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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
---------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 November 1, 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 September 30, 2004 (unaudited)
and December 31, 2003 3
Unaudited Condensed Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 2004 and 2003 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 33
Item 4. Controls and Procedures 34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 34
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 35
Item 3. Defaults Upon Senior Securities 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 5. Other Information 35
Item 6. Exhibits 36
SIGNATURES 36
EXHIBITS 37
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
ZAPATA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30,
2004 DECEMBER 31,
(UNAUDITED) 2003
ASSETS
Current assets: $ 72,181 $ 43,934
Cash and cash equivalents
Short-term investments -- 29,351
Accounts receivable, net 56,396 58,011
Inventories, net 71,521 63,957
Prepaid expenses and other current assets 7,267 6,045
--------- ---------
Total current assets 207,365 201,298
--------- ---------
Investments and other assets:
Intangible assets, net 6,562 8,121
Other assets 23,174 23,925
--------- ---------
Total investments and other assets 29,736 32,046
Property, plant and equipment, net 133,714 125,695
--------- ---------
Total assets $ 370,815 $ 359,039
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 5,426 $ 5,780
Accounts payable 19,540 27,935
Accrued and other current liabilities 36,646 27,278
--------- ---------
Total current liabilities 61,612 60,993
--------- ---------
Long-term debt 26,785 29,422
Pension liabilities 8,174 7,687
Other liabilities and deferred taxes 13,769 9,698
Minority interest 77,439 68,702
--------- ---------
Total liabilities 187,779 176,502
--------- ---------
Commitments and contingencies (Note 9)
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 160,788 163,490
Retained earnings 54,526 51,108
Treasury stock, at cost, 679,010 shares (31,668) (31,668)
Accumulated other comprehensive loss (641) (424)
--------- ---------
Total stockholders' equity 183,036 182,537
--------- ---------
Total liabilities and stockholders' equity $ 370,815 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues $ 97,672 $ 32,151 $ 284,273 $ 84,544
Cost of revenues 83,803 28,553 239,061 68,346
--------- --------- --------- ---------
Gross profit 13,869 3,598 45,212 16,198
Operating expense:
Selling, general and administrative 10,227 3,512 29,076 9,925
--------- --------- --------- ---------
Total operating expenses 10,227 3,512 29,076 9,925
--------- --------- --------- ---------
Operating income 3,642 86 16,136 6,273
--------- --------- --------- ---------
Other income (expense):
Interest income (expense), net (4) (2) (643) 194
Other, net 326 (12) 99 (42)
--------- --------- --------- ---------
322 (14) (544) 152
--------- --------- --------- ---------
Income before income taxes and minority
interest 3,964 72 15,592 6,425
--------- --------- --------- ---------
Provision for income taxes (2,045) (2,095) (8,656) (3,333)
Minority interest in net income of
consolidated subsidiaries (1,135) (294) (3,518) (2,293)
--------- --------- --------- ---------
Net income (loss) $ 784 $ (2,317) $ 3,418 $ 799
========= ========= ========= =========
Earnings per share:
Basic $ 0.33 $ (0.97) $ 1.43 $ 0.33
========= ========= ========= =========
Diluted $ 0.32 $ (0.97) $ 1.41 $ 0.33
========= ========= ========= =========
Weighted average common shares outstanding:
Basic 2,391 2,391 2,391 2,391
========= ========= ========= =========
Diluted 2,419 2,391 2,417 2,403
========= ========= ========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
ZAPATA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2004 2003
-------- --------
Cash flows from operating activities:
Net income $ 3,418 $ 799
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 18,222 9,188
Loss (gain) on disposal of assets 214 (137)
Provisions for losses on receivables 28 38
Tax benefit from stock option exercises 818 --
Minority interest in net income of consolidated subsidiaries 3,518 2,293
Deferred income taxes 3,732 2,312
Changes in assets and liabilities:
Accounts receivable 1,591 (9,091)
Inventories (7,563) (8,125)
Prepaid expenses and other current assets 137 172
Accounts payable (8,372) (865)
Pension liabilities (35) (371)
Accrued liabilities and other current liabilities 8,576 (1,465)
Other assets and liabilities 37 2,367
-------- --------
Total adjustments 20,903 (3,684)
-------- --------
Net cash provided by (used in) operating activities 24,321 (2,885)
-------- --------
Cash flows from investing activities:
Payment for purchase of Safety Components International, Inc., net of cash
acquired -- (25,077)
Proceeds from disposition of assets 66 180
Purchase of short-term investments -- (8,809)
Proceeds of maturities of short-term investments 29,351 35,832
Proceeds of maturities of long-term investments -- 3,994
Capital expenditures (24,115) (10,324)
-------- --------
Net cash provided by (used in) investing activities 5,302 (4,204)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings 1,132 52
Principal payments of short- and long-tem obligations (4,128) (948)
Proceeds from stock option exercises 1,586 1,149
-------- --------
Net cash (used in) provided by financing activities (1,410) 253
-------- --------
Effect of exchange rate changes on cash and cash equivalents 34 21
-------- --------
Net increase (decrease) in cash and cash equivalents 28,247 (6,815)
Cash and cash equivalents at beginning of period 43,934 80,643
-------- --------
Cash and cash equivalents at end of period $ 72,181 $ 73,828
======== ========
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 nine month periods
ended September 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 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
September 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 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. 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."
As used throughout this report, "Zapata Corporate" is defined as Zapata
Corporation exclusive of its majority owned subsidiaries Safety Components,
Omega Protein and Zap.Com.
6
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
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
Components' 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
SEPTEMBER 30,
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Net income (loss), as reported $ 784 $ (2,317)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax effects:
Zapata Corporate (32) (10)
Safety Components -- --
Omega Protein (112) (38)
Zap.Com -- --
------- ---------
Total pro forma expense (144) (48)
------- ---------
Pro forma net income (loss) $ 640 $ (2,365)
======= =========
Earnings per share:
Basic - as reported $ 0.33 $ (0.97)
======= =========
Basic - pro forma $ 0.27 $ (0.99)
======= =========
Diluted - as reported $ 0.32 $ (0.97)
======= =========
Diluted - pro forma $ 0.26 $ (0.99)
======= =========
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Net income, as reported $ 3,418 $ 799
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax effects:
Zapata Corporate (98) (35)
Safety Components -- --
Omega Protein (248) (207)
Zap.Com -- --
------- -------
Total pro forma expense (346) (242)
------- -------
Pro forma net income (loss) $ 3,072 $ 557
======= =======
Earnings per share:
Basic - as reported $ 1.43 $ 0.33
======= =======
Basic - pro forma $ 1.28 $ 0.23
======= =======
Diluted - as reported $ 1.41 $ 0.33
======= =======
Diluted - pro forma $ 1.27 $ 0.23
======= =======
8
RECLASSIFICATION
Certain reclassifications of prior year information have been made to conform to
the current presentation.
NOTE 3. SHORT-TERM INVESTMENTS
Short-term investments are summarized as follows:
SEPTEMBER 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 -- 505
------- -------
$ -- $29,351
======= =======
At 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%--1.06% at December 31, 2003.
NOTE 4. INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
(IN THOUSANDS)
SAFETY COMPONENTS: $ 5,743 $ 6,273
Work-in-process 8,209 7,089
Finished goods 12,092 10,190
------- -------
Total Safety Components inventory $26,044 $23,552
------- -------
OMEGA PROTEIN:
Fish meal $24,222 $21,963
Fish oil 12,186 7,666
Fish solubles 505 600
Unallocated inventory cost pool (including
off-season costs) 3,592 5,348
Other materials and supplies 4,972 4,828
------- -------
Total Omega Protein inventory $45,477 $40,405
------- -------
Total consolidated inventory
$71,521 $63,957
======= =======
The elements of Omega's unallocated inventory cost pool include plant and vessel
related labor, utilities, rent, repairs and depreciation, to be allocated to
inventories produced through the remainder of the 2004 season.
