UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14C

 

INFORMATION STATEMENT PURSUANT TO

 

SECTION 14 OF THE SECURITIES EXCHANGE ACT OF 1934

 

Check the appropriate box:

 

o  Preliminary Information Statement

o  Confidential, For Use of the Commission Only (as permitted by Rule 14c-5(d)(2))

þ  Definitive Information Statement

 

ZAPATA CORPORATION

(Name of Registrant as Specified in its Charter)

 

Payment of Filing Fee (Check the appropriate box):

 

o  No fee required

 

 

 

 

Common Stock, par value $0.01, of Omega Protein Corporation

 

 

14,501,000

 

 

(i)  9,268,292 shares at $5.125 per share or $47,500,000, negotiated price.

 

 

(the aggregate amount of cash to be received by the Registrant)

 

 

$71,047,200

 

 

$7,602

 

 

 

 

 

 

 

 

 

 

 

ZAPATA CORPORATION
100 Meridian Centre, Suite 350
Rochester, New York 14618

 

October 31, 2006

 

Dear Zapata Stockholder:

 

We are pleased to inform you that we have entered into a stock purchase agreement dated September 8, 2006 with our majority owned subsidiary, Omega Protein Corporation, a Nevada corporation, which provides for the repurchase of shares of Omega common stock held by us. Under this agreement, Omega has agreed to repurchase 9,268,292 Omega shares from us for a purchase price of $5.125 per share, or $47.5 million in the aggregate, in cash. In the agreement we also granted Omega a call option to acquire for an exercise price of $4.50 per share, payable in cash, not less than all of our remaining 5,232,708 Omega shares which we do not dispose of prior to the exercise of the option. The option is exercisable from the 270^th day until the 390^th day after the initial closing under the stock purchase agreement. Our Board of Directors has authorized us to seek purchasers for our remaining 5,232,708 Omega shares at a price of $4.50 per share or more. There is no assurance, however, that we will be able to sell our remaining Omega shares either to third parties or to Omega pursuant to its call option.

 

Our majority stockholder, the Malcolm I. Glazer Family Limited Partnership, which holds approximately 51.2% of our outstanding voting securities, has approved by written consent the sale of our Omega shares. The sale proposal contemplated by the written consent, if not revoked or terminated will not be completed until twenty (20) days after the date of this Information Statement is sent or given to our stockholders. We expect the transaction to close in the fourth quarter of 2006.

 

The sale of our Omega shares, if completed, will fulfill our process of monetizing the securities of our operating subsidiaries. Following the sale of our Omega shares, we plan to continue to operate Zapata as a public company and to pursue acquisitions of operating companies and other strategic opportunities that will put us in a position to enhance stockholder value.

 

The attached Information Statement and the accompanying documents provide detailed information about the sale of our Omega shares. Please read these documents carefully in their entirety. You may also obtain information about us from publicly available documents that have been filed with the Securities and Exchange Commission.

 

Chairman of the Board,

President and Chief Executive Officer

ZAPATA CORPORATION
100 Meridian Centre, Suite 350
Rochester, New York 14618

 

This Information Statement is being provided to you by the

Board of Directors of Zapata Corporation

 

This Information Statement is being furnished by our Board of Directors to the holders of our common stock as of October 9, 2006 to provide information with respect to the approval by written consent of our majority stockholder, the Malcolm I. Glazer Family Limited Partnership, of the terms and conditions of a stock purchase agreement, dated September 8, 2006, between us and our majority-owned subsidiary, Omega Protein Corporation, or Omega. We currently hold 14,501,000 shares of Omega common stock, or 58% of Omega’s outstanding common stock.

 

The stock purchase agreement provides for Omega’s repurchase from us of 9,268,292 Omega shares at a purchase price of $5.125 per share, or $47.5 million in the aggregate, payable in cash, and the grant to Omega of a call option to purchase all, but not less than all of our remaining Omega shares held on the date of exercise at a price of $4.50 per share, payable in cash. The call option is exercisable by Omega beginning on the 270^th day and ending on the 390^th day after the sale of our 9,268,292 Omega shares has been completed, subject to certain conditions. In addition, our majority stockholder has approved the sale of our remaining 5,232,708 Omega shares to any third party at a price approved by our Board of Directors and the sale of all our Omega shares in a “superior proposal,” as defined in the stock purchase agreement, if presented to us and our Board of Directors elects to accept the superior proposal and terminate the stock purchase agreement. Lastly, we may also distribute all or a portion of our remaining Omega shares to our stockholders as a dividend. Our Board of Directors decided to obtain the written consent of our majority stockholder in order to avoid the costs and management time required to hold a special meeting of stockholders.

 

All required corporate approvals for the proposed sale of our Omega shares have been obtained, subject to furnishing this Information Statement and twenty (20) days elapsing from its mailing to our stockholders. This Information Statement is furnished solely for the purpose of informing stockholders of the approval of the proposed sale by our Board of Directors, and majority stockholder, the Malcolm I. Glazer Family Limited Partnership. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.

 

Empire Valuation Consultants, LLC, or Empire, has delivered to our Board of Directors its written opinion to the effect that, as of the date of the stock purchase agreement, the purchase price, call option price, as well as any subsequent public or private sales of our remaining Omega shares at a price equal to or in excess of $4.50 per share, is fair to Zapata and its stockholders from a financial point of view. The full text of Empire’s written opinion containing the assumptions made, the matters considered and the scope of the opinion is included in this Information Statement as Appendix C. Stockholders are urged to read the Empire opinion in its entirety.

 

We have asked brokers and other custodians, nominees and fiduciaries to forward this Information Statement to the beneficial owners of our common stock held as of October 9, 2006 by such persons and will reimburse such persons for out-of-pocket expenses incurred in forwarding such material.

 

This Information Statement is being first sent or given to stockholders on November 6, 2006.

 

The following summary highlights material information from this Information Statement regarding the sale to our majority-owned subsidiary, Omega Protein Corporation, of 9,268,292 shares of Omega common stock held by us and the potential sale of our remaining 5,232,708 Omega shares either pursuant to a call option granted to Omega at a price of $4.50 per share during the period from the 270^th day to the 390^th day following the closing on Omega’s initial purchase of our shares, or to a third party at any time at a price of $4.50 per share or more. We are also authorized to sell all of our Omega shares in a “superior proposal” (as defined in the stock purchase agreement) if our Board of Directors determines to do so and terminates the stock purchase agreement. Lastly, we may distribute to our stockholders a dividend of all or a portion of our remaining Omega shares that are not sold to Omega in the initial closing. To fully understand the transaction, you should carefully read the entire Information Statement and the referenced documents and reports, including the stock purchase agreement attached as Appendix A. We have included cross-references in this summary which direct you to more complete descriptions of the topics that we have summarized.

 

Parties to the Sale

 

The seller is Zapata, a Nevada corporation, and the purchaser is Zapata’s majority-owned subsidiary, Omega, a Nevada corporation. Zapata and Omega are both public companies whose stock trades on the New York Stock Exchange under the symbols, “ZAP” and “OME,” respectively. See “THE PROPOSED SALE OF OUR OMEGA SHARES — The Parties to the Stock Purchase Agreement.”

 

Assets to Be Sold By Us

 

We are selling 9,268,292 Omega shares in an initial sale to Omega. We may sell our remaining 5,232,708 Omega shares pursuant to a call option granted to Omega which is exercisable, subject to certain conditions, during the period from the 270^th day to the 390^th day following the closing of our initial sale to Omega. We may also, at any time prior to the exercise of the call option, sell these remaining Omega shares to a third party at a price of $4.50 per share or more. Additionally, we may dispose of these remaining Omega shares in a dividend distribution to our stockholders. Finally, if a third party presents us with a proposal to acquire our Omega shares which our Board of Directors deems to be a “superior proposal,” as defined in the stock purchase agreement, we may terminate the stock purchase agreement and sell our Omega shares to the third party at the election of our Board of Directors.

 

Our Future Plans

 

Following our sale of 9,268,292 Omega shares to Omega, we will hold 5,232,708 Omega shares, or approximately 33% of Omega’s outstanding common stock, 98% of Zap.Com’s outstanding common stock and approximately $123 million in cash and cash equivalents. Our Board of Directors has authorized us to seek one or more buyers to purchase our remaining Omega shares and to pursue acquisitions or other strategic opportunities in an effort to enhance stockholder value. We are likely to use some or all of our cash and cash equivalents to fund, in whole or part, one or more acquisitions or related transactions. There are no limits on the types of businesses or fields in which we may make our acquisitions.

 

Background and Reasons for the Sale

 

Our Board of Directors concluded that the sale of our Omega shares is in the best interests of Zapata. Our Board of Directors considered numerous factors in making such a determination, including the factors described under the heading “THE PROPOSED SALE OF OUR OMEGA SHARES — Background of the Sale” and “— Reasons for the Sale.”

 

Structure of the Transaction

 

The transaction with Omega is structured as a stock repurchase in which Omega is obligated to purchase from us 9,268,292 Omega shares upon the satisfaction of closing conditions and has a call option to repurchase our remaining shares, subject to certain terms and conditions. On or before October 23, 2006, we and Omega are obligated to make escrow deposits with Manufacturers & Traders Trust Company, as escrow agent, which in our case is the stock certificate for the 9,268,292 Omega shares being purchased at the initial closing and in Omega’s case is immediately available funds in the amount of the $47.5 million purchase price. Both deposits were made as

of the October 23, 2006 deadline. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Description of the Terms of the Stock Purchase Agreement — Structure of the Sale and Price.”

 

The Purchase Price

 

The purchase price under the stock purchase agreement for our 9,268,292 Omega shares is $5.125 per share, or $47.5 million in the aggregate. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Description of the Terms of the Stock Purchase Agreement — The Purchase Price.”

 

Omega’s Debt Financing

 

Omega’s obligation to consummate the initial purchase of 9,268,292 Omega shares is subject to the consummation of the financing contemplated by the commitment letter dated September 8, 2006 between Omega and Ableco Finance LLC, an affiliate of Cerberus Capital Management, L.P., to provide Omega with up to $65 million in credit facilities. On October 20, 2006, Omega entered into a financing agreement as contemplated in the commitment letter in which Ableco and other financial institutions agreed to lend Omega $65 million. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Description of the Terms of the Stock Purchase Agreement — Omega’s Financing of the $47.5 Million Purchase Price.”

 

Regulatory Approvals

 

Within 30 days following our sale to Omega of 9,268,292 Omega shares, Omega must notify the United States Department of Transportation, Maritime Administration, of the change in ownership of its stock pursuant to 46 C.F.R Section 356.5. This is not a condition to the closing as it is not required to take place until after the closing. Except for this filing and the filing of this Information Statement with the SEC (and such other reports as may be required, if any, under the Exchange Act) we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the sale by us of all our Omega shares. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Regulatory Approvals.”

 

Omega Protein Board of Directors Resignations

 

Pursuant to the stock purchase agreement, Zapata has agreed to deliver the resignations, effective as of the closing date, from the Omega board of directors of its two representatives, Leonard DiSalvo and Avram A. Glazer. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Description of the Terms of the Stock Purchase Agreement — Conditions to Closing of the Sale.”

 

Conditions to Closing

 

Before Omega and Zapata are obligated to complete the initial the purchase and sale of 9,268,292 Omega shares, certain closing conditions must be satisfied or waived. These conditions are described in this Information Statement in the section entitled “THE PROPOSED SALE OF OUR OMEGA SHARES — Description of the Terms of the Stock Purchase Agreement — Conditions to Closing of the Sale,” “—  Omega’s Financing of the $47.5 Million Purchase Price.”

