UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2009
or
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from
|
To
|
|
Commission
File Number :
|
333-112111
|
Zhongpin
Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
54-2100419
|
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
21 Changshe Road, Changge City, Henan Province, People’s Republic of China
|
|
|
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
011 86
10-82861788
(Registrant’s
telephone number, including area code)
Not
Applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past ninety (90)
days. YES
x
NO
¨
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation
S-T
during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). YES
¨
NO
¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See definition of “accelerated filer”,
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check One):
Large
accelerated filer
¨
Accelerated filer
x
Non-accelerated filer
¨
Smaller reporting
company
¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES
¨
NO
x
As of November 4, 2009, 34,477,719
shares of the registrant’s common stock were outstanding.
ZHONGPIN
INC.
FORM
10-Q
INDEX
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Page
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Part I
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Financial Information
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Item
1.
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Unaudited
Financial Statements:
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Consolidated
Balance Sheets as of September 30, 2009 (unaudited) and December 31,
2008
|
2
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Consolidated
Statements of Income and Comprehensive Income (unaudited) for the
three-month and nine-month periods ended September 30, 2009 and
2008
|
4
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Consolidated
Statements of Cash Flows (unaudited) for the nine- month periods
ended September 30, 2009 and 2008
|
5
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Notes
to Consolidated Financial Statements (unaudited)
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
19
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
|
35
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Item
4.
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Controls
and Procedures
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35
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Part II
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Other Information
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Item
1.
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Legal
Proceedings
|
36
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Item
1A.
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Risk
Factors
|
36
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Item
2.
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Unregistered
Sales of Equity Securities and Use of Proceeds
|
36
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Item
3.
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Defaults
Upon Senior Securities
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36
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Item
4.
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Submission
of Matters to a Vote of Security Holders
|
36
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Item
5.
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Other
Information
|
36
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Item
6.
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Exhibits
|
36
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Signatures
|
37
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ZHONGPIN
INC.
Part
I - Financial Information
Item
1. Financial Statements
The accompanying unaudited consolidated
balance sheets, statements of income and comprehensive income, and statements of
cash flows and the related the notes thereto, have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“GAAP”) for interim financial information and in conjunction with the rules and
regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they
do not include all of the disclosures required by GAAP for complete financial
statements. The financial statements reflect all adjustments, consisting only of
normal, recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation for the interim periods.
The accompanying financial statements
should be read in conjunction with the notes to the aforementioned financial
statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations and the financial statements and notes thereto included in
our Annual Report on Form 10-K for the year ended December 31, 2008, as
amended.
The results of operations for the
three-month and nine-month periods ended September 30, 2009 are not necessarily
indicative of the results to be expected for the entire fiscal year or any other
period.
ZHONGPIN
INC.
CONSOLIDATED
BALANCE SHEETS
(Amounts
in U.S. dollars)
|
|
|
September 30, 2009
|
|
|
December 31, 2008
|
|
|
|
|
(Unaudited)
|
|
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ASSETS
|
|
|
|
|
|
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Current
assets
|
|
|
|
|
|
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Cash
and cash equivalents
|
|
$
|
26,802,325
|
|
|
$
|
41,857,166
|
|
|
Restricted
cash
|
|
|
25,559,875
|
|
|
|
17,040,201
|
|
|
Bank
notes receivable
|
|
|
5,323,181
|
|
|
|
1,268,890
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $1,402,612 and
$1,215,901
|
|
|
26,272,416
|
|
|
|
20,432,752
|
|
|
Other
receivables, net of allowance for doubtful accounts of $151,826 and
$500,447
|
|
|
1,106,285
|
|
|
|
1,907,243
|
|
|
Purchase
deposits
|
|
|
7,461,129
|
|
|
|
4,308,852
|
|
|
Inventories
|
|
|
31,940,372
|
|
|
|
16,724,217
|
|
|
Prepaid
expenses and deferred charges
|
|
|
241,124
|
|
|
|
360,265
|
|
|
VAT
recoverable
|
|
|
12,737,825
|
|
|
|
7,432,365
|
|
|
Assets
held for sale
|
|
|
—
|
|
|
|
623,871
|
|
|
Deferred
tax assets
|
|
|
310,759
|
|
|
|
311,055
|
|
|
Other
current assets
|
|
|
130,745
|
|
|
|
96,402
|
|
|
Total
current assets
|
|
|
137,886,036
|
|
|
|
112,363,279
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment (net)
|
|
|
187,908,499
|
|
|
|
133,684,051
|
|
|
Deposits
for purchase land usage right
|
|
|
8,717,719
|
|
|
|
6,429,295
|
|
|
Construction
in progress
|
|
|
32,589,566
|
|
|
|
40,773,039
|
|
|
Land
usage rights
|
|
|
61,440,278
|
|
|
|
35,983,947
|
|
|
Deferred
charges
|
|
|
176,889
|
|
|
|
231,769
|
|
|
Other
non-current assets
|
|
|
412,110
|
|
|
|
412,503
|
|
|
Total
assets
|
|
$
|
429,131,097
|
|
|
$
|
329,877,883
|
|
|
|
|
|
|
|
|
|
|
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LIABILITIES
AND EQUITY
|
|
|
|
|
|
|
|
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Current
liabilities
|
|
|
|
|
|
|
|
|
|
Short-term
loans
|
|
$
|
96,805,828
|
|
|
$
|
67,893,001
|
|
|
Bank
notes payable
|
|
|
19,859,423
|
|
|
|
13,252,180
|
|
|
Long-term
loans - current portion
|
|
|
4,538,700
|
|
|
|
145,671
|
|
|
Accounts
payable
|
|
|
11,022,371
|
|
|
|
9,528,937
|
|
|
Other
payables
|
|
|
18,117,760
|
|
|
|
7,130,384
|
|
|
Accrued
liabilities
|
|
|
6,038,090
|
|
|
|
5,055,660
|
|
|
Deposits
from customers
|
|
|
5,919,773
|
|
|
|
4,331,774
|
|
|
Tax
payable
|
|
|
1,233,591
|
|
|
|
1,382,589
|
|
|
Deferred
tax liabilities
|
|
|
94,722
|
|
|
|
94,812
|
|
|
Total
current liabilities
|
|
|
163,630,258
|
|
|
|
108,815,008
|
|
|
|
|
|
|
|
|
|
|
|
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Deposits
from customers
|
|
|
1,638,159
|
|
|
|
2,420,967
|
|
|
Capital
lease obligation
|
|
|
3,166,935
|
|
|
|
4,252,743
|
|
|
Long-term
loans
|
|
|
33,631,815
|
|
|
|
23,475,174
|
|
|
Total
liabilities
|
|
|
202,067,167
|
|
|
|
138,963,892
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
|
|
|
|
September 30, 2009
|
|
|
|
December 31, 2008
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock: par value $0.001; 25,000,000 authorized; 644,037 and 2,129,200
shares issued and outstanding
|
|
|
644
|
|
|
|
2,129
|
|
|
Common
stock: par value $0.001; 100,000,000 authorized; 29,233,682 and
27,504,918 shares issued and outstanding
|
|
|
29,233
|
|
|
|
27,505
|
|
|
Additional
paid in capital
|
|
|
108,298,215
|
|
|
|
105,680,772
|
|
|
Retained
earnings
|
|
|
99,808,453
|
|
|
|
66,108,995
|
|
|
Accumulated
other comprehensive income
|
|
|
18,927,385
|
|
|
|
19,094,590
|
|
|
Total
equity
|
|
|
227,063,930
|
|
|
|
190,913,991
|
|
|
Total
liabilities and equity
|
|
$
|
429,131,097
|
|
|
$
|
329,877,883
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ZHONGPIN
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Amount
in U.S. dollars) (Unaudited)
|
|
|
Three
Months Ended
September 30,
|
|
|
Nine
Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
revenues
|
|
$
|
194,851,183
|
|
|
$
|
153,752,841
|
|
|
$
|
510,547,733
|
|
|
$
|
400,007,165
|
|
|
Cost
of sales
|
|
|
(
171,143,879
|
)
|
|
|
(
134,166,298
|
)
|
|
|
(
448,729,105
|
)
|
|
|
(
349,125,172
|
)
|
|
Gross
profit
|
|
|
23,707,304
|
|
|
|
19,586,543
|
|
|
|
61,818,628
|
|
|
|
50,881,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
(4,481,072
|
)
|
|
|
(4,486,746
|
)
|
|
|
(13,329,063
|
)
|
|
|
(13,906,208
|
)
|
|
Selling
expenses
|
|
|
(3,768,061
|
)
|
|
|
(3,032,930
|
)
|
|
|
(9,348,419
|
)
|
|
|
(7,348,563
|
)
|
|
Research
& development expenses
|
|
|
22,383
|
|
|
|
(712,620
|
)
|
|
|
(2,968
|
)
|
|
|
(1,138,030
|
)
|
|
Gain
on disposal of a subsidiary
|
|
|
57
|
|
|
|
—
|
|
|
|
654,143
|
|
|
|
—
|
|
|
Amortization
of loss from sale-leaseback transaction
|
|
|
(16,669
|
)
|
|
|
—
|
|
|
|
(49,998
|
)
|
|
|
—
|
|
|
Total
operating expenses
|
|
|
(
8,243,362
|
)
|
|
|
(
8,232,296
|
)
|
|
|
(
22,076,305
|
)
|
|
|
(
22,392,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
15,463,942
|
|
|
|
11,354,247
|
|
|
|
39,742,323
|
|
|
|
28,489,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(1,740,306
|
)
|
|
|
(1,650,110
|
)
|
|
|
(4,503,801
|
)
|
|
|
(2,453,138
|
)
|
|
Other
income (expense), net
|
|
|
106,236
|
|
|
|
64,440
|
|
|
|
397,585
|
|
|
|
(36,883
|
)
|
|
Government
subsidies
|
|
|
6,981
|
|
|
|
482,801
|
|
|
|
229,389
|
|
|
|
1,054,684
|
|
|
Total
other income (expense)
|
|
|
(
1,627,089
|
)
|
|
|
(1,102,869
|
)
|
|
|
(
3,876,827
|
)
|
|
|
(
1,435,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before taxes
|
|
|
13,836,853
|
|
|
|
10,251,378
|
|
|
|
35,865,496
|
|
|
|
27,053,856
|
|
|
Provision
for income taxes
|
|
|
(602,142
|
)
|
|
|
(200,986
|
)
|
|
|
(2,166,038
|
)
|
|
|
(1,193,893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
13,234,711
|
|
|
$
|
10,050,392
|
|
|
$
|
33,699,458
|
|
|
$
|
25,859,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
$
|
95,942
|
|
|
$
|
1,875,399
|
|
|
$
|
(167,205
|
)
|
|
$
|
11,645,902
|
|
|
Comprehensive
income
|
|
$
|
13,330,653
|
|
|
$
|
11,925,791
|
|
|
$
|
33,532,253
|
|
|
$
|
37,505,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
0.44
|
|
|
$
|
0.34
|
|
|
$
|
1.13
|
|
|
$
|
0.90
|
|
|
Diluted
earnings per common share
|
|
$
|
0.44
|
|
|
$
|
0.34
|
|
|
$
|
1.12
|
|
|
$
|
0.89
|
|
|
Basic
weighted average shares outstanding
|
|
|
29,744,291
|
|
|
|
29,543,640
|
|
|
|
29,711,018
|
|
|
|
28,587,287
|
|
|
Diluted
weighted average shares outstanding
|
|
|
30,217,697
|
|
|
|
29,905,010
|
|
|
|
30,026,153
|
|
|
|
29,019,128
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ZHONGPIN
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amount
in U.S. dollars) (Unaudited)
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
33,699,459
|
|
|
$
|
25,859,963
|
|
|
Adjustments
to reconcile net income to net cash provided by (used in)
operations:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
6,031,646
|
|
|
|
3,194,119
|
|
|
Amortization
|
|
|
700,336
|
|
|
|
321,975
|
|
|
Allowance
for doubtful accounts
|
|
|
(159,649
|
)
|
|
|
876,515
|
|
|
Other
income
|
|
|
(105,734
|
)
|
|
|
—
|
|
|
Gain
on disposal of a subsidiary
|
|
|
(649,726
|
)
|
|
|
—
|
|
|
Non-cash
compensation expense
|
|
|
1,206,486
|
|
|
|
1,172,465
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(6,087,329
|
)
|
|
|
2,026,268
|
|
|
Other
receivables
|
|
|
1,109,764
|
|
|
|
3,106,460
|
|
|
Purchase
deposits
|
|
|
(3,353,892
|
)
|
|
|
(1,247,842
|
)
|
|
Prepaid
expense
|
|
|
118,728
|
|
|
|
(26,296
|
)
|
|
Inventories
|
|
|
(15,233,775
|
)
|
|
|
4,900,962
|
|
|
Tax
refunds receivable
|
|
|
(5,310,123
|
)
|
|
|
(3,131,223
|
)
|
|
Other
current assets
|
|
|
(34,419
|
)
|
|
|
—
|
|
|
Deferred
charges
|
|
|
54,635
|
|
|
|
—
|
|
|
Accounts
payable
|
|
|
1,520,789
|
|
|
|
1,523,517
|
|
|
Other
payables
|
|
|
6,787,710
|
|
|
|
2,432,317
|
|
|
Accrued
liabilities
|
|
|
1,083,418
|
|
|
|
2,756,036
|
|
|
Taxes
payable
|
|
|
(147,615
|
)
|
|
|
1,300,681
|
|
|
Deposits
from customers
|
|
|
943,127
|
|
|
|
2,608,668
|
|
|
Net
cash provided (used) by operating activities
|
|
|
22,173,836
|
|
|
|
47,674,585
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Deposits
for purchase of land usage rights
|
|
|
(7,128,875
|
)
|
|
|
(28,654
|
)
|
|
Construction
in progress
|
|
|
(43,576,794
|
)
|
|
|
(57,838,392
|
)
|
|
Additions
to property and equipment
|
|
|
(8,610,134
|
)
|
|
|
(10,691,673
|
)
|
|
Additions
to land usage rights
|
|
|
(17,093,428
|
)
|
|
|
(370,161
|
)
|
|
Proceeds
on disposal of fixed assets
|
|
|
111,548
|
|
|
|
75,669
|
|
|
Increase
in restricted cash
|
|
|
(8,532,020
|
)
|
|
|
(1,480,708
|
)
|
|
Proceeds
from disposal of a subsidiary
|
|
|
1,226,289
|
|
|
|
—
|
|
|
Net
cash used in investing activities
|
|
|
(83,603,414
|
)
|
|
|
(70,333,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from (repayment of) bank notes, net
|
|
|
2,563,194
|
|
|
|
(6,293,518
|
)
|
|
Proceeds
from short-term bank loans
|
|
|
28,964,439
|
|
|
|
17,757,665
|
|
|
Proceeds
from long-term bank loans
|
|
|
14,641,258
|
|
|
|
15,752,767
|
|
|
Repayment
of long-term bank loans
|
|
|
(75,855
|
)
|
|
|
(195,111
|
)
|
|
Proceeds
from capital lease obligations
|
|
|
(1,081,270
|
)
|
|
|
—
|
|
|
Proceeds
from exercise of warrants
|
|
|
1,411,200
|
|
|
|
1,236,923
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
46,422,966
|
|
|
|
28,258,726
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
of rate changes on cash
|
|
|
(48,229
|
)
|
|
|
3,436,331
|
|
|
Increase
(decrease) in cash and cash equivalents
|
|
|
(15,054,841
|
)
|
|
|
9,035,723
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
41,857,166
|
|
|
|
45,142,135
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
26,802,325
|
|
|
$
|
54,177,858
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
5,311,058
|
|
|
$
|
3,691,752
|
|
|
Cash
paid for income taxes
|
|
|
2,663,578
|
|
|
|
436,073
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
AND NATURE OF OPERATIONS
Zhongpin
Inc. (the “Company”) was established under the laws of the State of Delaware on
February 4, 2003. The Company is a public holding company holding an
equity interest in its subsidiaries outside the U.S. Its operating
subsidiaries are located in the People’s Republic of China (the “PRC”) and focus
on two business divisions: pork and pork products, and vegetables and
fruits.
