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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 June 30, 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: 1-4219
ZAPATA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
STATE OF DELAWARE C-74-1339132
(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) 940-6100
_________________
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
$0.25 PER SHARE, ON AUGUST 14, 1998: 24,102,703
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ZAPATA CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheet as of June 30, 1998 and
September 30, 1997.................................................... 3
Unaudited Condensed Consolidated Statement of Operations for the
three months and nine months ended June 30, 1998 and 1997............ 4
Unaudited Condensed Consolidated Statement of Cash Flows for the
nine months ended June 30, 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................................................13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.....................................20
SIGNATURES...................................................................22
EXHIBIT INDEX................................................................23
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
ZAPATA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 158,916 $ 55,598
Restricted cash 337 4,337
Receivables 14,469 11,150
Inventories:
Marine protein products 38,663 35,210
Materials, parts and supplies 4,834 3,238
Prepaid expenses and other current assets 2,439 2,414
--------- ---------
Total current assets 219,658 111,947
--------- ---------
Investments and other assets:
Investments in unconsolidated affiliates 14,578 19,033
Production payment receivable 2,435 2,656
Deferred income taxes 1,447 1,787
Other assets 16,055 14,531
--------- ---------
34,515 38,007
--------- ---------
Property and equipment 118,857 76,878
Accumulated depreciation (40,424) (35,881)
--------- ---------
78,433 40,997
--------- ---------
Total assets $ 332,606 $ 190,951
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,087 $ 1,034
Accounts payable and accrued liabilities 40,765 24,522
--------- ---------
Total current liabilities 41,852 25,556
--------- ---------
Long-term debt 11,588 11,294
--------- ---------
Commitments and contingencies -- --
--------- ---------
Other liabilities 10,638 10,696
--------- ---------
Minority interest 60,808 --
--------- ---------
Stockholders' equity:
Common stock 7,475 7,395
Capital in excess of par value 140,754 139,400
Reinvested earnings, from October 1, 1990 91,159 26,781
Treasury stock, at cost (31,668) (30,171)
--------- ---------
207,720 143,405
--------- ---------
Total liabilities and stockholders' equity $ 332,606 $ 190,951
========= =========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
3
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ZAPATA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
1998 1997 1998 1997
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Revenues $ 31,488 $ 31,025 $ 91,032 $ 79,612
---------- --------- --------- --------
Expenses:
Operating 18,026 21,916 51,764 59,153
Depreciation and amortization 1,024 928 4,571 2,783
Selling, general and administrative 3,196 3,229 8,094 7,094
---------- --------- --------- --------
22,246 26,073 64,429 69,030
---------- --------- --------- --------
Operating income 9,242 4,952 26,603 10,582
---------- --------- --------- --------
Operating income (expense):
Interest income 2,694 940 3,705 3,391
Interest expense (236) (420) (706) (2,004)
Equity in income (loss) of unconsolidaed affiliates (4,116) (544) (4,345) (1,382)
Gain on sale of Omega Protein 86,662 -- 86,662 --
Minority interest in net income of consolidated subsidiary (4,329) -- (4,329) --
Other, net (56) (312) (141) 802
---------- --------- --------- --------
80,619 (336) 80,846 807
---------- --------- --------- --------
Income from continuing operations before income taxes 89,861 4,616 107,449 11,389
---------- --------- --------- --------
Provision for income taxes 31,721 1,748 38,251 4,253
---------- --------- --------- --------
Income from continuing operations 58,140 2,868 69,198 7,136
---------- --------- --------- --------
Discontinued operations:
Income from discontinued operations, net of income taxes -- 1,962 -- 2,330
---------- --------- --------- --------
Net income $ 58,140 $ 4,830 $ 69,198 $ 9,466
========== ========= ========= ========
Per share data (basic):
Income from continuing operations $ 2.52 $ 0.11 $ 3.01 $ 0.25
Income from discontinued operations -- 0.07 -- 0.08
---------- --------- --------- --------
Net income per share (basic) $ 2.52 $ 0.18 $ 3.01 $ 0.33
========== ========= ========= ========
Average common shares outstanding 23,117 27,206 22,986 28,769
========== ========= ========= ========
Per share data (diluted):
Income from continuing operations $ 2.40 $ 0.11 $ 2.89 $ 0.25
Income from discontinued operations -- 0.07 -- 0.08
---------- --------- --------- --------
Net income per share (diluted) $ 2.40 $ 0.18 $ 2.89 $ 0.33
========== ========= ========= ========
Average common shares and common share equivalents
outstanding 24,229 27,231 23,961 28,791
========== ========= ========= ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
4
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ZAPATA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows provided (used) by operating activities:
Net income $ 69,198 $ 9,466
---------- ----------
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,254 2,783
Gain on sale of assets (86,865) (750)
