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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-4219
ZAPATA CORPORATION
(Exact name of Registrant as specified in its charter)
STATE OF NEVADA C-74-1339132
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 MERIDIAN CENTRE, SUITE 350
ROCHESTER, NY
(Address of principal executive 14618
offices) (Zip Code)
(585) 242-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 10, 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
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2005 (unaudited)
and December 31, 2004 3
Unaudited Condensed Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 2005 and 2004 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 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 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 49
Item 4. Controls and Procedures 50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51
Item 3. Defaults Upon Senior Securities 51
Item 4. Submission of Matters to a Vote of Security Holders 51
Item 5. Other Information 51
Item 6. Exhibits 51
SIGNATURES 53
EXHIBITS
EXPLANATORY NOTE:
This Quarterly report on Form 10-Q/A ("Form 10-Q/A") is being filed in order to
correct the previously issued consolidated financial statements of Zapata
Corporation (the "Company") for the three and nine month periods ended September
30, 2005 and 2004 initially filed with the Securities and Exchange Commission
(the "SEC") on November 14, 2005 (the "Original Filing"). The corrections are
primarily related to the timing of the reversal of $4.2 million of deferred tax
liabilities established during periods in which Safety Components International,
Inc. ("Safety Components") was consolidated into the financial statements of the
Company for book purposes and not consolidated for tax purposes. In the Original
Filing, the Company reported that the reversal of $4.2 million of deferred tax
liabilities would occur at the closing of the sale of Safety Components, that
the closing was anticipated to occur (and did occur) during the fourth quarter
of 2005 and that this reversal would result in a gain. The Company has
subsequently determined that this reversal should have been recognized in the
third quarter in conjunction with the write-down of the Company's carrying value
in Safety Components. Accordingly, this Form 10-Q/A recognizes the reversal of
this amount in the third quarter of 2005. In addition, as part of the
restatement, the Company i) corrected the allocation of the income tax provision
for the three and nine months ended September 30, 2005 between continuing and
discontinued operations for the amounts of $573,000 and $1.6 million,
respectively, and ii) recorded in the third quarter of 2005, certain immaterial
income tax adjustments related to the first and second quarters of 2005 of
$174,000. See Note 18 "Restatement" under Notes to Unaudited Condensed
Consolidated Financial Statements included in Part 1, Item 1 of this Form
10-Q/A.
This Form 10-Q/A amends Items 1, 2 and 4 of Part I and Exhibits 31.1, 31.2, 32.1
and 32.2 included in Item 6 of Part II of the Original Filing to reflect this
correction. The remaining Items contained within this Form 10-Q/A consists of
all other Items contained in the Original Filing. These remaining Items are not
amended hereby, but are included for the convenience of the reader. Except for
the forgoing amended information, this Form 10-Q/A continues to describe
conditions as of the date of the Original Filing, and we have not updated the
disclosures contained herein to reflect events that occurred at a later date.
The Company has filed three current reports on Form 8-K subsequent to the
original filing of the 10-Q.
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS AND NOTES
ZAPATA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SEPTEMBER 30, 2005 DECEMBER 31,
(RESTATED) 2004
------------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 38,191 $ 63,249
Accounts receivable, net 26,139 14,505
Inventories, net 50,285 40,442
Prepaid expenses and other current assets 3,827 2,373
Assets related to discontinued operations 74,706 78,440
------------- ------------
Total current assets 193,148 199,009
------------- ------------
Other assets, net 23,019 19,648
Property, plant and equipment, net 92,823 97,820
Non-current assets related to discontinued operations 32,470 46,012
------------- ------------
Total assets $ 341,460 $ 362,489
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 1,713 $ 1,661
Accounts payable 2,199 2,567
Accrued and other current liabilities 19,934 13,977
Liabilities related to discontinued operations 30,681 38,994
------------- ------------
Total current liabilities 54,527 57,199
------------- ------------
Long-term debt 14,680 15,943
Pension liabilities 10,255 9,677
Other liabilities and deferred taxes 2,579 6,333
Non-current liabilities related to discontinued operations 6,785 7,513
------------- ------------
Total liabilities 88,826 96,665
------------- ------------
Minority interest 79,524 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 September 30, 2005 and December 31, 2004,
respectively; and 19,137,856 and 19,132,520 shares outstanding
at September 30, 2005 and December 31, 2004, respectively 246 31
Capital in excess of par value 160,357 160,671
Retained earnings 46,222 54,841
Treasury stock, at cost, 5,432,080 shares (31,668) (31,668)
Accumulated other comprehensive (loss) income (2,047) 2,439
------------- ------------
Total stockholders' equity 173,110 186,314
------------- ------------
Total liabilities and stockholders' equity $ 341,460 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -----------------------
2005 2004 2005 2004
(RESTATED) (RESTATED)
--------- -------- ---------- --------
Revenues $ 31,418 $ 41,501 $ 82,759 $ 93,013
Cost of revenues 24,032 36,376 68,500 78,821
--------- -------- --------- --------
Gross profit 7,386 5,125 14,259 14,192
Operating expense:
Selling, general and administrative 4,738 3,737 13,567 11,451
Loss resulting from natural disaster, net 13,183 -- 13,183 --
--------- -------- --------- --------
Total operating expenses 17,921 3,737 26,750 11,451
--------- -------- --------- --------
Operating (loss) income (10,535) 1,388 (12,491) 2,741
--------- -------- --------- --------
Other income (expense):
Interest income 334 244 1,035 678
Interest expense (337) (63) (845) (713)
Other, net (59) (57) 149 (160)
--------- -------- --------- --------
(62) 124 339 (195)
(Loss) income before income taxes and minority
interest (10,597) 1,512 (12,152) 2,546
Benefit (provision) for income taxes 4,684 (854) 5,087 (1,636)
Minority interest in net loss (income) of
consolidated subsidiaries 2,583 (734) 2,264 (1,738)
--------- -------- --------- --------
Net loss from continuing operations (3,330) (76) (4,801) (828)
--------- -------- --------- --------
Discontinued operations:
(Loss) income before taxes and minority
interest (including loss on disposal) (8,846) 2,452 (3,130) 13,046
Benefit (provision) for income taxes 3,368 (1,191) 511 (7,020)
Minority interest (353) (401) (1,199) (1,780)
--------- -------- --------- --------
Net (loss) income from discontinued operations (5,831) 860 (3,818) 4,246
Net (loss) income to common stockholders $ (9,161) $ 784 $ (8,619) $ 3,418
========= ======== ========= ========
Net (loss) income per common share - basic and
diluted
Loss from continuing operations $ (0.17) $ (0.00) $ (0.25) $ (0.04)
Discontinued operations, net of income taxes
and minority interest (0.31) 0.04 (0.20) 0.22
--------- -------- --------- --------
(Loss) income per common share - basic and
diluted $ (0.48) $ 0.04 $ (0.45) $ 0.18
========= ======== ========= ========
Weighted average common shares outstanding:
Basic 19,136 19,131 19,135 19,131
========= ======== ========= ========
Diluted 19,136 19,131 19,135 19,131
========= ======== ========= ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
ZAPATA CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
2005 2004
(RESTATED)
----------- --------
Cash flows from operating activities:
Net(loss) income $ (8,619) $ 3,418
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 9,901 8,955
Involuntary conversion from natural disaster 8,333 --
Loss on sale of Safety Components International, Inc. 6,643 --
Loss on disposal of assets 136 --
Provisions for losses on receivables 23 28
Tax benefit from stock option exercises -- 449
Stock option modification expense 353 --
Minority interest in net (loss) income of consolidated subsidiaries (2,264) 1,738
Deferred income taxes (4,200) 3,604
Changes in assets and liabilities:
Accounts receivable (11,794) 5,403
Inventories (9,843) (5,072)
Prepaid expenses and other current assets (104) (79)
Other assets (428) 170
Accounts payable (368) (1,316)
Pension liabilities 578 (35)
Accrued liabilities and other current liabilities 4,470 5,278
Other
liabilities (78) 178
Discontinued operations 8,615 1,602
----------- --------
Total adjustments 9,973 20,903
----------- --------
Net cash provided by operating activities 1,354 24,321
----------- --------
Cash flows from investing activities:
Proceeds from disposition of assets 364 66
Gain on involuntary conversion (307) --
Proceeds of long-term investments -- 29,351
Capital expenditures (12,870) (19,409)
Discontinued operations (5,485) (4,706)
----------- --------
Net cash (used in) provided by investing activities (18,298) 5,302
----------- --------
Cash flows from financing activities:
Repayments of long-term obligations (1,211) (1,155)
Proceeds from stock option exercises 426 605
Discontinued operations (2,062) (860)
----------- --------
Net cash used in financing activities (2,847) (1,410)
----------- --------
Effect of exchange rate changes on cash and cash equivalents (3,193) 34
----------- --------
Net (decrease) increase in cash and cash equivalents (22,984) 28,247
Increase in cash from discontinued operations (2,074) (2,776)
----------- --------
Cash and cash equivalents at beginning of period 63,249 39,558
----------- --------
Cash and cash equivalents at end of period $ 38,191 $ 65,029
=========== ========
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 September 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
September 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.
On September 23, 2005, Zapata entered into a stock purchase agreement with WLR
Recovery Fund II, L.P., and WLR Recovery Fund III, L.P., Delaware limited
partnerships (collectively the "WLR Recovery Funds"), to sell all of its
4,162,394 shares of common stock in Safety Components International, Inc. The
purchase price is $12.30 per share or approximately $51.2 million. The closing
is expected to take place in the fourth quarter of 2005.
Safety Components is an 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 their demand for
such products. Safety Components also manufactures value-added technical fabrics
used in a variety of niche industrial and commercial applications such as fire
service apparel, filtration an military fabrics. 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 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."
6
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.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
DISCONTINUED OPERATIONS
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." This standard establishes a single accounting model for
long-lived assets to be disposed of by sale, including discontinued operations
to include a "component of an entity" (rather than a segment of a business). A
component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest
of the entity. A component of an entity that is classified as held for sale, or
has been disposed of, is presented as a discontinued operation if the operations
and cash flows of the component are eliminated from the ongoing operations of
the entity and the entity will not have any significant continuing involvement
in the operations of the component.
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 SFAS No. 148 and continues to use the
intrinsic value method of accounting for stock-based compensation. Had
compensation expense for the Company's stock option grants been determined based
on fair value at the grant date using the Black-Scholes option-pricing model,
the Company's net income and earnings per share (basic and diluted) would have
been as follows:
7
THREE MONTHS ENDED
SEPTEMBER 30,
2005 2004
(RESTATED)
----------- -----------
(IN THOUSANDS)
Net loss from continuing operations, as reported $ (3,330) $ (76)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of tax effects:
Zapata Corporate (22) (32)
Omega Protein (33) (112)
Zap.Com (1) --
----------- -----------
Pro forma expense (56) (144)
----------- -----------
Pro forma net loss from continuing operations $ (3,386) $ (220)
Net (loss) income from discontinued operations, as reported $ (5,831) $ 860
Deduct: Total stock-based employee compensation expense
determined under fair value based method for
all awards, net of tax effects -- --
----------- -----------
Pro forma net (loss) income from discontinued operations (5,831) 860
----------- -----------
Total pro forma net (loss) income $ (9,217) $ 640
=========== ===========
(Loss) earnings per share:
Basic - as reported $ (0.48) $ 0.04
=========== ===========
Basic - pro forma $ (0.48) $ 0.03
=========== ===========
Diluted - as reported $ (0.48) $ 0.04
=========== ===========
Diluted - pro forma $ (0.48) $ 0.03
=========== ===========
8
NINE MONTHS ENDED
SEPTEMBER 30,
2005 2004
(RESTATED)
----------- -----------
(IN THOUSANDS)
Net loss from continuing operations, as reported $ (4,801) $ (828)
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 (284) (98)
Omega Protein (716) --
Zap.Com (4) (248)
----------- -----------
Pro forma expense (1,004) (346)
----------- -----------
Pro forma net loss from continuing operations $ (5,586) $ (1,174)
Net (loss) income from discontinued operations, as reported $ (3,818) $ 4,246
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax effects -- --
----------- -----------
Pro forma net (loss) income from discontinued operations (3,818) 4,246
----------- -----------
Total pro forma net (loss) income $ (9,404) $ 3,072
=========== ===========
(Loss) earnings per share:
Basic - as reported $ (0.45) $ 0.18
=========== ===========
Basic - pro forma $ (0.49) $ 0.16
=========== ===========
Diluted - as reported $ (0.45) $ 0.18
=========== ===========
Diluted - pro forma $ (0.49) $ 0.16
=========== ===========
On May 5, 2005, Omega accelerated the vesting of all unvested, out-of-the-money,
explicit service period stock options granted under Omega's 2000 Long-Term
Incentive Plan. 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 by
Omega of SFAS No. 123R. As of September 30, 2005, Omega had not recognized any
expense relating to the acceleration of vesting. 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 a 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.
