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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
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 JUNE 30, 2004
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 August 2, 2004, the Registrant had outstanding 2,391,315 shares of common
stock, $0.01 par value.
ZAPATA CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2004 (unaudited)
and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2004 and 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2004 and 2003 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 30
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 30
Item 3. Defaults upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURES 32
EXHIBITS 33
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
ZAPATA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 72,349 $ 43,934
Short-term investments 508 29,351
Accounts receivable, net 56,655 58,011
Inventories, net 65,201 63,957
Prepaid expenses and other current assets 7,147 6,045
--------- --------
Total current assets 201,860 201,298
--------- --------
Investments and other assets:
Intangible assets, net 7,054 8,121
Other assets 25,523 23,925
--------- --------
Total investments and other assets 32,577 32,046
Property, plant and equipment, net 129,770 125,695
--------- --------
Total assets $ 364,207 $359,039
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 5,196 $ 5,780
Accounts payable 15,599 27,935
Accrued and other current liabilities 34,351 27,278
--------- --------
Total current liabilities 55,146 60,993
--------- --------
Long-term debt 31,263 29,422
Pension liabilities 8,012 7,687
Other liabilities and deferred taxes 12,661 9,698
Minority interest 75,240 68,702
--------- --------
Total liabilities 182,322 176,502
--------- --------
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
shares issued and 2,391,315 shares outstanding 31 31
Capital in excess of par value 160,897 163,490
Retained earnings 53,743 51,108
Treasury stock, at cost, 679,010 shares (31,668) (31,668)
Accumulated other comprehensive loss (1,118) (424)
--------- --------
Total stockholders' equity 181,885 182,537
--------- --------
Total liabilities and stockholders' equity $ 364,207 $359,039
========= ========
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ---------------------
2004 2003 2004 2003
---------- --------- --------- ---------
Revenues $ 92,314 $ 27,292 $ 186,601 $ 52,393
Cost of revenues 76,123 21,114 155,258 39,793
-------- --------- --------- ---------
Gross profit 16,191 6,178 31,343 12,600
Operating expense:
Selling, general and administrative 9,262 2,738 18,849 6,414
-------- --------- --------- ---------
Total operating expenses 9,262 2,738 18,849 6,414
-------- --------- --------- ---------
Operating income 6,929 3,440 12,494 6,186
-------- --------- --------- ---------
Other income (expense):
Interest (expense) income, net (325) 75 (638) 196
Other, net 49 (51) (227) (30)
-------- --------- --------- ---------
(276) 24 (865) 166
-------- --------- --------- ---------
Income before income taxes and minority
interest 6,653 3,464 11,629 6,352
-------- --------- --------- ---------
Provision for income taxes (4,280) (149) (6,611) (1,238)
Minority interest in net income of
consolidated subsidiaries (1,536) (951) (2,383) (2,000)
-------- --------- --------- ---------
Net income $ 837 $ 2,364 $ 2,635 $ 3,114
======== ========= ========= =========
Earnings per share:
Basic $ 0.35 $ 0.99 $ 1.10 $ 1.30
======== ========= ========= =========
Diluted $ 0.35 $ 0.98 $ 1.09 $ 1.30
======== ========= ========= =========
Weighted average common shares outstanding:
Basic 2,391 2,391 2,391 2,391
======== ========= ========= =========
Diluted 2,419 2,402 2,416 2,401
======== ========= ========= =========
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)
SIX MONTHS ENDED
JUNE 30,
2004 2003
---------- ---------
Cash flows from operating activities:
Net income $ 2,635 $ 3,114
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 12,246 5,967
Loss (gain) on disposal of assets 182 (77)
Provisions for losses on receivables 15 55
Tax benefit from stock option exercises 369 --
Minority interest in net income of consolidated subsidiaries 2,383 2,000
Deferred income taxes 2,745 2,396
Changes in assets and liabilities:
Accounts receivable 1,344 (4,467)
Inventories (1,244) (4,217)
Prepaid expenses and other current assets (214) 76
Accounts payable (12,311) 777
Pension liabilities 325 (22)
Accrued liabilities and other current liabilities 6,127 (1,582)
Other assets and liabilities (2,055) (287)
---------- ---------
Total adjustments 9,912 619
---------- ---------
Net cash provided by operating activities 12,547 3,733
---------- ---------
Cash flows from investing activities:
Proceeds from disposition of assets 62 83
Purchase of short-term investments (508) (56,644)
Proceeds of maturities of short-term investments 29,351 35,832
Proceeds of maturities of long-term investments -- 3,994
Capital expenditures (15,512) (7,269)
---------- ---------
Net cash provided by (used in) investing activities 13,393 (24,004)
---------- ---------
Cash flows from financing activities:
Proceeds from borrowings 3,410 --
Principal payments of short- and long-tem obligations (2,075) (624)
Proceeds from stock option exercises 1,169 574
---------- ---------
Net cash provided by (used in) financing activities 2,504 (50)
---------- ---------
Effect of exchange rate changes on cash and cash equivalents (29) --
---------- ---------
Net increase (decrease) in cash and cash equivalents 28,415 (20,321)
Cash and cash equivalents at beginning of period 43,934 80,643
---------- ---------
Cash and cash equivalents at end of period $ 72,349 $ 60,322
========== =========
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 unaudited condensed consolidated financial statements included herein have
been prepared by Zapata Corporation ("Zapata" or the "Company") 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 complete 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 2003 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 in their 2003 Annual Reports or Transition Reports on
Form 10-K. The results of operations for the three month and six month periods
ended June 30, 2004 are not necessarily indicative of the results for any
subsequent period or the entire fiscal year ending December 31, 2004.
BUSINESS DESCRIPTION
Zapata Corporation ("Zapata" or "the Company") was incorporated in Delaware in
1954 and was reincorporated in Nevada in April 1999. The Company's principal
executive offices are at 100 Meridian Centre, Suite 350, Rochester, New York
14618. Zapata's common stock is listed on the New York Stock Exchange ("NYSE")
and trades under the symbol "ZAP."
Zapata Corporation 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 June
30, 2004, Zapata had a 79% ownership interest in Safety and a 59% ownership
interest in Omega. In addition, Zapata owns 98% of Zap.Com Corporation
("Zap.Com"), a public shell company.
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."
Zap.Com is a public shell company which does not have any existing business
operations. From time to time, Zap.Com considers acquisitions that would result
in it becoming an operating company. Zap.Com may also consider developing a new
business suitable for its situation. Zap.Com trades on the over-the-counter
electronic bulletin board under the symbol "ZPCM."
6
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.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
Zapata and Omega each file a separate consolidated U.S. federal income tax
return. Zapata's consolidated U.S. federal income tax return includes
subsidiaries in which Zapata owns in excess of 80% of the voting interests. On
or about April 1, 2004, Zapata's stock ownership percentage of Safety Components
outstanding stock decreased below 80% due to stock option exercises by Safety
Component's employees. As a result of Zapata's ownership of Safety Components
outstanding stock falling below 80%, Zapata will not consolidate Safety
Components into Zapata's consolidated income tax returns for periods subsequent
to the first quarter of 2004. Zap.Com is included in Zapata's consolidated U.S.
federal income tax return.
The Company utilizes the liability method to account for income taxes. This
method requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of existing temporary differences between the
financial reporting and tax reporting basis of assets and liabilities, and
operating loss and tax credit carry-forwards for tax purposes. Valuation
allowances are recognized to reduce deferred tax assets to an amount that is
more likely than not to be realized. During the periods in which Safety
Components is included in Zapata's consolidated federal return, the assessment
of Safety's tax liabilities, deferred tax assets and liabilities, and valuation
allowance are calculated on a consolidated basis that includes Zapata's and
Zap.Com's activities and results of operations. With respect to Safety's foreign
operations, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards.
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 has adopted the
required disclosure provisions under Statement of Financial Accounting Standards
("SFAS") 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 income and earnings per
share (basic and diluted) would have been as follows:
7
THREE MONTHS ENDED
JUNE 30,
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Net income, as reported $ 837 $ 2,364
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax effects:
Zapata Corporate (33) (10)
Safety Components -- --
Omega Protein (89) (54)
Zap.Com -- --
------- -------
Total pro forma expense (122) (64)
------- -------
Pro forma net income $ 715 $ 2,300
======= =======
Earnings per share:
Basic - as reported $ 0.35 $ 0.99
======= =======
Basic - pro forma $ 0.30 $ 0.96
======= =======
Diluted - as reported $ 0.35 $ 0.98
======= =======
Diluted - pro forma $ 0.30 $ 0.96
======= =======
SIX MONTHS ENDED
JUNE 30,
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Net income, as reported $ 2,635 $ 3,114
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax effects:
Zapata Corporate (65) (23)
Safety Components -- --
Omega Protein (136) (169)
Zap.Com -- --
------- -------
Total pro forma expense (201) (192)
------- -------
Pro forma net income $ 2,434 $ 2,922
======= =======
Earnings per share:
Basic - as reported $ 1.10 $ 1.30
======= =======
Basic - pro forma $ 1.02 $ 1.22
======= =======
Diluted - as reported $ 1.09 $ 1.30
======= =======
Diluted - pro forma $ 1.01 $ 1.22
======= =======
8
NOTE 3. SHORT-TERM INVESTMENTS
Short-term investments are summarized as follows:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(IN THOUSANDS)
Federal National Mortgage Association Discount Note $ -- $21,024
Federal Home Loan Mortgage Corporation Discount Note -- 7,822
Commercial Paper 508 505
------- -------
$ 508 $29,351
======= =======
At June 30, 2004 and December 31, 2003, consolidated short-term investments
consisted exclusively of the short-term investments of Zapata Corporate.