The pork
and pork products division is involved primarily in the processing of live
market hogs into fresh, frozen and processed pork products which are sold
domestically to retail stores, food retailers, wholesalers, distributors,
restaurants, hotel chains and food service establishments, such as schools,
governments, healthcare facilities, the military and other food processors, as
well as to certain international markets in a limited scope. The
vegetables and fruits segment is involved primarily in the processing of frozen
vegetables and fruits that are exported or sold to our branded stores and food
retailers.
The
Company holds a 100% interest in Falcon Link Investment Limited, a company
organized under the laws of the British Virgin Islands (“Falcon”), through which
the Company holds a 100% interest in its China-based subsidiaries, each of which
was organized under the laws of the PRC. The Company’s China-based
subsidiaries include the following:
|
Name
|
|
Date
of
Incorp
oration
|
|
Registered
Capital
|
|
|
Percentage
of Ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henan
Zhongpin Food Company, Ltd.
|
|
Sep.
15, 2005
|
|
$
84,300,000
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henan
Zhongpin Food Share Company, Ltd.
|
|
Jan.
20, 2000
|
|
626,900,000
RMB
($82,011,411)
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henan
Zhongpin Import and Export Trading Company
|
|
Aug.
11, 2004
|
|
5,060,000
RMB
($611,111)
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zhumadian
Zhongpin Food Company Limited
|
|
June
7, 2006
|
|
60,000,000
RMB
($8,585,399)
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anyang
Zhongpin Food Company Limited
|
|
Aug.
21, 2006
|
|
4,800,000
RMB
($606,927)
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henan
Zhongpin Fresh Food Logistics Company Limited
|
|
Sept.
14, 2006
|
|
1,500,000
RMB
($189,665)
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deyang
Zhongpin Food Company Limited
|
|
Sept.
25, 2006
|
|
15,000,000
RMB
($1,967,799)
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henan
Zhongpin Business Development Company Limited
|
|
Sept.
27, 2006
|
|
5,000,000
RMB
($632,215)
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heilongjiang
Zhongpin Food Company Limited
|
|
Oct.
17, 2006
|
|
1,000,000
RMB
($126,406)
|
|
|
|
100
|
%
(1)
|
|
Luoyang
Zhongpin Food Company
Limited
|
|
April
26, 2007
|
|
5,000,000
RMB
($647,677)
|
|
|
|
100
|
%
|
|
Yongcheng
Zhongpin Food Company Limited
|
|
June
1, 2007
|
|
5,000,000
RMB
($646,836)
|
|
|
|
100
|
%
|
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Name
|
|
Date
of
Incorp
oration
|
|
|
Registered
Capital
|
|
|
Percentage
of Ownership
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin
Zhongpin Food Company Limited
|
|
Sept.
14, 2007
|
|
|
5,000,000
RMB
(
$664,699 )
|
|
|
|
100
|
%
|
|
Hengshui
Zhongpin Food Company Limited
|
|
Nov.
17, 2008
|
|
|
1,000,000
RMB
($146,428)
|
|
|
|
100
|
%
|
|
Jilin
Zhongpin Food Company Limited
|
|
Dec.
11, 2008
|
|
|
1,000,000
RMB
($145,688)
|
|
|
|
100
|
%
|
|
Henan
Zhongpin Agriculture and Animal Husbandry Industry Development Company
Limited
|
|
Dec.
26, 2008
|
|
|
10,000,000
RMB
($1,461,796)
|
|
|
|
100
|
%
|
____________
|
(1)
|
Includes
a 10% ownership interest of another stockholder with respect to which
Henan Zhongpin is entitled to all economic benefits and the right to vote
pursuant to the terms of a trust agreement with such
stockholder.
|
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
and Basis of Presentation
The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated during
the process of consolidation. The consolidated financial statements were
prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”).
Foreign
Currency Translations and Transactions
Renminbi (“RMB”), the national currency
of the PRC, is the primary currency of the economic environment in which the
Company’s China-based subsidiaries are operating. The United States dollar
(“U.S. dollar”) is the functional currency used by the Company and Falcon to
record all of their activities. The Company uses the U.S. dollar for financial
reporting purposes.
The Company translates assets and
liabilities into U.S. dollars using the middle rate of the People’s Bank of
China as of the balance sheet date. The consolidated statement of income is
translated at average rates during the reporting period. Adjustments resulting
from the translation of financial statements from RMB into U.S. dollars are
recorded in stockholders' equity as part of accumulated comprehensive income
(loss) translation adjustments. Gains or losses resulting from transactions in
currencies other than RMB are reflected in income for the reporting
period.
Use
of Estimates
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 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.
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
Recognition
Revenues generated from the sales of
various meat products and vegetables and fruits are recognized when these
products are delivered to customers in accordance with previously agreed upon
pricing and delivery arrangements, and the collectability of these sales is
reasonably assured. Since the products sold by the Company are primarily
perishable and frozen food products, the right of return is only for a few days
and has been determined to
be
insignificant by the management of the Company. Accordingly, no provision has
been made for returnable goods. Revenues presented on the consolidated
statements of income and comprehensive income are net of sales
taxes.
Cash
and Cash Equivalents
The Company considers all highly-liquid
investments with maturity of three months or less to be cash equivalents. The
Company maintains its cash accounts at creditworthy financial institutions and
closely monitors the movements of its cash positions.
Restricted
Cash and Bank Notes Payable
Under the terms of the credit
agreements with certain of its lenders, Henan Zhongpin has agreed to maintain
with such lenders in a deposit account an amount of cash that will serve as
collateral for Henan Zhongpin’s delivery of bank promissory notes of such
lenders as payment instruments for its procurement purposes. The amount of bank
promissory notes of such lenders that can be delivered by Henan Zhongpin can be
up to twice the amount of such deposits. As such cash deposits may
not be withdrawn by Henan Zhongpin without restriction, such cash deposits are
presented as “restricted cash” on the consolidated balance sheets.
Bank
Notes Receivable
The Company only accepts notes issued
by banks in the normal course of business as payment for products sold by the
Company. These bank notes receivable have maturity dates of up to 180 days and
bear no interest. The Company can hold the bank notes until the maturity date
and collect the amount from the issuing banks, or the Company can use these bank
notes as a means for payment for goods or services received. The Company accrues
no provision for these bank notes because such bank notes have little risk of
default in the PRC.
Accounts
Receivable
During the normal course of business,
the Company's policy is to ask larger customers to make deposits in reasonable
and meaningful amounts on a case-by-case basis. For certain newly-developed
customers, the Company may extend unsecured credit.
The Company regularly evaluates and
monitors the creditworthiness of each of its customers in accordance with the
prevailing practice in the meat industry and based on general economic
conditions in the PRC. If any particular customer appears to be delaying or
deferring payments for the Company’s products, the Company generally requests a
deposit from, or an increase in the deposits of, such customer. Such deposits
are typically applied against the outstanding accounts receivable of the
applicable customer during the year. As a result, the Company did not have a bad
debt allowance provided against any specific customer at September 30,
2009.
The
Company maintains a general policy of providing 100% allowance for doubtful
accounts in an amount equal to the aggregate amount of those accounts that are
not collected within one year plus an amount equal to 5% of the aggregate amount
of accounts receivable less than one year old. After all attempts to collect a
receivable have failed, the receivable is written off against the
allowance.
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The
following table presents allowance activities in accounts
receivable.
|
|
|
September 30
, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$
|
1,215,901
|
|
|
$
|
1,341,872
|
|
|
Additions
charged to expense
|
|
|
186,711
|
|
|
|
(125,971
|
)
|
|
Ending
balance
|
|
$
|
1,
402,612
|
|
|
$
|
1,215,901
|
|
Inventories
Inventories are stated at the lower of
cost or the market based on the weighted average method. Production cost
components include the purchase cost of live hogs, direct labor, depreciation,
packaging material, utility expense and other manufacturing overhead. By using a
systematic costing system, the production cost is allocated to various products
at the stage of work-in-progress and finished goods, respectively. Net
realizable value is the estimated selling price in the ordinary course of
business, less estimated costs to complete and dispose. The Company regularly
inspects the shelf life of prepared foods and, if necessary, writes down their
carrying value based on their salability and expiration dates into cost of goods
sold.
Property,
Plant and Equipment
Property, plant and equipment are
recorded at cost and are stated net of accumulated depreciation. Depreciation
expense is determined using the straight-line method over the estimated useful
lives of the assets, as follows:
|
|
|
Estimated
Useful
Economic Life
|
|
Plants
and buildings
|
|
5-30
years
|
|
|
|
|
|
Machinery
and equipment
|
|
5-20
years
|
|
|
|
|
|
Office
furniture and equipment
|
|
3-5
years
|
|
|
|
|
|
Vehicles
|
|
5
years
|
Maintenance and repairs are charged
directly to expense as incurred, whereas improvements and renewals are generally
capitalized in their respective property accounts. When an item is retired or
otherwise disposed of, the cost and applicable accumulated depreciation are
removed and the resulting gain or loss is recognized and reflected as a line
item before operating income (loss).
Land
Usage Rights
The Chinese government owns all of the
parcels of land on which the Company's plants are built. In the PRC, land usage
rights for commercial purposes are granted by the PRC government typically for a
term of 40-50 years. The Company is required to pay a lump sum of money to the
State Land and Resource Ministry of the applicable locality to acquire such
rights. The Company capitalizes the lump sum of money paid and amortizes these
land usage rights by using the straight line method over the term of the land
use license granted by the applicable governmental authority.
Construction
in Progress and Interest Capitalization
Construction in progress is stated at
cost. The cost accumulation process starts from time the construction project is
set-up and ends at the time the project has been put into service and all
regulatory permits and approvals
have been
received. The interest costs incurred for these construction projects have been
determined to be insignificant by management. Consequently, no interest has been
capitalized during the construction process.
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair
Value of Financial Instruments
The carrying amount of cash, accounts
receivable, other receivables, advances to vendors, accounts payable and accrued
liabilities are reasonable estimates of their fair value because of the short
maturity of these items. The fair value of amounts due from or paid to related
parties and stockholders are reasonable estimates of their fair value since the
amounts will be collected and paid off in a period less than one
year.
Shipping
and Handling Cost
All shipping and handling fees are
included in selling expenses.
Value
Added Tax
All China-based enterprises are subject
to a value-added tax (“VAT”) imposed by the PRC government on their domestic
product sales. The output VAT is charged to customers who purchase goods from
the Company and the input VAT is paid when the Company purchases goods from its
vendors. Input VAT rates are 13% for most of the purchasing activities conducted
by the Company. Output VAT rate is 13% for chilled pork products, frozen pork
products and vegetable and fruit products, and 17% for prepared meat products.
