<PAGE>
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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 001-14003
OMEGA PROTEIN CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STATE OF NEVADA 76-0562134
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1717 ST. JAMES PLACE, SUITE 550
HOUSTON, TEXAS 77056
(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 NO X
--- ---
NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, PAR VALUE
$0.01 PER SHARE, ON MAY 15, 1998: 24,276,000
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OMEGA PROTEIN CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of March 31, 1998 and
September 30, 1997 (unaudited with respect to March 31, 1998)....... 3
Unaudited Condensed Consolidated Statement of Operations for the
three months and six months ended March 31, 1998 and 1997.......... 4
Unaudited Condensed Consolidated Statement of Cash Flows for the
six months ended March 31, 1998 and 1997............................ 5
Notes to Unaudited Condensed Consolidated Financial Statements........ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.............................................. 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................. 19
ITEM 2. CHANGES IN SECURITIES.............................................. 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY INVESTORS.............. 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................... 20
SIGNATURES................................................................. 21
EXHIBIT INDEX.............................................................. 22
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
OMEGA PROTEIN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited with respect to March 31, 1998)
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
---- ----
(In thousands,
except for shares)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 14,727 $ 5,504
Receivables, net 10,790 9,936
Inventories 33,709 38,448
Prepaid expenses and other current assets 1,091 746
--------- ----------
Total current assets 60,317 54,634
--------- ----------
OTHER ASSETS 5,682 4,917
--------- ----------
PROPERTY AND EQUIPMENT, NET 70,253 40,889
--------- ----------
Total assets $ 136,252 $ 100,440
========= ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,557 $ 1,034
Accounts payable 1,489 1,622
Accrued liabilities 8,123 15,423
Amounts due to parent -- current 6,737 5,159
--------- ----------
Total current liabilities 17,906 23,238
--------- ----------
LONG-TERM DEBT 10,891 11,294
--------- ----------
DEFERRED INCOME TAXES 2,725 1,180
--------- ----------
OTHER LIABILITIES 374 374
--------- ----------
AMOUNTS DUE TO PARENT -- NONCURRENT 28,116 -
--------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued - -
Common stock, $0.01 par value; 80,000,000 shares
authorized; 19,676,000 shares issued and outstanding 197 197
Capital in excess of par value 43,731 43,731
Reinvested earnings, from October 1, 1990 32,312 20,426
--------- ----------
Total stockholder's equity 76,240 64,354
--------- ----------
Total liabilities and stockholder's equity $ 136,252 $ 100,440
========= ==========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
----------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues $ 30,041 $ 22,964 $ 59,544 $ 48,587
Cost of Sales 17,460 18,256 36,734 39,062
-------- -------- -------- --------
Gross profit 12,581 4,708 22,810 9,525
Selling, general and administrative 1,447 1,205 2,601 2,230
-------- -------- -------- --------
Operating income 11,134 3,503 20,209 7,295
Interest expense, net (604) (188) (983) (390)
Other expenses, net (66) (16) (79) (17)
-------- -------- -------- --------
Income before income taxes 10,464 3,299 19,147 6,888
Provision for income taxes 3,890 1,114 7,261 2,478
-------- -------- -------- --------
Net income $ 6,574 $ 2,185 $ 11,886 $ 4,410
======== ======== ======== ========
Net income per share (basic) $ 0.33 $ 0.11 $ 0.60 $ 0.22
======== ======== ======== ========
Average common shares outstanding 19,676 19,676 19,676 19,676
======== ======== ======== ========
Net income per share (diluted) $ 0.33 $ 0.11 $ 0.60 $ 0.22
======== ======== ======== ========
Average common shares and common share
equivalents outstanding 19,676 19,676 19,676 19,676
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
4
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OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
------------------------------
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income $ 11,886 $ 4,410
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Gain on disposal of assets, net (164) -
Depreciation and amortization 3,451 2,312
Deferred taxes 1,545 -
Changes in assets and liabilities:
Receivables (854) 3,580
Inventories 4,739 2,626
Prepaid expenses and other current assets (345) (214)
Accounts payable and accrued liabilities (7,433) (7,497)
Amounts due to parent 1,578 (71)
Other, net (823) (488)
------------ ------------
Total adjustments 1,694 248
------------ ------------
Net cash provided by operating activities 13,580 4,658
------------ ------------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Proceeds from sale of assets, net 941 -
Capital expenditures (4,535) (4,228)
Acquisitions (28,116) -
------------ ------------
Net cash used in investing activities (31,710) (4,228)
------------ ------------
CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Long term debt - 1,989
Borrowings from parent--noncurrent 28,116 -
Principal payments of debt obligations (763) (258)
------------ ------------
Net cash provided by financing activities 27,353 1,731
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,223 2,161
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,504 2,899
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,727 $ 5,060
============ ============
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
5
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OMEGA PROTEIN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS
SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION
The Company produces and markets a variety of products produced from
menhaden (a fish found in commercial quantities), including regular grade and
value added specialty fish meals, crude and refined fish oils and fish solubles.
