<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
[_] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from October 1, 1998 to December 31, 1998
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 [X] NO [_] .
NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, PAR VALUE
$0.01 PER SHARE, ON FEBRUARY 12, 1999: 24,277,954
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<PAGE>
OMEGA PROTEIN CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheet as of December 31, 1998
and September 30, 1998................................................ 3
Unaudited Condensed Consolidated Statement of Operations for the
three months ended December 31, 1998 and 1997......................... 4
Unaudited Condensed Consolidated Statement of Cash Flows for the
three months ended December 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..................................................... 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS......................................................... 23
ITEM 2. CHANGES IN SECURITIES..................................................... 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................... 24
SIGNATURES........................................................................ 25
EXHIBIT INDEX..................................................................... 26
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
(in thousands)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................................... $ 44,828 $ 49,768
Receivables, net............................................................ 8,902 11,903
Inventories................................................................. 43,351 40,784
Prepaid expenses and other current assets................................... 1,039 351
-------- --------
Total current assets...................................................... 98,120 102,806
-------- --------
Other assets.................................................................. 5,665 5,817
-------- --------
Property and equipment, net................................................... 86,068 84,798
-------- --------
Total assets.......................................................... $189,853 $193,421
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current maturities of long-term debt........................................ $ 997 $ 1,114
Accounts payable............................................................ 1,672 2,012
Accrued liabilities......................................................... 11,858 18,883
Amounts due to parent....................................................... 36 299
-------- --------
Total current liabilities................................................. 14,563 22,308
-------- --------
Long-term debt................................................................ 11,205 11,408
-------- --------
Deferred income taxes......................................................... 2,860 2,732
-------- --------
Other liabilities............................................................. 375 375
-------- --------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock. $0.01 par value: authorized 10,000,000 shares: none
issued.................................................................... - -
Common stock $0.01 par value; authorized 80,000,000 shares:
24,276,812 shares issued and outstanding, respectively.................... 243 243
Capital in excess of par value.............................................. 111,722 111,722
Reinvested earnings from October 1, 1990.................................... 48,885 44,633
-------- --------
Total stockholders' equity................................................ 160,850 156,598
-------- --------
Total liabilities and stockholders' equity............................ $189,853 $193,421
======== ========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
</TABLE>
3
<PAGE>
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------------------
1998 1997
------------- ------------
(in thousands, except
per share amounts)
<S> <C> <C>
Revenues........................................................................... $25,759 $29,503
Cost of Sales...................................................................... 17,553 19,274
------- -------
Gross profit....................................................................... 8,206 10,229
Selling, general, and administrative............................................... 1,934 1,154
------- -------
Operating income................................................................... 6,272 9,075
Interest income (expense), net..................................................... 429 (379)
Other income (expense), net........................................................ (58) (13)
------- -------
Income before income taxes......................................................... 6,643 8,683
Provision for income taxes......................................................... 2,391 3,371
------- -------
Net income......................................................................... $ 4,252 $ 5,312
======= =======
Earnings per share (basic)......................................................... $ 0.18 $ 0.27
======= =======
Average common shares outstanding.................................................. 24,277 19,676
======= =======
Earnings per share (diluted)....................................................... $ 0.18 $ 0.27
======= =======
Average common shares and common share
equivalents outstanding.......................................................... 24,277 19,676
======= =======
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
</TABLE>
4
<PAGE>
OMEGA PROTEIN CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------------
1998 1997
--------- ----------
(in thousands)
<S> <C> <C>
Cash flows (used in) provided by operating activities:
Net income........................................................................... $ 4,252 $ 5,312
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
(Gain) on disposal of assets, net.................................................. - (30)
Depreciation and amortization...................................................... 1,955 1,672
Deferred income taxes.............................................................. 128 100
Changes in assets and liabilities:
Receivables...................................................................... 3,001 549
