UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number : 333-112111
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Zhongpin Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 54-2100419
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
21 Changshe Road, Changge City, Henan Province, The People's Republic of China
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(Address of principal executive offices) (Zip Code)
011 86 374-6216633
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
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 ninety (90) days. YES _X_ NO ___
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer ___ Accelerate filer ___ Non-accelerated filer _X_
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES___ NO _X_
As of May 1, 2006, 11,752,568 shares of the registrant's common stock, and
6,900,000 shares of the registrant's Series A preferred stock, each such share
convertible into one share of the registrant's common stock, were outstanding.
ZHONGPIN INC.
FORM 10-Q
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Unaudited Financial Statements:
Consolidated Balance Sheets as of March 31, 2006 (unaudited)
and December 31, 2005 ....................................................... 4
Consolidated Statements of Operations and Comprehensive Income (unaudited)
for the three months ended March 31, 2006 and 2005 .......................... 5
Consolidated Statement of Changes in Stockholders' Equity for the
three months ended March 31, 2006 (unaudited) ............................... 6
Consolidated Statements of Cash Flows (unaudited) for the three months
ended March 31, 2006 and 2005 ............................................... 7
Notes to Consolidated Financial Statements (unaudited) ........................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................... 23
Item 4. Controls and Procedures .......................................................... 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................................................ 25
Item 1A. Risk Factors ..................................................................... 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...................... 25
Item 3. Defaults Upon Senior Securities .................................................. 25
Item 4. Submission of Matters to a Vote of Security Holders .............................. 25
Item 5. Other Information ................................................................ 25
Item 6. Exhibits ......................................................................... 25
SIGNATURES ............................................................................................. 26
i
ZHONGPIN INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated balance sheets, statements of
operations and comprehensive income, of changes in stockholders' equity, and of
cash flows and related notes thereto, have been prepared in accordance with
generally accepted accounting principles ("GAAP") for interim financial
information and in conjunction with the rules and regulations of the Securities
and Exchange Commission ("SEC"). Accordingly, they do not include all of the
disclosures required by GAAP for complete financial statements. The financial
statements reflect all adjustments consisting only of normal, recurring
adjustments, which are, in the opinion of management, necessary for a fair
presentation for the interim periods.
The aforementioned financial statements should be read in conjunction
with the notes to the aforementioned financial statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K, as amended, for the transition period from June 30, 2005 to
December 31, 2005.
The results of operations for the three month periods ended March 31,
2006 are not necessarily indicative of the results to be expected for the entire
fiscal year or any other period.
ZHONGPIN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
MARCH 31 2006 DECEMBER 31 2005
ASSETS
Current assets
Cash and cash equivalents $ 17,885,950 $ 10,142,394
Accounts receivable and other receivables 15,181,701 10,002,918
Purchase deposits 142,279 220,836
Prepaid expenses and deferred charges 94,364 99,009
Inventories 4,712,066 2,347,312
Tax refund receivables 151,329 644,232
Total current assets 38,167,690 23,456,701
-----------------------------------
Property, plant and equipment(net) 10,277,015 10,212,848
Related party receivables 269,427 267,658
Other receivable 653,232 632,063
Construction contracts 20,657,103 16,931,178
Intangible assets 1,754,697 1,753,124
-----------------------------------
Total assets $ 71,779,164 $ 53,253,572
===================================
LIABILITIES AND EQUITY
Current liabilities
Bank overdraft $ - $ 619,579
Accounts payable and other payables 7,160,488 10,278,464
Accrued liabilities 116,018 759,420
Short term loans payable 15,093,781 18,995,853
Taxes payable 2,174,462 2,055,925
Deposits from clients 849,034 769,398
Research and development grants payable 2,451,261 2,436,804
Long term loans payable-current portion 146,657 145,671
Payroll payable 211,526 0
Welfare payable 544,720 0
Total current liabilities 28,747,947 36,061,114
-----------------------------------
Long term loans payable 2,265,670 2,264,448
Total liabilities 31,013,617 38,325,562
-----------------------------------
Minority interest 422,462 411,742
Equity
Preferred stock par value $0.001;10,000,000 authorized; 6,900,000 shares issued
and outstanding 6,900 0
Common stock par value $0.001; 25,000,000 authorized; 11,752,578 shares issued
and outstanding 11,753 11,753
Additional paid in capital 25,206,736 2,102,933
Retained earnings 14,672,798 12,097,834
Accumulated other comprehensive income 444,898 303,748
Total equity 40,343,085 14,516,268
-----------------------------------
Total liabilities and equity $ 71,779,164 $ 53,253,572
===================================
The accompanying notes are an integral part of these consolidated
financial statements.
2
ZHONGPIN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(AMOUNTS IN U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2006 MARCH 31, 2005
Revenues
Sales revenues $30,493,507 $ 14,405,129
Cost of sales 25,914,155 11,808,779
Gross profit 4,579,352 2,596,350
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Operating expenses
General and administrative expenses 899,024 223,649
Operating expenses 804,146 365,359
Total operating expenses 1,703,170 589,008
Income from operations 2,876,182 2,007,342
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Other income (expense)
Interest income 95,690 48,905
Other income 12,392 14,674
Allowances income 113,184 38,647
Exchange gain 13,709 (11,173)
Interest expense (380,228) -349,750
Total other income (expense) (145,253) (258,697)
-----------------------------------------------------------
Net income before taxes 2,730,929 1,748,645
Provision for income taxes 145,245 -
Net income after taxes 2,585,684 1,748,645
Minority interest 10,720 12,254
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Net income 2,574,964 1,736,391
===========================================================
Foreign currency translation adjustment 141,150 -
-----------------------------------------------------------
Comprehensive income $ 2,716,114 $ 1,736,391
===========================================================
Basic earnings per common share $ 0.14 $ 0.09
Diluted earnings per common share $ 0.12 $ 0.08
Basic weighted average shares outstanding 18,652,578 18,652,578
Diluted weighted average shares outstanding 22,102,578 22,102,578
The accompanying notes are an integral part of these consolidated
financial statements.
