<PAGE> 1
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 ________
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
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 FEBRUARY 12, 1999: 23,862,281
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ZAPATA CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
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..................................................12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K......................................20
SIGNATURES....................................................................21
EXHIBIT INDEX.................................................................22
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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>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1998 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 154,367 $ 161,804
Restricted cash 337 337
Receivables 9,811 12,804
Inventories:
Marine protein products 43,351 40,784
Prepaid expenses and other current assets 3,468 1,871
--------- ---------
Total current assets 211,334 217,600
--------- ---------
Investments and other assets:
Investments in unconsolidated affiliates 78 11,914
Production payment receivable 1,493 2,073
Other assets 19,027 17,447
--------- ---------
20,598 31,434
Property and equipment, net 86,308 84,972
--------- ---------
$ 318,240 $ 334,006
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,033 $ 1,413
Accounts payable 2,599 2,900
Accrued liabilities 13,554 25,053
--------- ---------
Total current liabilities 17,186 29,366
--------- ---------
Long-term debt 11,205 11,408
Other liabilities 9,957 14,599
--------- ---------
Minority interest 64,800 63,086
--------- ---------
Stockholders' equity:
Common stock 7,665 7,665
Capital in excess of par value 153,300 149,311
Reinvested earnings, from October 1, 1990 85,795 90,239
Treasury stock, at cost (31,668) (31,668)
--------- ---------
Total stockholders' equity 215,092 215,547
--------- ---------
Total liabilities and stockholders' equity $ 318,240 $ 334,006
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ZAPATA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Revenues $ 25,759 $ 29,503
-------- --------
Expenses:
Operating 16,513 17,603
Depreciation and amortization 1,966 1,678
Selling, general and administrative 2,154 2,040
-------- --------
20,633 21,321
-------- --------
Operating income 5,126 8,182
-------- --------
Other income (expense):
Interest income 2,371 515
Interest expense (235) (255)
Equity in (loss) of unconsolidated affiliates (11,836) (1,097)
Minority interest in net income of consolidated subsidiary (1,714) --
Other, net (60) (20)
-------- --------
(11,474) (857)
-------- --------
(Loss) income before income taxes (6,348) 7,325
-------- --------
(Benefit from) provision for income taxes (1,904) 2,737
-------- --------
Net (loss) income $(4,444) $4,588
======== ========
Per share data (basic):
-------- --------
Net (loss) income per share (basic) ($ 0.19) $ 0.20
======== ========
Average common shares outstanding 23,862 22,910
======== ========
Per share data (diluted):
-------- --------
Net (loss) income per share (diluted) ($ 0.19) $ 0.19
======== ========
Average common shares and common share equivalents
outstanding 23,862 23,731
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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ZAPATA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three months ended
December 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows provided (used) by operating activities:
Net (loss) income ($4,444) $ 4,588
Adjustments to reconcile net income to net cash ------- -------
(used) provided by operating activities:
Depreciation and amortization 1,966 1,678
Gain on sale of assets -- (30)
Equity in loss of unconsolidated affiliates 11,836 1,097
Minority interest in net income of consolidated
subsidiary 1,714 --
Changes in assets and liabilities
Receivables 2,993 1,080
Inventories (2,567) 2,661
Prepaid expenses and other current assets (678) (432)
Accounts payable and accrued liabilities (7,811) (6,930)
Other assets and liabilities (7,162) (975)
-------- -------
Total adjustments 291 (1,851)
-------- -------
Net cash (used) provided by operating activities (4,153) 2,737
-------- -------
Cash flows used by investing activities:
Proceeds from sale of fixed assets, net -- 503
Proceeds from production payment receivable 580 293
Asset acquisitions -- (28,116)
Capital additions (3,281) (975)
-------- -------
Net cash used by investing activities (2,701) (28,295)
Cash flows provided (used) by financing activities:
Repayments of long-term obligations (583) (389)
Dividends paid -- (1,604)
-------- -------
Net cash provided (used) by financing activities (583) (1,993)
-------- -------
Net (decrease) in cash and cash equivalents (7,437) (27,551)
Cash and cash equivalents at beginning of period 161,804 55,598
-------- -------
Cash and cash equivalents at end of period $154,367 $28,047
======== =======
Supplemental Schedule of Noncash Investing and Financing
Activities:
Tax benefit for stock based compensation $ 3,989 $ --
======== =======
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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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
approximately 60% of the outstanding common stock of Omega Protein Corporation,
("Omega Protein,") (formerly known as Marine Genetics Corporation and Zapata
Protein Corporation) which 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. Zapata also
holds approximately 40% of the outstanding common stock of Viskase Corporation
("Viskase") (formerly known as Envirodyne Industries, Inc.) which is primarily
engaged in the business of selling food packaging products and disposable food
service supplies. Zapata also operates the internet based magazines Word and
Charged, and as of the date of this report, holds approximately $154 million
(including approximately $45 million held by Omega Protein) in certificates of
deposit and high quality commercial paper graded A2P2 or better.