 

Closing of the Sale

 

The purchase and sale of Zapata’s 9,268,292 Omega shares is scheduled to close on the second business day after the conditions set forth in the stock purchase agreement have been satisfied or waived. We expect this to occur in the fourth quarter of 2006. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Description of the Terms of the Stock Purchase Agreement — Closing of the Sale,” and “— Conditions to Closing of the Sale.”

 

Termination of the Agreement

 

The parties may terminate the stock purchase agreement under certain circumstances, including if our initial sale of 9,268,292 Omega shares is not completed on or before December 7, 2006 or, if there is a delay in finalizing any comments by the SEC to this Information Statement, January 21, 2007. We may also terminate the stock purchase agreement for several reasons, including if our Board of Directors accepts a “superior proposal,” as defined in the stock purchase agreement. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Description of the Terms of the Stock Purchase Agreement — Termination of the Agreement.”

Expense Reimbursement

 

Omega may be required to reimburse us for our actual out-of-pocket documented expenses up to a maximum of $1 million if we terminate the stock purchase agreement based on Omega’s material breach of the stock purchase agreement. We may be required to reimburse Omega for its actual out-of-pocket documented expenses up to a maximum of $1.3 million if we terminate the stock purchase agreement, or if our Board of Directors withdraws or modifies its approval of the stock purchase agreement in a manner adverse to Omega, in order to accept a “superior proposal” (as defined in the stock purchase agreement) to purchase our Omega shares that are to be sold at the initial closing or we materially breach the agreement. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Description of the Terms of the Stock Purchase Agreement — Expense Reimbursement.”

 

Omega’s Call Option

 

Pursuant to the stock purchase agreement, we granted Omega a call option entitling Omega, at its election and subject to certain conditions, to purchase, all, but not less than all, of our remaining 5,232,708 Omega shares not initially purchased by Omega and which continue to be held by us on the date the option is exercised at a price of $4.50 per share, payable in cash. The option may only be exercised, subject to certain conditions, from the 270th day to the 390th day following the consummation of Omega’s initial purchase of shares from us pursuant to the stock purchase agreement. If the call option is exercised, the closing with respect thereto must occur within two business days of Omega’s notice to us that it is exercising the call option. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Description of the Stock Purchase Agreement - Call Option.”

 

Zapata’s Voting Agreement

 

Following the sale of our 9,268,292 Omega shares, the stock purchase agreement requires that we vote all of our remaining Omega shares and any other Omega shares that we have the right to vote or direct the vote of in favor of the directors nominated by Omega’s board of directors or a committee thereof and in favor of all actions approved and recommended by Omega’s board of directors. This arrangement does not apply, however, to any merger, consolidation, stock exchange, asset sale, dissolution, recapitalization, restructuring, charter amendment or similar transaction which would result in us receiving less than the $4.50 per share in cash. We have appointed Omega’s Chief Executive Officer and Chief Financial Officer as our proxy to vote our Omega shares consistent with the voting agreement. The voting agreement and proxy terminate upon the occurrence of certain events, including Omega’s failure to achieve EBITDA, as defined in the stock purchase agreement, of $15 million for any 12 calendar month period, a continuous default with respect to its debt and decline in the trading price of Omega’s stock price below $4.50 per share for 10 consecutive trading days after Omega’s call option expires. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Description of the Stock Purchase Agreement — Voting Agreement.”

 

Omega’s Obligation to File a Shelf Registration on Form S-3 and to Assist Zapata in Sale of its Remaining Omega Shares

 

Under the stock purchase agreement, Omega is required to promptly file with the Securities and Exchange Commission, or the SEC, and to exercise reasonable best efforts to have declared effective as soon as possible a shelf registration statement on Form S-3 for the resale by us of all of our remaining 5,232,708 Omega shares following the sale of our 9,268,292 Omega shares. Upon being declared effective, Omega is obligated to maintain such effectiveness for a period of 390 days, subject to certain conditions. Omega is also obligated to assist us in the sale of our remaining Omega shares. On October 18, 2006, we entered into a letter amendment to the stock purchase agreement with Omega suspending Omega’s obligation to file the shelf registration statement on Form S-3. We further agreed with Omega, that Omega would file the Form S-3 with the SEC by the new deadline set by us, notification of which will precede the new deadline by at least 15 business days and will be given in writing. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Description of the Stock Purchase Agreement — Omega Covenants.”

 

Amended and Restated Registration Rights Agreement

 

Concurrent with the sale of our 9,268,292 Omega shares, Omega is required to enter into an amended and restated registration rights agreement with us that will amend and restate our April 1998 registration rights agreement. The amended and restated registration rights agreement will provide us with more favorable demand and piggyback registration rights than are contained in the original registration rights agreement. See “THE

PROPOSED SALE OF OUR OMEGA SHARES — Description of the Stock Purchase Agreement — Amended and Restated Registration Rights Agreement.”

 

Fairness Opinion of Empire Valuation Consultants, LLC

 

We retained Empire Valuation Consultants, LLC, or Empire, to provide a financial fairness opinion to our Board of Directors in connection with the sale of our Omega shares. At the meeting of our Board of Directors on September 7, 2006, Empire rendered its oral opinion, subsequently confirmed in writing, that as of September 7, 2006, and based upon and subject to the assumptions, qualifications and limitations set forth therein, the purchase price to be paid to Zapata for its Omega shares at the initial closing under the stock purchase agreement and the sale of our remaining Omega shares pursuant to the call option granted under the stock purchase agreement or to a third party at a price equal to or in excess of $4.50 per share was fair from a financial point of view to Zapata and its stockholders. The full text of Empire’s written opinion, dated September 8, 2006, which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations of the reviews undertaken in rendering the opinion, is attached as Appendix C to this Information Statement. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Fairness Opinion”

 

Stockholder Written Consent to the Sale Proposal

 

Under Nevada law, the sale of “all or substantially all” of our assets requires the affirmative vote of the holders of at least a majority of our outstanding common stock. Omega represents a substantial portion of our assets, revenues and operating income. Although we are only selling a portion of our Omega shares in the initial closing and we will continue to own substantial assets, including cash and cash equivalents, to remove any doubt whether the transaction has been properly approved under Nevada law, we obtained a written consent dated September 8, 2006 from our majority stockholder, The Malcolm I. Glazer Family Limited Partnership, which holds approximately 51.2% of our outstanding shares of common stock, approving the sale of our Omega shares described in this Information Statement. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Stockholder Consent to the Sale Proposal”

 

Accounting Treatment

 

We anticipate that the sale of 9,268,292 shares of our Omega shares to Omega will result in the recognition of a net loss for book purposes. The ultimate amount of such loss will not be known until the conclusion of the transaction since Omega’s financial statements will continue to be consolidated with ours until the closing of the sales of these shares. Generally, the ultimate loss recognized on the transaction will increase (decrease) as we consolidate net income (loss) related to Omega’s operations.

 

If the transaction had closed on June 30, 2006, we estimate that the loss for book purposes would have been approximately $6.2 million, net of tax effects. This loss includes an impairment loss on our remaining shares of approximately $3.7 million, net of taxes, which would be recorded in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Subsequent to the transaction, we will own approximately 33% of Omega’s common stock and will account for our remaining investment in Omega under the equity method. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Accounting Treatment.”

 

Material Federal Income Tax Consequences

 

Generally, as the expected sale proceeds of $47.5 million exceeds our original tax basis of $33.6 million, the sale will be taxable to us. After adjusting for transaction closing costs, we estimate a taxable gain from the sale of approximately $13.7 million. Because we have adequate loss carryforwards, we expect that our current taxes payable related to the sale will be limited to approximately $274,000. In addition, there will be no direct federal income tax consequences to the holders of our common stock. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Material Federal Income Tax Consequences.”

 

No Dissenters’ Rights

 

Under Nevada law our stockholders do not have dissenters’ rights or the right to demand an appraisal and receive payment of the fair value of their shares as a result of the sale. See “THE PROPOSED SALE OF OUR OMEGA SHARES — No Dissenters’ Rights.”

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward-looking statements in this Information Statement on Schedule 14C are intended to be subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based upon certain assumptions and describe future plans, strategies and expectations, are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans,” “seeks,” “estimates,” “projects,” “may” or similar expressions. Investors are cautioned that all forward-looking statements involve inherent risks and uncertainties. Actual results may differ materially from the results discussed in the forward-looking statements as a result of important risk factors. These risks include, without limitation, the possibility that the sale will not close or that the closing of the sale may be delayed, and those risks described under the caption of “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and other risks identified from time to time in our subsequent filings with the SEC, press releases and other communications by us, Omega or Zap.Com. We believe that forward-looking statements made by us 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. Further, any forward-looking statement speaks only as of the date on which it is made, and we assume no obligation to update forward-looking statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or to update the reasons actual results could differ from those projected in the forward-looking statements.

 

Zapata, a Nevada corporation which is a holding company, is the seller. Zapata’s corporate office is located at 100 Meridian Centre, Suite 350, Rochester, New York 14618 and its telephone number is (585) 242-2000. Zapata’s common stock trades on the New York Stock Exchange under the symbol “ZAP.”

 

Zapata currently owns approximately 58% of the outstanding common stock of Omega, a Nevada corporation described in more detail below and 98% of Zap.Com, which is a public shell company and trades on the OTCBB under the symbol “ZPCM.” In addition, Zapata currently holds approximately $75 million in cash and cash equivalents, at the corporate level.

 

Omega, our majority-owned subsidiary, is the purchaser. Omega is the largest processor, marketer and distributor of fish meal and fish oil products in the United States. Omega produces and sells a variety of protein and oil products derived from menhaden, a species of wild herring-like fish found along the Gulf of Mexico and Atlantic coasts. The fish are not genetically modified or genetically enhanced. Omega processes several grades of fish meal, as well as fish oil and fish solubles. Omega’s fish meal products are primarily used as a protein ingredient in animal feed for swine, cattle, aquaculture and household pets. Fish oil is utilized for animal and aquaculture feeds, industrial applications, additives to human food products and as dietary supplements. Omega’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer.

 

Under Omega’s patented production process, Omega produces OmegaPure^®, a taste-free, odorless refined fish oil which is the only marine source of long-chain Omega-3’s directly affirmed by the U.S. Food and Drug Administration as a food ingredient that is Generally Recognized as Safe. All of Omega’s products contain healthy

long-chain Omega-3 fatty acids. Omega-3 fatty acids are commonly referred to as “essential fatty acids” because the body does not produce them. Instead, essential fatty acids must be obtained from outside sources, such as food or special supplements. Long-chain Omega-3s are also commonly referred to as a “good fat” for their health benefits, as opposed to the “bad fats” that create or aggravate health conditions through long-term consumption. Scientific research suggests that long-chain Omega-3s as part of a balanced diet may provide significant benefits for health issues such as cardiovascular disease, inflammatory conditions and other ailments.

 

Omega operates four menhaden processing plants: two in Louisiana, one in Mississippi and one in Virginia. Omega also operates a Health and Science Center in Reedville, Virginia, which provides 100-metric tons per day fish oil processing capacity for Omega’s food grade oils and industrial and feed grade oils.

