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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 14618
ROCHESTER, NY (Zip Code)
(Address of principal executive 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 August 1, 2005 the Registrant had outstanding 19,137,856 shares of common
stock, $0.01 par value.
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ZAPATA CORPORATION
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2005
(unaudited) and December 31, 2004 3
Unaudited Condensed Consolidated Statements of Operations for
the Three Months and Six Months Ended June 30, 2005 and
2004 4
Unaudited Condensed Consolidated Statements of Cash Flows for
the Six Months Ended June 30, 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 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Item 4. Controls and Procedures 41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 3. Defaults Upon Senior Securities 42
Item 4. Submission of Matters to a Vote of Security Holders 42
Item 5. Other Information 42
Item 6. Exhibits 43
SIGNATURES 44
EXHIBITS 45
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
ZAPATA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JUNE 30, 2005 DECEMBER 31,
(UNAUDITED) 2004
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 47,665 $ 67,433
Accounts receivable, net 53,759 53,376
Assets held in subsidiary deferred compensation plan 2,178 4,361
Inventories, net 82,451 67,324
Prepaid expenses and other current assets 8,564 6,515
-------- --------
Total current assets 194,617 199,009
-------- --------
Other assets:
Intangible assets, net 5,007 6,158
Other assets 19,842 20,021
-------- --------
Total other assets 24,849 26,179
Property, plant and equipment, net 139,382 137,301
-------- --------
Total assets $358,848 $362,489
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,920 $ 4,924
Accounts payable 18,370 19,395
Accrued and other current liabilities 32,836 32,880
-------- --------
Total current liabilities 55,126 57,199
-------- --------
Long-term debt 17,574 19,672
Pension liabilities 10,061 9,677
Other liabilities and deferred taxes 11,530 10,117
-------- --------
Total liabilities 94,291 96,665
-------- --------
Minority interest 81,667 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;
24,569,936 and 24,564,600 shares issued at June 30, 2005
and December 31, 2005, respectively; and 19,137,856 and
19,132,520 shares outstanding at June 30, 2005 and
December 31, 2004, respectively 246 31
Capital in excess of par value 160,395 160,671
Retained earnings 55,383 54,841
Treasury stock, at cost, 5,432,080 shares (31,668) (31,668)
Accumulated other comprehensive (loss) income (1,466) 2,439
-------- --------
Total stockholders' equity 182,890 186,314
-------- --------
Total liabilities and stockholders' equity $358,848 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
2005 2004 2005 2004
------- ------- -------- --------
Revenues $86,518 $92,314 $168,961 $186,601
Cost of revenues 74,953 76,123 145,928 155,258
------- ------- -------- --------
Gross profit 11,565 16,191 23,033 31,343
Operating expense:
Selling, general and administrative 9,385 9,262 18,673 18,849
------- ------- -------- --------
Total operating expenses 9,385 9,262 18,673 18,849
------- ------- -------- --------
Operating income 2,180 6,929 4,360 12,494
------- ------- -------- --------
Other income (expense):
Interest income 402 377 727 768
Interest expense (400) (702) (841) (1,406)
Other, net 280 49 (85) (227)
------- ------- -------- --------
282 (276) (199) (865)
Income before income taxes and minority
interest 2,462 6,653 4,161 11,629
Provision for income taxes (1,297) (4,280) (2,454) (6,611)
Minority interest in net income of
consolidated subsidiaries (701) (1,536) (1,165) (2,383)
------- ------- -------- --------
Net income to common stockholders $ 464 $ 837 $ 542 $ 2,635
======= ======= ======== ========
Earnings per share:
Basic $ 0.02 $ 0.04 $ 0.03 $ 0.14
======= ======= ======== ========
Diluted $ 0.02 $ 0.04 $ 0.03 $ 0.14
======= ======= ======== ========
Weighted average common shares outstanding:
Basic 19,135 19,131 19,134 19,131
======= ======= ======== ========
Diluted 19,345 19,356 19,379 19,326
======= ======= ======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
ZAPATA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
-------------------
2005 2004
-------- --------
Cash flows from operating activities:
Net income $ 542 $ 2,635
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 11,523 11,437
Amortization of purchase accounting adjustments 401 401
Loss on disposal of assets 140 182
Provisions for losses on receivables 153 206
Tax benefit from stock option exercises 187 369
Stock option modification expense 353 --
Minority interest in net income of consolidated subsidiaries 1,165 2,383
Deferred income taxes 943 2,745
Changes in assets and liabilities:
Accounts receivable (536) 1,153
Inventories (15,128) (1,244)
Assets held in deferred compensation plan 2,183 (598)
Prepaid expenses and other current assets (1,075) (214)
Other assets (283) (1,061)
Accounts payable (1,025) (12,311)
Pension liabilities 384 325
Accrued liabilities and other current liabilities 256 6,127
Other liabilities (286) 12
-------- --------
Total adjustments (645) 9,912
-------- --------
Net cash (used in) provided by operating activities (103) 12,547
-------- --------
Cash flows from investing activities:
Proceeds from disposition of assets 339 62
Gain on involuntary conversion (307) --
Purchase of short-term investments -- (508)
Proceeds of maturities of short-term investments -- 29,351
Capital expenditures (15,388) (15,512)
-------- --------
Net cash (used in) provided by investing activities (15,356) 13,393
-------- --------
Cash flows from financing activities:
(Repayments of) proceeds from long-term obligations (2,883) 1,335
Proceeds from stock option exercises 987 1,169
-------- --------
Net cash (used in) provided by financing activities (1,896) 2,504
-------- --------
Effect of exchange rate changes on cash and cash equivalents (2,413) (29)
-------- --------
Net (decrease) increase in cash and cash equivalents (19,768) 28,415
Cash and cash equivalents at beginning of period 67,433 43,934
-------- --------
Cash and cash equivalents at end of period $ 47,665 $ 72,349
======== ========
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 June 30, 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 June
30, 2005, Zapata had a 77% 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, additives to human food products and as a dietary
supplement. 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
("SFAS") No. 148 and continues to use the intrinsic value method of accounting
for stock-based compensation. Had compensation expense for the Company's stock
option grants been determined based on fair value at the grant date using the
Black-Scholes option-pricing model, the Company's net income and earnings per
share (basic and diluted) would have been as follows:
THREE MONTHS ENDED
JUNE 30,
-------------------------
2005 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Net income, as reported $ 464 $ 837
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax effects:
Zapata Corporate (22) (33)
Safety Components -- --
Omega Protein (536) (89)
Zap.Com (1) --
----- -----
Total pro forma expense (559) (122)
----- -----
Pro forma net income $ (95) $ 715
===== =====
Earnings per share:
Basic - as reported $0.02 $0.04
===== =====
Basic - pro forma $0.00 $0.04
===== =====
Diluted - as reported $0.02 $0.04
===== =====
Diluted - pro forma $0.00 $0.04
===== =====
7
SIX MONTHS ENDED
JUNE 30,
-------------------------
2005 2004
(UNAUDITED) (UNAUDITED)
----------- -----------
(IN THOUSANDS)
Net income, as reported $ 542 $2,635
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 (264) (65)
Safety Components -- --
Omega Protein (618) (136)
Zap.Com (3) --
------ ------
Total pro forma expense (885) (201)
------ ------
Pro forma net income $ (124) $2,434
====== ======
Earnings (loss) per share:
Basic - as reported $ 0.03 $ 0.14
====== ======
Basic - pro forma $(0.01) $ 0.13
====== ======
Diluted - as reported $ 0.03 $ 0.14
====== ======
Diluted - pro forma $(0.01) $ 0.13
====== ======
On May 5, 2005, Omega Protein accelerated the vesting of all unvested,
out-of-the-money, explicit service period stock options granted under Omega's
2000 Long-Term Incentive Plan. A stock option was considered "out-of-the-money"
if the stock option exercise price was greater than $6.04 which was the closing
price of Omega's common stock on the New York Stock Exchange on May 5, 2005. As
a result of this action, stock options to purchase 390,000 shares of Omega's
common stock became immediately exercisable. The vesting created modification of
stock options; however, there was no impact on the fair value of the options.
The weighted average exercise price of all the accelerated stock options was
$9.98. Omega has reported that it believes that the future compensation expense
that will be avoided, based on an implementation date for SFAS No. 123R of
January 1, 2006, will be approximately $733,000 in 2006 and $237,000 in 2007.
Omega reported that the purpose of accelerating vesting was to eliminate future
compensation expense that Omega would otherwise recognize in its Statement of
Operations with respect to these accelerated stock options upon the adoption of
SFAS No. 123R. As of June 30, 2005, Omega had not recognized any expense
relating to the acceleration of vesting.
RECLASSIFICATION
Certain reclassifications of prior information have been made to conform to the
current presentation.
