UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission file number: 1-4219

 

Zapata Corporation

(Exact name of Registrant as specified in its charter)

 

 

Registrant’s Telephone Number, Including Area Code (585) 242-2000

 

Securities Registered Pursuant to Section 12(b) of the Act:

 

 

Securities Registered Pursuant to Section 12(g) of the Act:

None.

 

Indicate by check mark if the registrant is a well-know seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o or No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o or No þ

 

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 þ  or No o.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definitions of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o or No þ

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2006 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $64.8 million. For the sole purpose of making this calculation, the term “non-affiliate” has been interpreted to exclude directors, corporate officers and holders of 10% or more of the Company’s common stock.

 

As of March 1, 2007, the Registrant had outstanding 19,184,456 shares of common stock, $0.01 par value.

 

Documents Incorporated By Reference:

 

Portions of the Registrant’s definitive Proxy Statement to be delivered to the Company’s stockholders in connection with the Company’s 2007 Annual Meeting of Stockholders, which the Company plans to file with the Securities and Exchange Commission pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, on or prior to May 1, 2007, are incorporated by reference in Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K.

 

 

TABLE OF CONTENTS

 

FORWARD-LOOKING STATEMENTS

 

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. This document contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and includes this statement for purposes of such safe harbor provisions. Forward-looking statements, which are based upon certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans,” “seeks,” “estimates,” “projects,” “may” or similar expressions. The ability of the Company to predict results or the actual effect of future plans, strategies or expectations is inherently uncertain. Important factors which may cause actual results to differ materially from the forward-looking statements contained herein or in other public statements by the Company are described, among other places, under the caption of this report titled “Part I — Item 1A — Risk Factors” and other risks identified from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”), press releases and other communications by the Company or Zap.Com Corporation. 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.

 

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 has approximately $152 million in consolidated cash, cash equivalents and short-term investments at December 31, 2006 and currently owns 98% of Zap.Com Corporation, a public shell company that trades on the over-the-counter electronic bulletin board (“OTCBB”) under the symbol “ZPCM”. On December 4, 2006, the Company completed the disposition of its 14,501,000 shares of Omega Protein Corporation (“Omega Protein” or “Omega”) common stock. As of September 30, 2006, these shares constituted approximately 57% of Omega’s outstanding common stock. On December 2, 2005, Zapata completed the sale of its 77% ownership interest in Safety Components International, Inc. (“Safety Components” or “Safety”).

 

The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports with the United States Securities and Exchange Commission (“SEC”). The Company makes these reports and Section 16 filings by its officers and directors available free of charge on its website at www.zapatacorp.com as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. Information contained on the Company’s website is not incorporated by reference to this Report. This Report should be read in conjunction with the registration statements, reports and other items that the Company and its current and former subsidiaries file with the SEC.

 

In addition, the public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

 

As used throughout this report, “Zapata Corporate” is defined as Zapata Corporation exclusive of its majority owned subsidiary, Zap.Com, and its former majority owned subsidiaries, Omega Protein and Safety Components.

 

Since the December 4, 2006 sale of Omega shares, substantially all of Zapata’s assets have been held in government securities and it has no other primary operations. At December 31, 2006, this totaled approximately $152 million. Under the circumstances, and unless an exemption became available under the Investment Company Act of 1940 Act (the “1940 Act”), the Company could be deemed to be an investment company. Zapata does not intend to become an investment company and since the date of this sale it has been relying upon the transient investment company exemption under SEC Rule 3a-2 promulgated under the 1940 Act. This exemption is available for a one year period, ending on November 28, 2007, during which period Zapata intends to acquire one or more new operating businesses, or if the Company is unable to qualify for any other exemptions available under the 1940 Act. If Zapata can not complete an acquisition during this period due to circumstances beyond its control, it intends to apply to the SEC for a continuing exemption from registration under the 1940 Act. If the SEC should not grant this exemption the Company may be required to register as an investment company under the 1940 Act or liquidate. If the Company is a registered investment company, the Company will be subject to a substantial increase in the regulation and to the additional expenses of compliance.

 

As part of its acquisition efforts, Zapata has been reviewing target candidates for acquisition. The Company has not focused and does not intend to focus its acquisition efforts solely on any particular industry. Additionally, while the Company focuses its attention in the United States, the Company may investigate acquisition opportunities outside of the United States when management believes that such opportunities might be attractive. 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. These types of investments often involve a high degree of risk and may be considered highly speculative.

 

As of the date of this report, Zapata is not a party to any agreements providing for the acquisition of an operating business, business combination or for the sale or other transaction related to any of its subsidiaries. There can be no assurance that any of these possible transactions will occur or that they will ultimately be advantageous to Zapata or enhance Zapata stockholder value.

 

On April 6, 2005, the Company effected an eight-for-one stock split of its outstanding shares of common stock, par value $.01 per share (the “Common Stock”). 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.

 

Employees.  As of December 31, 2006, Zapata Corporate employed 7 employees who performed management and administrative functions, including managing the assets of the Company, providing oversight of its subsidiary companies, searching for and evaluating potential acquisition candidates, fulfilling various reporting requirements associated with being a publicly traded company and various other accounting, tax and administrative matters.

 

Zap.Com is a public shell company which does not have any existing business operations. In the future Zap.Com may acquire an operating company. Zap.Com may also consider developing a new business suitable for its situation.

 

As of December 31, 2006, Zap.Com had two employees, Avram Glazer, President and CEO, and Leonard DiSalvo, VP-Finance and Chief Financial Officer. Neither Mr. Glazer nor Mr. DiSalvo receive a salary or bonus from Zap.Com and currently devote a significant portion of their business time to Zapata, where they hold the same offices. Both of these officers, however, devote such time to Zap.Com’s affairs as is required to perform their duties to Zap.Com.

