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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal year ended December 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to____
Commission file number: 1-4219
Zapata Corporation
(Exact name of Registrant as specified in its charter)
State of Nevada 74-1339132
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
100 Meridian Centre, Suite 350
Rochester, NY 14618 Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (716) 242-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, $0.01 par value...................New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None.
As of March 15, 2001, the registrant had outstanding 2,390,849 shares
common stock, $0.01 par value (reflects completion of a one-for-ten reverse
stock split). As of March 15, 2001, the aggregate market value of the
registrant's common stock held by non-affiliates of the Company was $21,164,049,
based on the closing price in consolidated trading on that day, for the
Company's common stock. For the sole purpose of making this calculation, the
term "non-affiliate" has been interpreted to exclude directors, corporate
officers and holders of 5% or more of the Company's common stock. Such
interpretation is not intended to be, and should not be construed as an
admission by the Registrant or such directors, corporate officers or
stockholders that such directors, corporate officers or stockholders are
"affiliates" of the Registrant, as that term is defined in the Securities Act of
1933.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| or No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
Documents Incorporated By Reference: Portions of the Registrant's
definitive Proxy Statement for its 2000 Annual Meeting of Stockholders, which
the Company plans to file with the Securities and Exchange Commission pursuant
to regulations 14A, on or prior to April 30, 2001, are incorporated by reference
in Part III (Items 10, 11, 12, and 13) of this Form 10-K.
TABLE OF CONTENTS
Page
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PART I
Item 1. Description of Business .......................................... 2
General .......................................................... 2
Food Segment ..................................................... 3
Omega Protein Corporation ........................................ 3
Viskase Companies, Inc. .......................................... 6
Internet Segment ................................................. 6
Zap.Com Corporation .............................................. 6
Charged Productions, Inc. ........................................ 7
Business Acquisitions ............................................ 8
Employees ........................................................ 8
Financial Information About Industry Segments .................... 9
Item 2. Properties ....................................................... 9
Item 3. Legal Proceedings ................................................ 10
Item 4. Submission of Matters to a Vote of Security Holders .............. 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters ............................................ 11
Item 6. Selected Financial Data .......................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 13
General .......................................................... 13
Results of Operations ............................................ 15
Liquidity and Capital Resources .................................. 19
Recent Accounting Pronouncements ................................. 21
Significant Factors That Could Affect Future
Performance and Forward-Looking
Statements ....................................................... 21
Item 7.A.Quantitative and Qualitative Disclosures About Market Risk ....... 23
Item 8. Financial Statements and Supplementary Data ...................... 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .......................... 52
PART III
Item 10. Directors and Executive Officers of the Registrant ............... 52
Item 11. Executive Compensation ........................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 52
Item 13. Certain Relationships and Related Transactions ................... 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .. 53
FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. This document contains certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company
intends such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and includes this statement for purposes of such
safe harbor provisions. Forward-looking statements, which are based upon certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by use of the words "believes," "expects,",
"intends," "anticipates," "plans," "seeks," "estimates," "projects" or similar
expressions. The ability of the Company to predict results or the actual effect
of future plans or strategies is inherently uncertain. Important factors which
may cause actual results to differ materially from the forward-looking
statements contained herein or in other public statements by the Company are
described under the caption "Part II--Item 7--Management's Discussion and
Analysis of Financial Condition and Results of Operation-Significant Factors
That Could Affect Future Performance and Forward-Looking Statements" appearing
in this Report and other risks identified from time to time in the Company's
filings with the Securities and Exchange Commission ("SEC"), press releases and
other communications. The Company assumes no obligation to update
forward-looking statements.
PART I
All references herein to a Fiscal year for Zapata Corporation ("Zapata" or
the "Company") and Omega Protein Corporation ("Omega Protein" or "Omega") are to
a 12-month period ended September 30 for years prior to and including September
30, 1998, and December 31 for years subsequent to December 31, 1998. All
references herein to a transition period for Zapata and Omega Protein are to a
three-month period ending December 31, 1998. In January 2001, the Company
completed a one-for-ten reverse stock split. Accordingly, share and per share
amounts have been retroactively restated for the reverse split.
Item 1. Description of Business
General
Zapata was incorporated in Delaware in 1954 and was reincorporated in
Nevada in April 1999. The Company's principal executive offices are at 100
Meridian Centre, Suite 350, Rochester, New York 14618.
Zapata is a holding company, which since April 1998 has, through its
subsidiaries, operated primarily in two industry segments: the food segment and
the Internet segment. Zapata operates its food related businesses indirectly
through its 61% owned subsidiary, Omega Protein (formerly known as Marine
Genetics Corporation and Zapata Protein, Inc.) and its 38% owned company,
Viskase Corporation ("Viskase") (formerly known as Envirodyne Industries, Inc.).
Zapata has operated its Internet related businesses directly and indirectly
through its wholly owned subsidiary, Charged Productions, Inc. (formerly known
as Zap Internet Corporation) ("Charged Productions") and its 98% owned
subsidiary, Zap.Com Corporation ("Zap.Com"). Zap.Com is in the Internet industry
and its stock is traded on the over-the-counter market on the NASD's electronic
bulletin board. Omega Protein is engaged in the marine protein business and its
stock is traded on the New York Stock Exchange ("NYSE") under the symbol "OME."
Viskase is engaged in the food packaging business and its stock is traded in the
over-the-counter market on the NASDAQ Small-Cap Market under the symbol "VCIC."
During December 2000, the Company made a strategic decision to cease the
operations of Charged Productions. In connection with this decision, Charged
Productions incurred a one-time charge of approximately $420,000 related to
asset write-downs and approximately $182,000 related to contract termination
expenses. The Company is currently negotiating the sale of Charged Productions
to former employees. The Company expects to finalize the transaction in the
second quarter of 2001; however, there is no assurance that it will be
consummated.
2
In December 2000, the Zap.Com Board of Directors (which consists only of
Zapata's President and Chief Executive Officer, Avram Glazer) determined based
on projected continuing operating losses that it would cease its Internet
operations. In connection with this decision, Zap.Com incurred a one-time charge
of approximately $873,000 related to asset write-downs and approximately
$597,000 related to contract termination expenses. Although Zap.Com believes
that the reserves it has established for contingent liabilities are adequate,
there is no assurance that the ultimate liabilities will not exceed the reserved
amounts. Certain parties to the terminated contracts have challenged Zap.Com's
position as to the amount owed upon termination. There can be no assurance that
Zap.Com will not encounter litigation if an agreement cannot be reached with
these parties, or that it will be successful if any such litigation is
commenced.
During 2000, Zapata sought to establish a funding mechanism to leverage its
available funds for future acquisitions, while still meeting the funding
requirements for its direct operations. Specifically, Zapata expanded its
investment policy to include non-investment grade debt that could be purchased
at a significant discount. From June 2000 through November 2000, the Company
invested $29.9 million in significantly discounted non-investment grade. Due to
a decline deemed other than temporary, an impairment charge of approximately
$9.5 million was recognized during the current year to adjust the investment to
market value. In addition, the Company sold one of its non-investment grade
securities subsequent to year-end at an amount significantly below its carrying
value. As a result of the sale, this investment was deemed impaired as of
December 31, 2000 resulting in a charge of approximately $3.6 million.
Zapata is engaged in the active search for one or more new operating
businesses to acquire. The Company searches for and evaluates potential
acquisition candidates that are well managed and meet its financial acquisition
criteria. As of the date of this report, the Company is not a party to any
agreement for the acquisition of an operating business. Further there can be no
assurance that the Company will be able to locate and consummate a suitable
acquisition or that any acquisitions which are consummated will ultimately prove
to be beneficial to the Company and its stockholders.
Food Segment
Omega Protein
Omega Protein was a wholly-owned subsidiary of Zapata until April 1998 when
Omega Protein completed its initial public offering. As of the date of this
report, Zapata holds 14,501,000 shares of Omega Protein's common stock, or
approximately 61% of Omega Protein's outstanding common stock.
Omega Protein's marine protein operations involve the production and sale
of a variety of protein products derived from menhaden, a species of fish found
along the Gulf of Mexico and Atlantic coasts. Omega is the largest processor,
marketer and distributor of marine products (fish meal) and fats (fish oil) in
the United States. Omega processes several grades of fish meal (regular or "FAQ"
meal and specialty meals), as well as fish oil and fish solubles. Omega's fish
meal products are primarily used as a protein ingredient in animal feed for
poultry, swine, cattle, aquaculture and household pets. Omega's fish oil is
primarily used as an ingredient in margarine and shortening. Omega's fish
solubles are sold primarily to livestock feed manufacturers and for use as an
organic fertilizer.
Fishing. During Fiscal 2000, Omega owned a fleet of 65 fishing vessels and
33 spotter aircraft for use in its fishing operations and also leased additional
aircraft where necessary to facilitate operations. During the 2000 fishing
season in the Gulf of Mexico, where the fishing season runs from mid-April
through October, Omega operated 30 fishing vessels and 28 spotter aircraft. The
fishing area in the Gulf is generally located along the entire Gulf Coast, with
a concentration off of the Louisiana and Mississippi coasts. The fishing season
along the Atlantic coast begins in early May and usually extends into December.
Omega operated 10 fishing vessels and 8 spotter aircraft along the Mid-Atlantic
coast, concentrated primarily in and around the Chesapeake Bay. For Fiscal 2000,
Omega Protein converted four of its former fishing vessels to "carry vessels"
which did not engage in active fishing but instead carried fish catch from
Omega's offshore fishing vessels to its plants.
3
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 on the
carry vessel, and then are unloaded at Omega's processing plants.
Processing. During Fiscal 2000, Omega operated four processing plants, two
in Louisiana, one in Mississippi and one in Virginia, where the menhaden are
processed into fish meal, fish oil and fish solubles.
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 then
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 solids and is then put through a centrifugal
oil and water separation process. The separated fish oil is a finished product.
The separated water and protein mixture is further processed through evaporators
to remove 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.
Fish meal, the principal product made from menhaden, is sold primarily as a
high-protein feed ingredient. It is used as a protein supplement in feed
formulated for pigs and other livestock. Each use requires certain standards to
be met regarding quality and protein content, which are determined by the
freshness of the fish and by processing conditions such as speed and
temperatures. Fish solubles are a liquid protein product used as an additive in
fish meal and also marketed as an independent product to animal feed formulators
and the fertilizer industry.
Fish oil from menhaden is widely used for human consumption as an edible
fat in Europe. Refined and hydrogenated menhaden oils have a wide variety of
applications as ingredients of margarine, cooking oil and solid cooking fats
used in baked goods. In June 1997, the U.S. Food and Drug Administration
approved the use of refined non-hydrogenated menhaden oil, a natural source of
Omega-3 fatty acids, for human consumption in the United States. Ongoing
scientific studies continue to link consumption of Omega-3-rich fish oil to a
number of nutritional and health benefits.
Customers and Marketing. Most of Omega's marine protein products are sold
directly to about 400 customers by Omega's marketing department, while a smaller
amount is sold through independent sales agents. Product inventory was $28.0
million as of December 31, 2000 versus $34.1 million on December 31, 1999.
Omega's fish meal is sold primarily to domestic feed producers for
utilization as a high-protein ingredient for the poultry, swine, aquaculture and
pet food industries. Fish oil sales primarily involve export markets where the
fish oil is refined for use as an edible oil.
Omega's products are sold both in the U.S. and internationally.
International sales consist mainly of fish oil sales to Canada, Japan, Mexico
and The Netherlands. 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 under the
North American Free Trade Agreement in the case of Mexico and Canada and under
the Uruguay Round Agreement of the General Agreement on the Trade and Tariffs in
the case of Japan. In all cases, Omega's products are shipped to its customers
either by F.O.B. 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.
Insurance. Omega Protein 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 and Harbor Workers' 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 $50.0 million. The $50.0 million limit is
4
comprised of several excess liability policies, which are subject to
deductibles, underlying limits and exclusions. Omega believes its insurance
coverage to be in such form, against such risks, for such amounts and subject to
such deductibles as are prudent and normal for its operations.
Competition. Omega Protein 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 protein sources such as soybean meal and other vegetable
or animal protein products. Omega believes, however, that these other sources
are not complete substitutes because fish meal offers nutritional values not
contained in such sources. Vegetable fats and oils, such as soybean and palm
oils, provide the primary market competition for fish oil. In addition, Omega
competes against domestic, privately owned menhaden fishing companies as well as
domestic and international producers of fish meal and fish oil derived from
species such as anchovy and horse mackerel.
Fish meal prices have historically borne a relationship to prevailing
soybean meal prices, while prices for fish oil are generally influenced by
prices for vegetable fats and oils, such as soybean 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 to a
significant extent over the course of a year and from year to year.
Regulation. Omega Protein's operations are subject to federal, state and
local laws and regulations relating to the location and periods in which fishing
may be conducted as well as environmental and safety matters. At the state and
local level, certain state and local government agencies have either enacted
legislation and regulations or have the authority to enact with legislation and
regulation to prohibit, restrict or regulate menhaden fishing within their
jurisdictional waters. Omega, through its operation of fishing vessels, is
subject to the jurisdiction of the U.S. Coast Guard, the National Transportation
Safety Board and the U.S. Customs Service. The U.S. Coast Guard and the National
Transportation Safety Board set safety standards and are authorized to
investigate vessel accidents and recommend improved safety standards. The U.S.
Customs Service is authorized to inspect vessels at will.
Omega's operations are also subject to federal, state and local laws and
regulations relating to the protection of the environment, including the federal
Water Pollution Control Act of 1972, which was significantly modified in 1977 to
deal with toxic water pollutants and re-named as the Clean Water Act, and which
imposes strict controls against the discharge of pollutants in reportable
quantities, and along with the Oil Pollution Act of 1990, imposes substantial
liability for the costs of oil removal, remediation and damages. Omega's marine
protein operations also are subject to the federal Clean Air Act, as amended;
the federal Resource Comprehensive Environmental Response, Compensation, and
Liability Act, which imposes liability, without regard to fault, on certain
classes of persons that contributed to the release of any "hazardous substances"
into the environment; and the federal Occupational Safety and Health Act
("OSHA"). The OSHA hazard communications standard, the Environmental Protection
Agency community right-to-know regulations under Title III of the federal
Superfund Amendment and Reauthorization Act and similar state statutes require
Omega to organize information about hazardous materials used or produced in its
operations. Certain of this information must be provided to employees, state and
local governmental authorities and local citizens. Numerous other environmental
laws and regulations, along with similar state laws, also apply to the
operations of Omega Protein, and all such laws and regulations are subject to
change.
Omega has made, and anticipates that it will make in the future,
expenditures in the ordinary course of its business in connection with
environmental matters. Such expenditures have not been material in the past and
are not expected to be material in the future. However, there is no assurance
that environmental laws and regulations enacted in the future will not adversely
affect Omega Protein's operations.
Omega's harvesting operations are subject to certain federal maritime laws
and regulations which require, among other things, that Omega be incorporated
under the laws of the U.S. or a state, Omega's chief executive officer be a U.S.
citizen, no more of Omega's directors be non-citizens than a minority of the
number necessary to constitute a quorum and at least 75% of Omega's outstanding
capital stock (including a majority of Omega's voting capital stock) be owned by
U.S. citizens. If Omega Protein fails to observe any of these requirements, it
will not be eligible to conduct its harvesting activities in U.S. jurisdictional
waters. Such a loss of eligibility would have a material adverse affect on
Omega's business, results of operations and financial conditions.
5
Omega Protein believes that during the past five years it has substantially
complied with all material statutes and regulations applicable to its
operations, the failure to comply with which would have had a material adverse
impact on its operations.
Viskase Companies, Inc.
Zapata holds 5,877,304 shares of Viskase's common stock or approximately
38% of Viskase's outstanding common stock. Viskase is engaged in the food
packaging business. Through December 31, 1998, Zapata reported its investment in
Viskase on an equity basis. In 1998, due to losses incurred by Viskase, Zapata's
investment in Viskase was reduced to zero for financial reporting purposes.
Accordingly, Viskase does not appear in Zapata's 2000 and 1999 financial
statements.
In September 1997 Viskase's Board of Directors retained Donaldson, Lufkin
and Jenrette Securities Corporation to assist it in evaluating its strategic
alternatives. Such alternatives included, among other things, sale of the entire
company, sale of business units or recapitalization. In June 1998, Viskase sold
its wholly owned subsidiary Sandusky, and in July 1998 Viskase sold its wholly
owned subsidiary Clear Shield. On January 17, 2000, Viskase's Board of Directors
announced its intent to sell the Viskase's plastic barrier and non-barrier
shrink Films Business. The sale of the Films Business was completed on August
31, 2000. The aggregate purchase price of $245 million, subject to a working
capital adjustment, was used to retire debt and for general corporate purposes.
Viskase recognized a net gain in the amount of $56.6 million in its third
quarter 2000 results. The business sold includes production facilities in the
United States, United Kingdom, and Brazil. In conjunction with the sale of the
Films Business, the Company shut down its oriented polypropylene (OPP) films
business located in Newton Aycliffe, England and the films operation in Canada.
On December 15, 2000, Viskase announced that it was implementing
significant cost reduction measures in an attempt to offset a projected
shortfall in earnings before interest, depreciation, taxes, and amortization
("EBITDA") for Fiscal 2001 from the estimated Fiscal 2000 EBITDA for continuing
operations. Unless these cost reduction measures are successful, EBITDA for
Fiscal 2001 could be as much as 20% lower than Fiscal 2000. These cost reduction
measures are necessary due to continued deterioration in the cellulosic casings
market, specifically, continued competitive price pressure and increases in the
cost of raw materials and other production costs. In addition, Viskase reported
that it is closely monitoring the negative impact of the "mad cow disease"
situation in Europe will have on the demand for its products in 2001.
Internet Segment
Zap.Com Corporation
Zapata formed Zap.Com for the purpose of creating and operating a global
network of independently owned web sites. In April 1999, Zap.Com announced its
plan to establish the ZapNetwork by connecting web sites through a proprietary
multi-functional, portal-like Internet banner known as the ZapBox. Zap.Com
intended to distribute advertising and e-commerce opportunities over this
network.
In November 1999, Zapata invested $9.0 million in Zap.Com. In addition, two
of its directors, Avram Glazer and Malcolm Glazer, invested $1.1 million of
equity in Zap.Com. On November 12, 1999, Zapata distributed to its stockholders
477,742 shares of Zap.Com common stock, leaving Zapata as the holder of
approximately 98% of Zap.Com's outstanding common stock. On November 30, 1999,
Zap.Com's stock began to trade on the over-the-counter market on the NASD's
electronic bulletin board under the symbol "ZPCM," establishing Zap.Com as a
separate public company.
During 1999 and 2000, Zap.Com engaged primarily in the research and
investigation of the Internet industry, the development of Zap.Com's business
model, the establishment of strategic relationships to provide Internet
connectivity and technology systems to support the ZapNetwork, the development
of the ZapBox and the Zap.Com homepage, the filing of patent and trademark
applications and the solicitation of web sites to join the ZapNetwork. Zap.Com
also registered shares with the Securities and Exchange Commission, and
registered or qualified for offering the shares for offering and sale in 19
6
states so that it could offer these shares to web site owners as an incentive to
join the ZapNetwork. Zap.Com also registered 30,000,000 shares under a shelf
registration statement for the purpose of offering shares in business
acquisitions.
Zap.Com owns certain intellectual property rights related to the ZapBox and
the ZapNetwork. Zap.Com also currently has a patent application pending before
the United States Patent and Trademark Office for a business process patent
which is directed to a unique Internet-based commerce method and system
underlying the business model. Zap.Com has also filed applications seeking
registration of its trademarks and service marks in the United States, including
Zap.Com, Zap.Com Network, Zap.Com -- The Next Network, and UltraBanner. Zap.Com
has not decided whether it will continue to pursue these patents in light of the
termination of its Internet business.
