UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)


x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended March 31, 2011





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 May 4, 2011, 40,355,502 shares of the registrant’s common stock were outstanding.





ZHONGPIN INC.





FORM 10-Q





INDEX





PagePart I
Financial InformationItem 1.
Unaudited Financial Statements:

1Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010

2Consolidated Statements of Operations and Comprehensive Income (unaudited) for the three-month periods ended March 31, 2011 and 2010

3Consolidated Statements of Cash Flows (unaudited) for the three- month periods ended March 31, 2011 and 2010

4Notes to Consolidated Financial Statements (unaudited)

5Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

20Item 3.
Quantitative and Qualitative Disclosures About Market Risk

33Item 4.
Controls and Procedures

34Part II
Other InformationItem 1.
Legal Proceedings

35Item 1A.
Risk Factors

35Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

35Item 3.
Defaults Upon Senior Securities

35Item 4.
(Removed and Reserved)

35Item 5.
Other Information

35Item 6.
Exhibits

35Signatures


36










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, 2010.





The results of operations for the three-month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.


1


ZHONGPIN INC.


CONSOLIDATED BALANCE SHEETS


(Amounts in U.S. dollars)


March 31, 2011


December 31, 2010(Unaudited)ASSETSCurrent assetsCash and cash equivalents

$
177,565,058


$
84,172,186Restricted cash


56,112,212



17,527,056Bank notes receivable


30,853,963



19,282,740Accounts receivable, net of allowance for doubtful accounts of $2,105,961 and $1,708,479


38,261,591



30,784,463Other receivables, net of allowance for doubtful accounts of $244,539 and $232,751


2,009,314



1,035,850Purchase deposits


7,997,477



7,415,567Inventories


33,741,140



26,534,014Prepaid expenses


858,850



391,386VAT recoverable


24,406,346



20,771,902Allowance receivables


4,346,071



2,477,928Deferred tax assets


401,766



397,744Other current assets


424,037



442,080Total current assets


376,977,825



211,232,916Long-term investment


457,568



452,987Property, plant and equipment (net)


315,748,584



291,567,396Deposits for purchase of land use rights


33,447,089



17,059,644Construction in progress


19,575,070



30,433,905Land use rights


86,892,120



86,475,708Deferred charges


14,825



21,686Other non-current assets


1,451,254



1,436,726Total assets

$
834,564,335


$
638,680,968LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent liabilitiesShort-term loans

$
103,540,282


$
91,774,025Bank notes payable


106,581,355



18,646,473Long-term loans - current portion


15,397,943



14,943,260Capital lease obligation - current portion


6,531,215



7,282,720Accounts payable


17,554,610



8,551,003Other payables


16,773,831



15,842,331Accrued liabilities


12,157,862



9,794,474Deposits from customers


6,017,253



8,255,194Tax payable


1,544,020



1,604,847Total current liabilities


286,098,371



176,694,327Deferred tax liabilities


365,797



362,135Deposits from customers - long-term portion


1,824,432



1,958,827Capital lease obligation


4,084,650



4,999,454Long-term loans


82,981,178



83,672,401Total liabilities


375,354,428



267,687,144EquityCommon stock: par value $0.001; 100,000,000 authorized; 40,338,160 and 35,338,160 shares issued and outstanding


40,338



35,338Additional paid in capital


238,122,278



171,401,989Retained earnings


186,862,386



169,979,344Accumulated other comprehensive income


33,384,006



29,577,153Total Zhongpin Inc. shareholders’ equity


458,409,008



370,993,824Noncontrolling interest


800,899



—Total shareholders’ equity


459,209,907



370,993,824Total liabilities and shareholders’ equity

$
834,564,335


$
638,680,968





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

March 31,2011


2010RevenuesSales revenues

$
285,783,221


$
204,284,915Cost of sales


(249,866,971
)


(179,366,565
)Gross profit


35,916,250



24,918,350Operating expensesGeneral and administrative expenses


(6,427,546
)


(6,058,141
)Selling expenses


(6,273,320
)


(4,336,828
)Research and development expenses


(431,506
)


(40,852
)Total operating expenses


(13,132,372
)


(10,435,821
)Income from operations


22,783,878



14,482,529Other income (expense)Interest income (expenses), net


(5,437,069
)