8
NOTE 3. INVENTORIES
Inventories are summarized as follows:
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
(IN THOUSANDS)
SAFETY COMPONENTS:
Raw materials $ 5,794 $ 7,153
Work-in-process 7,129 8,073
Finished goods 12,682 11,656
------- -------
Total Safety Components inventory $25,605 $26,882
------- -------
OMEGA PROTEIN:
Fish meal $17,222 $18,693
Fish oil 15,665 11,118
Fish solubles 558 509
Unallocated inventory cost pool (including
off season costs) 18,397 5,794
Other materials and supplies 5,004 4,328
------- -------
Total Omega Protein inventory $56,846 $40,442
------- -------
Total consolidated inventory $82,451 $67,324
======= =======
9
NOTE 4. DEBT
Long-term debt consisted of the following:
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
(IN THOUSANDS)
SAFETY COMPONENTS:
Wachovia revolving credit facility due on October 8, 2006, interest
at a variable rate of 6.0% at June 30, 2005 and 5.0%
at December 31, 2004 $ -- $ 105
Wachovia Term A loan, due on October 8, 2006, interest at a
variable rate of 6.0% at June 30, 2005 and 5.0% at December 31, 2004 1,781 2,048
KeyCorp equipment note due August 2005, interest rate of 1.3%
over LIBOR 147 1,028
HBV Bank Czech Republic mortgage note due March 2007, interest
rate of 1.7% over EURIBOR 1,835 2,640
Capital equipment notes payable, with various interest rates ranging
from 6.42% to 8.36%, maturing at various dates through July
2008 948 1,171
------- -------
Total Safety Components' debt 4,711 6,992
Less: current maturities (2,216) (3,263)
------- -------
$ 2,495 $ 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% $16,388 $17,171
Amounts due in installments through 2014, interest at
Eurodollar rates of 3.93% and 2.03% at June 30, 2005 and
December 31, 2004, respectively, plus 4.5% 380 400
Other debt at 7.9% at June 30, 2005 and December 31, 2004 15 33
------- -------
Total Omega Protein's debt 16,783 17,604
Less: current maturities (1,704) (1,661)
------- -------
$15,079 $15,943
------- -------
Total consolidated long-term debt $17,574 $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. No amount was outstanding under the Wachovia Revolver at June 30,
2005 on Safety's consolidated balance sheet. The Wachovia Revolver also includes
a $5.0 million letter of credit facility, which was unutilized at June 30, 2005.
In addition, Safety has a term facility with Wachovia (the "Wachovia Term A
loan") under which $1.8 million was outstanding as of June 30, 2005. At June 30,
2005, $534,000 of the $1.8 million outstanding was included in current portion
of long-term debt on Safety's consolidated balance sheet. 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 $2.6 million was available as of June 30, 2005. At June
30, 2005, Safety's availability for
10
additional borrowings (based on the maximum allowable limit) under the Wachovia
Revolver and the Wachovia Term B loan was approximately $37.6 million.
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 June 30, 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. If 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 June 30, 2005, Safety was in
compliance with all financial covenants. At June 30, 2005, Safety was also in
compliance with all non-financial covenants and had obtained a waiver of
non-compliance from Wachovia for not timely dissolving an inactive subsidiary.
Substantially all assets of Safety are pledged as collateral for the borrowings
under the Wachovia Facilities.
OMEGA PROTEIN
Omega received $20.6 million in loans under the Title XI 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 the third quarter of 2005. As of June 30, 2005, Omega had
no borrowings outstanding under the Approval Letter.
11
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 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. The
Credit Facility was amended on July 26, 2005 to increase the annual limitation
on capital expenditures from $11.0 million to $16.5 million for the fiscal year
ending December 31, 2005. As of June 30, 2005, Omega had no borrowings
outstanding under the Credit Facility. At June 30, 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 JUNE 30,
-------------------------------------------------------
2005 2004
-------------------------- --------------------------
WEIGHTED PER WEIGHTED PER
AVERAGE SHARE AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ -------- ------ ------ -------- ------
Basic income per common
share $464 19,135 $0.02 $837 19,131 $0.04
===== =====
Effect of dilutive
stock options 210 225
------ ------
Diluted earnings per
common share $464 19,345 $0.02 $837 19,356 $0.04
====== ===== ====== =====
12
FOR THE SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------
2005 2004
-------------------------- --------------------------
WEIGHTED PER WEIGHTED PER
AVERAGE SHARE AVERAGE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ -------- ------ ------ -------- ------
Basic income per common
share $542 19,134 $0.03 $2,635 19,131 $0.14
===== =====
Effect of dilutive
stock options 245 195
------ ------
Diluted earnings per
common share $542 19,379 $0.03 $2,635 19,326 $0.14
====== ===== ====== =====
The following table details the potential common shares excluded from the
calculation of diluted earnings per share because their exercise price was
greater than the average market price for the period (in thousands, except per
share amounts):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
2005 2004 2005 2004
------ ------- ------- -------
Potential common shares excluded from the
calculation of diluted earnings per share:
Stock options (in thousands) 18 12 12 12
Weighted average price per share $9.793 $10.938 $10.938 $10.938
NOTE 7. COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) are as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
2005 2004 2005 2004
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
(IN THOUSANDS)
Net income to common stockholders $ 464 $837 $ 542 $2,635
Currency translation adjustment, net of tax effects (2,378) 16 (4,046) (573)
Unrealized gain (loss) on hedging transactions,
net of tax effects 94 (13) 141 (13)
Reclassification adjustment for losses in net
income -- 5 -- 5
------- ---- ------- ------
$(1,820) $845 $(3,363) $2,054
======= ==== ======= ======
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 investigations conducted by various levels of
Safety's management nor the ensuing external investigation conducted by a
forensic accounting firm engaged 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 file an objection and request a hearing
13
before an Administrative Law Judge. The employee has subsequently requested a
hearing before an Administrative Law Judge. The employee filed such objection,
but Safety has not received a notice of request for a hearing.
Zapata is involved in litigation relating to claims arising out of its past and
current operations in the normal course of business. Zapata maintains insurance
coverage against such potential ordinary course claims in an amount in which it
believes to be adequate. While the results of any ultimate resolution cannot be
predicted, in the opinion of Zapata's management, based upon discussions with
counsel, any losses resulting from these matters will not have a material
adverse effect on Zapata's results of operations, cash flow or financial
position.
ENVIRONMENTAL MATTERS
Zapata and its subsidiaries are subject to various possible claims and lawsuits
regarding environmental matters. Zapata's management believes that costs, if
any, related to these matters will not have a material adverse effect on the
consolidated results of operations, cash flows or financial position of the
Company.
CAPITAL COMMITMENTS
In May 2005, Omega Protein closed on the purchase of a previously reported
40-acre facility containing office and warehouse space located next to its Moss
Point, Mississippi facility. The purchase price was $1.8 million.
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 than 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.
14
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 June 30, 2005, Omega Protein had normal purchase commitments for energy
usage of approximately $2.5 million, that will be delivered in quantities
expected to be used in the normal course of business during the 2005 fishing
season.
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 and six months ended June 30, 2005 and reimbursed
Omega approximately $4,000 and $10,000 for services provided under the agreement
for the three and six months ended June 30, 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 June 30, 2005 and 2004, approximately $3,000 and
$4,000, respectively, was recorded as contributed capital for these services.
For the six months ended June 30, 2005 and 2004, approximately $6,000 and 7,000,
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.
15
NOTE 10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued 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 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 FOR THE SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
------------------------- -------------------------
2005 2004 2005 2004
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- -----------
(IN THOUSANDS)
Service cost $ 10 $ 10 $ 21 $ 19
Interest cost 645 651 1,291 1,302
Expected return on plan assets (734) (750) (1,468) (1,500)
Amortization of transition assets and other
deferrals 375 335 751 671
----- ----- ------- -------
Net periodic benefit cost $ 296 $ 246 $ 595 $ 492
===== ===== ======= =======
Zapata and Omega have not made, and do not anticipate making any contributions
to their respective pension plans during 2005. Additionally, neither company
made any contributions to their respective pension plans during 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
16
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 June 30,
2005, Safety had outstanding forward exchange contracts that mature between July
2005 and December 2005 to purchase Mexican pesos with an aggregate notional
amount of approximately $4.2 million. The fair values of these contracts at June
30, 2005 totaled approximately $246,000 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 and certain of its operating expenses are paid in Czech
Korunas. 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 with Euros for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts were designated as hedges
at inception and are monitored for effectiveness on a routine basis. At June 30,
2005, Safety had outstanding forward exchange contracts that mature between July
2005 and December 2005 to purchase Czech Korunas with an aggregate notional
amount of approximately $2.3 million. The fair values of these contracts at June
30, 2005 totaled approximately $75,000 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 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. INVOLUNTARY CONVERSION
In August, 2004, a fire damaged a piece of equipment at Omega Protein's plant in
Cameron, Louisiana. Insurance coverage for the loss provided for reimbursement
of replacement value for the equipment damaged in the fire. As of June 30, 2005,
Omega received $170,000 of the insurance proceeds and $145,000 was recorded in
"accounts receivable." For the three and six month periods ended June 30, 2005,
a net gain on involuntary conversion of approximately $307,000 was included in
"other income (expense)," representing insurance proceeds received and
receivable in excess of costs incurred.