 

Omega’s main office is located at 2101 City West Boulevard, Building 3, Suite 500, Houston, Texas 77042. The telephone number for Omega Protein’s main office is (713) 623-0060. Omega’s stock trades on the New York Stock Exchange under the symbol “OME.”

Following our sale of 9,268,292 Omega shares to Omega, we will hold 5,232,708 Omega shares, or approximately 33% of Omega’s outstanding common stock, 98% of Zap.Com’s outstanding common stock and approximately $123 million in cash and cash equivalents, including the $47.2 million in net proceeds we anticipate receiving from the initial sale of our Omega shares. See “Financial Statements — Unaudited Pro Forma Consolidated Financial Information.” We have no plans to dissolve or liquidate. Our Board of Directors has authorized us to seek one or more buyers for our remaining Omega shares and to pursue acquisitions or other strategic opportunities in an effort to position us to enhance stockholder value. We are likely to use some or all of our cash and cash equivalents to fund, in whole or part, one or more acquisitions or related transactions. There are no limits on the types of businesses or fields in which we may invest.

 

Following our initial sale of shares to Omega, the composition of our assets will subject us to the Investment Company Act of 1940. However, the Investment Company Act of 1940 provides a one year temporary exclusion for companies that are in transition in limited circumstances. We believe this temporary exclusion applies to us because our Board of Directors decided that during this time we would take action to become an operating company or obtain a special exemption from the Investment Company Act of 1940. We believe that we are, in fact, complying with this rule because we are seeking to acquire an operating company and we intend to do so within the one year period. So as to be ready to make appropriate acquisitions of operating business, we are maintaining our reserves in “cash and cash items,” as those terms are used in the Investment Company Act of 1940, that is, in deposits with banks that are payable on demand or on less than seven days’ notice. There is no assurance, however, that at all times following the sale of the Omega shares Zapata may not become subject to registration requirements under the Investment Company Act of 1940.

We are a holding company. Our primary holding is our 58% interest in Omega which is publicly traded on the New York Stock Exchange. Zapata and Omega have separate boards of directors. Two of Zapata’s officers, Avram A. Glazer and Leonard DiSalvo serve on the Omega board of directors. Omega’s financial results are consolidated with ours and reported in our consolidated financial statements.

 

Until April 1998, we owned all of the outstanding capital stock of Omega. In April 1998, Omega completed its initial public offering at a price of $16.00 per share and as part of the offering Zapata sold Omega shares as a selling stockholder. In the offering, Omega netted approximately $68.0 million and Zapata netted $76.6 million. Omega Protein used a portion of its net proceeds to repay Zapata approximately $33.3 million of inter-company indebtedness. Since Omega’s 1998 public offering, Zapata has not purchased or sold any Omega shares and Omega has not declared or paid any dividends.

 

Following the completion of the offering, the Omega shares held by Zapata constituted approximately 59.7% of Omega’s outstanding common stock. Since that time, Zapata has at all times had two representatives serve on Omega’s Board of Directors, which currently consists of seven directors. During the years subsequent to Omega’s initial public offering, Omega’s stock price declined. During the period from January 1, 2006 through September 8, 2006, the date the stock purchase agreement was executed, Omega’s stock traded at a high of $6.69 and a low of

$5.13. Although as of September 1, 2006, Omega had outstanding 25,150,909 shares, its average daily volume was only 12,000 shares during the 60 days prior to that date.

 

At our September 12, 2005 Board of Directors meeting, our Board of Directors reviewed Omega’s historic financial performance, both as an operating company and as an investment, as well as a number of other factors. After discussion, the Board determined in would be in the best interest of Zapata to exit its investment in Omega.

 

In the Fall of 2005, pursuant to Board direction, Zapata’s management contacted an international investment banking firm for the purpose of pursuing a parallel track of selling its Omega shares to strategic buyers and in a secondary public offering. After conducting due diligence, the investment banking firm advised us that it did not believe it would be beneficial for Zapata to proceed with the assignment at that time. On December 8, 2005, Zapata made a public announcement that its Board of Directors had authorized management to seek a buyer of its Omega shares.

 

Shortly after the December 8^th announcement, a potential strategic buyer contacted us about acquiring our Omega shares. The potential strategic buyer executed a confidentiality agreement dated February 7, 2006. The potential buyer also executed a confidentiality agreement with Omega dated April 24, 2006. The potential buyer conducted limited due diligence and proposed general terms but was unable to provide satisfactory evidence of its ability to complete a transaction.

 

In late May 2006, we received an indication of interest from a potential financial buyer for the purchase of all our Omega shares for a price of $4.24 per share, payable in immediately available funds to be placed in escrow pending the closing and very limited representations and warranties and conditions to closing. On June 2, 2006, Zapata’s Board of Directors met to review proposed terms for the sale of all of Zapata’s Omega shares to the potential financial buyer. The directors reviewed the terms which contemplated a purchase price of $4.24 per share and limited representations, warranties and closing conditions. After discussion, the directors instructed management to pursue the transaction and bring back final terms to the Board of Directors for consideration and approval.

 

From June 2, 2006 through June 21, 2006, Zapata and the potential financial buyer engaged in extensive negotiations of the transaction terms. The potential financial buyer negotiated and executed a confidentiality agreement with Omega which it signed on June 21, 2006. Through August 2006, the potential financial buyer conducted due diligence on Omega and continued to negotiate terms. The final proposal from the potential financial buyer contemplated the purchase of all our Omega shares pursuant to a stock purchase agreement at a price of $4.24 per share, payable in cash, and contained extensive representations and warranties concerning Zapata and Omega, a closing condition that the potential financial buyer be pre-approved by the United States Department of Transportation, Maritime Administration, as to its United States citizenship status so as not to affect Omega’s fishing licenses (which require at least 75% ownership of Omega by U.S. citizens) and another closing condition that Omega not take any action that would, in the buyer’s discretion, be a material adverse change that affected its anticipated value in the shares. The proposal also contemplated that the potential financial buyer would receive immediate representation on Omega’s board of directors concurrent with the execution of the stock purchase agreement, and that Zapata would be subject to a complete no talk/no shop provision without any fiduciary out.

 

On July 13, 2006, our Board of Directors convened with management and its legal advisors. After discussion and review of the then current terms, our Board of Directors directed management to investigate further the issues surrounding the potential financial buyer’s qualification as a U.S. citizen under the applicable fishing license laws and to address objectionable representations, warranties, closing conditions and covenants. During the course of these subsequent negotiations, our management was unable to satisfy themselves as to the certainty of the U.S. citizenship closing condition being satisfied or removing other objectionable terms.

 

On August 5, 2006, Zapata received from Omega management a verbal expression of interest for repurchasing Zapata’s Omega shares. Zapata management evaluated Omega’s stock repurchase proposal and began to negotiate the terms of a transaction. During the first part of August 2006, Zapata and TM Capital Corp., on behalf of Omega, negotiated the terms of Omega’s stock repurchase proposal which was set forth in a standstill letter and term sheet. After concluding negotiation, Zapata and Omega’s counsel prepared and finalized a standstill letter agreement and term sheet embodying Omega’s stock repurchase proposal.

 

On August 18, 2006, Zapata’s counsel advised the potential financial buyer of Zapata’s remaining issues with the proposed transaction. The potential financial buyer did not respond and ultimately, no agreement was reached with the potential financial buyer.

On August 23, 2006, Zapata management presented the Zapata Board of Directors with a standstill letter agreement and term sheet setting forth the stock repurchase proposal. Zapata management and counsel reviewed the proposal and the status of the negotiations with the potential financial buyer. Zapata directors reviewed and discussed the proposal and factors discussed below under the heading “THE PROPOSED SALE OF OUR OMEGA SHARES — Reason for the Sale.” Following their review, the Zapata Board of Directors authorized Zapata’s management to execute the standstill letter agreement and term sheet, to engage a firm to provide a fairness opinion and to engage counsel to negotiate and finalize definitive documents for the transaction.

 

From August 25, 2006 until September 8, 2006, counsel for Zapata and Omega conducted negotiations to finalize the stock purchase agreement and ancillary documents, including the amended and restated registration rights agreement and the escrow agreement. Upon concluding negotiations over the terms of these documents, Zapata management provided Zapata’s Board of Directors with the final form of stock purchase agreement, amended and restated registration rights agreement and escrow agreement together with a copy of the final form of Ableco Finance LLC commitment letter presented to Omega and the last draft of the stock purchase agreement proposed by the potential financial buyer.

 

On September 7, 2006, Zapata’s directors convened to consider and vote on the proposal to sell Zapata’s Omega shares pursuant to the stock purchase agreement and under certain other circumstances. Zapata’s legal advisors attended the meeting and reviewed with the directors their fiduciary duties and the transaction terms and other legal issues, as well as the fact that no response had been received from the last communication sent to the potential financial buyer regarding open issues. At the meeting, Zapata management presented a number of issues, including Omega’s financial performance and condition, stock trading price and volume history and anticipated accounting treatment and tax consequences for the proposed transactions. A representative of Empire Valuation Consultants, LLC also attended the meeting. After reviewing Empire’s experience and credentials and engaging in a discussion regarding Empire’s valuation procedure and certain aspects of its valuation process and considerations relevant to Zapata, the Omega shares, and Omega’s business, Empire rendered its opinion that as of September 7, 2006, the purchase price to be paid to Zapata for its Omega shares at the initial closing under the stock purchase agreement and the sale of Zapata’s remaining Omega shares pursuant to the call option granted under the stock purchase agreement or to a third party at a price of $4.50 per share or more was fair from a financial point of view to Zapata and its stockholders. The representative of Empire indicated that he expected that Empire would be able to deliver its written opinion the next day. Following the presentations and a discussion, the Zapata Board of Directors approved the sale and in doing so, considered a number of favorable factors supporting the sale as well as negative factors militating against the sale. See “THE PROPOSED SALE OF OUR OMEGA SHARES — Reasons for the Sale.”

 

On September 8, 2006, the parties entered into a stock purchase agreement providing for the purchase of 9,268,292 of our Omega shares at a final price of $5.125 per share and a call option at a price of $4.50 per share, subject to certain terms and conditions, with respect to the remaining Omega shares held by Zapata on the date of exercise of the call option. In addition, on the same date Zapata’s majority stockholder, the Malcolm I. Glazer Family Limited Partnership, or the Glazer Partnership, executed a written consent pursuant to which it authorized the sale by Zapata of its Omega shares.

 

The parties announced the transaction on September 8, 2006.

 

On October 18, 2006, we entered into a letter agreement with Omega amending the stock purchase agreement to suspend Omega’s obligation to file the shelf registration statement on Form S-3 for the resale of the remaining 5,232,708 Omega shares with the SEC as promptly as practicable after the date of the stock purchase agreement, but no less than 20 business days thereafter. We further agreed with Omega, that Omega will file the Form S-3 with the SEC by the new deadline set by us, notification of which will precede the new deadline by at least 15 business days and will be given in writing.

 

Our Board of Directors has concluded that our sale of Omega shares as described in this Information Statement is in Zapata’s best interests. In arriving at this conclusion, our Board of Directors considered a number of factors, including the following favorable factors supporting the sale:

 

 

Our Board of Directors believed that each of the foregoing factors to be the benefits of the sale. In reaching its conclusion, our Board of Directors also considered the following negative factors militating against the sale:

 

 

 

 

Our Board of Directors viewed its determination and approval as being based on the totality of the information presented. In considering all the factors described above, individual directors may have given different weight to different factors. Our Board of Directors considered all these factors as a whole to be favorable to us, and to support its determination to approve the sale.

