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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 MARCH 31, 2005
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 14618
(Address of principal executive (Zip Code)
offices)
(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 [X] No [ ]
As of April 29, 2005, the Registrant had outstanding 19,132,520 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 March 31, 2005 (unaudited)
and December 31, 2004 3
Unaudited Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2005 and 2004 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2005 and 2004 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits 29
SIGNATURES 31
EXHIBITS 32
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
ZAPATA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31,
2005 DECEMBER 31,
(UNAUDITED) 2004
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 65,409 $ 67,433
Accounts receivable, net 51,216 53,376
Assets held in subsidiary deferred compensation plan 4,706 4,361
Inventories, net 69,335 67,324
Prepaid expenses and other current assets 6,618 6,515
--------- ---------
Total current assets 197,284 199,009
--------- ---------
Other assets:
Intangible assets, net 5,584 6,158
Other assets 20,302 20,021
--------- ---------
Total other assets 25,886 26,179
Property, plant and equipment, net 137,223 137,301
--------- ---------
Total assets $ 360,393 $ 362,489
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,430 $ 4,924
Accounts payable 17,226 19,395
Accrued and other current liabilities 30,781 32,880
--------- ---------
Total current liabilities 52,437 57,199
--------- ---------
Long-term debt 21,964 19,672
Pension liabilities 9,869 9,677
Other liabilities and deferred taxes 10,232 10,117
--------- ---------
Total liabilities 94,502 96,665
--------- ---------
Minority interest 81,259 79,510
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par; 1,600,000 shares authorized; none issued or
outstanding -- --
Preference stock, $.01 par; 14,400,000 shares authorized; none issued
or outstanding -- --
Common stock, $0.01 par, 132,000,000 shares authorized, 24,564,600
shares issued and 19,132,520 shares outstanding 246 31
Capital in excess of par value 160,317 160,671
Retained earnings 54,919 54,841
Treasury stock, at cost, 5,432,080 shares (31,668) (31,668)
Accumulated other comprehensive income 818 2,439
--------- ---------
Total stockholders' equity 184,632 186,314
--------- ---------
Total liabilities and stockholders' equity $ 360,393 $ 362,489
========= =========
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
MARCH 31,
2005 2004
-------- --------
Revenues $ 82,443 $ 94,287
Cost of revenues 70,975 79,136
-------- --------
Gross profit 11,468 15,151
Operating expenses:
Selling, general and administrative 9,288 9,587
-------- --------
Total operating expenses 9,288 9,587
-------- --------
Operating income 2,180 5,564
-------- --------
Other income (expense):
Interest income 325 391
Interest expense (441) (704)
Other, net (365) (276)
-------- --------
(481) (589)
Income before income taxes and minority interest 1,699 4,975
Provision for income taxes (1,157) (2,330)
Minority interest in net income of consolidated subsidiaries (464) (847)
-------- --------
Net income to common stockholders $ 78 $ 1,798
======== ========
Basic and diluted earnings per share $ 0.00 $ 0.09
======== ========
Weighted average common shares outstanding:
Basic 19,133 19,131
======== ========
Diluted 19,411 19,293
======== ========
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)
THREE MONTHS ENDED
MARCH 31,
2005 2004
-------- --------
Cash flows from operating activities:
Net income to common stockholders $ 78 $ 1,798
Adjustments to reconcile net income to common stockholders to net cash provided
by operating activities:
Depreciation and amortization 5,831 5,850
Amortization of purchase accounting adjustments 201 201
Loss on disposal of assets -- 33
Provisions for losses on receivables 145 122
Tax benefit from stock option exercises 187 219
Stock option modification expense 353 --
Minority interest in net income of consolidated subsidiaries 464 847
Deferred income taxes (144) 277
Changes in assets and liabilities:
Accounts receivable 2,015 (1,767)
Inventories (2,011) 7,802
Prepaid expenses and other current assets (66) 890
Other assets (192) (230)
Accounts payable (2,168) (2,719)
Pension liabilities 192 163
Accrued liabilities and other current liabilities (2,132) 1,373
Other liabilities (160) (15)
-------- --------
Total adjustments 2,515 13,046
-------- --------
Net cash provided by operating activities 2,593 14,844
-------- --------
Cash flows from investing activities:
Purchase of short-term investments -- (29,427)
Proceeds from maturities of short-term investments -- 29,351
Capital expenditures (6,405) (5,207)
-------- --------
Net cash used in investing activities (6,405) (5,283)
-------- --------
Cash flows from financing activities:
Proceeds from short- and long-term obligations 1,929 1,970
Proceeds from stock option exercises 867 821
-------- --------
Net cash provided by financing activities 2,796 2,791
-------- --------
Effect of exchange rate changes on cash and cash equivalents (1,008) (53)
-------- --------
Net increase (decrease) in cash and cash equivalents (2,024) 12,299
Cash and cash equivalents at beginning of period 67,433 43,934
-------- --------
Cash and cash equivalents at end of period $ 65,409 $ 56,233
======== ========
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 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 2004 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 2004 Annual Reports on Form 10-K. The results of operations
for the three month period ended March 31, 2005 are not necessarily indicative
of the results for any subsequent quarter or the entire fiscal year ending
December 31, 2005.
BUSINESS DESCRIPTION
Zapata Corporation ("Zapata" or "the Company") was incorporated in Delaware in
1954 and was reincorporated in Nevada in April 1999. The Company's principal
executive offices are at 100 Meridian Centre, Suite 350, Rochester, New York
14618. Zapata's common stock is listed on the New York Stock Exchange ("NYSE")
and trades under the symbol "ZAP."
Zapata Corporation is a holding company which currently has two operating
companies, Safety Components International, Inc. ("Safety Components" or
"Safety") and Omega Protein Corporation ("Omega Protein" or "Omega"). As of
March 31, 2005, Zapata had a 78% ownership interest in Safety and a 58%
ownership interest in Omega. In addition, Zapata owns 98% of Zap.Com Corporation
("Zap.Com"), a public shell company.
Safety Components is a leading, low-cost, independent supplier of automotive
airbag fabric and cushions and technical fabrics with operations in North
America and Europe. Safety Components sells airbag fabric domestically and
cushions worldwide to the major airbag module integrators that outsource such
products. Safety Components also manufactures value-added technical fabrics used
in a variety of niche industrial and commercial applications such as ballistics
material for luggage, filtration, military tents and fire service apparel. The
ability to interchange airbag and specialty technical fabrics using the same
equipment and similar manufacturing processes allows Safety to more effectively
utilize its manufacturing assets and lower per unit overhead costs. Safety
Components trades on the over-the counter electronic bulletin board ("OTCBB"),
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. Zap.Com is likely to search for assets or businesses that it can
acquire so that it can become an operating company. Zap.Com may also consider
developing a new business suitable for its situation. Zap.Com trades on the
OTCBB 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
STOCK-BASED COMPENSATION
The Company accounts for stock- based compensation according to Accounting
Principles Board Opinion No. 25 and the related interpretations under Financial
Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation." The Company adopted the
required disclosure provisions under Statement of Financial Accounting Standards
No. 148 and continues to use the intrinsic value method of accounting for
stock-based compensation. Had compensation expense for the Company's stock
option grants been determined based on fair value at the grant date using the
Black-Scholes option-pricing model, the Company's net income and earnings per
share (basic and diluted) would have been as follows:
THREE MONTHS ENDED
MARCH 31,
2005 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Net income, as reported $ 78 $ 1,798
Add: Stock-based employee compensation expense determined
under APB No. 25, included in reported net income,
net of tax effects 219 --
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax effects:
Zapata Corporate (243) (33)
Safety Components -- --
Omega Protein (81) (47)
Zap.Com (1) --
------- -------
Total pro forma expense (325) (80)
------- -------
Pro forma net (loss) income $ (28) $ 1,718
======= =======
Earnings per share:
Basic - as reported $ 0.00 $ 0.09
======= =======
Basic - pro forma $ (0.00) $ 0.09
======= =======
Diluted - as reported $ 0.00 $ 0.09
======= =======
Diluted - pro forma $ (0.00) $ 0.09
======= =======
RECLASSIFICATION
Certain reclassifications of prior information have been made to conform to the
current presentation.