Inventories...................................................................... (2,567) 2,661
Accounts payable and accrued liabilities......................................... (7,365) (7,481)
Amounts due to parent............................................................ (263) 3,639
Other, net....................................................................... (731) (680)
------- --------
Total adjustments.............................................................. (5,842) 430
------- --------
Net cash (used in) provided by operating activities............................ (1,590) 5,742
------- --------
Cash flows (used in) investing activities:
Proceeds from sale of assets, net.................................................. - 503
Capital expenditures............................................................... (3,030) (1,102)
Acquisitions of property and equipment............................................. - (28,116)
------- --------
Net cash (used in) investing activities........................................ (3,030) (28,715)
------- --------
Cash flow (used in) provided by financing activities:
Proceeds from borrowings--Parent................................................... - 28,116
Principal payments of short and long-term debt obligations......................... (320) (389)
------- --------
Net cash (used in) provided by financing activities............................ (320) 27,727
------- --------
Net (decrease) increase in cash and cash equivalents................................. (4,940) 4,754
Cash and cash equivalents at beginning of year....................................... 49,768 5,504
------- --------
Cash and cash equivalents at end of period........................................... $44,828 $ 10,258
======= ========
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
</TABLE>
5
<PAGE>
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 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 producers. 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 ("Marine Genetics") merged
into Omega, a Nevada corporation, wholly-owned by Zapata Corporation
("Zapata"), with Omega 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
outstanding Common Stock was converted into Omega Common Stock at the rate of
one share for 19,676 shares of Omega Common Stock and Omega's pre-merger
outstanding Common Stock was canceled and treated as treasury stock.
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 issued and sold 4,600,000 shares, and Zapata sold
5,175,000 shares. Immediately following the offering Zapata owned
approximately 59.7% of the shares of the Company's outstanding common stock.
Change in Fiscal Year
On December 1, 1998 the Company's Board of Directors approved a change in
the Company's fiscal year end from September 30 to December 31, effective
beginning January 1, 1999.
Consolidation
The consolidated financial statements include the accounts of Omega and its
wholly and majority owned subsidiaries. Investments in affiliated companies
and joint ventures representing a 20% to 50% voting interest are accounted for
using the equity method. All significant intercompany accounts and
transactions have been eliminated in consolidation.
6
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The unaudited condensed consolidated financial statements included herein
have been prepared by Omega, without audit, pursuant to the rules and
regulations of the Securities 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,
1998 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 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 Annual Report on Form 10-K pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, filed with the
Securities and Exchange Commission on December 14, 1998. The results of
operations for the transition period ended December 31, 1998 and fiscal
quarter ended December 31,1997 are not necessarily indicative of the results
to be expected for any subsequent quarter or the 12 months ending December 31,
1999.
Revenue Recognition
The Company recognizes revenue for the sale of its products when title to
its products is transferred to the customer.
Inventories
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. Fishing
product inventories and materials, parts and supplies are stated at the lower
of cost (average cost) or market.
The Company's inventory cost system considers all costs, both variable and
fixed, associated with an annual fish catch and it's processing. 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.
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
7
<PAGE>
reporting basis of assets and liabilities, and operating loss and tax credit
carryforwards for tax purposes. Prior to the completion of the Company's
public offering in April 1998, the Company was included in Zapata's
consolidated U.S. federal income tax return and its income tax effects
reflected on a separate basis for financial reporting purposes.
Property, Equipment and Depreciation
Property and equipment are initially recorded at cost except as adjusted by
the quasi-reorganization as of October 1, 1990. Because of the quasi-
reorganization, the carrying value of the assets was reduced to estimated fair
value.
Depreciation of property and equipment is computed by the straight-line
method at rates expected to amortize the cost of property and equipment, net
of salvage value, over their estimated useful lives. Estimated useful lives of
assets acquired new, determined as of the date of acquisition are as follows:
<TABLE>
<CAPTION>
USEFUL LIVES
(YEARS)
------------
<S> <C>
Fishing vessels and fish processing plants........... 15-20
Furniture and fixtures............................... 3-10
</TABLE>
Replacements and major improvements are capitalized; 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 periodically evaluates its long-lived assets for impairment if events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration
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 December 31, 1998 and September 30, 1998, the Company had cash deposits
concentrated primarily in two major banks. In addition, the Company had
Certificates of Deposit and commercial quality grade A2P2 rated or better
securities paper with companies and financial institutions. As a result of the
foregoing, the Company believes that credit risk in such investments is
minimal.