The input VAT can be offset against the output VAT. The VAT payable or
recoverable balance presented on the consolidated balance sheets represents
either the input VAT less than or larger than the output VAT. The debit balance
represents a credit against future collections of output VAT instead of a
receivable.
Share-Based
Payment
The Company receives employee and
certain non-employee services in exchange for (a) equity securities of the
Company or (b) liabilities that are based on the fair value of the Company’s
equity securities or that may be settled by the issuance of such equity
securities. The Company uses a fair-value-based method to calculate
and account for above mentioned transactions.
Earnings
Per Share
Basic earnings per share includes no
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully-diluted earnings per
share. Based on the fact that the voting rights and certain other
characteristics of the Company’s Series A convertible preferred stock are
the same as those of common stock, the outstanding shares of the Company's
Series A convertible preferred stock at each reporting period are deemed to be
common shares outstanding. All of such securities are included in
the computation of diluted earnings per share. The number of shares of
common stock underlying the outstanding stock warrants and options at September
30, 2009 and 2008 was 1,805,827 and 1,915,603, respectively, all of which shares
were included in the computation of diluted earnings per share.
Government
Subsidies
The Company's subsidiaries in the PRC
receive government subsidies from local Chinese government agencies in
accordance with relevant Chinese government policies. In general, the Company
presents the government subsidies received as part of other income unless the
subsidies received are earmarked to compensate a
specific
expense, such as research and development expense or interest expense, in which
case such subsidies have been accounted for as an offset against such specific
expense. The information relating to government subsidies received
and recognized is presented in Note 11.
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Research
and Development Expenses
Research and development costs are
expensed as incurred. Gross research and development expenses for new product
development and improvements of existing products by the Company incurred for
the three-month periods ended September 30, 2009 and 2008 were $472,000 and
$659,000, respectively, and for the nine-month periods ended September 30, 2009
and 2008 were $1,490,000 and $1,943,600, respectively.
Comprehensive
Income (Loss)
The Company adopted FASB Accounting
Standards Codification 220,
Comprehensive Income
, which
establishes standards for reporting and presentation of comprehensive income
(loss) and its components in a full set of general-purpose financial
statements. The Company has chosen to report comprehensive income
(loss) in the statements of income and comprehensive
income. Comprehensive income (loss) is comprised of net income and
all changes to stockholders' equity except those due to investments by owners
and distributions to owners.
Recently
Adopted Accounting Pronouncements
Adoption
of FASB Accounting Standards Codification
The
issuance of FASB Accounting Standards Codification (“FASB ASC”) on July 1, 2009
(effective for interim or annual reporting periods ending after September 15,
2009) establishes the FASB Accounting Standards Codification as the sole
source of authoritative generally accepted accounting principles. Pursuant to
the provisions of FASB ASC, the Company has updated references to U.S. GAAP in
its financial statements issued for the period ended September 30, 2009. The
adoption of FASB ASC did not impact the Company’s financial position or results
of operations.
Adoption
of FASB ASC 805
Effective
January 1, 2009, the Company adopted FASB ASC 805, “
Business
Combinations.
” FASB ASC 805 changed accounting for acquisitions that
close beginning in 2009. FASB ASC 805 extends its applicability to
all transactions and other events in which one entity obtains control over one
or more other businesses. It broadens the fair value measurement and
recognition of assets acquired, liabilities assumed, and interests transferred
as a result of business combinations. FASB ASC 805 expands on
required disclosures to improve the statement users’ abilities to evaluate the
nature and financial effects of business combinations. The adoption
of FASB ASC 805 did not have a material impact on the Company’s financial
statements.
Adoption
of FASB ASC 805-20
Effective January 1, 2009, the Company
adopted FASB ASC 805-20, “
Noncontrolling Interests in
Consolidated Financial Statements
.
” FASB ASC 805-20
requires that a noncontrolling interest in a subsidiary be reported as equity
and the amount of consolidated net income specifically attributable to the
noncontrolling interest be identified in the consolidated financial
statements. It also calls for consistency in the manner of reporting
changes in the parent’s ownership interest and requires fair value measurement
of any noncontrolling equity investment retained in a
deconsolidation. FASB ASC 805-20 requires retroactive adoption of the
presentation and disclosure requirements for existing minority
interests.
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Adoption
of FASB ASC 815
Effective January 1, 2009, the Company
adopted FASB ASC 815, “
Disclosures about Derivative
Instruments and Hedging Activi
ties.
” FASB ASC 815
requires enhanced disclosures about (i) how and why the Company uses derivative
instruments, (ii) how the Company accounts for derivative instruments and
related hedged items, and (iii) how derivative instruments and related hedged
items affect the Company’s financial results. The adoption FASB ASC
815 did not have any impact on the Company’s financial statements.
Adoption
of FASB ASC 350-30
Effective
January 1, 2009, the Company adopted FASB ASC 350-30, “
Determination of the
Useful
Life of
Intangible Assets
.” FASB ASC 350-30 amended the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset. The adoption of
FASB ASC 350-30 did not have material impact on the Company’s financial
statements.
Adoption
of FASB ASC 470-20
Effective
January 1, 2009, the Company adopted FASB ASC 470-20, “
Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial
Cas
h
Settlement).
” FASB ASC 470-20 requires entities to account
separately for the liability and equity components of a convertible debt
security by measuring the fair value of a similar nonconvertible debt security
when interest cost is recognized in subsequent periods. FASB ASC
470-20 requires entities to retroactively separate the liability and equity
components of such debt on the entities’ balance sheets on a fair value
basis. The adoption of FASB ASC 470-20 did not have any impact on the
Company’s financial statements.
Adoption
of FASB ASC 855
In May
2009, new guidance was issued on subsequent events that requires management to
evaluate subsequent events through the date the financial statements are either
issued or available to be issued, depending on the company’s expectation of
whether it will widely distribute its financial statements to its shareholders
and other financial statement users. Companies are required to disclose the date
through which subsequent events have been evaluated. We adopted the guidance
effective June 30, 2009.
Reclassification
The
presentation of certain line items presented on the consolidated financial
statements and the relevant notes for the three-month and nine-month periods
ended September 30, 2008 have been changed in conformity with the current year
presentation of the consolidated financial statements and the corresponding
notes.
3. INVENTORIES
Inventories
at September 30, 2009 and December 31, 2008 consisted of the
following:
|
|
|
September 30
, 2009
|
|
|
December 31, 2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
4,969,570
|
|
|
$
|
4,361,159
|
|
|
Low
value consumables and packing materials
|
|
|
1,018,807
|
|
|
|
817,862
|
|
|
Work
in progress
|
|
|
2,875,541
|
|
|
|
1,961,693
|
|
|
Finished
goods
|
|
|
23,076,454
|
|
|
|
9,583,503
|
|
|
|
|
$
|
31,940,372
|
|
|
$
|
16,724,217
|
|
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
4. PROPERTY,
PLANT AND EQUIPMENT AND LAND USAGE RIGHTS
A summary
of property, plant and equipment, and land usage rights at cost at September 30,
2009 and December 31, 2008 is as follows:
|
|
|
September 30
, 2009
|
|
|
December 31, 2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plants
and buildings
|
|
$
|
126,155,066
|
|
|
$
|
86,521,013
|
|
|
Machinery
and equipment
|
|
|
70,231,375
|
|
|
|
50,803,893
|
|
|
Office
furniture and equipment
|
|
|
2,634,700
|
|
|
|
2,043,418
|
|
|
Vehicles
|
|
|
3,011,654
|
|
|
|
2,463,388
|
|
|
Land
usage rights
|
|
|
63,405,008
|
|
|
|
37,249,227
|
|
|
Accumulated
depreciation and amortization
|
|
|
(1
6,089,026
|
)
|
|
|
(9,412,941
|
)
|
|
|
|
$
|
249,348,777
|
|
|
$
|
1
69,667,998
|
|
The
depreciation and amortization expenses for the three-month periods ended
September 30, 2009 and 2008 were $2,559,398 and $1,420,841, respectively, and
for the nine-month periods ended September 30, 2009 and 2008 were
$6,731,982 and $3,516,094, respectively.
Property,
plant and equipment under the sale-leaseback agreement at cost at September 30,
2009 and December 31, 2008 was as follows:
|
|
|
September 30
, 2009
|
|
|
December 31, 2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plants
and buildings
|
|
$
|
487,083
|
|
|
$
|
487,547
|
|
|
Machinery
and equipment
|
|
|
6,086,254
|
|
|
|
6,092,053
|
|
|
Accumulated
depreciation
|
|
|
(
362,892
|
)
|
|
|
(90,809
|
)
|
|
|
|
$
|
6,
210,445
|
|
|
$
|
6,488,791
|
|
5. CONSTRUCTION
IN PROGRESS
Construction
in progress at September 30, 2009 and December 31, 2008 consisted of the
following:
|
Construction Project
|
|
Date
or
Estimated
Date
Put in Service
(1)
|
|
September 30
, 2009
|
|
|
December 31, 2008
|
|
|
Replacement
and maintenance in Changge industrial park
|
|
November
2009
|
|
$
|
112,826
|
|
|
$
|
48,435
|
|
|
Waste
water solution system in Deyang
|
|
April
2009
|
|
|
—
|
|
|
|
7,329
|
|
|
Production
facility for chilled and frozen pork in Zhumadian
|
|
November
2009
|
|
|
7,908
|
|
|
|
16,709
|
|
|
Production
facility for chilled and frozen pork in Tianjin
|
|
April
2010
|
|
|
18,293,155
|
|
|
|
—
|
|
|
Production
line for prepared pork in Changge industrial plant
|
|
January
2010
|
|
|
73,217
|
|
|
|
547,225
|
|
|
Production
line for fruits and vegetables in Changge industrial park
|
|
September
2009
|
|
|
—
|
|
|
|
13,670,361
|
|
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Construction Project
|
|
Date
or
Estimated
Date
Put in Service
(1)
|
|
September 30
, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Production
facility for chilled and frozen pork in Yongcheng
|
|
April
2009
|
|
|
—
|
|
|
|
25,434,684
|
|
|
Dormitories
and other infrastructure in Changge industrial park
|
|
April
2010
|
|
|
1,243,459
|
|
|
|
—
|
|
|
Production
facility for prepared pork in Changge industrial plant
|
|
April
2010
|
|
|
12,412,716
|
|
|
|
—
|
|
|
Zhengzhou
office
|
|
November
2009
|
|
|
446,285
|
|
|
|
—
|
|
|
Water
solution station in Changge industrial plant
|
|
September 2009
|
|
|
—
|
|
|
|
1,048,296
|
|
|
|
|
|
|
$
|
32,589,566
|
|
|
$
|
40,773,039
|
|
|
(1)
|
Represents
date all regulatory permits and approvals are received and project is
placed in service. In certain cases, construction of a project may be
substantially completed and the project may be operational during a
testing period prior to such date.
|
7. SHORT-TERM
BANK LOANS
Short-term
bank loans are due within one year. Of the $96.8 million aggregate principal
amount of short-term bank loans at September 30, 2009, loans in the principal
amount of $61.6 million were secured by the Company’s plants located
primarily in Henan Province, a loan in the principal amount of $2.9 million was
guaranteed by the Company’s subsidiaries, Zhumadian Zhongpin Food Company
Limited and Anyang Zhongpin Food Company Limited, a loan in the principal amount
of $2.2 million was guaranteed by the Company’s subsidiary,
Luoyang Zhongpin Food Company Limited, loans in the aggregate
principal amount of $14.6 million were guaranteed by Henan Huanghe
Enterprises Group Co., Ltd., an unaffiliated third party (“Huanghe
Group”), and loans in the aggregate principal amount of $4.4 million were
guaranteed by Xuji Group Co., Ltd., an unaffiliated third party (“Xuji Group”).
These loans bear interest at prevailing lending rates in the PRC, which ranged
from 4.86% to 5.67% per annum at September 30, 2009.
8. LONG-TERM
BANK LOANS
Amounts
outstanding under the Company’s long-term debt arrangements at September 30,
2009 and December 31, 2008 were as follows:
|
Bank
|
|
September 30
, 2009
|
|
|
December 31, 2008
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
Construction Bank
|
|
$
|
7,321,716
|
|
|
$
|
—
|
|
|
China
Minsheng Bank
|
|
|
7,321,716
|
|
|
|
—
|
|
|
Bank
of Communications
|
|
|
5,857,373
|
|
|
|
5,862,953
|
|
|
Rabobank
Nederland Shanghai
|
|
|
11,714,746
|
|
|
|
11,725,906
|
|
|
China
CITIC Bank
|
|
|
4,393,030
|
|
|
|
4,397,215
|
|
|
Canadian
Government Transfer Loan
|
|
|
1,561,934
|
|
|
|
1,634,771
|
|
|
Current
portion
|
|
|
(4,53
8,700
|
)
|
|
|
(145,671
|
)
|
|
Total
|
|
$
|
33,631,815
|
|
|
$
|
23,475,174
|
|
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM
BANK LOANS (continued)
In June
2009, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.3 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
was based on the prime rate published by the People’s Bank of China for loans
with the
same or similar terms on the drawdown date (5.4% per annum on September 30,
2009) and are payable on June 10, 2011. Borrowings under the
loan agreement are guaranteed by the land usage right, property and plant of
Henan Zhongpin.