 

Omega Protein is the largest processor, marketer and distributor of fish meal and fish oil products in the United States. Omega produces and sells a variety of protein and oil products derived from menhaden, a species of wild

herring-like fish found along the Gulf of Mexico and Atlantic coasts. As of September 30, 2006, Zapata owned approximately 57% of Omega’s outstanding common stock. During the fourth quarter of fiscal 2006, Zapata sold all of its Omega shares in two separate transactions

 

Zapata’s first sale of Omega shares closed on November 28, 2006, pursuant to a stock purchase agreement dated September 8, 2006 between Zapata, as seller, and Omega Protein, as purchaser. Pursuant to the agreement, Omega Protein repurchased 9,268,292 Omega shares held by Zapata at a price of $5.125 per share, or $47.5 million in the aggregate, which was paid in immediately available funds.

 

As a result of the first sale of Omega shares, Zapata recorded an impairment charge of $11.1 million ($7.2 million net of tax adjustments) to reduce the carrying value of the Company’s investment in Omega Protein to fair value, in accordance with Statement on Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This charge was based on the $5.109 (the sale price of $5.125 less the amount estimated for the call option value) per share value implied by the contemplated sale under the stock purchase agreement with Omega Protein.

 

Zapata’s second sale of Omega shares occurred on December 4, 2006, pursuant to a stock purchase agreement dated December 1, 2006 among Zapata and a group of institutional investors. Pursuant to this agreement, Zapata sold its remaining 5,232,708 Omega shares at a purchase price of $5.55 per share (less commission), or $28.3 million in the aggregate, which was paid in immediately available funds. The purchasers included Special Situations Fund III QP, L.P., Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., Franklin Microcap Value Fund, Wynnefield Partners Small Cap Value, L.P., Wynnefield Partners Small Cap Value, L.P. I, Channel Partnership II, L.P.

 

For the year ended December 31, 2006, Zapata recorded total transaction related losses of $10.3 million ($7.2 million net of tax adjustments) related to the impairment and sale of Omega. The difference between the initial impairment charge of $11.1 million and the ultimate transaction loss recognized for the year ended December 31, 2006 of $10.3 million is primarily due to the excess of sales proceeds on the shares sold to the group of institutional investors over the carrying value as adjusted for the impairment. Based on the sale of Zapata’s Omega shares, all amounts and disclosures throughout this document related to Omega has been classified as “Discontinued Operations” in accordance with SFAS No. 144. Accordingly, Zapata recorded income of $2.8 million within discontinued operations related to the Company’s ownership of Omega through the date of sale.

 

Safety Components is an independent supplier of automotive airbag fabric and cushions and technical fabrics with operations in North America and Europe. Zapata originally purchased 2,663,905 shares of Safety Components common stock for $30.9 million on September 23, 2003, and purchased an additional 1,498,489 shares on October 7, 2003 for $16.9 million, bringing the Company’s ownership percentage to approximately 84% at that time. The Company accounted for these transactions under the purchase method and began consolidating amounts related to Safety’s assets and liabilities as of September 30, 2003 and Safety’s results of operations in the fourth quarter of 2003.

 

On September 21, 2005, Zapata’s Board of Directors approved a plan to pursue a sale of all of the Company’s 4,162,394 shares of Safety 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. As used throughout this document, all amounts and disclosures related to Safety have been classified as “Discontinued Operations.”

 

On December 2, 2005, Zapata closed on the sale of all of its shares of Safety common stock to WLR Recovery Fund II, L.P. and WLR Recovery Fund III, L.P., Delaware limited partnerships (collectively the “WLR Recovery Funds”) for $12.30 per share or $51,197,446 in the aggregate. Prior to the close, the Company made a $1.0 million capital contribution to Safety for the Safety compensation committee to pay bonuses to the Safety executive officers and key employees. This payment was made under a plan approved by Zapata to provide Safety management with an incentive to continue with Safety until the completion of the sale to the WLR Recovery Funds.

 

For the year ended December 31, 2005, Zapata recorded a transaction related loss of $12.2 million ($9.9 million net of tax adjustments) related to the sale of Safety. Though the Company sold its shares in Safety for a cash gain compared to the original investment, this transaction related loss resulted from the sales proceeds being less than Zapata’s carrying value of its investment in Safety Components. Safety’s generation of net income subsequent to the Company’s original purchase of the stock increased Zapata’s carrying value which consisted of Zapata’s original investment in common stock of Safety Components and the aforementioned subsequent capital contribution.

 

Information required by this section is incorporated by reference from Note 16 to the Company’s Consolidated Financial Statements included in Item 8 of this Report.

 

Before you invest in shares of our common stock or if you otherwise receive ownership of our common stock, you should be aware that there are various risks which could negatively impact the Company’s results of operations, cash flows and financial condition, including those described below. We urge you to carefully consider these risk factors together with all of the other information included in this filing, the information incorporated in this filing, and other risks and uncertainties identified in Zapata’s other public reports, filings made with the SEC, press releases and public statements made by authorized officers of Zapata before you decide to purchase or make an investment decision regarding our common stock.

 

The market liquidity for our common stock is relatively low and may make it difficult to purchase or sell our stock.

 

As of December 31, 2006, the Company had 19,184,456 shares of common stock outstanding. The average daily trading volume in our stock during the twelve month period ending December 31, 2006 was approximately 12,000 shares. Although a more active trading market may develop in the future, the limited market liquidity for our stock could affect a stockholder’s ability to sell at a price satisfactory to that stockholder.

 

We may suffer adverse consequences if we are deemed an investment company and we may incur significant costs to avoid investment company status.

 

The composition of our remaining assets, which presently consists primarily of government securities, and our lack of an operating business, may cause us to be deemed to be an investment company under the 1940 Act. Since our November 28, 2006 sale of Omega shares, we have been relying on the one year transient investment company exemption under Rule 3s-2 of the 1940 Act. This exemption provides that a company will not be deemed an investment company for a one-year period, provided that such company has a bona fide intent to be engaged primarily, as soon as is reasonably possible (and in all events within one year), in a business other than that of investing, reinvesting, owning, holding or trading in securities. A company demonstrates such intent via (1) its business activities, and (2) an appropriate resolution of the company’s board of directors recorded in its minute books.

