Attached files
file | filename |
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EX-32.1 - ZHONGPIN INC. | v192924_ex32-1.htm |
EX-32.2 - ZHONGPIN INC. | v192924_ex32-2.htm |
EX-31.2 - ZHONGPIN INC. | v192924_ex31-2.htm |
EX-31.1 - ZHONGPIN INC. | v192924_ex31-1.htm |
EX-10.1 - ZHONGPIN INC. | v192924_ex10-1.htm |
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 June 30, 2010
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 :
|
001-33593
|
Zhongpin
Inc.
|
||
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
54-2100419
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
21
Changshe Road, Changge City, Henan Province, People’s Republic of
China
|
461500
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
011
86 10-8286-1788
|
||
(Registrant’s
telephone number, including area
code)
|
Not
Applicable
|
||
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past ninety (90) days. YES x NO ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). YES ¨ NO ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Large
accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨ (Do not check if a
smaller reporting company) Smaller reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES ¨ NO x
As of
August 5, 2010, 34,725,104 shares of the registrant’s common stock were
outstanding.
ZHONGPIN
INC.
FORM
10-Q
INDEX
Page
|
||||
Part
I
|
Financial
Information
|
|||
Item
1.
|
Unaudited
Financial Statements:
|
1 | ||
Consolidated
Balance Sheets as of June 30, 2010 (unaudited) and December 31,
2009
|
2 | |||
Consolidated
Statements of Operations and Comprehensive Income (unaudited) for the
three-month and six-month periods ended June 30, 2010 and
2009
|
3 | |||
Consolidated
Statements of Cash Flows (unaudited) for the six- month periods ended June
30, 2010 and 2009
|
4 | |||
Notes
to Consolidated Financial Statements (unaudited)
|
5 | |||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
19 | ||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
36 | ||
Item
4.
|
Controls
and Procedures
|
37 | ||
Part
II
|
Other
Information
|
|||
Item
1.
|
Legal
Proceedings
|
38 | ||
Item
1A.
|
Risk
Factors
|
38 | ||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
38 | ||
Item
3.
|
Defaults
Upon Senior Securities
|
38 | ||
Item
4.
|
(Removed
and Reserved)
|
38 | ||
Item
5.
|
Other
Information
|
38 | ||
Item
6.
|
Exhibits
|
38 | ||
Signatures
|
39 |
ZHONGPIN
INC.
Part
I - Financial Information
Item
1. Financial Statements
The
accompanying unaudited 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
financial statements reflect all adjustments, consisting only of normal,
recurring adjustments, which are, in the opinion of management, necessary for a
fair presentation for the interim periods.
The
accompanying financial statements should be read in conjunction with the notes
to the aforementioned financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and notes thereto included in our Annual Report on Form 10-K for the
year ended December 31, 2009.
The
results of operations for the three-month and six-month periods ended June 30,
2010 are not necessarily indicative of the results to be expected for the entire
fiscal year or any other period.
ZHONGPIN
INC.
CONSOLIDATED
BALANCE SHEETS
(Amounts
in U.S. dollars)
June
30,
2010
|
December
31,
2009
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 39,748,050 | $ | 68,982,259 | ||||
Restricted
cash
|
22,505,742 | 14,490,575 | ||||||
Bank
notes receivable
|
14,710,863 | 7,997,172 | ||||||
Accounts
receivable, net of allowance for doubtful accounts of $1,853,283 and
$1,132,038
|
33,915,825 | 20,419,797 | ||||||
Other
receivables, net of allowance for doubtful accounts of $177,310 and
$290,436
|
1,590,510 | 652,523 | ||||||
Purchase
deposits
|
4,026,654 | 5,653,192 | ||||||
Inventories
|
44,187,778 | 33,859,420 | ||||||
Prepaid
expenses and deferred charges
|
760,695 | 186,030 | ||||||
Allowance
receivable
|
4,436,779 | — | ||||||
VAT
recoverable
|
18,393,417 | 14,064,185 | ||||||
Deferred
tax assets
|
257,558 | 256,151 | ||||||
Other
current assets
|
137,480 | 120,709 | ||||||
Total
current assets
|
184,671,351 | 166,682,013 | ||||||
Long-term
investment
|
441,768 | — | ||||||
Property,
plant and equipment (net)
|
265,309,166 | 189,588,904 | ||||||
Deposits
for purchase of land use rights
|
20,835,887 | 8,718,740 | ||||||
Construction
in progress
|
30,566,969 | 70,192,150 | ||||||
Land
use rights
|
61,292,261 | 61,128,431 | ||||||
Deferred
charges
|
25,714 | 39,855 | ||||||
Other
non-current assets
|
1,771,386 | 1,761,709 | ||||||
Total
assets
|
$ | 564,914,502 | $ | 498,111,802 | ||||
LIABILITIES
AND EQUITY
|
||||||||
Current
liabilities
|
||||||||
Short-term
loans
|
$ | 69,357,134 | $ | 84,661,697 | ||||
Bank
notes payable
|
24,207,395 | 9,560,353 | ||||||
Long-term
loans - current portion
|
18,994,424 | 4,539,215 | ||||||
Capital
lease obligation - current portion
|
6,883,036 | 7,480,098 | ||||||
Accounts
payable
|
22,465,257 | 9,260,750 | ||||||
Other
payables
|
17,254,810 | 12,882,316 | ||||||
Accrued
liabilities
|
8,874,838 | 7,377,850 | ||||||
Deposits
from customers
|
4,410,989 | 5,335,907 | ||||||
Tax
payable
|
1,268,243 | 1,918,057 | ||||||
Total
current liabilities
|
173,716,126 | 143,016,243 | ||||||
Deferred
tax liabilities
|
249,307 | 247,945 | ||||||
Deposits
from customers
|
2,500,939 | 1,987,579 | ||||||
Capital
lease obligation
|
8,492,139 | 11,104,435 | ||||||
Long-term
loans
|
54,429,968 | 44,912,744 | ||||||
Total
liabilities
|
239,388,479 | 201,268,946 | ||||||
Equity
|
||||||||
Common
stock: par value $0.001; 100,000,000 authorized; 34,725,104 and
34,662,314 shares issued and outstanding
|
34,725 | 34,662 | ||||||
Additional
paid in capital
|
167,458,825 | 166,169,902 | ||||||
Retained
earnings
|
137,315,286 | 111,699,375 | ||||||
Accumulated
other comprehensive income
|
20,717,187 | 18,938,917 | ||||||
Total
equity
|
325,526,023 | 296,842,856 | ||||||
Total
liabilities and equity
|
$ | 564,914,502 | $ | 498,111,802 |
The
accompanying notes are an integral part of these consolidated financial
statements.
2
ZHONGPIN
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amount
in U.S. dollars) (Unaudited)
Three
Months Ended
June 30,
|
Six
Months Ended
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenues
|
||||||||||||||||
Sales
revenues
|
$ | 215,072,583 | $ | 161,847,101 | $ | 419,357,498 | $ | 315,696,550 | ||||||||
Cost
of sales
|
(189,738,151 | ) | (142,879,580 | ) | (369,104,716 | ) | (277,585,227 | ) | ||||||||
Gross
profit
|
25,334,432 | 18,967,521 | 50,252,782 | 38,111,323 | ||||||||||||
Operating
expenses
|
||||||||||||||||
General
and administrative expenses
|
(5,691,468 | ) | (4,239,704 | ) | (11,749,609 | ) | (8,847,990 | ) | ||||||||
Selling
expenses
|
(4,638,672 | ) | (2,787,080 | ) | (8,975,500 | ) | (5,580,358 | ) | ||||||||
Research
& development expenses
|
(35,871 | ) | 5,227 | (76,723 | ) | (25,351 | ) | |||||||||
Gain
on disposal of a subsidiary
|
- | 654,086 | - | 654,086 | ||||||||||||
Amortization
of loss from sale-leaseback transaction
|
- | (16,672 | ) | - | (33,329 | ) | ||||||||||
Impairment
loss
|
(1,007,447 | ) | - | (1,007,447 | ) | - | ||||||||||
Total
operating expenses
|
(11,373,458 | ) | (6,384,143 | ) | (21,809,279 | ) | (13,832,942 | ) | ||||||||
Income
from operations
|
13,960,974 | 12,583,378 | 28,443,503 | 24,278,381 | ||||||||||||
Other
income (expense)
|
||||||||||||||||
Interest
expense, net
|
(1,900,389 | ) | (1,263,975 | ) | (3,335,850 | ) | (2,763,495 | ) | ||||||||
Other
income
|
104,768 | 121,943 | 669,527 | 291,349 | ||||||||||||
Government
subsidies
|
1,244,925 | 127,453 | 1,870,081 | 222,408 | ||||||||||||
Total
other expense
|
(550,696 | ) | (1,014,579 | ) | (796,242 | ) | (2,249,738 | ) | ||||||||
Net
income before taxes
|
13,410,278 | 11,568,799 | 27,647,261 | 22,028,643 | ||||||||||||
Provision
for income taxes
|
(1,044,833 | ) | (845,351 | ) | (2,031,353 | ) | (1,563,896 | ) | ||||||||
Net
income
|
$ | 12,365,445 | $ | 10,723,448 | $ | 25,615,908 | $ | 20,464,747 | ||||||||
Foreign
currency translation adjustment
|
$ | 1,692,005 | $ | 115,825 | $ | 1,778,270 | $ | (263,147 | ) | |||||||
Comprehensive
income
|
$ | 14,057,450 | $ | 10,839,273 | $ | 27,394,178 | $ | 20,201,600 | ||||||||
Basic
earnings per common share
|
$ | 0.36 | $ | 0.36 | $ | 0.74 | $ | 0.69 | ||||||||
Diluted
earnings per common share
|
$ | 0.35 | $ | 0.36 | $ | 0.73 | $ | 0.69 | ||||||||
Basic
weighted average shares outstanding
|
34,725,104 | 29,709,893 | 34,720,312 | 29,694,105 | ||||||||||||
Diluted
weighted average shares outstanding
|
35,108,264 | 29,905,720 | 35,122,896 | 29,852,635 |
The
accompanying notes are an integral part of these consolidated financial
statements.
3
ZHONGPIN
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Amount
in U.S. dollars) (Unaudited)
Six
Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 25,615,908 | $ | 20,464,747 | ||||
Adjustments
to reconcile net income to net cash provided by (used in)
operations:
|
||||||||
Depreciation
|
6,093,089 | 3,772,108 | ||||||
Amortization
|
649,049 | 400,476 | ||||||
Provision
for allowance for bad debt
|
597,245 | 204,524 | ||||||
Impairment
loss
|
1,007,447 | - | ||||||
Other
income
|
- | (105,725 | ) | |||||
Gain
on disposal of a subsidiary
|
- | (649,669 | ) | |||||
Non-cash
compensation expense
|
1,075,636 | 754,034 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(14,027,015 | ) | (12,807,660 | ) | ||||
Other
receivables
|
(815,504 | ) | 654,943 | |||||
Purchase
deposits
|
1,649,138 | 402,479 | ||||||
Prepaid
expense
|
(571,257 | ) | 42,697 | |||||
Inventories
|
(10,090,670 | ) | (11,012,841 | ) | ||||
Allowance
receivables
|
(4,414,158 | ) | - | |||||
VAT
recoverable
|
(5,237,751 | ) | (3,588,961 | ) | ||||
Other
current assets
|
(16,025 | ) | (69,793 | ) | ||||
Deferred
charges
|
14,286 | - | ||||||
Accounts
payable
|
13,086,579 | 2,632,558 | ||||||
Other
payables
|
4,282,762 | 5,533,564 | ||||||
Accrued
liabilities
|
1,453,078 | 258,905 | ||||||
Taxes
payable
|
(656,983 | ) | 181,024 | |||||
Deposits
from clients
|
(949,361 | ) | (32,698 | ) | ||||
Deposits
from clients – Long term portion
|
499,881 | - | ||||||
Net
cash provided by operating activities
|
19,245,374 | 7,034,712 | ||||||
Cash
flows from investing activities:
|
||||||||
Deposits
for purchase of land use rights
|
(12,007,724 | ) | (7,245,146 | ) | ||||
Construction
in progress
|
(33,850,846 | ) | (19,063,158 | ) | ||||
Additions
to property and equipment
|
(6,733,687 | ) | (6,064,018 | ) | ||||
Additions
to land use rights
|
(477,998 | ) | (15,896,295 | ) | ||||
Proceeds
on disposal of fixed assets
|
- | 50,023 | ||||||
Increase
in restricted cash
|
(7,895,117 | ) | (3,758,823 | ) | ||||
Used
to invest in a subsidiary
|
(439,515 | ) | - | |||||
Proceeds
from disposal of a subsidiary
|
- | 1,226,182 | ||||||
Net
cash used in investing activities
|
(61,404,887 | ) | (50,751,235 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from (repayment of) bank notes, net
|
7,884,362 | 78,593 | ||||||
Proceeds
from (repayment of) short-term bank loans
|
(20,085,130 | ) | 14,342,993 | |||||
Proceeds
from long-term bank loans
|
30,985,833 | 14,635,501 | ||||||
Repayment
of long-term bank loans
|
(3,009,908 | ) | (70,776 | ) | ||||
Proceeds
from capital lease obligations
|
(3,294,553 | ) | (720,604 | ) | ||||
Proceeds
from warrants exercise
|
213,350 | - | ||||||
Net
cash provided by financing activities
|
12,693,954 | 28,265,707 | ||||||
Effects
of rate changes on cash
|
231,350 | (61,483 | ) | |||||
Increase
(decrease) in cash and cash equivalents
|
(29,234,209 | ) | (15,512,299 | ) | ||||
Cash
and cash equivalents, beginning of period
|
68,982,259 | 41,857,166 | ||||||
Cash
and cash equivalents, end of period
|
$ | 39,748,050 | $ | 26,344,867 | ||||
Supplemental
disclosures of cash flow information:
|
||||||||
Cash
paid for interest
|
$ | 4,006,111 | $ | 3,438,560 | ||||
Cash
paid for income taxes
|
$ | 1,955,733 | $ | 1,503,753 |
The
accompanying notes are an integral part of these consolidated financial
statements.