In May
2009, Henan Zhongpin entered into a loan agreement with China Minsheng Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.3 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
was based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.4% per annum on September
30, 2009) and are payable on May 6, 2011. Borrowings under the loan agreement
are guaranteed by Yongcheng Zhongpin Food Company Limited, a subsidiary of the
Company.
In
November 2008, Henan Zhongpin entered into a loan agreement with Bank of
Communications pursuant to which Henan Zhongpin borrowed RMB 40 million ($5.9
million). All amounts borrowed under the loan agreement bear interest at a
floating rate that was based on the prime rate published by the People’s Bank of
China for loans with the same or similar terms on the drawdown date (5.94%
per annum on September 30, 2009) and are payable on November 27,
2010. The accrued interest on this loan is payable quarterly on the
20th day of the last month of each quarter after the drawdown
date. Borrowings under the loan agreement are guaranteed by the land
usage rights, property and plant of the Company’s wholly-owned subsidiary,
Luoyang Zhongpin Food Company, Ltd.
In May
2008, Henan Zhongpin entered into a credit agreement with Rabobank Nederland
Shanghai Branch that provided for a three-year term loan of up to RMB 80 million
($11.7 million). On June 10, 2008, the first 50% of the long-term loan was
funded by the bank. The remaining 50% of the long-term loan was drawn down by
Henan Zhongpin on July 10, 2008. Amounts currently outstanding under
the term loan bear interest at the rate of 5.76% per annum, which is the
interest rate published by the People’s Bank of China for loans with the same or
similar terms. The accrued interest on this loan is payable on a quarterly
basis. Of the outstanding principal under the long-term loan, 25% is
payable 24 months after the first drawdown date (June 10, 2008), 37.5% is
payable 30 months after the first drawdown date and the balance is payable 36
months after the first drawdown date.
Borrowings
under the term loan agreement are guaranteed by the Company’s subsidiaries,
Anyang Zhongpin Food Company Limited and Zhumadian Zhongpin Food Company
Limited, are secured by the Company’s prepared pork production facilities
located at Changge City, Henan Province and are subject to various financial and
non-financial covenants, including a debt-to-net-worth ratio, a debt-to-EBIDTA
ratio, an interest coverage ratio, a required minimum tangible net worth,
restrictions on investments in fixed assets and financial assets, on
inter-company indebtedness and on consolidated contingent liabilities and a
requirement that a minimum percentage of Henan Zhongpin’s consolidated EBITDA be
generated by Henan Zhongpin and the guarantors. Henan Zhongpin also is
prohibited from paying dividends in an amount in excess of 50% of its retained
earnings during the term of the credit facility.
In April
2008, Henan Zhongpin entered into a loan agreement with China CITIC Bank
pursuant to which Henan Zhongpin borrowed RMB 30 million ($4.4 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
was based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.67% per annum on
September 30, 2009) and are payable on January 23,
2010. Borrowings under the loan agreement are guaranteed by Xuji
Group.
In May
2002, Henan Zhongpin entered into a loan agreement with Bank of Communications,
Zhengzhou Branch, which is the intermediary bank for a 40-year term loan in the
amount of $2,504,969 from the Canadian government. Under the terms of the loan
agreement, 58% of the principal amount ($1,452,882) of this loan bears interest
at the fixed rate of 6.02% per annum and remaining principal amount of this
loan is interest free. The loan is
repayable
in a fixed amount of $145,671, which includes principal and interest, that is
payable on a semi-annual basis through May 15, 2042. Borrowings under the loan
agreement are guaranteed by the Financing Department, Henan
Province.
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9. EQUITY
TRANSACTIONS
During
the three-months ended September 30, 2009, warrants to purchase an aggregate of
35,000 shares of the Company’s common stock were exercised on a cashless
basis. In connection with the transactions, the Company issued an aggregate of
33,731 shares of common stock and received no cash proceeds from such issuances.
For cash flow purposes, these transactions were non-cash
transactions.
During
the three-months ended September 30, 2009, options to purchase an aggregate of
120,000 shares of the Company’s common stock were exercised on a broker-assisted
cashless basis. In connection with the transaction, the Company issued 120,000
shares of common stock and received approximately $1.4 million
During
the three-month periods ended September 30, 2009 and 2008, the stock
compensation expenses were $452,452 and $376,704, respectively, and during the
nine-month periods ended September 30, 2009 and 2008, the stock compensation
expenses were $1,206,486 and $1,185,850, respectively.
10. EARNINGS
PER SHARE
The
following table shows the computation of basic and diluted net earnings per
share for the periods indicated:
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to common
shareholder
|
|
$
|
13,234,711
|
|
|
$
|
10,050,392
|
|
|
$
|
33,699,458
|
|
|
$
|
25,859,963
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares
outstanding
– basic
|
|
|
29,744,291
|
|
|
|
29,543,640
|
|
|
|
29,711,018
|
|
|
|
28,587,297
|
|
|
Dilutive
effect of stock options
|
|
|
473,406
|
|
|
|
361,370
|
|
|
|
315,135
|
|
|
|
431,831
|
|
|
Weighted
average common shares
outstanding
– diluted
|
|
|
30,217,697
|
|
|
|
29,905,010
|
|
|
|
30,026,153
|
|
|
|
29,019,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.34
|
|
|
$
|
1.13
|
|
|
$
|
0.90
|
|
|
Diluted
earnings per share
|
|
$
|
0.44
|
|
|
$
|
0.34
|
|
|
$
|
1.12
|
|
|
$
|
0.89
|
|
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
11. GOVERNMENT
SUBSIDIES
The local
government in Changge City, Henan Province provided Henan Zhongpin with various
subsidies to encourage its research and development activities and its
establishment of a fresh fruit and vegetable production facility in Changge
City, and for other contributions to the local community, such as increasing
employment opportunities. The government subsidies are generally classified as
earmarked (such as research and development activities) or non-earmarked. The
interest subsidies were earmarked to offset the Company’s interest expenses
incurred in relation to the construction of its fruit and vegetable production
facility. All subsidies were accounted for based on evidence that cash has been
received and the earmarked activities have taken place. In accordance with
internationally prevailing practice, subsidies earmarked for research and
development activities were first offset against relevant research and
development expenses incurred, and interest subsidies were offset against the
relevant interest expense incurred. Non-earmarked subsidies are generally
recognized as other income.
Government
subsidies received by the Company during the three-month and nine-month periods
ended September 30, 2009 and 2008 were as follows:
|
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Deferred
subsidies opening balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
subsidies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Earmarked
subsidies
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-earmarked
subsidies
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidies
received:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
subsidies
|
|
$
|
146,402
|
|
|
$
|
—
|
|
|
$
|
537,170
|
|
|
$
|
—
|
|
|
Earmarked
subsidies
|
|
|
48,305
|
|
|
|
—
|
|
|
|
92,212
|
|
|
|
—
|
|
|
Non-earmarked
subsidies
|
|
|
6,982
|
|
|
|
482,801
|
|
|
|
229,389
|
|
|
|
1,054,684
|
|
|
Total
|
|
$
|
201,689
|
|
|
$
|
482,801
|
|
|
$
|
858,771
|
|
|
$
|
1,054,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidies
recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
subsidies
|
|
$
|
146,402
|
|
|
$
|
—
|
|
|
$
|
537,170
|
|
|
$
|
—
|
|
|
Earmarked
subsidies
|
|
|
48,305
|
|
|
|
—
|
|
|
|
92,212
|
|
|
|
—
|
|
|
Non-earmarked
subsidies
|
|
|
6,982
|
|
|
|
482,801
|
|
|
|
229,389
|
|
|
|
1,054,684
|
|
|
Total
|
|
$
|
201,689
|
|
|
$
|
482,801
|
|
|
$
|
858,771
|
|
|
$
|
1,054,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
subsidies year ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
subsidies
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Earmarked
subsidies
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Non-earmarked
subsidies
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Subsidies
received and other income recognized are translated at the average exchange
rate. The beginning and ending balances are translated at the year-end exchange
rate.
12. SUBSEQUENT
EVENTS
On
October 15, 2009, the Company closed a registered offering of 4,000,000 shares
of common stock, and the sale of an additional 600,000 shares of common stock at
the public offering price of $13.25 per share pursuant to the underwriters’
over-allotment option, which was exercised in full by the underwriters prior to
the closing. The exercise of the over-allotment option brought the total
number of shares sold by the Company in the public offering to 4,600,000 shares
and the total gross proceeds to $60,950,000. The aggregate net proceeds received
by the Company totaled approximately $57.1 million, after deducting underwriting
discounts and offering expenses payable by the Company.
We evaluated the events occurring
between September 30, 2009 and November 6, 2009 when the financial statements
were available to be issued.
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
13. SEGMENT
REPORTING
The
Company operates in only one segment: meat production. The Company’s
fruit and vegetable operations, both financially and operationally, do not
represent a significant enough portion of the Company’s business to constitute a
separate segment. However, the Company’s product lines are divided
into two divisions: pork and pork products, and vegetables and
fruits.
The pork
and pork products division is involved primarily in the processing of live hogs
into fresh, frozen and processed pork products. The pork and pork products
division markets its products domestically to branded stores and to food
retailers, wholesalers, distributors, restaurants and foodservice
establishments, such as schools, hotel chains, healthcare facilities, the
military and other food processors, as well as in certain international markets
on a limited basis.
The
vegetables and fruits division is involved primarily in the processing of fresh
vegetables and fruits. The Company contracts with more than 100 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
operations ensures freshness from harvest to processing. The Company contracts
with those farms to grow more than 20 categories of vegetables and fruits,
including asparagus, sweet corn, broccoli, mushrooms, lima beans and
strawberries.
|
|
|
Sales
by Division
(U.S.
dollars in millions)
|
|
|
|
|
Three
Months
Ended
September 30
,
|
|
|
Nine
Months
Ended
September 30
,
|
|
|
|
|
2009
|
|
|
200
8
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Pork
and Pork Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilled
pork
|
|
$
|
107.9
|
|
|
$
|
86.1
|
|
|
$
|
277.6
|
|
|
$
|
213.0
|
|
|
Frozen
pork
|
|
|
60.6
|
|
|
|
51.9
|
|
|
|
159.6
|
|
|
|
141.0
|
|
|
Prepared
pork products
|
|
|
22.5
|
|
|
|
13.8
|
|
|
|
64.8
|
|
|
|
39.0
|
|
|
Vegetables
and Fruits
|
|
|
3.9
|
|
|
|
2.0
|
|
|
|
8.5
|
|
|
|
7.0
|
|
|
|
|
$
|
194.9
|
|
|
$
|
153.8
|
|
|
$
|
510.
5
|
|
|
$
|
400.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pork
products
|
|
$
|
167.9
|
|
|
$
|
132.4
|
|
|
$
|
441.6
|
|
|
$
|
343.1
|
|
|
Vegetables
and fruits
|
|
$
|
3.3
|
|
|
$
|
1.8
|
|
|
$
|
7.1
|
|
|
$
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pork
products
|
|
|
12.1
|
%
|
|
|
12.8
|
%
|
|
|
12.0
|
%
|
|
|
12.7
|
%
|
|
Vegetables
and fruits
|
|
|
15.4
|
%
|
|
|
10.0
|
%
|
|
|
16.5
|
%
|
|
|
14.3
|
%
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Disclosure
Regarding Forward-Looking Statements
The
statements contained in this Report with respect to our financial condition,
results of operations and business that are not historical facts are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in Section 21E of the Exchange Act. Forward-looking
statements can be identified by the use of forward-looking terminology, such as
“estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,”
“intends,” or the negative thereof or other variations thereon, or by
discussions of strategy that involve risks and uncertainties. Management wishes
to caution the reader of the forward-looking statements that any such statements
that are contained in this Report reflect our current beliefs with respect to
future events and involve known and unknown risks, uncertainties and other
factors, including, but not limited to, economic, competitive, regulatory,
technological, key employee, and general business factors affecting our
operations, markets, growth, services, products, licenses and other factors
discussed in our other filings with the Securities and Exchange Commission, and
that these statements are only estimates or predictions. No assurances can be
given regarding the achievement of future results, as actual results may differ
materially as a result of risks facing our company, and actual events may differ
from the assumptions underlying the statements that have been made regarding
anticipated events.
These forward-looking statements are
subject to numerous assumptions, risks and uncertainties tha
t may cause our actual results to be
materially different from any future results expressed or implied by us in those
statements. Some of these risks are described in “
Risk Factors”
in Item 1A of our Annual
Report on Form 10-K for the year ended December
3
1, 2008
,
as amended.
These
risk factors should be considered in connection with any subsequent written or
oral forward-looking statements that we or persons acting on our behalf may
issue. All written and oral forward looking statements made in connection with
this Report that are attributable to our company or persons acting on our behalf
are expressly qualified in their entirety by these cautionary statements. Given
these uncertainties, we caution investors not to unduly rely on our
forward-looking statements. We do not undertake any obligation to review or
confirm analysts’ expectations or estimates or to release publicly any revisions
to any forward-looking statements to reflect events or circumstances after the
date of this Report or to reflect the occurrence of unanticipated events.
Further, the information about our intentions contained in this Report is a
statement of our intention as of the date of this Report and is based upon,
among other things, the existing regulatory environment, industry conditions,
market conditions and prices, the economy in general and our assumptions as of
such date. We may change our intentions, at any time and without notice, based
upon any changes in such factors, in our assumptions or otherwise.
