AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 5, 2007
REGISTRATION NO. 333-140190
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ZHONGPIN INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 2011 54-2100419
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
21 CHANGSHE ROAD, CHANGGE CITY
HENAN PROVINCE, THE PEOPLE'S REPUBLIC OF CHINA
011 86 374-6216633
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
NORMAN C. KRISTOFF
P.O. BOX 181
194 UPPER TROY ROAD
FITZWILLIAM, NH 03447
TELEPHONE: (603) 352-1003
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent For Service)
-------------------------
COPIES TO:
Eric M. Hellige, Esq.
Pryor Cashman Sherman & Flynn LLP
410 Park Avenue
New York, New York 10022-4441
Telephone: (212) 421-4100
Facsimile: (212) 326-0806
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED APRIL 5, 2007
PROSPECTUS
1,041,108 SHARES
ZHONGPIN INC.
Common Stock
This prospectus relates to the resale by the selling stockholders
identified in this prospectus of up to 1,041,108 shares of common stock, of
which 97,200 shares are issued and outstanding on the date hereof and 943,908
shares are issuable upon the conversion of outstanding shares of our Series A
convertible preferred stock. All of the shares, when sold, will be sold by these
selling stockholders. The selling stockholders may sell their shares of common
stock from time to time at prevailing market prices. We will not receive any
proceeds from the sale of the shares of common stock by the selling
stockholders.
Our common stock is traded in the over-the-counter market and prices are
reported on the OTC Bulletin Board under the symbol "ZHNP." On April 2, 2007,
the closing bid price of our common stock, as report by the OTC Bulletin Board,
was $7.25 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR RISKS OF AN INVESTMENT IN THE
SECURITIES OFFERED BY THIS PROSPECTUS, WHICH YOU SHOULD CONSIDER BEFORE YOU
PURCHASE ANY SHARES.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is ________, 2007
We have not registered the sale of the shares under the securities laws
of any state. Brokers or dealers effecting transactions in the shares of common
stock offered hereby should confirm that the shares have been registered under
the securities laws of the state or states in which sales of the shares occur as
of the time of such sales, or that there is an available exemption from the
registration requirements of the securities laws of such states.
This prospectus is not an offer to sell any securities other than the
shares of common stock offered hereby. This prospectus is not an offer to sell
securities in any circumstances in which such an offer is unlawful.
We have not authorized anyone, including any salesperson or broker, to
give oral or written information about this offering, Zhongpin Inc., or the
shares of common stock offered hereby that is different from the information
included in this prospectus. You should not assume that the information in this
prospectus, or any supplement to this prospectus, is accurate at any date other
than the date indicated on the cover page of this prospectus or any supplement
to it.
TABLE OF CONTENTS
Page
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Special Note Regarding Forward-Looking Statements......................... 22
Use of Proceeds........................................................... 22
Market for Common Equity and Related Stockholders Materials............... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business.................................................................. 41
Management................................................................ 60
Principal Stockholders.................................................... 64
Certain Relationships and Related Transactions............................ 66
Description of Securities................................................. 68
Selling Stockholders...................................................... 74
Plan of Distribution...................................................... 78
Legal Matters............................................................. 80
Experts................................................................... 80
Where You Can Find More Information....................................... 80
Index to Consolidated Financial Statements................................ F-1
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE INVESTING IN THE SHARES. YOU ARE URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY, INCLUDING THE INFORMATION UNDER "RISK FACTORS" AND OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS,
INCLUDING PER SHARE DATA AND INFORMATION RELATING TO THE NUMBER OF SHARES
OUTSTANDING, GIVES RETROACTIVE EFFECT TO THE ONE-FOR-35.349 REVERSE SPLIT OF OUR
COMMON STOCK EFFECTED ON FEBRUARY 16, 2006.
OUR COMPANY
We are principally engaged in the meat and food processing business in
The People's Republic of China (the "PRC"). Our product line includes over 200
unique meat products, including chilled pork, frozen pork, pig by-products and
prepared meats, that are sold on a wholesale basis and on a retail basis through
an exclusive network of showcase stores, network stores and supermarket counters
under our "Zhongpin" brand. Our six processing plants, which are located in
Henan and Heilongjiang Provinces in the PRC, have a total of nine production
lines with an aggregate processing capacity of approximately 446 metric tons per
day, based on an eight-hour working day, or approximately 160,560 metric tons on
an annual basis. We also have recently begun the production and sale of
vegetables and fruits and have supply contracts with more than 120 farms in
Henan Province and nearby areas to produce high-quality vegetable varieties and
fruits that we may purchase for resale, primarily in the export markets. Our
products are sold under the "Zhongpin" brand name.
According to an October 2006 report of the United States Department of
Agriculture, the PRC is the largest food consuming nation in the world and is
the world's largest pork producer and consumer. The meat and meat processing
industry in the PRC is regarded by the central government as a "key" industry
and certain participants in the industry, including our company, receive special
tax incentives and technology subsidies. According to a market analysis of the
fresh and processed meat industry in the PRC published in June 2005 by Access
Asia Limited, an independent research organization ("Access Asia"):
o In 2004, domestic demand for meat and related products in the PRC
totaled 72,360,000 metric tons and such demand is expected to
reach 100,000,000 metric tons by 2010;
o The total domestic production value of meat and related products
in the PRC in 2004 was US$84 billion and the estimated production
value in 2010 is expected to reach US$120 billion;
o Domestic per capita meat consumption in the PRC was estimated to
be approximately 49 kg in 2004 and is expected to increase to
70-80 kg by 2010; and
o Per capita consumption of meat in urban areas in the PRC is twice
the amount of the national average.
Our customers include over 16 international or domestic fast food
companies in the PRC, over 36 export-registered processing factories and over
1,531 school cafeterias, factory canteens, army posts and national departments.
We also sell directly to over 2,721 retail outlets, including supermarkets,
within the PRC.
To differentiate our company from other market incumbents, we also have
successfully implemented a unique retail strategy that includes the
establishment of a network of showcase stores, branded network stores and
supermarket counters that are exclusive retailers of our product lines. At
December 31, 2006, we had a total of 96 showcase stores, 856 network stores and
1,769 supermarket counter locations.
We believe we are a market leader in the meat and meat products industry
in the PRC and that the principal strengths of our company are as follows:
o We have a vertically-integrated fresh meat, meat products, fresh
produce and fruit supply chain from farming, slaughtering,
cutting, processing and wholesaling to retailing;
o We have a wide distribution network through major areas of the
PRC;
o The "Zhongpin" brand name is well recognized in major areas of
the PRC as an established and leading brand;
o We have advanced production equipment for the packaging of meat
and food;
o Our customers include some of the largest supermarket chains,
such as Lianhua Supermarket Group, Carrefour China and Metro
(China) Group;
o We have implemented a comprehensive logistics management program
and have an efficient delivery system that utilizes over 192
temperature-controlled container trucks and public railway
services;
o Based upon our historical growth rates, we believe our
experienced management team, led by our founder and Chairman, Mr.
Xianfu Zhu, has the ability to grow and expand our business;
o We have an emphasis on quality assurance systems;
o We have a comprehensive brand building strategy and brand equity
management;
o We have an innovative product development program, with more than
150 new products now under development; and
o We experienced average annual revenue growth of 56.15%
(cumulative growth of 594%) and average annual profit growth of
56.77% (cumulative growth of 604%) during the five-year period
ended December 31, 2006.
Our principal executive offices are located at 21 Changshe Road, Changge
City, Henan Province, The People's Republic of China, and our telephone number
at that address is 011 86 374-6216633. We maintain Internet websites at
www.zhongpin.com (Chinese language) and www.zpfood.com (English language).
Information on our websites is not part of this prospectus.
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RECENT DEVELOPMENTS
On January 31, 2006, we completed a private placement in which we sold
for an aggregate purchase price of $27.6 million, 3.45 million units, each unit
consisting of two shares of our Series A convertible preferred stock and a
warrant to purchase one share of our common stock. Each share of Series A
convertible preferred stock is convertible at any time into one share of our
common stock, subject to adjustment for certain antidilutive events. The
warrants are exercisable for a period of five years at an exercise price of
$5.00 per share, subject to adjustment for certain antidilutive events. In
connection with such private placement, on January 30, 2006, in exchange for a
controlling interest in our publicly-held "shell" corporation, we acquired all
of the issued and outstanding capital stock of Falcon Link Investment Limited
("Falcon Link") in a transaction commonly referred to as a "reverse
acquisition."
TN Capital Equities Ltd. acted as placement agent for the offering and
received a cash fee in the amount of $2.76 million and a warrant to purchase
345,000 units.
In connection with the private placement, we agreed to register under
the Securities Act of 1933, as amended, the resale of the shares of common stock
issuable upon conversion of the shares of Series A convertible preferred stock
or exercise of the warrants issued in the private placement. However, due to the
nature and size of the offering that would have resulted from such registration,
only 1,001,408 shares issuable upon conversion of the Series A convertible
preferred stock have been included in the 1,500,005 shares of common stock that
are offered in this prospectus. In consideration of the agreement of certain
holders of shares of Series A convertible preferred stock and stock purchase
warrants issued in the private placement to permit us to remove from the
registration statement of which this prospectus forms a part shares of common
stock issuable upon the conversion or exercise of such securities, in December
2006 we issued to such holders additional stock purchase warrants to purchase an
aggregate of 884,799 of our common stock, which warrants have an exercise price
of $5.50 per share, subject to adjustment for certain antidilutive events, and
expire on January 30, 2011.
In December 2006, we also settled in full certain penalty payment
obligations resulting from our failure to file with the Securities and Exchange
Commission and have declared effective by the Commission in a timely manner the
registration statement of which this prospectus forms a part. Pursuant to such
settlement, we made cash payments to certain of the investors in the private
placement in the aggregate amount of $1,044,356.67 and issued to certain of such
investors an aggregate of 379,743 shares of our common stock.
ABOUT THIS OFFERING
This prospectus relates to the resale by the selling stockholders
identified in this prospectus of up to 1,041,108 shares of common stock, of
which 97,200 shares are issued and outstanding as of the date hereof and 943,908
shares are issuable upon the conversion of outstanding shares of our Series A
convertible preferred stock. All of the shares, when sold, will be sold by these
selling stockholders. The selling stockholders may sell their shares of common
stock from time to time at prevailing market prices. We will not receive any
proceeds from the sale of the shares of common stock by the selling
stockholders.
Common Stock Offered............................ 1,041,108 shares
Common Stock Outstanding at March 15, 2007...... 13,763,455 shares
Preferred Stock Outstanding at March 15, 2007... 5,268,856 shares, which shares
are convertible into 5,268,856
shares of common stock
3
Use of Proceeds................................. We will not receive any of the
proceeds from the sale of the
shares by the selling
stockholders.
OTC Bulletin Board Ticker Symbol................ ZHNP
SELECTED FINANCIAL INFORMATION
The following selected consolidated income statement data for the three
years ended December 31, 2004, 2005 and 2006 and the selected consolidated
balance sheet data as of December 31, 2005 and 2006 have been derived from our
audited consolidated financial statements included elsewhere in this prospectus.
These consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes included elsewhere in
this prospectus. Our selected consolidated income statement data for the year
ended December 31, 2002 and 2003 and our selected consolidated balance sheet
data as of December 31, 2002, 2003 and 2004 have been derived from the audited
financial statements of Henan Zhongpin, our deemed predecessor, which are not
included in this prospectus. The historical results presented below are not
necessarily indicative of the results that may be expected in any future period.
Fiscal Years Ended December 31,
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Net Sales.......................... $ 143,812 $ 73,400 $ 42,787 $ 29,593 $ 24,191
Gross Profit....................... 20,616 12,179 6,117 3,449 2,773
Income From Operations............. 5,788 7,484 3,058 1,736 1,403
Net Income......................... 6,359 5,914 2,768 1,536 1,053
Net Income per Common Share:
Basic.............................. 0.35 0.50 0.24 0.13 0.09
Diluted............................ 0.31 0.50 0.24 0.13 0.09
Cash Dividends..................... -- -- -- 0.005 0.005
SELECTED BALANCE SHEET DATA:
Property, Plant, Equipment.......... $ 32,597 $ 10,213 $ 10,072 $ 5,805 $ 4,794
Total Assets........................ 102,222 53,254 32,167 27,528 18,180
Long-Term Debt (Less Current 1,912 2,264 4,329 7,638 5,534
Maturities).......................
Stockholders' Equity.................. 52,697 14,516 8,183 5,414 3,934
4
RISK FACTORS
AN INVESTMENT IN OUR IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
THE RISKS DESCRIBED BELOW INCLUDE ALL MATERIAL RISKS TO OUR COMPANY OR TO
INVESTORS IN THIS OFFERING THAT ARE KNOWN TO OUR COMPANY. YOU SHOULD CAREFULLY
CONSIDER SUCH RISKS BEFORE PARTICIPATING IN THIS OFFERING. YOU SHOULD PAY
PARTICULAR ATTENTION TO THE FACT THAT WE CONDUCT ALL OF OUR OPERATIONS IN THE
PRC AND OUR BUSINESS IS GOVERNED BY A LEGAL AND REGULATORY ENVIRONMENT THAT IN
SOME RESPECTS DIFFERS SIGNIFICANTLY FROM THE ENVIRONMENT THAT MAY PREVAIL IN
OTHER COUNTRIES. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE MATERIALLY HARMED. AS A
RESULT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MIGHT LOSE
ALL OR PART OF YOUR INVESTMENT. WHEN DETERMINING WHETHER TO BUY OUR COMMON
STOCK, YOU SHOULD ALSO REFER TO THE OTHER INFORMATION IN THIS PROSPECTUS,
INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN
THIS PROSPECTUS.
RISKS RELATING TO OUR BUSINESS
OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR FUTURE
PROSPECTS AND RESULTS OF OPERATIONS.
We have a limited operating history. While Henan Zhongpin was
established as a state-owned meat processing factory in 1993, the current
management team purchased the business via a privatization scheme and commenced
a restructuring of the enterprise in 1997. Accordingly, you should consider our
future prospects in light of the risks and uncertainties experienced by early
stage companies in evolving markets such as the growing market for fresh meats
and processed meat products in the PRC. Some of these risks and uncertainties
relate to our ability to:
o offer additional food products to attract and retain a larger
customer base;
o attract additional customers and increased spending per customer;
o increase awareness of our brand and continue to develop customer
loyalty;
o respond to competitive market conditions;
o respond to changes in our regulatory environment;
o manage risks associated with intellectual property rights;
o maintain effective control of our costs and expenses;
o raise sufficient capital to sustain and expand our business;
o attract, retain and motivate qualified personnel; and
o upgrade our technology to support additional research and
development of new food products.
If we are unsuccessful in addressing any of these risks and
uncertainties, our business may be materially and adversely affected.
IF THERE ARE ANY INTERRUPTIONS TO OR A DECLINE IN THE AMOUNT OR QUALITY OF OUR
LIVE PIGS, RAW PORK OR OTHER MAJOR RAW MATERIAL SUPPLY, OUR PRODUCTION OR SALES
COULD BE MATERIALLY AND ADVERSELY AFFECTED.
5
Live pigs and raw pork are the principal raw materials used in our
production. We procure all of our live pigs and some of our raw pork from a
number of third-party suppliers. Our third-party suppliers may not continue to
be able to supply an adequate number of live pigs and raw pork to satisfy our
present and future production needs. The supply of pork is dependent on the
output of pig farms, which may be affected by outbreaks of diseases or
epidemics. Our current suppliers may not be able to provide live pigs or raw
pork of sufficient quality to meet our stringent quality control requirements.
Any interruptions to or decline in the amount or quality of our live pigs or raw
pork supply could materially disrupt our production and adversely affect our
business. In addition to live pigs and raw pork, we also use additives and
packaging in our production, which we source from third-party suppliers, and
resell a wide variety of fruits and vegetables, which we purchase from
third-party farms. Any interruptions to or decline in the amount or quality of
our additives or packaging supply, or in the fruits or vegetables we procure,
could also disrupt our production or sales and adversely affect our business. We
are vulnerable to further increases in the price of raw materials (particularly
of live pigs and raw pork) and other operating costs, and we may not be able to
entirely offset these increasing costs by increasing the prices of our products,
particularly our processed meat products.
We purchase agricultural products, such as live pigs, raw pork and a
wide variety of fruits and vegetables, for use in our production process and for
resale. The price of such raw materials is subject to fluctuations that are
attributable to a number of factors, such as the price of animal feed, diseases
and infections, and weather conditions. For example, during 2004, prices of live
pigs rose sharply. According to the Ministry of Agriculture of the PRC, the
average selling price of live pigs rose by approximately 35.6% from 2003 to
2004. During 2005 and 2006, however, the average prices of live pigs we
purchased decreased by approximately 0.6% and increased by approximately 8%,
respectively. If the costs of raw materials or other costs of production and
distribution of our products increase further, and we are unable to entirely
offset these increases by raising prices of our products, our profit margins and
financial condition could be adversely affected.
WE MAY BE UNABLE TO ANTICIPATE CHANGES IN CONSUMER PREFERENCES FOR PROCESSED
MEAT PRODUCTS, WHICH MAY RESULT IN DECREASED DEMAND FOR OUR PRODUCTS.
Our continued success in the processed meat products market is in large
part dependent on our ability to anticipate and develop products that appeal to
the changing tastes, dietary habits and preferences of customers. If we are not
able to anticipate and identify new consumer trends and develop new products
accordingly, demand for our products may decline and our operating results may
be adversely affected. In addition, we may incur significant costs relating to
developing and marketing new products or expanding our existing product lines in
reaction to what we perceive to be a consumer preference or demand. Such
development or marketing may not result in the level of market acceptance,
volume of sales or profitability anticipated.
IF THE CHILLED AND FROZEN PORK MARKET IN THE PRC DOES NOT GROW AS WE EXPECT, OUR
RESULTS OF OPERATIONS AND FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED.
We believe chilled and frozen pork products have strong growth potential
in the PRC and, accordingly, we have continuously increased our sales of chilled
and frozen pork. If the chilled and frozen pork market in the PRC does not grow
as we expect, our business may be harmed, we may need to adjust our growth
strategy and our results of operation may be adversely affected.
WE REQUIRE VARIOUS LICENSES AND PERMITS TO OPERATE OUR BUSINESS, AND THE LOSS OF
OR FAILURE TO RENEW ANY OR ALL OF THESE LICENSES AND PERMITS COULD REQUIRE US TO
SUSPEND SOME OR ALL OF OUR PRODUCTION OR DISTRIBUTION OPERATIONS.
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In accordance with PRC laws and regulations, we are required to maintain
various licenses and permits in order to operate our business, including,
without limitation, a slaughtering permit in respect of each of our chilled and
frozen pork production facilities and a permit for production of industrial
products in respect of each of our processed meat production facilities. We are
required to comply with applicable hygiene and food safety standards in relation
to our production processes. Our premises and transportation vehicles are
subject to regular inspections by the regulatory authorities for compliance with
applicable regulations. Failure to pass these inspections, or the loss of or
failure to renew our licenses and permits, could require us to temporarily or
permanently suspend some or all of our production or distribution operations,
which could disrupt our operations and adversely affect our revenues and
profitability.
OUR ABILITY TO EXPORT MAY BE RESTRICTED IF WE CANNOT MAINTAIN CURRENT LICENSES
OR OBTAIN ADDITIONAL LICENSES IN OTHER COUNTRIES AND REGIONS.
For the three years ended December 31, 2004, 2005 and 2006, revenue
attributable to our export business as a percentage of our total revenue was
approximately 9.5%, 10.2% and 8.5%, respectively. We must maintain certain
licenses from applicable foreign governments in order to continue to export to
those jurisdictions. In addition, we must apply for licenses from applicable
foreign governments should we desire to export our products to countries with
which we currently do not have business relations. We cannot assure you that we
can maintain our current licenses for export or obtain licenses to export to
countries with which we do not currently have business relations. The loss of
any licenses or the inability to obtain new licenses to export may adversely
affect the aggregate amount of our export sales and the profitability of our
business.
THE LOSS OF SENIOR MANAGEMENT OR KEY RESEARCH AND DEVELOPMENT PERSONNEL OR OUR
INABILITY TO RECRUIT ADDITIONAL PERSONNEL MAY HARM OUR BUSINESS.
We are highly dependent on our senior management to manage our business
and operations and our key research and development personnel for the
development of new processing technologies and food products and the enhancement
of our existing products. In particular, we rely substantially on our chairman
and chief executive officer, Mr. Xianfu Zhu, to manage our operations. We also
depend on our key research personnel. In addition, we also rely on information
technology and logistics personnel for the production, storage and shipment of
our products and on marketing and sales personnel, engineers and other personnel
with technical and industry knowledge to transport, market and sell our
products. We do not maintain key man life insurance on any of our senior
management or key personnel. The loss of any one of them, in particular Mr. Zhu,
would have a material adverse effect on our business and operations. Competition
for senior management and research and development personnel is intense and the
pool of suitable candidates is limited. We may be unable to locate a suitable
replacement for any senior management or key research and development personnel
that we lose. In addition, if any member of our senior management or key
research and development personnel joins a competitor or forms a competing
company, they may compete with us for customers, business partners and other key
professionals and staff members of our company. Although each of our senior
management and key research and development personnel has signed a
confidentiality and non-competition agreement in connection with his employment
with us, we cannot assure you that we will be able to successfully enforce these
provisions in the event of a dispute between us and any member of our senior
management or key research and development personnel.
We compete for qualified personnel with other food processing companies,
food retailers, logistics companies and research institutions. Intense
competition for these personnel could cause our compensation costs to increase
significantly, which could have a material adverse effect on our results of
7
operations. Our future success and ability to grow our business will depend in
part on the continued service of these individuals and our ability to identify,
hire and retain additional qualified personnel. If we are unable to attract and
retain qualified employees, we may be unable to meet our business and financial
goals.
OUR GROWTH STRATEGY MAY PROVE TO BE DISRUPTIVE AND DIVERT MANAGEMENT RESOURCES,
WHICH COULD ADVERSELY AFFECT OUR EXISTING BUSINESSES.
In November 2006, we leased a production facility located in Hailun
City, Heilongjiang Province in the PRC. Our growth strategy includes the
expansion of our manufacturing operations to include new production plants
located within Henan Province. In addition, we intend to expand our network of
sales offices and warehouses to additional cities in the PRC and may include
acquisitions of additional products, manufacturing or production capabilities or
sources of supply. The implementation of such strategy may involve large
transactions and present financial, managerial and operational challenges,
including diversion of management attention from existing businesses, difficulty
with integrating personnel and financial and other systems, increased expenses,
including compensation expenses resulting from newly-hired employees, assumption
of unknown liabilities and potential disputes. We also could experience
financial or other setbacks if any of our growth strategies incur problems of
which we are not presently aware.
WE MAY REQUIRE ADDITIONAL FINANCING IN THE FUTURE AND OUR OPERATIONS COULD BE
CURTAILED IF WE ARE UNABLE TO OBTAIN REQUIRED ADDITIONAL FINANCING WHEN NEEDED.
We may need to obtain additional debt or equity financing to fund future
capital expenditures. Additional equity may result in dilution to the holders of
our outstanding shares of capital stock. Additional debt financing may include
conditions that would restrict our freedom to operate our business, such as
conditions that:
o limit our ability to pay dividends or require us to seek consent
for the payment of dividends;
o increase our vulnerability to general adverse economic and
industry conditions;
o require us to dedicate a portion of our cash flow from operations
to payments on our debt, thereby reducing the availability of our
cash flow to fund capital expenditures, working capital and other
general corporate purposes; and
o limit our flexibility in planning for, or reacting to, changes in
our business and our industry.
We cannot guarantee that we will be able to obtain any additional
financing on terms that are acceptable to us, or at all.
OUR OPERATIONS ARE CASH INTENSIVE AND OUR BUSINESS COULD BE ADVERSELY AFFECTED
IF WE FAIL TO MAINTAIN SUFFICIENT LEVELS OF WORKING CAPITAL.
We expend a significant amount of cash in our operations, principally to
fund our raw material procurement. Our suppliers, in particular, suppliers of
pigs, typically require payment in full within seven days after delivery,
although some of our suppliers provide us with credit. In turn, we typically
require our customers of chilled and frozen pork to make payment in full on
delivery, although we offer some of our long-standing customers credit terms. We
generally fund most of our working capital requirements
8
out of cashflow generated from operations. If we fail to generate sufficient
revenues from our sales, or if we experience difficulties collecting our
accounts receivable, we may not have sufficient cashflow to fund our operating
costs and our profitability could be adversely affected.
WE MAY BE UNABLE TO MAINTAIN OUR PROFITABILITY IN THE FACE OF A CONSOLIDATING
RETAIL ENVIRONMENT IN THE PRC.
We sell substantial amounts of our products to supermarkets and large
retailers. The supermarket and food retail industry in the PRC has been, and is
expected to continue, undergoing a trend of development and consolidation. As
the retail food trade continues to consolidate and our retail customers grow
larger and become more sophisticated, they may demand lower pricing and
increased promotional programs. Furthermore, larger customers may be better able
to operate on reduced inventories and potentially develop or increase their
focus on private label products. If we fail to maintain a good relationship with
our large retail customers, or maintain a wide offering of quality products, or
if we lower our prices or increase promotional support of our products in
response to pressure from our customers and are unable to increase the volume of
our products sold, our profitability could decline.
OUR OPERATING RESULTS MAY FLUCTUATE FROM PERIOD TO PERIOD AND IF WE FAIL TO MEET
MARKET EXPECTATIONS FOR A PARTICULAR PERIOD, OUR SHARE PRICE MAY DECLINE.
Our operating results have fluctuated from period to period and are
likely to continue to fluctuate as a result of a wide range of factors,
including seasonal variations in live pig supply and processed meat products
consumption. For example, demand for our products in general is relatively high
before the Chinese New Year in January or February each year and lower
thereafter. Our production and sales of chilled and frozen pork are generally
lower in the summer, due to a lower supply of live pigs. Interim reports may not
be indicative of our performance for the year or our future performance, and
period-to-period comparisons may not be meaningful due to a number of reasons
beyond our control. We cannot assure you that our operating results will meet
the expectations of market analysts or our investors. If we fail to meet their
expectations, there may be a decline in our share price.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUES FROM SALES IN THE PRC AND ANY
DOWNTURN IN THE CHINESE ECONOMY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS AND FINANCIAL CONDITION.
Substantially all of our revenues are generated from sales in the PRC.
We anticipate that revenues from sales of our products in the PRC will continue
to represent a substantial proportion of our total revenues in the near future.
Any significant decline in the condition of the PRC economy could, among other
things, adversely affect consumer buying power and discourage consumption of our
products, which in turn would have a material adverse effect on our revenues and
profitability.
WE RELY ON OUR EXCLUSIVE NETWORK OF SHOWCASE STORES, NETWORK STORES AND
SUPERMARKET BRAND COUNTERS FOR THE SUCCESS OF OUR SALES AND OUR BRAND IMAGE, AND
SHOULD THEY PERFORM POORLY, OUR REVENUES AND BRAND IMAGE COULD BE MATERIALLY AND
ADVERSELY AFFECTED.
In addition to our sales to wholesale customers, we sell our products
through showcase stores, network stores and supermarket brand counters. All of
these retail-based stores exclusively sell our pork products and display the
Zhongpin logo on the fascia of the stores. For the years ended December 31,
2004, 2005 and 2006, these retail outlets accounted for approximately 47.0%,
48.0% and 45.0%, respectively, of our total revenue. If the sales performance of
our retail-based stores deteriorates, this could adversely affect the financial
results of the company. In addition, any sanitation, hygiene or food quality
problems that might arise from the retail-based stores could adversely affect
our brand image and lead to a loss of sales. We do not own or franchise any of
the retail-based stores.
9
WE RELY ON THE PERFORMANCE OF OUR WHOLESALE RETAILER AND MASS MERCHANT CUSTOMERS
FOR THE SUCCESS OF OUR SALES, AND SHOULD THEY PERFORM POORLY OR GIVE PRIORITY TO
OUR COMPETITORS' PRODUCTS, OUR SALES PERFORMANCE AND BRANDING IMAGE COULD BE
MATERIALLY AND ADVERSELY AFFECTED.
In addition to our retail sales channel, we sell our products to
supermarkets and large retailers, which in turn sell the products to end
consumers. If the sales performance of our wholesale customers deteriorates,
this could adversely affect the performance of our products. Furthermore, our
wholesale customers also carry products which directly compete with our products
for retail space and consumer purchases. There is a risk that our wholesale
customers may give higher priority to products of, or form alliances with, our
competitors. If our wholesale customers do not continue to purchase our
products, or provide our products with similar levels of promotional support,
our sales performance and brand imaging could be adversely affected.
THE LOSS OF ANY OF OUR SIGNIFICANT CUSTOMERS COULD REDUCE OUR REVENUES AND OUR
PROFITABILITY.
Our key customers are principally supermarkets and large retailers in
the PRC. For the years ended December 31, 2004, 2005 and 2006, sales to our five
largest customers amounted in the aggregate to approximately $11.1 million,
$15.5 million and $28.76 million, respectively, accounting for approximately
26%, 22% and 20%, respectively, of our total revenue. We have not entered into
long-term supply contracts with any of these major customers. Therefore, there
can be no assurance that we will maintain or improve the relationships with
these customers, or that we will be able to continue to supply these customers
at current levels or at all. If we cannot maintain long-term relationships with
our major customers, the loss of a significant portion of our sales to them
could have an adverse effect on our business, financial condition and results of
operations.
RECENT REGULATORY ENFORCEMENT CRACKDOWNS ON FOOD PROCESSING COMPANIES IN THE PRC
COULD INCREASE OUR COMPLIANCE COSTS AND REDUCE OUR PROFITABILITY.
We believe we are in compliance in all material respects with all
applicable regulatory requirements of the PRC and all local jurisdictions in
which we operate. However, the PRC government authorities recently have taken
certain measures to maintain the PRC food market in good order and to improve
the integrity of the PRC food industry, such as enforcing full compliance with
industry standards and closing certain food processing companies in the PRC that
did not meet regulatory standards. While the closing of competing meat
processing plants that do not meet regulatory standards could increase our
revenues in the long term, we may also experience increased regulatory
compliance costs that could reduce our profitability. We also cannot assure you
that our businesses and operations will not be affected as a result of the
deteriorating reputation of the food industry in the PRC due to recent scandals
regarding food products.
OUR FAILURE TO COMPLY WITH INCREASINGLY STRINGENT ENVIRONMENTAL REGULATIONS AND
RELATED LITIGATION COULD RESULT IN SIGNIFICANT PENALTIES, DAMAGES AND ADVERSE
PUBLICITY FOR OUR BUSINESS.
Our operations and properties are subject to extensive and increasingly
stringent laws and regulations pertaining to, among other things, the discharge
of materials into the environment and the handling and disposition of wastes
(including solid and hazardous wastes) or otherwise relating to protection of
the environment. Failure to comply with any laws and regulations and future
changes to them may result in significant consequences to us, including civil
and criminal penalties, liability for damages and negative publicity.
10
We have incurred, and will continue to incur, significant capital and
operating expenditures to comply with these laws and regulations. We cannot
assure you that additional environmental issues will not require currently
unanticipated investigations, assessments or expenditures, or that requirements
applicable to us will not be altered in ways that will require us to incur
significant additional costs.
OUR CONTROLLING SHAREHOLDER HAS SIGNIFICANT INFLUENCE OVER OUR MANAGEMENT AND
AFFAIRS AND COULD EXERCISE THIS INFLUENCE AGAINST YOUR BEST INTERESTS.
At March 15, 2007, Mr. Xianfu Zhu, our controlling shareholder,
beneficially owned approximately 46.3% of our outstanding shares of common stock
(33.5% including shares of common stock issuable upon conversion of our
outstanding shares of Series A convertible preferred stock), and our other
executive officers and directors collectively beneficially owned an additional
10.2% of our outstanding shares of common stock (7.4% including shares of common
stock issuable upon conversion of our outstanding shares of Series A convertible
preferred stock). As a result, pursuant to our By-laws and applicable laws and
regulations, our controlling shareholder and our other executive officers and
directors are able to exercise significant influence over our Company,
including, but not limited to, any shareholder approvals for the election of our
directors and, indirectly, the selection of our senior management, the amount of
dividend payments, if any, our annual budget, increases or decreases in our
share capital, new securities issuance, mergers and acquisitions and any
amendments to our By-laws. Furthermore, this concentration of ownership may
delay or prevent a change of control or discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of us, which
could decrease the market price of our shares.
DETERIORATION OF OUR PERISHABLE PRODUCTS MAY OCCUR DUE TO DELIVERY DELAYS,
MALFUNCTIONING OF FREEZER FACILITIES OR POOR HANDLING DURING TRANSPORTATION,
WHICH COULD ADVERSELY AFFECT OUR REVENUES AND THE GOODWILL OF OUR BUSINESS.
The condition of our food products (being perishable goods) may
deteriorate due to shipment or delivery delays, malfunctioning of freezer
facilities or poor handling during delivery by shippers or intermediaries. We
are not aware of any instances whereby we were made to compensate for delivery
delays, malfunctioning of freezer facilities or poor handling during
transportation. However, there is no assurance that such incidents will not
occur in the future. In the event of any delivery delays, malfunctioning of
freezer facilities or poor handling during transportation, we may have to make
compensation payments and our reputation, business goodwill and revenue will be
adversely affected.
IF WE FAIL TO DEVELOP AND MAINTAIN AN EFFECTIVE SYSTEM OF INTERNAL CONTROLS, WE
MAY NOT BE ABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD; AS
A RESULT, CURRENT AND POTENTIAL SHAREHOLDERS COULD LOSE CONFIDENCE IN OUR
FINANCIAL REPORTS, WHICH COULD HARM OUR BUSINESS AND THE TRADING PRICE OF OUR
COMMON STOCK.
Effective internal controls are necessary for us to provide reliable
financial reports and effectively prevent fraud. Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal
controls over financial reporting and have our independent registered public
accounting firm annually attest to our evaluation, as well as issue their own
opinion on our internal controls over financial reporting, beginning with our
Annual Report on Form 10-K for the fiscal year ended December 31, 2007. We plan
to prepare for compliance with Section 404 by strengthening, assessing and
testing our system of internal controls to provide the basis for our report. The
process of strengthening our internal controls and complying with Section 404 is
expensive and time consuming, and requires significant management attention,
especially given that we have only recently undertaken any efforts to comply
with the requirements of Section 404. We cannot be certain that the measures we
will undertake will ensure that we will maintain adequate controls over our
financial processes and reporting in the future. Furthermore,
11
if we are able to rapidly grow our business, the internal controls that we will
need will become more complex, and significantly more resources will be required
to ensure our internal controls remain effective. Failure to implement required
controls, or difficulties encountered in their implementation, could harm our
operating results or cause us to fail to meet our reporting obligations. If we
or our auditors discover a material weakness in our internal controls, the
disclosure of that fact, even if the weakness is quickly remedied, could
diminish investors' confidence in our financial statements and harm our stock
price. In addition, non-compliance with Section 404 could subject us to a
variety of administrative sanctions, including the suspension of trading,
ineligibility for listing on one of the Nasdaq Stock Markets or national
securities exchanges, and the inability of registered broker-dealers to make a
market in our common stock, which would further reduce our stock price.
