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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

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, computed by reference to the closing price as of the last business day of the registrants most recently completed second fiscal quarter, June 30, 2008, was approximately $65.2 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 February 24, 2009, the Registrant had outstanding 19,276,334 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 2009 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 April 30, 2009, 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 $154.7 million in consolidated cash, cash equivalents and short-term investments at December 31, 2008 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.” In December 2006, the Company completed the disposition of its 57% ownership interest in Omega Protein Corporation (“Omega Protein” or “Omega”) common stock.

 

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 100 F Street, NE, 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.

 

Since the December 2006 sale of its Omega shares, Zapata has held substantially all of its cash, cash equivalents and short-term investments in U.S. Government Agency or Treasury securities, and has held no “investment securities” (as that term is defined in the Investment Company Act of 1940 (the “1940 Act”)). In addition, Zapata has not held, and does not hold, itself out as an investment company. During this time, Zapata has conducted a good faith search for a merger or acquisition candidate, and has repeatedly and publicly disclosed its

intention to acquire such a business. Based on the foregoing, Zapata believes that it is not an investment company under the 1940 Act.

 

The Company has not focused and does not intend to focus its acquisition efforts solely on any particular industry. Additionally, while the Company generally 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.

 

The Company’s two executive officers currently spend a significant amount of their time searching for suitable acquisition candidates. The Company’s process for searching for acquisition candidates includes the ongoing development of relationships with a network of investment banks and related firms. In addition, other sources may introduce target businesses that they believe may interest the Company as Zapata is known to be looking for acquisition candidates. As a result of these relationships, contacts and personal networks, potential acquisition candidates are periodically brought to the Company’s attention for evaluation. In evaluating a prospective acquisition opportunity, the Company may consider, among other factors, the following:

 

 

In identifying, evaluating and selecting a target business, the Company may encounter intense competition from other entities having similar business objectives such as strategic investors, private equity groups and special purpose acquisition corporations. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than Zapata, and Zapata’s financial resources will be relatively limited when contrasted with many of these competitors. Any of these factors may place Zapata at a competitive disadvantage in successfully negotiating a business combination. Management believes, however, that Zapata’s status as a public entity and potential access to the public equity markets may give the Company a competitive advantage over privately-held entities with a similar business objective to acquire a target business on favorable terms.

 

As of the date of this Report, due to a variety of factors including the current global economic and financial market conditions and the significant deterioration of the credit markets, competitive pressures, and Zapata’s limited funds (as compared to many competitors) available for such a transaction, the Company has been unable to consummate an acquisition. Additionally, 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. Also, as of the date of this Report, Zapata has not formally engaged any investment banks or related firms, although it may do so in the future, in which the Company may pay a finder’s fee or other compensation in an amount and on such terms to be determined at the time of the engagement in an arm’s length negotiation. 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.

 

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.

 

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 subsidiary, Omega Protein.

 

Employees.  As of December 31, 2008, Zapata employed 7 employees, consisting of 2 executives, 3 professional staff in accounting/finance, and 2 performing administrative functions. In addition to typical duties of a CEO and CFO of a publicly traded company, the Company’s two executive officers currently spend a significant amount of their time searching for suitable acquisition candidates. The primary function of the Company’s accounting/finance employees is fulfilling various reporting requirements associated with being a publicly traded company, which includes addressing various accounting and tax related matters.

 

 

Zap.com is a public shell company that does not have any existing business operations other than complying with its reporting requirements under the Exchange Act. Zap.Com is searching for assets or businesses that it can acquire so that it can become an operating company and may also consider developing a new business suitable for its situation.

 

As of December 31, 2008, 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. During the fourth quarter of fiscal 2006, Zapata sold all of its Omega shares in two separate transactions for $75.8 million in the aggregate. 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 these transactions. Based on the sale of Zapata’s Omega shares, all amounts and disclosures throughout this document related to Omega have been classified as “Discontinued Operations” in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

 

 

Information required by this section is incorporated by reference from Note 17 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.

