Item 1. Financial Statements
The accompanying unaudited condensed consolidated
balance sheets, statements of operations and comprehensive income, and statements of cash flows and the related 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 condensed consolidated
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 unaudited condensed consolidated
financial statements should be read in conjunction with the notes to the aforementioned condensed consolidated 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, 2012.
The results of operations for the three
months ended March 31, 2013 are not necessarily indicative of the results to be expected for the entire fiscal year or any other
period.
ZHONGPIN INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in U.S. dollars)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
294,315,174
|
|
|
$
|
176,441,332
|
|
Restricted cash
|
|
|
105,866,898
|
|
|
|
109,954,161
|
|
Bank notes receivable
|
|
|
102,110,143
|
|
|
|
72,369,700
|
|
Accounts receivable, net of allowance for doubtful accounts of $6,666,258 and $4,775,526
|
|
|
120,800,332
|
|
|
|
85,167,801
|
|
Other receivables, net of allowance for doubtful accounts of $509,084 and $493,484
|
|
|
977,803
|
|
|
|
865,060
|
|
Purchase deposits
|
|
|
7,034,952
|
|
|
|
6,798,356
|
|
Inventories
|
|
|
34,600,019
|
|
|
|
37,979,226
|
|
Prepaid expenses
|
|
|
389,955
|
|
|
|
449,127
|
|
Allowance receivable
|
|
|
958,698
|
|
|
|
956,166
|
|
VAT recoverable
|
|
|
33,410,038
|
|
|
|
32,719,543
|
|
Deferred tax assets
|
|
|
802,297
|
|
|
|
800,179
|
|
Other current assets
|
|
|
699,311
|
|
|
|
73,413
|
|
Total current assets
|
|
|
701,965,620
|
|
|
|
524,574,064
|
|
|
|
|
|
|
|
|
|
|
Long-term investment
|
|
|
478,553
|
|
|
|
477,289
|
|
Property, plant and equipment, net
|
|
|
514,193,986
|
|
|
|
470,447,775
|
|
Deposits for purchase of land use rights
|
|
|
15,389,482
|
|
|
|
17,285,461
|
|
Construction in progress
|
|
|
46,193,135
|
|
|
|
86,509,865
|
|
Land use rights
|
|
|
118,412,570
|
|
|
|
116,785,769
|
|
Other non-current assets
|
|
|
4,452,434
|
|
|
|
2,554,680
|
|
Total assets
|
|
$
|
1,401,085,780
|
|
|
$
|
1,218,634,903
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Short-term loans
|
|
$
|
246,785,205
|
|
|
$
|
228,632,849
|
|
Bank notes payables
|
|
|
209,955,495
|
|
|
|
219,333,386
|
|
Long-term loans - current portion
|
|
|
45,303,004
|
|
|
|
52,183,597
|
|
Short-term financial bonds
|
|
|
95,710,571
|
|
|
|
—
|
|
Capital lease obligation - current portion
|
|
|
7,298,023
|
|
|
|
—
|
|
Accounts payable
|
|
|
13,498,479
|
|
|
|
11,918,351
|
|
Other payables
|
|
|
23,663,592
|
|
|
|
24,053,321
|
|
Accrued liabilities
|
|
|
19,335,514
|
|
|
|
18,353,887
|
|
Deposits from customers
|
|
|
7,343,501
|
|
|
|
9,935,877
|
|
Tax payable
|
|
|
1,396,404
|
|
|
|
1,778,724
|
|
Deferred subsidy - current portion
|
|
|
84,943
|
|
|
|
84,852
|
|
Total current liabilities
|
|
|
670,374,731
|
|
|
|
566,274,844
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
745,839
|
|
|
|
743,869
|
|
Long-term loans
|
|
|
143,374,475
|
|
|
|
101,792,652
|
|
Capital lease obligation
|
|
|
24,605,501
|
|
|
|
—
|
|
Deferred subsidy - long-term portion
|
|
|
2,371,185
|
|
|
|
2,386,002
|
|
Total liabilities
|
|
|
841,471,731
|
|
|
|
671,197,367
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Common stock: par value $0.001; 100,000,000 authorized; 40,376,182 and 40,376,182 shares issued as of March 31, 2013 and December 31, 2012; and 37,209,344 and 37,209,344 shares outstanding as of March 31, 2013 and December 31, 2012
|
|
|
40,376
|
|
|
|
40,376
|
|
Additional paid-in capital
|
|
|
240,063,993
|
|
|
|
240,063,993
|
|
Retained earnings
|
|
|
288,878,462
|
|
|
|
278,268,748
|
|
Treasury stock, at cost: 3,166,838 and 3,166,838 shares at March 31, 2013 and December 31, 2012
|
|
|
(26,225,646
|
)
|
|
|
(26,225,646
|
)
|
Accumulated other comprehensive income
|
|
|
55,967,484
|
|
|
|
54,413,960
|
|
Total Zhongpin Inc. shareholders’ equity
|
|
|
558,724,669
|
|
|
|
546,561,431
|
|
Non-controlling interests
|
|
|
889,380
|
|
|
|
876,105
|
|
Total shareholders’ equity
|
|
|
559,614,049
|
|
|
|
547,437,536
|
|
Total liabilities and shareholders’ equity
|
|
$
|
1,401,085,780
|
|
|
$
|
1,218,634,903
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
ZHONGPIN INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE INCOME
(Amount in U.S. dollars) (Unaudited)
|
|
Three Months Ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Revenues
|
|
|
|
|
|
|
|
|
Sales revenues
|
|
$
|
382,358,018
|
|
|
$
|
374,127,384
|
|
Cost of sales
|
|
|
(343,913,400
|
)
|
|
|
(338,651,649
|
)
|
Gross profit
|
|
|
38,444,618
|
|
|
|
35,475,735
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
(11,117,768
|
)
|
|
|
(9,416,975
|
)
|
Selling expenses
|
|
|
(8,650,157
|
)
|
|
|
(6,437,120
|
)
|
Research and development expenses
|
|
|
(132,331
|
)
|
|
|
(86,628
|
)
|
Total operating expenses
|
|
|
(19,900,256
|
)
|
|
|
(15,940,723
|
)
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18,544,362
|
|
|
|
19,535,012
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(8,289,066
|
)
|
|
|
(7,625,481
|
)
|
Other income, net
|
|
|
400,325
|
|
|
|
563,605
|
|
Government subsidies
|
|
|
776,718
|
|
|
|
915,348
|
|
Total other expense
|
|
|
(7,112,023
|
)
|
|
|
(6,146,528
|
)
|
|
|
|
|
|
|
|
|
|
Net income before taxes
|
|
|
11,432,339
|
|
|
|
13,388,484
|
|
Provision for income taxes
|
|
|
(811,687
|
)
|
|
|
(1,193,329
|
)
|
|
|
|
|
|
|
|
|
|
Net income after taxes
|
|
|
10,620,652
|
|
|
|
12,195,155
|
|
Net (income) loss attributable to non-controlling interests
|
|
|
(10,938
|
)
|
|
|
2,160
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Zhongpin Inc. shareholders
|
|
|
10,609,714
|
|
|
|
12,197,315
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
1,555,861
|
|
|
|
582,654
|
|
Foreign currency translation adjustment attributable to non-controlling interests
|
|
|
(2,337
|
)
|
|
|
(863
|
)
|
Foreign currency translation adjustment attributable to Zhongpin Inc. shareholders
|
|
|
1,553,524
|
|
|
|
581,791
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
12,176,513
|
|
|
|
12,777,809
|
|
Comprehensive (income) loss attributable to non-controlling interests
|
|
|
(13,275
|
)
|
|
|
1,297
|
|
Comprehensive income attributable to Zhongpin Inc. shareholders
|
|
$
|
12,163,238
|
|
|
$
|
12,779,106
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.29
|
|
|
$
|
0.33
|
|
Diluted earnings per common share
|
|
$
|
0.28
|
|
|
$
|
0.33
|
|
Basic weighted average shares outstanding
|
|
|
37,209,344
|
|
|
|
37,498,563
|
|
Diluted weighted average shares outstanding
|
|
|
37,278,630
|
|
|
|
37,503,019
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
ZHONGPIN INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Amount in U.S. dollars) (Unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
10,620,652
|
|
|
$
|
12,195,155
|
|
Adjustments to reconcile net income to net cash used in operations:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,899,289
|
|
|
|
5,537,984
|
|
Amortization of land use rights
|
|
|
644,802
|
|
|
|
516,966
|
|
Provision for allowance for bad debt
|
|
|
1,889,563
|
|
|
|
1,657,949
|
|
Other income
|
|
|
(88,790
|
)
|
|
|
(129,699
|
)
|
Deferred subsidy
|
|
|
(21,236
|
)
|
|
|
—
|
|
Stock-based compensation
|
|
|
—
|
|
|
|
417,749
|
|
|
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(37,228,084
|
)
|
|
|
(31,521,161
|
)
|
Other receivables
|
|
|
(124,907
|
)
|
|
|
(950,981
|
)
|
Purchase deposits
|
|
|
(218,259
|
)
|
|
|
1,489,444
|
|
Prepaid expenses
|
|
|
60,153
|
|
|
|
75,128
|
|
Inventories
|
|
|
3,474,455
|
|
|
|
(13,251,435
|
)
|
Allowance receivables
|
|
|
—
|
|
|
|
2,160,068
|
|
VAT recoverable
|
|
|
(602,931
|
)
|
|
|
(5,225,549
|
)
|
Other current assets
|
|
|
(2,023
|
)
|
|
|
(118,029
|
)
|
Deferred charges
|
|
|
—
|
|
|
|
1,855
|
|
Accounts payable
|
|
|
1,546,201
|
|
|
|
28,643,061
|
|
Other payables
|
|
|
(318,966
|
)
|
|
|
(2,035,430
|
)
|
Accrued liabilities
|
|
|
933,980
|
|
|
|
388,216
|
|
Tax payable
|
|
|
(400,248
|
)
|
|
|
373,669
|
|
Deposits from customers
|
|
|
(2,614,682
|
)
|
|
|
(3,541,776
|
)
|
Deposits from customers - long-term portion
|
|
|
—
|
|
|
|
(338,991
|
)
|
Net cash used in operating activities
|
|
|
(16,551,031
|
)
|
|
|
(3,655,807
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Deposits for purchase of land use rights
|
|
|
—
|
|
|
|
(10,555,624
|
)
|
Construction in progress
|
|
|
(5,413,842
|
)
|
|
|
(11,461,585
|
)
|
Additions to property and equipment
|
|
|
(2,267,416
|
)
|
|
|
(2,585,772
|
)
|
Additions to land use rights
|
|
|
(21,559
|
)
|
|
|
—
|
|
Proceeds on sale of fixed assets
|
|
|
—
|
|
|
|
5,905
|
|
Net cash used in investing activities
|
|
|
(7,702,817
|
)
|
|
|
(24,597,076
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from (repayment of) bank notes, net
|
|
|
(39,447,085
|
)
|
|
|
9,806,307
|
|
Proceeds from short-term bank loans
|
|
|
60,524,010
|
|
|
|
88,785,573
|
|
Repayment of short-term bank loans
|
|
|
(43,003,902
|
)
|
|
|
(49,538,008
|
)
|
Proceeds from long-term loans
|
|
|
54,790,156
|
|
|
|
7,926,069
|
|
Repayment of long-term loans
|
|
|
(20,549,090
|
)
|
|
|
—
|
|
Proceeds from short-term financial bonds, net of issuance costs
|
|
|
95,181,970
|
|
|
|
—
|
|
Proceeds from capital lease obligation, net of issuance costs
|
|
|
29,529,346
|
|
|
|
—
|
|
Repayment of capital lease obligation
|
|
|
—
|
|
|
|
(1,498,250
|
)
|
Repurchase of common stock
|
|
|
—
|
|
|
|
(2,812,322
|
)
|
Increase in restricted cash
|
|
|
4,371,725
|
|
|
|
—
|
|
Net cash provided by financing activities
|
|
|
141,397,130
|
|
|
|
52,669,369
|
|
|
|
|
|
|
|
|
|
|
Effects of rate changes on cash
|
|
|
730,560
|
|
|
|
226,450
|
|
Increase in cash and cash equivalents
|
|
|
117,873,842
|
|
|
|
24,642,936
|
|
Cash and cash equivalents, beginning of period
|
|
|
176,441,332
|
|
|
|
135,845,095
|
|
Cash and cash equivalents, end of period
|
|
$
|
294,315,174
|
|
|
$
|
160,488,031
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
|
9,596,014
|
|
|
|
8,122,027
|
|
Cash paid for income taxes
|
|
|
1,199,986
|
|
|
|
819,660
|
|
The accompanying notes are an integral
part of these condensed consolidated financial statements.