RECLASSIFICATION
Certain reclassifications of prior information have been made to conform to the
current presentation.
NOTE 3. DISCONTINUED OPERATIONS
On September 21, 2005, Zapata's Board of Directors approved a plan to pursue a
sale with respect to the Company's holdings of 4,162,394 shares of Safety
Components common stock. Based on this approval, the Company determined that
this subsidiary substantially met the criteria to report the pending sale as
"Assets Held for Sale" and the subsidiary as "Discontinued Operations" in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
9
Long-Lived Assets." Accordingly, assets classified as held for sale have been
measured at the lower of the carrying amount or fair value less cost to sell. As
used throughout this document, all amounts and disclosures related to Safety
Components pertain to "Discontinued Operations".
Zapata expects that this transaction will close during the fourth quarter of
2005 at which time the Company expects to receive net proceeds of approximately
$49.9 million. At that time, the Company will record the cash proceeds and cease
to consolidate Safety's statement of position, results of operations and cash
flows and disclosures. During the quarter ended September 30, 2005, the Company
recognized a transaction related loss of $6.6 million. This loss was recognized
primarily to reduce the carrying value of Safety Components to the fair value
less cost to sell, partially offset by the reversal of deferred tax liabilities
established during periods in which Safety Components was consolidated for book
purposes and not consolidated for tax purposes. At closing, the Company will
recognize additional losses (gains) to reflect Zapata's share of Safety's net
income (loss) for the period from October 1, 2005 through closing.
Although Zapata has agreed to sell its shares of Safety for $51.2 million and
originally purchased these shares for $47.8 million, the Company recorded an
accounting loss on the transaction quarter ended September 30, 2005. Despite
selling our interest in Safety Components for a cash gain, Zapata recorded an
accounting loss primarily due to Safety Components' generation of net income
subsequent to Zapata's acquisition of Safety's common stock. During the periods
in which Zapata consolidated Safety's results of operations, Safety Component's
recognition of net income caused Zapata's carrying value in the investment in
Safety's common stock to increase by its share of Safety's net income.
Accordingly, concurrent with the approval of Zapata's board of directors to sell
its interest in Safety Components, Zapata was required to record a loss equal to
the difference between its carrying value in Safety Component's common stock and
the net selling price.
Generally, as the expected sale proceeds of $51.2 million exceed Zapata's
original purchase price of $47.8 million, the sale will be taxable to us.
Adjusting for expected transaction closing costs and changes in the tax basis,
we estimate a taxable gain from the sale of approximately $213,000. Because we
have existing loss carryforwards, we do not anticipate that we will pay any
income taxes related to the sale.
In accordance with SFAS No. 144, depreciation and amortization expense were
suspended on assets held for sale effective with the September 21, 2005 Board
approval of the disposal plan. Operating results of our discontinued operations
for the periods ended September 30, are as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
(IN THOUSANDS)
Revenue from discontinued operations $ 50,562 $ 56,172 $ 168,182 $ 191,261
Income before taxes and minority interest 1,748 2,452 7,464 13,046
10
The major classes of assets and liabilities of our discontinued operations at
September 30, 2005 and December 31, 2004 are as follows:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(IN THOUSANDS)
CURRENT ASSETS:
Cash and cash equivalents $ 6,258 $ 4,184
Accounts receivable, net 38,383 38,872
Assets held in deferred compensation plan 2,205 4,361
Inventory, net 23,381 26,882
Prepaid expenses and other assets 4,479 4,141
------------- ------------
Total current assets $ 74,706 $ 78,440
============= ============
NON-CURRENT ASSETS:
Intangible assets, net $ 4,588 $ 6,158
Other assets 415 373
Property, plant and equipment, net 27,467 39,481
------------- ------------
Total non-current assets $ 32,470 $ 46,012
============= ============
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,273 $ 3,263
Accounts payable 13,896 16,828
Accrued and other current liabilities 14,512 18,903
------------- ------------
Total current liabilities $ 30,681 $ 38,994
============= ============
NON-CURRENT LIABILITIES:
Long-term debt $ 2,363 $ 3,729
Other liabilities and deferred taxes 4,422 3,784
------------- ------------
Total non-current liabilities $ 6,785 $ 7,513
============= ============
MINORITY INTEREST $ 18,525 $ 17,233
============= ============
Inventory related to discontinued operations is summarized as follows (in
thousands):
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
Raw materials $ 6,447 $ 7,153
Work-in-process 7,247 8,073
Finished goods 9,687 11,656
------------------ -----------------
Total $ 23,381 $ 26,882
================== =================
11
Long-term debt of discontinued operations consisted of the following:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
(IN THOUSANDS)
Wachovia revolving credit facility due on October 8, 2006, interest at a
variable rate of 6.5% at September 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 6.5% at September 30, 2005 and 5.0 % at December 31, 2004 1,648 2,048
KeyCorp equipment note due August 2005, interest rate of 1.3%
over LIBOR -- 1,028
HBV Bank Czech Republic mortgage note due March 2007, interest
rate of 1.7% over EURIBOR 1,563 2,640
Capital equipment notes payable, with various interest rates ranging
from 4.90% to 8.36%, maturing at various dates through July
2008 1,425 1,171
------------------ -----------------
Total debt related to discontinued operations 4,636 6,992
Less: current maturities (2,273) (3,263)
------------------ -----------------
Total long-term debt related to discontinued operations $ 2,363 $ 3,729
================== =================
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
September 30, 2005 on Safety's consolidated balance sheet. The Wachovia Revolver
also includes a $5.0 million letter of credit facility, of which $297,000 was
utilized at September 30, 2005.
In addition, Safety has a term facility with Wachovia (the "Wachovia Term A
loan") under which $1.6 million was outstanding as of September 30, 2005. At
September 30, 2005, $534,000 of the $1.6 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 $4.5 million was available as of September 30, 2005.
At September 30, 2005, Safety's availability for additional borrowings (based on
the maximum allowable limit) under the Wachovia Revolver and the Wachovia Term B
loan was approximately $39.2 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 September 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
12
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 September 30, 2005, Safety was in
compliance with all financial covenants. At September 30, 2005, Safety was also
in compliance with all non-financial covenants and had obtained a waiver of
non-compliance from Wachovia for not dissolving an inactive subsidiary.
Substantially all assets of Safety are pledged as collateral for the borrowings
under the Wachovia Facilities.
LITIGATION OF DISCONTINUED OPERATIONS
The U.S. Environmental Protection Agency (the "EPA") has notified Safety that it
believes Valentec Wells, LLC ("Valentec"), as a successor to one or more other
companies, is one of the 73 largest Potentially Responsible Parties ("PRPs")
with responsibility for the RRG Clayton Chemical Site (the "Site") in Sauget,
Illinois under the Comprehensive Environmental Response Compensation and
Liability Act ("CERCLA"). Valentec is an inactive subsidiary of Safety. Safety
requested that the EPA provide any information in its possession related to the
alleged successor relationship between Valentec and any other company that may
have sent waste to the Site; however, to date the EPA has provided no such
information, and Safety's own inquiries have not confirmed the presence or
absence of any such relationship. A group of PRPs has negotiated a proposed
administrative order of consent (the "Consent Order") with the EPA providing for
an initial limited soil cleanup, and has requested that Valentec and other
parties named as PRPs join the Consent Order. Safety has become a party to the
Consent Order and estimated costs of this matter are considered de minimis.
There can be no assurance, however, that Safety's entry into the Consent Order
would limit any costs imposed on Safety as proposed in the Consent Order because
compliance with the Consent Order does not release Safety from all further
liability, and if costs were greater than Safety's estimates, they could be
material to Safety. Although Safety does not believe that under current
circumstances, such costs could be material to Safety.
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 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.
DERIVATIVES AND HEDGING OF DISCONTINUED OPERATIONS
Safety Components monitors its risk associated with the volatility of certain
foreign currencies against its functional currency, the U.S. dollar. Safety uses
certain derivative financial instruments to reduce exposure to volatility of
foreign currencies. Safety has formally documented all relationships between
hedging instruments and hedged items, as well as risk management objectives and
strategies for undertaking various hedge transactions. Derivative financial
instruments are not entered into for trading or speculative purposes.
Certain operating expenses at Safety's Mexican facilities are paid in Mexican
pesos. To reduce exposure to fluctuations in the U.S. dollar and Mexican peso
exchange rates, Safety entered into forward contracts on February 16, 2005 to
buy Mexican pesos for periods and amounts consistent with the related,
underlying forecasted cash outflows. These contracts were designated as hedges
at inception and are monitored for effectiveness on a routine basis. At
13
September 30, 2005, Safety had outstanding forward exchange contracts that
mature between October 2005 and December 2005 to purchase Mexican pesos with an
aggregate notional amount of approximately $2.1 million. The fair values of
these contracts at September 30, 2005 totaled approximately $148,000 which is
recorded as an asset on the balance sheet in "current assets related to
discontinued operations." 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
September 30, 2005, Safety had outstanding forward exchange contracts that
mature between October 2005 and December 2005 to purchase Czech Korunas with an
aggregate notional amount of approximately $1.4 million. The fair values of
these contracts at September 30, 2005 totaled approximately $65,000 which is
recorded as an asset on the balance sheet in "current assets related to
discontinued operations." 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 goods sold.
GUARANTEES OF DISCONTINUED OPERATIONS
FASB Interpretation No. 45 provides guidance on the disclosures to be made by a
guarantor about its obligations under certain guarantees that it has issued and
specific disclosures related to product warranties. As of September 30, 2005,
Safety and various consolidated subsidiaries of Safety are borrowers under the
Wachovia Facilities (as defined above) and a note payable to a bank in the Czech
Republic, and are party to forward hedge contracts for foreign currency with a
U.S. bank (together, the "Guarantee Facilities"). The Guarantee Facilities are
guaranteed by either Safety and/or various consolidated subsidiaries of Safety
in the event that the borrower(s) default under the provisions of the Guarantee
Facilities. The guarantees are in effect for the duration of the related
Guarantee Facilities. Safety does not provide product warranties within the
disclosure provisions of Interpretation No. 45.
NOTE 4. ACCOUNTS RECEIVABLE
Accounts receivable as of September 30, 2005 and December 31, 2004 are
summarized as follows:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
(IN THOUSANDS)
Trade $ 12,869 $ 12,161
Insurance 12,931 1,242
Income tax 288 722
Other 234 540
------------- -----------
Total accounts receivable 26,322 14,665
Less: allowance for doubtful accounts (183) (160)
------------- -----------
Receivables, net $ 26,139 $ 14,505
============= ===========
As a result of Hurricanes Katrina and Rita (see Note 15 - Hurricane Losses),
Omega sustained damage to its three fish processing facilities and its shipyard
located in the Gulf of Mexico region. Based on preliminary discussions with its
insurers and adjusters, Omega believes its hurricane related insurance
recoveries will total approximately $12 million, which Omega has currently
recognized as an account receivable as of September 30, 2005. This estimate may
change as additional information becomes available. Omega anticipates that
further recoveries could be available, but such additional recoveries will
require further analysis and discussions with Omega's insurance carriers.
Additional amounts will be recognized when the amounts are probable.
14
NOTE 5. INVENTORIES
Inventories are summarized as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
(IN THOUSANDS)
Fish meal $21,221 $18,693
Fish oil 23,649 11,118
Fish solubles 831 509
Unallocated inventory cost pool (including off season costs) 477 5,794
Other materials and supplies 4,107 4,328
------- -------
Total inventory $50,285 $40,442
======= =======
At September 30, 2005 and December 31, 2004, consolidated inventory consisted
exclusively of Omega Protein's inventories.
Inventory at September 30, 2005 and December 31, 2004 is stated at the lower of
cost or market. The elements of unallocated inventory cost pool include plant
and vessel related labor, utilities, rent, repairs and depreciation, to be
allocated to inventories produced through the remainder of 2005.
As a result of hurricanes Katrina and Rita, Omega sustained damage to its Gulf
of Mexico fish meal storage facilities and materials and supplies warehouses.