POSSIBLE MATERIAL MISSTATEMENTS OR OMISSIONS IN THE REGISTRATION STATEMENT OR
REPORTS WE FILED UNDER THE FEDERAL SECURITIES LAWS OR OUR FAILURE TO FILE
CERTAIN REPORTS UNDER THE FEDERAL SECURITIES LAWS COULD REQUIRE US TO REPURCHASE
CERTAIN OUTSTANDING SHARES OF OUR COMMON STOCK OR TO PAY SUBSTANTIAL DAMAGES,
EITHER OF WHICH COULD MATERIALLY AND ADVERSELY AFFECT OUR CASH FLOWS AND OUR
FINANCIAL CONDITION.
Prior to our acquisition of Falcon Link on January 30, 2006, we engaged
in businesses unrelated to our current operations, which businesses were managed
by officers and directors who are no longer employed by or affiliated with our
company. In January 2004, we filed with the Securities and Exchange Commission a
registration statement on Form SB-2 to register the resale of up to 85,028
shares of common stock that were beneficially owned by Richard Armstrong, our
Chairman of the Board, Chief Executive Officer and Chief Financial Officer at
that time, and certain other stockholders of our company, including certain
members of Mr. Armstrong's immediate family. Such registration statement became
effective under the Securities Act on October 21, 2004. In addition, since
October 2004 we have been obligated to file with the Commission periodic reports
under the Exchange Act.
During the preparation of this prospectus, certain information has come
to our attention that indicates there may have been from time to time certain
material misstatements or omissions in our registration statement on Form SB-2
or in the reports we filed under the Exchange Act. In addition, we may have
failed to timely file certain reports under the Exchange Act or amendments or
supplements to our reports previously filed under the Exchange Act. Such
information includes the following:
o Following the change of control of our company on March 30, 2005,
we failed to amend our registration statement on Form SB-2 to
disclose such change of control, the change in the composition of
our board of directors, the changes in our executive officers and
the fact that we had ceased operations and had changed our
strategic plan to position our company as an acquisition vehicle
for the purchase of an operating company located in the PRC.
o Following our execution of the stock purchase agreement dated as
of March 15, 2005 among Richard Armstrong, Halter Capital
Corporation and our company, we failed to amend our registration
statement on Form SB-2 or to file a Current Report on Form 8-K
disclosing that, in connection with the proposed sale by Richard
Armstrong of a controlling interest in our company on March 30,
2005, (i) we had agreed to sell to Richard Armstrong, in
consideration of his forgiveness of certain outstanding
indebtedness owed to Mr. Armstrong and his family for loans and
accrued salary, all of the assets of our company relating to our
former business of supplying skilled workers and engineering
professionals to businesses on a temporary basis, which sale of
assets would represent a sale of substantially all of our assets,
and (ii) as a result of such asset sale, our company would become
on March 30, 2005 a blank check company (I.E., a development
stage company that has no specific business plan or has indicated
its
12
business plan is to engage in a merger or acquisition of an
unidentified company or companies).
o By agreeing on or about March 15, 2005 to sell all or
substantially all of our assets on or about March 30, 2005, a
claim may be made that on or about March 15, 2005 our company no
longer had a specific business plan and became a blank check
company on such date. In such event, we failed to make adequate
disclosure by amendment to our registration statement on Form
SB-2 or in proper filings under the Exchange Act of the change in
our status.
In general under U.S. federal and state securities laws, material
misstatements and omissions in a prospectus may give rise to rights of
rescission in favor of, or claims for damages by, persons who purchased
securities pursuant to the prospectus. Claims for rescission generally provide
successful claimants with the right to recover the entire purchase price of
their securities plus interest from the date of purchase in exchange for
surrender of their purchased shares. In general, a claim for rescission must be
made by a person who purchased shares pursuant to a defective prospectus or
other representation and within the applicable statute of limitations period,
which, for claims made under federal law (Section 12 of the Securities Act) and
most state statutes, is one year from the time the claimant discovered or
reasonably should have discovered the facts giving rise to the claim, but not
more than three years from the date of the event giving rise to the claim. A
successful claimant for damages under federal or state law could be awarded an
amount to compensate for the decrease in value of his or her shares caused by
the alleged violation (including, possibly, punitive damages), together with
interest, while retaining the shares. Claims under the anti-fraud provisions of
the federal securities laws must generally be brought within two years of
discovery, but not more than five years after occurrence.
While we have not received any claims that we have violated any federal
or state securities laws, and while based upon current facts known to us at this
time, we do not believe that assertion of such claims by any of our current or
former stockholders is probable, there can be no assurance that any such claims
will not arise in the future. Should any such claims arise, we can give no
assurance that the claimant in such action will not prevail. Depending upon the
magnitude of any judgment that may be entered against us in any such actions,
our cash flow, financial condition and prospects could be materially and
adversely affected.
RISKS RELATING TO OUR INDUSTRY
THE PIG SLAUGHTERING AND PROCESSED MEAT INDUSTRIES IN THE PRC ARE SUBJECT TO
EXTENSIVE GOVERNMENT REGULATION, WHICH IS STILL EVOLVING AND COULD ADVERSELY
AFFECT OUR ABILITY TO SELL PRODUCTS IN THE PRC OR INCREASE OUR PRODUCTION COSTS.
The pig slaughtering and processed meat industries in the PRC are
heavily regulated by a number of governmental agencies, including primarily the
Ministry of Agriculture, the Ministry of Commerce, the Ministry of Health, the
General Administration of Quality Supervision, Inspection and Quarantine and the
State Environmental Protection Administration. These regulatory bodies have
broad discretion and authority to regulate many aspects of the pig slaughtering
and processed meat industries in the PRC, including, without limitation, setting
hygiene standards for production and quality standards for processed meat
products. In addition, the pig slaughtering and processed meat products
regulatory framework in the PRC is still in the process of being developed. If
the relevant regulatory authorities set standards with which we are unable to
comply or which increase our production costs and hence our prices so as to
render our products non-competitive, our ability to sell products in the PRC may
be limited.
13
THE PIG SLAUGHTERING AND PROCESSED MEAT INDUSTRIES IN THE PRC MAY FACE
INCREASING COMPETITION FROM BOTH DOMESTIC AND FOREIGN COMPANIES, AS WELL AS
INCREASING INDUSTRY CONSOLIDATION, WHICH MAY AFFECT OUR MARKET SHARE AND PROFIT
MARGIN.
The pig slaughtering and processed meat industries in the PRC are highly
competitive. Our processed meat products are targeted at mid- to high-end
consumers, a market in which we face increasing competition, particularly from
foreign suppliers. In addition, the evolving government regulations in relation
to the pig slaughtering industry has driven a trend of consolidation through the
industry, with smaller operators unable to meet the increasing costs of
regulatory compliance and therefore at a competitive disadvantage. We believe
that our ability to maintain our market share and grow our operations within
this landscape of changing and increasing competition is largely dependant upon
our ability to distinguish our products and services.
In addition, prior to the entry of the PRC into the World Trade
Organization ("WTO"), high barriers to entry existed for many potential
competitors in our business through the use of tariffs and restrictive import
licensing and distribution practices. The admission of the PRC to the WTO has
lowered some of the tariffs and other barriers to entry so we can expect that
competition will increase.
We cannot assure you that our current or potential competitors will not
develop products of a comparable or superior quality to ours, or adapt more
quickly than we do to evolving consumer preferences or market trends. In
addition, our competitors in the raw meat market may merge or form alliances to
achieve a scale of operations or sales network which would make it difficult for
us to compete. Increased competition may also lead to price wars, counterfeit
products or negative brand advertising, all of which may adversely affect our
market share and profit margin. We cannot assure you that we will be able to
compete effectively with our current or potential competitors.
THE OUTBREAK OF ANIMAL DISEASES, INCLUDING THE RECENT OUTBREAK AFFECTING THOSE
IN CONTACT WITH STREPTOCOCCUS SUIS-INFECTED PIGS IN SICHUAN PROVINCE, PRC, OR
OTHER EPIDEMICS COULD ADVERSELY AFFECT OUR OPERATIONS.
An occurrence of serious animal diseases, such as foot-and-mouth
disease, or any outbreak of other epidemics in the PRC affecting animals or
humans might result in material disruptions to our operations, material
disruptions to the operations of our customers or suppliers, a decline in the
supermarket or food retail industry or slowdown in economic growth in the PRC
and surrounding regions, any of which could have a material adverse effect on
our operations and turnover. Recently, there has been an outbreak of
streptococcus suis in pigs, principally in Sichuan Province, PRC, with a large
number of cases of human infection following contact with diseased pigs. Our
procurement and production facilities are located in Henan Province, PRC and
were not affected by the streptococcus suis infection. However, there can be no
assurance that our facilities or products will not be affected by an outbreak of
this disease or similar ones in the future, or that the market for pork products
in the PRC will not decline as a result of fear of disease. In either case, our
business, results of operations and financial condition would be adversely and
materially affected.
CONSUMER CONCERNS REGARDING THE SAFETY AND QUALITY OF FOOD PRODUCTS OR HEALTH
CONCERNS COULD ADVERSELY AFFECT SALES OF OUR PRODUCTS.
Our sales performance could be adversely affected if consumers lose
confidence in the safety and quality of our products. Consumers in the PRC are
increasingly conscious of food safety and nutrition. Consumer concerns about,
for example, the safety of pork products, or about the safety of food additives
used in processed meat products, could discourage them from buying certain of
our products and cause our results of operations to suffer.
14
WE MAY BE SUBJECT TO SUBSTANTIAL LIABILITY SHOULD THE CONSUMPTION OF ANY OF OUR
PRODUCTS CAUSE PERSONAL INJURY OR ILLNESS AND, UNLIKE MOST FOOD PROCESSING
COMPANIES IN THE UNITED STATES, WE DO NOT MAINTAIN PRODUCT LIABILITY INSURANCE
TO COVER OUR POTENTIAL LIABILITIES.
The sale of food products for human consumption involves an inherent
risk of injury to consumers. Such injuries may result from tampering by
unauthorized third parties or product contamination or degeneration, including
the presence of foreign contaminants, chemical substances or other agents or
residues during the various stages of the procurement and production process.
While we are subject to governmental inspections and regulations, we cannot
assure you that consumption of our products will not cause a health-related
illness in the future, or that we will not be subject to claims or lawsuits
relating to such matters.
Even if a product liability claim is unsuccessful or is not fully
pursued, the negative publicity surrounding any assertions that our products
caused personal injury or illness could adversely affect our reputation with
customers and our corporate and brand image. Unlike most food processing
companies in the United States, but in line with industry practice in the PRC,
we do not maintain product liability insurance. Furthermore, our products could
potentially suffer from product tampering, contamination or degeneration or be
mislabeled or otherwise damaged. Under certain circumstances, we may be required
to recall products. Even if a situation does not necessitate a product recall,
we cannot assure you that product liability claims will not be asserted against
us as a result. A product liability judgment against us or a product recall
could have a material adverse effect on our revenues, profitability and business
reputation.
OUR PRODUCT AND COMPANY NAME MAY BE SUBJECT TO COUNTERFEITING AND/OR IMITATION,
WHICH COULD HAVE AN ADVERSE IMPACT UPON OUR REPUTATION AND BRAND IMAGE, AS WELL
AS LEAD TO HIGHER ADMINISTRATIVE COSTS.
We regard brand positioning as the core of our competitive strategy, and
intend to position our "Zhongpin" brand to create the perception and image of
"health, nutrition, freshness and quality" in the minds of our customers. There
have been frequent occurrences of counterfeiting and imitation of products in
the PRC in the past. We cannot guarantee that counterfeiting or imitation of our
products will not occur in the future or that we will be able to detect it and
deal with it effectively. Any occurrence of counterfeiting or imitation could
impact negatively upon our corporate and brand image, particularly if the
counterfeit or imitation products cause sickness, injury or death to consumers.
In addition, counterfeit or imitation products could result in a reduction in
our market share, a loss of revenues or an increase in our administrative
expenses in respect of detection or prosecution.
RISKS RELATING TO CONDUCTING BUSINESS IN THE PRC
Substantially all of our assets and operations are located in the PRC,
and substantially all of our revenue is sourced from the PRC. Accordingly, our
results of operations and financial position are subject to a significant degree
to economic, political and legal developments in the PRC, including the
following risks:
CHANGES IN THE POLITICAL AND ECONOMIC POLICIES OF THE PRC GOVERNMENT COULD HAVE
A MATERIAL ADVERSE EFFECT ON OUR OPERATIONS.
Our business operations may be adversely affected by the political and
economic environment in the PRC. The PRC has operated as a socialist state since
1949 and is controlled by the Communist Party of China. As such, the economy of
the PRC differs from the economies of most developed countries in many respects,
including, but not limited to:
15
o structure o capital re-investment
o government involvement o allocation of resources
o level of development o control of foreign exchange
o growth rate o rate of inflation
In recent years, however, the government has introduced measures
aimed at creating a "socialist market economy" and policies have been
implemented to allow business enterprises greater autonomy in their operations.
Nonetheless, a substantial portion of productive assets in the PRC is still
owned by the PRC government. Changes in the political leadership of the PRC may
have a significant affect on laws and policies related to the current economic
reforms program, other policies affecting business and the general political,
economic and social environment in the PRC, including the introduction of
measures to control inflation, changes in the rate or method of taxation, the
imposition of additional restrictions on currency conversion and remittances
abroad, and foreign investment. Moreover, economic reforms and growth in the PRC
have been more successful in certain provinces in the PRC than in others, and
the continuation or increases of such disparities could affect the political or
social stability in the PRC.
Although we believe the economic reform and the macroeconomic
measures adopted by the Chinese government have had a positive effect on the
economic development in the PRC, the future direction of these economic reforms
is uncertain and the uncertainty may decrease the attractiveness of our company
as an investment, which may in turn materially adversely affect the price at
which our stock trades.
SOCIAL CONDITIONS IN THE PRC COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
OPERATIONS AS THE PRC GOVERNMENT CONTINUES TO EXERT SUBSTANTIAL INFLUENCE OVER
THE MANNER IN WHICH WE MUST CONDUCT OUR BUSINESS ACTIVITIES.
The PRC only recently has permitted provincial and local economic
autonomy and private economic activities. The government of the PRC has
exercised and continues to exercise substantial control over virtually every
sector of the Chinese economy through regulation and state ownership. Our
ability to operate in the PRC may be adversely affected by changes in Chinese
laws and regulations, including those relating to taxation, import and export
tariffs, environmental regulations, land use rights, property and other matters.
We believe our operations in China are in compliance with all applicable legal
and regulatory requirements. However, the central or local governments may
impose new, stricter regulations or interpretations of existing regulations that
would require additional expenditures and efforts on our part to ensure our
compliance with such regulations or interpretations. Were the PRC government, or
local municipalities, to limit our ability to develop, produce, import or sell
our products in the PRC, or to finance and operate our business in the PRC, our
business could be adversely affected.
RECENT REGULATORY REFORMS IN THE PRC MAY LIMIT OUR ABILITY AS AN OFFSHORE
COMPANY CONTROLLED BY PRC RESIDENTS TO ACQUIRE ADDITIONAL COMPANIES OR
BUSINESSES IN THE PRC, WHICH COULD HINDER OUR ABILITY TO EXPAND IN THE PRC AND
ADVERSELY AFFECT OUR LONG-TERM PROFITABILITY.
Our long-term business plan may include an acquisition strategy to
increase the number or types of products we offer, increase our manufacturing or
production capabilities, strengthen our sources of supply or broaden our
geographic reach. Recent PRC regulations relating to acquisitions of PRC
companies by foreign entities controlled by PRC residents may limit our ability
to acquire PRC companies and adversely affect the implementation of our strategy
as well as our business and prospects.
16
On August 8, 2006, the PRC Ministry of Commerce, the State Assets
Supervision and Administration of Commerce, the State Administration of
Taxation, the State Administration of Industry and Commerce, the China
Securities Regulatory Commission and the State Administration of Foreign
Exchange jointly promulgated a new rule entitled "Provisions Regarding Mergers
and Acquisitions of Domestic Enterprises by Foreign Investors" (the "M&A
Rules"), which became effective on September 8, 2006, relating to acquisitions
by foreign investors of businesses and entities in the PRC. The M&A Rules
provide the basic framework in the PRC for the approval and registration of
acquisitions of domestic enterprises in the PRC by foreign investors.
In general, the M&A Rules provide that if an offshore company controlled
by PRC residents intends to acquire or take control of a PRC company, such
acquisition or transaction will be subject to strict examination by the relevant
foreign exchange authorities. The M&A Rules also state that the approval of the
relevant foreign exchange authorities is required for any sale or transfer by
the PRC residents of a PRC company's assets or equity interests to foreign
entities, such as us, for equity interests or assets of the foreign entities.
The M&A Rules also stress the necessity of protecting national economic
security in the PRC in the context of foreign acquisitions of domestic
enterprises. Foreign investors must comply with comprehensive reporting
requirements in connection with acquisitions of domestic companies in key
industrial sectors that may affect the security of the "national economy" or in
connection with acquisitions of domestic companies holding well-known trademarks
or traditional brands in the PRC. Failure to comply with such reporting
requirements that cause, or may cause, significant impact on national economic
security may be terminated by the relevant ministries or be subject to other
measures as are deemed necessary to mitigate any adverse impact.
Our business operations or future strategy could be adversely affected
by the interpretations of the M&A Rules. For example, if we decide to acquire a
PRC company, we cannot assure you that we or the owners of such company, as the
case may be, will be able to complete the necessary approvals, filings and
registrations for the acquisition. This may restrict our ability to implement
our acquisition strategy and adversely affect our business and prospects.
THE FAILURE OF THE PRC RESIDENTS THAT CONTROL OUR COMPANY TO COMPLY WITH VARIOUS
REPORTING OBLIGATIONS UNDER PRC REGULATIONS GOVERNING THE INVESTMENT BY FOREIGN
ENTITIES IN DOMESTIC ENTERPRISES MAY RESTRICT OUR FOREIGN EXCHANGE ACTIVITIES
AND OUR ABILITY TO RECEIVE DIVIDENDS FROM OUR SUBSIDIARIES LOCATED IN THE PRC.
In the formation of Falcon Link as an offshore special purpose vehicle
controlled by PRC residents, the six individual shareholders of Henan Zhongpin
were required to comply with various PRC regulations governing the financing of
a domestic enterprise by a foreign entity or special purpose vehicle, and each
submitted a registration form with the local SAFE branch with respect to his
respective ownership interests in Falcon Link. Each of such shareholders is
required to file an amendment to such registration if Falcon Link or our company
experiences certain material events, such as changes in share capital, share
transfers, mergers or acquisitions, spin-off transactions or the use of assets
in the PRC to guarantee offshore obligations. While we believe our PRC
stockholders are in compliance with all applicable rules and regulations
governing the financing by foreign entities of domestic enterprises, the failure
to comply with such rules and regulations, including compliance with the
registration procedures, may result in restrictions on our PRC resident
stockholders or Henan Zhongpin or may subject our PRC subsidiaries to more
stringent review and approval processes, including the respect to their foreign
exchange activities and their ability to remit dividends to our company and to
make foreign-currency-denominated borrowings.
17
FURTHER MOVEMENTS IN EXCHANGE RATES MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
At present, almost all of our domestic sales are denominated in Renminbi
and our export sales are denominated primarily in U.S. dollars. In addition, we
incur a portion of our cost of sales in Euros, U.S. dollars and Japanese yen in
the course of our purchase of imported production equipment and raw materials.
Since 1994, the conversion of the Renminbi into foreign currencies has been
based on rates set by the People's Bank of China, and the exchange rate for the
conversion of the Renminbi to U.S. dollars had generally been stable. However,
starting from July 21, 2005, the PRC government moved the Renminbi to a managed
floating exchange rate regime based on market supply and demand with reference
to a basket of currencies. As a result, the Renminbi is no longer directly
pegged to the U.S. dollar. On March 15, 2007, the exchange rate of the U.S.
dollar against the Renminbi was RMB 7.742 per U.S. dollar. The exchange rate may
become volatile, the Renminbi may be revalued further against the U.S. dollar or
other currencies or the Renminbi may be permitted to enter into a full or
limited free float, which may result in an appreciation or depreciation in the
value of the Renminbi against the U.S. dollar or other currencies, any of which
could have a material adverse effect on our financial condition and results of
operations.
GOVERNMENTAL CONTROL OF CURRENCY CONVERSION MAY AFFECT THE ABILITY OF OUR
COMPANY TO OBTAIN WORKING CAPITAL FROM OUR SUBSIDIARIES LOCATED IN THE PRC AND
THE VALUE OF YOUR INVESTMENT.
The PRC government imposes controls on the convertibility of Renminbi
into foreign currencies and, in certain cases, the remittance of currency
outside of the PRC. We receive substantially all of our revenues in Renminbi.
Under our current structure, our income is primarily derived from payments from
Henan Zhongpin. Shortages in the availability of foreign currency may restrict
the ability of Henan Zhongpin to remit sufficient foreign currency to pay
dividends or other payments to us, or otherwise satisfy its foreign currency
denominated obligations. Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest
payments and expenditures from trade-related transactions, can be made in
foreign currencies without prior approval from the PRC State Administration of
Foreign Exchange by complying with certain procedural requirements. However,
approval from appropriate government authorities is required in those cases in
which Renminbi is to be converted into foreign currency and remitted out of the
PRC to pay capital expenses, such as the repayment of bank loans denominated in
foreign currencies. The PRC government also may at its discretion restrict
access in the future to foreign currencies for current account transactions. If
the foreign exchange control system prevents us from obtaining sufficient
foreign currency to satisfy our currency demands, we may not be able to pay
dividends in foreign currencies to our shareholders.
HENAN ZHONGPIN IS SUBJECT TO RESTRICTIONS ON MAKING PAYMENTS TO US, WHICH COULD
ADVERSELY AFFECT OUR CASH FLOW AND OUR ABILITY TO PAY DIVIDENDS ON OUR CAPITAL
STOCK.
We are a holding company incorporated in the State of Delaware and do
not have any assets or conduct any business operations other than our investment
in our operating subsidiary in the PRC, Henan Zhongpin. As a result of our
holding company structure, we will rely entirely on contractual payments or
dividends from Henan Zhongpin for our cash flow to fund our corporate overhead
and regulatory obligations. The PRC government imposes controls on the
conversion of Renminbi into foreign currencies and the remittance of currencies
out of the PRC. As a result, we may experience difficulties in completing the
administrative procedures necessary to obtain and remit foreign currency.
Further, as Henan Zhongpin has in the past, and Henan Zhongpin and our other
subsidiaries in the PRC may in the future, incur debt on its or their own, the
instruments governing such debt may restrict such subsidiary's ability to make
contractual or dividend payments to any parent corporation or other affiliated
entity. If we are unable to receive all of the funds we require for our
operations through contractual or dividend
18
arrangements with our PRC subsidiaries, we may not have sufficient cash flow to
fund our corporate overhead and regulatory obligations in the United States and
may be unable to pay dividends on our shares of capital stock.
UNCERTAINTIES WITH RESPECT TO THE PRC LEGAL SYSTEM COULD ADVERSELY AFFECT OUR
ABILITY TO ENFORCE OUR LEGAL RIGHTS.
We conduct our business primarily through Henan Zhongpin, our subsidiary
in the PRC. Our operations in the PRC are governed by PRC laws and regulations.
We are generally subject to laws and regulations applicable to foreign
investments in the PRC and, in particular, laws applicable to wholly
foreign-owned enterprises. The PRC legal system is based on written statutes.
Prior court decisions may be cited for reference but have limited precedential
value.
Since 1979, PRC legislation and regulations have significantly enhanced
the protections afforded to various forms of foreign investments in the PRC.
However, the PRC has not developed a fully-integrated legal system and
recently-enacted laws and regulations may not sufficiently cover all aspects of
economic activities in the PRC. In particular, because these laws and
regulations are relatively new, and because of the limited volume of published
decisions and their nonbinding nature, the interpretation and enforcement of
these laws and regulations involve uncertainties. In addition, the PRC legal
system is based in part on government policies and internal rules (some of which
are not published on a timely basis or at all) that may have a retroactive
effect. As a result, we may not be aware of our violation of these policies and
rules until some time after the violation. The uncertainties regarding such
regulations and policies present risks that may affect our ability to achieve
our business objectives. If we are unable to enforce any legal rights we may
have under our contracts or otherwise, our ability to compete with other
companies in our industry could be materially and adversely affected. In
addition, any litigation in the PRC may be protracted and result in substantial
costs and diversion of resources and management attention.
IT MAY BE DIFFICULT TO EFFECT SERVICE OF PROCESS UPON US OR OUR DIRECTORS OR
SENIOR MANAGEMENT WHO LIVE IN THE PRC OR TO ENFORCE ANY JUDGMENTS OBTAINED FROM
NON-PRC COURTS.
Our operations are conducted and our assets are located within the PRC.
In addition, all of our Directors and our senior management personnel reside in
the PRC, where substantially all of their assets are located. You may experience
difficulties in effecting service of process upon us, our Directors or our
senior management as it may not be possible to effect such service of process
outside the PRC. In addition, our PRC counsel, DeHeng Law Office, has advised us
that the PRC does not have treaties with the United States and many other
countries providing for reciprocal recognition and enforcement of court
judgments. Therefore, recognition and enforcement in the PRC of judgments of a
court in the United States or certain other jurisdictions may be difficult or
impossible.
RECENT AMENDMENTS TO THE CORPORATE INCOME TAX LAW IN THE PRC MAY INCREASE THE
INCOME TAXES PAYABLE BY OUR OPERATING SUBSIDIARIES LOCATED IN THE PRC, WHICH
COULD ADVERSELY AFFECT OUR PROFITABILITY.
On March 16, 2007, the National People's Congress of the PRC adopted a
new corporate income tax law in its fifth plenary session. The new corporate
income tax law unifies the application scope, tax rate, tax deduction and
preferential policy for both domestic and foreign-invested enterprises. The new
corporate income tax law will be effective on January 1, 2008. According to the
new corporate income tax law, the applicable income tax rate for our operating
subsidiaries is subject to change. As the implementation detail has not yet been
announced, we cannot be sure of the potential impact of such new corporate
income tax law on our financial position or operating results.
19
RISK RELATING TO AN INVESTMENT IN OUR SECURITIES
WHILE CASH DIVIDENDS WERE PAID BY A DEEMED PREDECESSOR TO OUR COMPANY IN 2003
AND 2002, WE HAVE NOT PAID ANY CASH DIVIDENDS AND NO CASH DIVIDENDS WILL BE PAID
IN THE FORESEEABLE FUTURE.
Henan Zhongpin, a deemed predecessor to our company and our subsidiary
in the PRC, paid cash dividends to its stockholders in 2002 and 2003. However,
we do not anticipate paying cash dividends on our common stock in the
foreseeable future and we may not have sufficient funds legally available to pay
dividends. Even if the funds are legally available for distribution, we may
nevertheless decide not to pay, or may be unable to pay, any dividends. We
intend to retain all earnings for our company's operations.
OUR COMMON STOCK IS THINLY TRADED AND YOU MAY BE UNABLE TO SELL AT OR NEAR "ASK"
PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR OTHERWISE
DESIRE TO LIQUIDATE YOUR SHARES.
We cannot predict the extent to which an active public market for our
common stock will develop or be sustained. However, we do not rule out the
possibility of applying for listing on the Nasdaq Global Market or other
exchanges. Our common stock has historically been sporadically or
"thinly-traded" on the "Over-the-Counter Bulletin Board," meaning that the
number of persons interested in purchasing our common stock at or near bid
prices at any given time may be relatively small or nonexistent. This situation
is attributable to a number of factors, including the fact that we are a small
company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-adverse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we become more seasoned and viable. As a consequence
of this lack of liquidity, the trading of relatively small quantities of shares
by our stockholders may disproportionately influence the price of our common
stock in either direction. The price for our shares could, for example, decline
precipitously in the event a large number of shares of our common stock is sold
on the market without commensurate demand, as compared to a seasoned issuer that
could better absorb those sales without adverse impact on its share price. We
cannot give you any assurance that a broader or more active public trading
market for our common stock will develop or be sustained.
PAST ACTIVITIES OF OUR COMPANY AND ITS AFFILIATES, INCLUDING OUR FORMER
EXECUTIVE OFFICERS AND DIRECTORS, MAY LEAD TO FUTURE LIABILITY FOR OUR COMPANY.
Prior to our acquisition of Falcon Link and its subsidiary, Henan
Zhongpin, on January 30, 2006, we engaged in businesses unrelated to our current
operations. In connection with such acquisition, we did not receive any
indemnifications from our former controlling shareholders or management against
any loss, damage or expense arising out of or based on any breach of or
inaccuracy in any of their representations and warranties made regarding such
acquisition, and any liabilities that may arise relating to such prior
businesses may have a material adverse effect on our company.
THE MARKET PRICE FOR OUR STOCK MAY BE VOLATILE AND SUBJECT TO WIDE FLUCTUATIONS,
WHICH MAY ADVERSELY AFFECT THE PRICE AT WHICH YOU CAN SELL OUR SHARES.
The market price for our stock may be volatile and subject to wide
fluctuations in response to factors including the following:
o actual or anticipated fluctuations in our quarterly operations
results;
o changes in financial estimates by securities research analysts;
20
o conditions in foreign or domestic meat processing or agricultural
markets;
o changes in the economic performance or market valuations of other
meat processing companies;
o announcements by us or our competitors of new products,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o addition or departure of key personnel;
o fluctuations of exchange rates between the RMB and the U.S.
dollar;
o intellectual property litigation;
o general economic or political conditions in the PRC.
In addition, the securities market has from time to time experienced
significant price and volume fluctuations that are not related to the operating
performance of particular companies. These market fluctuations may also
materially and adversely affect the market price of our stock.
FUTURE SALES OF SHARES OF OUR COMMON STOCK MAY DECREASE THE PRICE FOR SUCH
SHARES.
On January 30, 2007, the 11,250,005 shares of our common stock issued to
the former stockholders of Falcon Link in our acquisition of that company on
January 30, 2006, became eligible for resale by such stockholders on the open
market, subject to the volume limitations and other restrictions of Rule 144. On
January 31, 2007, the 5,268,856 shares of our common stock issuable upon
conversion of the 5,268,856 shares of our Series A convertible preferred stock
outstanding at March 15, 2007 also became eligible for resale on the open
market, subject to the volume limitations and other restrictions of Rule 144. In
addition, the Securities and Exchange Commission has declared effective our
registration statement on Form S-1 registering the resale from time to time in
the open market the 1,041,108 shares of our common stock, including 943,908
shares of our common stock issuable upon conversion of our Series A convertible
preferred stock, offered hereby. Actual sales of such shares, or the prospect of
sales of such shares by the holders of such shares, may have a negative effect
on the market price of the shares of our common stock. We may also register for
resale additional outstanding shares of our common stock, additional shares that
are issuable upon conversion of outstanding shares of our Series A convertible
preferred stock or shares that are issuable upon exercise of outstanding
warrants or reserved for issuance under our stock option plan. Once such shares
are registered, they can be freely sold in the public market. If any of our
stockholders either individually or in the aggregate cause a large number of
securities to be sold in the public market, or if the market perceives that
these holders intend to sell a large number of securities, such sales or
anticipated sales could result in a substantial reduction in the trading price
of shares of our common stock and could also impede our ability to raise future
capital.
21
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," and elsewhere in this prospectus constitute
forward-looking statements. These statements involve risks known to us,
significant uncertainties, and other factors which may cause our actual results,
levels of activity, performance, or achievements to be materially different from
any future results, levels of activity, performance, or achievements expressed
or implied by those forward-looking statements.
You can identify forward-looking statements by the use of the words
"may," "will," "should," "could," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "intends," "potential," "proposed," or "continue" or
the negative of those terms. These statements are only predictions. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined above. These factors may cause our actual results
to differ materially from any forward-looking statement.
Although we believe that the exceptions reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares of our
common stock by the selling stockholders.
22
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS
MARKET FOR COMMON STOCK
Our shares began trading on the OTC Bulletin Board on January 12, 2005.
Prior to that date, there was no public market for our common stock.
Our common stock is traded on the OTC Bulletin Board under the symbol
"ZHNP." Prior to January 30, 2006, the date on which our reverse acquisition of
Falcon Link was consummated, our common stock was traded on the OTC Bulletin
Board under the symbol "STGH." During the period March 30, 2005 to January 30,
2006, we operated as a public "shell" corporation with no significant revenues
or assets. During such period, there was only a limited public market for our
common stock and our common stock traded only sporadically on the OTC Bulletin
Board.
The following table contains information about the range of high and low
bid prices for our common stock for each full quarterly period since our shares
began publicly trading and for the second fiscal quarter of 2007 (through April
2), based upon reports of transactions on the OTC Bulletin Board.
High Low
Fiscal 2005
-----------
First Quarter (commencing January 12)..... $ 3.54 $ 3.54
Second Quarter............................ 18.03 18.03
Third Quarter............................. 123.72 18.03
Fourth Quarter............................ 53.02 36.06
Fiscal 2006
-----------
First Quarter............................. $ 54.79 $ 5.11
Second Quarter............................ 8.00 5.00
Third Quarter............................. 10.00 8.00
Fourth Quarter............................ 8.50 7.50
Fiscal 2007
-----------
First Quarter............................. $ 8.50 $ 6.75
Second Quarter (through April 2).......... $ 7.38 $ 7.18
The source of these high and low prices was the OTC Bulletin Board.
These quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commissions and may not represent actual transactions. The high and low
prices listed have been rounded up to the next highest two decimal places. In
addition, such prices have been adjusted to give effect to the one-for-35.349
reverse stock split of all issued and outstanding shares of our common stock,
which became effective on February 16, 2006. As of April 2, 2007, there were
approximately 51 holders of record of our common stock. On April 2, 2007, the
closing bid price of our common stock as reported by the OTC Bulletin Board was
$7.25 per share.
At March 15, 2007, there were 5,268,856 shares of our common stock
issuable upon conversion of outstanding shares of our Series A convertible
preferred stock. In addition, there were 4,434,799 shares of our common stock
issuable upon exercise of outstanding common stock purchase warrants and
1,035,000 shares of our common stock issuable upon conversion or exercise of the
securities issuable upon the exercise of outstanding unit purchase warrants. We
have registered 943,908 of these shares,
23
along with 97,200 currently outstanding shares of our common stock (a total of
1,041,108 shares of our common stock) under the registration statement of which
this prospectus is a part.
While cash dividends were paid in 2003 and 2002 by Henan Zhongpin, which
is a deemed predecessor to our company and our subsidiary in the PRC, we have
never paid or declared any dividend on our common stock and we do not anticipate
paying cash dividends in the foreseeable future. As a result of our holding
company structure, we would rely entirely on contractual or dividend payments
from Henan Zhongpin for our cash flow to pay dividends on our common stock. The
PRC government imposes controls on the conversion of Renminbi into foreign
currencies and the remittance of currencies out of the PRC, which also may
affect our ability to pay cash dividends in the future. See Note 1 to our
audited consolidated financial statements.
The holders of our Series A convertible preferred stock are entitled to
receive, when and as declared by our Board of Directors, dividends in such
amounts as may be determined by our 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 our common stock until there
shall have been paid or declared and set apart during that fiscal year for the
holders of our Series A convertible preferred stock 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 convertible preferred stock.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
On January 30, 2006, our Board of Directors and stockholders adopted and
approved our 2006 Equity Incentive Plan (the "2006 Plan"). The 2006 Plan allows
for awards of stock options, restricted stock grants and share appreciation
rights for up to 1,800,000 shares of common stock.