 

Our Board of Directors, in order to attempt to qualify for the safe harbor available under Rule 3a-2, adopted such a resolution, stating that we intend to be engaged primarily in a non-investment company activity as soon as is reasonably possible. We are actively engaged in carrying out the intent of our Board. If we fail to comply with the requirements of Rule 3a-2, or for any other reason are deemed an investment company, we would be in violation of the 1940 Act and would be prohibited from engaging in business or selling our securities and could be subject to civil and criminal actions for doing so. In addition, our contracts would be voidable and a court could appoint a receiver to take control of us and liquidate our business. Therefore, our failure to comply with Rule 3a-2 and our classification as an investment company for this or any other reasons would have a material adverse impact on our financial position, results of operations and cash flows.

 

If we do not complete an acquisition of an operating company within one year and another exemption from the 1940 Act is not available, we will need to seek an exemptive order from the SEC. If the SEC does not grant such an exemption, then we will need to either register under the 1940 Act or liquidate. If we are required to register under

the 1940 Act, we would become subject to a number of severe substantive restrictions on our operations, capital structure and management. Such restrictions would have a material adverse impact our financial position, results of operations and cash flows and would likely inhibit our ability to complete an acquisition.

 

Since we already meet the ownership criteria of the personal holding company rules, we may have to pay a punitive tax if Zapata Corporate generates passive income in excess of operating expenses.

 

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 could become subject to the penalty tax if (1) 60% or more of its adjusted ordinary gross income is personal holding company income and (2) 50% or more of its outstanding common stock is owned, directly or indirectly, by five or fewer individuals at any time during the last half of the taxable year. The Company believes that five or fewer of Zapata’s stockholders hold 50% or more of its outstanding common stock for purposes of IRC Section 541. However, as of December 31, 2006, Zapata and its domestic subsidiaries had no undistributed personal holding company income due to losses (other than capital gain on disposition of stock of a subsidiary) generated by the consolidated tax filing group 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.

 

A change of ownership could reduce the benefits associated with the Company’s tax assets.

 

A change of ownership pursuant to Section 382 of the IRC could significantly or possibly eliminate our ability to utilize our 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.

 

Our company is majority-owned by the Malcolm I. Glazer Family Limited Partnership. As a result of this ownership, we are a “controlled company” within the meaning of the New York Stock Exchange rules and are exempt from certain corporate governance requirements.

 

Our majority stockholder, the Malcolm I. Glazer Family Limited Partnership, has 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.

 

Under the New York Stock Exchange rules, a company of which more than 50% of the voting power is held by an individual, a group, or another company is a “controlled company” and may elect not to comply with certain New York Stock Exchange corporate governance requirements, including (1) the requirement that a majority of the board of directors consist of independent directors, (2) the requirement that a nominating/corporate governance committee be in place that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities and (3) the requirement that a compensation committee be in place that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. Though we have utilized exemptions (1) and (2) above, the Company currently has a Compensation Committee comprised entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities. However, there can be no assurance that we will continue to have a compensation committee comprised entirely of independent directors, nor that we will continue to utilize the other exemptions while we are a controlled company.

 

Litigation defense and settlement costs may be material.

 

There can be no assurance that we will prevail in any pending litigation in which we are involved, or that our insurance coverage will be adequate to cover any potential losses. To the extent that we sustain losses from any pending litigation which are not presently reserved or otherwise provided for or insured against, our business, results of operations, cash flows and/or financial condition could be adversely affected.

 

Agreements and transactions involving former subsidiaries or related parties may give rise to future claims that could materially adversely impact our capital resources

 

Throughout our history, we have entered into numerous transactions relating to the sale, disposal or spin-off of partially and wholly owned subsidiaries, including the recent sale of shares of Safety Components and Omega Protein. We may have continuing obligations pursuant to certain of these transactions, including obligations to indemnify other parties to agreements or be subject to risks resulting from these transactions. For example, during the third quarter of 2005, we were notified by Weatherford International Inc. (“Weatherford”) of a claim for reimbursement 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. See Item 8, “Note 10. Commitments and Contingencies” for further description of the Weatherford claim. Additionally if Omega Protein experiences financial difficulties in the future, creditors of Omega Protein could bring claims against us alleging that Omega Protein did not receive fair value or reasonably equivalent value for the shares it repurchased from us and seek to have us return the purchase price we received for the shares plus interest. If any of these claims involving our former subsidiaries are brought, it could have a material adverse impact on our capital resources, results of operation or cash flows.

 

Additionally, in connection with our recent sale to private institutional investors of a portion of our Omega Protein shares, we agreed to reimburse Omega for liquidated damages that they may be required to pay to the purchasers if Omega Protein fails to continuously maintain such a registration statement as effective throughout a specified term and certain other conditions are met. See Item 1 “Business — Omega Protein” for further description of the liquidated damages provision of the letter agreement between Omega Protein and Zapata. If we are required reimburse Omega Protein under these circumstances, it could have a material adverse impact on our capital resources, results of operation or cash flows.

 

Future acquisitions and dispositions may not require a shareholder vote and may be material to the Company.

 

Any future acquisitions could be material in size and scope, and since we have not yet identified any additional assets, property or business that we may acquire or develop, potential investors will have virtually no substantive information about any such new business upon which to base a decision whether to invest in the company. In any event, depending upon the size and structure of any future acquisitions, stockholders may not have the opportunity to vote on the transaction, or access to any information about any new business until such time as a transaction is completed and we file 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 we had acquired a significant stake in Safety Components. Such transactions materially affected our financial position, results of operations and cash flows. In the Safety Components acquisition, we utilized approximately $47.8 million of our cash, cash equivalents and short-term investments to complete the acquisition.

 

We may not be successful in identifying any suitable future acquisition opportunities.

 

There is no assurance that we will be successful in identifying or consummating any suitable future acquisitions, and, if an acquisition does occur, there is no assurance that it will be successful in enhancing our business or will increase our earnings or not materially adversely affect our financial condition. We face significant competition for acquisition opportunities, which may inhibit our ability to complete suitable transactions or increase the cost that must be paid. Future acquisitions could also divert a substantial amount of our time, result in

reductions in earnings or 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, we may also borrow money to fund our acquisitions. In that event, our 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 our ability to secure future financing and the imposition of certain operating restrictions.

 

None.

 

Zapata’s corporate headquarters are located in Rochester, New York where the Company leases approximately 3,000 square feet of office space. Zapata believes its facilities and those of its subsidiaries are adequate and suitable for its current level of operations.