(1,435,461
)Other income (expenses), net


(27,033
)


565,063Exchange gain (loss)


(39,812
)


(304
)Government subsidies


1,114,621



625,156Total other income (expense)


(4,389,293
)


(245,546
)Net income before tax


18,394,585



14,236,983Provision for income taxes


(1,511,390
)


(986,520
)Net income


16,883,195



13,250,463Net income attributable to noncontrolling interest


(154
)


—Net income attributable to Zhongpin Inc. shareholders

$
16,883,042


$
13,250,463Foreign currency translation adjustment


3,807,915



86,265Foreign currency translation adjustment attributable to noncontrolling interest


(1,062
)


—Foreign currency translation adjustment attributable to Zhongpin Inc. shareholders

$
3,806,853


$
86,265Comprehensive income


20,691,110



13,336,728Comprehensive income attributable to noncontrolling interest


(1,216
)


—Comprehensive income attributable to Zhongpin Inc. shareholders

$
20,689,894


$
13,336,728Basic earnings per common share

$
0.47


$
0.38Diluted earnings per common share

$
0.47


$
0.38Basic weighted average shares outstanding


35,850,877



34,715,466Diluted weighted average shares outstanding


36,224,021



35,222,810





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)





Three Months Ended March 31,2011


2010Cash flows from operating activities:Net income

$
16,883,195


$
13,250,463Adjustments to reconcile net income to net cash provided by (used in) operations:Depreciation


3,964,080



2,729,974Amortization of intangible assets


456,188



327,390Provision for allowance for bad debt


388,054



374,030Stock-based compensation expense


368,627



473,472Changes in operating assets and liabilities:Accounts receivable


(7,515,312
)


(9,929,541
)Other receivables


(968,464
)


266,413Purchase deposits


(504,858
)


1,573,258Prepaid expense


(461,894
)


(110,379
)Inventories


(6,910,560
)


(2,024,048
)Tax refunds receivable


(3,410,453
)


(2,192,751
)Other current assets


22,422



(35,240
)Long-term deferred charges


7,052



11,351Accounts payable


8,880,836



3,280,371Other payables


773,741



534,534Allowance receivables


(1,835,583
)


(4,412,736
)Accrued liabilities


2,261,200



3,082,041Taxes payable


(76,742
)


21,859Deposits from customers


(2,311,969
)


(355,299
)Deposits from customers – long-term portion


(153,576
)


204,761Net cash provided by operating activities


9,855,984



7,069,923Cash flows from investing activities:Deposits for purchase of land use rights


(16,148,923
)


—Construction in progress


(11,504,427
)


(19,057,251
)Additions to property and equipment


(2,484,867
)


(1,942,869
)Additions to land use rights


—



(477,844
)Increase in restricted cash


(38,251,560
)


3,953,897Net cash used in investing activities


(68,389,777
)


(17,524,067
)Cash flows from financing activities:Proceeds from (repayment of) bank notes, net


76,059,193



(4,815,772
)Proceeds from (repayment of) short-term bank loans, net


10,794,093



(19,887,508
)Proceeds from long-term loans


—



23,945,495(Repayment of) long-term loans


(1,228,744
)


—Repayment of capital lease obligation


(1,783,221
)


(1,636,194
)Proceeds from offering of common stock


66,356,662



—Proceeds from exercised warrants and option


—



213,350Investment in a subsidiary by minority holder


797,485



—Net cash provided by financing activities


150,995,468



(2,180,629
)Effects of rate changes on cash


931,197



16,269Increase (decrease) in cash and cash equivalents


93,392,872



(12,618,504
)Cash and cash equivalents, beginning of period


84,172,186



68,982,259Cash and cash equivalents, end of period

$
177,565,058


$
56,363,755Supplemental disclosures of cash flow information:Cash paid for interest


5,158,272



1,926,252Cash paid for income taxes


1,674,353



964,583





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 division is involved primarily in the processing of frozen vegetables and fruits that are sold to the Company’s branded stores and food retailers.