As of March 15, 2007, no awards had been granted under the 2006 Plan.
Options granted in the future under the 2006 Plan are within the discretion of
our board of directors. The following table summarizes the number of shares of
our common stock authorized for issuance under our equity compensation plans.
(c)
NUMBER OF
SECURITIES
REMAINING
AVAILABLE
(b) FOR FUTURE
(a) WEIGHTED- ISSUANCE UNDER
NUMBER OF AVERAGE EQUITY
SECURITIES TO BE EXERCISE COMPENSATION
ISSUED UPON PRICE PLANS (EXCLUDING
EXERCISE OF OF SECURITIES
OUTSTANDING OUTSTANDING REFLECTED
PLAN CATEGORY OPTIONS OPTIONS IN COLUMN (a))
------------- ------- ------- --------------
Equity compensation plans
approved by security holders 0 N/A 1,800,000
Equity compensation plans not
approved by security holders 0 N/A 0
--- ---------
Total 0 N/A 1,800,000
=== =========
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS IN THIS PROSPECTUS CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF OUR COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE,
AMONG OTHERS, UNCERTAINTIES RELATING TO GENERAL ECONOMIC AND BUSINESS
CONDITIONS, INTENSE COMPETITION FOR THE ACQUISITION OF BUSINESSES, AND DOMESTIC
AND FOREIGN GOVERNMENT REGULATIONS.
During the period from our formation on February 4, 2003 to March 30,
2005, we were in an unrelated business that was discontinued on March 30, 2005.
From March 30, 2005 to January 30, 2006, we did not generate any significant
revenue, and accumulated no significant assets, as we explored various business
opportunities. On January 30, 2006, in exchange for a controlling interest in
our publicly-held "shell" corporation, we 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, our historical
financial statements for all periods prior to January 30, 2006 included in this
prospectus are those of Falcon Link.
OVERVIEW
We are principally engaged in the meat and food processing and
distribution business in the PRC. Currently, we have six processing plants
located in Henan and Heilongjiang Provinces in the PRC, with a total of nine
production lines. Our current total production capacity for chilled pork and
frozen pork is 446 metric tons per day, based on an 8-hour working day, or
approximately 160,560 metric tons on an annual basis. We also have production
capacity for prepared meats of 70 metric tons per 8-hour day (or approximately
25,200 metric tons on an annual basis) and for fruits and vegetables of 35
metric tons per 8-hour day (or approximately 12,600 metric tons on an annual
basis). We utilize state-of-the-art equipment in all of our abattoirs and
processing facilities.
On June 7, 2006, our subsidiary, Henan Zhongpin, formed a wholly-owned
subsidiary, Zhumadian Zhongpin Food Limited, through which we plan to invest
approximately $14 million to construct a new production facility in southern
Henan Province that will be designed with a production capacity for chilled or
frozen pork of 200 metric tons per 8-hour working day, or approximately 72,000
metric tons on an annual basis. We plan to put this new plant into production in
the second quarter of fiscal 2007.
On August 21, 2006, a new wholly-owned subsidiary, Anyang Zhongpin Food
Company Limited was formed by Henan Zhongpin. Through this subsidiary, we plan
to invest approximately $13.5 million to construct a new facility in northern
Henan Province with a production capacity of 175 metric tons per 8-hour working
day, or approximately 63,000 metric tons on an annual basis. Approximately 60%
of the production capacity will be designed for the production of chilled pork
and approximately 40% will be designed for the production of frozen pork. We
plan to put the new plant into operation in the third quarter of fiscal 2007.
Our products are sold under the "Zhongpin" brand name. Our customers
include over 16 international or domestic fast food companies in the PRC, over
36 export-registered processing factories
25
and over 1,531 school cafeterias, factory canteens, army posts and national
departments. We also sell directly to over 2,721 retail outlets, including
supermarkets, within the PRC.
Since 2001, we have been one of the "leading agricultural industrial
enterprises" in the PRC. During the past five years, we achieved a compound
annual growth rate of 56% in terms of revenues and 57% in terms of net profits.
We have established distribution networks in more than 24 provinces, including
four cities with special legal status, in the North, East, South and South
Midland of the PRC, and also have formed strategic partnerships with leading
supermarket chains and the catering industry in the PRC. In addition, we export
products to the European Union, Southeast Asia, Russia and South Africa.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We evaluate, on an on-going basis, our estimates for reasonableness as
changes occur in our business environment. We base our estimates on experience,
the use of independent third-party specialists, and various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments, estimates, and uncertainties, and potentially result in
materially different results under different assumptions and conditions. We
believe the following are our critical accounting policies:
ACCOUNTS RECEIVABLE. We state accounts receivable at cost, net of
allowance for doubtful accounts. Based on our past 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. During fiscal 2006, we were successful in
collecting $0.70 million, or approximately 93%, of doubtful accounts that were
outstanding at December 31, 2005 for longer than one year. It is management's
belief that the current bad debt allowance adequately reflects an appropriate
estimate based on management's judgment.
INVENTORY VALUATION. We value our pork inventories at the lower of cost,
determined on a weighted average basis, and net realizable value (the estimated
market price). When the carcasses are disassembled and transferred from primary
processing to various manufacturing departments, we adjust the net realizable
value for product specifications and further processing, which becomes the basis
for calculating inventory values. In addition, substantially all inventory
expenses, packaging, and supplies are valued by the weighted average method.
GOODWILL AND OTHER INTANGIBLES. Our identifiable intangible assets are
amortized over their useful life, unless the useful life is determined to be
indefinite. The useful life of an identifiable intangible asset is based on an
analysis of several factors, including contractual, regulatory or legal
obligations, demand, competition and industry trends. Goodwill and
indefinite-lived intangible assets are not amortized, but are tested annually
for impairment.
The goodwill impairment test is a two-step process. First, the fair
value of each reporting unit is compared with the carrying amount of the
reporting unit, including goodwill. The estimated fair value of
26
the reporting unit is determined on the basis of discounted cash flow. If the
carrying value exceeds fair value of the reporting unit, then a second step must
be completed in order to determine the amount of goodwill impairment that should
be recorded. In the second step, the implied fair value of the reporting unit's
goodwill is determined by allocating the reporting unit's fair value to all of
its assets and liabilities other than goodwill in a manner similar to a purchase
price allocation. The resulting implied fair value of the goodwill that results
from the application of this second step is then compared to the carrying amount
of the goodwill and an impairment charge is recorded for the difference. Annual
impairment testing for indefinite-lived intangible assets compares the fair
value and carrying value of the intangible. The fair value of indefinite-lived
intangible assets is determined on the basis of discounted cash flows. If the
carrying value exceeds fair value, the indefinite-lived intangible asset is
considered impaired and an impairment charge is recorded for the difference.
Intangible assets that are subject to amortization are evaluated for impairment
using a process similar to that used to evaluate elements of long-lived assets.
The assumptions used in the estimate of fair value are consistent with
historical performance and the estimates and assumptions used in determining
future profit plans for each reporting unit. We review product growth patterns,
market share information, industry trends, changes in distribution channels, and
economic indicators in determining the estimates and assumptions used to develop
cash flow and profit plan assumptions.
INCOME TAXES. We account for income taxes in accordance with Statement
of Financial Accounting Standard No. 109, "Accounting for Income Taxes." We
compute our provision for income taxes based on the statutory tax rates and tax
planning opportunities available to us in the PRC. Significant judgment is
required in evaluating our tax positions and determining our annual tax
position.
RESULTS OF OPERATIONS
In fiscal 2007, we intend to continue to focus on the implementation of
our strategic plan to continue the growth we have experienced in the last four
years. As discussed above, in February 2006, we completed the construction of a
new, fresh-chilled meat processing facility in the Zhongpin Industrial Park II,
in November 2006, we added an additional processing plant by leasing a meat
processing plant in Heilongjiang Province and we are currently constructing
additional processing facilities in Henan Province. We also are expanding our
capability in temperature-controlled, physical logistic systems. On January 31,
2006, we received gross proceeds of $27.6 million from the sale of our Series A
convertible preferred stock and warrants. We expect to continue to expand our
capital base, to scale up operations and to develop new markets, streamline our
supply chain management, continue the development of our information technology
systems, invest in training and human resources development and accelerate
revenue and profit growth.
In fiscal 2007, we expect the results of the pork and pork products
segment of our business to remain strong. While supply is expected to be ample,
live hog prices are expected to increase. We anticipate that our gross profit
margin will decrease slightly during the remainder of fiscal 2007 due to the
increase in the prices of raw materials. We anticipate strong demand for pork
throughout the remainder of fiscal 2007. We also expect to increase our market
share in the meat and meat products segment in our target markets in fiscal
2007.
27
The following table sets forth, for the periods indicated, certain
statement of operations data:
YEAR ENDED DECEMBER 31,
-----------------------------
2006 2005 2004
---- ---- ----
(U.S. dollars in thousands)
Revenues:
Sales revenues ................... $143,812 $ 73,400 $ 42,787
Cost of sales .................... 123,196 61,221 36,670
------------ -------- --------
Gross Profit ................... 20,616 12,179 6,117
Operating expenses:
General and administrative
expenses ........................ 2,989 2,396 1,214
Operating expenses ............... 3,485 2,300 1,845
Liquidated damages ............... 8,354 -- --
------------ -------- --------
Total operating expenses ....... 14,828 4,696 3,059
------------ -------- --------
Income from operations ............. 5,787 7,483 3,058
------------ -------- --------
Other income (expense):
Interest income .................. 316 183 86
Other income ..................... 50 167 32
Allowances income ................ 2,364 86 928
Exchange gain (loss) ............. (21) 226 (23)
Interest expense ................. (1,553) (1,802) (1,208)
------------ -------- --------
Total other income (expense) ... 1,154 (1,140) (185)
------------ -------- --------
Net income before taxes ............ 6,942 6,343 2,873
Provision for income taxes ....... 568 353 85
------------ -------- --------
Net income after taxes ............. 6,374 5,990 2,788
Minority interest in gain (loss).. 15 76 20
------------ -------- --------
Net income ......................... $ 6,359 5,914 2,768
Foreign currency translation
adjustment ...................... 1,379 304 --
------------ -------- --------
Comprehensive income ............... $ 7,738 $ 6,218 $ 2,768
============ ======== ========
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2006 AND DECEMBER 31, 2005
REVENUE. Total revenue increased from $73.40 million for the year ended
December 31, 2005 to $143.81 million for the year ended December 31, 2006, which
represented an increase of $70.41 million, or approximately 96%. The increase in
revenues was primarily due to increased sales in our meat and meat products
segment resulting from the effects of the continued increase in the amount of
branded stores sales and increased sales through food service distributors.
During the year ended December 31, 2006, 621 new showcase stores, "branded"
retail stores and supermarket counters were opened and we expanded our marketing
and sales efforts to include 31 additional second-tier cities and 84 additional
third-tier cities domestically.
During the year ended December 31, 2006, revenues from sales to branded
stores increased to $64.7 million, which represented an increase of $29.5
million, or approximately 84%, as compared to the year ended December 31, 2005.
During the year ended December 31, 2006, revenues from sales to food service
distributors increased to $28.5 million, which represented an increase of $16.2
million, or approximately 131%, as compared to the year ended December 31, 2005.
During the year ended December 31, 2006, revenues from sales to restaurants and
non-commercial customers increased to $38.4
28
million, which represented an increase of $20.1 million, or approximately 109%,
as compared to the year ended December 31, 2005. During the year ended December
31, 2006, revenues from export sales increased to $12.2 million, which
represented an increase of $4.7 million, or approximately 63%, as compared to
the year ended December 31, 2005. Within these four distribution channels, the
percentage of growth was highest for food service distributors. As a percentage
of total sales revenue, sales to food service distributors has grown from 17%
for the year ended December 31, 2005 to 20% for the year ended December 31,
2006, and sales through branded stores and super markets has decreased from 48%
for the year ended December 31, 2005 to 45% for the year ended December 31,
2006.
COST OF SALES. Cost of sales increased from $61.22 million for the year
ended December 31, 2005 to $123.20 million for the year ended December 31, 2006,
which represented an increase of $61.98 million, or approximately 101%. The
increase in cost of sales was primarily due to the corresponding increase in
revenues. The gross profit margin (gross profit divided by total sales revenue)
decreased from 16.59% for the year ended December 31, 2005 to 14.34% for the
year ended December 31, 2006. The decrease of gross profit margin was primarily
due to an increase in average live hog prices for the year ended December 31,
2006 as compared to the year ended December 31, 2005.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $2.40 million for the year ended December 31, 2005 to $2.99
million for the year ended December 31, 2006, which represented an increase of
$0.59 million, or approximately 25%. During fiscal 2006, we collected $1.34
million of outstanding accounts receivable for which bad debt allowance had been
provided during fiscal 2005. Such collections reduced our general and
administrative expenses by $1.34 million in fiscal 2006. As a percentage of
revenues, general and administrative expenses decreased from 3.26% for the year
ended December 31, 2005 to 2.08% for the year ended December 31, 2006. The
increase in general and administrative expenses primarily resulted from the
additional expenses we are incurring as a publicly-traded company that is
reporting under the U.S. federal securities laws. During the year ended December
31, 2006, we incurred approximately $1.22 million in legal fees, accounting
fees, advisory fees and consulting fees relating to such matters and in
preparing to become compliant in a timely manner with our obligations under the
Sarbanes-Oxley Act of 2002.
PENALTY EXPENSE. During the year ended December 31, 2006, we incurred a
non-recurring expense in the aggregate amount of $8.35 million as a result of
payments we made in December 2006 to the holders of our Series A convertible
preferred stock and related stock purchase warrants because of our failure to
register in a timely manner for resale under the Securities Act of 1933, as
amended, the shares of our common stock issuable upon the conversion or exercise
of such securities. Such payments included cash payments in the aggregate amount
of $1.04 million and our issuance of an aggregate of 379,743 shares of our
common stock valued at $2.85 million, and warrants to purchase 884,799 shares of
our common stock valued at $4.46 million. We do not anticipate any additional
expense of this nature in fiscal 2007.
OPERATING EXPENSES. Operating expenses increased from $2.30 million for
the year ended December 31, 2005 to $3.49 million for the year ended December
31, 2006, which represented an increase of $1.19 million, or approximately 52%.
As a percentage of revenue, operating expenses decreased from 3.13% for the year
ended December 31, 2005 to 2.42% for the year ended December 31, 2006. The
decrease in operating expenses as a percentage of revenue was the result of our
increased total sales and operating scale. The increase in the net amount of
operating expenses was primarily the result of additional transportation
expenses of $0.93 million.
INTEREST EXPENSE. Interest expense decreased from $1.80 million for the
year ended December 31, 2005 to $1.56 million for the year ended December 31,
2006, which represented a decrease of $0.24 million, or approximately 13%. The
decrease in interest expense was primarily a result of our having
29
adequate cash flow from the equity private placement we consummated in the first
quarter of 2006, which enabled us to repay and reduce our
higher-interest-bearing bank loans. During the year ended December 31, 2006, our
weighted average outstanding bank debt decreased by approximately $1.47 million,
from $22.00 million for the year ended December 31, 2005 to $20.53 million for
the year ended December 31, 2006. Our weighted average borrowing rate decreased
from 7.99% for the year ended December 31, 2005 to 5.83% for the year ended
December 31, 2006.
INTEREST INCOME, ALLOWANCE INCOME, OTHER INCOME AND EXCHANGE GAIN
(LOSS). Interest income, allowances income, other income and exchange gain
(loss) increased from $0.66 million for the year ended December 31, 2005 to
$2.71 million for the year ended December 31, 2006, which represented an
increase of $2.05 million, or approximately 311%. This increase was primarily
the result of an increase of $2.28 million in allowance income. The cash grant
we received from the Chinese central government for our participation in
research and development programs and training programs was recharacterized from
a long-term liability to allowance income when the production line was completed
and placed into operation during fiscal 2006.
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, including raw meat products and raw
fruits and vegetable products. The increase of $0.22 million in the provision
for income taxes for the year ended December 31, 2006 over the year ended
December 31, 2005 resulted from an increase of $0.67 million in our pre-tax net
income from the sale of prepared products in fiscal 2006.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 2005 AND DECEMBER 31, 2004
REVENUE. Total revenue increased by $30.61 million, or approximately
72%, during the year ended December 31, 2005, from $42.79 million in the year
ended December 31, 2004 to $73.40 million for the year ended December 31, 2005.
The increase in revenues was primarily due to increased sales in our 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.
During the year ended December 31, 2005, revenues from sales to branded
stores increased to $35.23 million, which represented an increase of $15.12
million, or approximately 75%, as compared to the year ended December 31, 2004,
of which $11.50 million was due to sales to new branded stores and $3.62 million
was due to increased same store sales. During the year ended December 31, 2005,
revenues from sales to food services distributors increased to $12.33 million,
which represented an increase of $4.67 million, or approximately 61%, as
compared to the year ended December 31, 2004, of which $1.40 million was due to
increased sales to existing distributors and $3.27 million was due to sales to
new distributors. During the year ended December 31, 2005, revenues from sales
to restaurants and non-commercial customers increased to $18.35 million, which
represented an increase of $7.40 million, or approximately 68%, as compared to
the year ended December 31, 2004, of which $5.92 million was due to sales to new
customers and $1.48 million was due to increased sales to existing customers.
During the year ended December 31, 2005, revenues from export sales increased to
$7.49 million, which represented an increase of $3.42 million, or approximately
84%, of which $0.69 million was due to sales to new export customers and $2.73
million was due to increased sales to existing export customers.
COST OF SALES. Cost of sales increased by $24.55 million, or
approximately 67%, for the year ended December 31, 2005, from $36.67 million in
fiscal 2004 to $61.22 million in fiscal 2005. As a percentage of revenue, total
cost of sales decreased from approximately 86% in fiscal 2004 to approximately
83% in fiscal 2005. The decrease in our cost of sales as a percentage of revenue
was primarily due to a lower rate of increase in raw material costs in fiscal
2005 (an increase of approximately
30
4%) as compared to the rate of increase in the prices of our products in fiscal
2005 (an increase of approximately 7%).
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $1.19 million, or approximately 98%, in the year ended December 31,
2005, from $1.21 million in fiscal 2004 to $2.40 million in fiscal 2005. As a
percentage of revenues, general and administrative expenses increased from 2.84%
in fiscal 2004 to 3.26% in fiscal 2005. During fiscal 2005, our bad debt
allowance increased by $0.73 million due to a slowdown in collections of old
accounts receivable. In addition, we incurred expenses of $0.46 million in
fiscal 2005 relating to the private placement of our equity securities that we
completed in January 2006.
INTEREST EXPENSE. Interest expense increased by $0.59 million, or
approximately 49%, in the year ended December 31, 2005, from $1.21 million in
fiscal 2004 to $1.80 million in fiscal 2005, primarily due to an increase of
approximately 31% in our average indebtedness. During fiscal 2005, we increased
our average indebtedness by approximately $5.84 million to meet our increasing
working capital requirements resulting from our significant growth in revenue.
Our weighted average annual borrowing rate increased from 7.23% in fiscal 2004
to 7.99% in fiscal 2005. We have been able to secure debt financing with lower
interest costs, and at September 30, 2006, our weighted average annual borrowing
rate had been reduced to 6.16%.
INTEREST INCOME, ALLOWANCE INCOME, OTHER INCOME AND EXCHANGE GAIN
(LOSS). Interest income, allowances income, other income and exchange gain
(loss) decreased by $0.36 million, or approximately 35%, in the year ended
December 31, 2005, from $1.02 million in fiscal 2004 to $0.66 million in fiscal
2005, primarily due to a decrease of allowance income. During fiscal 2004, we
received central or local government grants in the aggregate amount of $0.93
million for our participation in research and development programs targeted by
the government.
INCOME TAXES. The increase of $0.27 million in the provision for income
taxes in fiscal 2005 over the prior fiscal year resulted from an increase of
$0.82 million in our pre-tax income from the sale of prepared products in fiscal
2005.
SEGMENT INFORMATION
We operate in two business segments: pork and pork products, and
vegetables and fruits.
Our pork and pork products segment is involved primarily in the
processing of live market hogs into fresh, frozen and processed pork products.
Our 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.
Our vegetables and fruits segment is involved primarily in the
processing of fresh vegetables and fruits. We contract 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 our operations ensures freshness from harvest to processing. We contract to
grow more than 20 categories of vegetables and fruits, including asparagus,
sweet corn, broccoli, mushrooms, lima beans, strawberries and capsicum.
31
The following tables set forth our revenues, sales in metric tons,
operating income and production processed in metric tons by segment for the
fiscal years ended December 31, 2006, 2005 and 2004 and the percentage increases
for each segment between fiscal periods.
SALES BY SEGMENT
(U.S. DOLLARS IN MILLIONS)
YEAR ENDED
DECEMBER 31, NET PERCENTAGE
------------------- CHANGE CHANGE
2006 2005 2006/2005 2006/2005
-------- -------- --------- ---------
Pork and Pork Products
Chilled pork ................. $ 71.76 $ 31.50 $ 40.26 128%
Frozen pork .................. 50.88 33.03 17.85 54%
Prepared pork products ....... 15.44 6.93 8.51 123%
Vegetables and Fruits .......... 5.73 1.94 3.79 195%
-------- ------- -------
Total ................. $ 143.81 $ 73.40 $ 70.41 96%
======== ======== =======
SALES BY SEGMENT
(IN METRIC TONS)
YEAR ENDED
DECEMBER 31, NET PERCENTAGE
------------------- CHANGE CHANGE
2006 2005 2006/2005 2006/2005
-------- -------- --------- ---------
Pork and Pork Products
Chilled pork ................. 59,284 27,546 31,738 115%
Frozen pork .................. 43,785 30,011 13,774 46%
Prepared pork products ....... 9,838 4,747 5,091 107%
Vegetables and Fruits .......... 9,504 2,681 6,823 254%
-------- -------- -------
Total ................. 122,411 64,985 57,426 88%
======== ======== =======
OPERATING INCOME BY SEGMENT
(U.S. DOLLARS IN MILLIONS)
OPERATING MARGIN
YEAR ENDED YEAR ENDED
DECEMBER 31, NET DECEMBER 31,
-------------- CHANGE ----------------
2006 2005 2006/2005 2006 2005
------ ------ --------- ------ -----
Pork and Pork Products
Chilled pork ................. $ 2.65 $ 3.31 $(0.66) 3.69% 10.51%
Frozen pork .................. 1.52 3.34 (1.82) 2.99% 10.11%
Prepared pork products ....... 1.26 0.60 0.66 8.16% 8.66%
Vegetables and Fruits .......... 0.36 0.23 0.13 6.28% 11.86%
------ ------ -----
Total ................. $ 5.79 $ 7.48 $(1.69) 4.03% 10.19%
====== ====== ======
32
PRODUCTION BY SEGMENT
(IN METRIC TONS)
YEAR ENDED
DECEMBER 31, NET PERCENTAGE
------------------- CHANGE CHANGE
2006 2005 2006/2005 2006/2005
-------- -------- --------- ---------
Pork and Pork Products
Chilled pork ................. 59,288 27,599 31,689 115%
Frozen pork .................. 47,219 29,793 17,426 58%
Prepared pork products ....... 9,971 4,763 5,208 109%
Vegetables and Fruits .......... 9,342 2,713 6,629 244%
-------- -------- -------
Total ................. 125,820 64,868 60,952 94%
======== ======== =======
SALES BY SEGMENT
(U.S. DOLLARS IN MILLIONS)
YEAR ENDED
DECEMBER 31, NET PERCENTAGE
------------------- CHANGE CHANGE
2005 2004 2005/2004 2005/2004
-------- -------- --------- ---------
Pork and Pork Products
Chilled pork ................. $ 31.50 $ 16.98 $ 14.52 86%
Frozen pork .................. 33.03 22.28 10.75 48%
Prepared pork products ....... 6.93 2.54 4.39 173%
Vegetables and Fruits .......... 1.94 0.99 0.95 96%
-------- -------- -------
Total ................. $ 73.40 $ 42.79 $ 30.61 72%
======== ======== =======
SALES BY SEGMENT
(IN METRIC TONS)
YEAR ENDED
DECEMBER 31, NET PERCENTAGE
------------------- CHANGE CHANGE
2005 2004 2005/2004 2005/2004
-------- -------- --------- ---------
Pork and Pork Products
Chilled pork ................. 27,546 16,046 11,500 72%
Frozen pork .................. 30,011 21,116 8,895 42%
Prepared pork products ....... 4,747 1,751 2,996 171%
Vegetables and Fruits .......... 2,681 1,525 1,156 76%
-------- -------- -------
Total ................. 64,985 40,438 24,547 61%
======== ======== =======
33
OPERATING INCOME BY SEGMENT
(U.S. DOLLARS IN MILLIONS)
OPERATING MARGIN
YEAR ENDED YEAR ENDED
DECEMBER 31, NET DECEMBER 31,
-------------- CHANGE ----------------
2005 2004 2005/2004 2005 2004
------ ------ --------- ------ -----
Pork and Pork Products
Chilled pork ................. $ 3.31 $ 1.23 $ 2.08 10.51% 7.24%
Frozen pork .................. 3.34 1.58 1.76 10.11% 7.09%
Prepared pork products ....... 0.60 0.21 0.39 8.66% 8.27%
Vegetables and Fruits .......... 0.23 0.04 0.19 11.86% 4.04%
------ ------ ------
Total ................. $ 7.48 $ 3.06 $ 4.42 10.19% 7.15%
====== ====== ======
PRODUCTION BY SEGMENT
(IN METRIC TONS)
YEAR ENDED
DECEMBER 31, NET PERCENTAGE
------------------- CHANGE CHANGE
2005 2004 2005/2004 2005/2004
-------- -------- --------- ---------
Pork and Pork Products
Chilled pork ................. 27,599 16,114 11,485 71%
Frozen pork .................. 29,793 21,022 8,771 42%
Prepared pork products ....... 4,763 1,780 2,983 168%
Vegetables and Fruits .......... 2,713 1,610 1,103 68%
-------- -------- -------
Total ................. 64,868 40,526 24,342 60%
======== ======== =======
SALES BY SEGMENT
(U.S. DOLLARS IN MILLIONS)
YEAR ENDED
DECEMBER 31, NET PERCENTAGE
------------------- CHANGE CHANGE
2004 2003 2004/2003 2004/2003
-------- -------- --------- ---------
Pork and Pork Products
Chilled pork ................. $ 16.98 $ 11.41 $ 5.57 49%
Frozen pork .................. 22.28 16.80 5.48 33%
Prepared pork products ....... 2.54 0.78 1.76 226%
Vegetables and Fruits .......... 0.99 0.60 0.39 65%
-------- -------- -------
Total ................. $ 42.79 $ 29.59 $ 13.20 45%
======== ======== =======
34
SALES BY SEGMENT
(IN METRIC TONS)
YEAR ENDED
DECEMBER 31, NET PERCENTAGE
------------------- CHANGE CHANGE
2004 2003 2004/2003 2004/2003
-------- -------- --------- ---------
Pork and Pork Products
Chilled pork ................. 16,046 10,597 5,449 51%
Frozen pork .................. 21,116 15,616 5,500 35%
Prepared pork products ....... 1,751 601 1,150 191%
Vegetables and Fruits .......... 1,525 941 584 62%
-------- -------- -------
Total ................. 40,438 27,755 12,683 46%
======== ======== =======
OPERATING INCOME BY SEGMENT
(U.S. DOLLARS IN MILLIONS)
OPERATING MARGIN
YEAR ENDED YEAR ENDED
DECEMBER 31, NET DECEMBER 31,
-------------- CHANGE ----------------
2004 2003 2004/2003 2004 2003
------ ------ --------- ------ -----
Pork and Pork Products
Chilled pork ................. $ 1.23 $ 0.71 $ 0.52 7.24% 6.22%
Frozen pork .................. 1.58 0.92 0.66 7.09% 5.48%
Prepared pork products ....... 0.21 0.05 0.16 8.27% 6.41%
Vegetables and Fruits .......... 0.04 0.03 0.01 4.04% 5.00%
------ ------ ------
Total ................. $ 3.06 $ 1.71 $ 1.35 7.15% 5.78%
====== ====== ======
PRODUCTION BY SEGMENT
(IN METRIC TONS)
YEAR ENDED
DECEMBER 31, NET PERCENTAGE
------------------- CHANGE CHANGE
2004 2003 2004/2003 2004/2003
-------- -------- --------- ---------
Pork and Pork Products
Chilled pork ................. 16,114 10,607 5,507 52%
Frozen pork .................. 21,022 15,687 5,335 34%
Prepared pork products ....... 1,780 613 1,167 190%
Vegetables and Fruits .......... 1,610 1,207 403 33%
-------- -------- -------
Total ................. 40,526 28,114 12,412 44%
-------- -------- ------- ----
35
ADDITIONAL OPERATING DATA
In assessing our existing operations and planning our future growth and
the development of our business, management considers, among other factors, our
revenue growth and growth in sales volume by market segment, as well as our
sales by distribution channel and geographic market coverage.
The following table sets forth our revenues by sales channel for the
three years ended December 31, 2004, 2005 and 2006.
SALES BY DISTRIBUTION CHANNEL
(U.S. DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
DISTRIBUTION ------------------------------------------------------
CHANNEL 2004 2005 2006
------- ---- ---- ----
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
Branded stores ................... $ 20.11 47.0% $ 35.23 48.0% $ 64.71 45.0%
Food services distributors ....... 7.66 17.9 12.33 16.8 28.48 19.8
Restaurants and non-commercial ... 10.95 25.6 18.35 25.0 38.40 26.7
Export ........................... 4.07 9.5 7.49 10.2 12.22 8.5
------- ----- ------- ----- ------- -----
Total ........................ $ 42.79 100.0% $ 73.40 100.0% $143.81 100.0%
======= ===== ======= ===== ======= =====
The following table sets forth information with respect to the average
number of products we offered, the average number of stores in our retail
network and the number of provinces and cities in the PRC in which we offered
and sold our products for each of the three years ended December 31, 2004, 2005
and 2006.
YEAR ENDED DECEMBER 31,
---------------------------
2004 2005 2006
----- ----- -----
No. of products ............................... 125 168 229
No. of retail stores .......................... 978 2,100 2,721
Expansion of Market Coverage
No. of Provinces ............................ 23 24 24
No. of first-tier cities .................... 23 29 29
No. of second-tier cities ................... 36 44 75
No. of Third-tier cities .................... 109 142 226
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations over the three years ended December 31,
2006 primarily through cash from operating activities and borrowings under our
lines of credit with various lending banks in the PRC. In January 2006, we
completed a private placement of our Series A convertible preferred stock and
common stock purchase warrants and received net proceeds of approximately $23.11
million. At December 31, 2004, 2005 and 2006 we had cash and cash equivalents of
$5.20 million, $10.14 million and $21.69 million, respectively.
Net cash provided by operating activities was $9.46 million in fiscal
2006, $13.08 million in fiscal 2005 and $0.61 million in fiscal 2004. Net cash
provided by operating activities in fiscal 2006 was
36
primarily attributable to the net income of $6.36 million generated in fiscal
2006 and an increase of $8.25 million in accounts payable and other payables due
to improved payment terms to suppliers. In addition, due to our failure to have
our registration statement filed under the Securities Act of 1933, as amended,
declared effective by the Securities and Exchange Commission during fiscal 2006,
we accrued $8.35 million of penalty expense, of which $1.04 million was paid by
cash and $7.31 million was paid by issuing shares of our common stock and
warrants. Net cash used in operating activities in fiscal 2006 was primarily
attributable to increases in inventories, accounts receivable and taxes payable
in the amounts of $7.73 million, $3.32 million and $1.68 million, respectively.
However, during fiscal 2006, management focused on reducing the average age of
our accounts receivable. Our average accounts receivable turnover days decreased
from approximately 42 days in fiscal 2005 to approximately 30 days in fiscal
2006. In addition, our average inventory turnover days increased from
approximately 16 days in fiscal 2005 to approximately 18 days in fiscal 2006.
Net cash provided by operating activities in fiscal 2005 consisted primarily of
net income of $5.91 million, an increase in accounts payable and accrued
liabilities of $7.14 million, and increase in taxes payable of $1.30 million and
an increase in the allowance for bad debt of $1.21 million. Cash used in
operating activities in fiscal 2005 was primarily due to an increase of $3.79
million in accounts receivable and other receivables. Net cash provided by
operating activities in fiscal 2004 consisted primarily of net income of $2.77
million, an improvement of inventory management that generated cash inflow of
$1.32 million, an improved payment term that resulted in cash inflow of $1.20
million and an increase in taxes payable of $0.92 million. Cash used in
operating activities in fiscal 2004 was primarily due to an increase of $5.33
million in accounts receivable and other receivables.
Net cash used in investing activities was $26.28 million in fiscal 2006,
$13.23 million in fiscal 2005 and $2.54 million in fiscal 2004. In fiscal 2006,
construction in progress in the amount of $21.96 million for the construction of
Zhongpin Industrial Park II was completed and transferred to fixed assets.
During fiscal 2006, we invested an additional $17.05 million in construction in
progress and expended $1.82 million for the purchase of fixed assets. In
addition, we expended $7.40 million for an investment in land use rights during
fiscal 2006. During fiscal 2005, we expended $12.70 million for the construction
of additional production facilities and production lines. During fiscal 2004, we
expended $1.54 million for the purchase of fixed assets.
Net cash provided by financing activities was $26.99 million in fiscal
2006, $4.88 million in fiscal 2005 and $0.99 million in fiscal 2004. In fiscal
2006, cash provided by financing activities included net proceeds from the
issuance of Series A convertible preferred stock and common stock purchase
warrants of $23.11 million and net proceeds of short-term loans of $30.08
million, and the net cash used in financing activities included the repayment of
short-term indebtedness in the aggregate amount of $25.23 million, the repayment
of long-term indebtedness in the amount of $0.35 million and the repayment of
bank overdrafts of $0.62 million. During fiscal 2005 and 2004, we received net
proceeds from short-term bank loans of $9.64 million and $2.04 million,
respectively.
At December 31, 2006, Henan Zhongpin had short-term bank and
governmental loans in the aggregate amount of $23.99 million with a weighted
average interest rate per annum of 6.26%, and lines of credit with aggregate
credit availability of $83.75 million, as follows:
MAXIMUM
BANK CREDIT AMOUNT INTEREST MATURITY
---- AVAILABILITY BORROWED RATE DATE
------------ ----------- -------- ----------
Agriculture Bank of China ............................. $ 23,051,212 $ 2,433,184 7.344% 09/10/2007
2,561,246 7.334% 12/25/2007
896,436 7.344% 12/29/2007
Industrial and Commercial Bank of China ............... 15,367,475 1,920,934 5.85% 03/30/2007
1,920,934 5.85% 05/24/2007
37
MAXIMUM
BANK CREDIT AMOUNT INTEREST MATURITY
---- AVAILABILITY BORROWED RATE DATE
------------ ----------- -------- ----------
1,920,934 6.12% 10/11/2007
China Construction Bank ............................... 11,525,606 640,311 6.417% 01/16/2007
CITIC Industrial Bank ................................. 6,403,114 5,122,492 5.85% 07/16/2007
Agriculture Development Bank of China ................. 25,612,458 3,841,869 5.85% 07/03/2007
2,561,246 5.85% 07/17/2007
Bank of China ......................................... 10,244,983 --
Shanghai Pudong Development Bank of China ............. 6,403,114 --
Guangdong Development Bank ............................ 3,841,869 --
China Merchants Bank .................................. 5,122,492
------------
Total ......................................... $107,572,323 $23,819,587
============ ===========
Canadian Government Transfer Loan ..................... $ 1,780,440 * 05/15/2043
Canadian Government Transfer Loan - Current portion ... $ 145,671 6.02% 05/15/2007
City Finance .......................................... $ 131,904 0.00% None
City Finance - current portion ........................ $ 25,612 0.00% None
- ----------------
* 58% of the principal amount of this loan bears interest at the rate of 6.02%
per annum and the remaining principal amount of this loan is interest free.