4
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
ORGANIZATION
AND NATURE OF OPERATIONS
|
Zhongpin
Inc. (the “Company”) was established under the laws of the State of Delaware on
February 4, 2003. The Company is a public holding company holding 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 segment 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 the PRC. The Company’s China-based
subsidiaries include the following:
Date
of
|
Registered
|
Percentage
|
||||||||
Name
|
Incorporation
|
Capital
|
of Ownership
|
|||||||
Henan
Zhongpin Food Company Limited
|
May.20,
2005
|
$137,300,000
|
100 | % | ||||||
Henan
Zhongpin Food Share Company Limited (“Henan
Zhongpin”)
|
Jan.
20, 2000
|
1,000,000,000
RMB
($146,492,243)
|
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
|
June
7, 2006
|
60,000,000
RMB
($8,585,399)
|
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 | % | ||||||
Heilongjiang
Zhongpin Food Company Limited (“Heilongjiang Zhongpin”)
|
Oct.
17, 2006
|
1,000,000
RMB
($126,406)
|
100 | %(2) | ||||||
Luoyang
Zhongpin Food Company Limited (“Luoyang Zhongpin”)
|
Jan.18,
2007
|
60,000,000
RMB
($8,783,487)
|
100 | % | ||||||
Yongcheng
Zhongpin Food Company Limited
|
Mar. 1,
2007
|
60,000,000
RMB
($8,783,487)
|
100 | % |
5
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Date
of
|
Registered
|
Percentage
|
||||||||
Name
|
Incorporation
|
Capital
|
of Ownership
|
|||||||
Tianjin
Zhongpin Food Company Limited
|
Sept.
14, 2007
|
100,000,000
RMB
($14,639,145)
|
100 | % | ||||||
Hengshui Zhongpin
Food Company Limited
|
Nov.
17, 2008
|
1,000,000
RMB
($146,428)
|
100 | % | ||||||
Jilin
Zhongpin Food Company Limited
|
Dec.
11, 2008
|
1,000,000
RMB
($145,688)
|
100 | % | ||||||
Henan
Zhongpin Agriculture and Animal Husbandry Industry Development Company
Limited
|
Dec.
26, 2008
|
10,000,000
RMB
($1,461,796)
|
100 | % | ||||||
Taizhou
Zhongpin Food Company Limited
|
May
12, 2010
|
50,000,000
RMB
($7,362,794)
|
100 | % |
(1) Includes
a 1.7% 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) Includes
a 10% ownership interest of another stockholder with respect to which Henan
Zhongpin is entitled to all economic benefits and the right to vote pursuant to
the terms of a trust agreement with such stockholder.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Consolidation
and Basis of Presentation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated during the process of consolidation. The
consolidated financial statements were prepared in accordance with
GAAP.
Use
of Estimates
The
preparation of unaudited interim condensed consolidated 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 unaudited interim condensed consolidated
financial statements and the reported amounts of revenue and expenses during the
period reported. Actual results could materially 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, and determination of stock based
compensation.
Foreign
Currency Translations and Transactions
RMB, the
national currency of the PRC, is the primary currency of the economic
environment in which the Company’s China-based subsidiaries are operating.
The United States dollar (“U.S. dollar”) is the functional currency used by the
Company and Falcon to record all of their activities. The Company uses the U.S.
dollar for financial reporting purposes.
6
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
Revenue
Recognition
Revenues
generated from the sales of various meat products and vegetables and fruits are
recognized when these products are delivered to customers in accordance with
previously agreed upon pricing and delivery arrangements, and the collectability
of these sales is reasonably assured. Since the products sold by the Company are
primarily perishable and frozen food products, the right of return is only for a
few days and has been determined to be insignificant by the management of the
Company. Accordingly, no provision has been made for returnable goods. Revenues
presented on the consolidated statements of 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 in a deposit account an amount of cash that
will serve as collateral for its delivery of bank promissory notes of such
lenders as payment instruments for its procurement purposes. The amount of bank
promissory notes of such lenders that can be delivered by Henan Zhongpin can be
up to twice the amount of such deposits. As such deposits may not be withdrawn
by Henan Zhongpin without restriction, such cash deposits are presented as
“restricted cash” on the consolidated balance sheets.
Bank
Notes Receivable
The
Company only accepts notes issued by banks in the normal course of business as
payment for products sold by the Company. These bank notes receivable have
maturity dates of up to 180 days and bear no interest. The Company can hold the
bank notes until the maturity date and collect the amount from the issuing
banks, or the Company can use these bank notes as a means for payment for goods
or services received. The Company accrues no provision for these bank notes
because such bank notes have little risk of default in the PRC.
Accounts
Receivable
During
the normal course of business, the Company's policy is to ask larger customers
to make deposits in reasonable and meaningful amounts on a case-by-case basis.
For certain newly-developed customers, the Company may extend unsecured
credit.
The
Company regularly evaluates and monitors the creditworthiness of each of its
customers in accordance with the prevailing practice in the meat industry and
based on general economic conditions in the PRC. 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 June 30, 2010 and December 31, 2009,
respectively.
7
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
The
following table presents allowance activities in accounts
receivable.
June
30,
2010
|
December
31,
2009
|
|||||||
Beginning
balance
|
$ | 1,132,038 | $ | 1,215,901 | ||||
Additions
charged to (reduction in) expense
|
721,245 | (83,863 | ) | |||||
Ending
balance
|
$ | 1,853,283 | $ | 1,132,038 |
Inventories
Inventories
are stated at the lower of cost or the market based on the weighted average
method. Production cost components include the purchase cost of live hogs,
direct labor, depreciation, packaging material, utility expense and other
manufacturing overhead. By using a systematic costing system, the production
cost is allocated to various products at the stage of work-in-progress and
finished goods, respectively. Net realizable value is the estimated selling
price in the ordinary course of business, less estimated costs to complete and
dispose. The Company regularly inspects the shelf life of prepared foods and, if
necessary, writes down their carrying value based on their salability and
expiration dates into cost of goods sold.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost and are stated net of accumulated
depreciation. Depreciation expense is determined using the straight-line method
over the estimated useful lives of the assets, as follows:
Estimated
Useful
Economic Life
|
||||
Plants
and buildings
|
5-30
years
|
|||
Machinery
and equipment
|
5-20
years
|
|||
Office
furniture and equipment
|
3-5
years
|
|||
Vehicles
|
5
years
|
|||
Maintenance
and repairs are charged directly to expense as incurred, whereas improvements
and renewals are generally capitalized in their respective property accounts.
When an item is retired or otherwise disposed of, the cost and applicable
accumulated depreciation are removed and the resulting gain or loss is
recognized and reflected as a line item before operating income
(loss).
Land
Use Rights
The
Chinese government owns all of the parcels of land on which the Company's plants
are built. In the PRC, 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. In accordance with the provision of
Statement of Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification 350, Intangibles –Goodwill and Other, 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.
8
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 vendor, accounts payable and accrued liabilities,
capital lease obligations and short term and long term loans are reasonable
estimates of their fair value because of the short maturity of these items. The
fair value of amounts due from/to related parties and stockholders are a
reasonable estimate of their fair value as the amounts will be collected and
paid off in a period less than one year. 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 interest at the rate dictated and published by the People's
Bank of China. The current rates approximate the rate of the debts.
Shipping
and Handling Cost
All
shipping and handling fees are included in selling expenses.
Value
Added Tax
All
China-based enterprises are subject to a VAT imposed by the PRC government on
their domestic product sales. The output VAT is charged to customers who
purchase goods from the Company and the input VAT is paid when the Company
purchases goods from its vendors. Input VAT rates are 13% for most of the
purchasing activities conducted by the Company. Output VAT rate is 13% for
chilled pork products, frozen pork products and vegetable and fruit products,
and 17% for prepared meat products. The input VAT can be offset against the
output VAT. The VAT payable or recoverable balance presented on the consolidated
balance sheets represents either the input VAT less than or larger than the
output VAT. The debit balance represents a credit against future collections of
output VAT instead of a receivable.
Share-Based
Payment
The
Company receives employee and certain non-employee services in exchange for (a)
equity 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 options granted
using a fair-value-based method.
Earnings
Per Share
Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, similar to
fully-diluted earnings per share. All of such securities are included in the
computation of diluted earnings per share. The number of shares of common stock
underlying the outstanding stock warrants and options at June 30, 2010 and 2009
were 1,679,490 and 1,960,827, respectively, which were included in the
computation of diluted earnings per share.
9
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Government
Subsidies
The Company's subsidiaries in the PRC
receive government subsidies from local Chinese government agencies in
accordance with relevant Chinese government policies. In general, the Company
presents the government subsidies received as part of other income unless the
subsidies received are earmarked to compensate a specific expense, which have
been accounted for by offsetting the specific expense, such as research and
development expense or interest expenses. The information relating to government
subsidies received and recognized is presented in Note 11.
Research
and Development Expenses
Research and development costs are
expensed as incurred. Gross research and development expenses for new product
development and improvements of existing products by the Company incurred for
the three-month periods ended June 30, 2010 and 2009 were $1,220,000 and
$492,000, respectively, and for the six-month periods ended June 30,
2010 and 2009 were $2,150,000 and $1,018,000,
respectively.
Comprehensive
Income (Loss)
The Company adopted FASB Accounting
Standards Codification 220, Comprehensive Income, which
establishes standards for reporting and presentation of comprehensive income
(loss) and its components in a full set of general-purpose financial statements.
The Company has chosen to report comprehensive income (loss) in the statements
of operations and comprehensive income. Comprehensive income (loss)
is comprised of net income and all changes to stockholders' equity except those
due to investments by owners and distributions to owners.
Recently
Adopted Accounting Pronouncements
Adoption
of FASB ASU 2010-17
In April
2010, the FASB issued an Accounting Standard Update (“ASU”) No. 2010-17,
“Revenue Recognition – Milestone Method (Topic 605), which provides guidance on
defining milestones under Topic 605 and determining when it may be appropriate
to apply the milestone method of revenue recognition for research and
development deliverables in an arrangement in which one or more payments are
contingent upon achieving uncertain future events or circumstances. ASU 2010-17
shall be applied prospectively to milestones achieved in fiscal years, and
interim periods within those years, beginning on or after June 15, 2010 and is
not expected to have a material impact on the Company’s consolidated financial
position or results of operation.
Adoption
of FASB ASU 2010-13
In April
2010, the FASB issued ASU No. 2010-13, "Compensation—Stock Compensation (Topic
718): Effect of Denominating the Exercise Price of a Share-Based Payment Award
in the Currency of the Market in Which the Underlying Equity Security Trades,"
which addresses the classification of a share-based payment award with an
exercise price denominated in the currency of a market in which the underlying
equity security trades. Topic 718 is amended to clarify that a share-based
payment award with an exercise price denominated in the currency of a market in
which a substantial portion of the entity’s equity securities trades shall not
be considered to contain a market, performance, or service condition. Therefore,
such an award is not to be classified as a liability if it otherwise qualifies
as equity classification. The amendments in this ASU should be applied by
recording a cumulative-effect adjustment to the opening balance of retained
earnings. The cumulative-effect adjustment should be calculated for all awards
outstanding as of the beginning of the fiscal year in which the amendments are
initially applied, as if the amendments had been applied consistently since the
inception of the award. ASU 2010-13 is effective for interim and annual
periods beginning on or after December 15, 2010 and is not expected to have a
material impact on the Company’s consolidated financial position or results of
operations.