Interest rates on these investments ranged from 0.99% and 0.99%--1.06% at June
30, 2004 and December 31, 2003, respectively.
NOTE 4. INVENTORIES
Inventories are summarized as follows:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(IN THOUSANDS)
SAFETY COMPONENTS:
Raw materials $ 5,619 $ 6,273
Work-in-process 7,173 7,089
Finished goods 10,518 10,190
------- -------
Total Safety Components inventory $23,310 $23,552
------- -------
OMEGA PROTEIN:
Fish meal $ 5,983 $21,963
Fish oil 3,301 7,666
Fish solubles 315 600
Unallocated inventory cost pool (including off-season cost) 27,400 5,348
Other materials and supplies 4,892 4,828
------- -------
Total Omega Protein inventory $41,891 $40,405
------- -------
Total consolidated inventory $65,201 $63,957
======= =======
NOTE 5. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities are summarized as follows:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(IN THOUSANDS)
Salary and benefits $ 8,760 $ 8,935
Insurance 6,949 5,258
Taxes, other than income tax 743 12
Trade creditors 2,848 2,135
Federal and state income taxes 9,216 5,462
Litigation reserves 1,414 1,414
Other 4,421 4,062
------- -------
$34,351 $27,278
======= =======
9
NOTE 6. DEBT
Long-term debt consisted of the following:
JUNE 30, 2004 DECEMBER 31, 2003
------------- -----------------
(IN THOUSANDS)
SAFETY COMPONENTS:
Congress revolving credit facility due on October 8, 2006, interest at
a variable rate of 4.0% at June 30, 2004 and December 31, 2003 $ 8,038 $ 4,628
Congress Term A loan, due on October 8, 2006, interest at a variable
rate of 4.0% at June 30, 2004 and December 31, 2003 3,774 4,176
KeyCorp equipment note due August, 2005, interest rate of 1.3%
over LIBOR 1,868 2,690
HBV Bank Czech Republic mortgage note due March, 2007, interest
rate of 1.7% over EURIBOR 2,858 3,509
Capital equipment notes payable, with various interest rates ranging
from 7.6% to 10.0%, maturing at various dates through March
2008 1,521 1,028
--------- ---------
Total Safety Components' debt 18,059 16,031
Less: current maturities (3,579) (4,214)
--------- ---------
$ 14,480 $ 11,817
========= =========
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 5.7%
to 7.6% $ 17,927 $ 18,658
Amounts due in installments through 2014, interest at Eurodollar
rates (1.6% at June 30, 2004 and December 31, 2003, plus 4.5%) 420 441
Other debt at 7.9% at June 30, 2004 and December 31, 2003 53 72
--------- ---------
Total Omega Protein's debt 18,400 19,171
Less: current maturities (1,617) (1,566)
--------- ---------
$ 16,783 $ 17,605
--------- ---------
Total consolidated long-term debt $ 31,263 $ 29,422
========= =========
As of June 30, 2004 and December 31, 2003, the estimated fair value of debt
obligations approximated book value.
SAFETY COMPONENTS
Safety has a credit facility with Congress Financial Corporation (Southern), a
subsidiary of Wachovia Bank, National Association ("Congress"). Safety has an
aggregate, $35.0 million revolving credit facility with Congress (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 June 30, 2004 was
$8.1 million. The Congress Revolver also includes a $5.0 million letter of
credit facility, which was unutilized at June 30, 2004.
In addition, Safety has a term facility with Congress (the "Congress Term A
loan") under which $3.7 million was borrowed at June 30, 2004. The Congress Term
A loan is payable in equal monthly installments of approximately $72,000, with
the unpaid principal amount due on October 8, 2006. Additional amounts are not
available for borrowing under the Congress Term A loan. In addition to the
Congress Revolver and the Congress Term A loan, Safety also has an additional
$4.5 million term loan (the "Congress Term B loan" and, collectively with the
Congress Revolver and the Congress Term A loan, the "Congress Facilities") which
is undrawn and under which $4.25 million is currently available. At June 30,
2004, Safety's availability for additional borrowings (based on the maximum
allowable limit) under the Congress Revolver and the Congress Term B loan was
approximately $26.9 million.
10
The interest rate on the Congress Revolver and Congress Term A loan is variable,
depending on the amount of Safety's Excess Availability (as defined in the
Congress Facilities) at any particular time and the ratio of Safety's EBITDA,
less certain capital expenditures made by Safety, to certain fixed charges of
Safety (the "Fixed Charge Coverage Ratio"). Safety may make borrowings based on
the prime rate as described in the Congress Facilities (the "Prime Rate") or the
LIBOR rate as described in the Congress Facilities, in each case with an
applicable margin applied to the rate. The Congress Term B loan bears interest
at the Prime Rate plus 3%. At June 30, 2004, the margin on Prime Rate loans was
0.0% and the margin on LIBOR rate loans was 1.75%. Safety is required to pay a
monthly unused line fee of 0.25% on the unutilized portion of the Congress
Revolver and a monthly fee equal to 1.75% per annum of the amount of any
outstanding letters of credit.
Under the Congress Revolver and Congress Term A loan, Safety is subject to a
covenant that requires it to maintain a certain tangible net worth. To the
extent that Safety has borrowings outstanding under the Congress Term B loan, it
is subject to additional financial covenants that require Safety: (i) to
maintain EBITDA of no less than certain specified amounts, (ii) to maintain a
Fixed Charge Coverage Ratio of no less than a specified amount, (iii) to
maintain a ratio of certain indebtedness to EBITDA not in excess of a specified
amount, and (iv) not to make capital expenditures in excess of specified
amounts. In addition, Safety would be required to repay the Congress Term B loan
to the extent of certain excess cash flow.
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 June 30, 2004, Safety was in
compliance with all financial and non-financial covenants. At June 30, 2004,
Safety was also in compliance with all non-financial covenants other than a
covenant requiring Safety to dissolve certain inactive subsidiaries. The
non-compliance under this covenant was waived by Congress. Substantially all
assets of Safety are pledged as collateral for the borrowings under the Congress
Facilities.
OMEGA PROTEIN
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 in the amount of $5.3 million. Omega closed on the $5.3 million Title XI
loan on December 30, 2003.
On December 20, 2000, Omega 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 certain
existing financial covenants and added certain affirmative covenants such as a
Leverage Ratio covenant not to exceed 3 to 1 at any time and a Fixed Charge
Coverage Ratio covenant not to be less than 1 as of the end of each month,
measured for the twelve-month period then ended. Omega is 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 million on any date or the
Credit Facility's availability averages less than $6 million for any calendar
month. Omega is in compliance with its financial covenants as of June 30, 2004.
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 million or greater, the commitment fee on the unused portion
shall be 25 basis points per annum. Applicable interest is payable at
alternative rates of LIBOR plus 2.25% or Prime plus 0%. The applicable interest
note will be adjusted (up or down) prospectively on a quarter basis 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, respectively. 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. As of
June 30, 2004 Omega had no borrowings outstanding under the Credit Facility. At
June 30, 2004 and December 31, 2003, Omega had outstanding letters of credit
totaling approximately $2.7 million and $2.6 million, respectively, issued
primarily in support of worker's compensation insurance programs.