ZHONGPIN INC.
NOTES TO CONDENSED 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
equity interests 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 hogs into fresh, frozen and processed pork products
which are sold domestically to branded stores, food retailers, food service distributors, restaurants, hotel chains and non-commercial
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 division is involved primarily in the processing
of frozen vegetables and fruits that are sold to the Company’s 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 China. The Company’s
China-based subsidiaries include the following:
Name
|
|
Date of
Incorporation
|
|
|
Registered/Authorized
Capital
|
|
Percentage
of Ownership
|
|
|
|
|
|
|
|
|
|
|
Henan Zhongpin Food Company Limited
|
|
|
May 20, 2005
|
|
|
$203,300,000
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Henan Zhongpin Food Share Company Limited (“Henan Zhongpin”)
|
|
|
Jan. 20, 2000
|
|
|
1,430,000,000 RMB
($219,699,181)
|
|
|
100
|
%
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Henan Zhongpin Import and Export Trading Company Limited
|
|
|
Aug. 11, 2004
|
|
|
5,060,000 RMB
($611,111)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Zhumadian Zhongpin Food Company Limited (“Zhumadian Zhongpin”)
|
|
|
June 7, 2006
|
|
|
60,000,000 RMB
($8,585,398)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Anyang Zhongpin Food Company Limited
|
|
|
Aug. 21, 2006
|
|
|
34,800,000 RMB
($5,094,422)
|
|
|
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
($1,893,652)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Henan Zhongpin Business Development Company Limited
|
|
|
Sept. 27, 2006
|
|
|
5,000,000 RMB
($632,215)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Luoyang Zhongpin Food Company Limited (“Luoyang Zhongpin”)
|
|
|
Jan. 18, 2007
|
|
|
60,000,000 RMB
($8,703,452)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Yongcheng Zhongpin Food Company Limited (“Yongcheng Zhongpin”)
|
|
|
Mar. 1, 2007
|
|
|
60,000,000 RMB
($8,783,487)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin Zhongpin Food Company Limited (“Tianjin Zhongpin”)
|
|
|
Sept. 14, 2007
|
|
|
100,000,000 RMB
( $14,639,145 )
|
|
|
100
|
%
|
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Name
|
|
Date of
Incorporation
|
|
|
Registered/Authorized
Capital
|
|
Percentage
of Ownership
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Taizhou Zhongpin Food Company Limited (“Taizhou Zhongpin”)
|
|
|
May 12, 2010
|
|
|
100,000,000 RMB
($15,872,008)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Changchun Zhongpin Food Company Limited (“Changchun Zhongpin”)
|
|
|
Aug. 6, 2010
|
|
|
170,000,000 RMB
($26,292,994)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Henan Zhongpin Xinda Agriculture and Animal Husbandry Company Limited
|
|
|
Jun. 1, 2011
|
|
|
15,000,000 RMB
($2,287,841)
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Kunshan Zhongpin Cold Chain Logistics Company Limited
|
|
|
Jun. 3, 2011
|
|
|
300,000,000 RMB
($46,356,388)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Tangshan Zhongpin Food Company Limited
|
|
|
Nov. 15, 2011
|
|
|
5,000,000 RMB
($788,196)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Zhongpin (Hong Kong) Trading Co., Limited
|
|
|
Sept. 11, 2012
|
|
|
$1,000,000
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Tianjin Jinghui Hogs Breeding Company Limited
|
|
|
Nov.12, 2012
|
|
|
1,000,000RMB
($158,700)
|
|
|
100
|
%
|
(1) Includes a 1.19% ownership interest of another six stockholders
with respect to which Henan Zhongpin Food Company Limited is entitled to all economic benefits and the right to vote pursuant
to the terms of a trust agreement with such stockholders.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Consolidation and Basis of Presentation
The accompanying condensed consolidated
financial statements include the accounts of Zhongpin Inc. and its subsidiaries (collectively referred to herein as the “Company”).
All significant intercompany accounts and transactions have been eliminated during the process of consolidation. The condensed
consolidated financial statements were prepared in accordance with GAAP for interim financial information.
Non-controlling Interests
Effective July 1, 2009, the Company adopted
the authoritative pronouncement issued by the Financial Accounting Standards Board (the “FASB”) regarding non-controlling
interests in consolidated financial statements. The pronouncement requires non-controlling interests to be separately presented
as a component of equity in the consolidated financial statements.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Foreign Currency Translations and Transactions
RMB,
the
national currency of China, is the primary currency that the Company’s China-based subsidiaries use. The United States dollar
(“U.S. dollar”) is the functional currency used by Falcon and Zhongpin Inc. 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 published by the People’s Bank of China as of the balance sheet date. The condensed
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 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 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.
Certain accounting principles require subjective
and complex judgments to be used in the preparation of financial statements. Accordingly, a different financial presentation could
result depending on the judgments, estimates, or assumptions that are used. Such estimates and assumptions include, but are not
specifically limited to, those required in the valuation of long-lived assets, allowance for doubtful accounts, reserves for inventory
obsolescence, valuation allowances for value added tax (“VAT”) recoverable, deferred tax assets and determination of
stock based compensation.
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 valid 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 operations 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 an amount of cash that will serve as collateral
for its delivery of such lenders’ bank promissory notes. The amount of bank promissory notes that are to be delivered by
Henan Zhongpin to such lenders can be up to twice the amount of such deposits. As such deposits may not be withdrawn by Henan Zhongpin
without restriction, such cash deposits are presented as “restricted cash” on the consolidated balance sheets.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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. In addition, the Company may also acquire bank notes receivable, with maturity of less
than six months, from third parties, at a lower cost compared to the face value of the bank notes, so as to earn the interest.
The Company can hold these bank notes until
the maturity date and collect the amount from the issuing banks, or the Company can use these bank notes as 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 China.
Accounts Receivable
During the normal course of business, the
Company's policy is to ask customers to make deposits in reasonable and meaningful amounts on a case-by-case basis. For certain
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 China. 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. The Company also examines the credit terms of significant customers regularly and asks for more
cash deposits if these customers appear to have any indicators of delaying their payments to the Company. Such deposits are usually
applied for the collection of the outstanding accounts receivable during the year. With such a practice in place, the Company did
not have any specific allowance for doubtful accounts provided against specific customers at March 31, 2013 and December 31, 2012,
respectively.
The following table presents allowance activities
in accounts receivable.
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
4,775,526
|
|
|
$
|
2,323,920
|
|
Additions to a
llowance for bad debt
|
|
|
1,875,215
|
|
|
|
2,478,601
|
|
Exchange difference
|
|
|
15,517
|
|
|
|
(26,995
|
)
|
Ending balance
|
|
$
|
6,666,258
|
|
|
$
|
4,775,526
|
|
Inventories
Inventories are comprised of raw materials
and low-value consumables, work-in-progress, and finished goods. Inventories are stated at the lower of cost or market-based prices
according to 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, write down their carrying value based on their salability and expiration
dates as 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. Leased properties under capital leases are also amortized over the estimated useful life
of the property due to the transfer of ownership or availability of bargain purchase option at the end of the lease term. Estimated
useful lives of the assets are as follows:
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
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 under other income (expenses).
Land Use Rights
The Chinese government
owns all of the parcels of land on which the Company's plants are built. In China, land use 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 use 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 the 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 Company borrows bank loans from time to time
for these construction projects. The interest costs incurred for these construction projects have been capitalized during the construction
process.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through
the estimated undiscounted cash flows expected to result from the use and eventual disposition of that asset. Whenever any such
impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents,
accounts receivable, other receivables, advance to vendors, accounts payable and accrued liabilities, capital lease obligations
and short-term loans are reasonable estimates of their fair value because of the short maturity of these items. The carrying amounts
of capital lease obligations approximate their fair value based on the Company’s current incremental borrowing rates for
similar types of arrangements. Long-term debt approximates fair value since the bank term loans are fixed rate instruments and
bear interests at the rate dictated and published by the People's Bank of China. The current rates published by the People's Bank
of China approximate the interest rates of the loans outstanding.
Employee Benefit Plan
Full time employees of the PRC entities
participate in a government mandated employer defined contribution plan, pursuant to which certain pension benefits, medical care,
unemployment insurance and other welfare benefits are provided to employees. Chinese labor regulations require the Company to accrue
for these benefits based on certain percentages of the employees’ salaries. The total provision for such employee benefits
was $655,743 and $227,438 for three months ended March 31, 2013 and 2012.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Shipping and Handling Cost
All shipping and handling fees are included
in selling expenses. Shipping and handling fees amounted to $2.4 million and $ 2.4 million for the three months ended March 31,
2013 and 2012, respectively.
Advertising Costs
Advertising costs are expensed as incurred.
Advertising expense amounted to $377,261 and $282,921 for the three months ended March 31, 2013 and 2012, respectively.
Value Added Tax
All China-based enterprises are subject
to a 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 condensed 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.
On a quarterly basis, the Company forecasts
for each of its subsidiaries separately the amount of sales revenue necessary to fully utilize the VAT recoverable. Once the VAT
recoverable for a subsidiary is determined to be non-recoverable in part or in full, the VAT recoverable is written off and booked
as cost of goods sold or as impairment loss, depending on the nature of the event triggering the VAT write-off. The factors considered
when evaluating to which account VAT recoverable is written off are as follows: i) if VAT is determined to be non-recoverable due
to significant underperformance relative to expected historical or projected future operating results or negative industry or economic
trend, VAT recoverable will be written-off to cost of goods sold, or ii) if VAT is determined to be non-recoverable due to significant
changes in the strategy of the overall business, VAT recoverable would be written off as impairment loss. VAT write-off amounted
to $1.9 million and nil for the three months ended March 31, 2013 and 2012, respectively.
Leases
The Company classified its leases at the
inception date as either a capital lease or an operating lease. A lease is a capital lease if the following conditions exist: a)
ownership is transferred to the lessee by the end of the lease term, b) there is a bargain purchase option, c) the lease term is
at least 75% of the property’s estimated remaining economic life or d) the present value of the minimum lease payments at
the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. A
capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of
the lease. All other leases are accounted for as operating leases. In March 2013, the Company entered into a sale-leaseback agreement
with
CMB Financial Leasing Co., Ltd. (“CMB Leasing”)
to sell and lease back equipment.
For details of the transaction, see Note 14,
“
Commitments and Contingencies”.
Stock Compensation
The Company receives employee and certain
non-employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value
of the Company's equity instruments or that may be settled by the issuance of such equity instruments. The Company accounts for
stock compensation expense under the fair value recognition provisions of the FASB Accounting Standards Codification (ASC) Topic
718 (ASC 718), which requires companies to estimate the fair value of share-based payment awards on the date of grant using an
option pricing model. See Note 10, "Equity Transactions", for further discussion on stock compensation expense.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Earnings Per Share
Basic earnings per share does not include
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.
Such shares are excluded if determined to be
anti-dilutive. Of the 787,000 options outstanding at March 31, 2013, 514,000 options were anti-dilutive and therefore excluded
from the computation of diluted earnings per share for the three months ended March 31, 2013. The number of shares of common stock
underlying the outstanding stock warrants and options at March 31, 2013 and December 31, 2012 were 273,000 and 240,000, respectively,
which were all included in the computation of diluted earnings per share.
Government Subsidies
The Company’s
subsidiaries in China 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, which have been accounted for by offsetting
the specific expense, such as interest expenses.
Unearned government subsidies received are deferred for recognition until
the criteria for such recognition could be met.
Research and Development Expenses
Research and
development costs are expensed as incurred. The research and development expenses for the three-month periods ended March 31,
2013 and 2012 were $132,331 and $86,628, respectively. The Company did not receive
government
subsidies that were specified for supporting the Company’s research and development efforts for the three-month periods ended
March 31, 2013 and 2012.
Comprehensive Income (Loss)
The Company adopted FASB ASC 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 operations and comprehensive income. Comprehensive income (loss) is comprised of net income and all changes to shareholders'
equity except those due to investments by owners and distributions to owners.