The Company holds a 100% interest in Falcon Link Investment Limited, a company organized under the laws of the British Virgin Islands (“Falcon”), through which the Company holds a 100% interest in its China-based subsidiaries, each of which was organized under the laws of China. The Company’s China-based subsidiaries include the following:





Date of

Registered

PercentageName

Incorporation

Capital

of OwnershipHenan 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

($8,585,398)


100
%Anyang Zhongpin Food Company Limited

Aug. 21, 2006

34,800,000 RMB

($5,094,422)


100
%Henan Zhongpin Fresh Food Logistics Company Limited

Sept. 14, 2006

1,500,000 RMB

($189,665)


100
%Deyang Zhongpin Food Company Limited

Sept. 25, 2006

15,000,000 RMB

($1,893,652)


100
%Henan Zhongpin Business Development Company Limited

Sept. 27, 2006

5,000,000 RMB

($632,215)


100
%Luoyang Zhongpin Food CompanyLimited (“Luoyang Zhongpin”)

Jan. 18, 2007

60,000,000 RMB

($8,703,452)


100
%Yongcheng Zhongpin Food Company Limited

Mar. 1, 2007

60,000,000 RMB

($8,783,487)


100
%Tianjin Zhongpin Food Company Limited (“Tianjin Zhongpin”)

Sept. 14, 2007

100,000,000 RMB


100
%( $14,639,145 )




5


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Date of

Registered

PercentageName

Incorporation

Capital

of OwnershipJilin 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
%Changchun Zhongpin Food Company Limited

Aug. 6, 2010

50,000,000 RMB

($7,382,253)


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.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Consolidation and Basis of Presentation





The consolidated financial statements include the accounts of Zhongpin Inc. and its wholly owned subsidiaries (collectively referred to herein as the “Company”). All significant intercompany accounts and transactions have been eliminated during the process of consolidation. The consolidated financial statements were prepared in accordance with GAAP.





Foreign Currency Translations and Transactions





RMB, the national currency of China, 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 Falcon and Zhongpin Inc. to record all of their activities. The Company uses the U.S. dollar for financial reporting purposes.





The Company translates assets and liabilities into U.S. dollars using the middle rate published by the People’s Bank of China as of the balance sheet date. The consolidated statement of income is translated at average rates during the reporting period. Adjustments resulting from the translation of financial statements from RMB into U.S. dollars are recorded in stockholders' equity as part of accumulated comprehensive loss – translation adjustments. Gains or losses resulting from transactions in currencies other than RMB are reflected in income for the reporting period.





Use of Estimates





The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


6


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





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.





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 China.





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 China. The Company maintains a general policy of providing 100% allowance for doubtful accounts in an amount equal to the aggregate amount of those accounts that are not collected within one year plus an amount equal to 5% of the aggregate amount of accounts receivable less than one year old. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. The Company also examines the credit terms of significant customers regularly and asks for more cash deposits if these customers appear to have any indicators of delaying their payments to the Company. Such deposits are usually applied for the collection of the outstanding accounts receivable during the period. With such a practice in place, the Company did not have any specific allowance for doubtful accounts provided against specific customers at March 31, 2011 and December 31, 2010, 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.





March 31, 2011


December 31, 2010Beginning balance

$
1,708,479


$
1,132,038Additions to allowance for bad debt


397,482



576,441Ending balance

$
2,105,961


$
1,708,479





Inventories





Inventories are comprised of raw materials and low-value consumables, work-in-progress, and finished goods. Inventories are stated at the lower of cost or 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 LifePlants and buildings
5-30 yearsMachinery and equipment
5-20 yearsOffice furniture and equipment
3-5 yearsVehicles
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 China, land use rights for commercial purposes are granted by the PRC government typically for a term of 40-50 years. The Company is required to pay a lump sum of money to the State Land and Resource Ministry of the applicable locality to acquire such rights.The Company capitalizes the lump sum of money paid and amortizes these land use rights by using the straight line method over the term of the land use license granted by the applicable governmental authority.


8


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)




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 interests at the rate dictated and published by the People's Bank of China. The current rates published by the People's Bank of China approximate the interest rates of the loans outstanding.





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. On a semi-annual basis, the Company forecasts for each subsidiary separately the amount of sales revenue necessary to fully utilize the VAT recoverable. The factors considered in performing these forecasts include industry-specific and local economic conditions, as well as consumer behavior by the subsidiaries' designated geographical region and the demographics within those regions. Once the VAT recoverable for a subsidiary is determined to be non-recoverable in part or in full, the VAT recoverable is written-off as impairment loss.