Earnings Per Share
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), which established
standards for computing and
8
<PAGE>
presenting earnings per share. The Company adopted the statement on October 1,
1997. Basic earnings per share were 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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Quasi-Reorganization
In connection with the comprehensive restructuring accomplished in 1991,
the Company, in conjunction with Zapata, implemented, for accounting purposes,
a "quasi-reorganization," an elective accounting procedure that permits a
company that has emerged from previous financial difficulty to restate its
accounts and establish a fresh start in an accounting sense. After
implementation of the accounting quasi-reorganization, the Company's assets
and liabilities were revalued and its deficit in reinvested earnings was
charged to capital in excess of par value. The Company effected the accounting
quasi-reorganization as of October 1, 1990.
NOTE 2. ASSET ACQUISITIONS AND DIVESTITURES
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 fishing
vessels, 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 Operation
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.
9
<PAGE>
These acquisitions were financed by a $28.1 million intercompany loan from
Zapata. The interest rate on this loan was 8.5% and was repayable in quarterly
installments beginning May 1, 1998. The loan, which was to mature on August 1,
2002, was prepaid in May 1998 with a portion of the proceeds from the
Company's initial public offering described in Note 1.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable as of December 31, 1998 and September 30,1998 are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
1998 1998
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Trade...................................................................... $ 8,230 $ 9,503
Insurance.................................................................. 304 522
Employee................................................................... 102 115
Income Tax................................................................. - 1,507
Other...................................................................... 458 448
------------------- -------------------
9,094 12,095
Less allowance for doubtful accounts....................................... (192) (192)
------------------- -------------------
$ 8,902 $ 11,903
=================== ===================
</TABLE>
NOTE 4. INVENTORY
Inventory as of December 31, 1998 and September 30, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
1998 1998
-------------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
Fish meal................................................................. $ 19,025 $ 19,478
Fish oil.................................................................. 12,456 12,269
Fish solubles............................................................. 906 1,144
Off season cost........................................................... 5,973 3,329
Materials & supplies...................................................... 5,019 4,620
Other..................................................................... 74 46
Less oil inventory reserve................................................ (102) (102)
-------------------- --------------------
Total inventory........................................................... $ 43,351 $ 40,784
==================== ====================
</TABLE>
10
<PAGE>
NOTE 5. OTHER ASSETS
Other assets as of December 31, 1998 and September 30, 1998 are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
1998 1998
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Fishing nets................................................................ $ 1,263 $ 1,303
Prepaid pension cost........................................................ 2,890 2,927
Title XI loan origination fee............................................... 399 422
Note receivable............................................................. 384 387
Deposits.................................................................... 116 116
Investments in unconsolidated affiliates.................................... 78 78
Miscellaneous............................................................... 535 584
------------------- -------------------
$ 5,665 $ 5,817
=================== ===================
</TABLE>
Amortization expense for fishing nets amounted to $195,000 and $228,000 for
the quarters ended December 31, 1998 and 1997, respectively.
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 and September 30, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
1998 1998
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Land..................................................................... $ 5,390 $ 5,349
Plant assets............................................................. 53,696 52,077
Fishing vessels.......................................................... 60,879 59,088
Furniture and fixtures................................................... 1,552 1,445
Other.................................................................... 7,240 7,769
------------------- -------------------
128,757 125,728
Less accumulated depreciation and impairment............................. (42,689) (40,930)
------------------- -------------------
$ 86,068 $ 84,798
=================== ===================
</TABLE>
Depreciation expense for the quarters ended December 31, 1998 and 1997 was
$1.8 million and $1.4 million, respectively.