Equity in loss of unconsolidated affiliates 4,345 1,382
Change in restricted cash investment 4,000 --
Changes in other assets and liabilities (19,041) (9,939)
---------- ----------
Total adjustments (92,307) (6,524)
---------- ----------
Net cash provided (used) by operating activities (23,109) 2,942
---------- ----------
Cash flows provided (used) by investing activities:
Proceeds from sale of fixed assets, net 963 1,661
Proceeds from production payment receivable 477 457
Repayments from borrowings - subsidiary 28,116 --
Asset acquisitions (28,116) --
Capital additions (14,362) (6,761)
---------- ----------
Net cash used in investing activities (12,922) (4,643)
---------- ----------
Cash flow provided (used) by financing activities:
Proceeds from issuance of common stock 144,543 --
Proceeds from borrowing - Bank debt 3,331 --
Proceeds from exercise of stock options 776 --
Borrowings -- 1,849
Repayments of long-term obligations (2,984) (16,000)
Dividends paid (4,820) --
Purchase of treasury stock (1,497) (30,171)
---------- ----------
Net cash provided (used) by financing activities 139,349 (44,322)
---------- ----------
Net increase (decrease) in cash and cash equivalents 103,318 (46,023)
Cash and cash equivalents at beginning of period 55,598 99,601
---------- ----------
Cash and cash equivalents at end of period $ 158,916 $ 53,578
========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
5
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ZAPATA CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1. FINANCIAL STATEMENTS
SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION
Zapata Corporation ("Zapata" or the "Company") is the holder of 59.7% of
the outstanding common stock of Omega Protein Corporation, see Note 5, which
markets a variety of products produced from menhaden (a fish found in commercial
quantities), including regular grade and specialty fish meals and crude and
refined fish solubles. Zapata also holds 39.68% of the outstanding common stock
of Envirodyne Industries, Inc., which is primarily engaged in the business of
selling food packaging products and disposable food service supplies. Zapata has
recently announced a strategic initiative to make acquisitions in the Internet
and e-commerce market.
The unaudited condensed consolidated financial statements included herein
have been prepared by 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 Zapata
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 financial statements should be read in conjunction with the financial
statements and the notes thereto included in Zapata's latest Annual Report on
Form 10-K filed with the Securities and Exchange Commission. The results of
operations for the three months and nine months ended June 30, 1998 are not
necessarily indicative of the results for any subsequent quarter or the entire
fiscal year ending September 30, 1998.
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 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 were 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
6
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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 SFAS 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 operating segments 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
SFAS 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 disclosures 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 considered
useful. The Company will adopt the provisions of the statement in fiscal 1999.
The Company anticipates that implementing the provisions of SFAS 132 will not
have a significant impact on the Company's existing operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
133), which is effective for fiscal years beginning after June 15, 1999. SFAS
133 establishes standards requiring all derivatives to be recognized in the
statement of financial position as either assets or liabilities and measured at
fair value. The Company will adopt the provisions of the statement in fiscal
year 2000. The Company anticipates that implementing the provisions of SFAS
133 will not have a significant impact on the Company's existing operations.
7
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NOTE 2. ACQUISITIONS
On November 3, 1997, Zapata's then wholly-owned subsidiary Omega Protein
Corporation ("Omega Protein," formerly known as Marine Genetics Corporation and
Zapata Protein Corporation) 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.
American Protein's facilities were located in close proximity to Omega Protein's
Reedville, Virginia facility. Shortly after completing this transaction, Omega
Protein closed the American Protein processing plant and began integrating its
assets into Omega Protein's existing operations.
On November 25, 1997, Omega Protein 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,"). Omega Protein
accounted for this acquisition as a purchase; thus, the results of operations
being included in Omega Protein's Statement of Operations beginning November 25,
1997. In connection with the Gulf Protein Acquisition, Omega Protein also
entered into a five-year lease for the Gulf Protein plant at a $220,000 annual
rental rate. Omega Protein is currently upgrading this plant's processing
capabilities so that it can manufacture specialty meals. Omega Protein began
operations at the Morgan City, Louisiana plant at the start of the 1998 fishing
season.
These acquisitions were financed by Zapata with a $28.1 million
intercompany loan to Omega Protein financed through working capital. 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 Omega Protein's initial
public offering.