During 2000, Zap.Com entered into agreements with 10 web sites to join its
network. Zap.Com, however, did not recognize any significant revenue during 2000
or establish a source of revenue. On December 15, 2000, the Zap.Com Board of
Directors concluded that Zap.Com's operations were not likely to become
profitable in the foreseeable future and therefore, it was in the best interest
of the Company and its stockholders to cease all Internet operations. Since that
date, Zap.Com has terminated all salaried employees and all signed agreements
with web site owners who joined the ZapNetwork. In addition, Zap.Com has
terminated, and is in the process of terminating, all third party contractual
relationships entered into in connection with its Internet business.
In connection with the termination of its Internet business in December
2000, Zap.Com recorded the necessary charges to write down applicable
investments in long-lived assets (which consisted mainly of its capitalized
software costs) to fair value, and to record estimated liabilities, including
costs associated with the termination of various contracts. These charges
totaled $1.5 million. Although Zap.Com believes that the reserves it has
established for contingent liabilities are adequate, there is no assurance that
the ultimate liabilities will not exceed the reserved amounts. Certain parties
to the terminated contracts have challenged Zap.Com's position as to the amount
owed upon termination. There can be no assurance that Zap.Com will not encounter
litigation if an agreement cannot be reached with these parties, or that it will
be successful if any such litigation is commenced.
Zap.Com continues to wind down its Internet operations. Other than these
activities, Zap.Com does not have any existing business operations. During 2001,
Zap.Com's principal activities are expected to be exploring methods to enhance
stockholder value. Zap.Com is likely to search for assets or businesses that it
can acquire so that it can become an operating company. Zap.Com may also
consider developing a new business suitable for its situation.
In pursuing acquisitions, Zap.Com will have broad discretion in identifying
and selecting both the industries and the possible acquisition candidates within
those industries which it will acquire. As of the date of this filing, Zap.Com
has not identified a specific industry on which it initially intends to focus
and has no present plans, proposals, arrangements or understandings with respect
to the acquisition of any specific business. There can be no assurance that
Zap.Com will be able to identify or successfully complete any acquisitions.
Charged Productions, Inc.
In April 1998, Zapata acquired and began to operate the web-based magazines
"Word" and "Charged" and their supporting infrastructure. Subsequently, these
webzines were consolidated into Charged Productions, a multi-media production
company that operated www.charged.com, www.sissyfight.com and www.pixeltime.com.
Word's web site published an eclectic mix of essays, fiction, visual art,
photographs, underground comics, animation video, sound and music, weekly
columns, quirky humor, contests, games and on-line conversation. During 2000,
Word launched the on-line multi-player game Sissyfight 2000, and entered into a
publishing contract with Crown Publishers for GiG, a series of interviews about
the contemporary workplace. This book has since been published and is currently
sold in bookstores.
Charged's web site published leisure webzine content: the site presented
content - filmed and otherwise - in an innovative manner. During 1999, Charged
launched the "Charged 60 second film festival" which was a response to the
site's increasing use of filmed media in its content. Film.com, a RealNetworks
company, sponsored the 2000 festival.
7
As of December 31, 2000, Charged Productions had accumulated losses of
approximately $9.0 million since its inception in April 1998. Based on this and
projected continuing losses, the Company made a strategic decision to cease the
operations of Charged Productions. In connection with this decision, the Company
incurred a one-time charge of approximately $434,000 related to asset
write-downs and approximately $182,000 related to contract termination expenses.
The Company is currently negotiating the sale of Charged Productions to former
employees whereby the Company would retain a percentage of the outstanding
shares in exchange for the remaining assets of the company. The Company expects
to finalize the transaction in the second quarter of 2001; however, there is no
assurance that it will be consummated.
Business Acquisitions
The Company currently is engaged in the active search for one or more
operating businesses. The Company's strategy for making a suitable acquisition
is to utilize the considerable experience, knowledge and business contacts of
the Company's executive officers and directors. The Company plans to conduct
rigorous financial and legal due diligence with respect to any entity about
which it has a strong interest.
The Company is interested in operating companies that are undervalued and
have a history of earnings or a potential for growth. The Company does not
presently focus solely on any particular industry or geographical market. While
the Company focuses its attention in the United States, the Company may
investigate acquisition opportunities outside of the United States when
management believes that such opportunities might be attractive. Similarly, the
Company does not yet know the structure of any acquisition. The Company may pay
consideration in the form of cash, securities of the Company or some combination
of both.
The Company has cash, cash equivalents and short-term investments of
approximately $74.6 million, a significant amount which it intends to use to
fund its acquisitions. If the Company issues securities in connection with an
acquisition, it could result in significant dilution to existing stockholders.
Depending upon the size and number of acquisitions, the Company may also borrow
money to fund its acquisitions. In that event, the Company's stockholders would
be subject to the risks normally associated with leveraged transactions,
including the inability to service the debt or the dedication of a significant
amount of cash flow to service the debt, limitations on the Company's ability to
secure future financing and the imposition of certain operating restrictions.
The Company faces intense competition in its search for one or more
operating businesses. In this regard, the Company competes with strategic
buyers, financial buyers and others who are looking to acquire suitable
operating businesses, many of whom have greater financial resources than the
Company or have greater flexibility in structuring acquisition transactions or
strategic relationships.
As of the date of this report, the Company is not a party to any agreement
for the acquisition of an operating business. There can be no assurance that the
Company will be able to locate and consummate a suitable acquisition or that any
acquisitions which are consummated will ultimately prove to be beneficial to the
Company and its stockholders.
Employees
During 2000, total combined employment for Zapata reached a high of 39
employees, of which 25 were dedicated to Charged Productions, 6 were dedicated
to Zap.Com, and the balance performed management and administrative functions,
including managing the assets of the Company, evaluating potential acquisition
candidates, fulfilling various reporting requirement associated with being a
publicly traded company and various other accounting, tax and administrative
matters. Upon termination of its Internet operations on December 15, 2000,
Zapata employed approximately 15 persons, of which 3 were dedicated to Charged
Productions.
8
As of December 2000 when it terminated its Internet operations, Zap.Com had
six employees. Since that date, all Zap.Com's salaried employees have been
terminated. As of the date of this report, Zap.Com has two employees, Avram
Glazer, President and CEO, and Leonard DiSalvo, VP-Finance and Chief Financial
Officer. Neither Mr. Glazer nor Mr. DiSalvo receive a salary from Zap.Com and
currently devote a significant portion of their business time to Zapata, where
they hold the same offices. Both of these officers, however, devote such time to
Zap.Com's affairs as is required to perform their duties to Zap.Com.
Omega Protein employed approximately 1,044 persons at December 31, 2000.
Approximately 83 employees of Omega Protein are represented by an affiliate of
the United Food and Commercial Workers Union. During the past five years Omega
has not experienced any strike or work stoppage which has had a material impact
on its operations. Omega Protein considers its employee relations to be
generally satisfactory.
Financial Information About Industry Segments
During 2000, the Company operated within three industry segments: food,
Internet, and corporate. Information concerning revenues, operating results
(before net interest expense, other income and income taxes), identifiable
assets, depreciation, depletion and amortization and capital expenditures for
the Company's continuing operations, for each segment is incorporated herein by
reference from Note 20 to the Company's Consolidated Financial Statements
included in Item 8 of this Report.
Item 2. Properties
Zapata leases approximately 3,444 square feet of office space in Rochester,
New York and two locations in New York City with a total of approximately 6,374
square feet of office space. Due to the termination of Charged Productions'
operations, Zapata is in the process of finding a third party to sublease 5,000
square feet of the office space, which was previously used by Zapata's Internet
operations. Zapata also leases office space in Houston, Texas, which is
subleased to Omega Protein for use as executive offices. The Company believes
its administrative space is adequate for its current needs.
Zap.Com's headquarters are located in Rochester, New York, in space
subleased to it by Zapata on a month-to-month basis. Zapata has advised Zap.Com
that it will not charge rent or other fees for the use of this space for future
periods until further notice.
Omega Protein owns plants in Reedville, Virginia, Moss Point, Mississippi
and Abbeville, Louisiana and the real estate on which they are located (except
for a small leased parcel comprising a portion of the Abbeville facility). Omega
Protein leases from unaffiliated third parties the real estate on which its
Cameron, Louisiana and Morgan City, Louisiana plants are located. The Cameron
plant lease provides for a 10-year term ending on June 30, 2002 (with two
successive 10-year options) and annual rent of $56,000. The Morgan City plant
lease provides for a 5-year term beginning on November 25, 1997 at an annual
rent of $220,000. Omega Protein has an option under the Morgan City lease to
purchase the plant for $656,000 during the last month of the lease or earlier if
all rent through the end of the term is paid.
As of December 31, 2000, Omega Protein reported that its four processing
plants had an aggregate capacity to process approximately 950,000 tons of fish
annually. Omega Protein's processing plants are located in coastal areas near
Omega Protein's fishing fleet. Annual volume processed varies depending upon
menhaden catch and demand. Each plant maintains a dedicated dock to unload fish,
fish processing equipment and storage capacity. The Reedville, Virginia facility
contains an oil refining plant and net making facility. Omega Protein
periodically reviews possible application of new processing technologies in
order to enhance productivity and reduce costs.
In July 1997, Omega Protein commenced construction of a dry dock facility
in Moss Point, Mississippi to address the shortage of shoreside maintenance in
the U.S. Gulf coast and the increasing costs of these services. The facility was
completed in March 1998. Omega Protein is using this facility and other outside
facilities to perform routine maintenance to its fishing fleet providing
shoreside maintenance services to third party vessels if excess capacity exists.
9
Item 3. Legal Proceedings
On April 30, 1999, a state district court in Houston, Texas entered a
judgment against Zapata in a lawsuit brought by a former employee which was
commenced on April 1, 1998. The former employee claims that he was entitled to
the value of options for approximately 240,000 shares (24,000 shares subsequent
to the reverse stock split) of Zapata stock, which he alleges, should have been
issued to him in 1998 pursuant to his employment agreement with Zapata. The
judgment against Zapata was for approximately $3.45 million, which includes
prejudgment interest. Zapata has secured a letter of credit and on July 29, 1999
perfected its appeal with the Court of Appeal, for the Fourteenth District of
Texas at Houston. On March 15, 2001, the Court of Appeals for the Fourteenth
District at Houston issued an opinion reversing the jury verdict in favor of the
former employee and rendering judgment in favor of the Company. Under the Texas
Rules of Appellate Procedure, the former employee has forty-five (45) days after
the Court of Appeals renders judgment, or after the Court of Appeals ruling on a
timely filed motion for a rehearing to seek review from the Texas Supreme Court.
Any motion for rehearing must be filed within fifteen (15) days. The Company
continues to believe that it has a meritorious defense to all or a substantial
portion of the plaintiff's claim. However, there can be no assurance that the
Company will be successful on this claim if the Court of Appeals' decision is
appealed and the Texas Supreme Court decides to hear the appeal.
The Company is involved in litigation relating to claims arising out of its
past and current operations in the normal course of its business. The Company
maintains insurance coverage against such potential ordinary course claims in an
amount which it believes to be adequate. While the results of any ultimate
resolution can not be predicted, in the opinion of the Company's management,
based on discussion with counsel, any losses resulting from these matters will
not have a material adverse effect on Zapata's results of operations, cash flows
or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of Zapata's stockholders during the
fourth quarter of Fiscal 2000.
10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Zapata's common stock is listed on the New York Stock Exchange. The high
and low sales prices for the common stock, as reported in the consolidated
transactions reporting system, for each quarterly period for the last two fiscal
years, as well as the amounts per share of dividends declared during such
periods, are shown in the following table. The following stock prices reflect
the ten-for-one reverse stock split effective January 30, 2001.
Fiscal Quarter Ended
--------------------
12/31/00 9/30/00 6/30/00 3/31/00 12/31/99 9/30/99 6/30/99 3/31/99
-------- ------- ------- ------- -------- ------- ------- -------
High sales price $30.00 $32.50 $47.50 $64.38 $60.00 $79.21 $116.69 $142.69
Low sales price $13.75 $28.75 $31.25 $43.13 $45.95 $48.37 $72.55 $81.62
Dividends declared $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00
The Company does not expect to declare cash dividends on its common stock
in the foreseeable future. The Company intends to use all or a significant
portion of its cash assets in the acquisition of new operating businesses or for
the repurchase of stock as discussed below. See "Item 1 - Description of
Business - Business Acquisitions." In deciding whether to declare dividends, the
Company's Board of Directors will consider the Company's operating results, cash
flow, financial condition, capital requirements, general business condition of
its future operating businesses and such other factors, as the Board deems
relevant. The right to the holders of common stock to receive dividends or other
payments with respect thereto in the future will be subject to the prior and
superior rights of holders of Zapata's Preferred Stock and Preference Stock then
outstanding.
During 1998, Zapata's Board of Directors approved a stock repurchase
program pursuant to which Zapata may repurchase up to 5 million additional
shares of its own outstanding common stock from time to time. The authorized
number of shares for repurchase was reduced to 500,000 shares as a result of the
Company's one-for-ten reverse stock split discussed below. 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. Subject to applicable securities laws,
shares may be repurchased from time to time in the open market or private
transactions. Purchases are subject to availability of shares at prices deemed
appropriate by Zapata's management and other corporate considerations.
Repurchased shares will be held as treasury shares available for general
corporate purposes. As of the date of this report, Zapata has not made any
repurchases pursuant to this authorization and there can be no assurance that
any such repurchases will be made. Zapata reserves the right to discontinue the
repurchase program at any time.
In January 2001, Zapata's Board of Directors approved a one-for-ten reverse
stock split. Accordingly, share and per share amounts have been retroactively
restated for the reverse split. The reverse stock split was effective as of
January 30, 2001 and as of such date, the Company's authorized capital stock was
reduced to 16.5 million of common stock, par value $0.01 per share, 200,000
shares of preferred stock and 1.8 million shares of preference stock. The
preferred and preference shares are undersigned "blank check shares." As a
result of the reverse stock split, the Company's outstanding common stock was
reduced to 2,390,849 shares as of March 15, 2001. See Note 22 to the Company's
Consolidated Financial Statements included in Item 8 of this Report.
As of March 15, 2001, there were approximately 5,303 holders of record of
common stock. This number does not include the stockholders for whom shares are
held in a "nominee" or "street" name.
11
Item 6. Selected Financial Data
The following table sets forth certain selected historic consolidated
financial information of the Company for the periods and as of the dates
presented and should be read in conjunction with the Company's Consolidated
Financial Statements and the related notes thereto included in Item 8 of this
Report and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in Item 7 of this Report. The Company's
financial statements for Fiscal 1997 were restated to reflect the Company's oil
and gas operations as a discontinued operation. All amounts are in thousands,
except for per share income (loss) from operations and cash dividends paid.
For the
For the For the Three Month For the For the For the
Fiscal Year Fiscal Year Transition Fiscal Year Fiscal Year Fiscal Year
Ended Ended Period Ended Ended Ended Ended
December 31, December 31, December 31, September 30, September 30, September 30,
2000(1)(2)(3) 1999 1998(4) 1998(5)(6) 1997(7) 1996(8)
------------- ---- ------- ---------- ------- -------
Income Statement Data:
Revenues $84,140 $93,666 $25,759 $133,555 $117,564 $93,609
Operating (loss) income (38,386) (33,886) 5,126 30,507 12,842 5,951
(Loss) Income from continuing
operations (25,988) (20,332) (4,444) 69,960 7,412 598
Per share income (loss) from
continuing operations (10.88) (8.51) (1.86) 29.44 2.70 0.20
Cash dividend paid -- -- -- 6,502 1,604 --
Common stock, dividends paid,
per share -- -- -- 0.70 0.70 --
Cash Flow Data:
Capital expenditures 8,452 15,665 3,281 21,851 8,541 4,010
December 31, December 31, December 31, September 30, September 30, September 30,
2000 1999 1998 1998 1997 1996
-------- -------- -------- -------- -------- -------
Balance Sheet Data:
Working capital $100,628 $170,126 $194,148 $188,234 $86,391 $104,780
Property and equipment, net 89,374 91,052 86,308 84,972 40,997 36,702
Assets of discontinued operations -- -- -- -- -- 6,473
Total assets 261,859 299,814 318,240 334,006 190,951 232,966
Current maturities of long-term debt 1,227 1,146 997 1,413 1,034 16,108
Long-term debt 14,827 16,069 11,205 11,408 11,294 18,159
Stockholders' equity 164,995 196,245 215,092 215,547 143,405 152,313
(1) In connection with the termination of its Internet businesses, in December
2000, Zap.Com recorded the necessary charges to write down applicable
investments in long-lived assets (which consisted mainly of its capitalized
software costs) to fair value, and to record estimated liabilities,
including costs associated with the termination of various contracts. These
charges totaled $1.5 million. In addition, Charged Productions incurred a
one-time charge of approximately $434,000 related to asset write-downs and
approximately $182,000 related to contract termination expenses.
(2) During the quarters ended September 30, 2000 and December 31, 2000, Omega
Protein recorded inventory write-downs of $13.7 million and $4.4 million,
respectively, for market declines on the inventory values of Omega
Protein's fish meal and fish oil.
12
(3) On February 6, 2001, the Company sold its interest in non-investment grade
debt of Davel Communications, Inc. for approximately $1.6 million. As such,
at December 31, 2000 the Company has recorded an impairment charge of
approximately $3.7 million to adjust the investment to market value. See
Note 9 to the Company's Consolidated Financial Statements included in Item
8 of this Report. In addition, Management deemed the decline in the fair
value of the Company's investment in Decora Industries to be other than
temporary following Decora's announcement that it had filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. In connection with this
impairment, the Company recognized a loss of approximately $9.5 million
(4) On December 21, 1998, the Company's Board of Directors approved a change in
the Company's fiscal year end from September 30 to December 31, which
became effective January 1, 1999.
(5) In November 1997, Omega Protein closed the two acquisitions in which it
acquired two processing plants and related assets. Omega Protein accounted
for both acquisitions as purchases. See Note 3 to the Company's
Consolidated Financial Statements included in Item 8 of this Report.
(6) Zapata's former wholly-owned subsidiary, Omega Protein, completed its
initial public offering on April 8, 1998 and listed its stock on the NYSE.
Income from continuing operations includes $86.7 million of pre-tax gain on
Zapata's sale of Omega Protein stock in the offering and a charge of
approximately $5.0 million representing the minority interest in Omega
Protein's net income subsequent to the offering.
(7) In September 1997, Omega Protein disposed of its Venture Milling animal
blending protein business. See Note 3 to the Company's Consolidated
Financial Statements included in Item 8 of this Report.
(8) The Company's Fiscal 1996 financial results include $2.1 million of merger
costs that were expensed when the proposed merger with Houlihan's
Restaurant Group, Inc. was terminated.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is a discussion of the Company's financial condition and
results of operations. This discussion should be read in conjunction with the
Company's Consolidated Financial Statements included in Item 8 of this Report.
This discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below in "Significant Factors
That Could Affect Future Performance and Forward-Looking Statements," as well as
those discussed in this section and elsewhere in this report.
General
Zapata is a holding company, which since April 1998 has, through its
subsidiaries, operated primarily in two industry segments: the food segment and
the Internet segment. Zapata operates its food related businesses indirectly
through its 61% owned subsidiary, Omega, and its 38% owned company, Viskase.
Zapata has operated its Internet related businesses directly and indirectly
through its wholly owned subsidiary, Charged Productions, and its 98% owned
subsidiary, Zap.Com.
During 1998, Omega Protein, Zapata's then wholly owned subsidiary,
completed its initial public offering raising $144.6 million in net proceeds, of
which $76.6 million was paid directly to Zapata for shares it sold in the
offering. As of the date of this report, Zapata holds 14,501,000 shares or
approximately 61% of Omega Protein's outstanding common stock. Zapata reports
Omega Protein's results of operations on a consolidated basis.
Zapata's investment in Viskase is accounted for using the equity method.
Since historically Viskase's financial statements have not been available to
Zapata on a basis that would permit concurrent reporting, Zapata has reported
its equity in Viskase's results of operations on a three-month delay basis. In
the three-month transition period ending December 31, 1998,
13
Viskase reported a net loss of $119.6 million, which caused Zapata to write-off
its investment in Viskase. Thus, Viskase's financial results are not currently
included in Zapata's financial statements. See Note 10 to the Company's
Consolidated Financial Statements included in Item 8 of this Report.