7
NOTE 3. INVENTORIES
Inventories are summarized as follows:
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
(IN THOUSANDS)
SAFETY COMPONENTS:
Raw materials $ 5,819 $ 7,153
Work-in-process 7,982 8,073
Finished goods 10,794 11,656
---------- ----------
Total Safety Components inventory $ 24,595 $ 26,882
---------- ----------
OMEGA PROTEIN:
Fish meal $ 11,137 $ 18,693
Fish oil 7,955 11,118
Fish solubles 318 509
Unallocated inventory cost pool (including off season costs) 20,871 5,794
Other materials and supplies 4,459 4,328
---------- ----------
Total Omega Protein inventory $ 44,740 $ 40,442
---------- ----------
Total consolidated inventory $ 69,335 $ 67,324
========== ==========
8
NOTE 4. DEBT
Long-term debt consisted of the following:
MARCH 31, 2005 DECEMBER 31, 2004
-------------- -----------------
(IN THOUSANDS)
SAFETY COMPONENTS:
Wachovia revolving credit facility due on October 8, 2006, interest
at a variable rate of 5.5% at March 31, 2005 and 5.0 %
at December 31,2004 $ 3,456 $ 105
Wachovia Term A loan, due on October 8, 2006, interest at a variable
rate of 5.5% at March 31, 2005 and 5.0 % at December 31, 2004 1,915 2,048
KeyCorp equipment note due August, 2005, interest rate of 1.3%
over LIBOR 592 1,028
HBV Bank Czech Republic mortgage note due March, 2007, interest
rate of 1.7% over EURIBOR 2,222 2,640
Capital equipment notes payable, with various interest rates ranging
from 6.42% to 8.36%, maturing at various dates through March
2008 1,013 1,171
---------- -----------
Total Safety Components' debt 9,198 6,992
Less: current maturities (2,745) (3,263)
---------- -----------
$ 6,453 $ 3,729
---------- -----------
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% $ 16,783 $ 17,171
Amounts due in installments through 2014, interest at
Eurodollar rates of 3.0% and 2.03% at March 31, 2005 and
December 31, 2004, respectively, plus 4.5% 389 400
Other debt at 7.9% to 7.9% at March 31, 2005 and December 31, 2004,
respectively 24 33
---------- -----------
Total Omega Protein's debt 17,196 17,604
Less: current maturities (1,685) (1,661)
---------- -----------
$ 15,511 $ 15,943
---------- -----------
Total consolidated long-term debt $ 21,964 $ 19,672
========== ===========
SAFETY COMPONENTS
Safety has a credit facility with Wachovia Bank, National Association
("Wachovia"), successor by merger to Congress Financial Corporation (Southern).
Safety has an aggregate $35.0 million revolving credit facility with Wachovia
(the "Wachovia Revolver") expiring October 8, 2006. Under the Wachovia 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 outstanding under the Wachovia Revolver at March 31,
2005 was $3.5 million. The Wachovia Revolver also includes a $5.0 million letter
of credit facility, which was unutilized at March 31, 2005.
In addition, Safety has a term facility with Wachovia (the "Wachovia Term A
loan") under which $1.9 million was outstanding as of March 31, 2005. The
Wachovia Term A loan is payable in equal monthly installments of approximately
$45,000, with the unpaid principal amount due on October 8, 2006. Additional
amounts are not available for borrowing under the Wachovia Term A loan. In
addition to the Wachovia Revolver and the Wachovia Term A loan, Safety also has
an additional term loan (the "Wachovia Term B loan" and, collectively with the
Wachovia Revolver and the Wachovia Term A loan, the "Wachovia Facilities") which
is undrawn and under which $3.0 million was available as of March 31, 2005. At
March 31, 2005, Safety's availability for additional borrowings (based on the
maximum allowable limit) under the Wachovia Revolver and the Wachovia Term B
loan was approximately $34.5 million.
9
The interest rate on the Wachovia Revolver and Wachovia Term A loan is variable,
depending on the amount of Safety's Excess Availability (as defined in the
Wachovia 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 Wachovia Facilities (the "Prime Rate") or the
LIBOR rate as described in the Wachovia Facilities, in each case with an
applicable margin applied to the rate. The Wachovia Term B loan bears interest
at the Prime Rate plus 3%. At March 31, 2005, 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% per annum on the unutilized portion of the
Wachovia Revolver and a monthly fee equal to 1.75% per annum of the amount of
any outstanding letters of credit.
Under the Wachovia Revolver and Wachovia 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 Wachovia 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 Wachovia Term B loan
to the extent of certain excess cash flow.
The Wachovia 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 March 31, 2005, Safety was in
compliance with all financial covenants. At March 31, 2005, Safety was also in
compliance with all non-financial covenants or had obtained a waiver of
non-compliance from Wachovia. The non-compliance under this covenant was waived
by Wachovia. Substantially all assets of Safety are pledged as collateral for
the borrowings under the Wachovia Facilities.
OMEGA PROTEIN
Omega was initially authorized to receive up to $20.6 million in loans under the
Title XI program, and has borrowed the entire amount authorized under such
program. The Title XI loans are secured by liens on certain of Omega's fishing
vessels and mortgages on Omega's Reedville, Virginia and Abbeville, Louisiana
plants. Loans are now available under similar terms pursuant to the Title XI
program without intervening lenders.
On October 1, 2003, pursuant to the Title XI program, the United States
Department of Commerce approved the fiscal 2003 financing application made by
Omega in the amount of $5.3 million. Omega closed on the $5.3 million Title XI
loan on December 30, 2003.
In September 2004, the United States Department of Commerce Fisheries Finance
Program approved Omega's financing application in an amount not to exceed $14
million (the "Approval Letter"). Borrowings under the Approval Letter are to be
used to finance and/or refinance approximately 73% of the actual depreciable
cost of Omega's future fishing vessels refurbishments and capital expenditures
relating to shore-side fishing assets, for a term not to exceed 15 years from
inception at interest rates determined by the U.S. Treasury. Final approval for
all such future projects requires individual approval through the Secretary of
Commerce, National Oceanic and Atmospheric Administration, and National Marine
Fisheries Service ("National Marine Fisheries Service"). Borrowings under the
United States Department of Commerce Fisheries Finance Program are required to
be evidenced by secured agreements, undertakings, and other documents of
whatsoever nature deemed by the National Marine Fisheries Service sole
discretion, as necessary to accomplish the intent and purpose of the Approval
Letter. Omega is required to comply with customary National Marine Fisheries
Service covenants as well as certain special covenants. In December 2004, Omega
submitted a $4.9 million financing request. Omega expects to receive the $4.9
million financing in June 2005. As of March 31, 2005, Omega had no borrowings
outstanding under the Approval Letter.
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 to among other things,
extend the
10
maturity until December 20, 2006, delete certain existing financial covenants
and add 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. 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 will 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 rate 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 March 31, 2005 Omega had no
borrowings outstanding under the Credit Facility. At March 31, 2005 and December
31, 2004, Omega had outstanding letters of credit totaling approximately $2.9
million and $2.7 million, respectively, issued primarily in support of worker's
compensation insurance programs.
NOTE 5. COMMON STOCK
On April 6, 2005, the Company effected an eight-for-one stock split, resulting
in approximately 19.1 million shares of common stock then outstanding. In
addition, the Company's authorized shares increased to 132.0 million common
stock shares, 1.6 million preferred stock shares and 14.4 million preference
stock shares. The preferred and preference stock are undesignated "blank check"
shares.
