10-Q 1 c42666_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2006 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------------------------------- Commission File Number : 333-112111 ------------------------------------------------------ Zhongpin Inc. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 54-2100419 -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 21 Changshe Road, Changge City, Henan Province, The People's Republic of China -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 011 86 374-6216633 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety (90) days. YES _X_ NO ___ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check One): Large accelerated filer ___ Accelerate filer ___ Non-accelerated filer _X_ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES___ NO _X_ As of May 1, 2006, 11,752,568 shares of the registrant's common stock, and 6,900,000 shares of the registrant's Series A preferred stock, each such share convertible into one share of the registrant's common stock, were outstanding. ZHONGPIN INC. FORM 10-Q INDEX
PART I FINANCIAL INFORMATION PAGE Item 1. Unaudited Financial Statements: Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005 ....................................................... 4 Consolidated Statements of Operations and Comprehensive Income (unaudited) for the three months ended March 31, 2006 and 2005 .......................... 5 Consolidated Statement of Changes in Stockholders' Equity for the three months ended March 31, 2006 (unaudited) ............................... 6 Consolidated Statements of Cash Flows (unaudited) for the three months ended March 31, 2006 and 2005 ............................................... 7 Notes to Consolidated Financial Statements (unaudited) ........................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................... 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................... 23 Item 4. Controls and Procedures .......................................................... 24 PART II OTHER INFORMATION Item 1. Legal Proceedings ................................................................ 25 Item 1A. Risk Factors ..................................................................... 25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...................... 25 Item 3. Defaults Upon Senior Securities .................................................. 25 Item 4. Submission of Matters to a Vote of Security Holders .............................. 25 Item 5. Other Information ................................................................ 25 Item 6. Exhibits ......................................................................... 25 SIGNATURES ............................................................................................. 26
i ZHONGPIN INC. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The accompanying unaudited consolidated balance sheets, statements of operations and comprehensive income, of changes in stockholders' equity, and of cash flows and related notes thereto, have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. The financial statements reflect all adjustments consisting only of normal, recurring adjustments, which are, in the opinion of management, necessary for a fair presentation for the interim periods. The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company's Annual Report on Form 10-K, as amended, for the transition period from June 30, 2005 to December 31, 2005. The results of operations for the three month periods ended March 31, 2006 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period. ZHONGPIN INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
MARCH 31 2006 DECEMBER 31 2005 ASSETS Current assets Cash and cash equivalents $ 17,885,950 $ 10,142,394 Accounts receivable and other receivables 15,181,701 10,002,918 Purchase deposits 142,279 220,836 Prepaid expenses and deferred charges 94,364 99,009 Inventories 4,712,066 2,347,312 Tax refund receivables 151,329 644,232 Total current assets 38,167,690 23,456,701 ----------------------------------- Property, plant and equipment(net) 10,277,015 10,212,848 Related party receivables 269,427 267,658 Other receivable 653,232 632,063 Construction contracts 20,657,103 16,931,178 Intangible assets 1,754,697 1,753,124 ----------------------------------- Total assets $ 71,779,164 $ 53,253,572 =================================== LIABILITIES AND EQUITY Current liabilities Bank overdraft $ - $ 619,579 Accounts payable and other payables 7,160,488 10,278,464 Accrued liabilities 116,018 759,420 Short term loans payable 15,093,781 18,995,853 Taxes payable 2,174,462 2,055,925 Deposits from clients 849,034 769,398 Research and development grants payable 2,451,261 2,436,804 Long term loans payable-current portion 146,657 145,671 Payroll payable 211,526 0 Welfare payable 544,720 0 Total current liabilities 28,747,947 36,061,114 ----------------------------------- Long term loans payable 2,265,670 2,264,448 Total liabilities 31,013,617 38,325,562 ----------------------------------- Minority interest 422,462 411,742 Equity Preferred stock par value $0.001;10,000,000 authorized; 6,900,000 shares issued and outstanding 6,900 0 Common stock par value $0.001; 25,000,000 authorized; 11,752,578 shares issued and outstanding 11,753 11,753 Additional paid in capital 25,206,736 2,102,933 Retained earnings 14,672,798 12,097,834 Accumulated other comprehensive income 444,898 303,748 Total equity 40,343,085 14,516,268 ----------------------------------- Total liabilities and equity $ 71,779,164 $ 53,253,572 ===================================
The accompanying notes are an integral part of these consolidated financial statements. 2 ZHONGPIN INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (AMOUNTS IN U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2006 MARCH 31, 2005 Revenues Sales revenues $30,493,507 $ 14,405,129 Cost of sales 25,914,155 11,808,779 Gross profit 4,579,352 2,596,350 ----------------------------------------------------------- Operating expenses General and administrative expenses 899,024 223,649 Operating expenses 804,146 365,359 Total operating expenses 1,703,170 589,008 Income from operations 2,876,182 2,007,342 ----------------------------------------------------------- Other income (expense) Interest income 95,690 48,905 Other income 12,392 14,674 Allowances income 113,184 38,647 Exchange gain 13,709 (11,173) Interest expense (380,228) -349,750 Total other income (expense) (145,253) (258,697) ----------------------------------------------------------- Net income before taxes 2,730,929 1,748,645 Provision for income taxes 145,245 - Net income after taxes 2,585,684 1,748,645 Minority interest 10,720 12,254 ----------------------------------------------------------- Net income 2,574,964 1,736,391 =========================================================== Foreign currency translation adjustment 141,150 - ----------------------------------------------------------- Comprehensive income $ 2,716,114 $ 1,736,391 =========================================================== Basic earnings per common share $ 0.14 $ 0.09 Diluted earnings per common share $ 0.12 $ 0.08 Basic weighted average shares outstanding 18,652,578 18,652,578 Diluted weighted average shares outstanding 22,102,578 22,102,578