On December 21, 1998, Zapata's Board of Directors approved a change in
Zapata's fiscal year end from September 30 to December 31, effective beginning
January 1, 1999. A three-month transition period from October 1, 1998 through
December 1, 1998 (the "Transition Period") precedes the start of the Fiscal
1999. "Fiscal 1998" and "Fiscal 1997" refer to respective fiscal years ended
September 30. The Transition Period refers to the three months ended December
31, 1998 and "Fiscal 2000" refers to the twelve months ended December 31, 2000.
On April 13, 1999, the Zapata's stockholders approved the reincorporation
of the Company as a Nevada corporation and a related Agreement and Plan of
Merger. On April 30, 1999, the Company effected the merger by merging into a
wholly-owned Nevada subsidiary. In connection with the reincorporation, the par
value of the Company's common stock was changed from $0.25 per share to $0.01
per share. The change in the par value was effectuated by a reclassification
between the common stock, at par value and capital in excess of par,
respectively, on the balance sheet.
On November 12, 1999, Zapata distributed to its stockholders 477,742 shares
of Zap.Com common stock, or one share of Zap.Com common stock for every 50
shares of Zapata common stock held by Zapata stockholders on the record date of
November 5, 1999, establishing Zap.Com as a separate public company. As of the
date of this report, Zapata holds 48,972,258 shares of Zap.Com, or approximately
98% of its outstanding common stock. Zapata reports Zap.Com's results on a
consolidated basis.
In December 1999, Zapata entered into an agreement with Panaco, Inc. to
sell a gas production royalty payment obligation for $1.7 million in immediately
available funds (the "Production Payment Receivable Sale"). This transaction
closed in January 2000.
During 2000, Zapata sought to establish a funding mechanism to leverage its
available funds for future acquisitions, while still meeting the funding
requirements for its direct operations. Specifically, Zapata expanded its
investment policy to include non-investment grade debt that could be purchased
at a significant discount. From June 2000 through November 2000, the Company
invested $29.9 million in significantly discounted non-investment grade. Due to
a decline deemed other than temporary, an impairment charge of approximately
$9.5 million was recognized during the current year to adjust the investment to
market value. In addition, the Company sold one of its non-investment grade
securities subsequent to year-end at an amount significantly below its carrying
value. As a result of the sale, this investment was deemed impaired as of
December 31, 2000 resulting in a charge of approximately $3.6 million.
In December 2000, the Company made a strategic decision to cease the
operations of Charged Productions, a multi-media production company that
operated www.charged.com, www.sissyfight.com, and www.pixeltime.com. In
connection with this decision, the Company incurred a one-time charge of
approximately $434,000 related to asset write-downs and approximately $182,000
related to contract termination expenses. The Company is currently negotiating
the sale of Charged Productions to former employees whereby the Company would
retain a percentage of the outstanding shares in exchange for the remaining
assets of the company. The Company expects to finalize the transaction in the
second quarter of 2001; however, there is no assurance that it will be
consummated.
On December 15, 2000, the Zap.Com Board of Directors concluded that
Zap.Com's operations were not likely to become profitable in the foreseeable
future and therefore, it was in the best interest of the Company and its
stockholders to cease all Internet operations. Since that date, Zap.Com has
terminated all salaried employees and all signed agreements with web site owners
who joined the ZapNetwork. In addition, Zap.Com has terminated, and is in the
process of terminating, all third party contractual relationships entered into
in connection with its Internet business. Cumulative losses incurred by Zap.Com
since inception are approximately $8.5 million, including $5.0 million for the
year ended December 31, 2000.
14
Results of Operations
Zapata Consolidated Results of Operations
Zapata reported a net loss of $26.0 million on $84.1 million in revenues in
Fiscal 2000 as compared to a net loss of $20.3 million on revenues of $93.7
million in Fiscal 1999. The Fiscal 2000 net loss was primarily attributable to
an operating loss by Omega Protein, operating losses and impairment charges by
the Company's Internet operations, and investment impairment charges by Zapata
on non-investment grade debt securities, partially offset by interest income.
Zapata experienced a net loss in Fiscal 1999 as compared to net income in
Fiscal 1998. Zapata also experienced a net loss during the Transition Period.
The net loss of $20.3 million in Fiscal 1999 was primarily the result of an
operating loss experienced by Omega Protein and start-up costs incurred by
Zap.Com, partially offset by interest income, the Production Payment Receivable
Sale and tax benefits. During the Transition Period, Zapata incurred a net loss
of $4.4 million attributable to Zapata's remaining equity in the loss incurred
by Viskase which was partially offset by Omega Protein's net income.
The following presents a more detailed discussion of the consolidated
operating results:
Fiscal 2000-1999
Revenues. Fiscal 2000 revenues decreased $9.5 million to $84.1 million, or
10.1%, from $93.7 million in Fiscal 1999. The decrease in revenues from Fiscal
1999 to Fiscal 2000 was mainly attributable to lower selling prices of Omega
Protein's fish meal and fish oil. Fish meal prices and fish oil prices declined
7.3% and 20.0% respectively as compared to Fiscal 1999. Sales volume for Omega
Protein's fish oil decreased 32.1% during Fiscal 2000 as compared to Fiscal
1999. Sales volume for Omega Protein's fish meal increased 12.8% during Fiscal
2000 as compared to Fiscal 1999. Omega Protein attributes the decrease in
selling prices to low cyclical feed cost affecting the protein industry.
Zapata's Internet operations did not have significant revenue for Fiscal 2000 or
Fiscal 1999.
Cost of revenues. Cost of revenues, including depreciation, amortization
and an inventory write-down for Fiscal 2000 totaled $103.2 million, a decrease
of $2.5 million from $105.7 million in Fiscal 1999. Cost of sales as a
percentage of revenue was 123% and 113% for the Fiscal years ended December 31,
2000 and December 31, 1999, respectively. The increase in cost of sales as a
percentage of revenues was primarily due to continued market declines on the
inventory values of Omega Protein's fish meal and fish oil which resulted in an
inventory write-down of $18.1 million and $18.2 million in Fiscal 2000 and 1999,
respectively. The increase is also due to decreases in Omega Protein's selling
prices for fish meal and fish oil as discussed above. Per ton cost of sales were
1.3% higher in Fiscal 2000 as compared to Fiscal 1999, due to a 38.0% lower fish
oil yield in Fiscal 2000 creating higher cost inventories. Cost of revenues for
Zapata's Internet operations were $1.2 million and $141,000 in Fiscal 2000 and
1999, respectively. This increase was primarily due to Zap.Com's amortization of
the ZapBox and the development of the ZapNetwork.
Product Development. Product development costs decreased $1.4 million or
48.5% from Fiscal 1999 to Fiscal 2000. Product development costs consisted
mainly of activities at Charged Productions associated with business development
as well as Zap.Com software development costs. The decrease was mainly due to a
large decrease in spending at Zap.Com during Fiscal 2000 as compared to Fiscal
1999.
15
Selling, general and administrative expenses. Selling, general and
administrative expenses remained constant for Fiscal 2000. As a percentage of
revenues, selling, general and administrative expenses were approximately 18.8%
and 17.8% for Fiscal 2000, and 1999, respectively. As a result of the
termination of the Company's Internet operations, certain costs such as
salaries, benefits and other general and legal costs associated with these
companies will no longer be incurred. Selling, general and administrative
expenses for those Internet operations totaled $4.3 million and $6.2 million
during Fiscal 2000 and Fiscal 1999, respectively. Included in selling, general
and administrative expenses is a benefit of $428,000 for Fiscal 2000 and an
expense of $1.2 million related to consulting expenses incurred under an
agreement between Zap.Com and American Internetwork Sports Company, LLC.
Impairment of long-lived assets. Pursuant to the termination of Charged
Productions and Zap.Com certain assets of were deemed to be impaired as of
December 31, 2000. Current year charges for asset impairment totaled $1.3
million. Impairment costs for Fiscal 1999 related to the discontinued
utilization of certain in-line processing facilities at Omega Protein's Morgan
City plant.
Interest income, net. Net interest income increased $2.2 million or 42.2%
from net interest income of $5.2 million in Fiscal 1999 to $7.4 million in
Fiscal 2000. This increase was mainly due to approximately $2.4 million of
interest income earned on the Company's non-investment grade securities that the
Company purchased to provide funding for its direct operations. This was
partially offset by a decrease in interest income recognized by Omega Protein.
Omega had net interest income of $614,000 in Fiscal 1999 compared to net
interest expense of $293,000 in Fiscal 2000. This decrease in net interest
income resulted from Omega Protein's reduction in cash and cash equivalents
available for investment purposes during Fiscal 2000 compared to Fiscal 1999.
Realized loss on non-investment grade securities. Realized loss on
non-investment grade securities for Fiscal 2000 consisted mainly of the
write-down to market value of the non-investment grade debt held in the
Company's available for sale portfolio. The impairment for that portion of the
unrealized loss of an individual security is required to be recognized as a
realized loss in the accounting period when the holder determines that such
portion of the decline in the market value is other than temporary. Temporary
declines in the market value of Zapata's debt securities held to maturity do not
affect Zapata's carrying value of such securities, since Zapata has the ability
and the intent to hold these investments to maturity, at which time their full
face value is expected to be received at no loss to Zapata. Temporary
fluctuations in the market value of available for sale securities are reflected
in stockholders' equity as unrealized appreciation or depreciation net of
applicable deferred federal income taxes; however, any decline in the value of
the security below its cost considered to be other than temporary is reflected
as a realized loss in Zapata's income statement. Once an investment is written
down to reflect an other than temporary decline, the write-down establishes a
new cost basis for the security.
For 2000, Zapata had other than temporary write-downs related to the debt
instruments of Davel Communications, Inc. and Decora Industries, Inc. The
Company sold its Davel Communications debt instruments on February 6, 2001 at an
amount significantly below its carrying value. As a result of the sale, this
investment was deemed impaired as of December 31, 2000 resulting in an
impairment charge of approximately $3.7 million. Management deemed the decline
in the fair value of the Company's investment in Decora Industries to be other
than temporary following Decora's announcement that it had filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. In Connection with this
impairment, the Company recognized a loss of approximately $9.5 million
resulting in a remaining book value of approximately $1.2 million.
Other (expense) income, net. Other expense decreased to $906,000 in Fiscal
2000 from $3.2 million in Fiscal 1999. This decrease was primarily the result of
recording a $3.3 million expense in 1999 to reserve against potential costs
associated with a judgment against the Company on a claim for breach of
employment contract make by a former Zapata employee. See "Part I Item 3. Legal
Proceedings."
Income taxes. The Company recorded a tax benefit of $12.5 million
representing an effective tax rate of 28% as compared to a benefit of $5.8
million and an effective rate of 18% in the prior year. The current year benefit
was primarily the result of net operating losses incurred by Omega Protein and
Zapata. This net benefit includes a downward adjustment to deferred tax assets.
These adjustments are mainly attributable to assets that management believes,
more likely than not, will not be realized.
16
Minority Interest. Minority interest reflects the outside equity ownership
of Zapata's subsidiaries of approximately 39% in Omega Protein and approximately
2% in Zap.Com. In Fiscal 2000, minority interest was a $6.6 million reduction of
Zapata's share of the net losses incurred by Omega Protein and Zap.Com. Minority
interest was recorded for Zap.Com's results since the November 12, 1999
distribution of Zap.Com shares by Zapata to Zapata shareholders. In Fiscal 1999,
minority interest represented $5.8 million reduction of Zapata's share of Omega
Protein's net income for the period.
Fiscal 1999-1998
Revenues. Fiscal 1999 revenues decreased $39.9 million, or 29.9% from
$133.5 million in Fiscal 1998 to $93.6 million in Fiscal 1999. This decrease in
revenues was attributable to lower selling prices of Omega Protein's fish meal
and fish oil. Fish meal sales prices and fish oil prices declined 28.1% and
48.2%, respectively, as compared to Fiscal 1998. Sales volumes for Omega
Protein's fish meal and fish oil increased 10.6% and 9.7% respectively during
Fiscal 1999 as compared to Fiscal 1998. Omega Protein attributes the decrease in
selling prices to low cyclical feed cost affecting the protein industry.
Cost of revenues. Cost of revenues, including depreciation, amortization
and an inventory write-down for Fiscal 1999 totaled $105.7 million, a $16.2
million increase from $89.5 million in Fiscal 1998. The cost of revenues
increase was primarily due to the cyclical market declines on the inventory
values of Omega Protein's fish meal and fish oil resulting in an inventory
write-down charge of $18.2 million. Zap.Com recorded costs of revenues of
approximately $141,000, which was expended in the design and delivery of its Web
application, the ZapBox.
The increase in cost of revenues as a percent of revenues was primarily due
to decreases in Omega Protein's selling prices for fish meal and fish oil of
28.1% and 48.2%, respectively, during Fiscal 1999 as compared to Fiscal 1998.
Per ton cost of revenues were 10.6% lower in Fiscal 1999 as compared to Fiscal
1998, due mainly to lower inventoriable costs associated with the Fiscal 1999
fishing season. In Fiscal 1998 fishing operations were hampered by a series of
hurricanes and tropical storms that disrupted fishing operations, resulting in
higher cost inventory.
Product Development. Product development costs consisted of web site and
software development costs incurred by Zap.Com and Zapata's webzines,
www.word.com and www.charged.com, and its online interactive drawing site,
www.pixeltime.com, (subsequently consolidated in Fiscal 2000 as Charged
Productions). Zap.Com incurred product development costs in connection with the
design of its web site at www.zap.com and the preliminary design of its Web
application, the ZapBox. Product development costs increased to $2.9 million in
Fiscal 1999 from $1.3 million in Fiscal 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $4.4 million, or 38.8% from $12.3 million in
Fiscal 1998 to $16.7 million in Fiscal 1999. As a percentage of revenues,
selling, general and administrative expenses were approximately 9.2% in Fiscal
1998 and 17.8% in Fiscal 1999. The dollar increase was due primarily to
increased personnel and marketing costs associated with Omega Protein's expanded
emphasis on specialty meals and oils combined with severance payments made in
its Fiscal quarter ended December 31, 1999 associated with reductions in
management and administrative personnel. Additionally, general and legal costs
associated with the start-up activities of Zap.Com, including the registration
and distribution of its shares to Zapata stockholders, caused an increase in
selling, general and administrative costs in Fiscal 1999.
Impairment of long-lived assets. Omega Protein recorded an asset write-down
of $2.3 million, which was 2.4% of revenues, in Fiscal 1999 resulting from the
discontinued utilization of certain in-line processing facilities at its Morgan
City plant.
Operating (loss) income. As a result of the factors discussed above,
Zapata's had an operating loss of $33.9 million in Fiscal 1999, compared to
operating income of $30.5 million in Fiscal 1998.
Interest income, net. Net interest income remained consistent between
Fiscal 1999 and Fiscal 1998. The decrease in the cash balances during the period
was offset by higher rates of return. During Fiscal 1998 Zapata had generally
invested in U.S. Government agency securities with short-term maturities
(generally 30 days) and cash equivalents, but in Fiscal 1999 took
17
advantage of higher yields offered by U.S. Government agency securities with
longer-term maturities (generally 90 days). Omega Protein generally invested in
U.S. government securities and commercial paper grade A-2 P-2 or better and was
paid less interest as a result of a decrease in its average outstanding
borrowings during Fiscal 1999.
Equity in loss on unconsolidated affiliates. As a result of Zapata's equity
share of Viskase's cumulative losses being greater than Zapata's original book
value in its investment, Zapata did not record its equity in the results of
Viskase during Fiscal 1999 and it will not do so until its share of Viskase's
cumulative results is greater than zero. Zapata recorded a loss on its equity in
Viskase of $7.0 million in Fiscal 1998.
Other (expense) income, net. Other expense increased to $3.2 million in
Fiscal 1999 from $295,000 in Fiscal 1998 primarily the result of the recording
of a $3.3 million expense to reserve against potential costs associated with a
judgment against Zapata on a claim for breach of employment contract made by a
former Zapata employee. Zapata has appealed the Court's decision in this
lawsuit. See "Part I Item 3. Legal Proceedings."
Income taxes. Zapata recorded a tax benefit of $5.8 million representing an
effective tax rate of 22% after taking into account minority interest in Omega
Protein's results. The effective tax rate reflects the benefit from the losses
offset by an increase in valuation reserves for deferred tax benefits relating
to Zapata's equity in the loss of Viskase. Zapata recorded a provision for
income taxes of $40.0 million in Fiscal 1998, reflecting the gain on the Omega
Protein initial public offering.
Minority interest. Minority interest reflects the outside equity ownership
of Zapata's subsidiaries of approximately 39% in Omega Protein and the 2% in
Zap.Com. In Fiscal 1999, minority interest was a $5.8 million reduction of
Zapata's share of the net losses incurred by Omega Protein and Zap.Com,
respectively. Minority interest was recorded for Zap.Com's results since the
November 12, 1999 distribution of Zap.Com shares by Zapata to Zapata
shareholders. In Fiscal 1998, minority interest represented $5.0 million
reduction of Zapata's share of Omega Protein's net income for the period.
Transition Period Ending December 31, 1998--Three Months Ended December 31, 1997
Zapata experienced a net loss of $4.4 million for the Transition Period,
compared to net income of $4.6 million for the three months ended December 31,
1997. The loss was primarily due to Zapata's recognition of its equity in the
loss of Viskase which was partially offset by Omega Protein's $5.1 million in
operating income and $2.1 million in net interest income. Revenues totaled $25.8
million during the Transition Period versus $29.5 million during the
corresponding period in 1997. This decline in revenue was wholly attributable to
Omega Protein. Zapata's operating income for the Transition Period decreased to
$5.1 million from $8.2 million for the corresponding period in Fiscal 1997.
Results reflect a decrease in oil sales by Omega Protein, and costs associated
with the operations of Zapata's Word and Charged Productions webzines,
(subsequently consolidated in Fiscal 2000 as Charged Productions).
The following presents a more detailed discussion of the consolidated
operating results:
Revenues. For the Transition Period, revenues were $25.8 million versus
revenues of $29.5 million in the quarter ended December 31, 1997. The decrease
in revenue was attributable to a 33.0% lower fish oil inventory position carried
by Omega Protein over from Fiscal 1998 as compared to Fiscal 1997.
Cost of revenues. Cost of revenues, including depreciation and
amortization, for the Transition Period was $17.6 million, a $1.7 million
decrease from $19.3 million in the quarter ended December 31, 1997. As a percent
of revenues, cost of sales was 68.1% in the Transition Period as compared to
65.4% in the quarter ended December 31, 1997. Omega Protein's per ton costs of
sales were higher in the Transition Period as compared to the quarter ended
December 31, 1997, due mainly to higher cost inventories carried forward into
the 1998 quarter. During August and September of 1998, fishing operations were
hampered by unusually inclement weather which resulted in higher cost inventory.
18
Product development. Product development costs were $915,000 or 3.6% of
revenues during the Transition Period. Zapata took over the operations of the
two webzines, www.word.com and www.charged.com in April 1998, and, prior to that
date, had not incurred any product development costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $2.2 million or 8.4% of revenues in the Transition
Period versus $2.0 million during the quarter ended December 31, 1997. Selling,
general and administrative expenses at Omega Protein increased $780,000 or 67.6%
from $1.2 million in the quarter ended December 31, 1997 to $1.9 million in the
Transition Period. The increase in expense was due primarily to increased
personnel and related marketing costs associated with Omega Protein's efforts to
enter the U.S. food market with its refined menhaden oil.
Operating income. As a result of the factors listed above, operating income
was $5.1 million or 19.9 5% of revenue, in the Transition Period ended December
31, 1998 versus $8.2 million or 27.7% of revenue in the quarter ended December
31, 1997.