In accordance with SEC Staff Accounting Bulletin Topic 4C, all share information
on the financial statements and notes to financial statements, including per
share amounts, have been proportionally adjusted as if the eight-for-one stock
split had been effective as of the date or period presented.
NOTE 6. EARNINGS PER SHARE INFORMATION
The following reconciles amounts used in the computations of basic and diluted
income per common share (in thousands, except per share amounts):
FOR THE THREE MONTHS ENDED
MARCH 31,
2005 2004
--------------------------------------------------
WEIGHTED PER WEIGHTED PER
AVERAGE SHARE AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ -------- ------ ------ -------- ------
Basic income per
common share $ 78 19,133 $ 0.00 $1,798 19,131 $ 0.09
====== ======
Effect of dilutive
stock options 278 162
------ ------
Diluted earnings per
common share $ 78 19,411 $ 0.00 $1,798 19,293 $ 0.09
====== ====== ====== ======
The following table details the potential common shares excluded from the
calculation of diluted earnings per share because their exercise price was
greater than the average market price for the period (in thousands, except per
share amounts):
11
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2005 2004
---------- ----------
Potential common shares excluded from the
calculation of diluted earnings per share:
Stock options 12 12
Weighted average price per share $ 10.938 $ 10.938
NOTE 7. COMPREHENSIVE INCOME
The components of other comprehensive income are as follows:
THREE MONTHS ENDED
MARCH 31,
2005 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Net income $ 78 $ 1,798
Currency translation adjustment, net of tax effects (1,670) (721)
Unrealized gain on hedging transactions, net of tax effects 46 --
Reclassification adjustment for losses in net income -- 124
------- -------
$(1,546) $ 1,201
======= =======
NOTE 8. COMMITMENTS AND CONTINGENCIES
LITIGATION
By letter dated November 2, 2004, a division employee, at the time a controller
for the Safety's North American Automotive Group, filed a complaint with the
U.S. Department of Labor, Occupational Safety & Health Administration ("OSHA"),
pursuant to Section 806 of the Corporate and Criminal Fraud Accountability Act
of 2002, Title VIII of the Sarbanes-Oxley Act of 2002 (the "Act"), alleging that
a change in his duties in September 2004 resulted from his allegations of
improprieties in the Company's operations in Mexico and California. Safety has
reported that neither the internal investigation conducted by management nor the
ensuing external investigation led by the Audit Committee of Safety's Board of
Directors following notification by management of the issues raised
substantiated any of the allegations. Due to circumstances unrelated to the
investigation or the complaint, Safety terminated the employee on December 15,
2004. By letter dated December 15, 2004, the employee amended his complaint to
allege that his termination was also in retaliation for his allegations. By
letter dated February 14, 2005, Safety was notified by OSHA that it had
completed its investigation and found that there is no reasonable cause to
believe that Safety violated the Act, and that the employee has 30 days from his
receipt of such notification to request a hearing before an Administrative Law
Judge. The employee has subsequently requested a hearing before an
Administrative Law Judge.
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.
12
CAPITAL COMMITMENTS
Omega Protein has entered into a purchase agreement to purchase a 40-acre
facility containing office and warehouse space located next to its Moss Point,
Mississippi facility. The proposed purchase price is $1.8 million. The closing
of the purchase is contingent on the completion of the Omega's due diligence on
the property and is expected to occur in the second quarter of 2005. If the
Omega acquires the property, Omega estimates that it will spend an additional $2
million during the remainder of 2005 for capital improvements to the property.
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. These indemnification obligations were in effect prior
to December 31, 2002 and are therefore grandfathered under the provisions of FIN
No. 45. Accordingly, no liabilities have been recorded for the indemnification
clauses in these agreements.
During February 2003, Zapata's directors and officers entered into
indemnification agreements with the Company. These agreements provide additional
rights to persons entitled to indemnification that is currently provided under
the Company's Articles of Incorporation and By-laws and will protect the
officers and directors from losses incurred as a result of claims made against
such individuals arising out of, or because of their service to the Company. The
maximum potential amount of future payments the Company could be required to
make under these indemnification agreements is unlimited; however, Zapata
maintains director and officer liability insurance to limit potential exposure.
As a result of this insurance coverage, it is the opinion of Zapata's management
that the estimated fair value of any liabilities under these indemnification
agreements is minimal and accordingly, no liabilities have been recorded under
the provisions of FIN 45.
Throughout its history, the Company has entered into numerous transactions
relating to the sale, disposal or spin-off of past operations. Pursuant to
certain of these transactions, the Company may be obligated to indemnify other
parties to these agreements. These obligations include indemnifications for
losses incurred by such parties arising out of the operations of such businesses
prior to these transactions or the inaccuracy of representations of information
supplied by the Company in connection with such transactions. These
indemnification obligations were in effect prior to December 31, 2002 and are
therefore grandfathered under the provisions of FIN No. 45. Accordingly, no
liabilities have been recorded for the indemnification clauses in these
agreements.
In addition, Safety Components, Omega Protein and Zap.Com have articles of
incorporation, bylaws and certain other agreements containing indemnification
clauses for their officers and directors. The estimated fair values of any
liabilities under these indemnification agreements are limited by insurance
coverages and should not materially impact the Company's financial position,
results of operations or cash flows. No liabilities have been recorded for the
indemnification clauses in these agreements.
PURCHASE OBLIGATION
As of March 5, 2005, Omega Protein had normal purchase commitments for energy
usage of approximately $4.5 million, that will be delivered in quantities
expected to be used in the normal course of business during the 2005 fishing
season.
13
NOTE 9. RELATED PARTY TRANSACTIONS
SAFETY COMPONENTS
After acquiring in excess of 80% of the voting interests in Safety Components,
the Company entered into a Tax Sharing and Indemnity Agreement (the tax sharing
agreement) with Safety Components. 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.
The tax sharing agreement defines each company's 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 this 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.
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 received no services under
the agreement for the three months ended March 31, 2005 and reimbursed Omega
approximately $6,000 for services provided under the agreement for the three
months ended March 31, 2004.
ZAP.COM CORPORATION
Since its inception, Zap.Com has utilized the services of the Zapata's
management and staff under a shared services agreement that allocated these
costs on a percentage of time basis. Zap. Com also subleases its office space in
Rochester, New York from Zapata. Under the sublease agreement, annual rental
payments are allocated on a cost basis. Zapata has waived its rights under the
shared services agreement to be reimbursed for these expenses since May 1, 2000.
For the three months ended March 31, 2005 and 2004, approximately $3,000 and
$4,000, respectively, was recorded as contributed capital for these services.
OTHER
In February 2005, the Company modified the terms of certain outstanding stock
options held by Darcie Glazer and Edward Glazer, to extend the early termination
of the exercise period following Darcie Glazer's termination of employment with
the Company in 2001. Consistent with FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation (an interpretation of APB
Opinion No. 25)," the Company recorded a compensation charge of approximately
$353,000 related to this modification.
NOTE 10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123R, "Share-Based Payment." SFAS No. 123R is a revision of SFAS
No. 123, "Accounting for Stock Based Compensation", and supersedes APB 25. Among
other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value
method of accounting, and requires companies to recognize the cost of employee
services received in exchange for awards of equity instruments, based on the
grant date fair value of those awards, in the financial statements. On April 14,
2005, the Securities and Exchange Commission (SEC) announced that the effective
date of SFAS 123R will be suspended until January 1, 2006, for calendar year
companies. The Company currently expects to adopt SFAS 123R effective January 1,
2006, based on the new effective date announced by the SEC. The Company is in
the process of reviewing the impact of the adoption of this statement and
believes that the adoption of this standard may have a material effect on the
Company's consolidated financial position and results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which
clarifies the accounting for abnormal
14
amounts of idle facility expense, freight, handling costs, and wasted material.
