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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-4219
ZAPATA CORPORATION
(Exact name of Registrant as specified in its charter)
STATE OF NEVADA C-74-1339132
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 MERIDIAN CENTRE, SUITE 350
ROCHESTER, NY
(Address of principal executive 14618
offices) (Zip Code)
(585) 242-2000
(Registrant's telephone number, including area code)
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 "X" whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2). Yes [ ] No [X]
As of October 31, 2003, the Registrant had outstanding 2,391,315 shares common
stock, $0.01 par value.
ZAPATA CORPORATION
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2003 (unaudited)
and December 31, 2002 3
Unaudited Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 2003 and 2002 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2003 and 2002 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
Item 4. Controls and Procedures 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 39
Item 2. Changes in Securities and Use of Proceeds 40
Item 3. Defaults upon Senior Securities 40
Item 4. Submission of Matters to a Vote of Security Holders 40
Item 5. Other Information 40
Item 6. Exhibits and Reports on Form 8-K 40
SIGNATURES 41
EXHIBITS 42
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
ZAPATA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30,
2003 DECEMBER 31,
(UNAUDITED) 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 73,828 $ 80,643
Short-term investments 8,809 35,928
Accounts receivable, net 59,720 13,070
Inventories, net 72,540 41,939
Prepaid expenses and other current assets 4,333 4,015
--------- ---------
Total current assets 219,230 175,595
--------- ---------
Investments and other assets:
Long-term investments, available for sale -- 4,016
Other assets 26,065 24,524
--------- ---------
Total investments and other assets 26,065 28,540
Property, plant, equipment and other long-lived assets, net 134,660 80,842
--------- ---------
Total assets $ 379,955 $ 284,977
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 8,884 $ 1,270
Accounts payable 22,064 2,718
Accrued and other current liabilities 34,614 23,027
--------- ---------
Total current liabilities 65,562 27,015
--------- ---------
Long-term debt 31,403 14,239
Pension liabilities 11,464 11,835
Other liabilities and deferred taxes 10,367 1,608
Minority interest 84,352 55,018
--------- ---------
Total liabilities 203,148 109,715
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par; 200,000 shares authorized; none issued or
outstanding -- --
Preference stock, $.01 par; 1,800,000 shares authorized; none issued
or outstanding -- --
Common stock, $0.01 par, 16,500,000 shares authorized; 3,070,325 and
3,069,859 shares issued; 2,391,315 and 2,390,849 shares outstanding,
respectively 31 31
Capital in excess of par value 162,809 162,037
Retained earnings 51,015 50,216
Treasury stock, at cost, 679,010 shares (31,668) (31,668)
Accumulated other comprehensive loss (5,380) (5,354)
--------- ---------
Total stockholders' equity 176,807 175,262
--------- ---------
Total liabilities and stockholders' equity $ 379,955 $ 284,977
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
ZAPATA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2003 2002 2003 2002
----------------------- -----------------------
Revenues $ 32,151 $ 34,992 $ 84,544 $ 85,708
Cost of revenues 28,553 27,259 68,346 64,514
-------- -------- -------- --------
Gross profit 3,598 7,733 16,198 21,194
Operating expense:
Selling, general and administrative 3,512 2,089 9,925 8,653
-------- -------- -------- --------
Total operating expenses 3,512 2,089 9,925 8,653
-------- -------- -------- --------
Operating income 86 5,644 6,273 12,541
-------- -------- -------- --------
Other (expense) income:
Interest (expense) income, net (2) 225 194 589
Other, net (12) (65) (42) (161)
-------- -------- -------- --------
(14) 160 152 428
Income before income taxes and minority
interest 72 5,804 6,425 12,969
Provision for income taxes (2,095) (1,990) (3,333) (4,485)
Minority interest in net income of
consolidated subsidiaries (294) (1,422) (2,293) (3,650)
-------- -------- -------- --------
Net (loss) income to common stockholders $ (2,317) $ 2,392 $ 799 $ 4,834
======== ======== ======== ========
Net (loss) income per share:
Basic and diluted $ (0.97) $ 1.00 $ 0.33 $ 2.02
======== ======== ======== ========
Weighted average common shares outstanding:
Basic 2,391 2,391 2,391 2,391
======== ======== ======== ========
Diluted 2,391 2,395 2,403 2,395
======== ======== ======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
ZAPATA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
-------- --------
Cash flows from operating activities:
Net income $ 799 $ 4,834
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation and amortization 10,202 7,759
(Gain) loss on disposal of assets (137) 32
Provisions for losses on receivables 38 406
Stock option modification expense -- 127
Minority interest in net income of consolidated subsidiaries 2,293 3,649
Deferred income taxes 2,312 4,611
Changes in assets and liabilities net of effects of purchase of Safety
Components International, Inc.:
Accounts receivable (9,091) 8,476
Inventories (8,125) (7,703)
Prepaid expenses and other current assets 172 655
Accounts payable (865) 662
Pension liabilities (371) (288)
Accrued liabilities and other current liabilities (1,465) 6,662
Other assets and liabilities 1,354 (2,405)
-------- --------
Total adjustments (3,683) 22,643
-------- --------
Net cash (used in) provided by operating activities (2,885) 27,477
-------- --------
Cash flows from investing activities:
Payment for purchase of Safety Components International, Inc., net of cash
acquired (25,077) --
Proceeds from disposition of assets, net 180 23
Purchase of short-term investments (8,809) (42,434)
Purchase of long-term investments -- (11,898)
Proceeds of maturities of long-term investments 3,994 --
Proceeds of maturities of short-term investments 35,832 33,948
Capital expenditures (10,324) (5,698)
-------- --------
Net cash used in investing activities (4,204) (26,059)
-------- --------
Cash flows from financing activities:
Principal payments of short- and long-term obligations (948) (991)
Proceeds from borrowing 52 --
Proceeds from stock option exercises 1,149 --
-------- --------
Net cash provided by (used in) financing activities 253 (991)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 21 --
-------- --------
Net (decrease) increase in cash and cash equivalents (6,815) 427
Cash and cash equivalents at beginning of period 80,643 62,477
-------- --------
Cash and cash equivalents at end of period $ 73,828 $ 62,904
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
ZAPATA CORPORATION
NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF OPERATIONS AND BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by Zapata Corporation ("Zapata" or the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The financial statements reflect all adjustments that are, in the opinion of
management, necessary for a fair statement of such information. All such
adjustments are of a normal recurring nature. Although Zapata believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including a description of
significant accounting policies normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America, have been condensed or omitted pursuant to such rules
and regulations. These financial statements should be read in conjunction with
the financial statements and the notes thereto included in Zapata's 2002 Annual
Report on Form 10-K filed with the Securities and Exchange Commission and with
the information presented by Safety Components International, Inc., Omega
Protein Corporation and Zap.Com Corporation on their most recently filed Annual
Reports on Form 10-K. The results of operations for the three month and nine
month periods ended September 30, 2003 are not necessarily indicative of the
results for any subsequent period or the entire fiscal year ending December 31,
2003.
BUSINESS DESCRIPTION
Zapata is a holding company which currently has two operating companies, Safety
Components International, Inc. ("Safety Components" or "Safety") and Omega
Protein Corporation ("Omega Protein" or "Omega"). As of September 30, 2003,
Zapata had a 54% ownership interest in Safety and a 60% ownership interest in
Omega. In addition, Zapata owns 98% of Zap.Com Corporation ("Zap.Com"), a public
shell company. Subsequent to September 30, 2003, Zapata purchased additional
Safety common stock which increased its ownership interest to approximately 84%.
Safety Components is a leading, low-cost, independent supplier of automotive
airbag fabric and cushions and technical fabrics with operations in North
America and Europe. Safety Components sells airbag fabric domestically and
cushions worldwide to the major airbag module integrators that outsource such
products. Safety Components also manufactures value-added technical fabrics used
in a variety of niche industrial and commercial applications such as ballistics
material for luggage, filtration, military tents and fire service apparel. The
ability to interchange airbag and specialty technical fabrics using the same
equipment and similar manufacturing processes allows Safety to more effectively
utilize its manufacturing assets and lower per unit overhead costs. Safety
Components trades on the over-the counter electronic bulletin board under the
symbol "SAFY."
Omega Protein produces and markets a variety of products produced from menhaden
(a herring-like species of fish found in commercial quantities in the U.S.
coastal waters of the Atlantic Ocean and Gulf of Mexico), including regular
grade and value-added specialty fish meals, crude and refined fish oils and
regular and value-added fish solubles. Omega's fish meal products are primarily
used as a protein ingredient in animal feed for swine, cattle, aquaculture and
household pets. Fish oil is utilized for animal and aquaculture feeds,
industrial applications, as well as for additives to human food products.
Omega's fish solubles are sold primarily to livestock feed manufacturers,
aquaculture feed manufacturers and for use as an organic fertilizer. Omega
Protein trades on the New York Stock Exchange under the symbol "OME."
In December 2000, Zap.Com exited the Internet business and terminated all
salaried employees and third party contractual relationships. Currently, Zap.Com
does not have any existing business operations, other than maintaining its
status as a public shell company. 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.
Zap.Com trades on the over-the-counter electronic bulletin board under the
symbol "ZPCM."
As used throughout this report, "Zapata Corporate" is defined as Zapata
Corporation exclusive of its majority owned subsidiaries Safety Components,
Omega Protein and Zap.Com.
6
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include Zapata and its wholly and
majority-owned domestic and foreign subsidiaries (collectively, "Zapata" or the
"Company"). Consolidated financial statements are financial statements of a
parent company and its subsidiaries presented as if the entities were a single
economic unit. Although the assets, liabilities, revenues, and expenses of all
entities are combined to provide a single set of financial statements, certain
eliminations and adjustments are made. These eliminations are necessary to
ensure that only arm's-length transactions between independent parties are
reflected in the consolidated statements; transactions between related parties
are eliminated. In addition, when the parent company consolidates non-wholly
owned subsidiaries, minority interest on the consolidated balance sheets and
statements of operations represents the minority stockholders' (those other than
the parent company) interest in the net assets and net income of such
subsidiaries.
FISCAL YEAR
Zapata and its consolidated subsidiaries excluding Safety Components have fiscal
years ending on December 31st with calendar quarter-end dates. Safety's
operations are based on a fifty-two or fifty-three week fiscal year ending on
the Saturday closest to March 31. The Safety statement of financial position
balances has been included in the Company's consolidated financial information
as of September 30, 2003 as if it utilized calendar quarter-ends.
RESTRICTED CASH
Certain of Safety's cash and cash equivalents are restricted for use and
accordingly, such amounts have been included in "other assets" in the
accompanying consolidated balance sheets. As of September 30, 2003 this amount
was approximately $1.2 million.
INVENTORIES
Safety Components' inventories represent direct materials, labor and overhead
costs incurred for products not yet delivered and are stated at the lower of
cost (first-in, first-out) or market.
Omega Protein's inventory is stated at the lower of cost or market. Omega
Protein's fishing season runs from mid-April to the first of November in the
Gulf of Mexico and from the beginning of May into December in the Atlantic.
Government regulations preclude Omega Protein from fishing during the
off-seasons.
Omega Protein's inventory cost system considers all costs associated with an
annual fish catch and its processing, both variable and fixed, including both
costs incurred during the off-season and during the fishing season. 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. Omega Protein's lower-of-cost-or-market-value analyses at
year-end and at interim periods compares the total estimated per unit production
cost of expected production to the projected per unit market prices of the
products. The impairment analyses involve estimates of, among other things,
future fish catches and related costs, and expected commodity prices for the
fish products. These estimates, which management believes are reasonable and
supportable, involve estimates of future activities and events which are
inherently imprecise and from which actual results may differ materially.
During the off-seasons, in connection with the upcoming fishing seasons, Omega
Protein incurs costs (i.e., plant and vessel related labor, utilities, rent,
repairs, and depreciation) that are directly related to Omega's infrastructure.
These costs accumulate in inventory and are applied as elements of the cost of
production of Omega Protein's products throughout the fishing season ratably
based on Omega's monthly fish catch and the expected total fish catch for the
season.
7
PROPERTY, PLANT, EQUIPMENT AND OTHER LONG-LIVED ASSETS
Consolidated property, plant and equipment is 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:
Buildings 20 - 40 years
Fishing vessels 15 - 20 years
Machinery and equipment 4 - 10 years
Furniture and fixtures 3 - 10 years
Leasehold improvements are depreciated over the lesser of their useful life or
the lease term; 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.
DERIVATIVE FINANCIAL INSTRUMENTS
Safety Components utilizes derivative financial instruments to reduce exposures
to volatility of foreign currencies impacting the operations of its business.
Safety does not enter into financial instruments for trading or speculative
purposes. See Note 13 for further information regarding derivative instruments.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," establishes standards for the reporting and display of
comprehensive income and its components within the financial statements. Other
comprehensive income is comprised of charges to stockholders' equity, other than
contributions from or distributions to stockholders, excluded from the
determination of net income. The Company's other comprehensive income is
comprised of foreign currency translations, unrealized holding gains and losses
on the Company's long-term investments and additional minimum pension liability
adjustment.
REVENUE RECOGNITION
Safety Components and Omega Protein recognize revenue from product sales when
goods have been shipped and the risk of loss has passed. Additionally, Safety
accrues for sales returns and other allowances at the time of shipment based
upon historical experience.