The Company's fish meal products are used as nutritional feed additives by
animal feed manufacturers and by commercial livestock and poultry farmers. The
Company's crude fish oil is sold to food producers in Europe, and its refined
fish oil products are used in aquaculture feeds and certain industrial
applications. Fish solubles are sold as protein additives for animal feed and as
organic fertilizers.
On January 26, 1998, Marine Genetics Corporation merged into Omega Protein
Corporation, a Nevada corporation wholly-owned by Zapata Corporation ("Zapata"),
with Omega Protein Corporation being the surviving entity. The common control
merger was accounted for at historical cost in a manner similar to that in a
pooling of interests accounting. In connection with the merger, Marine Genetics
Corporation's outstanding common stock was converted into Omega Protein
Corporation common stock at the rate of one share for 19,676 shares of Omega
Protein Corporation common stock and Omega Protein Corporation's pre-merger
outstanding common stock was canceled and treated as treasury stock. As a
result, the Company's capitalization is as follows: authorized capital stock of
80,000,000 shares common stock, par value $0.01 per share; 10,000,000 shares of
preferred stock, par value of $0.01 per share; and outstanding shares of
19,676,000 shares of common stock.
The condensed consolidated financial statements included herein (other than
the condensed consolidated balance sheet at September 30, 1997) have been
prepared by Omega Protein Corporation ("Omega" or the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The financial statements reflect all adjustments that are, in the opinion of
management, necessary to fairly present such information. All such adjustments
are of a normal recurring nature. The condensed consolidated balance sheet at
September 30, 1997 has been derived from the audited financial statements at
that date. Although Omega believes that the disclosures are adequate to make the
information presented not misleading, certain information and footnote
disclosures, including a description of significant accounting policies,
normally included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to such
rules and regulations. These condensed consolidated financial statements should
be read in conjunction with the financial statements and the notes thereto
included in Omega's Registration Statement on Form S-1 (Reg. No. 333-44967)
filed with the Securities and Exchange Commission on January 27, 1998, as
amended through and declared effective on April 2, 1998. The results of
operations for the three months and six months ended March 31, 1998 are not
necessarily indicative of the results to be expected for any subsequent quarter
or the entire fiscal year ending September 30, 1998.
6
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New Accounting Pronouncements
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), which established
standards for computing and presenting earnings per share. The Company adopted
the statement on October 1, 1997. Basic earnings per share was computed by
dividing income by the weighted average number of common shares outstanding.
Diluted earnings per share was computed by dividing income by the sum of the
weighted average number of common shares outstanding and the effect of
any dilutive stock options.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which is effective for
fiscal years beginning after December 15, 1997. SFAS 130 establishes standards
for reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. It requires (a) classification of items of other comprehensive
income by their nature in a financial statement, and (b) display of the
accumulated balance of other comprehensive income separate from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. The Company will adopt the provisions of the statement in
fiscal 1999. The Company anticipates that implementing the provisions of
Statement 130 will not have a significant impact on the Company's existing
operations.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and Related
Information" ("SFAS 131"), which is effective for periods beginning after
December 15, 1997. The statement need not be applied to interim financial
statements in the initial year of its application. SFAS 131 establishes
standards for reporting information about in annual financial statements and
requires selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This Statement supersedes SFAS 14, "Financial Reporting for Segments of a
Business Enterprise," but retains the requirement to report information about
major customers. The Company will adopt the provisions of the statement in
fiscal 1999. The Company anticipates that implementing the provisions of
Statement 131 will not have a significant impact on the Company's existing
operations.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits" ("SFAS 132"), which is effective for fiscal years
beginning after December 15, 1997. SFAS 132 significantly changes current
financial statement disclosure requirements from those that were required under
SFAS 87, "Employers' Accounting for Pensions"; SFAS 88, "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits"; and SFAS 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions." SFAS 132 does not change the existing measurement
or recognition provisions of FASB Statement Nos. 87, 88 or 106. It requires that
additional information be disclosed regarding changes in benefit obligation and
fair values of plan assets, standardizes the disclosure requirements for
pensions and other postretirement benefits and presents them in one footnote,
and eliminates certain disclosures that are no longer
7
<PAGE>
considered useful. The Company will adopt the provisions of the statement in
fiscal 1999.
2. ASSET ACQUISITIONS
On November 3, 1997, the Company acquired the fishing and processing
assets of American Protein, Inc. ("American Protein"), which operated ten
steamers and a menhaden processing plant in the Chesapeake Bay area, for $14.5
million in cash (the "American Protein Acquisition"). American Protein's
facilities were located in close proximity to the Company's Reedville, Virginia
facility. Shortly after completing this transaction, the Company closed the
American Protein processing plant and began integrating its assets into the
Company's existing operations.
On November 25, 1997, the Company purchased the fishing and processing
assets of Gulf Protein, Inc. ("Gulf Protein"), which included six steamers, five
spotter planes and the processing equipment located at the Gulf Protein plant
near Morgan City, Louisiana, for $13.6 million in cash and the assumption of
$883,000 in liabilities (the "Gulf Protein Acquisition"). The Company
accounted for this acquisition as a purchase; thus, the results of operations
began being included in the Company's Statement of Operations beginning November
25, 1997. In connection with the Gulf Protein Acquisition, the Company also
entered into a five-year lease for the Gulf Protein plant at a $220,000 annual
rental rate. The Company is currently upgrading this plant's processing
capabilities so that it can manufacture specialty meals. The Company began
operations at the Morgan City, Louisiana plant at the start of the 1998 fishing
season.