Overview
We are
principally engaged in the meat and food processing and distribution business in
the PRC. Currently, we have 11 processing plants located in Henan, Jilin and
Sichuan Provinces and in Tianjin City in the PRC. Our total production capacity
for chilled pork and frozen pork is 1,374.3 metric tons per day, based on an
eight-hour working day, or approximately 494,760 metric tons on an annual basis.
We also have production capacity for prepared meats of 150 metric tons per
eight-hour day, or approximately 54,000 metric tons on an annual basis, and for
fruits and vegetables of 83.3 metric tons per eight-hour day, or approximately
30,000 metric tons on an annual basis. We use state-of-the-art equipment in all
of our slaughterhouses and processing facilities.
In April
2009, we began construction of a new pork production facility located in the
Jinghai Economic Technical Development Area in Tianjin City that is expected to
increase our total annual pork production capacity by 136,000 metric
tons. The facility has been designed to process approximately
100,000 metric tons of chilled and frozen pork products annually, of which 70%
will be dedicated to chilled pork and 30% to frozen pork. The facility also will
include annual production capacity of approximately 36,000 metric tons of
prepared meat products. Construction of this facility is expected to cost
approximately $62.0 million. Upon completion, this facility will be
equipped mostly with state-of-the-art, imported equipment and
machinery.
The
construction of the new Tianjin facility also will include a new warehouse and
distribution center and a research and development center, which should improve
our product portfolio, support our cold-chain logistics and help us to
effectively accommodate the newly-added production capacity by facilitating
efficient distribution.
The
production lines for chilled and frozen pork products at the new Tianjin
facility are expected to come on line at the end of the first quarter of 2010
and to achieve their target utilization rate at the end of the third quarter of
2010. The prepared meat production line and the new warehouse and
distribution center at this facility are expected to come on line in the third
quarter of 2010 and to achieve their target utilization rate at the end of the
fourth quarter of 2010.
Without
causing any interruption to our current marketing and distribution program, we
intend to terminate our lease at our existing Tianjin City facility after
production at the new facility begins. With the addition of the new facility and
the closure of the existing facility in Tianjin City, our annual chilled and
frozen pork production capacity will reach 541,760 metric tons from the current
494,760 metric tons.
We have
also begun constructing a new prepared meat production facility in our
industrial park in Changge City, Henan Province, which is expected to cost
approximately $21.0 million. The facility will increase annual prepared meat
production capacity by approximately 36,000 metric tons. This facility will be
equipped with advanced equipment and machinery imported from top-tier
international manufacturers and will produce quick-freeze sausages and other
prepared meat products catering to varying consumer tastes.
The
construction of this facility is expected to be completed and commence
production by the end of the fourth quarter of 2009, and the new facility is
expected to achieve its target utilization rate by the end of the second quarter
of 2010. With the additional prepared meat production capacity from the new
Tianjin and Changge City facilities, our annual prepared meat products capacity
is expected to increase by 133% to approximately 126,000 metric tons from the
current 54,000 metric tons.
Our
products are sold under the “Zhongpin” brand name. At September 30, 2009, our
customers included 27 international or domestic fast food companies in the PRC,
47 processing factories and 1,683 school cafeterias, factory canteens, army
posts and national departments. As of that date, we also sold
directly to 3,178 retail outlets, including supermarkets, within the
PRC.
Since
2001, we have been designated by a coalition of eight government ministries, led
by the Ministry of Agriculture, as one of the “leading agricultural industrial
enterprises” in the PRC.
We have
established distribution networks in 20 provinces and four cities with special
legal status in the north, east, south and mid-south regions of the PRC, and
also have formed strategic partnerships with leading supermarket chains and the
food industry in the PRC. In addition, we export products to the European Union
and Southeast Asia. Over the past five fiscal years, we achieved a
compound annual growth rate of 79% in terms of revenues and 84% in terms of net
profits.
As of
September 30, 2009, we had 6,229 employees, of whom 4,476 were in operations,
1,264 were in sales, 112 were in research and development and 377 were in
administration.
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 input of independent third-party specialists,
and various other assumptions that we believe 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:
Revenue
Recognition.
Revenues generated from the sale of various meat
products and vegetables and fruits are recognized when these products are
delivered to customers in accordance with previously-agreed-upon pricing and
delivery arrangements, and the collectability of these sales is reasonably
assured. Since the products sold by us are primarily perishable and
frozen food products, the right of return is only for a few days and has been
determined to be insignificant by our management. Accordingly, no
provision has been made for returnable goods. Revenues presented on
our consolidated income statements are net of sales taxes.
Accounts
Receivable.
During the normal course of business, our policy is to
ask larger customers to make deposits in reasonable and meaningful amounts on a
case-by-case basis. For certain newly-developed customers, we may
extend unsecured credit.
We
regularly evaluate and monitor the creditworthiness of each of our customers in
accordance with the prevailing practice in the meat industry and based on
general economic conditions in the PRC. If any particular customer appears
to be delaying or deferring payments for our products, we generally request a
deposit from, or an increase in the deposits of, such customer. Such
deposits are typically applied against the outstanding accounts receivable of
the applicable customer during the year. We did not have a bad debt
allowance provided against any specific customer at September 30,
2009.
We
maintain a general policy of providing an allowance for doubtful accounts in an
amount equal to the aggregate amount of those accounts that are not collected
within one year plus an amount equal to 5% of the aggregate amount of accounts
receivable less than one year old. After all attempts to collect a
receivable have failed, the receivable is written off against the
allowance.
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.
Property, Plant
and Equipment.
Property, plant and equipment are recorded at
cost and are stated net of accumulated depreciation. Depreciation
expense is determined using the straight-line method over the estimated useful
lives of the assets as follows:
|
|
|
Estimated Life
|
|
Plants
and buildings
|
|
5-30
years
|
|
Machinery
and equipment
|
|
5-20
years
|
|
Office
furniture and equipment
|
|
3-5
years
|
|
Vehicles
|
|
5
years
|
Maintenance
and repairs are charged directly to expense as incurred, whereas betterments and
renewals are generally capitalized in their respective property
accounts. When an asset is retired or otherwise disposed of, the cost
and applicable accumulated depreciation are removed and the resulting gain or
loss is recognized and reflected as a line item before operating income
(loss).
Results of
Operations
During
2009, we intend to continue to focus on the implementation of our strategic plan
to continue the growth we have experienced in the last five years. A
new chilled and frozen pork plant in eastern Henan Province with an annual
capacity of approximately 80,000 metric tons was put into operation in January
2009 and a new fruit and vegetable facility in Changge City with an annual
production capacity of 30,000 metric tons was put into operation in April
2009. We upgraded our current facility and added an annual production
capacity of 22,000 metric tons for chilled and frozen pork in August 2009. Over
the next 12 months, we expect to continue to expand our distribution channel and
develop new markets. Through our aggressive marketing campaign, we also expect
to increase our brand awareness and customer loyalty. We also intend to further
streamline our supply chain management to build a unified, safe and efficient
cold-chain logistics system. In addition, working with China Agriculture
University, we have established the Henan Province Prepared Meat Products
Technology Research Center, which has been certified by the Technology Bureau of
Henan Province. We expect the establishment of this research center to increase
our research and development capability. We also have invested in training and
human resources development so that we will be able to sustain rapid and healthy
growth while maintaining a satisfactory profit margin.
In late
April 2009, the A(H1N1) flu was reported in Mexico, the United States, Europe
and other countries. In June 2009, the A(H1N1) flu was reported in
the PRC, which adversely affected the pork industry in the PRC, as it has in
other developed countries throughout the world. Pork sales significantly
declined in the PRC due to consumer fear of contracting the disease through pork
consumption. The PRC government has taken steps to ease that fear by
educating consumers that eating pork will not cause swine flu and by renaming
the swine flu virus “A(H1N1) flu” in an effort to protect the hog breeding and
pork industries. With these efforts, the consumption of pork in the
PRC recovered approximately two weeks after the initial reports of A(H1N1) flu
in the PRC.
Pork
prices began to be supported in June 2009 by the PRC government, which bought
frozen pork to add to the country’s national pork reserves. The government built
up the national pork reserves to stabilize the price of hogs and to protect the
interests of hog breeding farmers. The government’s purchasing policy is based
on the relationship of the price of hogs to the price of corn (the
principal hog feed). The government authorized certain qualified enterprises,
including our Company, to acquire hogs and to slaughter, process and stock them
as frozen pork. That purchasing has tended to support higher hog and pork
prices, so that the market price of hogs was above the breakeven point for
farmers. During the third quarter of 2009, hog and pork prices
increased about 20% by the middle of the quarter, then remained stable through
the end of the quarter.
For the
fourth quarter 2009, we expect steady growth in the sales of our pork and pork
products. Two main factors will influence pork price. First, we assume the price
of corn will increase. Since corn is the primary feed for hogs, a corn price
increase will tend to cause hog prices to increase. Second, the supply of hogs
ready for market in the fourth quarter is relatively large, so that factor will
tend to cause the price of hogs to decrease. Those two factors should tend to
neutralize each other and result in relatively stable prices for hogs and for
pork in the fourth quarter 2009.
Co
mparison of Three Months Ended
September
30
, 2009 and 2008
Revenue
. Total revenue
increased from $153.8 million for the three months ended September 30, 2008 to
$194.9 million for the three months ended September 30, 2009, which represented
an increase of $41.1 million, or approximately 27%. The increase in revenues was
primarily due to the higher sales volume of our pork and pork products, which
was partially offset by a decrease in the prices of our pork and pork
products. The following table presents certain information regarding
our sales by product division for the three months ended September 30, 2009 and
2008.
|
|
|
Sales
by Division
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
,
2009
|
|
|
Three Months Ended
September 30
,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metric
Tons
|
|
|
Sales
Revenues
(in millions)
|
|
|
Average
Price/
Metric
Ton
|
|
|
Metric
Tons
|
|
|
Sales
Revenues
(in millions)
|
|
|
Average
Price/
Metric
Ton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pork
and Pork Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilled
pork
|
|
|
58,182
|
|
|
$
|
107.9
|
|
|
$
|
1,855
|
|
|
|
38,380
|
|
|
$
|
86.1
|
|
|
$
|
2,243
|
|
|
Frozen
pork
|
|
|
34,967
|
|
|
|
60.6
|
|
|
|
1,733
|
|
|
|
23,043
|
|
|
|
51.9
|
|
|
|
2,252
|
|
|
Prepared
pork products
|
|
|
10,086
|
|
|
|
22.5
|
|
|
|
2,231
|
|
|
|
6,258
|
|
|
|
13.8
|
|
|
|
2,205
|
|
|
Vegetables
and Fruits
|
|
|
5,735
|
|
|
|
3.9
|
|
|
|
680
|
|
|
|
3,449
|
|
|
|
2.0
|
|
|
|
580
|
|
|
Total
|
|
|
108,970
|
|
|
$
|
1
94.9
|
|
|
$
|
1,
789
|
|
|
|
71,130
|
|
|
$
|
153.8
|
|
|
$
|
2,
162
|
|
The pork
market in China is highly fragmented and in the markets in which we
sell our products no single supplier has a significant impact on
the market price of pork or related pork products. We have been pricing our
products based on the value of our brand, the quality of our products, hog
prices in the applicable period and pricing trends for similar products in the
regions in which we operate.
In the
third quarter of 2009 we increased our sales of chilled pork products by
approximately $21.8 million over the amount of our sales of such products
in the third quarter of 2008. As shown in the above table, our average price
during the third quarter of 2009 was approximately $1,855 per metric ton for
chilled pork compared with our average price during the third quarter of 2008 of
$2,243 per metric ton for chilled pork. Assuming the average price for chilled
pork during the three months ended September 30, 2009 was the same as the
average price during the three months ended September 30, 2008, the impact from
the increase in metric tons of chilled pork sold was $44.4 million. Assuming the
number of metric tons sold in the third quarter of 2009 was the same as the
number of metric tons sold in the third quarter of 2008, the impact from the
decrease in prices of our chilled pork products was negative $14.9 million.
The remaining negative $7.7 million of such increase
resulted from the combination of changes in prices and volume of chilled
pork products sold.
In the
third quarter of 2009 we increased our sales of frozen pork products by
approximately $8.7 million over the amount of our sales of such products in the
third quarter of 2008. Our average price during the third quarter of 2009 was
approximately $1,733 per metric ton for frozen pork compared with our average
price during the third quarter of 2008 of $2,252 per metric ton for frozen pork.
Assuming the average price for frozen pork during the three months ended
September 30, 2009 was the same as the average price during the three months
ended September 30, 2008, the impact from the increase in metric tons of
frozen pork sold was $26.9 million. Assuming the number of metric tons sold in
the third quarter of 2009 was the same as the number of metric tons sold in the
third quarter of 2008, the impact from the decrease in prices of our frozen pork
products was negative $12.0 million. The remaining negative $6.2 million of
such increase resulted from the combination of changes in prices and volume
of frozen pork products sold.
In the
third quarter of 2009 we increased our sales of prepared pork products by
approximately $8.7 million over the amount of our sales of such products in the
third quarter of 2008. Our average price during the third quarter of 2009 was
approximately $2,231 per metric ton for prepared pork products compared with our
average price during the third quarter of 2008 of $2,205 per metric ton for
prepared pork products. Assuming the average price for prepared pork products
during the three months ended September 30, 2009 was the same as the average
price during the three months ended September 30, 2008, the impact from the
increase in metric tons of prepared pork products sold was $8.4 million.