STOCK-BASED COMPENSATION
The Company accounts for stock- based compensation according to Accounting
Principles Board Opinion No. 25 and the related interpretations under Financial
Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." The Company adopted the
required disclosure provisions under Statement of Financial Accounting Standards
No. 148 and continues to use the intrinsic value method of accounting for
stock-based compensation. Had compensation expense for the Company's stock
option grants been determined based on fair value at the grant date using the
Black-Scholes option-pricing model, the Company's net (loss) income and net
(loss) income per share (basic and diluted) would have been as follows:
8
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Net (loss) income, as reported $(2,317) $ 2,392
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax effects:
Zapata Corporate 10 12
Omega Protein 38 15
Zap.Com -- 13
------- -------
Total pro forma charge 48 40
------- -------
Pro forma net (loss) income $(2,365) $ 2,352
======= =======
(Loss) earnings per share:
Basic and diluted - as reported $ (0.97) $ 1.00
======= =======
Basic and diluted - pro forma $ (0.99) $ 0.98
======= =======
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
(UNAUDITED) (UNAUDITED)
---------- -----------
(IN THOUSANDS)
Net income, as reported $ 799 $ 4,834
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax effects:
Zapata Corporate 35 38
Omega Protein 207 266
Zap.Com -- 38
------ -------
Total pro forma charge 242 342
------ -------
Pro forma net income $ 557 $ 4,492
====== =======
Earnings per share:
Basic and diluted - as reported $ 0.33 $ 2.02
====== =======
Basic and diluted - pro forma $ 0.23 $ 1.88
====== =======
Due to the timing of the acquisition, no amounts in the consolidated statements
of operations for the three and nine month periods ended September 30, 2003 and
2002 relate to Safety Components. Accordingly, no pro forma effects related to
Safety Components were included above.
CONCENTRATIONS OF CREDIT RISK
Zapata invests the majority of its excess cash, cash equivalents and short-term
investments in U.S. Government Agency Securities and therefore has significantly
reduced its future exposure to market risk.
Safety Components is subject to a concentration of credit risk consisting of its
trade receivables and typically has a limited customer base that accounts for a
significant portion of its trade receivables. Safety performs ongoing credit
evaluations of its customers and generally does not require collateral. Safety
evaluates potential losses for uncollectible accounts and such losses have
historically been immaterial and within management's expectations.
9
Omega Protein has cash deposits concentrated primarily in one major bank. Also,
Omega has Certificates of Deposit and commercial quality grade investments rated
A-2 P-2 or better with companies and financial institutions. As a result of the
forgoing, Omega believes that credit risk in such investments is minimal.
Omega's customer base generally remains consistent from year to year. Omega
performs ongoing credit evaluations of its customers and generally does not
require material collateral. Omega maintains reserves for potential credit
losses and such losses have historically been within management's expectations.
RECLASSIFICATION
Certain reclassifications of prior year information have been made to conform to
the current presentation.
NOTE 3. ACQUISITIONS
On September 23, 2003, Zapata purchased 2,663,905 shares of Safety Components
International, Inc. common stock in privately negotiated transactions. These
shares were purchased for $30.9 million and represented approximately 54% of
Safety's common stock outstanding. The Company has accounted for this
transaction under the purchase method and has consolidated amounts related to
Safety's assets and liabilities into the Company's consolidated balance sheet as
of September 30, 2003. Although Zapata and its other consolidated subsidiaries
have calendar quarter ends, balances and footnotes related to Safety's fiscal
quarter ended September 27, 2003 have been included as if Safety utilized a
calendar quarter end. Due to the timing of the acquisition, no amounts related
to Safety's operations have been included in the Company's consolidated
statements of operations for the three- or nine-month periods ended September
30, 2003. Safety's results of operations will be included in the Company's
consolidated results of operations beginning in the fourth quarter of 2003.
The following purchase price allocation associated with the 54% acquisition of
Safety's assets and liabilities is considered preliminary. The Company is in the
process of completing its determination of the fair value of certain assets and
liabilities; thus, the allocation of the purchase price is subject to
adjustment. The excess of the fair value of the net assets acquired over the
purchase price was applied to "Property, plant, equipment and other long-lived
assets."
(IN THOUSANDS)
Current assets $35,424
Property, plant, equipment and long-lived assets 26,818
Other assets 3,423
-------
Total assets acquired 65,665
Current liabilities 21,912
Long-term liabilities 12,879
-------
Total liabilities acquired 34,791
-------
Net assets acquired $30,874
=======
On October 7, 2003, Zapata purchased an additional 1,498,489 shares of Safety
common stock in privately negotiated transactions. These additional shares were
purchased for $16.9 million and increased the Company's ownership percentage of
Safety's outstanding common stock to approximately 84%. The Company is in the
process of performing an assessment of the fair values of the assets and
liabilities acquired to determine the allocation of the total purchase price.
The following table sets forth unaudited pro forma condensed consolidated
summary financial information for the nine months ended September 30, 2003 and
September 30, 2002, respectively. This information gives effect to the
acquisition of 84% of Safety Components common stock as if it had occurred as of
the beginning of each of the periods presented. These statements are presented
after giving effect to certain adjustments for compensation agreements,
transaction costs, forgone interest and related income tax effects which are
based upon currently available information and upon certain assumptions that the
Company believes are reasonable. These pro forma amounts do not purport to
present what the Company's consolidated results of operations would have been if
the
10
aforementioned transaction had in fact occurred at the beginning of the periods
indicated, nor do they project the Company's consolidated results of operations
for any future period.
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales $ 84,898 $ 92,529
Income before income taxes and minority interest 623 7,022
Net (loss) income (2,204) 2,861
Net (loss) income per share:
Basic $ (0.92) $ 1.20
Diluted $ (0.92) $ 1.19
Weighted average common shares outstanding:
Basic 2,391 2,391
Diluted 2,391 2,395
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
(UNAUDITED) (UNAUDITED)
------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
Net sales $ 268,182 $ 261,447
Income before income taxes, minority interest and cumulative
effect of a change in method of accounting (1) 18,132 22,471
Net income (loss) 6,170 (3,052)
Net income (loss) per share:
Basic $ 2.58 $ (1.28)
Diluted $ 2.57 $ (1.28)
Weighted average common shares outstanding:
Basic 2,391 2,391
Diluted 2,403 2,391
(1) Upon adoption of SFAS No. 142, Safety recorded a goodwill impairment charge
of approximately $14.7 million during its fourth quarter ended March 31, 2002.
NOTE 4. SHORT-TERM INVESTMENTS
Short-term investments are summarized as follows:
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------ -----------------
(IN THOUSANDS)
Federal National Mortgage Association Discount Note $ -- $25,061
Federal Home Loan Mortgage Corporation Discount Note 7,802 5,455
Federal Home Loan Bank Discount Note -- 1,413
Federal Farm Credit Bank -- 2,483
Commercial Paper -- --
1,007 1,516
------- -------
$ 8,809 $35,928
======= =======
Interest rates on these investments ranged from 0.90%--1.15% and 1.26%--1.88% at
September 30, 2003 and December 31, 2002, respectively.
11
NOTE 5. ACCOUNTS RECEIVABLE
Accounts receivable are summarized as follows:
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------ -----------------
(IN THOUSANDS)
Trade $ 51,795 $ 11,853
Insurance 2,550 755
Income Tax 4,641 650
Other 2,006 341
-------- --------
60,992 13,599
Less: Allowance for Doubtful Accounts (1,272) (529)
-------- --------
$ 59,720 $ 13,070
======== ========
As a result of the September 2003 acquisition, consolidated accounts receivable
as of September 30, 2003 include amounts attributable to Safety Components.
Accordingly, no such amounts are included as of December 31, 2002.
As a result of the completion of Zapata's Internal Revenue Service audit of the
tax fiscal years ended September 30, 1997-2001, the Company recorded a net
income tax receivable of $1.2 million during the second quarter of 2003.
NOTE 6. INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------- -----------------
(IN THOUSANDS)
SAFETY COMPONENTS:
Raw materials $ 4,734 $ -
Work-in-process 6,991 -
Finished goods 10,751 -
------- -------
Total Safety Components inventory $22,476 $ -
------- -------
OMEGA PROTEIN:
Fish meal $32,292 $21,564
Fish oil 11,007 9,583
Fish solubles 857 843
Off season cost 1,681 5,464
Other materials and supplies 4,227 4,485
------- -------
Total Omega Protein inventory $50,064 $41,939
------- -------
Total consolidated inventory $72,540 $41,939
======= =======
As a result of the September 2003 acquisition, consolidated inventory as of
September 30, 2003 include amounts attributable to Safety Components.
Accordingly, no such amounts are included as of December 31, 2002.
NOTE 7. PROPERTY, PLANT, EQUIPMENT AND OTHER LONG-LIVED ASSETS
Property, plant, equipment and other long-lived assets, net are summarized as
follows:
12
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------- ------------------
(IN THOUSANDS)
Land $ 7,633 $ 6,261
Building and improvements 25,484 9,038
Machinery and equipment 119,560 63,449
Fishing vessels 77,836 75,153
Furniture and fixtures 3,326 2,108
Construction in progress 11,891 3,292
Other long-lived assets 1,183 --
--------- ---------
247,543 159,301
Less: Accumulated depreciation and impairment (112,883) (78,459)
--------- ---------
$ 134,660 $ 80,842
========= =========
As a result of the September 2003 acquisition, consolidated property, plant,
equipment and other long-lived assets as of September 30, 2003 include amounts
attributable to Safety Components. Accordingly, no such amounts are included as
of December 31, 2002. Other long-lived assets includes identifiable intangible
assets and purchase price adjustments for the acquisition of 54% of Safety in
September 2003. To the extent there are purchase price adjustments, these
amounts are subject to change as the Company finalizes the determination of the
fair value of certain assets and liabilities acquired. Depreciation expense for
the nine months ended September 30, 2003 and 2002 (excluding Safety Components)
was $7.2 million and $6.0 million, respectively.
NOTE 8. OTHER ASSETS
Other assets are summarized as follows:
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
-------------------- -------------------
(IN THOUSANDS)
Fishing nets $ 1,184 $ 1,216
Prepaid pension cost 16,449 16,830
Deferred tax asset 3,330 3,115
Insurance receivable, net of allowance for doubtful accounts
of $1.8 million 1,363 2,548
Restricted cash 1,242 --
Other 2,497 815
------- -------
$26,065 $24,524
======= =======
As a result of the September 2003 acquisition, consolidated other assets as of
September 30, 2003 include amounts attributable to Safety Components.
Accordingly, no such amounts are included as of December 31, 2002.
Omega Protein's amortization expense for fishing nets amounted to approximately
$681,000 and $552,000 for the nine month periods ended September 30, 2003 and
2002, respectively.
Omega carries insurance for certain losses relating to its vessels and Jones Act
liability for employees aboard its vessels (collectively, "Vessel Claims
Insurance"). The typical Vessel Claims Insurance policy contains an annual
aggregate deductible ("AAD") for which Omega remains responsible, while the
insurance carrier is responsible for all applicable amounts which exceed the
AAD. It is Omega's policy to accrue current amounts due and record amounts paid
out on each claim. Once payments exceed the AAD, Omega records an insurance
receivable for a given policy year.
NOTE 9. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities are summarized as follows:
13
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------ -----------------
(IN THOUSANDS)
Salary and benefits $15,795 $ 7,065
Insurance 5,360 5,625
Taxes, other than income tax 1,180 443
Trade creditors 2,519 2,513
Federal and state income taxes 4,417 2,412
Litigation reserves 1,464 3,423
Other 3,879 1,546
------- -------
$34,614 $23,027
======= =======
As a result of the September 2003 acquisition, consolidated accrued and other
current liabilities as of September 30, 2003 include amounts attributable to
Safety Components. Accordingly, no such amounts are included as of December 31,
2002.
NOTE 10. DEBT
Long-term debt consisted of the following:
SEPTEMBER 30, 2003
(UNAUDITED) DECEMBER 31, 2002
------------------- -------------------
(IN THOUSANDS)
SAFETY COMPONENTS:
Congress revolving credit facility, interest at a
variable rate of 4.0% at September 30, 2003 $ 10,355 $ --
Congress term note, interest at a variable
rate of 4.0% at September 30, 2003 2,067 --
KeyBank term loan due on October 10, 2003, interest rate of 11.0% 3,750
KeyCorp equipment note due August, 2005, interest rate of 1.3%
over LIBOR (2.4% at September 30, 2003) 3,090 --
Deutsche Bank mortgage note with separate tranches due in 2009 and 2019 1,882 --
HBV Bank Czech Republic mortgage note due March, 2007, interest
rate of 1.7% over EURIBOR (3.8% at September 30, 2003) 3,552 --
GE Capital notes payable due August, 2005, interest at 7.6% 149
-------- --------
Capital equipment notes payable, with various interest rates ranging from 6.4%
to 10.0%, maturing at various dates through March 2008 829 --
-------- --------
Total Safety Components' debt 25,674 --
Less: current maturities (7,533) --
-------- --------
$ 18,141 $ --
-------- --------
OMEGA PROTEIN:
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 2016, interest from 6.6%
to 7.6% $ 13,659 $ 14,531
Amounts due in installments through 2014, interest at Eurodollar rates (1.6%
and 2.3% at September 30, 2003 and December
31, 2002, respectively), plus 4.5% 874 933
Other debt at 6.3% to 8.0% at September 30, 2003 and December 31,
2002, respectively 80 45
-------- --------
Total Omega Protein's debt 14,613 15,509
Less: current maturities (1,351) (1,270)
-------- --------
$ 13,262 $ 14,239
-------- --------
Total consolidated long-term debt $ 31,403 $ 14,239
======== ========
14
As a result of the September 2003 acquisition, consolidated long-term debt as of
September 30, 2003 includes amounts attributable to Safety Components.
Accordingly, no such amounts are included as of December 31, 2002. As of
September 30, 2003 and December 31, 2002, the estimated fair value of debt
obligations approximated book value.
SAFETY COMPONENTS
At September 30, 2003, Safety had an aggregate $35.0 million revolving credit
facility, with Congress Financial Corporation (Southern) (the "Congress
Facility") expiring October 9, 2003 and currently bearing interest at 4.0%.