SFAS No. 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company is in the process of reviewing the
impact, if any, that the adoption of this statement will have on the Company's
financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," which eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 will be
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company is in the process of reviewing the impact, if
any, that the adoption of this statement will have on the Company's financial
position, results of operations or cash flows.
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 MARCH 31,
2005 2004
-------- --------
(IN THOUSANDS)
Service cost $ 10 $ 10
Interest cost 645 651
Expected return on plan assets (734) (750)
Amortization of transition assets and other deferrals 375 335
-------- --------
Net periodic benefit cost $ 296 $ 246
======== ========
Zapata plans to make no contributions to its pension plan or to its supplemental
pension plan in 2005. In addition, Omega Protein anticipates the fiscal 2005
contribution to be zero due to the enactment of the Pension Funding Equity Act
of 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
instruments are not entered into for trading or speculative purposes.
Certain operating expenses at Safety's Mexican facilities are paid in Mexican
pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican peso
exchange rates, Safety entered into forward contracts on February 16, 2005 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 March
31, 2005, Safety had outstanding forward exchange contracts that mature between
April 2005 and December 2005 to purchase Mexican pesos with an aggregate
notional amount of approximately $6.3 million. The fair values of these
contracts at March 31, 2005 totaled approximately $9,000 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 revenues.
Certain intercompany sales at Safety's Czech Republic facility are denominated
and settled in Euros. To reduce exposure to fluctuations in the Euro and Czech
Koruna exchange rates, Safety entered into forward contracts on
15
March 3, 2005 to buy Czech Korunas 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
March 31, 2005, Safety had outstanding forward exchange contracts that mature
between April 2005 and December 2005 to purchase Czech Korunas with an aggregate
notional amount of approximately $4.2 million. The fair values of these
contracts at March 31, 2005 totaled approximately $74,000 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 revenues.
NOTE 13. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The following summarizes certain financial information of each segment for the
three months ended March 31, 2005 and 2004:
INTEREST INCOME
OPERATING DEPRECIATION (EXPENSE) TAX
INCOME TOTAL AND INCOME, (PROVISION) CAPITAL
REVENUES (LOSS) ASSETS AMORTIZATION NET BENEFIT EXPENDITURES
--------- --------- --------- ------------ --------- --------- ------------
THREE MONTHS ENDED
MARCH 31, 2005
Safety Components $ 58,612 $ 3,566 $ 123,532 $ 2,490 $ (163) $ (1,011) $ 638
Omega Protein 23,831 278 189,547 3,330 (123) (9) 5,767
Zap.Com -- (30) 1,795 -- 10 -- --
Corporate -- (1,634) 45,519 11 160 (137) --
--------- --------- --------- ------------ --------- --------- ------------
$ 82,443 $ 2,180 $ 360,393 $ 5,831 $ (116) $ (1,157) $ 6,405
========= ========= ========= ============ ========= ========= ============
THREE MONTHS ENDED
MARCH 31, 2004
Safety Components $ 69,231 $ 5,731 $ 127,772 $ 2,843 $ (207) $ (2,352) $ 869
Omega Protein 25,056 1,212 182,807 3,039 (187) (323) 4,338
Zap.Com -- (42) 1,915 -- 5 -- --
Corporate -- (1,337) 50,364 14 76 345 --
--------- --------- --------- ------------ --------- --------- ------------
$ 94,287 $ 5,564 $ 362,858 $ 5,896 $ (313) $ (2,330) $ 5,207
========= ========= ========= ============ ========= ========= ============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-looking statements in this Form 10-Q, future filings by the Company with
the Securities and Exchange Commission ("Commission"), the Company's press
releases and oral statements by authorized officers of the Company are intended
to be subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that all forward-looking statements
involve risks and uncertainty, including without limitation those identified
from time to time in press releases and other communications with stockholders
by the Company and the filings made with the Commission by the Company, Safety
Components International, Inc. ("Safety Components" or "Safety"), Omega Protein
Corporation ("Omega Protein" or "Omega") and Zap.Com Corporation ("Zap.Com"),
such as those disclosed under the caption "Significant Factors That Could Affect
Future Performance and Forward-Looking Statements" appearing in Item 2
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004. 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."
16
Zapata is a holding company which currently has two operating companies, Safety
Components International, Inc. ("Safety Components" or "Safety") and Omega
Protein Corporation ("Omega Protein" or "Omega"). As of March 31, 2005, the
Company had approximately a 78% ownership interest in Safety Components and a
58% ownership interest in Omega Protein. Safety Components trades on the
over-the counter electronic bulletin board ("OTCBB") under the symbol "SAFY" and
Omega Protein trades on the New York Stock Exchange under the symbol "OME." In
addition, Zapata owns 98% of Zap.Com Corporation ("Zap.Com"), which is a public
shell company and trades on the OTCBB under the symbol "ZPCM."
ZAPATA CORPORATE
The Company effected an eight-for-one stock split of its outstanding shares of
common stock, par value $.01 per share (the "Common Stock"), effective at the
close of business on April 6, 2005. Where a number of shares of Common Stock is
listed in this report for a date or period prior to the effective date of the
stock split, that number of shares of Common Stock has been proportionately
adjusted as if the eight-for-one stock split had been in effect on that prior
date or during that prior period.
Zapata's Board of Directors has authorized the Company to purchase up to 500,000
shares of its outstanding common stock in the open market or privately
negotiated transactions. The shares may be purchased from time to time as
determined by the Company. Any purchased shares would be placed in treasury and
may subsequently be reissued for general corporate purposes. The repurchases
will be made only at such times as are permissible under the federal securities
laws. No time limit has been placed on the duration of the program and no
minimum number or value of shares to be repurchased has been fixed. Zapata
reserves the right to discontinue the repurchase program at any time and there
can be no assurance that any repurchases will be made. As of the date of this
report, no shares have been repurchased under this program.
Zapata continues to evaluate strategic opportunities for the use of its capital
resources, including but not limited to the acquisition of other operating
businesses, the minority interest of controlled subsidiaries, funding of
start-up proposals and possible stock repurchases. The Company has not focused
and does not intend to focus its acquisition efforts solely on any particular
industry or geographical market. While the Company focuses its attention in the
United States, the Company may investigate acquisition opportunities outside of
the United States when management believes that such opportunities might be
attractive. Similarly, the Company does not yet know the structure of any
acquisition. The Company may pay consideration in the form of cash, securities
of the Company or a combination of both. The Company may raise capital through
the issuance of equity or debt and may utilize non-investment grade securities
as a part of an acquisition strategy. Such investments often involve a high
degree of risk and may be considered highly speculative.
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 has recently entered into joint ventures to produce
products in China and South Africa, although commercial production has not yet
commenced in either of these locations. 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 has reported that 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
17
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 our 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.
Safety has experienced, and expects to continue to experience, variability in
net sales and net income from quarter to quarter. Therefore, the results of the
interim periods presented herein are not necessarily indicative of the results
expected for any other interim period or the full year.
OMEGA PROTEIN
BUSINESS. Omega Protein is the largest U.S. producer of protein-rich meal and
oil derived from marine sources. Omega's products are produced from menhaden (a
herring-like fish found in commercial quantities), and includes regular grade
and value-added specialty fish meals, crude and refined fish oils and fish
solubles.
FISHING. Omega's harvesting season generally extends from May through December
on the mid-Atlantic coast and from April through October on the Gulf coast.
During the off-season and the first few months of each fishing season, Omega
fills purchase orders from the inventory it has accumulated during the previous
fishing season or in some cases, by re-selling meal purchased from other
suppliers.