9


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Stock Compensation





The Company receives employee and certain non-employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company's equity instruments or that may be settled by the issuance of such equity instruments. The Company accounts for stock compensation expense under the fair value recognition provisions of the Financial Accounting Standards Board, Accounting Standards Codification (ASC) Topic 718 (ASC 718), which requires companies to estimate the fair value of share-based payment awards on the date of grant using an option pricing model.




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 March 31, 2011 and 2010 were 1,074,564 and 1,439,490, respectively, which were all included in the computation of diluted earnings per share.




Government Subsidies





The Company’s subsidiaries in China receive government subsidies from local Chinese government agencies in accordance with relevant Chinese government policies. In general, the Company presents the government subsidies received as part of other income unless the subsidies received are earmarked to compensate a specific expense, which have been accounted for by offsetting the specific expense, such as research and development expense or interest expenses.





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 March 31, 2011 and 2010 were $431,506 and $40,852, respectively. After offsetting the government subsidies received by the Company that were specified for supporting the Company’s research and development efforts, the net research and development expenses for the three-month periods ended March 31, 2011 and 2010 were $431,506 and $40,852, respectively.





Comprehensive Income (Loss)





The Company adopted Financial Accounting Standards Board (“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 2009-05





In August 2009, the FASB issued Accounting Standards Update ("ASU") No. 2009-05, "Measuring Liabilities at Fair Value," which amends the guidance in ASC 820, Fair Value Measurements and Disclosures, to provide guidance on fair value measurement of liabilities. If a quoted price in an active market is not available for an identical liability, ASU 2009-05 requires companies to compute fair value by using quoted prices for an identical liability when traded as an asset, quoted prices for similar liabilities when traded as an asset or another valuation technique that is consistent with the guidance in ASC 820. ASU 2009-05 is effective for interim and annual periods beginning after its issuance and did not have a material impact on the Company’s consolidated financial position or results of operations.


10


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Adoption of FASB ASU 2010-06


In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”, which provides amendments to Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of FASB ASU 2010-06 did not have a material impact on the Company’s consolidated financial position or results of operations.





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 did not have a material impact on the Company’s consolidated financial position or results of operations.





3.           INVENTORIES




Inventories at March 31, 2011 and December 31, 2010 consisted of the following:




March 31, 2011


December 31, 2010(Unaudited)Raw materials

$
4,051,181


$
6,934,521Low value consumables and packaging


1,769,083



1,506,700Work-in-progress


3,986,085



2,719,933Finished goods


23,934,791



15,372,860Inventories

$
33,741,140


$
26,534,014




4.           PROPERTY, PLANT AND EQUIPMENT




A summary of property, plant and equipment at cost at March 31, 2011 and December 31, 2010 is as follows:





March 31, 2011


December 31, 2010(Unaudited)Plants and buildings

$
236,400,728


$
214,765,759Machinery and equipment


102,529,616



96,632,003Office furniture and equipment


4,250,385



3,915,451Vehicles


3,822,803



3,629,177Accumulated depreciation


(31,254,948
)


(27,374,994
)Total

$
315,748,584


$
291,567,396




11


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





The depreciation and amortization expenses for the three months ended March 31, 2011 and 2010 were $3,964,080 and $2,729,974, respectively.




Of the above information, property, plant and equipment under the sale-leaseback agreement at cost at March 31, 2011 and December 31, 2010 is as follows:





March 31, 2011


December 31, 2010(Unaudited)Plants and buildings

$
693,881


$
695,424Machinery and equipment


25,478,043



25,589,091Office furniture and equipment


36,223



34,655Vehicles


4,190



4,130Accumulated depreciation


(2,495,607
)


(2,111,119
)Total

$
23,716,730


$
24,212,181





The deferred losses included in the property and equipment balance were $2,435,672 and $2,784,665 at March 31, 2011 and December 31, 2010, respectively, and would be amortized over the lease term. Of the depreciation expenses, $375,617 and $361,662 were amortization of deferred loss and depreciation expense from assets under capital lease, respectively, for the quarter ended March 31, 2011; $362,155 and $357,158 were amortization of deferred loss and depreciation expense from assets under capital lease, respectively, for the quarter ended March 31, 2010.