3
ZHONGPIN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Amounts in U.S. dollars) (unaudited)
Preferred Stock Common Stock
Shares Par value Shares Par value
--------- --------- ------------ -----------
Balance at January 1, 2003 - $ - 1 $ 1,816,425
Net income for the year - -
Dividends paid - - - -
--------- -------- ------------ -----------
Balance December 31, 2003 - - 1 1,816,425
Net income for the year - - - -
--------- -------- ------------ -----------
Balance December 31, 2004 - - 1 1,816,425
Merger on May 20, 2005 - - - 115,942
Recapitalization on September 15, 2005 - - 9,999 (1,922,367)
Net income for the year
Foreign currency translation adjustment - - - -
--------- -------- ------------ -----------
Balance December 31, 2005 - - 10,000 10,000
Items applied retroactively:
Recapitalization on January 30, 2006 415,432,354 405,442
Reverse stock split on February 16, 2006 (1:35.349) - - (403,689,776) (403,689)
--------- -------- ------------ -----------
Restated December 31, 2005 - $ - 11,752,578 $ 11,753
Increase in Preferred Stock on January 31, 2006 6,900,000 6,900
Net income for the period
Increase in additional paid in capital on
January 31, 2006
Foreign currency translation adjustment
---------------------------------------------------------------------
Balance March 31, 2006 6,900,000 $ 6,900 11,752,578 $ 11,753
=====================================================================
Accumulated
Additional Other
Paid In Retained Comprehensive
Capital Earnings Income Total
------------- ------------- ------------- -------------
Balance at January 1, 2003 $ 182,319 $ 1,935,634 $ - $ 3,934,378
Net income for the year - 1,536,272 1,536,272
Dividends paid - (56,392) - (56,392)
------------- ------------- ---------- -------------
Balance December 31, 2003 182,319 3,415,514 - 5,414,258
Net income for the year - 2,768,473 - 2,768,473
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Balance December 31, 2004 182,319 6,183,987 - 8,182,731
Merger on May 20, 2005 115,942
Recapitalization on September 15, 2005 1,922,367 -
Net income for the year 5,913,847 5,913,847
Foreign currency translation adjustment - - 303,748 303,748
------------- ------------- ---------- -------------
Balance December 31, 2005 2,104,686 12,097,834 303,748 14,516,268
Items applied retroactively:
Recapitalization on January 30, 2006 (405,442) -
Reverse stock split on February 16, 2006 (1:35.349) 403,689 - - -
------------- ------------- ---------- -------------
Restated December 31, 2005 $ 2,102,933 $ 12,097,834 $ 303,748 $ 14,516,268
Increase in Preferred Stock on January 31, 2006 $ 23,110,703
Net income for the period 23,103,803 2,574,964 2,574,964
Foreign currency translation adjustment 141,150 141,150
-----------------------------------------------------------------------------
Balance March 31, 2006 $ 25,206,736 $ 14,672,798 $ 444,898 $ 40,343,085
=============================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
4
ZHONGPIN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN U.S. DOLLARS) (UNAUDITED)
Three months ended March 31,
-----------------------------------
2006 2005
---- ----
Cash flows from operating activities:
Net income $ 2,574,964 $ 1,736,391
Adjustments to reconcile net income to net cash
provided by (used in) operations:
Minority interest 10,720 12,254
Depreciation 145,734 142,562
Amortization 10,017 9,363
Changes in operating assets and liabilities:
Accounts receivable and other receivables (5,180,997) (1,676,904)
Purchase deposits 78,557 (22,872)
Prepaid expense and deferred charges 4,645 (104,612)
Inventories (2,364,754) (4,577)
Tax refunds receivable 492,903
Accounts payable and accrued liabilities 1,084,766 450,322
Taxes payable 118,537 180,057
Deposits from clients 79,636 258,393
------------ ------------
Net cash provided by (used in) operating activities (2,945,272) 980,377
Cash flows from investing activities:
Construction in progress (3,725,926) 21,183
Additions to fixed assets (236,210) (337,974)
------------ ------------
Net cash used in investing activities (3,962,136) (316,791)
Cash flows from financing activities:
Repayment of bank overdraft (619,579) -
Proceeds from short-term loans - 3,164,632
Repayment of short-term loans (7,976,527)
Proceeds from preferred stock, net of costs of issuance of
$4,489,297 23,110,703
Payments of dividends -
------------ ------------
Net cash provided by financing activities 14,514,597 3,164,632
Effect of rate changes on cash 136,367 -
------------ ------------
Increase in cash and cash equivalents 7,743,556 3,828,218
Cash and cash equivalents, beginning of period 10,142,394 5,204,637
------------ ------------
Cash and cash equivalents, end of period $ 17,885,950 $ 9,032,855
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 352,002 $ 349,750
============ ============
Cash paid for income taxes $ 186,567 $ -
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
5
ZHONGPIN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Zhongpin Inc. ("Zhongpin") was incorporated on February 4, 2003 as Strong
Technical Inc. in the State of Delaware for the purpose of operating a personnel
outsourcing service, providing skilled workers to industry. On March 30, 2005,
an 82.4% controlling interest in Zhongpin was acquired by Halter Capital
Corporation and all previous operations were discontinued. On January 30, 2006,
Zhongpin acquired Falcon Link Investment Limited ("Falcon") in a stock exchange
by issuing 397,676,704 (11,250,000 post-split) shares of its common stock in
exchange for all of the issued and outstanding stock of Falcon. The reverse
acquisition transaction was accounted for as a reverse acquisition resulting in
the recapitalization of Falcon. Accordingly, the historical financial statements
of Falcon have been retroactively restated to give effect to the
recapitalization as if it had occurred at the beginning of the first period
presented. Hereafter Zhongpin and its subsidiaries are collectively referred to
as the "Company."
Falcon was incorporated in the Territory of the British Virgin Islands ("BVI")
on July 21, 2005 as a holding company for the purpose of owning all of the
equity interests of Henan Zhongpin Food Co., Ltd. ("HZFC"), a People's Republic
of China ("PRC") company. Falcon acquired 100% ownership of HZFC by issuing
10,000 shares of its $1.00 par value common stock in exchange for the
outstanding shares of HZFC. The transaction was accounted for as a
recapitalization.
HZFC was established in the PRC on May 20, 2005 for the sole purpose of holding
Henan Zhongpin Food Share Company Limited and its subsidiaries ("Food Share").