Recently Issued Accounting Pronouncements
In January 2013, the FASB
issued Accounting Standards Update (“ASU”) 2013-01,
Balance Sheet (Topic 210): Clarifying the Scope of
Disclosures about Offsetting Assets and Liabilities
, which clarified that the scope of ASU 2011-11,
Disclosures about
Offsetting Assets and Liabilities
, would apply to derivatives including bifurcated embedded derivatives, repurchase
agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either
offset in accordance with Section 210-20-45 or Section 815-10-45 or are subject to a master netting arrangement or similar
agreement. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after January 1,
2013. Retrospective presentation for all comparative periods presented is required. The adoption of ASU 2013-01 did not have
a material impact on the Company’s consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, which
superseded and replaced the presentation requirements for reclassifications out of accumulated other comprehensive income in ASUs
2011-05 (issued in June 2011) and 2011-12 (issued in December 2011) for all public and private organizations. The amendments would
require an entity to provide additional information about reclassifications out of accumulated other comprehensive income. For
public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012, with early
adoption permitted. The adoption of ASU 2013-02 did not have a material impact on the Company’s consolidated financial statements.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Inventories at March 31, 2013 and December
31, 2012 consisted of the following:
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
4,684,028
|
|
|
$
|
6,466,664
|
|
Low value consumables and packaging
|
|
|
1,568,000
|
|
|
|
1,685,431
|
|
Work-in-progress
|
|
|
4,202,916
|
|
|
|
3,955,169
|
|
Finished goods
|
|
|
24,145,075
|
|
|
|
25,871,962
|
|
Total
|
|
$
|
34,600,019
|
|
|
$
|
37,979,226
|
|
|
4.
|
PROPERTY, PLANT AND EQUIPMENT
|
A summary of property, plant and equipment
at cost at March 31, 2013 and December 31, 2012 is as follows:
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Plants and buildings, net of impairment
|
|
$
|
407,508,102
|
|
|
$
|
368,003,263
|
|
Machinery and equipment, net of impairment
|
|
|
154,610,707
|
|
|
|
156,202,442
|
|
Office furniture and equipment
|
|
|
7,263,995
|
|
|
|
7,101,927
|
|
Vehicles
|
|
|
4,917,002
|
|
|
|
4,522,289
|
|
Accumulated depreciation
|
|
|
(60,105,820
|
)
|
|
|
(65,382,146
|
)
|
Total
|
|
$
|
514,193,986
|
|
|
$
|
470,447,775
|
|
The depreciation and amortization expenses
for the three months ended March 31, 2013 and 2012 were $5,899,289 and $5,537,984, respectively.
Of the above information, property, plant
and equipment under the sale-leaseback agreement at cost at March 31, 2013 and December 31, 2012 is as follows:
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Plants and buildings
|
|
$
|
4,869,288
|
|
|
$
|
—
|
|
Machinery and equipment
|
|
|
42,542,027
|
|
|
|
—
|
|
Vehicles
|
|
|
127,271
|
|
|
|
—
|
|
Accumulated depreciation
|
|
|
(165,193
|
)
|
|
|
—
|
|
Total
|
|
$
|
47,373,393
|
|
|
$
|
—
|
|
The
deferred losses included in the property, plant and equipment balance were $3,713,441 and nil at March 31, 2013 and December 31,
2012, respectively, and would be amortized over the lease term. Of the depreciation expenses, $78,888 and $164,939 were amortization
of deferred loss and depreciation expense from assets under capital lease, respectively, for the three months ended March 31, 2013;
and $373,995 and $280,688 were amortization of deferred loss and depreciation expense from assets under capital lease, respectively,
for the three months ended March 31, 2012.
The Company’s land use rights at March
31, 2013 and December 31, 2012 are as follows:
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land use rights
|
|
$
|
127,278,183
|
|
|
$
|
124,983,885
|
|
Accumulated amortization
|
|
|
(8,865,613
|
)
|
|
|
(8,198,116
|
)
|
Total
|
|
$
|
118,412,570
|
|
|
$
|
116,785,769
|
|
The amortization expenses for the three
months ended March 31, 2013 and 2012 were $644,802 and $516,966, respectively.
|
6.
|
CONSTRUCTION IN PROGRESS
|
Construction in progress at March 31, 2013
and December 31, 2012 consisted of the following:
Construction Project
|
|
Date or
Estimated Date
Put in Service
(1)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Production facility for prepared pork
products in Tianjin
|
|
February 2013
|
|
$
|
—
|
|
|
$
|
2,215,713
|
|
Upgrade for production facility in other locations
|
|
April 2013
|
|
|
36,211
|
|
|
|
375,627
|
|
Kunshan facility land preparation cost
|
|
April 2013
|
|
|
598,191
|
|
|
|
42,868,890
|
|
Upgrade for production facility in Anyang
|
|
May 2013
|
|
|
41,525,141
|
|
|
|
40,838,785
|
|
Improvement in Changge industrial park
|
|
July 2013
|
|
|
109,317
|
|
|
|
164,712
|
|
Production facility for chilled and frozen
pork in Changchun (second phase)
|
|
November 2013
|
|
|
95,852
|
|
|
|
46,138
|
|
Research and development
building in Changge
|
|
December 2013
|
|
|
3,828,423
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
46,193,135
|
|
|
$
|
86,509,865
|
|
Estimated cost to complete current construction
in progress is $9.3 million.
_______________
|
(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.
|
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Short-term bank loans are due
within one year. Of the $246.8 million and $176.4 million aggregate principal amount of short-term bank loans at March 31,
2013 and December 31, 2012, loans in the aggregate principal amount of $113.2 million and $116.1 million were guaranteed by
the Company’s subsidiaries in China, loans in the aggregate principal amount of $8.0 million and $8.0 million were
secured by the land use right of the Company’s subsidiaries in China, $111.2 million and $85.4 million aggregate
principal amount of loans was credit loans, and loans in the aggregate principal amount of $14.4 million and $19.1 million
were guaranteed by Henan Huanghe Enterprises Group Co., Ltd., an unaffiliated third party (“Huanghe Group”).
These loans bear interest at prevailing lending rates in China ranging from 5.88 % to 7.20% per annum.
In March 2013, Henan Zhongpin issued RMB600
million (approximately US$95.7 million) aggregate principal amount of 5.15% unsecured non-convertible one-year bonds which will
mature and be repaid on March 27, 2014.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Amounts outstanding under the Company’s
long-term debt arrangements at March 31, 2013 and December 31, 2012 were as follows:
Bank
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
China Construction Bank
|
|
$
|
24,725,231
|
|
|
$
|
24,659,932
|
|
Agriculture Bank of China
|
|
|
101,453,205
|
|
|
|
76,525,336
|
|
Canadian Government Transfer Loan
|
|
|
1,052,087
|
|
|
|
1,052,087
|
|
China Merchants Bank
|
|
|
11,963,821
|
|
|
|
11,932,225
|
|
China Development Bank
|
|
|
47,855,286
|
|
|
|
38,183,120
|
|
Changge Old Town
|
|
|
1,627,849
|
|
|
|
1,623,549
|
|
Total long-term loan
|
|
|
188,677,479
|
|
|
|
153,976,249
|
|
Current portion
|
|
|
(45,303,004
|
)
|
|
|
(52,183,597
|
)
|
Total long-term portion
|
|
$
|
143,374,475
|
|
|
$
|
101,792,652
|
|
In March 2013, Henan Zhongpin entered into
a loan agreement with China Construction Bank pursuant to which Henan Zhongpin borrowed RMB 20 million ($3.2 million). All amounts
borrowed under the loan agreement bear interest at a fixed rate of 6.15% and are payable in March 2015. Borrowings under the loan
agreement are secured by land use rights, property and plant of Henan Zhongpin.
In March 2013, Henan Zhongpin entered into
a loan agreement with the Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 100 million ($16.0 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 (6.46% per annum on March 31, 2013
and adjustable on each anniversary of the agreement based on the prime rate published by the People’s Bank of China for
loans with the same or similar terms) and are payable in installments on various scheduled repayment dates between June 2013 and
March 2016. Borrowings under the loan agreement are secured by the land use rights, property and plant of Henan Zhongpin.
In January 2013, Taizhou Zhongpin entered
into a loan agreement with the Agriculture Bank of China pursuant to which Taizhou Zhongpin may borrow up to RMB 180 million ($28.7
million). Taizhou Zhongpin drew down RMB 44 million ($7.0 million) in January 2013 and RMB 120 million ($19.1 million) in March
2013. 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 (7.04% per annum on March 31,
2013 and adjustable on each anniversary of the agreement based on the prime rate published by the People’s Bank of China
for loans with the same or similar terms) and RMB 164 million ($26.2 million) are payable in installments on various scheduled
repayment dates between January 2014 and January 2018. Borrowings under the loan agreement are guaranteed by Henan Zhongpin and
secured by land use rights of Taizhou Zhongpin.
In April 2012, Changchun Zhongpin entered
into a loan agreement with China Development Bank pursuant to which Changchun Zhongpin may borrow up to RMB 300 million ($47.9
million). Changchun Zhongpin drew down RMB 125 million ($19.9 million) in April 2012, RMB 76 million ($12.1 million) in July 2012,
RMB39 million ($6.2 million) in October 2012 and RMB 60 million ($9.6 million) in February 2013. 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 (7.21% per annum on March 31, 2013 and adjustable immediately following
the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments
on various scheduled repayment dates between April 2013 and May 2020. Borrowings under the loan agreement are guaranteed by Henan
Zhongpin and secured by all of Henan Zhongpin’s equity interests in Tianjin Zhongpin and Yongcheng Zhongpin.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
In April 2012, Henan Zhongpin entered into
a loan agreement with China Construction Bank pursuant to which Henan Zhongpin borrowed RMB 15 million ($2.4 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 for loans with the same or similar terms on the drawdown date (6.65% per annum on March 31, 2013 and adjustable
on each anniversary of the agreement based on the prime rate published by the People’s Bank of China for loans with the
same or similar terms) and are payable in March 2014. Borrowings under the loan agreement are secured by the land use rights,
property and plant of Yongcheng Zhongpin.
In March 2012, Henan Zhongpin entered into
a loan agreement with China Construction Bank pursuant to which Henan Zhongpin borrowed RMB 50 million ($8.0 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 (6.65% per annum on March 31, 2013 and adjustable
on each anniversary of the agreement based on the prime rate published by the People’s Bank of China for loans with the
same or similar terms) and are payable in March 2014. Borrowings under the loan agreement are secured by the land use rights,
property and plant of Yongcheng Zhongpin.
In June 2011, Henan Zhongpin entered into
a loan agreement with China Construction Bank pursuant to which Henan Zhongpin borrowed RMB 50 million ($8.0 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 (6.08% per annum on March 31, 2013 and adjustable
on each anniversary of the agreement based on the prime rate published by the People’s Bank of China for loans with the
same or similar terms) and are payable in installments in March and June 2013. Borrowings under the loan agreement are secured
by the land use rights, property and plant of Henan Zhongpin. Henan Zhongpin has repaid $3.2 million in March 2013, and $4.8 million
remained outstanding as of March 31, 2013.
In September 2010, Henan Zhongpin entered
into a loan agreement with the Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 75 million ($12.0 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 (6.40% per annum on March 31, 2013
and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during
the term of the loan) and are payable in installments on various scheduled repayment dates between September 2011 and December
2014. Borrowings under the loan agreement are guaranteed by Zhumadian Zhongpin. Henan Zhongpin has repaid an aggregate of $0.7
million, and $11.3 million remained outstanding as of March 31, 2013.
In July 2010, Tianjin Zhongpin entered
into a loan agreement with the Agriculture Bank of China pursuant to which Tianjin Zhongpin may borrow up to RMB 300 million ($47.9
million). Tianjin Zhongpin drew down RMB 50 million ($8.0 million) in July 2010, RMB 80 million ($12.8 million) in November 2010
and RMB 110 million ($17.5 million) in May 2011. As of March 31, 2013, the total outstanding balance under the agreement was $38.3
million and Tianjin Zhongpin had $9.6 million available for borrowing under the loan agreement. 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 (6.40% per annum on March 31, 2013 and adjustable in the month immediately
following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable
in installments in June 2013, 2014 and 2015. Borrowings under the loan agreement are secured by the land use rights, property
and plant of Tianjin Zhongpin.