The accompanying notes are an integral part of these consolidated financial statements. 3 ZHONGPIN INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Amounts in U.S. dollars) (unaudited)
Preferred Stock Common Stock Shares Par value Shares Par value --------- --------- ------------ ----------- Balance at January 1, 2003 - $ - 1 $ 1,816,425 Net income for the year - - Dividends paid - - - - --------- -------- ------------ ----------- Balance December 31, 2003 - - 1 1,816,425 Net income for the year - - - - --------- -------- ------------ ----------- Balance December 31, 2004 - - 1 1,816,425 Merger on May 20, 2005 - - - 115,942 Recapitalization on September 15, 2005 - - 9,999 (1,922,367) Net income for the year Foreign currency translation adjustment - - - - --------- -------- ------------ ----------- Balance December 31, 2005 - - 10,000 10,000 Items applied retroactively: Recapitalization on January 30, 2006 415,432,354 405,442 Reverse stock split on February 16, 2006 (1:35.349) - - (403,689,776) (403,689) --------- -------- ------------ ----------- Restated December 31, 2005 - $ - 11,752,578 $ 11,753 Increase in Preferred Stock on January 31, 2006 6,900,000 6,900 Net income for the period Increase in additional paid in capital on January 31, 2006 Foreign currency translation adjustment --------------------------------------------------------------------- Balance March 31, 2006 6,900,000 $ 6,900 11,752,578 $ 11,753 ===================================================================== Accumulated Additional Other Paid In Retained Comprehensive Capital Earnings Income Total ------------- ------------- ------------- ------------- Balance at January 1, 2003 $ 182,319 $ 1,935,634 $ - $ 3,934,378 Net income for the year - 1,536,272 1,536,272 Dividends paid - (56,392) - (56,392) ------------- ------------- ---------- ------------- Balance December 31, 2003 182,319 3,415,514 - 5,414,258 Net income for the year - 2,768,473 - 2,768,473 ------------- ------------- ---------- ------------- Balance December 31, 2004 182,319 6,183,987 - 8,182,731 Merger on May 20, 2005 115,942 Recapitalization on September 15, 2005 1,922,367 - Net income for the year 5,913,847 5,913,847 Foreign currency translation adjustment - - 303,748 303,748 ------------- ------------- ---------- ------------- Balance December 31, 2005 2,104,686 12,097,834 303,748 14,516,268 Items applied retroactively: Recapitalization on January 30, 2006 (405,442) - Reverse stock split on February 16, 2006 (1:35.349) 403,689 - - - ------------- ------------- ---------- ------------- Restated December 31, 2005 $ 2,102,933 $ 12,097,834 $ 303,748 $ 14,516,268 Increase in Preferred Stock on January 31, 2006 $ 23,110,703 Net income for the period 23,103,803 2,574,964 2,574,964 Foreign currency translation adjustment 141,150 141,150 ----------------------------------------------------------------------------- Balance March 31, 2006 $ 25,206,736 $ 14,672,798 $ 444,898 $ 40,343,085 =============================================================================
The accompanying notes are an integral part of these consolidated financial statements. 4 ZHONGPIN INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN U.S. DOLLARS) (UNAUDITED)
Three months ended March 31, ----------------------------------- 2006 2005 ---- ---- Cash flows from operating activities: Net income $ 2,574,964 $ 1,736,391 Adjustments to reconcile net income to net cash provided by (used in) operations: Minority interest 10,720 12,254 Depreciation 145,734 142,562 Amortization 10,017 9,363 Changes in operating assets and liabilities: Accounts receivable and other receivables (5,180,997) (1,676,904) Purchase deposits 78,557 (22,872) Prepaid expense and deferred charges 4,645 (104,612) Inventories (2,364,754) (4,577) Tax refunds receivable 492,903 Accounts payable and accrued liabilities 1,084,766 450,322 Taxes payable 118,537 180,057 Deposits from clients 79,636 258,393 ------------ ------------ Net cash provided by (used in) operating activities (2,945,272) 980,377 Cash flows from investing activities: Construction in progress (3,725,926) 21,183 Additions to fixed assets (236,210) (337,974) ------------ ------------ Net cash used in investing activities (3,962,136) (316,791) Cash flows from financing activities: Repayment of bank overdraft (619,579) - Proceeds from short-term loans - 3,164,632 Repayment of short-term loans (7,976,527) Proceeds from preferred stock, net of costs of issuance of $4,489,297 23,110,703 Payments of dividends - ------------ ------------ Net cash provided by financing activities 14,514,597 3,164,632 Effect of rate changes on cash 136,367 - ------------ ------------ Increase in cash and cash equivalents 7,743,556 3,828,218 Cash and cash equivalents, beginning of period 10,142,394 5,204,637 ------------ ------------ Cash and cash equivalents, end of period $ 17,885,950 $ 9,032,855 ============ ============ Supplemental disclosures of cash flow information: Cash paid for interest $ 352,002 $ 349,750 ============ ============ Cash paid for income taxes $ 186,567 $ - ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 ZHONGPIN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS Zhongpin Inc. ("Zhongpin") was incorporated on February 4, 2003 as Strong Technical Inc. in the State of Delaware for the purpose of operating a personnel outsourcing service, providing skilled workers to industry. On March 30, 2005, an 82.4% controlling interest in Zhongpin was acquired by Halter Capital Corporation and all previous operations were discontinued. On January 30, 2006, Zhongpin acquired Falcon Link Investment Limited ("Falcon") in a stock exchange by issuing 397,676,704 (11,250,000 post-split) shares of its common stock in exchange for all of the issued and outstanding stock of Falcon. The reverse acquisition transaction was accounted for as a reverse acquisition resulting in the recapitalization of Falcon. Accordingly, the historical financial statements of Falcon have been retroactively restated to give effect to the recapitalization as if it had occurred at the beginning of the first period presented. Hereafter Zhongpin and its subsidiaries are collectively referred to as the "Company." Falcon was incorporated in the Territory of the British Virgin Islands ("BVI") on July 21, 2005 as a holding company for the purpose of owning all of the equity interests of Henan Zhongpin Food Co., Ltd. ("HZFC"), a People's Republic of China ("PRC") company. Falcon acquired 100% ownership of HZFC by issuing 10,000 shares of its $1.00 par value common stock in exchange for the outstanding shares of HZFC. The transaction was accounted for as a recapitalization. HZFC was established in the PRC on May 20, 2005 for the sole purpose of holding Henan