The owners of Food Share formed HZFC by investing 16,000,000 Renminbi ("RMB").
HZFC acquired Food Share by paying 15,040,000 RMB to the holders of Food Share,
who were also the holders of HZFC, in exchange for 100% ownership of Food Share.
The transaction was accounted for as a transfer of entities under common
control, wherein Food Share is the continuing entity with an increase in
registered capital of 960,000 RMB. The historical financial statements of HZFC
are essentially those of Food Share shown with an increase in capital as if the
transfer had taken place at the beginning of the period.
Food Share is incorporated in the PRC. It is headquartered in Henan Province and
its corporate office is in Changge City. The Company is principally engaged in
the production of pork, pork products and vegetables, and the retail sales of
pork, processed pork products, vegetables and other grocery items to customers
throughout the PRC and other export countries, either directly or through its
subsidiaries.
On January 30, 2006, the Company consummated an agreement with the shareholders
of Falcon whereby the Company issued 397,676,704 (11,250,000 post-split) shares
of its common stock in exchange for all of the issued and outstanding stock of
Falcon. Immediately prior to the transaction there were 17,765,650 (502,578
post-split) shares outstanding as compared to 415,442,354 (11,752,578
post-split) shares outstanding immediately following the transaction.
Consequently, Falcon became a wholly-owned subsidiary of the Company.
In conjunction with the acquisition of Falcon, on January 31, 2006 the Company
sold, at $8.00 per unit, 3.45 million units, each consisting of two shares of
Series A Convertible Preferred Stock and a five year warrant to purchase an
additional 35.349 (1 post-split) common shares at a purchase price of $0.1414467
($5.00 post split) per share. Each preferred share is convertible into 35.349 (1
post-split) common shares. Total conversion rights were issued for 243,908,100
(6,900,000 post-split) common shares and total warrants were issued for
121,954,050 (3,450,000 post-split) common shares.
6
ZHONGPIN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS (continued)
On February 16, 2006, the Company amended its articles of incorporation to
change its name from Strong Technical, Inc. to Zhongpin Inc. In the same
amendment, the Company changed its authorized common stock to 25,000,000 shares
with par value of $0.001 and its authorized preferred stock to 10,000,000 shares
with par value of $0.001.
On February 16, 2006, the Company effected a 1:35.349 reverse split on its
outstanding common stock. Immediately prior to the split, 415,442,354 common
shares were outstanding as compared to 11,752,578 common shares outstanding
immediately following the split. Outstanding conversion rights on Series A
Convertible Preferred Stock were reduced from 243,908,100 common shares to
6,900,000 common shares, and outstanding warrants were reduced from 121,954,050
common shares to 3,450,000 common shares, exercisable at $5.00 per share.
Details of Food Share's subsidiaries are as follows:
DOMICILE AND DATE REGISTERED PERCENTAGE
NAME OF INCORPORATION CAPITAL OF OWNERSHIP
- --------------------------------------------------------------------------------------------------------------
Henan Zhongpin Industrial Company Limited PRC Jan. 17, 2004 18,000,000 RMB 88.00%
Henan Zhongpin Import and Export Trading Company PRC Aug. 11, 2004 5,060,000 RMB 88.93%
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Zhongpin Inc.
(formerly Strong Technical, Inc.), Falcon Link Investment Limited, Henan
Zhongpin Food Co., Ltd., Henan Zhongpin Food Share Company Limited, Henan
Zhongpin Industrial Company Limited and Henan Zhongpin Import and Export Trading
Company. All material intercompany accounts and transactions have been
eliminated in consolidation.
The consolidated financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities as of the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. U.S. GAAP differs from that used in the statutory
financial statements of the PRC subsidiaries, which were prepared in accordance
with the relevant accounting principles and financial reporting regulations as
established by the Ministry of Finance of the PRC. Certain accounting principles
stipulated under U.S. GAAP are not applicable in the PRC.
The RMB of the People's Republic of China has been determined to be the
functional currency of the Company. The balance sheets of the Company and its
subsidiaries were translated at year end or end of period exchange rates.
Expenses were translated at moving average exchange rates in effect during the
year. The effects of rate changes on assets and liabilities are recorded as
accumulated other comprehensive income.
7
ZHONGPIN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FISCAL YEAR
These financial statements have been prepared using December 31 as the fiscal
year end.
MINORITY INTEREST IN SUBSIDIARIES
The Company records minority interest expense, which reflects the minority
shareholders' portion of the earnings of Henan Zhongpin Industrial Company
Limited and Henan Zhongpin Import and Export Trading Company. During 2005, Henan
Zhongpin Industrial Company Limited increased its registered capital from
5,000,000 RMB to 18,000,000 RMB, which required the minority holders to increase
their investment by 1,560,000 RMB, effectively increasing the minority interest
shown on the Company's balance sheet by $188,406.
RESTRICTIONS ON TRANSFER OF ASSETS OUT OF THE PRC
Dividend payments by HZFC are limited by certain statutory regulations in the
PRC. No dividends may be paid by HZFC without first receiving prior approval
from the Foreign Currency Exchange Management Bureau. Dividend payments are
restricted to 85% of profits, after tax.
CONTROL BY PRINCIPAL STOCKHOLDERS
The directors, executive officers and their affiliates or related parties own,
beneficially and in the aggregate, the majority of the voting power of the
outstanding shares of the common stock of the Company. Accordingly, the
directors, executive officers and their affiliates, if they voted their shares
uniformly, would have the ability to control the approval of most corporate
actions, including increasing the authorized capital stock of the Company and
the dissolution, merger or sale of the Company's assets.
START-UP COSTS
The Company, in accordance with the provisions of the American Institute of
Certified Public Accountants' Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-up Activities," expenses all start-up and organizational
costs as they are incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
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 reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
SIGNIFICANT ESTIMATES
Several areas require significant management estimates relating to uncertainties
for which it is reasonably possible that there will be a material change in the
near term. The more significant areas requiring the use of management estimates
related to the valuation of receivables, equipment and accrued liabilities, and
the useful lives for amortization and depreciation.
8
ZHONGPIN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at cost, net of allowance for doubtful accounts.
Based on the Company's experience and current practice in the PRC, management
provides for an allowance for doubtful accounts equivalent to those accounts
that are not collected within one year plus 5% of receivables less than one year
old.