In June 2010, Henan Zhongpin entered into
a loan agreement with China Construction Bank pursuant to which Henan Zhongpin borrowed RMB 40 million ($6.4 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 for loans with the same or similar terms on the drawdown date (5.76% per annum on March 31, 2013 and adjustable
on each anniversary of date of the agreement based on the prime rate published by the People’s Bank of China for loans with
the same or similar terms) and are payable on June 29, 2013. Borrowings under the loan agreement are secured by the land use rights,
property and plant of Henan Zhongpin.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
In April 2010, in connection with the purchase
of a piece of land from Changge Old Town, Changge Old Town extended a loan to Henan Zhongpin with a principal amount of RMB 10.2
million ($1.6 million) and bearing interest at the rate of 7.00% per annum payable on June 30, 2010 and each anniversary thereafter.
Such loan does not have a fixed term and the principal amount of the loan should be repaid by Henan Zhongpin upon six months prior
written notice from Changge Old Town. The full amount of the loan remained outstanding as of March 31, 2013.
In December 2009, Henan Zhongpin entered
into a loan agreement with the Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 70 million ($11.2 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 (6.40% per annum on March 31, 2013
and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during
the term of the loan) and are payable in installments on various scheduled repayment dates between December 2010 and December
2014. Borrowings under the loan agreement are secured by the land use rights, property and plant of Luoyang Zhongpin. Henan Zhongpin
has repaid an aggregate of
$1.5 million, and
$9.7 million remained
outstanding as of March 31, 2013.
In November 2009, Henan Zhongpin entered
into a loan agreement with China Merchants Bank pursuant to which Henan Zhongpin borrowed RMB 95 million ($15.2 million). The
first 50% of the loan was drawn down in November 2009 and the remaining 50% of the loan was drawn down in March 2010. 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 (6.40% per annum on March 31, 2013 and adjustable
in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the
loan) and are payable in installments on various scheduled repayment dates between November 2012 and November 2014. Borrowings
under the loan agreement are guaranteed by Luoyang Zhongpin.
In May 2002, Henan Zhongpin entered into
a loan agreement with the 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 $42,083, which includes both principal and interest, that is payable on a semi-annual
basis through November 15, 2041. Borrowings under the loan agreement are guaranteed by the Financing Department of Henan province.
Of the $435.5 million short-term and long-term
loans outstanding as of March 31, 2013, $134,154,317 are secured by land use rights and property, plant and equipment of the Company’s
subsidiaries. The total amount of land use rights and property, plant and equipment pledged was $191,620,720 as of March 31, 2013.
During the three months ended March 31,
2013 and 2012, the stock-based compensation expenses were nil and $417,749, respectively.
During the three months ended March 31,
2013 and 2012, no warrants or options were exercised.
During the three months ended March 31,
2013 and 2012, the Company repurchased nil and 368,300 shares of common stock from the public market, respectively. The average
cost per share, including commission, was $8.4023 for repurchased shares for the three months ended March 31, 2012.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The following table sets forth the computation
of basic and diluted net earnings per share for the periods indicated:
|
|
Three Months Ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable
to common shares
|
|
$
|
10,609,714
|
|
|
$
|
12,197,315
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding –
basic
|
|
|
37,209,344
|
|
|
|
37,498,563
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
69,286
|
|
|
|
4,456
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding –
diluted
|
|
|
37,278,630
|
|
|
|
37,503,019
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.33
|
|
Diluted earnings per share
|
|
$
|
0.28
|
|
|
$
|
0.33
|
|
Of the 787,000
options and warrants outstanding at March 31, 2013, 514,000 options
were anti-dilutive and therefore excluded from the
computation of diluted earnings per share for the three months ended March 31, 2013. 273,000 options and warrants were dilutive
and therefore included in the computation of diluted earnings per share for the three months ended March 31, 2013.
|
12.
|
FAIR VALUE MEASUREMENT
|
The Company has adopted ASC Topic 820,
Fair Value Measurement and Disclosure
, which defines fair value, establishes a framework for measuring fair value in GAAP,
and expands disclosures about fair value measurements. It does not require any new fair value measurements, but provides guidance
on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. It establishes
a three-level valuation hierarchy of valuation techniques based on observable and unobservable inputs, which may be used to measure
fair value and include the following:
Level 1 – Quoted prices in active markets for identical
assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable,
either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of
the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little
or no market activity and that are significant to the fair value of the assets or liabilities.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Classification within the hierarchy is
determined based on the lowest level of input that is significant to the fair value measurement.
The carrying value of financial items
of the Company including cash and cash equivalents, restricted cash, other receivables, advance to vendors, accrued liabilities
and short-term borrowings loans, approximate their fair values due to their short-term nature and are classified within Level
1 of the fair value hierarchy. The Company’s financial items are classified within Level 1 of the fair value hierarchy.
The carrying amount of cash and cash equivalents, accounts receivable, other receivables, advance to vendors, accounts payable,
accrued liabilities, short-term financial bonds and short-term loans are reasonable estimates of their fair value because of the
short term nature of these items.
The following table sets forth the Company's
financial assets and liabilities not measured at fair value on a recurring basis and where they are classified within the hierarchy
as of March 31, 2013:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases
|
|
$
|
31,903,524
|
|
|
|
—
|
|
|
$
|
31,903,524
|
|
|
|
—
|
|
Note receivable
|
|
$
|
64,794,294
|
|
|
|
—
|
|
|
$
|
64,794,294
|
|
|
|
—
|
|
Long term loans
|
|
$
|
188,677,479
|
|
|
|
—
|
|
|
$
|
188,677,479
|
|
|
|
—
|
|
Note receivable approximates fair value
since it bears interest at Shanghai interbank offered rate, as is normally charged for notes of similar nature. Long-term debt
approximates fair value since the bank term loans are fixed rate instruments and bear interests at the rate dictated and published
by the People's Bank of China. The current rates published by the People's Bank of China approximate the interest rates of the
loans outstanding.
The Company
operates in only one segment: meat production.
The Company's
vegetable and fruit operations, both financially and operationally, do not represent a significant enough portion of its 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 retail stores and to food retailers, food service distributors, restaurant operators and
noncommercial food service 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 25
categories of vegetables and fruits, including asparagus, sweet corn, broccoli, mushrooms, lima beans and strawberries.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
|
|
Sales by Division
(U.S.
dollars in millions)
Three Months Ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Pork and Pork Products:
|
|
|
|
|
|
|
|
|
Chilled Pork
|
|
$
|
243.1
|
|
|
$
|
248.8
|
|
Frozen Pork
|
|
|
58.6
|
|
|
|
67.0
|
|
Prepared Pork Products
|
|
|
78.4
|
|
|
|
55.7
|
|
Vegetables and Fruits
|
|
|
2.3
|
|
|
|
2.6
|
|
Total
|
|
$
|
382.4
|
|
|
$
|
374.1
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
|
|
|
|
|
|
Pork Products
|
|
$
|
341.9
|
|
|
$
|
336.4
|
|
Vegetables and Fruits
|
|
|
2.0
|
|
|
|
2.3
|
|
|
|
|
|
|
|
|
|
|
Gross Profit Margin:
|
|
|
|
|
|
|
|
|
Pork Products
|
|
|
10.0
|
%
|
|
|
9.4
|
%
|
Vegetables and Fruits
|
|
|
13.0
|
%
|
|
|
11.5
|
%
|
|
14.
|
COMMITMENTS
AND CONTINGENCIES
|
Mutual Guarantee
In May 2012, Henan Zhongpin
entered into a mutual guarantee agreement with Huanghe Group, upon the expiration of a previous mutual guarantee agreement between
Henan Zhongpin and Huanghe Group. Under the agreement, Henan Zhongpin agreed to guarantee bank loans of Huanghe Group in an amount
up to $23.9 million and Huanghe Group agreed to guarantee Henan Zhongpin’s bank loans in an amount up to $23.9 million.
The agreement will expire in May 2013. 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.
The business purpose for the mutual guarantee
is to provide each party with a credit line from banks that would have otherwise been unavailable absent the guarantee. As bank
credit loans are generally unavailable in China, companies are required to provide either a pledge of assets, a third-party guarantee
or a combination of both in order to receive loans. In the case of pledges, companies can pledge their assets, including, among
other things, land, buildings and machines, to banks as collateral to secure loans; however, banks generally will only loan up
to 50% to 70% of the value of the pledged assets. Alternatively, if a company provides the banks with a guarantee agreement, the
banks generally will loan up to 90% to 100% of the amount being guaranteed.
Henan Zhongpin’s obligation as
guarantor to repay loans on behalf of Huanghe Group will only arise if Huanghe Group cannot repay its loans and proceeds from
liquidating Huanghe Group’s pledged assets are insufficient to cover its outstanding debt. Henan Zhongpin’s actual
liability for such guarantee, should the guarantee obligation become due, will vary depending on the difference between the outstanding
bank loan plus accrued interest and the proceeds received for the liquidated collateral. Henan Zhongpin did not pledge any of
its assets in connection with the mutual guarantee agreement as this guarantee was not based on credit quality concerns, but rather
based on the local banks’ requirements. In the event Henan Zhongpin is required to pay all or a portion of any loans covered
by the mutual guarantee, Henan Zhongpin would seek reimbursement for such payment from Huanghe Group.
At March 31, 2013, Henan Zhongpin had
outstanding guarantees for $19.7 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. As a result, the maximum potential amount of future payments (undiscounted)
Henan Zhongpin could be obligated to make under the mutual guarantee at such date was $19.7 million. The Company did not record
any liability on its balance sheet with respect to this mutual guarantee as the Company believes, based upon its continuing due
diligence on Huanghe Group and its business, that Henan Zhongpin’s liability there under remains contingent.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Legal Proceedings
On March 27, 2012, the Company announced
that its Board of Directors had received a preliminary, non-binding proposal from the Company’s Chairman and Chief Executive
Officer, Xianfu Zhu, stating that Mr. Zhu intended to seek to purchase the remaining shares of the Company that he does not presently
own (the “Proposed Buyout”). Following this announcement, at least three lawsuits have been filed in Delaware naming
the members of the Company's Board of Directors and/or the Company as defendants. On November 26, 2012, the Company announced
that it had entered into a definitive merger agreement with Golden Bridge Holdings Limited, a Cayman Islands exempted company
("Parent"), Golden Bridge Merger Sub Limited, a Delaware corporation and wholly owned subsidiary of Parent ("Merger
Sub") and Mr. Xianfu Zhu, which was subsequently amended and restated on February 8, 2013 (the “Merger Agreement”).
Pursuant to the Merger Agreement and subject to the satisfaction or waiver of the conditions to the transactions contemplated
thereby, at the effective time of the merger, each share of the Company common stock issued and outstanding immediately prior
to the effective time (other than shares owned by (i) Parent or Merger Sub, (ii) Mr. Xianfu Zhu, Mr. Baoke Ben, Mr. Chaoyang Liu,
Mr. Qinghe Wang, Mr. Shuichi Si and Ms. Juanjuan Wang, (iii) the Company or any direct or indirect wholly-owned subsidiary of
the Company or (iv) stockholders who have properly exercised and perfected appraisal rights under Delaware law), will be converted
automatically into the right to receive $13.50 in cash, without interest. On March 15, 2013, the Company filed with the SEC a
Schedule 13e-3 relating to the Proposed Buyout together with a preliminary proxy statement relating to a special meeting of stockholders
to adopt the Merger Agreement (collectively, and together with all filings with the SEC that are ancillary thereto, and all amendments
and supplements thereof, the “Transaction Filings”).
Following the November 2012 announcement
of the Merger Agreement, two additional lawsuits were filed in Delaware naming as defendants the members of the Company’s
Board of Directors, the Company, Parent, and Merger Sub. It is possible that more lawsuits will occur.
On April 3, 2012, a verified shareholder
class action lawsuit was filed by Phillip Meeks in the Court of Chancery of the State of Delaware against the Company and members
of its Board of Directors, alleging that, inter alia, the Company's Board of Directors breached their fiduciary duties in connection
with the Proposed Buyout, and that the price per share proposed by Mr. Zhu represented inadequate consideration in light of the
Company’s intrinsic value and future prospects, and that the Company aided and abetted the breach of fiduciary duties. The
plaintiff seeks damages, declaratory relief and injunctive relief, including an order preventing the Company from proceeding with
the Proposed Buyout or any transaction with Mr. Zhu, as well as an award of plaintiffs’ attorneys’ fees and costs.