Interest income, net. Net interest income was $2.1 million during the
Transition Period ended December 31, 1998 versus $300,000 during the quarter
ended December 31, 1997 reflecting higher levels of cash as a result of the
proceeds from Omega Protein's April 1998 initial public offering. Zapata's
interest expense was lower in the current period as compared to the
corresponding prior-year period, reflecting lower levels of indebtedness.
Equity in loss on unconsolidated affiliates. Equity in loss on
unconsolidated affiliates was $11.8 million during the Transition Period ended
December 31, 1998 due to Zapata's equity in the $119.6 million loss incurred by
Viskase in its quarter ending September 30, 1998, which included an unusual
charge of $148.6 for worldwide restructuring charges. Equity in loss on
unconsolidated affiliates was $1.1 million during the quarter ended December 31,
1997.
Income taxes. Zapata recorded a tax benefit of $1.9 million representing an
effective tax rate of 30% after taking into account minority interest in Omega
Protein's results. The $1.9 million benefit was primarily attributable to loss
from operations including the equity loss on the investment in Viskase. A $2.7
million provision was recorded in the quarter ended December 31, 1997, which was
primarily attributable to income from operations that included a gain on the
sale of certain real estate.
Minority Interest. Minority interest reflects the approximately 40% of
Omega Protein's equity not owned by Zapata. In the Transition Period, minority
interest was $1.7 million reduction of Zapata's share of Omega Protein's net
income during the three month period. In the quarter ended December 31, 1997,
Omega Protein was wholly owned by Zapata and therefore, there was no minority
interest.
Liquidity and Capital Resources
Prior to Omega Protein's 1998 initial public offering, Zapata, as the sole
stockholder of Omega Protein, caused cash to be moved between it and Omega
Protein as each company had cash needs. As a result of the offering, Zapata and
Omega Protein are now separate public companies. Similarly, since Zapata's
distribution of Zap.Com shares to Zapata stockholders in November 1999, Zapata
and Zap.Com are separate public companies. Accordingly, the capital resources
and liquidity of Omega Protein and Zap.Com are legally independent of Zapata.
The working capital and other assets of Omega Protein and Zap.Com are dedicated
to their respective operations and are not expected to be readily available for
the general corporate purposes of Zapata, except for any dividends that may be
declared and paid to their respective stockholders. For the foreseeable future,
Zapata does not expect to receive cash dividends on its Omega Protein or Zap.Com
shares.
Zapata's current source of liquidity is its cash, cash equivalents and
short-term investments and the interest income it earns on its investments.
Zapata's investments consist of U.S. Government agency securities, cash
equivalents and non-investment grade debt. At December 31, 2000, the Company's
cash, cash equivalents and short-term investments were $74.6 million (including
$7.4 million attributable to Omega Protein) as compared to $117.1 million
(including $15.7 million attributable to Omega Protein) as of the period in the
previous fiscal year.
19
Through June 2000, Zapata had invested its excess cash reserves in U.S.
Government agency securities and cash equivalents. In June 2000, Zapata
management determined that the non-investment grade debt market provided an
opportunity for the Company to meet the funding requirements of its Internet
business and corporate overhead activities while leveraging its available funds
for future acquisitions. Specifically, Zapata management believed that this debt
would yield sufficient income to support its direct operations and free-up
capital otherwise committed for this purpose for deployment in future
acquisitions. Based on this, in Fiscal 2000 Zapata purchased $29.9 million in
significantly discounted non-investment grade debt. See Item 7A "Quantitative
and Qualitative Disclosures about Market Risk." See also Note 9 to the Company's
Consolidated Financial Statements included in Item 8 of this Report. The
Company's future investment income may fall short of expectations due to changes
in interest rates or the Company may suffer losses in principal if forced to
sell securities that have declined in market value due to changes in interest
rates.
For the year ended December 31, 1999, Zapata's source of liquidity was
cash, cash equivalents, short-term investments and interest earned thereon. At
December 31, 1999, the Company's cash, cash equivalents and short-term
investments was $117.1 million (including $15.7 million attributable to Omega
Protein) as compared to $162.1 million (including $44.8 million attributable to
Omega Protein) as of the same period in the previous fiscal year. This decline
in liquidity was due to the use of capital to support operations, as well as
Zapata's expenditures related to the settlement of certain litigation, and its
investment in Zap.Com. In November 1999, Zapata invested $9.1 million in its
then wholly-owned subsidiary, Zap.Com, as a capital contribution for 49,450,000
shares of Zap.Com common stock, or 98% of Zap.Com's outstanding common stock.
The investment consisted of $8 million in cash and the forgiveness of $1 million
in inter-company debt.
In addition to its cash, cash equivalents, investments and interest income,
Zapata has a potential secondary source of liquidity is its publicly traded
securities of Omega Protein, Zap.Com and Viskase. Zapata's holdings of Omega
Protein and Zap.Com stock constitute "restricted stock" under SEC Rule 144 and
may only be sold in the public market pursuant to an effective registration
statement under the Securities Act of 1933 and under any required state
securities laws or pursuant to an available exemption. Zapata's Viskase holdings
may also be considered to be "restricted securities" under Rule 144. These and
other securities law restrictions could prevent or delay any sale by Zapata of
these securities or reduce the amount of proceeds that might otherwise be
realized there from.
Currently, all of Zapata's equity securities holdings are eligible for sale
under Rule 144. Zapata also has demand and piggyback registration rights for its
Omega Protein and Zap.Com shares and Zapata has registered with the SEC for
resale 1,000,000 shares of Zap.Com common stock. As of the date of this report,
it has not sold any of its Zap.Com shares and there is no assurance that it will
or can sell these shares. Although Zap.Com is publicly traded, the market for
its shares has to date been thin.
Zapata from time to time has other sources of liquidity. In Fiscal 1998,
Zapata received net proceeds of approximately $5.0 million in connection with
the exercise of stock options by former officers and employees of Zapata. In
January 2000, Zapata received approximately $1.7 in immediately available funds
in connection with the Production Payment Receivable Sale.
At December 31, 2000, Zapata had $16.1 million in consolidated
indebtedness, all of which was Omega Protein's indebtedness. Zapata's liquidity
needs are primarily for operating expenses, litigation and insurance reserves,
possible stock repurchases and acquisitions or investments. The Company also
intends to invest a significant portion of its cash assets in investments or
operating businesses as soon as practicable. To pay for or fund these
acquisitions, Zapata may need to raise additional capital through the issuance
of equity or debt. There is no assurance, however, that such capital will be
available at the time, in the amounts necessary or with terms satisfactory to
Zapata. See Item 1 "Descriptions of Business - Business Acquisitions."
In the absence of unforeseen developments, Zapata believes that it has
sufficient liquidity to fund its operating expenses and other operational
requirements at least for the 12 months following the date of this report.
20
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement on
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS 133 requires the recognition of
all derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. Zapata is
required to adopt this standard in the first quarter of Fiscal 2001 pursuant to
SFAS No. 137 (issued in June 1999), which delays the adoption of SFAS 133 until
that time. Zapata expects that the adoption of SFAS 133 will not have a material
impact on its financial position or its results of operations.
Significant Factors That Could Affect Future Performance and Forward-Looking
Statements
Zapata believes that its results of operations, cash flows and financial
condition could be negatively impacted by certain risks and uncertainties,
including, without limitation, the risks and uncertainties identified in
Zapata's other public reports and filings made with the SEC, press releases and
public statements made by authorized officers of Zapata from time to time and
those risks and uncertainties set forth below.
1. Risks associated with Omega Protein's future performance, including:
Omega Protein's ability to meet its raw material requirements through its annual
menhaden harvest, which is subject to fluctuation due to natural conditions over
which Omega Protein has no control, such as varying fish population, adverse
weather conditions and disease. The impact on the prices for Omega Protein's
products of worldwide supply and demand relationships over which Omega Protein
has no control and which tend to fluctuate to a significant extent over the
course of a year and from year to year. The impact of a violation by Omega
Protein of federal, state and local laws and regulations relating to menhaden
fishing and the protection of the environment and the health and safety of its
employees or of the adoption of new laws and regulations, or stricter
interpretations of existing laws or regulations that materially adversely affect
Omega Protein's business. The impact if Omega Protein cannot harvest menhaden in
U.S. jurisdictional waters if Omega Protein fails to comply with U.S.
citizenship ownership requirements. The ability of Omega Protein to recover
expenses and other expenditures made in connection with its venture into the
sale of refined, non-hydrogenated menhaden oil for consumption in the U.S. due
to the unproven market for this product. Omega Protein may experience
fluctuations in its quarterly operating results due to the seasonality of Omega
Protein's business and Omega Protein's deferral of sales of inventory based on
worldwide prices for competing products. Omega Protein may not have the ability
to retain and recruit key officers and qualified personnel, vessel captains and
crewmembers. The potential adverse impact on financial results which occur due
to fluctuations in the strength of local currencies of the countries in which
its products are sold, changes in social, political and economic conditions
inherent in foreign operations and international trade, including changes in the
law and policies that govern foreign investment and international trade in such
countries, changes in U.S laws and regulations relating to foreign investment
and trade, changes of tax or other laws, partial or total expatriation, currency
exchange rate fluctuations and restrictions on currency repatriation, on the
disruption of labor, political disturbances, insurrection or war and the effect
of requirements of partial local ownership of operations in certain countries.
Potential costs may result from unanticipated material adverse outcomes in any
pending litigation or any other unfavorable outcomes or settlements. There can
be no assurance that Omega Protein will prevail in any pending litigation and to
the extent that Omega Protein sustains losses growing out of any pending
litigation which are not presently reserved or otherwise provided for or insured
against, its business, results of operation and financial condition could be
adversely affected. In the future Omega Protein may undertake acquisitions,
although there is no assurance this will occur. Further, there can be no
assurance that Omega Protein will be able to profitably manage future businesses
it may acquire or successfully integrate future businesses it may acquire into
Omega Protein without substantial costs, delays or other problems which could
have a material adverse effect on Omega Protein's business, results of
operations and financial condition.
2. Risks associated with the future results of Viskase's performance, which
are subject to those risks identified from time to time in registration
statements, reports and other filings that it makes from time to time with the
SEC and in press releases issued by Viskase from time to time.
21
3. Risks associated with the future results of Zap.Com, including its lack
of a source of revenue, its failure to identify a particular industry in which
to concentrate its acquisition efforts, the risks associated with any new
business which is ultimately acquired, the absence of substantive disclosure
relating to prospective new businesses, the limited amount of time which
Zap.Com's management plans to devote to its business, the competition that
Zap.Com faces in pursuing a new acquisition which may inhibit its ability to
complete suitable transactions or increase the cost that must be paid and the
limited resources that Zap.Com has to devote to an acquisition.
4. Risks associated with the fact that a significant portion of Zapata's
assets consists of equity and other interests in its operating companies and
non-investment grade debt. Significant investments in entities that are not
majority owned by Zapata and its non-investment grade debt could subject Zapata
to the registration requirements of the Investment Company Act of 1940 (the
"Investment Company Act"). The Investment Company Act requires registration of,
and imposes substantial restrictions on, certain companies that engage, or
propose to engage, primarily in the business of investing, reinvesting, owning,
holding or trading in securities, or that fail certain statistical tests
concerning a company's asset composition and sources of income. Zapata intends
to actively participate in the management of its operating companies, consistent
with applicable laws, contractual arrangements and other requirements.
Accordingly, Zapata believes that it is primarily engaged in a business other
than investing, reinvesting, owning, holding or trading in securities. Further,
Zapata endeavors to ensure that its holdings of investment securities constitute
less than 40% of its total assets (excluding Government securities and cash) on
an unconsolidated basis. Zapata intends to monitor and attempt to adjust the
nature of its interests in and involvement with operating companies in order to
avoid subjecting Zapata to the registration requirements of the Investment
Company Act. There can be no assurance, however, that Zapata' business
activities will not ultimately subject Zapata to the Investment Company Act. If
Zapata were required to register as an investment company under the Investment
Company Act, it would become subject to regulations that would have a material
adverse impact on its business.
5. Risks related to the costs of defending litigation and the risk of
unanticipated material adverse outcomes in such litigation or any other
unfavorable outcomes or settlements. There can be no assurance that Zapata will
prevail in any pending litigation and to the extent that the Company sustains
losses growing out of any pending litigation which are not presently reserved or
otherwise provided for or insured against, its business, results of operation
and financial condition could be adversely affected.
6. Risks related to future changes in accounting and reporting practices of
Zapata and any of its equity investments which adversely affect Zapata's results
of operations, cash flows and financial condition.
7. Risks associated with pursuing potential acquisitions. These
acquisitions could be material in size and scope and since the Company has not
yet identified any assets, property or business that it may acquire or develop,
potential investors in the Company will have virtually no substantive
information about any such new business upon which to base a decision whether to
invest in the company. In any event depending upon the size and structure of the
acquisitions, stockholders may not have the opportunity to vote on the
transaction, or access to any information about any new business until such time
as a transaction is completed and the Company files a report with the Securities
and Exchange Commission disclosing the nature of such transaction and/or
business. While the Company continues to search for appropriate acquisition
opportunities, there is no assurance that it will be successful in identifying
suitable acquisition opportunities. If the Company does identify any potential
acquisition opportunity, there is no assurance that the acquisition will be
consummated, and if the acquisition does occur, there is no assurance that it
will be successful in enhancing the Company's business or will increase the
Company's earnings. The Company faces significant competition for acquisition
opportunities, which may inhibit its ability to complete suitable transactions
or increase the cost that must be paid. Future acquisitions could also divert
substantial management time, result in short term reductions in earnings or
special transactions or other charges and may be difficult to integrate with
existing operations or assets. The may, in the future, issue additional shares
of common stock or other securities in connection with one or more acquisitions,
which may dilute our stockholders.
22
8. Due to the high volatility of the market for bonds in the rating
classification of the corporate bonds held by the Company, the Company is
exposed to a significant degree of interest rate risk related to these bonds. In
addition, due to the high potential of default on these bonds and the fact that
the issuers of the bonds may not have sufficient liquid assets to satisfy their
obligations at the time such obligations become due, the Company is exposed to
potential loss of principal on these investments.
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk
During 2000, Zapata expanded its investment policy with respect to its
excess cash reserves. This policy is designed to continue to meet Zapata's
liquidity needs while enhancing returns by supplementing its investment grade
securities with non-investment grade debt.
Zapata's investment grade securities include obligations of the U.S.
Government or agencies thereof guaranteed by the U.S. Government, certificates
of deposit and money market deposits. In addition, Omega Protein holds
commercial paper with a rating of A-2 or P-2. Zapata defines non-investment
grade debt to include debt rated BB+ or lower as well as non-rated loans. These
non-investment grade instruments generally involve greater risk than investment
grade securities due to credit considerations and default risks, lack of
liquidity in secondary trading markets and vulnerability to general economic
conditions. We generally expect to hold this debt to maturity unless market
conditions or other circumstances warrant the disposition of the debt prior to
such time.
As of December 31, 2000, Zapata held $74.6 million in investment grade
securities. Changes in interest rates affect the investment income the Company
earns on its investment grade securities and, therefore, impacts its cash flows
and results of operations. Due to the short duration and conservative nature of
these instruments, the Company does not believe that the value of these
instruments have a material exposure to interest rate risk.
As of December 31, 2000, Zapata held $13.4 million in non-investment grade
debt. Changes in interest rates can affect the market value of the Company's
non-investment grade debt. For example, a hypothetical 10% adverse change in the
quoted market prices for this debt would amount to a $1.3 million potential
decline in the fair value of these assets as of December 31, 2000. The Company
generally expects to hold this debt to maturity unless market conditions or
other circumstances warrant the disposition of the debt prior to such time. See
Note 9 to the Company's Consolidated Financial Statements included in Item 8 of
this Report. See also Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Significant Factors That May
Affect Future Performance and Forward Looking Statements ." If this were to
occur, we may not be able to recover the full amount of these investments.