All repayments are applied first to the interest-bearing portion of this loan.
Of our outstanding short-term indebtedness at December 31, 2006, $3.46
million aggregate principal amount of loans was secured by our land and plants
located in the PRC and $20.36 million aggregate principle amount of loans was
guaranteed by our wholly-owned subsidiary, Henan Zhongpin Industry Co., Ltd.
We believe our existing cash and cash equivalents, together with our
available lines of credit, will be sufficient to finance our investment in new
facilities, operating requirements and anticipated capital expenditures of
approximately $26.0 million over the next 12 months. We may, however, determine
to sell additional debt or equity securities in fiscal 2007 to raise funds for
additional capital projects or strategic acquisitions that will enable us to
strengthen our market position and accelerate our growth.
38
CONTRACTUAL COMMITMENTS
The following table summarizes our contractual obligations at December
31, 2006 and the effect those obligations are expected to have on our liquidity
and cash flow in future periods.
PAYMENTS DUE BY PERIOD
(IN THOUSANDS)
LESS THAN 1-3 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
----------------------- ------ ---- ---- ---- ---------
Long-Term Debt Obligations .... $2,058 $146 $291 $291 $1,330
Capital Lease Obligations ..... -- -- -- -- --
Operating Lease Obligations ... 781 243 538 -- --
Purchase Obligations .......... -- -- -- -- --
Other Obligations ............. -- -- -- -- --
------ ---- ---- ---- ------
Total ................... $2,839 $389 $829 $291 $1,330
====== ==== ==== ==== ======
INFLATION AND SEASONALITY
While demand for our products in general is relatively high before the
Chinese New Year in January or February each year and lower thereafter, we do
not believe our operations have been materially affected by inflation or
seasonality.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DISCLOSURES ABOUT MARKET RISK. We 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. We currently do 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
our operations are conducted in the PRC, with the exception of our export
business and limited overseas purchases of raw materials. Most of our sales and
purchases are conducted within the PRC in Renminbi, which is the official
currency of the PRC. As a result, the effect of the fluctuations of exchange
rates is considered minimal to our business operations.
Substantially all of our revenues and expenses are denominated in
Renminbi. However, we use 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 our net assets and income derived from our operations in the
PRC.
INTEREST RATE RISK. We do not have significant interest rate risk, as
our debt obligations are primarily short-term in nature, with fixed interest
rates.
CREDIT RISK. We have not experienced significant credit risk, as most of
our customers are long-term customers with superior payment records. Our
receivables are monitored regularly by our credit managers.
39
NEW ACCOUNTING STANDARDS
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 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. We expect the Statement will have no material impact
on our 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 we have not traditionally paid
compensation through the issuance of equity securities, no impact is expected on
our 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 this
position has no application to our 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 our operations will
depend on future accounting pronouncements or changes in accounting principles.
In March 2005, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 47, "Accounting for Conditional Asset Retirement
Obligations," an interpretation of FASB Statement No. 143 (the Interpretation).
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" (SFAS No. 143), was issued in June 2001 and requires an
entity to recognize the fair value of a liability for an asset retirement
obligation in the period in which it is incurred if a reasonable estimate of
fair value can be made. SFAS No. 143 applies to legal obligations associated
with the retirement of a tangible long-lived asset that resulted from the
acquisition, construction, development and (or) the normal operation of a
long-lived asset. The associated asset costs are capitalized as part of the
carrying amount of the long-lived asset. The Interpretation clarifies that the
term "conditional asset retirement obligation" as used in SFAS No. 143, 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. The Interpretation requires an
entity 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. Uncertainty about the timing and (or) method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. SFAS No. 143 acknowledges
that in some cases, sufficient information may not be available to reasonably
estimate the fair value of an asset retirement obligation. The Interpretation is
effective for fiscal years ending after December 15, 2005. We are currently in
the process of evaluating any potential effects of the Interpretation but do not
believe its adoption will have a material impact on our consolidated financial
statements.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R, "Share-Based Payment" (SFAS No. 123R), which is a revision
of FASB Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS No.
123). SFAS No. 123R supersedes Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and amends FASB Statement No. 95,
"Statement of Cash Flows." The revision requires companies to measure and
recognize compensation expense for all share-based payments to employees,
including grants of employee stock options, in the financial statements based on
the fair value at the date of the grant. SFAS No. 123R permits companies to
adopt its requirements using either the modified prospective method or the
modified retrospective method. Under the modified prospective method,
compensation cost is recognized beginning with the effective date for all
share-based payments granted after the effective date and for all awards granted
to employees prior to the effective date of SFAS No. 123R that remain unvested
on the effective date. The modified retrospective method includes the
requirements of the modified prospective method, but also permits entities to
restate either all prior periods presented or prior interim periods of the year
of adoption for the impact of adopting this standard. We will apply the modified
prospective method upon adoption. In April 2005, the Securities and Exchange
Commission announced it would provide for phased-in implementation of SFAS No.
123R. As a result, SFAS No. 123R is effective for the first interim or annual
reporting period of a registrant's first fiscal year beginning on or after June
15, 2005. We estimate that compensation expense related to employee stock
options for fiscal 2006 is expected to be in the range of $0.5-$1.0 million.
SFAS No. 123R also requires the benefits of tax deductions in excess of
recognized compensation costs to be reported as financing cash flow, rather than
as an operating cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing cash flows in
periods after adoption. We believe this reclassification will not have a
material impact on our consolidated statements of cash flows.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 151, "Inventory Costs" (SFAS No. 151). SFAS No. 151 requires
abnormal amounts of inventory costs related to idle facility, freight handling
and wasted material expenses to be recognized as current period charges.
Additionally, SFAS No. 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The standard is effective for fiscal years beginning
after June 15, 2005. We believe the adoption of SFAS No. 151 will not have a
material impact on our consolidated financial statements.
40
BUSINESS
OVERVIEW
We are principally engaged in the meat and food processing business in
The People's Republic of China (the "PRC"). Our product line includes over 200
unique meat products, including chilled pork, frozen pork, pig by-products and
prepared meats, that are sold on a wholesale basis and on a retail basis through
an exclusive network of showcase stores, network stores and supermarket counters
under our "Zhongpin" brand. Our six processing plants, which are located in
Henan and Heilongjiang Provinces in the PRC, have a total of nine production
lines with an aggregate processing capacity of approximately 446 metric tons per
day, based on an eight-hour working day, or approximately 160,560 metric tons on
an annual basis. We also produce and sell vegetables and fruits, and have
contracts with more than 120 farms in Henan Province and nearby areas to produce
high-quality vegetable varieties and fruits suitable for export purposes. Our
products are sold under the "Zhongpin" brand name.
According to an October 2006 report of the United States Department of
Agriculture, the PRC is the largest food consuming nation in the world and is
the world's largest pork producer and consumer. The meat and meat processing
industry in the PRC is regarded by the central government as a "key" industry
and certain participants in the industry, including our company, receive special
tax incentives and technology subsidies. According to a market analysis of the
fresh and processed meat industry in the PRC published in June 2005 by Access
Asia Limited, an independent research organization ("Access Asia"):
o In 2004, domestic demand for meat and related products in the PRC
totaled 72,360,000 metric tons and such demand is expected to
reach 100,000,000 metric tons by 2010;
o The total domestic production value of meat and related products
in the PRC in 2004 was US$84 billion and the estimated production
value in 2010 is expected to reach US$120 billion;
o Domestic per capita meat consumption in the PRC was estimated to
be approximately 49 kg in 2004 and is expected to increase to
70-80 kg by 2010; and
o Per capita consumption of meat in urban areas in the PRC is twice
the amount of the national average.
At December 31, 2006, our customers included over 16 international or
domestic fast food companies in the PRC, over 36 export-registered processing
factories and over 1,531 school cafeterias, factory canteens, army posts and
national departments. At such date, we also sold directly to over 2,721 retail
outlets, including supermarkets, within the PRC.
To differentiate our company from other market incumbents, we also have
successfully implemented a unique retail strategy that includes the
establishment of a network of showcase stores, branded network stores and
supermarket counters that are exclusive retailers of our product lines. At
December 31, 2006, we had a total of 96 showcase stores, 856 network stores and
1,769 supermarket counter locations.
We believe we are a market leader in the meat and meat products industry
in the PRC and that the principal strengths of our company are as follows:
41
o We have a vertically-integrated fresh meat, meat products, fresh
produce and fruit supply chain from farming, slaughtering,
cutting, processing and wholesaling to retailing;
o We have a wide distribution network through major areas of the
PRC;
o The "Zhongpin" brand name is well recognized in major areas of
the PRC as an established and leading brand;
o We have advanced production equipment for the packaging of meat
and food;
o Our customers include some of the largest supermarket chains,
such as Lianhua Supermarket Group, Carrefour China and Metro
(China) Group;
o We have implemented a comprehensive logistics management program
and have an efficient delivery system that utilizes 192
temperature-controlled container trucks and public railway
services;
o Based upon our historical growth rates, we believe our
experienced management team, led by our founder and Chairman, Mr.
Zhu Xianfu, has the ability to grow and expand our business;
o We have an emphasis on quality assurance systems;
o We have a comprehensive brand building strategy and brand equity
management;
o We have an innovative product development program, with
approximately 156 new products now under development; and
o We experienced compound annual revenue growth of 56.15%
(cumulative growth of 594%) and compound annual profit growth of
56.77% (cumulative growth of 604%) during the five-year period
ended December 31, 2006.
DEVELOPMENT OF BUSINESS
We are a holding company and conduct substantially all of our
production, marketing, finance, research and development, and administrative
activities through our indirect subsidiaries located in the PRC. In 1993,
Changge Meat Factory was established in the PRC as a state-owned meat processing
factory from a spin off of a larger state-owned enterprise. In 1997, certain
members of our current management team purchased the business in connection with
a privatization scheme and restructured the enterprise under the name Changge
Zhongpin Food Industry Co., Ltd. as a privately-held entity with six
shareholders. In 2000, Changge Zhongpin Food Industry Co., Ltd. changed its
corporate name to "Henan Zhongpin Food Share Co., Ltd." ("Henan Zhongpin") and,
in order to comply with regulations under Chinese law regarding the use of the
word "Share" in Henan Zhongpin's corporate name, Henan Zhongpin Food Co., Ltd.
was incorporated as a wholly-owned foreign enterprise ("WOFE"). In 2001, Henan
Zhongpin purchased Yanling Meat Factory and established a share-holding
subsidiary company, Henan Zhongpin Industry Co., Ltd. In 2004, Henan Zhongpin
established a subsidiary company, Henan Zhongpin Imports and Exports Trade Co.,
Ltd., to conduct its international business operations.
To enable Henan Zhongpin Food Co., Ltd. to raise equity capital from
investors outside of the PRC, on July 21, 2005, Henan Zhongpin Food Co., Ltd.
established a holding company by incorporating
42
Falcon Link in the British Virgin Islands. On September 15, 2005, Falcon Link
acquired all of the equity interests in Henan Zhongpin Food Co., Ltd., which is
the controlling shareholder of Henan Zhongpin.
Various regulatory bodies in the PRC have issued regulations restricting
foreign investment in domestic enterprises. Pursuant to the "Notice of Relevant
Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in
Financing and Inbound Investment via Overseas Special Purposes Vehicles," or
SAFE Circular No. 75, issued by the PRC State Administration of Foreign Exchange
("SAFE") on October 21, 2005, (i) a PRC citizen residing in the PRC (a "PRC
Resident") must register with the local branch of SAFE before it establishes or
controls an overseas special purpose vehicle (an "SPV") for the purposes of
overseas equity financing (including convertible debts financing); (ii) when a
PRC Resident contributes the assets of or its equity interests in a domestic
enterprise into an SPV, or engages in overseas financing after contributing
assets or equity interests into an SPV, such PRC Resident must register his or
her interest in the SPV and the change thereof with the local branch of SAFE;
and (iii) when the SPV undergoes a material event outside of the PRC, such as a
change in share capital or merger and acquisition, the PRC Resident must, within
30 days from the occurrence of such event, register such change with the local
branch of SAFE. PRC Residents who are shareholders of SPVs established before
November 1, 2005 were required to register with the local SAFE branch before
March 31, 2006.
In connection with the formation of Falcon Link, the six individual
shareholders of Henan Zhongpin each submitted a registration form to the local
SAFE branch and received all required regulatory approvals with respect to his
respective ownership interests in the offshore company. Such shareholders are
required to file an amendment to such registration if Falcon Link or our company
experiences material events, such as changes in share capital, share transfers,
mergers and acquisitions or the use of assets in the PRC to guarantee offshore
obligations. We believe we and our subsidiaries, and the six individual
shareholders of Henan Zhongpin, are in compliance with SAFE Circular No. 75 and
all other laws and regulations in the PRC involving the formation of an SPV or
the financing of a PRC company by an offshore company controlled by PRC
residents.
We were incorporated in the State of Delaware under the name "Strong
Technical, Inc." on February 4, 2003. Prior to March 30, 2005, we had been
engaged in the business of supplying skilled workers and engineering
professionals (engineers, designers and draftspersons) to businesses on a
temporary basis. Our efforts were focused primarily in the petro-chemical,
pharmaceutical and nuclear power industries, and the personnel we supplied to
our customers were independent contractors to our company.
In early January 2005, Richard Armstrong, our Chairman of the Board,
Chief Executive Officer and Chief Financial Officer at that time and reportedly
the beneficial owner at that time of 422,642 shares of our common stock, or
approximately 84.1% of the outstanding shares of our common stock, retained
Scott Neil as a consultant to Mr. Armstrong and his family to explore
opportunities to maximize the value of their shares of common stock of our
company. Based upon discussions with representatives of prior management of our
company in connection with the preparation of this prospectus, we believe Mr.
Neil was assigned the task of seeking industry partners or other strategic
purchasers for the company as a whole and exploring alternatives for maximizing
the value of the Armstrong family ownership of our company, including the
possibility of selling control of our company through the sale and transfer of
the shares of our common stock beneficially owned by members of the Armstrong
family. We have been advised that Mr. Neil was not paid any cash compensation
for his consulting efforts, but instead was offered the opportunity to purchase
shares of our common stock from Mr. Armstrong's son, Christopher Armstrong,
which shares were at that time registered for resale under the Securities Act
under our registration statement on Form SB-2 that was declared effective by the
Commission on October 21, 2004. In consideration for his consulting services, on
or about January 5, 2005, Mr. Neil purchased 17,257
43
shares of our common stock from Christopher Armstrong for nominal consideration,
of which 15,983 shares were re-sold by Mr. Neil on March 30, 2005 as described
below.
In late February 2005, Mr. Neil approached Halter Capital Corporation, a
company with which Mr. Armstrong had no prior relationship or dealings ("Halter
Capital"), regarding the desire of Mr. Armstrong to raise funds through the sale
of his shares of our common stock. In early March 2005, Mr. Neil introduced Mr.
Armstrong to Kevin Halter, Jr., the President of Halter Capital. Between the
date of such meeting and March 15, 2005, Messrs. Armstrong and Halter reached
agreement that Halter Capital would purchase 414,014 of Mr. Armstrong's shares
for an aggregate purchase price of $273,500, and a definitive purchase agreement
was executed by Halter Capital, Mr. Armstrong and our company on or about March
15, 2005. During the course of such negotiations, Mr. Armstrong inquired as to
whether Halter Capital knew of other potential purchasers for the purchase of
additional outstanding shares of our common stock, and Halter Capital introduced
Mr. Armstrong to two investors who agreed on or about March 15, 2005 to purchase
an aggregate of 84,584 shares of our common stock from Mr. Armstrong and other
holders of our common stock. The individual purchasers and sellers of such
shares, the number of shares transferred and the amount paid for such shares,
are as follows:
Number of Aggregate
Seller Shares Purchase Price Purchaser
------ ---------- -------------- ---------
Heather Roberts 21,217 $ 500 Patricia Gunter
Brigette McLemore 21,217 500 Richard Coombe
Scott Neil 15,983 274,000 Patricia Gunter
Stacy Gilfry 14,145 500 Richard Coombe
Richard Armstrong(1) 7,355 500 Richard Coombe
Jonathan and Suzanne Rich 2,405 25,000 Patricia Gunter
Don Rogers 1,697 50,000 Patricia Gunter
Christopher Armstrong 565 500 Richard Coombe
------
84,584
======
- ----------------
(1) Of the 422,642 shares of our common stock owned by Mr. Armstrong on March
30, 2005, 414,014 shares were sold on such date to Halter Capital, 7,355
shares were sold on such date to Richard Coombe and 483 shares were
subsequently sold in the open market. We have been advised that Mr.
Armstrong has retained ownership of 790 shares.
In determining the respective purchase prices of the shares sold on
March 30, 2005 by Mr. Armstrong and the other selling stockholders of our
company, Mr. Armstrong, such sellers and the purchasers agreed that an aggregate
purchase price of $625,000 would be paid by the purchasers, and that Mr.
Armstrong would be able to allocate the proceeds among the sellers in his
discretion. Messrs. Armstrong and Neil had previously agreed that in
consideration of the consulting services rendered by Mr. Neil to the Armstrong
family, Messrs. Armstrong and Neil would share equally in the gross proceeds
received by them in any sale of shares of our common stock to a purchaser
introduced by Mr. Neil, including Halter Capital. In allocating the proceeds of
such sale, Messrs. Armstrong and Neil agreed that Messrs. Armstrong and Neil
would each receive $274,000 of the gross proceeds of such sale, Don Rogers and
Jonathan Rich, each of whom had participated in the operations of our temporary
staffing business at such time, would receive $50,000 and $25,000, respectively,
from such proceeds and the four remaining selling stockholders would each
receive $500 of such proceeds.
We have been advised by Halter Capital that, at the time it acquired a
controlling interest in our company, Halter Capital had no interest in pursuing
our then-existing business operations and that it acquired our company with the
view of using our company as an acquisition vehicle to acquire an
44
operating company located in the PRC. On March 30, 2005, Halter Capital acquired
an 82.4% controlling interest in our company from Mr. Armstrong and on such date
we discontinued our operations as a supplier of temporary personnel. In
connection with such acquisition, all of our officers and directors at that
time, including Mr. Armstrong, resigned as officers and directors of our
company, Mr. Halter was elected as a director of our company and as our
President and Chief Executive Officer and, pursuant to the purchase agreement
relating to such acquisition, we transferred and assigned to Mr. Armstrong all
intellectual property rights, customer lists, provider lists and agreements,
business methods and goodwill associated with the technical staffing business of
our company. Commencing on March 30, 2005, we continued our operations as a
public "shell" corporation with no significant revenues or assets as we
attempted to develop various business opportunities in the PRC.
In mid-December 2005, Mr. Halter was introduced by Halter Financial
Group, L.P., which in turn was introduced by representatives of Pinnacle China
Fund, L.P., an institutional investor that was at that time considering an
investment in our company, to representatives of Falcon Link, which was in the
process of raising capital in the United States and was seeking a public "shell"
company with which it could enter into a business combination for the purpose of
establishing a publicly-traded holding company in the United States. Between the
date of such introduction and January 30, 2006, Mr. Halter negotiated with
representatives of Falcon Link, including representatives of TN Capital Equities
Ltd., the placement agent for Falcon Link's private placement in the United
States, and Falcon Link's counsel, regarding the terms of a proposed business
combination between our company and Falcon Link.
On January 30, 2006, we acquired all of the outstanding shares of Falcon
Link in exchange for the issuance by us of an aggregate of 11,250,005 restricted
shares of our common stock to the shareholders of Falcon Link. In connection
with such share exchange, all of our officers and directors at that time,
including Mr. Halter, resigned as officers and directors of our company, and our
current directors were elected to our board and our current executive officers
were appointed. In addition, Falcon Link entered into an advisory agreement with
HFG International Limited, a Hong Kong corporation affiliated with Halter
Financial Group, L.P. ("HFG"), pursuant to which Falcon Link paid HFG a fee in
the amount of $350,000 in consideration of advisory and consulting services to
be rendered by HFG relating to Falcon Link's efforts to operate as a U.S. public
company. As a result of our share exchange with Falcon Link, which is commonly
referred to as a "reverse acquisition," Falcon Link became our wholly-owned
subsidiary and we changed our corporate name to Zhongpin Inc.
45
Our corporate organizational chart is set forth below.
- ------------------------------------------
ZHONGPIN
- ------------------------------------------
|
| 100%
|
\ /
- ------------------------------------------
FALCON LINK INVESTMENT LIMITED (B.V.I.)
- ------------------------------------------
|
| 100%
| OUTSIDE CHINA
================================================================================
| IN CHINA
|
|
\ /
- ------------------------------------------ -------------------------------
HENAN ZHONGPIN FOOD CO., LTD. (WOFE) INDIVIDUAL SHAREHOLDERS(1)
- ------------------------------------------/\ -------------------------------
| \ |
| 90% IN TRUST \ | 10%
| \ |
| \ |
| \ |
| \ |
| \ |
\ / \ /
-----------------------------------------
HENAN ZHONGPIN FOOD SHARE CO., LTD.
-----------------------------------------
|
|
|
|
\ /
----------------------------------------------------
HENAN ZHONGPIN INDUSTRY CO., LTD.
HENAN ZHONGPIN IMPORTS AND EXPORTS TRADE CO., LTD.
ZHUMADIAN ZHONGPIN FOOD LTD.
ANYANG ZHONGPIN FOOD CO., LTD.
DEYANG ZHONGPIN FOOD CO., LTD.
HENAN ZHONGPIN FRESH FOOD LOGISTICS CO., LTD.
HENAN ZHONGPIN BUSINESS DEVELOPMENT CO., LTD.
----------------------------------------------------
- ------------
(1) Under the laws of the PRC, Henan Zhongpin is required to have at least five
individual shareholders to use the word "share" in its corporate name. In
connection with the formation of Henan Zhongpin, each of the individual
shareholders of Henan Zhongpin (Xianfu Zhu (7.16%), Baoke Ben (0.74%),
Shuichi Si (0.53%), Qinghe Wang (0.54%), Chaoyang Liu (0.55%) and Juanjuan
Wang (0.47%)) entered into an agreement with Henan Zhongpin Food Co., Ltd.,
the controlling shareholder of Henan Zhongpin, pursuant to which such
individual shareholders irrevocably assigned to Henan Zhongpin Food Co.,
Ltd. all of the economic benefits to which he is or may be entitled as a
shareholder of Henan Zhongpin. As a result of such agreements, Henan
Zhongpin Food Co., Ltd., which is a wholly-owned indirect subsidiary of our
company, is entitled to 100% of any cash dividends declared and paid by
Henan Zhongpin and to vote all outstanding shares of capital stock of Henan
Zhongpin in any action by the shareholders of Henan Zhongpin.
In connection with Henan Zhongpin's formation of Falcon Link in July
2005, Falcon Link's share exchange with our company on January 30, 2006 and our
private placement of Series A convertible preferred stock and warrants on
January 31, 2006, we or our subsidiaries were advised by Greenstone Investment &
Consultants, Ltd., a financial consulting firm based in the PRC ("Greenstone"),
under consulting agreements entered into by Henan Zhongpin and Greenstone in
April 2005. Pursuant to the terms of such agreements, we paid Greenstone
consulting fees of $100,000 in each of 2005 and 2006 and a consulting fee of
$414,000 in connection with the consummation of our January 2006 private
placement and the acquisition of Falcon Link by our publicly-held "shell"
corporation.
AVAILABLE INFORMATION
We maintain corporate websites with the addresses www.zhongpin.com
(Chinese language) and www.zpfood.com (English language). We have not
incorporated by reference into this prospectus the information on any of our
websites and you should not consider any of such information to be a part of
this document. Our website addresses are included in this document for reference
only. We make
46
available free of charge through our English language corporate website our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K, and amendments to these reports, through a link to the EDGAR
database, as soon as reasonably practicable after we electronically file such
material with, or furnish such material to, the Securities and Exchange
Commission.
INDUSTRY OVERVIEW
THE MEAT INDUSTRY IN THE PRC. According to an October 2006 report of the
United States Department of Agriculture, the market for pork in the PRC is the
largest in the world, accounting for approximately 53% of global production and
consumption. In value terms, the PRC's overall meat industry is the second
largest sector in the country's entire retail food market basket. Historically,
the vast majority of meat sales in the PRC have taken place in free wet markets,
most of which are to be found in open-air markets or on streets. These markets
provide a venue through which the customer can buy live poultry or freshly
slaughtered meat produce direct from local farmers. However, as a result of new
hygiene regulations that were introduced by the Chinese government in 1995,
governmental agencies recently have encouraged the replacement of open air
markets by supermarkets and convenience stores, and the market share of open air
markets has continued to decline. We believe this trend will favorably impact
our wholesale business and will add additional customers for the network of
showcase stores, branded network stores and supermarket counters that retail our
products on an exclusive basis.
The meat industry in the PRC is characterized by fragmentation,
sanitation and hygiene issues, as well as social demographic trends. The meat
industry is highly fragmented, and supply is extremely localized with limited
distribution capability. The PRC's vast geography and under-developed transport
infrastructure have made it difficult to create national or even regional level
competition in the industry and thus, there are no genuine market leaders.
According to a market analysis of the fresh and processed meat industry
in the PRC prepared in June 2005 by Access Asia,
o In 2004, the meat sector (fresh, frozen and processed) made up
13.23% of the total value of the PRC's retail food market basket,
a proportion that has remained relatively constant;
o The total retail value of the PRC's fresh meat sector was
approximately RMB313.33 billion (US$37.86 billion) in 2004; and
o The fresh meat sector continues to dominate the total meat and
meat products market in the PRC, which registered a value of
RMB334.96 billion (US$40.47 billion) in 2004. Social and
demographic trends have dictated a switching of consumer
preference from processed meat in the earlier decades to a
growing demand for frozen and fresh/chilled meat.
According to Access Asia, factors that initiated this structural change
include:
o Increasing demand and ownership in the PRC of household
appliances, especially refrigerators and microwave ovens. By the
early 1990's, the penetration rate for household ownership of
refrigerators was close to 100% in many major cities, depending
on the economic prosperity of the region.
o Improvements in hygiene and sanitation, and the establishment of
the cold chain infrastructure, in the PRC have elongated the
wholesale and retail process. The cold chain
47
infrastructure refers to the complex network of processes and
services used to transport and preserve edible products in a
controlled temperature environment. Modern preparation and
storage methods in the PRC have resulted in longer life cycles
for frozen and fresh/chilled meat products. Superior taste and
nutrition, aided by the cold chain infrastructure have allowed
fresh/chilled and frozen meat products to become preferences for
today's consumers in the PRC, at the expense of highly processed
meat products.
o Increases in per capita income in the PRC, as well as a
proportionate share of such increase spent on food. In the PRC,
roughly one-third of every new dollar of income is spent on food,
and meat is a major target for much of the new spending.
o The PRC's new middle class, defined as those with annual incomes
of at least 40,000 RMB (US$5,000), numbered approximately 60
million people in 2002 and, according to Access Asia, is expected
to climb sharply to 160 million by 2010.
There are no governmental restrictions on the ability of foreign
entities to enter the meat and food processing business in the PRC, which has
been designated an encouraged industry for foreign investment.
THE RETAIL MEAT MARKET. According to Access Asia, total volume sales of
fresh and processed meat and meat products in the PRC increased to 25.69 million
tons (23.30 million metric tons) in 2004, which represented an increase of
approximately 46.74% from 1998 sales levels. Access Asia also reported that, as
the market matures, total growth is expected to continue its slowdown,
eventually settling at approximately 5-6% per annum in volume terms. Consumption
volumes are likely to increase as more consumers reach a standard of living that
enables them to eat meat and meat products at home on a more frequent basis.
According to Access Asia, in 2004, the meat and meat products sector in
the PRC accounted for 13.23% of the national retail food market basket in terms
of value, which was second only to the vegetable sector. Prior to the economic
reforms that commenced in the PRC in 1978, meat was traditionally eaten in the
PRC only when money could allow, or on special occasions. As a result, as
recently as 25 years ago, regular meat consumption was out of the reach of
approximately 200 million people living under the absolute poverty line. The
introduction of economic reforms in the PRC in the late 1970s has allowed the
number of citizens living under absolute poverty levels to decline to less than
50 million individuals. This has enabled more consumers to enjoy meat on a
regular basis. In the cities, most consumers can afford to eat meat at any time
without regard to cost.
As a result, not only are more people buying fresh meat in the PRC, but
there also is increasing demand for a wider range of processed meat products.
The market has quickly evolved to meet this demand, helped by the emergence and
spread of efficiently managed grocery and retail chains - notably supermarkets,
convenience stores and hypermarkets.
The retail market for fresh and processed meat and meat products in the
PRC has grown strongly over the past ten years due, primarily, to the following
key factors:
o Increased consumer spending power, which has lead to raised
consumer aspirations and the ability of consumers to make more
frequent purchases of fresh and processed meat and meat products,
as well as purchases of more expensive products;
48
o Rationalization and consolidation of the PRC's domestic industry
has improved industry productivity and profitability, and has
raised the level of market supply;
o Development of more integrated distribution systems and
infrastructure throughout the PRC, which has lead to better
distribution around the country from manufacturer to retailer;
and
o Increased market penetration of more organized retail outlets
with chilled and frozen produce display cabinets which, in turn,
has created a larger overall outlet for fresh and processed meat
and meat products.
These factors have led not only to increased consumer demand, but also
to improvements in the ability of meat processors and distributors to get their
products to consumers in fresher condition. The meat processors also have helped
to increase demand by improving the variety of products they are able to supply.
BUSINESS STRATEGY
Our long-term business strategy is to establish our company as the
leading provider of meats and fresh foods in the PRC. Our goal is to increase
our market presence and to provide our customers with the highest quality,
freshest, healthiest, most nutritious and safest meat and food products. The key
elements of our growth strategy include the following:
INCREASE OUR BRAND RECOGNITION. We believe sustainable growth can best
be achieved through a recognizable brand name, and we are focused on building
the best nationally-known brand name in the food business in the PRC. We intend
to invest heavily in building our "Zhongpin" brand as a unique identity and to
position our brand platform to create the perception and image of "HEALTH,
NUTRITION, FRESHNESS AND QUALITY" in the minds of our customers.
We intend to build our brand by building a comprehensive brand awareness
program that will focus on advertising and promotion, pricing strategies,
distribution channels and packaging design and functionality. In addition, in
order to differentiate the quality of our products from those of our competitors
and to help foster strong brand recognition with consumers, we have supplemented
our wholesale distribution channels by establishing and implementing a network
of specialty, high-end boutique grocery stores to showcase our meat, vegetable
and fruit products. At December 31, 2006, we had 96 showcase stores, 856 network
stores and 1,769 "Zhongpin" supermarket counters. We believe our retail stores
will help create additional brand awareness that will benefit our wholesale
customers and will showcase all of our products in a manner that will provide
the consumer with a broader view of our strategies and goals.
EXPAND OUR MARKET PRESENCE. In the PRC, the pork industry is highly
fragmented and supply is extremely localized with limited distribution
capability. The vast geography and under-developed transportation infrastructure
in the PRC have made it difficult to create national or even regional
competition in the meat and fresh foods industry, and no genuine market leaders
have emerged.
We regard our logistics capabilities as the keystone to our growth
strategy and believe our comprehensive plan for logistics management, which
includes the integration and coordination of our transportation, warehouse
management and inventory control systems, as well as the integration of our
marketing and manufacturing efforts, will enable us to accelerate our growth by
expanding our operations across the PRC and internationally. At December 31,
2006, we operated sales offices and warehouses in over 50 cities in the PRC,
including Shanghai, Beijing, Guangzhou, Zhengzhou, Wuhan and Xi'an. We
49
plan to expand our network of sales offices and warehouses in up to 14
additional cities in the PRC by the end of 2007, and are targeting cities with
over 1,000,000 residents, annual per capita income exceeding 10,000 RMB ($1,245)
and good infrastructure, including transportation, telecommunications and a
positive commercial environment.
We may also pursue an acquisition strategy to increase the number or
type of products we offer, increase our manufacturing or production
capabilities, acquire animal or agricultural farms to strengthen our sources of
supply, or broaden our geographic reach and our ability to sell and distribute
products in domestic and overseas regions in which we do not currently transact
business. We believe the industry in which we operate is highly fragmented and
that significant opportunities are available to a business that can consolidate
production and sales capabilities and the resources of a number of existing
producers in the fresh meat and produce markets, including the cost savings that
are inherent in a vertically integrated business.
EXPAND OUR PRODUCT LINES. At December 31, 2006, our product line
included over 200 unique meat products and over 20 different categories of
vegetables and fresh fruits. In 2000, we established a research and development
center to help us develop new processing technologies and food products. We also
work with 16 unaffiliated scientists and experts who act as our outside
technical consultants in the development of new processes and products. Our
strategic planning and marketing departments also conduct market studies, seek
to spot developing trends in the meat and fresh foods industries and evaluate
the ever-changing consumer consumption patterns in the PRC. We intend to
strengthen our market position and accelerate our growth by introducing new
lines of low temperature meat products with a view to maintaining customer
interest and creating new demand. We also believe the introduction of new
products will broaden our product range and make it more difficult for new
competitors to enter the market or to attain significant sales or market share
upon entry into the market. At December 31, 2006, we had approximately 156 new
products under development.
MAINTAIN OUR TECHNOLOGICAL SUPERIORITY. We have pursued an integrated
approach in designing our operations and have formulated a strategy to address
the current issues in the meat and fresh foods industry in the PRC, such as
hygiene, sanitation and distribution capability, that have hindered the
development of national brands by the larger incumbents in the industry. We have
purchased state-of-the-art equipment and installed production lines with the
most current technology in our processing plants. In addition, our advanced
information technology capability furnishes management with real time
information flow that enables all of our functional departments, including
marketing, sales, strategic planning, logistics management, procurement, retail,
trading and export, to exploit and utilize timely information on pricing,
demand, transportation and inventory levels. We believe our logistics management
capabilities also provide us a competitive advantage by allowing us to implement
significant modifications in our logistics systems on a quick response basis.
With feedback from our marketing and sales teams, procurement department and
strategic planning group, we can modify our systems in response to changes in
the marketplace, competition, government regulations and technology, such as the
use of bar codes and electronic interchange to enhance the speed and accuracy of
information.
OUR PRODUCTS
OUR PORK PRODUCTS.
The chilled and frozen pork products we produce are sold as various cuts
of meat, such as the shoulder, the ribs, the loin or the leg. Other parts of the
pig, such as the head, ears, trotters and internal organs, have a ready market
in the PRC and are also distributed and sold by us.
50
The pork products produced by our abattoirs are sold to a wide variety
of customers, such as meat and food distributors, wholesalers and importers,
food and food processing companies and markets and supermarkets. Our pork
products are distributed and sold locally in the domestic market and also are
exported.