Omega recognized a $2,375,000 fish meal inventory write-off and $1,387,000
materials and supplies write-off for the three-and nine-month periods ended
September 30, 2005. (See Note 15 - Hurricane Losses)
The hurricanes also affected Omega's 2005 Gulf of Mexico fishing season due to
the closure of its three fish processing facilities in the Gulf of Mexico
region. As a result of these closures and their impact on fishing, Omega has
recognized a $12,978,000 unallocated inventory cost pool write-off for the
three-and nine-month periods ended September 30, 2005. (See Note 15 - Hurricane
Losses)
NOTE 6. ACCRUED AND OTHER CURRENT LIABILITIES
Accrued and other current liabilities are summarized as follows:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
(IN THOUSANDS)
Salary and benefits $ 8,215 $ 4,619
Insurance 3,260 3,340
Safety Components management retention bonus 1,000 --
Transaction costs 309 --
Trade creditors 2,479 2,556
Federal and state income taxes 2,195 1,893
Litigation reserves 410 435
Other 1,892 1,134
---------- ----------
$ 19,760 $ 13,977
========== ==========
During the third quarter of 2005, Zapata approved a plan in order to provide
Safety Components management with an incentive to continue with Safety
Components until the completion of the proposed sale to WLR Recovery Funds.
Under this plan, Zapata has agreed to pay an aggregate of $1,000,000 in the form
of a capital contribution to Safety Components for the Safety Components
compensation committee to pay bonuses to the Safety Components executive
officers and key employees.
Transaction costs are general and administrative costs incurred by Zapata
associated with the sale of Safety Components.
15
NOTE 7. DEBT
Long-term debt consisted of the following:
SEPTEMBER 30, 2005 DECEMBER 31, 2004
------------------ -----------------
(IN THOUSANDS)
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% $ 16,014 $ 17,171
Amounts due in installments through 2014, interest at Eurodollar
rates of 3.93% and 2.42% at September 30, 2005 and December
31, 2004, respectively, plus 4.5% 369 400
Other debt at 6.25% at September 30, 2005 and December 31, 2004 10 33
------------------ -----------------
Total debt 16,393 17,604
Less: current maturities (1,713) (1,661)
------------------ -----------------
Total long-term debt $ 14,680 $ 15,943
================== =================
At September 30, 2005 and December 31, 2004, consolidated debt consisted
exclusively of 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 in its 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 against the $14 million approval, and
subsequently amended that request to include the entire $14 million. As of
September 30, 2005, Omega had no borrowings outstanding under the Approval
Letter. Subsequent to September 30, 2005, Omega closed on that $14 million loan
and received $14 million in loan proceeds. (See Note 17 - Subsequent Events)
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 quarterly 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
16
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 September 30, 2005, Omega had no borrowings
outstanding under the Credit Facility. At September 30, 2005 and December 31,
2004, Omega had outstanding letters of credit under the Credit Facility totaling
approximately $2.7 million, issued primarily in support of worker's compensation
insurance programs. Subsequent to September 30, 2005, Omega amended the existing
Credit Facility by entering into a Third Amendment to the Loan and Security
Agreement. (See Note 17 - Subsequent Events)
NOTE 8. 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 9. 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 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2005 2004 2005 2004
--------- --------- --------- ----------
Weighted average number of common shares
used in basic earnings per share 19,136 19,131 19,135 19,131
Effect of dilutive stock options -- 223 -- 205
--------- --------- --------- ----------
Weighted average number of common shares
and potentially dilutive common shares
outstanding used in diluted earnings per share 19,136 19,354 19,135 19,336
========= ========= ========= ==========
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 ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Potential common shares excluded from the
calculation of diluted earnings per share:
Stock options (in thousands) 12 12 12 18
Weighted average exercise price per share $ 10.938 $ 10.938 $ 10.938 $ 9.793
17
NOTE 10. COMPREHENSIVE (LOSS) INCOME
The components of other comprehensive (loss) income are as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2005 2004 2005 2004
------------ ----------- ------------ -----------
(RESTATED) (RESTATED)
(IN THOUSANDS)
Net (loss) income to common stockholders $ (9,161) $ 784 $ (8,619) $ 3,418
Currency translation adjustment, net of tax effects (1) 2 6 (8)
Amounts related to discontinued operations, net
of tax effects (580) 475 4,491 (87)
------------ ----------- ----------- ----------
Total comprehensive (loss) income $ (9,742) $ 1,261 $ (4,122) $ 3,323
============ =========== =========== ===========
NOTE 11. COMMITMENTS AND CONTINGENCIES
LITIGATION
Zapata is involved in litigation relating to claims arising out of its past and
current operations in the normal course of business. Zapata maintains insurance
coverage against such potential ordinary course claims in an amount in which it
believes to be adequate. While the results of any ultimate resolution cannot be
predicted, in the opinion of Zapata's management, based upon discussions with
counsel, any losses resulting from these matters will not have a material
adverse effect on Zapata's results of operations, cash flow or financial
position.
ENVIRONMENTAL MATTERS
During the third quarter of 2005, Zapata was notified by Weatherford
International Inc. ("Weatherford") of a claim for reimbursement of approximately
$200,000 in connection with the investigation and cleanup of purported
environmental contamination at two properties formerly owned by a non-operating
Zapata subsidiary. The claim was made under an indemnification provision given
by Zapata to Weatherford in a 1995 asset purchase agreement and relates to
alleged environmental contamination that purportedly existed on the properties
prior to the date of the sale.
Weatherford has also advised the Company that it anticipates that further
remediation and cleanup may be required, although they have not provided any
information regarding the cost of any such future clean up. Zapata has
challenged any responsibility to indemnify Weatherford and is in the process of
retaining its own expert to determine whether the condition is such that it
would be required to provide indemnification under the asset purchase agreement,
including, whether the contamination occurred after the sale of the property.
At this time, although it is reasonably possible that some costs could be
incurred related to this site, the Company has inadequate information to enable
it to estimate any reasonably possible range of estimated liability relating to
these sites beyond the specific amount claimed to date by Weatherford. Further,
there can be no assurance that the Company will not incur material costs and
expenses in connection with any further investigation and remediation at the
site.
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.
18
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.
In addition, 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 September 30, 2005, Omega Protein had normal purchase commitments for
energy usage of approximately $353,000, that will be delivered in quantities
expected to be used in the normal course of business during the 2005 fishing
season.
NOTE 12. RELATED PARTY TRANSACTIONS
SAFETY COMPONENTS
During the third quarter of 2005, Zapata approved a plan in order to provide
Safety Components management with an incentive to continue with Safety
Components until the completion of the proposed sale to WLR Recovery Funds.
Under this plan, Zapata has agreed to pay an aggregate of $1,000,000 in the form
of a capital contribution to Safety Components for the Safety Components
compensation committee to pay bonuses to the Safety Components executive
officers and key employees.
19
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 nine months ended September 30, 2005 and
reimbursed Omega approximately $4,000 and $15,000 for services provided under
the agreement for the three and nine months ended September 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 September 30, 2005 and 2004, approximately $3,000 was
recorded as contributed capital for these services. For each of the nine months
ended September 30, 2005 and 2004, approximately $9,000 and 10,000,
respectively, was recorded as contributed capital for these services.
OTHER
The Malcolm I. Glazer Family Limited Partnership, which owns approximately 51%
of Zapata's common stock, executed a Voting Agreement wherein it committed to
vote in favor of the proposed transaction between Zapata and the WLR Recovery
Funds and against any competing transaction. Pursuant to the Voting Agreement
the Malcolm I. Glazer Family Limited Partnership also granted WLR a voting proxy
to effect its undertaking in the Voting Agreement.
In February 2005, the Company modified the terms of certain outstanding stock
options held by Darcie Glazer and Edward Glazer, to extend the early termination
of the exercise period following Darcie Glazer's termination of employment with
the Company in 2001. Consistent with FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation (an interpretation of APB
Opinion No. 25)," the Company recorded a compensation charge of approximately
$353,000 related to this modification.
NOTE 13. 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
20
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 14. QUALIFIED DEFINED BENEFIT PLANS
Zapata and Omega Protein have separate and independent noncontributory defined
benefit pension plans covering certain U.S. employees. Additionally, Zapata has
a supplemental pension plan, which provides supplemental retirement payments to
certain former senior executives of Zapata.
The amounts shown below reflect the consolidated defined benefit pension plan
expense for Zapata and Omega Protein, including Zapata's supplemental pension
plan expense.
COMPONENTS OF NET PERIODIC BENEFIT COST
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
2005 2004 2005 2004
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
------------ ----------- ----------- -----------
(IN THOUSANDS)
Service cost $ 10 $ 10 $ 31 $ 29
Interest cost 645 651 1,936 1,953
Expected return on plan assets (734) (750) (2,201) (2,250)
Amortization of transition assets and other
deferrals 375 335 1,126 1,004
------------ ----------- ----------- -----------
Net periodic benefit cost $ 296 $ 246 $ 892 $ 736
============ =========== =========== ===========
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 15. HURRICANE LOSSES
On August 29, 2005, Omega's Moss Point, Mississippi fish processing facility and
adjacent shipyard were severely damaged by Hurricane Katrina. On September 24,
2005, Omega's Cameron, Louisiana and the Abbeville, Louisiana fish processing
facilities were also severely damaged by Hurricane Rita. Each of these
facilities was non-operational immediately after these weather related events.
For the three and nine-month periods ending September 30, 2005, the following
amounts have been recognized in Omega's statement of operations:
Damaged fish meal inventory $ 2,375,000
Write-off of other materials and supplies 1,387,000
Write-off of unallocated inventory cost pool 12,978,000
Involuntary conversion of property and equipment 8,333,000
Clean-up costs incurred 110,000
Estimated insurance recoveries (12,000,000)
------------
Estimated damages in excess of insurance recoveries $ 13,183,000
============
A substantial portion of the amounts listed above are based upon estimates and
assumptions. Actual amounts, when available, could differ materially from those
estimates and changes to those estimates could have a material affect on Omega's
future financial statements.
Not included in the amounts listed in the above table are the replacement
capital costs of property and equipment, which did not have any book basis and
were destroyed by the hurricanes, and the costs of clean up incurred subsequent
to September 30, 2005.
21
NOTE 16. INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The following summarizes certain financial information of each segment for the
three and nine months ended September 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
(RESTATED)
-------- --------- --------- ------------ --------- --------- ------------
THREE MONTHS ENDED
SEPTEMBER 30, 2005
Corporate $ -- $ (1,286) $ 43,909 $ 6 $ 214 $ 1,325 $ --
Discontinued Operations -- -- 107,039 -- -- -- --
Omega Protein 31,418 (9,201) 188,728 3,214 (232) 3,359 1,558
Zap.Com -- (48) 1,784 -- 15 -- --
--------- --------- --------- --------- --------- --------- ---------
$ 31,418 $ (10,535) $ 341,460 $ 3,220 $ (3) $ 4,684 $ 1,558
========= ========= ========= ========= ========= ========= =========
THREE MONTHS ENDED
SEPTEMBER 30, 2004
Corporate $ -- $ (1,277) $ 48,937 $ 10 $ 94 $ 57 $ --
Discontinued Operations -- -- 123,689 -- -- -- --
Omega Protein 41,501 2,703 196,351 2,883 81 (911) 6,769
Zap.Com -- (38) 1,838 -- 6 -- --
--------- --------- --------- --------- --------- --------- ---------
$ 41,501 $ 1,388 $ 370,815 $ 2,893 $ 181 $ (854) $ 6,769
========= ========= ========= ========= ========= ========= =========
NINE MONTHS ENDED
SEPTEMBER 30, 2005
Corporate $ -- $ (4,219) $ 43,909 $ 26 $ 560 $ 2,020 $ --
Discontinued Operations -- -- 107,039 -- -- -- --
Omega Protein 82,759 (8,159) 188,728 9,875 (407) 3,067 12,870
Zap.Com -- (113) 1,784 -- 37 -- --
--------- --------- --------- --------- --------- --------- ---------
$ 82,759 $ (12,491) $ 341,460 $ 9,901 $ 190 $ 5,087 $ 12,870
========= ========= ========= ========= ========= ========= =========
NINE MONTHS ENDED
SEPTEMBER 30, 2004
Corporate $ -- $ (4,017) $ 48,937 $ 35 $ 239 $ 512 $ --
Discontinued Operations -- -- 123,689 -- -- -- --
Omega Protein 93,013 6,886 196,351 8,920 (289) (2,148) 19,409
Zap.Com -- (128) 1,838 -- 15 -- --
--------- --------- --------- --------- --------- --------- ---------
$ 93,013 $ 2,741 $ 370,815 $ 8,955 $ (35) $ (1,636) $ 19,409
========= ========= ========= ========= ========= ========= =========
NOTE 17. SUBSEQUENT EVENTS
On October 11, 2005, Omega amended its existing credit facility with Bank of
America, N.A. by entering into a Third Amendment to the Loan and Security
Agreement dated December 20, 2000. The Third Amendment increased the amount of
Title XI loans (federal loans under the U.S. Department of Commerce Fisheries
Finance Program) that Omega is permitted to borrow from $25,000,000 to
$31,000,000. All other terms and conditions of the credit facility remain the
same.