The Company believes that none of the defendants has yet responded to the complaint.
On April 11, 2012, a verified shareholder
class action lawsuit was filed by Richard Bauschard in the Court of Chancery of the State of Delaware against members of the Company's
Board of Directors, alleging that, inter alia, the Board of Directors breached their fiduciary duties in connection with the Proposed
Buyout, and that the price per share proposed by Mr. Zhu represented inadequate consideration in light of the Company’s
intrinsic value and future prospects. The plaintiff seeks damages, declaratory relief and injunctive relief, including an order
preventing the defendants from proceeding with the Proposed Buyout or any transaction with Mr. Zhu, as well as an award of plaintiffs’
attorneys’ fees and costs. On April 12, 2013, plaintiff Richard Bauschard filed an amended complaint. The amended complaint
names the same defendants and includes the same cause of action alleging breach of fiduciary duties, but the amended complaint
includes additional allegations relating to the terms of the Merger Agreement and the disclosures contained in the preliminary
proxy statement filed by the Company on March 15, 2013 with the SEC. The Company believes that none of the defendants has yet
responded to the complaint.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
On April 18, 2012, a verified shareholder
class action lawsuit was filed by Harry Vonderlieth in the Court of Chancery of the State of Delaware against the Company and
members of its Board of Directors, alleging that, inter alia, the Company's Board of Directors breached their fiduciary duties
to the shareholders in connection with the Proposed Buyout, and that the price per share proposed by Mr. Zhu represented inadequate
consideration in light of the Company’s intrinsic value and future prospects, and that the Company aided and abetted the
breach of fiduciary duties. The plaintiff seeks damages, declaratory relief and injunctive relief, including an order preventing
the Company from proceeding with the Proposed Buyout or any transaction with Mr. Zhu, as well as an award of plaintiffs’
attorneys’ fees and costs. The Company believes that none of the defendants has yet responded to the complaint. On May 2,
2013, plaintiff Harry Vonderlieth voluntarily dismissed this case and the Court of Chancery of the State of Delaware granted the
dismissal on May 3, 2013.
On December 4, 2012, after the announcement
of the Company’s entering into the Merger Agreement, a verified shareholder class action lawsuit was filed by Ernesto Rodriguez
in the Court of Chancery of the State of Delaware against the Company and members of its Board of Directors, Parent and Merger
Sub, alleging that, inter alia, the Company’s Board of Directors breached their fiduciary duties to the Company’s
shareholders in connection with the Proposed Buyout and the Merger Agreement, and that the price per share and other terms provided
for in the Merger Agreement are inadequate and unfair in light of the Company’s intrinsic value and future prospects, and
that the Company, Parent and Merger Sub aided and abetted the breach of fiduciary duties. The plaintiff seeks damages, declaratory
relief and injunctive relief, including an order preventing the Company from proceeding with the Proposed Buyout or any transaction
with Mr. Zhu, as well as an award of plaintiffs’ attorneys’ fees and costs. On or about February 6, 2013, the
plaintiff served document discovery on the individual defendants. On April 12, 2013, plaintiff Ernesto Rodriguez filed an amended
complaint. The amended complaint names the same defendants and includes the same cause of action alleging breach of fiduciary
duties, but the amended complaint includes additional allegations relating to the disclosures contained in the preliminary proxy
statement filed by the Company on March 15, 2013 with the SEC. The Company believes that none of the defendants has yet responded
to the complaint or the discovery served by the plaintiff.
On April 23, 2013, after the announcement
of the Company’s entering into the Merger Agreement and certain of the Transaction Filings were made, a verified shareholder
class action lawsuit was filed by Alan Hall in the Court of Chancery of the State of Delaware against the Company and members
of its Board of Directors, Parent and Merger Sub, alleging that, inter alia, the Company’s Board of Directors breached their
fiduciary duties to the Company’s shareholders in connection with the Proposed Buyout and the Merger Agreement, and that
the price per share and other terms provided for in the Merger Agreement are inadequate and unfair in light of the Company’s
intrinsic value and future prospects, that the Transaction Filings contain materially misleading misstatements and omissions,
and that the Company, Parent and Merger Sub aided and abetted the breach of fiduciary duties. The plaintiff seeks damages, declaratory
relief and injunctive relief, including an order preventing the Company from proceeding with the Proposed Buyout, or any transaction
with Mr. Zhu, as well as an award of plaintiffs’ attorneys’ fees and costs. The Company believes that none of the
defendants has yet responded to the complaint.
On or about April 22, 2013, plaintiff Richard
Bauschard filed a motion to consolidate and appoint lead counsel with the Court of Chancery of the State of Delaware, moving the
Court for an order providing for (i) the consolidation of the aforesaid lawsuits filed by Phillip Meeks, Richard Bauschard, Harry
Vonderlieth and Ernesto Rodriguez, and (ii) the appointment of lead counsel and Delaware liaison counsel in the consolidated matter.
The Company believes that none of the defendants has yet responded to the motion.
The Company intends to defend against the
pending class action litigation vigorously.
In accordance with accounting standards
regarding loss contingencies, the Company accrues an undiscounted liability for those contingencies where the incurrence of a
loss is probable and the amount can be reasonably estimated, and the Company discloses the amount accrued and an estimate of any
reasonably possible loss in excess of the amount accrued, if such disclosure is necessary for the Company’s financial statements
not to be misleading. The Company does not accrue liabilities when the likelihood that the liability has been incurred is probable
but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote.
ZHONGPIN INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Because litigation outcomes are inherently
unpredictable, the evaluation of legal proceedings often involves a series of complex assessments by management about future events
and can rely heavily on estimates and assumptions. If the assessments indicate that loss contingencies that could be material
to any one of the Company’s financial statements are not probable, but are reasonably possible, or are probable, but cannot
be estimated, then the Company discloses the nature of the loss contingencies, together with an estimate of the possible loss
or a statement that such loss is not reasonably estimable.
With respect to the legal proceedings
and claims described above, such litigation is still in its preliminary stages and the final outcome, including the Company’s
liability, if any, with respect to such litigation, is uncertain. At present, the Company is unable to estimate a reasonably possible
range of loss, if any, that may result from such litigation. If an unfavorable outcome were to occur in the litigation described
above, the impact could be material to the Company’s business, financial condition, or results of operations.
In addition, it is not possible to determine
the maximum potential amount under the indemnification provisions under the terms and conditions of applicable bylaws, certificates
or articles of incorporation, agreements or applicable law due to the limited history of prior indemnification claims and the
preliminary stages of the litigation.
Capital Leases
In March 2013,
Henan
Zhongpin entered into a sale-leaseback agreement with CMB Leasing pursuant to which Henan Zhongpin sold to CMB Leasing equipment
with a net book value of $47.6million for $43.8 million and leased such equipment back. The lease payments for this equipment
are paid on a quarterly basis over a four-year period and consist of a fixed payment based upon a 48-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 March 31, 2013, the quarterly rental fee under the agreement was $2,246,214, which included an
interest component calculated at the rate of 5.82% and adjustable in the quarter following any rate adjustments published by the
People’s Bank of China. The sale-leaseback agreement will end in March 2017. Henan Zhongpin has the right to repurchase
all of the equipment under the sale-leaseback agreement for a nominal purchase price at the end of the lease term. The sale-leaseback
agreement was guaranteed by Mr. Xianfu Zhu, the Company’s Chairman and Chief Executive Officer.
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 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 that 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”
under Part II, Item 1A herein and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012.
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 China. Currently, we have 15 processing plants in China, located in Henan, Jiangsu
and Jilin provinces and in the municipality of Tianjin. Our total production capacity for chilled pork and frozen pork is approximately
1,899.3 metric tons per eight-hour day, or approximately 683,760 metric tons on an annual basis. In addition, we have production
capacity for prepared meats of approximately 488.9 metric tons per eight-hour day, or approximately 176,000 metric tons on an
annual basis, and for vegetables and fruits of approximately 83.3 metric tons per eight-hour day, or approximately 30,000 metric
tons on an annual basis. We have annual production capacity for food oil (pork oil) of approximately 20,000 metric tons. We also
have annual production capacity for 100 million meters of sausage casings and 300 billion units of raw material to make heparin
sodium. We use state-of-the-art equipment in all of our processing facilities and sell all of our products under our “Zhongpin”
brand name.
In December 2009, the PRC Ministry of Commerce
issued the Hog Slaughtering Industry Development Guidelines for 2010−2015. The guidelines state that the government will
control the number of slaughterhouses in China and specifically that there should be less than four slaughterhouses in urban areas
of municipalities and cities with a resident population of five million or more, and less than two slaughterhouses in urban areas
of other cities at or above the prefecture level.
In June 2010, the China Meat Association
(“CMA”) announced the China Meat Industry Development Strategy Report for 2011−2015. In that report, CMA provided
a development roadmap and targets for the meat industry for the coming five years:
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To decrease
the sales of room
temperature pork
to below 50% of
total pork sales
in cities at or
above county level
in China by 2015;
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To increase
the sales of chilled
pork to around 30%
of the total pork
sales in China by
2015;
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To decrease
outstanding licenses
for slaughterhouses
from more than 21,000
to around 3,000
in China by 2015;
and
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To build pork
and pork product
production bases
in North China,
Northeast China,
East China and Southwest
China.
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The report indicates to us
that
there is an opportunity to consolidate and integrate the industry for companies with strong brand recognition in China's meat
industry, high quality facilities and products, strict quality control systems and cold chain logistics capabilities.
Government and
consumers take food safety as one of their top priorities.
With the government support, the consolidation of the industry
is accelerating.
Our growth strategy
will include expanding our production capacity in the strategic areas in response to the suggestions in the report. We plan to
build new facilities for chilled and frozen pork, as well as new facilities for prepared pork products and cold chain logistic
distribution centers. We may also explore opportunities to acquire companies with strong regional brand recognition that produce
prepared pork products using high quality facilities. We expect that these new facilities, together with our existing ones, will
help us to build “Zhongpin” into a stronger, national brand, increase our market share, revenues and net income and
strengthen our ability to
take advantage of consolidation opportunities
in
the meat industry in China.
We put into operation, are currently constructing,
or plan to construct, additional production facilities in different parts of China:
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We are
investing
approximately
$18.0 million
in a cold
chain logistic
distribution
center in
Anyang, Henan
province.
This distribution
center will
have a 27,000
square meters
temperature
adjustable
warehouse,
processing
capacity,
distribution
center and
quality control
center. This
distribution
center will
be used for
third party
cold chain
logistic
service.
We expect
to put this
distribution
center into
operation
in the second
quarter of
2013.
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We are investing approximately
$87.5 million in a chilled
and frozen food processing
and distribution center
in Kunshan, Jiangsu province,
which is near Shanghai
city. The whole center
will be built in three
phases. The first phase
will include a processing
center, cold chain logistics
center and business complex.
We invested about $35.0
million on the first phase
and put it into operation
in February 2013.
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We are investing approximately
$58.5 million to build
a new production, research
and development, and training
complex in Changge, Henan
province excluding the
cost of land use rights
that we have already obtained.
When completed, we anticipate
that this new facility
will have a production
capacity of approximately
100,000 metric tons for
prepared pork products.
Adjacent to this new production
facility, we also plan
to develop a center for
research and development,
training, as well as quality
assurance and control.
Construction for the first
phase with a production
capacity of approximately
50,000 metric tons for
prepared pork products
started in the second quarter
of 2011 and was completed
in the second quarter of
2012. We started trial
production in this facility
in July 2012, and started
the regular production
at the end of the third
quarter of 2012.
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We established
a joint venture
company,
of which
we own 65%,
with Henan
Xinda Animal
Husbandry
Company Limited
in June 2011.
The joint
venture company
is financed
by capital
contributions
and bank
loans. All
capital contributions
to the joint
venture company
have been
made . We
expect the
new company
will provide
20,000 sire
boars annually.
Upon the
completion
of the building
of infrastructures
for sire
boars breeding
in the third
quarter of
2012, we
leased the
facility
to a third
party for
annual rental
in the amount
of RMB5.0
million.
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We will
be investing
approximately
$47.6 million
to build
a cold-chain
logistic
distribution
center in
Tangshan,
Hebei province.
This distribution
center will
have a 27,000
square meters
temperature
adjustable
warehouse,
processing
capacity,
distribution
center, and
quality control
center. This
distribution
center will
be used for
third-party
cold-chain
logistics
service.