INVENTORIES
Inventories are stated at the lower of cost, determined on a weighted average
basis, and net realizable value. Work-in-progress and finished goods are
composed of direct material, direct labor and an attributable portion of
manufacturing overhead. Net realizable value is the estimated selling price, in
the ordinary course of business, less estimated costs to complete and dispose.
LAND USE RIGHTS
The Company adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), effective January 1, 2002. Under SFAS 142,
goodwill and indefinite lived intangible assets are not amortized, but are
reviewed annually for impairment, or more frequently, if indications of possible
impairment exist. The Company has performed the requisite annual transitional
impairment tests on intangible assets and determined that no impairment
adjustments were necessary.
REVENUE RECOGNITION
The Company recognizes revenue on the sales of its products as earned when the
customer takes delivery of the product according to previously agreed upon
pricing and delivery arrangements, and when the Company believes that
collectibility is reasonably assured. The Company primarily sells perishable and
frozen food products. As such, any right of return is limited to only a few days
and has been determined to be insignificant by management. Accordingly, no
provision has been made for returnable goods.
EARNINGS PER SHARE
Basic earnings per common share ("EPS") are calculated by dividing net income by
the weighted average number of common shares outstanding during the year as if
conversion rights attached to preferred stock had been converted. Diluted EPS is
calculated by adjusting the weighted average outstanding shares, assuming
conversion of all potentially dilutive securities, such as stock options and
warrants.
The numerators and denominators used in the computations of basic and diluted
EPS are presented in the following table:
March 31, 2006 March 31, 2005
-------------- --------------
NUMERATOR FOR BASIC AND DILUTED EPS
Net income to common stockholders $ 2,574,964 $ 1,736,391
=========== ============
DENOMINATORS FOR BASIC AND DILUTED EPS
Common stock outstanding after recapitalization and
1:35.349 reverse stock split 11,752,578 11,752,578
Add: Series A Preferred conversion rights 6,900,000 6,900,000
----------- ------------
DENOMINATOR FOR BASIC EPS 18,652,578 18,652,578
=========== ============
Add: Outstanding stock warrants 3,450,000 3,450,000
----------- ------------
DENOMINATOR FOR DILUTED EPS 22,102,578 22,102,578
=========== ============
EPS - Basic $ 0.14 $ 0.09
----------- ------------
EPS - Diluted $ 0.12 $ 0.08
----------- ------------
The Company had no potentially dilutive securities outstanding at December 31,
2006 and 2005. However, in conjunction with the retrospective recapitalization
on January 30, 2006, the Company issued 6,900,000 shares of Series A Convertible
Preferred stock. The stock is convertible one for one to common stock and is
participating stock. The preferred stock subscribers also received warrants to
purchase one share of common stock at $5.00 per share for every two shares of
preferred stock received. Since these issuances were incident to the
recapitalization, their effects are also retroactively restated in computing
EPS.
PROPERTY AND EQUIPMENT
Impairment of long-lived assets is recognized when events or changes in
circumstances indicate that the carrying amount of the asset, or related groups
of assets, may not be recoverable. Under the provisions of SFAS No. 144,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company recognizes an "impairment charge" when the expected
net undiscounted future cash flows from an asset's use and eventual disposition
are less than the asset's carrying value and the asset's carrying value exceeds
its fair value. Measurement of fair value for an asset or group of assets may be
based on appraisal, market values of similar assets or estimated discounted
future cash flows resulting from the use and ultimate disposition of the asset
or assets.
Expenditures for maintenance, repairs and betterments, which do not materially
extend the normal useful life of an asset, are charged to operations as
incurred. Upon sale or other disposition of assets, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is reflected in income.
Depreciation and amortization are provided for financial reporting purposes
primarily on the straight-line method over the estimated useful lives ranging
from 5 to 50 years.
OPERATING LEASES
Operating leases represent those leases under which substantially all the risks
and rewards of ownership of the leased assets remain with the lessors. Rental
payments under operating leases are charged to expense on the straight-line
basis over the period of the relevant leases.
9
ZHONGPIN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
Income tax expense is based on reported income before income taxes. Deferred
income taxes reflect the effect of temporary differences between assets and
liabilities that are recognized for financial reporting purposes and the amounts
that are recognized for income tax purposes. In accordance with Statement of
Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes,"
these deferred taxes are measured by applying currently enacted tax laws. The
Company recorded income tax expenses of $145,245 and $0 for the first quarter of
2006 and 2005.
The Company withholds and pays income taxes on its employees' wages, which fund
the Chinese government's sponsored health and retirement programs of all Company
employees. For such employees, the Company was obligated to make contributions
to the social insurance bureau under the laws of the PRC for pension and
retirement benefits.
3. BUSINESS ACQUISITIONS
Food Share started Henan Zhongpin Import and Export Trading Company on August
11, 2004 as a joint venture with Li Jun Wei, an individual, to facilitate the
exporting of the Company's goods. The Company owns 88.93% of Henan Zhongpin
Import and Export Trading Company.
4. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
The Company accrued an allowance for bad debts related to its receivables. The
receivable and allowance balances at March 31, 2006 and December 31, 2005 are as
follows:
March 31, 2006 December 31, 2005
Accounts receivable $ 12,170,982 $ 10,278,464
Other receivables 5,391,914 2,013,757
Allowances receivable -- --
Allowance for bad debts (1,727,963) (1,716,614)
------------ -------------
$ 15,834,933 $ 10,634,981
============ =============
5. INVENTORIES
Inventories consisted of:
March 31, December 31,
2006 2005
---------- ----------
Raw materials $ 281,784 $ 210,288
Low value consumables and packaging 147,000
Work-in-progress 167,626 290,149
Finished goods 4,262,656 1,699,875
Provision for loss of pricing -- --
---------- ----------
Net inventories $4,712,066 $2,347,312
========== ==========
10
ZHONGPIN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost consisted of:
March 31, 2006 December 31, 2005
-------------- -----------------
Machinery and equipment $ 6,832,887 $ 6,832,887
Furniture and office equipment 253,187 253,187
Motor vehicles 281,371 281,371
Buildings 5,320,938 5,084,728
------------ ------------
Subtotal 12,688,383 12,452,173
Less: accumulated depreciation (2,411,368) (2,239,325)
------------ ------------
Net property and equipment $ 10,277,015 $ 10,212,848
============ ============
Depreciation expense $ 145,734 $ 602,008
============ ============
7. INTANGIBLE ASSETS
Intangible assets consisted of the following:
March 31, December 31,
2006 2005
----------- -----------
Land use rights $ 1,842,510 $ 1,840,937
Accumulated amortization (87,813) (87,813)
----------- -----------
$ 1,754,697 $ 1,753,124
=========== ===========
Amortization expense $ 10,017 $ 37,431
=========== ===========
8. RELATED PARTY RECEIVABLES
Related party receivables consist of advances made by the Company to the
minority interest holders of Henan Zhongpin Industrial Company Limited for their
investment in the registered capital of that entity. The advances are
non-interest bearing and have no fixed repayment terms. Consequently, they are
classified as non-current assets.