23
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Zapata Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Zapata
Corporation and its subsidiaries at December 31, 2000 and 1999, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 2000, the three month period ended December 31, 1998, and the
year ended September 30, 1998, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Rochester, New York
March 30, 2001
24
ZAPATA CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share and Per Share Amounts)
December 31, December 31,
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............................................................ $ 19,237 $ 72,751
Short-term investments ............................................................... 55,384 44,370
Accounts receivable, net ............................................................. 11,971 21,793
Inventories, net ..................................................................... 37,032 46,112
Production payment receivable, current ............................................... -- 1,673
Prepaid expenses and other current assets ............................................ 2,150 2,187
--------- ---------
Total current assets ........................................................... 125,774 188,886
--------- ---------
Investments and other assets:
Long-term investments, available for sale .......................................... 13,396 --
Other assets ......................................................................... 33,315 19,876
--------- ---------
Total investments and other assets ............................................. 46,711 19,876
Property and equipment, net ............................................................. 89,374 91,052
--------- ---------
Total assets ................................................................... $ 261,859 $ 299,814
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ................................................. $ 1,227 $ 1,146
Accounts payable ..................................................................... 2,766 2,637
Accrued liabilities .................................................................. 21,153 14,977
--------- ---------
Total current liabilities ...................................................... 25,146 18,760
--------- ---------
Long-term debt .......................................................................... 14,827 16,069
Other liabilities and deferred taxes .................................................... 4,820 10,009
Minority interest ....................................................................... 52,071 58,731
--------- ---------
Total liabilities .............................................................. 96,864 103,569
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, ($0.01 par), 200,000 shares authorized, 0 shares issued and
outstanding as of December 31, 2000 and 1999 ........................................ -- --
Preference stock, ($0.01 par), 1,800,000 shares authorized, 0 shares issued and
outstanding as of December 31, 2000 and 1999 ......................................... -- --
Common stock, ($0.01 par), 16,500,000 shares authorized, 3,066,718 shares
issued, and 2,388,708 shares outstanding on December 31, 2000 and 1999,
respectively ......................................................................... 31 31
Capital in excess of par value .......................................................... 161,755 173,431
Retained earnings ....................................................................... 39,389 65,377
Treasury stock, at cost, 679,010 shares at December 31, 2000 and 1999 ................... (31,668) (31,668)
Deferred consulting expense ............................................................. -- (10,329)
Accumulated other comprehensive loss .................................................... (4,512) (597)
--------- ---------
Total stockholders' equity ..................................................... 164,995 196,245
--------- ---------
Total liabilities and stockholders' equity ..................................... $ 261,859 $ 299,814
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
25
ZAPATA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Share and Per Share Amounts)
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
2000 1999 1998 1998
-------- -------- -------- ---------
Revenues ..................................................... $ 84,140 $ 93,666 $ 25,759 $ 133,555
Cost of revenues ............................................. 85,044 87,510 17,553 89,460
Inventory write-down ......................................... 18,117 18,188 -- --
-------- -------- -------- ---------
Gross (loss) profit .................................... (19,021) (12,032) 8,206 44,095
Operating expenses:
Product development ....................................... 1,489 2,890 915 1,266
Selling, general and administrative ....................... 15,790 16,697 2,165 12,322
Impairment of long-lived assets ........................... 1,307 2,267 -- --
Contract termination expenses ............................. 779 -- -- --
-------- -------- -------- ---------
Total operating expenses ............................... 19,365 21,854 3,080 13,588
-------- -------- -------- ---------
Operating (loss) income ...................................... (38,386) (33,886) 5,126 30,507
-------- -------- -------- ---------
Other income (expense):
Interest income, net ...................................... 7,352 5,170 2,136 5,025
Realized loss on non-investment grade securities .......... (13,201) -- -- --
Gain on sale of Omega Protein ............................. -- -- -- 86,662
Equity in loss of unconsolidated affiliates ............... -- -- (11,836) (7,009)
Other ..................................................... (906) (3,219) (60) (295)
-------- -------- -------- ---------
(6,755) 1,951 (9,760) 84,383
-------- -------- -------- ---------
(Loss) income before income taxes and minority interest ...... (45,141) (31,935) (4,634) 114,890
Benefit (provision) for income taxes ......................... 12,521 5,758 1,904 (39,965)
Minority interest in net loss (income) of
consolidated subsidiary, net of taxes ..................... 6,632 5,845 (1,714) (4,965)
-------- -------- -------- ---------
Net (loss) income to common stockholders ..................... $(25,988) $(20,332) $ (4,444) $ 69,960
======== ======== ======== =========
Net (loss) income per share (basic) .......................... $ (10.88) $ (8.51) $ (1.86) $ 30.36
======== ======== ======== =========
Weighted average common shares outstanding ................... 2,389 2,389 2,389 2,304
======== ======== ======== =========
Net (loss) income per share (diluted) ........................ $ (10.88) $ (8.51) $ (1.86) $ 29.44
======== ======== ======== =========
Weighted average common shares and common share
equivalents outstanding ................................... 2,389 2,389 2,389 2,376
======== ======== ======== =========
The accompanying notes are an integral part of the consolidated financial
statements
26
ZAPATA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
2000 1999 1998 1998
-------- -------- -------- --------
Cash flow (used in) provided by operating activities:
Net (loss) income ............................................... $(25,988) $(20,332) $ (4,444) $ 69,960
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities
Depreciation and amortization ................................ 9,614 9,071 1,966 6,385
Loss on disposal of assets ................................... 87 -- -- --
Deferred income taxes ........................................ (10,528) (5,758) 493 1,787
Write-off of subsidiary receivable ........................... 810 -- -- --
Amortization of bond discount ................................ (1,117) -- -- --
Additional minimum pension liability ......................... (99) -- -- --
Impairment of long-lived assets .............................. 1,307 2,267 -- --
Realized loss on non-investment grade securities ............. 13,201 -- -- --
Gain on sales of Omega Protein stock and
other assets .............................................. -- (694) -- (86,865)
Equity in loss of unconsolidated affiliates .................. -- -- 11,836 7,009
Restricted cash investments .................................. -- -- -- 4,337
Consulting expense of Zap.Com ................................ (428) 1,171 -- --
Minority interest in net income (loss) of
consolidated subsidiaries, net of taxes ................... (6,632) (5,845) 1,714 4,965
Changes in assets and liabilities:
Accounts receivable, net .................................. 9,822 (11,982) 2,993 (1,654)
Inventories, net of write-down ............................ 9,080 (2,761) (2,567) (2,336)
Prepaid expenses and other current assets ................. 37 684 (1,597) 543
Accounts payable .......................................... 129 33 (301) 993
Accrued liabilities ....................................... 6,176 7,181 (8,024) 7,204
Other assets .............................................. (5,004) (49) (1,580) (2,916)
Other liabilities ......................................... (5,189) 52 (4,642) 3,903
-------- -------- -------- --------
Total adjustments ......................................... 21,266 (6,630) 291 (56,645)
-------- -------- -------- --------
Net cash (used in) provided by
operating activities .................................... (4,722) (26,962) (4,153) 13,315
-------- -------- -------- --------
Cash flow (used in) provided by investing activities:
Proceeds from disposition of assets, net ..................... 55 6 -- 1,006
Proceeds from production payment
receivables ................................................ 1,673 801 580 1,281
Asset acquisitions ........................................... -- -- -- (28,116)
(Continued)
27
Three Months
Year Ended Year Ended Ended
Year December 31, December 31, December 31, September 30,
2000 1999 1998 1998
-------- --------- --------- ---------
Purchase of short-term investments ...................... (55,384) (44,370) -- --
Purchase of long-term investments ....................... (31,152) -- -- --
Proceeds of maturities of short-term
investments ........................................... 44,370 -- -- --
Refund of revolver from non-investment grade
security ............................................. 1,259 -- -- --
Capital expenditures .................................... (8,452) (15,665) (3,281) (21,851)
-------- --------- --------- ---------
Net cash (used in)provided by
investing activities ............................... (47,631) (59,228) (2,701) (47,680)
-------- --------- --------- ---------
Cash flow (used in) provided by financing activities
Proceeds from Omega Protein
Initial Public Offering ................................. -- -- -- 144,543
Proceeds from exercise of stock options .................... -- 159 -- 5,003
Borrowings ................................................. -- 6,070 -- 2,644
Principal payments of short- and
long-term obligations ................................... (1,161) (1,057) (583) (3,283)
Common stock repurchases ................................... -- -- -- (1,497)
Purchase of treasury shares by a
consolidated subsidiary ................................. -- (2,035) -- --
Issuance of common stock by Zap.Com ........................ -- 1,100 -- --
Dividend payments .......................................... -- -- -- (6,502)
-------- --------- --------- ---------
Net cash (used in)provided by
financing activities ................................. (1,161) 4,237 (583) 140,908
-------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents .......... (53,514) (81,953) (7,437) 106,543
Cash and cash equivalents at beginning of year ................ 72,751 154,704 162,141 55,598
-------- --------- --------- ---------
Cash and cash equivalents at end of year ...................... $ 19,237 $ 72,751 $ 154,704 $ 162,141
======== ========= ========= =========
Supplemental disclosure of non-cash operating activities
Reclassification of deferred tax asset ..................... $ -- $ -- $ -- $ 3,441
Tax benefit of stock option exercises ...................... -- -- 3,989 --
Supplemental disclosure of non-cash financing activities
(Decrease) increase from issuance of warrants for
consulting services - fair value ....................... $(10,757) $ 11,500 $ -- $ --
Cash paid during the fiscal year for:
Interest ................................................... $ 1,207 $ 614 $ 436 $ 883
Income taxes ............................................... 937 705 -- 27,810
The accompanying notes are an integral part of the consolidated financial
statements
28
ZAPATA CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
Comprehensive Capital in
Income Common Stock Excess of Retained Treasury
(Loss) Shares Amount Par Value Earnings Stock
------------ ------ ------ ---------- -------- --------
Balance at September 30, 1997 -- 2,958 $ 30 $ 146,499 $ 26,781 $(30,171)
Net income $ 69,960 -- -- -- 69,960 --
Cash dividends declared -- -- -- -- (6,502) --
Preferred stock redemption -- -- -- -- -- --
Common stock buyback (115,000 shares) -- -- -- -- -- (1,497)
Reverse unrealized gain (net of taxes) -- -- -- -- -- --
Reclassification of deferred tax asset -- -- -- 3,441 -- --
Exercise of stock options -- 109 1 6,729 -- --
Effect of reverse stock split -- -- -- 276 -- --
(See Note 22)
--------
Comprehensive Income $ 69,960
-------- ------ -------- --------- -------- --------
Balance at September 30, 1998 3,067 31 156,945 90,239 (31,668)
------ -------- --------- -------- --------
Net loss (4,444) -- -- -- (4,444) --
Tax benefit of stock option exercises -- -- -- 3,989 -- --
--------
Comprehensive Income $ (4,444)
-------- ------ -------- --------- -------- --------
Balance at December 31, 1998 3,067 31 160,934 85,795 (31,668)
------ -------- --------- -------- --------
Net loss (20,332) -- -- -- (20,332) --
Unrealized loss on securities (623) -- -- -- -- --
Minimum pension liability adjustment 26 -- -- -- -- --
Dividends--Zap.Com common stock -- -- -- -- (86) --
Exercise of stock options -- -- -- 46 -- --
Warrants issued by subsidiary -- -- -- 11,500 -- --
Effect of subsidiary equity transactions -- -- -- 951 -- --
--------
Comprehensive Loss $(20,929)
-------- ------ -------- --------- -------- --------
Balance at December 31, 1999 3,067 31 173,431 65,377 (31,668)
------ -------- --------- -------- --------
Net loss (25,988) -- -- -- (25,988) --
Unrealized loss on securities (3,790) -- -- -- -- --
Minimum pension liability adjustment (125) -- -- -- -- --
Effect of subsidiary equity transactions -- -- -- (920) -- --
Consulting expense -- -- -- (10,756) -- --
--------
Comprehensive Loss $(29,903) -- -- -- -- --
-------- ------ -------- --------- -------- --------
Balance at December 31, 2000 3,067 $ 31 $ 161,755 $ 39,389 $(31,668)
====== ======== ========= ======== ========
Deferred Other Total
Consulting Comprehensive Stockholders'
Expense Income (Loss) Equity
---------- ------------- -------------
Balance at September 30, 1997 $ -- $ -- $ 143,139
Net income -- -- 69,960
Cash dividends declared -- -- (6,502)
Preferred stock redemption -- -- --
Common stock buyback (115,000 shares) -- -- (1,497)
Reverse unrealized gain (net of taxes) -- -- --
Reclassification of deferred tax asset -- -- 3,441
Exercise of stock options -- -- 6,730
Effect of reverse stock split -- -- 276
(See Note 22)
Comprehensive Income
-------- --------- ---------
Balance at September 30, 1998 -- -- 215,547
-------- --------- ---------
Net loss -- -- (4,444)
Tax benefit of stock option exercises -- -- 3,989
---------
Comprehensive Income
-------- --------- ---------
Balance at December 31, 1998 -- -- 215,092
-------- --------- ---------
Net loss -- -- (20,332)
Unrealized loss on securities -- (623) (623)
Minimum pension liability adjustment -- 26 26
Dividends--Zap.Com common stock -- -- (86)
Exercise of stock options -- -- 46
Warrants issued by subsidiary (11,500) -- --
Effect of subsidiary equity transactions 1,171 -- 2,122
Comprehensive Loss
-------- --------- ---------
Balance at December 31, 1999 (10,329) (597) 196,245
-------- --------- ---------
Net loss -- -- (25,988)
Unrealized loss on securities -- (3,790) (3,790)
Minimum pension liability adjustment -- (125) (125)
Effect of subsidiary equity transactions -- -- (920)
Consulting expense 10,329 -- (427)
Comprehensive Loss -- -- --
-------- --------- ---------
Balance at December 31, 2000 $ -- $ (4,512) $ 164,995
The accompanying notes are an integral part of the consolidated financial
statements
29
ZAPATA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business and Organization
Zapata Corporation ("Zapata" or the "Company") is a holding company which
since April 1998 has, through its subsidiaries, operated primarily in two
industry segments: the food segment and the Internet segment. Zapata operates
its food related businesses indirectly through its 61% owned subsidiary, Omega
Protein Corporation ("Omega Protein" or "Omega") (formerly known as Marine
Genetics Corporation and Zapata Protein, Inc.), and its 38% owned company,
Viskase Corporation ("Viskase") (formerly known as Envirodyne Industries, Inc.).
Zapata has operated its Internet related businesses directly and indirectly
through its wholly owned subsidiary, Charged Productions, Inc. (formerly known
as Zap Internet Corporation) ("Charged Productions"), and its 98% owned
subsidiary, Zap.Com Corporation ("Zap.Com"). Zap.Com is in the Internet industry
and its stock is traded on the over-the-counter market on the NASD's electronic
bulletin board. Omega Protein is engaged in the marine protein business and its
stock is traded on the New York Stock Exchange ("NYSE") under the symbol "OME."
Viskase is engaged in the food packaging business and its stock is traded in the
over-the-counter market on the NASDAQ Small-Cap Market under the symbol "VCIC."
In April 1998, the Company acquired the Internet based magazines Word and
Charged Productions. Subsequently, these webzines were consolidated into Charged
Productions, Inc., ("Charged Productions"), a multi-media production company
which operated www.charged.com, www.sissyfight.com and www.pixeltime.com. During
December 2000, the Company made a strategic decision to cease the operations of
Charged Productions. In connection with this decision, the Company incurred a
one-time charge of approximately $420,000 related to asset write-downs and
approximately $182,000 related to contract termination expenses. The Company is
currently negotiating the sale of Charged Productions to former employees
whereby the Company would retain a percentage of the outstanding shares in
exchange for the remaining assets of the company. The Company expects to
finalize the transaction in the second quarter of 2001; however, there is no
assurance that it will be consummated.
In December 2000, the Zap.Com Board of Directors determined based on
projected continuing operating losses that it would cease its Internet
operations. In connection with this decision, Zap.Com incurred a one-time charge
of approximately $873,000 related to asset write-downs and approximately
$597,000 related to contract termination expenses. Although the Company believes
that the reserves it has established for contingent liabilities are adequate,
there is no assurance that the ultimate liabilities will not exceed the reserved
amounts. Certain parties to the terminated contracts have challenged the
Company's position as to the amount owed upon termination. There can be no
assurance that Zap.Com will not encounter litigation if an agreement cannot be
reached with these parties, or that it will be successful if any such litigation
is commenced.
Note 2. Significant Accounting Policies
Consolidation
The consolidated financial statements include Zapata Corporation and its
wholly and majority-owned domestic and foreign subsidiaries (collectively,
"Zapata" or the "Company"). Investments in affiliated companies and joint
ventures representing a 20% to 50% voting interest are accounted for using the
equity method, while interests of less than 20% are accounted for using the cost
method.
Cash, Cash Equivalents and Investments in Marketable Securities
The Company invests certain of its excess cash in government and corporate
debt instruments. All highly liquid investments with original maturities of
three months or less are considered to be cash equivalents. The recorded amounts
for cash equivalents approximate fair market value due to the short-term nature
of these financial instruments. Under the criteria set forth in Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"), debt and marketable equity securities
are required to be classified in one of three categories: trading,
available-for-sale, or held-to-maturity.
30
The Company's investments in debt securities at December 31, 2000 are
classified under SFAS 115 as available- for-sale. Such securities are recorded
at fair value and unrealized holding gains and losses, net of the related tax
effect, if any, are not reflected in earnings but are reported as a separate
component of other comprehensive income (loss) until realized. At each reporting
date, the Company considers whether market value declines below the cost of
available for sale or held to maturity securities are other than temporary. If
deemed other than temporary such declines are recognized as realized losses.
Realized gains and losses are determined on the specific identification method
and are reflected in income.
Inventories
Omega Protein's fishing season runs from mid-April to the end of October in
the Gulf of Mexico and from the beginning of May to the end of December in the
Atlantic. Government regulations preclude Omega Protein from fishing during the
off-seasons. During the off-seasons, Omega Protein incurs costs (i.e., plant and
vessel-related labor, utilities, rent and depreciation) that are directly
related to Omega Protein's infrastructure that will be used in the upcoming
fishing season. Costs that are incurred subsequent to a fish catch are deferred
until the next season and are included with inventory. Fishing product
inventories and materials, parts and supplies are stated at the lower of cost
(average cost) or market.
Omega Protein's inventory cost system considers all costs, both variable
and fixed, associated with an annual fish catch and its processing. Omega
Protein's costing system allocates cost to inventory quantities on a per unit
basis as calculated by a formula that considers total estimated inventoriable
costs for a fishing season (including off-season costs) to total estimated fish
catch and the relative fair market value of the individual products produced.
Omega Protein adjusts the cost of sales, off-season costs and inventory balances
at the end of each quarter based on revised estimates of total inventoriable
costs and fish catch.
Investments in unconsolidated affiliates
In August 1995, Zapata acquired 4,189,298 common shares of Viskase,
representing 31% of the then outstanding common stock of Viskase. In June and
July 1996, Zapata purchased 1,688,006 additional shares of Viskase and, as a
result of these transactions, Zapata currently owns approximately 38% of the
outstanding shares of Viskase common stock. Zapata's investment in Viskase is
accounted for using the equity method of accounting. Since historically
Viskase's financial statements have not been available to Zapata on a basis that
would permit concurrent reporting, Zapata historically reported its equity in
Viskase's results of operations on a three-month delay basis.
Property, plant and equipment
Property and equipment are recorded at cost and depreciated over the
estimated useful lives of the assets using the straight-line method. Estimated
useful lives of assets acquired, determined as of the date of acquisition, are
as follows:
Useful Lives
------------
(Years)
-------
Fishing vessels and fish processing plants 15-20
Computers, purchased software, furniture and fixtures 3-10
Internally developed software 3
31
Replacements and major improvements are capitalized; maintenance and
repairs are charged to expense as incurred. Upon sale or retirement, the costs
and related accumulated depreciation are eliminated from the accounts. Any
resulting gains or losses are included in the statement of operations. The
Company regularly assesses all of its long-lived assets for impairment when
events or circumstances indicate their carrying amounts may not be recoverable.
This is accomplished by comparing the expected undiscounted future cash flows of
the assets with the respective carrying amount as of the date of assessment.
Should aggregate future cash flows be less than the carrying value, a write-down
would be required, measured as the difference between the carrying value and the
fair value of the asset. Fair value is estimated either through independent
valuation or as the present value of expected discounted future cash flows. If
the expected undiscounted future cash flows exceed the respective carrying
amount as of the date of the assessment, no impairment is recognized.
Comprehensive income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in
Fiscal 1999 which established standards for the reporting and display of
comprehensive income and its components in a full set of comparative
general-purpose financial statements. SFAS 130 requires net unrealized holding
gains, which prior to adoption were reported separately in stockholders' equity,
to be included in other comprehensive income (expense). The adoption of SFAS 130
resulted in revised and additional disclosures but had no effect on the
financial position, results of operations or liquidity of the Company.
Revenue recognition
Omega Protein recognizes revenue for the sale of its products when title
and risk of loss of its products are transferred to the customer.
Income taxes
The Company utilizes the liability method to account for income taxes. This
method requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of existing temporary differences between the
financial reporting and tax reporting basis of assets and liabilities, and
operating loss and tax credit carry-forwards for tax purposes. Prior to the
completion of the Omega Protein initial public offering in April 1998, Omega
Protein was included in Zapata's consolidated U.S. federal income tax return and
its income tax effects were reflected on a separate return basis for financial
reporting basis. Since this offering, Omega Protein has filed a separate income
tax return for itself and its subsidiaries. Zap.Com will continue to be included
in Zapata's consolidated U.S. federal income tax return for as long as Zapata's
ownership interest is above 80%.
32
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Change of fiscal year
On December 21, 1998, the Company's Board of Directors adopted a change in
the Company's fiscal year from September 30 to December 31. Accordingly, the
Company had a transition period of three months that ended on December 31, 1998
(the "Transition Period"), followed by a full twelve-month fiscal year ending on
December 31, 1999 ("Fiscal 1999").
Reclassification
During Fiscal 2000, certain reclassifications of prior year information
have been made to conform to the current year presentation. These
reclassifications had no effect on net income. However, previously reported
stockholders' equity was decreased, and other liabilities and deferred taxes
were increased in 1999 by $2.0 million.
Note 3. Omega Protein Asset Acquisitions and Divestitures
On November 3, 1997, Omega Protein acquired the fishing and processing
assets of American Protein, Inc. ("America Protein") which operated ten fishing
vessels and a menhaden processing plant in the Chesapeake Bay area, for $14.5
million in cash (the "American Protein Acquisition"). American Protein's
facilities were located in close proximity to Omega Protein's Reedville,
Virginia facility. Shortly after completing this transaction, Omega Protein
closed the American Protein processing plant and began integrating its assets
into Omega Protein's existing operations.
On November 25, 1997, Omega Protein purchased the fishing and processing
assets of Gulf Protein, Inc. ("Gulf Protein"), which included six fishing
vessels, five spotter planes and the processing equipment located at the Gulf
Protein plant near Morgan City, Louisiana for $13.6 million in cash and the
assumption of $883,000 in liabilities (the "Gulf Protein Acquisition"). Omega
Protein accounted for both acquisitions as purchases, thus, the results of
operations began being included in Omega's Statement of Operations beginning
November 25, 1997. In connection with the Gulf Protein Acquisition, Omega
Protein also entered in a five-year lease for the Gulf Protein plant at a
$220,000 annual rental rate. Due to the decline in the average per-ton prices
for Omega's products, which occurred in Fiscal 1999, Omega elected to
discontinue processing operations at its Morgan City plant for the 2000 fishing
season and again for the 2001 fishing season. An impairment of long-lived assets
in the amount of $2.3 million has been recorded in Fiscal 1999 to reduce the
cost of this impairment of in-line equipment to its current salvage value.
Warehousing operations are being conducted at this facility until market
conditions improve or other opportunities develop for the property.
These acquisitions were financed by a $28.1 million intercompany loan from
Zapata. The interest rate on this loan was 8.5% and was repayable in quarterly
installments beginning May 1, 1998. The loan, which was to mature on August 1,
2002, was prepaid in May 1998 with a portion of the proceeds from Omega
Protein's initial public offering.