 

The following is a summary of significant provisions of the stock purchase agreement. The summary does not provide a complete description of all the terms and conditions of the stock purchase agreement, which is attached as Appendix A (without schedules or exhibits). The stock purchase agreement should be read in its entirety for a complete understanding of its terms.

Structure of the Sale and Price.  The stock purchase agreement provides that, upon the satisfaction, or waiver, if necessary, of certain other conditions, Omega will acquire from us 9,268,292 Omega shares. The purchase price for these shares is $5.125 per share, or $47.5 million in the aggregate. Omega will finance this purchase with debt financing.

 

An independent special committee of Omega’s Board of Directors, which did not include either of Zapata’s two representatives, Avram Glazer and Leonard DiSalvo, approved the transaction. Omega’s Board of Directors and its special committee received the opinions of TM Capital Corp., an independent financial advisor to the special committee, regarding the fairness, from a financial point of view, to Omega’s stockholders (except for Zapata) of the purchase price being paid at the initial closing for our Omega shares, and the solvency of Omega following the consummation of the transactions contemplated by the stock purchase agreement and Omega’s debt financing pursuant to the commitment letter referred to below. TM Capital provided us with a reliance letter allowing us to rely on the solvency opinion, although its opinion was otherwise furnished solely for the benefit of the special committee and the Board of Directors of Omega. TM Capital has consented to the inclusion of the summary of its solvency opinion in this Information Statement.

 

TM Capital is a New York and Atlanta based merchant banking and financial advisory firm. On September 8, 2006, TM Capital delivered certain of its analyses and its oral opinion to Omega’s special committee, subsequently confirmed in writing, to the effect that and subject to the various assumptions set forth therein, as of that date, assuming the transaction and financing had been consummated as proposed, immediately after and giving effect to the transaction and on a pro forma basis:

 

 

The opinion valued Omega and the assets of Omega on a going-concern basis (including goodwill), on a pro forma basis.

TM Capital provided its solvency opinion with the understanding that Omega’s Board of Directors (including the special committee thereof) would consult with and rely solely upon their own legal counsel with respect to the legal definition of terms related to the solvency opinion and TM Capital made no representations as to any legal matter or as to the sufficiency of said definitions for any purpose other than setting forth the scope of its opinion. TM Capital was not engaged to identify prospective purchasers, to ascertain the actual prices at which and terms on which Omega or the assets of Omega could be sold and did not express any opinion as to whether Omega would actually be sold for the amount TM Capital believes to be its fair value.

 

In connection with its solvency opinion, TM Capital made such reviews, analyses and inquiries as it deemed necessary and among other things, it:

 

 

In its review and analysis and in reaching the conclusions expressed in its opinion, TM Capital relied upon the accuracy and completeness of all the financial and other information made available to it by Omega, discussed or reviewed by or for it, or that was publicly available. TM Capital also relied upon certain representations made to it by Omega’s management and upon assurances of the management of Omega that they were unaware of any facts that would make the information provided to it incorrect, incomplete or misleading. Omega management also advised TM Capital that there was no adverse change that, either individually or in the aggregate, had or could reasonably be expected to have a material effect on the assets, business, properties, liabilities, financial condition, results or prospects of Omega since June 30, 2006. TM Capital did not make any independent appraisal of the properties or assets of Omega. There were no limitations placed on the scope of TM Capital’s review.

 

TM Capital’s opinion did not address the relative merits of the transaction as compared to other transactions or business strategies discussed by the special committee or the Board of Directors of Omega as alternatives to the transaction or the decision of the special committee and the Board of Directors of Omega to proceed with the transaction. The opinion did not address any tax matters or the impact of any tax matters that arise from the transaction.

 

TM Capital acted as financial advisor to Omega in connection with the transaction. TM Capital received a fee from Omega in connection with the rendering of the solvency opinion and a separate fairness opinion, neither of which was contingent upon the conclusion reached in the opinions or the consummation of the transaction. In addition, TM Capital will be receiving a fee in connection with the consummation of the transaction. TM Capital also served as financial advisor to Omega in the past, without respect to this transaction, and has received fees for such services.

 

Concurrently with the execution and delivery of the stock purchase agreement, Omega’s executive officers confirmed, in writing, that neither the agreement nor the transactions contemplated thereby, including the sale by us

of shares to Omega, either initially or pursuant to the call option, will constitute a change of control for the purposes of their employment or change of control agreements with Omega.

Omega’s Financing of the $47.5 Million Purchase Price.  Concurrent with the execution and delivery of the stock purchase agreement, Omega and Ableco Finance LLC, an affiliate of Cerberus Capital Management, L.P., entered into a commitment letter, pursuant to which the Ableco agreed, subject to the terms and conditions therein, to provide Omega with a senior secured financing facility in the maximum aggregate amount of $65 million to (i) acquire the 9,268,292 Omega shares (exclusive of the fees and expenses related to such financing), (ii) to fund Omega’s ongoing working capital requirements, including, establishing a letter of credit sub-facility and (iii) to pay the fees and expenses related to such financing. The facility will consist of a $30 million revolving credit facility (including a $5,000,000 subfacility for the issuance of letters of credit) and a $35 million term loan facility. Such revolving credit facility will replace Omega’s existing $20 million credit facility with Bank of America, N.A.

 

On October 20, 2006, Omega, its principal subsidiary, Omega Protein, Inc., certain other direct and indirect subsidiaries of Omega, certain financial institutions and Abelco, as collateral agent and administrative agent, entered into the financing agreement contemplated by the Ableco commitment letter pursuant to which the lenders agreed to provide Omega with a senior secured financing facility in the maximum amount of $65 million (i) to acquire the 9,268,292 Omega shares, (ii) to fund Omega’s ongoing working capital and other general corporate requirements and (iii) to pay the fees and expenses related to the financing. The financing facility consists of (a) a revolving credit facility of up to $30 million outstanding at any time, including a $5 million subfacility for the issuance of letters of credit, and (b) a term loan facility of $35 million.

Escrow.  Concurrent with the execution and delivery of the stock purchase agreement, Zapata, Omega and Manufacturers and Traders Trust Company, as escrow agent, entered into an escrow agreement. On or before October 23, 2006, Omega is required to consummate its debt financing with Ableco and deposit the $47.5 million purchase price with the escrow agent, pending the closing of the sale. On or before the same date, we are obligated to deposit with the escrow agent stock certificates evidencing the 9,268,292 Omega shares being purchased by Omega together with blank stock powers. The deposits of the $47.5 million purchase price by Omega and the stock certificates by Zapata were made with Manufacturers and Traders Trust Company as of the October 23, 2006 deadline. All interest accrued on the escrowed purchase price will be paid to Omega at the closing. If this accrued interest is less than the pre-default interest payable by Omega with respect to the $47.5 million which it has borrowed from Ableco in order to fund the escrow, then we will be required to pay Omega at closing this difference. All dividends or distributions declared or paid with respect to the escrowed Omega shares, if any, and all accrued interest on such dividends or distributions will be paid to Omega at the closing.

Amended and Restated Registration Rights Agreement.  Concurrent with the sale of our 9,268,292 Omega shares, Omega is required to provide us with an amended and restated registration rights agreement. This agreement amends and restates our April 12, 1998 registration rights agreement with Omega which grants to us demand and piggyback registration rights and is assignable, subject to certain conditions, to subsequent purchasers of our Omega shares.

 

Material changes to the 1998 registration rights agreement incorporated into the amended and restated registration rights agreement, include, among other things, that:

 

 

Closing of the Sale.  The closing of our sale of 9,268,292 Omega shares to Omega is required to take place on the second business day after the conditions set forth in the stock purchase agreement have been satisfied or waived. We expect this to occur in the fourth quarter of 2006.

Zapata’s Representations and Warranties.  We have made representations and warranties in the stock purchase agreement with respect to the following matters:

 

Omega’s Representations and Warranties.  Omega has made representations and warranties in the stock purchase agreement with respect to the matters listed below:

 

 

 

 

 

 

Mutual Covenants.  In the stock purchase agreement, we have agreed with Omega, among other covenants, to:

 

Zapata Covenants.  In the stock purchase agreement we agreed in favor of Omega, among other covenants, to:

 

Omega Covenants.  In the stock purchase agreement Omega has agreed in favor of Zapata, among other covenants, to:

 

 

 

Conditions to Closing of the Sale.  The obligation of the parties to close on the initial sale of the 9,268,292 Omega shares under the stock purchase agreement is subject to the satisfaction or waiver of various conditions, including, without limitation, the following conditions:

 

 

Additionally, Omega’s obligation to close on the initial sale is subject to the closing of a new debt facility contemplated by the Ableco commitment letter and the receipt of the resignations of Avram A. Glazer and Leonard DiSalvo from Omega’s board of directors and any committee thereof. On October 20, 2006, Omega entered into the financing agreement contemplated by the Ableco commitment letter pursuant to which Ableco and certain other lenders agreed to provide Omega with a senior secured financing facility in the maximum amount of $65 million. Thereafter, in accordance with the terms of the stock purchase agreement, Omega deposited the purchase price for the 9,268,292 Omega shares and we deposited the stock certificates for the Omega shares in escrow with Manufacturers and Traders Trust Company. Omega also received the NMFS consent.

Termination of the Agreement.  The stock purchase agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the initial closing, subject to certain conditions:

 

 

 

 

 

Superior proposal is defined in the stock purchase agreement to mean any acquisition proposal (on its most recently amended or modified terms, if amended or modified) (i) involving the acquisition of the 9,268,292 Omega shares subject to the stock purchase agreement and (ii) with respect to which the Zapata’s Board of Directors (A) determines in good faith that such acquisition proposal, if accepted, is reasonably likely to be consummated on a timely basis, taking into account all legal, financial, regulatory and other aspects of the acquisition proposal and the person making the acquisition proposal, (B) determines in its good faith judgment (based on, among other things, the advice of its outside financial advisor) to be more favorable, from a financial point of view, to Zapata’s stockholders than the sale of the Omega shares to Omega taking into account all relevant factors (including whether, in the good faith judgment of the Zapata’s Board of Directors, after obtaining the advice of such financial advisor, any proposed changes to the stock purchase agreement that may be proposed by Omega in response to such acquisition proposal) and (C) which provides that any requisite external financing (sufficient to pay the cash portion, if any, of the proposed transaction consideration and expenses related thereto) is either then committed or otherwise funded and not subject to any contingency other than those contained in the Ableco commitment letter

Expense Reimbursement.  Omega may be required to reimburse us for our actual out-of-pocket documented expenses up to a maximum of $1 million if we terminate the stock purchase agreement based on Omega’s material breach of the stock purchase agreement. We may be required to reimburse Omega for its actual out-of-pocket documented expenses up to a maximum of $1.3 million if we terminate the stock purchase agreement, or if our Board of Directors withdraws or modifies its approval of the stock purchase agreement in a manner adverse to Omega, in order to accept a “superior proposal” to purchase our Omega shares that are to be sold at the initial closing or we materially breach the stock purchase agreement. These rights of reimbursement are in addition to any other right or remedy that Omega or Zapata, as applicable, may have available at law or equity.