Under the Congress Facility, Safety may borrow up to the lesser of (a) $35.0
million or (b) 85% of eligible accounts receivable, plus 60% of eligible
finished goods, plus 50% of eligible raw materials. Included within borrowings
under the Congress Facility (and its borrowing limitations) are $2.1 million in
term loans that are to be repaid in equal monthly installments of approximately
$84,000, with the unpaid principal amount due on October 9, 2003 (as discussed
below, the Congress Facility was amended and extended on October 8, 2003). The
amount outstanding under the Congress Facility at September 30, 2003 (including
term loans) was $12.4 million. Also included within the borrowings under the
Congress Facility is a $3.0 million letter of credit facility, under which
Safety had exposure of $497,000 pursuant to letters of credit outstanding at
September 30, 2003. At September 30, 2003, Safety's availability for additional
borrowings (under the maximum allowable limit) was approximately $13.9 million.
At September 30, 2003, Safety's subordinated secured note facility (the
"Subordinated Facility"), bearing interest at 11%, with KeyBank National
Association and Fleet Bank was set to mature on October 10, 2003. The amount
outstanding under the Subordinated Facility at September 30, 2003 was $3.8
million. The Subordinated Facility was repaid in full on October 8, 2003 with
proceeds from the amended Congress facilities discussed below.
On October 8, 2003, Safety executed an amendment to its credit facility with
Congress Financial Corporation (Southern), a subsidiary of Wachovia Bank,
National Association ("Congress"). As amended, Safety has an aggregate, $35.0
million revolving credit facility with Congress Financial Corporation (Southern)
(the "Congress Revolver") expiring October 8, 2006. Under the Congress Revolver,
Safety may borrow up to the lesser of (a) $35.0 million or (b) 85% of eligible
accounts receivable, plus 60% of eligible finished goods, plus 50% of eligible
raw materials. The amount borrowed under the Congress Revolver at October 8,
2003 was $6.4 million. The Congress Revolver also provides for a $5.0 million
letter of credit facility, under which Safety had $497,000 outstanding pursuant
to letters of credit at October 8, 2003. At October 8, 2003, Safety's
availability for additional borrowings (under the maximum allowable limit) was
approximately $33.1 million.
In addition, the amendment provided for a term facility (the "Congress Term A")
under which $4.3 million was borrowed at October 8, 2003. The Congress Term Loan
A is payable in equal monthly installments of approximately $125,000, with the
unpaid principal amount due on October 8, 2006. In addition to the Congress
Revolver and Congress Term A, the amendment also provided for an additional $4.5
million term loan (the "Congress Term B") which is undrawn and is currently
fully available. The Congress Term B loan bears interest at Prime (as defined
under the facility) plus 3%.
The interest rate on the Congress Revolver and Congress Term A is variable,
depending on the amount of Safety's Excess Availability (as defined) at any
particular time and Safety's Fixed Charge Coverage Ratio (as defined). Safety
may make borrowings based on the Prime Rate (as defined) or the LIBOR rate, in
each case with an applicable margin applied to the rate. At October 8, 2003, the
margin on Prime Rate loans was 0.0% and the margin on LIBOR rate loans was 2.0%.
Safety is required to pay a monthly commitment fee of 0.25% on the unused
portion of the Congress Revolver.
Under the Congress Revolver and Congress Term A facilities, Safety is subject to
a minimum Tangible Net Worth financial covenant. To the extent that Safety has
borrowings outstanding under the Congress Term B facility, it is subject to
certain additional financial covenants including minimum EBITDA, minimum Fixed
Charge Coverage Ratio, maximum Leverage Ratio, and maximum Capital Expenditures
(all as defined under the facility). The Congress facilities also impose
limitations upon Safety's ability to, among other things, incur indebtedness
(including capitalized lease arrangements); become or remain liable with respect
to any guaranty; make loans; acquire investments; declare or make dividends or
other distributions; merge, consolidate, liquidate or dispose of assets or
indebtedness; incur liens; issue capital stock; or change its business. At
September 30, 2003 and October
15
8, 2003, Safety was in compliance with all financial and non-financial
covenants. Substantially all assets of Safety are pledged as collateral for the
borrowings under the Congress facilities.
OMEGA PROTEIN
Originally, Omega Protein 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 Omega Protein's Reedville, Virginia and Abbeville,
Louisiana plants. Loans are now available under similar terms pursuant to the
Title XI program without intervening lenders.
On October 1, 2003, pursuant to the Title XI program, the United States
Department of Commerce approved the fiscal 2003 financing application made by
Omega Protein in the amount of $5.3 million. Omega expects to close the $5.3
million Title XI loan during the fourth quarter of fiscal 2003.
On December 20, 2000 Omega Protein entered into a three-year $20 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. On May 19, 2003, Omega amended the existing Credit Facility and
among other things, these amendments extended the maturity until December 20,
2006, deleted existing financial covenants and added certain affirmative
covenants such as, a Leverage Ratio covenant not to exceed 3.0 to 1 at any time
and a Fixed Charge Coverage Ratio covenant not to be less than 1.0 to 1 as of
the end of the month, measured for the twelve-month period then ended. Omega
shall only be required to comply with the financial covenants from and after the
last day of any month in which the Credit Facility's availability is less than
$3,000,000 on any date, or Credit Facility's availability averages less than
$6,000,000 for any calendar month. A commitment fee of 50 basis points per annum
is payable on the unused portion of the Credit Facility. If at any time Omega's
loan outstanding under the Credit Facility is $5,000,000 or greater, the
commitment fee shall be 25 basis points per annum. Applicable interest is
payable at alternative rates of LIBOR plus 2.25% or Prime plus 0%. Applicable
interest shall be adjusted (up or down) prospectively on a quarterly basis as
determined by Omega's Fixed Charge Coverage Ratio from LIBOR plus 2.25% to LIBOR
plus 2.75% or at Omega's option Prime plus 0% to Prime plus 0.25% depending upon
the Fixed Charge Coverage Ratio being greater than 2.5 times to less than or
equal to 1.5 times. The Credit Facility is collateralized by all of Omega's
trade receivables, inventory and equipment. In addition, the Credit Facility
does not allow for the payment of cash dividends or stock repurchases and also
limits capital expenditures and investments. Omega Protein is in compliance with
the Credit facility covenants at September 30, 2003. As of September 30, 2003,
Omega had no borrowings outstanding under the Credit Facility. At September 30,
2003 and December 31, 2002, Omega had outstanding letters of credit totaling
approximately $2.6 million and $2.1 million, respectively, issued primarily in
support of worker's compensation insurance programs.
NOTE 11. EARNINGS PER SHARE INFORMATION
The following reconciles amounts used in the computations of basic and diluted
(loss) income per common share (in thousands, except per share amounts):
FOR THE THREE MONTHS ENDING SEPTEMBER 30,
2003 2002
---------------------------------- ---------------------------------
WEIGHTED PER WEIGHTED PER
AVERAGE SHARE AVERAGE SHARE
LOSS SHARES AMOUNT INCOME SHARES AMOUNT
------- -------- ------- ------ -------- ------
Basic (loss) income per common share $(2,317) 2,391 $ (0.97) $2,392 2,391 $ 1.00
Effect of dilutive stock options -- 4
Diluted (loss) earnings per common
Share $(2,317) 2,391 $ (0.97) $2,392 2,395 $ 1.00
16
FOR THE NINE MONTHS ENDING SEPTEMBER 30,
2003 2002
---------------------------------- ---------------------------------
WEIGHTED PER WEIGHTED PER
AVERAGE SHARE AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- -------- ------- ------ -------- ------
Basic income per common share $ 799 2,391 $ 0.33 $4,834 2,391 $ 2.02
Effect of dilutive stock options 12 4
Diluted (loss) earnings per common
Share $ 799 2,403 $ 0.33 $4,834 2,395 $ 2.02
The following table details the potential common shares excluded from the
calculation of diluted (loss) income per share because their effect would be
anti-dilutive to the net loss or because their exercise price was greater than
the average market price for the period (in thousands, except per share
amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ---------------------
2003 2002 2003 2002
------- ------- ------- -------
Potential common shares excluded from
the calculation of diluted (loss) income
per share:
Stock options 145 119 145 119
Weighted average price $ 42.74 $ 46.84 $ 47.09 $ 46.84
NOTE 12. COMPREHENSIVE (LOSS) INCOME
The components of other comprehensive (loss) income, net of minority interest
and income tax effects, are as follows:
THREE MONTHS ENDED
SEPTEMBER 30,
2003 2002
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Net (loss) income $(2,317) $ 2,392
Foreign translation adjustment (22) --
Unrealized gain on securities -- 20
------- -------
$(2,339) $ 2,412
======= =======
NINE MONTHS ENDED
SEPTEMBER 30,
2003 2002
(UNAUDITED) (UNAUDITED)
----------- ----------
(IN THOUSANDS)
Net income $ 799 $ 4,834
Foreign translation adjustment (13) --
Unrealized gain on securities -- 18
Minimum pension liability adjustment -- 220
------- -------
$ 786 $ 5,072
======= =======
Due to the timing of the acquisition, no amounts in the consolidated statements
of operations for the three and nine month periods ended September 30, 2003 and
2002 relate to Safety Components. Accordingly, no components of other
comprehensive (loss) income related to Safety Components were included above.
NOTE 13. DERIVATIVES AND HEDGING
Safety Components monitors its risk associated with the volatility of certain
foreign currencies against its functional currency, the U.S. dollar. Safety
Components uses certain derivative financial instruments to reduce exposure to
volatility of foreign currencies. Safety has formally documented all
relationships between hedging instruments and
17
hedged items, as well as risk management objectives and strategies for
undertaking various hedge transactions. Derivative financial instruments are not
entered into for speculative purposes.
Certain operating expenses at Safety's Mexican facilities are paid in Mexican
pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican peso
exchange rates, Safety entered into forward contracts on April 10, 2003 to buy
Mexican pesos for periods and amounts consistent with the related, underlying
forecasted cash outflows. These contracts were designated as hedges at inception
and are being monitored for effectiveness on a routine basis. At September 30,
2003, Safety had outstanding forward exchange contracts that mature between
October 2003 and March 2004 to purchase Mexican pesos with an aggregate notional
amount of approximately $5.3 million. The fair values of these contracts at
September 30, 2003, totaled approximately $180,000, which is recorded as a
liability on the consolidated balance sheet in other current liabilities.
Certain intercompany sales at Safety's Czech facility are denominated and
settled in Euros. To reduce exposure to fluctuation in the Euro and Czech Koruna
exchange rates, Safety entered into forward contracts on June 23, 2003 to buy
Czech Korunas for periods and amounts consistent with the related, underlying
forecasted cash inflows associated with the intercompany sales. These contracts
were designated as hedges at inception and are being monitored for effectiveness
on a routine basis. At September 30, 2003, Safety had outstanding forward
exchange contracts that mature between October 2003 and March 2004 to purchase
Czech Korunas with an aggregate notional amount of approximately $4.0 million.
The fair values of these contracts at September 30, 2003 totaled approximately
$147,000 which is recorded as a liability in the Company's balance sheet in
other current liabilities.
NOTE 14. COMMITMENTS AND CONTINGENCIES
LITIGATION
A non-operating wholly-owned subsidiary of Zapata, Energy Industries, Inc. was
named as a defendant in three cases commenced in 1996 and 1997 pending in the
83rd Judicial District Court of Upton County, Texas involving the death of one
individual and personal injuries to two others. The cases resulted from an
explosion and fire at a gas processing plant in Upton County caused by the
alleged failure of a valve cover. Zapata was named as a defendant in one of the
cases. The owners of the plant filed a cross-claim against Energy Industries for
property damage and lost profits resulting from the explosion and fire.
Plaintiffs and the cross-plaintiff owners based their claim on a theory of
manufacturing or design defect of the valve cover. Plaintiffs sought
compensatory damages. In January 2002, the primary insurance carrier for Zapata
and Energy Industries claimed for the first time that it did not believe that
Energy Industries had primary insurance coverage for the losses arising out of
these incidents. The primary insurance carrier brought a declaratory judgment
action claiming it did not owe a duty of indemnification. Zapata brought its own
declaratory judgment action to establish that the primary insurance carrier owed
a duty of indemnification. In July 2003, the court granted summary judgment to
Zapata and Energy Industries' holding that the primary insurance carrier owed
both Zapata and Energy Industries a duty to defend and indemnify. The primary
insurance carrier did not appeal this decision and agreed to defend and
indemnify both Zapata and Energy Industries in the underlying actions. The
primary insurance carrier, together with the excess insurance carrier, have now
settled each of the underlying actions.
Zapata and Omega Protein were named as defendants in a lawsuit instituted on
March 10, 2003 in the District Court of Clark County, Nevada by Omega Protein
shareholder Robert Strougo. Plaintiff brought the action individually and as a
putative class action on behalf of all Omega Protein stockholders. No class
period has been identified. Also named as defendants in the lawsuit are Avram A.
Glazer, Chairman, President and CEO of Zapata and Darcie Glazer, a director of
Zapata, both of whom are also directors of Omega Protein, and all other Omega
Protein directors. Plaintiff claims that the individual defendants and Zapata
breached their fiduciary duties to Omega Protein's stockholders by not properly
considering a so-called offer sent via e-mail to Zapata by Hollingsworth,
Rothwell & Roxford, a Florida partnership. On July 30, 2003, the court granted
Zapata's motion to dismiss the Complaint and denied the Plaintiffs' cross-motion
for leave to amend. On October 20, 2003 an order of dismissal signed by Judge
Leavitt was filed in the district court for Clark County, Nevada dismissing its
claims against Zapata pursuant to NRCP 12(b)(5), for failure to state a claim
upon which relevancy may be granted and deny its countermotion to amend on the
basis of futility. The time for appeal has not yet run. The Company does not
know whether the plaintiff will appeal, but believes that the claims are without
merit and will defend against any appeal vigorously.