During the first quarter of 2005, Omega owned a fleet of 66 fishing vessels and
32 spotter aircraft for use in its fishing operations and also leased additional
aircraft where necessary to facilitate operations. During the 2005 fishing
season in the Gulf of Mexico, which runs from mid-April through October, Omega
plans to operate 31 fishing vessels and 28 spotter aircraft. The fishing area in
the Gulf is generally located along the Gulf Coast, with a concentration off the
Louisiana and Mississippi coasts. The fishing season along the Atlantic coast
begins in early May and usually extends into December. During 2005, Omega plans
to operate 10 fishing vessels and 7 spotter aircraft along the mid-Atlantic
coast, concentrated primarily in and around Virginia and North Carolina. The
remaining fleet of fishing vessels and spotter aircraft are not routinely
operated during the fishing season and are back-up to the active fleet, used for
other transportation purposes, inactive or in the process of refurbishment in
Omega's shipyard.
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.
The fish catch is processed into three general types of products; fish meal,
fish oil and fish solubles at Omega's four operating meal and oil processing
plants, two in Louisiana, one in Mississippi and one in Virginia.
Omega's Health and Science Center located in Virginia provides 100-metric tons
per day of fish oil processing capacity. The food-grade facility allows Omega to
further refine its fish oil into fish oils of special quality and food grade
oils that offer a long-chain Omega-3 content.
During 2004 and 2003, Omega experienced a poor fish catch (approximately 18% and
11%, respectively, 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 2004 compared to 2003. The impact of higher cost inventories
and fewer volumes available for sale will be carried forward and has adversely
affected Omega's earnings in the first quarter of 2005. Omega believes that this
will continue to adversely affect its earnings through the second quarter of
2005.
18
MARKETS. Omega's products are sold both in the U.S. and internationally. Omega's
fish meal is sold primarily to domestic feed producers for utilization as a
high-protein ingredient for the swine, aquaculture, dairy and pet food
industries. International sales consist mainly of fish oil sales to Norway,
Canada, China, Chile and Mexico. Omega's sales in these foreign markets are
denominated in U.S. dollars and are not directly affected by currency
fluctuations. Such sales could be adversely affected by changes in demand
resulting from fluctuations in currency exchange rates.
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 41%. Future
volumetric growth in specialty meal sales will be dependent 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 crude fish oil. Omega cannot estimate,
however, the size of the actual domestic or international markets for Omega
Pure(R) or how long it may take to develop these markets.
Part of Omega's business plan involves expanding its purchase and resale of
other manufacturer's fish meal and fish oil products. Omega initially focused on
the purchase and resale of Mexican fish meal and fish oil and revenues generated
from these types of transactions. During 2003 and 2004, Omega's fish catch and
resultant product inventories were reduced, primarily due to adverse weather
conditions, and Omega further expanded its purchase and resales of other fish
meals and oils (primarily Panamanian, Peruvian and Mexican fish meal and U.S.
menhaden oil). Although operating margins from these activities are less than
the margins typically generated from Omega's base domestic production, these
operations provide Omega with a source of fish meal and oil to sell into other
markets where Omega has not historically had a presence. Omega purchased
products totaling approximately 15,950 and 17,800 tons, or approximately 37% and
8% of total volume sales for the quarter ending March 31, 2005 and the fiscal
year ended December 31, 2004, respectively. These purchases and resale
transactions have been ancillary to Omega's base manufacturing and sales
business.
Historically, approximately 35% to 40% of Omega's FAQ grade fish meal was sold
on a two-to-twelve-month forward contract basis. The balance of FAQ grade fish
meal and other products was substantially sold on a spot basis through purchase
orders. Due to increasing customer demand for Omega's specialty meal and crude
fish oil, approximately 50% and 43% of its specialty meals and crude fish oil
had been sold on a forward contract basis during 2003 and 2004, respectively.
The balance of FAQ grade fish meal, specialty meals, crude fish oil and other
products was substantially sold on a spot basis. As of March 31, 2005,
approximately 80% and 22% of Omega's fish meals and crude fish oil have either
been sold or 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 anticipated customer usage and demand during the
off-season. Thus, production volume does not necessarily correlate with sales
volume in the same year and sales volumes will fluctuate from quarter to
quarter. Omega's fish meal products have a useable life of approximately one
year from date of production. Practically, however Omega attempts to empty its
warehouses of the previous season's products by the second or third month of the
new fishing season. Omega's crude fish oil products do not lose efficacy unless
exposed to oxygen and, therefore, their storage life typically is longer than
that of fish meal.
The following table sets forth Omega's revenues by product (in millions) and the
approximate percentage of total revenues represented thereby, for the indicated
periods:
19
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
2005 2004
-------------------- -------------------
REVENUES PERCENT REVENUES PERCENT
-------- ------- -------- -------
Regular Grade $ 4.1 17.2% $ 4.3 17.1%
Special Select 9.9 41.6 9.4 37.5
Sea-Lac 4.9 20.6 3.9 15.5
Crude Oil 3.3 13.9 6.0 23.9
Refined Oil 1.1 4.6 1.0 4.0
Fish Solubles 0.5 2.1 0.5 2.0
-------- ----- -------- -----
Total $ 23.8 100.0% $ 25.1 100.0%
======== ===== ======== =====
COMPETITION. 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, but to a
lesser extent, 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 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's principal raw material is menhaden, a species of fish that inhabits
coastal and inland tidal waters in the United States. Menhaden are undesirable
for direct human consumption due to their small size, prominent bones and high
oil content. Certain state agencies impose resource depletion restrictions on
menhaden pursuant to fisheries management legislation or regulations and may
impose additional legislation or regulations in the future. For example, the
Menhaden Management Board of the ASMFC voted in February 2005 to initiate the
preparation of an addendum to the existing ASMFC Interstate Management Plan for
Atlantic Menhaden which would limit the amount of commercial menhaden catch in
the Chesapeake Bay for a two-year period. The proposal, if ultimately passed,
would limit annual menhaden catch from the Chesapeake Bay to the Bay's 5-year
average catch, or 110,400 metric tons. (Omega's Chesapeake Bay fish catch was
99,300 metric tons in 2004 or approximately 22% of Omega's total 2004 fish
catch). If any limitation were to be ultimately imposed, it would likely become
effective for Omega's 2006 and 2007 fishing seasons. To date, Omega has not
experienced any material adverse impact on its fish catch or results of
operations as a result of these restrictions.
Omega from time to time considers potential transactions including, but not
limited to, enhancement of physical facilities to improve production
capabilities and the acquisition of other businesses. Certain of the potential
transactions reviewed by Omega would, if completed, result in its entering new
lines of business (generally 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.
Omega maintains insurance against physical loss and damage to its assets,
coverage against liabilities to third parties it may incur in the course of its
operations, as well as workers' compensation, United States Longshoremen's and
Harbor Workers' Compensation Act and Jones Act coverage. Assets are insured at
replacement cost, market value or assessed earning power. Omega's limits for
liability coverage are statutory or $50 million. The $50 million limit
20
is comprised of several excess liability policies, which are subject to
deductibles, underlying limits and exclusions. Omega believes its insurance
coverage to be in such form, against such risks, for such amounts and subject to
such deductibles and self-retentions as are prudent and normal for its
operations. Omega does not carry insurance against terrorist attacks, or against
business interruption, in large part because of the high costs of such
insurance.
Omega carries insurance for certain losses relating to its vessels and Jones Act
liability for employees aboard its vessels (collectively, "Vessel Claims
Insurance"). The typical Vessel Claims Insurance policy contains an annual
aggregate deductible ("AAD") for which Omega remains responsible, while the
insurance carrier is responsible for all applicable amounts which exceed the
AAD. It is Omega's policy to accrue current amounts due and record amounts paid
out on each claim. Once payments exceed the AAD, Omega records an insurance
receivable for a given policy year.