NOTE 5. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities are summarized as follows:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
(IN THOUSANDS)
Salary and benefits $13,489 $ 8,935
Insurance 4,410 5,258
Taxes, other than income tax 1,104 12
Trade creditors 3,140 2,135
Federal and state income taxes 7,424 5,462
Litigation reserves 1,414 1,414
Other 5,665 4,062
------- -------
$36,646 $27,278
======= =======
9
NOTE 6. DEBT
Long-term debt consisted of the following:
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
(IN THOUSANDS)
SAFETY COMPONENTS:
Congress revolving credit facility due on October 8, 2006, interest at a
variable rate of 4.5 % at September 30, 2004 and 4.0% at
December 31, 2003 $ 5,760 $ 4,628
Congress Term A loan, due on October 8, 2006, interest at a
variable rate of 4.5 % at September 30, 2004 and 4.0% at
December 31, 2003 3,115 4,176
KeyCorp equipment note due August, 2005, interest rate of 1.3%
over LIBOR 1,447 2,690
HBV Bank Czech Republic mortgage note due March, 2007, interest
rate of 1.7% over EURIBOR 2,650 3,509
Capital equipment notes payable, with various interest rates ranging
from 7.6% to 10.0%, maturing at various dates through March 2008
1,223 1,028
--------- --------
Total Safety Components' debt 14,195 16,031
Less: current maturities (3,777) (4,214)
--------- --------
$ 10,418 $ 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% $ 17,552 $ 18,658
Amounts due in installments through 2014, interest at Eurodollar rates
of 2.03% and 1.6% at September 30, 2004 and
December 31, 2003, respectively, plus 4.5% 420 441
Other debt at 7.9% and 7.9% at September 30, 2004 and
December 31, 2003, respectively 44 72
--------- --------
Total Omega Protein's debt 18,016 19,171
Less: current maturities (1,649) (1,566)
--------- --------
$ 16,367 $ 17,605
--------- --------
Total consolidated long-term debt $ 26,785 $ 29,422
========= ========
As of September 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 September 30, 2004
was $5.8 million. The Congress Revolver also includes a $5.0 million letter of
credit facility, which was unutilized at September 30, 2004.
In addition, Safety has a term facility with Congress (the "Congress Term A
loan") under which $3.1 million was outstanding as of September 30, 2004. The
Congress Term A loan is payable in equal monthly installments of
10
approximately $64,000, 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 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 $3.75 million is currently
available. At September 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 $33.0 million.
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 September 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 September 30, 2004, Safety was in
compliance with all financial covenants. At September 30, 2004, Safety was also
in compliance with all non-financial covenants other than a covenant requiring
the company 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.
In July 2004, Safety and Congress entered into an amendment to the Congress
Facilities which, among other things, allows Safety to include its Romanian
subsidiary and entities formed in connection with a proposed joint venture in
China within the group of affiliates to which Safety is permitted to make loans
up to an aggregate specified amount. In October 2004, Safety and Congress
entered into an amendment and consent to the Congress Facilities pursuant to
which Congress consented to certain actions by Safety, and Safety and Congress
agreed to certain amendments to the Congress Facilities, in each case in order
to permit Safety to enter into a proposed joint venture in South Africa with
another third party. This amendment also, among other things, allows Safety to
include the entity formed to conduct this joint venture within the group of
affiliates to which Safety is permitted to make loans up to an aggregate
specified amount.
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 September 2, 2004, pursuant to the Title XI program, the United States
Department of Commerce approved a financing application made by Omega in the
amount of $14 million (the "Approval Letter"). Omega had no borrowings or
financing requests outstanding under the Approval Letter at September 30, 2004.
Borrowings under this Title XI program may be used for refurbishment of Omega's
fishing vessels and capital expenditures relating to
11
Omega's shore-side fishing assets. The Title XI loans are secured by liens on
certain of Omega's fishing vessels and mortgages on Omega's Reedville, Virginia
and Abbeville and Cameron, Louisiana plants.
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 was in compliance with its financial covenants as of September 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
September 30, 2004 Omega had no borrowings outstanding under the Credit
Facility. At September 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.
NOTE 7. EARNINGS PER SHARE INFORMATION
The following reconciles amounts used in the computations of basic and diluted
income (loss) per common share (in thousands, except per share amounts):
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
2004 2003
--------------------------------------------------------------------
WEIGHTED PER WEIGHTED PER
AVERAGE SHARE AVERAGE SHARE
INCOME SHARES AMOUNT LOSS SHARES AMOUNT
------- -------- ------ ------- -------- ---------
Basic income per common
share $ 784 2,391 $0.33 $(2,317) 2,391 $ (0.97)
===== ========
Effect of dilutive
stock options 28 --
----- -------
Diluted earnings per
common share $ 784 2,419 $0.32 $(2,317) 2,391 $ (0.97)
===== ===== ===== ========
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
-----------------------------------------------------------------
WEIGHTED PER WEIGHTED PER
AVERAGE SHARE AVERAGE SHARE
INCOME SHARES AMOUNT LOSS SHARES AMOUNT
------- -------- ------ ------- -------- ---------
Basic income per common
share $3,418 2,391 $ 1.43 $ 799 2,391 $ 0.33
======== ========
Effect of dilutive
stock options 26 12
----- -----
Diluted earnings per
common share $3,418 2,417 $ 1.41 $ 799 2,403 $ 0.33
====== ======== ====== ========
12
The following table details the potential common shares excluded from the
calculation of diluted earnings (loss) 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 ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------- ------- ------- -------
Potential common shares excluded from the calculation
of diluted earnings per share:
Stock options (in thousands) 2 145 2 145
Weighted average price per share $ 87.50 $ 42.74 $ 78.34 $ 47.09
NOTE 8. COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) are as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
(IN THOUSANDS)
Net income (loss) $ 784 $(2,317) $ 3,418 $ 799
Currency translation adjustment, net of tax effects 433 (22) (131) (13)
Unrealized gain on hedging transactions,
net of tax effects 31 -- 18 --
Reclassification adjustment for losses in net
income 13 -- 18 --
------- ------- ------- -------
$ 1,261 $(2,339) $ 3,323 $ 786
======= ======= ======= =======
Due to the timing of the acquisition, no amounts in the consolidated statements
of operations for the three and nine month periods ended September 30, 2003
relate to Safety Components. Accordingly, no components of other comprehensive
(loss) income related to Safety Components were included in the three and nine
month periods ended September 30, 2003 above.
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 has committed approximately $18 million to build a new 100 metric ton per
day fish oil processing facility at its Reedville, Virginia location. The
commitments covered by this agreement aggregate approximately $7 million and $11
million for 2003 and 2004, respectively. As of September 30, 2004 Omega has
incurred approximately $18.3 million related to its Reedville fish oil
processing facility placed in operations during October 2004.
13
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 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.
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
Components' 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 September 30, 2004 and 2003 and
$15,000 for the nine months ended September 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.
14
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 $3,000 for each of the three months ended September 30,
2004 and 2003 and $10,000 and $9,000 for the nine months ended September 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 $11,000 and $29,000 for the
three and nine months ended September 30, 2003, respctively, related to a
previously dismissed action against Malcolm I. Glazer, the Malcolm I. Glazer
Family Limited Partnership, and Malcolm I. Glazer GP, Inc. No amounts have been
incurred during the nine month period ending September 30, 2004 related to this
matter.