5.           LAND USE RIGHTS




The Company’s land use rights at March 31, 2011 and December 31, 2010 are as follows:





March 31, 2011


December 31, 2010(Unaudited)Land use rights

$
91,197,384


$
90,284,405Accumulated amortization


(4,305,264
)


(3,808,697
)Total

$
86,892,120


$
86,475,708




The amortization expenses for the three months ended March 31, 2011 and 2010 were $456,188 and $327,390, respectively.


12


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





6.           CONSTRUCTION IN PROGRESS




Construction in progress at March 31, 2011 and December 31, 2010 consisted of the following:




Date orEstimated DateConstruction Project

Put in Service(1)

March 31, 2011


December 31, 2010Upgrade for export certification in Changge

March 2011

$
—


$
2,305,978Zhengzhou office

April 2011


37,307



36,934Replacement and maintenance in Changge industrial park

May 2011


183,805



305,533Distribution center in Changge

May 2011


—



19,393,985Information system

July 2011


678,550



671,757Production facility for chilled and frozen pork in Taizhou

January 2012


7,326,782



2,566,868Production facility for chilled and frozen pork in Changchun

January 2012


5,115,409



5,054,401Production facility for prepared pork products in Tianjin

April 2012


6,141,245



98,449Zhongpin Xinda joint venture project

August 2011


91,972



—Total



$
19,575,070


$
30,433,905





Estimated cost to complete current construction in progress is $153.8 million.







(1)
Represents date all regulatory permits and approvals are received and project is placed in service. In certain cases, construction of a project may be substantially completed and the project may be operational during a testing period prior to such date.




7.           SHORT-TERM BANK LOANS




Short-term bank loans are due within one year. Of the $103.5 million aggregate principal amount of short-term bank loans at March 31, 2011, loans in the aggregate principal amount of $45.8 million were guaranteed by the Company’s subsidiaries in China, and loans in the aggregate principal amount of $22.9 million were guaranteed by Henan Huanghe Enterprises Group Co., Ltd., an unaffiliated third party. These loans bear interest at prevailing lending rates in China ranging from 5.00 % to 6.36% per annum.


13


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





8.           LONG-TERM BANK LOANS




Amounts outstanding under the Company’s long-term debt arrangements at March 31, 2011 and December 31, 2010 were as follows:




Bank

March 31, 2011


December 31, 2010(Unaudited)China Construction Bank

$
13,727,045


$
13,589,623Agriculture Bank of China


62,686,840



63,267,245Rabobank Nederland Shanghai


4,575,682



4,529,874Canadian Government Transfer Loan


1,343,428



1,343,429China Merchants Bank


14,489,659



14,344,605Changge Old Town


1,556,467



1,540,885Current portion


(15,397,943
)


(14,943,260
)Total long-term portion

$
82,981,178


$
83,672,401




In December 2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 25 million ($3.8 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 (6.10% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable on December 10, 2013. Borrowings under the loan agreement are secured by the land use right, property and plant of Henan Zhongpin.




In September 2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 75 million ($11.4 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.45% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on September 17, 2012, 2013 and December 27, 2014. Borrowings under the loan agreement are guaranteed by the Company’s wholly owned subsidiary, Yongcheng Zhongpin Food Company Limited.




In July 2010, Tianjin Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Tianjin Zhongpin may borrow up to RMB 300 million ($45.8 million). Tianjin Zhongpin drew down RMB 50 million ($7.6 million) in July 2010 and RMB 80 million ($12.2 million) in November 2010. All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.45% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments in June 2012, 2013, 2014 and 2015. Borrowings under the loan agreement are secured by the land use right, property and plant of Tianjin Zhongpin.




In June 2010, Henan Zhongpin entered into a loan agreement with China Construction Bank pursuant to which Henan Zhongpin borrowed RMB 40 million ($6.1 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 (4.86% per annum on March 31, 2011 and adjustable on the anniversary of date of the agreement based on the prime rate published by the People’s Bank of China for loans with the same or similar terms) and are payable on June 29, 2013. Borrowings under the loan agreement are secured by the land use right, property and plant of Henan Zhongpin.