SEASONAL AND QUARTERLY RESULTS. Omega's menhaden harvesting and processing
business is seasonal in nature. Omega generally has higher sales during the
menhaden harvesting season (which includes the second and third quarter of each
year) due to increased product availability, but prices during the fishing
season tend to be lower than during the off-season. As a result, Omega's
quarterly operating results have fluctuated in the past and may fluctuate in the
future. In addition, from time to time Omega defers sales of inventory based on
worldwide prices for competing products that affect prices for Omega's products
which may affect comparable period comparisons.
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.
21
CONSOLIDATED RESULTS OF OPERATIONS
The following tables summarize Zapata's consolidating results of operations (in
thousands). Certain reclassifications of prior information have been made to
conform to the current presentation.
ZAPATA SAFETY OMEGA
THREE MONTHS ENDED MARCH 31, 2005 CORPORATE COMPONENTS(1) PROTEIN ZAP.COM CONSOLIDATED
--------------------------------- --------- ------------- ----------- -------- ------------
Revenues $ -- $ 58,612 $ 23,831 $ -- $ 82,443
Cost of revenues -- 50,200 20,775 -- 70,975
------- ---------- ---------- ------- ----------
Gross profit -- 8,412 3,056 -- 11,468
Operating expense:
Selling, general and administrative 1,634 4,846 2,778 30 9,288
------- ---------- ---------- ------- ----------
Operating (loss) income (1,634) 3,566 278 (30) 2,180
------- ---------- ---------- ------- ----------
Other income (expense)
Interest income 160 12 143 10 325
Interest expense -- (175) (266) -- (441)
Other, net -- (326) (39) -- (365)
------- ---------- ---------- ------- ----------
(Loss) income before income taxes and minority interest (1,474) 3,077 116 (20) 1,699
Provision for income taxes (137) (1,011) (9) -- (1,157)
Minority interest in net income of consolidated subsidiaries(2) -- (421) (43) -- (464)
------- ---------- ---------- ------- ----------
Net (loss) income to common stockholders $(1,611) $ 1,645 $ 64 $ (20) $ 78
======= ========== ========== ======= ==========
Diluted earnings per share $ 0.00
==========
22
ZAPATA SAFETY OMEGA
THREE MONTHS ENDED MARCH 31, 2004 CORPORATE COMPONENTS(1) PROTEIN ZAP.COM CONSOLIDATED
- --------------------------------------------------------------- --------- ------------- ----------- -------- ------------
Revenues $ -- $ 69,231 $ 25,056 $ -- $ 94,287
Cost of revenues -- 57,754 21,382 -- 79,136
-------- ---------- ---------- ------- ----------
Gross profit -- 11,477 3,674 -- 15,151
Operating expense:
Selling, general and administrative 1,337 5,746 2,462 42 9,587
-------- ---------- ---------- ------- ----------
Operating (loss) income (1,337) 5,731 1,212 (42) 5,564
-------- ---------- ---------- ------- ----------
Other income (expense)
Interest income 76 167 143 5 391
Interest expense (374) (330) -- (704)
Other, net -- (220) (56) -- (276)
-------- ---------- ---------- ------- ----------
(Loss) income before income taxes and minority interest (1,261) 5,304 969 (37) 4,975
Benefit (provision) for income taxes 345 (2,352) (323) -- (2,330)
Minority interest in net income of consolidated subsidiaries(2) -- (586) (262) 1 (847)
-------- ---------- ---------- ------- ----------
Net (loss) income to common stockholders $ (916) $ 2,366 $ 384 $ (36) $ 1,798
======== ========== ========== ======= ==========
Diluted earnings per share $ 0.09
==========
(1) For the three months ended March 31, 2005 and 2004, Safety's results of
operations were adjusted for the continuing effects of certain purchase
accounting adjustments. Net of tax effects, these adjustments reduced Zapata's
consolidated net income by approximately $125,000 for the three months ended
March 31, 2005 and March 31, 2004.
(2) Minority interest represents Zapata's minority stockholders' interest in the
net income (loss) of each segment.
For more information concerning segments, see Note 13 to the Company's
Consolidated Financial Statements included in Item 1 of this Report.
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Zapata reported consolidated net income of $78,000 or $.00 per diluted share on
consolidated revenues of $82.4 million for the three months ended March 31, 2005
as compared to consolidated net income of $1.8 million or $0.09 per diluted
share on consolidated revenues of $94.3 million for the three months ended March
31, 2004. On a consolidated basis, the decrease in net income resulted from
decreased net income at Safety Components and Omega Protein.
The following is a more detailed discussion of Zapata's consolidated operating
results:
REVENUES. Consolidated revenues decreased $11.8 million from $94.3 million for
the three months ended March 31, 2004 to $82.4 million for the three months
ended March 31, 2005. This decrease was attributable to decreased revenues of
$10.6 million at Safety and $1.2 million at Omega. Safety's revenues were $58.6
million for the three months ended March 31, 2005 as compared to $69.2 for the
comparable period of the prior year, while Omega Protein's revenues decreased
from $25.1 million to $23.8 million for the three months ended March 31, 2005.
Safety's decrease in revenues was due to a decrease in North American
operations' net sales of approximately $4.3 million, or 14%, compared to the
quarter ended March 31, 2004, with the decrease principally due to decreased
demand in the North America automotive market. Net sales for European operations
decreased $6.3 million, or 17%, resulting from decreased overall demand in the
automotive market and decisions to insource production of certain programs by
23
certain customers. This decrease in net sales was partially offset by the $1.3
million favorable effect of changes in foreign currency exchange rates compared
to the quarter ended March 31, 2004.
Omega's decrease in revenues was primarily due to an 11% decrease in sales
volumes partially offset by 7% increase in sales price, of Omega's fish meal and
fish oil sales activity. Omega experienced a $3 million decrease in revenues due
to reduced sales volumes offset by a $1.6 million increase in revenues due to
higher sales prices for its fish meal and fish oil.
COST OF REVENUES. Zapata's consolidated cost of revenues for the three months
ended March 31, 2005 was $71.0 million, an $8.1 million decrease from $79.1
million for the comparable period of the prior year. This increase was primarily
attributable to decreases in cost of revenue at Safety and Omega.
Safety's decrease in cost of revenues was attributable to North American
operations' cost of sales decreasing approximately $3.2 million, or 12%, and
European operations' cost of sales decreasing $4.7 million, or 14%, compared to
the quarter ended March 31, 2004. The overall decrease in cost of sales is
primarily attributable to the decrease in net sales in the corresponding time
periods. Cost of sales as a percentage of net sales increased to 86% for the
quarter ended March 31, 2005 from 83% for the quarter ended March 31, 2004. The
increase in cost of sales as a percentage of net sales is a result of a relative
increase as a percentage of net sales of the fixed cost component of cost of
sales which was not reduced commensurate with the decrease in net sales in the
corresponding time periods, as well as inflationary increases on raw materials
and supplies, offset by a decrease in depreciation expense of approximately
$341,000 due to the maturation of the depreciable lives of certain property,
plant and equipment.
Omega's cost of revenues, including depreciation and amortization, for the
current quarter ended March 31, 2005 was $20.8 million, a decrease from $21.4
million for the quarter ended March 31, 2004. Omega cost of sales as a
percentage of its revenues increased 2% to 87% for the quarter ended March 31,
2005 as compared to the corresponding period in 2004. The increase in cost of
sales as a percentage of revenues was primarily due to higher fiscal 2004 costs
of production due to reduced fish catch, brought about by adverse weather
conditions along the Atlantic Coast and in the Gulf of Mexico, combined with
lower oil yields for the Gulf of Mexico fish.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated selling, general, and
administrative expenses decreased $299,000 from $9.6 million for the three
months ended March 31, 2004 to $9.3 million for the three months ended March 31,
2005. This decrease was primarily attributable to a decrease in selling, general
and administrative expenses at Safety Components, partially offset by increases
at Zapata Corporate and Omega Protein.