 

Volatility in global credit markets may impact the Company’s ability to obtain financing to fund acquisitions.

 

Zapata’s ability to consummate an acquisition may be largely dependent on our ability to obtain financing. The current global economic and financial market conditions, including severe disruptions in the credit markets and the potential for a significant and prolonged global economic recession, may impact our ability to obtain sufficient credit to finance an acquisition until the conditions become more favorable.

 

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. 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.

 

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

 

As of February 24, 2009, the Company had 19,276,334 shares of common stock outstanding. The average daily trading volume in our stock during the twelve month period ended December 31, 2008 was approximately 5,500 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.

 

Since the December 2006 sale of its Omega shares, Zapata has held substantially all of its assets in cash, cash equivalents and short-term investments in U.S. Government Agency and Treasury securities, and has held no “investment securities.” In addition, Zapata has not held, and does not hold, itself out as an investment company. Zapata has been conducting a good faith search for a merger or acquisition candidate, and has repeatedly and publicly disclosed its intention to acquire such a business. However, as of the date of this Report, due to a variety of factors including the current global economic and financial market conditions and the significant deterioration of the credit markets, competitive pressures in the market and Zapata’s limited funds (as compared to many competitors) available for such an acquisition, it has been unable to consummate such a transaction. Based on the foregoing, Zapata believes that it is not an investment company under the 1940 Act. If the SEC or a Court were to disagree with Zapata, the Company could be required to register as an investment company. This would negatively affect our ability to consummate an acquisition of an operating company, subjecting us to disclosure and accounting rules geared toward investment, rather than operating, companies; limiting our ability to borrow money, issue options, issue multiple classes of stock and debt, and engage in transactions with affiliates; and requiring Zapata to

undertake significant costs and expenses to meet the disclosure and regulatory requirements to which it would be subject as a registered investment company.

 

Since we already meet the ownership criteria of the personal holding company rules, we may continue to pay an additional tax on future undistributed personal holding company income 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% 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 income taxes. Personal holding company income is comprised primarily of passive investment income plus, under certain circumstances, personal service income. A corporation is generally considered to be a personal holding company 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 and substantially all of the Company’s gross income qualifies as personal holding company income. However, as of December 31, 2008, Zapata and its domestic subsidiaries had no undistributed personal holding company income due to losses generated by the consolidated tax filing group and therefore has not recorded a personal holding company tax liability.

 

Depending on the dates and sizes of future business combination transactions, it is possible that Zapata or its domestic subsidiaries could have at least 60% of adjusted ordinary gross income consist of personal holding company income as discussed above. In addition, depending on the concentration of Company stock, it is possible that more than 50% of our stock will continue to be owned by five or fewer stockholders. Thus, 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. In addition, if we continue to be subject to this tax, future statutory tax rate increases could significantly increase consolidated tax expense and adversely affect operating results 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 impact 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.

 

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 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 11. Commitments and Contingencies” for further description of the Weatherford claim. There can be no assurance that the Company will not incur costs and expenses in excess of our reserve in connection with Weatherford.

 

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.

 

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 International, Inc. (“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.

 

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to document and test our internal controls over financial reporting and to report on our assessment as to the effectiveness of these controls. Any delays or difficulty in satisfying these requirements or negative reports concerning our internal controls could adversely affect our future results of operations and our stock price.

 

We may in the future discover areas of our internal controls that need improvement, particularly with respect to business that we may acquire in the future. We cannot be certain that any remedial measures we take will ensure that

we implement and maintain adequate internal controls over our financial reporting processes and reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our reporting obligations. If we are unable to conclude that we have effective internal controls over financial reporting, or if our independent auditors are unable to provide us with an unqualified report regarding the effectiveness of our internal controls over financial reporting as required by Section 404, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock. Failure to comply with Section 404 could potentially subject us to sanctions or investigations by the SEC, or other regulatory authorities, which could also result in a decrease in the value of our common stock.

 

 

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.” 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 and the Company does not anticipate paying dividends in the foreseeable future.