10
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
3.
|
INVENTORIES
|
Inventories
at June 30, 2010 and December 31, 2009 consisted of the
following:
June 30,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
||||||||
Raw
materials
|
$ | 2,944,211 | $ | 4,941,774 | ||||
Low
value consumables and packing materials
|
1,199,603 | 961,009 | ||||||
Work
in progress
|
1,875,675 | 3,020,589 | ||||||
Finished
goods
|
38,168,289 | 24,936,048 | ||||||
Total
|
$ | 44,187,778 | $ | 33,859,420 |
4.
|
PROPERTY,
PLANT AND EQUIPMENT
|
A summary
of property, plant and equipment at June 30, 2010 and December 31, 2009 is as
follows:
June 30,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
||||||||
Plants
and buildings
|
$ | 191,359,950 | $ | 130,399,711 | ||||
Machinery
and equipment
|
87,723,050 | 68,060,172 | ||||||
Office
furniture and equipment
|
2,963,550 | 2,658,598 | ||||||
Vehicles
|
3,336,818 | 3,144,368 | ||||||
Accumulated
depreciation and amortization
|
(20,074,202 | ) | (14,673,945 | ) | ||||
Total
|
$ | 265,309,166 | $ | 189,588,904 |
The
depreciation and amortization expenses for the three-month periods ended June
30, 2010 and 2009 were $3,363,115 and $2,183,491, respectively, and for the
six-month periods ended June 30, 2010 and 2009 were $6,093,089 and $4,172,584,
respectively.
Property,
plant and equipment under the sale-leaseback agreement at cost at June 30, 2010
and December 31, 2009 was as follows:
June 30,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
||||||||
Plants
and buildings
|
$ | 694,759 | $ | 707,433 | ||||
Machinery
and equipment
|
25,669,370 | 26,239,328 | ||||||
Office
furniture and equipment
|
31,446 | 28,937 | ||||||
Vehicles
|
3,994 | 3,939 | ||||||
Accumulated
depreciation
|
(1,347,667 | ) | (631,251 | ) | ||||
Total
|
$ | 25,051,902 | $ | 26,348,386 |
11
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
deferred losses included in the property and equipment balance were
$3,443,950 and $4,149,415 at June 30, 2010 and December 31, 2009, respectively,
and would be amortized over the lease term. Of the depreciation expenses,
$724,543 and $709,314 were amortization of deferred loss and
depreciation expense from assets under capital lease, respectively, for the six
months ended June 30, 2010; $33,329 and $181,348 were amortization of
deferred loss and depreciation expense from assets under capital lease,
respectively, for the six months ended June 30, 2009.
5.
|
LAND
USE RIGHTS
|
The Company’s
land use rights at June 30, 2010 and December 31, 2009 are as
follows:
June 30,
2010
|
December 31,
2009
|
|||||||
(Unaudited)
|
||||||||
Land
use rights
|
$ | 64,241,186 | $ | 63,412,436 | ||||
Accumulated
amortization
|
(2,948,925 | ) | (2,284,005 | ) | ||||
Total
|
$ | 61,292,261 | $ | 61,128,431 |
The
amortization expenses for the three months ended June 30, 2010 and 2009 were
$321,659 and $212,618, respectively, and for the six-month periods ended
June 30, 2010 and 2009 were $649,049 and $400,476, respectively.
6.
|
CONSTRUCTION
IN PROGRESS
|
Construction
in progress at June 30, 2010 and December 31, 2009 consisted of the
following:
Construction Project
|
Date or
Estimated Date
Put in Service(1)
|
June 30,
2010
|
December 31,
2009
|
|||||||
Production
line for prepared pork in Changge industrial park
|
January
2010
|
$ | — | $ | 75,203 | |||||
Production
facility for prepared pork products in Changge industrial
park
|
March
2010
|
4,418 | 17,145,694 | |||||||
Water
solution station in Changge industrial park
|
April
2010
|
— | 64,439 | |||||||
Replacement
and maintenance in Changge industrial park
|
April
2010
|
181,191 | 121,187 | |||||||
Dormitories
and other infrastructure in Changge industrial park
|
April
2010
|
— | 2,844,349 | |||||||
Production
facility for food oil in Changge industrial park
|
April
2010
|
— | 4,515,099 | |||||||
Production facility
for chilled and frozen pork in Tianjin
|
April
2010
|
— | 38,100,295 | |||||||
Zhengzhou office |
May
2010
|
36,019 | 12,390 | |||||||
Distribution
center in Zhumadian
|
July 2010
|
5,373,804 | 3,611,201 | |||||||
Facility
upgrade and distribution center in Anyang
|
August 2010
|
11,359,494 | 2,958,320 | |||||||
Distribution
center in Luoyang
|
September
2010
|
5,514,926 | 743,973 | |||||||
Distribution
center in Changge
|
April
2011
|
8,097,117 | — | |||||||
Total
|
$ | 30,566,969 | $ | 70,192,150 |
|
Estimated
cost to complete current construction in process is $9.9
million.
|
12
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
|
Represents
date all regulatory permits and approvals are received and project is
placed in service. In certain cases, construction of a project may be
substantially completed and the project may be operational during a
testing period prior to such date.
|
7.
|
SHORT-TERM
BANK LOANS
|
Short-term
bank loans are due within one year. Of the $69.4 million aggregate principal
amount of short-term bank loans at June 30, 2010, loans in the principal amount
of $16.0 million were secured by the Company’s plants located primarily in Henan
province, loans in the aggregate principal amount of $10.5 million were
guaranteed by the Company’s subsidiaries, and loans in the aggregate principal
amount of $10.3 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 the PRC ranging from 4.78 % to 5.40% per
annum.
8.
|
LONG-TERM
BANK LOANS
|
Amounts
outstanding under the Company’s long-term debt arrangements at June 30, 2010 and
December 31, 2009 were as follows:
Bank
|
June 30,
2010
|
December 31,
2009
|
||||||
(Unaudited)
|
||||||||
China
Construction Bank
|
$ | 13,253,030 | $ | 7,322,574 | ||||
China
Minsheng Bank
|
7,362,794 | 7,322,574 | ||||||
Agriculture
Bank of China
|
28,567,642 | 10,251,605 | ||||||
Rabobank
Nederland Shanghai
|
8,835,353 | 11,716,118 | ||||||
China
CITIC Bank
|
— | 4,393,544 | ||||||
Canadian
Government Transfer Loan
|
1,416,264 | 1,489,099 | ||||||
China
Merchants Bank
|
13,989,309 | 6,956,445 | ||||||
Current
portion
|
(18,994,424 | ) | (4,539,215 | ) | ||||
Total
long-term portion
|
$ | 54,429,968 | $ | 44,912,744 |
In June
2010, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 40 million ($5.9 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.40% per annum on June 30,
2010) and are payable on June 29, 2013. Borrowings under the loan
agreement are guaranteed by the land use right, property and plant of Henan
Zhongpin.
In March
2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of
China pursuant to which Henan Zhongpin borrowed RMB 53 million ($7.8 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
June 30, 2010) and are payable in installments on March 18, 2012, 2013 and
2014 and December 27, 2014. Borrowings under the loan agreement
are guaranteed by the land use right, property and plant of Luoyang
Zhongpin.
In March
2010, Henan Zhongpin entered into a loan agreement with China Merchants Bank
pursuant to which Henan Zhongpin borrowed RMB 47.5 million ($7.0 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 (5.76% per annum on June 30,
2010) and are payable on November 26, 2014. Borrowings under the loan
agreement are guaranteed by Luoyang Zhongpin.
13
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
February 2010, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 71 million ($10.4
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 (5.40% per
annum on June 30, 2010) and are payable on February 3,
2013. Borrowings under the loan agreement are guaranteed by the land
use right, property and plant of Luoyang Zhongpin.
In
December 2009, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 70 million ($10.3
million). All amounts borrowed under the loan agreement bear interest at a
floating rate that is based on the prime rate published by the People’s Bank of
China for loans with the same or similar terms on the drawdown date (5.76% per
annum on June 30, 2010) and are payable on December 27,
2014. Borrowings under the loan agreement are guaranteed by the land
use right, property and plant of Luoyang Zhongpin.
In
November 2009, Henan Zhongpin entered into a loan agreement with China Merchants
Bank pursuant to which Henan Zhongpin borrowed RMB 47.5 million ($7.0 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 (5.76% per annum on
June 30, 2010) and are payable on November 26, 2014. Borrowings under
the loan agreement are guaranteed by Luoyang Zhongpin.
In June
2009, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.4 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 (5.40% per annum on June 30,
2010) and are payable on June 10, 2011. Borrowings under the loan
agreement are guaranteed by the land use right, property and plant of Henan
Zhongpin.
In May
2009, Henan Zhongpin entered into a loan agreement with China Minsheng Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.4 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 (5.40% per annum on June 30,
2010) and are payable on May 6, 2011. Borrowings under the loan agreement are
guaranteed by the Company’s wholly-owned subsidiary, Yongcheng Zhongpin Food
Company Limited.
In May
2008, Henan Zhongpin entered into a credit agreement with Rabobank Nederland
Shanghai Branch that provided for a three-year term loan of up to RMB 80 million
($11.8 million). On June 10, 2008, the first 50% of the long-term
loan was funded by the bank. The remaining 50% of the long-term loan
was drawn down by Henan Zhongpin on July 10, 2008. Amounts currently
outstanding under the long-term loan bear interest at the rate published by the
People’s Bank of China for loans with the same or similar terms. The accrued
interest on this loan is payable on a quarterly basis. Of the outstanding
principal under the long-term loan, 25% is payable 24 months after the first
drawdown date (June 10, 2008), 37.5% is payable 30 months after the first
drawdown date and the balance is payable 36 months after the first drawdown
date. Henan Zhongpin repaid $2.9 million of the loan on June 10, 2010
and $8.9 million remained outstanding as of June 30, 2010.
Borrowings
under the term loan agreement are guaranteed by the Company’s subsidiaries,
Anyang Zhongpin Food Co., Ltd. and Zhumadian Zhongpin Food Co., Ltd., are
secured by mortgages on the Company’s prepared pork production facilities
located in Changge City, Henan province and are subject to various financial and
non-financial covenants, including a debt-to-net-worth ratio, a debt-to-EBITDA
ratio, an interest coverage ratio, a required minimum tangible net worth,
restrictions on investments in fixed assets and financial assets, on
inter-company indebtedness and on consolidated contingent liabilities and a
requirement that a minimum percentage of Henan Zhongpin’s consolidated EBITDA be
generated by Henan Zhongpin and the guarantors. Henan Zhongpin also
is prohibited from paying dividends in an amount in excess of 50% of its
retained earnings during the term of the credit facility. We are in compliance
with both the financial and non-financial covenants.
14
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In May
2002, Henan Zhongpin entered into a loan agreement with Bank of Communications,
Zhengzhou Branch, which is the intermediary bank for a 40-year term loan in the
amount of $2,504,969 from the Canadian government. Under the terms of
the loan agreement, 58% of the principal amount ($1,452,882) of this loan bears
interest at the fixed rate of 6.02% per annum and remaining principal amount of
this loan is interest free. The loan is repayable in a fixed amount
of $145,671, which includes both principal and interest, that is payable on a
semi-annual basis through May 15, 2042. Borrowings under the loan
agreement are guaranteed by the Financing Department, Henan
province.
9.
|
EQUITY
TRANSACTIONS
|
On April
24, 2009, the Company granted stock options to its 22 employees to purchase an
aggregate of 720,000 shares of the Company’s common stock, exercisable in
accordance with the following schedule: 240,000 options vesting
on April 24, 2010 with an exercise price of $8.93 per share, equal to the
closing price of the Company’s common stock on April 24, 2009, 240,000 options
vesting on April 24, 2011 with an exercise price of $13.42 per share, equal to
the closing price of the Company’s common stock on April 23, 2010, the last
trading day before April 24, 2010 (Saturday), and 240,000 options vesting on
April 24, 2012 with an exercise price equal to the closing price of the
Company’s common stock on April 22, 2011, the last trading day before April 24,
2011 (Sunday),. Each tranche of options expires on the fourth
anniversary of its respective vesting dates.
The
Company adopted the fair value recognition to measure and recognize compensation
expense for all stock-based payment awards made to the Company’s employees and
directors, including stock options and employee stock
purchases. Stock-based compensation expense for stock options was
based on the grant-date fair value. During the process of
estimating the fair value of the stock options granted and recognizing
share-based compensation, the following assumptions were adopted.