These acquisitions were financed by a $28.1 million intercompany loan from
Zapata. The interest rate on this loan is 8.5 % and is repayable in quarterly
installments beginning May 1, 1998. The loan, which matures August 1, 2002, was
repaid with a portion of the proceeds from the Company's initial public offering
described in Note 7 below.
3. INVENTORIES
Fish product inventories are stated at the lower of cost or market.
Materials, parts and supplies are stated at average cost.
The Company's fishing season runs from mid-April to the end of October in
the Gulf Coast and from the beginning of May to the end of December in the
Atlantic Coast. Government regulations preclude the Company from fishing during
the off-seasons. During the off-seasons, the Company incurs costs (i.e., plant
and vessel related labor, utilities, rent and depreciation) that are directly
related to the Company's infrastructure that will be used in the upcoming
fishing season. Costs that are incurred subsequent to a fish catch are deferred
until the next season and are included with inventory.
The Company's inventory cost system considers all costs, both variable and
fixed, associated with an annual fish catch and its processing. The Company's
costing system allocates cost to
8
<PAGE>
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. The inventory is relieved at
average cost as the product is sold. 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.
Inventory as of March 31, 1998 and September 30, 1997 is summarized as follows:
MARCH 31, SEPTEMBER 30,
1998 1997
------- -----------
(IN THOUSANDS)
Fish meal...................... $ 8,110 $19,048
Crude fish oil................. 514 11,188
Other fish oil................. 1,084 1,558
Fish solubles.................. 500 983
Off-season costs............... 18,099 2,420
Materials and supplies......... 5,433 3,353
Other........................ 71 -
------- -------
33,811 38,550
Less oil inventory reserve... (102) (102)
------- -------
$ 33,709 $38,448
======= =======
4. LITIGATION
The Company is defending various claims and litigation arising from its
operations. 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.
5. COMMITMENT LETTER FOR LINE OF CREDIT
On December 30, 1997, SunTrust Bank, South Florida, N.A., issued a commitment
letter to the Company which provides for a new two-year secured revolving credit
facility for the Company (the "Credit Facility"). The commitment letter states
that under the Credit Facility the Company may make borrowings in a principal
amount not to exceed $20.0 million at any time. Borrowings under this facility
may be used for working capital and capital expenditures. Interest will accrue
on borrowings that will be outstanding under the Credit Facility at the
Company's election, either (i) the bank's prime rate less 75 basis points, or
(ii) LIBOR plus a margin based on the Company's financial performance. The
Credit Facility will be secured by all of the Company's assets not pledged to
secure the Company's other borrowings exclusive of the Company's rolling stock,
vessels and real estate. The Company and its subsidiaries will be required to
comply with certain financial covenants, including maintenance of a minimum
tangible net worth, debt to tangible net worth ratio, funded debt to cash flow
ratio and fixed charges ratio, and certain other covenants. The Company is
currently negotiating the documentation required for the Credit Facility.
9
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6. STOCK OPTION PLANS
1998 Long-Term Incentive Plan
On January 26, 1998, the 1998 Long-Term Incentive Plan of the Company (the
"1998 Incentive Plan") was approved by the Company's Board of Directors and the
Company's then sole stockholder, Zapata Corporation. The 1998 Incentive Plan
provides for the grant of any or all of the following types of awards: stock
options, stock appreciation rights, stock awards and cash awards. The Board
granted 1,657,360 stock options under the 1998 Incentive Plan at $12.75 per
share on January 26, 1998. These granted options vest ratably over three years
from the date of grant and expire ten years from the date of grant.
Non-Management Director Stock Option Plan
On January 26, 1998, the Non-Management Director Stock Option Plan (the
"Directors Plan") was approved by the Board of Directors and the Company's then
sole stockholder, Zapata Corporation. The Directors Plan provides that the
initial Chairman of the Board be granted options to purchase 568,200 shares of
common stock and each other initial non-employee director of the Company will be
granted options to purchase 14,200 shares of common stock at a price determined
by the Board. The Board granted 582,400 stock options under the Directors Plan
at $12.75 per share on January 26, 1998, of which 568,200 were granted to the
Chairman of the Board and 14,200 were granted to the other Board member. These
granted options vest ratably over the three years from the date of grant and
expire ten years from the date of grant.
7. SUBSEQUENT EVENTS
Completed Initial Public Offering
On April 8, 1998, the Company completed an initial public offering of
8,500,000 of its common stock at a gross price of $16.00 per share. On May 7,
1998, the Underwriters exercised their option to acquire 1,275,000 additional
shares at the same gross price. Of the 9,775,000 total shares sold in the
offering, the Company sold and issued 4,600,000 shares, and Zapata Corporation
sold 5,175,000 shares. Zapata now owns approximately 59.7% of the shares of the
Company's outstanding common stock.