CHILLED PORK. In our production of chilled pork, meat is chilled but not
frozen at a temperature of between 32o F (0oC) and 39.2 oF (4oC), immediately
after it is cut and packed, and thereafter maintained at that temperature during
storage or transportation. This serves to preserve the freshness and quality of
the meat. Chilled pork will usually have to be consumed within one week from the
time of slaughter.
While chilled pork generally is more costly than frozen pork, our market
research indicates a trend among customers toward chilled pork and away from
frozen pork. Most of the chilled pork we produce is distributed and sold to
domestic customers who comprise mainly fresh food distributors and wholesalers,
markets and supermarkets located within a 500 km delivery radius of our
processing facilities.
FROZEN PORK. In the production of our frozen pork, the meat is frozen at
- -31oF (-35oC) to -40oF (-40oC) for 48 hours, after which it is stored or
transported at a constant temperature of between -0.4 oF (-18oC) to -13oF
(-25oC). Generally, frozen pork can be kept for about six months from the time
of slaughter. Frozen pork is cheaper relative to chilled pork at the retail
level. Food and food processing companies usually require frozen pork in their
production of processed meats such as luncheon meat and canned, stewed meat. In
the PRC, most of the pork sold in markets, supermarkets and restaurants is
frozen. The domestic customers for our frozen pork include food processing
companies and food distributors.
PIG BY-PRODUCTS & VARIETY MEATS. Pig heads, ears and trotters and the
internal organs, such as the kidneys, livers, stomachs and intestines, are
commonly used in Chinese cuisine and therefore have a ready market. We usually
sell these by-products and variety meats to domestic customers. These items are
also sold to food processing companies to be used as raw materials for other
meat and meat-based products.
PREPARED MEATS. We also produce a line of prepared meats, such as
sausages, hams and Chinese cured hams, that includes more than 113 items that
are marketed under our "Zhongpin" brand.
OUR FRUIT AND VEGETABLE PRODUCTS.
We contract with more than 120 farms in Henan Province and nearby areas
to produce high quality vegetable varieties and fruits suitable for export
purposes. We have contracted with farms close in proximity to our operations to
ensure freshness from harvest to processing. The farms are relatively small,
ranging in size from 24.7 acres to 123.5 acres (10-50 hectares), with the
largest being approximately 1,358.5 acres (550 hectares). We contract to grow
more than 20 categories of vegetables and fruit, including asparagus, sweet
corn, broccoli, mushrooms, lima beans, strawberries and capsicum. In recent
years, we have worked closely with the Henan Academy of Agricultural Sciences in
the PRC to improve the yield and quality of crops.
Since 2001, we have been contracting with farms to produce selected
vegetables and fruits. Our technicians are sent to candidate farms to test the
soil and water quality and to evaluate local climatic conditions. Vegetables and
fruit grown at the candidate farms are evaluated in our laboratories. If the
quality of the farm products meets our standards, we enter into a contract with
the farm for the purchase of a stated minimum amount of products. Seeds,
fertilizer and pesticides are generally provided by us to the contracted farm at
wholesale prices. During the growing season, the vegetables or fruit at the
51
contracted farms are monitored and tested. At harvest, produce is tested and
purchased based on product criteria stated in the contract.
MANUFACTURING AND PRODUCTION
For each of the years ended December 31, 2004, 2005 and 2006
substantially all of our assets, including all of our material assets, were
located in the PRC.
We own and operate two abattoirs, one in Changge City, Henan Province
and the other in Yanling, Henan Province, and we lease and operate an additional
abattoir in Hailun City, Heilongjiang Province, to carry out the business of
slaughtering pigs and the production and sale of chilled and frozen pork
products. The abattoirs include six processing plants, with a total of nine
production lines. Our current total production capacity for chilled pork and
frozen pork is 446 metric tons per day, based on an eight-hour working day, or
approximately 160,560 metric tons on an annual basis. We also have production
capacity for prepared meats of 70 metric tons per eight-hour day (or
approximately 25,200 metric tons on an annual basis) and for fruits and
vegetables of 35 metric tons per eight-hour day (or approximately 12,600 metric
tons on an annual basis). We utilize state-of-the-art equipment in all of our
abattoirs and processing facilities.
We plan to increase our production capacity as follows:
o We plan to invest approximately $14 million to construct a new
production facility in southern Henan Province. This facility is
designed with a production capacity for chilled and frozen pork
of 200 metric tons per eight-hour working day, or approximately
72,000 metric tons on an annual basis, of which 60% of production
capacity is designed for the production of chilled pork and 40%
for the production of frozen pork. We plan to put this new plant
into operation in the second quarter of fiscal 2007.
o We plan to invest approximately $13.5 million to construct a new
facility in northern Henan Province with a production capacity of
175 metric tons per eight-hour working day, or approximately
63,000 metric tons on an annual basis. Approximately 60% of the
production capacity will be designed for the production of
chilled pork and approximately 40% will be designed for the
production of frozen pork. We plan to put this new plant into
operation in the third quarter of fiscal 2007.
We procure pigs from local pig farms and breeders located in the
vicinity of Changge City, Henan Province for our abattoirs located in Henan
Province. In addition, we procure pigs from local pig farms and breeders located
in the vicinity of Hailun City, Heilongjiang Province for our leased facility in
Heilongjiang Province. All the pigs we purchase for slaughtering in our
abattoirs must have all the health certificates issued by the relevant
authorities in the PRC to ensure that the pigs have been under strict and
consistent supervision during the rearing period and are in good health when
they are purchased by us. In addition, the pigs slaughtered in our abattoirs are
also subject to inspections by our own team of certified veterinarians.
PRODUCTION OF CHILLED AND FROZEN PORK PRODUCTS. Our veterinarians ensure
that only healthy pigs are slaughtered at our abattoirs. We maintain all of the
required licenses and certificates from the relevant central and local
government authorities with regard to our pork production business. In May 2002,
we were awarded ISO 9001 certification that covers our production, research and
development and sales activities. The ISO 9001 certification indicates that our
abattoirs and pork production operations comply with international standards of
quality assurance established by the International Organization of
Standardization. All of our production lines have also passed HACCP (Hazard
Analysis and Critical
52
Control Point) under GMP (Good Manufacturing Practice) and SSOP (Sanitation
Standard Operating Procedure in the PRC).
When pigs arrive at the abattoirs, our certified veterinarians, together
with the local Animal Husbandry Department inspectors, conduct a physical
inspection of the pigs to ascertain whether they are fit for human consumption.
Blood and urine samples are obtained from a random sample of pigs which are
tested for disease. The pigs are then weighed and are quarantined for
approximately 24 hours, during which time only water is provided to the pigs.
After the quarantine period has passed, we conduct another physical
inspection of the pigs. This physical inspection is conducted jointly with the
inspectors from the Animal Husbandry Department. Pigs that are found fit for
human consumption will be slaughtered while those found to be deficient are
immediately culled. We shower the pigs with water before and after slaughter to
clean them. Instruments used for slaughtering and cutting up the carcasses are
sterilized several times a day.
Quality control checks are conducted at all production stages to detect
and remove meat that is spoiled or has been infected by bacteria. The appearance
of the skin, internal organs and the meat itself are subject to physical
observation and laboratory testing to see if the pig is diseased. Every pig that
is slaughtered in our abattoirs is assigned a serial number so that a trace can
be run on any processed pig. All of these quality control checks are conducted
by our veterinarians and quality control staff.
A high level of hygiene is maintained at our abattoirs. All staff and
visitors who enter the abattoirs must first put on protective clothing and be
sterilized with disinfectant. All packaging materials used for meat also must be
sterilized.
At December 31, 2006, a total of 106 employees worked in our quality
assurance program, of which 18 were quality control engineers and 88 were staff.
The quality control laboratory meets and exceeds all standards set by the
authorities and relevant agencies in the PRC.
STORAGE AND TRANSPORTATION OF PORK PRODUCTS. The pork products from
freshly slaughtered pigs at our abattoirs are blast frozen after slaughtering to
prevent deterioration of the meat caused by bacteria or chemical changes. Frozen
meat is stored in cold storage facilities at a temperature of between-9.4oF
(-23oC) and -0.4oF (-18oC) for 24 hours before being transported. Chilled meat
is chilled to between 32oF (0oC) and 39.2oF (4oC) before being transported to
customers. The chilled and frozen pork is maintained within the requisite
temperature ranges during subsequent handling, transportation and distribution
to retain freshness and to prevent deterioration of the meat.
SALES, MARKETING AND DISTRIBUTION
Our key customers are principally supermarkets and large retailers in
the PRC. For the years ended December 31, 2004, 2005 and 2006, sales to our five
largest customers amounted in the aggregate to approximately $11.1 million,
$15.5 million and $28.76 million, respectively, accounting for approximately
26%, 22% and 20%, respectively, of our total revenue. For the years ended
December 31, 2004, 2005 and 2006, no customer accounted for 10% or more of our
consolidated revenues. No material amount of our business is dependent on
government contracts.
Sales volume for the meat industry typically increases during the period
leading to the one-week celebration of the Chinese Spring Festival, which
usually takes place in early February. In general, demand for pork tends to be
the greatest during the first quarter of the year due to the tendency of
consumers to eat greater amounts of meat during the Spring Festival and the
colder period of the year. The third quarter typically is the slower season for
the industry due to the slight drop in meat
53
consumption during the hot summer months. In general, we do not expect a
material seasonal impact on our revenues.
We have sales offices and warehouses in 50 cities in the PRC, extending
from Henan Province, in which our headquarters is located, to South China, East
China, North China and the South midland of the PRC. We plan to further expand
our network of sales offices and warehouses in 14 other cities in the PRC by the
end of 2007 in order to meet consumer demand.
We market our pork products through a sales team and a network of agents
in 24 provinces, including four cities with special legal status, throughout the
PRC. The sales team is responsible for securing orders for our pork products,
maintaining and building relationships with existing customers and for securing
new customers. Our sales team is also involved in identifying new markets in
line with the existing customer base and our geographical expansion plans.
Our sales teams travel to major cities in the PRC, such as Shanghai,
Beijing, Wuhan and Zhengzhou, to market and sell our pork products to wholesale
markets and selected retail chains in those cities. We usually transport pork
products by refrigerated trucks. Railroads are used for transporting pork
products to those cities that are located at a distance from our operations
center in Changge City, Henan Province and our leased facility in Hailun City,
Heilongjiang Province.
In addition, our sales teams travel and market pork products, vegetables
and fruits to potential customers in Europe, Russia, Hong Kong and selected
countries in Asia and South Africa. During the years ended December 31, 2004,
2005 and 2006, we exported approximately 2,588 tons (2,630 metric tons), 4,011
tons (4,076 metric tons) and 5,031 tons (5,111 metric tons), respectively, of
pork products, and 846 tons (860 metric tons), 1,102 tons (1,120 metric tons)
and 4,653 tons (4,727 metric tons), respectively, of vegetables and fruits.
The following table sets forth for the three years ended December 31,
2006 the amount and percentage of our revenues derived from our sales of
products to customers located in the United States, the PRC and all foreign
countries other than the PRC based upon the locations to which our products were
shipped.
Year Ended December 31,
2006 2005 2004
-------------------- ------------------- -------------------
Amount Percentage Amount Percentage Amount Percentage
------- ---------- ------ ---------- ------ ----------
(U.S. dollars in millions)
The People's Republic of China ... $131.59 91.5% $65.91 89.8% $38.72 90.5%
Other foreign countries .......... 12.22 8.5 7.49 10.2 4.07 9.5
United States of America ......... -- -- -- -- -- --
------- ------ ------ ------ ------ ------
Totals ..................... $143.81 100.0% $73.40 100.0% $42.79 100.0%
======= ====== ====== ====== ====== ======
We also sell directly to selected chains and independent resellers. Some
of the major selection criteria we employ to screen resellers are as follows:
o Market potential of the reseller's location;
o Competitiveness of the local market;
o Location and coverage;
o Traffic density; and
54
o Credibility of the operator and market development capacity.
RETAIL OPERATIONS
We have successfully established a unique, vertically-integrated fresh
meat and meat products supply chain from farming, slaughtering, cutting,
processing and wholesaling to retailing via an exclusive network of showcase
stores, network stores and supermarket brand counters. We believe our unique
business model differentiates our company from other major national meat and
meat products producers in the PRC. We have supplemented our wholesale channels
by establishing a unique retail network to establish a second sales channel
while minimizing channel conflict. We believe that by broadening awareness of
our entire product line, our retail stores will help drive the revenues of all
of our business lines, including the revenues of the retailers that are
wholesaling portions of our product line.
Our advertising also generally promotes our brands rather than a
particular store, in an effort to drive business to every retailer that carries
our products and not just to our network of retail stores. The Company's
marketing goals are not designed to take business from the supermarkets or other
partners of our company, but to increase the overall number of buyers of our
branded products.
SHOWCASE STORES. Based on market research and evolving consumption
trends, we have taken a customer-driven marketing approach and have focused on a
core customer segment that consists of the new middle class in the PRC, which
generally includes the rapidly increasing number of middle class households with
annual income above RMB40,000 (U.S.$5,000). We believe this consumer segment has
disposable income and a willingness to spend on quality goods and services. A
study conducted by MasterCard International concluded the middle-class segment
of the PRC numbered approximately 60 million people in 2002 and is expected to
climb sharply to 160 million people by 2010. As a result, we are pursuing a
first-mover advantage and have developed the concept of high-end specialty
boutique grocery chain stores to offer our products and other merchandise for
the convenience of a typical two-income, middle-class family that shops daily
after work.
The showcase stores are designed to highlight all of our products, as
well as to provide customers with a broad view of our strategies and goals. At
December 31, 2006, there were 96 showcase stores, most of which were located at
"Main & Main" locations in major cities within Henan Province. The showcase
stores are owned and operated by independent operators, but share the same
design and physical layout, and are managed in accordance with our operating
procedures. All employees of these stores are required to undergo our vigorous
three-month training program. In addition, we establish the merchandising and
pricing policies of these stores. On average, approximately 85% of all revenues
generated in these stores are derived from sales of our products.
NETWORK STORES. In addition to the showcase stores, we sell products
through network stores that are owned and operated by independent operators. At
December 31, 2006, there were 856 network stores that were generally located in
the larger cities in Henan Province and adjoining provinces. We provide the
operators of the network stores standardized physical designs and layouts for
each store, and the operators of the network stores manage the business
following our management guidelines and pricing policies. Each store has the
right to use "Zhongpin" logos and brands. On average, approximately 70% of the
revenues generated from such stores are derived from the sale of our branded
products.
ZHONGPIN SUPERMARKET COUNTERS. We also have established "Zhongpin"
supermarket counters in supermarkets and local markets. At December 31, 2006,
there were 1,769 Zhongpin supermarket counters. The counters are exclusive
purveyors of our meats and meat products. These counters are owned and operated
by the supermarkets and local markets. A majority of the "Zhongpin" counters at
55
supermarkets use our standardized physical design and layout in addition to
related rules and guidelines provided by the supermarket partners.
RESEARCH AND DEVELOPMENT
Research and development continues to be a significant component of our
strategy to extend our existing brands and product lines and expand into new
branded items and product lines. In 1999, Henan Zhongpin founded Zhongpin
Technology Research and Development Center, a food research institute in Changge
City, Henan Province. In 2000, Henan Zhongpin established a technology center,
which has evolved into the technical research center for the entire meat
industry in Henan Province. At December 31, 2006, the research center employed
51 scientists and technicians. The mission of the research center is to develop
new processing technologies and food products. In addition, our product
development team works with the China Meat Processing Research Center, the
premier research institute for meat processing technology in the PRC, and we
have jointly established a research center in Beijing. We also work with
scientists and researchers from Beijing University, China Agricultural
University, the Chinese Academy of Agricultural Science, Henan Agricultural
University and other universities to develop production technologies and
innovative meat products. At December 31, 2006, we had relationships with 16
scientists and experts who act as our outside technical consultants.
The meat and meat processing industry in the PRC is regarded by the
central government as a "key" industry and certain participants in the industry,
including our company, receive special technology subsidies and research grants
for undertaking "technologies plan projects" for the government. To receive
these subsidies and grants, the recipients must complete the research and
development objectives assigned by the government, and all funds must be used to
pay project-related costs, such as training fees, laboratory costs or the costs
of importing technology. As a qualified company, we are undertaking research and
development projects for both the central government and the Henan provincial
government.
During 2006, we launched over 40 new products that were developed in our
technology center and we currently have approximately 156 new products under
development. Our expenditures for research and development for the years ended
December 31, 2004, 2005 and 2006 were approximately $435,000, $723,000 and
$1,057,000, respectively.
INTELLECTUAL PROPERTY
We regard brand positioning as the core of our competitive strategy.
Since the ultimate aim of our business strategy is to satisfy the customer,
gaining a valued position in the minds of customers is of paramount importance.
Our branding process seeks to create a unique identity and to properly position
our brand platform. We intend to position our "Zhongpin" brand, and to protect
our brand identity, in order to create the perception and image of "HEALTH,
NUTRITION, FRESHNESS AND QUALITY" in the minds of our customers.
We have registered our "Zhongpin" trademark in the PRC, Australia,
Belgium, France, Germany, Holland, Japan, Luxemburg, Russia, Singapore, South
Korea, Spain and the United Kingdom. We have applied, or are in the process of
applying, to register this mark in a number of other significant jurisdictions
around the world, including the United States, Canada and the Philippines.
We believe we have the right to use our "Zhongpin" trademark for the
product categories for which it is currently used. However, there can be no
assurance that any application we make to register such mark, or any other
tradename or trademark we may seek to register, will be approved and/or that the
right to the use of any such trademarks outside of their respective current
areas of usage will not be claimed by others. If trademarks are issued, there
can be no assurance as to the extent of the protection
56
that will be granted to us as a result of having such trademarks or that we will
be able to afford the expenses of any complex litigation that may be necessary
to enforce our trademark rights. Our failure to enforce successfully our
trademark rights may have a material adverse impact on our business.
We also may seek to register our "Zhongpin" trademark, or any other
tradenames or trademarks we may develop, in certain jurisdictions as a
protective measure against the unauthorized use or registration of such marks by
third parties that are not affiliated with our company. For example, while we
have not in the past either directly or indirectly through our affiliates or, to
our knowledge, indirectly through unaffiliated third-party distributors marketed
or sold any of our products in North Korea, and we have no intention or plans to
do so in the future, we took steps to register our "Zhongpin" mark in North
Korea to protect against the use of such mark by unauthorized third parties.
While such application for registration has been withdrawn, we may take similar
steps to protect our marks and other intellectual property against unauthorized
appropriation in other jurisdictions.
COMPETITION
The production and sale of meat and food products in the PRC and
internationally are highly competitive. There are numerous producers of
processed meat products in the PRC, a number of which market their products
under different brand names. We believe most of these producers have only one or
two lines of production facilities and sell their products primarily in the
areas surrounding their facilities. Due to the lack of logistics capabilities,
we believe there are no national market leaders in the meat industry in the PRC.
As a result, our products compete with different brands in different areas of
the PRC. A number of our competitors, including Henan Shuanghui (Shineway) Food
Co., Ltd., Yurun Food Group Limited and People's Food Holdings Limited, have
greater resources, own or control more processing plants and equipment, or offer
a larger product line than we do. In addition, a number of the world's largest
food processing companies have recently established joint ventures with food
manufacturers or producers in the PRC, and we expect competition from these
ventures to increase in the future.
We believe all food segments in the PRC compete on the basis of price,
product quality, brand identification and customer service. Through our
aggressive marketing and strong quality assurance programs, our competitive
strategy is to provide a higher quality of products that possess strong brand
recognition, which will in turn support higher value perceptions from customers.
GOVERNMENT REGULATION
The PRC government is actively promulgating a plan for "safe meat" and
is expected to raise the proportion of slaughtering automation to over 70% of
all meat and actively enforce authorized slaughtering and quarantine. Special
grants, subsidized financing, preferential tax policies, governmental funding
and other subsidies are provided to enterprises in order to acquire state of the
art technology and equipment in meat processing. Such government incentives
provide competitive advantages and opportunities to well-performing companies
because such policies work to raise the bar for entering the industry and to
eliminate inefficient companies in the industry. We expect such government
support for the processing of agricultural products to continue for a number of
years in the foreseeable future. However, the determination as to whether we can
continue to benefit from such government programs in the future will depend on
how the government administers its incentive programs and how well we perform.
If we maintain the current trend in our performance, it is possible we may
obtain further government support through such incentive programs.
The 10th Five-Year Development Programming of the China Meat Industry,
promulgated in 2001, set the following guidelines:
57
o Encourage comprehensive improvements in automation of abattoirs
in "First-Tier" and "Second-Tier" cities and key provinces to
improve the sanitary condition and the safety of meat products
consumption. In the PRC, First-Tier cities refer to provincial
capitals, municipalities directly under the Central Government
(such as Beijing, Shanghai, Tianjin, and Chongqing), and
municipalities directly linked with the Central Government in
taxation (i.e., such cities do not need to send revenues to the
provincial government) (such as Shenzhen, Ningbo, Qingdao, Dalian
and Xiamen), whereas Second-Tier cities refer to cities with a
population above 500,000, not including First-Tier cities.
o Develop efficient scale production of pork, beef, mutton, poultry
and eggs;
o Develop processed meat and poultry products, with emphasis on
chilled fresh meat, packaged meat and ready-to-eat meat products;
o Encourage consolidation of fragmented producers and distributors
to form scale enterprises;
o Foster quality brands and modern chain distribution networks with
emphasis on developing cold storage chains;
o Support the development of a competitive and quality domestic
market; and
o Develop exports to international markets.
EMPLOYEES
As of December 31, 2006, we employed 2,870 employees, of whom 2,037 were
operating personnel, 532 were sales personnel, 67 were research and development
personnel and 234 were administrative personnel. We are not subject to any
collective bargaining agreement and we believe our relationship with our
employees is good.
PROPERTIES
The following table sets forth certain information relating to our
corporate offices and other facilities.
APPROXIMATE OWNERSHIP
LOCATION SQUARE FEET STATUS PRINCIPAL USES
-------- ----------- --------- --------------
21 Changshe Road 23,328 Owned Corporate headquarters
Changge City, Henan Province
21 Changshe Road 258,120 Owned Meat products
Changge City, Henan Province processing plant
South Part, Changxin Road 776,520 Owned Meat, fruit and
Changge City, Henan Province vegetable products
processing plant
21 Changshe Road 118,800 Owned Logistic center
Changge City, Henan Province and warehouse
58
APPROXIMATE OWNERSHIP
LOCATION SQUARE FEET STATUS PRINCIPAL USES
-------- ----------- --------- --------------
South of National Road 311 161,740 Owned Meat products
Yanling, Henan Province processing plant
No. 8 North Ring Road 65,870 Leased(1) Meat products
Hailun City, Heilongjiang Province processing plant
- -----------
(1) This facility is leased pursuant to a three-year lease that expires in
November 2009 and provides for aggregate rental payments of 1,900,000 RMB
($251,116.75) for the first year and 2,100,000 RMB ($266,497.46) per year
for the second and third years of the lease term.
Each of the foregoing properties is in good condition and is occupied
solely by our subsidiaries.
In the opinion of management, all of our properties are adequately
covered by insurance.
LEGAL PROCEEDINGS
Neither our company nor any of our subsidiaries is a party to any legal
proceedings that, individually or in the aggregate, are material to our company
as a whole.
59
MANAGEMENT
MANAGEMENT AND BOARD OF DIRECTORS
Our current members of the Board of Directors and executive officers are
listed below.
NAME AGE COMPANY TITLE
- ---- --- -------------
Xianfu Zhu 43 Chairman of the Board and Chief Executive Officer
Baoke Ben 43 Executive Vice President and Secretary
Yuanmei Ma 35 Chief Financial Officer
Xinyu Li 52 Director
Yunchun Wang 32 Director
All directors serve for one year and until their successors are elected
and qualified. All officers serve at the pleasure of the Board of Directors.
There are no family relationships among any of our officers and directors.
Information concerning our executive officers and directors is set forth
below.
XIANFU ZHU. Mr. Zhu became our Chairman of the Board and Chief Executive
Officer in January 2006. Mr. Zhu was a founder of Henan Zhongpin in 1993 and has
served as the Chairman and Chief Executive Officer of Henan Zhongpin since its
inception. Mr. Zhu graduated from Beijing Technology and Business University and
received an EMBA from Tsinghua University.
BAOKE BEN. Mr. Ben became our Executive Vice President in January 2006.
Mr. Ben has been an Executive Vice President of Henan Zhongpin since July 2002
and was Director of Technology of Henan Zhongpin from October 1999 to July 2002.
Prior to joining Henan Zhongpin in October 1999, Mr. Ben was a researcher at the
Agriculture Research Center. Mr. Ben graduated from Henan Finance & Economy
University and received his EMBA from Tsinghua University.
YUANMEI MA. Ms. Ma became our Vice President and Chief Financial Officer
in January 2006 and has been a Vice President and Chief Financial Officer of
Henan Zhongpin since September 2005. From October 2004 to September 2005, Ms. Ma
was Senior Operations Manager, Investment Banking for Daton Securities Co.,
Ltd., an investment banking firm based in the PRC. From March 2002 to September
2004, Ms. Ma was an Accounting Manager with Neotek International Corporation,
(USA), an automobile parts import and export company. From December 1998 to
January 2002, Ms. Ma was an Operations Manager in the Asian Project Department
for Trans-Pacific Venture Investment, Inc., a financial consulting firm based in
the United States. Ms. Ma received her Bachelor of Science in Accounting from
Arkansas State University and an MBA from Oklahoma City University, Oklahoma.
Ms. Ma is a licensed CPA in the United States.
XINYU LI. Professor Li became a Director of our company in January 2006.
Since 1982, Professor Li has been a Professor in the School of Economics, Peking
University. Professor Li received her B.A. from Xiamen University and her M.A.
from Renmin University.
YUNCHUN WANG. Mr. Wang became a Director of our company in January 2006.
Since October 2004, Mr. Wang has served as the Chief Representative (China) of
Greenstone Investment & Consultants, Ltd., a China-based financial consulting
firm. From May 2001 to October 2004, Mr. Wang served as the Chief Representative
(China) of Frontier Financial Service Inc., a U.S.-based financial consulting
firm,
60
and from March 2002 to October 2004, Vice President of Highlight Management
Consulting Co. Ltd. (Frontier's Chinese partnership firm). Mr. Wang received a
degree in Engineering from Wuxi University of Light Industry (China), and an MBA
from the Business School of the University of Hertfordshire, UK.
So long as the number of shares of our common stock issuable upon
conversion of the outstanding shares of our Series A convertible preferred stock
is greater than 10% of the number of our outstanding shares of common stock on a
fully diluted basis, the holders of shares of our Series A convertible preferred
stock, as a separate class, are entitled to elect one member of our Board of
Directors. Any director elected by the holders of Series A convertible preferred
stock may be removed without cause only by the affirmative vote of the holders
of Series A convertible preferred stock. The holders of our common stock and the
holders of our Series A convertible preferred stock, voting together as a single
class, are entitled to elect the balance of the total number of directors of our
company. The holders of our Series A convertible preferred stock have not yet
nominated or elected any person to serve on our Board of Directors.
COMPENSATION DISCUSSION AND ANALYSIS
Prior to our acquisition of Falcon Link on January 30, 2006, we were
engaged in businesses unrelated to our current operations, which businesses were
managed by officers and directors who are no longer employed by or affiliated
with our company. Kevin Halter, Jr., our chief executive and chief financial
officer during fiscal 2006 prior to our acquisition of Falcon Link, received no
compensation or other perquisites for serving in such capacities.
The compensation paid in fiscal 2006 to our current executive officers
was determined by our Chairman and Chief Executive Officer, Xianfu Zhu, prior to
our acquisition of Falcon Link. The cash bonuses paid to our executive officers
in 2006 also were determined by Mr. Zhu and were intended to compensate such
officers for services rendered to our operating subsidiaries prior to our
acquisition of Falcon Link and the concurrent closing of our $27.6 million
private placement in January 2006, during which period such officers received no
compensation for services rendered to our operating subsidiaries. The amounts of
the cash bonuses paid to our executive officers were approved by our board of
directors in February 2006.
Our board of directors has not yet developed or considered the
compensation program for our executive officers for fiscal 2007 and beyond. It
is expected that our board will seek to establish a compensation program for
executive officers that will be designed to attract, as needed, individuals with
the skills necessary for us achieve our business plan, to motivate those
individuals, to reward those individuals fairly over time, and to retain those
individuals who continue to perform at or above the levels that we expect. We
also expect that our executive compensation program will be designed to afford
our executive officers a sense of ownership in our company and overall
entrepreneurial spirit, and to link rewards to measurable company and individual
performance.
Our board of directors does not currently have a compensation committee.
However, we anticipate that our board of directors will establish a compensation
committee in fiscal 2007 that will be comprised of non-employee members of our
board of directors. Our current expectation is that the compensation committee
of our board of directors will perform, at least annually, a strategic review of
the compensation program for our executive officers to determine whether it
provides adequate incentives and motivation to our executive officers and
whether it adequately compensates our executive officers relative to comparable
officers in other companies with which we compete for executives. Those
companies may or may not be public companies or companies located in the PRC or
even, in all cases, companies in the meat or food processing businesses.
61
SUMMARY COMPENSATION TABLE
The following table sets forth, for the fiscal years indicated, all
compensation awarded to, earned by or paid to Mr. Xianfu Zhu, our Chairman of
the Board and Chief Executive Officer, Ms. Yuanmei Ma, our Chief Financial
Officer, and Mr. Kevin Halter, Jr., our former Chairman of the Board, Chief
Executive Officer and Chief Financial Officer. No other executive officer
received more than $100,000 in compensation during fiscal 2005.
EXECUTIVE OFFICER
COMPENSATION TABLE
Change
In Pension
Value Of
Non-Equity Nonqualified
Incentive Deferred
Stock Option Plan Compensation All other
Name and Salary Bonus Awards Awards Compensation Earnings Compensation Total
Principal Position Year ($) ($) ($) ($) ($) ($) ($) ($)
------------------ ---- ------ ----- ------ ------ ------------ -------- ------------ ---------
Xianfu Zhu(1) 2006 $113,333 -- -- -- -- -- -- $113,333
Chairman and 2005 40,000 -- -- -- -- -- -- 40,000
Chief Executive Officer 2004 30,000 -- -- -- -- -- -- 30,000
Kevin Halter Jr.(2) 2006 -- -- -- -- -- -- -- --
Chairman and 2005 -- -- -- -- -- -- -- --
Chief Executive Officer 2004 -- -- -- -- -- -- -- --
Yuanmei Ma(3) 2006 $ 73,335 $20,000 -- -- -- -- -- $ 93,335
Chief Financial Officer 2005 -- -- -- -- -- -- -- --
2004 -- -- -- -- -- -- -- --
- -------------
(1) Mr. Zhu was elected our Chairman of the Board and Chief Executive Officer on
January 30, 2006. All compensation reflected in the table for fiscal 2004
and 2005 was for services rendered by Mr. Zhu as Chairman of the Board and
Chief Executive Officer of Henan Zhongpin during such fiscal years.
(2) Mr. Halter resigned as our Chairman of the Board and Chief Executive Officer
on January 30, 2006.
(3) Ms. Ma was elected our Chief Financial Officer on January 30, 2006.
STOCK-BASED COMPENSATION
None of our officers, directors or other employees have been granted
stock options or stock appreciation rights, or paid any other stock-based
compensation, by our company or any of our subsidiaries.
BOARD OF DIRECTORS COMPENSATION
Directors who are employees of our company or of any of our subsidiaries
receive no additional compensation for serving on our Board of Directors or any
of its committees. All directors who are not employees of our company or of any
of our subsidiaries are compensated at the rate of $30,000 per year and are
reimbursed for their expenses incurred in attending Board and committee
meetings.
62
The following table provides compensation information for all of our
non-employee directors during 2006.
DIRECTOR
COMPENSATION TABLE
Change in
Pension
Fees Non-Equity Value and
Earned Incentive Nonqualified All
or Paid Stock Option Plan Deferred Other
in Cash Awards Awards Compensation Compensation Compensation Total
Name ($) ($) ($) ($) Earnings ($) ($)
---- ------- ------ ------ ------------ ------------ ------------ -----
Xinyu Li $30,000 -- -- -- -- -- $30,000
Yunchun Wang $30,000 -- -- -- -- -- $30,000
63
PRINCIPAL STOCKHOLDERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The following table sets forth, as of March 15, 2007, the names,
addresses and number of shares of our common stock beneficially owned by all
persons known to us to be beneficial owners of more than 5% of the outstanding
shares of our common stock, and the names and number of shares beneficially
owned by all of our directors and all of our executive officers and directors as
a group (except as indicated, each beneficial owner listed exercises sole voting
power and sole dispositive power over the shares beneficially owned). As of
March 15, 2007, we had a total of 13,763,455 shares of common stock outstanding.
NUMBER OF SHARES PERCENT OF
AND NATURE COMMON
OF BENEFICIAL STOCK
NAME OF BENEFICIAL OWNER OWNERSHIP(1) OUTSTANDING(2)
- ------------------------ ---------------- --------------
Xianfu Zhu .................................... 6,367,506 46.3%
c/o Zhongpin Inc.
21 Changshe Road
Changge City, Henan Province
The People's Republic of China
Pinnacle China Fund, L.P. ..................... 1,362,582(3) 9.9%
4965 Preston Park Blvd
Suite 240
Plano, TX 75093
Entities Affiliated with
RENN Capital Group, Inc. .................... 1,299,414(4) 9.4%
8080 Central Expressway, Suite 210, LB-59
Dallas, TX 75206
Jayhawk China Fund (Cayman), Ltd. ............. 1,326,582(5) 9.9%
c/o Genesis Fund Service Limited
8201 Mission Road, Suite 110
Prairie Village, KS 66208
Entities Affiliated with Special
Situations Private Equity Fund, L.P. ........ 1,200,563(6) 8.7%
527 Madison Avenue, Suite 2600
New York, NY 10022
Entities Affiliated with Atlas Capital L.P. ... 800,376(7) 5.8%
100 Crescent Court, Sutie 880
Dallas, TX 75201
Vision Opportunity Master Fund, Ltd. .......... 720,338(8) 5.2%
317 Madison Avenue, Suite 200
New York, NY 10017
Southwell Partners, L.P. ...................... 736,446(9) 5.3%
1901 North Akard Street
Dallas, Texas 75201
Yunchun Wang .................................. 562,500 4.1%
Xinyu Li ...................................... -- --
All directors and executive officers
as a group (six persons) .................... 7,768,134 56.4%
64
- ---------------
(1) A person is considered to beneficially own any shares: (i) over which such
person, directly or indirectly, exercises sole or shared voting or
investment power, or (ii) of which such person has the right to acquire
beneficial ownership at any time within 60 days (such as through exercise
of stock options or warrants). Unless otherwise indicated, voting and
investment power relating to the shares shown in the table for our
directors and executive officers is exercised solely by the beneficial
owner or shared by the owner and the owner's spouse or children.
(2) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of common stock that such person has
the right to acquire within 60 days after the date of this prospectus. For
purposes of computing the percentage of outstanding shares of our common
stock held by each person or group of persons named above, any shares that
such person or persons has the right to acquire within 60 days after the
date of this prospectus is deemed to be outstanding, but is not deemed to
be outstanding for the purpose of computing the percentage ownership of any
other person. The inclusion herein of any shares listed as beneficially
owned does not constitute an admission of beneficial ownership.