NOTE 11. 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 ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
(IN THOUSANDS)
Service cost $ 10 $ 7 $ 29 $ 22
Interest cost 651 696 1,953 2,089
Expected return on plan assets (750) (639) (2,250) (1,916)
Amortization of transition assets and other
deferrals 335 440 1,004 1,320
------- ------- ------- -------
Net periodic benefit cost $ 246 $ 504 $ 736 $ 1,515
======= ======= ======= =======
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 September 30, 2004, no contributions have been made. As of September
30, 2004 Omega anticipates that the 2004 fiscal year contribution will be zero
due to the passage of the Pension Funding Equity Act of 2004. Additionally, as
of September 30, 2004, Zapata has made no contributions to either of its plans
and anticipates no contributions in 2004.
NOTE 12. DERIVATIVES AND HEDGING
Safety Components monitors its risk associated with the volatility of certain
foreign currencies against its functional currency, the U.S. dollar. Safety 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
15
instruments are not entered into for trading or speculative purposes.
Certain costs 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 September 30, 2004, Safety
had outstanding forward exchange contracts that mature between October 2004 and
December 2004 to purchase Mexican pesos with an aggregate notional amount of
approximately $801,000. The fair values of these contracts at September 30, 2004
totaled approximately $23,000 which is recorded as an asset on Safety's balance
sheet in other current assets. 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 $22,000 of previously recorded
derivative fair values in AOCI into earnings for the nine months ended September
30, 2004 as a credit to cost of goods sold.
NOTE 13. 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 beginning
with the fourth quarter of 2003. Accordingly, total assets include amounts
attributable to Safety as of September 30, 2004 and 2003, whereas results of
operations from Safety are not included for the three and nine months ended
September 30, 2003.
The following summarizes certain financial information of each segment as of and
for the three months and nine months ended September 30, 2004 and 2003:
INTEREST INCOME
OPERATING DEPRECIATION INCOME TAX
INCOME TOTAL AND (EXPENSE) (PROVISION) CAPITAL
REVENUES (LOSS) ASSETS AMORTIZATION NET BENEFIT EXPENDITURES
--------- --------- --------- ------------ --------- ----------- ------------
THREE MONTHS ENDED
SEPTEMBER 30, 2004
Safety Components $ 56,171 $ 2,257 $ 123,689 $ 3,082 $ (186) $ (653) $ 1,834
Omega Protein 41,501 2,700 196,351 2,883 82 (911) 6,769
Zap.Com -- (38) 1,838 -- 6 -- --
Corporate -- (1,277) 48,937 10 94 (481) --
--------- --------- --------- --------- --------- --------- ---------
$ 97,672 $ 3,642 $ 370,815 $ 5,975 $ (4) $ (2,045) $ 8,603
========= ========= ========= ========= ========= ========= =========
THREE MONTHS ENDED
SEPTEMBER 30, 2003
Safety Components $ -- $ -- $ 122,293 $ -- $ -- $ -- $ --
Omega Protein 32,151 1,366 186,450 4,217 (178) (436) 3,029
Zap.Com -- (41) 1,965 -- 5 -- --
Corporate -- (1,239) 69,247 19 171 (1,659) 26
--------- --------- --------- --------- --------- --------- ---------
$ 32,151 $ 86 $ 379,955 $ 4,236 $ (2) $ (2,095) $ 3,055
NINE MONTHS ENDED
SEPTEMBER 30, 2004
Safety Components $ 191,260 $ 13,394 $ 123,689 $ 9,267 $ (608) $ (4,572) $ 4,706
Omega Protein 93,013 6,887 196,351 8,920 (289) (2,148) 19,409
Zap.Com -- (128) 1,838 -- 15 -- --
Corporate -- (4,017) 48,937 35 239 (1,936) --
--------- --------- --------- --------- --------- --------- ---------
$ 284,273 $ 16,136 $ 370,815 $ 18,222 $ (643) $ (8,656) $ 24,115
========= ========= ========= ========= ========= ========= =========
NINE MONTHS ENDED
SEPTEMBER 30, 2003
Safety Components $ -- $ -- $ 122,293 $-- $ -- $ -- $ --
Omega Protein 84,544 9,487 186,450 9,131 (497) (3,181) 10,294
16
Zap.Com -- (104) 1,965 -- 17 -- --
Corporate -- (3,110) 69,247 57 674 (152) 30
--------- --------- --------- --------- --------- --------- ---------
$ 84,544 $ 6,273 $ 379,955 $ 9,188 $ 194 $ (3,333) $ 10,324
========= ========= ========= ========= ========= ========= =========
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, the risks set forth 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" and 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"). 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.
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 September 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.
17
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 Components' 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.
On September 2, 2004, the Malcolm I. Glazer Family Limited Partnership (the
"Glazer LP") filed a Schedule 13D indicating that it had acquired 114,700 shares
of common stock of Zapata Corporation. As a result of the transaction, the
Glazer LP now owns approximately 51.3% of the Company's outstanding common
stock.
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.
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 North America airbag fabric weaving facility. Safety's
management has estimated the impact on the cost of raw material purchases to be
approximately $2.0
18
million for the year ending December 31, 2004. Safety is currently in
negotiations with its airbag cushion customers in North America to pass along
this increase. However, the outcome of such negotiations cannot be determined at
this time.
During the quarter ended September 30, 2004, the Audit Committee of Safety's
Board of Directors, with the assistance of special outside counsel and a
forensic accounting firm, completed an investigation begun in July 2004 based
upon issues raised by a Safety employee who claimed improprieties in Safety's
operations in Mexico and California. The thorough investigation of all of the
issues raised did not substantiate any of the concerns. Expenses related to the
investigation were approximately $550,000 for the three and nine months ended
September 30, 2004.
OMEGA PROTEIN
Omega is the largest U.S. producer of protein-rich meal and oil derived from
marine sources. Omega's products are produced from menhaden (a herring-like fish
found in commercial quantities), and include FAQ (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 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 human food and animal feed production and certain
industrial applications. Fish solubles are sold as protein additives for animal
feed and as fertilizers.
Omega operates four menhaden processing plants: two in Louisiana, one in
Mississippi and one in Virginia, as well as a fish oil processing facility also
located in Virginia. The four plants have an aggregate annual processing
capacity of 950,000 tons of fish. Omega also completed a new 100-metric ton per
day fish oil processing facility in Reedville, Virginia in October 2004, which
replaced its existing fish oil processing facility.
Omega operates through three material subsidiaries: Omega Protein, Inc., Omega
Shipyard, Inc. and Omega Protein Mexico, S. de R.L. de C.V. ("Omega Mexico").
Omega Protein, Inc. is Omega's principal operating subsidiary for its menhaden
processing business and is the successor to a business conducted since 1913.
Omega Shipyard, Inc. owns a drydock facility in Moss Point, Mississippi, which
is used to provide shoreside maintenance for Omega's fishing fleet and, subject
to outside demand and excess capacity, third-party vessels. Revenues from
shipyard work for third-party vessels for the nine months ended September 30,
2004 were not material. Omega Mexico is a subsidiary formed in 2002 for Omega's
meal and oil sales and purchases in Mexico. Omega also has a number of other
immaterial direct and indirect subsidiaries. Three former subsidiaries, Protein
Operating Company, Protein USA Company and Protein Securities Company, were
merged into Omega Protein, Inc. in 2003.
Omega produces and sells a variety of protein and oil products derived from
menhaden, a species of wild herring-like fish found along the Gulf of Mexico and
Atlantic coasts. The fish is not genetically modified or genetically enhanced.