The net proceeds to the Company from the offering (after deducting
underwriting discounts and commissions and estimated offering expenses) totaled
approximately $68.1 million. Of these proceeds, the Company utilized
approximately $33.3 million to repay intercompany indebtedness to Zapata and
$2.1 million to repay bank indebtedness. The Company has invested the remaining
proceeds in short-term government securities and interest bearing cash
equivalents pending their use.
10
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The following unaudited pro forma balance sheet data, as of March 31, 1998,
gives effect to the April 8, 1998 and May 7, 1998 common stock sales as if the
sales had been consummated as of March 31, 1998:
Balance Sheet Data:
Actual Adjustments Pro Forma
March 31, March 31,
1998 1998
--------- ---------
Working capital........ $ 42,411 $ 38,394 $ 80,805
Total assets........... 136,252 33,452 169,704
Total Debt............. 40,564 (30,180) 10,384
Stockholder's equity... 76,240 68,132 144,372
Certain Transactions and Arrangements Between the Company and Zapata
Upon completion of the Company's initial public offering, the Company
and Zapata entered into certain agreements that include the Separation,
Sublease, Registration Rights, Tax Indemnity and Administrative Services
Agreements. The Separation Agreement required the Company to repay $33.3 million
of indebtedness owed by the Company to Zapata contemporaneously with the
consummation of the Company's initial public offering and also prohibits Zapata
from competing with the Company for a period of five years. The Sublease
Agreement provides for the Company to lease its principal corporate offices in
Houston, Texas from Zapata and provides for the Company to utilize certain
shared office equipment for no additional charge. The Registration Rights
Agreement sets forth the rights and responsibilities of each party concerning
certain registration filings and provides for the sharing of fees and expenses
related to such filings. The Tax Indemnity Agreement requires the Company to be
responsible for federal, state and local income taxes from its operations and
the Administrative Services Agreement allows the Company to provide certain
administrative services to Zapata at the Company's estimated cost.
11
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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 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 identified from time to time by the Company in
press releases, other communications with shareholders and the Company's filings
with the Securities and Exchange Commission, including, without limitation,
under the caption "Risk Factors" in the Company's Registration Statement on Form
S-1 (Reg. No. 333-44967) filed with the Commission on January 27, 1998, as
amended through and declared effective on April 2, 1998. 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. The words
"estimate," "project," "anticipate," "expect," "predict," "believe" and similar
expressions are intended to identify forward-looking statements. The Company
assumes no obligation to update forward-looking statements to reflect events or
circumstances after the date on which such statements are made. All references
to a fiscal year refer to the 12 month period ended September 30/th/ of such
calendar year.
GENERAL
Omega Protein Corporation ("Omega" or the "Company") and its
predecessors have been a wholly-owned subsidiary of Zapata Corporation
("Zapata"), a publicly traded company which has shares listed on the New York
Stock Exchange, since 1973 when Zapata acquired the Company's operations. The
Company 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 fish found
in commercial quantities), including regular grade and value added specialty
fish meals, crude and refined fish oils and fish solubles. The Company's fish
meal products are used as nutritional feed additives by animal feed
manufacturers and by commercial livestock and poultry farmers. The Company's
crude fish oil is sold to food producers in Europe and its refined fish oil
products are used in aquaculture feeds and certain industrial applications. Fish
solubles are sold as protein additives for animal feed and as organic
fertilizers.
On September 16, 1997, the Company's wholly-owned subsidiary, Venture
Milling Company, a Delaware corporation ("Venture Milling"), sold substantially
all of its assets to an unrelated third party (the "Venture Milling
Disposition"). Venture Milling was primarily in the business of blending
different animal protein products (i.e., fish meal, blood meal and feather meal)
for sale to producers of feed for broilers and other animals with low
nutritional requirements. Venture Milling had revenues and operating income of
$7.4 million and $66,000, respectively, for the quarter ended March 31, 1997,
and $14.9 million and $130,000, respectively, for the six months ended March 31,
1997. The Venture Milling Disposition resulted in a $531,000 pre-tax loss to the
Company in the fourth quarter of fiscal 1997 and did not have a material impact
on the Company's balance sheet since Venture Milling leased most of the assets
employed in its operations.
12
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On November 3, 1997, Omega acquired the fishing and processing assets
of American Protein, Inc. ("American Protein"), which operated ten steamers and
a menhaden processing plant in the Chesapeake Bay area, for $14.5 million in
cash (the "American Protein Acquisition"). American Protein's facilities were
located in close proximity to the Company's Reedville, Virginia facility.
Shortly after completing this transaction, Omega closed the American Protein
processing plant and began integrating its assets into the Company's existing
operations.
On November 25, 1997, the Company purchased the fishing and processing
assets of Gulf Protein, Inc. ("Gulf Protein"), which included six steamers, five
spotter planes and the processing equipment located at the Gulf Protein plant
near Morgan City, Louisiana, for $13.6 million in cash and the assumption of
$883,000 in liabilities (the "Gulf Protein Acquisition," and together with the
American Protein Acquisition, the "Recent Acquisitions"). In connection with the
Gulf Protein Acquisition, Omega also entered into a five-year lease for the Gulf
Protein plant at a $220,000 annual rental rate. Omega began operations at the
Morgan City, Louisiana plant at the start of the 1998 fishing season.