11
<PAGE>
NOTE 7. NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 1998 and September 30, 1998, the Company's long-term debt
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
1998 1998
-------------------- -------------------
<S> <C> <C>
U.S. government guaranteed obligations (Title XI loan) collateralized by
a first lien on certain vessels and certain plant assets:
Amounts due in installments through 2011, interest from 6.63% to 8.25%......... $ 10,872 $ 11,152
Amounts due in installments through 2014, interest at Eurodollar rates
Plus .45%; 5.77% and 6.14% at December 31, 1998 and September 30, 1998, 1,250 1,270
respectively..................................................................
Other debt at 4% at December 31, 1998 and September 30, 1998..................... 80 100
------------ -----------
Total debt....................................................................... 12,202 12,522
Less current maturities................................................ 997 1,114
------------ -----------
Long-term debt................................................................... $ 11,205 $ 11,408
============ ===========
</TABLE>
At December 31, 1998 and September 30, 1998, the estimated fair value of
debt obligations approximated book value.
The Company is currently authorized to receive up to $20.6 million in loans
under the Title XI program. To date the Company has used $15.0 million of the
authorized Title XI funds. At December 31, 1998 and September 30, 1998, the
Company was in compliance with all restrictive covenants, the Company was
required to maintain a current ratio of at least 1.25:1 and maintain a debt to
equity ratio of not more than 2:1. Covenants also limit capital expenditures
and investments.
On August 11, 1998 the Company entered into a two year $20.0 million
revolving credit agreement with SunTrust Bank, South Florida, N.A. (the
"Credit Facility") fulfilling the commitment letter dated December 30, 1997.
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 accrues 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 revolving
credit agreement requires a per annum commitment fee of one-eighth of a
percent (0.125%) on the average daily unused portion of the commitment of the
Lender. The Credit Facility is collateralized by all of the Company's trade
receivables, inventory and specific computer equipment. The Company and its
subsidiaries are 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 ration and fixed charges ratio, and
certain other covenants. As of December 31, 1998 and September 30, 1998, the
Company had no borrowings outstanding under the Credit Facility.
12
<PAGE>
NOTE 8. ACCRUED LIABILITIES
Accrued liabilities as of December 31, 1998 and September 30, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
1998 1998
----------- -------------
(IN THOUSANDS)
<S> <C> <C>
Salary and benefits......................... $ 2,826 $ 11,587
Insurance................................... 3,598 3,102
Taxes, other than income tax................ 868 1,432
Federal and state income taxes.............. 1,674 926
Trade creditors............................. 2,865 1,375
Other....................................... 27 461
----------- ------------
$ 11,858 $ 18,883
=========== ============
</TABLE>
NOTE 9. CERTAIN TRANSACTIONS AND ARRANGEMENTS BETWEEN THE COMPANY AND ZAPATA
The Company provided to Zapata payroll and certain administrative services
billed at their approximate cost. During the three month periods ended
December 31, 1998 and 1997 fees for these services totaled $68,400 and
$8,000, respectively. The cost of such services were based on the estimated
percentage of time that employees spend working on the other party's matters
as a percent of total time worked. The Company's management deemed this
allocation method to be reasonable.
Upon completion of the Company's initial public offering in April 1998, 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.
13
<PAGE>
NOTE 10. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is defending various claims and litigation arising from its
operations. In the opinion of management, uninsured losses, if any, resulting
from these matters will not have a material adverse affect on the Company's
results of operations, cash flows or financial position.
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.
14
<PAGE>
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 "Significant Factors that
May Affect Forward Looking Statements" appearing in Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company believes that forward-looking statements made by it are based on
reasonable expectations. However, no assurances can be given that actual
results will not differ materially from those contained in such forward-
looking statements. Forward-looking statements involve statements that are
predictive in nature, which depend upon or refer to future events or
conditions, which include the words "estimate," "project," "anticipate,"
"expect," "predict," and "believe" and similar expressions as well as the
Company's statements concerning the state of the Company's Year 2000
readiness. The Company assumes no obligation to upgrade forward-looking
statements.