NOTE 3. UNCONSOLIDATED AFFILIATES
In August 1995, Zapata acquired 4,189,298 shares of Envirodyne Industries,
Inc. ("Envirodyne"), common stock, representing 31% of the then outstanding
common stock of Envirodyne, for $18.8 million. In June and July 1996, Zapata
purchased 1,688,006 additional shares of Envirodyne common stock for aggregate
consideration of approximately $7.0 million. As a result of these transactions,
Zapata currently owns approximately 39.68% of the outstanding shares of
Envirodyne common stock.
Zapata reports its equity in Envirodyne's results of operations on a three-
month delayed basis since Envirodyne's financial statements are not available to
the Company on a basis that would permit concurrent reporting. The financial
statement information presented below for Envirodyne is based upon its December
25, 1997 annual report and its interim report for the quarter ended March 26,
1998 (in millions, except per share amounts):
8
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ENVIRODYNE INDUSTRIES, INC.
(Unaudited)
MARCH 26,
1998
---------
BALANCE SHEET
Current assets................................ $223.5
Other assets.................................. 151.9
Property and equipment, net................... 437.4
------
Total assets................................. $812.8
======
Current liabilities........................... $161.9
Long-term debt................................ 497.7
Deferred income taxes and other............... 72.9
Stockholders' equity.......................... 80.3
------
Total liabilities and stockholders' equity... $812.8
======
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 26, MARCH 26,
1998 1998
------------ -----------
INCOME STATEMENT
Revenues...................................... $128.7 $430.5
====== ======
Loss before income taxes...................... $(12.0) $(29.9)
====== ======
Net income (loss)............................. $(11.4) $(14.0)
====== ======
Net income (loss) per share................... $(0.77) $(0.95)
====== ======
NOTE 4. LITIGATION
On August 11, 1995, a derivative and class action was filed by Elly Harwin
against Zapata and its then directors in the Court of Chancery of the State of
Delaware, New Castle County. On January 18, 1996, a second derivative action
was filed by Crandon Capital Partners against Zapata and its directors in the
same court. On May 7, 1996, a third derivative action was filed by Elly Harwin
and Crandon Capital Partners against Zapata and its directors in the same court.
These cases have since been consolidated into one action (the "Harwin/Crandon
Case") by way of an amended, consolidated complaint. The consolidated complaint
alleges that Zapata's directors engaged in conduct constituting breach of
fiduciary duty and waste of Zapata's assets in connection with Zapata's
investment in Envirodyne, in connection with the decision to shift Zapata's
business focus
9
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from energy to food services, and in connection with the proposed (but
subsequently abandoned) merger with Houlihan's Restaurant Group, Inc.
("Houlihan's Merger"). The complaint alleges, among other things, that the
purchase of Envirodyne common stock from Malcolm I. Glazer's affiliate was a
wrongful expenditure of Zapata's funds and was designed to permit Malcolm I.
Glazer to obtain personal financial advantage to the detriment of Zapata. The
complaint also alleges that Zapata's Board of Directors is controlled by Malcolm
I. Glazer and that George Loar, now deceased, lacked independence from Malcolm
I. Glazer because he was employed until his retirement by a corporation
indirectly controlled by Malcolm I. Glazer, that Robert V. Leffler Jr. lacks
such independence because of his status as a paid consultant to Malcolm I.
Glazer, that Avram A. Glazer lacks such independence because of familial
relationship and that Ronald C. Lassiter lacks such independence by reason of an
employment or consulting relationship with Zapata. The complaint seeks relief,
including, among other things, rescission of Zapata's purchase of the shares of
Envirodyne common stock from the Malcolm Glazer Trust, injunctive relief to void
the election of Messrs. Leffler and Loar as directors at Zapata's Annual Meeting
of Stockholders held on July 27, 1995 and to enjoin any transaction in which
Malcolm I. Glazer has an interest, and an award of unspecified compensatory
damages and expenses, including attorneys' fees. Because Zapata's investment in
Envirodyne has increased in value since the stock was purchased from the Malcolm
I. Glazer Trust, Zapata believes the plaintiffs are without damages. Zapata
intends to defend the Harwin/Crandon Case vigorously.