Assuming the number of metric tons sold in the third quarter of 2009 was the
same as the number of metric tons sold in the third quarter of 2008, the impact
from the increase in prices of our prepared pork products was $0.2 million.
The remaining negative $0.1 million of such increase resulted from the
combination of changes in prices and volume of prepared pork products
sold.
The sales
of our products are closely related to the particular regional markets in which
our distribution channels are located. Therefore, the increase in metric tons
sold for the third quarter of 2009 was partly attributable to our effort to
expand our retail distribution channels. The following table sets forth the
changes in our retail distribution channels:
|
|
|
Numbers
of Stores and Cities Generating Sales Volume
(unaudited)
|
|
|
|
|
|
|
|
|
|
September 30
,
|
|
|
Net
|
|
|
Percentage
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Showcase
stores
|
|
|
141
|
|
|
|
123
|
|
|
|
18
|
|
|
|
15
|
%
|
|
Branded
stores
|
|
|
996
|
|
|
|
944
|
|
|
|
52
|
|
|
|
6
|
%
|
|
Supermarket
counters
|
|
|
2,041
|
|
|
|
1,928
|
|
|
|
113
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First-tier
cities
|
|
|
29
|
|
|
|
29
|
|
|
|
0
|
|
|
|
0
|
%
|
|
Second-tier
cities
|
|
|
117
|
|
|
|
100
|
|
|
|
17
|
|
|
|
17
|
%
|
|
Third-tier
cities
|
|
|
368
|
|
|
|
311
|
|
|
|
57
|
|
|
|
18
|
%
|
The
expansion in our distribution channels and geographical coverage has been a
significant factor in the increase in our sales volume. The following table sets
forth our revenues by distribution channel for the third quarter of 2009 and
2008, respectively.
|
|
|
Sales
by Distribution Channel
(Dollars
in millions)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Net
|
|
|
Percentage
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
Change
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
channels
|
|
$
|
76.7
|
|
|
$
|
65.6
|
|
|
$
|
11.1
|
|
|
|
17
|
%
|
|
Wholesalers
and distributors
|
|
|
60.2
|
|
|
|
45.6
|
|
|
|
14.6
|
|
|
|
32
|
%
|
|
Restaurants
and food service
|
|
|
55.6
|
|
|
|
41.2
|
|
|
|
14.4
|
|
|
|
35
|
%
|
|
Export
|
|
|
2.4
|
|
|
|
1.4
|
|
|
|
1.0
|
|
|
|
71
|
%
|
|
Total
|
|
$
|
1
94.9
|
|
|
$
|
1
53.8
|
|
|
$
|
41.1
|
|
|
|
27
|
%
|
The
increase in sales to different distribution channels was mainly due to the
following factors: (i) our production capacity has increased since our Jilin,
Tianjin and Yongcheng production facilities commenced production in late 2008 or
early 2009; (ii) we have built up our brand image and recognition through our
advertising, display promotion and sales campaign; (iii) we have increased the
number of stores and other channels through which we sell our products; and (iv)
we believe consumers are placing increased importance on food safety and
are willing to pay higher prices for safe food products. As presented in
the table above, our most significant revenue increases were generated from our
restaurants and noncommercial customers and our food services
distributors. These two channels are higher volume channels and we
increased our sales efforts in these channels.
Costs of Sales.
Our cost of
sales increased from $134.2 million for the three months ended September 30,
2008 to $171.1 million for the three months ended September 30, 2009, which
represented an increase of $36.9 million, or approximately 27%. Our costs of
sales primarily include our costs of raw materials, labor and overhead. Of our
total cost of sales, our cost of raw materials typically accounts for
approximately 96% to 97%, our overhead typically accounts for 2% to 2.5% and our
labor costs typically accounts for 1% to 1.3%, with slight variations from
period to period. All of our meat products are derived from the same raw
materials, which are live hogs. Our vegetable and fruit products are purchased
from farmers located close to our processing facility in Changge City, Henan
Province. As a result, the purchasing costs of live hogs and vegetables and
fruits represent substantially all of our costs of raw materials.
|
|
|
Cost of Sales by Division
(unaudited)
|
|
|
|
|
|
|
|
|
|
Three
Months
Ended
September
30
,
2009
|
|
|
Three
Months
Ended
September
30
,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metric
Tons
|
|
|
Cost
of
Sales
(in
millions)
|
|
|
Average
Price/
Metric
Ton
|
|
|
Metric
Tons
|
|
|
Cost
of
Sales
(in
millions)
|
|
|
Average
Price/
Metric
Ton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pork
and Pork Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilled
pork
|
|
|
58,182
|
|
|
$
|
95.6
|
|
|
$
|
1,643
|
|
|
|
38,380
|
|
|
$
|
75.3
|
|
|
$
|
1,962
|
|
|
Frozen
pork
|
|
|
34,967
|
|
|
|
55.1
|
|
|
|
1,576
|
|
|
|
23,043
|
|
|
|
46.6
|
|
|
|
2,022
|
|
|
Prepared
pork products
|
|
|
10,086
|
|
|
|
17.1
|
|
|
|
1,695
|
|
|
|
6,258
|
|
|
|
10.5
|
|
|
|
1,678
|
|
|
Vegetables
and Fruits
|
|
|
5,735
|
|
|
|
3.3
|
|
|
|
575
|
|
|
|
3,449
|
|
|
|
1.8
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
108,970
|
|
|
$
|
171.1
|
|
|
|
1,570
|
|
|
|
71,130
|
|
|
$
|
134.2
|
|
|
|
1,887
|
|
Our gross
profit margin (gross profit divided by sales revenue) decreased from 12.7% for
the three months ended September 30, 2008 to 12.2% for the three months ended
September 30, 2009. The decrease in our gross margin during the third
quarter of 2009 was primarily due to (i) the increase in our labor costs as a
result of implementing the new labor law in the PRC, (ii) the increase in our
depreciation expense resulting from the newly-built production facilities that
were put into service over the past year, and (iii) our strategic decision to
take steps to increase our market share and utilization rate. As a
result, our gross profit margin was lower than the level we would expect to
achieve when we fully integrate our new production facilities and open new
regional markets for our products. We intend to adjust our production
levels and product mix and the percentages of our sales through our different
sales channels in the coming quarters to increase our gross profit
margin.
General and Administrative
Expenses.
General and administrative expenses amounted to $4.5 million
for each of the three-month periods ended September 30, 2008
and 2009. As a percentage of revenues, general and
administrative expenses decreased from 2.9% for the three months ended September
30, 2008 to 2.3% for the three months ended September 30, 2009.
The changes
in general and administrative expenses during the three months ended September
30, 2009 compared with the prior-year period were primarily the result of a $0.4
million decrease in advertising expenses and a $0.1 million decrease in training
fees, which was partly offset by a $0.2 million increase in stock option
amortization expense and $0.2 million increase in intangible assets amortization
expenses.
Selling
Expenses.
Selling expenses increased from $3.0 million for the three
months ended September 30, 2008 to $3.8 million for the three months ended
September 30, 2009, which represented an increase of $0.8 million, or
approximately 27%. The increase in selling expenses was primarily the
result of our increased sales of pork and pork products and was primarily due to
a $0.4 million increase in promotion fees and a $0.2 million increase in
salaries, both in support of successful efforts to achieve higher sales in pork
and pork products. As a percentage of revenues, selling expenses
were 2.0% for the three months ended September 30, 2008 compared with 1.9%
for the three months ended September 30, 2009.
Interest Expense
(net of interest income)
.
Interest expense net of
interest income remained the same at $1.7 million for the three months ended
September 30, 2008 and 2009. The impact on interest expense of our increase in
loan balances was offset by the impact from a decrease in interest rates and an
increase in government subsidies.
Other Income and Government
Subsidies.
Other income and government subsidies decreased
from $0.5 million for the three months ended September 30, 2008 to $0.1 million
for the three months ended September 30, 2009. This decrease was
primarily the result of a decrease in government subsidies. The
changes in government subsidies are discussed in Note 11 of Notes to
Consolidated Financial Statements.
Income Taxes.
The effective
tax rate in the PRC on income generated from the sale of prepared products is
25%. There is no income tax on income generated from the sale of raw
products, including raw meat products or raw fruits and vegetable products. The
increase of $0.4 million in the provision for income taxes for the three months
ended September 30, 2009 over the three months ended September 30, 2008 was due
to higher revenues from prepared pork products.
Comparison of
Nine
Months Ended
September 30
, 2009 and 2008
Reven
ue
. Total revenue increased
from $400.0 million for the nine months ended September 30, 2008 to $510.5
million for the nine months ended September 30, 2009, which represented an
increase of $110.5 million, or approximately 28%. The increase in revenues was
primarily due to increases in the sales volume of our pork and pork products,
which was partly offset by a decrease in the prices of our pork and pork
products. The following table presents certain information regarding
our sales by product division for the nine months ended September 30, 2009 and
2008.
|
|
|
Sales by Division
(unaudited)
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
September 30
, 2009
|
|
|
Nine
Months Ended
September 30
, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metric
Tons
|
|
|
Sales
Revenues
(in millions)
|
|
|
Average
Price/
Metric
Ton
|
|
|
Metric
Tons
|
|
|
Sales
Revenues
(in millions)
|
|
|
Average
Price/
Metric
Ton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pork
and Pork Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilled
pork
|
|
|
153,767
|
|
|
$
|
277.6
|
|
|
$
|
1,805
|
|
|
|
91,934
|
|
|
$
|
213.0
|
|
|
$
|
2,317
|
|
|
Frozen
pork
|
|
|
95,274
|
|
|
|
159.6
|
|
|
|
1,675
|
|
|
|
62,411
|
|
|
|
141.0
|
|
|
|
2,259
|
|
|
Prepared
pork products
|
|
|
29,806
|
|
|
|
64.8
|
|
|
|
2,174
|
|
|
|
17,646
|
|
|
|
39.0
|
|
|
|
2,210
|
|
|
Vegetables
and Fruits
|
|
|
11,111
|
|
|
|
8.5
|
|
|
|
765
|
|
|
|
10,079
|
|
|
|
7.0
|
|
|
|
695
|
|
|
Total
|
|
|
289,958
|
|
|
$
|
510.5
|
|
|
$
|
1,761
|
|
|
|
182,070
|
|
|
$
|
400.0
|
|
|
$
|
2,197
|
|
The pork
market in China is highly fragmented and in the markets in which we
sell our products no single supplier has a significant impact on
the market price of pork or related pork products. We have been pricing our
products based on the value of our brand, the quality of our products, hog
prices in the applicable period and pricing trends for similar products in the
regions in which we operate.
For the
nine months ended September 30, 2009, we increased our sales of chilled pork
products by approximately $64.6 million over the amount of our sales of
such products for the nine months ended September 30, 2008. As shown in the
above table, our average price during the first three quarters of 2009 was
approximately $1,805 per metric ton for chilled pork compared with our average
price during the same period of 2008 of $2,317 per metric ton for chilled pork.
Assuming the average price for chilled pork during the nine months ended
September 30, 2009 was the same as the average price during the nine months
ended September 30, 2008, the impact from the increase in metric tons of chilled
pork sold was $143.3 million. Assuming the number of metric tons sold in the
first three quarters of 2009 was the same as the number of metric tons sold in
the same period of 2008, the impact from the decrease in prices of our chilled
pork products was negative $47.1 million. The remaining negative
$31.6 million of such increase resulted from the combination of changes in
prices and volume of chilled pork products sold.
In the
first three quarters of 2009, we increased our sales of frozen pork products by
approximately $18.6 million over the amount of our sales of such products in the
same period of 2008. Our average price during the first three quarters of 2009
was approximately $1,675 per metric ton for frozen pork compared with our
average price during the same period of 2008 of $2,259 per metric ton for frozen
pork. Assuming the average price for frozen pork during the nine months ended
September 30, 2009 was the same as the average price during the nine months
ended September 30, 2008, the impact from the increase in metric tons of frozen
pork sold was $74.2 million. Assuming the number of metric tons sold in the
first three quarters of 2009 was the same as the number of metric tons sold in
the same period of 2008, the impact from the decrease in prices of our frozen
pork products was negative $36.4 million. The remaining negative $19.2
million of such increase resulted from the combination of changes in prices
and volume of frozen pork products sold.
In the
first three quarters of 2009, we increased our sales of prepared pork products
by approximately $25.8 million over the amount of our sales of such products in
the same period of 2008. Our average price during the first three quarters of
2009 of approximately $2,174 per metric ton for prepared pork products compared
with our average price during the same period of 2008 of $2,210 per metric ton
for prepared pork products. Assuming the average price for prepared pork
products during the nine months ended September 30, 2009 was the same as the
average price during the nine months ended September 30, 2008, the impact from
the increase in metric tons of prepared pork products sold was $26.9 million.
Assuming the number of metric tons sold in the first three quarters of 2009 was
the same as the number of metric tons sold in the same period of 2008, the
impact from the decrease in prices of our prepared pork products was negative
$0.6 million. The remaining negative $0.5 million of such increase
resulted from the combination of changes in prices and volume of prepared
pork products sold.