17
NOTE 14. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The following summarizes certain financial information of each segment for the
three and six months ended June 30, 2005 and 2004 (in thousands):
INTEREST INCOME
OPERATING DEPRECIATION (EXPENSE) TAX
INCOME TOTAL AND INCOME (PROVISION) CAPITAL
REVENUES (LOSS) ASSETS AMORTIZATION NET BENEFIT EXPENDITURES
-------- --------- -------- ------------ --------- ----------- ------------
THREE MONTHS ENDED
JUNE 30, 2005
Safety Components $ 59,008 $ 2,750 $118,166 $ 2,352 $(144) $ (868) $ 3,438
Omega Protein 27,510 764 194,186 3,331 (52) (283) 5,545
Zap.Com -- (35) 1,782 1 12 -- --
Corporate -- (1,299) 44,714 8 186 (146) --
-------- ------- -------- ------- ----- ------- -------
$ 86,518 $ 2,180 $358,848 $ 5,692 $ 2 $(1,297) $ 8,983
======== ======= ======== ======= ===== ======= =======
THREE MONTHS ENDED
JUNE 30, 2004
Safety Components $ 65,858 $ 5,404 $122,098 $ 2,941 $(215) $(1,566) $ 2,003
Omega Protein 26,456 2,975 190,734 2,590 (184) (914) 8,302
Zap.Com -- (48) 1,864 -- 5 -- --
Corporate -- (1,402) 49,511 10 69 (1,800) --
-------- ------- -------- ------- ----- ------- -------
$ 92,314 $ 6,929 $364,207 $ 5,541 $(325) $(4,280) $10,305
======== ======= ======== ======= ===== ======= =======
SIX MONTHS ENDED
JUNE 30, 2005
Safety Components $117,620 $ 6,316 $118,166 $ 4,842 $(307) $(1,879) $ 4,076
Omega Protein 51,341 1,042 194,186 6,661 (175) (292) 11,312
Zap.Com -- (65) 1,782 1 22 -- --
Corporate -- (2,933) 44,714 19 346 (283) --
-------- ------- -------- ------- ----- ------- -------
$168,961 $ 4,360 $358,848 $11,523 $(114) $(2,454) $15,388
======== ======= ======== ======= ===== ======= =======
SIX MONTHS ENDED
JUNE 30, 2004
Safety Components $135,089 $11,136 $122,098 $ 5,784 $(422) $(3,919) $ 2,872
Omega Protein 51,512 4,187 190,734 5,629 (371) (1,237) 12,640
Zap.Com -- (90) 1,864 -- 9 -- --
Corporate -- (2,739) 49,511 24 146 (1,455) --
-------- ------- -------- ------- ----- ------- -------
$186,601 $12,494 $364,207 $11,437 $(638) $(6,611) $15,512
======== ======= ======== ======= ===== ======= =======
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 this Report. The Company believes that forward-looking statements
made by it are based on reasonable expectations. However, no assurances can be
given that actual results will not differ materially from those contained in
such forward-looking statements. The Company assumes no obligation to update
forward-looking statements or to update the reasons actual results could differ
from those projected in the forward-looking statements.
18
GENERAL
Zapata Corporation ("Zapata" or the "Company") was incorporated in Delaware in
1954 and was reincorporated in Nevada in April 1999. The Company's principal
executive offices are at 100 Meridian Centre, Suite 350, Rochester, New York
14618. Zapata's common stock is listed on the New York Stock Exchange ("NYSE")
and trades under the symbol "ZAP."
Zapata is a holding company which currently has two operating companies, Safety
Components International, Inc. ("Safety Components" or "Safety") and Omega
Protein Corporation ("Omega Protein" or "Omega"). As of June 30, 2005, the
Company had approximately a 77% 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."
During the quarter ended June 30, 2005, Messrs. Goldfarb, Hopkins, Wetzel and
Waide resigned as members of the Board of Directors of Safety Components. None
of the resignations were a result of a disagreement with Safety Components. Also
during the quarter, the Board elected Daniel D. Tessoni as an independent Class
I director and as chair of the Audit Committee. Mr. Tessoni was not named as a
director pursuant to any arrangement or understanding with any other person. Mr.
Tessoni is not a party to any transaction described in Item 404(a) of Regulation
S-K involving the Zapata, Safety Components, or any related subsidiaries. As of
the date of this report, Safety's Board of Directors comprises Mr. Daniel
Tessoni; Mr. John Corey, Safety's President and CEO; Mr. Avram A. Glazer,
Zapata's President and CEO; and Mr. Leonard DiSalvo, Zapata's VP--Finance and
CFO.
During the quarter ended June 30, 2005, Ms. Darcie Glazer, a member of Zapata's
Board of Directors, resigned as a member of the Board of Directors of Omega
Protein. Also during the quarter, Omega's Board elected Mr. Leonard DiSalvo,
Zapata's VP--Finance and CFO, as a member of Omega's Board of Directors.
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 4.0
million 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.
19
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 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.
During the second quarter of 2004, one of Safety's largest raw materials
suppliers implemented a price increase of approximately 11% on raw material yarn
purchased for the Company's North America airbag fabric weaving facility.
Safety's negotiations with its airbag cushion customers in North America to
increase prices of certain of its products in order to preserve profit margins
on these products were only partially successful and resulted in a mixture of
agreements where such price increases were either agreed to or future sales
price reductions were deferred. Safety's customers supply airbag modules to
various automotive manufacturers. The automotive manufacturers have experienced
rising inventories of unsold automobiles and trucks resulting in reduced
production in order to balance inventory levels with sales. The impact of any
further sustained reductions in production cannot be predicted but may impact
the Company's results of operations and/or financial position adversely.
Safety has a $16.2 million intercompany note in the form of a loan from a U.S.
subsidiary to a European subsidiary. This note has been classified as long-term
in nature pursuant to U.S. generally accepted accounting principles which treat
any changes in the value of the note due to fluctuations of currency rates
between the U.S. dollar and the euro to be recorded as a separate component of
equity (i.e. designated as a hedging transaction). On June 30, 2005 this note
ceased to be designated as a hedging transaction and the European subsidiary
began to pay down the note resulting in the note's equity component of
approximately $6.2 million being frozen in the separate component of equity. Any
gains or losses due to fluctuations in currency rates between the U.S. dollar
and the euro in future periods will be included in net income in Safety's
consolidated statements of operations.
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
20
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.
As of June 30, 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 is operating 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 the 2005 season, Omega is
operating 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 actual
results), combined with poor oil yields. The reduced fish catch was primarily
attributable to adverse weather conditions and the poor oil yields were 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 was carried forward and
has adversely affected Omega's earnings through the first and second quarters of
2005.
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, Japan, 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.
21
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 17% and
8% of total volume sales, for the six months ended June 30, 2005 and the fiscal
year ended December 31, 2004, respectively. Omega did not purchase fish meal or
fish oil products during the quarter ended June 30, 2005. These purchases and
resale transactions have historically 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 43% and 50% of its specialty meals and crude fish oil
had been sold on a forward contract basis during 2004 and 2003, 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 had either
been sold or sold on a forward contract basis. The percentage of fish meals and
crude fish oil sold on a forward contract basis fluctuate from year to year
based upon perceived market availability. 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:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------- ---------------------------------------
2005 2004 2005 2004
------------------ ------------------ ------------------ ------------------
Revenues Percent Revenues Percent Revenues Percent Revenues Percent
-------- ------- -------- ------- -------- ------- -------- -------
Regular Grade $ 5.5 20.0% $ 5.4 20.5% $ 9.6 18.8% $ 9.7 18.8%
Special Select 11.9 43.3 11.1 42.0 21.8 42.5 20.5 39.8
Sea-Lac 4.2 15.3 4.3 16.3 9.1 17.7 8.2 15.9
Crude Oil 4.0 14.5 3.6 13.6 7.3 14.2 9.6 18.7
Refined Oil 1.4 5.1 1.4 5.3 2.5 4.9 2.4 4.7
Fish Solubles 0.5 1.8 0.6 2.3 1.0 1.9 1.1 2.1
----- ----- ----- ----- ----- ----- ----- -----
Total $27.5 100.0% $26.4 100.0% $51.3 100.0% $51.5 100.0%
===== ===== ===== ===== ===== ===== ===== =====
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
22
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.
In May 2005, Omega closed on the purchase of a previously reported 40-acre
facility containing office and warehouse space located next to Omega's Moss
Point, Mississippi facility. The purchase price was $1.8 million. Omega
estimates that it will spend approximately $2.0 million during the remainder of
2005 for capital improvements to the property.
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 and state compacts 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 Atlantic States Marine
Fisheries Commission ("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). Omega has participated in the public hearing and comment process in
order to present evidence that the fishery is healthy, and that no cap is needed
(and in fact, as proposed, may not be permissible under existing ASMFC
regulations and policies). The imposition of management measures by the ASMFC
such as the proposed cap, must, pursuant to the ASMFC's charter, be based on the
"best scientific information available." Omega believes, based on consultations
with its scientific and technical advisors, that the proposed cap falls short of
this standard. After the public hearing and comment process is completed, the
Menhaden Management Board may make a recommendation on the addendum to the ASMFC
Interstate Fisheries Management Policy Board at a meeting scheduled for August
17, 2005. If that Board were to ultimately approve the addendum, the addendum
would be sent to individual ASMFC member states for them to consider adoption
and implementation. 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 pet food manufacturers, aquaculture feed
manufacturers, other protein additive 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
23
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.
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.