On November 9, 1995, a petition was filed in the 148/th/ Judicial District
Court of Nueces County, Texas by Peter M. Holt, a former director of the
Company, and certain of his affiliates who sold their interests in Energy
Industries, Inc. ("Energy Industries"), and other natural gas compression
companies, to the Company in November 1993. The petition names the Company,
Malcolm I. Glazer and Avram A. Glazer as defendants and alleges several causes
of action based on alleged misrepresentations on the part of the Company and the
other defendants concerning the Company's long-term development strategy
focusing its efforts on the natural gas services business. The petition does
not allege a breach of any provision of the purchase agreement pursuant to which
the Company acquired Energy Industries from the plaintiffs. The remedies sought
by the plaintiffs include: (i) the disgorgement to the plaintiffs of the
Company's profit made on its sale of Energy Industries, plus the cash profit the
Company made from the operations of Energy Industries, which the plaintiffs
contend equals approximately $54 million, (ii) money damages based on the
alleged lower value of the Company's common stock had the alleged
misrepresentations not been made, which the plaintiffs contend is approximately
$6 million, (iii) money damages based on the plaintiffs' assumption that the
Company's common stock price would have increased if it had remained in the
natural gas services industry after 1995, which the plaintiffs contend equals
approximately $23 million, or (iv) money damages on the assumption that had the
plaintiffs not sold Energy Industries but had taken it public in January 1997,
which the plaintiffs contend amounts to more than $100 million. The Company,
Malcolm I. Glazer and Avram A. Glazer filed counterclaims against the plaintiffs
for breach of the purchase agreement, breach of fiduciary duty and material
misrepresentations and omissions by Mr. Holt. Trial is set for November 30,
1998. The Company intends to defend the case vigorously.
10
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The Company is defending various claims and litigation arising from
continuing and discontinued operations. In the opinion of management, uninsured
losses, if any, resulting from these matters would be minimal and would not have
a material adverse effect on Zapata's results of operations, cash flows or
financial position.
NOTE 5. OMEGA PROTEIN, COMPLETED PUBLIC OFFERING
On April 8, 1998, the Company's then wholly-owned subsidiary, Omega
Protein, completed an initial public offering of 8,500,000 shares of its common
stock at a gross price of $16 per share. On May 7, 1998, the Underwriters
exercised their option to acquire 1,275,000 additional shares at the same gross
price (the entire transaction being referred to as the "Offering"). Of the
9,775,000 total shares sold in the Offering of Omega Protein common stock,
Zapata sold 5,175,000 shares and Omega Protein issued and sold 4,600,000 shares.
Immediately following the Offering, Zapata owned 59.7% of Omega Protein's
outstanding common stock.
In connection with the Offering, Zapata received $76.6 million from the
sale of its 5,175,000 shares of Omega Protein common stock after deducting
commissions and selling expenses of $6.2 million. Additionally, Omega Protein
received $68.0 million from the sale of 4,600,000 shares of its common stock
after deducting commissions and offering expenses. Omega Protein used a portion
of its net proceeds to repay approximately $33.3 million of intercompany
indebtedness owed to Zapata. As a result of the Offering, Zapata recorded an
$86.7 million gain and related tax effects of $31.4 million or $2.31 per share
(diluted).
On April 27, 1998, Zapata announced plans to initiate a major strategic
thrust to acquire and consolidate Internet and e-mail commerce business. On
April 27, 1998, the Company acquired from ICON CMT Corporation ("ICON) the
assets used in connection with the operation of the Word and Charged on-line Web
magazines in consideration for the assumption of certain related liabilities and
obligations and nominal cash consideration. In connection with the acquisition,
the Company and ICON entered into a multi-year services agreement. ICON is a
tier one Internet solutions provider.
NOTE 6. SUBSEQUENT EVENTS
Revolving Line of Credit
On August 11, 1998, Omega Protein entered into a revolving credit
agreement with SunTrust Bank, South Florida, N.A. establishing a $20.0 million
revolving Credit Facility (the "Credit Facility") for Omega Protein. Under the
Credit Facility, Omega Protein 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 Omega Protein's election,
either at (i) the bank's prime rate less 75 basis points, or (ii) LIBOR plus a
margin based on the Omega Protein's financial performance. The Credit Facility
is secured by all of Omega Protein's trade receivables, inventory and specific
computer
11
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equipment. Omega Protein 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 ratio and
fixed charges ratio, and certain other covenants.
Pending Transactions
In July and August 1998, the Company announced that its wholly-owned
subsidiary, Zap Corporation, had signed non-binding letters of intent to acquire
or invest in 31 Web sites and Internet properties. It is the Company's plan to
finance these potential acquisitions through available cash and the issuance of
capital stock. The Company also announced its intention to explore strategic
options to maximize the value of Zap, including a possible spin-off, initial
public offering or other transaction. There are no assurances that the pending
acquisitions or any of the possible strategic alternatives will be consummated.
Stock Repurchase Program
In July 1998, the Company announced a stock repurchase program, whereby the
Company may, at its option, repurchase up to 5,000,000 shares of its outstanding
common stock from time to time. To date, the Company has not made any
repurchases under this program.