 

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 February 24, 2009, there were approximately 1,850 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, 2008, with respect to compensation plans under which equity securities of the Company are authorized for issuance:

 

Performance Graph

 

The following graph compares the performance of the Company’s common stock with the performance of the S&P SmallCap 600 Index and the Dow Jones Industrial Diversified Index by measuring the changes in common stock prices from December 31, 2003. 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^© 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

Copyright^© 2009 Dow Jones & Co. All rights reserved.

 

 

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 above 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 $154.7 million in consolidated cash, cash equivalents and short-term investments at December 31, 2008 and currently owns 98% of Zap.Com Corporation, a public shell company. In December 2006, the Company completed the disposition of its 57% ownership interest in Omega Protein common stock.

 

Since the December 2006 sale of its Omega shares, Zapata has held substantially all of its cash, cash equivalents and short-term investments in U.S. Government Agency or Treasury securities, and has held no “investment securities” (as that term is defined in the Investment Company Act of 1940 (the “1940 Act”)). In addition, Zapata has not held, and does not hold, itself out as an investment company. During this time, Zapata has conducted a good faith search for a merger or acquisition candidate, and has repeatedly and publicly disclosed its intention to acquire such a business. Based on the foregoing, Zapata believes that it is not an investment company under the 1940 Act.

 

The Company has not focused and does not intend to focus its acquisition efforts solely on any particular industry. Additionally, while the Company generally 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.

 

The Company’s two executive officers currently spend a significant amount of their time searching for suitable acquisition candidates. The Company’s process for searching for acquisition candidates includes the ongoing development of relationships with a network of investment banks and related firms. In addition, other sources may introduce target businesses that they believe may interest the Company as Zapata is known to be looking for acquisition candidates. As a result of these relationships, contacts and personal networks, potential acquisition candidates are periodically brought to the Company’s attention for evaluation. In evaluating a prospective acquisition opportunity, the Company may consider, among other factors, the following:

 

 

In identifying, evaluating and selecting a target business, the Company may encounter intense competition from other entities having similar business objectives such as private equity groups and special purpose acquisition corporations. Many of these entities are well established and have extensive experience identifying and effecting business combinations directly or through affiliates. Many of these competitors possess greater technical, human and other resources than Zapata, and Zapata’s financial resources will be relatively limited when contrasted with many of these competitors. Any of these factors may place Zapata at a competitive disadvantage in successfully negotiating a business combination. Management believes, however, that Zapata’s status as a public entity and potential access to the public equity markets may give the Company a competitive advantage over privately-held entities with a similar business objective to acquire a target business on favorable terms.

As of the date of this Report, due to a variety of factors including the current global economic and financial market conditions and the significant deterioration of the credit markets, competitive pressures, and Zapata’s limited funds (as compared to many competitors) available for such a transaction, the Company has been unable to consummate an acquisition. Additionally, 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. Also, as of the date of this Report, Zapata has not formally engaged any investment banks or related firms, although it may do so in the future, in which the Company may pay a finder’s fee or other compensation in an amount and on such terms to be determined at the time of the engagement in an arm’s length negotiation. 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.

 

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 other than complying with its reporting requirements under the Exchange Act. Zap.Com is searching for assets or businesses that it can acquire so that it can become an operating company and may also consider developing a new business suitable for its situation.

 

Discontinued Operations

 

Omega Protein is the largest processor, marketer and distributor of fish meal and fish oil products in the United States. During the fourth quarter of fiscal 2006, Zapata sold all of its Omega shares in two separate transactions for $75.8 million in the aggregate. 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 these transactions. Based on the sale of Zapata’s Omega shares, all amounts and disclosures throughout this document related to Omega have been classified as “Discontinued Operations” in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”.

 

The following tables summarize Zapata’s consolidating results of operations (in thousands, except per share amounts).

 

 

 

 

 

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 17 to the Company’s Consolidated Financial Statements included in Item 8 of this Report.