(3) Pinnacle China Fund, L.P. ("Pinnacle") owns 144,466 outstanding shares of
common stock, shares of Series A convertible preferred stock that are
convertible into an aggregate of 1,750,000 shares of common stock, and
warrants to purchase an aggregate of 1,137,500 shares of common stock. The
shares of Series A convertible preferred stock and warrants contain
provisions known as "exercise caps," which prohibit the holder of the
shares of Series A convertible preferred stock and warrants (and its
affiliates) from converting such shares or exercising such warrants to the
extent that giving effect to such conversion or exercise, such holder would
beneficially own in excess of 9.999% of our outstanding common stock. The
figures set forth above as the ownership prior to the offering and the
ownership after the offering reflect the operation of such exercise caps in
that we have not included 1,669,384 shares of common stock issuable
pursuant to such convertible shares and warrants as Pinnacle has advised us
that it does not beneficially own such shares due to the fact that it
cannot exercise its right to receive such shares at this time. In the
absence of such caps, Pinnacle would have the right to receive all shares
issuable upon conversion of the shares of Series A convertible preferred
stock and exercise of the warrants (an aggregate of 2,887,500 shares) and
would have a beneficial ownership percentage of 21.0%.
Pinnacle China Advisers, L.P. ("Pinnacle Advisers") is the general partner
of Pinnacle. Pinnacle China Management, LLC ("Pinnacle Management") is the
general partner of Pinnacle Advisers. Kitt China Management, LLC ("Pinnacle
Manager") is the manager of Pinnacle Management. Barry M. Kitt is the sole
member of Pinnacle Manager. Mr. Kitt may be deemed to be the beneficial
owner of the shares of common stock beneficially owned by Pinnacle. Mr.
Kitt expressly disclaims beneficial ownership of all shares of common stock
beneficially owned by Pinnacle.
(4) (i) BFS US Special Opportunities Trust PLC ("BFS") owns 30,957 outstanding
shares of common stock, shares of Series A convertible preferred stock that
are convertible into an aggregate of 375,000 shares of common stock and
warrants to purchase an aggregate of 243,750 shares of common stock, and
(ii) Renaissance US Growth Investment Trust PLC ("Renaissance") owns 30,957
outstanding shares of common stock, shares of Series A convertible
preferred stock that are convertible into an aggregate of 375,000 shares of
common stock and warrants to purchase an aggregate of 243,750 shares of
common stock. RENN Capital Group, Inc. ("RENN Advisor") is the investment
manager of each of BFS and Renaissance.
Russell Cleveland, the President of RENN Advisor, has voting and/or
investment control over the shares owned by each of BFS and Renaissance.
(5) Jayhawk China Fund (Cayman), Ltd. ("Jayhawk") owns 73,172 outstanding
shares of common stock, shares of Series A convertible preferred stock that
are convertible into an aggregate of 900,000 shares of common stock and
warrants to purchase an aggregate of 585,000 shares of common stock. The
shares of Series A convertible preferred stock and warrants contain
provisions known as "exercise caps," which prohibit the holder of the
shares of Series A convertible preferred stock and warrants (and its
affiliates) from converting such shares or exercising such warrants to the
extent that giving effect to such conversion or exercise, such holder would
beneficially own in excess of 9.999% of our outstanding common stock. The
figures set forth above as the ownership prior to the offering and the
ownership after the offering
65
reflect the operation of such exercise caps in that we have not included
231,590 shares of common stock issuable pursuant to such convertible shares
and warrants as Jayhawk has advised us that it does not beneficially own
such shares due to the fact that it cannot exercise its right to receive
such shares at this time. In the absence of such caps, Jayhawk would have
the right to receive all shares issuable upon conversion of the shares of
Series A convertible preferred stock and exercise of the warrants (an
aggregate of 1,485,000 shares) and would have a beneficial ownership
percentage of 10.8%.
Jayhawk Capital Management, LLC is the investment manager of Jayhawk. Kent
C. McCarthy has voting and/or investment control over the shares owned by
Jayhawk.
(6) Consists of (i) 214,500 shares of common stock issuable upon the conversion
of Series A convertible preferred stock beneficially owned by Special
Situations Private Equity Fund L.P. ("Private Equity Fund") and 128,860
shares of common stock issuable upon the exercise of warrants beneficially
owned by the Private Equity Fund, (ii) 492,750 shares of common stock
issuable upon the conversion of Series A convertible preferred stock
beneficially owned by Special Situation Fund III QP, L.P. ("Fund III QP")
and 296,020 shares of common stock issuable upon the exercise of warrants
beneficially owned by Fund III QP and (iii) 42,750 shares of common stock
issuable upon the conversion of Series A convertible preferred stock
beneficially owned by Special Situations Fund III, L.P. ("Fund III") and
25,683 shares of common stock issuable upon the exercise of warrants
beneficially owned by Fund III.
MG Advisors, L.L.C. ("MG") is the general partner of and investment adviser
to the Private Equity Fund. Austin W. Marxe and David M. Greenhouse are the
principal owners of MG and are principally responsible for the selection,
acquisition and disposition of the portfolio securities by MG on behalf of
Private Equity Fund. MGP Advisers Limited Partnership ("MGP") is the
general partner of Fund III and Fund III QP. Austin W. Marxe and David M.
Greenhouse are the general partners of MGP and are principally responsible
for the selection, acquisition and disposition of the portfolio securities
by MGP on behalf of Fund III and Fund III QP.
(7) Consists of (i) 283,750 shares of common stock issuable upon the conversion
of Series A convertible preferred stock, and 170,462 shares of common stock
issuable upon the exercise of warrants, beneficially owned by Atlas Capital
Master Fund, L.P., (ii) 172,000 shares of common stock issuable upon the
conversion of Series A convertible preferred stock, and 103,330 shares of
common stock issuable upon the exercise of warrants, beneficially owned by
Atlas Capital (Q.P.), L.P. and (iii) 44,250 shares of common stock issuable
upon the conversion of Series A convertible preferred stock, and 26,584
shares of common stock issuable upon the exercise of warrants, beneficially
owned by Atlas Advantage Master Fund, Ltd. Atlas Capital L.P. and Atlas
Advantage Master Fund Ltd. ("Atlas Advantage") are the general partners of
Atlas Capital Master Fund Ltd. Atlas Capital Management L.P. ("Atlas
Management") is the general partner of Atlas Capital L.P. Atlas Management
is also the general partner of Atlas Capital (QP), L.P. and Atlas
Advantage. RHA is the general partner of Atlas Management. Robert H. Alpert
("Alpert") is President of RHA and is a director of Atlas Offshore. Alpert
has voting and/or investment control over the shares owned by the selling
stockholder.
(8) Consists of 450,000 shares of common stock issuable upon the conversion of
Series A Convertible Preferred Stock, and 270,338 shares of common stock
issuable upon the exercise of Warrants, beneficially owned by Vision
Opportunity Master Fund, Ltd. Adam Benowitz, managing partner of the
selling stockholder, has voting and/or investment control over the shares
owned by the selling stockholder.
(9) Consists of 36,117 outstanding shares of common stock, 437,500 shares of
common stock issuable upon the conversion of Series A convertible preferred
stock, and 262,829 shares of common stock issuable upon the exercise of
warrants, beneficially owned by Southwell Partners, L.P. Southwell
Management, L.P. is the general partner of the selling stockholder. Wilson
Jaeggli is the managing director of the selling stockholder and has voting
and/or investment control over the shares owned by the selling stockholder.
From time to time, the number of our shares held in the "street name"
accounts of various securities dealers for the benefit of their clients or in
centralized securities depositories may exceed 5% of the total shares of our
common stock outstanding.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 30, 2006, we acquired all of the issued and outstanding
capital stock of Falcon Link pursuant to a share exchange agreement dated as of
January 30, 2006 among our company and the shareholders of Falcon Link. Included
among the shareholders of Falcon Link were Mr. Xianfu Zhu, our
66
Chairman of the Board and Chief Executive Officer, Mr. Baoke Ben, our Executive
Vice President and Secretary, and Mr. Yunchun Wang, a director of our company.
In connection with such transaction, Messrs. Zhu, Ben and Wang were issued
6,367,506 shares of common stock, 838,125 shares of common stock and 562,500
shares of common stock, respectively.
Yunchun Wang, a director of our company and the registered owner of
562,500 shares, or approximately 4.1% of our outstanding shares, of our common
stock, is the Chief Representative (China) and the beneficial owner of
approximately 33.33% of the capital stock of Greenstone Investment &
Consultants, Ltd., a financial consulting firm based in the PRC ("Greenstone").
Each of Yousu Lin and Qian Wang also is the registered owner of 562,500 shares
of our common stock and is the beneficial owner of approximately 33.33% of the
capital stock of Greenstone. In April 2005, we entered into advisory and
consulting agreements with Greenstone pursuant to which Greenstone provides us
financial advisory services, including financial consulting, merger and
acquisition consulting and financial restructuring consulting services,
management advisory services, including consultation regarding corporate
governance and human resources, and business advisory services, including
strategic planning and business development consulting services. Pursuant to our
retainer agreement with Greenstone, in each of 2005 and 2006, we paid Greenstone
consulting fees in the amount of $100,000 for such consulting services rendered
during such year. In addition, pursuant to such agreement, in February 2006, we
paid Greenstone a fee in the amount of $414,000 in connection with the
consummation of our private placement of Series A convertible preferred stock
and warrants and the acquisition of Falcon Link by our publicly-held "shell"
corporation.
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DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares of common
stock, par value $.001 per share, and 25,000,000 shares of preferred stock, par
value $.001 per share. As of March 15, 2007, 13,763,455 shares of common stock
were issued and outstanding and 5,268,856 shares of Series A convertible
preferred stock were issued and outstanding, each such share convertible into
one share of common stock. In addition, at such date, 4,434,799 shares of common
stock were reserved for issuance upon the exercise of outstanding common stock
purchase warrants, 690,000 shares of Series A convertible preferred stock were
reserved for issuance upon the exercise of outstanding unit purchase warrants
and 1,035,000 shares of common stock were reserved for issuance upon the
conversion of Series A convertible preferred stock and common stock purchase
warrants comprising such unit purchase warrants.
COMMON STOCK
VOTING, DIVIDEND AND OTHER RIGHTS. Each outstanding share of common
stock entitles the holder to one vote on all matters presented to the
shareholders for a vote. Holders of shares of common stock have no cumulative
voting, preemptive, subscription or conversion rights. All shares of common
stock to be issued pursuant to this registration statement will be duly
authorized, fully paid and non-assessable. Our Board of Directors determines if
and when distributions may be paid out of legally available funds to the
holders. To date, we have not declared any dividends with respect to our common
stock. Our declaration of any cash dividends in the future will depend on our
Board of Directors' determination as to whether, in light of our earnings,
financial position, cash requirements and other relevant factors existing at the
time, it appears advisable to do so. We do not anticipate paying cash dividends
on the common stock in the foreseeable future.
RIGHTS UPON LIQUIDATION. Upon liquidation, subject to the right of any
holders of the preferred stock to receive preferential distributions, each
outstanding share of common stock may participate pro rata in the assets
remaining after payment of, or adequate provision for, all our known debts and
liabilities.
MAJORITY VOTING. The holders of a majority of the outstanding shares of
common stock constitute a quorum at any meeting of the shareholders. A plurality
of the votes cast at a meeting of shareholders elects our directors. The common
stock does not have cumulative voting rights. Therefore, the holders of a
majority of the outstanding shares of common stock can elect all of our
directors. In general, a majority of the votes cast at a meeting of shareholders
must authorize shareholder actions other than the election of directors. Most
amendments to our certificate of incorporation require the vote of the holders
of a majority of all outstanding voting shares.
PREFERRED STOCK
AUTHORITY OF BOARD OF DIRECTORS TO CREATE SERIES AND FIX RIGHTS. Under
our certificate of incorporation, as amended, our Board of Directors can issue
up to 25,000,000 shares of preferred stock from time to time in one or more
series. The Board of Directors is authorized to fix by resolution as to any
series the designation and number of shares of the series, the voting rights,
the dividend rights, the redemption price, the amount payable upon liquidation
or dissolution, the conversion rights, and any other designations, preferences
or special rights or restrictions as may be permitted by law. Unless the nature
of a particular transaction and the rules of law applicable thereto require such
approval, our Board of Directors has the authority to issue these shares of
preferred stock without shareholder approval. Our Board of Directors has
designated 7,631,250 shares of the authorized but unissued preferred stock as
Series A convertible preferred stock.
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SERIES A CONVERTIBLE PREFERRED STOCK
DIVIDENDS. The holders of the Series A convertible preferred stock are
entitled to receive, when and as declared by our Board of Directors, dividends
in such amounts as may be determined by our 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 convertible preferred stock a dividend in an amount per
share equal to the product of (i) the number of shares of common stock issuable
upon conversion of their shares of Series A convertible preferred stock and (ii)
the amount per share of the dividend to be paid on the common stock.
PREFERENCE ON LIQUIDATION. In the event of a merger, consolidation or
sale of all or substantially all of our assets or other liquidation, holders of
the Series A convertible preferred stock shall get a priority in payment over
all other classes of stock. In such events, the Series A convertible preferred
stock would be entitled to receive the greater of (i) the original purchase
price of the Series A convertible preferred stock or (ii) the amount the holder
would get if he converted all of his Series A convertible preferred stock into
common stock.
VOTING. The holder of each share of Series A convertible preferred stock
(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
convertible preferred stock 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 our 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 convertible
preferred stock 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 convertible preferred stock, exclusively and as a separate class, shall
be entitled to elect one of our directors.
CONVERSION RIGHT. Subject to the limitation on conversion described
below, the holders of Series A convertible preferred stock may convert each
share of Series A convertible preferred stock into common stock at an initial
conversion price of $4.00. The conversion price will be adjusted for stock
dividends, stock splits and similar events.
AUTOMATIC CONVERSION. Subject to the limitation on conversion described
below, each share of Series A convertible preferred stock will automatically be
converted into shares of common stock at the conversion price at the time in
effect if (i) we have an underwritten public offering of our common stock giving
us at least $30 million in net proceeds, (ii)(A) the closing price of the common
stock equals or exceeds $10 (as adjusted) for the twenty (20)
consecutive-trading-day period ending within two (2) days of the date on which
we 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 convertible preferred stock has been
declared effective and remains effective and available for resale 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
Convertible Preferred Stock.
LIMITATIONS ON CONVERSION. We will not effect the conversion of any
share of Series A convertible preferred stock, and no person who is a holder of
Series A convertible preferred stock shall have the right to convert shares of
Series A convertible preferred stock into shares of common stock, to
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the extent that after giving effect to such conversion, such person (together
with such person's affiliates) would beneficially own in excess of 9.999% of the
shares of our common stock outstanding immediately after giving effect to such
conversion. For purposes of the this limitation, the aggregate number of shares
of our common stock beneficially owned by such person and its affiliates shall
include, without limitation, the number of shares of common stock issuable upon
conversion of Series A convertible preferred stock with respect to which such
determination is being made, but shall exclude shares of common stock that would
be issuable upon (i) exercise of the remaining unconverted shares of Series A
convertible preferred stock beneficially owned by such person and its affiliates
and (ii) exercise or conversion of the unexercised or unconverted portion of any
other securities of our company beneficially owned by such person and its
affiliates (including, without limitation, shares of convertible stock, any
debentures, convertible notes or other convertible preferred stock or warrants)
subject to a limitation on conversion or exercise analogous to the limitation on
conversion of our Series A convertible preferred stock. Notwithstanding the
foregoing, such limitation on conversion shall not be applicable to any person
who notifies the Secretary of our company in writing prior to the purchase of
any shares of Series A convertible preferred stock that such person irrevocably
elects not to have such provisions apply to any shares of Series A convertible
preferred stock owned by record by such person.
PROTECTIVE PROVISIONS. So long as at least 1,750,000 shares of Series A
convertible preferred stock are outstanding (subject to adjustment for stock
splits, combinations and the like), the holders of a majority of the outstanding
Series A convertible preferred stock 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 convertible preferred stock, (3)
create a new class of preferred stock or increase the number of shares of Series
A convertible preferred stock 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 convertible preferred stock; or (5) make any change
in the size of our Board of Directors.
POTENTIAL DILUTION OF SHARE VALUE; PREFERENCES. Any issuance of shares
of preferred stock could dilute the earnings per share and book value of
existing shares of common stock. Because our Board of Directors has the
authority to fix the voting rights for any series of preferred stock, the
holders of shares of a series of preferred stock could be entitled to vote
separately as a class in connection with the approval of certain extraordinary
corporate transactions where Delaware law does not require such class vote, or
might be given a disproportionately large number of votes. The issuance of
shares of preferred stock could also result in a class of securities outstanding
that would have certain preferences (for example, with respect to dividends or
liquidation), or would enjoy certain voting rights in addition to those of the
common stock.
POTENTIAL FRUSTRATION IN CHANGE OF CONTROL. Although we currently have
no such intention, we could use authorized but unissued shares of preferred
stock to hinder a change in control of our company. Any issuance of shares of
preferred stock could dilute the stock ownership of persons seeking to gain
control. Shares of a new series of preferred stock could also be convertible
into a large number of shares of common stock or have other terms that might
make more difficult or costly the acquisition of a controlling interest in our
company. Under certain circumstances, such shares could be used to create voting
impediments or to frustrate persons attempting to effect a takeover or otherwise
gain control. Such shares could be privately placed with purchasers who might
side with the Board of Directors in opposing a hostile takeover bid. In
addition, the Board of Directors could authorize holders of a series of
preferred stock to vote as a class, either separately or with the holders of the
common stock, on any merger, sale or exchange of assets by us or any other
extraordinary corporate transactions. The ability of the Board of Directors to
take such actions might be considered as having an effect of discouraging any
attempt by another person or entity to acquire control of our company.
70
WARRANTS
At March 15, 2007, the following warrants were outstanding:
o Warrants to purchase 3,450,000 shares of common stock at any time
on or prior to January 30, 2011 at an initial exercise price of
$5.00 per share. Pursuant to this terms of such warrants, the
exercise price of such warrants is, subject to adjustment in the
event of stock splits, combinations or the like of our common
stock.
o Warrants to purchase 100,000 shares of common stock at any time
on or prior to June 30, 2009 at an initial exercise price of
$6.50 per share. Pursuant to the terms of such warrants, the
exercise price of such warrants is subject to adjustment in the
event of stock splits, combinations or the like of our common
stock.
o Warrants to purchase 345,000 units at any time on or prior to
January 30, 2011 at an initial exercise price of $8.00 per unit.
Pursuant to the terms of such warrants, the exercise price of
such warrants is subject to adjustment in the event of stock
splits, combinations or the like of our Series A convertible
preferred stock. The units that may be acquired upon exercise of
such warrants consist of two shares of Series A convertible
preferred stock and one warrant to purchase one share of common
stock at an initial exercise price per share equal to $5.00,
subject to adjustment for stock splits, combinations or the like
of our common stock.
o Warrants to purchase 884,799 shares of common stock at any time
on or prior to January 30, 2011 at an initial exercise price of
$5.50 per share. Pursuant to the terms of such warrants, the
exercise price of such warrants is subject to adjustment in the
event of stock splits, combinations or the like of our common
stock.
RESTRICTIONS ON TRANSFER OF CERTAIN OUTSTANDING SHARES
Several of our stockholders owned shares of our common stock during the
period from March 30, 2005 to January 30, 2006, during which period our company
was a blank check or "shell" company. It is the position of the Securities and
Exchange Commission that
o promoters or affiliates of blank check companies, as well as
their transferees, are "underwriters" of the securities issued;
o such persons may not resell the securities of the blank check
company beneficially owned by such persons pursuant to the
exemption from registration provided by Rule 144 of the
Securities Act or the Section 4(1) exemption from registration
under the Securities Act that exempts sales by persons other than
"an issuer, underwriter or dealers;" and
o the securities of the blank check company beneficially owned by
such persons can only be resold through registration under the
Securities Act.
Based upon discussions between our company and Kevin Halter, Jr., our
Chairman of the Board and Chief Executive Officer between March 30, 2005 and
January 30, 2006 and reportedly the beneficial owner of 82.4% of the outstanding
shares of our common stock during such period, we believe the following
stockholders of our company were either promoters or affiliates of our company
during the
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period in which our company was a blank check company, or are transferees of
shares held by such persons during such period, and that the shares of our
common stock beneficially owned by such stockholders may only be resold or
transferred through registration under the Securities Act.
NUMBER OF
NAME OF STOCKHOLDER RESTRICTED SHARES*
------------------- -----------------
Halter Financial Group, LP............ 48,200
M1 Advisors LLC....................... 49,000
------
Total............................ 97,200
======
- ------------
* These shares have been registered for resale under the registration
statement of which this prospectus is a part.
REGISTRATION RIGHTS
After this offering, the holders of 379,743 shares of common stock,
5,898,592 shares of common stock issuable upon conversion of our Series A
convertible preferred stock and 4,334,799 shares of common stock issuable upon
exercise of warrants will be entitled to rights with respect to the registration
of such shares under the Securities Act of 1933 pursuant to the terms of the
Registration Rights Agreement dated as of January 30, 2006, and last amended on
December 21, 2006. We are required to file a registration statement under the
Securities Act with respect to these shares not later than April 22, 2007, and
we are required to use our best efforts to effect this required registration. If
all of such shares cannot be registered in such registration statement, we are
required to file additional registration statements under the Securities Act
until all such shares have been registered. Furthermore, the holders may require
us to register their shares on Form S-3 when Form S-3 becomes available to us.
Under the terms of the Registration Rights Agreement, if we propose to register
any of our securities under the Securities Act for our own account, the holders
of such shares of common stock and shares of common stock issuable upon
conversion of Series A convertible preferred stock and exercise of warrants are
entitled to notice of our intent to register shares and are entitled to include
shares in the registration. The Registration Rights Agreement limits
registration rights in some situations.
The holders of warrants to purchase units of Series A convertible
preferred stock and warrants are also entitled to rights with respect to the
registration of the 1,035,000 shares of common stock issuable upon the
conversion of the Series A convertible preferred stock and exercise of the
warrants issuable upon exercise of such unit warrants. We are prohibited by the
terms of the Registration Rights Agreement referred to above from registering
any such shares until all of the shares registrable under the Registration
Rights Agreement have been registered for resale.
Generally, we must bear all registration and selling expenses incurred
in connection with any of the registrations described above. The registration
rights under the Registration Rights Agreement are also subject to conditions
and limitations, among them the right of the underwriters of an offering to
limit the number of shares included in the proposed registration.
Pursuant to the Registration Rights Agreement, on April 12, 2006, we
filed with the Securities and Exchange Commission a registration statement on
Form S-1 pursuant to which we attempted to register under the Securities Act all
of the shares of common stock issuable upon the conversion of our outstanding
shares of Series A convertible preferred stock or the exercise of warrants
issued in the private placement of our Series A convertible preferred stock, as
well as certain outstanding shares of our common stock. However, due to the
nature and size of the offering that would have resulted from such registration,
we were required to amend such registration statement to reduce the number of
shares
72
included therein, and only 1,001,408 shares issuable upon conversion of the
Series A convertible preferred stock were included in the 1,500,005 shares of
common stock that were to be offered pursuant to such registration statement. In
consideration of the agreement of certain holders of shares of Series A
convertible preferred stock and stock purchase warrants issued in the private
placement to permit us to remove from such registration statement shares of
common stock issuable upon the conversion or exercise of such securities, in
December 2006 we issued to such holders additional stock purchase warrants to
purchase an aggregate of 884,799 of our common stock, which warrants have an
exercise price of $5.50 per share, subject to adjustment for certain
antidilutive events, and expire on January 30, 2011. In January 2007, in
response to certain comments of the Securities and Exchange Commission, we
elected to withdraw such registration statement and to file with the Commission
in lieu thereof the registration statement of which this prospectus forms a
part.
In December 2006, we also settled in full certain penalty payment
obligations resulting from our failure to file with the Securities and Exchange
Commission and have declared effective by the Commission in a timely manner our
prior registration statement and the registration statement of which this
prospectus forms a part. Pursuant to such settlement, we made cash payments to
certain of the investors in the private placement in the aggregate amount of
$1,044,356.67 and issued to certain of such investors an aggregate of 379,743
shares of our common stock.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION
AND BYLAWS
Our certificate of incorporation and our Bylaws contain certain
provisions that could have the effect of delaying, deferring or discouraging
another party from acquiring control of us. These provisions and certain
provisions of Delaware law, which are summarized below, may discourage coercive
takeover practices and inadequate takeover bids. These provisions also may
encourage persons seeking to acquire control of us to first negotiate with our
Board of Directors. We believe that the benefits of increased protection of our
potential ability to negotiate with an unfriendly or unsolicited acquirer
outweigh the disadvantages of discouraging a proposal to acquire us because
negotiation of these proposals could result in an improvement of their terms.
UNDESIGNATED PREFERRED STOCK. As discussed above, our Board of Directors
has the ability to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
us. These and other provisions may have the effect of deferring hostile
takeovers or delaying changes in our control or management.
DELAWARE ANTI-TAKEOVER STATUTE. We are subject to the provisions of
Section 203 of the Delaware General Corporation Law regulating corporate
takeovers. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging, under certain circumstances, in a business
combination with an interested stockholder for a period of three years following
the date the person became an interested stockholder unless:
o Prior to the date of the transaction, the Board of Directors of the
corporation approved either the business combination or the transaction
that resulted in the stockholder's becoming an interested stockholder;
o Upon completion of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
voting stock outstanding, but not the outstanding voting stock owned by
the interested stockholder, (1) shares owned by persons who are
directors and also officers and (2) shares owned by employee stock plans
in which employee participants do not have the right to
73
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
o At or subsequent to the date of the transaction, the business
combination is approved by the Board of Directors and authorized at an
annual or special meeting of stockholders, and not by written consent,
by the affirmative vote of at least 66-2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Generally, a business combination includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is a person who, together with affiliates
and associates, owns or, within three years prior to the determination of
interested stockholder status, did own 15% or more of a corporation's
outstanding voting stock. We expect the existence of this provision to have an
anti-takeover effect with respect to transactions our Board of Directors does
not approve in advance. We also anticipate that Section 203 may discourage
attempts that might result in a premium over the market price for the shares of
common stock held by stockholders.
The provisions of Delaware law and the provisions of our certificate of
incorporation and Bylaws, as amended, could have the effect of discouraging
others from attempting hostile takeovers and, as a consequence, they may also
inhibit temporary fluctuations in the market price of our common stock that
often result from actual or rumored hostile takeover attempts. These provisions
may also have the effect of preventing changes in our management. It is possible
that these provisions could make it more difficult to accomplish transactions
that stockholders may otherwise deem to be in their best interests.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for our common stock is The Bank of New
York located at 101 Barclay Street, New York, New York 10286.
SELLING STOCKHOLDERS
The following table sets forth information with respect to the maximum
number of shares of common stock beneficially owned by the selling stockholders
named below and as adjusted to give effect to the sale of the shares offered
hereby. The shares beneficially owned have been determined in accordance with
rules promulgated by the Securities and Exchange Commission, and the information
is not necessarily indicative of beneficial ownership for any other purpose. The
information in the table below is current as of March 28, 2007. All information
contained in the table below is based upon information provided to us by the
selling stockholders and we have not independently verified this information.
The selling stockholders are not making any representation that any shares
covered by the prospectus will be offered for sale. The selling stockholders may
from time to time offer and sell pursuant to this prospectus any or all of the
common stock being registered.
As explained below under "Plan of Distribution," we have agreed with the
selling stockholders to bear certain expenses (other than broker discounts and
commissions, if any) in connection with the registration statement, which
includes this prospectus.
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SHARES OF COMMON
SHARES OF COMMON STOCK STOCK BENEFICIALLY
BENEFICIALLY OWNED SHARES BEING OWNED AFTER
PRIOR TO OFFERING(1) OFFERED OFFERING(2)
----------------------- ------------ ------------------
SELLING STOCKHOLDER SHARES % SHARES %
------------------- --------- --- ------- ---
Entities Affiliated with Atlas Capital L.P. ... 800,376(3)# 5.8% 164,166 636,210 4.6%
Cordillera Fund, L.P. ......................... 160,076(4)# 1.2% 32,833 127,243 *
Crestview Capital Master, LLC ................. 400,188(5)# 2.9% 82,083 318,105 2.3%
Gryphon Master Fund, L.P. ..................... 280,132(6)# 2.0% 57,458 222,674 1.6%
GSSF Master Fund, L.P. ........................ 120,057(7)# * 24,625 95,432 *
Southwell Partners, L.P. ...................... 736,446(8)# 5.4% 143,644 592,802 4.3%
Entities Affiliated with Special
Situations Private Equity Fund, L.P. ........ 1,200,564(9) 8.7% 246,248 954,316 6.9%
Entitles Affiliated with SRB
Management, L.P. ............................ 187,414(10)# 1.4% 18,041 169,373 1.2%
Vision Opportunity Master Fund, Ltd. .......... 720,338(11)# 5.2% 147,749 572,589 4.2%
Entitles Affiliated with WSV
Management L.L.C ............................ 281,123(12)# 2.0% 27,061 254,062 1.8%
Halter Financial Group, L.P. .................. 48,200(13)(14) * 48,200 -- --
M1 Advisors, LLC .............................. 49,000(13)(15) * 49,000 -- --
- ---------------
* Less than 1.0%.
# The number of shares of common stock underlying the Series A convertible
preferred stock and warrants that may be acquired by a selling stockholder
upon the conversion of the Series A convertible preferred stock or the
exercise of the warrants, as the case may be, is limited to ensure that,
following such conversion or exercise, the total number of shares of common
stock then beneficially owned by such selling stockholder and its
affiliates and other persons whose beneficial ownership of common stock
would be aggregated with such selling stockholder's for purposes of Section
13(d) of the Securities and Exchange Act of 1934, does not exceed 9.999% of
the total number of our issued and outstanding shares of common stock.
! Represents shares of common stock issuable upon conversion or exercise of
securities issuable upon the exercise of outstanding unit purchase
warrants, each unit consisting of two shares of Series A convertible
preferred stock and one common stock purchase warrant.
(1) This table is based upon information supplied by officers, directors and
principal stockholders, and in Schedules 13D and 13G filed with the
Securities and Exchange Commission. Unless otherwise indicated in the
footnotes to this table and subject to community property laws, where
applicable, we believe each stockholder named in this table has sole voting
and investment power with respect to the shares indicated as beneficially
owned. The number and percentage of shares beneficially owned are based on
an aggregate of 12,132,311 shares of our common stock outstanding as of
December 22, 2006, and are determined under rules promulgated by the
Securities and Exchange Commission. This information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules,
beneficial ownership includes any shares as to which the individual has
sole or shared voting power or investment power and also any shares which
the individual has the right to acquire within 60 days through the exercise
of any stock option or other right.
(2) Because the selling shareholders identified in this table may sell some,
all or none of the shares owned by them that are registered under this
registration statement, and because, to our knowledge, there are currently
no agreements, arrangements or understandings with respect to the sale of
any of the shares registered hereunder, no estimate can be given as to the
number of shares available for resale hereby that will be held by
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the selling shareholders at the time of this registration statement.
Therefore, we have assumed for purposes of this table that the selling
shareholders will sell all of the shares beneficially owned by them.
(3) Consists of (i) 283,750 shares of common stock issuable upon the conversion
of Series A convertible preferred stock, and 170,462 shares of common stock
issuable upon the exercise of warrants, beneficially owned by Atlas Capital
Master Fund, L.P., (ii) 172,000 shares of common stock issuable upon the
conversion of Series A convertible preferred stock, and 103,330 shares of
common stock issuable upon the exercise of warrants, beneficially owned by
Atlas Capital (Q.P.), L.P. and (iii) 44,250 shares of common stock issuable
upon the conversion of Series A convertible preferred stock, and 26,584
shares of common stock issuable upon the exercise of warrants, beneficially
owned by Atlas Advantage Master Fund, LP. Atlas Capital L.P. and Atlas
Advantage Master Fund LP. ("Atlas Master") are the general partners of
Atlas Capital Master Fund Ltd. Atlas Capital Management L.P. ("Atlas
Management") is the general partner of Atlas Capital L.P. Atlas Management
is also the general partner of Atlas Capital (Q.P.), L.P. and Atlas Master.
RHA is the general partner of Atlas Management. Robert H. Alpert ("Alpert")
is President of RHA and is a director of Atlas Offshore. Alpert has voting
and/or investment control over the shares owned by the selling stockholder.
(4) Consists of 100,000 shares of common stock issuable upon the conversion of
Series A convertible preferred stock, and 60,076 shares of common stock
issuable upon the exercise of warrants, beneficially owned by Cordillera
Fund, L.P. pursuant to the Securities Purchase Agreement dated as of
January 30, 2006, as amended. ACCF GenPar, L.P. is the general partner of
the selling stockholder. Andrew Carter Capital, Inc. is the general partner
of ACCF GenPar, L.P. James P. Andrew and Stephen J. Carter, Co-Chief
Executive Officers of Andrew Carter Capital, Inc., have voting and/or
investment control over the shares owned by the selling stockholder.
(5) Consists of 250,000 shares of common stock issuable upon the conversion of
Series A convertible preferred stock and 150,188 shares of common stock
issuable upon the exercise of warrants beneficially owned by Crestview
Capital Master, LLC. Crestview Capital Partners, LLC ("Crestview Partners")
is the general partner of the selling stockholder. Stewart R. Flink, Robert
Hoyt and Daniel I. Warsh are the managers of Crestview Partners and have
voting and/or investment control over the shares owned by the selling
stockholder.
(6) Consists of 175,000 shares of common stock issuable upon the conversion of
Series A convertible preferred stock, and 105,132 shares of common stock
issuable upon the exercise of warrants, beneficially owned by Gryphon
Master Fund, L.P. Gryphon Management Partners, L.P. is the general partner
of the selling stockholder. E.B. Lyon, IV has voting and/or investment
control over the shares owned by the selling stockholder.
(7) Consists of 75,000 shares of common stock issuable upon the conversion of
Series A convertible preferred stock, and 45,057 shares of common stock
issuable upon the exercise of warrants, beneficially owned by GSSF Master
Fund, L.P. GSSF Management Partners, L.P. is the manager of the selling
stockholder. Tom C. Davis has voting and/or investment control over the
shares owned by the selling stockholder.
(8) Consists of 36,117 outstanding shares of common stock, 437,500 shares of
common stock issuable upon the conversion of Series A convertible preferred
stock, and 262,829 shares of common stock issuable upon the exercise of
warrants beneficially owned by Southwell Partners, L.P. Southwell
Management, L.P. is the general partner of the selling stockholder. Wilson
Jaeggli is the managing director of the selling stockholder and has voting
and/or investment control over the shares owned by the selling stockholder.
(9) Consists of (i) 214,500 shares of common stock issuable upon the conversion
of Series A convertible preferred stock, and 128,861 shares of common stock
issuable upon the exercise of warrants, beneficially owned by Special
Situations Cayman Fund, L.P., (ii) 492,750 shares of common stock issuable
upon the conversion of Series A convertible preferred stock, and 296,020
shares of common stock issuable upon the exercise of warrants, beneficially
owned by Special Situations Fund III QP, L.P. and (iii) 42,750 shares of
common stock issuable upon the conversion of Series A convertible preferred
stock, and 25,683 shares of common stock issuable upon the exercise of
warrants, beneficially owned by Special Situations Fund III, L.P. MGP is
the investment advisor and general partner of the selling stockholder.