GENERAL
Omega Protein Corporation is a Nevada corporation organized in 1998. As
used herein, the term "Omega" or the "Company" refers to Omega Protein
Corporation and its consolidated subsidiaries, as applicable. All references
herein to a "Fiscal" year mean the 12 month period ended September 30 of such
year. The Company's principal executive offices are located at 1717 St. James
Place, Suite 550, Houston, Texas 77056 (Telephone: (713) 623-0060).
Omega is the largest 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 producers. 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.
The Company owns 66 fishing vessels (50 of which were directly involved in
the harvesting operations during Fiscal 1998) and owns 33 and leases 11
aircraft (of which 41 were directly involved in the harvesting operations)
that are used to harvest menhaden in coastal waters along the U.S. mid-
Atlantic and Gulf of Mexico coasts. The fish catch is processed into regular
grade fish meal, specialty fish meals, fish oils and fish solubles at the
Company's five processing plants located in Virginia, Mississippi and
Louisiana.
15
<PAGE>
The Company closed the American Protein Acquisition on November 3, 1997 and
the Gulf Protein Acquisition on November 25, 1997. See Part I - Financial
Information - Note 2 to Financial Statements. Both Acquisitions were accounted
for as purchases and, therefore, their results of operations were included in
the Company's Statement of Operations as of the closing dates for each
Acquisition.
The Company completed its initial public offering on April 8, 1998.
Subsequent to the offering, the Underwriters elected to purchase over-
allotment options. These issuance's generated net proceeds of approximately
$68.0 million (after deducting underwriting discounts and commissions and
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. 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.
The Company's harvesting season generally extends from May through December
in the mid-Atlantic coast and from April through October in the Gulf coast.
During the off season, the Company fills purchase orders from the inventory it
has accumulated during the fishing season. Prices for the Company's products
tend to be lower during the fishing season when product is more abundant than
in the off season. Throughout the entire year, prices are significantly
influenced by supply and demand in world markets for competing products,
particularly soybean meal for its fish meal products and vegetable oils and
fats for its fish oil products when used as an alternative to vegetable oils
and fats. In an effort to reduce price volatility and to generate higher, more
consistent profit margin, the Company has concentrated on the production and
marketing of specialty meal products, which generally have higher margins than
the Company's regular grade meal product.
LIQUIDITY AND CAPITAL RESOURCES
Prior to Omega's initial public offering in April 1998, Zapata, as the sole
stockholder of Omega, caused cash to be moved between Omega and Zapata as each
company had cash needs. As a result of the offering, Omega and Zapata are now
separate public companies and each entity's capital resources and liquidity is
legally independent of the other and dedicated to its own operations. 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.
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 used
for capital expenditures (including acquisitions) and payment of long-term
debt. The Company expects to finance future expenditures through internally
generated cash flows and, if necessary, through funds available from its $20
million credit facility and/or Title XI facilities described below.
16
<PAGE>
Under a program offered through National Marine Fisheries Service, the
Company has the ability to secure loans for vessels and shoreside capital
expenditures and maintenance through lenders with terms generally ranging
between 12 and 20 years at an 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
14 fishing vessels and mortgages on the Company's Reedville, Virginia and
Abbeville, Louisiana plants. The Company is currently authorized to receive up
to $20.6 million in loans under this program. To date, the Company has used
$15.0 million of these funds.
Omega had an unrestricted cash balance of $44.8 million at December 31,
1998, down $5.0 million from September 30, 1998. This decrease was due to a
$1.6 million increase in cash used in operating activities (mainly as a result
of increases in inventory and cash payments to suppliers), which was more than
offset by net cash used in investing and financing activities.
Investing activities used $3.0 million in the quarter ended December 31,
1998 and $28.7 million during the quarter ended December 31, 1997. The higher
1997 investing activities reflect the investments in the November 1997
Acquisitions. Other than the Acquisitions, the Company's investing activities
consisted mainly of capital expenditures for equipment purchases and
replacements in the three month periods ended December 31, 1998 and 1997.