11
NOTE 7. EARNINGS PER SHARE INFORMATION
The following reconciles amounts used in the computations of basic and diluted
income per common share (in thousands, except per share amounts):
FOR THE THREE MONTHS ENDED
JUNE 30,
2004 2003
------------------------- ------------------------
WEIGHTED PER WEIGHTED PER
AVERAGE SHARE AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ -------- ------ ------ -------- ------
Basic income per common
share $ 837 2,391 $ 0.35 $2,364 2,391 $ 0.99
====== ======
Effect of dilutive stock
options 28 11
----- -----
Diluted earnings per
common share $ 837 2,419 $ 0.35 $2,364 2,402 $ 0.98
===== ====== ===== ======
FOR THE SIX MONTHS ENDED
JUNE 30,
2004 2003
------------------------- ------------------------
WEIGHTED PER WEIGHTED PER
AVERAGE SHARE AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ -------- ------ ------ -------- ------
Basic income per common
share $2,635 2,391 $ 1.10 $3,114 2,391 $ 1.30
====== ======
Effect of dilutive stock
options 25 10
----- -----
Diluted earnings per
common share $2,635 2,416 $ 1.09 $3,114 2,401 $ 1.30
===== ====== ===== ======
The following table details the potential common shares excluded from the
calculation of diluted earnings per share because their exercise price was
greater than the average market price for the period (in thousands, except per
share amounts):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Potential common shares excluded from the
calculation of diluted earnings per share:
Stock options (in thousands) 2 119 2 119
Weighted average price per share $ 87.50 $ 46.84 $ 87.50 $ 46.84
NOTE 8. COMPREHENSIVE INCOME
The components of other comprehensive income are as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
------------------------ ------------------------
2004 2003 2004 2003
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
(IN THOUSANDS)
Net income $ 837 $ 2,364 $ 2,635 $ 3,114
Currency translation adjustment, net of tax effects 16 16 (573) 16
Unrealized gain (loss) on hedging transactions,
net of tax effects (13) -- (13) --
Reclassification adjustment for losses in net
income 5 -- 5 --
------- ------- ------- -------
$ 845 $ 2,380 $ 2,054 $ 3,130
======= ======= ======= =======
12
NOTE 9. COMMITMENTS AND CONTINGENCIES
LITIGATION
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
Zapata and its subsidiaries are subject to various possible claims and lawsuits
regarding environmental matters. Zapata's management believes that costs, if
any, related to these matters will not have a material adverse effect on the
consolidated results of operations, cash flows or financial position of the
Company.
CAPITAL COMMITMENTS
Omega Protein has committed approximately $18 million to build a new 100 metric
ton per day fish oil processing facility at its Reedville, Virginia location. As
of June 30, 2004, Omega has incurred $13.7 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 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. The following is
a description of arrangements in which the Company is the guarantor.
Zapata's articles of incorporation, bylaws and certain other agreements contain
indemnification clauses for its officers, directors and certain consultants for
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 that limits this 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 should not materially impact the Company's financial position, results of
operations or cash flows. Accordingly, no liabilities have been recorded for the
indemnification clauses in these agreements.
Throughout its history, the Company has entered into numerous transactions
relating to the sale, disposal or spin-off of past operations. Pursuant to
certain of these transactions, the Company may be obligated to indemnify other
parties to these agreements. These obligations include indemnifications for
losses incurred by such parties arising out of the operations of such businesses
prior to these transactions or the inaccuracy of representations of information
supplied by the Company in connection with such transactions. These
indemnification obligations were in effect prior to December 31, 2002 and are
therefore grandfathered under the provisions of FIN No. 45. Accordingly, no
liabilities have been recorded for the indemnification clauses in these
agreements.
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 each company's financial position,
results of operations or cash flows. No liabilities have been recorded for the
indemnification clauses in these agreements.
13
NOTE 10. RELATED PARTY TRANSACTIONS
SAFETY COMPONENTS
Zapata and Omega each file a separate consolidated U.S. federal income tax
return. Zapata's consolidated U.S. federal income tax return includes
subsidiaries in which Zapata owns in excess of 80% of the voting interests. On
or about April 1, 2004, Zapata's stock ownership percentage of Safety Components
outstanding stock decreased below 80% due to stock option exercises by Safety
Component's employees. As a result of Zapata's ownership of Safety Components
outstanding stock falling below 80%, Zapata will not consolidate Safety
Components into Zapata's consolidated income tax returns for periods subsequent
to the first quarter of 2004. Under a tax sharing and indemnity agreement
included as Exhibit 10(s) to the Company's Annual Report on Form 10-K, Safety
will be consolidated into Zapata's tax filing group for the fourth calendar
quarter of 2003 and the first calendar quarter of 2004.
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
approximately $4,000 for the three months ended June 30, 2004 and 2003 and
$10,000 for the six months ended June 30, 2004 and 2003 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.
Contributed capital of $4,000 and $3,000 for the three months ended June 30,
2004 and 2003, respectively, and $7,000 and $6,000 for the six months ended June
30, 2004 and 2003, respectively, was recorded 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.
The Company incurred legal fees of approximately $0 and $1,000 for the three
months ended June 30, 2004 and 2003, respectively, and $0 and $18,000 for the
six months ended June 30, 2004 and 2003, 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 11. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." It does not change the measurement
or recognition of pension and other postretirement benefit plans. It requires
additional disclosures to those in the original SFAS No. 132 about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit
pension plans and other defined benefit postretirement plans. It also requires
disclosure of the components of net periodic benefit cost in interim financial
statements. The revised disclosure requirements are required for financial
statements with fiscal years ending after December 15,
14
2003 and the interim-period requirements are effective for interim periods
beginning after December 15, 2003. The adoption of this statement did not have
an effect on the Company's financial position, results of operations or cash
flows.
NOTE 12. QUALIFIED DEFINED BENEFIT PLANS
Zapata and Omega Protein have separate and independent noncontributory defined
benefit pension plans covering certain U.S. employees. Additionally, Zapata has
a supplemental pension plan, which provides supplemental retirement payments to
certain former senior executives of Zapata.
The amounts shown below reflect the consolidated defined benefit pension plan
expense for Zapata and Omega Protein, including Zapata's supplemental pension
plan expense.
COMPONENTS OF NET PERIODIC BENEFIT COST
FOR THE THREE MONTHS FOR THE SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
------------------------ ------------------------
2004 2003 2004 2003
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
(IN THOUSANDS)
Service cost $ 10 $ 7 $ 19 $ 15
Interest cost 651 696 1,302 1,393
Expected return on plan assets (750) (639) (1,500) (1,278)
Amortization of transition assets and other
deferrals 335 440 671 880
------ ------ ------- -------
Net periodic benefit cost $ 246 $ 504 $ 492 $ 1,010
====== ====== ======= =======
Omega previously disclosed in its financial statements for the year ended
December 31, 2003 that it expected to contribute $939,000 to its pension plan in
2004. As of June 30, 2004, Omega has made no contributions to its pension plan
and anticipates no contributions in 2004 due to the enactment of the Pension
Funding Equity Act of 2004. Additionally, as of June 30, 2004, Zapata has made
no contributions to either of its plans and anticipates no contributions in
2004.
NOTE 13. DERIVATIVES AND HEDGING
Safety 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. 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 trading or 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 May 11, 2004 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 monitored for effectiveness on a routine basis. At June 30, 2004, Safety
had outstanding forward exchange contracts that mature between July 2004 and
December 2004 to purchase Mexican pesos with an aggregate notional amount of
approximately $1.7 million. The fair values of these contracts at June 30, 2004
totaled approximately $16,000 which is recorded as a liability on Safety's
balance sheet in other current liabilities. Changes in the derivatives' fair
values are deferred and recorded in the balance sheet as a component of
accumulated other comprehensive income ("AOCI"), until the underlying
transaction is recorded in earnings. When the hedged item affects earnings,
gains or losses are reclassified from AOCI to the consolidated statement of
operations as cost of goods sold. Safety reclassified approximately $6,000 of
previously recorded derivative fair values in AOCI into earnings as of June 30,
2004 as a credit to cost of goods sold.
NOTE 14. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
Since the acquisition of Safety Components in September 2003, all financial
results from Safety are reported as a separate segment. Safety's results of
operations have been included in the Company's consolidated amounts since the
15
third quarter of 2003. Accordingly, total assets include amounts attributable to
Safety as of June 30, 2004 and no such amounts are included as of June 30, 2003.