12
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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, including without limitation those identified from time to time
in press releases and other communications with stockholders by the Company and
the filings made with the Securities and Exchange Commission by the Company,
Omega Protein Corporation and Envirodyne Industries, Inc., and disclosed
elsewhere in this Quarterly Report. 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. All reference herein to a
particular fiscal year are to the 12 month period ended September 30/th/ of the
referenced year.
GENERAL
On November 3, 1997, Omega Protein 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"). Additionally, on November
25, 1997, Omega Protein 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 "Omega Protein Recent Acquisitions").
On April 8, 1998, Zapata's then wholly-owned subsidiary, Omega Protein
Corporation ("Omega Protein") completed an initial public offering (the "Omega
Protein Offering") of 8,500,000 shares of its common stock for $16 per share
less underwriting discounts and selling commissions. On May 7, 1998, the
Underwriters exercised their over-allotment option to acquire 1,275,000
additional shares at the same gross price. Of the 9,775,000 shares sold in the
Omega Protein Offering, Zapata sold 5,175,000 shares and Omega Protein issued
and sold 4,600,000 shares. Immediately following the Offering, Zapata owned
59.7% of Omega Protein's outstanding common stock.
In connection with the Omega Protein Offering, Zapata received $76.6
million from the sale of its 5,175,000 shares of Omega Protein common stock
after deducting commissions and selling expenses of $6.0 million. Additionally,
Omega Protein received $68.0 million from the sale of 4,600,000 shares of its
common stock after deducting commissions and offering expenses. Omega
13
<PAGE>
Protein used a portion of its net proceeds to repay approximately $33.3 million
of intercompany indebtedness owed to Zapata and an additional $2.1 million to
pay certain long-term debt owed to a bank. As a result of the Omega Protein
Offering, Zapata will record an $86.7 million gain and related tax effects of
$31.4 million or $2.31 per share (diluted).
On April 27, 1998, Zapata announced plans to initiate a major strategic
thrust to acquire and consolidate Internet and e-commerce businesses and assets.
On April 27, 1998, the Company acquired from ICON CMT Corporation ("ICON") the
assets used in connection with the operation of the Word and Charged on-line Web
magazines in consideration for the assumption of certain related liabilities and
obligations and nominal cash consideration (the "April Acquisitions"). The
transaction was accounted for as an acquisition of rights to be developed and
purchased in process technology distribution rights. In connection with the
acquisition, the Company and ICON entered into a multi-year services agreement.
ICON is a tier one Internet solutions provider.
In July and August 1998, the Company announced that its wholly-owned
subsidiary, Zap Corporation, had signed non-binding letters of intent to acquire
or invest in 31 Web sites and Internet properties (the "Pending Transactions").
It is the Company's plan to finance these potential acquisitions through
available cash and the issuance of capital stock.
The April Acquisitions and the Pending Transactions are the first step in
the Company's implementation of its Internet consolidation strategy. The Company
is also engaged in acquisition discussions with other acquisition candidates
regarding Internet properties and expects to have ongoing discussions with
prospective acquisition candidates with a view to advancing the consolidation
strategy. Although no definitive agreements have been signed for the Pending
Transactions, the Company continues to be in discussion with each of the
acquisition candidates and has begun its due diligence investigations.
Completion of the Pending Transactions is subject to satisfactory completion of
due diligence investigations, the preparation and execution of definitive
agreements, approval by the respective Board of Directors of Zap and the
acquisition candidates and the stockholders of some of the acquisition
candidates, as well as other customary conditions.
In July 1998, the Company also announced its intention to explore strategic
options to maximize the value of Zap, including a possible spin-off, initial
public offering or other transaction. There can be no assurance that any of the
Pending Transactions or any of the possible strategic transactions under
consideration will be consummated.
On July 6, 1998, the board of Directors approved a stock repurchase
program, whereby the Company may, at its option, repurchase up to 5,000,000
shares of its own outstanding common stock from time to time. To date, the
Company has not made any repurchases under this program.
LIQUIDITY AND CAPITAL RESOURCES
Zapata's unrestricted cash balance totaled $158.9 million at June 30, 1998,
up from $55.6
14
<PAGE>
million at September 30, 1997. The increase was due primarily to the Omega
Protein Offering. For the same reason, Zapata's working capital increased to
$177.8 million at June 30, 1998, from $86.4 million at September 30, 1997.
Cash provided by operating activities decreased $26.8 million for the
first nine months of fiscal 1998, from $2.9 million for the first nine months of
fiscal 1997, due primarily to Zapata's gain on the sale of Omega Protein's
common stock in connection with the Offering.