Net financing activities used $320,000 to repay debt obligations during the
transition period ended December 31, 1998 compared with $27.7 million provided
by net financing activities during the quarter ended December 31, 1997. The
increased cash provided during the quarter ended December 31, 1997 was due
primarily to an acquisition loan from Zapata.
The Company believes that its existing cash, cash equivalents, short-term
investments and funds available through its credit facility will be sufficient
to meet its working capital and capital expenditure requirements through at
least the end of 2000.
17
<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 DECEMBER 31,
-------------------------------------------
1998 1997
--------------------- ---------------
<S> <C> <C>
Revenues....................................................... 100.0% 100.0%
Cost of sales.................................................. 68.1 65.3
--------------------- ---------------
Gross profit......................................... 31.9 34.7
Selling, general and administrative............................ 7.5 3.9
--------------------- ---------------
Operating income............................................... 24.3 30.8
Interest expense............................................... 1.7 1.3
Other (expense) income......................................... (.2) -
--------------------- ---------------
Income before income taxes..................................... 25.8 29.5
(Provision) for income taxes................................... (9.3) 11.4
--------------------- ---------------
Net income..................................................... 16.5 18.1
===================== ===============
</TABLE>
RESULTS FOR THE TRANSITION PERIOD ENDED DECEMBER 31, 1998 AND THE QUARTER
ENDED DECEMBER 31, 1997
REVENUES. For the transition period ended December 31, 1998 revenues
decreased $3.7 million, or 12.5% from $29.5 million in the quarter ended
December 31, 1997. The decrease was attributable to a 33.0% lower oil
inventory position carried-over from Fiscal 1998 as compared to Fiscal 1997.
Correspondingly, sales volumes of the Company's oil decreased 39.8% in the
transition period ended December 31, 1998 as compared to the comparable period
ended December 31, 1997. Fishmeal sales volumes increased approximately 8%
from the comparable period during the prior year while sales prices were
relatively unchanged. Crude fish oil prices increased approximately 19.9% over
the same period in the prior years quarter.
COST OF SALES. Cost of sales, including depreciation and amortization, for
the transition period ended December 31, 1998 was $17.6 million, a $1.7
million decrease from $19.3 million in the quarter ended December 31, 1997. As
a percent of revenues, cost of sales was 68.1% in the transition period ended
December 31, 1998 as compared to 65.3% in the quarter ended December 31, 1997.
Per ton cost of sales were higher in the transition period ended December 31,
1998 as compared to the quarter ended December 31, 1997, due mainly to higher
cost inventories carried forward from Fiscal 1998. During August and September
of 1998, fishing operations were hampered by unusually inclement weather which
resulted in higher cost inventory.
GROSS PROFIT. Gross Profit decreased $2.0 million or 19.6% from $10.2
million in the quarter ended December 31, 1997 to $8.2 million in the
transition period ended December 31, 1998. As a percentage of revenues, the
Company's gross profit margin decreased 2.8% in the transition period ended
December 31, 1998 compared to the same period in prior Fiscal
18
<PAGE>
year. The decline in gross profit was the result of the decrease in both
revenues and gross profit margin during the transition period compared to the
first quarter of Fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE PRODUCTS. Selling, general and
administrative expenses increased $780,000 or 67.6% from $1.2 million in the
quarter ended December 31, 1997 compared to $1.9 million in the transition
period ended December 31, 1998. The increase in expense was due primarily to
increased personnel and marketing costs associated with the Company's efforts
to enter the U.S. food market with its refined menhaden oil.
OPERATING INCOME. As a result of the factors discussed above, the Company's
operating income decreased from $9.1 million in the quarter ended December 31,
1997 to $6.3 million for the transition period ended December 31, 1998. As a
percentage of revenue, operating income decreased 6.5% from 30.8% in the
quarter ended December 31, 1997 to 24.3% in the transition period ended
December 31, 1998.