 

2008 Compared to 2007

 

Zapata reported a consolidated net loss of $12,000 or $0.00 per diluted share for the year ended December 31, 2008 as compared to consolidated net income of $2.6 million or $0.13 per diluted share in 2007. On a consolidated basis, the change from net income to net loss resulted primarily from decreased interest income during 2008 as compared to 2007.

 

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

 

Revenues.  For the years ended December 31, 2008 and 2007, 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.  For the years ended December 31, 2008 and 2007, Zapata had no cost of revenues from continuing operations.

 

General and administrative expenses.  Consolidated general and administrative expenses consist primarily of salaries and benefits, professional fees (including legal and accounting incurred in connection with ongoing regulatory compliance as a public company, financial statement audits and defense of pending litigation), occupancy costs for corporate offices, insurance costs and general corporate expenses. For the year ended December 31, 2008, general and administrative expenses totaled $3.2 million and had decreased $151,000 from the prior year as a result of decreases in professional fees and costs.

 

The Company expects to recognize approximately $1.0 million of pension expense during 2009 as compared to approximately $122,000 during 2008. The projected increase is primarily attributable to a decrease in the expected return on plan assets which was caused by (1) a substantial decline in the market value of the plan assets during 2008 and (2) a decrease in the assumption used for the expected long-term return on plan assets.

 

Interest income.  Consolidated interest income decreased $4.7 million from $7.7 million for the year ended December 31, 2007 to $3.0 million for the year ended December 31, 2008. This decrease was primarily attributable to sustained lower interest rates on cash equivalents and investments during 2008 as compared to 2007. In July 2008, due to market conditions and in an effort to preserve principal, the Company liquidated its U.S. Government Agency securities and purchased U.S. Treasury securities with the proceeds. On the date of liquidation, the Company realized a consolidated loss of approximately $90,000. Although the Treasury securities generally have lower yields, they are fully insured by the U.S. Government against risk of loss. Accordingly, while the Company’s funds are invested in Treasury securities, interest income will be less than it would have been before this change.

 

Income taxes.  The Company recorded a consolidated benefit for income taxes of $98,000 for the year ended December 31, 2008 as compared to a provision for income taxes of $2.3 million for the prior year. On a consolidated basis, the change from a provision to a benefit for income taxes was primarily attributable to a decrease in interest income recognized during the year ended December 31, 2008 as compared to the prior year. Additionally, a decline in interest income in 2008 caused the Company to not have any personal holding company income tax due at year end. Accordingly, no accrual for a 15% tax on undistributed personal holding company income was required for the year ended December 31, 2008 as was required for the prior year.

 

2007 Compared to 2006

 

Zapata reported consolidated net income of $2.6 million or $0.13 per diluted share for the year ended December 31, 2007 as compared to a consolidated net loss of $4.7 million or $(.24) per diluted share in 2006. On a

consolidated basis, the change from net loss to net income resulted from increased interest income at Zapata Corporate, as well as not recognizing discontinued operations and loss on sale related to Omega Protein during 2007 as compared to 2006.

 

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

 

Revenues from continuing operations.  For the years ended December 31, 2007 and 2006, Zapata had no revenues from continuing operations.

 

Cost of revenues from continuing operations.  For the years ended December 31, 2007 and 2006, Zapata had no cost of revenues from continuing operations.

 

General and administrative expenses from continuing operations.  Consolidated general and administrative expenses decreased $1.3 million from $4.7 million in 2006 to $3.4 million in 2007. General and administrative expenses for 2006 included $490,000 of consulting expenses paid to Malcolm Glazer (Zapata’s former Chairman of the Board of Directors) prior to the expiration of his consulting agreement and a curtailment loss of approximately $147,000 related to the freezing of the Zapata qualified defined benefit pension plan. These expenses were not incurred during 2007. The remaining decrease resulted primarily from a current period decrease in actuarially determined pension expenses of $197,000, a decrease of $125,000 in stock based compensation charges as certain option grants became fully vested during the prior year and a decrease in professional fees.

 

Interest income from continuing operations.  Consolidated interest income increased $3.6 million to $7.7 million for the year ended December 31, 2007. This increase was primarily attributable to increases at Zapata Corporate resulting from increased cash balances available for investment after selling its common stock holdings in Omega Protein in December of 2006.