18
Omega Protein and each of its directors were named as defendants in a lawsuit
instituted on September 19, 2003 in the 280th District Court of Harris County,
Texas by purported stockholder Joseph Chaput. The lawsuit was served on Omega on
October 10, 2003. The plaintiff brought the action individually and as a
putative class action on behalf of all Company stockholders. No class period has
been identified and no monetary damages have been specified. The plaintiff
claims that Omega Protein directors and Omega breached their fiduciary duties to
Omega's stockholders by not properly considering a $9.50 per share offer (the
"Ferrari Acquisition Proposal") sent to Omega by Ferrari Investments, an
Argentine entity. The plaintiff seeks to direct the defendants to act in the
interests of Omega's stockholders, including negotiating in good faith with
Ferrari Investments, and seeks costs and attorneys' fees. Upon its receipt of
the Ferrari Acquisition Proposal, Omega had requested additional information
from Ferrari Investments in order to assist Omega's Board of Directors in
assessing the proposal, including financial statements, source of cash for the
transaction, biographical information on principals, compliance with the
Department of Homeland Security's requirements on U.S. citizenship for ownership
of fishing vessels in U.S. waters, and banking references. Ferrari Investments
never responded to Omega's request with any answers that could be independently
verified. As Omega disclosed in its September 5, 2003 press release, Omega was
unable to obtain any information that supported the credibility of the Ferrari
Acquisition Proposal. Omega's Board of Directors concluded that the Acquisition
Proposal did not represent a credible proposal. Omega believes that the claims
in the lawsuit are without merit and intends to vigorously defend the lawsuit.
Zapata is involved in litigation relating to claims arising out of its past and
current operations in the normal course of business. Zapata maintains insurance
coverage against such potential ordinary course claims in an amount in which it
believes to be adequate. While the results of any ultimate resolution cannot be
predicted, in the opinion of Zapata's management, based upon discussions with
counsel, any losses resulting from these matters will not have a material
adverse effect on Zapata's results of operations, cash flow or financial
position.
ENVIRONMENTAL MATTERS
The Company and its subsidiaries are subject to various possible claims and
lawsuits regarding environmental matters. Management believes that costs, if
any, related to these matters will not have a material adverse effect on the
results of operations, cash flows or financial position of the Company.
SAFETY COMPONENTS BANKRUPTCY
Safety Components emerged from bankruptcy on October 11, 2000; however, the
Chapter 11 case remains open until all claims, disputes and pleadings are
resolved before the Bankruptcy Court. As of September 30, 2003, Safety had no
material disputes before the Court. Safety is in the process of closing the
Chapter 11 proceedings.
TAX ASSESSMENT
Omega Protein had been previously notified by representatives from the
Vermillion and St. Mary Parish tax authorities in Louisiana of deficiencies in
parish sales and use taxes for Omega's 1997 to 2000 tax years. In August 2003,
Omega received assessments from the parish tax authorities, which claimed
additional parish sales and use taxes including penalties and interest, and
recalculation of the Louisiana sales and use tax exemption pertaining to vessels
operating in foreign and interstate commerce. Omega was able to settle the 1997
to 2000 tax assessment for $409,000. The provision that Omega had previously
recorded in 2002 was adequate to cover these assessments.
CAPITAL COMMITMENTS
Omega Protein has committed approximately $16 million to build a new 100 metric
ton per day fish oil processing facility at its Reedville, Virginia location.
The commitments covered by this agreement aggregate approximately $6 million and
$10 million for 2003 and 2004, respectively. As of September 30, 2003, Omega has
incurred $2.8 million related to its Reedville processing facility.
GUARANTEES
The Company has applied the disclosure provisions of FASB Interpretation No. 45
(FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," to its agreements
containing guarantee or indemnification clauses. These disclosure provisions
expand those
19
required by SFAS No. 5, "Accounting for Contingencies," by requiring a guarantor
to disclose certain types of guarantees, even if the likelihood of requiring the
guarantor's performance is remote. A description of the arrangements in which
the Company is the guarantor is provided within the Company's 2002 Annual Report
on Form 10-K.
During February 2003, Zapata's directors and officers entered into
indemnification agreements with the Company. These agreements provide additional
rights to persons entitled to indemnification that is currently provided under
the Company's Articles of Incorporation and By-laws and will protect the
officers and directors from losses incurred as a result of claims made against
such individuals arising out of, or because of their service to the Company. The
maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is unlimited; however, Zapata
maintains Director and Officer Liability insurance to limit potential exposure.
As a result of this insurance coverage, it is the opinion of Zapata's management
that the estimated fair value of any liabilities under these indemnification
agreements is minimal and accordingly, no liabilities have been recorded under
the provisions of FIN 45.
In addition, Safety Components, Omega Protein and Zap.Com have articles of
incorporation, bylaws and certain other agreements containing indemnification
clauses for their officers and directors. The estimated fair values of any
liabilities under these indemnification agreements are limited by insurance
coverages and should not materially impact the Company's financial position,
results of operations or cash flows. No liabilities have been recorded for the
indemnification clauses in these agreements.
NOTE 15. RELATED PARTY TRANSACTIONS
OMEGA PROTEIN CORPORATION
Upon completion of Omega's initial public offering in 1998, Omega and Zapata
entered into certain agreements including the Administrative Services Agreement,
which covers certain administrative services Omega provides to Zapata. The
Administrative Services Agreement allows Omega to provide certain administrative
services to Zapata at Omega's estimated cost. Zapata reimbursed Omega $4,000 for
the three months ended September 30, 2003 and 2002, and $15,000 and $12,000 for
the nine months ended September 30, 2003 and 2002, respectively, for services
provided under the plan.
Zapata and Omega also entered into a Sublease Agreement which provided for Omega
to lease its principal corporate offices in Houston, Texas from Zapata
Corporation of Texas, Inc., a non-operating wholly-owned subsidiary of Zapata,
and provided Omega with the ability to utilize telephone equipment worth
approximately $21,000 for no additional charge. In May 2003, Zapata Corporation
of Texas, Inc. assigned the lease to Omega who assumed all obligations under the
lease with the third party landlord.
ZAP.COM CORPORATION
Since its inception, Zap.Com has utilized the services of the Zapata's
management and staff under a shared services agreement that allocated these
costs on a percentage of time basis. Zap. Com also subleases its office space in
Rochester, New York from Zapata. Under the sublease agreement, annual rental
payments are allocated on a cost basis. Zapata has waived its rights under the
shared services agreement to be reimbursed for these expenses since May 1, 2000.
For the three and nine month periods ended September 30, 2003, Zapata recorded
approximately $3,000 and $9,000, respectively, as contributed capital for these
services. For the year ended December 31, 2002, approximately $12,000 was as
contributed capital for these services.
OTHER
During 2002, the Company finalized the terms of a consulting agreement with its
former Chairman of the Board of Directors, Malcolm Glazer. Subject to the terms
of the agreement, the Company pays Malcolm Glazer $122,500 per month until April
30, 2006. The agreement also provides for health and other medical benefits for
Mr. Glazer and his wife. This agreement will terminate in the event of Mr.
Glazer's death or permanent disability.
20
For the three months and nine-month periods ended September 30, 2003, the
Company incurred legal fees of approximately $11,000 and $29,000, respectively,
related to a previously dismissed action against Malcolm I. Glazer, the Malcolm
I. Glazer Family Limited Partnership, and Malcolm I. Glazer GP, Inc.
NOTE 16. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
its scope as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement is effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this statement did not have a material
impact on the Company's financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. In addition,
all provisions of this statement should be applied prospectively. The provisions
of this statement that relate to SFAS No. 133 implementation issues that have
been effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective dates. The
adoption of this statement did not have a material impact on the Company's
financial position, results of operations or cash flows.
In January 2003, the FASB issued FIN No. 46, "Consolidated of Variable Interest
Entities." This standard clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, and addresses consolidation
by business enterprises of variable interest entities (more commonly known as
Special Purpose Entities of SPE's). FIN No. 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risk among the parties involved. FIN
No. 46 also enhances the disclosure requirements related to variable interest
entities. The disclosure requirements of this interpretation are effective for
all financial statements issued after January 31, 2003. The consolidation
requirements of this interpretation are effective for the first reporting period
ending after December 15, 2003. Management does not expect the adoption of FIN
No. 46 to have a material impact on the Company's financial position, results of
operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN No. 45), which expands previously issued accounting
guidance and disclosure requirements for certain guarantees. The Interpretation
requires an entity to recognize an initial liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company adopted SFAS
No. 143 on January 1, 2003. The adoption of this standard did not have a
material impact on the Company's financial position, results of operations or
cash flows.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation" to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB Opinion No. 28, "Interim
Financial Reporting", to require disclosure about those effects in interim
financial information. Although the Company continues to account for stock-
based compensation according to APB 25, the Company has adopted the required
disclosure provisions for interim financial reporting under SFAS No. 148. As a
result of the Company's continued use of the intrinsic value method of
accounting for stock-based compensation, the transition provisions did not have
an effect of the Company's financial position, results of operations or cash
flows upon adoption of SFAS 148.
21
At the end of June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that obligations associated with
the retirement of a tangible long-lived asset be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Company adopted SFAS No. 143 as of
January 1, 2003. The adoption of this standard did not have a material impact on
the Company's financial position, results of operations or cash flows.
NOTE 17. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
Prior to the sale of the Company's Viskase shares, Zapata primarily operated in
two industry segments: the Food segment, consisting of Omega Protein and
Viskase, and Zap.Com. Since the sale of the Company's Viskase shares, the Food
segment has been exclusive to Omega Protein. Accordingly, as of January 1, 2003,
all activity related to Omega Protein is reported as a separate segment.
Since the acquisition of Safety Components in September 2003, all financial
results from Safety are reported as a separate segment. Safety's revenues and
operating income will be included in the Company's consolidated amounts
beginning the fourth quarter of 2003.
The following summarizes certain financial information of each segment for the
three-month and nine-month periods ended September 30, 2003 and 2002:
THREE MONTHS ENDED OPERATING TOTAL
SEPTEMBER 30, 2003 REVENUES INCOME (LOSS) ASSETS
- ------------------ -------- ------------- ------
(IN THOUSANDS)
Safety $ -- $ -- $ 122,293
Omega 32,151 1,366 186,450
Zap.Com -- (41) 1,965
Corporate -- (1,239) 69,247
--------- --------- ---------
$ 32,151 $ 86 $ 379,955
========= ========= =========
THREE MONTHS ENDED OPERATING TOTAL
SEPTEMBER 30, 2002 REVENUES INCOME (LOSS) ASSETS
- ------------------ --------- ------------- ---------
(IN THOUSANDS)
Food $ 34,992 $ 5,407 $ 180,739
Zap.Com -- (32) 2,098
Corporate -- (28) 104,111
--------- --------- ---------
$ 34,992 $ 5,644 $ 286,948
========= ========= =========
NINE MONTHS ENDED OPERATING TOTAL
SEPTEMBER 30, 2003 REVENUES INCOME (LOSS) ASSETS
- ------------------ -------- ------------- ------
(IN THOUSANDS)
Safety $ -- $ -- $ 122,293
Omega 84,544 9,487 186,450
Zap.Com -- (104) 1,965
Corporate -- (3,110) 69,247
--------- --------- ---------
$ 84,544 $ 6,273 $ 379,955
========= ========= =========
22
NINE MONTHS ENDED OPERATING TOTAL
SEPTEMBER 30, 2002 REVENUES INCOME (LOSS) ASSETS
- ------------------ --------- ------------- ---------
(IN THOUSANDS)
Food $ 85,708 $ 14,936 $ 180,739
Zap.Com -- (140) 2,098
Corporate -- (2,255) 104,111
--------- --------- ---------
$ 85,708 $ 12,541 $ 286,948
========= ========= =========
NOTE 18. SUBSEQUENT EVENTS
On October 7, 2003, Zapata purchased an additional 1,498,489 shares of Safety
Components common stock in privately negotiated transactions. These additional
shares were purchased for $16.9 million and increased the Company's ownership
percentage of Safety's outstanding common stock to approximately 84%. See Note 3
for further information regarding Zapata's purchase of the additional shares of
Safety's common stock.
The Company's ownership of approximately 84% of Safety's common stock has
resulted in the creation of a parent-subsidiary controlled group for purposes of
the provisions of the Internal Revenue Code applicable to qualified retirement
plans. As a result of the application of certain nondiscrimination requirements
that apply on a controlled group basis, it may be necessary to modify the
qualified retirement plans maintained by each of the members of the group to
preserve the tax-qualified status of the plans. The applicable transition rules
pertaining to business acquisitions do not require such changes until January 1,
2005.
On November 13, 2003, Zapata submitted a non-binding preliminary indication of
interest to acquire the outstanding shares of Safety Components common stock not
owned by Zapata. As of September 27, 2003, Safety Components reported that it
had outstanding 4,959,678 shares of common stock, of which Zapata owned
4,162,394 shares and Safety Components' public shareholders owned 797,284
shares. In addition, as of that date, Safety Components reported exercisable
outstanding options of 379,200, 126,900 and 188,600 at exercise prices of $8.75,
$0.01 and $6.71, respectively. Zapata's proposal contemplates a price of $11.49
per share and representation on Safety Components' Board of Directors. Zapata
has not yet determined whether the price will be paid in cash, Zapata stock or a
combination thereof. Zapata is contemplating structuring the transaction as
either a tender offer or an exchange offer followed by a short-form merger.
Zapata's proposal is subject to the completion of routine due diligence and the
negotiation and execution of a definitive agreement and certain other
conditions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking statements in this Form 10-Q, future filings by Zapata
Corporation ("Zapata" or the "Company") with the Securities and Exchange
Commission ("Commission"), the Company's press releases and oral statements by
authorized officers of the Company are intended to be subject to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Investors
are cautioned that all forward-looking statements involve risks and uncertainty,
including without limitation those 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. The Company
assumes no obligation to update forward-looking statements or to update the
reasons actual results could differ from those projected in the forward-looking
statements.