The following summarizes certain financial information of each segment for the
three months and six months ended June 30, 2004 and 2003:
INTEREST INCOME
OPERATING DEPRECIATION (EXPENSE) TAX
INCOME TOTAL AND INCOME, (PROVISION) CAPITAL
REVENUES (LOSS) ASSETS AMORTIZATION NET BENEFIT EXPENDITURES
-------- --------- ---------- ------------ --------- ----------- ------------
THREE MONTHS ENDED
JUNE 30, 2004
Safety Components $ 65,858 $ 5,404 $ 122,098 $ 3,141 $ (215) $ (1,566) $ 2,003
Omega Protein 26,456 2,975 190,734 2,999 (184) (914) 8,302
Zap.Com -- (48) 1,864 -- 5 -- --
Corporate -- (1,402) 49,511 9 69 (1,800) --
-------- --------- ---------- ------- ------ -------- --------
$ 92,314 $ 6,929 $ 364,207 $ 6,149 $ (325) $ (4,280) $ 10,305
======== ========= ========== ======= ====== ======== ========
THREE MONTHS ENDED
JUNE 30, 2003
Omega Protein $ 27,292 $ 3,895 $ 186,315 $ 2,964 $ (165) $ (1,299) $ 3,739
Zap.Com -- (33) 2,009 -- 6 -- --
Corporate -- (422) 102,650 25 234 1,150 4
-------- --------- ---------- ------- ------ -------- --------
$ 27,292 $ 3,440 $ 290,974 $ 2,989 $ 75 $ (149) $ 3,743
======== ========= ========== ======= ====== ======== ========
SIX MONTHS ENDED
JUNE 30, 2004
Safety Components $135,089 $ 11,136 $ 122,098 $ 6,185 $ (422) $ (3,919) $ 2,872
Omega Protein 51,512 4,187 190,734 6,038 (371) (1,237) 12,640
Zap.Com -- (90) 1,864 -- 9 -- --
Corporate -- (2,739) 49,511 23 146 (1,455) --
-------- --------- ---------- ------- ------ -------- --------
$186,601 $ 12,494 $ 364,207 $12,246 $ (638) $ (6,611) $ 15,512
======== ========= ========== ======= ====== ======== ========
SIX MONTHS ENDED
JUNE 30, 2003
Omega Protein $ 52,393 $ 8,121 $ 186,315 $ 5,927 $ (319) $ (2,745) $ 7,265
Zap.Com -- (63) 2,009 -- 11 -- --
Corporate -- (1,872) 102,650 40 504 1,507 4
-------- --------- ---------- ------- ------ -------- --------
$ 52,393 $ 6,186 $ 290,974 $ 5,967 $ 196 $ 1,238 $ 7,269
======== ========= ========== ======= ====== ======== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking statements in this Form 10-Q, future filings by the Company with
the Securities and Exchange Commission ("Commission"), the Company's press
releases and oral statements by authorized officers of the Company are intended
to be subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that all forward-looking statements
involve risks and uncertainty, including without limitation those identified
from time to time in press releases and other communications with stockholders
by the Company and the filings made with the Commission by the Company, Safety
Components International, Inc. ("Safety Components" or "Safety"), Omega Protein
Corporation ("Omega Protein" or "Omega") and Zap.Com Corporation ("Zap.Com"),
such as those disclosed under the caption "Significant Factors That Could Affect
Future Performance and Forward-Looking Statements" appearing in Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2003 filed with the Commission or elsewhere in this report. The
Company believes that forward-looking statements made by it are based on
reasonable expectations. However, no assurances can be given that actual results
will not differ materially from those contained in such forward-looking
statements. The 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.
16
GENERAL
Zapata Corporation ("Zapata" or "the Company") was incorporated in Delaware in
1954 and was reincorporated in Nevada in April 1999. The Company's principal
executive offices are at 100 Meridian Centre, Suite 350, Rochester, New York
14618. Zapata's common stock is listed on the New York Stock Exchange ("NYSE")
and trades under the symbol "ZAP."
Zapata is a holding company which currently has two operating companies, Safety
Components and Omega Protein. As of June 30, 2004, the Company had a 79%
ownership interest in Safety Components and a 59% 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, which
is a public shell company and trades on the over-the-counter electronic bulletin
board under the symbol "ZPCM."
ZAPATA CORPORATE
On September 23, 2003, Zapata purchased 2,663,905 shares of Safety common stock
in privately negotiated transactions for $30.9 million. 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% at that time. All purchases of
Safety's common stock were funded from Zapata's cash and cash equivalents. The
Company accounted for these transactions under the purchase method and began
consolidating amounts related to Safety's assets and liabilities as of September
30, 2003 and results of operations in the fourth quarter of 2003.
After Zapata acquired more than 80% of its outstanding common stock, Safety
Components and its affiliated group of corporations became members of Zapata's
affiliated tax group. On March 19, 2004, Zapata and Safety Components entered
into a Tax Sharing and Indemnity Agreement to define their respective rights and
obligations relating to federal, state and other taxes for taxable periods
attributable to the filing of consolidated or combined income tax returns as
part of the Zapata affiliated tax group. Pursuant to the Tax Sharing and
Indemnity Agreement, Safety Components is required to pay Zapata its share of
federal income taxes, if any, for those periods. In addition, each party is
required to reimburse the other party for its use of either party's tax
attributes for those periods. Similar provisions apply under the Tax Sharing and
Indemnity Agreement to other taxes, such as state and local income taxes.
On or about April 1, 2004, Zapata's stock ownership percentage of Safety
Components outstanding stock decreased below 80% due to stock option exercises
by Safety Component's employees. As a result of Zapata's ownership of Safety
Components outstanding stock falling below 80%, Zapata will not consolidate
Safety Components into Zapata's consolidated income tax returns for periods
subsequent to the first quarter of 2004. Due to this deconsolidation, Zapata
Corporate began recording deferred taxes to reflect the impact of the basis
difference between "book" and "tax" resulting from the consolidation of Safety
Components for book purposes and the deconsolidation for tax purposes. Zapata
Corporate will continue to record deferred taxes for this basis difference as
long as Safety is consolidated for book purposes and deconsolidated for tax
purposes.
The Internal Revenue Code generally prohibits the reconsolidation of companies
for a period of 60 months. Therefore, if Zapata's stock ownership percentage in
Safety Components increases to 80% or more, there can be no assurance that
Safety would be reconsolidated into Zapata's tax filing group before the 61st
month after the first taxable year in which it ceased to be a member of such
group.
Zapata continues to explore ways to enhance Zapata stockholder value through its
59% 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.
Zapata's Board of Directors has authorized Zapata to purchase up to 500,000
shares of its outstanding common stock in the open market or privately
negotiated transactions. 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. As of the date of this report, no shares have been repurchased under this
program.
17
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. 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.
As the automotive airbag industry has evolved, module integrators have
outsourced significant portions of non-proprietary components, such as cushions,
to companies like Safety Components specializing in the production of individual
components. Safety believes that its module integrator customers will continue
to outsource a portion of their cushion requirements as they focus on the
development of proprietary technologies. Safety also believes that a majority of
the module integrators purchase fabric from airbag fabric producers such as
Safety. Like the automotive supply industry generally, Safety continues to
experience significant competitive pressure. For example, Safety supplies airbag
cushions and/or airbag fabric to its three most significant customers based upon
releases from formal purchase orders, which typically cover periods of up to
twelve months and are subject to periodic negotiation with respect to price and
quantity. Safety expects that its customers, including these significant
customers, will continue to seek to negotiate lower prices for its products.
Although Safety believes that it has good working relationships with its
customers due to its high volume and low-cost manufacturing capabilities and
consistency of quality products and service, it cannot give assurances that
purchases by its module integrator customers will continue at their current
levels.
During the second quarter of 2004 one of Safety's largest raw materials
suppliers implemented a price increase of approximately 11% on raw material yarn
purchased for Safety's airbag fabric weaving facility. Safety's management has
estimated the impact on the cost of raw material purchases to be approximately
$2.1 million for the remaining six months of 2004. Safety is currently in
negotiations with its airbag cushion customers in North America to pass along
this increase. The outcome of such negotiations is unknown at this time.
OMEGA PROTEIN
Omega Protein is the largest U.S. producer of protein-rich meal and oil derived
from marine sources. Omega's products are produced from menhaden (a herring-like
fish found in commercial quantities), and include FAQ 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 used as nutritional feed additives
by animal feed manufacturers and by commercial livestock producers. Omega's
crude fish oil is sold to food producers and feed manufacturers and its refined
fish oil products are used in food production and certain industrial
applications. Fish solubles are sold as protein additives for animal feed and as
fertilizers.
The fish catch is processed into FAQ grade fish meal, specialty fish meals, fish
oils and fish solubles at Omega's four operating plants located in Virginia,
Mississippi and Louisiana. Omega utilized 38 fishing vessels, 2 carry vessels
and 34 spotter craft in the harvesting operations during 2003. For its 2004
season, Omega added one additional fishing vessel to its operations. Menhaden
are harvested offshore the U.S. mid-Atlantic and Gulf of Mexico coasts. In 2000,
Omega converted several of its fishing vessels to "carry vessels" that do not
engage in active fishing but instead carry fish from Omega's offshore fishing
vessels to its plants. Utilization of carry vessels increases the amount of time
that certain of Omega's fishing vessels remain offshore fishing productive
waters and therefore increases Omega's fish catch per vessel employed. The carry
vessels have reduced crews and crew expenses and incur less maintenance cost
than the actual fishing vessels.