 

Income taxes from continuing operations.  The Company recorded a consolidated provision for income taxes of $2.3 million for the year ended December 31, 2007 as compared to $183,000 for the prior year. On a consolidated basis, the increase in the provision for income taxes was primarily attributable to a significant increase in interest income, the recognition of a 15% tax on undistributed personal holding company income, and decreases in general and administrative expenses during the year ended December 31, 2007 as compared to the comparable period in the prior year.

 

Net income from discontinued operations.  Pursuant to the Zapata Board of Directors’ approval of the plan to sell the Company’s shares of Omega Protein and the subsequent sale of these shares in December 2006, all operating results related to Omega were 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 no amounts related to discontinued operations in 2007 due to the timing of the sale.

 

Zapata and Zap.Com are separate public companies. Accordingly, the capital resources and liquidity of Zap.Com is 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 salaries and benefits, professional fees (including legal and accounting incurred in connection with ongoing regulatory compliance as a public company, financial statement audits and defense of pending litigation), occupancy costs for corporate offices, insurance costs and general corporate expenses. The Company may also utilize a significant portion of its cash, cash equivalents and short-term investments to fund all or a portion of the cost of any future acquisitions.

The following table summarizes information about Zapata’s consolidated contractual obligations (in thousands) as of December 31, 2008 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. As of December 31, 2008, Zapata Corporate’s cash, cash equivalents and short-term investments totaled $154.7 million as compared to $154.3 million as of December 31, 2007. This increase resulted primarily from an excess of interest payments received, primarily those received during the first half of 2008, over cash used by Zapata Corporate’s operations during 2008.

 

Based on current levels of operations, Zapata management believes that the Company’s cash, cash equivalents and short-term investments on hand 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, 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 11 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 $389,000 and $2.2 million for the years ended December 31, 2008 and 2007, respectively. This decrease resulted from less interest income during the year ended December 31, 2008 as compared to the prior year.

 

Consolidated cash provided by operating activities was $2.2 million and $1.7 million for the years ended December 31, 2007 and 2006, respectively. The increase in consolidated cash provided by operating activities was due to an increase in cash provided by Zapata Corporate, attributable to increased interest income in 2007 as compared to 2006. This increase was partially offset by a decrease attributable to not consolidating Omega’s cash provided by operating activities after completing the sale in December 2006.

 

Net cash provided by investing activities.

 

Consolidated cash provided by investing activities was $3.1 million and $180,000 for the years ended December 31, 2008 and 2007, respectively. This increase resulted from additional purchases and sales of short-term investments during the year ended December 31, 2008 as compared to the prior year.

 

Consolidated cash provided by investing activities was $180,000 and $43.8 million for the years ended December 31, 2007 and 2006, respectively. This decrease was a result of receiving $75.5 million of proceeds from the sale of Omega during 2006 as compared to no proceeds in 2007. This decrease was offset by the lack of consolidation of Omega Protein’s cash used in investing activities of $16.5 million and the change from cash used in

investing activities to cash provided by investing activities at Zapata Corporate, resulting from the timing of purchases of short-term investments versus cash equivalents.

 

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 2009.

 

Net cash (used in) provided by financing activities.

 

There was no cash used in or provided by financing activities for the years ended December 31, 2008 or 2007. Consolidated cash used in financing activities was $3.5 million for the year ended December 31, 2006 as a result of discontinued operations attributable to Omega $14.0 million in proceeds from Title XI debt received during 2005, as compared to no proceeds during 2006.

 

In 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 141(R), “Business Combinations”. SFAS No. 141(R) requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose the information needed to evaluate and understand the nature and financial effect of the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The impact of SFAS No. 141(R) on our consolidated financial statements will depend upon the nature, terms and size of the acquisitions we consummate after the effective date.