Zhongpin Food Share Company Limited and its subsidiaries ("Food Share"). The owners of Food Share formed HZFC by investing 16,000,000 Renminbi ("RMB"). HZFC acquired Food Share by paying 15,040,000 RMB to the holders of Food Share, who were also the holders of HZFC, in exchange for 100% ownership of Food Share. The transaction was accounted for as a transfer of entities under common control, wherein Food Share is the continuing entity with an increase in registered capital of 960,000 RMB. The historical financial statements of HZFC are essentially those of Food Share shown with an increase in capital as if the transfer had taken place at the beginning of the period. Food Share is incorporated in the PRC. It is headquartered in Henan Province and its corporate office is in Changge City. The Company is principally engaged in the production of pork, pork products and vegetables, and the retail sales of pork, processed pork products, vegetables and other grocery items to customers throughout the PRC and other export countries, either directly or through its subsidiaries. On January 30, 2006, the Company consummated an agreement with the shareholders of Falcon whereby the Company issued 397,676,704 (11,250,000 post-split) shares of its common stock in exchange for all of the issued and outstanding stock of Falcon. Immediately prior to the transaction there were 17,765,650 (502,578 post-split) shares outstanding as compared to 415,442,354 (11,752,578 post-split) shares outstanding immediately following the transaction. Consequently, Falcon became a wholly-owned subsidiary of the Company. In conjunction with the acquisition of Falcon, on January 31, 2006 the Company sold, at $8.00 per unit, 3.45 million units, each consisting of two shares of Series A Convertible Preferred Stock and a five year warrant to purchase an additional 35.349 (1 post-split) common shares at a purchase price of $0.1414467 ($5.00 post split) per share. Each preferred share is convertible into 35.349 (1 post-split) common shares. Total conversion rights were issued for 243,908,100 (6,900,000 post-split) common shares and total warrants were issued for 121,954,050 (3,450,000 post-split) common shares. 6 ZHONGPIN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS (continued) On February 16, 2006, the Company amended its articles of incorporation to change its name from Strong Technical, Inc. to Zhongpin Inc. In the same amendment, the Company changed its authorized common stock to 25,000,000 shares with par value of $0.001 and its authorized preferred stock to 10,000,000 shares with par value of $0.001. On February 16, 2006, the Company effected a 1:35.349 reverse split on its outstanding common stock. Immediately prior to the split, 415,442,354 common shares were outstanding as compared to 11,752,578 common shares outstanding immediately following the split. Outstanding conversion rights on Series A Convertible Preferred Stock were reduced from 243,908,100 common shares to 6,900,000 common shares, and outstanding warrants were reduced from 121,954,050 common shares to 3,450,000 common shares, exercisable at $5.00 per share. Details of Food Share's subsidiaries are as follows:
DOMICILE AND DATE REGISTERED PERCENTAGE NAME OF INCORPORATION CAPITAL OF OWNERSHIP -------------------------------------------------------------------------------------------------------------- Henan Zhongpin Industrial Company Limited PRC Jan. 17, 2004 18,000,000 RMB 88.00% Henan Zhongpin Import and Export Trading Company PRC Aug. 11, 2004 5,060,000 RMB 88.93%
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of Zhongpin Inc. (formerly Strong Technical, Inc.), Falcon Link Investment Limited, Henan Zhongpin Food Co., Ltd., Henan Zhongpin Food Share Company Limited, Henan Zhongpin Industrial Company Limited and Henan Zhongpin Import and Export Trading Company. All material intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. U.S. GAAP differs from that used in the statutory financial statements of the PRC subsidiaries, which were prepared in accordance with the relevant accounting principles and financial reporting regulations as established by the Ministry of Finance of the PRC. Certain accounting principles stipulated under U.S. GAAP are not applicable in the PRC. The RMB of the People's Republic of China has been determined to be the functional currency of the Company. The balance sheets of the Company and its subsidiaries were translated at year end or end of period exchange rates. Expenses were translated at moving average exchange rates in effect during the year. The effects of rate changes on assets and liabilities are recorded as accumulated other comprehensive income. 7 ZHONGPIN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) FISCAL YEAR These financial statements have been prepared using December 31 as the fiscal year end. MINORITY INTEREST IN SUBSIDIARIES The Company records minority interest expense, which reflects the minority shareholders' portion of the earnings of Henan Zhongpin Industrial Company Limited and Henan Zhongpin Import and Export Trading Company. During 2005, Henan Zhongpin Industrial Company Limited increased its registered capital from 5,000,000 RMB to 18,000,000 RMB, which required the minority holders to increase their investment by 1,560,000 RMB, effectively increasing the minority interest shown on the Company's balance sheet by $188,406. RESTRICTIONS ON TRANSFER OF ASSETS OUT OF THE PRC Dividend payments by HZFC are limited by certain statutory regulations in the PRC. No dividends may be paid by HZFC without first receiving prior approval from the Foreign Currency Exchange Management Bureau. Dividend payments are restricted to 85% of profits, after tax. CONTROL BY PRINCIPAL STOCKHOLDERS The directors, executive officers and their affiliates or related parties own, beneficially and in the aggregate, the majority of the voting power of the outstanding shares of the common stock of the Company. Accordingly, the directors, executive officers and their affiliates, if they voted their shares uniformly, would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of the Company and the dissolution, merger or sale of the Company's assets. START-UP COSTS The Company, in accordance with the provisions of the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities," expenses all start-up and organizational costs as they are incurred. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. SIGNIFICANT ESTIMATES Several areas require significant management estimates relating to uncertainties for which it is reasonably possible that there will be a material change in the near term. The more significant areas requiring the use of management estimates related to the valuation of receivables, equipment and accrued liabilities, and the useful lives for amortization and depreciation. 