24
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1) PROTEIN ZAP.COM CONSOLIDATED
--------- ------------- ------- ------- ------------
THREE MONTHS ENDED JUNE 30, 2005
Revenues $ -- $59,008 $27,510 $ -- $86,518
Cost of revenues -- 51,260 23,693 -- 74,953
------- ------- ------- ---- -------
Gross profit -- 7,748 3,817 -- 11,565
Operating expense:
Selling, general and administrative 1,299 4,998 3,053 35 9,385
------- ------- ------- ---- -------
Operating (loss) income (1,299) 2,750 764 (35) 2,180
------- ------- ------- ---- -------
Other income (expense)
Interest income 186 14 190 12 402
Interest expense -- (158) (242) -- (400)
Other, net 17 33 230 -- 280
------- ------- ------- ---- -------
(Loss) income before income taxes and
minority interest (1,096) 2,639 942 (23) 2,462
Provision for income taxes (146) (868) (283) -- (1,297)
Minority interest in net income of
consolidated subsidiaries(2) -- (425) (276) -- (701)
------- ------- ------- ---- -------
Net (loss) income to common stockholders $(1,242) $ 1,346 $ 383 $(23) $ 464
======= ======= ======= ==== =======
Diluted earnings per share $ 0.02
=======
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1) PROTEIN ZAP.COM CONSOLIDATED
--------- ------------- ------- ------- ------------
THREE MONTHS ENDED JUNE 30, 2004
Revenues $ -- $65,858 $26,456 $ -- $92,314
Cost of revenues -- 55,060 21,063 -- 76,123
------- ------- ------- ---- -------
Gross profit -- 10,798 5,393 -- 16,191
Operating expense:
Selling, general and administrative 1,402 5,394 2,418 48 9,262
------- ------- ------- ---- -------
Operating (loss) income (1,402) 5,404 2,975 (48) 6,929
------- ------- ------- ---- -------
Other income (expense)
Interest income 69 166 137 5 377
Interest expense (381) (321) (702)
Other, net -- 99 (50) -- 49
------- ------- ------- ---- -------
(Loss) income before income taxes and
minority interest (1,333) 5,288 2,741 (43) 6,653
Provision for income taxes (1,800) (1,566) (914) -- (4,280)
Minority interest in net income (loss) of
consolidated subsidiaries(2) -- (794) (743) 1 (1,536)
------- ------- ------- ---- -------
Net (loss) income to common stockholders $(3,133) $ 2,928 $ 1,084 $(42) $ 837
======= ======= ======= ==== =======
Diluted earnings per share $ 0.04
=======
25
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1) PROTEIN ZAP.COM CONSOLIDATED
--------- ------------- -------- ------- ------------
SIX MONTHS ENDED JUNE 30, 2005
Revenues $ -- $117,620 $51,341 $ -- $168,961
Cost of revenues -- 101,460 44,468 -- 145,928
------- -------- ------- ---- --------
Gross profit -- 16,160 6,873 -- 23,033
Operating expense:
Selling, general and administrative 2,933 9,844 5,831 65 18,673
------- -------- ------- ---- --------
Operating (loss) income (2,933) 6,316 1,042 (65) 4,360
------- -------- ------- ---- --------
Other income (expense)
Interest income 346 26 333 22 727
Interest expense -- (333) (508) -- (841)
Other, net 17 (293) 191 -- (85)
-------- ------- ---- --------
(Loss) income before income taxes and (2,570) 5,716 1,058 (43) 4,161
minority interest
Provision for income taxes (283) (1,879) (292) -- (2,454)
Minority interest in net income of
consolidated subsidiaries(2) -- (846) (319) -- (1,165)
------- -------- ------- ---- --------
Net (loss) income to common
stockholders $(2,853) $ 2,991 $ 447 $(43) $ 542
======= ======== ======= ==== ========
Diluted earnings per share $ 0.03
========
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1) PROTEIN ZAP.COM CONSOLIDATED
--------- ------------- -------- ------- ------------
SIX MONTHS ENDED JUNE 30, 2004
Revenues $ -- $135,089 $51,512 $ -- $186,601
Cost of revenues -- 112,813 42,445 -- 155,258
------- -------- ------- ---- --------
Gross profit -- 22,276 9,067 -- 31,343
Operating expense:
Selling, general and administrative 2,739 11,140 4,880 90 18,849
------- -------- ------- ---- --------
Operating (loss) income (2,739) 11,136 4,187 (90) 12,494
------- -------- ------- ---- --------
Other income (expense)
Interest income 146 333 280 9 768
Interest expense -- (755) (651) -- (1,406)
Other, net -- (121) (106) -- (227)
------- -------- ------- ---- --------
(Loss) income before income taxes and (2,593) 10,593 3,710 (81) 11,629
minority interest
Provision for income taxes (1,455) (3,919) (1,237) -- (6,611)
Minority interest in net income (loss)
of consolidated subsidiaries(2) -- (1,380) (1,005) 2 (2,383)
------- -------- ------- ---- --------
Net (loss) income to common
stockholders $(4,048) $ 5,294 $ 1,468 $(79) $ 2,635
======= ======== ======= ==== ========
Diluted earnings per share $ 0.14
========
26
(1) For the three and six months ended June 30, 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 $124,000 and $123,000 for
the three months ended June 30, 2005 and 2004 and $249,000 and $249,000 for
the six months ended June 30, 2005 and 2004, respectively.
(2) Minority interest represents Zapata's minority stockholders' interest in
the net income (loss) of each segment.
For more information concerning segments, see Note 14 to the Company's
Consolidated Financial Statements included in Item 1 of this Report.
THREE MONTHS ENDED JUNE 30, 2005 AND 2004
Zapata reported consolidated net income of $464,000 or $.02 per diluted share on
consolidated revenues of $86.5 million for the three months ended June 30, 2005
as compared to consolidated net income of $837,000 or $0.04 per diluted share on
consolidated revenues of $92.3 million for the three months ended June 30, 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 $5.8 million from $92.3 million for
the three months ended June 30, 2004 to $86.5 million for the three months ended
June 30, 2005. This decrease was attributable to decreased revenues of $6.9
million at Safety, partially offset by a $1.1 million increase at Omega.
Safety's revenues were $59.0 million for the three months ended June 30, 2005 as
compared to $65.9 for the comparable period of the prior year, while Omega
Protein's revenues increased from $26.5 million to $27.5 million for the three
months ended June 30, 2005.
Safety's decrease in revenues was due to a decrease in North American
operations' net revenues of approximately $1.9 million, or 6%, compared to the
quarter ended June 30, 2004, with the decrease principally due to decreased
demand in the North America automotive market and increased customer in-sourcing
of production, which frequently occurs when demand decreases. Net revenues for
European operations decreased $5.0 million, or 14%, resulting from decreased
overall demand in the automotive market and decisions by certain customers to
curtail outsourcing and begin production of certain programs using their own
facilities. The decrease in net revenues for European operations included the
effect of approximately $1.0 million of favorable changes in foreign currency
exchange rates compared to the quarter ended June 30, 2004.
Omega's increase in revenues was primarily due to a 7% increase in sales prices
partially offset by a 3% decrease in sales volumes, of Omega's fish meal and
fish oil sales activity. Omega experienced a $0.3 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 June 30, 2005 was $75.0 million, a $1.2 million decrease from $76.1
million for the comparable period of the prior year. This decrease was
attributable to a decrease in cost of revenue at Safety, partially offset by an
increase in cost of revenue at Omega.
Safety's decrease in cost of revenues was attributable to North American
operations' cost of revenues decreasing approximately $884,000, or 4%, and
European operations' cost of revenues decreasing $3.3 million, or 11%, compared
to the quarter ended June 30, 2004. The overall decrease in cost of revenues is
primarily attributable to the decrease in sales volumes in the corresponding
time periods. Cost of revenues as a percentage of net revenues increased to 87%
for the quarter ended June 30, 2005 from 85% for the quarter ended June 30,
2004. The increase in cost of revenues as a percentage of net revenues is a
result of the fixed cost component of cost of revenues which was not reduced in
proportion to the decrease in net revenues in the corresponding time periods, as
well as inflationary increases on raw materials and supplies, offset by a
decrease in depreciation expense of approximately $604,000 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 June 30, 2005 was $23.7 million, an increase from $21.1
million for the quarter ended June 30, 2004. Omega's cost of revenues as a
percentage of its revenues increased 7% to 86% for the quarter ended June 30,
2005 as compared to the corresponding period in 2004. The increase in cost of
revenues as a percentage of revenues was primarily due to the purchase of fish
27
meal at prices in excess of Omega's cost to produce similar products.
Additionally, Omega experienced an increased cost of production primarily
attributed to an increase in energy costs.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated selling, general, and
administrative expenses increased $123,000 for the three months ended June 30,
2004 to $9.4 million for the three months ended June 30, 2005. This increase was
attributable to an increase in selling, general and administrative expenses at
Omega Protein, partially offset by decreases at Safety Components and Zapata
Corporate.
Zapata Corporate's selling, general and administrative expenses decreased
$103,000 from $1.4 million in the three months ended June 30, 2005. This
decrease resulted primarily from reductions in professional fees partially
offset by the expenses associated with Zapata's recent 8-for-1 stock split.
Safety's selling, general and administrative expenses increased $396,000 to $5.0
million for the quarter ended June 30, 2005 compared to the quarter ended June
30, 2004. The increase in selling, general and administrative expenses is
attributable primarily to costs associated with Safety's joint venture
operations, partially offset by reduced professional services. During the
quarter ended June 30, 2005, Safety incurred costs of approximately $192,000
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, which is
expected to occur in the second half of 2005. Selling, general and
administrative expenses as a percentage of net revenues increased to 8% for the
quarter ended June 30, 2005 from 7% for the quarter ended June 30, 2004 as a
result of certain fixed costs that were not reduced in proportion to the
decrease in net revenues in the corresponding time periods.
Omega's selling, general, and administrative expenses increased $635,000 from
$2.4 million in the second quarter ended June 30, 2004 compared to $3.1 million
for the current quarter ended June 30, 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 increased $25,000 from $377,000
for the three months ended June 30, 2004 to $402,000 for the comparable period
of the current year. This increase was attributable to increases of $117,000 at
Zapata Corporate and $53,000 at Omega Protein resulting from higher interest
rates on investments. These increases were partially offset by a decrease of
$152,000 at Safety Components.