The fair
value for these awards was estimated using the Black-Scholes option pricing
model with the following weighted average assumptions, assuming no expected
dividends:
Six Months Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
Expected
life (years)
|
3-5 | 3-5 | ||||||
Expected
volatility
|
65.11 | % | 39.91 | % | ||||
Risk-free
interest rate
|
1.42 | % | 1.36 | % | ||||
Dividend
yield
|
— | % | — | % |
The
expected volatilities are based on the historical volatility of the Company’s
common stock. The observation is made on a weekly
basis. The observation period covered is consistent with the expected
life of the options. The risk-free rate is consistent with the
expected terms of the stock options and is based on the United States Treasury
yield curve in effect at the time of grant. In estimating expected lives of
the options, the Company considered the contractual and vesting terms of awards,
along with historical experience; however, due to insufficient historical data
from which to reliably estimate expected lives, the Company used estimates based
on the “simplified method” set forth by the SEC in Staff Accounting Bulletin No.
107, where expected life is estimated by summing the award’s vesting term and
contractual term and dividing that result by two. Insufficient historical data
from which to reliably estimate expected lives is expected to exist for the
foreseeable future due to different terms associated with awards granted in
recent years, along with other factors.
For the
three-month periods ended June 30, 2010 and 2009, the stock-based
compensation expenses were $602,163 and $464,117, respectively, and for the
six-month periods ended June 30, 2010 and 2009, the stock-based
compensation expenses were $1,075,635 and $754,034, respectively.
10.
|
EARNINGS
PER SHARE
|
The
following table shows the computation of basic and diluted net earnings per
share for the periods indicated:
15
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
||||||||||||
Numerator:
|
||||||||||||||||
Net
income attributable to common shareholders
|
$ | 12,365,445 | $ | 10,723,448 | $ | 25,615,908 | $ | 20,464,747 | ||||||||
Denominator:
|
||||||||||||||||
Weighted
average number of common shares outstanding
– basic
|
34,725,104 | 29,709,893 | 34,720,312 | 29,694,105 | ||||||||||||
Dilutive
effect of stock options
|
383,160 | 195,827 | 402,584 | 158,530 | ||||||||||||
Weighted
average number of common shares outstanding
– diluted
|
35,108,264 | 29,905,720 | 35,122,896 | 29,852,635 | ||||||||||||
Basic
earnings per share
|
$ | 0.36 | $ | 0.36 | $ | 0.74 | $ | 0.69 | ||||||||
Diluted
earnings per share
|
$ | 0.35 | $ | 0.36 | $ | 0.73 | $ | 0.69 |
11.
|
GOVERNMENT
SUBSIDIES
|
The
central and local government provided Henan Zhongpin with various subsidies to
encourage its research and development activities, building new facilities using
information technology, building cold chain logistic and distribution networks,
and for other contributions to the local community, such as increasing
employment opportunities. The government subsidies are generally classified as
earmarked (such as research and development activities) or non-earmarked. The
interest subsidies were earmarked to offset the Company’s interest expenses
incurred in relation to the construction of its fruit and vegetable production
facility. All subsidies were accounted for based on evidence that cash has been
received and the earmarked activities have taken place. In accordance with
internationally prevailing practice, subsidies earmarked for research and
development activities were first offset against relevant research and
development expenses incurred, and interest subsidies were offset against the
relevant interest expense incurred. Non-earmarked subsidies are generally
recognized as other income.
Government
subsidies received by the Company during the three-month and six-month periods
ended June 30, 2010 and 2009 were as follows:
16
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Deferred
subsidies opening balance:
|
||||||||||||||||
Interest
subsidies
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Earmarked
subsidies
|
— | — | — | — | ||||||||||||
Non-earmarked
subsidies
|
— | — | — | — | ||||||||||||
Total
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Subsidies
received:
|
||||||||||||||||
Interest
subsidies
|
$ | — | $ | 390,767 | $ | 307,045 | $ | 390,767 | ||||||||
Earmarked
subsidies
|
— | 43,907 | — | 43,907 | ||||||||||||
Non-earmarked
subsidies
|
1,244,925 | 127,453 | 1,870,081 | 222,408 | ||||||||||||
Total
|
$ | 1,244,925 | $ | 562,127 | $ | 2,177,126 | $ | 657,082 | ||||||||
Subsidies
recognized:
|
||||||||||||||||
Interest
subsidies
|
$ | — | $ | 390,767 | $ | 307,045 | $ | 390,767 | ||||||||
Earmarked
subsidies
|
— | 43,907 | — | 43,907 | ||||||||||||
Non-earmarked
subsidies
|
1,244,925 | 127,453 | 1,870,081 | 222,408 | ||||||||||||
Total
|
$ | 1,244,925 | $ | 562,127 | $ | 2,177,126 | $ | 657,082 | ||||||||
Deferred
subsidies year ending balance:
|
||||||||||||||||
Interest
subsidies
|
$ | — | $ | — | $ | — | $ | — | ||||||||
Earmarked
subsidies
|
— | — | — | — | ||||||||||||
Non-earmarked
subsidies
|
— | — | — | — | ||||||||||||
Total
|
$ | — | $ | — | $ | — | $ | — |
Subsidies
received and other income recognized are translated at the average exchange
rate. The beginning and ending balances are translated at the period-end
exchange rates.
12.
|
SEGMENT
REPORTING
|
The
Company operates in only one segment: meat production. The Company’s
vegetables and fruits 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 branded stores and to food
retailers, foodservice distributors, restaurant operators and noncommercial
foodservice establishments, such as schools, hotel chains, healthcare
facilities, the military and other food processors, as well as 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 34 categories of vegetables and
fruits, including asparagus, sweet corn, broccoli, mushrooms, lima beans and
strawberries.
17
ZHONGPIN
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Sales by Division
(U.S. dollars in millions)
|
||||||||||||||||
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
Pork
and Pork Products:
|
||||||||||||||||
Chilled
pork
|
$ | 114.3 | $ | 83.3 | $ | 229.0 | $ | 169.8 | ||||||||
Frozen
pork
|
58.3 | 55.0 | 108.7 | 99.0 | ||||||||||||
Prepared
pork products
|
36.8 | 20.4 | 73.1 | 42.3 | ||||||||||||
Vegetables
and Fruits
|
5.7 | 3.1 | 8.6 | 4.6 | ||||||||||||
Total
|
$ | 215.1 | $ | 161.8 | $ | 419.4 | $ | 315.7 | ||||||||
Cost
of Sales:
|
||||||||||||||||
Pork
products
|
$ | 184.9 | $ | 140.4 | $ | 361.9 | $ | 273.8 | ||||||||
Vegetables
and fruits
|
$ | 4.8 | $ | 2.5 | $ | 7.2 | $ | 3.8 | ||||||||
Gross
Profit Margin:
|
||||||||||||||||
Pork
products
|
11.7 | % | 11.5 | % | 11.9 | % | 12.0 | % | ||||||||
Vegetables
and fruits
|
15.8 | % | 19.4 | % | 16.3 | % | 17.4 | % |
18
Item
2. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Disclosure
Regarding Forward-Looking Statements
The
statements contained in this Report with respect to our financial condition,
results of operations and business that are not historical facts are
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). We intend such forward-looking statements
to be covered by the safe harbor provisions for forward-looking statements
contained in Section 21E of the Exchange Act. Forward-looking statements can be
identified by the use of forward-looking terminology, such as “estimates,”
“projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the
negative thereof or other variations thereon, or by discussions of
strategy that involve risks and uncertainties. Management wishes to caution
the reader of the forward-looking statements that any such statements that are
contained in this Report reflect our current beliefs with respect to future
events and involve known and unknown risks, uncertainties and other factors,
including, but not limited to, economic, competitive, regulatory, technological,
key employee, and general business factors affecting our operations, markets,
growth, services, products, licenses and other factors discussed in our other
filings with the Securities and Exchange Commission, and that these statements
are only estimates or predictions. No assurances can be given regarding the
achievement of future results, as actual results may differ materially as a
result of risks facing our company, and actual events may differ from the
assumptions underlying the statements that have been made regarding anticipated
events.
These
forward-looking statements are subject to numerous assumptions, risks and
uncertainties 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” in Item 1A of our Annual Report on
Form 10-K for the year ended December 31, 2009 and in Part II, Item 1A of this
Report.
These
risk factors should be considered in connection with any subsequent written or
oral forward-looking statements that we or persons acting on our behalf may
issue. All written and oral forward looking statements made in connection with
this Report that are attributable to our company or persons acting on our behalf
are expressly qualified in their entirety by these cautionary statements. Given
these uncertainties, we caution investors not to unduly rely on our
forward-looking statements. We do not undertake any obligation to review or
confirm analysts’ expectations or estimates or to release publicly any revisions
to any forward-looking statements to reflect events or circumstances after the
date of this Report or to reflect the occurrence of unanticipated events.
Further, the information about our intentions contained in this Report is a
statement of our intention as of the date of this Report and is based upon,
among other things, the existing regulatory environment, industry conditions,
market conditions and prices, the economy in general and our assumptions as of
such date. We may change our intentions, at any time and without notice, based
upon any changes in such factors, in our assumptions or otherwise.
Overview
We are
principally engaged in the meat and food processing and distribution business in
the PRC. Currently, we have 13 processing plants located in Henan, Jilin
and Sichuan provinces and in Tianjin in the PRC. Our total production capacity
for chilled pork and frozen pork is approximately 1,504.9 metric tons per day,
based on an eight-hour working day, or approximately 541,760 metric tons on an
annual basis. We also have production capacity for prepared meats of
approximately 250 metric tons per eight-hour day, or approximately 90,000 metric
tons on an annual basis, and for fruits and vegetables of approximately 83.3
metric tons per eight-hour day, or approximately 30,000 metric tons on an annual
basis. In
addition, we also have annual production capacity for food oil (pork oil) of
approximately 20,000 metric tons. We use state-of-the-art equipment in
all of our slaughterhouses and processing facilities.
In
December 2009, the PRC Ministry of Commerce issued the Hog Slaughtering
Industry Development Guidelines (2010-2015). The guidelines state that the
government will control the number of slaughterhouses in China and
specifically that there should be no more than four slaughterhouses in cities
with a population of 5 million or more.
In June
2010, the China Meat Association (“CMA”) announced the China Meat Industry
Development Strategy Report (2011-2015). In that report, CMA provided a
development roadmap and targets for the meat industry for the coming five
years:
19
|
Ø
|
By
2015, to decrease sales of room temperature pork to below 50% of total
pork sales in cities at or above county level in
China;
|
|
Ø
|
By 2015,
to increase sales of chilled pork from 10% to around 30% of total pork
sales in China;
|
|
Ø
|
By 2015,
to decrease outstanding licenses for slaughterhouses from more than 21,000
to around 3,000 in China; and
|
|
Ø
|
To
build pork and pork products production bases in north China,
north-east China, east China and south-west
China.
|
The
report indicates to us and other companies with strong
brand recognition in China's meat industry, high standard facilities,
high quality products, strict quality control systems and cold chain logistics
capabilities, that there is an opportunity to consolidate and integrate the
industry. Our growth strategy will include consideration of opportunities to
expand our production capacity in these 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, and with 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,
revenue and net profit and more importantly, strengthen our ability to
consolidate the meat industry in China.
We will
be investing approximately $61.5 million to build a slaughtering and processing
plant, low temperature prepared pork plant, logistics center, and
research and development center in Nong'an county in the Jilin province of
China. This facility will have a production capacity of approximately 70,000
metric tons for chilled pork, 25,000 metric tons for frozen pork, and 30,000
metric tons for prepared pork products. The construction work will start from
the third quarter of 2010. We expect to put the new facility for chilled and
frozen pork into operation in the fourth quarter of 2011 and the new facility
for prepared pork products into operation in the third quarter of
2012.
We will
be investing approximately $63.0 million to build a production facility,
warehouse and distribution center in Taizhou, Jiangsu province. This facility
will have a production capacity of approximately 100,000 metric tons for chilled
and frozen pork, of which 80% will be for chilled pork including easy-to-cook
products and 20% for frozen pork, and 30,000 metric tons for prepared pork
products. The construction work will start in August 2010. We expect to put the
new facility for chilled and frozen pork into operation in the third quarter of
2011 and the new facility for prepared pork products into operation in the first
quarter of 2012.
In
January 2010, we put the new facility in Tianjin with a production capacity of
approximately 100,000 metric tons for chilled and frozen pork into operation. We
will commence the construction of phase two of the facility, with a production
capacity of approximately 36,000 metric tons for prepared pork products in
the fourth quarter of 2010 and expect to put it into operation in
the third quarter of 2011.
We are
also investing approximately $6.3 million to further improve our facility in
Anyang, Henan province. We plan to improve the facility’s pre-cooling room and
equipment so as to increase its annual capacity from 63,000 metric tons
currently to 85,000 metric tons. After the expansion, chilled pork will account
for about 70% of the facility’s capacity, up from the current 60%. This
improvement project will be completed in August 2010 and there is no impact
on our operations in Anyang.
Our
products are sold under the “Zhongpin” brand name. At June 30, 2010, our
customers included approximately 60 international or domestic fast food
companies in the PRC, 75 processing factories and 1,650 school cafeterias,
factory canteens, army posts and national departments. As of that
date, we also sold directly to 3,243 retail outlets, including supermarkets,
within the PRC.