Omega processes several grades of fish meal (regular or "FAQ" meal and specialty
meals), as well as fish oil and fish solubles. Omega's fish meal products are
primarily used as a protein ingredient in animal feed for swine, cattle,
aquaculture and household pets. Fish oil is utilized for animal and aquaculture
feeds, industrial applications, and 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. All of Omega's products
contain healthy long-chain Omega-3 fatty acids rich in EPA (eicosapentaenoic
acid) and DHA (docosahexaenoic acid). Omega-3 fatty acids are commonly referred
to as "essential fatty acids" because the body does not produce them. Instead,
essential fatty acids must be obtained from outside sources, such as food or
special supplements. Long-chain Omega-3s are also commonly referred to as a
"good fat" for their health benefits, as opposed to the "bad fats" that create
or aggravate health conditions through long-term consumption. Scientific
research suggest that long-chain Omega-3s as part of a balanced diet may provide
significant benefits for health issues such as cardiovascular disease,
inflammatory conditions and other ailments. Under its patented production
process, Omega produces OmegaPure (R) , a taste-free, odorless refined fish oil
that is the only marine source of long-chain Omega-3s directly affirmed by the
U.S. Food and Drug Administration ("FDA") as a food ingredient which is
Generally Recognized as Safe ("GRAS"). In September 2004, the FDA announced that
scientific evidence indicates that long-chain Omega-3 fatty acids containing
both EPA and DHA may be beneficial in reducing coronary heart disease.
The fish catch is processed into FAQ grade fish meal, specialty fish meals, fish
oils and fish solubles at Omega's four operating plants. 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
19
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.
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 11.0%. 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 (R) 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 fish oil. Omega cannot
estimate, however, the size of the actual domestic or international markets for
OmegaPure (R) 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
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 and oil products.
Although operating margins from these activities are less than the margins
typically generated from Omega's base domestic production, these operations
provide Omega with a source of fish meal and oil to sell into other markets
where Omega has not historically had a presence. Omega purchased products
totaling approximately 16,900 and 12,500 tons, or approximately 4.3% and 5% of
total volume sales for the nine months ending September 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 two quarters of 2004.
During 2004, Omega's fishing efforts in the Gulf of Mexico were hampered by
numerous hurricanes which resulted in lower fish catches than predicted. As a
result, Omega's per unit product costs were higher than anticipated and were
comparable to the 2003 season. Such reduced fish catch quantities results in
higher cost inventories and correspondingly higher cost of sales, as well as
less available product for sale. The impact of the higher cost inventories and
fewer volumes available for sale will be carried forward and is expected to
adversely affect Omega's earnings in the fourth quarter of fiscal 2004 as well
as the first and second quarters of fiscal 2005.
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
20
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:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- -----------------------------------------
2004 2003 2004 2003
----------------- ----------------- ------------------ -------------------
REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT REVENUES PERCENT
-------- ------- -------- ------- -------- ------- -------- -------
Regular Grade $ 6.9 16.6% $ 7.2 22.4% $16.6 17.8% $16.0 19.0%
Special Select 19.0 45.8 10.0 31.1 39.5 42.5 29.5 34.9
Sea-Lac 4.9 11.8 2.9 9.0 13.1 14.1 11.0 13.0
Crude Oil 9.2 22.2 10.7 33.2 18.8 20.2 23.6 27.9
Refined Oil 1.1 2.6 1.0 3.1 3.5 3.8 2.8 3.3
Fish Solubles 0.4 1.0 0.4 1.2 1.5 1.6 1.6 1.9
----- ----- ----- ----- ----- ----- ----- -----
Total $41.5 100.0% $32.2 100.0% $93.0 100.0% $84.5 100.0%
===== ===== ===== ===== ===== ===== ===== =====
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 and was completed in October
2004. The cost of the project was approximately $18.3 million. Omega funded the
project through its available cash balances.
Omega's principal raw material is menhaden, a species of fish that inhabits
coastal and inland tidal waters in the United States. Menhaden are undesirable
for direct human consumption due to their small size, prominent bones and high
oil content. Certain state, 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
21
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. 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.
Omega's menhaden harvesting and processing business is seasonal in nature. Omega
generally has higher sales during the menhaden harvesting season (which includes
the second and third quarter of each fiscal year) due to increased product
availability. 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 SEPTEMBER 30, 2004
Revenues $ -- $ 56,171 $ 41,501 $ -- $ 97,672
Cost of revenues -- 47,427 36,376 83,803
-------- -------- -------- -------- --------
Gross profit -- 8,744 5,125 13,869
Operating expense:
Selling, general and administrative 1,277 6,487 2,425 38 10,227
-------- -------- -------- -------- --------
Operating (loss) income (1,277) 2,257 2,700 (38) 3,642
-------- -------- -------- -------- --------
Other income (expense)
Interest income (expense), net 94 (186) 82 6 (4)
Other, net -- 381 (55) -- 326
-------- -------- -------- -------- --------
(Loss) income before income taxes and
minority interest (1,183) 2,452 2,727 (32) 3,964
Provision for income taxes (481) (653) (911) -- (2,045)
Minority interest in net income (loss) of
consolidated subsidiaries(3) -- (401) (735) 1 (1,135)
-------- -------- -------- -------- --------
Net (loss) income to common
stockholders $ (1,664) $ 1,398 $ 1,081 $ (31) $ 784
======== ======== ======== ======== ========
$ 0.32
========
Diluted earnings per share
22
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1)(2) PROTEIN ZAP.COM CONSOLIDATED
--------- --------------- -------- -------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 2003
Revenues $ -- $ -- $ 32,151 $ -- $ 32,151
-------- -------- -------- -------- --------
Cost of revenues -- -- 28,553 -- 28,553
Gross profit -- -- 3,598 -- 3,598
Operating expense:
Selling, general and administrative 1,239 -- 2,232 41 3,512
-------- -------- -------- -------- --------
Operating (loss) income (1,239) -- 1,366 (41) 86
-------- -------- -------- -------- --------
Other income (expense)
Interest income (expense), net 171 -- (178) 5 (2)
Other, net -- -- (12) -- (12)
-------- -------- -------- -------- --------
(Loss) income before income taxes and
minority interest (1,068) -- 1,176 (36) 72
Provision for income taxes (1,659) -- (436) -- (2,095)
Minority interest in net income (loss) of
consolidated subsidiaries(3) -- -- (295) 1 (294)
-------- -------- -------- -------- --------
Net (loss) income to common
stockholders $ (2,727) $ -- $ 445 $ (35) $ (2,317)
======== ======== ======== ======== ========
Diluted loss per share $ (0.97)
========
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1)(2) PROTEIN ZAP.COM CONSOLIDATED
--------- --------------- -------- -------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2004
Revenues $ -- $ 191,260 $ 93,013 $ -- $ 284,273
Cost of revenues -- 160,240 78,821 -- 239,061
--------- --------- --------- --------- ---------
Gross profit -- 31,020 14,192 -- 45,212
Operating expense:
Selling, general and administrative 4,017 17,626 7,305 128 29,076
--------- --------- --------- --------- ---------
Operating (loss) income (4,017) 13,394 6,887 (128) 16,136
--------- --------- --------- --------- ---------
Other income (expense)
Interest income (expense), net 239 (608) (289) 15 (643)
Other, net -- 260 (161) -- 99
--------- --------- --------- --------- ---------
(Loss) income before income taxes and
minority interest (3,778) 13,046 6,437 (113) 15,592
Provision for income taxes (1,936) (4,572) (2,148) -- (8,656)
Minority interest in net income (loss) of
consolidated subsidiaries(3) -- (1,780) (1,740) 2 (3,518)
--------- --------- --------- --------- ---------
Net (loss) income to common
stockholders $ (5,714) $ 6,694 $ 2,549 $ (111) $ 3,418
========= ========= ========= ========= =========
Diluted earnings per share $ 1.41
=========
23
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1)(2) PROTEIN ZAP.COM CONSOLIDATED
--------- --------------- -------- -------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
Revenues $ -- $ -- $ 84,544 $ -- $ 84,544
Cost of revenues -- -- 68,346 -- 68,346
-------- -------- -------- -------- --------
Gross profit -- -- 16,198 -- 16,198
Operating expense:
Selling, general and administrative 3,110 -- 6,711 104 9,925
-------- -------- -------- -------- --------
Operating (loss) income (3,110) -- 9,487 (104) 6,273
-------- -------- -------- -------- --------
Other income (expense)
Interest income (expense), net 674 -- (497) 17 194
Other, net -- -- -- (42) (42)
-------- -------- -------- -------- --------
(Loss) income before income taxes and
minority interest (2,436) -- 8,948 (87) 6,425
Provision for income taxes (152) -- (3,181) -- (3,333)
Minority interest in net income (loss) of
consolidated subsidiaries(3) -- -- (2,295) 2 (2,293)
-------- -------- -------- -------- --------
Net (loss) income to common
stockholders $ (2,588) $ -- $ 3,472 $ (85) $ 799
======== ======== ======== ======== ========
Diluted earnings per share $ 0.33
========
(1) Safety's results of operations have been included in Zapata's consolidated
results of operations for the three months and nine months ended September 30,
2004. As a result of the acquisition of Safety in September 2003, the Company
began consolidating amounts related to Safety's operations during the fourth
quarter of 2003. Accordingly, no amounts were included in the three months and
nine months ended September 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 SEPTEMBER 30, 2004 AND 2003
Zapata reported consolidated net income of $784,000 or $.32 per diluted share on
consolidated revenues of $97.7 million for the three months ended September 30,
2004 as compared to a consolidated net loss of $2.3 million or $0.97 per diluted
share on consolidated revenues of $32.2 million for the three months ended
September 30, 2003. The increase in consolidated revenues was primarily the
result of consolidating Safety's results of operations for the period and
increased revenues at Omega Protein. As a result of the Safety Components
acquisition, the Company began consolidating amounts related to Safety's
operations during the fourth quarter of 2003. On a consolidated basis, the
recognition of net income during the current period as compared to net loss
during the same period in the prior year was primarily due to the consolidation
of Safety's operating results, increased net income recognized by
24
Omega, and the establishment of a deferred tax valuation allowance related to
certain tax benefit carry-forwards that occurred during the three months ended
September 30, 2003.
