SPB

SEC Filing Summary: Zapata Corporation (10-Q)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2008, for Zapata Corporation (ZAP). Zapata is a holding company with no active operating business, having sold its remaining operating subsidiary (Omega Protein) in December 2006. The company currently owns 98% of Zap.Com Corporation, a public shell company. Zapata's primary activity involves managing a portfolio of cash, cash equivalents, and short-term investments while searching for acquisition candidates.

Key Financial Metrics

Material Changes vs. Prior Period

• Net Income Decline: For the nine months ended September 30, 2008, net income was $444,000, a significant decrease from $1.642 million in the same period of 2007. The three-month period ended September 30, 2008, resulted in a net loss of $188,000 compared to net income of $490,000 in the prior year quarter.
• Interest Income Reduction: Interest income dropped approximately $3.0 million for the nine-month period (from $5.9 million in 2007 to $2.8 million in 2008). This was driven by lower interest rates and a strategic shift in July 2008 where the company liquidated U.S. Government agency securities to purchase U.S. Treasury securities to preserve principal. This liquidation resulted in a realized loss of approximately $90,000.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses decreased slightly to $2.409 million for the nine months ended September 30, 2008, down from $2.536 million in the prior year, primarily due to reduced professional fees.
• Tax Provision: The company recorded a tax provision of $59,000 for the nine months of 2008, compared to $1.775 million in 2007, largely due to lower taxable interest income.

Outlook, Risks, and Contingencies

• Acquisition Strategy: Zapata continues to search for a merger or acquisition candidate. However, management notes that competitive market pressures and limited funds compared to competitors have prevented a transaction to date. There is no assurance that a transaction will occur.
• Liquidity: The company holds approximately $154.7 million in liquid assets. Management believes these funds are adequate to cover operational requirements for at least the next twelve months. However, access to additional capital may be constrained by the global financial crisis.
• Legal Proceedings:
  • Utica Mutual: A dormant lawsuit seeking approximately $760,000 in indemnity has resumed discovery. The company intends to vigorously defend the claim based on staleness and the sale of the relevant subsidiaries prior to the alleged bond issuances. No liability has been recorded.
  • Environmental: A claim from Weatherford International for approximately $200,000 regarding environmental cleanup at former properties is being contested. The company has accrued $100,000 as a reserve but believes it has meritorious defenses.
• Pension Plan: The company's defined benefit pension plan is frozen. While no contributions were planned for 2008, deteriorating market conditions may require contributions in 2009.

Investor Verification Checklist

• Verify the current status of the Utica Mutual litigation and any potential impact on the $760,000 claim.
• Confirm the yield on the current portfolio of U.S. Treasury securities versus the previous agency securities to assess future interest income projections.
• Monitor the company's progress in identifying acquisition targets, given the stated difficulty in the current credit market.
• Review the $100,000 environmental reserve to ensure it remains sufficient against potential Weatherford claims.
• Check for any updates on the potential 2009 pension plan funding requirements due to market volatility.