Austin Marxe and David Greenhouse are the principal owners of MGP and have
voting and/or investment control over the shares owned by the selling
stockholder.
76
(10) Consists of (i) 1,251 outstanding shares of common stock, 4,474 shares of
common stock issuable upon the conversion of Series A convertible preferred
stock, and 4,010 shares of common stock issuable upon the exercise of
warrants, beneficially owned by SRB Greenway Offshore Operating Fund, L.P.,
(ii) 3,001 outstanding shares of common stock, 8,926 shares of common stock
issuable upon the conversion of Series A convertible preferred stock, and
8,005 shares of common stock issuable upon the exercise of warrants,
beneficially owned by SRB Greenway Capital, L.P. and (iii) 24,109
outstanding shares of common stock, 70,559 shares of common stock issuable
upon the conversion of Series A convertible preferred stock, and 63,079
shares of common stock issuable upon the exercise of warrants, beneficially
owned by SRB Greenway Capital (QP), L.P. SRB Management is the general
partner of the selling stockholder. BC Advisors is the general partner of
SRB Management. Steve Becker, a member of BC Advisors, has voting and/or
investment control over the shares owned by the selling stockholder.
(11) Consists of 450,000 shares of common stock issuable upon the conversion of
Series A convertible preferred stock, and 270,338 shares of common stock
issuable upon the exercise of warrants, beneficially owned by Vision
Opportunity Master Fund, Ltd. Adam Benowitz, managing partner of the
selling stockholder, has voting and/or investment control over the shares
owned by the selling stockholder.
(12) Consists of (i) 19,934 outstanding shares of common stock, 63,809 shares of
common stock issuable upon the conversion of Series A convertible preferred
stock, and 57,072 shares of common stock issuable upon the exercise of
warrants, beneficially owned by WS Opportunity Fund International, Ltd.,
(ii) 12,199 outstanding shares of common stock, 36,942 shares of common
stock issuable upon the conversion of Series A convertible preferred stock,
and 33,042 shares of common stock issuable upon the exercise of warrants,
acquired by WS Opportunity Fund, L.P. and (iii) 10,408 outstanding shares
of common stock, 25,188 shares of common stock issuable upon the conversion
of Series A convertible preferred stock, and 22,529 shares of common stock
issuable upon the exercise of warrants, beneficially owned by WS
Opportunity Fund (QP), L.P. WSV Management L.L.C. ("WSV") is the general
partner of WS Management. Patrick Walker, G. Stacy Smith and Reid S.
Walker, members of WSV, have voting and/or investment control over the
shares owned by the selling stockholder.
(13) In accordance with the letter from Richard K. Wulff, Chief of the Office of
Small Business Policy of the Securities and Exchange Commission's Division
of Corporation Finance, to Ken Worm of NASD Regulation, Inc., dated January
21, 2000, these shares of common stock can not be sold under the exemptions
from registration provided by Rule 144 under the Securities Act or Section
4(1) of the Securities Act.
(14) Consists of 48,200 shares of common stock owned by Halter Financial Group,
L.P. Timothy P. Halter is the general partner of Halter Financial Group, LP
and has voting and/or investment control over the shares of common stock
held by such limited partnership.
(15) Michael Campbell has voting and/or investment control over the shares owned
by M1 Advisors, LLC.
77
PLAN OF DISTRIBUTION
We are registering the shares of common stock on behalf of the selling
stockholders. The shares of common stock may be sold in one or more transactions
at fixed prices, at prevailing market prices at the time of sale, at prices
related to the prevailing market prices, at varying prices determined at the
time of sale, or at negotiated prices. These sales may be effected at various
times in one or more of the following transactions, or in other kinds of
transactions:
o transactions on any national securities exchange or U.S.
inter-dealer system of a registered national securities
association on which the common stock may be listed or quoted at
the time of sale;
o in the over-the-counter market;
o in private transactions and transactions otherwise than on these
exchanges or systems or in the over-the-counter market;
o in connection with short sales of the shares entered into after
the effective date of the registration statement of which this
prospectus is a part;
o by pledge to secure or in payment of debt and other obligations;
o through the writing of options, whether the options are listed on
an options exchange or otherwise;
o in connection with the writing of non-traded and exchange-traded
call options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options; or
o through a combination of any of the above transactions.
Each selling stockholder and its successors, including its transferees,
pledgees or donees or their successors, may sell the common stock directly to
the purchaser or through underwriters, broker-dealers or agents, who may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholder or the purchaser. These discounts, concessions or
commissions as to any particular underwriter, broker-dealer or agent may be in
excess of those customary in the types of transactions involved.
Any securities covered by this prospectus that qualify for sale pursuant
to Rule 144 of the Securities Act may be sold under Rule 144 rather than
pursuant to this prospectus.
M1 Advisors, LLC and Halter Financial Group, L.P. acquired their shares
of our common stock from Halter Capital Corporation, which owned shares of our
common stock during the period from March 30, 2005 to January 30, 2006, during
which period our company was a blank check or "shell" company. It is the
position of the Securities and Exchange Commission that M1 Advisors, LLC and
Halter Financial Group, L.P. are "underwriters" with respect to such shares and
may not resell such shares under Rule 144 of the Securities Act or the Section
4(1) exemption from registration under the Securities Act that exempts sales by
persons other than "an issuer, underwriter or dealer." As a result,
notwithstanding any statements to the contrary in this prospectus, the shares of
such selling stockholders, (49,000 shares in the case of M1 Advisors LLC and
48,200 shares in the case of Halter Financial Group,
78
L.P.) may be resold by these persons only pursuant to registration under the
Securities Act, including under this prospectus.
The selling stockholders may from time to time pledge or grant a
security interest in some or all of the shares of common stock owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell shares of common stock from time
to time under this prospectus, or under an amendment to this prospectus under
Rule 424(b)(3) or other applicable provision of the Securities Act of 1933
amending the list of selling stockholders to include the pledgees, transferees
or other successors in interest as selling stockholders under this prospectus.
In connection with the sale of our common stock or interests therein,
the selling stockholders may enter into hedging transactions with broker-dealers
or other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such transaction).
Upon being notified in writing by a selling stockholder that any
material arrangement has been entered into with a broker-dealer for the sale of
common stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
supplement to this prospectus, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing (i) the name of each such selling stockholder and of
the participating broker-dealer(s), (ii) the number of shares involved, (iii)
the price at which such the shares of common stock were sold, (iv) the
commissions paid or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by reference in
this prospectus, and (vi) other facts material to the transaction. In addition,
upon being notified in writing by a selling stockholder that a donee or pledgee
intends to sell more than 500 shares of common stock, we will file a supplement
to this prospectus if then required in accordance with applicable securities
law.
The selling stockholders also may transfer shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners under an amendment to this
prospectus under Rule 424(b)(3) or other applicable provisions of the Securities
Act of 1933 amending the list of selling stockholders to include the
transferees, pledges or other successors in interest as selling stockholders
under this prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Discounts, concessions,
commissions and similar selling expenses, if any, that can be attributed to the
sale of common stock will be paid by the selling stockholders and/or the
purchasers. Each selling stockholder has represented and warranted to us that
such selling stockholder acquired the securities subject to this prospectus in
the ordinary course of such selling stockholder's business and, at the time of
its purchase of such securities, such selling stockholder had no agreements or
understandings, directly or indirectly, with any person to distribute any such
securities.
79
We have advised each selling stockholder that it may not use shares to
be sold under this prospectus to cover short sales of common stock made prior to
the date on which the registration statement of which this prospectus forms a
part shall have been declared effective by the Commission. If a selling
stockholder uses this prospectus for any sale of common stock, it will be
subject to the prospectus delivery requirements of the Securities Act. The
selling stockholders will be responsible to comply with the applicable
provisions of the Securities Act and the Exchange Act, and the rules and
regulations thereunder promulgated, including, without limitation, Regulation M,
as applicable to such selling stockholders in connection with resales of their
respective shares under this prospectus.
We entered into a registration rights agreement for the benefit of the
selling stockholders to register the common stock under applicable federal and
state securities laws. The registration rights agreement provides for
cross-indemnification of the selling stockholders and us and our respective
directors, officers and controlling persons against specific liabilities in
connection with the offer and sale of the common stock, including liabilities
under the Securities Act. We will pay substantially all of the expenses incurred
by the selling stockholders incident to the registration of the offering and
sale of the common stock.
LEGAL MATTERS
The legality of the issuance of the shares offered in this prospectus
will be passed upon for us by Pryor Cashman LLP, New York, New York. Pryor
Cashman LLP holds warrants to purchase 10,000 units at an initial exercise price
of $8.00 per unit, each unit consisting of two shares of our Series A
convertible preferred stock and a warrant to purchase one share of our common
stock at an initial exercise price of $5.00 per share.
EXPERTS
The consolidated financial statements of our company as of December 31,
2006, 2005 and 2004 and for the years ended December 31, 2006, 2005 and 2004
included in this prospectus have been audited by Child, Van Wagoner & Bradshaw,
PLLC, independent registered pubic accountants, as stated in its report
appearing herein and elsewhere in this prospectus, and have been so included in
reliance upon the report of this firm given upon their authority as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 (including exhibits) under the Securities Act, with
respect to the shares to be sold in this offering. This prospectus does not
contain all the information set forth in the registration statement. For further
information with respect to our company and the common stock offered in this
prospectus, reference is made to the registration statement, including the
exhibits filed thereto, and the financial statements and notes filed as a part
thereof. With respect to each such document filed with the SEC as an exhibit to
the registration statement, reference is made to the exhibit for a more complete
description of the matter involved.
We file quarterly and annual reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at the
public reference facilities of the SEC in Washington, D.C. You may call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC
filings are also available to the public from the SEC's website at
http://www.sec.gov.
80
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Registered Public Accounting Firm................. F-2
Consolidated Balance Sheets as of December 31, 2006, 2005 and 2004...... F-3
Consolidated Statements of Operations and Comprehensive Income
for the years ended December 31, 2006, 2005 and 2004.................. F-4
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2006, 2005 and 2004...................... F-5
Consolidated Statements of Cash Flows for the years December 31,
2006, 2005 and 2004................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
F-1
CHILD, VAN WAGONER & BRADSHAW, PLLC
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Zhongpin Inc.
Henan Province, People's Republic of China
We have audited the consolidated balance sheets of Zhongpin Inc. (the Company)
as of December 31, 2006 and 2005, and the related consolidated statements of
operations and comprehensive income, stockholders' equity, and cash flows for
the years ended December 31, 2006, 2005 and 2004. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
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 audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
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, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zhongpin Inc. as of
December 31, 2006 and 2005, and the results of its operations and its cash flows
for the years ended December 31, 2006, 2005 and 2004, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Child, Van Wagoner & Bradshaw, PLLC
Salt Lake City, Utah
March 8, 2007
F-2
ZHONGPIN INC.
CONSOLIDATED BALANCE SHEETS
(US dollars)
December 31, December 31,
ASSETS 2006 2005
------------ ------------
Current assets
Cash and cash equivalents ....................... $ 21,692,814 $10,142,394
Accounts receivable and other receivables ....... 13,471,450 10,002,918
Purchase deposits ............................... -- 220,836
Prepaid expenses and deferred charges ........... 200,436 99,009
Inventories ..................................... 10,077,479 2,347,312
Tax refund receivable ........................... 1,079,002 644,232
------------ -----------
Total current assets .............................. 46,521,181 23,456,701
Property, plant and equipment (net) ............... 32,597,150 10,212,848
Related party receivables ......................... -- 267,658
Other receivables ................................. 2,056,642 632,063
Construction in progress .......................... 12,016,823 16,931,178
Intangible assets ................................. 9,030,077 1,753,124
------------ -----------
Total assets ...................................... $102,221,873 $53,253,572
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft .................................. $ -- $ 619,579
Accounts payable and other payables ............. 20,712,794 10,278,464
Accrued liabilities ............................. 1,597,557 759,420
Short-term loans payable ........................ 23,845,198 18,995,853
Taxes payable ................................... 378,705 2,055,925
Deposits from clients ........................... 683,814 769,398
Research & development grants payable ........... 248,572 2,436,804
Long-term loans payable - current portion ....... 145,671 145,671
------------ -----------
Total current liabilities ......................... 47,612,311 36,061,114
Long-term loans payable ........................... 1,912,343 2,264,448
------------ -----------
Total liabilities ................................. 49,524,654 38,325,562
Minority interest ................................. -- 411,742
Stockholders' equity
Preferred stock par value $0.001; 10,000,000
authorized; 6,900,000 and 0 issued
and outstanding ............................... 6,900 --
Common stock par value $0.001; 25,000,000
authorized; 12,132,311 and 11,752,568
issued and outstanding ........................ 12,133 11,753
Additional paid in capital ...................... 32,538,535 2,102,933
Retained earnings ............................... 18,456,884 12,097,834
Accumulated other comprehensive income .......... 1,682,767 303,748
------------ -----------
Total stockholders' equity ........................ 52,697,219 14,516,268
------------ -----------
Total liabilities and stockholders' equity ........ $102,221,873 $53,253,572
============ ===========
The accompanying notes are an integral part
of the consolidated financial statements
F-3
ZHONGPIN INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(US dollars)
Year ended
December 31,
---------------------------------------------
2006 2005 2004
------------- ------------ ------------
Revenues
Sales revenues .............................. $ 143,812,212 $ 73,399,998 $ 42,787,153
Cost of sales ............................... 123,195,870 61,220,499 36,669,989
------------- ------------ ------------
Gross profit .............................. 20,616,342 12,179,499 6,117,164
Operating expenses
General and administrative expenses ......... 2,989,158 2,395,961 1,214,365
Operating expenses .......................... 3,485,397 2,299,950 1,844,840
Liquidated damages .......................... 8,354,205 -- --
------------- ------------ ------------
Total operating expenses .................. 14,828,760 4,695,911 3,059,205
------------- ------------ ------------
Income from operations ........................ 5,787,582 7,483,588 3,057,959
Other income (expense)
Interest income ............................. 316,604 182,798 85,854
Other income ................................ 50,589 166,673 31,807
Allowances income ........................... 2,364,803 85,592 928,302
Exchange gain (loss) ........................ (21,377) 226,547 (22,554)
Interest expense ............................ (1,555,671) (1,802,042) (1,208,362)
------------- ------------ ------------
Total other income (expense) .............. 1,154,948 (1,140,432) (184,953)
------------- ------------ ------------
Net income before taxes ....................... 6,942,530 6,343,156 2,873,006
Provision for income taxes .................. 568,433 352,880 84,541
------------- ------------ ------------
Net income after taxes ........................ 6,374,097 5,990,276 2,788,465
Less: minority interest in gain ............. 15,047 76,429 19,992
------------- ------------ ------------
Net income .................................... $ 6,359,050 $ 5,913,847 $ 2,768,473
============= ============ ============
Foreign currency translation adjustment ..... 1,379,019 303,748 --
------------- ------------ ------------
Comprehensive income .......................... $ 7,738,069 $ 6,217,595 $ 2,768,473
============= ============ ============
Basic earnings per common share ............... $ 0.35 $ 0.50 $ 0.24
------------- ------------ ------------
Diluted earnings per common share ............. $ 0.31 $ 0.50 $ 0.24
------------- ------------ ------------
Basic weighted average shares outstanding ..... 11,761,932 11,752,568 11,752,568
------------- ------------ ------------
Diluted weighted average shares outstanding ... 20,334,259 11,752,568 11,752,568
------------- ------------ ------------
The accompanying notes are an integral part
of the consolidated financial statements
F-4
ZHONGPIN INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(US dollars)
Accumulated
Additional Other
Preferred Stock Common Stock Paid In Retained Comprehensive
Shares Par Value Shares Par value Capital Earnings Income Total
---------- --------- ------------ ----------- ----------- ----------- ---------- -----------
Balance January 1, 2004 ....... -- $ -- 1 $ 1,816,425 $ 182,319 $ 3,415,514 $ -- $ 5,414,258
Net income for the year .... -- -- -- -- -- 2,768,473 -- 2,768,473
---------- --------- ------------ ----------- ----------- ----------- ---------- -----------
Balance December 31, 2004 ..... -- -- 1 1,816,425 182,319 6,183,987 -- 8,182,731
Merger on May 20 ........... -- -- -- 115,942 115,942
Recapitalization on
September 15 ............. -- -- 9,999 (1,922,367) 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 ..... -- -- 10,000 10,000 2,104,686 12,097,834 303,748 14,516,268
Items applied retroactively:
Recapitalization on
January 30, 2006 ......... 415,432,354 405,442 (405,442) --
Reverse stock split on
February 16, 2006 ........ -- -- (403,689,786) (403,689) 403,689 -- -- --
---------- --------- ------------ ----------- ----------- ----------- ---------- -----------
Restated balance
December 31, 2005 ........ -- -- 11,752,568 11,753 2,102,933 12,097,834 303,748 14,516,268
Preferred stock sold
for cash ................. 6,900,000 6,900 27,593,100 27,600,000
Cost of issuance ........... (4,489,297) (4,489,297)
Warrant expense ............ 22,330 22,330
Common stock issued
for damages .............. 379,743 380 2,847,693 2,848,073
Warrants issued for
damages .................. 4,461,776 4,461,776
Net income for the year .... 6,359,050 6,359,050
Foreign currency
translation adjustment ... -- -- -- -- -- -- 1,379,019 1,379,019
---------- --------- ------------ ----------- ----------- ----------- ---------- -----------
Balance December 31, 2006 ..... 6,900,000 $ 6,900 12,132,311 $ 12,133 $32,538,535 $18,456,884 $1,682,767 $52,697,219
========== ========= ============ =========== =========== =========== ========== ===========
The accompanying notes are an integral part
of the consolidated financial statements
F-5
ZHONGPIN INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US dollars)
Year ended
December 31,
------------------------------------------
2006 2005 2004
------------ ------------ ------------
Cash flows from operating activities:
Net income .......................................... $ 6,359,050 $ 5,913,847 $ 2,768,473
Adjustments to reconcile net income to
net cash provided by (used in) operations:
Minority interest ................................ 15,047 76,447 87,625
Acquisition gain ............................... 1,066 -- --
Depreciation ................................... 973,618 602,008 415,979
Amortization ................................... 127,449 37,431 38,144
Provision for bad debt ......................... (1,304,589) 1,214,461 267,668
Liquidated damages ............................. 7,309,848 -- --
Warrant expense ................................ 22,330 -- --
Changes in operating assets and liabilities:
Accounts receivable and other receivables .... (3,320,865) (3,788,597) (5,327,868)
Purchase deposits ............................ 220,836 (91,712) 114,890
Prepaid expense and deferred charges ......... (101,427) (4,383) (72,836)
Inventories .................................. (7,730,167) 865,583 1,323,097
Tax refunds receivable ....................... (434,770) (634,793) --
Accounts payable and other payable ........... 8,248,230 7,135,575 1,201,819
Accrued liabilities .......................... 838,137 419,194 (43,842)
Taxes payable ................................ (1,677,220) 1,303,773 920,393
Deposits from clients ........................ (85,584) 35,676 (1,084,338)
------------ ------------ ------------
Net cash provided by operating activities ........... 9,460,989 13,084,510 609,204
Cash flows from investing activities:
Construction in progress ............................ (17,051,855) (12,703,414) (49,267)
Additions to fixed assets ........................... (1,820,630) (527,369) (1,536,144)
Purchase of intangible assets ....................... (7,404,402) -- (951,436)
------------ ------------ ------------
Net cash used in investing activities ........... (26,276,887) (13,230,783) (2,536,847)
Cash flows from financing activities:
Proceeds from (repayment of) bank overdraft ......... (619,579) 610,501 --
Proceeds from short-term loans ...................... 30,081,418 9,641,295 2,035,903
Repayment of short-term loans ....................... (25,232,072)
Repayments of long-term loans ....................... (352,105) (5,490,645) (1,044,150)
Proceeds from preferred stock ....................... 23,110,703
Capital paid in at acquisition ...................... -- 117,216 --
Advances to related parties ......................... -- (190,476) --
Investment in sub by minority holder ............... -- 190,476 --
------------ ------------ ------------
Net cash provided by financing activities ....... 26,988,365 4,878,367 991,753
Effect of rate changes on cash ...................... 1,379,019 205,663 --
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents .... 11,551,486 4,937,757 (935,890)
Cash and cash equivalents, beginning of period ...... 10,142,394 5,204,637 6,140,527
------------ ------------ ------------
Cash and cash equivalents, end of period ............ $ 21,693,880 $ 10,142,394 $ 5,204,637
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest .............................. $ 1,554,883 $ 1,699,634 $ 1,208,362
============ ============ ============
Cash paid for income taxes .......................... $ 323,866 $ 370,696 $ 84,541
============ ============ ============
The accompanying notes are an integral part
of the consolidated financial statements
F-6
ZHONGPIN INC.
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 that provides skilled workers to industry. On
March 30, 2005, an 82.4% controlling interest in our company was acquired by
Halter Capital Corporation and all previous operations were discontinued. On
January 30, 2006, we acquired Falcon Link Investment Limited ("Falcon") in a
stock exchange by issuing 11,250,000 shares of our common stock in exchange for
all of the issued and outstanding capital stock of Falcon. The 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. Zhongpin
and its subsidiaries are collectively referred to herein as "our company," "we,"
"us" and "our."
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
paying 20,940,000 Renminbi ("RMB") ($2,528,986) to the stockholders of HZFC, who
also were the stockholders of Falcon. The transaction was accounted for as a
transfer of entities under common control, wherein HZFC was the continuing
entity. The historical financial statements of Falcon are essentially those of
HZFC and are shown as if the transfer had taken place at the beginning of the
first period presented.
HZFC was established in the PRC on May 20, 2005 for the sole purpose of
holding the capital stock of Henan Zhongpin Food Share Company Limited ("Food
Share") and its subsidiaries. The owners of Food Share formed HZFC by investing
16,000,000 RMB ($1,932,367). HZFC acquired Food Share by paying 15,040,000 RMB
($1,816,425) to the stockholders of Food Share, who were also the stockholders
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
was the continuing entity with an increase in registered capital of 960,000 RMB
($115,942). 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 first period presented.
Food Share was incorporated in the PRC. It is headquartered in Henan
Province in the PRC and its corporate office is in Changge City. Through our
subsidiaries, we are 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 our subsidiaries.
On January 30, 2006, we consummated an agreement with the shareholders
of Falcon whereby we issued 11,250,000 shares of our common stock in exchange
for all of the issued and outstanding stock of Falcon. Immediately prior to the
transaction there were 502,578 shares outstanding as compared to 11,752,578
shares outstanding immediately following the transaction. Consequently, Falcon
became a wholly-owned subsidiary of our company. The transaction was accounted
for as a reverse acquisition resulting in a recapitalization of Falcon, wherein
Falcon's historical financial statements became those of our company,
retrospectively restated to reflect the adopted capital structure of our company
as if the transaction had occurred at the beginning of the first period
presented. These financial statements have been adjusted to reflect such
restatement.
F-7
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS (continued)
In conjunction with our acquisition of Falcon, on January 31, 2006, we
sold for $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 one
share of common stock at a purchase price of $5.00 per share. Each preferred
share is convertible into one share of common stock. The outstanding shares of
Series A convertible preferred stock are convertible into an aggregate of
6,900,000 shares of common stock and the outstanding warrants are exercisable to
purchase an aggregate of 3,450,000 shares of common stock.
On February 16, 2006, we amended our articles of incorporation to change
our name from Strong Technical, Inc. to Zhongpin Inc. In the same amendment, we
changed our authorized common stock to 25,000,000 shares with a par value of
$0.001 per share and our authorized preferred stock to 10,000,000 shares with a
par value of $0.001 per share.
On February 16, 2006, we effected a 1:35.349 reverse split of our
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. The aggregate number of shares of common stock
issuable upon conversion of our outstanding shares of Series A convertible
preferred stock was reduced from 243,908,100 common shares to 6,900,000 common
shares, and the aggregate number of shares of our common stock issuable upon the
exercise of our outstanding warrants was reduced from 121,954,050 common shares
to 3,450,000 common shares. These financial statements have been adjusted to
show all stock transactions using post-split amounts.
In June 2006, Zhumadian Zhongpin Food Company Limited was registered
with a registered capital of 5,000,000 RMB ($625,344), which is 100%-owned by
Food Share. In August 2006, Anyang Zhongpin Food Company Limited was registered
with a registered capital of 4,800,000 RMB ($606,927), which is 100%-owned by
Food Share. In September 2006, Henan Zhongpin Fresh Food Logistics Company
Limited, Deyang Zhongpin Food Company Limited and Henan Zhongpin Business
Development Company Limited were registered with the registered capitals of
1,500,000 RMB ($189,665), 1,000,000 RMB ($126,443) and 5,000,000 RMB ($632,215),
respectively, which are all 100%-owned by Food Share. In October 2006,
Heilongjiang Zhongpin Food Company Limited was registered with a registered
capital of 1,000,000 RMB ($126,406), which is 100%-owned by Food Share.
Details of Food Share's subsidiaries are as follows:
DOMICILE/DATE OF REGISTERED PERCENTAGE
NAME INCORPORATION CAPITAL OF OWNERSHIP
---- ----------------- -------------- ------------
Henan Zhongpin Industry Company Limited PRC/Jan. 17, 2004 18,000,000 RMB 100.00%
($2,173,913)
Henan Zhongpin Imports and Exports PRC/Aug. 11, 2004 5,060,000 RMB 100.00%
Trade Company Limited ($611,111)
Zhumadian Zhongpin Food Company Limited PRC/June 7, 2006 5,000,000 RMB 100.00%
($625,344)
Anyang Zhongpin Food Company Limited PRC/Aug. 21, 2006 4,800,000 RMB 100.00%
($606,927)
F-8
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DOMICILE/DATE OF REGISTERED PERCENTAGE
NAME INCORPORATION CAPITAL OF OWNERSHIP
---- ----------------- -------------- ------------
Henan Zhongpin Fresh Food PRC/Sept. 14, 2006 1,500,000 RMB 100.00%
Logistics Company Limited ($189,665)
Deyang Zhongpin Food Company Limited PRC/Sept. 25, 2006 1,000,000 RMB 100.00%
($126,443)
Henan Zhongpin Business PRC/Sept. 27, 2006 5,000,000 RMB 100.00%
Development Company Limited ($632,215)
Heilongjiang Zhongpin Food Company Limited PRC/Oct. 17, 2006 1,000,000 RMB 100.00%
($126,406)
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., Food Share, Henan Zhongpin Industry Co. Ltd., Henan
Zhongpin Imports and Exports Trade Company Limited, Zhumadian Zhongpin Food
Company Limited, Anyang Zhongpin Food Company Limited, Henan Zhongpin Business
Development Company Limited, Henan Zhongpin Fresh Food Logistics Company
Limited, Deyang Zhongpin Food Company Limited and Heilongjiang Zhongpin Food
Company Limited. 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 our 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.
The Renminbi of the People's Republic of China (RMB) has been determined
to be our functional currency. The balance sheets of our company and our
subsidiaries were translated at year end 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.
FISCAL YEAR
Our financial statements have been prepared using December 31 as the
fiscal year end.
F-9
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
MINORITY INTEREST IN SUBSIDIARIES
We record minority interest expense, which reflects the minority
shareholders' portion of the earnings of Henan Zhongpin Industry Co. Ltd. and
Henan Zhongpin Imports and Exports Trade Company Limited. During 2004, Henan
Zhongpin Industry Co. Ltd. increased its registered capital from 5,000,000 RMB
($603,864) to 18,000,000 RMB ($2,173,913), which required the minority holders
to increase their investment by 1,560,000 RMB ($188,406), effectively increasing
the minority interest shown on our balance sheet by $188,406. In November 2006,
Food Share acquired the minority interest shares of Henan Zhongpin Industry Co.
Ltd. and Henan Zhongpin Imports and Exports Trade Company Limited and became the
100% owner of Henan Zhongpin Industry Co. Ltd. and Henan Zhongpin Imports and
Exports Trade Company Limited.
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
Our directors and 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 our common stock. Accordingly, if our directors and
executive officers and their affiliates or related parties vote their shares
uniformly, they would have the ability to control the approval of most corporate
actions, including increasing our authorized capital stock and the dissolution
or merger of our company or the sale of our assets.
START-UP COSTS
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," we expense 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.
F-10
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SIGNIFICANT ESTIMATES
Several areas require significant management estimates relating to
uncertainties for which it is reasonably possible there will be a material
change in the near term. The more significant areas requiring the use of
management estimates relate to the valuation of receivables, equipment and
accrued liabilities, and the useful lives for amortization and depreciation.
CASH EQUIVALENTS
We consider 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 our 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
We adopted the provisions of Statement of Financial Accounting Standard
("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. We have performed the requisite
annual impairment tests on intangible assets and determined that no impairment
adjustments were necessary.
REVENUE RECOGNITION
We recognize revenue on the sales of our products as earned when the
customer takes delivery of the product according to previously agreed upon
pricing and delivery arrangements, and when we believe collectibility is
reasonably assured. We sell primarily perishable and frozen food products. As
such, any right of return is only for a few days and has been determined to be
insignificant by management. Accordingly, no provision has been made for
returnable goods.
F-11
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
EARNINGS PER SHARE
Basic earnings per common share ("EPS") are calculated by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding during the period. Our Series A convertible preferred stock
is a participating security. Consequently, the two-class method of income
allocation is used in determining net income available to common stockholders.
Diluted EPS is calculated by using the treasury stock method, assuming
conversion of all potentially dilutive securities, such as stock options and
warrants. Under this method, (i) exercise of options and warrants is assumed at
the beginning of the period and common shares are assumed to be issued, (ii) the
proceeds from exercise are assumed to be used to purchase common stock at the
average market price during the period, and (iii) the incremental shares (the
difference between the number of shares assumed issued and the number of shares
assumed purchased) are included in the denominator of the diluted EPS
computation.
The numerators and denominators used in the computations of basic and
diluted EPS are presented in the following table:
2006 2005 2004
---- ---- ----
NUMERATOR FOR BASIC AND DILUTED EPS
Net income (numerator for Diluted EPS) $ 6,359,050 $ 5,913,847 $ 2,768,473
=========== =========== ===========
Net income allocated to preferred stock 2,225,558 -- --
----------- ----------- -----------
Net income to common stockholders (Basic) $ 4,133,492 $ 5,913,847 $ 2,768,473
=========== =========== ===========
DENOMINATORS FOR BASIC AND DILUTED EPS
Common stock outstanding after recapitalization
and 1:35.349 reverse stock split 11,761,932 11,752,568 11,752,568
----------- ----------- -----------
DENOMINATOR FOR BASIC EPS 11,761,932 11,752,568 11,752,568
=========== =========== ===========
Add: Weighted average preferred as if converted 6,332,876 -- --
Add: Weighted average stock warrants outstanding 2,239,451 -- --
DENOMINATOR FOR DILUTED EPS 20,334,259 11,752,568 11,752,568
=========== =========== ===========
EPS - Basic $ 0.35 $ 0.50 $ 0.24
----------- ----------- -----------
EPS - Diluted $ 0.31 $ 0.50 $ 0.24
----------- ----------- -----------
SHIPPING AND HANDLING COSTS
Shipping and handling amounts billed to customers in related sales
transactions are included in sales revenues. Direct shipping costs are included
in operating expenses, which were approximately $1,885,900, $933,300 and
$755,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
Handling costs are included in costs of sales, which were approximately
$1,232,800, $717,200 and $382,100 for the years ended December 31, 2006, 2005
and 2004, respectively.
F-12
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expenses were
approximately $327,700, $225,800 and $59,400 for the years ended December 31,
2006, 2005 and 2004, respectively.
RESEARCH AND DEVELOPMENT COSTS
The PRC government has made a cash grant to our company specifically to
fund research and development. We have recorded this grant as a liability titled
"Research & development grants payable" on our balance sheet. Qualifying
research and development costs reduce the liability while non-qualifying
research and development costs are expensed as incurred. Research and
development costs were approximately $1,057,100, $723,000 and $435,000 for the
years ended December 31, 2006, 2005 and 2004, respectively.
PROPERTY AND EQUIPMENT
Impairment of long-lived assets is recognized when events or changes in
circumstances indicate the carrying amount of an 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," we recognize 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 related group of assets,
may be based on appraisals, 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 five 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.
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 SFAS No.
F-13
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
109, "Accounting for Income Taxes," these deferred taxes are measured by
applying currently-enacted tax laws. We recorded income tax expenses of
$568,400, $352,900 and $84,500 for the years ended December 31, 2006, 2005 and
2004, respectively.
We withhold and pay income taxes on our employees' wages, which fund the
Chinese government's sponsored health and retirement programs for all of our
employees. For our employees, we were 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 formed Henan Zhongpin Imports and Exports Trade Company
Limited on August 11, 2004 as a joint venture with Li Jun Wei, an individual, to
facilitate exporting of our goods. Initially, we owned 88.93% of Henan Zhongpin
Imports and Exports Trade Company Limited. In November 2006, Food Share acquired
Li Jun Wei's share interest in, and became the 100% owner of Henan Zhongpin
Imports and Exports Trade Company Limited. During 2001, Zhongpin Food Share Co.
Limited acquired Yanlin Meat factory and established Zhongpin Industry Company
Limited as a joint venture with three individuals and owned 88% initially. In
November 2006, Henan Zhongpin Food Share Co. Limited acquired the three
individuals' share interest in, and became the 100% owner of Henan Zhongpin
Industry Company Limited.
4. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES
We accrue an allowance for bad debts related to our receivables. The
receivable and allowance balances at December 31, 2006 and 2005 were as follows:
December 31, 2006 December 31, 2005
----------------- -----------------
Accounts receivable $ 13,763,260 $ 10,337,838
Other receivables 2,176,858 2,013,757
Allowance for bad debts (412,026) (1,716,614)
------------- -------------
$ 15,528,092 $ 10,634,981
============= =============
Current $ 13,471,450 $ 10,002,918
Non-current 2,056,642 632,063
------------- -------------
$ 15,528,092 $ 10,634,981
============= =============
Other receivables consist primarily of cash advances to suppliers to
ensure preferential pricing and delivery. These advances bear no interest and
are expected to be repaid in cash. Repayment is typically required to be made in
less than one year. Advances that are not expected to be repaid within one year
are classified as non-current. During fiscal 2006, we collected $1.34 million of
outstanding accounts receivable for which bad debt allowance had been provided
during fiscal 2005. Such collections reduced our general and administrative
expenses by $1.34 million in fiscal 2006.