The following is a more detailed discussion of Zapata's consolidated operating
results for the quarter:
REVENUES. Consolidated revenues increased $65.5 million from $32.2 million for
the three months ended September 30, 2003 to $97.7 million for the three months
ended September 30, 2004. This increase was primarily attributable to the
consolidation of Safety's revenues of $56.2 million for the current period and a
$9.4 million increase in revenues at Omega. Omega's revenues for the three
months ended September 30, 2004 were $41.5 million, an increase of 29% from the
comparable period of the prior year. Omega's increase in revenue was
attributable to increased prices for fish meal and fish oil of 8% and 24%
respectively, as well as a 44% increase in the sales volume of fish meal.
COST OF REVENUES. Zapata's consolidated cost of revenues for the three months
ended September 30, 2004 was $83.8 million, a $55.3 million increase from $28.6
million for the comparable period of the prior year. This increase was primarily
attributable to the consolidation of Safety's cost of revenues of $47.4 million
for the quarter ended September 30, 2004 and a $7.8 million increase in cost of
revenues at Omega Protein. Omega's cost of revenues for the three months ended
September 30, 2004 were $36.4 million, an increase of 27% from the comparable
period of the prior year. Omega's cost of sales as a percentage of revenues
decreased by 1% to 88% for the three months ended September 30, 2004. Omega's
cost of sales for each of the periods presented were higher than historical
averages due primarily to weather related events in both periods which resulted
in reduced fish catches, causing higher per unit cost of inventory.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated selling, general, and
administrative expenses increased $6.7 million from $3.5 million for the three
months ended September 30, 2003 to $10.2 million for the three months ended
September 30, 2004. This increase was primarily attributable to the
consolidation of $6.5 million of selling, general and administrative costs
related to Safety for the current quarter.
INTEREST INCOME, NET. Net interest income decreased $2,000 from net interest
expense of $2,000 for the three months ended September 30, 2003 to net interest
expense of $4,000 for the three months ended September 30, 2004. This decrease
was primarily attributable to the consolidation of Safety's net interest expense
of $186,000 and $77,000 of decreased interest income at Zapata Corporate for the
current period as compared to the comparable period of the prior year resulting
from the Company's lower principal balance of cash and cash equivalents after
spending $47.8 million in 2003 to purchase a majority interest in Safety
Components. These decreases was largely offset by Omega's increase in net
interest income of approximately $260,000 due to the capitalization of interest
associated with the construction of Omega's new fish oil procession facility.
INCOME TAXES. The Company recorded a consolidated provision for income taxes of
$2.0 million for the three months ended September 30, 2004 as compared to $2.1
million for the comparable period of the prior year. For the three months ended
September 30, 2004, Zapata Corporate's provision decreased by $1.2 million as
compared to the comparable period of the prior year. Zapata Corporate's period
over period decrease in provision was primarily the result of a provision
recorded in the prior year which established a deferred tax valuation allowance
for certain tax benefit carry-forwards. On a consolidated basis, Zapata
Corporate's decrease was largely offset by Safety's provision of $653,000 and
Omega's provision increase of $475,000 which resulted from an increase in
pre-tax income recognized during the three months ended September 30, 2004.
The Company's effective tax rate for the three months ended September 30, 2004
was 52%. The high effective rate was primarily the result of Zapata Corporate's
current quarter recognition of a $481,000 provision which reflects $997,000 of
deferred tax liabilities recorded to reflect the Company's tax effected
proportionate share of Omega and Safety's net income recognized during the
period. 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 its subsidiaries.
25
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 September 30, 2004, minority interest was a
$1.2 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.
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Zapata reported consolidated net income of $3.4 million or $1.41 per diluted
share on consolidated revenues of $284.3 million for the nine months ended
September 30, 2004 as compared to consolidated net income of $799,000 or $.33
per diluted share on consolidated revenues of $84.5 million for the nine months
ended September 30, 2003. The increase in consolidated revenues was primarily
the result of consolidating Safety's results of operations for the period and
increased revenues at Omega Protein. The increase in consolidated net income
resulted from the consolidating of Safety's results of operations for the
period, offset by the tax effects of Safety's deconsolidation for tax purposes
and a decrease in net income contributed by Omega Protein.
The following is a more detailed discussion of Zapata's consolidated operating
results for the nine month period:
REVENUES. Consolidated revenues increased $199.8 million from $84.5 million for
the nine months ended September 30, 2003 to $284.3 million for the nine months
ended September 30, 2004. This increase was primarily attributable to the
consolidation of Safety's revenues of $191.3 million for the current period and
an $8.5 million increase in revenues at Omega. Omega's revenues for the nine
months ended September 30, 2004 were $93.0 million, an increase of 10% from the
comparable period of the prior year. Omega's increase in revenues is
attributable to a 6% and 13% increase in the prices for Omega's fish meal and
fish oil, respectively, along with a 16% increase in sales volume of fish meal.
COST OF REVENUES. Zapata's consolidated cost of revenues for the nine months
ended September 30, 2004 was $239.1 million, a $170.8 million increase from
$68.3 million for the comparable period of the prior year. This increase was
primarily attributable to the consolidation of Safety's cost of revenues of
$160.2 million for the nine months ended September 30, 2004 and a $10.5 million
increase in cost of revenues at Omega Protein. Omega's cost of revenues was
$78.8 million, a 15% increase from $68.3 million for the nine months ended
September 30, 2003. Omega's cost of sales as a percentage of revenues increased
4% to 85% for the nine months ended September 30, 2004 as compared to the nine
months ended September 30, 2003. Omega's increase in cost of sales was primarily
due to higher fiscal 2003 inventory costs carried forward into 2004, combined
with the 2004 reduced fish catch brought about by adverse weather conditions in
the Gulf of Mexico.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated selling, general, and
administrative expenses increased $19.2 million from $9.9 million for the nine
months ended September 30, 2003 to $29.1 million for the nine months ended
September 30, 2004. This increase was primarily attributable to the
consolidation of $17.6 million of selling, general and administrative costs
related to Safety for the current period. Zapata Corporate's selling, general
and administrative costs increased $907,000 in the nine months ended September
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 $594,000 from $6.7 million for the nine months ended September 30,
2003 as compared to $7.3 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 Sarbanes-Oxley 404
compliance efforts.