On December 21, 1998 the Company's Board of Directors approved a change in
the Company's fiscal year end from September 30 to December 31, to be effective
beginning January 1, 1999.
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, 1998 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 transition period from October 1, 1998 to December 31, 1998
are not necessarily indicative of the results for any subsequent quarter or the
entire fiscal year ending December 31, 1999.
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
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amounts of 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.
Omega Protein initial 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, 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 inter-company
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).
NOTE 2. ACQUISITIONS
On November 3, 1997, Omega Protein acquired the fishing and processing
assets of American Protein, Inc. ("American Protein"), which operated 10 fishing
vessels 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 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,"). Omega
Protein accounted for this acquisition as a purchase and, therefore, Gulf
Protein's results of operations have been included in Omega Protein's Statement
of Operations since 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.
These acquisitions were financed by Zapata through working capital with a
$28.1 million
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inter-company loan to Omega Protein. 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.
On April 27, 1998, the Company acquired from Quest Communications
Corporation ("Quest") (f/k/a ICON CMT Corporation) 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 Quest entered into a multi-year services agreement obligating the Company to
purchase a minimum of $2 million in services over four years.
NOTE 3. UNCONSOLIDATED AFFILIATES
In August 1995, Zapata acquired 4,189,298 shares Viskase representing 31%
of the then outstanding common stock of Viskase for $18.8 million from a trust
controlled by Malcolm Glazer, Chairman of the Board of Zapata and a director of
Viskase. Zapata paid the purchase price by issuing to the seller a subordinated
promissory note bearing interest at prime and maturing in August 1997, subject
to prepayment at the Company's option. The Company prepaid approximately $15.6
million on the promissory note in Fiscal 1995 and the remaining $3.2 million in
Fiscal 1996. In June and July 1996, Zapata purchased 1,688,006 additional shares
of Viskase common stock in brokerage and privately negotiated transactions for
aggregate consideration of approximately $7.0 million. As a result of these
transactions, Zapata currently owns approximately 40% of the outstanding shares
of Viskase common stock.
Zapata reports its equity in Viskase results of operations on a
three-month delayed basis since Viskase financial statements are not available
to the Company on a basis that would permit concurrent reporting. In Viskase's
Quarterly Report on Form 10-Q for the quarter ended September 24, 1998, Viskase
reported it had incurred a net loss of $119.6 million, including unusual charges
of $148.6 million in connection with the restructuring of its worldwide
operations and net write-down of excess reorganization value. The charge is
primarily non-cash in nature. The charge includes $6.0 million for cash
severance and decommissioning and certain non-cash charges, including $40.1
million for Chicago plant write-offs, $3.0 million for inventory and maintenance
store charges, $8.3 million for the shutdown of certain foreign operations and
$91.2 million for the write-down of the corporations reorganization value. The
excess reorganization value, which is similar to goodwill, was established at
the time of Viskase's reorganization in 1993.
Because Zapata has not guaranteed any obligations and is not committed to
provide any financial support to Viskase, Zapata will only record its equity in
Viskase's loss for Viskase's quarter ended September 24, 1998 to the extent that
it reduces Zapata's net investment in Viskase to zero. Accordingly, Zapata
recorded a pre-tax loss of $11.8 million or $.50 per share (diluted). Zapata
will resume recording its equity in Viskase's earnings when its share of
Viskase's net
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income equals the share of net losses not recognized during the period the
equity method was suspended. In addition, due to shareholder's deficit position
and Zapata's reduction of the carrying value of its investment in Viskase to
zero, the Company discontinued recording the amortization of the excess of its
equity in Viskase's net assets over its investment.