18
Omega's harvesting season generally extends from May through December on the
mid-Atlantic coast and from April through October on the Gulf coast. During the
off-season and the first few months of each fishing season, Omega fills purchase
orders from the inventory it has accumulated during the previous fishing season.
Prices for Omega's products tend to be lower during the fishing season when
product is more abundant than in the off-season. Throughout the entire year,
prices are significantly influenced by supply and demand in world markets for
competing products, particularly other globally produced fish meal and fish oil
as well as other animal proteins and soybean meal for its fish meal products and
vegetable fats and oils for its fish oil products when used as an alternative to
vegetable fats and oils.
Pricing for Omega's products has been volatile in the past several years and is
attributable mainly to the international availability, or the perceived
international availability, of fish meal and fish oil inventories. In an effort
to reduce price volatility and to generate higher, more consistent profit
margins, in fiscal 2000 Omega embarked on a quality control program designed to
increase its capability of producing higher quality fish meal products and, in
conjunction therewith, enhanced it sales efforts to penetrate premium product
markets. Since 2000, Omega's sales volumes of specialty meal products have
increased approximately 17.5%. Future volumetric growth in specialty meal sales
will be dependant upon increased harvesting efforts and market demand.
Additionally, Omega is attempting to introduce its refined fish oil into the
food market. Omega has made sales, which to date have not been material, of its
refined fish oil, trademarked OmegaPure(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, however, the size of the actual domestic or international
markets for Omega Pure(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 and engaged a full-time
consultant to implement Omega's business plan which focused initially on the
purchase and resale of Mexican fish meal and fish oil. In 2002, revenues
generated from these types of transactions represented less than 1% of total
Company revenues. During 2003, Omega's fish catch and resultant product
inventories were reduced, primarily due to adverse weather conditions. Omega
supplemented its inventories and subsequent sales by purchasing other fish meal
products (primarily Panamanian fish meal, Mexican fish meal and oil and U.S.
menhaden oil). Although operating margins from these activities are less than
the margins typically generated from Omega's base domestic production, these
operations provide Omega with a source of fish meal and oil to sell into other
markets where Omega has not historically had a presence. Omega purchased
products totaling approximately 5,400 and 12,500 tons, or approximately 5% of
total volume sales for the six months ending June 30, 2004 and the fiscal year
ended December 31, 2003, respectively.
During 2003, Omega experienced a poor fish catch (approximately 11% below
expectations and a similar reduction from 2002), combined with poor oil yields.
The reduced fish catch was primarily attributable to adverse weather conditions
and the poor oil yields due to the reduced fat content of the fish. As a result
of the poor fish catch and reduced yields, Omega experienced significantly
higher per unit product costs (approximately 15% increase) during 2003 compared
to 2002. The impact of higher cost inventories and fewer volumes available for
sale has been carried forward and has adversely affected Omega's earnings
through the first and second quarters of 2004.
Historically, approximately 35% to 40% of Omega's FAQ grade fish meal was sold
on a two-to-twelve-month forward contract basis. The balance of FAQ grade fish
meal and other products was substantially sold on a spot basis through purchase
orders. In 2002, Omega began a similar forward sales program for its specialty
grade meals and crude fish oil due to increasing demand for these products.
During 2003 and 2004, approximately 50% of Omega's specialty meals and crude
fish oil had been sold on a forward contract basis. Omega's annual revenues are
highly dependent on both annual fish catch and inventories and, in addition,
inventory is generally carried over from one year to the next year. Omega
determines the level of inventory to be carried over based on prevailing market
prices of the products, and sales volumes that will fluctuate from quarter to
quarter and year to year. Omega's fish meal products have a useable life of
approximately one year from date of production; however, Omega typically
attempts to empty its warehouses of the previous season's meal 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:
19
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------ ------------------------------------
2004 2003 2004 2003
----------------- ----------------- ----------------- -----------------
REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT
-------- ------- -------- ------- -------- ------- -------- -------
Regular Grade $ 5.4 20.5% $ 5.3 19.4% $ 9.7 18.8% $ 8.8 16.8%
Special Select 11.1 42.0 9.9 36.3 20.5 39.8 19.5 37.2
Sea-Lac 4.3 16.3 4.7 17.2 8.2 15.9 8.1 15.5
Crude Oil 3.6 13.6 5.8 21.2 9.6 18.7 13.0 24.8
Refined Oil 1.4 5.3 1.0 3.7 2.4 4.7 1.8 3.4
Fish Solubles 0.6 2.3 0.6 2.2 1.1 2.1 1.2 2.3
----- ----- ----- ----- ----- ----- ----- -----
Total $26.4 100.0% $27.3 100.0% 51.5 100.0% 52.4 100.0%
===== ===== ===== ===== ===== ===== ===== =====
The marine protein and oil business is subject to significant competition from
producers of vegetable and other animal protein products and oil products such
as Archer Daniels Midland and Cargill. In addition, Omega competes with smaller
domestic privately-owned menhaden fishing companies and international marine
protein and oil producers, including Scandinavian herring processors and South
American anchovy and sardine processors. Many of these competitors have greater
financial resources and more extensive operations than Omega. Omega competes on
price, quality and performance characteristics of its products, such as protein
level and amino acid profile in the case of fish meal. The principal competition
for Omega's fish meal and fish solubles is from other global production of
marine proteins as well as other protein sources such as soybean meal and other
vegetable or animal protein products. Omega believes, however, that these other
non-marine sources are not complete substitutes because fish meal offers
nutritional values not contained in such other sources. Other globally produced
fish oils provide the primary market competition for Omega's fish oil, as well
as soybean and palm oil, from time to time.
Fish meal prices have historically borne a relationship to prevailing soybean
meal prices, while prices for fish oil are generally influenced by prices for
vegetable fats and oils, such as soybean and palm oils. Thus, the prices for
Omega's products are established by worldwide supply and demand relationships
over which Omega has no control and tend to fluctuate significantly over the
course of a year, and from year to year.
Omega 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 $18 million. Omega currently
anticipates that it will fund the project through its available cash balances.
As of June 30, 2004, Omega has incurred $13.7 million related to its Reedville
processing facility.
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, intra-state and federal 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,
although it is possible that it may do so in the future.
Omega from time to time considers potential transactions including, but not
limited to, enhancement of physical facilities to improve production
capabilities and the acquisition of other businesses. Certain of the potential
transactions reviewed by Omega would, if completed, result in its entering new
lines of business (generally including certain businesses to which Omega sells
its products such as pet food manufacturers, aquaculture feed manufacturers,
fertilizer companies and organic foods distributors) although historically,
reviewed opportunities have been generally related in some manner to Omega's
existing operations. Although Omega does not, as of the date hereof, have any
commitment with respect to a material acquisition, 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 in recent years and is likely to continue to
increase Omega's cost of insurance. In response, Omega has elected to increase
its deductibles and self-retentions in order to achieve lower insurance premium
costs. These higher deductibles and self-retentions will expose Omega to greater
risk of loss if claims occur.
SEASONAL AND QUARTERLY RESULTS. Omega's menhaden harvesting and processing
business is seasonal in nature. Omega generally has higher sales during the
menhaden harvesting season (which includes the second and third
20
quarter of each year) due to increased product availability. Prices during the
fishing season tend to be lower than during the off-season. As a result, Omega's
quarterly operating results have fluctuated in the past and may fluctuate in the
future. In addition, from time to time Omega defers sales of inventory based on
worldwide prices for competing products that affect prices for Omega's products
which may affect comparable period comparisons.
ZAP.COM
Zap.Com is a public shell company which does not have any existing business
operations. From time to time, Zap.Com considers acquisitions that would result
in it becoming an operating company. Zap.Com may also consider developing a new
business suitable for its situation.