INTEREST INCOME (EXPENSE), NET. Interest expense decreased by $808,000 or
213.0% from net interest expense in the quarter ended December 31, 1997 to net
interest income in the transition period ended December 31, 1998. The decrease
in net interest expense is due to the Company's investment of the
approximately $40.0 million in net proceeds generated from the Company's
initial public offering in April 1998.
OTHER INCOME (EXPENSE), NET. Other expense increased $45,000 in the
transition period ended December 31, 1998 due to the amortization of a non-
compete agreement procured in connection with the Gulf Protein Acquisition.
PROVISION FOR INCOME TAXES. The Company recorded a $2.4 million provision
for income tax for the transition period ended December 31, 1998. This
represents an effective tax rate of 36.0% in comparison to a $3.4 million tax
provision in the quarter ended December 31, 1997, representing an effective
tax rate of 40.2%. The effective tax rate approximates 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 three month periods ending June 30 and September
30) 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 Year 2000 ("Y2K") issue is the result of computer programs using a two-
digit format, as opposed to four digits, to indicate the year. Some computer
systems will be unable
19
<PAGE>
to interpret dates beyond the year 1999, which could cause a system failure or
other computer errors, leading to disruptions in operations.
The Company is aware of the issues surrounding the Y2K and the problems
that may occur. In 1997 the Company developed a program for Y2K compliance.
Since 1997 the Company has converted most of its computer information systems
to enable proper processing of critical management information systems ("MIS")
related to the Y2K issue and beyond. To conform the remaining system to be Y2K
compliant requires a new purchasing application. A new purchasing system has
been selected and implementation is expected to be completed by April 1999.
Critical MIS systems consist of software programs such as the operating
system, spreadsheets, accounting and financial programs. Testing methodology
involved changing the date on the system being tested to be in the year 2000
and then exercising all relevant applications to verify Y2K compliance. The
Company's current estimates indicate that the costs of addressing potential
problems are not expected to have a material impact upon the Company's
financial position, result of operations or cash flows in future periods. To
date, the cost of the Company's Y2K Compliance program (including software
conversion) has been immaterial.
The Company continues to evaluate its non-critical MIS systems and expects
that they will be compliant prior to the year 2000. Non-critical MIS systems
refer to embedded technology such as micro controllers found in computers and
other hardware systems that the Company has identified as non-critical MIS
systems. Non-critical MIS systems are those that would not cause a disruption
in any harvesting or manufacturing application involved in producing product.
Internal systems are not the only ones that may have a material effect on
the Company. External relationships to the Company, such as vendors and
customers may also impact the Company by their inability to deliver goods and
services required by the Company to operate. Customers could impact the
Company by their inability to operate, reducing the sale of product, or their
inability to pay the Company for products purchased. The Company has decided
to address this issue in Fiscal 1999 by identifying major vendors and
customers and sending surveys to discover their level of Y2K compliance. Major
vendors are defined as those that provide critical goods or services to the
Company or those that provide critical components to the Company (such as fuel
suppliers and financial institutions). Major customers are identified as those
customers that are at the greatest risk of being impacted by the Y2K problem
(mainly large domestic and foreign industrial and commercial customers). The
projected completion date of system surveys of external parties is June 30,
1999. There can be no guarantee that the systems of other companies on which
Omega's systems rely will be timely converted or that a failure to convert by
another company or that a conversion that is incompatible with the Company's
systems, would not have a material adverse affect on the Company.
At this point in time, management has not engaged any firm, nor does it
plan to engage any firm, to perform an independent verification and validation
of the Company's Y2K compliance.
20
<PAGE>
At present, the Company does not have a contingency plan in place to
specifically cover the Y2K issues. However, the Company's management continues
to evaluate its systems and expects that all of its systems will be compliant
prior to the year 2000.