On October 17, 2005, Omega closed on a $14 million loan with the U.S. Department
of Commerce Fisheries Finance Program ("FFP"). This loan was entered into
pursuant to Omega's financing application previously approved by the FFP in
September 2004. The loan is secured by liens on four of Omega's fishing vessels
and a mortgage on Omega's Reedville, Virginia facility. Borrowings will be used
to reimburse Omega for prior expenditures for fishing vessel refurbishments and
improvements to shore-side marine assets. The loan has a term of 15 years, is
amortized on a quarterly basis, and bears interest at 6.5%.
NOTE 18. RESTATEMENT
The Company's financial statements as of and for the three months and nine month
periods ended September 30, 2005 have been restated from amounts previously
reported. The adjustments are primarily related to the timing of the reversal of
$4.2 million of deferred tax liabilities established during periods in which
Safety Components was consolidated into the financial statements of the Company
for book purposes and not consolidated for tax purposes. In the Company's
initial filing of its Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 2005 (the "Original Filing"), the Company reported that the
reversal of $4.2 million of deferred tax liabilities would occur at the closing
of the transaction, that the closing was anticipated to occur (and did occur)
during the fourth quarter of 2005 and that this reversal would result in a gain.
The Company has subsequently determined that this reversal should have been
recognized in the third quarter in conjunction with the write-down of the
Company's carrying value in Safety Components. Accordingly, this Form 10-Q/A
recognizes the reversal of this amount in the third quarter of 2005. In
addition, as part of the restatement, the Company i) corrected the allocation of
the income tax provision for the three and nine months ended September 30, 2005
between continuing and discontinued operations for the amounts of $573,000 and
$1.6 million, respectively, and ii) recorded in the third quarter of 2005,
certain immaterial income tax adjustments related to the first and second
quarters of 2005 of $174,000. The following tables show the Condensed
Consolidated Statement of Operations and Balance Sheet line items that have been
restated.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 PREVIOUSLY
REPORTED ADJUSTMENTS RESTATED
---------- ----------- --------
Continuing operations:
----------------------
Benefit (provision) for income taxes 4,285 399 4,684
Net (loss) from continuing operations (3,729) 399 (3,330)
Discontinued operations:
------------------------
(Provision) benefit for income taxes (223) 3,591 3,368
Net (loss) income from discontinued operations (9,422) 3,591 (5,831)
Net (loss) income to common stockholders (13,151) 3,990 (9,161)
Net (loss) income per common share - basic and diluted:
Loss from continuing operations (0.20) 0.03 (0.17)
(Loss) income from discontinued operations (0.49) 0.18 (0.31)
(Loss) income per common share - basic and diluted (0.69) 0.21 (0.48)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2005 PREVIOUSLY
REPORTED ADJUSTMENTS RESTATED
---------- ----------- --------
Continuing operations:
----------------------
Benefit (provision) for income taxes 3,710 1,377 5,087
Net (loss) income from continuing operations (6,178) 1,377 (4,801)
Discontinued operations:
------------------------
(Provision) benefit for income taxes (2,102) 2,613 511
Net (loss) income from discontinued operations (6,431) 2,613 (3,818)
Net (loss) income to common stockholders (12,609) 3,990 (8,619)
Net (loss) income per common share - basic and diluted:
Loss from continuing operations (0.32) 0.07 (0.25)
(Loss) income from discontinued operations (0.34) 0.14 (0.20)
(Loss) income per common share - basic and diluted (0.66) 0.21 (0.45)
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2005 PREVIOUSLY
REPORTED ADJUSTMENTS RESTATED
---------- ----------- --------
Accrued and other current liabilities 19,760 174 19,934
Other liabilities and deferred taxes 6,743 (4,164) 2,579
Retained earnings 42,232 3,990 46,222
22
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.
RESTATEMENT
This Quarterly report on Form 10-Q/A ("Form 10-Q/A") is being filed in order to
correct the previously issued consolidated financial statements of Zapata
Corporation for the three and nine month periods ended September 30, 2005 and
2004 initially filed with the Securities and Exchange Commission (the "SEC") on
November 14, 2005 (the "Original Filing"). The corrections are primarily related
to the timing of the reversal of $4.2 million of deferred tax liabilities
established during periods in which Safety Components International, Inc. was
consolidated into the financial statements of the Company for book purposes and
not consolidated for tax purposes. In the Original Filing, the Company reported
that the reversal of $4.2 million of deferred tax liabilities would occur at the
closing of the sale of Safety Components, that the closing was anticipated to
occur (and did occur) during the fourth quarter of 2005 and that this reversal
would result in a gain. The Company has subsequently determined that this
reversal should have been recognized in the third quarter in conjunction with
the write-down of the Company's carrying value in Safety Components.
Accordingly, this Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations recognizes the reversal of this amount in
the third quarter of 2005 and has been updated accordingly. In addition, as part
of the restatement, the Company i) corrected the allocation of the income tax
provision for the three and nine months ended September 30, 2005 between
continuing and discontinued operations for the amounts of $573,000 and $1.6
million, respectively, and ii) recorded in the third quarter of 2005, certain
immaterial income tax adjustments related to the first and second quarters of
2005 of $174,000. See Note 18 "Restatement" under Notes to Unaudited Condensed
Consolidated Financial Statements included in Part 1, Item 1 of this Form
10-Q/A.
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 September 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."
On September 23, 2005, Zapata Corporation entered into a Stock Purchase
Agreement with WLR Recovery Fund II, L.P. and WLR Recovery Fund III, L.P.,
Delaware limited partnerships (collectively the "WLR Recovery Funds"), to sell
all its 4,162,394 shares of common stock in Safety Components. The purchase
price is $12.30 per share or $51,197,446 in the aggregate, which has been placed
in escrow pending the closing of the transaction. The parties obligation to
consummate the transaction is subject to customary closing conditions, including
approval by Zapata stockholders and the expiration or termination of the waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"). The Company requested early termination of the waiting
period which was granted and effective on October 26, 2005. The parties have
covenanted to take all actions required of them under the agreement to complete
the transaction (subject to certain exceptions) by December 31, 2005.
The closing is expected to take place in the fourth quarter of 2005. The Stock
Purchase Agreement provides that after the closing of the transaction, Zapata's
representatives will resign as Safety Components directors. Until the issuance
of the share certificates to the WLR Recovery Funds, Zapata is obligated to vote
WLR's nominees to Safety Components board of directors.
Zapata expects that this transaction will close during the fourth quarter of
2005 at which time the Company expects to receive net proceeds of approximately
$49.9 million. At that time, the Company will record the cash proceeds and cease
to consolidate Safety's statement of position, results of operations and cash
flows and disclosures. During the quarter ended September 30, 2005, the Company
recognized a transaction related loss of $6.6 million. This loss was recognized
23
primarily to reduce the carrying value of Safety Components to the fair value
less cost to sell, partially offset by the reversal of deferred tax liabilities
established during periods in which Safety Components was consolidated for book
purposes and not consolidated for tax purposes. At closing, the Company will
recognize additional losses (gains) to reflect Zapata's share of Safety's net
income (loss) for the period from October 1, 2005 through closing.
Although Zapata has agreed to sell its shares of Safety for $51.2 million and
originally purchased these shares for $47.8 million, the Company recorded an
accounting loss on the transaction quarter ended September 30, 2005. Despite
selling our interest in Safety Components for a cash gain, Zapata recorded an
accounting loss primarily due to Safety Components' generation of net income
subsequent to Zapata's acquisition of Safety's common stock. During the periods
in which Zapata consolidated Safety's results of operations, Safety Component's
recognition of net income caused Zapata's carrying value in the investment in
Safety's common stock to increase by its share of Safety's net income.
Accordingly, concurrent with the approval of Zapata's board of directors to sell
its interest in Safety Components, Zapata was required to record a loss equal to
the difference between its carrying value in Safety Component's common stock and
the net selling price.
Either Zapata or the WLR Recovery Funds may terminate the Stock Purchase
Agreement if the closing conditions are not satisfied as of December 31, 2005
(unless they have not been satisfied due to the terminating parties breach of
the agreement). Zapata will be required to pay the WLR Recovery Funds WLR
$2,000,000 and actual documented out-of-pocket expenses incurred by WLR up to
$500,000 plus a limited amount of accrued interest if the termination is by the
WLR Recovery Funds and if as of December 31, 2005 Zapata has not completed
certain covenants in the agreement or Zapata's stockholder vote has not been
secured as a result of a breach by Zapata and there are no other unfulfilled
conditions or breaches by the WLR Recovery Funds.
During the third quarter of 2005, Zapata approved a plan in order to provide
Safety Components management with an incentive to continue with Safety
Components until the completion of the proposed sale to WLR Recovery Funds.
Under this plan, Zapata has agreed to pay an aggregate of $1,000,000 in the form
of a capital contribution to Safety Components for the Safety Components
compensation committee to pay bonuses to the Safety Components executive
officers and key employees.
Concurrently with the execution of the Stock Purchase Agreement, the Malcolm I.
Glazer Family Limited Partnership, which owns approximately 51% of Zapata's
common stock, executed a Voting Agreement wherein it committed to vote in favor
of the proposed transaction and against any competing transaction. Pursuant to
the Voting Agreement the Malcolm I. Glazer Family Limited Partnership also
granted the WLR Recovery Funds a voting proxy to effect its undertaking in the
Voting Agreement.
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
24
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.
Other than the aforementioned Stock Purchase Agreement with the WLR Recovery
Funds, as of the date of this report, Zapata is not a party to any other
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 the sale of the Company's common
stock to the WLR Recovery Funds or any other possible transaction will occur or
that they will ultimately be advantageous to Zapata or enhance Zapata
stockholder value.
SAFETY COMPONENTS
Based on Zapata's Board of Directors approval to pursue the sale of Safety
Components, the Company determined that this subsidiary substantially met the
criteria to be reported as "Discontinued Operations". Accordingly, as used
throughout this document, all amounts and disclosures related to Safety
Components pertain to "Discontinued Operations".
Safety Components is an 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 their demand for
such products. Safety Components also manufactures value-added technical fabrics
used in a variety of niche industrial and commercial applications such as fire
service apparel, filtration and military fabrics.
On September 1, 2005 Safety exercised an option to acquire 49% of the ownership
interests of NxGen Technologies, LLC ("NxGen"), which is in the business of
designing airbags, airbag systems and inflator units. Safety exercised this
option in connection with NxGen's entry into a License and Consulting Agreement
with Delphi Automotive Systems LLC ("Delphi") pursuant to which NxGen granted
Delphi an exclusive, worldwide, royalty-bearing license to certain of NxGen's
patents and patent know-how. Safety recognized approximately $1.5 million (free
of tax from an existing capital loss carryforward) into equity in earnings from
unconsolidated affiliate in connection with the exercise of the option and
recorded an asset of approximately $247,000 (which represents Safety's ownership
interest in this affiliate's equity) in "Non-current assets related to
discontinued operations" on the balance sheet. Safety will participate in
NxGen's subsequent profits and losses pro rata in accordance with its equity
ownership.
Safety's customers supply airbag modules to various automotive manufacturers.
The automotive manufacturers have recently 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 Safety's results of
operations and/or financial position adversely.
A number of significant uncertainties are impacting the outlook for Safety's
financial results for the fourth quarter of 2005 and beyond. These include
instability in the raw material and commodity markets, particularly given the
effects of the 2005 Gulf Coast storms; continuing distress throughout the supply
chain, exacerbated by the unprecedented increases in raw material prices,
potential for supply disruptions and other supplier and customer bankruptcies;
and an uncertain sales and production environment in North America and Europe.