On April 8, 1998, Omega completed an initial public offering of 8.5
million shares of its common stock for $16 per share (the "Offering") less
underwriting discounts and selling commissions. On May 7, 1998, the underwriters
exercised their over-allotment options totaling 1,275,000 shares for the same
gross price. Of the 9.8 million shares of Omega common stock sold in the
Offering, Zapata sold 5.2 million shares, and Omega issued and sold 4.6 million
shares. Immediately following the exercise of the over-allotment options, Zapata
owned 59.7% of Omega's outstanding common stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity and capital resources have
been cash flows from operations, borrowings from Zapata, bank credit facilities
and term loans from various lenders provided pursuant to the Title XI of the
Marine Act of 1936 ("Title XI"). These sources of cash flows have been offset by
cash used for capital expenditures (including acquisitions) and payment of long-
term debt. During fiscal 1997, Zapata contributed to the Company as equity $41.9
million of intercompany debt owed to Zapata. As a result, the historical
liquidity and capital resources of the Company may not be indicative of the
Company's future liquidity and capital resources.
Omega's unrestricted cash balance totaled $14.7 million at March 31,
1998, up $9.2 million from September 30, 1997 and $5.5 million from the same
time last year. This increase was due primarily to improved operating results
and corresponding changes in working capital accounts.
Reflecting the Recent Acquisitions, investing activities used $31.7
million through the second quarter of fiscal 1998 while using $4.2 million
during the corresponding fiscal 1997 period. Excluding the Recent Acquisitions,
the Company anticipates making approximately $14.0 million of capital
expenditures in fiscal 1998, a significant portion of which will be used to
refurbish vessels and docks, and to acquire certain equipment, including a new
evaporation unit for the Reedville, Virginia plant.
13
<PAGE>
Financing activities provided $27.4 million during the six month
period ending March 31, 1998, due primarily to an acquisition loan from Zapata.
During the six month period ending March 31, 1997, financing activities provided
$2.0 million from financing pursuant to Title XI. Omega has historically used
Title XI financing to finance certain of its marine capital additions. The
Company is currently authorized to receive up to $20.6 million in loans under
this program. To date, the Company has used $12.4 million of these funds and
currently has an application pending for $2.6 million of additional Title XI
borrowings for qualified Title XI projects.
As previously described, on April 8, 1998 the Company completed its
Offering. Subsequent to the Offering, the underwriters elected to purchase over-
allotment options. These issuances generated net proceeds of approximately $68.1
million (after deducting underwriting discounts and commissions and estimated
offering expenses). Of these proceeds, the Company used approximately $33.3
million to repay indebtedness to Zapata and $2.1 million to repay bank
indebtedness outstanding at March 31, 1998. Of the $33.3 million indebtedness
owed to Zapata, $28.1 million was incurred to fund the cash portion of the
purchase price for the Recent Acquisitions and the balance was primarily
incurred to pay the Company's federal income taxes. The Company has invested the
remaining net proceeds in short-term government securities and interest bearing
cash equivalents pending their use. The Company intends to use these proceeds to
fund possible acquisitions and other capital expenditures as well as for general
corporate purposes. See PART 1. ITEM 1. NOTE 7. to the condensed consolidated
financial statement for a pro forma presentation of certain balance sheet items
which give effect to the Offering as if it occurred on March 31, 1998.
On December 30, 1997, SunTrust Bank, South Florida, N.A., issued a
commitment letter to the Company which provides for a new two-year secured
revolving Credit Facility for the Company (the "Credit Facility"). The
commitment letter states that under the Credit Facility the Company may make
borrowings in a principal amount not to exceed $20.0 million at any time.
Borrowings under this facility may be used for working capital and capital
expenditures. Interest will accrue on borrowings that will be outstanding under
the Credit Facility at the Company's election, either (i) the bank's prime rate
less 75 basis points, or (ii) LIBOR plus a margin based on the Company's
financial performance. The Credit Facility will be secured by all of the
Company's assets not pledged to secure the Company's other borrowings exclusive
of the Company's rolling stock, vessels and real estate. The Company and its
subsidiaries will be required to comply with certain financial covenants,
including maintenance of a minimum tangible net worth, debt to tangible net
worth ratio, funded debt to cash flow ratio and fixed charges ratio, and certain
other covenants. The Company is currently negotiating the documentation required
for the Credit Facility.
The Company believes that the net proceeds from the Offering, together
with existing cash, cash equivalents, short-term investments and funds available
through its anticipated Credit Facility will be sufficient to meet its working
capital and capital expenditure requirements through at least the end of 1999.