The financial statement information presented below for Viskase is based
upon its September 24, 1998 interim report (in millions, except per share
amounts):
VISKASE COMPANIES, INC.
(Unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 24,
1998
<S> <C>
BALANCE SHEET
Current assets ................................................. $191.3
Other assets ................................................... 36.7
Property and equipment, net .................................... 370.4
------
Total assets ............................................. $598.4
======
Current liabilities ............................................ $238.8
Long-term debt ................................................. 334.9
Deferred income taxes and other ................................ 70.3
Stockholders' equity ........................................... (45.6)
------
Total liabilities and stockholders' equity ............... $598.4
======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 24,
1998
<S> <C>
INCOME STATEMENT
Revenues ................................................. $ 102.6
=======
(Loss) before income taxes ............................... $(160.8)
=======
Net (loss) ............................................... $(119.6)
=======
Net (loss) per share ..................................... $ (8.06)
=======
</TABLE>
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
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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 the Company's investment in
Envirodyne Industries, Inc. (n/k/a Viskase Corporation), in connection with the
decision to shift Zapata's business focus 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, The Malcolm Glazer Trust, was a wrongful expenditure of the Company's
funds and was designed to permit Malcolm I. Glazer to obtain personal financial
advantage to the detriment of the Company. The complaint also alleges that the
Company's Board of Directors is controlled by Malcolm I. Glazer and that then
director George Loar, (who is 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 Mr. Leffler lacked such independence
because of his status as a paid consultant to Malcolm I. Glazer, that Avram A.
Glazer lacked such independence because of familial relationship and that then
director, Ronald C. Lassiter, lacked such independence by reason of an
employment or consulting relationship with the Company. The complaint seeks
relief, including, among other things, rescission of the Company'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 the
Company's Annual Meeting of Stockholders held on July 27, 1995 and to enjoin
consummation of the Houlihan's merger and any transaction in which Malcolm I.
Glazer has an interest; and an award of unspecified compensatory damages and
expenses, including attorneys' fees. Due to the uncertainties inherent in the
litigation process, it is not possible to predict the outcome of this lawsuit.
The Company, however, believes that the complaint is without merit and is
vigorously defending itself. The plaintiffs have taken no action to prosecute
this matter for over two years. It is the opinion of the Company's management,
based on discussions with counsel, that the probability of this matter, when
finally concluded, having a material adverse effect on the Company's results of
operations, cash flows or financial position is more than remote, but less than
likely.
On November 9, 1995, a petition was filed in the 148th 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 "Holt Case") The petition names
the Company, Malcolm I. Glazer and Avram A. Glazer as defendants and alleges
several causes of action based on alleged misrepresentations 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,
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which the plaintiffs contend is approximately $6 million, (iii) money damages
based on the plaintiffs' assumptions 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 based on the assumption that the plaintiffs had 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/or material misrepresentations and
omissions by Mr. Holt. Trial is currently set for August 16, 1999. Due to the
uncertainties inherent in the litigation process, it is not possible to predict
the outcome of this lawsuit. The Company, however, believes that the petition
is without merit and is vigorously defending itself. It is the opinion of the
Company's management, based on discussions with counsel, that the probability
of the resolution of this matter having a material adverse effect on the
Company's results of operations, cash flows or financial position is more than
remote, but less than likely.
Between October 21, 1998 and December 4, 1998, 20 essentially identical,
purported securities class action lawsuits were filed against the Company and
certain of its current and former officers and directors. All of the suits were
filed in United States District Court for the Southern District of Texas,
Houston Division, and generally allege that the Company and current and former
members of its management violated Sections 10 (a) and 20 (a) of the Securities
Exchange Act of 1934 by making false and misleading statements concerning the
Company's business condition, strategy and future business prospects with
respect to the various internet acquisitions, which allegedly artificially
inflated the price of the Company's Common Stock. The putative class actions
were commenced on behalf of persons who purchased the Company's Common Stock
during the period between July 6, 1998 through October 15, 1998. The Plaintiffs
seek unspecified monetary damages and their costs and expenses incurred in the
action. The Company has not yet answered or otherwise responded to the
Complaints. The Court has ordered that all Plaintiffs file a single Consolidated
Complaint by February 18, 1999. The Company will have 45 days from the
Plaintiffs' filing to submit an Answer or otherwise move against the complaint.