During the third quarter of 2005, one of the Company's largest raw materials
suppliers announced a price increase of approximately 4% on raw material yarn
purchased for the Company's North America airbag fabric weaving facility,
effective in the fourth quarter of 2005. Management has estimated the impact on
the cost of raw material purchases to be approximately $250,000 for the year
ending December 31, 2005 and approximately $1 million on an annual basis. The
Company is currently in negotiations with its airbag cushion customers in North
America to pass along this increase. However, the outcome of such negotiations
cannot be determined at this time.
During the second quarter of 2004, one of Safety's largest raw materials
suppliers implemented a price increase of approximately 11% on raw material yarn
purchased for Safety's North America airbag fabric weaving facility.
25
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 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
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.
On August 29, 2005, Omega's Moss Point, Mississippi fish processing facility and
adjacent shipyard were severely damaged by Hurricane Katrina. On September 25,
2005, Omega's Cameron, Louisiana and Abbeville, Louisiana fish processing
facilities were also severely damaged by Hurricane Rita. Each of these
facilities was non-operational immediately after these weather events.
Operations at the Moss Point fish processing facility, the Abbeville fish
processing facility and the shipyard were re-established in mid-October, 2005,
but at reduced processing capabilities.
Omega currently plans to re-open an additional Gulf of Mexico facility in late
2006 or early 2007, but is still evaluating whether the location of that
facility will be Cameron, Louisiana or the Company's existing property at Morgan
City, Louisiana. Omega currently estimates that its full contingent of 31 Gulf
of Mexico fishing vessels will begin the 2006 fishing season and will be capable
of unloading its fish catch at the Company's Moss Point and Abbeville fish
processing facilities. Although these facilities have adequate processing
capacity, Omega believes that fishing efforts may be diminished because
increased unloading time due to additional vessels will keep some vessels off
the fishing grounds during the most optimal fishing times.
As of September 30, 2005, Omega owned a fleet of 61 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.
26
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. During the third quarter of 2005, Omega suffered plant closures due to
Hurricanes Katrina and Rita. The direct impact of the hurricanes upon Omega was
loss of physical inventories and physical damage to three plants. The
interruption of processing capabilities caused Omega to address the impact of
abnormal downtime of its processing facilities, which resulted in the immediate
recognition of costs which would ordinarily have been captured as inventory
costs. The amounts of these losses were substantial and are more fully described
in Notes 4, 5 and 16 to the Unaudited Condensed Consolidated Financial
Statements included in Item 1 of this Report.
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. 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 September 30, 2005. As a result of
Hurricanes Katrina and Rita and their impact on the Company's fishing efforts,
the Company is currently negotiating the purchase of approximately 18,000 to
20,000 tons of fish meal from third parties to be delivered in early 2006, in
order to meet the domestic spot buyers' demands. The Company
27
anticipates that the margins on these third party purchases and resales will be
significantly less than the margins typically generated from its base domestic
production.
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. Subsequent to the temporary suspension
of the Gulf of Mexico operations caused by Hurricanes Katrina and Rita, the
Company reviewed the contract status of those customers that would possibly be
impacted as a result of inventory shortages or reduced fish catch and determined
that Omega would not be able to supply 100% of its volume commitments with its
existing supplies of inventories or inventories or projected inventories to be
produced from its Atlantic operations. The Company determined that approximately
80% of its volume commitments could be met. Accordingly, Omega reduced its
volume commitments as permitted by its standard form purchase contracts and
worked with its customer base to allocate available inventory.
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------- ---------------------------------------------------
2005 2004 2005 2004
---------------------- ----------------------- ---------------------- ----------------------
Revenues Percent Revenues Percent Revenues Percent Revenues Percent
-------- ------- -------- ------- -------- ------- -------- -------
Regular
Grade $ 5.6 17.8% $ 6.9 16.6% $ 15.4 18.5% $ 16.6 17.8%
Special Select 14.6 46.5 19.0 45.8 36.4 44.0 39.5 42.5
Sea-Lac 5.3 16.9 4.9 11.8 14.4 17.4 13.1 14.1
Crude Oil 4.2 13.4 9.2 22.2 11.5 13.9 18.8 20.2
Refined Oil 1.3 4.1 1.1 2.6 3.7 4.5 3.5 3.8
Fish Solubles 0.4 1.3 0.4 1.0 1.4 1.7 1.5 1.6
------- ----- ------- ----- ------- ----- ------- -----
Total $ 31.4 100.0% $ 41.5 100.0% $ 82.8 100.0% $ 93.0 100.0%
======= ===== ======= ===== ======= ===== ======= =====
COMPETITION. The marine protein and oil business is subject to significant
competition from producers of vegetable and other animal protein products and
oil products such as Archer Daniels Midland and Cargill. In addition, but to a
lesser extent, Omega competes with smaller domestic privately-owned menhaden
fishing companies and international marine protein and oil producers, including
Scandinavian herring processors and South American anchovy processors. Many of
these competitors have greater financial resources and more extensive operations
than Omega.
Omega competes on price, quality and performance characteristics of its
products, such as protein level and amino acid profile in the case of fish meal.
The principal competition for Omega's fish meal and fish solubles is from other
global production of marine proteins as well as other protein sources such as
soybean meal and other vegetable or animal protein products. Omega believes,
however, that these other non-marine sources are not complete substitutes
because fish meal offers nutritional values not contained in such other sources.
Other globally produced fish oils provide the primary market competition for
Omega's fish oil, as well as soybean and palm oil, from time to time.
28
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.
On August 17, 2005, the Atlantic Menhaden Management Board (the "Management
Board") of the Atlantic States Marine Fisheries Commission ("ASMFC") approved an
addendum to the existing Interstate Fishery Management Plan for Atlantic
Menhaden. The addendum, which has been submitted for approval by the ASMFC to
its member states for approval, would establish an annual cap on Omega's fishery
landings from the Chesapeake Bay in an amount equal to Omega's average annual
landings over the last five years (2000 - 2004). Omega estimates that this
annual limitation would be approximately 106,000 metric tons. The cap would be
implemented for a five-year period beginning in 2006.
The ASMFC's 2003 peer-reviewed stock assessment of the menhaden resource
indicated that menhaden are not overfished and that overfishing is not occurring
on a coast wide basis. However, the Management Board stated that because it
believed that the Chesapeake Bay-wide status of the menhaden resource was
unknown, it was implementing a precautionary cap to limit the expansion of
menhaden processing landings from the Bay. The addendum also initiated a
multi-year research program to determine the status of menhaden in the Bay and
assess whether localized depletion is occurring. The proposed cap would not
adversely affect Omega's ability to fish in Virginia waters outside the
Chesapeake Bay or in any federal waters (waters beyond three miles from shore).
Omega's Gulf of Mexico operations also remain unrestricted. Omega is currently
reviewing the relevant authorities governing the ASMFC's actions and may elect
to challenge the validity of the regulation if it is implemented by the ASMFC
member states.
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 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.
29
The Company has experienced substantially higher costs for energy in recent
years, particularly in 2005. The Company's business is dependent on diesel fuel
for its vessels and natural gas for its operating facilities. The costs of these
commodities, which are beyond the Company's control, may have a material impact
on the Company's business, results of operations and financial condition.
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.
30
CONSOLIDATED RESULTS OF OPERATIONS
The following tables summarize Zapata's consolidating results of operations (in
thousands). Certain reclassifications of prior information have been made to
conform to the current presentation.
ZAPATA DISCONTINUED OMEGA
CORPORATE OPERATIONS(1) PROTEIN ZAP.COM CONSOLIDATED
(RESTATED) (RESTATED)
--------- ------------- -------- -------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 2005
Revenues $ -- $ -- $ 31,418 $ -- $ 31,418
Cost of revenues -- -- 24,032 -- 24,032
-------- -------- -------- -------- --------
Gross profit -- -- 7,386 -- 7,386
Operating expense:
Selling, general and administrative 1,286 -- 3,404 48 4,738
Loss resulting from natural disaster, net -- -- 13,183 -- 13,183
-------- -------- -------- -------- --------
Operating loss (1,286) -- (9,201) (48) (10,535)
-------- -------- -------- -------- --------
Other income (expense)
Interest income 214 -- 105 15 334
Interest expense -- -- (337) -- (337)
Other, net 7 -- (66) -- (59)
-------- -------- -------- -------- --------
221 -- (298) 15 (62)
Loss before income taxes and
minority interest (1,065) -- (9,499) (33) (10,597)
Benefit for income taxes 1,325 -- 3,359 -- 4,684
Minority interest in net loss of
consolidated subsidiaries(2) -- -- 2,581 2 2,583
-------- -------- -------- -------- --------
Loss from continuing operations 260 -- (3,559) (31) (3,330)
-------- -------- -------- -------- --------
Discontinued operations:
(Loss) income before taxes and minority
interest (including loss on disposal) (10,594) 1,748 -- -- (8,846)
Provision for income taxes 3,378 (10) -- -- 3,368
Minority interest (2) -- (353) -- -- (353)
-------- -------- -------- -------- --------
Net (loss) income from discontinued
operations (7,216) 1,385 -- -- (5,831)
-------- -------- -------- -------- --------
Net (loss) income to common stockholders $(6,956) $ 1,385 $ (3,559) $ (31) $ (9,161)
======== ======== ======== ======== ========
Diluted loss per share $ (0.48)
========
31
ZAPATA DISCONTINUED OMEGA
CORPORATE OPERATIONS(1) PROTEIN ZAP.COM CONSOLIDATED
--------- ------------- -------- -------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 2004
Revenues $ -- $ -- $ 41,501 $ -- $ 41,501
Cost of revenues -- -- 36,376 -- 36,376
-------- -------- -------- -------- --------
Gross profit -- -- 5,125 -- 5,125
Operating expense:
Selling, general and administrative 1,277 -- 2,422 38 3,737
Loss resulting from natural disaster, net -- -- -- -- --
-------- -------- -------- -------- --------
Operating (loss) income (1,277) -- 2,703 (38) 1,388
Other income (expense)
Interest income 94 -- 144 6 244
Interest expense -- -- (63) -- (63)
Other, net -- -- (57) -- (57)
-------- -------- -------- -------- --------
94 -- 24 6 124
(Loss) income before income taxes and
minority interest (1,183) -- 2,727 (32) 1,512
Provision for income taxes 57 -- (911) -- (854)
Minority interest in net income (loss) of
consolidated subsidiaries(2) -- -- (735) 1 (734)
-------- -------- -------- -------- --------
(Loss) income from continuing operations (1,126) -- 1,081 (31) (76)
Discontinued operations:
Income before taxes and minority interest
(including loss on disposal) -- 2,452 -- -- 2,452
Provision for income taxes (538) (653) -- -- (1,191)
Minority interest (2) -- (401) -- -- (401)
-------- -------- -------- -------- --------
Net income from discontinued operations (538) 1,398 -- -- 860
-------- -------- -------- -------- --------
Net (loss) income to common stockholders $ (1,664) $ 1,398 $ 1,081 $ (31) $ 784
======== ======== ======== ======== ========
Diluted earnings per share $ 0.04
========
32
ZAPATA
CORPORATE DISCONTINUED OMEGA CONSOLIDATED
(RESTATED) OPERATIONS(1) PROTEIN ZAP.COM (RESTATED)
--------- ------------- -------- -------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2005
Revenues $ -- $ -- $ 82,759 $ -- $ 82,759
Cost of revenues -- -- 68,500 -- 68,500
-------- -------- -------- -------- --------
Gross profit -- -- 14,259 -- 14,259
Operating expense:
Selling, general and administrative 4,219 -- 9,235 113 13,567
Loss resulting from natural disaster, net -- -- 13,183 -- 13,183
-------- -------- -------- -------- --------
Operating (loss) income (4,219) -- (8,159) (113) (12,491)
-------- -------- -------- -------- --------
Other income (expense)
Interest income 560 -- 438 37 1,035
Interest expense -- -- (845) -- (845)
Other, net 24 -- 125 -- 149
-------- -------- -------- -------- --------
584 -- (282) 37 339
Loss before income taxes and
Minority interest (3,635) -- (8,441) (76) (12,152)
Benefit for income taxes 2,020 -- 3,067 -- 5,087
Minority interest in net loss of
consolidated subsidiaries(2) -- -- 2,262 2 2,264
-------- -------- -------- -------- --------
Loss from continuing operations (1,615) -- (3,112) (74) (4,801)
Discontinued operations:
(Loss ) income before taxes and minority
interest (including loss on disposal) (10,594) 7,464 -- -- (3,130)
Provision for income taxes 2,400 (1,889) -- -- 511
Minority interest (2) -- (1,199) -- -- (1,199)
-------- -------- -------- -------- --------
Net (loss) income from discontinued
operations (8,194) 4,376 -- -- (3,818)
-------- -------- -------- -------- --------
Net (loss) income to common stockholders $ (9,809) $ 4,376 $ (3,112) $ (74) $ (8,619)
======== ======== ======== ======== ========
Diluted loss per share $ (0.45)
========
33
ZAPATA DISCONTINUED OMEGA
CORPORATE OPERATIONS(1) PROTEIN ZAP.COM CONSOLIDATED
--------- ------------- -------- -------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2004
Revenues $ -- $ -- $ 93,013 $ -- $ 93,013
Cost of revenues -- -- 78,821 -- 78,821
-------- -------- -------- -------- --------
Gross profit -- -- 14,192 -- 14,192
Operating expense:
Selling, general and administrative 4,017 -- 7,306 128 11,451
Loss resulting from natural disaster, net -- -- -- -- --
-------- -------- -------- -------- --------
Operating (loss) income (4,017) -- 6,886 (128) 2,741
-------- -------- -------- -------- --------
Other income (expense)
Interest income 239 -- 424 15 678
Interest expense -- -- (713) -- (713)
Other, net -- -- (160) -- (160)
-------- -------- -------- -------- --------
239 -- (449) 15 (195)
(Loss) income before income taxes and
minority interest (3,778) -- 6,437 (113) 2,546
Benefit for income taxes 512 -- (2,148) -- (1,636)
Minority interest in net (loss) income of
consolidated subsidiaries(2) -- -- (1,740) 2 (1,738)
-------- -------- -------- -------- --------
(Loss) income from continuing operations (3,266) -- 2,549 (111) (828)
-------- -------- -------- -------- --------
Discontinued operations:
Income before taxes and minority interest
(including loss on disposal) -- 13,046 -- -- 13,046
Provision for income taxes (2,448) (4,572) -- -- (7,020)
Minority interest (2) -- (1,780) -- -- (1,780)
-------- -------- -------- -------- --------
Net income from discontinued operations (2,448) 6,694 -- -- 4,246
-------- -------- -------- -------- --------
Net (loss) income to common stockholders $ (5,714) $ 6,694 $ 2,549 $ (111) $ 3,418
======== ======== ======== ======== ========
Diluted earnings per share $ 0.18
========
(1) Results of operations related to Safety Components have been disclosed
within discontinued operations in accordance with SFAS No. 144.