26
INTEREST INCOME, NET. Interest income, net decreased $836,000 from net interest
income of $194,000 for the nine months ended September 30, 2003 to net interest
expense of $643,000 for the nine months ended September 30, 2004. This decrease
was primarily attributable to the acquisition of Safety Components and the
consolidation of Safety's net interest expense of $608,000 for the nine months
ended September 30, 2004, as well as decreased interest income of $435,000 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. This decrease was offset by Omega's increase in net
interest income of approximately $208,000 due to the capitalization of interest
associated with the construction of Omega's new fish oil procession facility.
INCOME TAXES. The Company recorded a consolidated provision for income taxes of
$8.7 million for the nine months ended September 30, 2004 as compared to $3.3
million for the comparable period of the prior year. The period over period
increase in the consolidated provision was primarily the result of the
consolidation of Safety's provision of $4.6 million, and Zapata Corporate's
provision increase of approximately $1.8 million. Zapata Corporate's period over
period increase was primarily the result of the recognition deferred tax
liabilities recorded to reflect the Company's tax effected proportionate share
of Safety's net income recognized during the period. Zapata Corporate's period
over period increase was partially offset by a provision recorded in the prior
year which established a deferred tax valuation allowance for certain tax
benefit carry-forwards. Omega's provision decreased by $1.0 million due to a
decrease in pre-tax income recognized during the nine months ended September 30,
2004.
The Company's effective tax rate for the nine months ended September 30, 2004
was 56%. The high effective rate was primarily the result of Zapata Corporate's
recognition of a $1.9 million provision which reflects $3.5 million of deferred
tax liabilities recorded to reflect the Company's tax effected proportionate
share of Omega and Safety's net income recognized during the period.
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). For the
nine months ended September 30, 2004, minority interest was a $3.5 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.
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 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
September 30, 2004, Zapata Corporate's cash, cash equivalents and short-term
investments were $29.3 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
27
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.
CONTRACTUAL OBLIGATIONS
As of September 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 September 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
--------- ------------ -------- -------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2004
CASH (USED IN) PROVIDED BY
Operating activities $ (2,349) $ 8,296 $ 18,451 $ (77) $ 24,321
Investing activities 29,351 (4,706) (19,343) -- 5,302
Financing activities -- (860) (550) -- (1,410)
Effect of exchange rate changes on cash
and cash equivalents -- 46 (12) -- 34
-------- --------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents $ 27,002 $ 2,776 $ (1,454) $ (77) $ 28,247
======== ========= ======== ======== ========
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1) PROTEIN ZAP.COM CONSOLIDATED
--------- ------------ -------- -------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
CASH (USED IN) PROVIDED BY
Operating activities $ (4,207) $ -- $ 1,428 $ (106) $ (2,885)
Investing activities 5,910 -- (10,114) -- (4,204)
Financing activities 10 -- 243 -- 253
Effect of exchange rate changes on cash
and cash equivalents -- -- 21 -- 21
-------- --------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents $ 1,713 $ -- $ (8,422) $ (106) $ (6,815)
======== ========= ======== ======== ========
28
(1) Safety's cash flow information has been included in Zapata's consolidated
cash flows for the nine months ended September 30, 2004. As a result of the
acquisition of Safety in September 2003, the Company began consolidating amounts
related to Safety's operations during the fourth quarter of 2003. Accordingly,
no amounts were included in the nine months ended September 30, 2003.
NET CASH PROVIDED BY OPERATING ACTIVITIES. For the nine months ended September
30, 2004, the Company had consolidated cash provided by operating activities of
$24.3 million as compared to consolidated cash used in operating activities of
$2.9 million for the comparable period of the prior year. The increase in
consolidated cash provided by operating activities was primarily due to an
increase in cash provided by operating activities at Omega Protein which was
largely the result of the timing of changes in balances of certain assets and
liabilities. The increase was also attributable to the consolidation of amounts
related to Safety operations, and a reduction in cash used in operating
activities at Zapata Corporate. Zapata Corporate's decreased in cash used in
operating activities was primarily due to the timing of changes in the balances
of certain assets and liabilities, partially offset by lower net income.
NET CASH USED IN INVESTING ACTIVITIES.
The change from net cash used in investing activities in the prior period as
compared to net cash provided by investing activities was primarily related to
Zapata's purchase of Safety's common stock during the third quarter of 2003. The
decrease in cash used in investing activities was largely offset by an increase
in cash used in investing activities at Omega Protein primarily due to
expenditures associated with the construction of Omega's new fish oil processing
facility. The decrease was also offset by the consolidation of amounts related
to Safety Components. Omega anticipates making approximately $21.7 million of
capital expenditures during 2004, of which approximately $11.9 million was
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 $3.3 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.
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. For example, as of December 31, 2003, the Company had $29.4 million
of short-term investments and none as of September 30, 2004. This change in the
mix of cash and cash equivalents and short-term investments appears as proceeds
from investing activities in the current period's Unaudited Condensed
Consolidated Statement of Cash Flows.
NET CASH USED IN FINANCING ACTIVITIES. Consolidated cash used in financing
activities was $1.4 million as compared to provided by financing of $253,000 for
the comparable period in the prior year. The change from net cash provided by
financing activities to net cash used by financing activities was primarily due
to the consolidation of amounts related to Safety Components and Omega's change
from cash provided by financing activities to cash used by financing activities.
Omega's change to cash used in financing activities was primarily the result of
lower proceeds from stock options exercised and increased payments on debt
obligations during the current period as compared to the same period in the
prior year.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As of September 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.
SIGNIFICANT FACTORS THAT COULD AFFECT FUTURE PERFORMANCE AND FORWARD-LOOKING
STATEMENTS
1. Zapata believes that its results of operations, cash flows and financial
condition could be negatively impacted by certain risks and uncertainties,
including, without limitation, the risks and uncertainties identified in
Zapata's other public reports and filings made with the SEC, press releases and
public statements made by authorized officers of Zapata from time to time and
those risks and uncertainties set forth below.
29
- Risks associated with the fact that a significant portion of Zapata's
assets have consisted of securities, including equity and other interests
in its operating companies. This could subject Zapata to the registration
requirements of the Investment Company Act of 1940 (the "Investment
Company Act"). The Investment Company Act requires registration of, and
imposes substantial restrictions on, certain companies that engage, or
propose to engage, primarily in the business of investing, reinvesting,
owning, holding or trading in securities, or that fail certain statistical
tests concerning a company's asset composition and sources of income.
Zapata intends to actively participate in the management of its operating
companies, consistent with applicable laws, contractual arrangements and
other requirements. Accordingly, Zapata believes that it is primarily
engaged in a business other than investing, reinvesting, owning, holding
or trading in securities. Further, Zapata endeavors to ensure that its
holdings of investment securities constitute less than 40% of its total
assets (excluding Government securities and cash) on an unconsolidated
basis. Zapata intends to monitor and attempt to adjust the nature of its
interests in and involvement with operating companies in order to avoid
subjecting Zapata to the registration requirements of the Investment
Company Act. There can be no assurance, however, that Zapata's business
activities will not ultimately subject Zapata to the Investment Company
Act. If Zapata were required to register as an investment company under
the Investment Company Act, it would become subject to regulations that
would have a material adverse impact on its financial position, results of
operations and cash flows.