GENERAL
Zapata is a holding company which currently has two operating companies, Safety
Components International, Inc. ("Safety Components" or "Safety") and Omega
Protein Corporation ("Omega Protein" or "Omega"). As of September 30, 2003, the
Company had a 54% ownership interest in Safety Components and a 60% ownership
interest in Omega Protein. Safety Components trades on the over-the counter
electronic bulletin board under the symbol "SAFY" and Omega Protein trades on
the New York Stock Exchange under the symbol "OME." In addition, Zapata owns 98%
of Zap.Com Corporation ("Zap.Com"), which is a public shell company and trades
on the over-the-counter electronic bulletin board under the symbol "ZPCM."
23
ZAPATA CORPORATE
On September 23, 2003, Zapata purchased 2,663,905 shares of Safety Components
International, Inc. common stock in privately negotiated transactions. These
shares were purchased for $30.9 million and represented approximately 54% of
Safety's common stock outstanding. The Company has accounted for this
transaction under the purchase method and has consolidated amounts related to
Safety's assets and liabilities into the Company's consolidated balance sheet
September 30, 2003. Although Zapata and its other consolidated subsidiaries have
calendar quarter ends, balances and footnotes related to Safety's fiscal quarter
ended September 27, 2003 have been included as if Safety utilized a calendar
quarter end. Due to the timing of the acquisition, no amounts related to
Safety's operations have been included in the Company's consolidated statements
of operations for the three- or nine-month periods ended September 30, 2003.
Safety's results of operations will be included in the Company's consolidated
results of operations beginning in the fourth quarter of 2003. Due to purchase
accounting adjustments which required a write-up to fair value of the carrying
amount of inventory, Zapata's consolidated results of operations for the fourth
quarter of 2003 will include decreased margins related to Safety Components.
On October 7, 2003, Zapata purchased an additional 1,498,489 shares of Safety
common stock in privately negotiated transactions. These additional shares were
purchased for $16.9 million and increased the Company's ownership percentage of
Safety's outstanding common stock to approximately 84%.
On November 13, 2003, Zapata submitted a non-binding preliminary indication of
interest to acquire the outstanding shares of Safety Components common stock not
owned by Zapata. As of September 27, 2003, Safety Components reported that it
had outstanding 4,959,678 shares of common stock, of which Zapata owned
4,162,394 shares and Safety Components' public shareholders owned 797,284
shares. In addition, as of that date, Safety Components reported exercisable
outstanding options of 379,200, 126,900 and 188,600 at exercise prices of $8.75,
$0.01 and $6.71, respectively. Zapata's proposal contemplates a price of $11.49
per share and representation on Safety Components' Board of Directors. Zapata
has not yet determined whether the price will be paid in cash, Zapata stock or a
combination thereof. Zapata is contemplating structuring the transaction as
either a tender offer or an exchange offer followed by a short-form merger.
Zapata's proposal is subject to the completion of routine due diligence and the
negotiation and execution of a definitive agreement and certain other
conditions.
In December 2002, the Board of Directors authorized the Company to purchase up
to 500,000 shares of its outstanding common stock in the open market or
privately negotiated transactions. The shares may be purchased from time to time
as determined by the Company. Any purchased shares would be placed in treasury
and may subsequently be reissued for general corporate purposes. The repurchases
will be made only at such times as are permissible under the federal securities
laws. No time limit has been placed on the duration of the program and no
minimum number or value of shares to be repurchased has been fixed. Zapata
reserves the right to discontinue the repurchase program at any time and there
can be no assurance that any repurchases will be made. As of the date of this
report, no shares have been repurchased under this program.
In addition, Zapata continues to evaluate strategic opportunities for the use of
its capital resources, including the acquisition of other operating businesses,
funding of start-up proposals and possible stock repurchases. The Company has
not focused and does not intend to focus its acquisition efforts 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 a combination of both. The Company may
utilize non-investment grade securities as a part of an acquisition strategy.
Such investments often involve a high degree of risk and must be considered
highly speculative.
Zapata continues to explore ways to enhance Zapata stockholder value through its
60% owned consolidated subsidiary Omega Protein. Possible transactions include
the sale, merger or another significant strategic transaction involving Omega,
purchases of Omega stock through the open market or private transactions.
24
As of the date of this report, Zapata is not a party to any agreements related
to the acquisition of an operating business, business combination or for the
sale or other transaction related to any of its subsidiaries. There can be no
assurance that any of these possible transactions will occur or that they will
ultimately be advantageous to Zapata or enhance Zapata stockholder value.
SAFETY COMPONENTS
Safety Components is a leading, low-cost, independent supplier of automotive
airbag fabric and cushions and technical fabrics with operations in North
America and Europe. Safety Components sells airbag fabric domestically and
cushions worldwide to the major airbag module integrators that outsource such
products. Safety Components also manufactures value-added technical fabrics used
in a variety of niche industrial and commercial applications such as ballistics
material for luggage, filtration, military tents and fire service apparel. The
ability to interchange airbag and specialty technical fabrics using the same
equipment and similar manufacturing processes allows Safety to more effectively
utilize its manufacturing assets and lower per unit overhead costs.
OMEGA PROTEIN
During 1999 and continuing through 2000, world grain and oilseed markets were
burdened by excess supplies relative to demand which, in turn, resulted in
prices for most major commodities being sharply lower than in previous years.
Correspondingly, Omega's product prices were adversely impacted during these
periods, resulting in decreased gross margins. During 1999 and again during
2000, Omega determined that the costs of its fish meal and fish oil product
inventories were in excess of those products' realization value by approximately
$18.2 million and $18.1 million, respectively. This realization was due mainly
to the continuing depressed market values of world protein markets and
particularly, animal and oilseed oil markets. The average prices received for
Omega's fish meal and fish oil products were approximately 28.1% and 48.2%
lower, respectively, during 1999 as compared to 1998. Price decreases continued
during 2000 and fish meal and fish oil prices were approximately 7.3% and 20%,
respectively, lower than 1999 average prices. Also impacting 2000 and
contributing to the write-down of inventories was the reduced crude fish oil
production yields (approximately 38% lower yields compared to 1999) experienced
during the majority of the 2000 fishing season in the Gulf of Mexico. These
reduced yields were primarily a result of the reduced fat content in the fish,
which was a result of poor nutritional conditions caused by the extreme drought
conditions.
The depressed pricing conditions in worldwide markets in 1999 and 2000 for
protein, particularly animal and oilseed oil, continued into the early months of
2001 before making significant improvements late in 2001 and continuing
throughout most of 2002. The price increases stabilized in late 2002 and have
been relatively stable since then, with the exception of crude fish oil prices.
Pricing for crude fish oil swiftly declined approximately 20% early in the
second quarter of Fiscal 2003 before rising mildly by the end of the same
quarter.
At September 30, 2003, Omega determined that its 2003 estimated product
inventory quantities would be less than its original estimates. Such reduced
estimated inventory quantities results in higher cost inventories and
correspondingly higher cost of sales, as well as less available product for
sale. The estimated reduced inventories were due to lower fish catch brought
about by adverse weather conditions along the Atlantic Coast and the Gulf of
Mexico, combined with lower oil yields from the Gulf of Mexico fish. The impact
of the higher cost inventories and fewer volumes available for sale will be
carried forward which will adversely affect Omega's earnings in the fourth
quarter of fiscal 2003 as well as the first and second quarters of fiscal 2004.
Pricing for Omega's products has been volatile in the past several years and is
attributable mainly to the international availability, or the perceived
international availability, of fish meal and fish oil inventories. In an effort
to reduce price volatility and to generate higher, more consistent profit
margins, in fiscal 2000 Omega embarked on a quality control program designed to
increase its capability of producing higher quality fish meal products and, in
conjunction therewith, enhanced its sales efforts to penetrate premium product
markets. Since 2000, Omega's sales volumes of specialty meal products have
increased approximately 18%. Future volumetric growth in specialty meal sales
will be dependant upon increased harvesting efforts. Additionally, Omega is
attempting to introduce its refined fish oil into the food market. Omega has
made sales, which to date have not been material, of its refined fish oil,
trademarked OmegaPure(TM), to food manufacturers in the United States and Canada
at prices that provide substantially improved margins over the margins that can
be obtained from selling non-refined crude fish oil. Omega cannot estimate,
25
however, the size of the actual domestic or international market for
OmegaPure(TM) or how long it may take to develop these markets.
During 2002, Omega developed a business plan to expand its purchase and resale
of other manufacturers' fish meal and fish oil products. In 2002, Omega engaged
a full-time consultant to implement Omega's business plan which will focus
initially on the purchase and resale of Mexican fish meal and fish oil. Revenues
generated from these types of transactions represented less than 1% of total
revenues during 2002. Omega expects that although operating margins from these
activities will be less than the margins generated from Omega's base domestic
production, its Mexican operations will provide it with a source of fish meal
and oil to sell into other markets where Omega has not historically had a
presence. Revenues generated from these activities for the nine months ended
September 30, 2003 were approximately $2.5 million, with no contribution to net
income. Omega believes that, with additional volumetric activity, these purchase
and resale activities will become profitable.
Historically, approximately 35% to 40% of Omega's FAQ fish meal was sold on a
two-to-twelve-month forward contract basis. The balance of regular grade and
other products was substantially sold on a spot basis through purchase orders.
Omega undertook a similar forward sales program for its specialty grade meals
and crude fish oil for 2002 and has continued this program for 2003. Omega's
annual revenues are highly dependent on both annual fish catch and inventories
and, in addition, inventory is generally carried over from one year to another
year. Omega determines the level of inventory to be carried over based on
prevailing market prices of the products and anticipated customer usage and
demand during the off-season. Thus, production volume does not necessarily
correlate with sales volume in the same year, and sales volumes will fluctuate
from quarter to quarter. Omega's fish meal products have a useable life of
approximately one year from date of production. Practically, however, Omega
typically attempts to empty its warehouses of the previous season's products by
the second or third month of the new fishing season. Omega's crude fish oil
products do not lose efficacy unless exposed to oxygen, and therefore, their
storage life typically is longer than that of fish meal.
The following table sets forth Omega's revenues by product (in millions) and the
approximate percentage of total revenues represented thereby, for the indicated
periods:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------ -----------------------------------------------
2003 2002 2003 2002
--------------------- --------------------- -------------------- --------------------
REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT
-------- ------- -------- ------- -------- ------- -------- -------
Regular
Grade $ 7.2 22.4% $ 8.1 23.1% $ 16.0 19.0% $ 14.4 16.8%
Special Select 10.0 31.1 12.7 36.3 29.5 34.9 32.7 38.2
Sea-Lac 2.9 9.0 4.3 12.3 11.0 13.0 9.1 10.6
Crude Oil 10.7 33.2 8.0 22.9 23.6 27.9 24.1 28.1
Refined Oil 1.0 3.1 1.3 3.7 2.8 3.3 3.2 3.7
Fish Solubles 0.4 1.2 0.6 1.7 1.6 1.9 2.2 2.6
------- ----- ------- ----- ------- ----- ------- -----
Total $ 32.2 100.0% $ 35.0 100.0% $ 84.5 100.0% $ 85.7 100.0%
======= ===== ======= ===== ======= ===== ======= =====
Omega Protein announced in April 2003, that it had committed to build a new 100
metric ton per day fish oil processing facility at its Reedville, Virginia
location. Construction on the project began in June 2003, with projected
completion in the summer of 2004 and will cost approximately $16 million. Omega
currently anticipates that it will fund the project through its available cash
balances.
Omega's principal raw material is menhaden, a species of fish that inhabits
coastal and inland tidal waters in the United States. Menhaden are undesirable
for direct human consumption due to their small size, prominent bones and high
oil content. Certain state agencies impose resource depletion restrictions on
menhaden pursuant to fisheries management legislation or regulations. To date,
Omega has not experienced any material adverse impact on its fish catch or
results of operations as a result of these restrictions.
Omega from time to time considers potential transactions including, but not
limited to, enhancement of physical facilities to improve production
capabilities and the acquisition of other businesses. Certain of the potential
transactions reviewed by Omega would, if completed, result in its entering new
lines of business (generally
26
including certain businesses to which Omega sells its products such as pet food
manufacturers, aquaculture feed manufacturers, fertilizer companies and organic
foods distributors) although historically, reviewed opportunities have been
generally related in some manner to Omega's existing operations. Although Omega
does not, as of the date hereof, have any commitment with respect to a material
acquisition or transaction (other than the previously announced fish oil
processing facility in Reedville, Virginia), it could enter into such agreement
in the future.
A general hardening of the world insurance markets in recent years has made
Omega's insurance more costly and is likely to continue to do so as various
lines of insurance come up for renewal throughout 2003. Depending on the
magnitude of the increase in insurance premiums, Omega may elect to increase its
deductibles and self-retentions in order to achieve lower insurance premium
costs. These higher deductibles and self-retentions will expose Omega Protein to
greater risk of loss if claims occur.
ZAP.COM
In December 2000, Zap.Com exited the Internet business and terminated all
salaried employees and third party contractual relationships. Currently, Zap.Com
does not have any existing business operations, other than maintaining its
status as a public shell company. 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Zapata reported consolidated net loss of $2.3 million or $0.97 per share on
revenues of $32.2 million for the three months ended September 30, 2003 compared
to consolidated net income of $2.4 million or $1.00 per share on revenues of
$35.0 million for the three months ended September 30, 2002. Omega's net income
for the three months ended September 30, 2003 was $740,000 as compared to $3.6
million for the comparable period of the prior year. On a consolidated basis,
the decrease in net income was primarily due to Zapata Corporate's recognition
of an income tax valuation allowance combined with Omega's decrease in net
income. Due to the timing of the acquisition, no amounts related to Safety
Components' Statements of Operations have been included in the Company's
Condensed Consolidated Statements of Operations for the three-month period ended
September 30, 2003. Safety's results of operations will be included in the
Company's Consolidated Statements of Operations beginning in the fourth quarter
of 2003.