Reflecting the increase in capital expenditures by Omega Protein, investing
activities used $12.9 million during the first three quarters of fiscal 1998 as
compared to $4.6 million during the corresponding fiscal 1997 period. Reflecting
the Omega Protein Recent Acquisitions capital expenditures totaled $42.5 million
in the fiscal 1998 period and $6.8 million in the corresponding fiscal 1997
period.
Financing activities provided $140.2 million during the nine-month period
ended June 30, 1998 versus a use of $44.3 million during the same period in the
prior year. Financing activities in the fiscal 1998 period included proceeds
from the Omega Protein Offering of $144.5 million, proceeds of $2.6 million from
financing by lenders pursuant to Title XI of the Marine Act of 1936, along with
$0.9 million assumption of Title XI debt in connection with the Gulf Protein
Acquisition. Additionally, financing activities generated $1.4 million from the
exercise of stock options.
For the nine months ended June 30, 1998, financing activities used $3.0
million to repay debt, $4.8 million to pay dividends and $1.5 million to
purchase treasury stock from the May 30, 1997 Repurchase Plan. The fiscal 1997
period financing activities also included proceeds of $1.8 million from
financing by lenders pursuant to Title XI of the Marine Act of 1936 and debt
repayments of $16.0 million that included the redemption of Zapata's 10-1.4%
subordinated debentures and the financing use of $30.2 million to purchase
treasury stock.
On April 8, 1998, Zapata's then wholly-owned subsidiary, Omega Protein,
completed its initial public offering. In connection with the Omega Protein
Offering, Zapata received $76.7 million in proceeds after selling expenses of
$6.1 million. Also, Zapata recorded a gain of $37.6 million, net of $20.7
million tax effects and a $18.3 million minority interest reduction. The
Company anticipates using the net proceeds from the Omega Protein Offering for
general corporate purposes (including possibly the Pending Transactions which
the Company considers from time to time). Pending such use, the net proceeds
have been invested in short-term government securities and interest-bearing cash
equivalents.
The Company expects that existing cash and cash equivalents and short
investments together with cash flow from operations will be sufficient to meet
the Company's requirements through the end of fiscal 1999, including to meet its
capital needs in connection with the Pending Transactions and potential
repurchases of its common stock under the announced stock repurchase plan. The
Pending Transactions and the strategic transactions under consideration for Zap
could potentially have an impact on liquidity and capital resources.
15
<PAGE>
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.
RESULTS OF OPERATIONS
FISCAL QUARTER ENDED JUNE 30, 1998
Zapata's net income increased to $58.1 million for the third quarter of
fiscal 1998 from $4.8 million for the third quarter of fiscal 1997. The
increase in net income was primarily due to a $51.1 million gain net of minority
interest and taxes from the sale of Omega Protein common stock, offset by a $4.1
million loss in Zapata's recorded 39.68% equity income of Envirodyne Industries,
Inc. Revenues totaled $31.5 million during the fiscal 1998 period versus $31.0
million during the fiscal 1997 period. The Company's operating income for the
third quarter of fiscal 1998 rose to $9.2 million from $5.0 million for the
corresponding prior-year period. The increase was attributable to Omega
Protein's improved operating performance.
Zapata recorded equity loss of $4.1 million in the third quarter of fiscal
1998 related to its 39.68% interest in Envirodyne Industries, Inc., compared to
equity loss of $544,000 recorded in the third quarter of fiscal 1997. The
Company's interest income was higher in the current quarter as compared to the
corresponding prior-year period reflecting higher levels of cash. The Company's
interest expense was lower in the current quarter as compared to the
corresponding prior-year period, reflecting lower levels of indebtedness.
NINE MONTHS ENDED JUNE 30, 1998
For the first nine months of fiscal 1998, Zapata reported revenues of $91.0
million and net income of $69.2 million compared to revenues of $79.6 million
and net income of $9.5 million for the first nine months of fiscal 1997. Net
income included $2.3 million in fiscal 1997 related to the Company's
discontinued oil and gas operations. Zapata's year-to-date operating income
improved to $26.6 million in fiscal 1998 from $10.6 million in the corresponding
prior-year period due to Omega Protein's improved operating performance.
Zapata's results included an equity loss of $4.3 million in the fiscal 1998
period compared to an equity loss of $1.4 million in the corresponding fiscal
1997 period. Zapata's fiscal 1998 net income also included a $51.1 million after
tax gain on the sale of Omega Protein common stock.