Call Option.  Pursuant to the stock purchase agreement, we granted Omega a call option entitling Omega, at its election and subject to certain conditions, to purchase, all, but not less than all, of our remaining 5,232,708 Omega shares not initially purchased by Omega and which we continue to hold on the date the option is exercised at a price of $4.50 per share, payable in cash. The option may only be exercised, subject to certain conditions, from the 270th day to the 390^th day following the consummation of Omega’s initial purchase of shares from us pursuant to the stock purchase agreement. The closing with respect to the call option must occur within two business days of Omega’s exercising it.

Voting Agreement.  Subject to certain conditions, during the period from the initial closing until the occurrence of a “voting agreement termination event” (as defined in the stock purchase agreement), we have agreed that if any action is submitted to the holders of Omega common stock for their approval, whether at a meeting or by written consent, we will cause to be voted all Omega shares to which we have the right to vote or direct the vote in favor of the directors nominated by Omega’s Board of Directors or a committee thereof and in favor of all actions approved and recommended by the Omega’s Board of Directors. We have also granted an irrevocable proxy to the Chief Executive Officer and Chief Financial Officer of Omega to vote all of our Omega voting securities at any such meeting (and at any adjournment or adjournments thereof) or with respect to any such written consent in the manner described in the preceding sentence. The stock purchase agreement contains provisions whereby we have the right to assert the occurrence of a voting agreement termination event and to terminate the effectiveness of the proxy.

 

Under the stock purchase agreement, “voting agreement termination event” means the earlier to occur of the following dates (i) the last day of any 12 calendar month period in which Omega’s trailing 12-month EBITDA (as defined in the stock purchase agreement) is less than $15 million, (ii) the continuation of an uncured or unwaived event of default or default for more than 30 days on one or more of Omega’s outstanding indebtedness for borrowed money in excess of $1 million or (iii) the first day following the expiration of Omega’s call option that the average closing price of Omega’s common stock for 10 consecutive trading days is less than $4.50 per share. The stock purchase agreement defines “EBITDA” to mean for the applicable period, Omega’s consolidated net income (loss)

before interest, taxes, depreciation and amortization, excluding any non-recurring, extraordinary or unusual income, gains or charges (including, without limitation, the “Loss resulting from natural disaster, net (see Note 11 — Hurricane Losses)” disclosed in Omega’s Quarterly Report on Form 10-Q for the period ended September 30, 2005 filed with the SEC), all as determined in accordance with the generally accepted accounting principles applied on a consistent basis. For purposes of the forgoing, net income excludes the income or loss of any entity accrued prior to the date on which it becomes a subsidiary or is merged into or consolidated with Omega or any subsidiary of Omega or the date on which such entity’s assets are acquired by Omega or any consolidated subsidiary of Omega.

Expenses.  Except as provided above, each party bears its own expenses in connection with the stock purchase agreement and the sale of our Omega shares, including, without limitation, all fees of respective legal counsel, investment advisors and accountants.

 

Our Board of Directors retained Empire Valuation Consultants, LLC to render an opinion to it as to the fairness, from a financial point of view, to Zapata and its stockholders of the consideration to be received under the stock purchase agreement pursuant to the initial sale and the call option, as well as any other sale of our Omega shares remaining after the initial sale which are sold to third parties, either in public or private sales, at a price equal to or in excess of $4.50 per share. On September 7, 2006, Empire delivered its analyses and oral opinion to our Board of Directors, subsequently confirmed in writing, to the effect that and subject to the various assumptions set forth therein, as of that date. Empire subsequently delivered its written opinion to the same effect as it had provided at the September 7, 2006 meeting of our Board of Directors.

 

The full text of the written opinion of Empire, dated September 8, 2006, is attached as Appendix C and is incorporated by reference. Empire has reviewed Appendix C as well as the summary of its opinion set forth in this Information Statement and has consented to the inclusion of its opinion and the summary of such opinion in this Information Statement. Our stockholders are urged to read the opinion in its entirety for the assumptions made, procedures followed, other matters considered and limits of the review by Empire. The summary of the written opinion of Empire set forth herein is qualified in its entirety by reference to the full text of such opinion. Empire’s analyses and opinion were prepared for and addressed to our Board of Directors and do not constitute an opinion as to the merits of the transaction (other than the fairness thereof) or a recommendation to any stockholder. Empire’s analyses and opinion also did not take into consideration any tax issues related to the sale of the Omega shares. The consideration received in the transaction was determined through negotiations between Zapata and Omega and not pursuant to the recommendation of Empire.

 

In arriving at its opinion, Empire reviewed and considered such financial and other matters as it deemed relevant, including, among other things:

 

 

 

 

 

In conducting its review and arriving at its opinion, Empire, with management’s consent, assumed and relied, without independent investigation, upon the accuracy and completeness of all financial and other information provided to it by Zapata or which was publicly available. Empire did not undertake any responsibility for the accuracy, completeness or reasonableness of, or attempt independently to verify, this information.

 

In addition, Empire did not conduct any physical inspection of the properties or facilities of Omega. Empire further relied upon the assurance of our management that they were unaware of any facts that would make the information provided to Empire incomplete. There were no limitations placed on the scope of Empire’s review.

 

Empire did not make or obtain any independent evaluations, valuations or appraisals of Omega’s assets or liabilities, nor was Empire furnished with these materials. Empire expressed no opinion with respect to legal matters. Empire’s services to us in connection with the transaction only included rendering the fairness opinion described herein. Empire’s opinion was necessarily based upon economic and market conditions and other circumstances as they existed and could be evaluated by Empire on the date of its opinion. It should also be understood that although subsequent developments may affect its opinion, Empire does not have any obligation to update, revise or reaffirm its opinion and Empire expressly disclaims any responsibility to do so.

 

Empire’s opinion does not constitute a recommendation to any Zapata stockholder and is limited to the opinion expressed therein. Empire provides no opinion as to the underlying business reasons that may support the decision of our Board of Directors to approve, or our decision to consummate, the sale of our Omega shares.

 

Empire’s opinion and analyses were only one of many factors considered by our Board of Directors in its evaluation of the sale of our Omega shares and should not be viewed as determinative of the views of our Board of Directors or management with respect to the sale.

 

Within 30 days following our sale to Omega of 9,268,292 Omega shares, Omega must notify the United States Department of Transportation, Maritime Administration, of the change in ownership of Omega’s stock pursuant to 46 C.F.R Section 356.5. This is not a condition to the closing as it is not required to take place until after the closing. Except for this filing and the filing of this Information Statement with the SEC (and such other reports as may be required, if any, under the Exchange Act) we are unaware of any material federal, state or foreign regulatory requirements or approvals required for the sale by us of all our Omega shares.

 

Under Nevada law, the sale of “all or substantially all” our assets requires the affirmative vote of the holders of at least a majority of the voting shares of our outstanding common stock as of the record date. Omega represents a substantial portion of our assets, revenues and operating income. Although we are only selling a portion of our Omega shares in the initial closing and we will continue to own substantial assets, including cash and cash

equivalents, to remove any doubt whether the transaction has been properly approved under Nevada law, we conditioned the transaction on stockholder approval.

 

The record date for determining the stockholders who are entitled to give a written consent for the sale proposal is September 8, 2006. As of September 8, 2006, we had 19,182,456 shares of our common stock outstanding. Each share of common stock is entitled to one vote. We do not have any class of voting securities outstanding at this date other than our common stock.

 

Under Nevada law and Zapata’s organizational documents, the required stockholder approval may be accomplished by written consent of the stockholders holding a majority of the outstanding shares of our capital stock entitled to vote, voting as a class. Our majority stockholder, The Malcolm I. Glazer Family Limited Partnership, which holds 9,813,112 shares of our common stock, or approximately 51.2% of our outstanding shares of common stock, provided us with a written consent dated September 8, 2006 approving the proposed sale of our Omega shares pursuant to the stock purchase agreement, the sale of our 5,232,708 remaining shares in an alternative transaction approved by our Board of Directors and the sale of all of our Omega shares in a “superior proposal” (as defined in the stock purchase agreement) as determined by our Board of Directors. Federal securities laws state that the sale proposal contemplated by the written consent may not be completed until 20 days after the date this Information Statement is sent or given to Zapata stockholders. Therefore, notwithstanding the execution and delivery of the written consent, the sale transaction will not occur until that time period has elapsed and the other conditions under the stock purchase agreement are satisfied or waived.

 

We anticipate that the sale of 9,268,292 shares of our Omega shares to Omega will result in the recognition of a net loss for book purposes. Based on the $5.109 per share value implied by the contemplated sale under the stock purchase agreement (the sale price of $5.125 less the amount estimated for the call option value), we concluded that we expect to record an estimated impairment charge of approximately $6.2 million, net of tax effects, in the third quarter of fiscal 2006 with respect to our Omega shares. This includes an estimated impairment charge on the remaining 5,232,708 shares of approximately $3.7 million, net of taxes, which would be recorded in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

 

The exact amount of the total impairment recognized will depend upon a number of factors and will not be known until the conclusion of the sale of all of our Omega shares to Omega. First, Omega’s financial statements will continue to be consolidated with ours until the closing of the stock purchase agreement. Generally, the ultimate loss recognized on the transaction will increase (decrease) as we consolidates net income (loss) related to Omega’s operations.

 

Second, the amount of the impairment on the remaining shares will be affected by the price at which our ultimately agrees to sell the remaining shares. Our Board of Directors has authorized us to seek purchasers for our remaining 5,232,708 Omega shares at a price of $4.50 per share or higher. If we enter into an agreement to sell the remaining shares at a price above or below $5.109 per share, we would be required to decrease or increase, as appropriate, our estimated impairment charge. Subsequent to the closing of the transaction, we will own approximately 33% of Omega’s common stock and will account for our remaining investment in Omega under the equity method, recording our proportionate share of Omega’s income (loss) as incurred. Additionally, we believe that the call option that Omega has on the remaining shares does not have material value and is not expected to have a material impact on our financial statements.

 

Generally, as the expected sale proceeds of $47.5 million exceeds our original tax basis of $33.6 million, the sale will be taxable to us. After adjusting for transaction closing costs, we estimate a taxable gain from the sale of approximately $13.7 million. Because we have adequate loss carryforwards, we expect that our current taxes payable related to the sale will be limited to approximately $274,000. In addition, there will be no direct federal income tax consequences to our stockholders.

 

Neither Nevada law, nor our organizational documents, provide our stockholders with dissenters’ rights or the right to demand appraisal of their shares as a result of the sale of all of our Omega shares as described in this Information Statement.

 

As of the date of this Information Statement, there are no persons who have been a director or officer of Zapata, or any associate of such person, since the beginning of the last fiscal year, that have any substantial interest in the matters acted upon by the written consent other than the options to purchase Omega common stock held by our Chairman of the Board, Chief Executive Officer and President, Avram Glazer. On January 26, 1998, in consideration for Mr. Glazer serving as an Omega director, Omega granted to Mr. Glazer options to purchase 568,200 shares of Omega common stock at any exercise price of $12.75 per share. These options are fully vested. Because the exercise price of these options has generally been greater than the trading price of Omega’s common stock, these options generally remained unexercised. These options will expire on January 26, 2008 if unexercised as of that date.

 

The following table sets forth certain of our selected historical consolidated financial information for the periods and as of the dates presented and should be read in conjunction with our consolidated financial statements and the related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” set forth below in this Information Statement. All amounts are in thousands, except for per share amounts.