If these actions were determined adversely to the Company, such judgements could
have a material adverse effect on the Company's financial position, results of
operation and cash flow. The Company disputes the allegations in all pending
putative class actions and intends to defend itself vigorously in such actions.
On August 17, 1998, LFG, Inc. d/b/a Zap Futures ("LFG") commenced an action
against Zapata and its wholly-owned subsidiary, Zap Corporation ("Zap") in the
United States District Court for the Northern District of Illinois. LFG alleges
that the Company and Zap are guilty of trademark infringement, trademark
dilution and unfair competition under the federal Lanham Act and various
Illinois statutes. The action arises out of the use by the Company and Zap of
the Zap trade name and the internet domain name "zap.com" for its internet Web
site. LFG seeks injunctive relief, unspecified compensatory damages, punitive
damages and an award of attorneys' fees. On August 21, 1998, LFG brought a
motion for a preliminary injunction, but a disposition of that motion has been
postponed pending a determination of a motion to dismiss for lack of personal
jurisdiction which the Company filed on September 21, 1998. The motion was
argued on November 25, 1998 and on January 13, 1999 the Court denied the motion.
Due to the uncertainties inherent in the litigation process, it is not possible
to predict the outcome of this lawsuit. The Company, however, disputes the
allegations made in this action and is vigorously
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defending itself. It is the opinion of the Company's management, based on
discussions with counsel, that the possibility is remote that the matter, when
finally concluded, will have a material adverse effect on the results of
operations, cash flows or financial position of the Company. Future events and
circumstances however, could alter management's belief.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of its business. The Company
maintains insurance coverage against such potential ordinary course claims in an
amount which it believes to be adequate. While the results of any ultimate
resolution can not be predicted, in the opinion of the Company's management,
based on discussions with counsel, except as for the matters described above,
the likelihood of uninsured losses, having a material adverse effect on Zapata's
results of operation, cash flows or financial position is remote.
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 ("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
Viskase Companies, Inc., and disclosed under the caption "Significant Factors
That Could Affect Future Performance and Forward-Looking Statements" appearing
in Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operation" of the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1998 filed with the Commission. 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 as well as the Company's statements concerning the state of the
Company's Year 2000 readiness are intended to identify forward-looking
statements. The Company assumes no obligation to upgrade forward-looking
statements.
GENERAL
On November 3, 1997, Omega Protein acquired for $14.5 million in cash, the
fishing and processing assets of American Protein, Inc. ("American Protein"),
which operated 10 fishing vessels and a menhaden processing plant in the
Chesapeake Bay area (the "American Protein Acquisition"). American Protein's
facilities were located in close proximity to Omega Protein's Reedville,
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Virginia facility. Shortly after closing this acquisition, Omega Protein closed
the American Protein 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 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 long term liabilities. 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. The Gulf Protein transaction has
been accounted for as a purchase and, therefore, results of operations for this
operation have been included in Omega Protein's results from the closing date.
On April 8, 1998, Omega Protein completed its 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 over-allotment option to acquire
1,275,000 additional shares at the same gross price. Of the 9,775,000 shares
sold in the 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. Following the Offering, Zapata reports
Omega Proteins' results of operations on a consolidated basis eliminating all
inter-company transactions and recording a minority interest. In connection with
the Offering, Zapata received $76.6 million from the sale of Omega Protein
shares after deducting commissions and selling expenses.. Additionally, Omega
Protein received $68.0 million from the issuance of shares after deducting
commissions and offering expenses. Omega Protein used a portion of its net
proceeds to repay approximately $33.3 million of inter-company indebtedness and
$2.1 million in bank debt. Neither Zapata nor Omega Protein have used the
balance of the net proceeds from the Offering. Pending use, Zapata and Omega
Protein has invested the net proceeds in certificates of deposit and high
quality commercial paper graded A2P2 or better. As a result of the Offering,
Zapata recorded a gain in the third quarter of 1998 net of taxes of $55.3
million or $2.31 per share (diluted).