33
On September 16, 1997, Omega Protein's wholly-owned subsidiary, Venture
Milling Company, a Delaware corporation ("Venture Milling"), sold substantially
all of its assets to an unrelated third party (the "Venture Milling
Disposition"). Venture Milling was primarily in the business of blending
different animal protein products (i.e., fish meal, blood meal and feather meal
for sale to producers of feed for broilers and other animals with low
nutritional requirements). Omega Protein's net income for the 1997 and 1996
Fiscal years was not materially impacted by activity related to Venture Milling.
The Venture Milling Disposition resulted in a $531,000 pre-tax loss to Omega
Protein in the fourth quarter of Fiscal 1997 and did not have a material impact
on Omega Protein's balance sheet since Venture Milling leased most of the assets
employed in its operations.
Note 4. Accounts Receivable
Accounts receivable as of December 31, 2000 and 1999 are summarized as
follows:
December 31, December 31,
2000 1999
-------- --------
(in thousands)
Trade ................................... $ 6,745 $ 8,717
Insurance ............................... 970 1,354
Employee ................................ 43 60
Income tax .............................. 2,401 9,950
Other ................................... 2,030 1,900
-------- --------
12,189 21,981
Less: Allowance for doubtful accounts ... (218) (188)
-------- --------
$ 11,971 $ 21,793
======== ========
Note 5. Inventories
Inventories as of December 31, 2000 and 1999 are summarized as follows:
December 31, December 31,
2000 1999
-------- --------
(in thousands)
Fish meal .................................... $ 19,474 $ 24,195
Fish oil ..................................... 7,590 8,445
Fish solubles ................................ 938 1,538
Off season cost .............................. 3,982 7,282
Materials and supplies ....................... 5,048 4,633
Other ........................................ -- 121
Less: fish oil inventory reserve ............. -- (102)
-------- --------
Total inventory .............................. $ 37,032 $ 46,112
======== ========
During Fiscal 2000 and 1999, Omega Protein provided $18.1 and $18.2
million, respectively, in write-downs of the value of its fish meal and fish oil
product inventories. The inventory write-downs were made necessary due to market
prices Omega Protein either has received or expects to receive for its products
had declined to a level below Omega's cost basis in those products. The
resultant net basis of $28.0 million and $34.1 million for the fish meal, oil
and soluble products approximates current market value, less estimated selling
costs, at December 31, 2000 and December 31, 1999, respectively.
34
Note 6. Short-Term Investments
Short-term investments as of December 31, 2000 and 1999 are summarized as
follows:
December 31, December 31,
2000 1999
------------ ------------
(in thousands)
Federal Home Loan Bank Discount Note ........................................... $29,465 $44,071
Federal National Mortgage Association Discount Note ............................ 25,599 --
Time Deposit CD ................................................................ 320 299
------- -------
$55,384 $44,370
======= =======
Interest rates on these investments ranged from 5.65%--6.53% and
4.50%--5.54% at December 31, 2000 and 1999, respectively. The Time Deposit CD is
collateral for a letter of credit the Company must carry for certain insurance
coverages.
Note 7. Other Assets
Other assets as of December 31, 2000 and 1999 are summarized as
follows:
December 31, December 31,
2000 1999
------------ ------------
(in thousands)
Fishing nets ................................................................... $ 1,134 $ 1,258
Title XI loan origination fee .................................................. 396 339
Note receivable ................................................................ 369 35
Deposits ....................................................................... 140 116
Miscellaneous .................................................................. 124 701
Prepaid pension cost ........................................................... 18,082 16,232
Investments in unconsolidated affiliates ....................................... 1 58
Insurance receivable ........................................................... 4,195 1,830
Deferred tax asset ............................................................. 9,334 --
Valuation allowance for treasury shares purchased by
subsidiary at below book value ............................................... (460) (693)
------- -------
$33,315 $19,876
======= =======
Omega Protein's amortization expense for fishing nets amounted to $720,000
and $874,000 for the fiscal years ended December 31, 2000 and December 31, 1999,
$195,000 for the three months ended December 31, 1998, and $879,000 for the year
ended September 30, 1998.
35
Note 8. Property and Equipment
Property and equipment, net as of December 31, 2000 and 1999 are summarized
as follows:
December 31, December 31,
2000 1999
------------ ------------
(in thousands)
Land ........................................... $ 5,390 $ 5,390
Plant assets ................................... 69,772 62,231
Fishing vessels ................................ 72,933 66,859
Furniture and fixtures ......................... 2,466 2,225
Capitalized Software costs ..................... -- 273
Other .......................................... -- 4,572
-------- --------
150,561 141,550
Less: Accumulated depreciation and impairment .. 61,187 50,498
-------- --------
$ 89,374 $ 91,052
======== ========
Depreciation expense for Fiscal 2000 and 1999 was $8.5 million and $8.0
million, respectively. During Fiscal 1999, Omega wrote-down approximately $2.3
million of impaired in-line processing assets in accordance with SFAS No. 121.
Note 9. Long-Term Investments, Available for Sale
As of December 31, 2000, the Company held approximately $13.4 million
in available for sale corporate debt, which includes an unrealized loss of
approximately $4.4 million. These bonds are considered non-investment grade and
were purchased at a large discount to par value. The risk of default on the
bonds is considered high. Available for sale securities consist of the following
at December 31, 2000:
Amortized Market Value Unrealized
Cost Basis December 31, 2000 Gain (loss)
---------- ----------------- -----------
Decora Industries, Inc. $ 1,273 $ 1,273 $ --
Pueblo Xtra, Inc. 12,589 8,854 (3,735)
Franks Nursery & Crafts, Inc. 368 394 26
Newcor, Inc 1,954 1,250 (704)
Davel Communications, Inc. 1,625 1,625 --
------- ------- -------
Total $17,809 $13,396 $(4,413)
======= ======= =======
As of December 31, 2000, management deemed the decline in the fair value of
the Company's investment in Decora Industries Inc. ("Decora") to be other than
temporary following Decora's announcement that it had filed for protection under
Chapter 11 of the U.S. Bankruptcy Code. In Connection with this impairment, the
Company recognized a loss of approximately $9.5 million resulting in a remaining
book value of approximately $1.3 million.
In July 2000, the Company purchased participation interests in the bank
debt of Davel Communications, Inc. and Davel Financing, LLC ("Davel"). Davel's
bank debt consists of a $245 million facility, including a $110 million tranche
A term loan, a $93.8 million tranche B term loan and a $ 45 million revolving
credit facility. The Company's participation interest consists of an
approximately 12.4% interest in the tranche A term loan, a 6.3% interest in the
tranche B term loan and a 12.4% interest in the revolving credit facility. The
Company paid or committed a total of approximately $5.2 million for its
participation interest in the Davel bank debt. On February 6, 2001 the Company
sold its interest in Davel for approximately $1.6 million. As such, at December
31, 2000 the Company recorded a loss of approximately $3.7 million to adjust the
investment to market value.
36
A valuation allowance on the deferred tax asset for anticipated future tax
deductions associated with realized or unrealized losses on these investments
has been established as it is unlikely that there will be sufficient capital
gains such that the Company will be able to deduct these losses in future
periods.
Note 10. Unconsolidated Affiliates
In August 1995, Zapata acquired 4,189,298 shares of Viskase common stock,
representing 31% of the then outstanding common stock of Viskase, for $18.8
million from a trust controlled by Malcolm Glazer, Chairman of the Board of
Zapata and a then-director of Viskase. Zapata paid the purchase price by issuing
to the seller a subordinated promissory note bearing interest at prime and
maturing in August 1997, subject to prepayment at the Company's option. The
Company prepaid approximately $15.6 million on the promissory note in Fiscal
1995 and the remaining $3.2 million in Fiscal 1996. In June and July 1996,
Zapata purchased 1,688,006 additional shares of Viskase common stock in
brokerage and privately negotiated transactions for aggregate consideration of
approximately $7.0 million. As a result of these transactions, Zapata currently
owns approximately 38% of the outstanding shares of Viskase common stock.
The difference between Zapata's share of Viskase's equity and Zapata's
recorded investment in Viskase was to be amortized over 15 years. At September
30, 1998, the unamortized balance of this difference was $21.1 million.
In Viskase's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998, Viskase reported that it had incurred a net loss of $119.6 million,
including an unusual charge of $148.6 million in connection with the
restructuring of its worldwide operations and the write-down of excess
reorganization value. The charge was primarily non-cash in nature. The charge
included $6.0 million for cash severance and decommissioning and non-cash
charges including $40.1 million for Chicago plant write-offs, $3.0 million for
inventory and maintenance store charges, $8.3 million of charges related to the
shutdown of certain foreign operations and a $91.2 million write-down of the
corporation's reorganization value. The excess reorganization value, which is
similar to goodwill, was established at the time of Viskase's reorganization in
1993.
Since Zapata reports its equity in Viskase's results of operations on a
three-month delayed basis, the impact of this loss was recorded in the
transition period ending December 31, 1998. Because Zapata has not guaranteed
any obligations and is not committed to provide any financial support to
Viskase, Zapata only recorded its equity in Viskase's loss for Viskase's quarter
ended September 24, 1998 to the extent that it reduced Zapata's net investment
in Viskase to zero. Accordingly, Zapata recorded a pre-tax loss of $11.8 million
or $.50 per share (diluted) during the transition period. Zapata will resume
recording its equity in Viskase's earnings when its share of Viskase's net
income equals the share of net losses not recognized during the period the
equity method was suspended. In addition, due to Viskase's loss for their
quarter ended September 24, 1998 resulting in a shareholders' deficit position
and Zapata's subsequent reduction of the value of its investment in Viskase to
zero, the Company discontinued recording the amortization of the excess of its
equity in Viskase's net assets over its investment. At December 31, 2000, the
fair value of Zapata's investment in Viskase was approximately $6.3 million
based on the closing price of Viskase on that day.
Due to the significance of the Company's investment, the financial position
and results of operations of Viskase are summarized below. The financial
statement information presented below for Viskase is based upon its annual and
interim reports for the corresponding periods presented (in millions, except per
share amounts):
37
VISKASE COMPANIES, INC.
(in millions except per share amounts)
September 30, September 30,
2000 1999
---- ----
Balance Sheet
Current assets ................................... $230.1 $157.8
Other ............................................ 14.8 37.0
Property and equipment, net ...................... 182.7 314.3
------ ------
Total assets .................................. $427.6 $509.1
====== ======
Current liabilities .............................. $ 89.8 $121.8
Long-term debt ................................... 301.2 402.6
Deferred income taxes and other .................. 70.2 68.9
Stockholders' deficit ............................ (33.6) (84.2)
------ ------
Total liabilities and stockholders' deficit ... $427.6 $509.1
====== ======
Twelve Months Ended
-------------------
September 30, September 30, September 24,
2000 1999 1998
-------- ------- --------
Income Statement
Revenues ........................... $ 369.2 $ 385.3 $ 430.2
Loss before income taxes ........... (13.6) (37.3) (193.0)
Net income (loss) .................. 50.1 (37.2) (137.5)
Net income (loss) per share ........ 3.53 (2.5) (9.29)
Note 11. Debt
At December 31, 2000 and 1999, the Company's long-term debt consisted of
the following:
December 31, December 31,
2000 1999
------- -------
(in thousands)
U.S. government guaranteed obligations (Title XI loan)
collateralized by a first lien on certain vessels and certain plant assets:
Amounts due in installments through 2014, interest from 6.63% to 7.60% ...................... $14,678 $15,564
Amounts due in installments through 2014, interest at Eurodollar rates plus 4.5%;
7.17% and 5.96% at December 31, 2000 and 1999, respectively ................................ 1,092 1,171
Other debt at 8.0% at December 31, 2000 and 1999, respectively ................................. 284 480
------- -------
Total debt ..................................................................................... 16,054 17,215
Less: current maturities .................................................................... 1,227 1,146
------- -------
Long-term debt ................................................................................. $14,827 $16,069
======= =======
At December 31, 2000 and 1999, the estimated fair value of debt obligations
approximated book value.
38
On December 22, 1999, Omega Protein closed on its Fiscal 1999 Title XI
application and received $5.6 million of Title XI borrowings for qualified Title
XI projects. Originally, Omega was authorized to receive up to $20.6 million in
loans under the Title XI program and has used the entire amount authorized under
such program. The Title XI loans are secured by liens on certain of Omega's
fishing vessels and mortgages on the Reedville, Virginia and Abbeville,
Louisiana plants. Loans are now available under similar terms pursuant to the
Title XI program without intervening lenders. Omega has made application for
loans under this new program but has not yet closed on such applications.
On December 20, 2000, Omega entered into a three-year $20.0 million
revolving credit agreement with Bank of America, N.A. (the "Credit Facility").
Borrowings under this facility may be used for working capital and capital
expenditures. The Credit Facility shall bear interest at a rate equal to (i)
LIBOR plus 250 basis points or (ii) at the Borrower's option, the Bank's prime
rate. The Credit Facility requires a per annum commitment fee of one-half of one
percent (0.5%) on the daily average unused portion of the commitment of the
Lender. The Credit Facility is collateralized by all of Omega's trade
receivables, inventory and equipment. Omega and its subsidiaries are required to
comply with certain financial covenants, including maintenance of a minimum
tangible net worth and minimum EBITDA. In addition, the Credit Facility does not
allow for the payment for cash dividends or stock repurchases and also limits
capital expenditures and investments. As of December 31, 2000 Omega had no
borrowings outstanding under the Credit Facility. The Credit Facility expires on
December 20, 2003.
The annual maturities of long-term debt for the five years ending September 30,
2005 are as follows (in thousands):
2001 .................................................. $ 1,227
2002 .................................................. 1,186
2003 .................................................. 1,173
2004 .................................................. 1,250
2005 .................................................. 1,336
Thereafter ............................................ 9,882
-------
$16,054
=======
Note 12. Earnings Per Share Information
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations (in thousands):
For the Year Ended For the Year Ended
December 31, 2000 December 31, 1999
------------------ -----------------
Income Shares Per share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------ ------
Basic EPS
Net (loss) income to common stockholders .. $(25,988) 2,389 $(10.88) $(20,332) 2,389 $(8.51)
Effect of Dilutive Stock Option Grants ...... -- -- -- -- -- --
Diluted EPS
Net (loss) income to common stockholders .. $(25,988) 2,389 $(10.88) $(20,332) 2,389 $(8.51)
======== ======== ======= ======== ===== ======
39
For the Three Months Ended For the Year Ended
December 31, 1998 September 30, 1998
------------------ -----------------
Income Shares Per share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------ ------
Basic EPS
Net (loss) income to common stockholders ....... (4,444) 2,389 $(1.86) 69,960 2,304 $30.36
Effect of Dilutive Stock Option Grants ........... -- -- -- -- 72 --
Diluted EPS
Net (loss) income to common stockholders ..... $(4,444) 2,389 $(1.86) $69,960 2,376 $29.44
======= ======= ===== ======= ===== ======
Note 13. Preferred, Preference and Common Stock
Preferred stock
At December 31, 2000 and 1999, Zapata had authorized 200,000 shares of
preferred stock issuable in one or more series.
Preference stock
The Company has authorized 1,800,000 shares of preference stock issuable in
one or more series. The Company redeemed the balance of its outstanding
preference stock in September 1997 at the redemption price of $80 per share.
Common stock
At December 31, 2000 and 1999, Zapata had authorized 16,500,000 shares of
common stock, of which 3,066,718 shares were issued and 2,388,708 shares were
outstanding.
On April 13, 1999, the Company's stockholders approved the re-incorporation
of the Company as a Nevada corporation and a related Agreement and Plan of
Merger. On April 30, 1999, the Company effected the merger by merging into a
wholly-owned Nevada subsidiary. In connection with the re-incorporation, the par
value of the Company's common stock was changed from $.25 per share to $.01 per
share. The change in the par value was effectuated by a reclassification between
the common stock, at par value and capital in excess of par, respectively, on
the balance sheet.
On July 6, 1998, Zapata's Board of Directors approved a stock repurchase
program whereby Zapata may repurchase up to 500,000 additional shares of its own
outstanding common stock from time to time. 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. Subject to applicable securities laws, shares may be
repurchased from time to time in the open market or private transactions.
Purchases are subject to availability of shares at prices deemed appropriate by
the Zapata's management and other corporate considerations. Repurchased shares
will be held as treasury shares available for general corporate purposes. To
date, Zapata has not made any repurchases under this program. Zapata reserves
the right to discontinue the repurchase program at any time.
40
Note 14. Accrued Liabilities
Accrued liabilities as of December 31, 2000 and 1999 are summarized
as follows:
December 31, December 31,
2000 1999
------------ -----------
(in thousands)
Salary and benefits .......................... $ 6,011 $ 4,900
Insurance .................................... 10,120 5,501
Taxes, other than income tax ................. 79 8
Federal and state income taxes ............... -- 271
Trade creditors .............................. 1,908 2,518
Contract termination ......................... 779 --
Other ........................................ 2,256 1,779
------- -------
$21,153 $14,977
======= =======
Note 15. Income Taxes
The Company utilizes the liability method to account for income taxes. This
method requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of existing temporary differences between the
financial reporting and tax reporting base of assets and liabilities, and
operating loss and tax credit carry-forwards for tax purposes. Due to the
implementation of the quasi-reorganization as of October 1, 1990, the Company
was required to adjust capital in excess of par value for the recognition of
deductible temporary differences and credit carry-forward items which existed at
the date of the quasi-reorganization. Future reductions, if any, in the deferred
tax valuation allowance relating to tax attributes that existed at the time of
the quasi-reorganization will also be allocated to capital in excess of par
value.
Zapata and its domestic subsidiaries (other than Omega Protein) file a
consolidated U.S. federal income tax return. The consolidated provision for
income tax benefit (expense) from continuing operations consisted of the
following:
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
2000 1999 1998 1998
------------ ------------ ------------- --------------
(in thousands)
Current:
State ......................................... $ 785 $ 737 $ (199) $ (1,325)
Federal ....................................... 1,208 5,391 (2,259) (27,867)
Deferred:
State ......................................... 378 (343) 236 (50)
Federal ....................................... 10,150 (27) 4,126 (10,723)
------- ------- ------- --------
Benefit (expense) for income taxes ................. $12,521 $ 5,758 $ 1,904 $(39,965)
======= ======= ======= ========
For Federal income tax purposes, Zapata has approximately $850,000 of
investment tax credit carryforwards that expire on September 30, 2001. Zapata
and Omega Protein have $6.3 and $1.2 million, respectively, of alternative
minimum tax credit carryforwards. As a result of a change of ownership, the
combined use of the Company's tax credit carryforwards is limited to a maximum
of $1.5 million per year. Investment tax credit carryforwards are reflected in
the balance sheet as a reduction of deferred taxes using the flow through
method.
The following table reconciles the income tax provisions for all periods
computed using the U.S. statutory rate of 35% to the provisions from continuing
operations as reflected in the financial statements.