 

Zap.Com’s headquarters are located in Rochester, New York, in space subleased to it by Zapata on a month-to month basis. Zapata has advised Zap.Com that it will not charge rent or other fees for the use of this space for future periods until further notice.

 

None.

 

None.

 

Market Information and Dividends

 

Zapata’s common stock is listed on the New York Stock Exchange (“NYSE”) and trades under the symbol “ZAP.” On April 6, 2005, the Company effected an eight-for-one stock split, par value $.01 per share. 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.

 

The high and low sales prices for the Company’s common stock for each quarterly period for the last two fiscal years are shown in the following table.

 

 

The Company has not declared any dividends since the Company’s Board of Directors discontinued dividend payments in 1998. The Company may use all or a significant portion of its cash assets in the acquisition of operating businesses, funding of start-up proposals and possible stock repurchases as discussed below. In deciding whether to declare dividends, the Company’s Board of Directors considers the Company’s operating results, cash flow, financial condition, capital requirements, general business condition of its future operating businesses and such other factors, as the Board of Directors deems relevant. The rights of the holders of common stock to receive dividends or other payments with respect thereto in the future would be subject to the prior and superior rights of holders of Zapata’s Preferred Stock and Preference Stock then outstanding, if any. Zapata has authorized Preferred Stock and Preference Stock, none of which are outstanding as of the date of this report.

 

On December 6, 2002, the Board of Directors 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.

 

As of March 1, 2007, there were approximately 1,900 holders of record of common stock. This number does not include the stockholders for whom shares are held in a “nominee” or “street” name.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table sets forth information as of December 31, 2006, with respect to compensation plans under which equity securities of the Company are authorized for issuance:

 

Performance Graph

 

The Commission requires a five-year comparison of the cumulative total return of the Company’s Common Stock with that of (1) a broad equity market index and (2) a published industry or line-of-business index, or index of peer companies with similar market capitalization. Pursuant to the Commission’s rules, the graph presented below includes comparisons of the performance (on a cumulative total return basis) of the Company’s Common Stock with the S&P SmallCap 600 Index and the Dow Jones US Industrial Diversified Index. The stock price performance shown on the graph is not necessarily indicative of future price performance.

 

The Stock Performance Graph shall not be deemed incorporated by reference by any general statement incorporating by reference the Proxy Statement into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates this document by reference and shall not otherwise be deemed filed.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Zapata Corporation, The S & P Smallcap 600 Index
And The Dow Jones US Diversified Industrials Index

 

 

 

Copyright^© 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.www.researchdatagroup.com/S&P.htm

 

 

The following table sets forth certain selected historic consolidated financial information of the Company for the periods and as of the dates presented and should be read in conjunction with the Company’s Consolidated Financial Statements and the related notes thereto included in Item 8 of this Report and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Report. All amounts are in thousands, except for per share amounts.

 

 

 

 

 

The following is a discussion of the Company’s financial condition and results of operations. This discussion should be read in conjunction with the Company’s Consolidated Financial Statements included in Item 8 of this Report. This discussion contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below in “Part I, Item 1A., Risk Factors,” as well as those discussed in this section and elsewhere in this report.

 

Zapata is a holding company which has approximately $152 million in consolidated cash, cash equivalents and short-term investments at December 31, 2006 and currently owns 98% of Zap.Com Corporation, a public shell company. On December 4, 2006, the Company completed the disposition of its 14,501,000 shares Omega Protein Corporation common stock. As of September 30, 2006, these shares constituted approximately 57% of Omega’s outstanding common stock. On December 2, 2005, Zapata completed the sale of its 77% ownership interest in Safety Components International, Inc.

 

Zapata Corporate

 

Since the December 4, 2006 sale of Omega shares, substantially all of Zapata’s assets have been held in government securities and it has no other primary operations. At December 31, 2006, this totaled approximately $152 million. Under the circumstances, and unless an exemption became available under the Investment Company Act of 1940 Act (the “1940 Act”), the Company could be deemed to be an investment company. Zapata does not intend to become an investment company and since the date of this sale it has been relying upon the transient investment company exemption under SEC Rule 3a-2 promulgated under the 1940 Act. This exemption is available for a one year period, ending on November 28, 2007, during which period Zapata intends to acquire one or more new operating businesses, or if the Company is unable to qualify for any other exemptions available under the 1940 Act. If Zapata can not complete an acquisition during this period due to circumstances beyond its control, it intends to apply to the SEC for a continuing exemption from registration under the 1940 Act. If the SEC should not grant this exemption the Company may be required to register as an investment company under the 1940 Act or liquidate. If the Company are a registered investment company, the Company will be subject to a substantial increase in the regulation and to the additional expenses of compliance.

 

As part of its acquisition efforts, Zapata has been reviewing target candidates for acquisition. The Company has not focused and does not intend to focus its acquisition efforts solely on any particular industry. Additionally, while the Company focuses its attention in the United States, the Company may investigate acquisition opportunities outside of the United States when management believes that such opportunities might be attractive. 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. These types of investments often involve a high degree of risk and may be considered highly speculative.

 

As of the date of this report, Zapata is not a party to any agreements providing for the acquisition of an operating business, business combination or for the sale or other transaction related to any of its subsidiaries. There can be no assurance that any of these possible transactions will occur or that they will ultimately be advantageous to Zapata or enhance Zapata stockholder value.

 

On April 6, 2006, the Company effected an eight-for-one stock split of its outstanding shares of common stock, par value $.01 per share (the “Common Stock”). 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.

 

In December 2002, the Board of Directors authorized the Company to purchase up to 4.0 million shares of its outstanding common stock in the open market or privately negotiated transactions. No time limit has been placed on the duration of the program and no minimum number or value of shares to be repurchased has been fixed. As of the date of this report, no shares have been repurchased under this program.

 

Zap.Com

 

Zap.Com is a public shell company which does not have any existing business operations. In the future Zap.Com may acquire an operating company. Zap.Com may also consider developing a new business suitable for its situation.