ZAPATA CORPORATION CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES FOR THE
TRANSITION PERIOD ENDED DECEMBER 31, 1998 AND THE QUARTER ENDED DECEMBER 31,
1997
Prior to the Omega Protein Offering, Zapata, as the sole shareholder of
Omega Protein caused cash to be moved between the Company and Omega Protein as
each company had cash needs. As a result of the Offering, Zapata and Omega
Protein are now separate public companies and each entity's capital resources
and liquidity are legally independent of the other. The assets of Omega Protein
are now dedicated to its operations and are not expected to be readily available
for the general corporate purposes of Zapata. Accordingly, following the
Offering and until the Company acquires another operating company, it's primary
sources of additional cash will include existing cash and cash equivalent
balances, sales of equity securities, interest earned on cash equivalents and
dividends earned on equity securities. For the foreseeable future, the Company
does
13
<PAGE> 14
not expect to receive cash dividends on its holdings of Omega Protein common
stock or Viskase common stock.
Zapata's consolidated working capital totaled $193.2 million and $62.0
million as of December 31, 1998 and 1997 respectively. Substantially all of the
Company's consolidated cash and cash equivalent balances of $154.4 million
(including $44.8 held by Omega Protein) as of December 31, 1998 were deposited
with three major banking institutions in interest-bearing accounts or invested
in high grade commercial paper rated A2P2 or better.
Zapata's unrestricted cash balance totaled $154.4 million at December
31, 1998, down from $161.8 million at September 30, 1998. The decrease was due
primarily to increases in Omega Protein's inventory, cash payments to suppliers,
and capital additions. Zapata's working capital was increased to $193.2 million
at December 31, 1998 compared to $188.2 million at September 30, 1998.
Cash provided by operating activities decreased $6.9 million for the three
months ending December 31, 1998, from $2.7 million for the first three months of
Fiscal 1997, due primarily to the increases in inventory at Omega Protein and
cash payments to suppliers by Omega Protein.
Primarily reflecting capital expenditures by Omega Protein, investing
activities used $2.7 million during the three months ending December 31, 1998 as
compared to $28.3 million during the corresponding 1997 period. The 1997 amount
reflects the Omega Protein acquisitions of American Protein, Inc. and Gulf
Protein, Inc., respectively.
Financing activities used $583,000 for debt repayment during the three
months ended December 31, 1998 versus a use of $2.0 million during the same
period in the prior year. Financing activities in the three months ended
December 31, 1997 included repayment of debt obligations and payment of
dividends.
On July 6, 1998, Zapata's Board of Directors approved a new stock
repurchase program allowing Zapata to repurchase up to five million shares of
its common stock. As of February 12, 1999, Zapata had not repurchased any shares
pursuant to such authorization. To the extent that shares are repurchased under
the program, Zapata's liquidity and working capital will be correspondingly
reduced. Zapata's liquidity and working capital could also be significantly
affected by additional capital commitments in connection with its internet
initiative or other acquisition or business opportunities. In such event, Zapata
may need to raise additional capital through the issuance of equity or debt.
There is no assurance however, that such capital will be available at the time,
in the amounts necessary or with terms satisfactory to Zapata.
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<PAGE> 15
Zapata believes that existing cash and cash equivalents will be sufficient
to meet Zapata's requirements (including any purchases made by Zapata pursuant
to its current stock repurchase program) at least through the end of 2000.
OMEGA PROTEIN CORPORATION LIQUIDITY AND CAPITAL RESOURCES
Omega Protein's primary sources of liquidity and capital resources have
been cash flows from operations, borrowings from Zapata prior to the Omega
Offering, 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. Omega expects to finance future expenditures
through internally generated cash flows and, if necessary, through funds
available from the credit facility and/or Title XI facilities described below.
Under a program offered through NMFS pursuant to Title XI of the Marine
Act of 1936 ("Title XI"), Omega has the ability to secure loans through lenders
with terms generally ranging between 12 and 20 years at interest rates between
6% and 8% per annum which are enhanced with a government guaranty to the lender
for up to 80% of the financing. Omega's current Title XI borrowings are secured
by liens on 14 fishing vessels and mortgages on its Reedville, Virginia and
Abbeville, Louisiana plants. In 1996, Title XI borrowing was modified to permit
use of proceeds from borrowings obtained through this program for shoreside
construction. Omega is currently authorized to receive up to $20.6 million in
loans under this program. To date, Omega 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. Investing activities used
$3.0 million in the acquisition of plant and equipment. Financing activities
used $320,000 in repayment of debt principal.
Investing activities used $3.0 million in the transition period ended
December 31, 1998 and $28.7 million during the quarter ended December 31, 1997.