 

In 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin No. 51”. SFAS No. 160 requires reporting entities to present noncontrolling (minority) interests as equity (as opposed to as a liability) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. SFAS No. 160 applies prospectively as of January 1, 2009, except for the presentation and disclosure requirements which will be applied retrospectively for all periods presented. The Company does not expect the adoption of SFAS No. 160 to have a material impact on its financial position, results of operations or cash flows.

 

In February 2008, the FASB issued FSP 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of SFAS 157, “Fair Value Measurements” for certain non-financial assets and non-financial liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company does not expect the adoption of FSP No. 157-2 to have a material effect on its financial position, results of operations or 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:

 

Litigation and environmental reserves.  The establishment of litigation and environmental reserves requires judgments concerning the ultimate outcome of pending claims 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 claims have met the criteria for the recognition of a liability under SFAS No. 5. Other claims for which a liability has not been recognized are 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, environmental

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, the Company has been 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 Company believes that it has meritorious defenses to the claim, including that the alleged contamination occurred after the sale of the property, and intends to vigorously defend against it. As it is probable that some costs could be incurred related to this site, the Company has accrued $100,000 related to this claim. This reserve represents the lower end of a range of possible outcomes, in accordance with the standards of SFAS No. 5, as no other amount within the range is considered more likely than any other. There can be no assurance however that the Company will not incur material costs and expenses in excess of our reserve in connection with any further investigation and remediation at the site.

 

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 net 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.

 

The Company also applies the provisions of the FASB Interpretation No. 48 (“FIN 48”). FIN 48 establishes a single model to address accounting for uncertain tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Accrued interest expense and penalties related to unrecognized tax benefits are recorded as a component of income tax expense.

 

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. 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.

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.

 

 

Interest Rate Risk.  Zapata Corporate and Zap.Com hold investment grade securities which may include a mix of U.S. Government Agency or Treasury securities, certificates of deposit and money market deposits. Although the majority of the Company’s consolidated investment grade securities constitute U.S. Government Treasury securities classified as cash equivalents as of December 31, 2008, the Company may be exposed to interest rate risk related to its investments in such securities. Changes in interest rates affect the investment income the Company earns on its cash equivalents and marketable securities and, therefore, impacts its cash flows and results of operations. Specifically, there is inherent roll-over risk for the Company’s investment grade securities as they mature and are renewed at current market rates. As of December 31, 2008 interest rates on the Company’s cash and cash equivalents approximated 0%, and interest rates on the Company’s $12.0 million of short-term investments ranged between 1.70% and 2.05%.

 

Report of Independent Registered Public Accounting Firm

 

To the Board of

Directors and Stockholders of

Zapata Corporation

Rochester, New York

 

We have audited the internal control over financial reporting of Zapata Corporation and subsidiaries (the “Company”) as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit 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. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2008 of the Company and our report dated March 4, 2009 expressed an unqualified opinion on those financial statements.

 

Deloitte & Touche LLP

 

Rochester, New York
March 4, 2009

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

Zapata Corporation

Rochester, NY

 

We have audited the accompanying consolidated balance sheets of Zapata Corporation and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of the Company for the year ended December 31, 2006 were audited by other auditors whose report, dated March 13, 2007, expressed an unqualified opinion on those statements.

 

We conducted our audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such 2008 and 2007 consolidated financial statements present fairly, in all material respects, the financial position of Zapata Corporation and subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2008, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 4, 2009 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

Deloitte & Touche LLP

 

Rochester, New York

March 4, 2009

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders

of Zapata Corporation:

 

In our opinion, the consolidated statements of operations, shareholders’ equity and cash flows for the year ended December 31, 2006 present fairly, in all material respects, the results of operations and cash flows of Zapata Corporation and its subsidiaries for the year ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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 12 Qualified Defined Benefit Plans to the consolidated financial statements 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.