INTEREST EXPENSE. Consolidated interest expense decreased $302,000 from $702,000
for the three months ended June 30, 2004 to $400,000 for the comparable period
of 2005. This decrease resulted from lower interest expense of $223,000 at
Safety Components, combined with a decrease of $79,000 at Omega Protein. Omega's
decrease resulted primarily from lower Title XI loan and interest of
approximately $54,000 which was capitalized in conjunction with the construction
of certain fixed assets during the current quarter ended June 30, 2005, as
compared to the quarter ended June 30, 2004. Safety's decrease was attributable
to its average outstanding debt decreasing to $7.0 million from $17.9 million,
partially offset by the average weighted interest rate for Safety's debt
increasing to 5.54% from 3.78% for the quarter ended June 30, 2005 as compared
to the quarter ended June 30, 2004. Because a substantial portion of Safety's
debt carries interest rates based on the prime rate, such increases in Safety's
average weighted interest rate is primarily attributable to increases totaling
200 basis points in the prime rate over the past 12 months.
OTHER EXPENSE, NET. Other income increased $232,000 to $281,000 for the three
months ended June 30, 2005. On a consolidated basis, this increase resulted
primarily from an increase of $281,000 at Omega Protein related to the
recognition of a gain associated with the involuntary conversion of a piece of
equipment resulting from a fire, partially offset by a decrease of $66,000 at
Safety. 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 June 30, 2005 resulted from
changes in foreign currency exchange rates of approximately 5.8% from those at
March 31, 2005.
INCOME TAXES. The Company recorded a consolidated provision for income taxes of
$1.3 million for the three months ended June 30, 2005 as compared to $4.3
million for the comparable period of the prior year. On a consolidated basis,
the decrease in provision for income taxes was primarily the result of decreased
pre-tax income recognized at Safety and Omega as compared to the comparable
period of the prior year. Zapata Corporate recognized a provision of $146,000 as
compared to a provision of $1.8 million in the comparable period of the prior
year.
28
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 consolidated effective tax rate for the three months ended June
30, 2005 was 53%. The high effective rate was primarily the result of Zapata
Corporate's current quarter recognition of a $146,000 provision for income taxes
which reflects $538,000 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 23% 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 June 30, 2005, minority interest was a
$701,000 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.
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
Zapata reported consolidated net income of $542,000 or $.03 per diluted share on
consolidated revenues of $169.0 million for the six months ended June 30, 2005
as compared to consolidated net income of $2.6 million or $0.14 per diluted
share on consolidated revenues of $186.6 million for the six months ended June
30, 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 $17.6 million from $186.6 million for
the six months ended June 30, 2004 to $169.0 million for the six months ended
June 30, 2005. This decrease was attributable to decreased revenues of $17.5
million at Safety and $172,000 at Omega. Safety's revenues were $117.6 million
for the six months ended June 30, 2005 as compared to $135.1 for the comparable
period of the prior year, while Omega Protein's revenues decreased from $51.5
million to $51.3 million for the six months ended June 30, 2005.
Safety's decrease in revenues was due to a decrease in North American
operations' net revenues of approximately $6.2 million, or 10%, compared to the
six months ended June 30, 2004, with the decrease principally due to decreased
demand in the North America automotive market and increased customer in-sourcing
of production which frequently occurs when demand decreases. Net revenues for
European operations decreased $11.3 million, or 16%, resulting from decreased
overall demand in the automotive market and decisions by certain customers to
curtail outsourcing and begin production of certain programs using their own
facilities. The decrease in net revenues for European operations included the
effect of approximately $2.3 million of favorable changes in foreign currency
exchange rates compared to the six months ended June 30, 2004.
Omega's decrease in revenues was primarily due to a 7% decrease in sales volumes
of fish meal and fish oil sales activity. Omega experienced a $3.4 million
decrease in revenues due to reduced sales volumes offset by a $3.2 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 six months
ended June 30, 2005 was $145.9 million, a $9.3 million decrease from $155.3
million for the comparable period of the prior year. This decrease was primarily
attributable to decreases in cost of revenue at Safety of $11.4 million
partially offset by an increase of $2.2 million at Omega.
29
Safety's decrease in cost of revenues was attributable to North American
operations' cost of revenues decreasing approximately $4.1 million, or 8%, and
European operations' cost of revenues decreasing $8.2 million, or 13%, compared
to the six months ended June 30, 2004. The overall decrease in cost of revenues
is primarily attributable to the decrease in net revenues in the corresponding
time periods. Cost of revenues as a percentage of net revenues increased to 87%
for the six months ended June 30, 2005 from 85% for the six months ended June
30, 2004. The increase in cost of revenues as a percentage of net revenues is a
result of the fixed cost component of cost of revenues not being reduced in
proportion to the decrease in net revenues in the corresponding time periods, as
well as inflationary increases on raw materials and supplies, offset by a
decrease in depreciation expense of approximately $945,000 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 June 30, 2005 was $44.6 million, an increase from $42.4
million for the six months ended June 30, 2004. Omega's cost of revenues as a
percentage of its revenues increased 4% to 87% for the six months ended June 30,
2005 as compared to the corresponding period in 2004. The increase in cost of
revenues as a percentage of revenues was primarily due to the purchase of fish
meal at prices in excess of Omega's cost to produce similar products.
Additionally, Omega experienced an increased cost of production primarily
attributed to an increase in energy costs.
SELLING, GENERAL AND ADMINISTRATIVE. Consolidated selling, general, and
administrative expenses decreased $176,000 from $18.8 million for the six months
ended June 30, 2004 to $18.7 million for the six months ended June 30, 2005.
This decrease was primarily attributable to a decrease in selling, general and
administrative expenses at Safety Components, partially offset by an increase at
Zapata Corporate and Omega Protein.
Zapata Corporate's selling, general and administrative expenses increased
$194,000 from $2.7 million for the six months ended June 30, 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 six months ended June 30, 2004. Additionally, in the first six months of
2005, Safety incurred costs of approximately $476,000 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, which is expected to occur in the
second half of 2005. Selling, general and administrative expenses as a
percentage of net revenues increased to 8% for the six months ended June 30,
2005 from 7% for the six months ended June 30, 2004 due to the corresponding
decrease in net revenues in the period as a result of certain fixed costs not
being reduced in proportion to the decrease in net revenues in the corresponding
time periods.
Omega's selling, general, and administrative expenses increased $951,000 from
$4.9 million in the first six months ended June 30, 2004 compared to $5.8
million for the current six months ended June 30, 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 $41,000 from $768,000
for the six months ended June 30, 2004 as compared to $727,000 for the
comparable period of the current year. This decrease was primarily due to a
decrease of $307,000 at Safety Components, partially offset by an increase in
interest income of $200,000 at Zapata Corporate and $53,000 at Omega Protein as
a result of higher interest rates as compared to 2004.
INTEREST EXPENSE. Interest expense decreased $565,000 from $1.4 million for the
six months ended June 30, 2004 to $841,000 for the comparable period of 2005.
This decrease resulted from lower interest expense of $422,000 at Safety
Components, combined with a decrease of $143,000 at Omega Protein. Omega's
decrease resulted primarily from lower Title XI loan balance and interest of
approximately $95,000 which was capitalized in conjunction with the construction
of certain fixed assets during the current six months ended June 30, 2005 as
compared to the six months ended June 30, 2004. Safety's decrease was
attributable to its average outstanding debt decreasing to $7.0 million from
$17.3 million, offset by the average weighted interest rate for Safety's debt
increasing to 5.31% from 3.73% for the six months ended June 30, 2005 as
compared to the six months ended June 30, 2004. Because a substantial portion of
Safety's debt carries interest rates based on the prime rate, such increases in
Safety's average weighted interest rate is primarily attributable to increases
totaling 200 basis points in the prime rate over the past 12 months.
30
OTHER EXPENSE, NET. Other expenses decreased $143,000 to $84,000 for the six
months ended June 30, 2005. On a consolidated basis, this decrease resulted
primarily from Omega Protein's recognition of other income of $192,000 for the
six months ended June 30, 2005 as compared to recognition of other expense of
$106,000 for the comparable period of the prior year. This change at Omega
related to the recognition of a gain associated with the involuntary conversion
of a piece of equipment resulting from a fire. This was partially offset by
additional expense of $172,000 recognized at Safety Components. 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 June 30, 2005 resulted from changes in foreign
currency exchange rates of approximately 9.4% from those at December 30, 2004.
INCOME TAXES. The Company recorded a consolidated provision for income taxes of
$2.6 million for the six months ended June 30, 2005 as compared to $6.6 million
for the comparable period of the prior year. On a consolidated basis, the
decrease in provision for income taxes was primarily the result of decreased
pre-tax income recognized at Safety and Omega as compared to the comparable
period of the prior year. Zapata Corporate recognized a provision of $283,000 as
compared to a provision of $1.5 million for the comparable period in the prior
year.
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 consolidated effective tax rate for the six months ended June 30,
2005 was 59.0%. The high effective rate was primarily the result of Zapata
Corporate's current quarter recognition of a $283,000 provision for income taxes
which reflects $1.1 million of deferred tax liabilities recorded to reflect the
Company's tax effected proportionate share of Omega and Safety's net income
recognized during the period.
MINORITY INTEREST. Minority interest from the consolidated statements of
operations represents the minority stockholders' interest in the net income or
net loss of the Company's subsidiaries (approximately 23% 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 six months ended June 30, 2005, minority interest was a $1.2
million reduction to net income for the minority interest's share in the net
incomes of Safety Components and Omega Protein, partially offset by the minority
interest's share in the net loss of Zap.Com.