Additionally, for the three and nine months ended September 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
$112,000 and $124,000 for the three months ended September 30, 2005 and 2004
and $360,000 and $373,000 for the nine months ended September 30, 2005 and
2004.
(2) Minority interest represents Zapata's minority stockholders' interest in the
net income (loss) of each segment.
For more information concerning segments, see Note 17 to the Company's
Consolidated Financial Statements included in Item 1 of this Report.
THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Zapata reported a consolidated net loss of $9.2 million or $(.48) per diluted
share on consolidated revenues of $31.4 million for the three months ended
September 30, 2005 as compared to consolidated net income of $784,000 or $0.04
per diluted share on consolidated revenues of $41.5 million for the three months
ended September 30, 2004. On a consolidated basis, the decrease in net income
resulted from decreased net income at Omega Protein related to
34
hurricane losses, combined with a loss recorded for the pending sale of Zapata's
shares of Safety Components common stock.
The following is a more detailed discussion of Zapata's consolidated operating
results:
REVENUES FROM CONTINUING OPERATIONS. Consolidated revenues decreased $10.1
million or 24% from $41.5 million for the three months ended September 30, 2004
to $31.4 million for the three months ended September 30, 2005, related to
decreased revenues at Omega Protein. Omega's decrease was primarily due to a 19%
and 43% decrease in meal and oil sales volumes of fish meal and fish oil,
respectively. Omega experienced a $10.7 million decrease in revenues due to
reduced sales volumes offset by a $1.6 million increase in revenues due to
higher sales prices for fish meal and fish oil.
COST OF REVENUES FROM CONTINUING OPERATIONS. Zapata's consolidated cost of
revenues for the three months ended September 30, 2005 was $24.0 million, a
$12.4 million decrease from $36.4 million for the comparable period of the prior
year, attributable to decreased cost of revenue at Omega Protein. Omega's cost
of revenues as a percentage of revenues decreased 11% to 76% for the quarter
ended September 30, 2005,due to higher sales prices for the current quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES FROM CONTINUING OPERATIONS.
Consolidated selling, general, and administrative expenses increased $1.0
million for the three months ended September 30, 2004 to $4.7 million for the
three months ended September 30, 2005. This increase was primarily attributable
to Omega Protein's increased consulting expenditures relating to its
governmental relations program and abandoned acquisition activity.
LOSS RESULTING FROM NATURAL DISASTER, NET. For the current quarter ended
September 30, 2005, Omega incurred losses, net of insurance receivable, of $13.2
million relating to damages incurred at its Moss Point, Mississippi fish
processing facility and adjacent shipyard from Hurricane Katrina, and damages
incurred at its Cameron and Abbeville, Louisiana fish processing facilities from
Hurricane Rita.
INTEREST INCOME FROM CONTINUING OPERATIONS. Consolidated interest income
increased $90,000 from $244,000 for the three months ended September 30, 2004 to
$334,000 for the comparable period of the current year. This increase was
attributable to increases of $120,000 at Zapata Corporate resulting from higher
interest rates on investment, partially offset by a decrease at Omega Protein of
$39,000 primarily resulting from reductions in cash balances available for
investment.
INTEREST EXPENSE FROM CONTINUING OPERATIONS. Consolidated interest expense
increased $274,000 from $63,000 for the three months ended September 30, 2004 to
$337,000 for the comparable period of 2005. This increase in interest expense is
primarily due to Omega's capitalization of interest for construction projects
for the third quarter ended September 30, 2004 of $263,000.
INCOME TAXES FROM CONTINUING OPERATIONS. From continuing operations, the Company
recorded a consolidated benefit for income taxes of $4.7 million for the three
months ended September 30, 2005 as compared to a provision for income taxes of
$854,000 for the comparable period of the prior year. On a consolidated
basis, the change from a provision to a benefit for income taxes was primarily
the result of the recognition of tax benefits associated with Omega's hurricane
related losses which occurred during the third quarter of 2005.
Additionally, 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
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.
MINORITY INTEREST FROM CONTINUING OPERATIONS. 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 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 Omega Protein
35
continue to decline due to stock option exercises of its employees, minority
interest would increase and Zapata would consolidate less of Omega's net income
or loss recognized during future periods. For the three months ended September
30, 2005, minority interest was a $2.3 million reduction of the net loss for the
minority interest's share in the net loss of Omega Protein, combined with the
minority interest's share in the net loss of Zap.Com.
NET (LOSS) INCOME FROM DISCONTINUED OPERATIONS. Pursuant to the Zapata board of
directors' approval of the plan to sell the Company's shares of Safety
Components, all operating results related to Safety have been reclassified and
included in discontinued operations. For the three months ended September 30,
2005, discontinued operations consisted of the operating results of Safety
Components (net of income taxes and minority interest), less the $6.6 million
loss on disposal that was recorded by Zapata. The following discusses the
elements of Safety's reported operating results included within discontinued
operations. See Note 3 to the Company's Notes to Unaudited Financial Statements
included in Item 1 of this Report.
Safety's net revenues decreased $5.6 million, or 10%, to $50.6 million for the
quarter ended September 30, 2005 compared to the quarter ended September 30,
2004. Safety's North American operations' net revenues increased approximately
$108,000, or 0%, compared to the quarter ended September 30, 2004. Net revenues
for Safety's European operations decreased $5.7 million, or 19%, 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 Safety's European
operations included the effect of approximately $120,000 of unfavorable changes
in foreign currency exchange rates compared to the quarter ended September 30,
2004.
Safety's cost of revenues decreased $1.5 million, or 3%, to $46.6 million for
the quarter ended September 30, 2005 compared to the quarter ended September 30,
2004. The decrease was comprised of Safety's European operations' cost of
revenues decreasing $3.4 million, or 12%, partially offset by North American
operations' cost of revenues increasing approximately $1.6 million, or 9%, and
costs of approximately $325,000 related to the ongoing joint venture
pre-production activities in South Africa and China, compared to the quarter
ended September 30, 2004. The decrease in cost of revenues is attributable to
the decrease in revenues volumes in the corresponding time periods. Cost of
revenues as a percentage of net revenues increased to 92% for the quarter ended
September 30, 2005 from 86% for the quarter ended September 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 for raw materials and supplies as noted above, offset by
a decrease in depreciation expense of approximately $600,000 due to the
maturation of the depreciable lives of certain property, plant and equipment.
Safety's selling, general and administrative expenses decreased $2.0 million, or
35%, to $3.6 million for the quarter ended September 30, 2005 compared to the
quarter ended September 30, 2004. The decrease in selling, general and
administrative expenses is attributable primarily to reduced professional
services costs of approximately $1.6 million, including $550,000 for a
whistleblower investigation in 2004, and reduced compensation, benefits and
other costs of approximately $600,000. During the quarter ended September 30,
2005, Safety incurred costs of approximately $200,000 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 on a
limited basis in the fourth quarter of 2005. Selling, general and administrative
expenses as a percentage of net revenues decreased to 7% for the quarter ended
September 30, 2005 from 10% for the quarter ended September 30, 2004 as a result
of the above noted items.
Safety recognized equity in earnings from unconsolidated affiliate of $1.2
million for the quarter ended September 30, 2005 compared to equity in earnings
from unconsolidated affiliate of $0 for the quarter ended September 30, 2004.
Equity in earnings from unconsolidated affiliate was realized primarily from the
receipt of approximately $1.5 million representing Safety's share in a one-time
license payment for the license of patent and related technology from NxGen in
which Safety has a 49% ownership interest, offset by $258,000 to record the
investment at net book value.
Safety's other income was $184,000 for the quarter ended September 30, 2005
compared to other income, net of $412,000 for the quarter ended September 30,
2004. Other income, net was realized primarily from foreign transaction gains
and losses resulting primarily from the revaluation of intercompany balances
between Safety's European subsidiaries and the U.S. parent company impact other
income, net. Net foreign transaction gains of
36
approximately $200,000 during the quarter ended September 30, 2005 resulted from
positive changes in foreign currency exchange rates of approximately 2% from
those at June 30, 2005.
Safety's interest expense decreased $61,000, or 28%, to $157,000 for the quarter
ended September 30, 2005 compared to the quarter ended September 30, 2004. The
decrease is attributable to average outstanding debt decreasing to $4.7 million
from $17.9 million, partially offset by the average weighted interest rate for
all Company debt increasing to 5.45% from 3.78% for the quarter ended September
30, 2005 as compared to the quarter ended September 30, 2004. Because a
substantial portion of Safety's debt carries interest rates based on the prime
rate, such increase 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.
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Zapata reported a consolidated net loss of $8.6 million or $(.45) per diluted
share on consolidated revenues of $82.8 million for the nine months ended
September 30, 2005 as compared to consolidated net income of $3.4 million or
$0.18 per diluted share on consolidated revenues of $93.0 million for the nine
months ended September 30, 2004. On a consolidated basis, the decrease in net
income resulted from decreased net income at Omega Protein related to hurricane
losses, combined with a loss recorded for the pending sale of Zapata's shares of
Safety Components common stock.
The following is a more detailed discussion of Zapata's consolidated operating
results:
REVENUES FROM CONTINUING OPERATIONS. Consolidated revenues decreased $10.3
million or 11% from $93.0 million for the nine months ended September 30, 2004
to $82.8 million for the nine months ended September 30, 2005, relating to
decreased revenues at Omega. Omega's decrease was primarily due to a 7% and 33%
decrease in meal and oil sales volumes of fish meal and fish oil, respectively.
Omega experienced a $14.1 million decrease in revenues due to reduced sales
volumes offset by a $4.5 million increase in revenues due to higher sales prices
for Omega's fish meal and fish oil.