14
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------- -------------------------
1998 1997 1998 1997
------------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of Sales 58.1% 79.5% 61.7% 80.4%
----- ----- ----- -----
Gross Profit 41.9% 20.5% 38.3% 19.6%
Selling, general and administrative 4.8% 5.2% 4.4% 4.6%
----- ----- ----- -----
Operating income 37.1% 15.3% 33.9% 15.0%
Interest expense, net (2.0%) (0.9%) (1.7%) (0.8%)
Other expense, net (0.2%) 0.0% (0.1%) 0.0%
----- ----- ----- -----
Income before income taxes 34.9% 14.4% 32.1% 14.2%
Provision for income taxes 12.9% 4.9% 12.2% 5.1%
----- ----- ----- -----
Net income 22.0% 9.5% 19.9% 9.1%
===== ===== ===== =====
</TABLE>
INTERIM RESULTS FOR THE SECOND QUARTER ENDED MARCH 31, 1998 AND 1997
REVENUES. Second quarter fiscal 1998 revenues increased $7.0 million
or 30.4% from $12.30 million in second quarter fiscal 1997 to $30.0 million in
the current quarter. This growth resulted primarily from a 65.5% increase in the
tons of regular grade meal and a 14.5% increase in the tons of specialty grade
meal shipped, coupled with a 84.9% increase in tons of oil shipped compared to
second quarter fiscal 1997. Additionally, the average selling price of all the
Company's product lines increased 24.1%. The increase in sales volumes for fish
meal and fish oil reflect higher levels of inventory carried over into fiscal
1998 from the fiscal 1997 fishing season as compared to the levels of inventory
the Company carried over into fiscal 1997 from the fiscal 1996 fishing season
and increased demand for the Company's products. Adjusted for the Venture
Milling Disposition, revenues for the second quarter fiscal 1997 would have been
$15.9 million.
COST OF SALES. Cost of sales, including depreciation and amortization,
for second quarter fiscal 1998 was $17.5 million, a 4.4% decrease from the $18.3
million in the second quarter fiscal 1997. As a percent of net sales, cost of
sales was 58.1% in second quarter 1998 as compared to 79.5% in
15
<PAGE>
second quarter fiscal 1997. Exclusive of the Venture Milling results from second
quarter fiscal 1997, the Company's cost of sales for the second quarter of
fiscal 1998 decreased 12.1%. However, per ton cost of sales were slightly
higher in fiscal 1998 compared to fiscal 1997, due mainly to an increase in
maintenance and vessel related labor costs. Adjusted for the Venture Milling
Disposition, cost of sales as a percentage of net sales for the second quarter
fiscal 1997 would have been 70.2%.
GROSS PROFIT. Gross Profit increased $7.9 million or 167.2% from $4.7
million in the second quarter fiscal 1997 to $12.6 million in the second quarter
fiscal 1998. As a percentage of revenues, the Company's gross profit margin
increased from 20.5% in the second quarter fiscal 1997 to 41.9% in the second
quarter fiscal 1998. The improvement in gross profit margin in the second
quarter fiscal 1998 was the result of a 14.5% overall increase in sales volume
of the Company's higher margin specialty products combined with higher prices
received for the Company's crude oil and the elimination of lower gross margin
sales resulting from the Venture Milling Disposition.
SELLING, GENERAL AND ADMINISTRATIVE PRODUCTS. Selling, general and
administrative expenses increased $242,000 or 20.1%, from $1.2 million in
second quarter fiscal 1997 to $1.4 million in second quarter fiscal 1998 but
decreased 0.4% as a percentage of sales from 5.2% in the second quarter fiscal
1997 to 4.8% in the second quarter fiscal 1998. The comparative quarterly
increase in fiscal 1998 over fiscal 1997 was due largely to increased employee
related costs.
OPERATING INCOME. As a result of the factors discussed above, the
Company's operating income of $11.1 million for the three months ended March 31,
1998 was $7.6 million or 217.8%, greater than the three months ended March 31,
1997. Operating income as a percent of sales rose to 37.1% for the three months
ended March 31, 1998, as compared to 15.3% for the three months period ended
March 31, 1997.
INTEREST EXPENSE, NET. Interest expense increased $416,000 or 221.3%,
from $188,000 in 1997 to $604,000 in fiscal 1998. The increase in fiscal 1998
net interest expense is due to a $28.1 million intercompany acquisition loan
from Zapata. The interest rate on this loan was 8.5%. This loan was repaid in
full with a portion of the net proceeds from the Company's initial public
offering.
OTHER EXPENSE, NET. Other expense increased $50,000 from $16,000 in
the second quarter fiscal 1997 to $66,000 in the second quarter fiscal 1998.
This is primarily due to the writedown of an investment in a joint venture.
PROVISION FOR INCOME TAXES. The company recorded a $1.1 million
provision for income tax for the second quarter fiscal 1997, for a 33.8%
effective tax rate, in comparison to a $3.9 million provision for the second
quarter fiscal 1998 resulting in a 37.2% effective tax rate. The effective tax
rates approximate the applicable combined state and federal statutory tax rates
for the respective periods.
16
<PAGE>
INTERIM RESULTS FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES. Revenues increased $11.0 million or 22.6%, in the first six
months of fiscal 1998 from $48.6 million in 1997 to $59.5 million in fiscal
1998. The improvement was attributed to a 27.0% increase in the tons of fish
meal shipped and a 61.2% increase in the tons of fish oil shipped, coupled with
a 21.5% increase in the overall average selling price of the Company's product
lines. Sales volumes for the Company's fish meal and fish oil products were
significantly higher in the first six months of fiscal 1998 versus sales volumes
during the first six months of fiscal 1997 due primarily to higher levels of
inventory carried into fiscal 1998 and increased demand for the Company's
products. Excluding Venture Milling revenues, the Company had revenues of $34.5
million for the first six months of fiscal 1997.