 

Omega Protein

 

Omega Protein is the largest processor, marketer and distributor of fish meal and fish oil products in the United States. Omega produces and sells a variety of protein and oil products derived from menhaden, a species of wild herring-like fish found along the Gulf of Mexico and Atlantic coasts. As of September 30, 2006, Zapata owned approximately 57% of Omega’s outstanding common stock. During the fourth quarter of fiscal 2006, Zapata sold all of its Omega shares in two separate transactions

 

Zapata’s first sale of Omega shares closed on November 28, 2006, pursuant to a stock purchase agreement dated September 8, 2006 between Zapata, as seller, and Omega Protein, as purchaser. Pursuant to the agreement, Omega Protein repurchased 9,268,292 Omega shares held by Zapata at a price of $5.125 per share, or $47.5 million in the aggregate, which was paid in immediately available funds.

 

As a result of the first sale of Omega shares, Zapata recorded an impairment charge of $11.1 million ($7.2 million net of tax adjustments) to reduce the carrying value of the Company’s investment in Omega Protein to fair value, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This charge was based on the $5.109 (the sale price of $5.125 less the amount estimated for the call option value) per share value implied by the contemplated sale under the stock purchase agreement with Omega Protein.

 

Zapata’s second sale of Omega shares occurred on December 4, 2006, pursuant to a stock purchase agreement dated December 1, 2006 among Zapata and a group of institutional investors. Pursuant to this agreement, Zapata sold its remaining 5,232,708 Omega shares at a purchase price of $5.55 per share (less commission), or $28.3 million in the aggregate, which was paid in immediately available funds. The purchasers included Special Situations Fund III QP, L.P., Special Situations Fund III, L.P., Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund, L.P., Franklin Microcap Value Fund, Wynnefield Partners Small Cap Value, L.P., Wynnefield Partners Small Cap Value, L.P. I, Channel Partnership II, L.P. This transaction closed on December 4, 2006. As a result of this transaction, Omega’s call option to purchase the remaining shares held by Zapata terminated.

 

For the year ended December 31, 2006, Zapata recorded total transaction related losses of $10.3 million ($7.2 million net of tax adjustments) related to the impairment and sale of Omega. The difference between the initial impairment charge of $11.1 million and the ultimate transaction loss recognized for the year ended December 31, 2006 of $10.3 million is primarily due to the excess of sales proceeds on the shares sold to the group of institutional investors over the carrying value as adjusted for the impairment. Based on the sale of Zapata’s Omega shares, all amounts and disclosures throughout this document related to Omega has been classified as “Discontinued Operations” in accordance with SFAS No. 144. Accordingly, Zapata recorded income of $2.8 million within discontinued operations related to the Company’s ownership of Omega through the date of sale.

 

Subsequent to the December 4, 2006 closing on the sale of 5,232,708 shares of Omega Protein, Omega registered these shares for resale by the purchasers under a registration rights agreement with them. The registration statement was declared effective by the Securities and Exchange Commission on January 29, 2007. Omega is required to keep the registration statement effective for resale of the shares until the earlier of the following: (i) all shares have been sold, and (ii) all shares may be sold pursuant to Rule 144(k) of the Securities Act.

 

In connection with this registration statement, Zapata entered into a letter agreement with Omega on December 1, 2006, whereby the Company agreed, subject to certain conditions and obligations of Omega and generally for a period of two years from the closing date, to reimburse Omega for liquidated damages it may be required to pay to the purchasers. Omega would be liable to the purchasers for liquidated damages in the event the purchasers cannot make sales under the registration statement, except due to market conditions or an allowed delay of not more than twenty consecutive days or for a total of not more than forty-five days in any twelve month period. Zapata would be required to reimburse Omega for these damages, unless Omega fails to fulfill certain conditions, including: (i) not breaching the registration rights agreement, (ii) responding promptly to the extent commercially reasonable to all SEC comment letters, questions and requests, (iii) filing to the extent commercially reasonable all required post-effective amendments and prepares and provides the purchasers with any necessary supplements to the prospectus in a commercially reasonably manner, and (iv) not intentionally taking an action or omit to take an action that would cause the purchasers to be unable to make sales under the registration statement. The liquidated

damages are equal to 1.0% of the gross purchase price for each 30-day period during which the registration statement is not effective, up to a maximum of 10% of the gross purchase price of $29.0 million.

 

The Company has determined that the fair value of the liquidated damages provision of the registration rights agreements at December 31, 2006 is de minimis and accordingly has recorded no liability at that date. In determining the fair value, the Company considered the following factors: (i) The registration statement was declared effective within 2 months of the closing of the sale of the Company’s remaining 5,232,708 shares and therefore the Company was aware that there was no value to the liquidated damages provision related to the initial effectiveness of the registration statement. (ii) The liquidated damages provision would only have value in the future if the purchasers are unable to sell under the registration statement for the reasons stated in the registration rights agreement for more than 20 consecutive days or for a total of not more than forty-five days in any twelve month period. (iii) As of the date of this filing, the Company is not aware that any events have occurred or are expected to occur that would cause the purchasers to be unable to sell under the registration statement. There can be no assurance that such events will not occur in the future. In the event that the Company changes its assessment of the likelihood of making payments under the liquidated damages provision of the registration rights agreement, the Company will re-assess its valuation of this provision.

 

Safety Components

 

Safety Components is an independent supplier of automotive airbag fabric and cushions and technical fabrics with operations in North America and Europe. Zapata originally purchased 2,663,905 shares of Safety Components common stock for $30.9 million on September 23, 2003, and purchased an additional 1,498,489 shares on October 7, 2003 for $16.9 million, bringing the Company’s ownership percentage to approximately 84% at that time. The Company accounted for these transactions under the purchase method and began consolidating amounts related to Safety’s assets and liabilities as of September 30, 2003 and amounts related to Safety’s results of operations in the fourth quarter of 2003.

 

On September 21, 2005, Zapata’s Board of Directors approved a plan to pursue a sale of all of the Company’s 4,162,394 shares of Safety 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. As used throughout this document, all amounts and disclosures related to Safety have been classified as “Discontinued Operations.”