CONSOLIDATED RESULTS OF OPERATIONS
The following tables summarize Zapata's consolidating results of operations (in
thousands):
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1)(2) PROTEIN ZAP.COM CONSOLIDATED
--------- --------------- --------- --------- ------------
THREE MONTHS ENDED JUNE 30, 2004
Revenues $ -- $ 65,858 $ 26,456 $ -- $ 92,314
Cost of revenues -- 55,060 21,063 -- 76,123
-------- -------- -------- -------- --------
Gross profit -- 10,798 5,393 -- 16,191
Operating expense:
Selling, general and administrative 1,402 5,394 2,418 48 9,262
-------- -------- -------- -------- --------
Operating (loss) income (1,402) 5,404 2,975 (48) 6,929
-------- -------- -------- -------- --------
Other income (expense)
Interest income (expense), net 69 (215) (184) 5 (325)
Other, net -- 99 (50) -- 49
-------- -------- -------- -------- --------
(Loss) income before income taxes and (1,333) 5,288 2,741 (43) 6,653
minority interest
Benefit (provision) for income taxes (1,800) (1,566) (914) -- (4,280)
Minority interest in net income (loss) of
consolidated subsidiaries(3) -- (794) (743) 1 (1,536)
-------- -------- -------- -------- --------
Net (loss) income to common stockholders $ (3,133) $ 2,928 $ 1,084 $ (42) $ 837
======== ======== ======== ======== ========
Diluted earnings per share $ 0.35
========
21
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1)(2) PROTEIN ZAP.COM CONSOLIDATED
--------- --------------- --------- --------- ------------
THREE MONTHS ENDED JUNE 30, 2003
Revenues $ -- $ -- $ 27,292 $ -- $ 27,292
Cost of revenues -- -- 21,114 -- 21,114
-------- -------- -------- -------- --------
Gross profit -- -- 6,178 -- 6,178
Operating expense:
Selling, general and administrative 422 -- 2,283 33 2,738
-------- -------- -------- -------- --------
Operating (loss) income (422) -- 3,895 (33) 3,440
-------- -------- -------- -------- --------
Other income (expense)
Interest income (expense), net 234 -- (165) 6 75
Other, net -- -- (51) -- (51)
-------- -------- -------- -------- --------
(Loss) income before income taxes and (188) -- 3,679 (27) 3,464
minority interest
Benefit (provision) for income taxes 1,150 -- (1,299) -- (149)
Minority interest in net income (loss) of
consolidated subsidiaries(3) -- (952) 1 (951)
-------- -------- -------- -------- --------
Net (loss) income to common stockholders $ 962 $ -- $ 1,428 $ (26) $ 2,364
======== ======== ======== ======== ========
Diluted earnings per share $ 0.98
========
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1)(2) PROTEIN ZAP.COM CONSOLIDATED
--------- --------------- --------- --------- ------------
SIX MONTHS ENDED JUNE 30, 2004
Revenues $ -- $ 135,089 $ 51,512 $ -- $ 186,601
Cost of revenues -- 112,813 42,445 -- 155,258
-------- --------- -------- -------- ---------
Gross profit -- 22,276 9,067 -- 31,343
Operating expense:
Selling, general and administrative 2,739 11,140 4,880 90 18,849
-------- --------- -------- -------- ---------
Operating (loss) income (2,739) 11,136 4,187 (90) 12,494
-------- --------- -------- -------- ---------
Other income (expense)
Interest income (expense), net 146 (422) (371) 9 (638)
Other, net -- (121) (106) -- (227)
-------- --------- -------- -------- ---------
(Loss) income before income taxes and (2,593) 10,593 3,710 (81) 11,629
minority interest
Benefit (provision) for income taxes (1,455) (3,919) (1,237) -- (6,611)
Minority interest in net income (loss) of
consolidated subsidiaries(3) -- (1,380) (1,005) 2 (2,383)
-------- --------- -------- -------- ---------
Net (loss) income to common stockholders $ (4,048) $ 5,294 $ 1,468 $ (79) $ 2,635
======== ========= ======== ======== =========
Diluted earnings per share $ 1.09
=========
22
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1)(2) PROTEIN ZAP.COM CONSOLIDATED
--------- --------------- --------- --------- ------------
SIX MONTHS ENDED JUNE 30, 2003
Revenues $ -- $ -- $ 52,393 $ -- $ 52,393
Cost of revenues -- -- 39,793 -- 39,793
-------- -------- -------- -------- --------
Gross profit -- -- 12,600 -- 12,600
Operating expense:
Selling, general and administrative 1,872 -- 4,479 63 6,414
-------- -------- -------- -------- --------
Operating (loss) income (1,872) -- 8,121 (63) 6,186
-------- -------- -------- -------- --------
Other income (expense)
Interest income (expense), net 504 -- (319) 11 196
Other, net -- -- (30) -- (30)
-------- -------- -------- -------- --------
(Loss) income before income taxes and (1,368) -- 7,772 (52) 6,352
minority interest
Benefit (provision) for income taxes 1,507 -- (2,745) -- (1,238)
Minority interest in net income (loss) of
consolidated subsidiaries(3) -- (2,001) 1 (2,000)
-------- -------- -------- -------- --------
Net (loss) income to common stockholders $ 139 $ -- $ 3,026 $ (51) $ 3,114
======== ======== ======== ======== ========
Diluted earnings per share $ 1.30
========
(1) Safety's results of operations have been included in Zapata's consolidated
results of operations for the three months and six months ended June 30, 2004.
The acquisition of Safety occurred subsequent to the second quarter of 2003.
Accordingly, no amounts were included in the three months and six months ended
June 30, 2003.
(2) At the time of the Safety acquisition, Zapata had the choice of whether to
apply push-down basis of accounting, and elected not to do so. Accordingly, all
of the purchase accounting adjustments have been maintained on Zapata's books
and records and are reflected in the "Safety Components" segment.
(3) Minority interest represents the minority stockholders' interest in the net
income (loss) of each segment.
For more information concerning segments, see Note 14 to the Company's
Consolidated Financial Statements included in Item 1 of this Report.
THREE MONTHS ENDED JUNE 30, 2004 AND 2003
Zapata reported consolidated net income of $837,000 or $.35 per diluted share on
consolidated revenues of $92.3 million for the three months ended June 30, 2004
as compared to consolidated net income of $2.4 million or $0.98 per diluted
share on consolidated revenues of $27.3 million for the three months ended June
30, 2003. The increase in consolidated revenues was the result of the Company's
acquisition of the majority of the outstanding common stock of Safety
Components. As a result of this acquisition, the Company began consolidating
amounts related to Safety's operations during the fourth quarter of 2003. On a
consolidated basis, net income decreased primarily due to an increase in
provision for income taxes at Zapata Corporate, which was partially offset by
Safety's net income for the quarter.
The following is a more detailed discussion of Zapata's consolidated operating
results for the quarter:
REVENUES. Consolidated revenues increased $65.0 million from $27.3 million for
the three months ended June 30, 2003 to $92.3 million for the three months ended
June 30, 2004. This increase was attributable to the consolidation of Safety's
revenues of $65.9 million for the current period. Omega's revenues for the three
months ended June 30, 2004 were $26.5 million, a decrease of $836,000 or 3% from
the comparable period of the prior year. While prices for Omega's fish meal and
fish oil increased 4% and 7%, respectively, Omega experienced a 28% lower sales
23
volume for fish oil. The lower fish oil volumes were primarily attributable to
reduced fish catch and production in the prior fiscal year.
COST OF REVENUES. Zapata's consolidated cost of revenues for the three months
ended June 30, 2004 was $76.1 million, a $55.0 million increase from $21.1
million for the comparable period of the prior year. This increase was
attributable to the consolidation of Safety's cost of revenues of $55.1 million
for the quarter ended June 30, 2004. Omega's cost of revenues remained at $21.1
million for the three months ended June 30, 2004 as compared to June 30, 2003,
however Omega's cost of revenues as a percentage of revenues increased 2% to 80%
for the quarter ended June 30, 2004 as compared to the corresponding period in
2003. Omega's increase in cost of sales as a percentage of revenues was
primarily due to higher fiscal 2003 inventory costs carried forward into 2004.
Omega's 2003 higher cost inventories resulted from the late season reduced fish
catch, brought about by adverse weather conditions along the Atlantic Coast and
Gulf of Mexico, combined with lower oil yields for Gulf of Mexico fish.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated selling, general, and
administrative expenses increased $6.5 million from $2.7 million for the three
months ended June 30, 2003 to $9.3 million for the three months ended June 30,
2004. This increase was primarily attributable to the consolidation of $5.4
million of selling, general and administrative costs related to Safety for the
current quarter. In addition, selling, general, and administrative expenses at
Zapata Corporate increased $981,000 from $422,000 in the quarter ended June 30,
2003 to $1.4 million for the current quarter ended June 30, 2004. In 2003,
Zapata Corporate experienced a one-time $800,000 reduction of a legal reserve
resulting from a favorable development in a legal action pending against a
non-operating wholly-owned subsidiary of Zapata, combined with a reduction in a
reserve for benefits for former employees of non-operating wholly-owned
subsidiaries of Zapata which decreased selling general and administrative costs
in comparison to 2004.
INTEREST INCOME, NET. Net interest income decreased $400,000 from interest
income of $75,000 for the three months ended June 30, 2003 to net interest
expense of $325,000 for the three months ended June 30, 2004. This decrease was
primarily attributable to the consolidation of Safety's net interest expense of
$215,000 for the quarter ended June 30, 2004. Interest income at Zapata
Corporate decreased for the period as compared to the comparable period of the
prior year as result of lower principal balance of cash and cash equivalents
after spending $47.8 million in 2003 to purchase a majority interest in Safety
Components. In addition, Omega recognized additional interest expense due to
additional Title XI loans in effect during the current quarter ended June 30,
2004.