F-14
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVENTORIES
Inventories at December 31, 2006 and 2005 consisted of:
December 31, 2006 December 31, 2005
----------------- -----------------
Raw materials $ 307,202 $ 210,288
Low value consumables & packaging 401,177 147,000
Work-in-progress 487,930 290,149
Finished goods 8,881,170 1,699,875
----------- -----------
Provision for loss of pricing -- --
----------- -----------
Net inventories $10,077,479 $ 2,347,312
=========== ===========
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at cost at December 31, 2006 and 2005
consisted of:
December 31, 2006 December 31, 2005
----------------- -----------------
Machinery and equipment $ 12,453,177 $ 6,832,887
Furniture and office equipment 434,128 253,187
Motor vehicles 416,479 281,371
Buildings 22,584,113 5,084,728
------------ ------------
Subtotal 35,887,897 12,452,173
Less: Acquisition gain (92,510) --
Less: accumulated depreciation (3,198,237) (2,239,325)
------------ ------------
Net property and equipment $ 32,597,150 $ 10,212,848
============ ============
Depreciation expense $ 973,618 $ 602,008
7. INTANGIBLE ASSETS
Intangible assets consist of prepaid land use rights. According to the
laws of the PRC, the government owns all of the land in the PRC. Companies or
individuals are authorized to possess and use the land only through land use
rights granted by the PRC government. Accordingly, we paid in advance for
certain land use rights. Prepaid land use rights are being amortized and
recorded as lease expense using the straight-line method over the use terms of
20 to 50 years. Intangible assets at December 31, 2006 and 2005 consisted of the
following:
December 31, 2006 December 31, 2005
----------------- -----------------
Land use rights $ 9,250,410 $ 1,840,937
Accumulated amortization (220,333) (87,813)
----------- -----------
$ 9,030,077 $ 1,753,124
=========== ===========
Amortization expense $ 127,449 $ 37,431
F-15
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CONSTRUCTION IN PROGRESS
Construction in progress at December 31, 2006 and 2005 consisted of:
Completion
or Estimated
Construction Project Completion Date December 31, 2006 December 31, 2005
-------------------- --------------- ----------------- -----------------
Industrial plant February 2006 $ 16,931,178
Production line for chilled May 2007 $ 9,313,544 --
pork (in Zhumadian)
Production line for chilled August 2007 1,161,339
pork (in Anyang)
Land use right of Industrial
Park No.4 land December 2007 970,147
Production line for prepared
pork (in industrial plant) April 2007 542,493
Logistic Software July 2007 29,300
$ 12,016,823 $ 16,931,178
============ ============
9. LOANS PAYABLE
SHORT-TERM LOANS
Short-term loans are due within one year. Of the $23.85 million
aggregate principal amount of short-term loans at December 31, 2006, loans in
the principal amount of $3.46 million were secured by our land and plants
located in the PRC and loans in the aggregate principal amount of $20.36 million
were guaranteed by Henan Zhongpin Industry Co., Ltd. These loans bear interest
at prevailing lending rates in the PRC ranging from 5.85% to 7.34% per annum. At
December 31, 2006, there was approximately $83.75 million in available unused
lines of credit.
LONG-TERM LOANS
Our long-term loan bears interest at the rate of 6.0% per annum.
The balances of loans payable at December 31, 2006 and 2005 were as
follows:
December 31, 2006 December 31, 2005
----------------- -----------------
Short-Term Loans Payable $ 23,845,199 $ 18,995,853
------------ ------------
Total Long-Term Loans Payable 2,058,014 2,410,119
------------ ------------
$ 25,903,213 $ 21,405,972
============ ============
F-16
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. LOANS PAYABLE (continued)
Long-Term Repayment Schedule
Payments due in 2007 - current portion $ 145,671
Payments due in 2008 145,671
Payments due in 2009 145,671
Payments due in 2010 145,671
Payments due in 2011 145,671
Payments due thereafter 1,329,659
-----------
$ 2,058,014
===========
10. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS
From time to time, we have disputes that arise in the ordinary course of
our business. At December 31, 2006, there was no material legal proceeding to
which we were a party or to which any of our property was subject that will have
a material adverse effect on our financial condition.
REGISTRATION RIGHTS AGREEMENT
In connection with the issuance of our Series A convertible preferred
stock and warrants on January 30, 2006, we entered into a registration rights
agreement with certain investors. The agreement requires us to effect the
registration of our common stock issuable upon the conversion of the Series A
convertible preferred stock and the exercise of the warrants. If such
registration was not effected by June 29, 2006, we were required to pay the
investors liquidated damages in an amount equal to 1-1/2% per month times the
amount paid by the investors for the purchase of our Series A convertible
preferred stock and warrants (approximately $414,000 per month) until the
registration statement we filed with the Securities and Exchange Commission (the
"SEC") to effect such registration was declared effective by the SEC. On June
29, 2006, such registration statement had not become effective, and in July 2006
we began to accrue a liability in the amount of $414,000 per month for this
contingency because a loss was reasonably possible and a loss amount could
reasonably be estimated.
On December 22, 2006, we amended the registration rights
agreement and agreed to pay an aggregate of $1,044,357 in cash and to issue an
aggregate of 379,743 shares of our common stock to settle in full our
obligations under such agreement to have the registration statement required
thereunder declared effective by the SEC in an timely manner. At the same time,
in order to obtain the consent of investors to remove from such registration
statement certain shares of common stock underlying our stock purchase warrants,
we issued to such investors warrants to purchase an aggregate of 884,799 shares
of common stock with an exercise price of $5.50 per share. The total expenses
related to the penalty were $1,044,357 in cash, $2,848,073 related to the shares
of common stock and $4,461,775 related to the warrants. On February 2, 2007, the
initial registration statement we filed pursuant to the registration rights
agreement was declared effective by SEC.
F-17
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. ALLOWANCES INCOME
"Allowances income" consists of grants from the government of the PRC
for our participation in specific programs, such as import and export, branding,
and city maintenance and construction. We received allowances income for the
years ended December 31, 2006, 2005 and 2004 as follows:
2006 2005 2004
---- ---- ----
Allowances income $2,364,803 $85,592 $928,302
In addition to paying our company for our participation in ongoing
programs, the PRC government has made a cash grant to our company specifically
to fund research and development. We recorded this grant as a liability titled
"Research & development grants payable" on our balance sheet rather than as
revenue. As qualifying research and development costs are incurred, we reduce
the liability rather than recording an expense.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 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 fiscal 2006, 2005 or 2004.
13. 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 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. We expect the Statement will have no material impact
on our consolidated financial statements.
F-18
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. NEW ACCOUNTING PRONOUNCEMENTS (continued)
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 we have not traditionally paid
compensation through the issuance of equity securities, no impact is expected on
our 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 this
position has no application to our 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 our 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 the first fiscal year ending after December 15, 2005.
Management does not believe the adoption of FIN 47 will have a material effect
on our consolidated financial position, results of operations or cash flows.
In November 2004, the FASB issued Statement No. 151, "Inventory Costs."
SFAS No. 151 requires that items such as idle facility expense, excessive
spoilage, double freight, and rehandling costs be recognized as current period
charges and that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
statement is effective for fiscal periods beginning after June 15, 2005. We
believe the application of SFAS No. 151 will have no significant impact on our
consolidated financial statements.
14. PREFERRED STOCK
The principal terms of our Series A convertible preferred stock are as
follows.
DIVIDENDS. The holders of our Series A convertible preferred stock are
entitled to receive, when and as declared by our board of directors, dividends
in such amounts as may be determined by our board of directors from time to time
out of funds legally available therefor. No dividends (other than those
F-19
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PREFERRED STOCK (continued)
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 our Series A convertible preferred stock a dividend in
an amount per share that the holders would have received for the shares of
common stock issuable upon conversion of their shares of Series A convertible
preferred stock.
PREFERENCE ON LIQUIDATION. In the event of our merger or consolidation
or the sale of all or substantially all of our assets or other liquidation of
our company, holders of our Series A convertible preferred stock shall get a
priority in payment over all other classes of stock. In such event, the Series A
convertible preferred stock would be entitled to receive the greater of (i) the
original purchase price of the Series A convertible preferred stock or (ii) the
amount the holder would get if such holder converted all of such holder's Series
A convertible preferred stock into common stock.
VOTING. The holder of each share of Series A convertible preferred stock
(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
convertible preferred stock 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 our by-laws.
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 convertible
preferred stock 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 convertible preferred stock, exclusively and as a separate class, shall
be entitled to elect one of our directors.
CONVERSION RIGHT. The holders of Series A convertible preferred stock
may convert each share of Series A convertible preferred stock into common stock
at an initial conversion price of $4.00. The conversion price will be adjusted
for stock dividends, stock splits and similar events.
AUTOMATIC CONVERSION. Each share of Series A convertible preferred stock
will automatically be converted into shares of common stock at the conversion
price at the time in effect if (i) we consummate an underwritten public offering
of our common stock giving us at least $30 million in net proceeds, (ii)(A) the
closing price of our common stock equals or exceeds $10.00 (as adjusted) for the
twenty (20) consecutive-trading-day period ending within two (2) days of the
date on which we provide 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 convertible preferred stock has
been declared effective and remains effective and available for resale for the
twenty (20)-day period, or Rule 144(k) under the Securities Act of 1933, as
amended, is available for the resale of such shares, or (iii) by consent of at
least 67% of the then-outstanding shares of Series A convertible preferred
stock.
PROTECTIVE PROVISIONS. So long as at least 1,750,000 shares of Series A
convertible preferred stock are outstanding (subject to adjustment for stock
splits, combinations and the like), the holders of a majority of the outstanding
shares of Series A convertible preferred stock shall be required (in addition to
any consent or approval otherwise required by law) for us to take certain
actions, including (1) the liquidation, dissolution or wind up of our company,
(2) the amendment, alteration or repeal of any provision of our certificate of
incorporation so as to affect the rights, preferences or privileges of the
Series A convertible preferred stock, (3) the creation of a new class of
preferred stock or any increase in the number of shares of Series A convertible
preferred stock that can be issued, or (4) the purchase or
F-20
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. PREFERRED STOCK (continued)
redemption, or the payment or declaration of any dividend or the making of any
distribution on, any securities junior in priority to the Series A convertible
preferred stock; or (5) making any change in the size of our board of directors.
15. WARRANTS
In conjunction with the issuance of preferred stock discussed in Note
15, we issued warrants for the purchase of 3,450,000 shares of our common stock.
Also in conjunction with the issuance of preferred stock, we issued
warrants to purchase 345,000 units at an initial exercise price of $8.00 per
unit. The units that may be acquired upon exercise of such warrants consist of
two shares of Series A convertible preferred stock and one warrant to purchase
one share of common stock at an initial exercise price per share of $5.00. These
warrants, if fully exercised and converted, would require the issuance of
1,035,000 shares of common stock.
On June 15, 2006, in conjunction with a one-year consulting agreement,
we issued three-year warrants to purchase 100,000 shares of common stock at a
price of $6.50 per share. The warrants vest monthly over a one-year period.
These warrants were accounted for using the fair value method, with the expense
being recognized ratably over the requisite service period of one year.
Consulting expense related to the warrants amounted to $22,330 for the year
ended December 31, 2006.
On December 22, 2006, in conjunction with an amendment to a registration
rights agreement, we issued to investors warrants to purchase 884,799 shares of
common stock at a price of $5.50 per share. The warrants were accounted for
using the fair value method. Penalty expense related to the warrants amounted to
$4,461,775 for the year ended December 31, 2006.
The following table provides certain information with respect to the
above-referenced warrants outstanding at December 31, 2006:
Weighted Weighted
Number Average Average Life -
Exercise Price Outstanding Exercise Price Years
-------------- ----------- -------------- -----
Warrants $4.00 - $6.50 5,469,799 $4.98 4.20
The following table provides certain information with respect to
warrants exercisable at December 31, 2006:
Number Weighted Average
Exercise Price Outstanding Exercise Price
-------------- ----------- --------------
Warrants $4.00 - $6.50 5,421,799 $4.97
The weighted average fair value at date of grant for warrants granted
during 2006 was $0.38, and was estimated using the Black-Scholes option
valuation model with the following assumptions:
Expected life in years 3 - 5
Interest rate 4% - 4.52%
Volatility 6.1% - 68.5%
Dividend yield 0%
F-21
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SEGMENT REPORTING
We operate in two business segments: pork and pork products, and
vegetables and fruits.
Our pork and pork products segment is involved primarily in the
processing of live market hogs into fresh, frozen and processed pork products.
Our pork and pork products segment markets its products domestically to our
branded stores and to 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.
Our vegetables and fruits segment is involved primarily in the
processing of fresh vegetables and fruits. We contract 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 our operations ensures freshness from harvest to processing. We contract to
grow more than 20 categories of vegetables and fruits, including asparagus,
sweet corn, broccoli, mushrooms, lima beans and strawberries.
SALES BY SEGMENT
(U.S. DOLLARS IN MILLIONS)
YEAR ENDED
DECEMBER 31, PERCENTAGE
-------------------- NET CHANGE CHANGE
2006 2005 2006/2005 2006/2005
---- ---- --------- ---------
Pork and Pork Products
Chilled Pork ........... $ 71.76 $31.50 $40.26 128%
Frozen Pork ............ 50.88 33.03 17.85 54%
Prepared Pork Products . 15.44 6.93 8.51 123%
Vegetables and Fruits ..... 5.73 1.94 3.79 195%
------- ------ ------
Total ............ $143.81 $73.40 $70.41 96%
======= ====== =====
SALES BY SEGMENT
(U.S. DOLLARS IN MILLIONS)
YEAR ENDED
DECEMBER 31, PERCENTAGE
-------------------- NET CHANGE CHANGE
2005 2004 2005/2004 2005/2004
---- ---- --------- ---------
Pork and Pork Products
Chilled Pork ........... $ 31.50 $16.98 $14.52 86%
Frozen Pork ............ 33.03 22.28 10.75 48%
Prepared Pork Products . 6.93 2.54 4.39 173%
Vegetables and Fruits ..... 1.94 0.99 0.95 96%
------- ------ ------
Total ............ $ 73.40 $42.79 $30.61 72%
======= ====== =====
F-22
ZHONGPIN INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SEGMENT REPORTING (continued)
OPERATING INCOME BY SEGMENT
(U.S. DOLLARS IN MILLIONS)
OPERATING
MARGIN YEAR
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
---------------- CHANGE
2006 2005 2006/2005 2006 2005
---- ---- --------- ---- ----
Pork and Pork Products
Chilled Pork .............. $2.65 $3.31 ($0.66) 3.69% 10.51%
Frozen Pork................ 1.52 3.34 (1.82) 2.99% 10.11%
Prepared Pork Product...... 1.26 0.60 0.66 8.16% 8.66%
Vegetables and Fruits......... 0.36 0.23 0.13 6.28% 11.86%
----- ----- -----
Total................ $5.79 $7.48 ($1.69) 4.03% 10.19%
===== ===== =====
OPERATING INCOME BY SEGMENT
(U.S. DOLLARS IN MILLIONS)
OPERATING
MARGIN YEAR
YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31,
---------------- CHANGE
2005 2004 2005/2004 2005 2004
---- ---- --------- ---- ----
Pork and Pork Products
Chilled Pork .............. $3.31 $1.23 $2.08 10.51% 7.24%
Frozen Pork................ 3.34 1.58 1.76 10.11% 7.09%
Prepared Pork Product...... 0.60 0.21 0.39 8.66% 8.27%
Vegetables and Fruits......... 0.23 0.04 0.19 11.86% 4.04%
----- ----- -----
Total................ $7.48 $3.06 $4.42 10.19% 7.15%
===== ===== =====
F-23
No dealer, salesperson, or other person has been authorized to give any
information or to make any representation not contained in this prospectus, and,
if given or made, such information and representation should not be relied upon
as having been authorized by us or the selling stockholder. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered by this prospectus in any jurisdiction or to any person to
whom it is unlawful to make such offer or solicitation. Neither the delivery of
this prospectus nor any sale made hereunder shall under any circumstances create
an implication that there has been no change in the facts set forth in this
prospectus or in our affairs since the date hereof.
Until _________, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
overallotments or subscriptions.
1,041,108 SHARES
ZHONGPIN INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
_________, 2007
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses expected to be incurred by
us in connection with the issuance and distribution of the common stock
registered hereby, all of which expenses, except for the Securities and Exchange
Commission registration fee, are estimates:
DESCRIPTION AMOUNT
----------- ------
Securities and Exchange Commission registration fee..... $ 346
Accounting fees and expenses............................ 15,000*
Legal fees and expenses................................. 35,000*
Miscellaneous fees and expenses......................... 1,654*
-------
Total......................................... $52,000*
=======
- -------------
* Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Delaware law, a Delaware corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than one by or in the right of the corporation) by
reason of the fact that the person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, against
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorneys' fees actually and necessarily incurred as a result of such action or
proceeding, if such director or officer acted, in good faith, for a purpose
which such person reasonably believed to be, in, or not opposed to, the best
interests of the corporation and, in criminal actions or proceedings, in
addition, had no reasonable cause to believe that such conduct was unlawful.
In the case of a derivative action, a Delaware corporation may indemnify
any such person against expense, including attorneys' fees actually and
necessarily incurred by such person in connection with the defense or settlement
of such action or suit if such director or officer if such director or officer
acted, in good faith, for a purpose which such person reasonably believed to be,
in or not opposed to, the best interests of the corporation, except that no
indemnification will be made in respect on any claim, issue or matter as to
which such person will have been adjudged to be liable to the corporation unless
and only to the extent that the Court of Chancery of the State of Delaware or
any other court in which such action was brought determines such person is
fairly and reasonably entitled to indemnity for such expense.
Delaware Law permits a corporation to include in its certificate of
incorporation a provision eliminating or limiting a director's liability to a
corporation or its stockholders for monetary damages for breaches of fiduciary
duty. Delaware Law provides, however, that liability for breaches of the duty of
loyalty, acts or omissions not in good faith or involving intentional
misconduct, or knowing violation of the law, and the unlawful purchase or
redemption of stock or payment of unlawful purchase or redemption of stock or
payment of unlawful dividends or the receipt of improper personal benefits
cannot be eliminated or limited in this manner.
II-1
Our Certificate of Incorporation and Bylaws provide that we will
indemnify our directors to the fullest extent permitted by Delaware law and may,
if and to the extent authorized by the Board of Directors, indemnify our
officers and any other person whom we have the power to indemnify against any
liability, reasonable expense or other matter whatsoever.
Any amendment, modification or repeal of the foregoing provisions shall
be prospective only, and shall not affect any rights or protections of any of
our directors existing as of the time of such amendment, modification or repeal.
We may also, at the discretion of the Board of Directors, purchase and
maintain insurance to the fullest extent permitted by Delaware law on behalf of
any of our directors, officers, employees or agents against any liability
asserted against such person and incurred by such person in any such capacity.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the
Registrant pursuant to the foregoing, the Registrant has been informed that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On January 30, 2006, we entered into a Share Exchange Agreement dated as
of January 30, 2006 (the "Share Exchange Agreement") with Falcon Link Investment
Limited ("Falcon Link") and its shareholders pursuant to which we issued to the
shareholders of Falcon Link an aggregate of 11,250,000 shares of common stock in
exchange for all of the issued and outstanding shares of capital stock of Falcon
Link. Such shares of common stock were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act").
We entered into a Securities Purchase Agreement (the "Securities
Purchase Agreement"), dated as of January 30, 2006, with the investors named
therein. Pursuant to the Securities Purchase Agreement, on January 31, 2006, we
sold units at $8.00 per unit, with each unit consisting of two shares of Series
A convertible preferred stock and a warrant exercisable to purchase one share of
our common stock at an initial exercise price of $5.00 per share. We sold 3.45
million units, primarily to institutional investors, and received gross proceeds
of $27.6 million. The Series A convertible preferred stock and the warrants were
issued in reliance on the exemption from registration provided by Section 4(2)
of the Securities Act and Regulation D under the Securities Act on the basis
that their issuance did not involve a public offering and each investor
represented to us that it was an "accredited investor," as defined in the
Securities Act.
As a result of the sale of such units, we issued 6.9 million shares of
Series A convertible preferred stock and 3.45 million warrants. The Series A
convertible preferred stock is convertible into 6.9 million shares of common
stock (based on an initial conversion price of $4.00). The warrants are
exercisable for a five-year period at an exercise price of $5.00 per share.
In connection with the sale of the 3.45 million units, we issued to TN
Capital Equities, Ltd., the placement agent for the offering, or its designees,
warrants to purchase an aggregate of 345,000 units at an initial exercise price
of $8.00 per unit, subject to adjustment, at any time prior to January 30, 2011.
The warrants were issued in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act.
II-2
We agreed to register for resale under the Securities Act the shares of
common stock issuable upon conversion of the Series A convertible preferred
stock and exercise of the warrants comprising the units sold, as well as the
units issuable upon exercise of the placement agent warrants.
In connection with our engagement of CCG Partners LLC to perform certain
public relations services for our company, in June 2006, we issued to CCG
Partners LLC three-year warrants to purchase up to 100,000 shares of our common
stock for a purchase price of $6.50 per share. The warrants were issued in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act.
In December 2006, we issued to certain of the investors that purchased
our securities under the Securities Purchase Agreement warrants to purchase an
aggregate of 884,799 shares of our common stock at an initial exercise price of
$5.50 per share. Such warrants were issued in consideration of the agreement of
such investors to permit us to remove from this registration statement 9,348,592
shares of common stock issuable upon conversion of the Series A convertible
preferred stock or exercise of the warrants purchased under the Securities
Purchase Agreement. Such warrants were issued in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act and Regulation D
under the Securities Act on the basis that their issuance did not involve public
offering and each investor represented to us that it was an "accredited
investor" as defined in the Securities Act.
In December 2006, we issued to certain investors that purchased our
securities under the Securities Purchase Agreement an aggregate of 379,743
shares of our common stock in consideration of the settlement of certain penalty
payments payable to such investors due to our failure to file this registration
statement with the Securities and Exchange Commission, and to have this
registration statement declared effective by the Commission, within the time
periods required by the Registration Rights Agreement filed as Exhibit 10.17 to
this registration statement. Such shares were issued in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act and
Regulation D under the Securities Act on the basis that their issuance did not
involve public offering and each investor represented to us that it was an
"accredited investor" as defined in the Securities Act.
ITEM 16. - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Documents filed as part of this registration statement:
(1) Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006, 2005
and 2004
Consolidated Statements of Operations and Comprehensive Income
for the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 2006, 2005 and 2004
Consolidated Statements of Cash Flows for the years December 31,
2006, 2005 and 2004
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
None.
(b) Exhibits:
3.1 Certificate of Incorporation of the Registrant filed
February 4, 2003 with the Delaware Secretary of State,
incorporated by reference to Exhibit 3.1 to our
Registration Statement on Form SB-2 filed with the
Securities and Exchange Commission on January 22, 2004.
II-3
3.2 Amendment to Certificate of Incorporation of the Registrant
filed January 30, 2006 with the Delaware Secretary of
State, incorporated by reference to Exhibit 3.2 to our
Current Report on Form 8-K dated January 30, 2006.
3.3 Certificate of Designation of Series A Convertible
Preferred Stock of the Registrant filed January 30, 2005
with the Delaware Secretary of State, incorporated by
reference to Exhibit 3.3 to our Current Report on Form 8-K
dated January 30, 2006.
3.4 Amendment to Certificate of Incorporation of the Registrant
filed February 16, 2006 with the Delaware Secretary of
State, incorporated by reference to Exhibit 3.1 to our
Current Report on Form 8-K dated February 16, 2006.
3.5 Amendment to the Certificate of Incorporation of the
Registrant filed March 20, 2007 with the Delaware Secretary
of State, incorporated by reference to Exhibit 3.5 to our
Annual Report on Form 10-K for the year ended December 31,
2006.
3.6 Amended and Restated By-laws of the Registrant,
incorporated by reference to Exhibit 3.2 to our Current
Report on Form 8-K dated February 14, 2007.
5.1# Opinion of Pryor Cashman Sherman & Flynn LLP, regarding
legality of securities being registered.
10.1 Loan Agreements between Agricultural Bank of China, Xuchang
Branch and Henan Zhongpin Food Share Co., Ltd.,
incorporated by reference to Exhibit 10.1 to our Current
Report on Form 8-K dated January 30, 2006.*
10.2 Loan Agreement dated March 31, 2005 between CITIC
Industrial Bank, Zhengzhou Branch and Henan Zhongpin Food
Share Co., Ltd., incorporated by reference to Exhibit 10.2
to our Current Report on Form 8-K dated January 30, 2006.*
10.3 Loan Agreements between Shanghai Pudong Development Bank,
Zhengzhou Branch and Henan Zhongpin Food Share Co., Ltd.,
incorporated by reference to Exhibit 10.3 to our Current
Report on Form 8-K dated January 30, 2006.*
10.4 Loan Agreements between China Construction Bank, Xuchang
Branch and Henan Zhongpin Food Share Co., Ltd.,
incorporated by reference to Exhibit 10.4 to our Current
Report on Form 8-K dated January 30, 2006.*
10.5 Transfer Loan Agreement dated May 31, 2002 between Bank of
Communications, Zhengzhou Branch and Henan Zhongpin Food
Share Co., Ltd., incorporated by reference to Exhibit 10.5
to our Current Report on Form 8-K dated January 30, 2006.*
10.6 Equipment Purchase Agreement dated July 18, 2001 between
Henan International Economic Trading Corporation (buyer),
Henan Zhongpin Food Share Co., Ltd. (end user) and Berg
Chilling Systems Inc.(seller), incorporated by reference to
Exhibit 10.6 to our Current Report on Form 8-K dated
January 30, 2006.*
II-4
10.7 Advisory Agreements dated April 07, 2005 and April 26, 2005
between Greenstone Investment & Consultants Ltd. and Henan
Zhongpin Food Share Co., Ltd., incorporated by reference to
Exhibit 10.7 to our Registration Statement on Form S-1
(Registration No. 333-133226) (TRANSLATED FROM MANDARIN).
10.8 Agreement on Transfer of Shares of Henan Zhongpin Food
Share Co., Ltd. dated May 23, 2005 between Zhu Xianfu and
Henan Zhongpin Food Co., Ltd., incorporated by reference to
Exhibit 10.8 to our Current Report on Form 8-K dated
January 30, 2006.*
10.9 Agreement on Transfer of Shares of Henan Zhongpin Food
Share Co., Ltd. dated May 23, 2005 between Ben Baoke and
Henan Zhongpin Food Co., Ltd., incorporated by reference to
Exhibit 10.9 to our Current Report on Form 8-K dated
January 30, 2006.*
10.10 Agreement on Transfer of Shares of Henan Zhongpin Food
Share Co., Ltd. dated May 23, 2005 between Si Shuichi and
Henan Zhongpin Food Co., Ltd., incorporated by reference to
Exhibit 10.10 to our Current Report on Form 8-K dated
January 30, 2006.*
10.11 Agreement on Transfer of Shares of Henan Zhongpin Food
Share Co., Ltd. dated May 23, 2005 between Wang Qinghe and
Henan Zhongpin Food Co., Ltd., incorporated by reference to
Exhibit 10.11 to our Current Report on Form 8-K dated
January 30, 2006.*
10.12 Agreement on Transfer of Shares of Henan Zhongpin Food
Share Co., Ltd. dated May 23, 2005 between Liu Chaoyang and
Henan Zhongpin Food Co., Ltd., incorporated by reference to
Exhibit 10.12 to our Current Report on Form 8-K dated
January 30, 2006.*
10.13 Agreement on Transfer of Shares of Henan Zhongpin Food
Share Co., Ltd. dated May 23, 2005 between Wang Juanjuan
and Henan Zhongpin Food Co., Ltd., incorporated by
reference to Exhibit 10.13 to our Current Report on Form
8-K dated January 30, 2006.*
10.14 Agreement on Trust of Share Equity of Henan Zhongpin Food
Share Co., Ltd. dated May 23, 2005 between Zhu Xianfu, Ben
Baoke, Si Shuichi, Wang Qinghe, Liu Chaoyang and Wang
Juanjuan and Henan Zhongpin Food Co., Ltd., incorporated by
reference to Exhibit 10.14 to our Current Report on Form
8-K dated January 30, 2006.*
10.15 Agreement on Transfer of Equity Interest of Henan Zhongpin
Food Co., Ltd. dated August 16, 2005 between Zhu Xianfu,
Ben Baoke, Si Shuichi, Wang Qinghe, Liu Chaoyang and Wang
Juanjuan (Transferors) and Falcon Link Investment Ltd.,
incorporated by reference to Exhibit 10.15 to our Current
Report on Form 8-K dated January 30, 2006.*
10.16 Securities Purchase Agreement, dated as of January 30,
2006, by and among the Registrant and the purchasers named
therein, incorporated by reference to Exhibit 10.16 to our
Registration Statement on Form S-1 (Registration No.
333-133226).*
II-5
10.17 Registration Rights Agreement, dated as of January 30,
2006, by and among the Registrant and the purchaser named
therein, incorporated by reference to Exhibit 10.17 to our
Registration Statement on Form S-1 (Registration No.
333-133226).*
10.18 Form of Warrant to purchase common stock, incorporated by
reference to Exhibit 10.18 to our Current Report on Form
8-K dated January 30, 2006, incorporated by reference to
Exhibit 10.18 to our Registration Statement on Form S-1
(Registration No. 333-133226).
10.19 Placement Agent Warrant Agreement, dated as of January 30,
2006, between the Registrant and TN Capital Equities, Ltd.,
incorporated by reference to Exhibit 10.19 to our
Registration Statement on Form S-1 (Registration No.
333-133226).
10.20 Stock Purchase Agreement, dated as of March 15, 2005, among
Richard Armstrong, Halter Capital Corporation and the
Registrant, incorporated by reference to Exhibit 10.1 to
our Current Report on Form 8-K dated March 30, 2005.
10.21 Share Exchange Agreement, dated as of January 30, 2006,
among the Registrant, Falcon Link Investment Limited, the
stockholders of the Registrant signatory thereto and as to
Articles IV, VII and IX only, Kevin Halter, Jr.,
incorporated by reference to Exhibit 10.21 to our
Registration Statement on Form S-1 (Registration No.
333-133226).
10.22 Advisory Agreement, dated as of January 30, 2006, between
HFG International Limited and Falcon Link Investment
Limited, incorporated by reference to Exhibit 10.22 to our
Registration Statement on Form S-1 (Registration No.
333-133226).
10.23 Amendment dated as of February 21, 2006 [to Securities
Purchase Agreement dated as of January 30, 2006] among the
Registrant and the purchasers named therein, incorporated
by reference to Exhibit 10.23 to our Registration Statement
on Form S-1 (Registration No. 333-133226).
10.24 Escrow Agreement dated as of January 30, 2006 among the
Registrant, Law Debenture Trust Company of New York, as
escrow agent, and the stockholders of the Registrant named
therein, incorporated by reference to Exhibit 10.24 to our
Registration Statement on Form S-1 (Registration No.
333-133226).
10.25 Amendment to Escrow Agreement dated as of February 21, 2006
among the Registrant, Law Debenture Trust Company of New
York, as escrow agent, and the stockholders of the
Registrant named therein, incorporated by reference to
Exhibit 10.25 to our Registration Statement on Form S-1
(Registration No. 333-133226).
10.26 Common Stock Purchase Warrant dated June 15, 2006 between
the Registrant and CCG Partners LLC, incorporated by
reference to Exhibit 10.26 to our Registration Statement on
Form S-1 (Registration No. 333-133226).
10.27 Leasing Contract dated as of November 6, 2006 between
Heilongjiang Gongzhun Meat and Food Co., Ltd. and Henan
Zhongpin Food Share Co., Ltd., incorporated
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by reference to Exhibit 10.1 to our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2006.
10.28 Amendment dated as of December 21, 2006 [to Registration
Rights Agreement dated as of January 30, 2006] among the
Registrant and the Investors named therein, incorporated by
reference to Exhibit 10.28 to our Registration Statement on
Form S-1 (Registration No. 333-133226).
10.29 Form of Common Stock Purchase Warrant issued in December
2006, incorporated by reference to Exhibit 10.29 to our
Registration Statement on Form S-1 (Registration No.
333-133226).
14.1 Code of Business Conduct and Ethics of the Registrant,
incorporated by reference to Exhibit 14.1 to our
Registration Statement on Form S-1 (Registration No.
333-133226).
21.1 List of Subsidiaries of Registrant, incorporated by
reference to Exhibit 21.1 to our Registration Statement on
Form S-1 (Registration No. 333-133226).
23.1 Consent of Child, Van Wagoner & Bradshaw, PLLC.
23.3 Consent of Pryor Cashman Sherman & Flynn LLP (included in
their opinion filed as Exhibit 5.1).
24.1 Powers of Attorney of certain of our officers and directors
(included on the signature page of this Registration
Statement as originally filed on January 24, 2007).
99.1 Business License of Henan Zhongpin Food Share Co., Ltd.,
dated December 16, 2003, incorporated by reference to
Exhibit 99.1 to our Current Report on Form 8-K dated
January 30, 2006. (TRANSLATED FROM MANDARIN)
99.2 By-Laws of Henan Zhongpin Food Share Co., Ltd., dated May
23, 2005, incorporated by reference to Exhibit 99.2 to our
Current Report on Form 8-K dated January 30, 2006.
(TRANSLATED FROM MANDARIN)
99.3 Governmental Approval of the Acquisition of Henan Zhongpin
Food Co., Ltd. by Falcon Link Investment Limited, dated
September 13, 2005, incorporated by reference to Exhibit
99.3 to our Current Report on Form 8-K dated January 30,
2006. (TRANSLATED FROM MANDARIN)
99.4 Certificate of Approval for Establishment of an Enterprise
with Foreign Investment [Henan Zhongpin Food Co., Ltd.] in
the People's Republic of China, dated September 15, 2005,
incorporated by reference to Exhibit 99.4 to our Current
Report on Form 8-K dated January 30, 2006. (TRANSLATED FROM
MANDARIN)
99.5 By-Laws of Henan Zhongpin Food Co., Ltd., dated August,
2005, incorporated by reference to Exhibit 99.5 to our
Current Report on Form 8-K dated January 30, 2006.
(TRANSLATED FROM MANDARIN)
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99.6 Certificate of Incorporation of Falcon Link Investment
Limited, dated July 21, 2005, incorporated by reference to
Exhibit 99.6 to our Current Report on Form 8-K dated
January 30, 2006.
99.7 Memorandum of Association of Falcon Link Investment
Limited, dated July 21, 2005, incorporated by reference to
Exhibit 99.7 to our Registration Statement on Form S-1
(Registration No. 333-133226).
99.8 Articles of Association of Falcon Link Investment Limited,
dated July 21, 2005, incorporated by reference to Exhibit
99.8 to our Registration Statement on Form S-1
(Registration No. 333-133226).
99.9 Business License of Henan Zhongpin Food Co., Ltd. dated May
26, 2005, incorporated by reference to Exhibit 99.9 to our
Current Report on Form 8-K dated January 30, 2006.
(TRANSLATED FROM MANDARIN)
- ---------------
* Original agreement in Mandarin, summary of key terms attached.
# Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Company, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change
in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation from
the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee"
table in the effective Registration Statement;
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(iii) Include any additional or changed information on the
plan of distribution.
(2) For determining liability under the Securities Act, the Company
will treat each such post-effective amendment as a new Registration Statement of
the securities offered, and the offering of such securities at that time to be
the initial bona fide offering.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of prospectus as a new
Registration Statement for the securities offered in the Registration Statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it met all
the requirements of filing on Form S-1 and authorized this Post-Effective
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, in Changge City, Henan Province, The People's Republic of China, on
April 4, 2007.
ZHONGPIN INC.
By: /s/Xianfu Zhu
-----------------------------------
Xianfu Zhu
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to Registration Statement was signed by the
following persons in the capacities and on the dates stated.
Signature Title Date
- ----------------------- ------------------------------------ -------------
/s/ Xianfu Zhu Chairman of the Board of Directors April 4, 2007
- -------------------------- and Chief Executive Officer
Xianfu Zhu (Principal Executive Officer)
/s/ Yuanmei Ma Chief Financial Officer April 4, 2007
- -------------------------- (Principal Financial and
Yuanmei Ma Accounting Officer)
/s/ Xinyu Li Director April 4, 2007
- --------------------------
Xinyu Li
/s/ Yunchun Wang Director April 4, 2007
- --------------------------
Yunchun Wang
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