Rita and the Company has had to undertake substantial rebuilding efforts |
| As an immediate result of the two hurricanes, approximately 70prca of the Company’s operating capacity was impaired |
| Operations at the Moss Point and Abbeville fish processing facilities and the shipyard were re-established in mid-October 2005, but at reduced processing capabilities |
| The Company expects that these two facilities will return to full operational status prior to the beginning of the Gulf fishing season in April 2006 |
| The Company is currently rebuilding is Cameron, Louisiana facility and expects it to be fully operational by mid 2006 |
| The costs of the rebuilding efforts will be substantial and not all costs will be covered by insurance due to deductibles, exclusions and other policy limitations |
| In addition, there could be some initial loss of productivity as Company personnel become familiar with new equipment and associated new operating procedures |
| The Company’s failure to successfully rebuild its operations by effectively managing rebuilding costs, as well as any initial loss of productivity from the rebuilding efforts, could have a material adverse effect on the Company’s financial condition and results of operations |
| The Company’s plan to operate 31 vessels out of two Gulf of Mexico plants in 2006 rather than three may be unsuccessful |
| Because of the damages to the Company’s Cameron, Louisiana facility caused by Hurricane Rita, the Company intends to begin its 2006 fishing season by operating its full contingent of 31 Gulf of Mexico fishing vessels out of its two operating facilities in Abbeville, Louisiana and Moss Point, Mississippi |
| Later in the 2006 fishing season when the Company expects that the Cameron, Louisiana plant will be operational, up to 11 vessels will be shifted to Cameron |
| This plan will substantially increase the number of vessels at Abbeville and Moss Point to a level that the Company has not operated at previously |
| Although these two facilities have adequate processing capacity, the Company believes that fishing efforts may be diminished because increased unloading time due to additional vessels will keep some vessels off the fishing grounds during the most optimal fishing times |
| It is possible that other logistical, mechanical or other manpower constraints arising out of this increased vessel load could also reduce the efficiency of these two plants |
| The Company’s strategy to expand into the food grade oils market may be unsuccessful |
| The Company’s attempts to expand its fish oil sales into the market for refined, 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 |
| Fluctuations in the Company’s quarterly operating results will occur due to the seasonality of the Company’s business, the unpredictability of the Company’s fish catch and oil yields, and the Company’s deferral of sales of inventory based on worldwide prices for competing products |
| 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, but to a lesser extent, the Company competes with small domestic privately-owned menhaden fishing companies and international marine protein and oil producers, including Scandinavian herring processors and South American anchovy and sardine processors |
| Many of these competitors have significantly greater financial resources and more extensive and diversified operations than the Company |
| 18 ______________________________________________________________________ [19]Index to Financial Statements 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 US 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 |
| 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 US citizenship ownership requirements may prevent it from harvesting menhaden in the US 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 US or a state, the Company’s chief executive officer be a US 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 75prca of the Company’s outstanding capital stock (including a majority of its voting capital stock) be owned by US citizens |
| If the Company fails to observe any of these requirements, the Company will not be eligible to conduct its harvesting activities in US jurisdictional waters |
| Such a lost of eligibility 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 |
| To the extent that the Company is not successful in recruiting, training and retaining these 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 and Rita have exacerbated the difficulties of recruiting and retaining qualified marine personnel in the Gulf Coast area |
| The Company participates 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 |
| 19 ______________________________________________________________________ [20]Index to Financial Statements The Company’s Credit Facility and other Fisheries Finance Program loan agreements contain covenants and restrictions that may limit the Company’s financial flexibility |
| The Company’s Credit Facility with Bank of America, NA 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 Credit Facility also contains various financial covenants that provide, for example, that the Company may not report two quarters of consecutive net losses, and that the Company must maintain a certain ratio of earnings to fixed charges |
| Because the Company did experience net losses in quarters three and four in 2005 and did not maintain the required fixed charge coverage ratio for the fourth quarter of 2005, it requested (and received) a waiver of these two covenants from the bank lender |
| If the Company were to experience an additional two quarters of consecutive net losses or fail to maintain the fixed charge coverage ratio covenant again, it would require an additional waiver from the bank lender or the Company would be in default under the Credit Facility |
| Investment Risks |
| Investment risks specifically related to the Company’s common stock include: The Company’s market liquidity for its common stock is relatively low |
| As of December 31, 2005, the Company had 25cmam034cmam309 shares of common stock outstanding |
| The average daily trading volume in the Company’s common stock during the twelve month period ending December 31, 2005 was approximately 18cmam900 shares |
| Although a more active trading market may develop in the future, the limited market liquidity for the Company’s stock could affect a stockholder’s ability to sell at a price satisfactory to that stockholder |
| If significant shares eligible for future sale are sold, the result could depress the Company’s stock price by increasing the supply of shares in the market at a time when demand may be limited |
| As of December 31, 2005, the Company had approximately 25dtta0 million shares of common stock outstanding, as well as stock options to purchase approximately 4dtta7 million shares of common stock |
| Of these options, approximately 4dtta7 million were exercisable at December 31, 2005 |
| In addition, certain of the Company’s officers and directors have 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 Company common stock over a period of time according to their own individual criteria |
| To the extent that the above stock options are exercised or the above shares are sold, it is possible that the additional shares being offered in the market or the increase in the number of outstanding shares could adversely affect the price for the Company’s common stock |
| The Company is controlled by a principal stockholder |
| Zapata Corporation, a publicly traded company, owns approximately 58prca of the Company’s common stock |
| As a result, Zapata has the ability to elect all the members of the Company’s Board of Directors and otherwise control the management and affairs of the Company |
| This concentration of ownership makes it unlikely that any other holder or holders of the Company’s common stock will be able to affect the way the Company is managed or the direction of the Company’s business |
| The interests of Zapata with respect to matters potentially or actually involving or affecting the Company, such as future acquisitions, financings and other corporate opportunities and attempts to acquire the Company, may conflict with the interests of the Company’s other stockholders |
| Zapata’s ownership will make an unsolicited acquisition of the Company’s common stock more difficult, and could discourage certain types of transactions in which holders of Company common stock might otherwise receive a premium for their shares over current market prices |
| In addition, because of Zapata’s majority ownership, the Company is a “controlled company” under the New York Stock Exchange corporate governance guidelines and accordingly, is exempt from certain of the NYSE corporate governance requirements |
| In December 2005, Zapata issued a press release announcing that Zapata’s Board of Directors had authorized its management to seek a buyer for its 58prca interest in the Company |
| The press release also announced that although Zapata’s Board has asked its management to find a buyer for its interest in the Company, there can be no assurance that any transaction will result from that process |
| 20 ______________________________________________________________________ [21]Index to Financial Statements The Company’s Articles of Incorporation and Bylaws, Nevada Law, and Federal Law 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 involvement 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 additional, the Articles of Incorporation and Bylaws contain a number of provisions which could impede a takeover or change in control of the Company, including, among other things, staggered terms for members of its Board of Directors, the requiring of two-thirds vote of stockholders to amend certain provisions of the Articles of Incorporation or the inability, after Zapata no longer owns a majority of the Company’s common stock, 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 75prca of the Company’s outstanding capital stock be owned by US 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 revolving credit agreement with Bank of America, NA |