41
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
2000 1999 1998 1998
----------- ------------ ------------ -------------
(in thousands)
Benefit (taxes) at statutory rate .......................... $ 15,145 $ 11,188 $1,622 $(40,212)
Foreign sales corporation exempt income .................... -- -- 91 907
Adjustment for prior year deferred taxes.................... (2,637) -- -- --
Non-deductible costs ....................................... (487) -- -- --
Valuation allowance for deferred tax assets ................ -- (6,431) -- --
Valuation allowance for capital losses ..................... (3,724) -- -- --
Adjustment for basis difference in subsidiary .............. 3,368 -- -- --
State taxes, net of federal benefit ........................ 1,141 722 103 (894)
Other ...................................................... (285) 279 88 234
-------- -------- ------ --------
Benefit (provision) for income taxes ....................... $ 12,521 $ 5,758 $1,904 $(39,965)
======== ======== ====== ========
Temporary differences and tax credit carryforwards that gave rise to
significant portions of deferred tax assets and liabilities are as follows:
December 31, December 31,
2000 1999
-------- --------
(in thousands)
Deferred tax assets:
Asset write-downs and accruals not yet deductible ................ $ 6,158 $ 10,499
Investment tax credit carryforwards .............................. 851 2,580
Alternative minimum tax credit carryforwards ..................... 7,557 8,767
Equity in loss of unconsolidated affiliates ...................... 8,553 8,553
Net operating loss carryforward .................................. 14,796 362
Valuation loss on investment ..................................... 3,724 --
Capital loss carryforward/ carryback ............................. 1,733 --
Loss in market valuation -- available for sale securities ........ 1,721 --
Other ............................................................ 50 970
-------- --------
Total deferred tax assets ............................................. 45,143 31,731
Valuation allowance ................................................... (14,543) (10,827)
-------- --------
Net deferred tax assets ............................................... 30,600 20,904
-------- --------
Deferred tax liabilities:
Property and equipment ........................................... (7,672) (6,352)
Pension .......................................................... (6,381) (5,558)
Write up of subsidiary investment ................................ (6,911) (10,279)
Amortized market discount on bonds ............................... (302) --
Other ............................................................ -- 91
-------- --------
Total deferred tax liabilities ........................................ (21,266) (22,098)
-------- --------
Net deferred tax asset (liability) .................................... $ 9,334 $ (1,194)
======== ========
A valuation allowance is provided to reduce the deferred tax assets to a
level which, more likely than not, will be realized. Primary factors considered
by management to determine the size of the allowance include the estimated
taxable income level for future years and the limitations on the use of such
carryforwards and expiration dates. The valuation allowance was decreased by
approximately $1.7 million in Fiscal 2000 to reflect the expiration of the
investment tax credit on September 30, 2000. The valuation allowance was
increased by $1.7 million in connection with a valuation loss on investments
available for sale and by $3.7 million to reflect a loss on another investment.
These potential losses would qualify as capital losses if the underlying assets
were sold at their current values.
A certain deferred tax asset or assets recorded prior to the current period
were deemed to be unrealizable during the current year. As such, the Company
incurred a charge of approximately $2.6 million which caused a reduction to the
current year's calculation of deferred tax benefit.
42
Note 16. Commitments and Contingencies
Operating leases payable
Future minimum payments under non-cancelable operating lease obligations
aggregate $3.6 million, and for the five years ending December 31, 2005 are (in
thousands):
2001 2002 2003 2004 2005 Thereafter
---- ---- ---- ---- ---- ----------
$960 $899 $699 $630 $313 $93
Rental expenses for operating leases were $1,045, $971, $379, and $606 in
Fiscal 2000, 1999, the Transition period ended December 31, 1998, and Fiscal
1998, respectively.
Litigation
On April 30, 1999, a state district court in Houston, Texas entered a
judgment against Zapata in a lawsuit brought by a former employee that was
commenced on April 1, 1998. The former employee claims that he was entitled to
the value of options for approximately 240,000 shares (24,000 shares subsequent
to the reverse stock split) of Zapata stock, which he alleges should have been
issued to him in 1998 pursuant to his employment agreement with Zapata. The
judgment against Zapata was for approximately $3.45 million, which includes
prejudgment interest. Zapata has secured a letter of credit and on July 29, 1999
perfected its appeal with the Court of Appeal, for the Fourteenth District of
Texas at Houston. On March 15, 2001, the Court of Appeals for the Fourteenth
District at Houston issued an opinion reversing the jury verdict in favor of the
former employee and rendering judgment in favor of the Company. Under the Texas
Rules of Appellate Procedure, the former employee has forty-five (45) days after
the Court of Appeals renders judgment, or after the Court of Appeals ruling on a
timely filed motion for a rehearing to seek review from the Texas Supreme Court.
Any motion for rehearing must be filed within fifteen (15) days. The Company
continues to believe that it has a meritorious defense to all or a substantial
portion of the plaintiff's claim. However, there can be no assurance that the
Company will be successful if the Court of Appeals' decision is appealed and the
Texas Supreme Court decides to hear the appeal.
The Company is involved in litigation relating to claims arising out of its
past and current operations in the normal course of its business. The Company
maintains insurance coverage against such potential ordinary course claims in an
amount that it believes to be adequate. While the results of any ultimate
resolution cannot be predicted, in the opinion of the Company's management,
based on discussion with counsel, any losses resulting from these matters will
not have a material adverse effect on Zapata's results of operations, cash flows
or financial position.
Environmental Matters
The Company is subject to various possible claims and lawsuits regarding
environmental matters. Management believes that costs, if any, related to these
matters will not have a material adverse affect on the results of operations,
cash flows or financial position of the Company.
43
Note 17. Benefit Plans
Qualified Defined Benefit Plans
Zapata has two noncontributory defined benefit pension plans covering
certain U.S. employees. Omega Protein has one noncontributory defined benefit
pension plan. For both Plans, benefits are generally based on employees' years
of service and compensation level. All of the costs of these plans are borne by
Zapata and Omega. The plans have adopted an excess benefit formula integrated
with covered compensation. Participants are 100% vested in the accrued benefit
after five years of service. The following represents a presentation of
consolidated data for the Zapata and Omega Protein Pension Plans.
Components of consolidated net periodic benefit cost:
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
2000 1999 1998 1998
------- ------- ------- -------
(in thousands)
Service cost ........................................... $ 647 $ 677 $ 158 $ 550
Interest cost .......................................... 3,075 2,629 650 2,613
Expected return on plan assets ......................... (4,851) (4,521) (989) (4,206)
Amortization of transition asset and other deferrals ... (721) (681) (16) (706)
------- ------- ------- -------
Net pension benefit .................................... $(1,850) $(1,896) $ (197) $(1,749)
======= ======= ======= =======
The Company's funding policy is to make contributions as required by
applicable regulations. No contributions to the plans have been required since
1984. The plans' funded status and amounts recognized in the Company's balance
sheet at December 31, 2000 and 1999 are presented below:
Year Ended Year Ended
December 31, December 31,
2000 1999
-------- --------
(in thousands)
Change in Benefit Obligation
Benefit Obligation at beginning of year ............ $ 41,309 $ 40,196
Service Cost ....................................... 647 677
Interest Cost ...................................... 3,075 2,629
Actuarial Gain ..................................... (2,240) (1,558)
Benefits Paid ...................................... (2,911) (635)
-------- --------
Benefit Obligation at end of year .................. 39,880 41,309
-------- --------
Change in Plan Assets
Plan Assets at Fair Value at beginning of year ..... 54,213 51,480
Actual Return on Plan Assets ....................... (266) 3,368
Benefits Paid ...................................... (2,911) (635)
-------- --------
Plan Assets at Fair Value at end of year ........... 51,036 54,213
-------- --------
Reconciliation of Prepaid Pension Cost and
Total Amount Recognized
Funded Status of Plan .............................. 11,156 12,904
Unrecognized Prior Service Cost .................... 542 641
Unrecognized Net Transition Asset .................. (1,466) (2,303)
Unrecognized Net Loss .............................. 7,850 4,990
-------- --------
Prepaid Pension Cost ............................... $ 18,082 $ 16,232
======== ========
44
Weighted Average Assumptions at end of year
Discount Rate ...................................... 7.50% 7.50%
Long-Term Rate of Return ........................... 9.00% 9.00%
Salary Scale up to age 50 .......................... 5.00% 5.00%
Salary Scale over age 50 ........................... 4.50% 4.50%
The unrecognized transition asset at October 1, 1987 was $10.6 million,
which is being amortized over 15 years. Pension plan assets are invested in
cash, common and preferred stocks, short-term investments and insurance
contracts.
Supplemental Retirement Plan
Effective April 1, 1992, Zapata adopted a supplemental pension plan, which
provides supplemental retirement payments to certain senior executives of
Zapata. The amounts of such payments equal the difference between the amounts
received under the applicable pension plan and the amounts that would otherwise
be received if pension plan payments were not reduced as the result of the
limitations upon compensation and benefits imposed by federal law. Effective
December 1994, the supplemental pension plan was frozen.
Components of net periodic benefit cost are as follows:
Three Months
Year Ended Year Ended Ended Year Ended
December 31, December 31, December 31, September 30,
2000 1999 1998 1998
---- ---- ------- -------
(in thousands)
Service cost ........................................... $-- $-- $ 15 $ 66
Interest cost .......................................... 62 60 -- --
Amortization of prior service cost ..................... 3 4 1 1
--- --- ------ ------
Net pension expense .................................... $65 $64 $ 16 $ 67
=== === ====== ======
No contributions to the plan have been required. For Fiscal 2000 and 1999,
the actuarial present value of the projected benefit obligation was based on a
7.5% discount rate, respectively. The plan's funded status and amounts
recognized in the Company's balance sheet at December 31, 2000 and 1999 are
presented below:
Year Ended Year Ended
December 31, December 31,
2000 1999
----- -----
(in thousands)
Change in Benefit Obligation
Benefit Obligation at beginning of year .............. $ 876 $ 941
Interest Cost ........................................ 62 60
Actuarial Loss/(Gain) ................................ 18 (21)
Benefits Paid ........................................ (104) (104)
----- -----
Benefit Obligation at end of year .................... 852 876
----- -----
Change in Plan Assets
Contributions ........................................ 104 104
Benefits Paid ........................................ (104) (104)
----- -----
Plan Assets at Fair Value at end of year ............. -- --
----- -----
45
Reconciliation of Accrued Pension Cost and
Total Amount Recognized
Funded Status of Plan ................................ (852) (876)
Unrecognized Net Loss ................................ 153 138
----- -----
Accrued Pension Cost ................................. (699) (738)
Accumulated Other Comprehensive Income ............... (153) (138)
----- -----
Net Amount Recognized ................................ $(852) $(876)
===== =====
Weighted Average Assumptions at end of year
Discount Rate ........................................ 7.50% 7.50%
Long-Term Rate of Return ............................. N/A 9.00%
Salary Scale up to age 50 ............................ N/A 5.00%
Salary Scale over age 50 ............................. N/A 4.50%
Qualified Defined Contribution Plan
The Company sponsors a defined contribution plan for certain eligible
employees of the Company. Effective October 1, 1998, the Zapata Profit Sharing
Plan merged with the Omega Protein 401(k) Retirement and Savings Plan, (the
"Profit Sharing Plan"). The Company's contributions are calculated based on
employee contributions and compensation. The Company's contribution to the
Profit Sharing Plan totaled $13,736, $29,870, $0 and $5,132 in Fiscal 2000,
1999, the transition Period, and Fiscal 1998, respectively.
Stock Option Plans
Under the Company's 1981 Stock Incentive Plan (the "1981 Plan"), options
may be granted at prices equivalent to the market value of the Company's common
stock at the date of the grant. Options become exercisable in annual
installments equal to one-third of the shares covered by the grant beginning one
year from the grant date. Options not exercised in the period they become
exercisable may be carried forward and exercised in subsequent periods. During
1986, the Company amended and restated the 1981 Plan to provide for the award of
restricted shares of common stock. No shares of common stock are available for
further grants of stock options or awards of restricted stock under the 1981
Plan.
Zapata's Amended and Restated Special Incentive Plan (the "1987 Plan")
provides for the granting of stock options and the awarding of restricted stock.
Under the 1987 Plan, options may be granted at prices equivalent to the market
value of the common stock at the date of grant. Options become exercisable on
dates as determined by the Zapata Board of Director's Compensation Committee,
provided that the earliest such date cannot occur before six months after the
date of grant. Unexercised options will expire on varying dates, up to a maximum
of ten years from the date of grant. The awards of restricted stock have a
restriction period of not less than six months and not more than five years. The
1987 Plan provided for the issuance of up to 60,000 shares of the common stock.
During 1992, the stockholders approved an amendment to the 1987 Plan that
provides for the automatic grant of a nonqualified stock option to directors of
Zapata who are not employees of Zapata or any subsidiary of Zapata. At December
31, 2000, stock options covering a total of 32,966 stock options had been
exercised. No shares of common stock are available for future stock options or
other awards under the Plan.
On December 6, 1990, the Company's stockholders approved another stock
option plan (the "1990 Plan"). The 1990 Plan provides for the granting of
nonqualified stock options to key employees of the Company. Under the 1990 Plan,
options may be granted by the Committee at prices equivalent to the market value
of the common stock on the date of grant. Options become exercisable in one or
more installments on such dates as the Committee may determine, provided that
such date cannot occur prior to the expiration of one year of continued
employment with the Company following the date of grant. Unexercised options
will expire on varying dates up to a maximum of ten years from the date of
grant. The 1990 Plan provides for the issuance of options to purchase up to
100,000 shares of common stock. At December 31, 2000, a total of 96,734 stock
options had been exercised and a total of 3,267 shares of common stock were
reserved for stock options outstanding under the 1990 Plan. No shares of common
stock are available for future stock options or other awards under the Plan.
46
On December 5, 1996, the Company's stockholders approved a new stock option
plan (the "1996 Plan"). The 1996 Plan provides for the granting of nonqualified
stock options to key employees of the Company. Under the 1996 Plan, options may
be granted by the Committee at prices equivalent to the market value of the
common stock on the date of grant. Options become exercisable in one or more
installments on such dates as the Committee may determine. Unexercised options
will expire on varying dates up to a maximum of ten years from the date of
grant. The 1996 Plan provides for the issuance of options to purchase up to
500,000 shares of common stock. During 1999, the stockholders approved an
amendment to the 1996 Plan which increased the number of shares available for
options granted under the plan to 1,000,000 shares. At December 31, 2000, stock
options covering a total of 105,285 shares had been exercised and a total of
78,304 shares of common stock were reserved for the future granting of stock
options under the 1996 Plan.
Under the 1981 Plan, the 1987 Plan, the 1990 Plan and the 1996 Plan (the
"Plans") the Company is authorized to issue shares of common stock pursuant to
"Awards" granted in various forms, including incentive stock options (intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended),
non-qualified stock options and other similar stock-based awards.
The Company granted options under the 1996 Plan in Fiscal 2000 and 1999.
The Company did not grant any stock options in the Transition period ended
December 31, 1998 or the year ended September 30, 1998 to employees and
directors. The stock options granted in Fiscal 2000 and 1999 have contractual
terms of 10 years. All of the options granted to the employees and directors
have an exercise price equal to the fair market value of the stock at grant
date. The options granted in Fiscal 2000 and 1999 vest ratably over three years
beginning on the first anniversary of the date of grant.
A summary of the status of the Company's stock options is presented below:
For the Year Ended For the Year Ended For the Three Months For the Year Ended
December 31, 2000 December 31, 1999 December 31, 1998 September 30, 1998
------------------ -------------------- -------------------- --------------------
# Shares Weighted # Shares Weighted # Shares Weighted # Shares Weighted
of Average of Average of Average of Average
Underlying Exercise Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices Options Prices
---------- -------- ---------- -------- ---------- -------- ---------- --------
Outstanding at beginning of year ...... 126,790 $46.5 125,290 $46.5 125,290 $46.5 233,030 $46.2
Granted ............................... 930 32.5 1,500 90.0 -- -- -- --
Exercised ............................. -- -- -- -- -- -- 107,740 45.8
Forfeited ............................. 5,373 44.4 -- -- -- -- -- --
------- ------- ------- -------
Outstanding at end of year ............ 122,347 46.9 126,790 47.0 125,290 46.5 125,290 46.5
======= ======= ======= =======
Exercisable at end of year ............ 120,417 46.7 125,290 46.5 125,290 46.5 125,290 46.5
======= ======= ======= =======
Options outstanding and exercisable as of December 31, 2000 are summarized
below:
Options Outstanding Options Exercisable
----------------------------------------------------------- ---------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Range Outstanding at Remaining Average Range Exercisable Average
of Exercise December 31, Contractual Exercise of Exercise At December 31, Exercise
Prices 2000 Life Price Prices 2000 Price
-------------- -------------- ----------- -------- ---------------- --------------- ---------
16.88 to 25.00 230 9.88 20.74 33.75 to 46.25 115,917 46.08
27.50 to 38.13 1,367 7.01 34.44 59.38 to 84.65 4,500 62.19
-----
44.38 to 84.65 120,750 2.62 47.07 120,417
------- =======
122,347
=======
47
The Company applies APB Opinion 25 and related Interpretations in
accounting for stock options. In 1995, the FASB issued SFAS 123, which, if fully
adopted by the Company, would change the methods the Company applies in
recognizing the cost for stock options. Adoption of the cost recognition
provisions of SFAS 123 is optional and the Company has decided not to elect
these provisions of SFAS 123. However, pro forma disclosures as if the Company
adopted the cost recognition provisions of SFAS 123 are presented below (amounts
in thousands, except per share amounts):
Three Months
Year Ended Year Ended Ended Year Ended
December 31, 2000 December 31, 1999 December 31, 1998 September 30, 1998
------------------- ---------------------- ---------------------- --------------------
As Pro As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma Reported Forma
-------- ----- -------- ----- -------- ----- -------- -----
SFAS 123 charge ............... $ -- $ 4,381 $ -- $ 3,650 $ -- $ -- $ -- $ 2,344
Net (loss) income ............. (25,988) (30,369) (20,332) (23,982) (4,444) (4,444) 69,960 67,616
Basic net (loss) income per
common share ........... (10.88) (12.71) (8.51) (10.04) (1.86) (1.86) 30.36 29.35
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future charges.
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in Fiscal 2000 and 1999, respectively:
Expected option terms of three years for all periods; dividend yield of 0.00%
for all periods; risk-free interest rate of 6.27% and 5.05% for 2000 and 1999
respectively; and volatility of 91.57% and 86.00% for 2000 and 1999,
respectively. The weighted-average grant date fair value of options granted was
$19.74 and $54.85 per share for 2000 and 1999, respectively. No options were
granted in the Transition period ended December 31, 1998 and the Fiscal year
ended September 30, 1998.
Note 18. Related Party Transactions
As of and prior to November 12, 1999, Zap.Com had satisfied all of its
startup and offering costs with borrowings from the Company. On November 12,
1999, Zapata contributed $9,000,000 in cash to Zap.Com and forgave $1,000,000 in
intercompany debt from Zap.Com pursuant to the completion of the distribution of
Zap.Com's shares to Zapata's shareholders. In addition, two Zapata directors,
Malcolm Glazer (who beneficially owns 44% of Zapata's outstanding common stock)
and Avram Glazer, contributed $1,100,000 in cash as payment for 550,000 shares
of Zap.Com common stock.
48
On October 20, 1999, Zap.Com granted to American Internetwork Sports
Company, LLC stock warrants in consideration for sports related consulting
services. American Internetwork Sports is owned by the siblings of Zapata's CEO,
Avram Glazer, the Company's president and Chief Executive Officer. Zap.Com
accounts for this transaction in accordance with EITF 96-18, which requires the
recognition of expense based on the then current fair value of the warrants at
the end of each reporting period with adjustment of prior period expense to
actual expense at each vesting date. Pursuant to the December 2000 decision to
cease Internet operations, these warrants became fully vested. As a result,
Zap.Com recorded the entire cost of $743,000 for all 2,000,000 warrants at the
then market value of the stock.
Note 19. Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS 133 requires the recognition of
all derivatives as either assets or liabilities in the statement of financial
position and the measurement of those instruments at fair value. The Company is
required to adopt this standard in the first quarter of Fiscal year 2001
pursuant to SFAS No. 137 (issued in June 1999), which delays the adoption of
SFAS 133 until that time. The Company expects that the adoption of SFAS 133 will
not have a material impact on its financial position or its results of
operations.
Note 20. Industry Segment and Geographic Information
Zapata primarily operates in three industry segments: the food segment,
consisting of Omega Protein and Viskase, the Company's Internet segment,
consisting of Charged Productions and Zap.Com and our Corporate segment.
Zapata's majority owned subsidiary Omega Protein is engaged in menhaden fishing
for the production and sale of fish meal and fish oil. Export sales of fish oil
and fish meal were approximately $21.7 million, $38.6 million, $7.9 million, and
$55.4 million in Fiscal 2000, Fiscal 1999, the Transition Period and Fiscal
1998, respectively. Such sales were made primarily to European markets. In
Fiscal 2000, Fiscal 1999, the Transition Period and Fiscal 1998, sales to one
customer were approximately $6.3 million, $8.7 million and $3.2 million,
respectively.