We have
established distribution networks in 20 provinces and four cities with special
legal status in the North, East, South and South Midland regions of the
PRC, and also have formed strategic business alliances with leading
supermarket chains and the catering industry in the PRC. In addition, we export
products to Europe, Hong Kong and other selected countries in Asia.
20
As of
June 30, 2010, we had 7,013 employees, of whom 5,305 were operating personnel,
1,248 were sales personnel, 108 were research and development personnel and 352
were administrative personnel.
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
June 30, 2010, which was RMB6.7909 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 August 5, 2010, the middle rate was RMB6.7783 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 evaluate, on an on-going basis, our estimates for
reasonableness as changes occur in our business environment. We base
our estimates on experience, the use of independent third-party specialists, and
various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Critical
accounting policies are defined as those that are reflective of significant
judgments, estimates and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We
believe the following are our critical accounting policies:
Revenue
Recognition. Revenues generated from the sale of various meat
products and vegetables and fruits are recognized when these products are
delivered to customers in accordance with previously-agreed-upon pricing and
delivery arrangements, and the collectability of these sales is reasonably
assured. Since the products sold by us are primarily perishable and
frozen food products, the right of return is only for a few days and has been
determined to be insignificant by our management. Accordingly, no
provision has been made for returnable goods. Revenues presented on
our consolidated income statements are net of sales taxes.
Accounts
Receivable. During the normal course of business, our policy is to
ask larger customers to make deposits in reasonable and meaningful amounts on a
case-by-case basis. For certain newly-developed customers, we may
extend unsecured credit.
We
regularly evaluate and monitor the creditworthiness of each of our customers in
accordance with the prevailing practice in the meat industry and based on
general economic conditions in the PRC. If any particular customer appears
to be delaying or deferring payments for our products, we generally request a
deposit from, or an increase in the deposits of, such customer. Such
deposits are typically applied against the outstanding accounts receivable of
the applicable customer during the year. As a result, we did not have
a bad debt allowance provided against any specific customer at June 30,
2010.
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.
Inventories. Inventories
are stated at the lower of cost or the market based on the weighted average
method. Production cost components include the purchase cost of live hogs,
direct labor, depreciation, packaging material, utility expense and other
manufacturing overhead. By using a systematic costing system, the production
cost is allocated to various products at the stage of work-in-progress and
finished goods, respectively. Net realizable value is the estimated selling
price in the ordinary course of business, less estimated costs to complete and
dispose. We regularly inspect the shelf life of prepared foods and, if
necessary, writes down their carrying value based on their salability and
expiration dates into cost of goods sold.
21
Property, Plant, and
Equipment. Property, plant, and equipment are
recorded at cost and are stated net of accumulated
depreciation. Depreciation expense is determined using the
straight-line method over the estimated useful lives of the assets as
follows:
Estimated Life
|
||
Plants
and buildings
|
5-30 years
|
|
Machinery
and equipment
|
5-20 years
|
|
Office
furniture and equipment
|
3-5 years
|
|
Vehicles
|
5 years
|
Maintenance
and repairs are charged directly to expense as incurred, whereas improvements
and renewals are generally capitalized in their respective property
accounts. When an asset is retired or otherwise disposed of, the cost
and applicable accumulated depreciation are removed and the resulting gain or
loss is recognized and reflected as a line item before operating income
(loss).
Results
of Operations
In 2010,
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 advance and extend
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.
Hog and
pork prices decreased approximately 10% in the second quarter of
2010, compared to the same period last year, primarily because the supply
of hogs was higher than the demand in the market. The imbalance between
supply and demand was primarily due to two factors: (i) an oversupply of hogs,
and (ii) the outbreak of hog diseases in south China that affected the hog
breeding and pork industries.
Since the
end of the second quarter of 2010 to date, hog and pork prices have
increased approximately 20% primarily because (i) the government stepped into
the market and built up frozen pork reserves in the first half of the year to
stabilize the price and protect the interests of hog breeding farmers; (ii) the
drought in south-west China and flood in south, north-east and other regions in
China increased the price of agriculture products, including pork; and
(iii) a better balance of supply and demand has been achieved.
The
Chinese government maintains a national frozen pork reserve, for which it buys
in the pork market and sells into the same pork market. The government’s primary
objective is to maintain an adequate national reserve and to maintain the
stability of hog and pork prices within a varying price range in the national
market. The government outsources hog slaughtering and frozen storage services
to qualified companies and provides financial subsidies to those service
providers. The frozen pork reserves normally are preserved for 12 months, then
sold. We are a service provider for both hog slaughtering and frozen pork
storage. When pork consumption was expected to increase during the Chinese New
Year period in early 2010 and some of the reserve was soon to reach the end of
its 12 month holding period, the government sold some of the national pork
reserve into the market. Zhongpin and other companies bought portions of that
released frozen pork reserve from the government. Because the pork price can
decline somewhat after the government sells into the market, which happened in
this case, the government paid us an allowance for the difference between our
purchase price for the frozen pork from the national reserve and the subsequent
lower price in the market.
We expect
that hog prices will continue to increase and remain at a higher level
during the second half of 2010.
22
Comparison
of Three Months Ended June 30, 2010 and 2009
Revenue. Total revenue
increased from $161.8 million for the three months ended June 30, 2009 to
$215.1 million for the three months ended June 30, 2010, which represented
an increase of $53.3 million, or approximately 33%. The increase in
revenues during the second quarter of 2010 was primarily due to increased
sales volume in our meat and meat products divisions resulting from the effects
of the continuing increases in the number of our retail channels, geographic
expansion, and increased sales to chain restaurants, food service providers, and
wholesalers and distributors in the PRC. The following table presents our sales
by product division for the three months ended June 30, 2010 and
2009.
Sales by Division
(unaudited)
|
||||||||||||||||||||||||
Three Months Ended
June 30, 2010
|
Three Months Ended
June 30, 2009
|
|||||||||||||||||||||||
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
|
71,200 | $ | 114.3 | $ | 1,605 | 52,086 | $ | 83.3 | $ | 1,599 | ||||||||||||||
Frozen
pork
|
39,084 | 58.3 | 1,492 | 36,231 | 55.0 | 1,518 | ||||||||||||||||||
Prepared
pork products
|
18,747 | 36.8 | 1,963 | 10,189 | 20.4 | 2,002 | ||||||||||||||||||
Vegetables
and Fruits
|
5,341 | 5.7 | 1,067 | 2,731 | 3.1 | 1,135 | ||||||||||||||||||
Total
|
134,372 | $ | 215.1 | $ | 1,601 | 101,237 | $ | 161.8 | $ | 1,598 |
The pork
market in China is highly fragmented and in the markets in which we
sell our products, no single supplier has a significant impact on
the market price of pork or related pork products. We have been pricing our
products based on the value of our brand, the quality of our products, hog
prices in the applicable period, and pricing trends for similar products in the
regions in which we operate.
In the
second quarter of 2010, we increased our sales of chilled pork products by
approximately $31.0 million over the amount of our sales of such products
in the second quarter of 2009. As shown in the table above, our average price
during the second quarter of 2010 was approximately $1,605 per metric ton for
chilled pork, compared to $1,599 during the second quarter of 2009, an increase
of 0.4%. The number of metric tons of chilled pork sold during the
second quarter of 2010 increased by 19,114, or 37% from the second quarter of
2009. Our total revenue increased primarily due to successful
capacity expansion, increased sales to existing customers, and significantly
increased volume of sales of our products as we entered new geographic markets,
expanded our points of sales, and acquired new customers, and partially due to
the effect of the slight increase in average price in the second quarter of
2010 as a result of market fluctuations.
In the
second quarter of 2010, we increased our sales of frozen pork products by
approximately $3.3 million over the amount of our sales of such products in the
second quarter of 2009. Our average price during the second quarter of 2010 was
approximately $1,492 per metric ton for frozen pork compared to $1,518 during
the second quarter of 2009, a decrease of 2%. The number of metric
tons of frozen pork sold during the second quarter of 2010 increased by 2,853,
or 8% from the second quarter of 2009. Despite the decrease in
average price in the second quarter of 2010 as a result of market fluctuations,
our total revenue still increased due to successful capacity expansion,
increased sales to existing customers, and significantly increased volume of
sales of our products as we entered new geographic markets, expanded our points
of sales, and acquired new customers.
In the
second quarter of 2010, we increased our sales of prepared pork products by
approximately $16.4 million over the amount of our sales of such products in the
second quarter of 2009. Our average price during the second quarter of 2010 was
approximately $1,963 per metric ton for prepared pork products compared to
$2,002 during the second quarter of 2009, a decrease of 2%. The number of metric
tons of prepared pork products sold during the second quarter of 2010 increased
by 8,558, or 84% from the second quarter of 2009. This product
division is becoming more important to our business as customers increasingly
demand prepared pork products and are willing to pay higher average prices for
the convenience of such products. We plan to gradually increase sales from
prepared pork products by building up our brand recognition and expanding our
capacities for this division.
23
The sales
of pork 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 second quarter of 2010 was partly
attributable to our success in expanding our distribution channels. The
following table shows the changes in our distribution channels:
Numbers of Stores and Cities Generating Sales Volume
(unaudited)
|
||||||||||||||||
June
30,
|
Net
|
Percentage
|
||||||||||||||
2010
|
2009
|
Change
|
of Change
|
|||||||||||||
Showcase
stores
|
152 | 138 | 14 | 10 | % | |||||||||||
Branded
stores
|
1,026 | 982 | 44 | 4 | % | |||||||||||
Supermarket
counters
|
2,065 | 2,015 | 50 | 2 | % | |||||||||||
Total
|
3,243 | 3,135 | 108 | 3 | % | |||||||||||
First-tier
cities
|
29 | 29 | — | 0 | % | |||||||||||
Second-tier
cities
|
127 | 113 | 14 | 12 | % | |||||||||||
Third-tier
cities
|
401 | 355 | 46 | 13 | % | |||||||||||
Total
cities
|
557 | 497 | 60 | 12 | % |
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 second quarter of
2010 and 2009, respectively.
Sales by Distribution Channel
(Dollars in millions)
(unaudited)
|
||||||||||||||||
Three months ended June 30,
|
Net
|
Percentage
|
||||||||||||||
2010
|
2009
|
Change
|
of Change
|
|||||||||||||
Retail
channels
|
$ | 85.7 | $ | 71.1 | $ | 14.6 | 21 | % | ||||||||
Wholesalers
and distributors
|
67.6 | 46.6 | 21.0 | 45 | % | |||||||||||
Restaurants
and food services
|
60.0 | 42.4 | 17.6 | 42 | % | |||||||||||
Export
|
1.8 | 1.7 | 0.1 | 6 | % | |||||||||||
Total
|
$ | 215.1 | $ | 161.8 | $ | 53.3 | 33 | % |
The
increase in sales to different distribution channels was mainly due to the
following factors: (i) our production capacity has increased since our Tianjin
production facilities commenced production in early 2010; (ii) we have built up
our brand image and recognition through advertisements on China Central TV and
local television and through product promotions; (iii) we have increased the
number of stores and other channels through which we sell our products and
we have improved the efficiency of these stores; and (iv) we believe consumers
are placing increased importance on food safety and are willing to pay higher
prices for safe food products. As presented in the table above, our most
significant revenue increases were generated from our wholesalers and
distributors and our restaurants and food services. Retail
channels are the highest gross profit margin channels and are the channels
through which we build up our brand recognition in the market. Our
Zhongpin logo and brand name are prominently displayed in each of the retail
stores and supermarket counters that sell our products.
24
Cost of Sales. Our cost
of sales increased from $142.9 million for the three months ended June 30, 2009
to $189.7 million for the three months ended June 30, 2010, which represented an
increase of $46.8 million, or approximately 33%. 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 96%, our overhead typically accounts for 2.5% and our labor costs
typically accounts for 1.5%, with slight variations from period to period. All
of our meat products are derived from the same raw materials, which are live
hogs. Our vegetable and fruit products are purchased from farmers located close
to our processing facility in Changge City, Henan province. As a result, the
purchasing costs of live hogs and vegetables and fruits represent substantially
all of our costs of raw materials. The increase in our cost of sales was
consistent with our increase in sales revenue.