INCOME TAXES. The Company recorded a consolidated provision for income taxes of
$4.3 million for the three months ended June 30, 2004 as compared to a provision
of $149,000 for the comparable period of the prior year. The consolidated
provision for the three months ended June 30, 2004 was primarily the result of
Safety's provision of $1.6 million resulting from the generation of operating
income. In addition, due to the deconsolidation of Safety Components from the
Zapata Corporation tax filing group effective April 1, 2004, Zapata Corporate
was required to record a provision of approximately $1.9 million. This provision
was recorded to reflect a deferred tax liability associated with the basis
differences resulting from the consolidation of Safety Components for book
purposes and the deconsolidation for tax purposes. Omega recognized a provision
of $914,000 and $1.3 million for the three months ended June 30, 2004 and 2003,
respectively, resulting primarily for the generation of operating income.
The Company's effective tax rate for the three months ended June 30, 2004 was
64% compared to 4% for the three months ended June 30, 2003. The higher
effective rate for the three months ended June 30, 2004 was primarily the result
of Zapata Corporate's current quarter recognition of a $1.9 million dollar
provision to reflect deferred tax liabilities associated with the
deconsolidation of Safety as discussed above. The lower consolidated effective
tax rate generated during the comparable period of the prior year was primarily
the result of Zapata Corporate's recognition of a net income tax receivable for
$1.2 million resulting from the completion of an IRS audit.
For all periods in which any of the Company's subsidiaries are consolidated for
book purposes and not consolidated for tax purposes, Zapata will recognize a
provision or benefit to reflect the increase or decrease in the difference
between the Company's book and tax basis in each subsidiary. The provision or
benefit will be equal to the sum of the Company's tax effected proportionate
share of each subsidiary's net income or loss. Accordingly, the Company's
effective tax rate for each period can vary significantly depending on the
changes in the underlying difference between the Company's book and tax basis
in the subsidiaries.
24
MINORITY INTEREST. Minority interest from the consolidated statements of
operations represents the minority stockholders' interest in the net income or
net loss of the Company's subsidiaries (approximately 21% of Safety Components,
approximately 41% of Omega Protein and approximately 2% of Zap.Com). Increases
or decreases in Zapata's ownership of its subsidiary's common stock will result
in corresponding decreases or increases in the minority stockholders' interest
in the net income or loss of Zapata's subsidiaries. For example, should Zapata's
ownership percentage of Safety Components continue to decline due to stock
option exercises of its employees, minority interest would increase and Zapata
would consolidate less of Safety's net income or loss recognized during future
periods. For the three months ended June 30, 2004, minority interest was a $1.5
million reduction to net income for the minority interest's share in the net
incomes of Safety Components and Omega Protein, partially offset by the minority
interest's share in the net loss of Zap.Com.
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Zapata reported consolidated net income of $2.6 million or $1.09 per diluted
share on consolidated revenues of $186.6 million for the six months ended June
30, 2004 as compared to consolidated net income of $3.1 million or $1.30 per
diluted share on consolidated revenues of $52.4 million for the six months ended
June 30, 2003. The increase in consolidated revenues was the result of
consolidating Safety's results of operations for the period. The decrease in
consolidated net income resulted from the tax effects of Safety's
deconsolidation for tax purposes, a decrease in net income contributed by Omega
Protein, and the prior year recognition of a tax benefit resulting from the
completion of an IRS audit, all of which were largely offset by the
consolidation of Safety's operating results.
The following is a more detailed discussion of Zapata's consolidated operating
results for the six month period:
REVENUES. Consolidated revenues increased $134.2 million from $52.4 million for
the six months ended June 30, 2003 to $186.6 million for the six months ended
June 30, 2004. This increase was attributable to the consolidation of Safety's
revenues of $135.1 million for the period. Omega's revenues for the six months
ended June 30, 2004 were $51.5 million, a decrease of $881,000 or 2% from the
comparable period of the prior year. While prices for Omega's fish meal and fish
oil increased 4% and 6%, respectively, Omega experienced a 13% and 23% lower
sales volume for fish meal and oil, respectively. The lower fish meal and oil
volumes were primarily attributable to reduced fish catch and production in the
prior fiscal year.
COST OF REVENUES. Zapata's consolidated cost of revenues for the six months
ended June 30, 2004 was $155.3 million, a $115.5 million increase from $39.8
million for the comparable period of the prior year. This increase was primarily
attributable to the consolidation of Safety's cost of revenues of $112.8 million
for the six months ended June 30, 2004. In addition, Omega's cost of revenues
was $42.4 million, a 7% increase from $39.8 million for the six months ended
June 30, 2003. Omega's cost of sales as a percentage of revenues increased 6% to
82% for the six months ended June 30, 2004 as compared to the six months ended
June 30, 2003. The increase in cost of sales as a percentage of revenues was
primarily due to higher fiscal 2003 inventory costs carried forward into 2004.
The 2003 higher cost inventories were the result of late season 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.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated selling, general, and
administrative expenses increased $12.4 million from $6.4 million for the six
months ended June 30, 2003 to $18.8 million for the six months ended June 30,
2004. This increase was primarily attributable to the consolidation of $11.1
million of selling, general and administrative costs related to Safety for the
current period. Zapata Corporate's selling, general and administrative costs
increased $867,000 in the six months ended June 30, 2004 as compared to the
similar period in the prior year. In 2003, Zapata Corporate experienced a
one-time $800,000 reduction of a legal reserve resulting from a favorable
development in a legal action pending against a non-operating wholly-owned
subsidiary of Zapata, combined with a reduction in a reserve for benefits for
former employees of non-operating wholly-owned subsidiaries of Zapata which
decreased selling general and administrative costs in comparison to 2004. In
addition, Omega's selling, general, and administrative expenses increased
$401,000 from $4.5 million for the six months ended June 30, 2003 as compared to
$4.9 million for the comparable period of the current year. This increase was
attributable primarily to increased consulting expenditures related to Omega's
governmental relations program and its marketing efforts.
INTEREST INCOME, NET. Interest income decreased $834,000 from net interest
income of $196,000 for the six months ended June 30, 2003 to net interest
expense of $638,000 for the six months ended June 30, 2004. This decrease was
primarily attributable to the acquisition of Safety Components and the
consolidation of Safety's net interest expense of
25
$422,000 for the six months ended June 30, 2004, as well as decreased interest
income at Zapata Corporate resulting from lower interest rates on cash, cash
equivalents and short-term investments as well as a lower principal balance of
cash and cash equivalents after spending $47.8 million in 2003 to purchase a
majority interest in Safety Components. In addition, Omega recognized additional
interest expense during the six months ended June 30, 2004 as compared to the
six months ended June 30, 2003 due to additional Title XI loans secured and in
effect during the current period.
INCOME TAXES. The Company recorded a consolidated provision for income taxes of
$6.6 million for the six months ended June 30, 2004 as compared to a provision
of $1.2 million for the comparable period of the prior year. The consolidated
provision for the six months ended June, 2004 was primarily the result of
Safety's provision of $3.9 million resulting from the generation of operating
income. In addition, due to the deconsolidation of Safety Components from the
Zapata Corporation tax filing group effective April 1, 2004, Zapata Corporate
was required to record a provision of approximately $1.9 million in the second
quarter of 2004. This provision was recorded to reflect a deferred tax liability
associated with the basis differences resulting from the consolidation of Safety
Components for book purposes and the deconsolidation for tax purposes. Omega
recognized a provision of $1.2 million and $2.7 million for the six months ended
June 30, 2004 and 2003, respectively, resulting primarily for the generation of
operating income.
The Company's effective tax rate for the six months ended June 30, 2004 was 57%
compared to 19% for the six months ended June 30, 2003. The higher effective
rate for the six months ended June 30, 2004 was primarily the result of Zapata
Corporate's current quarter recognition of a $1.9 million dollar provision to
reflect deferred tax liabilities associated with the deconsolidation of Safety
as discussed above. The lower consolidated effective tax rate generated during
the comparable period of the prior year was primarily the result of Zapata
Corporate's recognition of a net income tax receivable for $1.2 million
resulting from the completion of an IRS audit.
For all periods in which any of the Company's subsidiaries are consolidated for
book purposes and not consolidated for tax purposes, Zapata will recognize a
provision or benefit to reflect the increase or decrease in the difference
between the Company's book and tax basis in each subsidiary. The provision or
benefit will be equal to the sum of the Company's tax effected proportionate
share of each subsidiary's net income or loss. Accordingly, the Company's
effective tax rate for each period can vary significantly depending on the
changes in the underlying difference between the Company's book and tax basis
in the subsidiaries.