COST OF REVENUES FROM CONTINUING OPERATIONS. Consolidated cost of revenues for
the nine months ended September 30, 2005 was $68.5 million, a $10.3 million
decrease from $78.8 million for the comparable period of the prior year,
relating to a decrease at Omega Protein. Omega's cost of revenues as a
percentage of revenues decreased 2% to 83% for the quarter ended September 30,
2005. The decrease in cost of sales as a percentage of revenues was due to
higher sales prices for the current nine month period,
SELLING, GENERAL AND ADMINISTRATIVE FROM CONTINUING OPERATIONS. Consolidated
selling, general, and administrative expenses increased $2.1 million from $11.5
million for the nine months ended September 30, 2004 to $13.6 million for the
nine months ended September 30, 2005. This increase was attributable to
increases at Omega Protein and Zapata Corporate.
Zapata Corporate's selling, general and administrative expenses increased
$202,000 from $4.0 million for the nine months ended September 30, 2004 as
compared to $4.2 million for the current nine month period. 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.
Omega's selling, general, and administrative expenses increased $1.9 million
from $7.3 million for the nine months ended September 30, 2004 to $9.1 million
for nine months ended September 30, 2005. This increase was attributable
primarily to increased consulting expenditures relating to Omega's governmental
relations program and abandoned acquisition activity.
LOSS RESULTING FROM NATURAL DISASTER, NET. During the nine months ended
September 30, 2005, Omega incurred losses, net of insurance receivable, of $13.2
million relating to damages incurred at its Moss Point, Mississippi fish
processing facility and adjacent shipyard from Hurricane Katrina, and damages
incurred at its Cameron and Abbeville, Louisiana fish processing facilities from
Hurricane Rita.
INTEREST INCOME FROM CONTINUING OPERATIONS. Consolidated interest income
increased $357,000 from $678,000 for the nine months ended September 30, 2004 to
$1.0 million for the comparable period of the current year. This increase was
37
due to an increase of $321,000 at Zapata Corporate and $14,000 at Omega Protein
as a result of higher interest rates as compared to 2004.
INTEREST EXPENSE FROM CONTINUING OPERATIONS. Interest expense increased $132,000
from $713,000 for the nine months ended September 30, 2004 to $845,000 for the
comparable period of 2005. This increase in interest expense is primarily due to
Omega's capitalization of interest for construction projects for the nine months
ended September 30, 2004 of $263,000.
OTHER EXPENSE FROM CONTINUING OPERATIONS, NET. Other expenses decreased $309,000
to other income of $149,000 for the nine months ended September 30, 2005 as
compared to other expenses of $160,000 for the comparable period of the prior
year. On a consolidated basis, this decrease resulted primarily from Omega
Protein's recognition of other income of $125,000 for the nine months ended
September 30, 2005 as compared to other expense of $160,000 for the nine months
ended September 30, 2004, due to the recognition of a gain associated with the
involuntary conversion of a piece of equipment resulting from a fire.
INCOME TAXES FROM CONTINUING OPERATIONS. From continuing operations, the Company
recorded a consolidated benefit for income taxes of $5.1 million for the nine
months ended September 30, 2005 as compared to a provision for income taxes of
$1.6 million for the comparable period of the prior year. On a consolidated
basis, the change from a provision to a benefit for income taxes was primarily
the result of the recognition of tax benefits associated with Omega's hurricane
related losses which occurred during the third quarter of 2005.
Additionally, 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
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.
MINORITY INTEREST FROM CONTINUING OPERATIONS. 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 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 Omega Protein continue to decline due to stock option
exercises of its employees, minority interest would increase and Zapata would
consolidate less of Omega's net income or loss recognized during future periods.
For the nine months ended September 30, 2005, minority interest was a $2.3
million reduction to the net loss for the minority interest's share in the net
loss of Omega Protein, combined with the minority interest's share in the net
loss of Zap.Com.
NET (LOSS) INCOME FROM DISCONTINUED OPERATIONS. Pursuant to the Zapata board of
directors' approval of the plan to sell the Company's shares of Safety
Components, all operating results related to Safety have been reclassified and
included in discontinued operations. For the nine months ended September 30,
2005, discontinued operations consist of the operating results of Safety
Components (net of income taxes and minority interest), less the $6.6 million
loss on disposal that was recorded by Zapata. The following discusses the
elements of Safety's reported operating results included within discontinued
operations. See Note 3 to the Company's Notes to Unaudited Financial Statements
included in Item 1 of this Report.
Safety's net revenues decreased $23.1 million, or 12.1%, to $168.2 million for
the nine months ended September 30, 2005 compared to the nine months ended
September 30, 2004. North American operations' net revenues decreased
approximately $6.1 million, or 6.9%, compared to the nine months ended September
30, 2004, with the decrease principally due to decreased demand in the North
America automotive market and increased customer in-sourcing of production. Net
revenues for European operations decreased $17.0 million, or 17%, 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 $2.2 million of favorable changes in
foreign currency exchange rates compared to the nine months ended September 30,
2004.
38
Safety's cost of revenues decreased $13.4 million, or 8%, to $148.9 million for
the nine months ended September 30, 2005 compared to the nine months ended
September 30, 2004. The decrease was attributable to North American operations'
cost of revenues decreasing approximately $1.8 million, or 3%, and European
operations' cost of revenues decreasing $10.8 million, or 12%, and costs of
approximately $800,000 related to the ongoing joint venture pre-production
activities in South Africa and China, compared to the nine months ended
September 30, 2004. The decrease in cost of revenues is attributable to the
decrease in net revenues in the corresponding time periods. Cost of revenues as
a percentage of net revenues increased to 89% for the nine months ended
September 30, 2005 from 85% for the nine months ended September 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 for raw materials and supplies as noted above, offset by
a decrease in depreciation expense of approximately $1.5 million due to the
maturation of the depreciable lives of certain property, plant and equipment.
Safety's selling, general and administrative expenses decreased $2.7 million, or
18%, to $12.3 million for the nine months ended September 30, 2005 compared to
the nine months ended September 30, 2004. The decrease in selling, general and
administrative expenses is attributable primarily to reduced professional
services costs of approximately $2.0 million, including $550,000 for a
whistleblower investigation in 2004 and reduced compensation, benefits and other
costs of approximately $900,000 partially offset by the one-time charge
associated with the closure of Safety's U.K. facility of approximately $300,000
recorded in the nine months ended September 30, 2004. Additionally in the first
nine months of 2005, Safety incurred costs of approximately $500,000 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 on a limited basis in the fourth quarter of 2005. Selling,
general and administrative expenses as a percentage of net revenues decreased to
7% for the nine months ended September 30, 2005 from 8% for the nine months
ended September 30, 2004 due to the items noted above.
Safety recognized equity in earnings from unconsolidated affiliate of $1.2
million for the nine months ended September 30, 2005 compared to equity in
earnings from unconsolidated affiliate of $0 for the nine months ended September
30, 2004. Equity in earnings from unconsolidated affiliate was realized
primarily from the receipt of approximately $1.5 million representing Safety's
share in a one-time license payment for the license of patent and related
technology from NxGen in which Safety has a 49% ownership interest, offset by
$258,000 to record the investment at net book value.
Safety recognized other expense, net of $290,000 for the nine months ended
September 30, 2005 compared to other income, net of $299,000 for the nine months
ended September 30, 2004. Other income, net was realized primarily from foreign
transaction gains and losses resulting primarily from the revaluation of
intercompany balances between Safety's European subsidiaries and the U.S. parent
company impact other income, net. Net foreign transaction losses of
approximately $300,000 during the nine months ended September 30, 2005 resulted
from negative changes in foreign currency exchange rates of approximately 9.8%
from those at December 31, 2004.
Safety's interest expense decreased $159,000, or 25%, to $490,000 for the nine
months ended September 30, 2005 compared to the nine months ended September 30,
2004. The decrease is attributable to average outstanding debt decreasing to
$6.2 million from $17.3 million, offset by the average weighted interest rate
for all Company debt increasing to 5.23% from 3.73% for the nine months ended
September 30, 2005 as compared to the nine months ended September 30, 2004.
Because a substantial portion of Safety's debt carries interest rates based on
the prime rate, such increase 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.
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 the respective stockholders of Omega Protein or
Zap.Com. Omega Protein's credit facility currently prohibits any dividends from
being declared or paid with respect to its respective outstanding
39
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 September 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.
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 September 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
September 30, 2005, Zapata Corporate's cash and cash equivalents were $25.8
million as compared to $28.7 million as of December 31, 2004. This decline
resulted primarily from cash used by Zapata Corporate's operations.
Pursuant to the Company's stock purchase agreement with the WLR Recovery Funds,
the Company expects to receive net proceeds of approximately $49.9 million at
the closing of the pending transaction. The Company has no immediate plans to
use the proceeds from this transaction.
In addition to its cash, cash equivalents, and interest income, Zapata Corporate
has a potential secondary source of liquidity from dividends declared by 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 September 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.
40
SUMMARY OF CASH FLOWS
The following table summarizes Zapata's consolidating cash flow information (in
thousands):
ZAPATA DISCONTINUED OMEGA
CORPORATE OPERATIONS(1) PROTEIN ZAP. COM CONSOLIDATED
--------- ------------- --------- -------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2005(RESTATED)
CASH (USED IN) PROVIDED BY
Operating activities $ (2,874) $ 12,824 $ (8,561) $ (35) $ 1,354
Investing activities -- (5,485) (12,813) -- (18,298)
Financing activities 23 (2,062) (808) -- (2,847)
Effect of exchange rate changes on cash
and cash equivalents -- (3,203) 10 -- (3,193)
--------- ------------- --------- ------- ------------
Net (decrease) increase in cash and cash
equivalents $ (2,851) $ 2,074 $ (22,172) $ (35) $ (22,984)
========= ============= ========= ======= ============
ZAPATA DISCONTINUED OMEGA
CORPORATE OPERATIONS(1) PROTEIN ZAP. COM CONSOLIDATED
--------- ------------- --------- -------- ------------
NINE MONTHS ENDED SEPTEMBER 30, 2004
CASH (USED IN) PROVIDED BY
Operating activities $ (2,349) $ 8,296 $ 18,451 $ (77) $ 24,321
Investing activities 29,351 (4,706) (19,343) -- 5,302
Financing activities -- (860) (550) -- (1,410)
Effect of exchange rate changes on cash
and cash equivalents -- 46 (12) -- 34
--------- ------------- --------- ------- ------------
Net increase (decrease) in cash and cash
equivalents $ 27,002 $ 2,776 $ (1,454) $ (77) $ 28,247
========= ============= ========= ======= ============
(1) Cash flow information related to Safety Components for the nine months
ended September 30, 2005 and 2004 has been disclosed within discontinued
operations in accordance with SFAS No. 144.
NET CASH PROVIDED BY OPERATING ACTIVITIES. Consolidated cash provided by
operating activities was $1.4 million for the nine months ended September 30,
2005 as compared to $24.3 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 $18.5 million for the nine months ended September 30,
2004 to cash used in operating activities of $8.6 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 amounts contributed by Omega Protein were partially offset by an
increase in cash provided by operations related to Safety Components resulting
principally from positive changes in working capital.
NET CASH USED IN INVESTING ACTIVITIES. Consolidated cash used in investing
activities was $18.3 million for the nine months ended September 30, 2005 as
compared to cash provided by investing activities of $5.3 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 long-term investments at December 31, 2003 which were sold during the nine
months ended September 30, 2004, resulting in cash proceeds of $29.4 million, as
compared to no cash proceeds during the nine months ended September 30, 2005.
In addition to any future capital expenditures related to the hurricanes, 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. Safety expects to spend approximately $6.3 million for the remainder
of 2005 on capital expenditures primarily for equipment to support expected new
contracts with customers and including approximately $1.7 million to support its
joint ventures in South Africa and China.
41
NET CASH USED IN FINANCING ACTIVITIES. Consolidated cash used in financing
activities was $2.9 million for the nine months ended September 30, 2005 as
compared to $1.4 million for comparable period of the prior year. This change
was driven by Safety's cash used in financing of $2.1 million in the current
nine month period as compared to $860,000 in the comparable period of the prior
year, resulting from net repayments of Safety's credit facilities in the nine
months ended September 30, 2005. Net repayments of Safety's credit facilities in
the nine months ended September 30, 2005 were funded by cash flows from
operations.
The activities discussed above, combined with unfavorable effects of foreign
exchange rates of $3.2 million at Safety Components, resulted in a net decrease
in cash and cash equivalents of approximately $23.0 million for the nine months
ended September 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
Other than the following, as of September 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.