REVENUES. For the three months ended September 30, 2003, Zapata's consolidated
revenues were $32.2 million as compared to $35.0 million for the three months
ended September 30, 2002. The revenue decrease was primarily due to lower sales
volumes of 30% for Omega's fish meal and lower fish oil prices. The lower fish
meal volumes were primarily attributable to Omega's reduced fish catch,
weakening demand in the swine markets and fewer export sales. Fish oil prices
decreased 4% during the third quarter, while prices for Omega's fish meal
increased 8%. Omega attributes the higher fish meal price to lower available
world supplies of fish meal. Omega's Mexican fish meal and fish oil sales
increased $455,000 or 49% for the third quarter.
COST OF REVENUES. Zapata's consolidated cost of revenues, including depreciation
and amortization, for the current quarter ended September 30, 2003 was $28.6
million, a 5% increase from $27.3 million for the quarter ended September 30,
2002. Cost of sales as a percentage of revenues increased 11% to 89% for the
quarter ended September 30, 2003 as compared to the corresponding period in
2002. The increase in cost of sales as a percentage of revenues was primarily
due to higher fiscal 2003 costs of production due to reduced fish catch, brought
about by adverse weather conditions along the Atlantic Coast and Gulf of Mexico,
combined with lower oil yields for the Gulf of Mexico fish.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Zapata's consolidated selling,
general and administrative expenses increased $1.4 million or 68% for the three
months ended September 30, 2003 as compared to the third quarter of the prior
year. The third quarter of 2002 included a $1.5 million reduction of accrued
legal settlements at Zapata Corporate. Omega's selling, general, and
administrative expenses increased $203,000 from $2.0 million in the quarter
ended September 30, 2002 to $2.2 million in the current quarter ended September
30, 2003. This increase was attributable primarily to increases in
employee-related costs and marketing expenses.
27
INTEREST (EXPENSE) INCOME, NET. Consolidated interest (expense) income, net
decreased by $227,000 to net interest expense of $2,000 for the three months
ended September 30, 2003 as compared to the comparable quarter of the prior
year. The decrease was primarily due to lower interest rates on cash and cash
equivalents and short-term investments as compared to the corresponding period
of the previous year. Due to the purchase of Safety Components common stock for
$30.9 million and $16.9 million in September and October 2003, respectively,
interest income is expected to be lower in the future, depending on market
conditions and other factors.
INCOME TAXES. The Company recorded a consolidated provision for income taxes of
$2.1 for the three months ended September 30, 2003 as compared to a provision of
$2.0 million for the comparable period of the prior year. The consolidated
provision for the three months ended September 30, 2003 was largely comprised of
Zapata Corporate's provision of $1.7 which primarily resulted from the
establishment of a deferred tax valuation allowance related to certain tax
benefit carry-forwards. The consolidated provision for the three months ended
September 30, 2002 was primarily the result of Omega's provision of $1.8 million
resulting from taxable income. Depending on a number of factors, the Company may
incur a personal holding company tax in the future. See "Significant Factors
That Could Affect Future Performance and Forward-Looking Statements."
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Zapata reported consolidated net income of $799,000 or $0.33 per share on
revenues of $84.5 million for the nine months ended September 30, 2003 compared
to consolidated net income of $4.8 million or $2.02 per share on revenues of
$85.7 million for the nine months ended September 30, 2002. Omega's net income
for the nine months ended September 30, 2003 was $5.8 million as compared to
$9.3 million for the comparable period of the prior year. On a consolidated
basis, the decrease in net income was primarily due to Zapata Corporate's
recognition of an income tax valuation allowance combined with Omega's decrease
in net income. Due to the timing of the acquisition, no amounts related to
Safety Components' Statements of Operations have been included in the Company's
Condensed Consolidated Statements of Operations for the nine-month periods ended
September 30, 2003. Safety's results of operations will be included in the
Company's Consolidated Statements of Operations beginning in the fourth quarter.
REVENUES. For the nine months ended September 30, 2003, Zapata's consolidated
revenues decreased approximately 1% to $84.5 million from $85.7 million for the
nine months ended September 30, 2002. On a consolidated basis, the decrease in
revenues resulted primarily from lower sales volumes of 11% and 7% for Omega's
fish meal and fish oil, respectively. The lower sales volumes were primarily
attributable to weakening demand in both the crude fish oil spot markets and
fish meal spot markets and reduced fish catch due to adverse weather conditions
along the Atlantic Coast and in the Gulf of Mexico during the third quarter.
Omega's fish meal prices increased 9% while fish oil prices increased by 2% for
the nine months ended September 30, 2003. Omega attributes the higher fish meal
prices to lower available world supplies of fish meal.
COST OF REVENUES. Zapata's consolidated cost of sales, including depreciation
and amortization, for the nine months ended September 30, 2003 was $68.3
million, a $3.8 million or a 6% increase from $64.5 million for the comparable
nine month period ending September 30, 2002. Cost of sales as a percentage of
revenues was 81% and 75% for the nine months ended September 30, 2003 and
September 30, 2002, respectively. The increase in cost of sales as a percentage
of revenues was primarily due to higher fiscal 2003 cost of production due to
reduced fish catch, brought about by adverse weather conditions along the
Atlantic Coast and Gulf of Mexico, combined with lower oil yields for the Gulf
of Mexico fish.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Zapata's consolidated selling,
general and administrative expenses increased $1.3 million or 15% for the nine
months ended September 30, 2003 as compared to the comparable period of the
prior year. The increase resulted primarily from pension expense recognized at
Zapata Corporate. Due to recent market conditions and plan assumptions, Zapata
Corporate recorded pension expense of approximately $426,000 for the nine months
ended September 30, 2003 as compared to pension income of approximately $527,000
during the comparable period of the prior year. On a consolidated basis, the
Company expects to record approximately $505,000 in pension expense during the
remaining three months of 2003. Omega's selling, general and administrative
expenses increased $453,000 for the nine months ended September 30, 2003 as
compared to the comparable period of the prior year and was attributable to
increases in employee-related costs and marketing expenses.
28
INTEREST INCOME, NET. Interest income, net decreased by $395,000 for the nine
months ended September 30, 2003 as compared to the comparable period of the
prior year. The decrease was primarily due to lower interest rates on cash and
cash equivalents and short-term investments as compared to the corresponding
period of the prior year. Due to the purchase of Safety Components common stock
for $30.9 million and $16.9 million in September and October 2003, respectively,
interest income is expected to be lower in the future, depending on market
conditions and other factors.
INCOME TAXES. The Company recorded a consolidated provision for income taxes of
$3.3 million for the nine months ended September 30, 2003 as compared to a
provision of $4.5 million for the comparable period of the prior year. The
consolidated provision for the nine months ended September 30, 2003 was
primarily the result of Omega's provision of $3.2 million resulting from taxable
income, and Zapata's provision related to the aforementioned establishment of a
deferred tax valuation allowance related to certain tax benefit carry-forwards.
These provisions are offset by Zapata's second quarter recognition of a tax
benefit of $1.2 million resulting from the completion of an IRS audit. The
consolidated provision for the nine months ended September 30, 2002 was
primarily the result of Omega's provision of $5.1 million resulting from taxable
income. Depending on a number of factors, the Company may incur a personal
holding company tax in the future. See "Significant Factors That Could Affect
Future Performance and Forward-Looking Statements".
LIQUIDITY AND CAPITAL RESOURCES
Zapata, Safety Components, Omega Protein and Zap.Com are separate public
companies. Accordingly, the capital resources and liquidity of Safety
Components, Omega Protein and Zap.Com are legally independent of Zapata. The
working capital and other assets of Safety Components, 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. The credit
facilities of Safety Components and Omega Protein prohibit any dividends from
being declared or paid with respect to its outstanding capital stock, including
the shares held by Zapata. For the foreseeable future, Zapata does not expect to
receive cash dividends on its Safety Components, Omega Protein or Zap.Com
shares.
Zapata Corporate's current source of liquidity is its cash, cash equivalents and
short- and long-term investments and the interest income it earns on these
funds. Zapata expects these assets to continue to be a source of liquidity
except to the extent that they may be used to fund any acquisitions of operating
companies, the minority interest of controlled subsidiaries, or repurchases of
Zapata stock. Zapata Corporate's investments consist of U.S. Government agency
securities and cash equivalents. At September 30, 2003, Zapata Corporate's cash,
cash equivalents and short- and long-term investments were $49.9 million as
compared to $85.0 million as of December 31, 2002. This decline resulted from
the purchase of Safety Components common stock for $30.9 million during
September 2003. In October 2003, the Company purchased additional Safety
Components common stock for $16.9 million which was funded from its cash and
cash equivalents. Due to the purchase of Safety Components common stock for
$30.9 million and $16.9 million in September and October 2003, respectively,
interest income is expected to be lower in the future, depending on market
conditions and other factors.
In addition to its cash, cash equivalents, short- and long-term investments and
interest income, Zapata Corporate has a potential secondary source of liquidity
in its publicly traded securities of Safety Components, Omega Protein and
Zap.Com. These holdings 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. 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
therefrom. 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. The low trading volumes for
Safety Components, Omega Protein and Zap.Com common stock may make it difficult
for Zapata to sell any significant number of shares in the public market.
As of September 30, 2003, the Company's consolidated contractual obligations and
other commercial commitments have not changed materially from those set forth in
the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2003,
except in connection with the Company's acquisition of its 84% ownership
interest in Safety Components. As a result of this acquisition, Safety's
commitments and obligations have been included in the Company's consolidated
financial statements as of September 30, 2003. Zapata has neither guaranteed nor
otherwise
29
agreed to be liable for the repayment of Safety's commitments or obligations.
Amounts reported by Safety Components as contractual obligations are as follows.
SAFETY COMPONENTS
CONTRACTUAL OBLIGATIONS TOTAL 2004 2005 2006 2007 2008 THEREAFTER
- ----------------------- ------- ------- ------- ------- ------- ------- ----------
Credit facility $12,422 $ 1,000 $ 1,000 $10,422 $ -- $ -- $ --
Other long-term debt 12,275 6,155 2,297 746 709 1,536 832
Capital lease obligation 977 377 318 261 14 7 --
Operating lease commitments 2,532 846 596 453 333 304 --
------- ------- ------- ------- ------- ------- -------
Total $28,206 $ 8,378 $ 4,211 $11,882 $ 1,056 $ 1,847 $ 832
======= ======= ======= ======= ======= ======= =======
For more information concerning debt, see Note 10 to the Company's Condensed
Consolidated Unaudited Financial Statements included in Item 1 of this report.
Zapata Corporate's liquidity needs are primarily for operating expenses,
litigation, insurance costs and possible Zapata stock repurchases. Zapata
Corporate may also invest a significant portion of its cash, cash equivalents
and short-term investments in the purchase of operating companies or the
minority interest of controlled subsidiaries, including the proposed acquisition
of the remaining Safety Components public shares. Zapata management believes
that, based on current levels of operations and anticipated growth, cash flow
from operations, together with other available sources of funds, will be
adequate to fund its operational and capital requirements for at least the next
twelve months. Depending on the size and terms of future acquisitions of
operating companies or of the minority interest of controlled subsidiaries,
Zapata may 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.
SUMMARY OF CASH FLOWS
The following table summarizes Zapata's consolidating cash flow information (in
thousands). Due to the timing of the acquisition, no amounts related to Safety
Components' cash flows have been included in the Company's summary cash flows
for the nine-month periods ended September 30, 2003. Safety's cash flow
information will be included in the Company's Consolidated Statement of Cash
Flows beginning in the fourth quarter.
ZAPATA OMEGA
CORPORATE PROTEIN ZAP.COM CONSOLIDATED
--------- -------- -------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
CASH (USED IN) PROVIDED BY
Operating activities $ (4,207) $ 1,428 $ (106) $ (2,885)
Investing activities, net of cash acquired 5,910 (10,114) -- (4,204)
Financing activities 10 243 -- 253
Effect of exchange rate changes on cash and cash
equivalents -- 21 -- 21
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents $ 1,713 $ (8,422) $ (106) $ (6,815)
======== ======== ======== ========
ZAPATA OMEGA
CORPORATE PROTEIN ZAP.COM CONSOLIDATED
--------- -------- -------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2002
CASH PROVIDED BY (USED IN)
Operating activities $ 13,579 $ 13,976 $ (78) $ 27,477
Investing activities (20,416) (5,643) -- (26,059)
Financing activities -- (991) -- (991)
-------- -------- -------- --------
Net (decrease) increase in cash and cash
equivalents $ (6,837) $ 7,342 $ (78) $ 427
======== ======== ======== ========
30
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES. On a consolidated basis,
Zapata had net cash used in operating activities for the nine months ended
September 30, 2003 as compared to net cash provided by operating activities for
the same period in the prior year. The change from net cash provided by
operating activities to net cash used by operating activities was primarily due
to an income tax refund that was received during the prior year by Zapata. This
refund caused Zapata to have a significant amount of cash provided by operating
activities during the nine months ended September 30, 2002. The change from net
cash provided by operating activities to net cash used by operating activities
is also due to Omega's net decrease in cash provided by operating activities
which was primarily due the timing of changes in the balances of certain assets
and liabilities and lower net income.