OMEGA PROTEIN
Omega Protein had operating income of $10.4 million on revenues of $31.5
million in the third
16
<PAGE>
quarter of fiscal 1998 versus operating income of $6.5 million on revenues of
$31.0 million in the third quarter of fiscal 1997. The fiscal 1997 period
results included revenues of $10.4 million and operating income of $71,000 from
a blending operation that was sold in September 1997.
The improvement in Omega Protein's results was attributable to continued
higher prices and sales volumes for its fish meal and fish oil products. This
growth resulted primarily from a 54.4% increase in the tons of regular grade
meal and a 21.6% increase in the tons of specialty grade meal shipped, coupled
with a 12.8% increase in tons of oil shipped compared to the third quarter
fiscal 1997. Additionally, the average selling price of all of Omega Protein's
product lines increased 12.3%. The increased volumes and higher prices are
attributed to increased customer demand for Omega Protein's product lines in
fiscal 1998 over fiscal 1997. The increase in sales volumes for fish meal and
fish oil also reflect higher levels of inventory carried over into fiscal 1998
from the fiscal 1997 fishing season as compared to the levels of inventory
carried over into fiscal 1997 from the fiscal 1996 fishing season.
Similarly, Omega Protein's year-to-date fiscal 1998 revenues of $91.0
million and operating income of $30.6 million compared favorably to revenues of
$79.6 million and operating income of $13.7 million for the comparable period in
fiscal 1997. Omega Protein's fiscal 1997 nine months' results included
revenues of $25.3 million and operating income of $201,377 from the blending
operation that was sold in September 1997. The improved operating results were
attributed to a 32.6% increase in the tons of fish meal shipped and a 45.9%
increase in the tons of fish oil shipped, coupled with a 18.7% increase in the
overall average selling price of Omega Protein's product lines. The increased
volumes and prices are attributed to continued increased customer demand for
Omega Protein's product lines in fiscal 1998 over fiscal 1997. Sales volumes for
Omega Protein's fish meal and fish oil products were significantly higher in the
first nine months of fiscal 1998 versus sales volumes during the first nine
months of fiscal 1997 also due to higher levels of inventory carried over into
fiscal 1998.
ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company believes that results of operations in any quarterly period may
be impacted by certain factors, including the factors discussed elsewhere in the
Quarterly Report and the ability of the Company to achieve its strategic plan of
acquiring and consolidating Internet and e-commerce properties. The Company
believes that its ability to achieve this plan will be affected by a number of
factors, including those discussed below.
1. Ability to Identify, Acquire and Operate Internet and E-Commerce Businesses
As part of its business strategy, the Company expects to acquire or enter
into business combinations with companies providing services through the
Internet or otherwise engaged in e-commerce. For example, during April 1998 the
Company acquired the assets related to the Web magazines "Word" and "Charged."
There can be no assurance that the Company will be successful
17
<PAGE>
in identifying and reaching mutually agreeable terms with any additional
acquisition candidates and their owners or that the Company will be able to
profitably manage businesses it acquires or successfully integrate acquired
businesses into the Company without substantial costs, delays or other problems.
Acquisition transactions are accompanied by a number of risks, including, among
other things, the difficulty of assimilating the operations and personnel of the
acquired companies and retaining key management to maximize the financial and
strategic position of the Company through the successful incorporation of
acquired technology or content and rights into the Company's products and media
properties, expenses associated with the acquisitions, additional expenses
associated with amortization of acquired intangible assets, the impairment of
new management personnel and potential unknown liabilities and unexpected
problems associated with businesses which are acquired or will be acquired
(including litigation). Further, the acquisition candidates which the Company
will be pursuing will generally have a limited operating history upon which an
evaluation of the Company can be based and the prospects of such companies will
be subject to those risks, expenses and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for Internet products and
services market, including the Web-based advertising market. Specifically, such
risks include, without limitation, the failure of the market to adopt the Web as
an advertising medium, potential reductions in market prices for Web-based
advertising as a result of competition or other factors, the failure of the
Company to effectively generate commerce-related revenues through sponsored
services and placements in the Company media properties and operations, the
failure to continue to develop and extend the brand names of acquired media
properties, the failure to develop new media properties, the inability of the
Company to maintain and increase levels of traffic on its media properties, the
development or acquisitions of equal or superior services or products by
competitors, the failure to adopt rapidly changing technologies, the failure of
the Web infrastructure to support growing demands with the necessary speed, data
capacity and security and timely developments of enabling products such as high-
speed modems for providing reliable Web access and services and improved
content, the inability to protect proprietary rights and the adoption of laws
and regulations which could dampen the growth of the Web generally and decrease
the acceptance of the Web as a communication and commercial medium. Moreover, as
is typical in the case of new and rapidly evolving industries, demand and market
acceptance for newly introduced products and services are subject to a high
level of uncertainty and risk which makes predictions as to future growth rates
for acquisition candidates difficult. There can be no assurance that the Company
would be successful in addressing these risks or any other problems encountered
in connection with acquisitions which it has made or may make in the future.