9. CONSTRUCTION IN PROGRESS
Construction in progress consisted of:
11
ZHONGPIN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. CONSTRUCTION IN PROGRESS (continued)
March 31, December 31,
Construction in Progress Completed on 2006 2005
- ------------------------------ -------------- ----------- ------------
Sewage Construction October 2004 $ -- $ --
Industrial Plant February 2006 16,931,178 16,931,178
Frozen machinery and store room March 2005 -- --
Production line for chilled pork January 2007 3,725,925
----------- -----------
$20,657,103 $16,931,178
=========== ===========
10. LOANS PAYABLE
SHORT-TERM LOANS
Short-term loans are due within one year. These loans are partially secured by
the land and plant of Food Share. These loans bear interest at prevailing
lending rates in the PRC ranging from 3.0% to 9.4% per annum.
LONG-TERM LOANS
A long-term loan is outstanding and bears an interest rate 6.0% per annum.
10. LOANS PAYABLE
The balances of loans payable were as follows:
March 31, December 31,
2006 2005
----------- -----------
Short Term Loans Payable $15,093,781 $18,995,853
Long Term Loans Payable 2,265,670 2,410,119
----------- -----------
$17,359,451 $21,405,972
=========== ===========
Long Term Repayment Schedule
- -------------------------------------------------
Payments due in 2006 $ 146,657
Payments due in 2007 146,657
Payments due in 2008 146,657
Payments due in 2009 146,657
Payments due in 2010 146,657
Payments due thereafter 1,679,042
----------
2,412,327
Less current portion (146,657)
----------
Long term debt $2,265,670
==========
12
ZHONGPIN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
From time to time, the Company has disputes that arise in the ordinary course of
its business. Currently, according to management, there are no material legal
proceedings to which the Company is party or to which any of its property is
subject that will have a material adverse effect on the Company's financial
condition.
12. ALLOWANCES INCOME
"Allowances income" consists of grants from the government of the PRC for the
Company's participation in specific programs, such as import and export,
branding, and city maintenance and construction. The Company received allowances
income as follows:
Three months ended Three months ended
March 31, 2006 March 31, 2005
------------------- ------------------
Allowances income $ 113,184 $ 38,647
========= =========
In addition to paying the Company for its participation in ongoing programs, the
PRC government has made a cash grant to the Company specifically to fund
research and development. The Company recorded this grant as a liability titled
"Research & development grants payable" on the balance sheet rather than as
revenue. As qualifying research and development costs are incurred the Company
reduces the liability rather than recording an expense.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS 107") requires entities to disclose the
fair values of financial instruments except when it is not practicable to do so.
Under SFAS No. 107, it is not practicable to make this disclosure when the costs
of formulating the estimated values exceed the benefit when considering how
meaningful the information would be to financial statement users.
As a result of the difficulties presented in the valuation of the loans payable
to related entities/parties because of their related party nature, estimating
the fair value of these financial instruments is not considered practical. The
fair values of all other assets and liabilities do not differ materially from
their carrying amounts. None of the financial instruments held are derivative
financial instruments and none were acquired or held for trading purposes in the
first quarter of 2006 and 2005.
14. NEW ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of
FASB Statements No. 133 and 140". The statement permits fair value remeasurement
for any hybrid financial instrument that contains an embedded derivative that
otherwise would require bifurcation, clarifies which interest-only strips are
not
13
ZHONGPIN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. NEW ACCOUNTING PRONOUNCEMENTS (continued)
subject to the requirements of Statement 133, establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation, clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends Statement 140 to eliminate the prohibition on a
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. The Statement is effective for financial instruments acquired or
issued after the beginning of the first fiscal year that begins after September
15, 2006. The Company expects that the Statement will have no material impact on
its consolidated financial statements.
In February 2006, the FASB issued Staff Position No. FAS 123(R)-4,
"Classification of Options and Similar Instruments Issued as Employee
Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent
Event". This position addresses the classification of options and similar
instruments issued as employee compensation that allow for cash settlement upon
the occurrence of a contingent event, amending paragraphs 32 and A229 of SFAS
No. 123 (revised 2004), "Share-Based Payment". As the Company has not
traditionally paid compensation through the issuance of equity securities, no
impact is expected on its consolidated financial statements.
In October 2005, the FASB issued Staff Position No. FAS 13-1, "Accounting for
Rental Costs Incurred during a Construction Period". This position addresses the
accounting for rental costs associated with operating leases that are incurred
during a construction period. Management believes that this position has no
application to the Company.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS No. 154"), which replaced Accounting Principles Board Opinion
No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements. SFAS No. 154 changes the requirements for the
accounting for and reporting of a change in accounting principles. It requires
retrospective application to prior periods' financial statements of changes in
accounting principles, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. This statement
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The impact on the Company's operations
will depend on future accounting pronouncements or changes in accounting
principles.
