|HRG GROUP, INC. filed this Form 10-Q on 08/14/2002|
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Inventory is stated at the lower of cost or market. Omega Proteins 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 Proteins 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 Proteins 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 Proteins lower-of-cost-or-market-value analyses at year-end and at interim periods compare the total estimated per unit production cost of Omegas 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 Omegas infrastructure. These costs accumulate in inventory and are applied as elements of the cost of production of Omega Proteins products throughout the fishing season ratably based on Omegas monthly fish catch and the expected total fish catch for the season.
As mentioned previously, Omega Protein carries insurance for certain losses relating to its vessels and Jones Act liabilities for employees aboard its vessels (collectively, Vessel Claims Insurance). The typical Vessel Claims Insurance policy contains an annual aggregate deductible (AAD) for which Omega remains responsible, while the insurance carrier is responsible for all applicable amounts which exceed the AAD. Omega Protein provides reserves for those portions of the AAD for which Omega remains responsible by using an estimation process that considers Omega Protein, Inc. specific and industry data as well as Omega Protein managements experience assumptions and consultation with outside counsel. Omega Protein managements current estimated range of liabilities related to such cases is based on claims for which Omegas management can estimate the amount and range of loss. Omega Protein has recorded the minimum estimated liability related to those claims, where there is a range of loss. As additional information becomes available, Omega will assess the potential liability related to its pending litigation and revise its estimates. Such revisions in estimates of the potential liability could materially impact Omega Proteins results of operation and financial position.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Companys investment policy is designed to continue to meet Zapatas liquidity needs by purchasing investment grade securities.
Zapatas investment grade securities include obligations of the U.S. Government or agencies thereof guaranteed by the U.S. Government, certificates of deposit and money market deposits. In addition, Omega Protein holds commercial paper with a rating of A-2 or P-2.
As of June 30, 2002, Zapata held $87.5 million in investment grade securities. Changes in interest rates affect the investment income the Company earns on its investment grade securities and, therefore, impacts its cash flows and results of operations. Due to the short duration and conservative nature of these instruments, the Company does not believe that the value of these instruments have a material exposure to interest rate risk.
In the normal course of business, the financial condition of the Company is exposed to minimal market risk associated with interest rate movements on Omega Proteins borrowings. A one percent increase or decrease in the levels of interest rates on variable rate debt would not result in a material change to the Companys results of operations.
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