 

 

 

 

 

 

The following table presents certain unaudited consolidated operating results for each of our preceding ten quarters. We believe that the following information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the results for the interim periods presented. The operating results for any interim period are not necessarily indicative of results for any other period. The following unaudited quarterly results reflect restated amounts from our Quarterly Report of Form 10-Q/A for the period ended September 30, 2005 as filed with the SEC on April 5, 2006.

 

 

 

 

 

 

Omega’s menhaden harvesting and processing business is seasonal in nature. Omega generally has higher sales during the menhaden harvesting season (which includes the second and third quarter of each year) due to increased product availability, but prices during the fishing season tend to be lower than during the off-season. As a result, the Omega’s quarterly operating results have fluctuated in the past and may fluctuate in the future. In addition, from time to time Omega defers sales of inventory based on worldwide prices for competing products that affects prices for Omega’s products which may affect comparable period comparisons.

 

Overview

 

We were incorporated in Delaware in 1954 and reincorporated in Nevada in April 1999. Our principal executive offices are located at 100 Meridian Centre, Suite 350, Rochester, New York 14618. Our common stock is listed on the New York Stock Exchange and trades under the symbol “ZAP.”

 

We are a holding company which currently has one operating company, Omega Protein Corporation, or Omega, in which we had a 58% ownership interest at June 30, 2006. In December 2005, we completed the sale of our 77% ownership interest in Safety Components International, Inc., or Safety. Omega trades on the New York Stock Exchange under the symbol “OME” and Safety trades on the over-the counter electronic bulletin board under the symbol “SAFY.” In addition, we own 98% of Zap.Com Corporation, which is a public shell company and trades on the OTCBB under the symbol “ZPCM.”

 

On December 8, 2005, we announced that our Board of Directors had authorized management to seek a buyer for our 58% ownership interest in Omega. On September 8, 2006, we entered into a stock purchase agreement with our majority-owned subsidiary Omega which provides for the repurchase of shares of Omega common stock held by us. Under this agreement, Omega has agreed to repurchase 9,268,292 Omega shares from us for a purchase price of $5.125 per share, or $47.5 million in the aggregate, in cash. In the agreement, we also granted Omega a call option to acquire for an exercise price of $4.50 per share, payable in cash, not less than all of our remaining 5,232,708 Omega shares which we do not dispose of prior to the exercise of the option. The option is exercisable from the 270th day until the 390th day after the initial closing under the stock purchase agreement. Our Board of Directors has authorized us to seek purchasers for our remaining 5,232,708 Omega shares at a price of $4.50 per share or higher. Lastly, we may distribute to our stockholders a dividend consisting of all of or a portion of our remaining Omega Shares. There is no assurance, however, that we will be able to sell our remaining Omega shares either to third parties or to Omega pursuant to its call option or that we will distribute our remaining Omega Shares.

 

Zapata Corporate

 

We effected an eight-for-one stock split of our outstanding shares of common stock, par value $.01 per share, effective at the close of business on April 6, 2005. Where a number of shares of common stock is listed in this Information Statement for a date or period prior to the effective date of the stock split, that number of shares of common stock has been proportionately adjusted as if the eight-for-one stock split had been in effect on that prior date or during that prior period.

 

In December 2002, our Board of Directors authorized us to purchase up to 4.0 million shares of our outstanding common stock in the open market or privately negotiated transactions. The shares may be purchased from time to time as determined by us. Any purchased shares would be placed in treasury and may subsequently be reissued for general corporate purposes. The repurchases will be made only at such times as are permissible under the federal securities laws. No time limit has been placed on the duration of the program and no minimum number or value of shares to be repurchased has been fixed. We reserve the right to discontinue the repurchase program at any time and there can be no assurance that any repurchases will be made. As of the date of this Information Statement, no shares have been repurchased under this program.

 

We continue to evaluate strategic opportunities for the use of our capital resources, including, but not limited to, the acquisition of other operating businesses, funding of start-up proposals and possible stock repurchases. There are no limits on the type of business or fields in which we may make our acquisitions. While we focus our attention in the United States, we may investigate acquisition opportunities outside of the United States when our management believes that such opportunities might be attractive. Similarly, we do not yet know the structure of any acquisition. We may pay consideration in the form of cash, our securities or a combination of both. We may raise capital through the issuance of equity or debt and may utilize non-investment grade securities as a part of an acquisition strategy. Such investments often involve a high degree of risk and may be considered highly speculative.

Other than previously disclosed in this Information Statement, as of the date of this Information Statement, we are not a party to any agreements related to the acquisition of an operating business, business combination or for the sale or other transaction related to any of our subsidiaries. There can be no assurance that any of these possible transactions will occur or that they will ultimately be advantageous to us or enhance our stockholder value.

 

Zap.Com

 

Zap.Com is a public shell company which has no business operations other than complying with its reporting requirements under the Exchange Act. From time to time, Zap.Com considers acquisitions that would result in it becoming an operating company. Zap.Com may also consider developing a new business suitable for its situation.

 

Omega Protein

 

Business.  Omega is the largest U.S. producer of protein-rich meal and oil derived from marine sources. Omega’s products are produced from menhaden (a herring-like fish found in commercial quantities), and includes regular grade and value-added specialty fish meals, crude and refined fish oils and fish solubles.

 

Omega produces and sells a variety of protein and oil products derived from menhaden, a species of wild herring-like fish found along the Gulf of Mexico and Atlantic coasts. The fish are not genetically modified or genetically enhanced. Omega processes several grades of fish meal, as well as fish oil and fish solubles. Omega’s fish meal products are primarily used as a protein ingredient in animal feed for swine, cattle, aquaculture and household pets. Fish oil is utilized for animal and aquaculture feeds, industrial applications, additives to human food products and as dietary supplements. Omega’s fish solubles are sold primarily to livestock feed manufacturers, aquaculture feed manufacturers and for use as an organic fertilizer.

 

All of Omega’s products contain healthy long-chain Omega-3 fatty acids. Omega-3 fatty acids are commonly referred to as “essential fatty acids” because the body does not produce them. Instead, essential fatty acids must be obtained from outside sources, such as food or special supplements. Long-chain Omega-3s are also commonly referred to as a “good fat” for their health benefits, as opposed to the “bad fats” that create or aggravate health conditions through long-term consumption. Scientific research suggests that long-chain Omega-3s as part of a balanced diet may provide significant benefits for health issues such as cardiovascular disease, inflammatory conditions and other ailments.

 

Under its patented production process, Omega produces OmegaPure^®, a taste-free, odorless refined fish oil which is the only marine source of long-chain Omega-3’s directly affirmed by the U.S. Food and Drug Administration (“FDA”) as a food ingredient that is Generally Recognized as Safe (“GRAS”). See “Company Overview — Products” in Part I Item 1 and 2 of Omega’s Form 10-K Annual Report for the year ended December 31, 2005.

 

Omega operates through two material subsidiaries: Omega Protein, Inc. and Omega Shipyard, Inc. Omega Protein, Inc. is Omega’s principal operating subsidiary for its menhaden processing business and is the successor to a business conducted since 1913. Omega Shipyard, Inc. owns a drydock facility in Moss Point, Mississippi, which is used to provide shoreside maintenance for Omega’s fishing fleet and, subject to outside demand and excess capacity, occasionally for third-party vessels. Revenues from shipyard work for third-party vessels for the three and six-month periods ended June 30, 2006 and 2005 were not material. Omega also has a number of other immaterial direct and indirect subsidiaries.

 

Prior to 2005, Omega had operated a Mexican subsidiary which had coordinated Omega’s fish meal and oil sales and purchases through a local Mexican sales office. In 2005, Omega discontinued its use of this Mexican office and consolidated these functions in its Houston, Texas headquarters.

 

Fishing.  Omega’s harvesting season generally extends from May through December on the mid-Atlantic coast and from April through October on the Gulf coast. During the off-season and the first few months of each fishing season, Omega fills purchase orders from the inventory it has accumulated during the previous fishing season or in some cases, by re-selling meal purchased from other suppliers.

During the second quarter of 2006, Omega owned a fleet of 61 fishing vessels and 32 spotter aircraft for use in its fishing operations and also leased additional aircraft where necessary to facilitate operations. During the 2006 fishing season in the Gulf of Mexico, which runs from mid-April through October, Omega is operating 30 fishing and carry vessels and 28 spotter aircraft. The fishing area in the Gulf is generally located along the Gulf Coast, with a concentration off the Louisiana and Mississippi coasts. The fishing season along the Atlantic coast begins in early May and usually extends into December. During the 2006 season, Omega is operating 11 fishing vessels and 7 spotter aircraft along the Mid-Atlantic coast, concentrated primarily in and around Virginia and North Carolina. The remaining fleet of fishing vessels and spotter aircraft are not routinely operated during the fishing season and are back-up to the active fleet, used for other transportation purposes, inactive or in the process of refurbishment in Omega’s shipyard.

 

Menhaden usually school in large, tight clusters and are commonly found in warm, shallow waters. Spotter aircraft locate the schools and direct the fishing vessels to them. The principal fishing vessels transport two 40-foot purse boats, each carrying several fishermen and one end of a 1,500-foot net. The purse boats encircle the school and capture the fish in the net. The fish are then pumped from the net into refrigerated holds of the fishing vessel or onto a carry vessel, and then are unloaded at Omega’s processing plants. “Carry vessels” do not engage in active fishing but instead carry fish from Omega’s offshore fishing vessels to its plants. Utilization of carry vessels increases the amount of time that certain of Omega’s fishing vessels remain offshore fishing productive waters and therefore increases Omega’s fish catch per vessel employed. The carry vessels have reduced crews and crew expenses and incur less maintenance cost than the actual fishing vessels.

 

Omega’s principal raw material is menhaden, a species of fish that inhabits coastal and inland tidal waters in the United States. Menhaden are undesirable for direct human consumption due to their small size, prominent bones and high oil content. Certain state agencies, as well as interstate compacts, impose resource depletion restrictions on menhaden pursuant to fisheries management legislation or regulations and may impose additional legislation or regulations in the future. For example, in August 2005, the Management Board of the Atlantic States Marine Fisheries Commission, or ASMFC, approved an addendum to an existing Fishery Management Plan. The addendum would have established an annual cap for a five year period beginning in 2006 on Omega’s menhaden landings from the Chesapeake Bay in an amount equal to Omega’s average annual landings over a five year period from 2000 to 2004 (approximately 106,000 metric tons). The Commonwealth of Virginia has declined to adopt the ASMFC’s recommended addendum but has instead put forth its own proposal whereby Omega’s Chesapeake Bay menhaden harvest would be capped for a five year period at its most recent five-year average (2001 to 2005) of 109,020 metric tons per year. The Virginia proposal would also allow Omega a credit whereby any under-harvest in a particular year below the 109,020 metric ton cap would be added to increase the cap for the following year, up to a maximum of 122,740 metric tons per year. Omega has agreed to support the Commonwealth of Virginia’s proposal in an effort to move forward constructively and avoid further contention on this issue. See Omega’s 2005 10-K “Item 1 and 2. Business and Properties — Company Overview — Regulation” and Omega’s Form 10-Q for the quarter ended June 30, 2006 “Item 5. Other Information.” To date, Omega has not experienced any material adverse impact on its fish catch or results of operations as a result of these recommended restrictions.