8 ZHONGPIN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. ACCOUNTS RECEIVABLE Accounts receivable are stated at cost, net of allowance for doubtful accounts. Based on the Company's experience and current practice in the PRC, management provides for an allowance for doubtful accounts equivalent to those accounts that are not collected within one year plus 5% of receivables less than one year old. INVENTORIES Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value. Work-in-progress and finished goods are composed of direct material, direct labor and an attributable portion of manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. LAND USE RIGHTS The Company adopted the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), effective January 1, 2002. Under SFAS 142, goodwill and indefinite lived intangible assets are not amortized, but are reviewed annually for impairment, or more frequently, if indications of possible impairment exist. The Company has performed the requisite annual transitional impairment tests on intangible assets and determined that no impairment adjustments were necessary. REVENUE RECOGNITION The Company recognizes revenue on the sales of its products as earned when the customer takes delivery of the product according to previously agreed upon pricing and delivery arrangements, and when the Company believes that collectibility is reasonably assured. The Company primarily sells perishable and frozen food products. As such, any right of return is limited to only a few days and has been determined to be insignificant by management. Accordingly, no provision has been made for returnable goods. EARNINGS PER SHARE Basic earnings per common share ("EPS") are calculated by dividing net income by the weighted average number of common shares outstanding during the year as if conversion rights attached to preferred stock had been converted. Diluted EPS is calculated by adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive securities, such as stock options and warrants. The numerators and denominators used in the computations of basic and diluted EPS are presented in the following table:
March 31, 2006 March 31, 2005 -------------- -------------- NUMERATOR FOR BASIC AND DILUTED EPS Net income to common stockholders $ 2,574,964 $ 1,736,391 =========== ============ DENOMINATORS FOR BASIC AND DILUTED EPS Common stock outstanding after recapitalization and 1:35.349 reverse stock split 11,752,578 11,752,578 Add: Series A Preferred conversion rights 6,900,000 6,900,000 ----------- ------------ DENOMINATOR FOR BASIC EPS 18,652,578 18,652,578 =========== ============ Add: Outstanding stock warrants 3,450,000 3,450,000 ----------- ------------ DENOMINATOR FOR DILUTED EPS 22,102,578 22,102,578 =========== ============ EPS - Basic $ 0.14 $ 0.09 ----------- ------------ EPS - Diluted $ 0.12 $ 0.08 ----------- ------------
The Company had no potentially dilutive securities outstanding at December 31, 2006 and 2005. However, in conjunction with the retrospective recapitalization on January 30, 2006, the Company issued 6,900,000 shares of Series A Convertible Preferred stock. The stock is convertible one for one to common stock and is participating stock. The preferred stock subscribers also received warrants to purchase one share of common stock at $5.00 per share for every two shares of preferred stock received. Since these issuances were incident to the recapitalization, their effects are also retroactively restated in computing EPS. PROPERTY AND EQUIPMENT Impairment of long-lived assets is recognized when events or changes in circumstances indicate that the carrying amount of the asset, or related groups of assets, may not be recoverable. Under the provisions of SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company recognizes an "impairment charge" when the expected net undiscounted future cash flows from an asset's use and eventual disposition are less than the asset's carrying value and the asset's carrying value exceeds its fair value. Measurement of fair value for an asset or group of assets may be based on appraisal, market values of similar assets or estimated discounted future cash flows resulting from the use and ultimate disposition of the asset or assets. Expenditures for maintenance, repairs and betterments, which do not materially extend the normal useful life of an asset, are charged to operations as incurred. Upon sale or other disposition of assets, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. Depreciation and amortization are provided for financial reporting purposes primarily on the straight-line method over the estimated useful lives ranging from 5 to 50 years. OPERATING LEASES Operating leases represent those leases under which substantially all the risks and rewards of ownership of the leased assets remain with the lessors. Rental payments under operating leases are charged to expense on the straight-line basis over the period of the relevant leases. 9 ZHONGPIN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) INCOME TAXES Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. In accordance with Statement of Financial Accounting Standard ("SFAS") No. 109, "Accounting for Income Taxes," these deferred taxes are measured by applying currently enacted tax laws. The Company recorded income tax expenses of $145,245 and $0 for the first quarter of 2006 and 2005. The Company withholds and pays income taxes on its employees' wages, which fund the Chinese government's sponsored health and retirement programs of all Company employees. For such employees, the Company was obligated to make contributions to the social insurance bureau under the laws of the PRC for pension and retirement benefits. 3. BUSINESS ACQUISITIONS Food Share started Henan Zhongpin Import and Export Trading Company on August 11, 2004 as a joint venture with Li Jun Wei, an individual, to facilitate the exporting of the Company's goods. The Company owns 88.93% of Henan Zhongpin Import and Export Trading Company. 4. ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES The Company accrued an allowance for bad debts related to its receivables. The receivable and allowance balances at March 31, 2006 and December 31, 2005 are as follows: March 31, 2006 December 31, 2005 Accounts receivable $ 12,170,982 $ 10,278,464 Other receivables 5,391,914 2,013,757 Allowances receivable -- -- Allowance for bad debts (1,727,963) (1,716,614) ------------ ------------- $ 15,834,933 $ 10,634,981 ============ ============= 5. INVENTORIES Inventories consisted of: March 31, December 31, 2006 2005 ---------- ---------- Raw materials $ 281,784 $ 210,288 Low value consumables and packaging 147,000 Work-in-progress 167,626 290,149 Finished goods 4,262,656 1,699,875 Provision for loss of pricing -- -- ---------- ---------- Net inventories $4,712,066 $2,347,312 ========== ========== 10 ZHONGPIN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at cost consisted of: March 31, 2006 December 31, 2005 -------------- ----------------- Machinery and equipment $ 6,832,887 $ 6,832,887 Furniture and office equipment 253,187 253,187 Motor vehicles 281,371 281,371 Buildings 5,320,938 5,084,728 ------------ ------------ Subtotal 12,688,383 12,452,173 Less: accumulated depreciation (2,411,368) (2,239,325) ------------ ------------ Net property and equipment $ 10,277,015 $ 10,212,848 ============ ============ Depreciation expense $ 145,734 $ 602,008 ============ ============ 7. INTANGIBLE ASSETS Intangible assets consisted of the following: March 31, December 31, 2006 2005 ----------- ----------- Land use rights $ 1,842,510 $ 1,840,937 Accumulated amortization (87,813) (87,813) ----------- ----------- $ 1,754,697 $ 1,753,124 =========== =========== Amortization expense $ 10,017 $ 37,431 =========== =========== 8. RELATED PARTY RECEIVABLES Related party receivables consist of advances made by the Company to the minority interest holders of Henan Zhongpin Industrial Company Limited for their investment in the registered capital of that entity. The advances are non-interest bearing and have no fixed repayment terms. Consequently, they are classified as non-current assets. 