We expect
to put this
distribution
center into
operation
in the fourth
quarter of
2013.
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Our products are sold under the “Zhongpin”
brand name. As of March 31, 2013, our wholesale customers included 158 international and domestic fast food companies in China,
167 processing factories and 1,392 school cafeterias, hotels, factory canteens, army bases, and government departments. As of
such date, we also sold directly to 3,502 retail outlets, including supermarkets, within China.
We have established distribution networks
in 20 provinces and in the four central government- administered municipalities of Beijing, Shanghai, Tianjin and Chongqing in
the North, East, South and Mid-South regions of China, and have also formed strategic business alliances with leading supermarket
chains within China. We also export our products to Europe, Hong Kong as well as other selected countries and regions in Asia.
As of March 31, 2013, we had 7,492 employees,
of whom 5,551 were operating personnel, 1,432 were sales personnel, 130 were research and development personnel and 379 were administrative
personnel. We are not subject to any collective bargaining agreement and we believe our relationship with our employees is good.
On March 27, 2012, our Board of Directors
received a preliminary non-binding proposal from our Chairman and Chief Executive Officer, Mr. Xianfu Zhu, to buy all of the shares
of our common stock not currently owned by him for $13.50 per share (the “Proposed Buyout”). Following receipt of
the proposal, our Board of Directors formed a special committee of independent directors to consider the proposal and any amendments
thereto as well as any alternative proposals. . On November 26, 2012, we entered into a definitive Agreement and Plan of Merger
with Golden Bridge Holdings Limited, a Cayman Islands exempted company with limited liability (“Parent”), Golden Bridge
Merger Sub Limited, a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”) and Mr. Xianfu Zhu,
which was subsequently amended and restated on February 8, 2013 (the “Merger Agreement”). Pursuant to the Merger Agreement
and subject to the satisfaction or waiver of the conditions to the transactions contemplated thereby, at the effective time of
the merger, each share of our common stock issued and outstanding immediately prior to the effective time (other than shares owned
by (i) Parent or Merger Sub, (ii) Mr. Xianfu Zhu, Mr. Baoke Ben, Mr. Chaoyang Liu, Mr. Qinghe Wang, Mr. Shuichi Si and Ms. Juanjuan
Wang (collectively, the “Rollover Holders”), (iii) our company or any direct or indirect wholly-owned subsidiary of
us or (iv) stockholders who have properly exercised and perfected appraisal rights under Delaware law), will be converted automatically
into the right to receive $13.50 in cash (the “Per Share Merger Consideration”), without interest. Collectively, the
Rollover Holders own approximately 26% of our outstanding common stock. The Per Share Merger Consideration of $13.50 represents
a premium of approximately 47% over the closing price on March 26, 2012, the last trading day prior to our March 27, 2012 announcement
of the Proposed Buyout. Under the Merger Agreement, the going private transaction contemplated thereunder is required to be approved
by affirmative vote of the holders of a majority of the outstanding shares of our common stock and a majority of outstanding shares
of our common stock other than shares of our common stock owned by Parent, Merger Sub, the Rollover Holders, and their respective
affiliates at a stockholders’ meeting. There can be no assurance that the going private transaction will receive the required
vote.
Critical Accounting Policies
Unless otherwise noted, all translations
from RMB to U.S. dollars were made at the middle rate published by the People’s Bank of China, or the middle rate, as of
March 29, 2013, which was RMB6.2689 to $1.00. We make no representation that the RMB amounts referred to in this Quarterly Report
on Form 10-Q could have been or could be converted into U.S. dollars at any particular rate or at all. On May 6, 2013, the middle
rate was RMB6.2114 to $1.00.
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
continually evaluate our policies and estimation procedures.
Estimates are often based on historical experience and on
assumptions that are believed to be reasonable under the circumstances, but which could change in the future.
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 valid 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 customers to make deposits in reasonable
and meaningful amounts on a case-by-case basis. 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 four to eight 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 to four weeks. For restaurants and food service
customers, the credit terms are four to eight weeks. These credit terms are subject to negotiation if requested by our customers,
and credit limits vary depending on the credit worthiness and sales volume of the individual customers, which may be increased
at times to accommodate for deteriorating economic circumstances. Any adjustment must be approved and credit limits are frequently
reviewed by designated management.
We regularly evaluate and monitor the creditworthiness
of each of our customers in accordance with the prevailing practice in the meat industry, considering factors such as general
economic conditions and industry-specific economic condition in China, historical customer performance, as well as anticipated
customer performance. We maintain 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. We also examine the credit terms of significant customers regularly and ask for more cash deposits
if these customers appear to have any indicators of delaying their payments to us. Such deposits are usually applied towards the
outstanding accounts receivable. The focus of our collection effort is on receivable balances less than one year old, as receivable
over a year old has typically been insignificant compared to the total gross receivable. With such a practice in place, we did
not have any specific bad debt allowance provided against specific customers as of March 31, 2013.
Inventories.
Inventories
are comprised of raw materials and low-value consumables, work-in-progress, and finished goods. Inventories are stated at the
lower of cost or market-based prices according to 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. We regularly inspect the shelf life of prepared foods and, if necessary, writes down their carrying value
based on their salability and expiration dates as cost of goods sold.
Leases.
We classified our
leases at the inception date as either a capital lease or an operating lease. To determine if a lease is a capital lease, we evaluate
if the following conditions exist: a) ownership is transferred to the lessee by the end of the lease term, b) there is a bargain
purchase option, c) the lease term is at least 75% of the property’s estimated remaining economic life or d) the present
value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property
to the lessor at the inception date. A capital lease is accounted for as if there was an acquisition of an asset and an incurrence
of an obligation at the inception of the lease. We account for all other leases as operating leases. In March 2013, we entered
into a sale-leaseback agreement with CMB Leasing Co., Ltd. to sell and lease back equipment. For details of the transaction, see
Note 14
“
Commitments and Contingencies” in the Notes to Condensed Consolidated Financial
Statements.
Results of Operations
In 2013, we intend to continue to focus
on the implementation of our strategic plan to sustain the growth we have experienced since becoming a U.S. public company in
2006. 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 further improve and expand our unified, safe and efficient cold-chain logistics system. We also
have invested in employee training and development to help sustain our rapid and healthy growth while maintaining a satisfactory
profit margin.
In 2013,
we
expect that the demand for pork in China and the results of the pork and pork products segment of our business will remain strong
while live hog prices will remain at current levels, compared with 2012. We anticipate that our profit margin in 2013 will decrease
due to increased competition in the industry, the expected increase in labor cost and overheads, and the expected increase in
quality assurance and control cost in response to increased importance on food safety placed by the government and consumers.
Comparison of Three Months Ended March 31, 2013 and 2012
Revenue
. Total revenue increased
from $374.1 million for the three months ended March 31, 2012 to $382.4 million for the three months ended March 31, 2013, which
represented an increase of $8.3 million, or approximately 2%. The increase in revenues was primarily due to increased sales volume
in our meat and meat products segment resulting from the effects of the continuing increases in the number of our retail outlets,
geographic expansion of our distribution network and processing facilities, and increased sales to chain restaurants, food service
providers, and wholesalers and distributors in China since the second quarter of 2012, which was partially offset by the decreased
average selling price of our pork products resulting from market fluctuations and industry competition during the first quarter
of 2013. The following table presents certain information regarding our sales by product division for the three months ended March
31, 2013 and 2012.
|
|
Sales by Division
(unaudited)
|
|
|
|
Three Months Ended
March 31, 2013
|
|
|
Three Months Ended
March 31, 2012
|
|
|
|
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
|
|
|
92,349
|
|
|
$
|
243.1
|
|
|
$
|
2,632
|
|
|
|
87,146
|
|
|
$
|
248.8
|
|
|
$
|
2,855
|
|
Frozen pork
|
|
|
25,282
|
|
|
|
58.6
|
|
|
|
2,318
|
|
|
|
25,523
|
|
|
|
67.0
|
|
|
|
2,625
|
|
Prepared pork products
|
|
|
30,657
|
|
|
|
78.4
|
|
|
|
2,557
|
|
|
|
21,426
|
|
|
|
55.7
|
|
|
|
2,600
|
|
Vegetables and Fruits
|
|
|
2,498
|
|
|
|
2.3
|
|
|
|
921
|
|
|
|
2,906
|
|
|
|
2.6
|
|
|
|
895
|
|
Total
|
|
|
150,786
|
|
|
$
|
382.4
|
|
|
$
|
2,536
|
|
|
|
137,001
|
|
|
$
|
374.1
|
|
|
$
|
2,731
|
|
The pork market in China is highly fragmented
and in the markets where we sell our products, no single supplier has a significant impact on the market price of pork or 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 first quarter of 2013, we decreased
our sales of chilled pork products by approximately $5.7 million over the amount of our sales of such products in the first quarter
of 2012. As shown in the table above, our average price during the first quarter of 2013 was approximately $2,632 per metric ton
for chilled pork, compared to $2,855 during the first quarter of 2012, a decrease of 8%. The number of metric tons of chilled
pork sold during the first quarter of 2013 increased by 5,203, or 6% from the first quarter of 2012. Our total revenue decreased
primarily due to the decrease in the average selling prices of our chilled pork products as a result of fluctuations in the market
price of pork or pork-related products which was partially offset by our increased volume of sales.
In the first quarter of 2013, we decreased
our sales of frozen pork products by approximately $8.4 million over the amount of our sales of such products in the first quarter
of 2012. Our average price during the first quarter of 2013 was approximately $2,318 per metric ton for frozen pork compared to
$2,625 during the first quarter of 2012, a decrease of 12%. The number of metric tons of frozen pork sold during the first quarter
of 2013 decreased by 241, or 1% from the first quarter of 2012. The sales volume decreased in the first quarter of 2013 due to
our strategic adjustment of our product mix towards selling less frozen pork products which have a lower profit margin. The average
selling prices of our frozen pork products decreased due to fluctuations in the market price of pork or pork-related products.
In the first quarter of 2013, we increased
our sales of prepared pork products by approximately $22.7 million over the amount of our sales of such products in the first
quarter of 2012. Our average price during the first quarter of 2013 was approximately $2,557 per metric ton for prepared pork
products compared to $2,600 during the first quarter of 2012, a decrease of 2%. The number of metric tons of prepared pork products
sold during the first quarter of 2013 increased by 9,231, or 43% from the first quarter of 2012. This product division is becoming
more important to our business as customers increasingly demand prepared pork products for their convenience and flavor. We plan
to gradually increase sales from prepared pork products by building our brand recognition and expanding our capacities for this
division.
The sales of meat and vegetable 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 first quarter of 2013 was partly attributable to our efforts to expand our distribution channels.
The following table shows the changes in our distribution channels:
|
|
Numbers of Stores and Cities Generating Sales Volume
(unaudited)
|
|
|
|
March 31,
|
|
|
Net
|
|
|
Percentage
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
of Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Showcase stores
|
|
|
152
|
|
|
|
161
|
|
|
|
(9
|
)
|
|
|
(6
|
)%
|
Branded stores
|
|
|
1,497
|
|
|
|
1,329
|
|
|
|
168
|
|
|
|
13
|
%
|
Supermarket counters
|
|
|
1,853
|
|
|
|
1,948
|
|
|
|
(95
|
)
|
|
|
(5
|
)%
|
Total
|
|
|
3,502
|
|
|
|
3,438
|
|
|
|
64
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First-tier cities
|
|
|
29
|
|
|
|
29
|
|
|
|
—
|
|
|
|
—
|
|
Second-tier cities
|
|
|
137
|
|
|
|
134
|
|
|
|
3
|
|
|
|
2
|
%
|
Third-tier cities
|
|
|
439
|
|
|
|
435
|
|
|
|
4
|
|
|
|
1
|
%
|
Total
|
|
|
605
|
|
|
|
598
|
|
|
|
7
|
|
|
|
1
|
%
|
The expansion in our distribution channels
and geographical coverage has been a significant factor in the increase in our sales volume. The following table shows our revenues
by distribution channel for the first quarter of 2013 and 2012, respectively.
|
|
Sales by Distribution Channel
(in millions)
(unaudited)
|
|
|
|
March 31,
|
|
|
Net
|
|
|
Percentage
|
|
|
|
2013
|
|
|
2012
|
|
|
Change
|
|
|
of Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail channels
|
|
$
|
115.3
|
|
|
$
|
117.0
|
|
|
$
|
(1.7
|
)
|
|
|
(1
|
)%
|
Wholesalers and distributors
|
|
|
157.2
|
|
|
|
153.7
|
|
|
|
3.5
|
|
|
|
2
|
%
|
Restaurants and food services
|
|
|
104.6
|
|
|
|
96.1
|
|
|
|
8.5
|
|
|
|
9
|
%
|
Import and export
|
|
|
5.3
|
|
|
|
7.3
|
|
|
|
(2.0
|
)
|
|
|
(27
|
)%
|
Total
|
|
$
|
382.4
|
|
|
$
|
374.1
|
|
|
$
|
8.3
|
|
|
|
2
|
%
|
The increase in sales to different distribution
channels was mainly due to the following factors:
|
·
|
we have built
our brand image
and brand recognition
through general
advertising, display
promotions and
sales campaigns;
|
|
·
|
we have increased
the number of stores
and other channels
through which we
sell our products;
and
|
|
·
|
we
believe
consumers
are
placing
more
importance
on
food
safety
considerations
and
are
willing
to
pay
higher
prices
for
safe
food
products.
|
Cost of Sales.