SIGNIFICANT FACTORS THAT MAY AFFECT FORWARD-LOOKING STATEMENTS
The Company wishes to caution investors that the following significant
factors, and those factors described elsewhere in this Report, other filings
by the Company with the SEC from time to time and press releases issued by the
Company, could affect the Company's actual results causing such results to
differ materially from those expressed in any forward-looking statements made
by or on behalf of the Company:
1. The Company's ability to meet its raw material requirements through
its annual menhaden harvest, which is subject to fluctuation due to
natural conditions over which the Company has no control, such as
varying fish population, adverse weather conditions and disease.
2. The impact on the prices for the Company's products of worldwide
supply 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.
3. The impact of a violation by the Company of federal, state and local
laws and regulations relating to menhaden fishing and the protection of
the environment and the health and safety of its employees or of the
adoption of new laws and regulations, or stricter interpretations of
existing laws or regulations that materially adversely affect the
Company's business.
4. The impact if the Company cannot harvest menhaden in U.S.
jurisdictional waters if the Company fails to comply with the U.S.
citizenship ownership requirements.
5. Risks inherent with the Company's venture into the sale of refined,
non-hydrogenated menhaden oil for consumption in the U.S., including
the unproven market for this product.
6. Fluctuations in the Company's quarterly operating results due to the
seasonality of the Company's business and the Company's deferral of
sales of inventory based on worldwide prices for competing products.
7. The ability of the Company to retain and recruit key officers and
qualified personnel, vessel captains and crew members.
8. Risks associated with the strength of local currencies of the
countries in which its products are sold, changes in social, political
and economic conditions inherent in foreign investment and
international trade in such countries, changes in U.S. laws and
regulations relating to foreign investment and trade, changes of tax or
other laws, partial or total expatriation, currency exchange rate
fluctuations and restrictions on
21
<PAGE>
currency repatriation, the disruption of labor, political disturbances,
insurrection or war and the effect of requirements of partial local
ownership of operations in certain countries.
9. The unanticipated impact of Year 2000 issues, including the Company's
ability to address Year 2000 compliance and to develop information
technology and management information systems to support strategic goals
while continuing to control costs and expenses and counter-party issues.
22
<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
(a) None.
(b) In April and May 1998, the Company sold 4,600,000 shares of its
common stock for an aggregate offering price of $73.6 million. Also
pursuant tot he 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. The net offering
proceeds to the Company and Zapata, as selling stockholder, after
underwriting discounts and commissions expenses was $68.0 million
and $77.2 million, respectively. All disbursements from the
aggregate proceeds of the offering (including expenses) were direct
or indirect payments to non-related parties. On April 8, 1998, the
Company used approximately $33.3 million of its 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.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 - Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended December 31, 1998, Omega filed the
following Current Report on Form 8-K with the Securities and
Exchange Commission:
(1) Date of Earliest Event Reported: December 15, 1998
Item Reported: Change in Fiscal Year
24
<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)
February 12, 1999 By: /s/ ERIC T. FUREY
------------------------------------
(Vice President, General Counsel
and Corporate Secretary)
February 12, 1999 By: /s/ ROBERT W. STOCKTON
-------------------------------------
(Executive Vice President and Chief
Financial Officer)
25
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
27.1 - Financial Data Schedule
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 44,828
<SECURITIES> 0
<RECEIVABLES> 8,902
<ALLOWANCES> 0
<INVENTORY> 43,351
<CURRENT-ASSETS> 98,120
<PP&E> 128,758
<DEPRECIATION> 42,690
<TOTAL-ASSETS> 189,853
<CURRENT-LIABILITIES> 14,563
<BONDS> 11,205
0
0
<COMMON> 243
<OTHER-SE> 111,722
<TOTAL-LIABILITY-AND-EQUITY> 189,853
<SALES> 25,759
<TOTAL-REVENUES> 25,759
<CGS> 17,553
<TOTAL-COSTS> 19,487
<OTHER-EXPENSES> (58)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 429
<INCOME-PRETAX> 6,643
<INCOME-TAX> 2,391
<INCOME-CONTINUING> 4,252
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,252
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>