The higher 1997 investing activities reflect the American Protein Acquisition
and the Gulf Protein Acquisition. Other than these acquisitions, Omega's
investing activities consisted mainly of capital expenditures for equipment
purchases and replacements in the three months 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 $277 million
provided by net financing activities during the quarter ended December 31, 1997.
Financing activities provided $27.7 million during the quarter ended December
31, 1997, due primarily to an acquisition loan from Zapata.
15
<PAGE> 16
Omega Protein's April 1998 initial public offering generated net proceeds
of approximately $68.0 million (after deducting underwriting discounts and
commissions and offering expenses). Of these proceeds, Omega 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 American
Protein Acquisition and the Gulf Protein Acquisition, respectively, and the
balance was primarily incurred to pay Omega's federal income taxes. Omega has
invested the remaining net proceeds in short-term government securities and
interest bearing cash equivalents pending their use. Omega intends to use these
proceeds to fund possible acquisitions and other capital expenditures as well as
for general corporate purposes.
On August 11, 1998 Omega entered into a $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 Omega 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's election, either (I) the bank's
prime rate less 75 basis points, or (ii) LIBOR plus a margin based on the
Omega's financial performance. The Credit Facility is collateralized by all of
the Omega's trade receivables, inventory and specific computer equipment. Omega
and its subsidiaries are required to comply with certain financial covenants,
including maintenance of a minimum tangible net worth, debt to tangible new
worth ratio, funded debt to cash flow ratio and fixed charges ratio, and certain
other covenants. As of December 31, 1998 and September 31, 1998, Omega had no
borrowings outstanding under the Credit Facility.
Omega has reported that it believes that the net proceeds from the
Offering, together with 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
1999.
ZAPATA CORPORATION CONSOLIDATED RESULTS OF OPERATIONS FOR THE TRANSITION PERIOD
ENDED DECEMBER 31, 1998 AND THE QUARTER ENDED DECEMBER 31, 1997
Zapata's experienced a net loss of $4.4 million for the transition period
ending December 31, 1998 compared to net income of $4.6 million for the first
quarter of Fiscal 1997. The loss was primarily due to Zapata's recognition of
its equity in the loss of Viskase of $11.8 million, (for further explanation of
the Viskase charge see Note 3 to the Company's Consolidated Financial Statements
included elsewhere herein) offset by $5.1 million in operating income and $2.4
million in interest income. Revenues totaled $25.8 million during the 1998
transition period versus $29.5 million during the 1997 quarter. This decline in
revenue is wholly attributable to Omega Protein. The Company's operating income
for the 1998 transition period decreased to $5.1 million from $8.2 million for
the corresponding 1997 quarter. Results reflect a decrease in oil sales by Omega
Protein, and costs associated with the operations of Word and
16
<PAGE> 17
Charged.
The Company's interest income was higher in the current period as compared
to the corresponding prior-year period reflecting higher levels of cash. The
Company's interest expense was lower in the current period as compared to the
corresponding prior-year period, reflecting lower levels of indebtedness. The
Company also recorded a net tax benefit of $1.9 million in the 1998 transition
period versus a tax provision of $2.7 million in the 1997 quarter. The $1.9
million benefit was attributable to loss from operations including the equity
loss on the investment in Viskase. The $2.7 million provision in 1997 was
attributable to income from operations which included a gain on the sale of
certain real estate.
OMEGA PROTEIN RESULTS OF OPERATIONS
Omega Protein had operating income of $6.3 million on revenues of $25.8
million in the transition period ended December 31, 1998 versus operating income
of $9.1 million on revenues of $29.5 million in the quarter ended December 31,
1997.
The decrease in sales and revenue was attributable to a 33.0% lower oil
inventory position carried over from Fiscal 1998 as compared to Fiscal 1997.
Correspondingly, sales volumes of Omega's oil decreased 39.8% in the transition
period ended December 31, 1998 as compared to the previous quarter ended
December 31, 1997. Fishmeal sales volumes increased approximately 8% from the
prior year's quarter and sales prices were relatively unchanged. Crude fish oil
prices increased approximately 19.9% over the prior year's quarter.
Cost of sales, including depreciation and amortization, for the period
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 costs
of sales were higher in the quarter ended December 31, 1998 as compared to the
quarter ended December 31, 1997, due mainly to higher cost inventories carried
forward into the 1998 quarter. During August and September of 1998, fishing
operations were hampered by unusually inclement weather which resulted in higher
cost inventory.