 

On December 2, 2005, Zapata closed on the sale of all of its 4,162,394 shares of common stock in Safety Components to WLR Recovery Fund II, L.P. and WLR Recovery Fund III, L.P., Delaware limited partnerships (collectively the “WLR Recovery Funds”) for $12.30 per share or $51,197,446 in the aggregate. Prior to the close of the sale, Zapata paid an aggregate of $1,000,000 in the form of a capital contribution to Safety Components for the Safety compensation committee to pay bonuses to its executive officers and key employees. This payment was made under a plan approved by Zapata during the third quarter of 2005 to provide Safety Components management with an incentive to continue with Safety until the completion of the sale to the WLR Recovery Funds.

 

For the year ended December 31, 2005, Zapata recorded a transaction related loss of $12.2 million ($9.9 million net of tax adjustments) related to the sale of Safety. Though the Company sold its shares in Safety for a cash gain compared to the original investment, this transaction related loss resulted from the sales proceeds being less than Zapata’s carrying value of its investment in Safety Components. Safety’s generation of net income subsequent to the Company’s original purchase of the stock increased Zapata’s carrying value which consisted of Zapata’s original investment in common stock of Safety Components and the aforementioned subsequent capital contribution.

 

The following tables summarize Zapata’s consolidating results of operations (in thousands). Certain reclassifications of prior year information have been made to conform to the current presentation.

 

 

 

 

 

 

For information affecting period to period comparability see the notes to the selected financial data included in “Item 6 — Selected Financial Data.” For more information concerning segments, see Note 20 to the Company’s Consolidated Financial Statements included in Item 8 of this Report.

 

2006 Compared to 2005

 

Zapata reported a consolidated net loss of $4.7 million or $(.24) per diluted share for the year ended December 31, 2006 as compared to consolidated net loss of $9.2 million or $(.48) per diluted share in 2005. On a consolidated basis, the decrease in net loss resulted from an improvement related to continuing operations of $2.8 million resulting primarily from increased interest income and decreased selling, general and administrative expenses recognized during 2006 at Zapata Corporate, combined with a reduction of losses from discontinued operations of $1.7 million.

 

The following presents a more detailed discussion of the consolidated operating results:

 

Revenues from continuing operations.  For the years ended December 31, 2006 and 2005, Zapata had no revenues from continuing operations. Since the Company sold its remaining operating business in December 2006, the Company does not expect to recognize revenues until the Company acquires one or more operating businesses.

 

Cost of revenues from continuing operations.  For the years ended December 31, 2006 and 2005, Zapata had no cost of revenues from continuing operations.

 

Selling, general and administrative from continuing operations.  Consolidated selling, general, and administrative expenses decreased $787,000 from $5.5 million in 2005 to $4.7 million in 2006. This resulted from decreases at Zapata Corporate, primarily attributable to the scheduled termination of the consulting agreement with Zapata’s former Chairman of the Board of Directors, Malcolm Glazer during 2006.

 

Interest income from continuing operations.  Consolidated interest income increased $2.8 million to $4.1 million for the year ended December 31, 2006. This increase was primarily attributable to an increase of $2.7 million at Zapata Corporate resulting from higher interest rates on investments and an increase in cash balances available for investment after selling its common stock holdings in Safety Components and Omega Protein. In addition, Zap.Com had an increase of $30,000, resulting from higher returns on cash and cash equivalents. Based on the Company’s reliance on Rule 3a-2 of the 1940 Act, the Company will continue to invest in government agency securities and will not invest in investment grade securities which generally have higher returns.

 

Income taxes from continuing operations.  The Company recorded a consolidated provision for income taxes of $183,000 for the year ended December 31, 2006 as compared to a benefit of $982,000 for the prior year. The change from the recognition of a benefit for the year ended December 31, 2005 as compared to a provision for the current year is primarily due to a current year reduction in pre-tax losses recognized by Zapata due to higher interest income recognized on the Company’s cash balances available for investment and the current year increase in the valuation allowance for deferred tax assets.

 

Minority interest from continuing operations.  Minority interest from the consolidated statements of operations represents the minority stockholders’ interest in the net income of the Company’s consolidated subsidiaries (approximately 2% of Zap.Com). For each of 2006 and 2005, minority interest represents a $1,000 reduction of the net loss for Zapata’s share in Zap.Com.

 

Net income from discontinued operations.  Pursuant to the Zapata Board of Directors’ approval of the plan to sell the Company’s shares of Safety Components and Omega Protein and the subsequent sale of these shares, all operating results related to Safety and Omega have been reclassified and included in discontinued operations. For the year ended December 31, 2006, the Company recognized a net loss from discontinued operations of $4.4 million as compared to $6.1 million for the year ended 2005. Because the sale of Omega Protein closed in the fourth quarter of 2006 and the sale of Safety Components closed in December 2005, 2006 discontinued operations includes the transaction related losses on the Omega sale as well as Omega’s income through the date of sale. Discontinued operations for 2005 include all of Omega’s losses for the year, as well as transaction related losses on the Safety sale as well as Safety’s income through the date of sale.

 

2005 Compared to 2004

 

Zapata reported a consolidated net loss of $9.2 million or $(.48) per diluted share for the year ended December 31, 2005 as compared to consolidated net income of $3.7 million or $.20 per diluted share in 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 sale of Zapata’s shares of Safety Components common stock.

 

The following presents a more detailed discussion of the consolidated operating results:

 

Revenues from continuing operations.  For the years ended December 31, 2005 and 2004, Zapata had no revenues from continuing operations.

 

Cost of revenues from continuing operations.  For the years ended December 31, 2005 and 2004, Zapata had no cost of revenues from continuing operations.

 

Selling, general and administrative from continuing operations.  Consolidated selling, general and administrative expenses increased $1.1 million from $4.4 million in 2004 to $5.5 million in 2005. This was primarily due to an increase at Zapata Corporate of $1.2 million, primarily attributable to legal accruals which were reduced in the prior year, combined with stock option modification expenses in 2005.

 

Interest income from continuing operations.  Consolidated interest income increased $898,000 from $398,000 for the year ended December 31, 2004 to $1.3 million in the year ended December 31, 2005. This

was attributable to an increase of $868,000 at Zapata Corporate resulting from higher interest rates on investment and an increase in cash balances available for investment after selling its common stock holdings in Safety Components. In addition, Zap.Com had an increase in interest income of $30,000, resulting from higher returns on cash and cash equivalents.