LIQUIDITY AND CAPITAL RESOURCES
Zapata, Safety Components, Omega Protein and Zap.Com are separate public
companies. Accordingly, the capital resources and liquidity of Safety
Components, Omega Protein and Zap.Com are legally independent of Zapata. The
working capital and other assets of Safety Components, Omega Protein and Zap.Com
are dedicated to their respective operations and are not expected to be readily
available for the general corporate purposes of Zapata, except for any dividends
that may be declared and paid to their respective stockholders. The credit
facilities of Safety Components and Omega Protein 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 June 30, 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.
31
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 and cash equivalents
investments in the purchase of companies.
As of June 30, 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 and cash equivalents
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 companies, the minority interest of controlled
subsidiaries, or repurchases of Zapata stock. Zapata Corporate's investments
consist of U.S. Government agency securities and cash equivalents. As of June
30, 2005, Zapata Corporate's cash and cash equivalents were $26.7 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, 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 other than pursuant to an underwritten offering.
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 June 30, 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.
32
SUMMARY OF CASH FLOWS
The following table summarizes Zapata's consolidating cash flow information (in
thousands):
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS PROTEIN ZAP.COM CONSOLIDATED
--------- ---------- -------- ------- ------------
SIX MONTHS ENDED JUNE 30, 2005
CASH (USED IN) PROVIDED BY
Operating activities $(2,049) $ 7,461 $ (5,476) $(39) $ (103)
Investing activities -- (4,076) (11,280) -- (15,356)
Financing activities 23 (1,363) (556) -- (1,896)
Effect of exchange rate changes on cash
and cash equivalents -- (2,425) 12 -- (2,413)
------- ------- -------- ---- --------
Net decrease in cash and cash equivalents $(2,026) $ (403) $(17,300) $(39) $(19,768)
======= ======= ======== ==== ========
ZAPATA SAFETY OMEGA
CORPORATE COMPONENTS(1) PROTEIN ZAP.COM CONSOLIDATED
--------- ------------- -------- ------- ------------
SIX MONTHS ENDED JUNE 30, 2004
CASH (USED IN) PROVIDED BY
Operating activities $(1,447) $ 629 $ 13,427 $(62) $12,547
Investing activities 28,843 (2,872) (12,578) -- 13,393
Financing activities -- 3,087 (583) -- 2,504
Effect of exchange rate changes on cash
and cash equivalents -- (14) (15) -- (29)
------- ------- -------- ---- -------
Net (decrease) increase in cash and cash
equivalents $27,396 $ 830 $ 251 $(62) $28,415
======= ======= ======== ==== =======
NET CASH PROVIDED BY OPERATING ACTIVITIES. Consolidated cash used in operating
activities was $103,000 for the six months ended June 30, 2005 as compared to
cash provided by operating activities of $12.5 million for the comparable period
of the prior year. This change was driven primarily from Omega's change from
cash provided by operating activities of $13.4 million for the six months ended
June 30, 2004 to cash used in operating activities of $5.5 million for the
comparable period of the current year. Omega's decrease in operating activities
was primarily attributable to the change in activities relating to increased
inventory. The change at Omega was partially offset by Safety's additional cash
provided by operating activities of $6.8 million from $629,000 for the six
months ended June 30, 2004. Safety's increase in cash provided by operating
activities resulted primarily from an increase in accounts receivable due to a
change in payment terms with a significant customer in return for foregoing
early payment discounts, and a decrease in accounts payable resulting from a
change in payment terms with a significant supplier in return for prompt payment
discounts and payments of trade balances with certain significant suppliers.
NET CASH USED IN INVESTING ACTIVITIES. Consolidated cash used in investing
activities was $15.4 million for the six months ended June 30, 2005 as compared
to cash provided by investing activities of $13.4 million in the comparable
period of the prior year. The change in cash (used in) provided by investing
activities resulted primarily from activity at Zapata Corporate. Variations in
Zapata Corporate's cash (used in) provided by investing activities typically
result from the change in the mix of cash and cash equivalents and short-term
investments during the period. All highly liquid investments with original
maturities of three months or less are considered to be cash equivalents and all
investments with original maturities of greater than three months are classified
as either short or long-term investments. Zapata Corporate held short-term
investments at December 31, 2003 which were sold during the six months ended
June 30, 2004, resulting in cash provided by investing activities of $28.8
million, as compared to no cash used in or provided by investing activities
during the six months ended June 30, 2005.
Safety expects to spend approximately $8.0 million for the remainder of 2005 on
capital expenditures primarily for equipment to support expected new contracts
with customers and information technology as well as approximately $1.7 million
to support its joint ventures in South Africa and China. Omega anticipates
making approximately $16.1 million in capital expenditures in 2005, which will
be used to refurbish vessels, plant assets and to repair certain equipment.
33
NET CASH USED IN FINANCING ACTIVITIES. Consolidated cash used in financing
activities was $1.9 million for the six months ended June 30, 2005 as compared
to cash provided by financing activities of $2.5 million for comparable period
of the prior year. This change was driven by Safety's cash used in financing of
$1.4 million in the current year as compared to cash provided by financing of
$3.1 million in the prior year, resulting from net repayments of Safety's credit
facilities in the six months ended June 30, 2005.
The activities discussed above combined with unfavorable effects of foreign
exchange rates of $2.4 million at Safety Components, partially offset by
favorable foreign exchange rates of $12,000 at Omega Protein, resulted in a net
decrease in cash and cash equivalents of approximately $19.8 million for the six
months ended June 30, 2005.
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 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 June 30, 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.
SIGNIFICANT FACTORS THAT COULD AFFECT FUTURE PERFORMANCE AND FORWARD-LOOKING
STATEMENTS
1. Zapata believes that its results of operations, cash flows and financial
condition could be negatively impacted by certain risks and uncertainties,
including, without limitation, the risks and uncertainties identified in
Zapata's other public reports and filings made with the SEC, press releases and
public statements made by authorized officers of Zapata from time to time and
those risks and uncertainties set forth below.
- Risks associated with the fact that a significant portion of Zapata's
assets have consisted of securities, including equity and other interests
in its operating companies. This could subject Zapata to the registration
requirements of the Investment Company Act of 1940 (the "Investment Company
Act"). The Investment Company Act requires registration of, and imposes
substantial restrictions on, certain companies that engage, or propose to
engage, primarily in the business of investing, reinvesting, owning,
holding or trading in securities, or that fail certain statistical tests
concerning a company's asset composition and sources of income. Zapata
intends to actively participate in the management of its operating
companies, consistent with applicable laws, contractual arrangements and
other requirements. Accordingly, Zapata believes that it is primarily
engaged in a business other
34
than investing, reinvesting, owning, holding or trading in securities.
Further, Zapata endeavors to ensure that its holdings of investment
securities constitute less than 40% of its total assets (excluding
Government securities and cash) on an unconsolidated basis. Zapata intends
to monitor and attempt to adjust the nature of its interests in and
involvement with operating companies in order to avoid subjecting Zapata to
the registration requirements of the Investment Company Act. There can be
no assurance, however, that Zapata's business activities will not
ultimately subject Zapata to the Investment Company Act. If Zapata were
required to register as an investment company under the Investment Company
Act, it would become subject to regulations that would have a material
adverse impact on its financial position, results of operations and cash
flows.
- Risks associated with the personal holding company penalty tax. Section
541 of the Internal Revenue Code of 1986, as amended (the "IRC"), subjects
a corporation, which is a "personal holding company" as defined in the IRC,
to a 15% penalty tax on "undistributed personal holding company income" in
addition to the corporation's normal income tax. Generally, undistributed
personal holding company income is based on taxable income, subject to
certain adjustments, most notably a reduction for Federal incomes taxes.
Personal holding company income is comprised primarily of passive
investment income plus, under certain circumstances, personal service
income. Zapata and its domestic subsidiaries (other than Safety and Omega)
could become subject to the penalty tax if (i) 60% or more of its adjusted
ordinary gross income is personal holding company income and (ii) 50% or
more of its outstanding common stock is owned, directly or indirectly, by
five or fewer individuals at any time during the last half of the taxable
year. The Company believes that five or fewer of Zapata's stockholders hold
50% or more of its outstanding common stock for purposes of IRC Section
541. However, as of December 31, 2004, Zapata and its domestic subsidiaries
(other than Safety and Omega) had no undistributed personal holding company
income and therefore has not recorded a personal holding company tax
liability. There can be no assurance that Zapata will not be subject to
this tax in the future that in turn may materially and adversely impact the
Company's financial position, results of operations and cash flows.
- Risks associated with a change of ownership pursuant to Section 382 of
the Internal Revenue Code. Such risks could significantly or possibly
eliminate Zapata's utilization of its net operating losses and/or
alternative minimum tax credits. An ownership change for this purpose is
generally a change in the majority ownership of a company over a three year
period.
- Risks associated with the ownership by the Malcolm I. Glazer Family
Limited Partnership of approximately 51.3% of our outstanding common stock.
Our majority stockholder will have the ability to effectively control our
management and affairs. In addition, any action requiring a simple-majority
stockholder vote can be determined solely by our majority stockholder. This
includes the ability to elect all members of our Board of Directors and
determine the outcome of certain corporate actions requiring majority
stockholder approval, such as merger and acquisition decisions, and the
election of directors, or sale of all or substantially all of our assets.
This level of ownership may also have a significant effect in delaying,
deferring, or preventing a change in control of Zapata and may adversely
affect the voting and other rights of other holders of our common stock.
- Risk that our earnings may be reduced in the future due to the potential
impairment of our intangible assets. The Company's acquisition of Safety
Components common stock resulted in the recognition of intangible assets.