COST OF SALES. Cost of sales, including depreciation and amortization,
for the first six months of fiscal 1998, was $36.7 million, a 6.0% decrease from
the $39.1 million for the same period in fiscal 1997. As a percent of net sales,
cost of sales was 61.7% in fiscal 1998 as compared to 80.4% in fiscal 1997.
Exclusive of the Venture Milling Disposition, the Company's cost of sales for
fiscal 1998 decreased 10.4%. However, per ton cost of sales were slightly higher
in fiscal 1998 compared to fiscal 1997, due mainly to an increase in maintenance
and vessel related labor costs. Adjusted for the Venture Milling Disposition,
cost of sales as a percentage of net sales for fiscal 1997 would have been
72.1%.
GROSS PROFIT. Gross profit increased $13.3 million or 139.5%, from
$9.5 million in fiscal 1997 to $22.8 million in fiscal 1998. As a percentage of
revenues, gross profit increased from 19.6% through the second quarter fiscal
1997 to 38.3% through the second quarter fiscal 1998. The gross profit
performance was primarily a result of a 21.5% increase in the overall selling
prices of the Company's products and the elimination of lower gross margin
sales resulting from the Venture Milling Disposition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $371,000 or 16.6%, from $2.2 million in
fiscal 1997 to $2.6 million in fiscal 1998 but decreased 0.2% as a percentage
of sales from 4.6% through the second quarter fiscal 1997 to 4.4% through the
second quarter fiscal 1998. The increases in 1998 were due primarily to
increased employee related costs and consulting fees.
OPERATING INCOME. As a result of the factors discussed above, the
Company's operating income increased to $20.2 million in fiscal 1998, from $7.3
million in fiscal 1997. As a percentage of revenues, operating income increased
to 33.9% in 1998, from 15.0% in fiscal 1997.
INTEREST EXPENSE, NET. Interest expense increased $593,000 or 152.1%,
from $390,000 in fiscal 1997 to $983,000 in fiscal 1998. The increase in fiscal
1998 net interest expense is due to a $28.1 million intercompany acquisition
loan from Zapata. The interest rate on this loan was 8.5%. This loan was repaid
in full with a portion of the net proceeds from the Company's initial public
offering.
OTHER EXPENSE, NET. Other expense increased from $17,000 in 1997 to
$79,000 in 1998. This is primarily due to the writedown in the investment in a
joint venture.
17
<PAGE>
PROVISION FOR INCOME TAXES. The Company recorded a $7.3 million
provision for income taxes in fiscal 1998. This represents an effective tax rate
of 37.9% in comparison to a $2.5 million tax provision in fiscal 1997,
representing an effective tax rate of 36.0%. The effective tax rates approximate
the applicable combined state and federal statutory tax rates for the respective
periods.
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 third and fourth 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 the Company's
products which may affect comparable period comparisons.
YEAR 2000
The Company has converted most of its computer information systems
enabling proper processing of transactions related to the year 2000 and beyond.
The cost of conversion was immaterial and has been expensed. The Company
continues to evaluate its systems and expects that all of its systems will be
compliant prior to the year 2000.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various claims and disputes arising in the
normal course of business, including claims made by employees under the Jones
Act which generally are covered by the Company's insurance. The Company believes
that it has adequate insurance coverage for all existing matters and that the
outcome of all pending proceedings, individually and in the aggregate, will not
have a material adverse effect upon the Company's business, results of
operations, cash flows or financial position.
ITEM 2. CHANGES IN SECURITIES
The effective dates of the Company's registration statements, filed on Form
S-1 under the Securities Act of 1933 (File No. 333-44967 and File No. 333-
49321), were April 2, 1998 and April 3, 1998 respectively (collectively the
"Registration Statement"). The class of securities registered was Common Stock.
The Offering commenced on April 2, 1998, and all securities were sold in the
Offering. The managing underwriters for the Offering were Prudential Securities
Incorporated and Deutsche Morgan Grenfell, Inc.
Pursuant to the Registration Statement, the Company sold 4,600,000 shares
of its common stock for an aggregate offering priced of $73.6 million. Also
pursuant to the Registration Statement, Zapata, as a selling stockholder, sold
5,175,000 shares of common stock of the Company for an aggregate offering price
of $82.8 million.
From the effective date of the Registration Statement through May 7, 1998,
the Company incurred expenses of approximately $11.6 million of which
approximately $10.6 million represented underwriting discounts and commissions
and approximately $1.0 million represented other estimated expenses related to
the Offering.
The net Offering proceeds to the Company and Zapata, as selling
stockholder, after total expenses was $68.6 million and $77.2 million,
respectively. All payments from proceeds of the Offering (including expenses)
were direct or indirect payments to others.
On April 8, 1998, the Company used approximately $33.3 million of the net
proceeds from the Offering to repay an acquisition loan and certain other
indebtedness owed Zapata and approximately $2.1 million to repay a bank loan.