NET CASH USED IN INVESTING ACTIVITIES. On a consolidated basis, Zapata had net
cash used in investing activities for the nine months ended September 30, 2003
and September 30, 2002 respectively. Variations in the Company's consolidated
net cash (used in) provided by investing activities are typically the result of
the change in the mix of cash and cash equivalents and short and long-term
investments during the period. All highly liquid investments with original
maturities of three months or less are considered to be cash equivalents and all
investments with original maturities of greater than three months are classified
as either short or long-term investments. The decrease in net cash used in
investing activities was primarily due to the Company's decrease in purchases of
short-term investments during the period as compared to the same period in the
prior year, largely offset by the Company's purchase of a majority interest in
Safety Components. In addition, Omega anticipates making approximately $14
million of capital expenditures in 2003, a significant portion of which will be
used to build a new 100 metric ton per day fish oil processing facility and to
refurbish vessels and plant assets and to repair certain equipment.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. On a consolidated basis,
Zapata had net cash provided by financing activities during the nine months
ended September 30, 2003 as compared to net cash used in financing activities
during the same period in the prior year. The change from net cash used in
financing activities to net cash provided by financing activities was primarily
due to the receipt of cash proceeds from the exercise of stock options during
the current period.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within it scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. This statement is effective for financial
instruments entered into or modified after May 31, 2003 and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of this statement did not have a material impact on the
Company's financial position, results of operations or cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. In addition,
all provisions of this statement should be applied prospectively. The provisions
of this statement that relate to SFAS No. 133 implementation issues that have
been effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective dates. The
adoption of this statement did not have a material impact on the Company's
financial position, results of operations or cash flows.
In January 2003, the FASB issued FIN No. 46, "Consolidated of Variable Interest
Entities." This standard clarifies the application of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, and addresses consolidation
by business enterprises of variable interest entities (more commonly known as
Special Purpose Entities of SPE's). FIN No. 46 requires existing unconsolidated
variable interest entities to be consolidated by their primary beneficiaries if
the entities do not effectively disperse risk among the parties involved. FIN
No. 46 also enhances the disclosure requirements related to variable interest
entities. The disclosure requirements of this interpretation are effective for
all financial statements issued after January 31, 2003. The consolidation
requirements of this interpretation are effective for the first reporting period
ending after December 15, 2003.
31
Management does not expect the adoption of FIN No. 46 to have a material impact
on the Company's financial position, results of operations or cash flows.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN No. 45), which expands previously issued accounting
guidance and disclosure requirements for certain guarantees. The Interpretation
requires an entity to recognize an initial liability for the fair value of an
obligation assumed by issuing a guarantee. The provision for initial recognition
and measurement of the liability will be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The adoption of FIN No.
45 did not have a material impact on the Company's financial position, results
of operations or cash flows.
In December 2002, FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation" to provide alternative methods of transition for a voluntary
change to the fair value-based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends APB Opinion No. 28, "Interim
Financial Reporting", to require disclosure about those effects in interim
financial information. Although the Company continues to account for stock-
based compensation according to APB 25, the Company has adopted the required
disclosure provisions for interim financial reporting under SFAS No. 148. As a
result of the Company's continued use of the intrinsic value method of
accounting for stock-based compensation, the transition provisions did not have
an effect of the Company's financial position, results of operations or cash
flows upon adoption of SFAS 148.
At the end of June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that obligations associated with
the retirement of a tangible long-lived asset be recorded as a liability when
those obligations are incurred, with the amount of the liability initially
measured at fair value. Upon initially recognizing a liability for an asset
retirement obligation, an entity must capitalize the cost by recognizing an
increase in the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized cost
is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The Company adopted SFAS No. 143 on
January 1, 2003. The adoption of this standard did not have a material impact on
the Company's financial position, results of operations or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of Zapata's financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect amounts reported
therein. The following lists our current accounting policies involving
significant management judgment and provides a brief description of these
policies:
ACQUISITION ACCOUNTING. In connection with the acquisition of Safety Components,
the Company used the purchase method of accounting in accordance with SFAS No.
141, "Business Combinations." Under the purchase method, the cost, including
transaction costs, is allocated to the underlying net assets and liabilities
acquired based on their respective estimated fair values. A significant amount
of judgments and estimates are involved in determining the fair market value of
assets and liabilities acquired. Different assumptions could yield materially
different results.
LITIGATION RESERVES. The establishment of litigation reserves requires judgments
concerning the ultimate outcome of pending litigation against the Company and
its subsidiaries. In applying judgment, management utilizes opinions and
estimates obtained from outside legal counsel to apply the standards of SFAS No.
5 "Accounting for Contingencies." Accordingly, estimated amounts relating to
certain litigation have met the criteria for the recognition of a liability
under SFAS No. 5. Other litigation for which a liability has not been recognized
is reviewed on an ongoing basis in conjunction with the standards of SFAS No. 5.
A liability is recognized for all associated legal costs as incurred.
Liabilities for litigation settlements, legal fees and changes in these
estimated amounts may have a material impact on the Company's financial
position, results of operations or cash flows.
32
VALUATION ALLOWANCES FOR DEFERRED INCOME TAXES. The Company reduces its deferred
tax assets to an amount that it believes is more likely than not to be realized.
In so doing, the Company estimates future taxable income in determining if any
valuation allowance is necessary. While the Company believes it is more likely
than not that it will be able to realize this amount of estimated net deferred
income tax benefits, it is possible that the facts and circumstances on which
the Company's estimates and judgments are based could change, which could result
in additional income tax expense in the future to recognize or increase the
associated valuation allowances.
BENEFIT PLAN ASSUMPTIONS. On a consolidated basis, the Company has three defined
benefit plans, under which participants earn a retirement benefit based upon a
formula set forth in each plan. The Company records income or expense related to
these plans using actuarially determined amounts that are calculated under the
provisions of SFAS No. 87, "Employers' Accounting for Pensions." Key assumptions
used in the actuarial valuations include the discount rate and the anticipated
rate of return on plan assets. These rates are based on market interest rates,
and therefore fluctuations in market interest rates could impact the amount of
pension income or expense recorded for these plans.
Despite the Company's belief that its estimates are reasonable for these key
actuarial assumptions, future actual results will likely differ from the
Company's estimates, and these differences could materially affect the Company's
future financial statements either unfavorably or favorably. It is possible that
assets of these plans could decline as a result of negative investment returns,
which combined with increasing amounts of accumulated benefit obligations, could
result in the Company with respect to its plans and Omega Protein with respect
to its plan being required to make significant cash contributions to its plans
in future periods. Additionally, depending on market conditions, Zapata
Corporate may have to reverse its current prepaid pension asset position of
$16.4 million and record a pension liability in the form of a charge to equity.
SAFETY'S FOREIGN CURRENCY TRANSLATION. Financial statements of substantially all
of Safety's foreign operations are prepared using the local currency as the
functional currency. In accordance with SFAS No. 52, "Foreign Currency
Translation," translation of these foreign operations to United States dollars
occurs using the current exchange rate for balance sheet accounts and a weighted
average exchange rate for results of foreign operations. Translation gains or
losses are recognized in "accumulated other comprehensive income (loss)" as a
component of stockholders' equity in the accompanying consolidated balance
sheets. For Safety's subsidiary in Mexico, whose financial statements are
prepared using the United States dollar as the functional currency, the
translation effects of the financial statements are included in the results of
operations.
Operations in Mexico, Germany, the United Kingdom and the Czech Republic expose
Safety Components to currency exchange rate risks associated with the volatility
of certain foreign currencies against its functional currency, the U.S. dollar.
In prior years, the relationship of other currencies to the U.S. dollar has not
had a material effect on Safety's Consolidated Financial Statements. It is
unknown what effect foreign currency rate fluctuations will have on Safety's
financial position or results of operations in the future. If, however, there
were a sustained decline of these currencies versus the U.S. dollar, the
consolidated financial statements could be materially adversely affected.
OMEGA'S LOWER-OF-COST-OR-MARKET INVENTORY ANALYSIS. Inventory is stated at the
lower of cost or market. Omega Protein's fishing season runs from mid-April to
the first of November in the Gulf of Mexico and from the beginning of May into
December in the Atlantic. Government regulations generally preclude Omega
Protein from fishing during the off-seasons.
Omega Protein's inventory cost system considers all costs associated with an
annual fish catch and its processing, both variable and fixed and including both
costs incurred during the off-season and during the fishing season. 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. Omega Protein's lower-of-cost-or-market-value analyses at
year-end and at interim periods compare the total estimated per unit production
cost of Omega's expected production to the projected per unit market prices of
the products. The impairment analyses involve estimates of, among other things,
future fish catches and related costs, and expected commodity prices for the
fish products. These estimates, which management believes are reasonable and
supportable, involve estimates of future activities and events which are
inherently imprecise and for
33
which actual results may differ materially. Revisions in such estimates or
actual results could materially impact Omega Protein's results of operation and
financial position.
OMEGA'S DEFERRAL OF OFF-SEASON COSTS. During the off-seasons, in connection with
the upcoming fishing seasons, Omega Protein incurs costs (i.e., plant and vessel
related labor, utilities, rent and depreciation) that are directly related to
Omega's infrastructure. These costs accumulate in inventory and are applied as
elements of the cost of production of Omega Protein's products throughout the
fishing season ratably based on Omega's monthly fish catch and the expected
total fish catch for the season.
OMEGA'S ACCOUNTING FOR SELF-INSURANCE RETENTIONS. Omega Protein carries
insurance for certain losses relating to its vessels and Jones Act liabilities
for employees aboard its vessels (collectively, "Vessel Claims Insurance"). The
typical Vessel Claims Insurance policy contains an annual aggregate deductible
("AAD") for which Omega remains responsible, while the insurance carrier is
responsible for all applicable amounts which exceed the AAD. It is Omega's
policy to accrue current amounts due and record amounts paid out on each claim.
Once payments exceed the AAD, Omega records an insurance receivable for a given
policy year. Omega Protein provides reserves for those portions of the AAD for
which Omega remains responsible by using an estimation process that considers
Omega Protein, Inc. specific and industry data as well as Omega Protein
management's experience assumptions and consultation with outside counsel. Omega
Protein management's current estimated range of liabilities related to such
cases is based on claims for which Omega's management can estimate the amount
and range of loss. Omega Protein has recorded the minimum estimated liability
related to those claims, where there is a range of loss. As additional
information becomes available, Omega will assess the potential liability related
to its pending litigation and revise its estimates. Such revisions in estimates
of the potential liability could materially impact Omega Protein's results of
operation and financial position.
The Company continually updates and assesses the facts and circumstances
regarding these critical accounting matters and other significant accounting
matters affecting estimates in its financial statements. See "Significant
Factors That Could Affect Future Performance and Forward-Looking Statements."
SIGNIFICANT FACTORS THAT COULD AFFECT FUTURE PERFORMANCE AND FORWARD-LOOKING
STATEMENTS
1. 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.
- Risks associated with the fact that a significant portion of Zapata's
assets have consisted of securities, including equity and other
interests in its operating companies. This 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's 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 financial position, results
of operations and cash flows.
- Risks associated with the personal holding company penalty tax.
Section 541 of the Internal Revenue Code of 1986, as amended (the
"IRC"), subjects a corporation, which is a "personal holding company"
as defined in the IRC, to a 39.6% penalty tax on "undistributed
personal holding company income" in addition to the corporation's
normal income tax. Generally, undistributed personal holding company
income is based on taxable income, subject to certain adjustments, most
notably a reduction for Federal incomes taxes. Personal holding company
34
income is comprised primarily of passive investment income plus, under
certain circumstances, personal service income. Zapata and its domestic
subsidiaries (other than Omega) could become subject to the penalty tax
if (i) 60% or more of its adjusted ordinary gross income is personal
holding company income and (ii) 50% or more of its outstanding common
stock is owned, directly or indirectly, by five or fewer individuals at
any time during the last half of the taxable year. The Company believes
that five or fewer of Zapata's stockholders hold 50% or more of its
outstanding common stock for purposes of IRC Section 541. However, as
of September 30, 2003, Zapata and its domestic subsidiaries (other than
Omega) had no undistributed personal holding company income and
therefore has not recorded a personal holding company tax liability.
There can be no assurance that Zapata will not be subject to this tax
in the future, that in turn may materially and adversely impact the
Company's financial position, results of operations and cash flows.
- Risks associated with a change of ownership pursuant to Section 382
of the Internal Revenue Code. Such risks could significantly or
possibly eliminate Zapata's utilization of its net operating losses
and/or alternative minimum tax credits. An ownership change for this
purpose is generally a change in the majority ownership of a company
over a three year period.
- Risk that our officers, directors and majority stockholder exert
substantial influence over Zapata. Members of our Board of Directors,
our executive officers together with members of their families and
entities that may be deemed affiliates of or related to such persons or
entities, and our majority stockholder beneficially own approximately
47% of our outstanding common shares. Accordingly, these stockholders
may be able to elect all members of our Board of Directors and
determine the outcome of certain corporate actions requiring
stockholder approval, such as any future issuances of common stock or
other securities, merger and acquisition decisions, declaration of
dividends, and the election of directors. This level of ownership may
have a significant effect in delaying, deferring, or preventing a
change in control of Zapata and may adversely affect the voting and
other rights of other holders of our common shares.
- 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/or financial condition
could be adversely affected.
- Risks associated with future acquisitions of operating companies.
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 SEC disclosing the
nature of such transaction and/or business. There is no assurance that
the Company 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 or not materially adversely affect the
Company's financial condition. 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. We 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. 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.
35
2. Risks associated with Safety Components include the following, any of which
could have a material adverse impact on Safety's (and hence Zapata's) financial
position, results of operations and cash flows:
- The impact of competitive products and pricing, dependence of
revenues upon several major module suppliers; worldwide economic
conditions; the results of cost savings programs being implemented;
domestic and international automotive industry trends, including the
marketplace for airbag related products; the ability of Safety
Components to effectively control costs and to satisfy customers on
timeliness and quality; approval by automobile manufacturers of airbag
cushions currently in production; pricing pressures and labor strikes.