Cost of Sales by Division
(unaudited)
|
||||||||||||||||||||||||
Three Months Ended
June 30, 2010
|
Three Months Ended
June 30, 2009
|
|||||||||||||||||||||||
Metric
Tons
|
Cost of
Sales
(in millions)
|
Average
Price/
Metric
Ton
|
Metric
Tons
|
Cost of
Sales
(in millions)
|
Average
Price/
Metric
Ton
|
|||||||||||||||||||
Pork
and Pork Products
|
||||||||||||||||||||||||
Chilled
pork
|
71,200 | $ | 101.3 | $ | 1,423 | 52,086 | $ | 74.6 | $ | 1,432 | ||||||||||||||
Frozen
pork
|
39,084 | 53.9 | 1,379 | 36,231 | 51.1 | 1,410 | ||||||||||||||||||
Prepared
pork products
|
18,747 | 29.8 | 1,590 | 10,189 | 14.7 | 1,443 | ||||||||||||||||||
Vegetables
and Fruits
|
5,341 | 4.7 | 880 | 2,731 | 2.5 | 915 | ||||||||||||||||||
Total
|
134,372 | $ | 189.7 | $ | 1,412 | 101,237 | $ | 142.9 | $ | 1,412 |
Our gross
profit margin (gross profit divided by sales revenue) increased from 11.7% for
the three months ended June 30, 2009 to 11.8% for the three months ended June
30, 2010. The increase in our gross margin during the second quarter
of 2010 was primarily due to the increase in revenue from prepared pork
products, the margin of which is higher than our average margin. We
increased our production capacity for prepared pork products and promoted our
prepared pork products in the market. The increase in revenue from our
prepared pork products was partly offset by (i) the increase in our depreciation
expense resulting from the newly-built production facilities that were put into
service over the past year, and (ii) our strategic decision to take steps to
increase our market share and utilization rate of our production
capacity at a time when our production capacity increased due to the
opening of new production facilities. As a result, our gross profit
margin was lower than the level we would expect to achieve once we fully
integrate our new production facilities and expand into new regional
markets for our products. We intend to adjust our production levels
and product mix and the percentages of our sales through our different sales
channels in the coming quarters to increase our gross profit
margin.
General and Administrative
Expenses. General and administrative expenses increased from $4.2
million for the three months ended June 30, 2009 to $5.7 million for
the three months ended June 30, 2010, which represented an increase of
$1.5 million, or approximately 36%. As a percentage of revenues,
general and administrative expenses remained at 2.6% for the three months
ended June 30, 2009 and 2010.
The increase in
general and administrative expenses during the three months ended June 30, 2010
was primarily the result of a $0.2 million increase in training expense and
a $0.4 million increase in depreciation.
Selling Expenses. Selling expenses
increased from $2.8 million for the three months ended June 30, 2009 to $4.6
million for the three months ended June 30, 2010, which represented an increase
of $1.8 million, or approximately 64%. The increase in selling expenses was
primarily the result of our increased sales of pork and pork products and was
primarily due to a $0.5 million increase in transportation fees, a $0.6
million increase in advertising cost and a $0.6 million increase in
salaries. As a percentage of revenues, selling expenses increased from 1.7%
for the three months ended June 30, 2009 to 2.2% for the three months ended
June 30, 2010.
25
Impairment Loss. Impairment
loss for the three months ended June 30, 2010 is $1.0 million, compared to $0
for the three months ended June 30, 2009. The increase is due to the write-off
of the value added tax (“VAT”) recoverable from the Heilongjiang facility. We
terminated the lease of that facility at the end of 2008. We determined that the
recoverability of the VAT is not likely because there has been no
operation in Heilongjiang Zhongpin since the termination of the
lease.
Interest Expense (net of interest income). Interest expense net of
interest income increased from $1.3 million for the three months ended June
30, 2009 to $1.9 million for the three months ended June 30, 2010, which
represented an increase of $0.6 million, or approximately 46%. The increase in
interest expense was primarily the result of an increase of $29.1 million in
long-term bank loans, which is partly offset by a decrease of $12.8 million
in short-term bank loans.
Other Income, Exchange Gain and Government
Subsidies. Other income, exchange gain and government
subsidies increased from $0.2 million for the three months ended June 30,
2009 to $1.3 million for the three months ended June 30, 2010, which
represented an increase of $1.1 million. This increase was primarily the result
of an increase in government subsidies. The changes in government
subsidies are discussed in Note 11 of Notes to Consolidated Financial
Statements.
Income Taxes. The effective
tax rate in the PRC on income generated from the sale of prepared products is
25% and there is no income tax on income generated from the sale of raw
products, including raw meat products and raw fruits and vegetable products. The
increase of $0.2 million in the provision for income taxes for the three
months ended June 30, 2010 over the three months ended June 30,
2009 resulted from the increase in revenue from prepared meat
products.
Comparison of Six Months Ended June 30, 2010 and 2009
Revenue. Total revenue
increased from $315.7 million for the six months ended June 30, 2009 to $419.4
million for the six months ended June 30, 2010, which represented an increase of
$103.7 million, or approximately 33%. The increase in revenues during the first
half of 2010 was primarily due to increased sales volume in our meat and
meat products divisions resulting from the effects of the continuing increases
in the number of our retail channels, geographic expansion and increased sales
to chain restaurants, food service providers and wholesalers and distributors in
the PRC. The following table presents certain information regarding
our sales by product division for the six months ended June 30, 2010 and
2009.
Sales by Division
(unaudited)
|
||||||||||||||||||||||||
Six Months Ended
June 30, 2010
|
Six Months Ended
June 30, 2009
|
|||||||||||||||||||||||
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
|
135,618 | $ | 229.0 | $ | 1,689 | 95,585 | $ | 169.8 | $ | 1,776 | ||||||||||||||
Frozen
pork
|
71,929 | 108.7 | 1,511 | 60,308 | 99.0 | 1,642 | ||||||||||||||||||
Prepared
pork products
|
34,794 | 73.1 | 2,101 | 19,719 | 42.3 | 2,145 | ||||||||||||||||||
Vegetables
and Fruits
|
9,292 | 8.6 | 926 | 5,376 | 4.6 | 856 | ||||||||||||||||||
Total
|
251,633 | $ | 419.4 | $ | 1,667 | 180,988 | $ | 315.7 | $ | 1,744 |
26
The pork
market in China is highly fragmented and in the markets in which we
sell our products no single supplier
has a significant impact on the market price of pork or related pork
products. We have been pricing our products based on the value of our brand, the
quality of our products, hog prices in the applicable period and pricing trends
for similar products in the regions in which we operate.
In the
first half of 2010, we increased our sales of chilled pork products by
approximately $59.2 million over the amount of our sales of such products
in the first half of 2009. As shown in the table above, our average price during
the first half of 2010 was approximately $1,689 per metric ton for chilled pork,
compared to $1,776 during the first half of 2009, a decrease of
5%. The number of metric tons of chilled pork sold during the first
half of 2010 increased by 40,033, or 42% from the first half of
2009. Despite the decrease in average price in the first half of 2010
as a result of market fluctuations, our total revenue still increased due to
successful capacity expansion, increased sales to existing customers, and
significantly increased volume of sales of our products as we entered new
geographic markets, expanded our points of sales and acquired new
customers.
In the
first half of 2010, we increased our sales of frozen pork products by
approximately $9.7 million over the amount of our sales of such products in the
first half of 2009. Our average price during the first half of 2010 was
approximately $1,511 per metric ton for frozen pork compared to $1,642 during
the first half of 2009, a decrease of 8%. The number of metric tons
of frozen pork sold during the first half of 2010 increased by 11,621, or 19%
from the first half of 2009. Despite the decrease in average price in
the first half of 2010 as a result of market fluctuations, our total revenue
still increased due to successful capacity expansion, increased sales to
existing customers, and significantly increased volume of sales of our products
as we entered new geographic markets, expanded our points of sales and acquired
new customers.
In the
first half of 2010, we increased our sales of prepared pork products by
approximately $30.8 million over the amount of our sales of such products in the
first half of 2009. Our average price during the first half of 2010 was
approximately $2,101 per metric ton for prepared pork products compared to
$2,145 during the first half of 2009, a decrease of 2%. The number of metric
tons of prepared pork products sold during the first half of 2010 increased by
15,075, or 76% from the first half of 2009. This product division is
becoming more important to our business as customers increasingly demand
prepared pork products and are willing to pay higher average prices for the
convenience of such products. The average selling price of this product division
dropped only 2% comparing to 5% decrease from chilled pork division and 8%
decrease from frozen pork division. We plan to gradually increase sales from
prepared pork products by building up our brand recognition and expanding our
capacities for this division.
The
following table shows our revenues by distribution channel for the first half of
2010 and 2009, respectively.
Sales by Distribution Channel
(Dollars in millions)
(unaudited)
|
||||||||||||||||
Six Months Ended June 30,
|
Net
|
Percentage
|
||||||||||||||
2010
|
2009
|
Change
|
of Change
|
|||||||||||||
Retail
channels
|
$ | 170.3 | $ | 139.4 | $ | 30.9 | 22 | % | ||||||||
Wholesalers
and distributors
|
129.8 | 92.1 | 37.7 | 41 | % | |||||||||||
Restaurants
and food services
|
116.2 | 82.0 | 34.2 | 42 | % | |||||||||||
Export
|
3.1 | 2.2 | 0.9 | 41 | % | |||||||||||
Total
|
$ | 419.4 | $ | 315.7 | $ | 103.7 | 33 | % |
The
increase in sales to different distribution channels was mainly due to the
following factors: (i) our production capacity has increased since our Tianjin
production facilities commenced production in early 2010; (ii) we have built up
our brand image and recognition through advertisements on China Central TV and
local television and by product promotions; (iii) we have increased the number
of stores and other channels through which we sell our products and we have
improved the efficiency of these stores; and (iv) we believe consumers are
placing increased importance on food safety and are willing to pay higher prices
for safe food products. As presented in the table above, our most
significant revenue increases were generated from our restaurants and food
services, from which we receive high gross profit margin, and our wholesalers
and distributors.
27
During
the six months ended June 30, 2010, revenues from export sales increased to $3.1
million, which represented an increase of $0.9 million, or
approximately 41%, as compared with the six months ended June 30,
2009.
Cost of Sales. Our cost
of sales increased from $277.6 million for the six months ended June 30, 2009 to
$369.1 million for the six months ended June 30, 2010, which represented an
increase of $91.5 million, or approximately 33%. 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 96%,
our overhead typically accounts for 2.5% and our labor costs typically accounts
for 1.5%, with slight variations from period to period. All of our meat products
are derived from the same raw materials, which are live hogs. Our vegetable and
fruit products are purchased from farmers located close to our processing
facility in Changge City, Henan province. As a result, the purchasing costs of
live hogs and vegetables and fruits represent substantially all of our costs of
raw materials. The increase in our cost of sales was consistent with our
increase in sales revenue.
Cost of Sales by Division
(unaudited)
|
||||||||||||||||||||||||
Six Months Ended June 30, 2010
|
Six Months Ended June 30, 2009
|
|||||||||||||||||||||||
Metric
Tons
|
Cost of
Sales
(in millions)
|
Average
Price/
Metric Ton
|
Metric
Tons
|
Cost of
Sales
(in millions)
|
Average
Price/
Metric
Ton
|
|||||||||||||||||||
Pork
and Pork Products
|
||||||||||||||||||||||||
Chilled
pork
|
135,618 | $ | 203.4 | $ | 1,500 | 95,585 | $ | 151.2 | $ | 1,582 | ||||||||||||||
Frozen
pork
|
71,929 | 100.2 | 1,393 | 60,308 | 91.1 | 1,511 | ||||||||||||||||||
Prepared
pork products
|
34,794 | 58.4 | 1,678 | 19,719 | 31.5 | 1,597 | ||||||||||||||||||
Vegetables
and Fruits
|
9,292 | 7.1 | 764 | 5,376 | 3.8 | 707 | ||||||||||||||||||
Total
|
251,633 | $ | 369.1 | $ | 1,467 | 180,988 | $ | 277.6 | $ | 1,534 |
Our gross
profit margin (gross profit divided by sales revenue) decreased from 12.1% for
the six months ended June 30, 2009 to 12.0% for the six months ended June 30,
2010. The decrease in our gross margin during the first half of 2010 was
primarily due to (i) the increase in labor costs, (ii) the increase in our
depreciation expense resulting from the newly-built production facilities that
were put into service over the past year, and (iii) our strategic decision to
take steps to increase our market share and utilization rate of our
production capacity at a time when our production capacity increased due to
the opening of new production facilities. As a result, our gross
profit margin was lower than the level we would expect to achieve once we fully
integrate our new production facilities and expand into new regional markets for
our products. We intend to adjust our production levels and product
mix and the percentages of our sales through our different sales channels in the
coming quarters to increase our gross profit margin.
General and Administrative
Expenses. General and administrative expenses increased from $8.8 million
for the six months ended June 30, 2009 to $11.7 million for the six months
ended June 30, 2010, which represented an increase of $2.9 million, or
approximately 33%. As a percentage of revenues, general and
administrative expenses remained at 2.8% for the six months ended June 30,
2009 and 2010.
The increase
in general and administrative expenses during the six months ended June 30, 2010
was primarily the result of a $0.2 million increase in salary expense due
to the expansion of our business, which required us to hire more
employees. Also the increase was the result of a $0.8 million increase in
depreciation, a $0.5 million increase in training expenses and a $0.4 million
increase in bad debt provision due to more accounts receivable balance coming
with more revenue.