The Company anticipates using the balance of the net proceeds for capital
expenditures (including possible acquisitions), working capital and general
corporate purposes. All unused net proceeds have been invested in cash, cash
equivalents and short-term investments. The use of the proceeds from the
Offering to date does not represent a material change in the use of the proceeds
described in the prospectus included in the Registration Statement.
19
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company was formed on January 26, 1998 to effect the reincorporation of
Marine Genetics Corporation ("Marine Genetics") from a Delaware corporation to a
Nevada corporation and to change its name to Omega Protein Corporation. In
January 1998, the Company's sole stockholder, Zapata, provided its written
consent with respect to various matters, including the following actions: (1)
the election of Joseph L. von Rosenberg III, Avram Glazer and Malcolm Glazer as
the Company's directors; (2) the merger of the Company with Marine Genetics
Corporation; (3) the approval of the Company's 1998 Long-Term Incentive Plan;
and (4) the approval of the Company's 1998 Non-Employee Directors' Stock Option
Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits indicated by an asterisk (*) are incorporated by reference.
2.1 -- Agreement and Plan of Merger, dated January 27, 1998, between
Marine Genetics Inc., a Delaware corporation, and Omega
Protein Corporation, a Nevada corporation*
3.1 -- Articles of Incorporation*
3.2 -- By-Laws*
10.1 -- Employment Agreement, dated April 2, 1998, with Joseph L. von
Rosenberg III*
10.2 -- Employment Agreement, dated April 2, 1998, with Robert W.
Stockton*
10.3 -- Employment Agreement, dated April 2, 1998, with Kelsey D.
Short Jr.*
10.4 -- Employment Agreement, dated April 2, 1998, with
Clyde R. Gilbert*
10.5 -- Employment Agreement, dated April 2, 1998, with Eric T. Furey*
10.6 -- Separation Agreement, dated April 2, 1998, with Zapata
Corporation*
10.7 -- Tax Indemnity Agreement, dated April 2, 1998, with Zapata
Corporation*
10.8 -- Registration Rights Agreement, dated April 2, 1998,
with Zapata Corporation*
10.9 -- Sublease Agreement, dated April 2, 1998, with Zapata
Corporation*
10.10 -- Administrative Services Agreement, dated April 2, 1998, with
Zapata Corporation*
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K:
None.
*Incorporated by reference from the Company's Registration Statement on Form S-1
(File No. 333-44967) originally filed with the Securities and Exchange
Commission on January 27, 1998, as amended.
20
<PAGE>
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)
May 15, 1998 By: /s/ ERIC T. FUREY
-------------------------------------
(Vice President, General Counsel and
Corporate Secretary)
May 15, 1998 By: /s/ ROBERT W. STOCKTON
-------------------------------------
(Executive Vice President and Chief
Financial Officer)
21
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
The exhibits indicated by an asterisk (*) are incorporated by reference.
2.1 -- Agreement and Plan of Merger, dated January 27, 1998, between
Marine Genetics, Inc., a Delaware corporation, and Omega
Protein Corporation, a Nevada corporation*
3.1 -- Articles of Incorporation*
3.2 -- By-Laws*
10.1 -- Employment Agreement, dated April 2, 1998, with Joseph L. von
Rosenberg III*
10.2 -- Employment Agreement, dated April 2, 1998, with Robert W.
Stockton*
10.3 -- Employment Agreement, dated April 2, 1998, with Kelsey D.
Short Jr.*
10.4 -- Employment Agreement, dated April 2, 1998, with
Clyde R. Gilbert*
10.5 -- Employment Agreement, dated April 2, 1998, with Eric T. Furey*
10.6 -- Separation Agreement, dated April 2, 1998, with Zapata
Corporation*
10.7 -- Tax Indemnity Agreement, dated April 2, 1998, with Zapata
Corporation*
10.8 -- Registration Rights Agreement, dated April 2, 1998,
with Zapata Corporation*
10.9 -- Sublease Agreement, dated April 2, 1998, with Zapata
Corporation*
10.10 -- Administrative Services Agreement, dated April 2, 1998, with
Zapata Corporation*
27.1 -- Financial Data Schedule
*Incorporated by reference from the Company's Registration Statement on Form S-1
(File No. 333-44967) originally filed with the Securities and Exchange
Commission on January 27, 1998, as amended.
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,727
<SECURITIES> 0
<RECEIVABLES> 10,790
<ALLOWANCES> 0
<INVENTORY> 33,709
<CURRENT-ASSETS> 60,317
<PP&E> 108,708
<DEPRECIATION> 38,455
<TOTAL-ASSETS> 136,252
<CURRENT-LIABILITIES> 17,906
<BONDS> 10,891
0
0
<COMMON> 197
<OTHER-SE> 76,043
<TOTAL-LIABILITY-AND-EQUITY> 136,252
<SALES> 30,041
<TOTAL-REVENUES> 30,041
<CGS> 17,460
<TOTAL-COSTS> 18,907
<OTHER-EXPENSES> 66
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 604
<INCOME-PRETAX> 10,464
<INCOME-TAX> 3,890
<INCOME-CONTINUING> 6,574
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,574
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