Selling, general and administrative expenses increased $780,000 or 67.6%
from $1.2 million in the transition period ended December 31, 1998 to $1.9
million in the quarter ended December 31, 1998. The increase in expense was due
primarily to increased personnel and related marketing costs associated with the
Company's efforts to enter the U.S. food market with its refined menhaden oil.
THE YEAR 2000
The Year 2000 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 to interpret
17
<PAGE> 18
dates beyond the year 1999, which could cause a system failure or other computer
errors leading to disruptions in operations.
Omega Protein employs a number of IT systems, which are used by both
Omega Protein and Zapata including, without limitation, computer networking
systems, financial systems and other similar systems.
Omega Protein has reported that it is aware of the issues surrounding the
Year 2000 and the problems that may occur. In 1997, Omega Protein developed a
program for Year 2000 compliance. Since 1997, Omega Protein has converted most
of its computer information systems to enable proper processing of critical
management information systems ("MIS") related to the Year 2000 issue and
beyond. Critical MIS systems consist of software programs such as the operating
system, spreadsheets, accounting and financial programs. To conform the
remaining system to be Year 2000 compliant requires a new purchasing
application. Omega Protein has selected a new purchasing system and
implementation is expected to be complete by April 1999. Testing methodology
involved changing the date on the systems being tested to be in the Year 2000
and then exercising all relevant applications to verify Year 2000 compliance.
The cost of Omega Protein's conversion was immaterial and has been expensed.
Omega Protein's current estimates indicate that the costs of addressing
potential problems are not expected to have a material impact upon Omega
Protein's financial position, results of operations or cash flows in future
periods. To date, the cost of Omega Protein's Year 2000 compliance program
(including, software conversion) has been immaterial.
Omega Protein has reported that it 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 Omega Protein 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
Omega Protein. External relationships to Omega Protein such as vendors and
customers may also impact Omega Protein by their inability to deliver goods and
services required by Omega Protein to operate. Customers could impact Omega
Protein by their inability to operate, reducing the sale of product, or their
inability to pay Omega Protein for products purchased. Omega Protein has decided
to address this issue in Fiscal 1999 by identifying major vendors and customers
and sending surveys to discover their level of Year 2000 compliance. Major
vendors are defined as those that provide critical goods or services to Omega
Protein or those that provide critical components to Omega Protein (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 Year 2000
problem (mainly large domestic and foreign industrial and commercial customers).
18
<PAGE> 19
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 Protein's systems rely will be timely converted or that a failure to
convert by another company or that a conversion that is incompatible with Omega
Protein's systems, would not have a material adverse affect on Omega Protein.
At this point in time, Omega Protein has not engaged any firm, nor does it
plan to engage any firm, to perform an independent verification and validation
of Omega Protein's Year 2000 compliance. At present, Omega Protein does not have
a contingency plan in place to specifically cover the Year 2000 issues. However,
Omega Protein's management continues to evaluate its systems and expects that
all of is systems will be compliant prior to the Year 2000.
Zapata is also in the process of developing a plan to acquire its own
hardware and software systems for its business and, prior to purchasing any such
hardware or software, it will assess whether such component will properly
recognize dates beyond December 31, 1999. Zapata does not anticipated that any
hardware or software that it will purchase or license will have material
problems in this regard as the Company will only purchase or license current
versions of hardware and software provided by major vendors. Likewise, Zapata
does not anticipate that any material issues will arise with respect to Omega
Protein in this regard before Zapata has developed its own systems so that it
may operate independently of Omega Protein. If Zapata becomes concerned that
Omega Protein is not Year 2000 compliant or has what Zapata believes to be
inadequate programs to become Year 2000 compliant prior to Zapata implementing
its own computer networking, financial and other systems, Zapata will accelerate
its timetable for moving to it own systems so as to reduce or eliminate its
reliance on Omega Protein. In such event, Zapata believes that it has adequate
financial and other resources to accomplish this plan. With respect to non-IT
systems containing embedded electronic circuits, Zapata does not itself have any
such systems.
19
<PAGE> 20
PART II. - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
Current Report on Form 8-K, filed December 24, 1998 reporting that
effective on January 1, 1999 the Company's year would change from
September 30 to December 31.
20
<PAGE> 21
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)
February 16, 1999 By: /s/ LEONARD DISALVO
--------------------------------------------
(Vice President and Chief Financial Officer)
21
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