Some or all of these risks could have a material adverse effect on the Company's
business, results of operations and financial condition. There can also be no
assurance that any debt or equity financing needed for future acquisitions can
be obtained or that, if obtained, such financing will be on terms that are
favorable to the Company or sufficient for the Company's needs.
2. Lack of Internet and E-Commerce Experience
The Company's current management has no operating experience in owning and
operating Internet and e-commerce businesses. The Company's ability to
successfully accomplish its strategic
18
<PAGE>
goal of entering this market will depend on the Company's ability to hire
experienced personnel, which may or may not, be done in conjunction with
acquisitions it makes from time to time. Competition for such personnel in the
Internet industry is intense, and there can be no assurance that the Company
will be able to retain its key personnel or that it can attract, assimilate or
retain other highly qualified personnel in the future.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On July 9, 1998, the Envirodyne Industries, Inc. ("Envirodyne"), the
Company and Messrs. Malcolm Glazer and Avram Glazer (the "Glazers") entered into
a letter agreement ("July 9/th/ Agreement") pursuant to which Envirodyne's Board
of Directors agreed to use all reasonable efforts to cause the Glazers to be
elected to Envirodyne's Board of Directors at Envirodyne's 1998 Annual Meeting
which is scheduled for August 27, 1998. In addition, Envirodyne agreed in the
July 9/th/ Agreement to immediately expand the size of its entire Board of
Directors from five to six directors so that the Glazers, upon their election,
would constitute two out of Envirodyne's six directors.
In consideration for Envirodyne's undertakings, the Company and the Glazers
agreed in the July 9/th/ Agreement, until the earlier of one year from the date
thereof or the date on which the Company owns more than 50% of Envirodyne's
outstanding shares of Common Stock, to (a) cause all Envirodyne shares
beneficially owned by them to be voted for the director candidates nominated by
Envirodyne's Board, (b) refrain from assisting another person in their efforts
to be elected to Envirodyne's Board and (c) refrain from any action to change
the membership of Envirodyne's Board.
On July 9, 1998, Envirodyne announced that it had increased the size of its
Board of Directors from five directors to six directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 - Letter Agreement dated July 9, 1998, among Envirodyne Industries,
Inc., Zapata Corporation, Malcolm Glazer and Avram Glazer
(incorporated by reference to Amendment No. 12 to schedule 13D
filed on July 22, 1998 by Zapata Corporation with respect to
common stock of Envirodyne Industries, Inc.)
27 -- Financial Data Schedule
(b) Reports on Form 8-K:
During the quarter ended June 30, 1998, Zapata filed the following two
Current Reports on Form 8-K with the Securities and Exchange Commission:
(1) Date of Earliest Event Reported: April 8, 1998
Item Reported: Completion of an initial public
offering by
20
<PAGE>
Omega Protein, including sale of
Omega Protein shares by Zapata.
Financial Statements Filed: Unaudited Pro Forma Consolidated
Condensed Balance Sheet of Zapata
as of December 31, 1997 and
Unaudited Pro Forma Consolidated
Condensed Income Statements of
Zapata for the three months ended
December 31, 1997 and the fiscal
year ended September 30, 1997.
(2) Date of Earliest Event Reported: July 6, 1998
Item Reported: The entry by the Company's wholly-
owned subsidiary, Zap Corporation,
into letters of intent to acquire
or acquire an interest in 25
Internet Properties; the Board of
Directors review of strategic
alternatives for Zap Corporation,
including possible spin-off,
initial public offering or other
transactions and authorization of
stock repurchase program for
5,000,000,000 shares of Company
stock.
Financial Statements Filed: None.
21
<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.
ZAPATA CORPORATION
(Registrant)
August 14, 1998 By: /s/ AVRAM A. GLAZER
---------------------------------------
(President and Chief Executive Officer)
22
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
10.1 -- Letter Agreement dated July 9, 1998, among Envirodyne
Industries, Inc., Zapata Corporation, Malcolm Glazer and Avram
Glazer (incorporated by reference to Amendment No. 12 to
schedule 13D filed on July 22, 1998 by Zapata Corporation with
respect to common stock of Envirodyne Industries, Inc.)
27 -- Financial Data Schedule
23
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