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47, "Accounting
for Conditional Asset Retirement Obligations." FIN 47 clarifies that the term
"Conditional Asset Retirement Obligation" as used in FASB Statement No. 143,
"Accounting for Asset Retirement Obligations," refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not be within the
control of the entity. Accordingly, an entity is required to recognize a
liability for the fair value of a Conditional Asset Retirement Obligation if the
fair value of the liability can be reasonably estimated. FIN 47 is effective no
later than the end of fiscal year ending after December 15, 2005. Management
does not believe the adoption of FIN 47 will have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
15. PREFERRED STOCK
The features of the Series A Convertible Preferred Stock are as follows:
14
ZHONGPIN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. PREFERRED STOCK (continued)
Dividends. The holders of the Series A Preferred are entitled to receive, when
and as declared by the Board of Directors, dividends in such amounts as may be
determined by the Board of Directors from time to time out of funds legally
available therefor. No dividends (other than those payable solely in common
stock) will be paid to the holders of common stock until there shall have been
paid or declared and set apart during that fiscal year for the holders of the
Series A Preferred a dividend in an amount per share that the holders would have
got for the shares of common stock issuable upon conversion of their shares of
Series A Preferred. Preference on Liquidation. In the event of merger,
consolidation or sale of all or substantially all of the Company's assets or
other liquidation, holders of the Series A Preferred shall get a priority in
payment over all other classes of stock. In such event, the Series A Preferred
would be entitled to receive the greater of (i) the original purchase price of
the Series A Preferred or (ii) the amount the holder would get if he converted
all of his Series A Preferred into common stock.
Voting. The holder of each share of Series A Preferred (i) shall be entitled to
the number of votes with respect to such share equal to the number of shares of
common stock into which such share of Series A Preferred could be converted on
the record date for the subject vote or written consent (or, if there is no such
record date, then on the date that such vote is taken or consent is effective)
and (ii) shall be entitled to notice of any stockholders' meeting in accordance
with the Company's Bylaws. Appoint and Elect a Director. So long as the number
of shares of common stock issuable upon conversion of the outstanding shares of
Series A Preferred is greater than 10% of the number of outstanding shares of
common stock (on a fully diluted basis), the holders of record of the shares of
Series A Preferred, exclusively and as a separate class, shall be entitled to
elect one of the Company's directors.
Conversion Right. The holder may convert each share of Series A Preferred into
common stock at an initial conversion price of $0.113157 ($4.00 post-split). The
conversion price will be adjusted for stock dividends, stock splits and similar
events.
Automatic Conversion. Each share of Series A Preferred will automatically be
converted into shares of common stock at the conversion price at the time in
effect if (i) the Company has an underwritten public offering of its common
stock giving the Company at least $30 million in net proceeds, (ii)(A) the
closing price of the common stock equals or exceeds $0.2828934 ($10.00
post-split) (as adjusted) for the twenty (20) consecutive-trading-day period
ending within two (2) days of the date on which the Company provides notice of
such conversion as hereinafter provided and (B) either a registration statement
registering for resale the shares of common stock issuable upon conversion of
the Series A Preferred has been declared effective and remains effective and
available for resales for the twenty (20)-day period, or Rule 144(k) is
available for the resale of such shares, or (iii) by consent of at least 67% of
the then-outstanding shares of Series A Preferred.
Protective Provisions. So long as at least 1,750,000 shares of Series A
Preferred are outstanding (subject to adjustment for stock splits, combinations
and the like), the holders of a majority of the outstanding Series A Preferred
shall be required (in addition to any consent or approval otherwise required by
law) for us to take certain actions, including (1) liquidation, dissolution or
wind up, (2) amend, alter or repeal any provision of our certificate of
incorporation so as to affect the rights, preferences or privileges of the
Series A Preferred, (3) create new class of preferred stock or increase the
number of shares of Series A Preferred that can be issued, or (4) purchase or
redeem, or pay or declare any dividend or make any distribution on, any
securities junior in priority to the Series A Preferred; or (5) make any change
in the size of the Company's Board of Directors.
15
ZHONGPIN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SEGMENT REPORTING
The Company operates in two business segments: pork and pork products, and
vegetables and fruits.
The Company's pork and pork products segment is involved primarily in the
processing of live market hogs into fresh, frozen and processed pork products.
The Company's pork and pork products segment markets its products domestically
to our branded stores, food retailers, foodservice distributors, restaurant
operators and noncommercial foodservice establishments, such as schools, hotel
chains, healthcare facilities, the military and other food processors, as well
as to international markets.
The Company's vegetables and fruits segment is involved primarily in the
processing of fresh vegetables and fruits. The Company contracts with more than
120 farms in Henan Province and nearby areas to produce high-quality vegetable
varieties and fruits suitable for export purposes. The proximity of the
contracted farms to the Company's operations ensures freshness from harvest to
processing. The Company contracts to grow more than 20 categories of vegetables
and fruits, including asparagus, sweet corn, broccoli, mushrooms, lima beans and
strawberries.
SALES BY SEGMENT
(IN MILLIONS)
SALES SALES
THREE MONTHS ENDED THREE MONTHS ENDED
MAR. 31, 2006 MAR. 31, 2005
------------------ ------------------
Pork and Pork Products............. $ 29.77 $14.27
Vegetables and Fruits.............. 0.72 0.14
- ------ ------ ------
Total $30.49 $14.41
OPERATING INCOME BY SEGMENT
(IN MILLIONS)
OPERATING INCOME OPERATING INCOME
THREE MONTHS ENDED THREE MONTHS ENDED
MAR. 31, 2006 MAR. 31, 2005
------------------ ------------------
Pork and Pork Products........... $2.81 $2.00
Vegetables and Fruits............ 0.07 0.01
----- -----
Total $2.88 $2.01
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THE STATEMENTS CONTAINED IN THIS REPORT WITH RESPECT TO OUR FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND BUSINESS THAT ARE NOT HISTORICAL FACTS ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE
16
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 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 SECTION 21E OF THE
EXCHANGE ACT. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY, SUCH AS "ESTIMATES," "PROJECTS," "PLANS,"
"BELIEVES," "EXPECTS," "ANTICIPATES," "INTENDS," OR THE NEGATIVE THEREOF OR
OTHER VARIATIONS THEREON, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND
UNCERTAINTIES. MANAGEMENT OF THE COMPANY WISHES TO CAUTION THE READER OF THE
FORWARD-LOOKING STATEMENTS THAT SUCH STATEMENTS, WHICH ARE CONTAINED IN THIS
REPORT, REFLECT THE COMPANY'S CURRENT BELIEFS WITH RESPECT TO FUTURE EVENTS AND
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, INCLUDING, BUT
NOT LIMITED TO, ECONOMIC, COMPETITIVE, REGULATORY, TECHNOLOGICAL, KEY EMPLOYEE,
AND GENERAL BUSINESS FACTORS AFFECTING THE COMPANY'S OPERATIONS, MARKETS,
GROWTH, SERVICES, PRODUCTS, LICENSES AND OTHER FACTORS DISCUSSED IN THE
COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, AND THAT
THESE STATEMENTS ARE ONLY ESTIMATES OR PREDICTIONS. NO ASSURANCES CAN BE GIVEN
REGARDING THE ACHIEVEMENT OF FUTURE RESULTS, AS ACTUAL RESULTS MAY DIFFER
MATERIALLY AS A RESULT OF RISKS FACING THE COMPANY, AND ACTUAL EVENTS MAY DIFFER
FROM THE ASSUMPTIONS UNDERLYING THE STATEMENTS THAT HAVE BEEN MADE REGARDING
ANTICIPATED EVENTS.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO NUMEROUS ASSUMPTIONS,
RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY THE COMPANY
IN THOSE STATEMENTS. SOME OF THESE RISKS ARE DESCRIBED IN "RISK FACTORS" IN ITEM
1A OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, AS AMENDED, FOR THE TRANSITION
PERIOD FROM JUNE 30, 2005 TO DECEMBER 31, 2005.