Our cost of sales primarily includes our costs of raw materials, labor costs, and overhead.
Of our total cost of sales,
our cost of raw materials typically accounts for approximately 95.5% to 95.8%, our overhead typically accounts for 2.7% to 2.8%
and our labor costs typically account for 1.5% to 1.7%, 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 farms 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. The increase in our cost of sales was
consistent with but considerably lower than our increase in sales revenue.
|
|
Cost of Sales by Division
(unaudited)
|
|
|
|
Three Months Ended
March 31, 2013
|
|
|
Three Months Ended
March 31, 2012
|
|
|
|
Metric
Tons
|
|
|
Cost of Sales
(in millions)
|
|
|
Average
Cost/
Metric
Ton
|
|
|
Metric
Tons
|
|
|
Cost of
Sales
(in millions)
|
|
|
Average
Cost/
Metric
Ton
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pork and Pork Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilled pork
|
|
|
92,349
|
|
|
$
|
221.3
|
|
|
$
|
2,396
|
|
|
|
87,146
|
|
|
$
|
227.1
|
|
|
$
|
2,606
|
|
Frozen pork
|
|
|
25,282
|
|
|
|
54.8
|
|
|
|
2,168
|
|
|
|
25,523
|
|
|
|
62.8
|
|
|
|
2,461
|
|
Prepared pork products
|
|
|
30,657
|
|
|
|
65.8
|
|
|
|
2,146
|
|
|
|
21,426
|
|
|
|
46.5
|
|
|
|
2,170
|
|
Vegetables and Fruits
|
|
|
2,498
|
|
|
|
2.0
|
|
|
|
801
|
|
|
|
2,906
|
|
|
|
2.3
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
150,786
|
|
|
$
|
343.9
|
|
|
$
|
2,281
|
|
|
|
137,001
|
|
|
$
|
338.7
|
|
|
$
|
2,472
|
|
Our gross profit
margin (gross profit divided by sales revenue) increased from 9.5% for the three months ended March 31, 2012 to 10.1% for the
three months ended March 31, 2013. The increase in our gross margin during the first quarter of 2013 was primarily due to
(i)
higher percentage of revenue from prepared pork products, which contribute a higher margin than other products, and (ii) the increase
in the gap between pork prices over hog prices, which is the bulk of our cost of sales.
General and
Administrative Expenses.
General and administrative expenses increased from $9.4 million for the three months ended March
31, 2012 to $11.1 million for the three months ended March 31, 2013
which represented an increase of $1.7 million, or approximately
18%
. As a percentage of revenues, general and administrative expenses increased from 2.5% for the three
months ended March 31, 2012 to 2.9% for the three months ended March 31, 2013.
The increase in general and
administrative expenses during the three months ended March 31, 2013 was primarily the result of a $0.2 million increase in
bad debt provision due to the increased account receivable balance on March 31, 2013, a $0.3 million increase in
salary expenses because the average salary we paid to our employees increased, and a $0.7 million increase in administrative expenses
primarily due to higher expenses related to the going private transaction.
Selling
Expenses.
Selling expenses increased from $6.4 million for the three months ended March 31, 2012 to $8.7 million for
the three months ended March 31, 2013, which represented an increase of $2.3 million, or approximately 34%. The increase
in selling expenses was primarily the result of our increased sales of pork and pork products and was primarily due to a
$0.3 million increase in salary expenses because the average salary we paid to our employees increased, a $0.8 million
increase in promotion expenses for increasing promotional activities to compete more effectively in the industry, and a $0.6
million increase in super market management fees. As a percentage of revenue, selling expenses increased from 1.7% for
the three months ended March 31, 2012 to 2.3% for the three months ended March 31, 2013.
Interest Expense (net of interest income).
Interest expense increased from $7.6 million for the three months ended March 31, 2012 to $8.3 million for the three months
ended March 31, 2013, which represented an increase of $0.7 million, or approximately 9%. The increase in interest expense net
of interest income was primarily due to higher average outstanding loan balances in the three months ended March 31, 2013 compared
to three months ended March 31, 2012.
Other Income and Government Subsidies.
Other income and government subsidies decreased from $1.5 million for the three months ended March 31, 2012 to $1.2 million
for the three months ended March 31, 2013,
which represented a decrease of $0.3 million,
or approximately 20%. The decrease was primarily due to a $0.2 million decrease in other income and a $0.1 million decrease in
government subsidies.
Income Taxes.
The enterprise tax
rate in China 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 vegetable and fruit products. The decrease of $0.4 million in the
provision for income taxes for the three months ended March 31, 2013 over the three months ended March 31, 2012 resulted from
the increased sales of prepared meat products at lower gross profit margins.
Segment Information
Under generally accepted accounting principles
in the United States, we operate in only one segment: meat production. Our vegetable and fruit 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 hogs into fresh, frozen and processed pork products. Our pork and pork products division markets
its products domestically to our retail stores, food retailers, food service distributors, restaurant operators and noncommercial
food service establishments, such as schools, hotel chains, healthcare facilities, the military and other food processors, as well
as to international markets on a limited basis.
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. The proximity of the contracted farms to our operations
ensures freshness from harvest to processing. We contract to grow more than 25 categories of vegetables and fruits, including asparagus,
sweet corn, broccoli, mushrooms, lima beans, strawberries and capsicum.
The following
tables show our sales in metric tons and production processed in metric tons by division for the three months ended March 31, 2013
and 2012
a
nd the percentage increases for each division between periods.
|
|
Sales by Division
(in metric tons)
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Net
Change
2013/2012
|
|
|
%
Change
2013/2012
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Pork and Pork Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilled pork
|
|
|
92,349
|
|
|
|
87,146
|
|
|
|
5,203
|
|
|
|
6
|
%
|
Frozen pork
|
|
|
25,282
|
|
|
|
25,523
|
|
|
|
(241
|
)
|
|
|
(1
|
)%
|
Prepared pork products
|
|
|
30,657
|
|
|
|
21,426
|
|
|
|
9,231
|
|
|
|
43
|
%
|
Vegetables and Fruits
|
|
|
2,498
|
|
|
|
2,906
|
|
|
|
(408
|
)
|
|
|
(14
|
)%
|
Total
|
|
|
150,786
|
|
|
|
137,001
|
|
|
|
13,785
|
|
|
|
10
|
%
|
|
|
Production by Division
(in metric tons)
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Net
Change
2013/2012
|
|
|
%
Change
2013/2012
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Pork and Pork Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chilled pork
|
|
|
93,104
|
|
|
|
87,787
|
|
|
|
5,317
|
|
|
|
6
|
%
|
Frozen pork
|
|
|
28,329
|
|
|
|
33,016
|
|
|
|
(4,687
|
)
|
|
|
(14
|
)%
|
Prepared pork products
|
|
|
29,753
|
|
|
|
22,938
|
|
|
|
6,815
|
|
|
|
30
|
%
|
Vegetables and Fruits
|
|
|
2,308
|
|
|
|
2,493
|
|
|
|
(185
|
)
|
|
|
(7
|
)%
|
Total
|
|
|
153,494
|
|
|
|
146,234
|
|
|
|
7,260
|
|
|
|
5
|
%
|
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 China in which we offered and sold our products as of March 31, 2013 and December 31, 2012, 2011 and 2010.
|
|
|
|
|
December 31,
|
|
|
|
March 31, 2013
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of products
|
|
|
441
|
|
|
|
441
|
|
|
|
439
|
|
|
|
429
|
|
Number of retail outlets
|
|
|
3,502
|
|
|
|
3,490
|
|
|
|
3,428
|
|
|
|
3,326
|
|
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
|
|
|
137
|
|
|
|
136
|
|
|
|
134
|
|
|
|
130
|
|
Number of third-tier cities
|
|
|
439
|
|
|
|
438
|
|
|
|
432
|
|
|
|
421
|
|
Liquidity and Capital Resources
As of March 31,
2013 and December 31, 2012, we had cash and cash equivalents of $294.3 million and $
176.4
million,
respectively. As of March 31, 2013, our working capital was approximately $31.6 million.
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 four to eight 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 to four weeks. For restaurants
and food service customers, the credit terms are four to eight weeks. These credit terms are subject to negotiation if requested
by our customers, and credit limits vary depending on the credit worthiness and sales volume of the individual customers, which
may be increased at times to accommodate for deteriorating economic circumstances. Any adjustment must be approved and credit limits
are frequently reviewed 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 three months ended March 31, 2013,
net cash used in operating activities was $16.6 million, which represented an increase of $12.9 million as compared to the net
cash used in operating activities of $3.7 million for the same period of 2012. Of the $12.9 million increase, net income accounted
for $1.6 million, changes in operating assets and liabilities accounted for $11.6 million. Of the non-cash items, depreciation
and amortization accounted for $0.5 million of the change due to the fact that more plant, equipment and machinery were put into
use, and provision for bad debts accounted for $0.2 million of the change due to the increased balance of accounts receivable at
March 31, 2013 compared to March 31, 2012.
Cash outflow from changes in operating assets
and liabilities increased by approximately $11.6 million, as compared to the changes in operating assets and liabilities of $23.9
million for the same period of the prior year. Of the $11.6 million increase in cash outflow, $27.1 million was attributable to
the change in accounts payable and $5.7 million was attributable to the change in accounts receivable. The increase was offset
by decrease in cash outflow from inventory of $16.7 million and VAT receivable of $4.6 million.
Net cash used in investing activities was
$7.7 million for the three months ended March 31, 2013, which represented a decrease of $16.9 million as compared to the net cash
of $24.6 million used in investing activities for the same period of the prior year. We spent $10.6 million less on deposits for
land use rights and $6.0 million less on construction in progress.
Net cash provided
by financing activities was $141.4 million during the three months ended March 31, 2013, an increase of $88.7 million compared
to the net cash provided by financing activities of $52.7 million for the same period of the prior year. We received $95.2 million
more in net proceeds from issuing short-term financial bonds, $26.3 million more in net proceeds from long-term bank loans net
of repayment, and $29.6 million more in proceeds from a sales-leaseback transaction
during the
three months ended March 31, 2013. We received $21.7 million less in net proceeds from short-term bank loans net of repayment,
and $49.3 million less in net proceeds from bank notes.
Capital Commitment
Capital Expenditure.
See Note 6 “Construction
in Progress” in the Notes to Condensed Consolidated Financial Statements for description of ongoing construction projects
and estimated cost to complete.
Loans.
As of March 31, 2013, Henan
Zhongpin had short-term and long-term bank and government loans in the aggregate amount of $435.5 million with interest rates ranging
from 5.76 % to 7.21% per annum, as follows.