The
following table shows our revenues by distribution channel for the first three
quarters of 2009 and 2008, respectively.
|
|
|
Sales
by Distribution Channel
(Dollars
in millions)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
|
Net
|
|
|
Percentage
|
|
|
|
|
September
30,
|
|
|
Change
|
|
|
of Change
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
channels
|
|
$
|
216.1
|
|
|
$
|
166.0
|
|
|
$
|
50.1
|
|
|
|
30
|
%
|
|
Wholesalers
and distributors
|
|
|
152.3
|
|
|
|
113.0
|
|
|
|
39.3
|
|
|
|
35
|
%
|
|
Restaurants
and food service
|
|
|
137.6
|
|
|
|
116.0
|
|
|
|
21.6
|
|
|
|
19
|
%
|
|
Export
|
|
|
4.5
|
|
|
|
5.0
|
|
|
|
(
0
.
5
|
)
|
|
|
(10
|
)%
|
|
Total
|
|
$
|
510.5
|
|
|
$
|
400.0
|
|
|
$
|
110.5
|
|
|
|
28
|
%
|
The
increase in sales to different distribution channels was mainly due to the
following factors: (i) our production capacity has increased since our Jilin,
Tianjin and Yongcheng production facilities commenced production in late 2008 or
early 2009; (ii) we have built up our brand image and recognition through our
advertising, display promotion and sales campaign; (iii) we have increased the
number of stores and other channels through which we sell our products; and (iv)
we believe consumers are placing increased importance on food safety and are
willing to pay higher prices for safe food products. As discussed above,
our most significant revenue increases were generated from our wholesalers and
distributors and from our retail channels, where we receive our highest gross
profit margin.
During
the nine months ended September 30, 2009, revenues from export sales decreased
to $4.5 million, which represented a decline of $0.5 million, or approximately
10%, as compared with the nine months ended September 30, 2008. The decrease in
export sales was primarily due to the reduction of our export sales efforts
during the 2009 period because we could achieve higher gross profit margins
during that period by selling our pork products domestically in the
PRC.
Costs of Sales.
Our cost of
sales increased from $349.1 million for the nine months ended September 30, 2008
to $448.7 million for the nine months ended September 30, 2009, which
represented an increase of $99.6 million, or approximately 29%. Our costs of
sales primarily include our costs of raw materials, labor costs and overhead. Of
our total cost of sales, our cost of raw materials typically accounts for
approximately 96% to 97%, our overhead typically accounts for 2% to 2.5% and our
labor costs typically accounts for 1% to 1.3%, with slight variations from
period to period. All of our meat products are derived from the same raw
materials, which are live hogs. Our vegetable and fruit products are purchased
from farmers located close to our processing facility in Changge City, Henan
Province. As a result, the purchasing costs of live hogs and vegetables and
fruits represent substantially all of our costs of raw materials.
|
|
|
Cost of Sales by Division
(unaudited)
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended
September 30
, 2009
|
|
|
Nine
Months Ended
September 30
, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metric
Tons
|
|
|
Cost of
Sales
(in millions)
|
|
|
Average
Price/
Metric Ton
|
|
|
Metric
Tons
|
|
|
Cost of
Sales
(in millions)
|
|
|
Average
Price/
Metric
Ton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pork
and Pork Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilled
pork
|
|
|
153,767
|
|
|
$
|
246.8
|
|
|
$
|
1,605
|
|
|
|
91,934
|
|
|
$
|
186.0
|
|
|
$
|
2,023
|
|
|
Frozen
pork
|
|
|
95,274
|
|
|
|
146.2
|
|
|
|
1,535
|
|
|
|
62,411
|
|
|
|
126.5
|
|
|
|
2,027
|
|
|
Prepared
pork products
|
|
|
29,806
|
|
|
|
48.6
|
|
|
|
1,631
|
|
|
|
17,646
|
|
|
|
30.6
|
|
|
|
1,734
|
|
|
Vegetables
and Fruits
|
|
|
11,111
|
|
|
|
7.1
|
|
|
|
639
|
|
|
|
10,079
|
|
|
|
6.0
|
|
|
|
595
|
|
|
Total
|
|
|
289,958
|
|
|
$
|
448.7
|
|
|
|
1,547
|
|
|
|
182,070
|
|
|
$
|
349.1
|
|
|
|
1,917
|
|
Our gross
profit margin (gross profit divided by sales revenue) decreased from 12.7% for
the nine months ended September 30, 2008 to 12.2% for the nine months ended
September 30, 2009. The slight decrease in our gross margin during
the first three quarters of 2009 was primarily due to (i) the increase in labor
costs as a result of implementing the new labor law in the PRC, (ii) the
increase in our depreciation expense resulting from the newly-built production
facilities that were put into service over the past year, and (iii) our
strategic decision to take steps to increase our market share and utilization
rate. As a result, our gross profit margin was lower than the level
we would expect to achieve when we fully integrate our new production facilities
and open new regional markets for our products. We intend to adjust
our production levels and product mix and the percentages of our sales through
our different sales channels in the coming quarters to increase our gross
profit margin.
General and Administrative
Expenses.
General and administrative expenses decreased from $13.9
million for the nine months ended September 30, 2008 to $13.3 million for
the nine months ended September 30, 2009, which represented a decrease of $0.6
million, or approximately 4%. As a percentage of revenues, general
and administrative expenses decreased from 3.5% for the nine months ended
September 30, 2008 to 2.6% for the nine months ended September 30,
2009.
The
decrease in general and administrative expenses for the nine months ended
September 30, 2009 was primarily the result of a $1.6 million decrease in
advertising expenses, a $0.5 million decrease in training expenses and a
$1.0 million decrease in the allowance for doubtful accounts. These decreases
were partly offset by a $0.9 million increase in salary expense due to the
expansion of our business, which required the hiring of more employees, and
certain salary increases that were implemented in 2008 to bring our compensation
levels more in line with industry and regional standards.
Selling
Expenses.
Selling expenses increased from $7.3 million for the nine
months ended September 30, 2008 to $9.3 million for the nine months ended
September 30, 2009, which represented an increase of $2.0 million, or
approximately 27%. The increase in selling expenses was primarily due to
the increase in sales of pork and pork products, the corresponding increases of
$0.8 million in promotional fees and of $0.8 million in salaries. As a
percentage of revenues, selling expenses remained the same at 2.1% for the
nine months ended September 30, 2008 and 2009.
Interest Expense
(net of interest income)
.
Interest expense net of
interest income increased from $2.5 million for the nine months ended September
30, 2008 to $4.5 million for the nine months ended September 30, 2009, which
represented an increase of $2.0 million, or approximately 80%. The increase in
interest expense was primarily the result of a $27.3 million increase in
short-term bank loans and a $15.9 million increase in long-term bank
loans.
Other Income and Government
Subsidies.
Other income and government subsidies decreased from $1.0
million for the nine months ended September 30, 2008 to $0.6 million for the
nine months ended September 30, 2009, which was primarily due to lower
government subsidies we received in 2009.
Gain on dispos
al of a
subsidiary.
On June
30, 2009, an unaffiliated company purchased the equity of our former subsidiary,
Henan Zhongpin Industry Company Limited, for RMB8.4 million ($1.2 million),
which resulted in a gain of approximately $0.7 million.
Income Taxes.
The effective
tax rate in the PRC on income generated from the sale of prepared products is
25% 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 $1.0 million in the provision for income taxes for the nine months
ended September 30, 2009 over the nine months ended September 30, 2008 resulted
from the increase in revenue from prepared pork products.
Segment
Information
Under
generally accepted accounting principles in the United States, we operate in
only one segment: meat production. Our fruit and vegetable
operations, both financially and operationally, do not represent a significant
enough portion of our business to constitute a separate
segment. However, our product lines have been divided into two
divisions: pork and pork products, and vegetables and fruits.
Our pork
and pork products division is involved primarily in the processing of live
market hogs into fresh, frozen and processed pork products. Our pork and pork
products division 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 division is involved primarily in the processing of fresh
vegetables and fruits. We contract with more than 100 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.
The
following tables set forth our sales volume and the production volume in metric
tons by product division for the three-month and nine-month periods ended
September 30, 2009 and 2008.
|
|
|
Sales
by Division
(in
metric tons)
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Pork
and Pork Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilled
pork
|
|
|
58,182
|
|
|
|
38,380
|
|
|
|
153,767
|
|
|
|
91,934
|
|
|
Frozen
pork
|
|
|
34,967
|
|
|
|
23,043
|
|
|
|
95,274
|
|
|
|
62,412
|
|
|
Prepared
pork products
|
|
|
10,086
|
|
|
|
6,258
|
|
|
|
29,806
|
|
|
|
17,647
|
|
|
Vegetable
and Fruits
|
|
|
5,735
|
|
|
|
3,449
|
|
|
|
11,111
|
|
|
|
10,078
|
|
|
Total
|
|
|
108,970
|
|
|
|
71,130
|
|
|
|
289,958
|
|
|
|
182,071
|
|
|
|
|
Production
by Division
(in
metric tons)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30
,
|
|
|
Nine
Months
Ended
September 30
,
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Pork
and Pork Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilled
pork
|
|
|
57,840
|
|
|
|
37,936
|
|
|
|
153,678
|
|
|
|
91,734
|
|
|
Frozen
pork
|
|
|
36,793
|
|
|
|
22,761
|
|
|
|
107,038
|
|
|
|
63,920
|
|
|
Prepared
pork products
|
|
|
9,654
|
|
|
|
6,187
|
|
|
|
31,026
|
|
|
|
17,668
|
|
|
Vegetable
and Fruits
|
|
|
6
,
63
7
|
|
|
|
3,362
|
|
|
|
12,143
|
|
|
|
10,239
|
|
|
Total
|
|
|
110
,
92
4
|
|
|
|
70,246
|
|
|
|
303,885
|
|
|
|
183,561
|
|
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 information with respect to the number of products we
offered, the 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 at September 30,
2009 and December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
December 31,
|
|
|
|
|
September 30
,
2009
|
|
|
2008
|
|
|
200
7
|
|
|
200
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of products
|
|
|
329
|
|
|
|
314
|
|
|
|
270
|
|
|
|
229
|
|
|
Number
of retail stores
|
|
|
3,178
|
|
|
|
3,061
|
|
|
|
2,939
|
|
|
|
2,721
|
|
|
Expansion
of Market Coverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of provinces
|
|
|
24
|
|
|
|
24
|
|
|
|
24
|
|
|
|
24
|
|
|
Number
of first-tier cities
|
|
|
29
|
|
|
|
29
|
|
|
|
29
|
|
|
|
29
|
|
|
Number
of second-tier cities
|
|
|
117
|
|
|
|
106
|
|
|
|
93
|
|
|
|
75
|
|
|
Number
of third-tier cities
|
|
|
368
|
|
|
|
324
|
|
|
|
287
|
|
|
|
226
|
|
Liquidity
and Capital Resources
At
September 30, 2009 and December 31, 2008, we had cash and cash equivalents of
$26.8 million and $41.9 million, respectively. At September 30, 2009, we had
working capital of approximately negative $25.5 million. Considering
our available lines of credit, which amounted to approximately $213.5 million at
September 30, 2009, we do not anticipate any cash shortage in the next
twelve months. In addition, on October 15, 2009, we completed a
registered offering of our common stock and received net proceeds of
approximately $57.1 million, which enables us to pay off short-term debt as
needed.
We have
established and implemented corporate policies to manage our cash flows
generated by our operating activities. We have established strict
credit policies to manage the credit we give to our customers, and we give
different credit terms to different types of customers in different sales
channels. For supermarket customers, the credit terms are generally
two to four weeks. For showcase stores and branded stores, the credit
terms are generally cash sales within one week. For food
distributors, the credit terms are generally two weeks. For
restaurants and non-commercial customers, the credit terms are from one week to
one month. These credit terms are subject to negotiation if requested
by our customers, but any adjustment must be approved by designated
management. In general, we ask for credit terms from our
suppliers. We generally pay for the hogs we purchase within one week
after the hogs pass our health and quality examinations.
For the
nine months ended September 30, 2009, net cash provided by operating activities
was $22.2 million, which represented a decrease of $25.5 million compared with
the net cash provided by operating activities of $47.7 million for the same
period of 2008. The decrease was primarily due to a
$34.8 million decline in cash flow from operating assets and liabilities,
which was offset in part by a $7.8 million increase in net income and a $1.5
million increase in non-cash items. Of the non-cash items,
depreciation and amortization accounted for $3.2 million of change due to the
fact that more plants, equipment and machinery were put into use.
Cash flow
from changes in operating assets and liabilities decreased approximately $34.8
million, compared with the positive cash flow of $16.2 million from changes in
operating assets and liabilities for the same period of the prior year. Of the
$34.8 million decrease, $20.1 million was attributable to the change of
cash flow from inventories due to the fact that we intentionally built up our
inventories in the first half of 2009 to take advantage of lower hog prices
during that period. In addition, we increased our inventories to
assist the Chinese government in building up its pork reserves and we are
prohibited from selling these reserves until pork prices increase to a level at
which the government wants to sell its reserves to stable pork
prices. Of the remaining decrease, $8.1 million was attributable to
the change of cash flow from accounts receivable due to the fact that
(i) the revenue in the nine months ended September 30, 2009 was
significantly higher compared with the same period in 2008 and (ii) we sold
more through our wholesaler and food service distributors channel and the
turnover rate of the accounts receivable for this channel is a little higher
than for our other channels. In addition, $1.7 million of the
decrease was attributable to the change in cash flow from deposits from
customers because we received less deposits from customers in the first three
quarters of 2009 compared with the same period in 2008 due primarily to our
efforts to encourage sales.