Zapata Corporate's selling, general and administrative expenses increased
$297,000 from $1.3 million in the three months ended March 31, 2005. This
increase resulted from a compensation charge of approximately $353,000 recorded
in the first quarter of 2005 related to a stock option modification, partially
offset by a decrease in professional fees.
Safety's decrease in selling, general and administrative expenses is
attributable to reduced professional services and the one-time charge associated
with the closure of Safety's U.K. facility of approximately $300,000 recorded in
the quarter ended March 31, 2004. Additionally, Safety incurred costs of
approximately $240,000 related to the ongoing joint venture pre-production
activities in South Africa and China. Expenses from pre-production activities
are expected to continue until commercial production begins at these joint
venture facilities expected in the second half of 2005.
Omega's selling, general, and administrative expenses increased $316,000 from
$2.5 million in the first quarter ended March 31, 2004 compared to $2.8 million
for the current quarter ended March 31, 2005. This increase was attributable
primarily to increased consulting expenditures related to Omega's governmental
relations program and Sarbanes-Oxley compliance efforts.
INTEREST INCOME. Consolidated interest income decreased $66,000 from $391,000
for the three months ended March 31, 2005 as compared to $325,000 for the
comparable period of the current year. This decrease was primarily due to a
decrease of $155,000 at Safety Components, partially offset by an increase in
interest income of $84,000 at Zapata Corporate as a result of higher interest
rates as compared to 2004.
24
INTEREST EXPENSE. Interest expense decreased $263,000 from $704,000 for the
three months ended March 31, 2004 to $441,000 for the comparable period of 2005.
On a consolidated basis, this decrease resulted from lower interest expense of
$199,000 at Safety Components, combined with a decrease of $64,000 at Omega
Protein. Omega's decrease resulted primarily from lower Title XI loan balances
during the three months ended March 31, 2005 as compared to the three months
ended March 31, 2004. Safety's decrease was attributable to its average
outstanding debt decreasing to $8.1 million from $17.1 million, offset by the
average weighted interest rate for Safety's debt increasing to 5.11% from 3.68%
for the quarter ended March 31, 2005 as compared to the quarter ended March 31,
2004. Because a substantial portion of Safety's debt carries interest rates
based on the prime rate, increases in Safety's average weighted interest rate is
primarily attributable to increases totaling 150 basis points in the prime rate
over the past 12 months.
Other expense, net. Other expenses increased $89,000 to $365,000 for the three
months ended March 31, 2005. On a consolidated basis, this increase resulted
from an increase of $106,000 at Safety Components, partially offset by a
decrease of $17,000 at Omega related to line of credit commitment fees. Other
expense at Safety Components is realized primarily from foreign transaction
gains and losses resulting from the revaluation of intercompany balances between
Safety's European subsidiaries and the U.S. parent company. Net foreign
transaction losses during the quarter ended March 31, 2005 resulted from changes
in foreign currency exchange rates of approximately 3.9% from those at December
31, 2004.
INCOME TAXES. The Company recorded a consolidated provision for income taxes of
$1.2 million for the three months ended March 31, 2005 as compared to $2.3
million for the comparable period of the prior year. On a consolidated basis,
the decrease in provision for income taxes was primarily a result of decreased
pre-tax income recognized at Safety and Omega as compared to the comparable
period of the prior year. These decreases were partially offset by recognition
of a provision of $137,000 at Zapata Corporate as compared to a benefit of
$345,000 in the comparable period of the prior year.
Zapata Corporate's recognition of a tax provision during the period ended March
31, 2005 as compared to a tax benefit during the same period of the prior period
is the result of the deconsolidation of Safety Components for tax purposes which
occurred at the beginning of the second quarter of 2004. 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.
The Company's effective tax rate for the three months ended March 31, 2005 was
68%. The high effective rate was primarily the result of Zapata Corporate's
current quarter recognition of a $137,000 provision for income taxes which
reflects $600,000 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.
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 22% of Safety Components,
approximately 42% 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 March 31, 2005, minority interest was a
$464,000 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
25
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 currently prohibit any dividends from being
declared or paid with respect to their respective outstanding capital stock,
including the shares held by Zapata. For all periods presented in this Report,
Zapata has not received any dividends from any of its consolidated subsidiaries.
As of March 31, 2005, the Company's consolidated contractual obligations and
other commercial commitments have not changed materially from those set forth in
the Company's Annual Report on Form 10-K for the year ended December 31, 2004.
ZAPATA CORPORATE
Because Zapata does not guarantee or otherwise assume the liabilities of Safety
Components, Omega Protein or Zap.Com or have any investment commitments to these
majority-owned subsidiaries, it is useful to separately review the cash
obligations of Zapata exclusive of its majority-owned subsidiaries ("Zapata
Corporate").
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.
As of March 31, 2005, Zapata Corporate's contractual obligations and other
commercial commitments have not changed materially from those set forth in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004.
Zapata Corporate's current source of liquidity 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 March 31, 2005, Zapata Corporate's cash,
cash equivalents and short-term investments were $27.6 million as compared to
$28.7 million as of December 31, 2004. This decline resulted primarily from cash
used by Zapata Corporate's operations.
In addition to its cash, cash equivalents, short-term investments and interest
income, Zapata Corporate has a potential secondary source of liquidity from
dividends declared by Safety Components, Omega Protein or Zap.Com, provided a
consent is obtained from their lenders. Also, the sale of the Company's holdings
of common stock in these subsidiaries could provide another secondary source of
liquidity. These holdings constitute "restricted stock" under SEC Rule 144 and
may only be sold in the public market pursuant to an effective registration
statement under the Securities Act of 1933 and under any required state
securities laws or pursuant to an available exemption. These and other
securities law restrictions could prevent or delay any sale by Zapata of these
securities or reduce the amount of proceeds that might otherwise be realized
therefrom. Currently, all of Zapata's equity securities holdings are eligible
for sale under Rule 144. Zapata also has demand and piggyback registration
rights for its Omega Protein and Zap.Com shares. The low trading volumes for
Safety Components, Omega Protein and Zap.Com common stock may make it difficult
for Zapata to sell any significant number of shares in the public market.
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.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2005, 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, 2004.
26
SUMMARY OF CASH FLOWS
The following table summarizes Zapata's consolidating cash flow information (in
thousands):
ZAPATA SAFETY OMEGA
THREE MONTHS ENDED MARCH 31, 2005 CORPORATE COMPONENTS PROTEIN ZAP.COM CONSOLIDATED
- ------------------------------------------------------------ --------- ---------- -------- -------- ------------
CASH (USED IN) PROVIDED BY
Operating activities $ (1,065) $ 2,781 $ 905 $ (28) $ 2,593
Investing activities -- (638) (5,767) -- (6,405)
Financing activities -- 2,987 (191) -- 2,796
Effect of exchange rate changes on cash and cash equivalents -- (1,007) (1) -- (1,008)
-------- --------- ------- ------- --------
Net (decrease) increase in cash and cash equivalents $ (1,065) $ 4,123 $(5,054) $ (28) $ (2,024)
======== ========= ======= ======= ========
ZAPATA SAFETY OMEGA
THREE MONTHS ENDED MARCH 31, 2004 CORPORATE COMPONENTS PROTEIN ZAP.COM CONSOLIDATED
- ------------------------------------------------------------ --------- ---------- -------- -------- ------------
CASH (USED IN) PROVIDED BY
Operating activities $ (251) $ (1,256) $16,371 $ (20) $ 14,844
Investing activities (76) (869) (4,338) -- (5,283)
Financing activities -- 3,102 (311) -- 2,791
Effect of exchange rate changes on cash and cash equivalents -- (54) 1 -- (53)
-------- --------- ------- ------- --------
Net (decrease) increase in cash and cash equivalents $ (327) $ 923 $11,723 $ (20) $ 12,299
======== ========= ======= ======= ========
NET CASH PROVIDED BY OPERATING ACTIVITIES. Consolidated cash provided by
operating activities was $2.6 million and $14.8 million for the three months
ended March 31, 2005 and 2004, respectively. The decrease in consolidated cash
provided by operating activities was primarily due to a decrease in cash
provided by operating activities related to increases in inventory balances at
Omega Protein. On a consolidated basis, the decrease at Omega was partially
offset by an increase at Safety Components, from cash used in operating
activities of $1.3 million for the three months ended March 31, 2004 to cash
proved by operating activities of $2.8 million for the comparable period of
2005. The increase at Safety was primarily the result of timing of payments for
accounts receivable and accrued and other liabilities.