9. CONSTRUCTION IN PROGRESS Construction in progress consisted of: 11 ZHONGPIN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. CONSTRUCTION IN PROGRESS (continued)
March 31, December 31, Construction in Progress Completed on 2006 2005 ------------------------------ -------------- ----------- ------------ Sewage Construction October 2004 $ -- $ -- Industrial Plant February 2006 16,931,178 16,931,178 Frozen machinery and store room March 2005 -- -- Production line for chilled pork January 2007 3,725,925 ----------- ----------- $20,657,103 $16,931,178 =========== ===========
10. LOANS PAYABLE SHORT-TERM LOANS Short-term loans are due within one year. These loans are partially secured by the land and plant of Food Share. These loans bear interest at prevailing lending rates in the PRC ranging from 3.0% to 9.4% per annum. LONG-TERM LOANS A long-term loan is outstanding and bears an interest rate 6.0% per annum. 10. LOANS PAYABLE The balances of loans payable were as follows: March 31, December 31, 2006 2005 ----------- ----------- Short Term Loans Payable $15,093,781 $18,995,853 Long Term Loans Payable 2,265,670 2,410,119 ----------- ----------- $17,359,451 $21,405,972 =========== =========== Long Term Repayment Schedule ------------------------------------------------- Payments due in 2006 $ 146,657 Payments due in 2007 146,657 Payments due in 2008 146,657 Payments due in 2009 146,657 Payments due in 2010 146,657 Payments due thereafter 1,679,042 ---------- 2,412,327 Less current portion (146,657) ---------- Long term debt $2,265,670 ========== 12 ZHONGPIN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS From time to time, the Company has disputes that arise in the ordinary course of its business. Currently, according to management, there are no material legal proceedings to which the Company is party or to which any of its property is subject that will have a material adverse effect on the Company's financial condition. 12. ALLOWANCES INCOME "Allowances income" consists of grants from the government of the PRC for the Company's participation in specific programs, such as import and export, branding, and city maintenance and construction. The Company received allowances income as follows: Three months ended Three months ended March 31, 2006 March 31, 2005 ------------------- ------------------ Allowances income $ 113,184 $ 38,647 ========= ========= In addition to paying the Company for its participation in ongoing programs, the PRC government has made a cash grant to the Company specifically to fund research and development. The Company recorded this grant as a liability titled "Research & development grants payable" on the balance sheet rather than as revenue. As qualifying research and development costs are incurred the Company reduces the liability rather than recording an expense. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107") requires entities to disclose the fair values of financial instruments except when it is not practicable to do so. Under SFAS No. 107, it is not practicable to make this disclosure when the costs of formulating the estimated values exceed the benefit when considering how meaningful the information would be to financial statement users. As a result of the difficulties presented in the valuation of the loans payable to related entities/parties because of their related party nature, estimating the fair value of these financial instruments is not considered practical. The fair values of all other assets and liabilities do not differ materially from their carrying amounts. None of the financial instruments held are derivative financial instruments and none were acquired or held for trading purposes in the first quarter of 2006 and 2005. 14. NEW ACCOUNTING PRONOUNCEMENTS In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140". The statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips are not 13 ZHONGPIN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. NEW ACCOUNTING PRONOUNCEMENTS (continued) subject to the requirements of Statement 133, establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. The Statement is effective for financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. The Company expects that the Statement will have no material impact on its consolidated financial statements. In February 2006, the FASB issued Staff Position No. FAS 123(R)-4, "Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event". This position addresses the classification of options and similar instruments issued as employee compensation that allow for cash settlement upon the occurrence of a contingent event, amending paragraphs 32 and A229 of SFAS No. 123 (revised 2004), "Share-Based Payment". As the Company has not traditionally paid compensation through the issuance of equity securities, no impact is expected on its consolidated financial statements. In October 2005, the FASB issued Staff Position No. FAS 13-1, "Accounting for Rental Costs Incurred during a Construction Period". This position addresses the accounting for rental costs associated with operating leases that are incurred during a construction period. Management believes that this position has no application to the Company. In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections ("SFAS No. 154"), which replaced Accounting Principles Board Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principles. It requires retrospective application to prior periods' financial statements of changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The impact on the Company's operations will depend on future accounting pronouncements or changes in accounting principles. In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47, "Accounting for Conditional Asset Retirement Obligations." FIN 47 clarifies that the term "Conditional Asset Retirement Obligation" as used in FASB Statement No. 143, "Accounting for Asset Retirement Obligations," refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a Conditional Asset Retirement Obligation if the fair value of the liability can be reasonably estimated. FIN 47 is effective no later than the end of fiscal year ending after December 15, 2005. Management does not believe the adoption of FIN 47 will have a material effect on the Company's consolidated financial position, results of operations or cash flows. 