14


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





In April 2010, in connection with the purchase of a piece of land from Changge Old Town, Changge Old Town extended a loan to Henan Zhongpin with a principal amount of RMB 10.2 million ($1.6 million) and bearing interest at the rate of 7.00% per annum payable on June 30, 2010 and each anniversary thereafter. Such loan does not have a fixed term and the principal amount of the loan should be repaid by Henan Zhongpin upon six months prior written notice from Changge Old Town.




In March 2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 53 million ($8.1 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.45% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on March 18, 2011, 2012, 2013 and 2014 and December 27, 2014. Borrowings under the loan agreement are secured by the land use right, property and plant of Henan 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 ($10.8 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 (6.10% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable on February 3, 2013. Borrowings under the loan agreement are secured by the land use right, property and plant of Henan 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 ($10.7 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.45% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on December 27, 2011, 2012, 2013 and 2014. Borrowings under the loan agreement are secured 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 95 million ($14.5 million). The first 50% of the loan was drawn down in November 2009 and the remaining 50% of the loan was drawn down in March 2010. All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.45% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on November 26, 2012, 2013 and 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 ($7.6 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 (5.85% per annum on March 31, 2011 and adjustable on the anniversary date of the agreement based on the prime rate published by the People’s Bank of China for loans with the same or similar terms) and are payable on June 10, 2011. Borrowings under the loan agreement are secured by the land use right, property and plant of Henan Zhongpin.




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 ($12.2 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 (6.10% per annum on March 31, 2011). 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. As of March 31, 2011, $4.6 million of the principal amount of the loan remained outstanding.


15


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





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. As of March 31, 2011, Rabobank has waived the right to enforce any and all covenants against Henan Zhongpin on this term loan going forward.




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 November 15, 2041. Borrowings under the loan agreement are guaranteed by the Financing Department of Henan province.




9.           EQUITY TRANSACTIONS




During the three months ended March 31, 2011, warrants to purchase an aggregate of 15,000 units were exercised on a cashless basis. Each unit is comprised of two shares of the Company’s Series A preferred stock and a five-year warrant to purchase one share of the Company’s common stock with the exercise price of $5.00 per share. At the time of exercise of the unit warrants, the holders also exercised the underlying warrants to purchase shares of common stock. In connection with these transactions, the Company issued an aggregate of 17,342 shares of common stock. For cash flow purposes, these transactions were non-cash transactions.




On March 22, 2011, the Company issued 5,000,000 shares of common stock at $14.10 per share in a underwritten public offering. The net proceeds the Company received from the sale of common stock in this offering were approximately $66.4million. The Company will use approximately 60% of the proceeds to fund the Company’s capacity expansion and 40% for general corporate purposes.




On March 31, 2009, the Company granted stock options to its Chief Financial Officer to purchase an aggregate of 100,000 shares of the Company’s common stock, exercisable in accordance with the following schedule: 33,000 options vesting on March 31, 2010 with an exercise price of $8.88 per share, equal to the closing price of the Company’s common stock on March 31, 2009, 33,000 options vesting on March 31, 2011 with an exercise price of $12.70 per share, equal to the closing price of the Company’s common stock on March 31, 2010, and 34,000 options vesting on March 31, 2012 with an exercise price of $15.15 per share, equal to the closing price of the Company’s common stock on March 31, 2011. 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 of 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.


16


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





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:





Three Months Ended March 31,2011


2010Expected life (years)


3



3-5Expected volatility


57.76
%


33.22
%Risk-free interest rate


1.342
%


1.60
%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 Bulletins 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.





During the three months ended March 31, 2011 and 2010, the stock-based compensation expenses were $368,627 and $473,472, respectively.




10.         EARNINGS PER SHARE




The following table sets forth the computation of basic and diluted net earnings per share for the periods indicated:




Three Months Ended

March 31,2011


2010(Unaudited)


(Unaudited)Numerator:Net income attributable to common shares

$
16,833,042


$
13,250,463Denominator:Weighted average number of common shares outstanding – basic


35,850,877



34,715,466Dilutive effect of stock options


373,144



507,344Weighted average number of common shares outstanding – diluted


36,224,021



35,222,810Basic earnings per share

$
0.47


$
0.38Diluted earnings per share

$
0.47


$
0.38




17


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





All potentially dilutive securities were included in diluted earnings per share as the average market price is greater than the exercise price of the warrants and options outstanding.