- Risks associated with the personal holding company penalty tax. Section
541 of the Internal Revenue Code of 1986, as amended (the "IRC"), subjects
a corporation, which is a "personal holding company" as defined in the
IRC, to a 15% penalty tax on "undistributed personal holding company
income" in addition to the corporation's normal income tax. Generally,
undistributed personal holding company income is based on taxable income,
subject to certain adjustments, most notably a reduction for Federal
incomes taxes. Personal holding company income is comprised primarily of
passive investment income plus, under certain circumstances, personal
service income. Zapata and its domestic subsidiaries (other than Safety
and Omega) could become subject to the penalty tax if (i) 60% or more of
its adjusted ordinary gross income is personal holding company income and
(ii) 50% or more of its outstanding common stock is owned, directly or
indirectly, by five or fewer individuals at any time during the last half
of the taxable year. The Company believes that five or fewer of Zapata's
stockholders hold 50% or more of its outstanding common stock for purposes
of IRC Section 541. However, as of September 30, 2004, Zapata and its
domestic subsidiaries (other than Safety and Omega) had no undistributed
personal holding company income and therefore has not recorded a personal
holding company tax liability. There can be no assurance that Zapata will
not be subject to this tax in the future that in turn may materially and
adversely impact the Company's financial position, results of operations
and cash flows.
- Risks associated with a change of ownership pursuant to Section 382 of
the Internal Revenue Code. Such risks could significantly or possibly
eliminate Zapata's utilization of its net operating losses and/or
alternative minimum tax credits. An ownership change for this purpose is
generally a change in the majority ownership of a company over a three
year period.
- Risks associated with the ownership by the Malolm I. Glazer Family
Limited Partnersip of approximately 51.3% of our outstanding common
stock. Our majority stockholder will have the ability to effectively
control our management and affairs. In additon, any action requiring a
simple-majority stockholder vote can be determined solely by our majority
stockholder. This includes the ability to elect all members of our Board
of Directors and determine the outcome of certain corporate actions
requiring majority stockholder approval, such as merger and acquisition
decisions, or sale of all or substantiially all of our assets and the
election of directors. This level of ownership may also have a
significant effect in delaying, deferring, or preventing a change in
control of Zapata and may adversely affect the voting and other rights
of other holders of our common stock.
- Risk that our earnings may be reduced in the future due to the potential
impairment of our intangible assets. The Company's acquisition of Safety
Components common stock resulted in the recognition of intangible assets.
As required by applicable accounting rules, we assess the value of
intangible assets annually or when events or changes in circumstances
require. If we determine through this process that the value of these
assets has been impaired, we may be required to record impairment charges
in our Statement of Operations. Such charges may be substantial.
- Risk that our subsidiaries' outstanding stock options could
significantly dilute our ownership in these subsidiaries. Such dilution
would cause the Company to consolidate proportionately less net income (or
loss) recognized by our subsidiaries and would increase minority interest.
Such dilution could also cause a loss of control (typically when ownership
falls below 50%) which could lead to deconsolidation. Such investments
would be subsequently accounted for under the equity method of accounting.
30
- Risk that the carrying value of the Company's prepaid pension asset
could be significantly reduced. In the event that the Company decides to
terminate its pension plan (the "Plan"), at the time of this decision, the
Company would be required to incur a non-cash charge through earnings in
an amount equal to the remaining balance of its prepaid pension asset, net
of any reversion. If not terminated, the Plan would continue to be subject
to the additional minimum liability requirements of SFAS No. 87. Such
requirements require the recognition of an additional pension liability in
the amount of the unfunded accumulated benefit obligation in excess of
accrued pension with an equal amount to be recognized net of the
associated tax benefits in accumulated other comprehensive (loss) income.
Accordingly, depending on market conditions, the Company may have to
reverse its prepaid pension balance and record a pension liability through
a non-cash charge to equity. As the Company has not determined if it will
terminate the Plan, and due to the uncertainty of market conditions, the
Company can provide no assurances as to the ultimate financial statement
impact that Plan modifications or changes in market conditions may have.
- Risks related to the costs of defending litigation and the risk of
unanticipated material adverse outcomes in such litigation or any other
unfavorable outcomes or settlements. There can be no assurance that Zapata
will prevail in any pending litigation and to the extent that the Company
sustains losses growing out of any pending litigation which are not
presently reserved or otherwise provided for or insured against, its
business, results of operation and/or financial condition could be
adversely affected.
- Risks associated with future acquisitions of operating companies. Any
future acquisitions could be material in size and scope, an since the
Company has not yet identified any additional assets, property or business
that it may acquire or develop, potential investors in the Company will
have virtually no substantive information about any such new business upon
which to base a decision whether to invest in the Company. In any event
depending upon the size and structure of any future acquisitions,
stockholders may not have the opportunity to vote on the transaction, or
access to any information about any new business until such time as a
transaction is completed and the Company files a report with the SEC
disclosing the nature of such transaction and/or business. For example,
during September and October, 2003, stockholders were informed through
press releases and SEC filings that the Company had acquired a significant
stake in Safety Components. Such transactions materially affect the
Company's financial position, results of operations and cash flows. In the
Safety Components acquisition, the Company utilized approximately $47.8
million of its cash, cash equivalents and short-term investments and the
acquisition contributed an additional $63.5 million to the Company's
consolidated revenues for the fourth quarter of 2003.
There is no assurance that the Company will be successful in identifying
any suitable future acquisition opportunities. If the Company does identify
any additional potential acquisition opportunities, there is no assurance
that the acquisition will be consummated, and if the acquisition does
occur, there is no assurance that it will be successful in enhancing the
Company's business or will increase the Company's earnings or not
materially adversely affect the Company's financial condition. The Company
faces significant competition for acquisition opportunities, which may
inhibit its ability to complete suitable transactions or increase the cost
that must be paid. Future acquisitions could also divert substantial
management time, result in short term reductions in earnings or special
transactions or other charges and may be difficult to integrate with
existing operations or assets. We may, in the future, issue additional
shares of common stock or other securities in connection with one or more
acquisitions, which may dilute our stockholders. Depending upon the size
and number of any future acquisitions, the Company may also borrow money to
fund its acquisitions. In that event, the Company's stockholders would be
subject to the risks normally associated with leveraged transactions,
including the inability to service the debt or the dedication of a
significant amount of cash flow to service the debt, limitations on the
Company's ability to secure future financing and the imposition of certain
operating restrictions.
2. Risks associated with Safety Components that may impact Zapata include the
following, any of which could have a material adverse impact on Safety's
financial position, results of operations and cash flows:
- The impact of competitive products and pricing, dependence of
revenues upon several major module suppliers; worldwide economic
conditions; the results of cost savings programs being implemented;
domestic and international automotive industry trends, including the
marketplace for airbag related products; the ability of Safety
Components to effectively control costs and to satisfy customers on
timeliness and quality;
31
approval by automobile manufacturers of airbag cushions currently in
production; pricing pressures and labor strikes.
- Our nominees on the Safety Components' Board of Directors do not
comprise a majority of the board members. Therefore, we do not have
the ability to directly influence the management of Safety
Components and cannot be assured that the actions taken by the
Safety Components Board of Directors will necessarily be consistent
with Zapata's best interest.
3. Risks associated with Omega Protein that may impact Zapata include the
following, any of which could have a material adverse impact on Omega's
financial position, results of operations and cash flows:
- Omega's ability to meet its raw material requirements through its
annual menhaden harvest, which is subject to fluctuation due to
natural conditions over which Omega has no control, such as varying
fish population, adverse weather conditions and disease.