15. PREFERRED STOCK The features of the Series A Convertible Preferred Stock are as follows: 14 ZHONGPIN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. PREFERRED STOCK (continued) Dividends. The holders of the Series A Preferred are entitled to receive, when and as declared by the Board of Directors, dividends in such amounts as may be determined by the Board of Directors from time to time out of funds legally available therefor. No dividends (other than those payable solely in common stock) will be paid to the holders of common stock until there shall have been paid or declared and set apart during that fiscal year for the holders of the Series A Preferred a dividend in an amount per share that the holders would have got for the shares of common stock issuable upon conversion of their shares of Series A Preferred. Preference on Liquidation. In the event of merger, consolidation or sale of all or substantially all of the Company's assets or other liquidation, holders of the Series A Preferred shall get a priority in payment over all other classes of stock. In such event, the Series A Preferred would be entitled to receive the greater of (i) the original purchase price of the Series A Preferred or (ii) the amount the holder would get if he converted all of his Series A Preferred into common stock. Voting. The holder of each share of Series A Preferred (i) shall be entitled to the number of votes with respect to such share equal to the number of shares of common stock into which such share of Series A Preferred could be converted on the record date for the subject vote or written consent (or, if there is no such record date, then on the date that such vote is taken or consent is effective) and (ii) shall be entitled to notice of any stockholders' meeting in accordance with the Company's Bylaws. Appoint and Elect a Director. So long as the number of shares of common stock issuable upon conversion of the outstanding shares of Series A Preferred is greater than 10% of the number of outstanding shares of common stock (on a fully diluted basis), the holders of record of the shares of Series A Preferred, exclusively and as a separate class, shall be entitled to elect one of the Company's directors. Conversion Right. The holder may convert each share of Series A Preferred into common stock at an initial conversion price of $0.113157 ($4.00 post-split). The conversion price will be adjusted for stock dividends, stock splits and similar events. Automatic Conversion. Each share of Series A Preferred will automatically be converted into shares of common stock at the conversion price at the time in effect if (i) the Company has an underwritten public offering of its common stock giving the Company at least $30 million in net proceeds, (ii)(A) the closing price of the common stock equals or exceeds $0.2828934 ($10.00 post-split) (as adjusted) for the twenty (20) consecutive-trading-day period ending within two (2) days of the date on which the Company provides notice of such conversion as hereinafter provided and (B) either a registration statement registering for resale the shares of common stock issuable upon conversion of the Series A Preferred has been declared effective and remains effective and available for resales for the twenty (20)-day period, or Rule 144(k) is available for the resale of such shares, or (iii) by consent of at least 67% of the then-outstanding shares of Series A Preferred. Protective Provisions. So long as at least 1,750,000 shares of Series A Preferred are outstanding (subject to adjustment for stock splits, combinations and the like), the holders of a majority of the outstanding Series A Preferred shall be required (in addition to any consent or approval otherwise required by law) for us to take certain actions, including (1) liquidation, dissolution or wind up, (2) amend, alter or repeal any provision of our certificate of incorporation so as to affect the rights, preferences or privileges of the Series A Preferred, (3) create new class of preferred stock or increase the number of shares of Series A Preferred that can be issued, or (4) purchase or redeem, or pay or declare any dividend or make any distribution on, any securities junior in priority to the Series A Preferred; or (5) make any change in the size of the Company's Board of Directors. 15 ZHONGPIN INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. SEGMENT REPORTING The Company operates in two business segments: pork and pork products, and vegetables and fruits. The Company's pork and pork products segment is involved primarily in the processing of live market hogs into fresh, frozen and processed pork products. The Company's pork and pork products segment markets its products domestically to our branded stores, food retailers, foodservice distributors, restaurant operators and noncommercial foodservice establishments, such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets. The Company's vegetables and fruits segment is involved primarily in the processing of fresh vegetables and fruits. The Company contracts with more than 120 farms in Henan Province and nearby areas to produce high-quality vegetable varieties and fruits suitable for export purposes. The proximity of the contracted farms to the Company's operations ensures freshness from harvest to processing. The Company contracts to grow more than 20 categories of vegetables and fruits, including asparagus, sweet corn, broccoli, mushrooms, lima beans and strawberries. SALES BY SEGMENT (IN MILLIONS) SALES SALES THREE MONTHS ENDED THREE MONTHS ENDED MAR. 31, 2006 MAR. 31, 2005 ------------------ ------------------ Pork and Pork Products............. $ 29.77 $14.27 Vegetables and Fruits.............. 0.72 0.14 ------ ------ ------ Total $30.49 $14.41 OPERATING INCOME BY SEGMENT (IN MILLIONS) OPERATING INCOME OPERATING INCOME THREE MONTHS ENDED THREE MONTHS ENDED MAR. 31, 2006 MAR. 31, 2005 ------------------ ------------------ Pork and Pork Products........... $2.81 $2.00 Vegetables and Fruits............ 0.07 0.01 ----- ----- Total $2.88 $2.01 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS THE STATEMENTS CONTAINED IN THIS REPORT WITH RESPECT TO OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS THAT ARE NOT HISTORICAL FACTS ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE 16 MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THE COMPANY INTENDS SUCH FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR PROVISIONS FOR FORWARD-LOOKING STATEMENTS CONTAINED IN SECTION 21E OF THE EXCHANGE ACT. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY, SUCH AS "ESTIMATES," "PROJECTS," "PLANS," "BELIEVES," "EXPECTS," "ANTICIPATES," "INTENDS," OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. MANAGEMENT OF THE COMPANY WISHES TO CAUTION THE READER OF THE FORWARD-LOOKING STATEMENTS THAT SUCH STATEMENTS, WHICH ARE CONTAINED IN THIS REPORT, REFLECT THE COMPANY'S CURRENT BELIEFS WITH RESPECT TO FUTURE EVENTS AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, INCLUDING, BUT NOT LIMITED TO, ECONOMIC, COMPETITIVE, REGULATORY, TECHNOLOGICAL, KEY EMPLOYEE, AND GENERAL BUSINESS FACTORS AFFECTING THE COMPANY'S OPERATIONS, MARKETS, GROWTH, SERVICES, PRODUCTS, LICENSES AND OTHER FACTORS DISCUSSED IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, AND THAT THESE STATEMENTS ARE ONLY ESTIMATES OR PREDICTIONS. NO ASSURANCES CAN BE GIVEN REGARDING THE ACHIEVEMENT OF FUTURE RESULTS, AS ACTUAL RESULTS MAY DIFFER MATERIALLY AS A RESULT OF RISKS FACING THE COMPANY, AND ACTUAL EVENTS MAY DIFFER FROM THE ASSUMPTIONS UNDERLYING THE STATEMENTS THAT HAVE BEEN MADE REGARDING ANTICIPATED EVENTS. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO NUMEROUS ASSUMPTIONS, RISKS AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS EXPRESSED OR IMPLIED BY THE COMPANY IN THOSE STATEMENTS. SOME OF THESE RISKS ARE DESCRIBED IN "RISK FACTORS" IN ITEM 1A OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K, AS AMENDED, FOR THE TRANSITION PERIOD FROM JUNE 30, 2005 TO DECEMBER 31, 2005. THESE RISK FACTORS SHOULD BE CONSIDERED IN CONNECTION WITH ANY SUBSEQUENT WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS THAT THE COMPANY OR PERSONS ACTING ON THE COMPANY'S BEHALF MAY ISSUE. ALL WRITTEN AND ORAL FORWARD LOOKING STATEMENTS MADE IN CONNECTION WITH THIS REPORT THAT ARE ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON THE COMPANY'S BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THESE CAUTIONARY STATEMENTS. GIVEN THESE UNCERTAINTIES, THE COMPANY CAUTIONS INVESTORS NOT TO UNDULY RELY ON THE COMPANY'S FORWARD-LOOKING STATEMENTS. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVIEW OR CONFIRM ANALYSTS' EXPECTATIONS OR ESTIMATES OR TO RELEASE PUBLICLY ANY REVISIONS TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS. FURTHER, THE INFORMATION ABOUT THE COMPANY'S INTENTIONS CONTAINED IN THIS DOCUMENT IS A STATEMENT OF THE COMPANY'S INTENTION AS OF THE DATE OF THIS DOCUMENT AND IS BASED UPON, AMONG OTHER THINGS, THE EXISTING REGULATORY ENVIRONMENT, INDUSTRY CONDITIONS, MARKET CONDITIONS AND PRICES, THE ECONOMY IN GENERAL AND THE COMPANY'S ASSUMPTIONS AS OF SUCH DATE. THE COMPANY MAY CHANGE THE COMPANY'S INTENTIONS, AT ANY TIME AND WITHOUT NOTICE, BASED UPON ANY CHANGES IN SUCH FACTORS, IN THE COMPANY'S ASSUMPTIONS OR OTHERWISE. GENERAL During the period from the formation of the Company on February 4, 2003 to January 30, 2006, the Company did not generate any significant revenue, and accumulated no significant assets, as the Company explored various business opportunities. On January 30, 2006, in exchange for a controlling interest in the Company's publicly-held "shell" corporation, the Company acquired all of the issued and outstanding capital stock of Falcon Link. This transaction is commonly referred to as a "reverse acquisition." For financial reporting purposes, Falcon Link was considered the acquirer in such transaction. As a result, the Company's historical financial statements for all periods prior to January 30, 2006 included in this Report are those of Falcon Link. The Company is principally engaged in the meat and food processing business in The People's Republic of China (the "PRC"). Currently, the Company has five processing plants located in Henan 17 Province in the PRC, with a total of seven production lines. The Company began construction of a third fully-dedicated case-ready plant in fiscal 2005. This plant was put into production on February 23, 2006. On a daily basis, an average of 2,000 pigs (approximately 14.5 metric tons) are butchered and processed at this location. The Company expects to increase the meat processing capacity at this plant by 60,000 metric tons on an annual basis. The Company utilizes state-of-the-art equipment in all of our abattoirs and processing facilities. The Company's products are sold under the "Zhongpin" and "Shengpin" brand names. The Company's customers include over ten international fast food companies in the PRC, over 30 export-registered processing factories and over 1,200 school cafeterias, factory canteens, army posts and national departments. The Company also sells directly to over 2,100 retail outlets, including supermarkets, within the PRC. In 2005, the Company was one of the top 151 national agricultural industrial enterprises in the PRC and were ranked eighth overall, in terms of revenue, in the national meat industry. During the past five years, the Company's growth rate has exceeded 50% percent in terms of both revenues and net profits. The Company has established distribution networks in more than 20 provinces in the North, East, South and South Midland of the PRC, and also has formed strategic partnerships with leading supermarket chains and the catering industry in the PRC. In addition, the Company exports products to the European Union, Southeast Asia and Russia. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain operating information expressed in U.S dollars (in thousands)
THREE MONTHS ENDED MARCH 31 2006 2005 ------------------------------ SALES REVENUES $ 30,494 $ 14,405 COST OF SALES 25,914 11,809 GROSS PROFIT 4,579 2,596 ------------------------------ GENERAL AND ADMINISTRATIVE EXPENSES 899 224 OPERATING EXPENSES 804 365 TOTAL OTHER INCOME (EXPENSE) (145) (258) NET INCOME BEFORE TAXES 2,731 1,749 ------------------------------ PROVISION FOR INCOME TAXES 145 --- NET INCOME AFTER TAXES 2,586 1,749 MINORITY INTEREST 11 12 NET INCOME 2,575 1,736 ------------------------------ FOREIGN CURRENCY TRANSLATION ADJUSTMENT 141 --- COMPREHENSIVE INCOME 2,716 1,736 ------------------------------
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31, 2005 18 REVENUE. Total revenue increased from $14.41 million for the quarter ended March 31, 2005 to $30.49 million for the quarter ended March 31, 2006, or approximately 112%. The increase in revenues was primarily due to increased sales in the Company's meat and meat products segment resulting from the effects of the continued increase in the amount of branded stores sales and a widening wholesale customer base. COST OF SALES. Cost of sales increased from $11.81 million for the quarter ended March 31, 2005 to $25.91 million for the quarter ended March 31, 2006, or approximately 119%. As a percentage of revenue, total cost of sales increased from approximately 82% for the quarter ended March 31, 2005 to approximately 85% in the quarter ended March 31 2006. The increase in cost of sales was primarily due to an increase of approximately 3% in raw material costs for the quarter ended March 31 2006 as compared to the quarter ended March 31, 2005. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased by approximately 302% for the quarter ended March 31, 2006 from $0.22 million for the quarter ended March 31, 2005 to $0.90 million for the quarter ended March 31, 2006. As a percentage of revenues, general and administrative expenses increased from 1.55% for the quarter ended March 31, 2005 to 2.95% for the quarter ended March 31, 2006. The increase in general and administrative expenses was primarily the result of the addition of senior executives to the management team. INTEREST EXPENSE. Interest expense increased from $0.35 million for the quarter ended March 31, 2005 to $0.38 million for the quarter ended March 31, 2006, or approximately 8.7%. During the quarter ended March 31, 2006, total liabilities decreased by approximately $7.3 million, however, the average debt outstanding was approximately $20.70 million for the quarter ended March 31, 2006 and $18.34 million for the quarter ended March 31, 2005. INTEREST INCOME, ALLOWANCES INCOME, OTHER INCOME AND EXCHANGE GAIN (LOSS). Interest income, allowances income, other income and exchange gain (loss) increased from $0.09 million for the quarter ended March 31, 2005 to $0.23 million for the quarter ended March 31, 2006, primarily due to an increase of allowance income. INCOME TAXES. The effective tax rate in the PRC on income generated from the sale of prepared products is 33% and there is no income tax on income generated from the sale of raw products. The increase in the provision for income taxes for the quarter ended March 31, 2006 over the quarter ended March 31, 2005 resulted from an increase in the Company's sales of prepared products for the quarter ended March 31, 2006. LIQUIDITY AND CAPITAL RESOURCES During the quarter ended March 31, 2006, the Company funded its operations primarily through cash flows from operations and the sale of preferred stock. Net cash provided by (used in) operating activities of the Company was $0.98 million and ($2.95) million in the quarters ended March 31, 2005 and 2006, respectively. Cash flows from operations of the Company decreased for the quarter ended March 31, 2006 primarily due to an increase in accounts receivable and other receivables as well as an increased level of inventories due to a significant increase in revenues and increased scale of production capacity. Net accounts receivable and other receivables of the Company were $15.83 million as of March 31, 2006. This compares to $10.63 million at December 31, 2005. The increase in accounts receivable was due primarily to the increase in the Company's revenues. 19 The Company expended $3.73 million for the construction of new facilities in the quarter ended March 31, 2006. As of March 31, 2006, the Company had approximately $17.89 million in cash and cash equivalents. On January 31, 2006, we received net proceeds of approximately $23.11 million from the sale of units consisting of our Series A convertible preferred stock and common stock purchase warrants. The Company believes its existing cash and cash equivalents and its available lines of credit, which totaled approximately $80 million at March 31, 2006, will be sufficient to finance its operating requirements and capital expenditures over the next 12 months. INFLATION AND SEASONALITY While demand for the Company's products, in general, is relatively high before the Chinese New Year in January or February each year and lower thereafter, the Company does not believe its operations have been materially affected by inflation or seasonality. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DISCLOSURES ABOUT MARKET RISK The Company may be exposed to changes in financial market conditions in the normal course of business. Market risk generally represents the risk that losses may occur as a result of movements in interest rates and equity prices. The Company currently does not use financial instruments in the normal course of business that are subject to changes in financial market conditions. CURRENCY FLUCTUATIONS AND FOREIGN CURRENCY RISK Substantially all of the Company's operations are conducted in the PRC, with the exception of the Company's export business and limited overseas purchases of raw materials. Most of the Company's sales and purchases are conducted within the PRC in Chinese Renminbi, which is the official currency of the PRC. As a result, the effect of the fluctuations of exchange rates is considered minimal to the Company's business operations. Substantially all of the Company's revenues and expenses are denominated in Renminbi. However, the Company uses the United States dollar for financial reporting purposes. Conversion of Renminbi into foreign currencies is regulated by the People's Bank of China through a unified floating exchange rate system. Although the PRC government has stated its intention to support the value of the Renminbi, there can be no assurance that such exchange rate will not again become volatile or that the Renminbi will not devalue significantly against the U.S. dollar. Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms, of the Company's net assets and income derived from its operations in the PRC. INTEREST RATE RISK The Company does not have significant interest rate risk, as the Company's debt obligations are primarily short-term in nature, with fixed interest rates. 20 CREDIT RISK The Company has not experienced significant credit risk, as most of the Company's customers are long-term customers with superior payment records. The Company's receivables are monitored regularly by the Company's credit managers. ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES. The Company's management, with the participation its chief executive officer and chief financial officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company's chief executive officer and chief financial officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act. INTERNAL CONTROL OVER FINANCIAL REPORTING. There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 21 ZHONGPIN INC. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 1A. RISK FACTORS During the three months ended March 31, 2006, there were no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K, as amended, for the transition period from June 30, 2005 to December 31, 2005. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a) None. (b) Not Applicable. (c) None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable. ITEM 5. OTHER INFORMATION (a) None. (b) None. ITEM 6. EXHIBITS The exhibits required by this item are set forth on the Exhibit Index attached hereto. 22 ZHONGPIN INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ZHONGPIN INC. (Company) Date: May 15, 2006 By: /s/ Xianfu Zhu -------------------------------- Xianfu Zhu Chief Executive Officer By: /s/ Yuanmei Ma -------------------------------- Yuanmei Ma Chief Financial Officer 23 EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT TITLE ----------- ---------------------------------------------------------------- 31.1* Certification of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certification of our Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2* Certification of our Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * filed herewith 24