 

Income taxes from continuing operations.  The Company recorded a consolidated benefit for income taxes of $982,000 for the year ended December 31, 2005 as compared to a benefit of $687,000 for the prior year. The lower benefit recognized during 2004 reflects a larger increase in the deferred tax asset valuation allowance than was recognized during 2005.

 

Minority interest from continuing operations.  Minority interest from the consolidated statements of operations represents the minority stockholders’ interest in the net income of the Company’s consolidated subsidiaries (approximately 2% of Zap.Com). In 2005 and 2004, minority interest was a $1,000 and $4,000 reduction of the net loss for Zapata’s share in Zap.Com.

 

Net income from discontinued operations.  Pursuant to the Zapata Board of Directors’ approval of the plans to sell the Company’s shares of Omega Protein and Safety Components, and the subsequent sales of these shares, all operating results related to Omega and Safety have been reclassified and included in discontinued operations. For the year ended December 31, 2005, discontinued operations had a net loss of $6.1 million, as compared to net income of $7.0 million for the year ended December 31, 2004. This decrease resulted primarily from the recognition of a transaction related loss in 2005 related to the sale of Safety Components, as well as hurricane losses at Omega Protein.

 

Zapata and Zap.Com are separate public companies. Accordingly, the capital resources and liquidity of Zap.Com is legally independent of Zapata. The working capital and other assets of Zap.Com are dedicated to Zap.Com 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 its stockholders. Zapata has never received any dividends from Zap.Com. In addition, Zapata does not have any investment commitments to Zap.Com.

 

Zapata Corporate’s liquidity needs are primarily for operating expenses, litigation and insurance costs. The Company plans to acquire an operating business on or before November 28, 2007. The Company may also utilize a significant portion of its cash, cash equivalents and short-term investments to fund the acquisition.

 

The following table summarizes information about Zapata’s consolidated contractual obligations (in thousands) as of December 31, 2006 and the effect such obligations are expected to have on its consolidated liquidity and cash flow in future periods:

 

 

 

 

Zapata’s current source of liquidity is its cash, cash equivalents and short-term investments and the interest income it earns on these funds. Zapata expects these assets to continue to be a source of liquidity except to the extent

that they may be used to fund the acquisition of operating businesses, funding of start-up proposals and possible stock repurchases. Zapata investments consist of U.S. Government agency securities and cash equivalents. As of December 31, 2006, Zapata Corporate’s cash, cash equivalents and short-term investments were $150.4 million as compared to $75.3 million as of December 31, 2005. This increase resulted from the sale of Omega Protein and the receipt of the combined net proceeds of approximately $75.5 million.

 

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.

 

The Company and its subsidiaries do not have any off-balance sheet arrangements that are material to its financial position, results of operations or cash flows. The Company is a party to agreements with its officers, directors and to certain outside parties. For further discussion of these guarantees, see Note 10 to the Consolidated Financial Statements included in Item 8 of this report.

 

The following table summarizes Zapata’s consolidating cash flow information (in thousands) for the last three fiscal years:

 

 

 

 

 

 

Net cash provided by operating activities.

 

Consolidated cash provided by operating activities was $1.7 million and $2.1 million for the years ended December 31, 2006 and 2005, respectively. The decrease in consolidated cash provided by operating activities was due to a decrease in cash provided by operating activities of $4.5 million related to discontinued operations, attributable to the effects of Hurricanes Katrina and Rita at Omega Protein during 2005 and not consolidating Safety’s cash provided by operating activities after completing the sale in December 2005. This decrease was partially offset by a decrease in cash used in operating activities at Zapata Corporate, primarily resulting from a decrease in net losses of $4.0 million.

 

Consolidated cash provided by operating activities was $2.1 million and $30.9 million for the years ended December 31, 2005 and 2004, respectively. The decrease in consolidated cash provided by operating activities was primarily due to a decrease in cash provided by operating activities of $27.1 million related to discontinued operations. This change was primarily attributable to the change in activities at Omega Protein relating to increased inventory and losses associated with Hurricanes Katrina and Rita.

 

Net cash used in investing activities.

 

Consolidated cash provided by investing activities was $43.8 million and $29.6 million for the years ended December 31, 2006 and 2005, respectively. This increase was primarily the result of increases at Zapata Corporate, resulting from the proceeds of the Omega Protein sale in 2006 being $24.3 million greater than the proceeds of the Safety Components sale in 2005, partially offset by the purchase of $15.2 million of short-term investments during 2006. In addition, consolidated cash provided by investing activities increased $5.1 million during 2006 due to discontinued operations, primarily attributable to the lack of consolidation of Safety Components’ cash flow in 2006 as compared to 2005.

 

Consolidated cash provided by investing activities was $29.6 million for the year ended December 31, 2005 as compared to cash used in investing activities of $29,000 for the year ended December 31, 2004. The reason for this change is primarily due to an increase in cash provided by investing activities of $21.8 million at Zapata Corporate. This increase resulted from the receipt of the $51.2 million in proceeds from the sale of Safety Components in 2005, as compared to proceeds from the maturities of short-term investments of $29.4 million in 2004 related to the change in mix of cash, cash equivalents and short-term investments during the period.

 

Other than possible acquisitions of operating companies, funding of start-up proposals and possible stock repurchases, Zapata and Zap.Com do not expect any capital expenditures during 2007.

 

Net cash used in financing activities.

 

Consolidated cash used in financing activities was $3.5 million for the year ended December 31, 2006 as compared to cash provided by financing activities of $10.6 million for the prior year. This change was a result of

discontinued operations, attributable to discontinued operations and Omega’s $14.0 million in proceeds from Title XI debt received during 2005, as compared to no proceeds during 2006.

 

Consolidated cash provided by financing activities was $10.6 million for the year ended December 31, 2005 as compared to cash used in financing activities of $9.2 million for the year ended December 31, 2004. The change in cash from financing activities resulted from a change of $19.7 million related to discontinued operations primarily attributable to Omega’s $14.0 million in proceeds from Title XI debt received during 2005.

 

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). This Standard defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The adoption of SFAS No. 157 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.” Specifically, the pronouncement prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure and transition of uncertain tax positions. The interpretation is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of adopting FIN No. 48 on the Company’s financial position, results of operations and cash flows.