- We do not currently have representation on the Safety Component's
Board of Directors and, therefore, do no have the ability to influence
the management of Safety Components and can not be assured that the
actions taken by Safety Components Board of Directors will be
consistent with Zapata's best interest.
3. Risks associated with Omega Protein include the following, any of which could
have a material adverse impact on Omega's (and hence Zapata's) financial
position, results of operations and cash flows:
- Omega'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 has no control, such as varying fish
population, adverse weather conditions and disease.
- The impact on Omega if its spotter aircraft are prohibited or
restricted from operating in their normal manner during Omega's fishing
season. For example, as a direct result of the September 11, 2001
terrorist attacks, the Secretary of Transportation issued a federal
ground stop order that grounded certain aircraft (including Omega's
fish-spotting aircraft) for approximately nine days. This loss of
spotter aircraft coverage severely hampered Omega's ability to locate
menhaden fish during this nine-day period and thereby reduced its
amount of saleable product.
- The impact on the prices for Omega's products of worldwide supply and
demand relationships over which Omega has no control and which tend to
fluctuate to a significant extent over the course of a year and from
year to year. The products that influence the supply and demand
relationship are world supplies of fish meal made from other fish
species, palm oil, soy meal and oil, and other edible oils.
- The impact of a violation by Omega of federal, state and local laws
or regulations relating to menhaden fishing, environmental protection
or the health and safety of its employees, or of the adoption of new
laws or regulations at federal, state, local or foreign government
levels that restrict or prohibit menhaden or purse-seine fishing, or
that lower permissible levels of various contaminants or compounds
which may be present in fish meals or fish oils to levels to which
Omega cannot comply, or which make Omega's products more expensive to
produce.
- The impact on Omega if it cannot harvest menhaden in U.S.
jurisdictional waters if Omega fails to comply with U.S. citizenship
ownership requirements.
- Risks inherent in Omega's attempt to expand into sales of refined,
food grade fish oils for consumption in the U.S., including the
unproven market for this product.
- Fluctuations in Omega's quarterly operating results due to the
seasonality of Omega's business and Omega's deferral of sales of
inventory based on worldwide prices for competing products.
- The ability of Omega to retain and recruit key officers and qualified
personnel, vessel captains and crewmembers.
- Risks related to unanticipated material adverse outcomes in any
pending litigation or any other unfavorable outcomes or settlements.
There can be no assurance that Omega will prevail in any pending
litigation and to the
36
extent that Omega 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.
4. Risks associated with the foreign operations of our controlled subsidiaries,
any of which could have a material adverse impact on any such subsidiary's (and
hence Zapata's) financial position, results of operations and cash flows),
including 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 in tax or other laws, partial or total expatriation, currency
exchange rate fluctuations and restrictions on currency repatriation, the
disruption of labor, political disturbances, insurrection or war and the effect
of requirements of partial local ownership of operations in certain countries.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EQUITY PRICE RISK
As the Company considers its holdings of Safety Components, Omega Protein and
Zap.Com to be a potential source of secondary liquidity, the Company is subject
to equity price risk to the extent of fluctuations in the market prices and
trading volumes of these securities. Fluctuation in the market price of a
security may result from perceived changes in the underlying economic
characteristics of the investee, the relative price of alternative investments
and general market conditions. Furthermore, amounts realized in the sale of a
particular security may be affected by the relative quantity of the security
being sold.
INTEREST RATE RISK
Zapata Corporate's investment grade securities include obligations of the U.S.
Government or agencies thereof, certificates of deposit, money market deposits
and a minimal amount of commercial paper with a rating of A-1 or P-1. In
addition, Omega Protein has certificates of deposit and commercial quality grade
investments rated A-2 P-2 or better with companies and financial institutions.
As the majority of the Company's consolidated investment grade securities
constitute short-term U.S. Government agency securities, the Company does not
believe that the value of these instruments have a material exposure to interest
rate risk. However, changes in interest rates do affect the investment income
the Company earns on its cash equivalents and marketable securities and,
therefore, impacts its cash flows and results of operations. Accordingly, there
is inherent roll-over risk for the Company's investment grade securities as they
mature and are renewed at current market rates. Using the Company's investment
grade security balance of $82.6 million at September 30, 2003 as a hypothetical
constant cash balance, an adverse change of 1% in interest rates would decrease
interest income by approximately $207,000 and $620,000 during a three-month and
nine-month period, respectively.
To the extent that amounts borrowed under Safety's revolving credit facility are
outstanding, Safety has market risk relating to such amounts because the
interest rates under the Congress Facility are variable. As of September 30,
2003, Safety's interest rates under its revolving credit facility approximated
4.0%. A hypothetical increase or decrease in interest rates of 100 basis points
relating to the Congress Facility would result in an addition to or reduction in
annual interest expense of approximately $200,000. Omega Protein is exposed to
minimal market risk associated with interest rate movements on its borrowings. A
one percent increase or decrease in the levels of interest rates on Omega's
variable rate debt would not result in a material change to the Company's
results of operations.
CURRENCY EXCHANGE RATES AND FORWARD CONTRACTS
Safety's operations in Mexico, Germany, the United Kingdom and the Czech
Republic expose Safety to currency exchange rate risks. Safety Components
monitors its risk associated with the volatility of certain foreign currencies
against its functional currency, the U.S. dollar. Safety uses certain derivative
financial instruments to reduce exposure to volatility of foreign currencies.
However, the changes in the relationship of other currencies to the U.S. dollar
could have a materially adverse effect on the consolidated financial statements
if there were a sustained
37
decline of these currencies versus the U.S. dollar. Safety has formally
documented all relationships between hedging instruments and hedged items, as
well as risk management objectives and strategies for undertaking various hedge
transactions. Derivative financial instruments are not entered into for
speculative purposes.
Certain operating expenses at Safety's Mexican facilities are paid in Mexican
pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican peso
exchange rates, Safety entered into forward contracts on April 10, 2003 to buy
Mexican pesos for periods and amounts consistent with the related, underlying
forecasted cash outflows. These contracts were designated as hedges at inception
and are being monitored for effectiveness on a routine basis. At September 30,
2003, Safety had outstanding forward exchange contracts that mature between
October 2003 and March 2004 to purchase Mexican pesos with an aggregate notional
amount of approximately $5.3 million. The fair values of these contracts at
September 30, 2003, totaled approximately $180,000, which is recorded as a
liability on the Company's balance sheet in other current liabilities.
Certain intercompany sales at Safety's Czech facility are denominated and
settled in Euros. To reduce exposure to fluctuation in the Euro and Czech Koruna
exchange rates, Safety entered into forward contracts on June 23, 2003 to buy
Czech Korunas for periods and amounts consistent with the related, underlying
forecasted cash inflows associated with the intercompany sales. These contracts
were designated as hedges at inception and are being monitored for effectiveness
on a routine basis. At September 27, 2003, Safety had outstanding forward
exchange contracts that mature between October 2003 and March 2004 to purchase
Czech Korunas with an aggregate notional amount of approximately $4.0 million.
The fair values of these contracts at June 28, 2003 totaled approximately
$147,000, which is recorded as a liability on the Company's balance sheet in
other current liabilities.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision of the Company's management,
including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Securities Exchange Act of 1934 (the
"Exchange Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of the period
covered by this report. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective to provide reasonable assurance that information we
are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
Notwithstanding the foregoing, there can be no assurance that the Company's
disclosure controls and procedures will detect or uncover all failures of
persons within the Company and its consolidated subsidiaries to disclose
material information otherwise required to be set forth in the Company's
periodic reports. There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide
reasonable, not absolute, assurance of achieving their control objectives.
No changes in internal control over financial reporting occurred during the
quarter ended September 30, 2003 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
38
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LITIGATION
A non-operating wholly-owned subsidiary of Zapata, Energy Industries, Inc. was
named as a defendant in three cases commenced in 1996 and 1997 pending in the
83rd Judicial District Court of Upton County, Texas involving the death of one
individual and personal injuries to two others. The cases resulted from an
explosion and fire at a gas processing plant in Upton County caused by the
alleged failure of a valve cover. Zapata was named as a defendant in one of the
cases. The owners of the plant filed a cross-claim against Energy Industries for
property damage and lost profits resulting from the explosion and fire.
Plaintiffs and the cross-plaintiff owners based their claim on a theory of
manufacturing or design defect of the valve cover. Plaintiffs sought
compensatory damages. In January 2002, the primary insurance carrier for Zapata
and Energy Industries claimed for the first time that it did not believe that
Energy Industries had primary insurance coverage for the losses arising out of
these incidents. The primary insurance carrier brought a declaratory judgment
action claiming it did not owe a duty of indemnification. Zapata brought its own
declaratory judgment action to establish that the primary insurance carrier owed
a duty of indemnification. In July 2003, the court granted summary judgment to
Zapata and Energy Industries' holding that the primary insurance carrier owed
both Zapata and Energy Industries a duty to defend and indemnify. The primary
insurance carrier did not appeal this decision and agreed to defend and
indemnify both Zapata and Energy Industries in the underlying actions. The
primary insurance carrier, together with the excess insurance carrier, have now
settled each of the underlying actions.
Zapata and Omega Protein were named as defendants in a lawsuit instituted on
March 10, 2003 in the District Court of Clark County, Nevada by Omega Protein
shareholder Robert Strougo. Plaintiff brought the action individually and as a
putative class action on behalf of all Omega Protein stockholders. No class
period has been identified. Also named as defendants in the lawsuit are Avram A.
Glazer, Chairman, President and CEO of Zapata and Darcie Glazer, a director of
Zapata, both of whom are also directors of Omega Protein, and all other Omega
Protein directors. Plaintiff claims that the individual defendants and Zapata
breached their fiduciary duties to Omega Protein's stockholders by not properly
considering a so-called offer sent via e-mail to Zapata by Hollingsworth,
Rothwell & Roxford, a Florida partnership. On July 30, 2003, the court granted
Zapata's motion to dismiss the Complaint and denied the Plaintiffs' cross-motion
for leave to amend. On October 20, 2003 an order of dismissal signed by Judge
Leavitt was filed in the district court for Clark County, Nevada dismissing its
claims against Zapata pursuant to NRCP 12(b)(5), for failure to state a claim
upon which relevancy may be granted and deny its countermotion to amend on the
basis of futility. The time for appeal has not yet run. The Company does not
know whether the plaintiff will appeal, but believes that the claims are without
merit and will defend against any appeal vigorously.
Omega Protein and each of its directors were named as defendants in a lawsuit
instituted on September 19, 2003 in the 280th District Court of Harris County,
Texas by purported stockholder Joseph Chaput. The lawsuit was served on Omega on
October 10, 2003. The plaintiff brought the action individually and as a
putative class action on behalf of all Company stockholders. No class period has
been identified and no monetary damages have been specified. The plaintiff
claims that Omega Protein directors and Omega breached their fiduciary duties to
Omega's stockholders by not properly considering a $9.50 per share offer (the
"Ferrari Acquisition Proposal") sent to Omega by Ferrari Investments, an
Argentine entity. The plaintiff seeks to direct the defendants to act in the
interests of Omega's stockholders, including negotiating in good faith with
Ferrari Investments, and seeks costs and attorneys' fees. Upon its receipt of
the Ferrari Acquisition Proposal, Omega had requested additional information
from Ferrari Investments in order to assist Omega's Board of Directors in
assessing the proposal, including financial statements, source of cash for the
transaction, biographical information on principals, compliance with the
Department of Homeland Security's requirements on U.S. citizenship for ownership
of fishing vessels in U.S. waters, and banking references. Ferrari Investments
never responded to Omega's request with any answers that could be independently
verified. As Omega disclosed in its September 5, 2003 press release, Omega was
unable to obtain any information that supported the credibility of the Ferrari
Acquisition Proposal. Omega's Board of Directors concluded that the Acquisition
Proposal did not represent a credible proposal. Omega believes that the claims
in the lawsuit are without merit and intends to vigorously defend the lawsuit.
39
Zapata is involved in litigation relating to claims arising out of its past and
current operations in the normal course of business. Zapata maintains insurance
coverage against such potential ordinary course claims in an amount in which it
believes to be adequate. While the results of any ultimate resolution cannot be
predicted, in the opinion of Zapata's management, based upon discussions with
counsel, any losses resulting from these matters will not have a material
adverse effect on Zapata's results of operations, cash flow or financial
position.
ENVIRONMENTAL MATTERS
The Company and its subsidiaries are subject to various possible claims and
lawsuits regarding environmental matters. Management believes that costs, if
any, related to these matters will not have a material adverse effect on the
results of operations, cash flows or financial position of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of CEO as required by Rule 13a-14(a), as adopted
Pursuant to Section 304 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO as required by Rule 13a-14(a), as adopted
Pursuant to Section 304 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of CEO Pursuant to 18 U.S.C Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of CFO Pursuant to 18 U.S.C Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K:
Zapata filed an 8-K on September 29, 2003 announcing the acquisition of
2,663,905 shares of common stock of Safety Components International,
Inc. (OTCBB: SAFY) in privately negotiated block purchases or $30.9
million, including brokerage commissions.
Zapata filed an 8-K/A on October 9, 2003 amending the 8-K filed on
September 29, 2003. The 8-K/A announced the acquisition of an
additional 1,498,489 shares of common stock of Safety Components
International, Inc. (OTCBB:SAFY) in privately negotiated block
purchases for $16.9 million, including brokerage commissions. This
additional purchase brought Zapata's total stock owned to 4,162,394, or
approximately 84% of Safety's common stock outstanding.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZAPATA CORPORATION
(REGISTRANT)
Dated: November 14, 2003 By: /s/ Leonard DiSalvo
-----------------------------
(Vice President-- Finance and
Chief Financial Officer)
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