MINORITY INTEREST. Minority interest from the consolidated statements of
operations represents the minority stockholders' interest in the net income or
net loss of the Company's subsidiaries (approximately 21% of Safety Components,
approximately 41% of Omega Protein and approximately 2% of Zap.Com). Increases
or decreases in Zapata's ownership of its subsidiary's common stock will result
in corresponding decreases or increases in the minority stockholders' interest
in the net income or loss of Zapata's subsidiaries. For example, should Zapata's
ownership percentage of Safety Components continue to decline due to stock
option exercises of its employees, minority interest would increase and Zapata
would consolidate less of Safety's net income or loss recognized during future
periods. For the six months ended June 30, 2004, minority interest was a $2.4
million reduction to net income for the minority interest's share in the net
incomes of Safety Components and Omega Protein, partially offset by the minority
interest's share in the net loss of Zap.Com.
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 dividends from being
declared or paid with respect to their 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.
The current source of liquidity of Zapata Corporate (Zapata Corporation
exclusive of its majority owned subsidiaries Safety Components, Omega Protein,
and Zap.Com) is its cash, cash equivalents and short-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
26
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. As of June 30, 2004, Zapata Corporate's cash,
cash equivalents and short-term investments were $30.2 million as compared to
$31.6 million as of December 31, 2003.
In addition to its cash, cash equivalents, short-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 publicly sell any
significant number of shares.
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 as
additional investments in its majority-owned subsidiaries. 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.
As of June 30, 2004, the Company's consolidated contractual obligations and
other commercial commitments, as well as those of Zapata Corporate, have not
changed materially from those set forth in the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
OFF-BALANCE SHEET ARRANGEMENTS
As of June 30, 2004, the Company's off-balance sheet arrangements have not
changed materially from those set forth in the Company's Annual Report on Form
10-K for the year ended December 31, 2003.
SUMMARY OF CASH FLOWS
The following table summarizes Zapata's consolidating cash flow information (in
thousands):
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1) PROTEIN ZAP.COM CONSOLIDATED
----------- ------------- --------- ------- ------------
SIX MONTHS ENDED JUNE 30, 2004
CASH (USED IN) PROVIDED BY
Operating activities $ (1,447) $ 629 $ 13,427 $ (62) $ 12,547
Investing activities 28,843 (2,872) (12,578) -- 13,393
Financing activities -- 3,087 (583) -- 2,504
Effect of exchange rate changes on cash
and cash equivalents -- (14) (15) -- (29)
-------- ------- --------- ------- --------
Net (decrease) increase in cash and cash
equivalents $ 27,396 $ 830 $ 251 $ (62) $ 28,415
======== ======= ========= ======= ========
27
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1) PROTEIN ZAP.COM CONSOLIDATED
----------- ------------- --------- ------- ------------
SIX MONTHS ENDED JUNE 30, 2003
CASH (USED IN) PROVIDED BY
Operating activities $ (3,179) $ -- $ 6,983 $ (71) $ 3,733
Investing activities (16,822) -- (7,182) -- (24,004)
Financing activities -- -- (50) -- (50)
-------- ------- --------- ------- --------
Net decrease in cash and cash equivalents $(20,001) $ -- $ (249) $ (71) $(20,321)
======== ======= ========= ======= ========
(1) Safety's cash flow information has been included in Zapata's consolidated
cash flows for the six months ended June 30, 2004. The acquisition of Safety
occurred subsequent to the second quarter of 2003. Accordingly, no amounts were
included in the six months ended June 30, 2003.
NET CASH PROVIDED BY OPERATING ACTIVITIES. Consolidated cash provided by
operating activities was $12.5 million and $3.7 million for the six months ended
June 30, 2004 and 2003, respectively. The increase in consolidated cash provided
by operating activities was primarily due to an increase in cash provided by
operating activities at Omega Protein and a decrease in cash used in operating
activities at Zapata Corporate. These increases were primarily due to the timing
of changes in the balances of certain assets and liabilities offset by lower net
income.
NET CASH USED IN INVESTING ACTIVITIES. For the six months ended June 30, 2004,
the Company had consolidated cash provided by investing activities of $13.4
million as compared to consolidated cash used in investing activities of $24.0
million for the comparable period of the prior year. 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 usage was primarily due to Zapata Corporate's decrease in purchases of
short-term investments during the period as compared to the same period in the
prior year, partially offset by increased capital expenditures at Omega Protein
and Safety Components. Omega anticipates making approximately $20.7 million of
capital expenditures during 2004, of which approximately $10.8 million will be
dedicated to the new fish oil processing facility and the remainder will be used
to refurbish vessels and plant assets and to repair certain equipment. Safety
Components anticipates making approximately $5.1 million of capital expenditures
during the remainder of 2004. These expenditures will be made to sustain
Safety's growth of operations. Safety anticipates that it will fund these
expenditures through a combination of cash flows from operations, equipment
financing and the use of its line of credit.
NET CASH USED IN FINANCING ACTIVITIES. Consolidated cash provided by financing
activities was $2.5 million compared to consolidated cash used in financing
activities of $50,000 for the six months ended June 30, 2004 and 2003. The
increase in consolidated cash provided by financing activities was primarily due
to Safety's net proceeds from borrowings, partially offset by repayments of debt
at Safety and Omega during the period as compared to the same period in the
prior year.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") revised
Statement on Financial Accounting Standard ("SFAS") No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." It does not
change the measurement or recognition of pension and other postretirement
benefit plans. It requires additional disclosures to those in the original SFAS
No. 132 about the assets, obligations, cash flows, and net periodic benefit cost
of defined benefit pension plans and other defined benefit postretirement plans.
It also requires disclosure of the components of net periodic benefit cost in
interim financial statements. The revised disclosure requirements are required
for financial statements with fiscal years ending after December 15, 2003 and
the interim-period requirements are effective for interim periods beginning
after December 15, 2003. The adoption of this statement did not have an effect
on the Company's financial position, results of operations or cash flows.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As of June 30, 2004, the Company's consolidated critical accounting policies and
estimates have not changed materially from those set forth in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003.
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 common stock 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 and Zap.Com hold investment grade
securities including a mix of U.S. Government or Government agency obligations,
certificates of deposit, money market deposits and commercial paper rated A-1 or
P-1. In addition, Omega Protein holds 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 consolidated
investment grade security balance of $72.9 million at June 30, 2004 as a
hypothetical constant cash balance, an adverse change of 1% in interest rates
would decrease interest income by approximately $182,000 and $364,000 during a
three-month and six-month period, respectively.
MARKET RISK. To the extent that amounts borrowed under Safety's Congress
Financial Corporation (Southern), a subsidiary of Wachovia Bank, National
Association ("Congress") Facilities and certain other facilities are
outstanding, Safety has market risk relating to such amounts because the
interest rates under the Congress Facilities are variable. As of June 30, 2004,
Safety's interest rates under the Congress Facilities and those certain other
facilities approximated 4.0%. A hypothetical increase or decrease in interest
rates of 100 basis points relating to the Congress Facilities would not result
in a material change to the Company's results of operations. In addition, 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 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 trading or 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 May 11, 2004 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 monitored for effectiveness on a routine basis. At June 30, 2004, Safety
had outstanding forward exchange contracts that mature between July 2004 and
December 2004 to purchase Mexican pesos with an aggregate notional amount of
approximately $1.7 million. The fair values of these contracts at June 30, 2004
totaled approximately $16,000 which is recorded as a liability on Safety's
balance sheet in other current liabilities. Changes in the derivatives' fair
values are deferred and recorded in the balance sheet as a component of
accumulated other comprehensive income ("AOCI"), until the underlying
transaction is recorded in operations. When the hedged item affects earnings,
gains or losses are reclassified from
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AOCI to the consolidated statement of earnings as cost of goods sold. Safety
reclassified approximately $6,000 of previously recorded derivative fair values
in AOCI into earnings as of June 30, 2004 as a credit to cost of goods sold.
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 June 30, 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
LITIGATION
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
Zapata and its subsidiaries are subject to various possible claims and lawsuits
regarding environmental matters. Zapata's management believes that costs, if
any, related to these matters will not have a material adverse effect on the
consolidated results of operations, cash flows or financial position of the
Company.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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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 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO as required by Rule 13a-14(a), as adopted
Pursuant to Section 302 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 April 22, 2004 announcing that on or about April 1,
2004, Zapata's stock ownership percentage of Safety Components outstanding
stock decreased below 80% (approximately 79.9%) due to stock option
exercises by Safety Component's employees. As a result of Zapata's
ownership of Safety Components outstanding stock falling below 80%, as of
April 1, 2004, Zapata would no longer consolidate Safety Components into
Zapata's consolidated income tax returns.
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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: August 16, 2004 By: /s/ Leonard DiSalvo
----------------------------------
(Vice President--Finance and Chief
Financial Officer)
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