Harvesting and Production.  The following table summarizes Omega’s harvesting and production for the indicated periods:

 

 

 

 

In 2002, Omega’s total production was 241,972 tons of meal, oil and solubles. During 2005, 2004 and 2003, Omega experienced a poor fish catch (approximately 11%, 18% and 11%, respectively, below expectations and a similar reduction from 2002 actual results), combined with poor oil yields. In 2005, the reduced fish catch was primarily attributable to Hurricanes Katrina and Rita and the subsequent loss of substantially all Gulf operating capacity resulting from those hurricanes. In 2004 and 2003, the reduced fish catch was primarily attributable to adverse weather conditions and the poor oil yields were due to the reduced fat content of the fish. As a result of the poor fish catch and reduced yields, Omega experienced significantly higher per unit product costs (approximately 15% increase) during 2004 compared to 2003. The impact of higher cost inventories and fewer volumes available for sale was carried forward and has adversely affected Omega’s earnings through the first and second quarters of 2005. During the third quarter of 2005, Omega suffered plant closures due to Hurricanes Katrina and Rita. The direct impact of the hurricanes upon Omega was loss of physical inventories and physical damage to three plants. The interruption of processing capabilities caused Omega to address the impact of abnormal downtime of its processing facilities, which resulted in the immediate recognition of costs which would ordinarily have been captured as inventory costs. The amounts of these losses were substantial and are more fully described in Notes 4, 5, 6 and 11 in Notes to Consolidated Financial Statements as of and for the fiscal years ended December 31, 2005 and 2004, and for the fiscal year ended December 31, 2003 appearing elsewhere in this Information Statement.

 

Meal and Oil Processing Plants.  Omega operates four meal and oil processing plants, two in Louisiana, one in Mississippi and one in Virginia, where the menhaden are processed into three general products types: fish meal, fish oil and fish solubles. Omega’s processing plants are located in coastal areas near Omega’s fishing fleet. Annual volume processed varies depending upon menhaden catch. Each plant maintains a dedicated dock to unload fish, fish processing equipment and storage facility. The fish are unloaded from the fishing vessels into storage boxes and then conveyed into steam cookers. The fish are then passed through presses to remove most of the oil and water. The solid portions of the fish are dried and ground into fish meal. The liquid that is produced in the cooking and pressing operations contains oil, water, dissolved protein and some fish solids. This liquid is decanted to remove the water and solids and is put through a centrifugal oil and water separation process. The separated fish oil is a finished product called crude oil. The separated water and protein mixture is further processed through evaporators to recover the soluble protein, which can be sold as a finished product or added to the solid portions of the fish for processing into fish meal.

 

Shipyard.  Omega owns a 49.4 acre shipyard facility in Moss Point, Mississippi which includes two dry docks, each with a capacity of 1,300 tons. The shipyard is used for routine maintenance and vessel refurbishment on Omega’s fishing vessels and occasionally for shoreside maintenance services to third-party vessels if excess capacity exists.

Health and Science Center.  In October 2004, Omega completed construction and commenced operation of a new Health and Science Center that provides 100-metric tons per day fish oil processing capacity. The new center is located adjacent to Omega’s Reedville, Virginia processing plant. The food-grade facility includes state-of-the-art processing equipment and controls that will allow Omega to refine, bleach, fractionate and deodorize its menhaden fish oil and has more than tripled Omega’s previous refined fish oil production capacity for food grade oils and industrial and feed grade oils. The facility also provides Omega with automated packaging and on-site refrigerated storage capacity and has a lipids analytical laboratory to enhance the development of Omega-3 oils and food products.

 

New Technical Center.  Omega is in the process of building a new technical center to be located in Houston, Texas to further develop its OmegaPure^® food grade Omega-3 product line. The technical center will have food science application labs, as well as analytical, sensory and pilot plant capabilities. The technical center will also have a lipids research lab where Omega plans to continue to develop new Omega-3 products that have improved functionality and technical characteristics. The new facility is expected to be completed the latter part of 2006.

 

Hurricane Damages.  In August 2005, Omega’s Moss Point, Mississippi fish processing facility and adjacent shipyard were severely damaged by Hurricane Katrina. In September 2005, Omega’s Cameron, Louisiana and Abbeville, Louisiana fish processing facilities were also severely damaged by Hurricane Rita. Each of these facilities was non-operational immediately after these weather events. The Moss Point, Abbeville and Cameron facilities accounted for approximately 16%, 31% and 22%, respectively, of Omega’s full year 2004 production tonnage, so as an immediate result of the two hurricanes, approximately 70% of Omega’s operating capacity was impaired and Omega’s business, results of operations and financial condition were materially adversely affected.

 

Operations at the Moss Point and Abbeville fish processing facilities and the shipyard were re-established in mid-October 2005, but at reduced processing capabilities. These two facilities were returned to full operational status prior to the beginning of the Gulf fishing season in April 2006. Operations at the Cameron fish processing facility were re-established in June 2006, but at reduced processing capabilities. The reduced capacity has not had a significant impact on the processing of the Cameron fish catch since operations were re-established. Omega plans for the Cameron facility to be at full operational status prior to the end of the 2006 fishing season.

 

Omega maintains insurance coverage for a variety of these damages, most notably property, inventory and vessel insurance. The nature and extent of the insurance coverage varies by line of policy and Omega has recorded insurance recoveries as an account receivable based on the preliminary discussions with insurers and adjusters. Omega anticipates that further recoveries could be available, but such additional recoveries will require further analysis and discussions with Omega’s insurance carriers, and the resolution of the lawsuit filed by Omega against its property insurance carriers described below. Such recoveries, if any, would be recognized in future periods once they are deemed probable. Omega does not maintain business interruption insurance in any material amounts due to its high cost and limited availability.

 

The direct impact of the two hurricanes upon Omega was a loss of physical inventories and physical damage to the plants. Omega estimated its total hurricane damages at approximately $28.0 million, of which approximately $12.0 million is expected to be recovered under insurance policies ($4.0 million of which was received as of June 30, 2006). Therefore, Omega has recognized a $16.2 million loss as of June 30, 2006 due to estimated damages in excess of insurance recoveries. Of the damage estimate, approximately $2.5 million was related to damaged fish meal inventory and approximately $13.0 million was related to write-offs of inventory costs that had been allocated to future production that did not occur. Omega did not maintain business interruption insurance for these types of deferred inventory costs due to its high cost and limited availability. During the second quarter 2006, Omega salvaged additional fish meal that was previously recognized as a loss from natural disaster of approximately $610,000. This meal was sold during the second quarter 2006 which resulted in Omega recognizing revenue without cost of revenues as the related costs were recorded as a loss in the third quarter 2005. Omega did not maintain business interruption insurance for these types of deferred inventory costs due to its high cost and limited availability. See Omega’s 2005 Annual Report on Form 10-K “Item 8. Financial Statements and Supplementary Data — Note 12 Hurricane Losses” for additional information on the components of the hurricane related losses. A substantial portion of the amounts listed are based upon estimates and assumptions. Actual amounts, when

available, could differ materially from those estimates and changes to those estimates could have a material effect on Omega’s future financial statements.

 

In order to facilitate the insurance recovery process, on July 28, 2006, Omega filed a lawsuit against its property insurance carriers, Lexington Insurance Company and RSUI Indemnity Company, in U.S. District Court for the Western District of Louisiana, alleging breach of contract and bad faith based on the insurance carriers’ failure to pay amounts due to Omega under its property insurance policies for damages sustained from Hurricanes Katrina and Rita in the third quarter of 2005. Omega seeks recovery in a jury trial of all available damages to which it is entitled by law, legal interest on those damages, the cost of the litigation and any other damages as the court deems appropriate. The total damages sought in the lawsuit are in excess of the amount Omega has remaining as a receivable relating to its initial recorded hurricane claim from its property insurance carriers. Omega believes collection of the recorded receivable is probable; however, an unfavorable outcome of the proceeding could have a material impact on Omega’s financial position and result of operations.

 

Not included in the amounts listed are the replacement capital costs of property and equipment, which did not have any book basis and were destroyed in the hurricanes, and the costs of clean up incurred subsequent to June 30, 2006.

 

As of June 30, 2006, Omega’s four active processing plants, assuming that no hurricane damages had occurred, would have had an aggregate annual capacity to process approximately 950,000 tons of fish. The previously described hurricane damages reduced the annual aggregate processing capacity to approximately 850,000 tons as of June 30, 2006. Operations at the Cameron fish processing facility were re-established in June 2006, but at reduced processing capabilities. Omega plans for the Cameron facility to be at full operational status prior to the end of the 2006 fishing season.

 

Because of the damages to Omega’s Cameron, Louisiana facility caused by Hurricane Rita, Omega began its 2006 fishing season by operating its full contingent of 30 Gulf of Mexico fishing and carry vessels out of its two operating facilities in Abbeville, Louisiana and Moss Point, Mississippi. These activities substantially increased the number of vessels at the Abbeville and Moss Point plants to a level that Omega had not operated previously. Although these two facilities had adequate processing capacity, Omega’s fishing efforts were diminished because increased unloading time due to the additional vessels which reduced the number of vessels on the fishing grounds during the most optimal fishing times. During June 2006, 10 vessels were shifted to the Cameron facility when it became operational.

 

Markets.  Pricing for Omega’s products has been volatile in the past several years and is attributable mainly to the international availability, or the perceived international availability, of fish meal and fish oil inventories. In an effort to reduce price volatility and to generate higher, more consistent profit margins, in fiscal 2000 Omega embarked on a quality control program designed to increase its capability of producing higher quality fish meal products and, in conjunction therewith, enhanced it sales efforts to penetrate premium product markets. Since 2000, Omega’s sales volumes of specialty meal products have increased approximately 41%. Future volumetric growth in specialty meal sales will be dependant upon increased harvesting efforts and market demand. Additionally, Omega is attempting to introduce its refined fish oil into the food market. Omega has made sales, which to date have not been material, of its refined fish oil, trademarked OmegaPure^®, to food manufacturers in the United States and Canada at prices that provide substantially improved margins over the margins that can be obtained from selling non-refined crude fish oil. Omega cannot estimate, however, the size of the actual domestic or international markets for Omega Pure or how long it may take to develop these markets.

 

During 2002, Omega developed a business plan to expand its purchase and resale of other manufacturers’ fish meal and fish oil products and engaged a full-time consultant to implement Omega’s business plan which focused initially on the purchase and resale of Mexican fish meal and fish oil. In 2002, revenues generated from these types of transactions represented less than 2% of Omega’s total revenues. During 2003 and again in 2004, Omega’s fish catch and resultant product inventories were reduced, primarily due to adverse weather conditions. Omega supplemented its inventories and subsequent sales by purchasing other fish meal and oil products. Although operating margins from these activities are less than the margins typically generated from Omega’s base domestic production, these operations provide Omega with a source of fish meal and oil to sell into other markets where Omega has not historically had a presence. Omega purchased products totaling approximately 16,555 and 17,800

tons, or approximately 8% and 8% of total volume sales for the fiscal year ended December 31, 2005 and 2004, respectively.

 

Distribution System.  Omega’s distribution system of warehouses, tank storage facilities, vessel loading facilities, trucks, barges and railcars allows Omega to service customers throughout the United States and also foreign locations. Omega owns and leases warehouses and tank storage space for storage of its products, generally at terminals along the Mississippi River and Tennessee River. Omega generally contracts with third-party trucking, vessel, barge and railcar companies to transport its products to and from warehouses and tank storage facilities and directly to its customers.