THESE RISK FACTORS SHOULD BE CONSIDERED IN CONNECTION WITH ANY
SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS THAT THE COMPANY OR
PERSONS ACTING ON THE COMPANY'S BEHALF MAY ISSUE. ALL WRITTEN AND ORAL FORWARD
LOOKING STATEMENTS MADE IN CONNECTION WITH THIS REPORT THAT ARE ATTRIBUTABLE TO
THE COMPANY OR PERSONS ACTING ON THE COMPANY'S BEHALF ARE EXPRESSLY QUALIFIED IN
THEIR ENTIRETY BY THESE CAUTIONARY STATEMENTS. GIVEN THESE UNCERTAINTIES, THE
COMPANY CAUTIONS INVESTORS NOT TO UNDULY RELY ON THE COMPANY'S FORWARD-LOOKING
STATEMENTS. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVIEW OR CONFIRM
ANALYSTS' EXPECTATIONS OR ESTIMATES OR TO RELEASE PUBLICLY ANY REVISIONS TO ANY
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF
THIS DOCUMENT OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FURTHER, THE
INFORMATION ABOUT THE COMPANY'S INTENTIONS CONTAINED IN THIS DOCUMENT IS A
STATEMENT OF THE COMPANY'S INTENTION AS OF THE DATE OF THIS DOCUMENT AND IS
BASED UPON, AMONG OTHER THINGS, THE EXISTING REGULATORY ENVIRONMENT, INDUSTRY
CONDITIONS, MARKET CONDITIONS AND PRICES, THE ECONOMY IN GENERAL AND THE
COMPANY'S ASSUMPTIONS AS OF SUCH DATE. THE COMPANY MAY CHANGE THE COMPANY'S
INTENTIONS, AT ANY TIME AND WITHOUT NOTICE, BASED UPON ANY CHANGES IN SUCH
FACTORS, IN THE COMPANY'S ASSUMPTIONS OR OTHERWISE.
GENERAL
During the period from the formation of the Company on February 4, 2003
to January 30, 2006, the Company did not generate any significant revenue, and
accumulated no significant assets, as the Company explored various business
opportunities. On January 30, 2006, in exchange for a controlling interest in
the Company's publicly-held "shell" corporation, the Company acquired all of the
issued and outstanding capital stock of Falcon Link. This transaction is
commonly referred to as a "reverse acquisition." For financial reporting
purposes, Falcon Link was considered the acquirer in such transaction. As a
result, the Company's historical financial statements for all periods prior to
January 30, 2006 included in this Report are those of Falcon Link.
The Company is principally engaged in the meat and food processing
business in The People's Republic of China (the "PRC"). Currently, the Company
has five processing plants located in Henan
17
Province in the PRC, with a total of seven production lines. The Company began
construction of a third fully-dedicated case-ready plant in fiscal 2005. This
plant was put into production on February 23, 2006. On a daily basis, an average
of 2,000 pigs (approximately 14.5 metric tons) are butchered and processed at
this location. The Company expects to increase the meat processing capacity at
this plant by 60,000 metric tons on an annual basis. The Company utilizes
state-of-the-art equipment in all of our abattoirs and processing facilities.
The Company's products are sold under the "Zhongpin" and "Shengpin"
brand names. The Company's customers include over ten international fast food
companies in the PRC, over 30 export-registered processing factories and over
1,200 school cafeterias, factory canteens, army posts and national departments.
The Company also sells directly to over 2,100 retail outlets, including
supermarkets, within the PRC.
In 2005, the Company was one of the top 151 national agricultural
industrial enterprises in the PRC and were ranked eighth overall, in terms of
revenue, in the national meat industry. During the past five years, the
Company's growth rate has exceeded 50% percent in terms of both revenues and net
profits. The Company has established distribution networks in more than 20
provinces in the North, East, South and South Midland of the PRC, and also has
formed strategic partnerships with leading supermarket chains and the catering
industry in the PRC. In addition, the Company exports products to the European
Union, Southeast Asia and Russia.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operating
information expressed in U.S dollars (in thousands)
THREE MONTHS ENDED
MARCH 31
2006 2005
------------------------------
SALES REVENUES $ 30,494 $ 14,405
COST OF SALES 25,914 11,809
GROSS PROFIT 4,579 2,596
------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES 899 224
OPERATING EXPENSES 804 365
TOTAL OTHER INCOME (EXPENSE) (145) (258)
NET INCOME BEFORE TAXES 2,731 1,749
------------------------------
PROVISION FOR INCOME TAXES 145 ---
NET INCOME AFTER TAXES 2,586 1,749
MINORITY INTEREST 11 12
NET INCOME 2,575 1,736
------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 141 ---
COMPREHENSIVE INCOME 2,716 1,736
------------------------------
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005
18
REVENUE. Total revenue increased from $14.41 million for the quarter
ended March 31, 2005 to $30.49 million for the quarter ended March 31, 2006, or
approximately 112%. The increase in revenues was primarily due to increased
sales in the Company's meat and meat products segment resulting from the effects
of the continued increase in the amount of branded stores sales and a widening
wholesale customer base.