As required by applicable accounting rules, we evaluate the carrying value
of our intangible assets whenever certain events or changes in
circumstances indicate that the carrying amount of these assets may not be
recoverable. If we determine through this process that the value of these
assets has been impaired, we may be required to record impairment charges
in our Statement of Operations. Such charges may be substantial.
- Risk that our subsidiaries' outstanding stock options could significantly
dilute our ownership in these subsidiaries. Such dilution would cause the
Company to consolidate proportionately less net income (or loss) recognized
by our subsidiaries and would increase minority interest. Such dilution
could also cause a loss of control (typically when ownership falls below
50%) which could lead to deconsolidation. Such investments would be
subsequently accounted for under the equity method of accounting.
- Risk that the carrying value of the Company's prepaid pension asset could
be significantly reduced. In the event that the Company decides to
terminate its pension plan (the "Plan"), at the time of this decision, the
Company would be required to incur a non-cash charge through earnings in an
amount equal to the remaining balance of the Plan's unrecognized net losses
and unrecognized prior service cost components of the Plan's prepaid
pension asset. If not terminated, the Plan would continue to be subject to
the additional minimum
35
liability requirements of SFAS No. 87. Such requirements require the
recognition of an additional pension liability in the amount of the
unfunded accumulated benefit obligation in excess of accrued pension with
an equal amount to be recognized net of the associated tax benefits in
accumulated other comprehensive (loss) income. Accordingly, depending on
market conditions, the Company may have to reverse its prepaid pension
balance and record a pension liability through a non-cash charge to equity.
As the Company has not determined if it will terminate the Plan, and due to
the uncertainty of market conditions, the Company can provide no assurances
as to the ultimate financial statement impact that Plan modifications or
changes in market conditions may have.
- Risks related to the costs of defending litigation and the risk of
unanticipated material adverse outcomes in such litigation or any other
unfavorable outcomes or settlements. There can be no assurance that Zapata
will prevail in any pending litigation and to the extent that the Company
sustains losses growing out of any pending litigation which are not
presently reserved or otherwise provided for or insured against, its
business, results of operation and/or financial condition could be
adversely affected.
- Risks associated with future acquisitions of operating companies. Any
future acquisitions could be material in size and scope, and since the
Company has not yet identified any additional assets, property or business
that it may acquire or develop, potential investors in the Company will
have virtually no substantive information about any such new business upon
which to base a decision whether to invest in the Company. In any event
depending upon the size and structure of any future acquisitions,
stockholders may not have the opportunity to vote on the transaction, or
access to any information about any new business until such time as a
transaction is completed and the Company files a report with the SEC
disclosing the nature of such transaction and/or business. For example,
during September and October, 2003, stockholders were informed through
press releases and SEC filings that the Company had acquired a significant
stake in Safety Components. Such transactions materially affect the
Company's financial position, results of operations and cash flows. In the
Safety Components acquisition, the Company utilized approximately $47.8
million of its cash, cash equivalents and short-term investments and the
acquisition contributed an additional $63.5 million to the Company's
consolidated revenues for the fourth quarter of 2003.
There is no assurance that the Company will be successful in identifying
any suitable future acquisition opportunities. If the Company does identify
any additional potential acquisition opportunities, there is no assurance
that the acquisition will be consummated, and if the acquisition does
occur, there is no assurance that it will be successful in enhancing the
Company's business or will increase the Company's earnings or not
materially adversely affect the Company's financial condition. The Company
faces significant competition for acquisition opportunities, which may
inhibit its ability to complete suitable transactions or increase the cost
that must be paid. Future acquisitions could also divert substantial
management time, result in short term reductions in earnings or special
transactions or other charges and may be difficult to integrate with
existing operations or assets. We may, in the future, issue additional
shares of common stock or other securities in connection with one or more
acquisitions, which may dilute our stockholders. Depending upon the size
and number of any future acquisitions, the Company may also borrow money to
fund its acquisitions. In that event, the Company's stockholders would be
subject to the risks normally associated with leveraged transactions,
including the inability to service the debt or the dedication of a
significant amount of cash flow to service the debt, limitations on the
Company's ability to secure future financing and the imposition of certain
operating restrictions.
2. Risks associated with Safety Components that may impact Zapata include the
following, any of which could have a material adverse impact on Safety's
financial position, results of operations and cash flows:
- The impact of competitive products and pricing, dependence of revenues
upon several major module suppliers; the degree to which Safety's
customers satisfy their airbag cushion requirements internally or from
external sources; worldwide economic conditions; the results of cost
savings programs being implemented; domestic and international
automotive industry trends, including the marketplace for airbag
related products; the ability of Safety Components to effectively
control costs and to satisfy customers on timeliness and quality;
approval by automobile manufacturers of airbag cushions currently in
production; pricing pressures and labor strikes.
- Certain of Safety's consolidated net sales are generated outside the
United States. Foreign operations and exports to foreign markets are
subject to a number of special risks including, but not limited to,
risks with
36
respect to fluctuations in currency exchange rates, economic and
political destabilization and other disruption of markets, restrictive
actions by foreign governments (such as restrictions on transfer of
funds, export duties and quotas, foreign customs and tariffs and
unexpected changes in regulatory environments), changes in foreign
laws regarding trade and investment, difficulty in obtaining
distribution and support, nationalization, the laws and policies of
the United States affecting trade, foreign investment and loans and
foreign tax laws. There can be no assurance that one or a combination
of these factors will not have a material adverse effect on Safety's
ability to increase or maintain its foreign sales or on its future
results of operations.
In addition, Safety has a significant portion of its manufacturing
operations in foreign countries and purchases a portion of its raw
materials from foreign suppliers. The production costs, profit margins
and competitive position of Safety are affected by the strength of the
currencies in countries where it manufactures or purchases goods
relative to the strength of the currencies in countries where its
products are sold.
Certain of Safety's operations generate net sales and incur expenses
in foreign currencies. Safety's financial results from international
operations may be affected by fluctuations in currency exchange rates.
Future fluctuations in certain currency exchange rates could adversely
affect Safety's financial results. Safety monitors its risk associated
with the volatility of certain foreign currencies against its
functional currency, the U.S. dollar. The impact of changes in the
relationship of other currencies to the U.S. dollar in the fiscal year
ended December 31, 2004 has resulted in the recognition of other
income of approximately $677,000. However, it is unknown what the
effect of foreign currency rate fluctuations will have on Safety's
financial position or results of operations in the future. In certain
situations, Safety utilizes derivative financial instruments
designated as cash flow hedges to reduce exposures to volatility of
foreign currencies impacting the operation of its business.
- Our nominees on the Safety Components' Board of Directors do not
comprise a majority of the board members. Therefore, we do not have
the ability to directly influence the management of Safety Components
and cannot be assured that the actions taken by the Safety Components
Board of Directors will necessarily be consistent with Zapata's best
interest.
3. Risks associated with Omega Protein that may impact Zapata include the
following, any of which could have a material adverse impact on Omega's
financial position, results of operations and cash flows:
RISKS RELATING TO OMEGA'S BUSINESS AND INDUSTRY:
- Omega is dependent on a single natural resource and may not be able to
catch the amount of menhaden that it requires to operate profitably.
Omega's primary raw material is menhaden. Omega's business is totally
dependent on its annual menhaden harvest in ocean waters along the
U.S. Atlantic and Gulf coasts. Omega's ability to meet its raw
material requirements through its annual menhaden harvest fluctuates
from year to year, and even at times month to month, due to natural
conditions over which Omega has no control. These natural conditions,
which include varying fish population, adverse weather conditions and
disease, may prevent Omega from catching the amount of menhaden
required to operate profitability.
- Fluctuation in "oil yields" derived from Omega's fish catch could
impact Omega's ability to operate profitably. The "oil yield," or the
percentage of oil derived from the menhaden fish, while it is
relatively high compared to many species of fish, has fluctuated over
the years and from month to month due to natural conditions relating
to fish biology over which Omega has no control. The oil yield has at
times materially impacted the amount of fish oil that Omega has been
able to produce from its available fish catch and it is possible that
oil yields in the future could also impact Omega's ability to operate
profitably.
- Laws or regulations that restrict or prohibit menhaden or purse seine
fishing operations could adversely affect Omega's ability to operate.
The adoption of new laws or regulations at federal, regional, state or
local levels that restrict or prohibit menhaden or purse seine fishing
operations, or stricter interpretations of existing laws or
regulations, could materially adversely affect Omega's business,
results of operations and financial condition. In addition, the impact
of a violation by Omega of federal, regional, state or local law or
regulation relating to its fishing operations, the protection of the
environment or the health and safety of
37
its employees could have a material adverse affect on Omega's
business, results of operations and financial condition.
One example of potentially restrictive regulation involves a vote by a
regional regulatory board in February 2005 to permit discussion on,
and consider for potential adoption, a proposal which could limit for
a two-year period the annual amount commercial menhaden catch in the
Chesapeake Bay to the Bay's 5-year average catch, or 110,400 metric
tons.
- Omega's fish catch may be impacted by restrictions on its spotter
aircraft. If Omega's spotter aircraft are prohibited or restricted
from operating in their normal manner during Omega's fishing season,
Omega's business, results of operations and financial condition could
be adversely affected. For example, as a direct result of the
September 11, 2001 terrorist attacks, the Secretary of Transportation
issued a federal ground stop order that grounded certain aircraft
(including Omega's fish-spotting aircraft) for approximately nine
days. This loss of spotter aircraft coverage severely hampered Omega's
ability to locate menhaden fish during this nine-day period and
thereby reduced its amount of saleable product.