NET CASH USED IN INVESTING ACTIVITIES. Consolidated cash used in investing
activities was $6.4 million and $5.3 million for the three months ended March
31, 2005 and 2004, respectively. The increase in cash used in investing
activities resulted primarily from increased capital expenditures at Omega
Protein, partially offset by decreases in capital expenditures at Safety
Components in the current period as compared to the comparable period of the
prior year. Safety expects to spend approximately $11.0 million on capital
expenditures during the remainder of 2005. These expenditures include
approximately $2.0 million for its joint ventures in South Africa and China.
Omega Protein anticipates making approximately $12.7 million in capital
expenditures in 2005, which will be used to refurbish vessels, plant assets and
to repair certain equipment. Omega's capital expenditures totaled $5.8 million
in the first quarter of 2005.
NET CASH USED IN FINANCING ACTIVITIES. Consolidated cash provided by financing
activities was $2.8 million for the three months ended March 31, 2005 and 2004.
Safety Components and Omega Protein had additional cash provided by stock option
exercises in the three months ended March 31, 2005 as compared to the three
months ended March 31, 2004, offset by additional cash used in repayments of
debt obligations.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based
Payment". SFAS No. 123R is a revision of SFAS No. 123, "Accounting for Stock
Based Compensation", and supersedes APB 25. Among other items, SFAS 123R
eliminates
27
the use of APB 25 and the intrinsic value method of accounting, and requires
companies to recognize the cost of employee services received in exchange for
awards of equity instruments, based on the grant date fair value of those
awards, in the financial statements. On April 14, 2005, the Securities and
Exchange Commission (SEC) announced that the effective date of SFAS 123R will be
suspended until January 1, 2006, for calendar year companies. The Company
currently expects to adopt SFAS 123R effective January 1, 2006, based on the new
effective date announced by the SEC. The Company is in the process of reviewing
the impact of the adoption of this statement and believes that the adoption of
this standard may have a material effect on the Company's consolidated financial
position and results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material. SFAS No. 151 will be effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. The
Company is in the process of reviewing the impact, if any, that the adoption of
this statement will have on the Company's financial position, results of
operations or cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets," which eliminates the exception for nonmonetary exchanges of similar
productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. SFAS No. 153 will be
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Company is in the process of reviewing the impact, if
any, that the adoption of this statement will have on the Company's financial
position, results of operations or cash flows.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As of March 31, 2005, 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, 2004.
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 which may include 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 $65.4 million at
March 31, 2005 as a hypothetical constant cash balance; an adverse change of 1%
in interest rates would decrease interest income by approximately $164,000
during a three-month period.
MARKET RISK. Both Safety and Omega are exposed to minimal market risk associated
with interest rate movements on their borrowings. A one percent increase or
decrease in the levels of interest rates on such borrowings would not result in
a material change to the Company's results of operations.
CURRENCY EXCHANGE RATES AND FORWARD CONTRACTS. Safety's operations in Mexico,
Germany, the United Kingdom and the Czech Republic expose Safety to currency
exchange rate risks. Safety monitors its risk associated with the volatility of
certain foreign currencies against its functional currency, the U.S. dollar.
Safety uses certain derivative financial instruments to reduce exposure to
volatility of foreign currencies. However, the changes in the relationship
28
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 operating expenses at Safety's Mexican facilities are paid in Mexican
pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican peso
exchange rates, Safety entered into forward contracts on February 16, 2005 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 March
31, 2005, Safety had outstanding forward exchange contracts that mature between
April 2005 and December 2005 to purchase Mexican pesos with an aggregate
notional amount of approximately $6.3 million. The fair values of these
contracts at March 31, 2005 totaled approximately $9,000 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 revenues.
Certain intercompany sales at Safety's Czech Republic facility are denominated
and settled in Euros. To reduce exposure to fluctuations in the Euro and Czech
Koruna exchange rates, Safety entered into forward contracts on March 3, 2005 to
buy Czech Korunas 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 March
31, 2005, Safety had outstanding forward exchange contracts that mature between
April 2005 and December 2005 to purchase Czech Korunas with an aggregate
notional amount of approximately $4.2 million. The fair values of these
contracts at March 31, 2005 totaled approximately $74,000 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 revenues.
Although Omega Protein sells products in foreign countries, all of Omega's
revenues are billed and paid for in US dollars. As a result, Omega's management
does not believe that it 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
EVALUATION OF DISCLOSURE 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 15d-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.
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INTERNAL CONTROL OVER FINANCIAL REPORTING. No changes in internal control over
financial reporting occurred during the quarter ended March 31, 2005 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
By letter dated November 2, 2004, a division employee, at the time a controller
for the Safety's North American Automotive Group, filed a complaint with the
U.S. Department of Labor, Occupational Safety & Health Administration ("OSHA"),
pursuant to Section 806 of the Corporate and Criminal Fraud Accountability Act
of 2002, Title VIII of the Sarbanes-Oxley Act of 2002 (the "Act"), alleging that
a change in his duties in September 2004 resulted from his allegations of
improprieties in the Company's operations in Mexico and California. Safety has
reported that neither the internal investigation conducted by management nor the
ensuing external investigation led by the Audit Committee of Safety's Board of
Directors following notification by management of the issues raised
substantiated any of the allegations. Due to circumstances unrelated to the
investigation or the complaint, Safety terminated the employee on December 15,
2004. By letter dated December 15, 2004, the employee amended his complaint to
allege that his termination was also in retaliation for his allegations. By
letter dated February 14, 2005, Safety was notified by OSHA that it had
completed its investigation and found that there is no reasonable cause to
believe that Safety violated the Act, and that the employee has 30 days from his
receipt of such notification to request a hearing before an Administrative Law
Judge. The employee has subsequently requested a hearing before an
Administrative Law Judge.
Zapata is involved in litigation relating to claims arising out of its past and
current operations in the normal course of business. Zapata maintains insurance
coverage against such potential ordinary course claims in an amount in which it
believes to be adequate. While the results of any ultimate resolution cannot be
predicted, in the opinion of Zapata's management, based upon discussions with
counsel, any losses resulting from these matters will not have a material
adverse effect on Zapata's results of operations, cash flow or financial
position.
ENVIRONMENTAL MATTERS
Zapata and its subsidiaries are subject to various possible claims and lawsuits
regarding environmental matters. Zapata's management believes that costs, if
any, related to these matters will not have a material adverse effect on the
consolidated results of operations, cash flows or financial position of the
Company.
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
The exhibits indicated by an asterisk (*) are incorporated by reference.
30
3(c)* Certificate of Change to Certificate of Incorporation dated April 6,
2005 (Exhibit 99.1 to Current Report on Form 8-K filed April 8, 2005
(File No. 1-4219)).
3(d) Amended By-Laws of Zapata Corporation dated May 6, 2005.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZAPATA CORPORATION (REGISTRANT)
Dated: May 6, 2005 By: /s/ Leonard DiSalvo
---------------------------
(Vice President-- Finance and
Chief Financial Officer)
32