Bank
|
|
Amount
Borrowed
|
|
|
Interest Rate
|
|
|
Maturity Date
|
Short-term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SDIC Trust
|
|
|
25,522,819
|
|
|
|
6.00
|
%
|
|
09/28/2013
|
|
|
|
|
|
|
|
|
|
|
|
China Everbright Bank
|
|
|
4,785,529
|
|
|
|
6.63
|
%
|
|
06/13/2013
|
|
|
|
7,975,881
|
|
|
|
6.30
|
%
|
|
11/08/2013
|
|
|
|
4,785,529
|
|
|
|
6.30
|
%
|
|
01/05/2014
|
|
|
|
3,190,352
|
|
|
|
6.30
|
%
|
|
01/30/2014
|
|
|
|
|
|
|
|
|
|
|
|
China Construction Bank
|
|
|
7,975,881
|
|
|
|
6.00
|
%
|
|
07/30/2013
|
|
|
|
6,380,704
|
|
|
|
6.00
|
%
|
|
11/19/2013
|
|
|
|
7,975,881
|
|
|
|
6.00
|
%
|
|
01/15/2014
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture Development Bank of China
|
|
|
967,917
|
|
|
|
6.00
|
%
|
|
07/02/2013
|
|
|
|
4,913,781
|
|
|
|
6.00
|
%
|
|
06/28/2013
|
|
|
|
4,785,529
|
|
|
|
6.00
|
%
|
|
12/18/2013
|
|
|
|
11,166,233
|
|
|
|
6.00
|
%
|
|
12/19/2013
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture Bank of China
|
|
|
7,975,881
|
|
|
|
6.00
|
%
|
|
02/26/2014
|
|
|
|
|
|
|
|
|
|
|
|
China Minsheng Bank
|
|
|
6,380,705
|
|
|
|
6.30
|
%
|
|
05/17/2013
|
|
|
|
6,380,705
|
|
|
|
6.30
|
%
|
|
08/09/2013
|
|
|
|
6,380,705
|
|
|
|
6.30
|
%
|
|
08/17/2013
|
|
|
|
6,380,705
|
|
|
|
6.30
|
%
|
|
08/24/2013
|
|
|
|
|
|
|
|
|
|
|
|
China Merchants Bank
|
|
|
3,190,352
|
|
|
|
6.30
|
%
|
|
09/16/2013
|
|
|
|
4,785,529
|
|
|
|
6.30
|
%
|
|
11/21/2013
|
|
|
|
1,595,176
|
|
|
|
6.30
|
%
|
|
01/10/2014
|
|
|
|
9,571,056
|
|
|
|
6.30
|
%
|
|
01/25/2014
|
|
|
|
4,785,529
|
|
|
|
6.60
|
%
|
|
03/10/2014
|
|
|
|
3,190,352
|
|
|
|
6.00
|
%
|
|
03/29/2014
|
|
|
|
|
|
|
|
|
|
|
|
China CITIC Bank
|
|
|
4,785,529
|
|
|
|
6.60
|
%
|
|
07/20/2013
|
|
|
|
1,595,176
|
|
|
|
6.60
|
%
|
|
07/25/2013
|
|
|
|
4,785,529
|
|
|
|
6.60
|
%
|
|
09/28/2013
|
|
|
|
4,785,529
|
|
|
|
6.60
|
%
|
|
11/22/2013
|
Bank of Xuchang
|
|
|
3,190,352
|
|
|
|
6.00
|
%
|
|
06/12/2013
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Bank
|
|
|
3,190,352
|
|
|
|
7.20
|
%
|
|
04/01/2013
|
|
|
|
7,975,881
|
|
|
|
6.31
|
%
|
|
06/11/2013
|
|
|
|
7,975,881
|
|
|
|
6.00
|
%
|
|
08/13/2013
|
|
|
|
|
|
|
|
|
|
|
|
Huaxia Bank
|
|
|
12,761,409
|
|
|
|
6.00
|
%
|
|
06/25/2013
|
|
|
|
|
|
|
|
|
|
|
|
Rabobank Nederland
|
|
|
7,975,881
|
|
|
|
5.88
|
%
|
|
05/07/2013
|
|
|
|
|
|
|
|
|
|
|
|
Bank of Shanghai
|
|
|
6,380,705
|
|
|
|
6.00
|
%
|
|
11/29/2013
|
|
|
|
|
|
|
|
|
|
|
|
HSBC
|
|
|
9,571,057
|
|
|
|
6.00
|
%
|
|
12/05/2013
|
|
|
|
|
|
|
|
|
|
|
|
CIBC
|
|
|
7,975,881
|
|
|
|
6.60
|
%
|
|
10/31/2013
|
|
|
|
|
|
|
|
|
|
|
|
Pingan Bank
|
|
|
12,761,409
|
|
|
|
6.30
|
%
|
|
02/04/2014
|
|
|
|
|
|
|
|
|
|
|
|
City Finance – short-term
|
|
|
31,903
|
|
|
|
0.00
|
%
|
|
Extendable
|
Total
|
|
$
|
246,785,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Loan - Current portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture Bank of China
|
|
|
319,036
|
|
|
|
6.40
|
%
|
|
05/27/2013
|
|
|
|
2,392,764
|
|
|
|
6.40
|
%
|
|
12/27/2013
|
|
|
|
9,571,057
|
|
|
|
6.40
|
%
|
|
05/30/2013
|
|
|
|
797,588
|
|
|
|
6.46
|
%
|
|
06/30/2013
|
|
|
|
797,588
|
|
|
|
6.46
|
%
|
|
12/31/2013
|
|
|
|
1,595,176
|
|
|
|
7.04
|
%
|
|
01/07/2014
|
|
|
|
|
|
|
|
|
|
|
|
China Merchants Bank
|
|
|
4,785,529
|
|
|
|
6.40
|
%
|
|
11/26/2013
|
|
|
|
|
|
|
|
|
|
|
|
China Development Bank
|
|
|
1,754,694
|
|
|
|
7.21
|
%
|
|
04/19/2013
|
|
|
|
1,754,694
|
|
|
|
7.21
|
%
|
|
11/20/2013
|
|
|
|
|
|
|
|
|
|
|
|
China Construction Bank
|
|
|
4,785,529
|
|
|
|
6.08
|
%
|
|
06/21/2013
|
|
|
|
6,380,704
|
|
|
|
5.76
|
%
|
|
06/29/2013
|
|
|
|
7,975,881
|
|
|
|
6.65
|
%
|
|
03/25/2014
|
|
|
|
2,392,764
|
|
|
|
6.65
|
%
|
|
03/25/2014
|
Total
|
|
$
|
45,303,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agriculture Bank of China
|
|
|
159,517
|
|
|
|
6.40
|
%
|
|
06/27/2014
|
|
|
|
797,588
|
|
|
|
6.40
|
%
|
|
06/30/2014
|
|
|
|
7,178,293
|
|
|
|
6.40
|
%
|
|
12/27/2014
|
|
|
|
7,975,881
|
|
|
|
6.40
|
%
|
|
05/30/2015
|
|
|
|
7,975,881
|
|
|
|
6.40
|
%
|
|
07/11/2015
|
|
|
|
11,006,716
|
|
|
|
6.40
|
%
|
|
12/27/2014
|
|
|
|
11,166,234
|
|
|
|
6.40
|
%
|
|
03/21/2016
|
|
|
|
3,190,352
|
|
|
|
7.04
|
%
|
|
07/07/2014
|
|
|
|
12,761,410
|
|
|
|
6.40
|
%
|
|
11/28/2014
|
|
|
|
797,588
|
|
|
|
6.40
|
%
|
|
12/31/2014
|
|
|
|
797,588
|
|
|
|
6.40
|
%
|
|
06/30/2015
|
|
|
|
797,588
|
|
|
|
6.40
|
%
|
|
12/31/2015
|
|
|
|
3,190,352
|
|
|
|
7.04
|
%
|
|
07/01/2015
|
|
|
|
3,987,940
|
|
|
|
7.04
|
%
|
|
07/07/2015
|
|
|
|
3,987,940
|
|
|
|
7.04
|
%
|
|
01/07/2016
|
|
|
|
3,987,940
|
|
|
|
7.04
|
%
|
|
07/07/2016
|
|
|
|
3,987,940
|
|
|
|
7.04
|
%
|
|
01/07/2017
|
|
|
|
2,233,247
|
|
|
|
7.04
|
%
|
|
07/07/2017
|
China Development Bank
|
|
|
2,073,729
|
|
|
|
7.21
|
%
|
|
05/20/2014
|
|
|
|
2,073,729
|
|
|
|
7.21
|
%
|
|
11/20/2014
|
|
|
|
2,392,764
|
|
|
|
7.21
|
%
|
|
05/20/2015
|
|
|
|
2,392,764
|
|
|
|
7.21
|
%
|
|
11/20/2015
|
|
|
|
2,711,800
|
|
|
|
7.21
|
%
|
|
05/20/2016
|
|
|
|
2,711,800
|
|
|
|
7.21
|
%
|
|
11/20/2016
|
|
|
|
3,030,835
|
|
|
|
7.21
|
%
|
|
05/20/2017
|
|
|
|
3,030,835
|
|
|
|
7.21
|
%
|
|
11/20/2017
|
|
|
|
3,349,870
|
|
|
|
7.21
|
%
|
|
05/20/2018
|
|
|
|
3,349,870
|
|
|
|
7.21
|
%
|
|
11/20/2018
|
|
|
|
3,668,906
|
|
|
|
7.21
|
%
|
|
05/20/2019
|
|
|
|
3,668,906
|
|
|
|
7.21
|
%
|
|
11/20/2019
|
|
|
|
3,987,940
|
|
|
|
7.21
|
%
|
|
05/20/2020
|
|
|
|
3,987,940
|
|
|
|
7.21
|
%
|
|
11/20/2022
|
|
|
|
638,070
|
|
|
|
7.21
|
%
|
|
05/20/2021
|
|
|
|
638,070
|
|
|
|
7.21
|
%
|
|
11/20/2021
|
|
|
|
638,070
|
|
|
|
7.21
|
%
|
|
05/20/2022
|
|
|
|
|
|
|
|
|
|
|
|
China Merchants Bank
|
|
|
7,178,293
|
|
|
|
6.40
|
%
|
|
11/26/2014
|
|
|
|
|
|
|
|
|
|
|
|
China Construction Bank
|
|
|
3,190,353
|
|
|
|
6.15
|
%
|
|
03/26/2015
|
|
|
|
|
|
|
|
|
|
|
|
Changge Old Town
|
|
|
1,627,849
|
|
|
|
7.00
|
%
|
|
Extendable
|
|
|
|
|
|
|
|
|
|
|
|
Canadian Government Transfer Loan
|
|
|
1,052,087
|
|
|
|
*
|
|
|
05/31/2042
|
Total
|
|
$
|
143,374,475
|
|
|
|
|
|
|
|
* The principal amount of this loan is interest
free.
Of our outstanding short-term loans as of
March 31, 2013, $8.0 million aggregate principal amount of loans were secured by our subsidiaries in China, $111.2 million aggregate
principal amount of loans was credit loans, and $14.4 million aggregate principal amount of loans was guaranteed by Henan Huanghe
Enterprises Group Co., Ltd., a group corporation that is not affiliated with our company or with any of our subsidiaries (“Huanghe
Group”).
Of our long-term loans outstanding at March
31, 2013, $126,178,436 are secured by land use rights and property, plant and equipment of our subsidiaries. The total amount of
land use rights and property, plant and equipment pledged was $191,620,720 at March 31, 2013.
In May 2012, 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 $23.9 million and Huanghe Group agreed to guarantee Henan Zhongpin’s bank loans in an amount up
to $23.9 million. The agreement will expire in May 2013. 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 March 31, 2013, Henan
Zhongpin had outstanding guarantees for $19.7 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 March 2013, Henan Zhongpin issued RMB600
million (approximately US$95.7 million) aggregate principal amount of 5.15% unsecured one-year bonds which will mature on March
27, 2014, solely to PRC institutional investors. We issued short-term financial bonds because the cost of bonds is lower than short-term
loans we borrowed from banks, so that we can repay some of these short-term loans with proceeds from short-term financial bonds.
In addition, we may issue more bonds in the future if we need more lower-cost finance resources.
We believe our existing cash and cash equivalents,
together with our ability to secure bank borrowings, will be sufficient to finance our investment in new facilities, with budgeted
capital expenditures of approximately $103.5 million over the next 12 months, and to satisfy our working capital needs. We intend
to satisfy our short-term debt obligations that mature over the next 12 months through additional short-term bank loans, in most
cases by rolling the maturing loans into new short-term loans with the same lenders as we have done in the past.
Contractual Obligations
For information on our contractual obligations,
please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources and Capital Commitment - Contractual Commitments.” as presented in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2012.
Off-Balance Sheet Arrangements
We do not have off-balance sheet arrangements
that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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 seasonality. In addition, certain components of our operations, such as revenue and cost of sales,
have partially increased due to inflation; however, we do not believe that our overall results of operations have been materially
affected by inflation.