Subsequent periods' Internet segment information will consist exclusively
of any activities of Zap.Com. The following amounts for our Internet segment
consist of the activities of Zap.Com and Charged Productions through December
31, 2000.
49
Operating
(Loss) Total Depreciation Capital
Revenues Income Assets Amortization Expenditures
-------- --------- ------ ------------ ------------
(in thousands)
Year Ended December 31, 2000
Food ..................................... $ 84,042 $ (25,541) $160,484 $ 9,211 $ 6,977
Internet ................................. 98 (8,519) 3,652 341 862
Corporate ................................ -- (4,326) 97,723 62 613
--------- --------- -------- ------- -------
$ 84,140 $ (38,386) $261,859 $ 9,614 $ 8,452
========= ========= ======== ======= =======
Year Ended December 31, 1999
Food ..................................... $ 93,636 $ (23,273) $176,148 $ 8,995 $15,145
Internet ................................. 30 (6,437) 8,730 49 342
Corporate ................................ -- (4,176) 114,936 27 178
--------- --------- -------- ------- -------
$ 93,666 $ (33,886) $299,814 $ 9,071 $15,665
========= ========= ======== ======= =======
Three Months Ended December 31, 1998
Food ..................................... $ 25,759 $ 6,272 $189,853 $ 1,955 $ 3,030
Internet ................................. -- (927) 351 8 133
Corporate ................................ -- (219) 128,036(1) 3 118
--------- --------- -------- ------- -------
$ 25,759 $ 5,126 $318,240 $ 1,966 $ 3,281
========= ========= ======== ======= =======
Year Ended September 30, 1998
Food ..................................... $ 133,555 $ 38,118 $193,421 $ 6,351 $21,540
Internet ................................. -- (1,269) 153 3 91
Corporate ................................ -- (6,342) 140,432(1) 31 220
--------- --------- -------- ------- -------
$ 133,555 $ 30,507 $334,006 $ 6,385 $21,851
========= ========= ======== ======= =======
(1) Includes Zapata's investment in Viskase.
The following table shows the geographical distribution of revenues based
on location of customers:
Three Months
For the Year Ended For the Year Ended Ended For the Year Ended
December 31, December 31, December 31, September 30,
2000 1999 1998 1998
----------------------- ---------------------- --------------------- ---------------------
Revenues Percentage Revenues Percent Revenues Percent Revenues Percent
U.S. .................. $63,811 75.9% $55,069 58.8% $17,835 69.2% $ 78,106 58.5%
Europe ................ 5,661 6.7 19,215 20.5 3,259 12.7 29,101 21.8
Asia .................. 2,441 2.9 7,942 8.5 2,462 9.6 -- --
Canada ................ 3,385 4.0 3,443 3.7 1,201 4.7 8,729 6.5
Mexico ................ 6,557 7.8 4,756 5.1 137 .5 4,214 3.2
Other ................. 2,285 2.7 3,241 3.4 865 3.3 13,405 10.0
------- ----- ------- ----- ------- ----- -------- -----
Total ................. $84,140 100.0% $93,666 100.0% $25,759 100.0% $133,555 100.0%
======= ===== ======= ===== ======= ===== ======== =====
50
Note 21. Quarterly Financial Data (unaudited)
Consolidated Quarterly Information
Quarter Ended
-------------
March 31, June 30, September 30, December 31,
Fiscal 2000 2000 2000 2000 2000
- ----------- -------- -------- -------- --------
(in thousands, except per share data)
Revenues ............................................... $ 19,388 $ 20,873 $ 17,864 $ 26,015
Operating loss ......................................... $ (5,979) $ (3,991) $(18,584) $ (9,832)
Loss before taxes ...................................... $ (4,740) $ (1,301) $(17,288) $(21,812)
Net loss ............................................... $ (2,673) $ (410) $ (7,408) $(15,497)
Net loss per share (basic and diluted) ................. $ (1.12) $ (.17) $ (3.10) $ (6.49)
Quarter Ended
-------------
March 31, June 30, September 30, December 31,
Fiscal 1999 1999 1999 1999 1999
- ----------- -------- -------- -------- --------
(in thousands, except per share data)
Revenues ............................................... $ 22,162 $ 18,225 $ 23,692 $ 29,587
Operating loss ......................................... $ 2,631 $ (2,952) $(18,595) $(14,970)
Loss before taxes ...................................... $ 905 $ (1,660) $(17,479) $(13,701)
Net loss ............................................... $ (612) $ (885) $ (7,942) $(10,893)
Net loss per share (basic and diluted) ................. $ (0.26) $ (0.37) $ (3.32) $ (4.56)
Note 22. Subsequent Events
On January 30, 2001, the Company effected a ten-for-one reverse split of
its outstanding shares of common stock resulting in there then being
approximately 2.4 million common shares outstanding. In addition, the Company's
authorized shares will be reduced to approximately 16.5 million common shares,
200,000 preferred shares and 1.8 million preference shares. The preferred stock
and preference shares are undesignated "blank check" shares. All share and per
share amounts have been retroactively restated for the reverse split.
On February 6, 2001, the Company sold its participation interests in the
bank debt of Davel Communications, Inc. and Davel Financing, LLC. As such, at
December 31, 2000 the Company has recorded an impairment charge of approximately
$3.7 million to adjust the investment to market value.
On February 20, 2001, Frank's Nursery & Crafts, Inc. filed for Chapter 11
bankruptcy protection from creditors. As of December 31, 2000, the Company did
not have any material interest receivable from Frank's. In addition, the
investment is stated at fair market value on the Consolidated Balance Sheet with
the unrealized gain recorded in accumulated other comprehensive loss. As of the
date of this filing, the current market value of this investment is
approximately $313,000, or approximately $81,000 less than the fair value as of
December 31, 2000.
On April 30, 1999, a state district court in Houston, Texas entered a
judgment against Zapata in a lawsuit brought by a former employee which was
commenced on April 1, 1998. The former employee claimed that he was entitled to
the value of options for approximately 240,000 shares of Zapata stock that he
alleges should have been issued to him in 1998 pursuant to his employment
agreement with Zapata. The judgment against Zapata was for approximately $3.45
million, which includes prejudgment interest. On March 15, 2001, the 14th Court
of Appeals reversed the judgment of the trial court and rendered judgment that
the former employee take nothing from Zapata Corporation. Under the Texas Rules
of Appellate Procedure, the former employee has forty-five (45) days after the
court of appeals renders judgment, or after the court of appeal's ruling on a
timely filed motion for rehearing to seek review from the Texas Supreme Court.
As of December 31, 2000, the
51
Company has reserved for the entire amount of the original judgment and has not
reversed this reserve as the ultimate outcome of this matter is still uncertain.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Pursuant to General Instruction G on Form 10-K, the information called for
by Item 10 of Part III of Form 10-K is incorporated by reference to the
information set forth in the Company's definitive proxy statement relating to
its 2001 Annual Meeting of Stockholders (the "2001 Proxy Statement") to be filed
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), in response to Items 401 and 405 of Regulation S-K under
the Securities Act of 1933, as amended, and the Exchange Act ("Regulation S-K").
Item 11. Executive Compensation.
Pursuant to General Instruction G of Form 10-K, the information called for
by Item 11 of Part III of Form 10-K is incorporated by reference to the
information set forth in the 2001 Proxy Statement in response to Item 402 of
Regulation S-K, excluding the material concerning the report on executive
compensation and the performance graph specified by paragraphs (k) and (l) of
such Item
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Pursuant to General Instruction G of Form 10-K, the information called for
by Item 12 of Part III of Form 10-K is incorporated by reference to the
information set forth in the 2001 Proxy Statement in response to Item 403 of
Regulation S-K.
Item 13. Certain Relationships and Related Transactions
Pursuant to General Instruction G of Form 10-K, the information called for
by Item 13 of Part III of Form 10-K is incorporated by reference to the
information set forth in the 2001 Proxy Statement in response to Item 404 of
Regulation S-K.
52
Item 14. Exhibit, Financial Statement Schedules, and Reports on Form 8-K
(1) Exhibits
EXHIBIT INDEX
The exhibits indicated by an asterisk (*) are incorporated by reference.
Exhibit No. Description of Exhibits
- ----------- -----------------------
3(a)* Articles of Incorporation of Zapata filed with Secretary of State
of Nevada May 14, 1999 (Exhibit 3.1 to Current Report on Form 8-K
filed May 14, 1999) (File No. 1-4219)).
3(b) Certificate of Amendment of Articles of Incorporation of Zapata
filed with Secretary of State of Nevada January 26, 2001.
3(c) Certificate of Decrease in Authorized and Outstanding Shares, filed
with Secretary of State of Nevada January 23, 2001.
3(d)* By-laws of Zapata (Exhibit 3.2 to Current Report on Form 8-K filed
May 14, 1999) (File No. 1-4219)).
10(a)*+ Zapata 1990 Stock Option Plan (Exhibit 10(b) to Zapata's Annual
Report on Form 10-K for the Fiscal year ended September 30, 1990
(File No. 1-4219)).
10(b)*+ First Amendment to Zapata 1990 Stock Option Plan (Exhibit 10(c) to
Zapata's Registration Statement on Form S-1 (Registration No.
33-40286)).
10(c)*+ Zapata Supplemental Pension Plan effective as of April 1,1992
(Exhibit 10(b) to Zapata's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992 (File No. 1-4219)).
10(d)* Supplemental Agreement dated June 4, 1996 between Malcolm I. Glazer
and Zapata (Exhibit 10.20 to Zapata's Registration Statement on
Form S-4 (Reg. No. 333-06729)).
10(e)*+ 1996 Long-Term Incentive Plan of Zapata (Appendix A to Zapata's
Definitive Proxy Statement Dated November 13, 1996 (File No.
1-4219)).
10(f) First Amendment to Zapata 1996 Long-Term Incentive Plan
10(g)* Shareholders' Agreement dated May 30, 1997 by Malcolm I. Glazer and
the Malcolm I. Glazer Family Limited Partnership in favor of Zapata
(Exhibit 10(z) to Zapata's Quarterly Report on Form 10-Q for the
Fiscal quarter ended June 30, 1997 (File No. 1-4219)).
10(h)* Underwriting Agreement dated April 12, 1998 among Zapata, Omega
Protein and Prudential Securities Incorporated and Deutsche Morgan
Grenfell, Inc., as representatives of the underwriters named
therein. (Exhibit 10.1 to Zapata's Current Report on Form 8-K filed
April 21, 1998 (File No. 1-4219)).
10(i)* Separation Agreement dated April 8, 1998 between Zapata and Omega
Protein. (Exhibit 10.2 to Zapata's Current Report on Form 8-K filed
April 21, 1998 (File No. 1-4219)).
10(j)* Administrative Services Agreement dated April 8, 1998 between
Zapata and Omega Protein. (Exhibit 10.3 to Zapata's Current Report
on Form 8-K filed April 21, 1998 (File No. 1-4219)).
53
Exhibit No. Description of Exhibits
- ----------- -----------------------
10(k)* Letter Agreement dated July 9, 1998, among Viskase, Inc. (f/k/a
Envirodyne Industries, Inc.), Zapata, Malcolm Glazer and Avram
Glazer (Exhibit 1 to Amendment No. 12 to Schedule 13D filed on July
22, 1998 by Zapata with respect to common stock of Viskase, Inc.).
10(l)* Investment and Distribution Agreement between Zap.Com and Zapata
(Exhibit No. 10.1 to Zap.Com's Registration Statement of Form S-1
(File No. 333-76135) originally filed with the Securities and
Exchange Commission on April 12, 1999, as amended)
10(m)* Services Agreement between Zap.Com and Zapata (Exhibit No. 10.2 to
Zap.Com's Registration Statement of Form S-1 (File No. 333-76135)
originally filed with the Securities and Exchange Commission on
April 12, 1999, as amended)
10(n)* Tax Sharing and Indemnity Agreement between Zap.Com and Zapata
(Exhibit No. 10.3 to Zap.Com's Registration Statement of Form S-1
(File No. 333-76135) originally filed with the Securities and
Exchange Commission on April 12, 1999, as amended)
10(o)* Registration Rights Agreement between Zap.Com and Zapata (Exhibit
No. 10.4 to Zap.Com's Registration Statement of Form S-1 (File No.
333-76135) originally filed with the Securities and Exchange
Commission on April 12, 1999, as amended)
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants.
24 Powers of attorney.
27 Financial Data Schedule.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to the requirements of Item 14(c) of Form
10-K.
(b) Current Reports on Form 8-K.
Zapata did not file any current reports during the fourth quarter of Fiscal
2000.
(c) Consolidated Financial Statement Schedule.
Filed herewith as a consolidated financial statement schedule is the
schedule supporting Zapata's consolidated financial statements listed under
paragraph (a) of this Item, and the Independent Accountant's Report with respect
thereto.
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ZAPATA CORPORATION
(Registrant)
By: /s/ LEONARD DISALVO
--------------------------------
(Leonard DiSalvo Vice President)
April 2, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ AVRAM A. GLAZER* President and Chief Executive Officer April 2, 2001
- ----------------------------------------- (Principal Executive Officer)
(Avram A. Glazer) and Director
/s/ LEONARD DISALVO Vice President and Chief Financial April 2, 2001
- ----------------------------------------- Officer (Principal Financial
(Leonard DiSalvo) and Accounting Officer)
/s/ WARREN H. GFELLER*
- -----------------------------------------
(Warren H. Gfeller)
/s/ BRYAN G. GLAZER*
- -----------------------------------------
(Bryan G. Glazer)
/s/ EDWARD S. GLAZER*
- -----------------------------------------
(Edward S. Glazer)
/s/ MALCOLM I. GLAZER* Directors of the Registrant April 2, 2001
- -----------------------------------------
(Malcolm I. Glazer*)
/s/ ROBERT V. LEFFLER, JR.*
- -----------------------------------------
(Robert V. Leffler, Jr.)
/s/ LEONARD DISALVO
- -----------------------------------------
(Leonard DiSalvo Attorney-in-Fact)
REPORT OF INDEPENDENT ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Zapata Corporation:
Our audits of the consolidated financial statements referred to in our
report dated March 30, 2001 appearing in this Form 10-K, also included an audit
of the consolidated financial statement schedule listed in Item 14(c) of this
Form 10-K. In our opinion, this consolidated financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Rochester, New York
March 30, 2001
SCHEDULE II
ZAPATA CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged in Balance at
Beginning Costs and Change in End of
Description of Period Expenses Estimate Deductions Period
- ----------- --------- -------- -------- ---------- ------
September 30, 1997
Allowance for doubtful accounts ................... $ 161 $50 $ -- $(35) $ 176
Inventory reserve ................................. 102 -- -- -- 102
Deferred tax asset valuation account .............. 16,857 -- (2,643) -- 14,214
September 30, 1998
Allowance for doubtful accounts ................... $ 176 $27 $ -- $(11) $ 192
Inventory reserve ................................. 102 -- -- -- 102
Deferred tax asset valuation account .............. 14,214 -- 442 -- 14,656
December 31, 1998:
Allowance for doubtful accounts ................... $ 192 $-- $ -- $ -- $ 192
Inventory reserve ................................. 102 -- -- -- 102
Deferred tax asset valuation account .............. 14,656 -- 23 -- 14,679
December 31, 1999:
Allowance for doubtful accounts ................... $ 192 $30 $ -- $(34) $ 188
Inventory reserve ................................. 102 -- -- -- 102
Deferred tax asset valuation account .............. 14,679 -- (3,852) -- 10,827
December 31, 2000:
Allowance for doubtful accounts ................... $ 188 $30 $ -- $ -- $ 218
Inventory reserve ................................. 102 -- (102) -- --
Deferred tax asset valuation account .............. 10,827 -- 3,716 -- 14,543
EXHIBIT INDEX
The exhibits indicated by an asterisk (*) are incorporated by reference.
Exhibit No. Description of Exhibits
- ----------- -----------------------
3(a)* Articles of Incorporation of Zapata filed with Secretary of State
of Nevada May 14, 1999 (Exhibit 3.1 to Current Report on Form 8-K
filed May 14, 1999) (File No. 1-4219)).
3(c) Certificate of Decrease in Authorized and Outstanding Shares, filed
with Secretary of State of Nevada January 23, 2001.
3(d)* By-laws of Zapata (Exhibit 3.2 to Current Report on Form 8-K filed
May 14, 1999) (File No. 1-4219)).
10(a)*+ Zapata 1990 Stock Option Plan (Exhibit 10(b) to Zapata's Annual
Report on Form 10-K for the Fiscal year ended September 30, 1990
(File No. 1-4219)).
10(b)*+ First Amendment to Zapata 1990 Stock Option Plan (Exhibit 10(c) to
Zapata's Registration Statement on Form S-1 (Registration No.
33-40286)).
10(c)*+ Zapata Supplemental Pension Plan effective as of April 1,1992
(Exhibit 10(b) to Zapata's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992 (File No. 1-4219)).
10(d)* Supplemental Agreement dated June 4, 1996 between Malcolm I. Glazer
and Zapata (Exhibit 10.20 to Zapata's Registration Statement on
Form S-4 (Reg. No. 333-06729)).
10(e)*+ 1996 Long-Term Incentive Plan of Zapata (Appendix A to Zapata's
Definitive Proxy Statement Dated November 13, 1996 (File No.
1-4219)).
10(f) First Amendment to Zapata 1996 Long-Term Incentive Plan
10(g)* Shareholders' Agreement dated May 30, 1997 by Malcolm I. Glazer and
the Malcolm I. Glazer Family Limited Partnership in favor of Zapata
(Exhibit 10(z) to Zapata's Quarterly Report on Form 10-Q for the
Fiscal quarter ended June 30, 1997 (File No. 1-4219)).
10(h)* Underwriting Agreement dated April 12, 1998 among Zapata, Omega
Protein and Prudential Securities Incorporated and Deutsche Morgan
Grenfell, Inc., as representatives of the underwriters named
therein. (Exhibit 10.1 to Zapata's Current Report on Form 8-K filed
April 21, 1998 (File No. 1-4219)).
10(i)* Separation Agreement dated April 8, 1998 between Zapata and Omega
Protein. (Exhibit 10.2 to Zapata's Current Report on Form 8-K filed
April 21, 1998 (File No. 1-4219)).
10(j)* Administrative Services Agreement dated April 8, 1998 between
Zapata and Omega Protein. (Exhibit 10.3 to Zapata's Current Report
on Form 8-K filed April 21, 1998 (File No. 1-4219)).
10(k)* Letter Agreement dated July 9, 1998, among Viskase, Inc. (f/k/a
Envirodyne Industries, Inc.), Zapata, Malcolm Glazer and Avram
Glazer (Exhibit 1 to Amendment No. 12 to Schedule 13D filed on July
22, 1998 by Zapata with respect to common stock of Viskase, Inc.).
10(l)* Investment and Distribution Agreement between Zap.Com and Zapata
(Exhibit No. 10.1 to Zap.Com's Registration Statement of Form S-1
(File No. 333-76135) originally filed with the Securities and
Exchange Commission on April 12, 1999, as amended)
Exhibit No. Description of Exhibits
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10(m)* Services Agreement between Zap.Com and Zapata (Exhibit No. 10.2 to
Zap.Com's Registration Statement of Form S-1 (File No. 333-76135)
originally filed with the Securities and Exchange Commission on
April 12, 1999, as amended)
10(n)* Tax Sharing and Indemnity Agreement between Zap.Com and Zapata
(Exhibit No. 10.3 to Zap.Com's Registration Statement of Form S-1
(File No. 333-76135) originally filed with the Securities and
Exchange Commission on April 12, 1999, as amended)
10(o)* Registration Rights Agreement between Zap.Com and Zapata (Exhibit
No. 10.4 to Zap.Com's Registration Statement of Form S-1 (File No.
333-76135) originally filed with the Securities and Exchange
Commission on April 12, 1999, as amended)
21 Subsidiaries of the Registrant.
23 Consent of Independent Accountants
24 Powers of attorney.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to the requirements of Item 14(c) of Form
10-K.