- The impact on Omega if its spotter aircraft are prohibited or
restricted from operating in their normal manner during Omega'
fishing season. For example, as a direct result of the September 11,
2001 terrorist attacks, the Secretary of Transportation issued a
federal ground stop order that grounded certain aircraft (including
the Company's fish-spotting aircraft) for approximately nine days.
This loss of spotter aircraft coverage severely hampered Omega's
ability to locate menhaden fish during this nine-day period and
thereby reduced its amount of saleable product.
- The impact on the prices for Omega's products of worldwide supply
and demand relationships over which Omega has no control and which
tend to fluctuate to a significant extent over the course of a year
and from year to year. The products that influence the supply and
demand relationship are world supplies of fish meal made from other
fish species, animal proteins and fats, palm oil, soy meal and oil,
and other edible oils.
- The impact of a violation by Omega of federal, state, intra-state
and local laws and regulations relating to menhaden fishing or of
the adoption of new laws or regulations at federal, state,
intra-state or local levels that restrict or prohibit menhaden or
purse-seine fishing, or stricter interpretations of existing laws or
regulations that materially adversely affect Omega's business.
- The impact of the enactment of increasingly stringent regulations
regarding contaminants in fish meal or fish oil by foreign countries
or the United States. More stringent regulations may result in: (a)
Omega's incurrence of additional capital expenditures on contaminant
reduction technology in order to meet the requirements of those
jurisdictions, and possibly higher production costs for Omega's
products, or (b) Omega's withdrawal from marketing its products in
those jurisdictions.
- The impact on Omega if it cannot harvest menhaden in U.S.
jurisdictional waters if Omega fails to comply with U.S. citizenship
ownership requirements.
- Risks inherent in Omega's attempt to expand into sales of refined,
food grade fish oils for consumption in the U.S., including the
unproven market for this product.
- Fluctuations in Omega's quarterly operating results due to the
seasonality of Omega's business and Omega's deferral of sales of
inventory based on worldwide prices for competing products.
- The ability of Omega to retain and recruit key officers and
qualified personnel, vessel captains and crewmembers.
- Risks associated with the strength of local currencies of the
countries in which its products are sold, changes in social,
political and economic conditions inherent in foreign operations and
international trade, including changes in the law and policies that
govern foreign investment and international trade in such countries,
changes in U.S. laws and regulations relating to foreign investment
and trade, changes in tax or other laws, partial or total
expatriation, currency exchange rate fluctuations and restrictions
on currency repatriation, the
32
disruption of labor, political disturbances, insurrection or war and
the effect of requirements of partial local ownership of operations
in certain countries.
- In the future Omega may undertake acquisitions, although there is no
assurance this will occur. Further, there can be no assurance that
Omega will be able to profitably manage future businesses it may
acquire or successfully integrate future businesses it may acquire
into Omega without substantial costs, delays or other problems which
could have a material adverse effect on Omega's business, results of
operations and financial condition.
- A general hardening of the world insurance markets in recent years
has made Omega's insurance more costly. 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.
4. Risks associated with the foreign operations of our controlled subsidiaries
that may impact Zapata include the following, (any of which could have a
material adverse impact on any such subsidiary's financial position, results of
operations and cash flows): the strength of local currencies of the countries in
which its products are sold, changes in social, political and economic
conditions inherent in foreign operations and international trade, including
changes in the law and policies that govern foreign investment and international
trade in such countries, changes in U.S laws and regulations relating to foreign
investment and trade, changes in tax or other laws, partial or total
expatriation, currency exchange rate fluctuations and restrictions on currency
repatriation, the disruption of labor, political disturbances, insurrection or
war and the effect of requirements of partial local ownership of operations in
certain countries.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EQUITY PRICE RISK. As the Company considers its holdings of Safety Components,
Omega Protein and Zap.Com 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 $72.2 million at September 30, 2004 as a
hypothetical constant cash balance, an adverse change of 1% in interest rates
would decrease interest income by approximately $180,000 and $541,000 during a
three-month and nine-month period, respectively.
MARKET RISK. To the extent that amounts borrowed under Safety's 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 September 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 Components 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,
33
the changes in the relationship of other currencies to the U.S. dollar could
have a material 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 costs 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 September 30, 2004, Safety
had outstanding forward exchange contracts that mature between October 2004 and
December 2004 to purchase Mexican pesos with an aggregate notional amount of
approximately $801,000. The fair values of these contracts at September 30, 2004
totaled approximately $23,000 which is recorded as an asset on Safety's balance
sheet in other current assets. 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 $22,000 of previously recorded
derivative fair values in AOCI into earnings for the nine months ended September
30, 2004 as a credit to cost of goods sold.
Although Omega Protein sells products in foreign countries, substantially all of
Omega's revenues are billed and paid for in US dollars. As a result, Omega's
management does not believe that Omega is exposed to any significant foreign
country currency exchange risk, and Omega does not utilize market risk sensitive
instruments to manage its exposure to this risk.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision of the Company's management,
including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Securities Exchange Act of 1934 (the
"Exchange Act") Rules 13a-15(e) and 15-d-15(e)) as of the end of the period
covered by this report. Based on that evaluation, the Company's management,
including the CEO and CFO, concluded that the Company's disclosure controls and
procedures were effective to provide reasonable assurance that information we
are required to disclose in reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.
Notwithstanding the foregoing, there can be no assurance that the Company's
disclosure controls and procedures will detect or uncover all failures of
persons within the Company and its consolidated subsidiaries to disclose
material information otherwise required to be set forth in the Company's
periodic reports. There are inherent limitations to the effectiveness of any
system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide
reasonable, not absolute, assurance of achieving their control objectives.
No changes in internal control over financial reporting occurred during the
quarter ended September 30, 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
34
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. UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
(d) Maximum Number
(or Approximate
(c) Total Number of Dollar Value) of
Shares (or Units) Shares (or Units)
(a) Total Number of (b) Average Price Purchased as Part of that May Yet Be
Shares (or Units) Paid per Share (or Publicly Announced Purchased Under the
Period Purchased Unit) Plans or Programs Plans or Programs
- ------------------- --------------------------- -------------------------- -------------------- --------------------
08/01/04 - 08/31/04 114,700 (1) $61.50 0 500,000 (2) shares
Total 114,700 $61.50 0 500,000 shares
(1) On September 2, 2004, the Malcolm I. Glazer Family Limited Partnership
(the "Glazer LP") filed a Schedule 13D indicating that it had acquired
114,700 shares of the company's common stock of Zapata Corporation in an
open market broker-assisted transaction. As a result of the transaction,
the Glazer LP now owns approximately 51.3% of the Company's outstanding
common stock.
(2) On December 6 2002, the company announced that its Board of Directors
authorized the company to purchase up to 500,000 shares of its outstanding
common stock in the open market or privately negotiated transactions. 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders' was held on November 1, 2004. In
connection with the Annual Meeting of Stockholders, the following are the
results of the vote taken on the various matters presented to the Company's
stockholders.
(1) All of the Board's nominees for directors were elected as follows:
For Withhold No Vote
--- -------- -------
Class III Directors: Term ending 2007
Edward S. Glazer 1,879,154 346,888 165,273
Robert V. Leffler, Jr. 2,041,120 184,922 165,273
35
(2) The proposal to ratify the appointment of PricewaterhouseCoopers LLP as
independent auditors was passed with the following vote:
For Against Abstain No Vote
--- ------- ------- -------
2,178,509 46,868 665 165,273
ITEM 5. OTHER INFORMATION
None.
ITEM 6. 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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZAPATA CORPORATION
(REGISTRANT)
Dated: November 12, 2004 By:/s/ Leonard DiSalvo
-----------------------------------
(Vice President-- Finance and Chief
Financial Officer)
36