COST OF SALES. Cost of sales increased from $11.81 million for the
quarter ended March 31, 2005 to $25.91 million for the quarter ended March 31,
2006, or approximately 119%. As a percentage of revenue, total cost of sales
increased from approximately 82% for the quarter ended March 31, 2005 to
approximately 85% in the quarter ended March 31 2006. The increase in cost of
sales was primarily due to an increase of approximately 3% in raw material costs
for the quarter ended March 31 2006 as compared to the quarter ended March 31,
2005.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased by approximately 302% for the quarter ended March 31, 2006
from $0.22 million for the quarter ended March 31, 2005 to $0.90 million for the
quarter ended March 31, 2006. As a percentage of revenues, general and
administrative expenses increased from 1.55% for the quarter ended March 31,
2005 to 2.95% for the quarter ended March 31, 2006. The increase in general and
administrative expenses was primarily the result of the addition of senior
executives to the management team.
INTEREST EXPENSE. Interest expense increased from $0.35 million for the
quarter ended March 31, 2005 to $0.38 million for the quarter ended March 31,
2006, or approximately 8.7%. During the quarter ended March 31, 2006, total
liabilities decreased by approximately $7.3 million, however, the average debt
outstanding was approximately $20.70 million for the quarter ended March 31,
2006 and $18.34 million for the quarter ended March 31, 2005.
INTEREST INCOME, ALLOWANCES INCOME, OTHER INCOME AND EXCHANGE GAIN
(LOSS). Interest income, allowances income, other income and exchange gain
(loss) increased from $0.09 million for the quarter ended March 31, 2005 to
$0.23 million for the quarter ended March 31, 2006, primarily due to an increase
of allowance income.
INCOME TAXES. The effective tax rate in the PRC on income generated
from the sale of prepared products is 33% and there is no income tax on income
generated from the sale of raw products. The increase in the provision for
income taxes for the quarter ended March 31, 2006 over the quarter ended March
31, 2005 resulted from an increase in the Company's sales of prepared products
for the quarter ended March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended March 31, 2006, the Company funded its
operations primarily through cash flows from operations and the sale of
preferred stock.
Net cash provided by (used in) operating activities of the Company was
$0.98 million and ($2.95) million in the quarters ended March 31, 2005 and 2006,
respectively. Cash flows from operations of the Company decreased for the
quarter ended March 31, 2006 primarily due to an increase in accounts receivable
and other receivables as well as an increased level of inventories due to a
significant increase in revenues and increased scale of production capacity.
Net accounts receivable and other receivables of the Company were
$15.83 million as of March 31, 2006. This compares to $10.63 million at December
31, 2005. The increase in accounts receivable was due primarily to the increase
in the Company's revenues.
19
The Company expended $3.73 million for the construction of new
facilities in the quarter ended March 31, 2006.
As of March 31, 2006, the Company had approximately $17.89 million in
cash and cash equivalents. On January 31, 2006, we received net proceeds of
approximately $23.11 million from the sale of units consisting of our Series A
convertible preferred stock and common stock purchase warrants.
The Company believes its existing cash and cash equivalents and its
available lines of credit, which totaled approximately $80 million at March 31,
2006, will be sufficient to finance its operating requirements and capital
expenditures over the next 12 months.
INFLATION AND SEASONALITY
While demand for the Company's products, in general, is relatively high
before the Chinese New Year in January or February each year and lower
thereafter, the Company does not believe its operations have been materially
affected by inflation or seasonality.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURES ABOUT MARKET RISK
The Company may be exposed to changes in financial market conditions in
the normal course of business. Market risk generally represents the risk that
losses may occur as a result of movements in interest rates and equity prices.
The Company currently does not use financial instruments in the normal course of
business that are subject to changes in financial market conditions.
CURRENCY FLUCTUATIONS AND FOREIGN CURRENCY RISK
Substantially all of the Company's operations are conducted in the PRC,
with the exception of the Company's export business and limited overseas
purchases of raw materials. Most of the Company's sales and purchases are
conducted within the PRC in Chinese Renminbi, which is the official currency of
the PRC. As a result, the effect of the fluctuations of exchange rates is
considered minimal to the Company's business operations.
Substantially all of the Company's revenues and expenses are
denominated in Renminbi. However, the Company uses the United States dollar for
financial reporting purposes. Conversion of Renminbi into foreign currencies is
regulated by the People's Bank of China through a unified floating exchange rate
system. Although the PRC government has stated its intention to support the
value of the Renminbi, there can be no assurance that such exchange rate will
not again become volatile or that the Renminbi will not devalue significantly
against the U.S. dollar. Exchange rate fluctuations may adversely affect the
value, in U.S. dollar terms, of the Company's net assets and income derived from
its operations in the PRC.
INTEREST RATE RISK
The Company does not have significant interest rate risk, as the
Company's debt obligations are primarily short-term in nature, with fixed
interest rates.
20
CREDIT RISK
The Company has not experienced significant credit risk, as most of the
Company's customers are long-term customers with superior payment records. The
Company's receivables are monitored regularly by the Company's credit managers.
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES. The Company's management, with
the participation its chief executive officer and chief financial officer, has
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report. Based on such
evaluation, the Company's chief executive officer and chief financial officer
have concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by the
Company in the reports that the Company files or submits under the Exchange Act.
INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
21
ZHONGPIN INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
During the three months ended March 31, 2006, there were no material
changes to the risk factors previously disclosed in the Company's Annual Report
on Form 10-K, as amended, for the transition period from June 30, 2005 to
December 31, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) Not Applicable.
(c) None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
(a) None.
(b) None.
ITEM 6. EXHIBITS
The exhibits required by this item are set forth on the Exhibit Index
attached hereto.
22
ZHONGPIN INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZHONGPIN INC.
(Company)
Date: May 15, 2006
By: /s/ Xianfu Zhu
--------------------------------
Xianfu Zhu
Chief Executive Officer
By: /s/ Yuanmei Ma
--------------------------------
Yuanmei Ma
Chief Financial Officer
23
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
- ----------- ----------------------------------------------------------------
31.1* Certification of our Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of our Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of our Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2* Certification of our Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
* filed herewith
24