Net cash
used in investing activities was $83.6 million for the nine months ended
September 30, 2009, which represented an increase of $13.3 million compared with
the net cash of $70.3 million used by investing activities for the same period
of the prior year. We spent $14.3 million less on the costs of construction
for new production facilities, $2.1 million less on equipment and
machinery, $16.7 million more on land usage rights and $7.1 million more on
purchase deposits for land usage rights during the first three quarters of 2009
compared to the same period of 2008.
Net cash
provided by financing activities was $46.4 million during the nine months ended
September 30, 2009, an increase of $18.1 million compared to the net cash
provided by financing activities of $28.3 million for the same period of the
prior year. We had net proceeds of $11.2 million for short-term
bank loans and received $8.9 million in net proceeds from bank notes during
the current period.
At
September 30, 2009, Henan Zhongpin had short-term bank and governmental loans in
the aggregate amount of $96.8 million with interest rates ranging from 4.86% to
5.67% per annum, as shown below.
|
Bank
|
|
Amount
Borrowed
|
|
|
Interest Rate
|
|
|
Maturity
Date
|
|
|
Agriculture
Bank of China
|
|
$
|
4,393,030
5,710,939
1,025,040
5,418,070
7,761,019
|
|
|
|
5.58
5.31
5.31
5.31
5.31
|
%
|
|
12/21/2009
01/04/2010
01/21/2010
03/12/2010
03/30/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rabobank
Nederland Shanghai
|
|
|
2,928,686
|
|
|
|
5.31
|
%
|
|
05/28/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai
Pudong Development Bank of China
|
|
|
2,196,515
2,196,515
1,464,343
3,221,555
5,564,504
|
|
|
|
5.31
5.31
5.31
5.31
5.31
|
%
|
|
03/15/2010
03/16/2010
03/18/2010
03/22/2010
03/25/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture
Development Bank of China
|
|
|
7,321,716
5,125,201
2,196,515
15,359,058
|
|
|
|
5.31
4.86
4.86
4.86
|
%
|
|
11/18/2009
11/24/2009
11/25/2009
12/30/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
CITIC Bank
|
|
|
3,660,858
|
|
|
|
5.31
|
%
|
|
03/25/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
Merchants Bank
|
|
|
5,857,373
2,928,686
|
|
|
|
5.31
5.31
|
%
|
|
06/04/2010
06/22/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong
Development Bank
|
|
|
5,857,373
|
|
|
|
5.31
|
%
|
|
09/28/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
Construction Bank
|
|
|
4,393,030
|
|
|
|
5.31
|
%
|
|
06/10/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xuchang
Merchants Bank
|
|
|
2,196,515
|
|
|
|
4.86
|
%
|
|
11/18/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
City
Finance – short-term
|
|
|
29,
2
87
|
|
|
|
|
|
|
Extendable
|
|
|
Total
|
|
$
|
96,805,828
|
|
|
|
|
|
|
|
|
In
September 2009, Henan Zhongpin entered into a mutual guarantee agreement with
Henan Huanghe Enterprises Group Co., Ltd., a group corporation based in Henan
Province that is not affiliated with our company or with any of our subsidiaries
(“Huanghe Group”). Under the agreement, Henan Zhongpin agreed to guarantee bank
loans of Huanghe Group in an amount up to $5.8 million and Huanghe Group agreed
to guarantee Henan Zhongpin’s bank loans in an amount up to $5.8 million. The
agreement expires in September 2010. At the expiration of the
agreement, each party will remain obligated under its guarantee for any loans of
the other party that are outstanding on the date of expiration of the
agreement. At September 30, 2009, Henan Zhongpin had
outstanding guarantees for $5.8 million of Huanghe Group’s bank loans under
the agreement. All of the bank loans guaranteed by Henan Zhongpin
will mature within the next 12 months.
In June
2009, Henan Zhongpin entered into a mutual guarantee agreement with Huanghe
Group. Under the agreement, Henan Zhongpin agreed to guarantee bank loans of
Huanghe Group in an amount up to $8.8 million and Huanghe Group agreed to
guarantee Henan Zhongpin’s bank loans in an amount up to $8.8 million. The
agreement expires in June 2010. At the expiration of the agreement,
each party will remain obligated under its guarantee for any loans of the other
party that are outstanding on the date of expiration of the
agreement. At September 30, 2009, Henan
Zhongpin had outstanding guarantees for $8.8 million of Huanghe
Group’s bank loans under the agreement. All of the bank loans
guaranteed by Henan Zhongpin will mature within the next 12 months.
In April
2008, Henan Zhongpin entered into a mutual guarantee agreement with Xuji Group
Co., Ltd., a group corporation based in Henan Province that is not affiliated
with our company or with any of our subsidiaries. Under the agreement, Henan
Zhongpin agreed to guarantee bank loans of Xuji Group in an amount up to $44.2
million and Xuji Group agreed to guarantee Henan Zhongpin's bank loans in an
amount up to $44.2 million. The agreement expired in March 2009. At
the expiration of the agreement, each party remained obligated under its
guarantee for any loans that were outstanding on the date of expiration of the
agreement. At September 30, 2009, Henan Zhongpin had outstanding
guarantees for $4.4 million of Xuji Group’s bank loans.
In June
2009, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.3 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.4% per annum on September
30, 2009) and are payable on June 10, 2011. Borrowings under the loan
agreement are guaranteed by the land usage right, property and plant of Henan
Zhongpin.
In May
2009, Henan Zhongpin entered into a loan agreement with China Minsheng Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.3 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.4% per annum on September
30, 2009) and are payable on May 6, 2011. Borrowings under the loan agreement
are guaranteed by our wholly-owned subsidiary, Yongcheng Zhongpin Food Company
Limited.
In
November 27, 2008, Henan Zhongpin entered into a loan agreement with Bank of
Communications pursuant to which Henan Zhongpin borrowed RMB 40 million ($5.9
million). All amounts borrowed under the loan agreement bear interest at a
floating rate that is based on the prime rate published by the People’s Bank of
China (5.94% per annum on September 30, 2009) and are payable on November 27,
2010. The accrued interest on this loan is payable quarterly on the
20th day of last month of each quarter. Borrowings under the
loan agreement are secured by the land usage right, property and plant of our
wholly-owned subsidiary, Luoyang Zhongpin Food Co., Ltd.
On
November 5, 2008, Henan Zhongpin entered into a sale-leaseback agreement with
CMB Finance Lease Company (“CMB Finance”) pursuant to which we sold to CMB
Finance equipment with a book net value of $6.6 million for $4.6 million and
leased such equipment back. The lease payments for this equipment are paid on a
monthly basis over a three-year period and consist of a fixed payment based upon
a 36-month amortization of the purchase price plus an interest component that is
based upon the rate announced from time to time by the People’s Bank of China
for three-year loans. At September 30, 2009, the monthly rental fee
under the agreement was $138,773, which included an interest component
calculated at the rate of 5.4% per annum. Henan Zhongpin has the right at the
end of the lease term to repurchase all of the equipment for a nominal purchase
price.
In May
2008, Henan Zhongpin entered into a credit agreement with Rabobank Nederland
Shanghai Branch that provided for a three-year term loan of up to RMB 80 million
($11.7 million). On June 10, 2008, the first 50% of the long-term loan was
funded by the bank. The remaining 50% of the long-term loan was drawn down by
Henan Zhongpin on July 10, 2008. Amounts currently outstanding under the
long-term loan bear interest rate published by the People’s Bank of China for
loans with the same or similar terms. The accrued interest on this loan is
payable on a quarterly basis. Of the outstanding principal under the long-term
loan, 25% is payable 24 months after the first drawdown date (June 10, 2008),
37.5% is payable 30 months after the first drawdown date and the balance is
payable 36 months after the first drawn down date.
Borrowings
under the term loan agreement are guaranteed by our subsidiaries, Anyang
Zhongpin Food Co., Ltd. and Zhumadian Zhongpin Food Ltd., are secured by
mortgages on our prepared pork production facilities located in Changge city,
Henan province and are subject to various financial and non-financial covenants,
including a debt to net worth ratio, a debt to EBITDA ratio, an interest
coverage ratio, a required minimum tangible net worth, restrictions on
investments in fixed assets and financial assets, on inter-company indebtedness
and on consolidated contingent liabilities and a requirement that a minimum
percentage of Henan Zhongpin’s consolidated EBITDA be generated by Henan
Zhongpin and the guarantors. Henan Zhongpin also is prohibited from paying
dividends in an amount in excess of 50% of its retained earnings during the term
of the credit facility.
In April
2008, Henan Zhongpin entered into a loan agreement with China CITIC Bank
pursuant to which Henan Zhongpin borrowed RMB 30 million ($4.4 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China (5.67% on
September 30, 2009) and are payable on January 23, 2010. Borrowings under
the loan agreement are guaranteed by Xuji Group.
In May
2002, Henan Zhongpin entered into a loan agreement with Bank of Communications,
Zhengzhou Branch, which is the intermediary bank for a 40-year term loan in the
amount of $2,504,969 from the Canadian government. Under the terms of the loan
agreement, 58% of the principal amount ($1,452,882) of this loan bears interest
at the fixed rate of 6.02% per annum and remaining principal amount of this loan
is interest free. The loan is repayable in a fixed amount of $145,671, which
includes both principal and interest, that is payable on a semi-annual basis
through May 15, 2042. Borrowings under the loan agreement are guaranteed by the
Financing Department, Henan Province.
We
believe our existing cash and cash equivalents, together with our available
lines of credit totaling $213.5 million at September 30, 2009, will be
sufficient to finance our investment in new facilities, operating requirements
and anticipated capital expenditures of approximately $53.3 million over the
next 12 months. We intend to use such funds over the next 12 months to fund our
capacity expansion and the construction of supporting facilities and to
supplement our working capital requirements to enable us to strengthen our
market position and accelerate our growth.
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.
Item
3. 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 RMB, which is the official currency of the PRC. As a
result, the affect of the fluctuations of exchange rates is considered minimal
to our business operations.
Substantially all of our revenues and
expenses are denominated in RMB. However, we use the U.S. dollar for financial
reporting purposes. Conversion of RMB 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
RMB, there can be no assurance that such exchange rate will not again become
volatile or that the RMB 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 the interest we pay on substantially all
of our debt obligations is calculated at a fixed rate in accordance with the
terms of such indebtedness.
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.
Item
4. Controls and Procedures
Our management, with the participation
of our chief executive officer and chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”)) as of the end of the period covered by this
report. Based on such evaluation, our chief executive officer and
chief financing officer concluded that, as of the end of such period, our
disclosure controls and procedures were effective to ensure that information
that we are required to disclose in reports that we file or submit under the
Exchange Act were recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms.
There were no changes in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Part
II – Other Information
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
During the nine months ended September
30, 2009, there were no material changes to the risk factors previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2008, except as follows:
The
recent outbreak of swine influenza (swine flu) could adversely affect our
business, results of operations and financial condition.
An occurrence of a serious animal
disease, such as swine influenza (A/H1N1 flu), a respiratory disease of pigs
caused by influenza viruses, 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 sales
revenue. According to the World Health Organization (WHO), nearly
5,000 people have died of A/H1N1 flu worldwide in 2009. Since
June 11, 2009, WHO has maintained its flu alert level at level 6, the
highest level, which indicates a pandemic, although the WHO maintains that the
severity of the pandemic is moderate. As of October 31, more than
46,000 confirmed cases of A/H1N1 in humans were reported by health officials in
China, with the death toll at six. According to the U.S. Center for
Disease Control and Prevention, A/H1N1 flu cannot be contracted by humans
through eating properly-handled and cooked pork or pork products. In
addition, our procurement and production facilities have not been affected by
A/H1N1 flu and we are not aware of any recent cases of A/H1N1 flu anywhere in
the PRC. However, there can be no assurance that our facilities or
products will not be affected by A/H1N1 flu or similar influenzas in the future,
or that the market for pork products in the PRC will not decline as a result of
fear of such disease. If either case should occur, our business,
results of operations and financial condition would be adversely and materially
affected.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
(a) None.
(b) Not
Applicable.
(c) None.
Item
3. Defaults Upon Senior Securities
Not Applicable.
Item
4. Submission of Matters to a Vote of Security
Holders
Not Applicable.
Item
5. Other Information
None.
Item
6. Exhibits
The exhibits required by this item are
set forth on the Exhibit Index attached hereto.
Signatures
Pursuant to the requirements of the
Securities Exchange Act of 1934, we have duly caused this report to be signed on
our behalf by the undersigned thereunto duly authorized.
|
Date: November
9, 2009
|
Zhongpin
Inc.
|
|
|
(Company)
|
|
|
|
|
|
|
By:
|
/s/ Xianfu Zhu
|
|
|
|
Xianfu
Zhu
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
By:
|
/s/ Feng Wang
|
|
|
|
Feng
Wang
|
|
|
|
Chief
Financial Officer
|
Exhibit
Index
|
Exhibit
Number
|
|
Exhibit Title
|
|
|
|
|
|
31.1
*
|
|
Certification
of our Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
31.2
*
|
|
Certification
of our Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.1
*
|
|
Certification
of our Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.2
*
|
|
Certification
of our Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of
2002.
|
* Filed
herewith
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