- Worldwide supply and demand relationships, which are beyond Omega's
control, influence the prices that Omega receives for many of its
products and may from time to time result in low prices for many of
Omega's products. Prices for many of Omega's products are subject to,
or influenced by, worldwide supply and demand relationships over which
Omega has no control and which tend to fluctuate to a significant
extent over the course of a year and from year to year. The factors
that influence these supply and demand relationships are world
supplies of fish meal made from other fish species, animal proteins
and fats, palm oil, soy meal and oil, and other edible oils.
- New laws or regulation regarding contaminants in fish oil or fish meal
may increase Omega's cost of production or cause Omega to lose
business. It is possible that future enactment of increasingly
stringent regulations regarding contaminants in fish meal or fish oil
by foreign countries or the United States may adversely affect Omega's
business, results of operations and financial condition. More
stringent regulations could result in: (i) Omega's incurrence of
additional capital expenditures on contaminant reduction technology in
order to meet the requirements of those jurisdictions, and possibly
higher production costs for Company's products, or (ii) Omega's
withdrawal from marketing its products in those jurisdictions.
RISKS RELATING TO OMEGA'S ONGOING OPERATIONS:
- Omega's strategy to expand into the food grade oils market may be
unsuccessful. Omega's attempts to expand its fish oil sales into the
market for refined, food grade fish oils for human consumption may not
be successful. Omega's expectations regarding future demand for
Omega-3 fatty acids may prove to be incorrect or, if future demand
does meet Omega's expectations, it is possible that purchasers could
utilize Omega-3 sources other than Omega's products.
- Omega's quarterly operating results will fluctuate. Fluctuations in
Omega's quarterly operating results will occur due to the seasonality
of Omega's business, the unpredictability of Omega's fish catch and
oil yields, and Omega's deferral of sales of inventory based on
worldwide prices for competing products.
- Omega's business is subject to significant competition, and some
competitors have significantly greater financial resources and more
extensive and diversified operations than Omega. 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 small domestic privately-owned menhaden
fishing companies and international marine protein and oil producers,
including Scandinavian herring processors and South American anchovy
and sardine processors. Many of these competitors have significantly
greater financial resources and more extensive and diversified
operations than Omega.
38
- Omega's foreign customers are subject to disruption typical to foreign
countries. Omega's sales of its products in foreign countries are
subject to risks associated with foreign countries such as changes in
social, political and economic conditions inherent in foreign
operations, including:
- Changes in the law and policies that govern foreign investment
and international trade in foreign countries;
- Changes in U.S. laws and regulations relating to foreign
investment and trade;
- Changes in tax or other laws;
- Partial or total expropriation;
- Current exchange rate fluctuations;
- Restrictions on current repatriation; or
- Political disturbances, insurrection or war.
In addition, it is possible that Omega, at any one time, could have a
significant amount of its revenues generated by sales in a particular
country which would concentrate Omega's susceptibility to adverse
events in that country.
- Omega may undertake acquisitions that are unsuccessful and Omega's
inability to control the inherent risks of acquiring businesses could
adversely affect its business, results of operations and financial
condition operations. In the future Omega may undertake acquisitions
of other businesses, located either in the United States or in other
countries, although there can be no assurances that this will occur.
There can be no assurance that Omega will be able (i) to identify and
acquire acceptable acquisition candidates on favorable terms, (ii) to
profitably manage future businesses it may acquire, or (iii) to
successfully integrate future businesses it may acquire without
substantial costs, delays or other problems. Any of these outcomes
could have a material adverse effect on Omega's business, results of
operations and financial condition.
- Omega's failure to comply with federal U.S. citizenship ownership
requirements may prevent it from harvesting menhaden in the U.S.
jurisdictional waters. Omega's harvesting operations are subject to
the Shipping Act of 1916 and the regulations promulgated thereunder by
the Department of Transportation, Maritime Administration which
require, among other things, that Omega be incorporated under the laws
of the U.S. or a state, Omega's chief executive officer be a U.S.
citizen, no more of Omega's directors be non-citizens than a minority
of a number necessary to constitute a quorum and at least 75% of
Omega's outstanding capital stock (including a majority of its voting
capital stock) be owned by U.S. citizens. If Omega fails to observe
any of these requirements, Omega will not be eligible to conduct its
harvesting activities in U.S. jurisdictional waters. Such a lost of
eligibility would have a material adverse effect on Omega's business,
results of operations and financial condition.
- Omega may not be able to recruit, train and retain qualified marine
personnel in sufficient numbers. Omega's business is dependent on its
ability to recruit, train and retain qualified marine personnel in
sufficient numbers such as vessel captains, vessel engineers and other
crewmembers. To the extent that Omega is not successful in recruiting,
training and retaining these employees in sufficient numbers, its
productivity may suffer. If Omega were unable to secure a sufficient
number of workers during periods of peak employment, the lack of
personnel could have an adverse effect on Omega's business, results of
operations and financial condition.
4. Risks associated with the foreign operations of our controlled subsidiaries
that may impact Zapata include the following, (any of which could have a
material adverse impact on any such subsidiary's financial position, results of
operations and cash flows): the strength of local currencies of the countries in
which its products are sold, changes in social, political and economic
conditions inherent in foreign operations and international trade, including
changes in the law and policies that govern foreign investment and international
trade in such countries, changes in U.S laws and regulations relating to foreign
investment and trade, changes in tax or other laws, partial or total
expatriation, currency exchange rate fluctuations and restrictions on currency
repatriation, the disruption of labor, political disturbances, insurrection or
war and the effect of requirements of partial local ownership of operations in
certain countries.
39
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 $47.7 million at
June 30, 2005 as a hypothetical constant cash balance; an adverse change of 1%
in interest rates would decrease interest income by approximately $119,000 and
$238,000 during a three-and six-month period, respectively.
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, China, the United Kingdom and the Czech Republic expose Safety to
currency exchange rate risks which are recorded in other expense (income), net
on Safety's consolidated statements of operations. Based on the amounts
outstanding at June 30, 2005, a hypothetical increase or decrease of 1% in the
value of the U.S. dollar against the foreign currencies corresponding to the
countries in which Safety has operations would result in a reduction or addition
of approximately $125,000 in other expense (income), net. Safety's joint venture
in China uses the yuan as its functional currency. In mid-July, the government
of China announced an end to the yuan's peg to the U.S. dollar and tied it to a
basket of currencies, the initial steps in anticipated reforms aimed at letting
the currency float freely. Although Safety currently is unable to measure the
effect that currency reforms by the government of China will have on its
financial position, results of operations and cash flows, Safety's China joint
venture is intended to produce airbag cushions for the Chinese domestic market
and Asian markets. Because raw material sources, production and sales related to
Safety's China joint venture are expected to occur primarily within China,
currency reforms by the government of China are not expected to have a material
impact on Safety's financial position or results of operations. 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 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 June 30,
2005, Safety had outstanding forward exchange contracts that mature between July
2005 and December 2005 to purchase Mexican pesos with an aggregate notional
amount of approximately $4.2 million. The fair values of these contracts at June
30, 2005 totaled approximately $246,000 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
40
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 and certain of its operating expenses are paid in Czech
Korunas. 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 with Euros for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts were designated as hedges
at inception and are monitored for effectiveness on a routine basis. At June 30,
2005, Safety had outstanding forward exchange contracts that mature between July
2005 and December 2005 to purchase Czech Korunas with an aggregate notional
amount of approximately $2.3 million. The fair values of these contracts at June
30, 2005 totaled approximately $75,000 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 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.
INTERNAL CONTROL OVER FINANCIAL REPORTING. No changes in internal control over
financial reporting occurred during the quarter ended June 30, 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 investigations conducted by various levels of
Safety's management nor the ensuing external investigation conducted by a
forensic accounting firm engaged by the Audit Committee of Safety's
41
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 file an objection and request a hearing before
an Administrative Law Judge. The employee has subsequently requested a hearing
before an Administrative Law Judge. The employee filed such objection, but
Safety has not received a notice of request for a hearing.
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
The Company held its Annual Meeting of Stockholders on June 1, 2005. The
following are the results of the votes taken on the various matters presented to
the Company's stockholders at the meeting.
All of the Board's nominees for directors were elected as follows:
CLASS I DIRECTORS: TERM ENDING 2008 FOR WITHHOLD NO VOTE
- ----------------------------------- ---------- --------- ---------
Darcie S. Glazer 16,049,859 1,965,335 1,122,662
Bryan G. Glazer 16,052,731 1,962,463 1,122,662
The proposal to ratify the appointment of PricewaterhouseCoopers LLP as the
independent registered public accounting firm was passed with the following
vote:
FOR AGAINST ABSTAIN NO VOTE
- ---------- ------- ------- ---------
17,684,044 323,536 7,614 1,122,662
ITEM 5. OTHER INFORMATION
None.
42
ITEM 6. EXHIBITS
(a) Exhibits
The exhibits indicated by an asterisk (*) are incorporated by reference.
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 (Exhibit
3(d) to Quarterly Report on Form 10-Q filed May 6, 2005 (File No.
1-4219)).
31.1 Certification of CEO as required by Rule 13a-14(a) or 15d-14 of the
Securities Exchange Act of 1934, 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) or 15d-14 of the
Securities Exchange Act of 1934, 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.
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZAPATA CORPORATION (REGISTRANT)
Dated: August 8, 2005 By: /s/ Leonard DiSalvo
------------------------------------
(Vice President-- Finance and Chief
Financial Officer)
44