28
Selling
Expenses. Selling expenses increased from $5.6 million for the six
months ended June 30, 2009 to $9.0 million for the six months ended June
30, 2010, which represented an increase of $3.4 million, or approximately 61%.
The increase in selling expenses was primarily due to the increase in sales
of pork and pork products and was primarily due to a $1.5 million increase in
advertising and promotional fees, a $0.6 million increase in salaries and a $0.8
million increase in transportation fees. As a percentage of
revenues, selling expenses increased from 1.8% for the six months
ended June 30, 2009 to 2.1% for the six months ended June 30, 2010.
Impairment Loss. Impairment
loss for the six months ended June 30, 2010 is $1.0 million, compared to $0
for the six months ended June 30, 2009. The increase is due to the
write-off of the VAT recoverable from the Heilongjiang facility. We terminated
the lease of that facility at the end of 2008. We determined that the
recoverability of the VAT is not likely because there has been no operation
in Heilongjiang Zhongpin since the termination of the lease.
Interest Expense (net of interest income). Interest expense net of
interest income increased from $2.8 million for the six months ended June 30,
2009 to $3.3 million for the six months ended June 30, 2010, which
represented an increase of $0.5 million, or approximately 18%. The increase in
interest expense was primarily the result of an increase of $35.3 million in
long-term bank loans, which is partly offset by a decrease of $12.8 million in
short-term bank loans.
Other Income, Exchange Gain and Government Subsidies.
Other income, exchange gain and government subsidies increased from $0.5 million
for the six months ended June 30, 2009 to $2.5 million for the six months
ended June 30, 2010, which represented an increase of $2.0 million. This
increase was primarily due to higher government subsidies in the first half of
2010.
Income Taxes. The effective
tax rate in the PRC on income generated from the sale of prepared products is
25% and there is no income tax on income generated from the sale of raw
products, including raw meat products and raw fruits and vegetable products. The
increase of $0.4 million in the provision for income taxes for the six
months ended June 30, 2010 over the six months ended June 30, 2009 resulted from
the increase in revenue from prepared meat products.
Segment
Information
Under
generally accepted accounting principles in the United States, we operate in
only one segment: meat production. Our fruits and vegetables
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 branded stores, food
retailers, food service distributors, restaurant operators and
noncommercial foodservice establishments, such as schools, hotel chains,
healthcare facilities, the military and other food processors, as well as to
international markets.
Our
vegetables and fruits division is involved primarily in the processing of fresh
vegetables and fruits. We contract with more than 100 farms in Henan province
and nearby areas to produce high-quality vegetable varieties and fruits suitable
for export. The proximity of the contracted farms to our operations ensures
freshness from harvest to processing. We contract to grow more than 34
categories of vegetables and fruits, including asparagus, sweet corn, broccoli,
mushrooms, lima beans, strawberries and capsicum.
29
The
following tables show our sales volume and the production volume in metric tons
by product division for the three-month and six-month periods ended June 30,
2010 and 2009.
Sales by Division
(in metric tons)
|
||||||||||||||||
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
Pork
and Pork Products
|
||||||||||||||||
Chilled
pork
|
71,200 | 52,086 | 135,618 | 95,585 | ||||||||||||
Frozen
pork
|
39,084 | 36,231 | 71,929 | 60,308 | ||||||||||||
Prepared
pork products
|
18,747 | 10,189 | 34,794 | 19,719 | ||||||||||||
Vegetable
and Fruits
|
5,341 | 2,731 | 9,292 | 5,376 | ||||||||||||
Total
|
134,372 | 101,237 | 251,633 | 180,988 |
Production by Division
(in metric tons)
|
||||||||||||||||
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
(Unaudited)
|
|||||||||||||
Pork
and Pork Products
|
||||||||||||||||
Chilled
pork
|
71,032 | 52,508 | 135,417 | 95,838 | ||||||||||||
Frozen
pork
|
45,315 | 40,796 | 85,793 | 70,245 | ||||||||||||
Prepared
pork products
|
18,500 | 10,647 | 34,374 | 21,373 | ||||||||||||
Vegetable
and Fruits
|
4,675 | 3,110 | 8,574 | 5,506 | ||||||||||||
Total
|
139,522 | 107,061 | 264,158 | 192,962 |
Additional
Operating Data
In
assessing our existing operations and planning our future growth and the
development of our business, management considers, among other factors, our
revenue growth and growth in sales volume by market segment, as well as our
sales by distribution channel and geographic market coverage.
The
following table sets forth information with respect to the number of products we
offered, the number of stores in our retail network and the number of provinces
and cities in the PRC in which we offered and sold our products at June 30,
2010 and December 31, 2009, 2008 and 2007.
30
December
31,
|
||||||||||||||||
June 30, 2010
|
2009
|
2008
|
2007
|
|||||||||||||
Number
of products
|
409 | 392 | 314 | 270 | ||||||||||||
Number
of retail stores
|
3,243 | 3,205 | 3,061 | 2,939 | ||||||||||||
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
|
127 | 120 | 106 | 93 | ||||||||||||
Number
of third-tier cities
|
401 | 383 | 324 | 287 |
Liquidity
and Capital Resources
At June
30, 2010 and December 31, 2009, we had cash and cash equivalents of $39.7
million and $69.0 million, respectively. At June 30, 2010, we had working
capital of approximately $11.0 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
two to four weeks. For showcase stores and branded stores, the credit
terms are generally cash sales within one week. For food
distributors, the credit terms are generally two weeks. For
restaurants and non-commercial customers, the credit terms are from one week to
one month. These credit terms are subject to negotiation if requested
by our customers, but any adjustment must be approved by designated
management. In general, we ask for credit terms from our
suppliers. We generally pay for the hogs we purchase within one week
after the hogs pass our health and quality examinations.
For the
six months ended June 30, 2010, net cash provided by operating activities was
$19.2 million, which represented an increase of $12.2 million as
compared to the net cash provided by operating activities of $7.0 million for
the same period of 2009. The increase was primarily due to a $2.0
million increase in cash flow from operating assets and liabilities, a $5.2
million increase in net income and a $5.0 million increase in non-cash
items. Of the non-cash items, depreciation and amortization accounted
for $2.6 million of change due to the fact that more plants, equipment and
machinery were put into use.
Cash flow
from changes in operating assets and liabilities increased approximately
$2.0 million, as compared to the negative cash flow of $17.8 million from
changes in operating assets and liabilities for the same period of the prior
year. Of the $2.0 million increase, $10.5 million was attributable to the
change of cash flow from accounts payable due to the fact that the operation in
the six months ended June 30, 2010 was significantly increased compared to the
same period last year. It was partly offset by $4.4 million changes on
allowance receivable. Central government granted us this amount of allowance
because we helped government on building government reserves last year. We
expected to receive this allowance when government finishes certain procedures
on the second half of this year.
Net cash
used in investing activities was $61.4 million for the six months ended June 30,
2010, which represented an increase of $10.7 million as compared to
the net cash of $50.8 million used by investing activities for the same period
of the prior year. We spent $14.8 million more on the costs of
construction for new production facilities, $15.4 million less on land use
rights and $4.8 million more on purchase deposit for land use rights during the
first half of 2010 compared to the same period of 2009.
Net cash
provided by financing activities was $12.7 million during the six months ended
June 30, 2010, a decrease of $15.6 million compared to the net cash
provided by financing activities of $28.3 million for the same period of the
prior year. We had net repayments of $20.1 million
for short-term bank loans and received $28.0 million in net proceeds
from long-term bank loans during the current period. We optimized our
balance sheet by borrowing more long-term bank loans and less short-term
loans.
31
At June
30, 2010, Henan Zhongpin had short-term and long-term bank and governmental
loans in the aggregate amount of $130.7 million with interest rates ranging from
4.78% to 5.76% per annum, as shown below.
Bank
|
Maximum
Credit
Availability
|
Amount
Borrowed
|
Interest Rate
|
Maturity Date
|
|||||||||
Short-term
Loans
|
|
||||||||||||
Industrial
and Commercial Bank of China
|
$ | 22,088,383 | $ | 4,417,677 | 4.86 | % |
12/06/2010
|
||||||
China
Everbright Bank
|
7,362,794 | — | |||||||||||
Bank
of Luoyang
|
4,417,677 | 4,417,677 | 5.31 | % |
01/17/2011
|
||||||||
Bank
of Communications
|
5,890,235 | — | |||||||||||
China
Construction Bank
|
29,451,177 | — | |||||||||||
China
CITIC Bank
|
45,649,325 | 4,417,677 | 5.31 | % |
01/19/2011
|
||||||||
Agriculture
Development Bank of China
|
103,079,121 | 6,199,084 | 4.86 | % |
12/27/2010
|
||||||||
9,129,865 | 5.31 | % |
12/30/2010
|
||||||||||
6,876,850 | 5.31 | % |
12/28/2010
|
||||||||||
Shanghai
Pudong development Bank of China
|
17,670,706 | — | |||||||||||
Bank
of China
|
14,725,589 | — | |||||||||||
China
Merchants Bank
|
27,242,339 | 4,417,677 | 5.31 | % |
02/01/2011
|
||||||||
Guangdong
Development Bank
|
10,307,912 | 5,890,235 | 5.31 | % |
09/28/2010
|
||||||||
Xuchang
Commercial Bank
|
4,417,677 | 2,945,118 | 4.78 | % |
05/11/2011
|
||||||||
Rabobank
Nederland
|
14,725,589 | 2,945,118 | 5.31 | % |
05/28/2010
|
||||||||
Zhongyuan
Trust Co., Ltd.
|
17,670,706 | 5.04 | % |
03/31/2011
|
|||||||||
City
Finance –short-term
|
29,450 | 0.00 | % |
Extendable
|
|||||||||
Total
|
$ | 69,357,134 | |||||||||||
Long-term
Loan-Current portion
|
|||||||||||||
Canadian
Government Transfer Loan
|
145,671 | 6.02 | % |
11/15/2010
|
|||||||||
China
Minsheng Bank
|
7,362,794 | 7,362,794 | 5.40 | % |
05/06/2011
|
||||||||
China
Construction Bank
|
29,451,177 | 7,362,794 | 5.40 | % |
06/10/2011
|
||||||||
Rabobank
Nederland
|
14,725,589 | 2,945,118 | 5.40 | % |
06/15/2011
|
32
Bank
|
Maximum
Credit
Availability
|
Amount
Borrowed
|
Interest Rate
|
Maturity Date
|
|||||||||
Agriculture
Bank of China
|
117,804,709 | 1,178,047 | 5.76 | % |
03/18/2011
|
||||||||
Total
|
$ | 18,994,424 | |||||||||||
Long-term
Loans
|
|||||||||||||
China
Construction Bank
|
29,451,177 | 5,890,235 | 5.40 | % |
06/29/2013
|
||||||||
Agriculture
Bank of China
|
117,804,709 | 12,516,750 | 5.76 | % |
12/27/2014
|
||||||||
10,455,168 | 5.40 | % |
02/03/2013
|
||||||||||
1,472,559 | 5.76 | % |
03/18/2012
|
||||||||||
1,472,559 | 5.76 | % |
03/18/2013
|
||||||||||
1,472,559 | 5.76 | % |
03/18/2014
|
||||||||||
China
Merchants Bank
|
27,242,339 | 13,989,310 | 5.76 | % |
11/26/2014
|
||||||||
Rabobank
Nederland
|
14,725,589 | 5,890,235 | 5.40 | % |
07/09/2011
|
||||||||
Canadian
Government Transfer Loan
|
1,270,593 | * |
05/15/2042
|
||||||||||
Total
|
$ | 54,429,968 |
* 17% of
the principal amount of this loan bears interest at the rate of 6.02% per annum
and the remaining principal amount of this loan is interest free. All
repayments are applied first to the interest-bearing portion of this
loan.
Of our
outstanding short-term loans at June 30, 2010, $16.0 million aggregate principal
amount of loans was secured by our land and plants located in the PRC and $10.3
million aggregate principal amount of loans was guaranteed by Henan Huanghe
Enterprises Group Co., Ltd., a group corporation based in Henan province that is
not affiliated with our company or with any of our subsidiaries (“Huanghe
Group”).
In June
2010, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 40 million ($5.9 million). All
amounts borrowed under the loan agreement bear interest at a floating rate that
is based on the prime rate published by the People’s Bank of China for loans
with the same or similar terms on the drawdown date (5.40% per annum on June 30,
2010) and are payable on June 29, 2013. Borrowings under the loan
agreement are guaranteed by the land use right, property and plant of Henan
Zhongpin.
In March
2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of
China pursuant to which Henan Zhongpin borrowed RMB 53 million ($7.8 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
June 30, 2010) and are payable in installments on March 18, 2012, 2013 and
2014 and December 27, 2014. Borrowings under the loan agreement are
guaranteed by the land use right, property and plant of Luoyang
Zhongpin.