 

Historically, approximately 35% to 40% of Omega’s FAQ grade fish meal was sold on a two-to-twelve-month forward contract basis. The balance of FAQ grade fish meal and other products was substantially sold on a spot basis through purchase orders. In 2002, Omega began a similar forward sales program for its specialty grade meals and crude fish oil due to increasing demand for these products. During 2003, 2004 and 2005, approximately 50%, 43% and 70%, respectively, of Omega’s specialty meals and crude fish oil had been sold on a forward contract basis. Prior to the beginning of Omega’s 2006 fishing season, approximately 64% and 86% of Omega’s 2006 forecasted fish meal and crude fish oil had either been sold or sold forward on a contract basis. The percentage of fish meal and crude fish oil sold on a forward contract basis will fluctuate from year to year based upon perceived market availability.

 

Omega’s annual revenues are highly dependent on both annual fish catch and inventories and, in addition, inventory is generally carried over from one year to the next year. Omega determines the level of inventory to be carried over based on prevailing market prices of the products and anticipated customer usage and demand during the off-season. Thus, production volume does not necessarily correlate with sales volume in the same year and sales volumes will fluctuate from quarter to quarter. Omega’s fish meal products have a useable life of approximately one year from date of production. Practically, however Omega attempts to empty its warehouses of the previous season’s products by the second or third month of the new fishing season. Omega’s crude fish oil products do not lose efficacy unless exposed to oxygen and, therefore, their storage life typically is longer than that of fish meal.

 

The following table sets forth Omega’s revenues by product (in millions) and the approximate percentage of total revenues represented thereby, for the indicated periods:

 

 

 

Omega from time to time considers potential transactions including, but not limited to, enhancement of physical facilities to improve production capabilities and the acquisition of other businesses. Certain of the potential transactions reviewed by Omega would, if completed, result in its entering new lines of business (generally including certain businesses to which Omega sells its products such as pet food manufacturers, aquaculture feed manufacturers, fertilizer companies and organic foods distributors), although historically, reviewed opportunities have been generally related in some manner to Omega’s existing operations or which would have added new protein products to Omega’s product lines. Although Omega does not, as of the date hereof, have any commitment with respect to a material acquisition, except as described in this Information Statement, it could enter into such agreement in the future.

 

Omega carries insurance for certain losses relating to its vessels and Jones Act liability for employees aboard its vessels, or vessel claims insurance. The typical vessel claims insurance policy contains an annual aggregate deductible, or AAD, for which Omega remains responsible, while the insurance carrier is responsible for all applicable amounts which exceed the AAD. It is Omega’s policy to accrue current amounts due and record amounts paid out on each claim. Once payments exceed the AAD, Omega records an insurance receivable for a given policy year.

 

Customers and Marketing.  Most of Omega’s marine protein products are sold directly to about 600 customers by Omega’s agriproducts sales department, while a smaller amount is sold through independent sales agents. Product inventory was $30.7 million on June 30, 2006 versus $33.4 million as of June 30, 2005.

 

Omega’s fish meal is sold primarily to domestic feed producers for utilization as a high-protein ingredient for the swine, aquaculture, dairy and pet food industries. Fish oil sales primarily involve export markets where the fish oil is used for aquaculture feeds and is refined for use as a hydrogenated edible oil.

 

Omega’s products are sold both in the U.S. and internationally. International sales consist mainly of fish oil sales to Norway, Canada, Chile, China, Japan and Mexico. Omega’s sales in these foreign markets are denominated in U.S. dollars and not directly affected by currency fluctuations. Such sales could be adversely affected by changes in demand resulting from fluctuations in currency exchange rates.

 

A number of countries in which Omega currently sells products impose various tariffs and duties, none of which have a significant impact on Omega’s foreign sales. Certain of these duties are being reduced annually for certain countries under the North American Free Trade Agreement and the Uruguay Round Agreement of the General Agreement on Tariffs and Trade. In all cases, Omega’s products are shipped to its customers either by FOB shipping point or CIF terms, and therefore, the customer is responsible for any tariffs, duties or other levies imposed on Omega’s products sold into these markets.

 

During the off season, Omega fills purchase orders from the inventory it has accumulated during the fishing season or in some cases, by re-selling meal purchased from other suppliers. Prices for Omega’s products tend to be lower during the fishing season when product is more abundant than in the off season. Throughout the entire year, prices are often significantly influenced by supply and demand in world markets for competing products, primarily other global sources of fish meal and oil, and also soybean meal for its fish meal products, and vegetable oils for its fish oil products when used as an alternative.

Quality Control.  Omega believes that maintaining high standards of quality in all aspects of its manufacturing operations play an important part in its ability to attract and retain customers and maintain its competitive position. To that end, Omega has adopted strict quality control systems and procedures designed to test the quality aspects of its products, such as protein content and digestibility. Omega regularly reviews, updates and modifies these systems and procedures as appropriate.

 

Purchases and Sales of Third-Party Meal and Oils.  Omega has from time to time purchased fish meal and fish oil from other domestic and international manufacturers. These purchase and resale transactions have been ancillary to Omega’s base manufacturing and sales business.

 

Part of Omega’s business plan involves expanding its purchase and resale of other manufacturers’ fish meal and fish oil products. During 2003, 2004 and 2005, Omega’s fish catch and resultant product inventories were reduced, primarily due to adverse weather conditions, and Omega further expanded its purchase and resales of other fish meals and oils (primarily Panamanian, Peruvian and Mexican fish meal and U.S. menhaden oil). Although operating margins from these activities are less than the margins typically generated from Omega’s base domestic production, these operations provide Omega with a source of fish meal and oil to sell into other markets, some of which, Omega has not historically had a presence. During 2003, Omega purchased products totaling approximately 12,500 tons, or approximately 5% of total volume 2003 sales. During 2004, Omega purchased products totaling approximately 17,800 tons, or approximately 8% of total volume 2004 sales. During 2003, Omega purchased products totaling approximately 12,500 tons, or approximately 5% of total volume 2003 sales. During 2004, Omega purchased products totaling approximately 17,800 tons, or approximately 8% of total volume 2004 sales. During 2005, Omega purchased products totaling approximately 16,600 tons, or approximately 8% of total volume 2005 sales. During the quarter ended March 31, 2006, Omega purchased products totaling approximately 12,000 tons, the majority of which were sold during the quarter ended June 30, 2006.

 

Insurance.  Omega maintains insurance against physical loss and damage to its assets, coverage against liabilities to third parties it may incur in the course of its operations, as well as workers’ compensation, United States Longshoremen’s and Harbor Workers’ Compensation Act and Jones Act coverage. Assets are insured at replacement cost, market value or assessed earning power. Omega’s limits for liability coverage are statutory or $50 million. The $50 million limit is comprised of several excess liability policies, which are subject to deductibles, underlying limits, annual aggregates and exclusions. Omega believes its insurance coverage to be in such form, against such risks, for such amounts and subject to such deductibles and self-retentions as are prudent and normal for its operations. Over the last four years, Omega has elected to increase its deductibles and self-retentions in order to achieve lower insurance premium costs. These higher deductibles and self-retentions have resulted in greater costs to Omega in the case of Hurricanes Katrina and Rita and will expose Omega to greater risk of loss if additional future claims occur. In addition, Omega’s cost of insurance for property damage has increased materially and will likely further increase materially in future years as insurers recoup losses paid and to be paid out in connection with the Katrina and Rita hurricanes by charging higher premiums. Omega does not maintain business interruption insurance in any material amount due to its high cost and limited availability.

 

Competition.  Omega competes with a smaller domestic privately-owned menhaden fishing company and with international marine protein and oil producers, including Mexican sardine processors and South American anchovy processors. In addition, but to a lesser extent, Omega’s marine protein and oil business is also subject to significant competition from producers of vegetable and other animal protein products and oil products such as Archer Daniels Midland and Cargill. Many of these competitors have significantly greater financial resources and more extensive and diversified operations than those of Omega.

 

Omega competes on price, quality and performance characteristics of its products, such as protein level and amino acid profile in the case of fish meal. The principal competition for Omega’s fish meal and fish solubles is from other global production of marine proteins as well as other protein sources such as soybean meal and other vegetable or animal protein products. Omega believes, however, that these other non-marine sources are not complete substitutes because fish meal offers nutritional values not contained in such other sources. Other globally produced fish oils provide the primary market competition for Omega’s fish oil, as well as soybean and rapeseed oil, from time to time.

Fish meal prices have historically borne a relationship to prevailing soybean meal prices (more weakly correlated in recent years), while prices for fish oil are generally influenced by prices for vegetable fats and oils, such as rape and palm oils. Thus, the prices for Omega’s products are established by worldwide supply and demand relationships over which Omega has no control and tend to fluctuate significantly over the course of a year and from year to year.

 

Seasonal and Quarterly Results.  Omega’s menhaden harvesting and processing business is seasonal in nature. Omega generally has higher sales during the menhaden harvesting season (which includes the second and third quarter of each fiscal year) due to increased product availability, but prices during the fishing season tend to be lower than during the off-season. As a result, Omega’s quarterly operating results have fluctuated in the past and may fluctuate in the future. In addition, from time to time Omega defers sales of inventory based on worldwide prices for competing products that affect prices for Omega’s products which may affect comparable period comparisons.

 

Safety Components

 

Safety is an independent supplier of automotive airbag fabric and cushions and technical fabrics with operations in North America and Europe. We originally purchased 2,663,905 shares of Safety common stock for $30.9 million on September 23, 2003, and purchased an additional 1,498,489 shares on October 7, 2003 for $16.9 million, bringing our ownership percentage to approximately 84% at that time. We accounted for these transactions under the purchase method and began consolidating amounts related to Safety’s assets and liabilities as of September 30, 2003 and amounts related to Safety’s results of operations in the fourth quarter of 2003.

 

On September 21, 2005, our Board of Directors approved a plan to pursue a sale of all of our 4,162,394 shares of Safety common stock. Based on this approval, we determined that this subsidiary substantially met the criteria to report the pending sale as “Assets Held for Sale” and the subsidiary as “Discontinued Operations” in accordance with accounting rules. As used throughout this document, all amounts and disclosures related to Safety pertain to “Discontinued Operations.”

 

On December 2, 2005, we closed on the sale of all of its 4,162,394 shares of common stock in Safety to WLR Recovery Fund II, L.P. and WLR Recovery Fund III, L.P., Delaware limited partnerships, or the WLR Recovery Funds, for $12.30 per share or $51,197,446 in the aggregate. Prior to the close of the sale, we paid an aggregate of $1,000,000 in the form of a capital contribution to Safety for the Safety compensation committee to pay bonuses to its executive officers and key employees. This payment was made under a plan approved by us during the third quarter of 2005 to provide Safety management with an incentive to continue with Safety until the completion of the sale to the WLR Recovery Funds.

 

For the year ended December 31, 2005, we recorded a transaction related loss of $9.9 million related to the sale of Safety. This amount primarily reflects the reduction of the carrying value of Safety to the net selling price, partially offset by the reversal of certain deferred tax liabilities. Though we sold our shares in Safety for a cash gain compared to the original investment, this transaction related loss resulted from the sales proceeds being less than our carrying value of our investment in Safety. Safety’s generation of net income subsequent to our original purchase of the stock increased our carrying value which consisted of our original investment in common stock of Safety and the aforementioned subsequent capital contribution.

Consolidated Results of Operations

 

The following tables summarize our consolidating results of operations (in thousands). Certain reclassifications of prior information have been made to conform to the current presentation.