HURRICANE LOSSES. On August 29, 2005, Omega's Moss Point, Mississippi fish
processing facility and adjacent shipyard were severely damaged by Hurricane
Katrina. On September 25, 2005, Omega's Cameron, Louisiana and Abbeville,
Louisiana fish processing facilities were also severely damaged by Hurricane
Rita. Each of these facilities was non-operational immediately after these
weather events. Operations at the Moss Point fish processing facility, the
Abbeville fish processing facility and the shipyard were re-established in
mid-October, 2005, but at reduced processing capabilities. Omega currently plans
to re-open an additional Gulf of Mexico facility in late 2006 or early 2007, but
is still evaluating whether the location of that facility will be Cameron,
Louisiana or Omega's existing property at Morgan City, Louisiana.
The direct impact of the two hurricanes upon Omega was a loss of physical
inventories and physical damage to the plants. The interruption of processing
capabilities caused Omega to address the impact of abnormal downtime of its
processing facilities, which resulted in the immediate recognition of costs
which would ordinarily have been captured as inventory costs. The amounts of
these losses are more fully described in Notes 4, 5 and 15.
42
Omega maintains insurance coverage for a variety of these damages, most notably
property, inventory and vessel insurance. The nature and extent of the insurance
coverage varies by line of policy and Omega has recorded insurance recoveries as
accounts receivable based on preliminary discussions with its insurers and
adjusters. Omega anticipates that further recoveries could be available, but
such additional recoveries will require further analysis and discussions with
Omega's insurance carriers. Such recoveries, if any, would be recognized in
future periods once they are deemed probable. Omega does not maintain business
interruption insurance.
DISCONTINUED OPERATIONS. The Company has adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." This standard establishes a single accounting model for
long-lived assets to be disposed of by sale, including discontinued operations
to include a "component of an entity" (rather than a segment of a business). A
component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest
of the entity. A component of an entity that is classified as held for sale, or
has been disposed of, is presented as a discontinued operation if the operations
and cash flows of the component will be (or have been) eliminated from the
ongoing operations of the entity and the entity will not have any significant
continuing involvement in the operations of the component.
For example, on September 21, 2005, Zapata's Board of Directors approved a plan
to pursue a sale with respect to the Company's holdings of 4,162,394 shares of
Safety Components' common stock. Based on this approval, the Company determined
that this subsidiary substantially met the criteria to report the pending sale
as "Assets Held for Sale" and the subsidiary as "Discontinued Operations" in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." Accordingly, assets classified as held for sale have been
measured at the lower of the carrying amount or fair value less cost to sell.
SIGNIFICANT FACTORS THAT COULD AFFECT FUTURE PERFORMANCE AND FORWARD-LOOKING
STATEMENTS
1. Zapata believes that its results of operations, cash flows and financial
condition could be negatively impacted by certain risks and uncertainties,
including, without limitation, the risks and uncertainties identified in
Zapata's other public reports and filings made with the SEC, press releases and
public statements made by authorized officers of Zapata from time to time and
those risks and uncertainties set forth below.
- Risks associated with the fact that a significant portion of Zapata's
assets have consisted of securities, including equity and other interests
in its operating companies. This could subject Zapata to the registration
requirements of the Investment Company Act of 1940 (the "Investment
Company Act"). The Investment Company Act requires registration of, and
imposes substantial restrictions on, certain companies that engage, or
propose to engage, primarily in the business of investing, reinvesting,
owning, holding or trading in securities, or that fail certain statistical
tests concerning a company's asset composition and sources of income.
Zapata intends to actively participate in the management of its operating
companies, consistent with applicable laws, contractual arrangements and
other requirements. Accordingly, Zapata believes that it is primarily
engaged in a business other than investing, reinvesting, owning, holding
or trading in securities. Further, Zapata endeavors to ensure that its
holdings of investment securities constitute less than 40% of its total
assets (excluding Government securities and cash) on an unconsolidated
basis. Zapata intends to monitor and attempt to adjust the nature of its
interests in and involvement with operating companies in order to avoid
subjecting Zapata to the registration requirements of the Investment
Company Act. There can be no assurance, however, that Zapata's business
activities will not ultimately subject Zapata to the Investment Company
Act. If Zapata were required to register as an investment company under
the Investment Company Act, it would become subject to regulations that
would have a material adverse impact on its financial position, results of
operations and cash flows.
- Risks associated with the personal holding company penalty tax. Section
541 of the Internal Revenue Code of 1986, as amended (the "IRC"), subjects
a corporation, which is a "personal holding company" as defined in the
IRC, to a 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
43
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 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
44
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.
- Risks associated with the completion of our sale of Safety Components to
the WLR Recovery Funds, including the possibility that the transaction
will not close or that the closing may be delayed. Our stock purchase
agreement with the WLR Recovery Funds provides that it may be terminated
by either side if all of the other party's covenants have not been
satisfied, subject to limited exceptions, on or before December 31, 2005,
or if the waiting periods under the HSR Act have not expired or terminated
on or before June 30, 2006 (or such later date as may have been agreed
upon in writing). If the stock purchase agreement is terminated by the WLR
Recovery Funds due to our failure to perform all our covenants by December
31, 2005 or to obtain stockholder approval by June 30, 2006, we would be
required to pay a $2,000,000 break-up fee and the WLR Recovery Funds
expenses up to a maximum of $500,000, plus limited interest expenses.
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 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.
45
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.
- Omega's operations are geographically concentrated in the Gulf of
Mexico where they are susceptible to regional adverse weather
patterns such as hurricanes. Three of Omega's four operating plants
are located in the Gulf of Mexico (two in Louisiana and one in
Mississippi), a region which has historically been subject to late
summer/early fall hurricane season. In addition, Omega's Virginia
facility has in the past also been adversely affected by hurricanes.
For the first time in Omega's history, all three of Omega's Gulf
plants were severely damaged within a one-month span by Hurricanes
Katrina and Rita in August and September 2005. Immediately after the
second hurricane, approximately 70% of Omega's 2005 production
capacity was impaired. These types of weather related disruptions
may have a material adverse effect on Omega's business, results of
operations and financial condition. In addition, Omega's costs of
insurance for property damages will likely increase in future years
as insurers attempt to recoup losses paid out in connection with the
Katrina and Rita hurricanes.
- The costs of energy may materially impact the Company's business.
The Company has experienced substantially higher costs for energy in
recent years, particularly in 2005. The Company's business is
dependent on diesel fuel for its vessels and natural gas for its
operating facilities. The costs of these commodities, which are
beyond the Company's control, may have a material impact on the
Company's business, results of operations and financial condition.
- 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
46
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 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
regulation adopted by a regional regulatory board in August 2005 and
subsequently submitted for approval to its member states to limit
for a five-year period the annual amount commercial menhaden catch
in the Chesapeake Bay to the Bay's 5-year commercial processing
average catch, or 106,000 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 plan to operate 31 vessels out of two Gulf of Mexico plants
in 2006 rather than three may be unsuccessful. Because of the
damages to Omega's Cameron, Louisiana facility caused by Hurricane
Rita, Omega intends to operate its full contingent of 31 Gulf of
Mexico fishing vessels during the 2006 fishing season out of its two
operating facilities in Abbeville, Louisiana and Moss Point,
Mississippi. This plan will substantially increase the number of
vessels at these two plants to a level that Omega has not operated
at previously. Although these facilities have adequate processing
capacity, Omega believes that fishing efforts may be diminished
because increased unloading time due to additional vessels will keep
some vessels off the fishing grounds during the most optimal fishing
times. It is possible that other logistical, mechanical or other
manpower constraints arising out of this increased vessel load could
also reduce the efficiency of these two plants.
- 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
47
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.
- 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
48
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
EQUITY PRICE RISK. As the Company considers its holdings in the common stock of
its subsidiaries 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 $38.2 million at
September 30, 2005 as a hypothetical constant cash balance; an adverse change of
1% in interest rates would decrease interest income by approximately $96,000 and
$287,000 during a three-and nine-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 "(Loss) income from
discontinued operations" on the consolidated statements of operations. Based on
the amounts outstanding at September 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 "(Loss) income from
discontinued operations." 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
49
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
September 30, 2005, Safety had outstanding forward exchange contracts that
mature between October 2005 and December 2005 to purchase Mexican pesos with an
aggregate notional amount of approximately $2.1 million. The fair values of
these contracts at September 30, 2005 totaled approximately $148,000 which is
recorded as an asset on the balance sheet in "current assets related to
discontinued operations." 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
September 30, 2005, Safety had outstanding forward exchange contracts that
mature between September 2005 and December 2005 to purchase Czech Korunas with
an aggregate notional amount of approximately $1.4 million. The fair values of
these contracts at September 30, 2005 totaled approximately $65,000 which is
recorded as an asset on the balance sheet in "current assets related to
discontinued operations." 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
DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports filed or
submitted under the Securities Exchange Act of 1934, as amended ("Exchange
Act"), is recorded, processed, summarized, and reported within the time periods
specified in the Commission's rules and forms. Disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in its Exchange Act reports is accumulated and communicated to the
Company's management including its principal executive and financial officers,
as appropriate to allow timely decisions regarding required disclosure.
As discussed in the Explanatory Note at the beginning of this report and in Note
18 of the Notes to Unaudited Condensed Consolidated Financial Statements, the
Company has restated its financial statements for the three and nine month
periods ended September 30, 2005 to correct errors in the Company's accounting
for income taxes. In the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2005, filed on November 14, 2005, management concluded that
the Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e)) as of the end of the period covered by this report were
effective. In connection with the restatement, the Company's Chief Executive
Officer ("CEO") and Chief Financial Officer ("CFO") re-evaluated the
effectiveness of the Company's disclosure controls and procedures in place as of
the end of the period covered by this quarterly report pursuant to Rule
13a-15(b) of the Exchange Act. The Company's Chief Executive Officer and Chief
Financial Officer have concluded that as a result of the material weakness as
of September 30, 2005, the Company's disclosure controls and procedures were not
effective.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.
As of September 30, 2005, the Company did not maintain effective controls over
the application and monitoring of its accounting for income taxes. Specifically,
we did not have controls designed and in place to ensure the accuracy and
completeness of financial information provided to the Company by third party tax
advisors used in accounting for income taxes and the determination of current
income taxes payable, deferred income tax assets and liabilities and the related
income tax provision (benefit) and the review and evaluation of the application
of generally accepted accounting principles relating to accounting for income
taxes. This control deficiency resulted in the restatement of the Company's
consolidated financial statements for the quarter ended September 30, 2005.
Additionally, this control deficiency could result in a material misstatement of
the aforementioned accounts that would result in a material misstatement to
annual or interim financial statements that would not be prevented or detected.
Accordingly, management has determined that this control deficiency constitutes
a material weakness.
REMEDIATION PLAN
The Company is implementing enhancements to its internal control over financial
reporting to provide reasonable assurance that errors and control deficiencies
in its accounting for income taxes will not recur. These enhancements are
expected to include improving our knowledge of accounting for income taxes which
should enhance our ability to review and evaluate the tax financial information
prepared by our outside tax advisors which supports the Company's quarterly tax
provision. Additionally, the Company will engage our outside tax advisors in a
more robust quarterly discussion which should improve the review and oversight
process relating to the internal controls over the Company's accounting for
income taxes.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting
during the most recently completed fiscal quarter that have materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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. A lawsuit was
commenced by the employee on November 4, 2005, in the United States District
Court for the District of South Carolina challenging his termination based on
similar allegations made in his administrative complaint.
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
(a) Exhibits
The exhibits indicated by an asterisk (*) are incorporated by reference.
10.1 Stock Purchase Agreement, dated September 23, 2005, between Zapata,
WLR Recovery Fund II, L.P. and WLR Recovery Fund III, L.P. (as
amended by Amendment No. 1 and Joinder dated September 26, 2005)
(Exhibits and schedules have been omitted pursuant to Item 601(b)(2)
of Regulation S-K, but a copy will be furnished supplementally to
the Securities and Exchange Commission upon request) .
10.2 Escrow Agreement dated September 26, 2005 among WLR Recovery Fund
II, L.P., WLR Recovery Fund III, L.P., Zapata Corporation and
Citibank N.A., as escrow agent (Exhibits and schedules have been
omitted pursuant to Item 601(b)(2) of Regulation S-K, but a copy
will be furnished supplementally to the Securities and Exchange
Commission upon request).
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10.3 Summary of Agreement to make capital contribution by Zapata
Corporation to Safety Components International, Inc.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ZAPATA CORPORATION
(REGISTRANT)
Dated: April 5, 2006 By: /s/ Leonard DiSalvo
------------------------------------
(Vice President-- Finance and Chief
Financial Officer)
53