 

PricewaterhouseCoopers LLP

 

Rochester, New York

March 13, 2007

ZAPATA CORPORATION

 

CONSOLIDATED BALANCE SHEETS

 

 

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

ZAPATA CORPORATION

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

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

ZAPATA CORPORATION

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

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

ZAPATA CORPORATION

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

 

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

ZAPATA CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Zapata Corporation (“Zapata” or “the Company”) is a holding company which has approximately $154.7 million in consolidated cash and cash equivalents and short-term investments at December 31, 2008 and currently owns 98% of Zap.Com Corporation (“Zap.Com”). In December 2006, the Company completed the disposition of its 57% ownership interest in Omega Protein Corporation (“Omega Protein” or “Omega”) common stock.

 

Zap.com is a public shell company that does not have any existing business operations other than complying with its reporting requirements under the Exchange Act. Zap.Com is searching for assets or businesses that it can acquire so that it can become an operating company and may also consider developing a new business suitable for its situation. Zap.Com trades on the over-the-counter electronic bulletin board under the symbol “ZPCM.”

 

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

 

 

Consolidation

 

The consolidated financial statements include Zapata and its wholly and majority-owned subsidiaries (collectively, “Zapata” or the “Company”). Consolidated financial statements are financial statements of a parent company and its subsidiaries presented as if the entities were a single economic unit. Although the assets, liabilities, revenues, and expenses of all entities are combined to provide a single set of financial statements, certain eliminations and adjustments are made. These eliminations are necessary to ensure that only arm’s-length transactions between independent parties are reflected in the consolidated statements. In addition, when the parent company consolidates non-wholly owned subsidiaries, minority interest on the consolidated balance sheets and statements of operations represents the minority stockholders’ (those other than the parent company) interest in the net assets and net income of such subsidiaries.

 

Cash and Cash Equivalents

 

The Company invests certain of its excess cash in government instruments. All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. The recorded amounts for cash equivalents approximate fair market value due to the short-term nature of these financial instruments.

 

Investments

 

The Company may purchase investments in U.S. Government Agency or Treasury securities with maturities greater than three months. As the Company has both the intent and the ability to hold these securities to maturity, they are considered held-to-maturity investments. Investments are recorded at original cost plus accrued interest.

 

Income Taxes

 

Zapata’s consolidated U.S. federal income tax return includes subsidiaries in which Zapata owns in excess of 80% of the voting interests. Accordingly, Zap.Com is included in Zapata’s consolidated U.S. federal income tax return.

 

The Company utilizes the liability method to account for income taxes. This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of existing temporary differences between the financial reporting and tax reporting basis of assets and liabilities, and operating loss and tax credit carry-forwards for tax purposes. Valuation allowances are recognized to reduce deferred tax assets to an amount that is more likely than not to be realized.

 

ZAPATA CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The Company also applies the provisions of the Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”) which establishes a single model to address accounting for uncertain tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Accrued interest expense and penalties related to unrecognized tax benefits are recorded as a component of provision for income taxes.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principals generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Due to the inherent uncertainty involved in making estimates, actual results in future periods could differ from these estimates.

 

Concentrations of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk include the Company’s cash, cash equivalents and short-term investments. These funds are currently concentrated among three financial institutions; however, the majority of the Company’s funds are invested in U.S. Government Treasuries which are fully insured by the U.S. Government against risk of loss.

 

 

During the fourth quarter of fiscal 2006, Zapata sold all of its Omega Protein 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, whereby Omega repurchased 9,268,292 Omega shares held by Zapata at a price of $5.125 per share, or $47.5 million in the aggregate. 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 whereby 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. 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 these transactions. As used throughout this document, all amounts and disclosures related to Omega have been classified as “Discontinued Operations.”

 

In connection with the sale to a group of institutional investors of its remaining Omega shares, Zapata agreed, subject to certain conditions and obligations of Omega and generally for a period of two years from the December 2006 closing date, to reimburse Omega for liquidated damages that they may have been required to pay to the purchasers if Omega failed to continuously maintain a registration statement as effective as specified in the agreement. See Note 3 “Discontinued Operations — Omega Protein” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 for further description of this agreement. As of December 31, 2008 and 2007, no liabilities have been recorded for these liquidated damages. Zapata believes that its obligation under this agreement has been completed.

 

Operating results of discontinued operations are as follows: