implementation issues. This statement requires that those long-lived assets be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. This
statement is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Company's adoption of the provisions of
SFAS No. 144 on January 1, 2002 did not have a material impact on the Company's
financial position or its results of operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of Zapata's financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles 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 estimates that require management's most difficult, subjective or
complex judgments are described below. We believe that the critical judgments
impacting the financial statements include:
- Litigation reserves,
- Valuation allowances for deferred income taxes,
- Benefit plan components,
- Omega's deferral of off-season costs,
- Omega's lower-of-cost-or-market inventory analysis, and
- Omega's accounting for self-insurance retentions.
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.
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.
On a consolidated basis, the Company has three 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.
Inventory is stated at the lower of cost or market. Omega Protein's fishing
season runs from mid-April to the first of November in the Gulf of Mexico and
from the beginning of May into December in the Atlantic. Government regulations
preclude Omega Protein from fishing during the off-seasons.
Omega Protein's inventory cost system considers all costs associated with an
annual fish catch and its processing, both variable and fixed and including both
costs incurred during the off-season and during the fishing season. Omega
Protein's costing system allocates cost to inventory quantities on a per unit
basis as calculated by a formula that considers total estimated inventoriable
costs for a fishing season (including off-season costs) to total estimated fish
catch and the relative fair market value of the individual products produced.
Omega Protein adjusts the cost of sales, off-season costs and inventory balances
at the end of each quarter based on revised estimates of total inventoriable
costs and fish catch. Omega Protein's lower-of-cost-or-market-value analyses at
year-end and at interim periods compare the total estimated per unit production
cost of Omega's expected production to the projected per unit market prices of
the products. The impairment analyses involve estimates of, among other things,
future fish catches and related costs, and expected commodity prices for the
fish products. These estimates, which management believes are reasonable and
supportable, involve estimates of future activities and events which are
inherently imprecise and for which actual results may differ.
During the off-seasons, in connection with the upcoming fishing seasons, Omega
Protein incurs costs (i.e., plant and vessel related labor, utilities, rent and
depreciation) that are directly related to Omega's infrastructure. These costs
accumulate in inventory and are applied as elements of the cost of production of
Omega Protein's products