 

The discussion and analysis of Zapata’s consolidated financial condition, liquidity and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect amounts reported therein. The following lists the Company’s current accounting policies involving significant management judgment and provides a brief description of these policies:

 

Impairment and Disposal of Long-Lived Assets.  The Company has adopted the provisions of 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 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, based on Zapata’s Board of Directors approval to sell the Company’s Omega shares back to Omega, the Company recorded an impairment charge of approximately $11.1 million ($7.2 million net of tax adjustments) to reduce the carrying value of the Company’s investment in Omega Protein to estimated fair value in accordance with SFAS No. 144.

 

Acquisition Accounting.  The Company accounts for acquisitions using the purchase method of accounting in accordance with SFAS No. 141, “Business Combinations.” Under the purchase method, the Company is required to record the net assets acquired at the estimated fair value at the date of acquisition. The determination of the fair value of the assets acquired and liabilities assumed requires the Company to make estimates and assumptions that affect the Company’s financial statements. In addition, depending on the specific facts and circumstances, goodwill

and other intangible assets, including those intangible assets with finite lives could result from an acquisition. Different estimates and assumptions regarding these assets, specifically the estimated fair values and lives, could result in materially different amortization expense over the estimated lives of such assets.

 

Litigation reserves.  The establishment of litigation reserves requires judgments concerning the ultimate outcome of pending litigation against the Company and its subsidiaries. In applying judgment, management utilizes opinions and estimates obtained from outside legal counsel to apply the standards of SFAS No. 5 “Accounting for Contingencies.” Accordingly, estimated amounts relating to certain litigation have met the criteria for the recognition of a liability under SFAS No. 5. Other litigation for which a liability has not been recognized is reviewed on an ongoing basis in conjunction with the standards of SFAS No. 5. A liability is recognized for all associated legal costs as incurred. Liabilities for litigation settlements, legal fees and changes in these estimated amounts may have a material impact on the Company’s financial position, results of operations or cash flows.

 

For example, in a claim settled in 2003 against Zapata and a non-operating wholly-owned subsidiary of Zapata which commenced during the 1990’s, the Company had been carrying a reserve of $1.0 million due to the uncertainty regarding the Company’s insurance coverage as it related to the claim. During July 2003, a court granted summary judgment to Zapata and our subsidiary holding that the insurance carrier owed a duty to defend and indemnify both Zapata and our subsidiary in this matter. Based on the court’s decision, Zapata reversed the entire $1.0 million reserve into income during 2003.

 

Deferred income taxes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rates is recognized in earnings in the period that includes the enactment date. Additionally, taxing jurisdictions could retroactively disagree with the Company’s tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner.

 

The Company reduces its deferred tax assets to an amount that it believes is more likely than not to be realized. In so doing, the Company estimates future taxable income in determining if any valuation allowance is necessary. While the Company believes it is more likely than not that it will be able to realize its amount of estimated deferred tax assets, it is possible that the facts and circumstances on which the Company’s estimates and judgments are based could change, which could result in additional income tax expense in the future to recognize or increase the associated valuation allowances.

 

Benefit plan assumptions.  On a consolidated basis, the Company has two defined benefit plans, under which participants earn a retirement benefit based upon a formula set forth in each plan. The Company records income or expense related to these plans using actuarially determined amounts that are calculated under the provisions of SFAS No. 87, “Employers’ Accounting for Pensions.” Key assumptions used in the actuarial valuations include the discount rate and the anticipated rate of return on plan assets. These rates are based on market interest rates, and therefore fluctuations in market interest rates could impact the amount of pension income or expense recorded for these plans. Despite the Company’s belief that its estimates are reasonable for these key actuarial assumptions, future actual results will likely differ from the Company’s estimates, and these differences could materially affect the Company’s future financial statements either unfavorably or favorably.

 

The discount rate enables a company to state expected future cash flows at a present value on the measurement date. The Company has little latitude in selecting this rate as it is based on a review of projected cash flows and on high-quality fixed income investments at the measurement date. A lower discount rate increases the present value of benefit obligations and increases pension expense. On a consolidated basis, a 50 basis point reduction in the discount rate would increase pension expense by $2,000 in 2007.

 

To determine the expected long-term rate of return on pension plan assets, the Company considers a variety of factors including historical returns and asset class return expectations based on each Company’s plan’s current asset

allocation. On a consolidated basis, a 50 basis point reduction in the expected return on assets would increase pension expense by $99,000 in 2007.

 

The Company continually updates and assesses the facts and circumstances regarding these critical accounting matters and other significant accounting matters affecting estimates in its financial statements.

 

Equity Price Risk.  As the Company considers its holdings of Zap.Com common stock to be a potential source of secondary liquidity, the Company is subject to equity price risk to the extent of fluctuations in the market prices and trading volumes of these securities. Fluctuation in the market price of a security may result from perceived changes in the underlying economic characteristics of the investee, the relative price of alternative investments and general market conditions. Furthermore, amounts realized in the sale of a particular security may be affected by the relative quantity of the security being sold.

 

Interest Rate Risk.  Zapata Corporate and Zap.Com hold investment grade securities which may include a mix of U.S. Government or Government agency obligations, certificates of deposit, money market deposits and commercial paper rated A-1 or P-1. 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 $152.1 million at December 31, 2006 as a hypothetical constant cash balance, an adverse change of 1% in interest rates would decrease interest income by approximately $1.5 million during a twelve-month period.

 

To the Board of Directors and Stockholders:

 

We have completed integrated audits of Zapata Corporation’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

 

Consolidated financial statements

 

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Zapata Corporation and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

As described in Note 2 — Significant Accounting Policies and in Note 11 — Qualified Defined Benefit Plans to the consolidated financial statements respectively, the Company modified the manner in which it accounts for share-based compensation effective January 1, 2006, and the manner in which it accounts for defined benefit pension and other postretirement plans effective December 31, 2006.

 

Internal control over financial reporting

 

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

PricewaterhouseCoopers LLP

 

Rochester, New York

March 13, 2007

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

The accompanying notes are an integral part of the consolidated financial statements.