In March
2010, Henan Zhongpin entered into a loan agreement with China Merchants Bank
pursuant to which Henan Zhongpin borrowed RMB 47.5 million ($7.0 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 (5.76% per annum on June 30,
2010) and are payable on November 26, 2014. Borrowings under the loan
agreement are guaranteed by Luoyang Zhongpin.
In
February 2010, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 71 million
($10.4 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 (5.40%
per annum on June 30, 2010) and are payable on February 3,
2013. Borrowings under the loan agreement are guaranteed by the land
use right, property and plant of Luoyang Zhongpin.
33
In
December 2009, Henan Zhongpin entered into a loan agreement with Agriculture
Bank of China pursuant to which Henan Zhongpin borrowed RMB 70 million
($10.3 million). All amounts borrowed under the loan agreement bear
interest at a floating rate that is based on the prime rate published by the
People’s Bank of China for loans with the same or similar terms on the drawdown
date (5.76% per annum on June 30, 2010) and are payable on December 27,
2014. Borrowings under the loan agreement are guaranteed by the land
use right, property and plant of Luoyang Zhongpin.
In
November 2009, Henan Zhongpin entered into a loan agreement with China Merchants
Bank pursuant to which Henan Zhongpin borrowed RMB 47.5 million ($7.0 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 (5.76% per annum on
June 30, 2010) and are payable on November 26, 2014. Borrowings under
the loan agreement are guaranteed by Luoyang Zhongpin.
In
November 2009, Henan Zhongpin entered into a sale-leaseback agreement with CMB
Financial Leasing Co., Ltd. (“CMB Leasing”) pursuant to which we sold to CMB
Leasing equipment with a book net value of $8.3 million for $5.9 million and
leased such equipment back. The lease payments for this equipment are paid on a
monthly basis over a three-year period and consist of a fixed payment based upon
a 36-month amortization of the purchase price plus an interest component that is
based upon the rate announced from time to time by the People’s Bank of China
for three-year loans. At June 30, 2010, the monthly rental fee under
the agreement was $528,049, which included an interest component calculated at
the rate of 4.91% per annum. Henan Zhongpin has the right at the end of the
lease term to repurchase all of the equipment for a nominal purchase
price.
In
November 2009, our subsidiary Luoyang Zhongpin Food Co., Ltd. entered into a
sale-leaseback agreement with CMB Leasing pursuant to which we sold to CMB
Leasing equipment with a book net value of $6.8 million for $4.4 million and
leased such equipment back. The lease payments for this equipment are paid on a
monthly basis over a three-year period and consist of a fixed payment based upon
a 36-month amortization of the purchase price plus an interest component that is
based upon the rate announced from time to time by the People’s Bank of China
for three-year loans. At June 30, 2010, the monthly rental fee under
the agreement was $396,037, which included an interest component calculated at
the rate of 4.91% per annum. Henan Zhongpin has the right at the end of the
lease term to repurchase all of the equipment for a nominal purchase
price.
In
November 2009, our subsidiary Zhumadian Zhongpin Food Co., Ltd. entered into a
sale-leaseback agreement with De Lage Landen (China) Co., Ltd. (“De Lage
Landen”) pursuant to which we sold to De Lage Landen equipment with a book net
value of $5.9 million for $6.0 million and leased such equipment back. The lease
payments for this equipment are paid on a monthly basis over a three-year period
and consist of a fixed payment based upon a 36-month amortization of the
purchase price plus an interest component that is based upon the rate announced
from time to time by the People’s Bank of China for three-year
loans. At June 30, 2010, the monthly rental fee under the agreement
was $176,482, which included an interest component calculated at the rate of
5.31% per annum. Henan Zhongpin has the right at the end of the lease term to
repurchase all of the equipment for a nominal purchase price.
In June
2009, Henan Zhongpin entered into a mutual guarantee agreement with Huanghe
Group. Under the agreement, Henan Zhongpin agreed to guarantee bank loans of
Huanghe Group in an amount up to $8.8 million and Huanghe Group agreed to
guarantee Henan Zhongpin’s bank loans in an amount up to $8.8 million. The
agreement expired in June 2010. In September 2009, Henan Zhongpin entered into a
mutual guarantee agreement with Huanghe Group. Under the agreement, Henan
Zhongpin agreed to guarantee bank loans of Huanghe Group in an amount up to $5.9
million and Huanghe Group agreed to guarantee Henan Zhongpin’s bank loans in an
amount up to $5.9 million. The agreement with an original term
until September
2010 expired in June 2010 when Henan Zhongpin
entered into a
new mutual guarantee agreement with
Huanghe Group. Under the new agreement, Henan Zhongpin
agreed to guarantee bank loans of Huanghe Group in an amount up to RMB 150 million ($22.1 million) and Huanghe Group agreed
to guarantee Henan Zhongpin’s bank loans in an amount up to
RMB 150 million
($22.1 million). The agreement will expire in June 2011. At
the expiration of the agreements, 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 agreements. At June 30, 2010, Henan Zhongpin had
outstanding guarantees for $10.3 million of Huanghe Group’s bank loans under the
agreements. All of the bank loans of Huanghe Group guaranteed by
Henan Zhongpin will mature within the next 6 months.
34
In June
2009, Henan Zhongpin entered into a loan agreement with China Construction Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.4 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 (5.40% per annum on
June 30, 2010) and are payable on June 10, 2011. Borrowings under the
loan agreement are guaranteed by the land use right, property and plant of Henan
Zhongpin.
In May
2009, Henan Zhongpin entered into a loan agreement with China Minsheng Bank
pursuant to which Henan Zhongpin borrowed RMB 50 million ($7.4 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 (5.40% per annum on
June 30, 2010) and are payable on May 6, 2011. Borrowings under the loan
agreement are guaranteed by our wholly-owned subsidiary, Yongcheng Zhongpin Food
Co., Ltd.
In
November 2008, Henan Zhongpin entered into a sale-leaseback agreement with CMB
Leasing pursuant to which we sold to CMB Leasing equipment with a book net value
of $6.6 million for $4.6 million and leased such equipment back. The lease
payments for this equipment are paid on a monthly basis over a three-year period
and consist of a fixed payment based upon a 36-month amortization of the
purchase price plus an interest component that is based upon the rate announced
from time to time by the People’s Bank of China for three-year
loans. At June 30, 2010, the monthly rental fee under the agreement
was $138,859, which included an interest component calculated at the rate of
5.40% per annum. Henan Zhongpin has the right at the end of the lease term to
repurchase all of the equipment for a nominal purchase price.
In May
2008, Henan Zhongpin entered into a credit agreement with Rabobank Nederland
Shanghai Branch that provided for a three-year term loan of up to RMB 80 million
($11.8 million). On June 10, 2008, the first 50% of the long-term loan was
funded by the bank. The remaining 50% of the long-term loan was drawn down by
Henan Zhongpin on July 10, 2008. Amounts currently outstanding under the
long-term loan bear interest at the rate published by the People’s Bank of China
for loans with the same or similar terms. The accrued interest on this loan is
payable on a quarterly basis. Of the outstanding principal under the long-term
loan, 25% is payable 24 months after the first drawdown date (June 10, 2008),
37.5% is payable 30 months after the first drawdown date and the balance is
payable 36 months after the first drawdown date. Henan Zhongpin repaid $2.9
million of the loan on June 10, 2010 and $8.9 million remained outstanding as of
June 30, 2010.
Borrowings
under the term loan agreement are guaranteed by our subsidiaries, Anyang
Zhongpin Food Co., Ltd. and Zhumadian Zhongpin Food Co., Ltd., are secured by
mortgages on our prepared pork production facilities located in Changge City,
Henan province and are subject to various financial and non-financial covenants,
including a debt-to-net-worth ratio, a debt-to-EBITDA ratio, an interest
coverage ratio, a required minimum tangible net worth, restrictions on
investments in fixed assets and financial assets, on inter-company indebtedness
and on consolidated contingent liabilities and a requirement that a minimum
percentage of Henan Zhongpin’s consolidated EBITDA be generated by Henan
Zhongpin and the guarantors. Henan Zhongpin also is prohibited from paying
dividends in an amount in excess of 50% of its retained earnings during the term
of the credit facility. We are in compliance with both the financial and
non-financial covenants.
In May
2002, Henan Zhongpin entered into a loan agreement with Bank of Communications,
Zhengzhou Branch, which is the intermediary bank for a 40-year term loan in the
amount of $2,504,969 from the Canadian government. Under the terms of the loan
agreement, 58% of the principal amount ($1,452,882) of this loan bears interest
at the fixed rate of 6.02% per annum and remaining principal amount of this loan
is interest free. The loan is repayable in a fixed amount of $145,671, which
includes both principal and interest, that is payable on a semi-annual basis
through May 15, 2042. Borrowings under the loan agreement are guaranteed by the
Financing Department, Henan province.
35
We
believe our existing cash and cash equivalents, together with our available
lines of credit ($289.4 million at June 30, 2010), will be sufficient to finance
our investment in new facilities, operating requirements and anticipated capital
expenditures of approximately $78.9 million over the next 12 months. We intend
to use such funds over the next 12 months to fund our capacity expansion and the
construction of supporting facilities and to supplement our working capital
requirements to enable us to strengthen our market position and accelerate our
growth. 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. We also we intend to optimize our loan structure
by replacing certain of our short-term indebtedness with additional long-term
debt.
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 - Contractual Commitments.” as
presented in our Annual Report on Form 10-K for the fiscal year ended December
31, 2009.
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 inflation or seasonality.
Item
3.
|
Quantitative
and Qualitative Disclosures About Market
Risk
|
Disclosures About Market
Risk. We may be exposed to changes in financial market conditions in the
normal course of business. Market risk generally represents the risk that losses
may occur as a result of movements in interest rates and equity prices. We
currently do not use financial instruments in the normal course of business that
are subject to changes in financial market conditions.
Currency Fluctuations and Foreign
Currency Risk. Substantially all of our operations are conducted in the
PRC, with the exception of our export business and limited overseas purchases of
raw materials. Most of our sales and purchases are conducted within
the PRC in RMB, which is the official currency of the PRC. As a
result, the effect of the fluctuations of exchange rates is considered minimal
to our business operations.
Substantially all of our revenues and
expenses are denominated in RMB. However, we use the U.S. dollar for financial
reporting purposes. Conversion of RMB into foreign currencies is regulated by
the People’s Bank of China through a unified floating exchange rate system.
Although the PRC government has stated its intention to support the value of
RMB, there can be no assurance that such exchange rate will not again become
volatile or that RMB will not devalue significantly against the U.S. dollar.
Exchange rate fluctuations may adversely affect the value, in U.S. dollar terms,
of our net assets and income derived from our operations in the
PRC.
Interest Rate Risk. We do not
have significant interest rate risk as the interest we pay on substantially all
of our debt obligations is calculated at a fixed rate in accordance with the
terms of such indebtedness.
Credit Risk. We have not
experienced significant credit risk, as most of our customers are long-term
customers with superior payment records. Our receivables are monitored regularly
by our credit managers.
36
Item
4. Controls and Procedures
Our management, with the participation
of our chief executive officer and chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”)) as of the end of the period covered by this
report. Based on such evaluation, our chief executive officer and
chief financial officer concluded that, as of the end of such period, our
disclosure controls and procedures were effective to ensure that information
that we are required to disclose in reports that we file or submit under the
Exchange Act was recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms and accumulated and communicated
to our management, including our chief executive officer and chief financial
officer, or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.
There were no changes in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this report
relates that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
37
Part
II – Other Information
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
During the six months ended June 30,
2010, there were no material changes to the risk factors previously disclosed in
our Annual Report on Form 10-K for the year ended December 31,
2009.
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. (Removed and Reserved)
Item
5. Other Information
None.
Item
6. Exhibits
The
exhibits required by this item are set forth on the Exhibit Index attached
hereto.
38
Signatures
Pursuant to the requirements of the
Securities Exchange Act of 1934, we have duly caused this report to be signed on
our behalf by the undersigned thereunto duly authorized.
Date: August
9, 2010
|
Zhongpin
Inc.
|
|
(Company)
|
||
By:
|
/s/ Xianfu Zhu
|
|
Xianfu
Zhu
|
||
Chief
Executive Officer
|
||
By:
|
/s/ Feng Wang
|
|
Feng
Wang
|
||
Chief
Financial Officer
|
39
Exhibit
Index
Exhibit
Number
|
Exhibit Title
|
|
10.1*
|
Mutual
Guarantee Agreement, dated as of June 22, 2010, between Henan Zhongpin
Food Share Co., Ltd. and Henan Huanghe Enterprises Group Co.,
Ltd. (Translated from
Mandarin).
|
|
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
|
40