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 logistics 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 vegetable and fruit production facility. All subsidies were accounted for based on evidence that cash has been received and the earmarked activities have taken place. 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 months ended March 31, 2011 and 2010 were as follows:





Three Months Ended

March 31,2011


2010Deferred subsidies opening balance:Interest subsidies

$
—


$
—Earmarked subsidies


—



—Non-earmarked subsidies


—



—Total

$
—


$
—Subsidies received:Interest subsidies

$
—


$
306,947Earmarked subsidies


—



—Non-earmarked subsidies


1,114,621



625,156Total

$
1,114,621


$
932,103Subsidies recognized:Interest subsidies

$
—


$
306,947Earmarked subsidies


—



—Non-earmarked subsidies


1,114,621



625,156Total

$
1,114,621


$
932,103Deferred subsidies year ending balance:Interest subsidies

$
—


$
—Earmarked subsidies


—



—Non-earmarked subsidies


—



—Total

$
—


$
—




18


ZHONGPIN INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





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 vegetable and fruit operations, both financially and operationally, do not represent a significant enough portion of its business to constitute a separate segment. However, the Company’s product lines are divided into two divisions: pork and pork products, and vegetables and fruits.




The pork and pork products division is involved primarily in the processing of live hogs into fresh, frozen and processed pork products. The pork and pork products division markets its products domestically to retail stores and to food retailers, food service distributors, restaurant operators and noncommercial food service establishments, such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as in certain international markets on a limited basis.




The vegetables and fruits division is involved primarily in the processing of fresh vegetables and fruits. The Company contracts with more than 100 farms in Henan province and nearby areas to produce high-quality vegetable varieties and fruits suitable for export purposes. The proximity of the contracted farms to operations ensures freshness from harvest to processing. The Company contracts with those farms to grow more than 35 categories of vegetables and fruits, including asparagus, sweet corn, broccoli, mushrooms, lima beans and strawberries.




Sales by Division(U.S. dollars in millions)Three Months EndedMarch 31,2011


2010(Unaudited)


(Unaudited)Pork and Pork Products:Chilled Pork

$
168.6


$
114.7Frozen Pork


73.5



50.4Prepared Pork Products


41.3



36.3Vegetables and Fruits


2.4



2.9Total

$
285.8


$
204.3Cost of SalesPork Products

$
248.0


$
177.0Vegetables and Fruits


1.9



2.4Gross Profit Margin:Pork Products


12.5
%


12.1
%Vegetables and Fruits


20.8
%


17.2
%




19


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 Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.




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 release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Report or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this Report is a statement of our intention as of the date of this Report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.




Overview




We are principally engaged in the meat and food processing and distribution business in China. Currently, we have 13 processing plants in China, located in Henan, Jilin and Sichuan provinces and in the municipality of Tianjin. Our current total production capacity for chilled pork and frozen pork is approximately 1,566 metric tons per eight-hour day, or approximately 563,760 metric tons on an annual basis. In addition, we 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 vegetables and fruits of approximately 83.3 metric tons per eight-hour day, or approximately 30,000 metric tons on an annual basis. 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 processing facilities.




In December 2009, the PRC Ministry of Commerce issued the Hog Slaughtering Industry Development Guidelines for 2010−2015. The guidelines state that the government will control the number of slaughterhouses in China and specifically that there should be less than four slaughterhouses in urban areas of municipalities and cities with a resident population of five million or more, and less than two slaughterhouses in urban areas of other cities at or above the prefecture level.


20





In June 2010, the China Meat Association (“CMA”) announced the China Meat Industry Development Strategy Report for 2011−2015. In that report, CMA provided a development roadmap and targets for the meat industry for the coming five years:





Ø
By 2015, to decrease the 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 the sales of chilled pork to around 30% of the total pork sales in China;




Ø
By 2015, to decrease the 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, Northeast China, East China and Southwest China.




The report indicates to us that there is an opportunity to consolidate and integrate the industry for companies with strong brand recognition in China's meat industry, high quality facilities and products, strict quality control systems and cold chain logistics capabilities.





Government and consumers take food safety as one of their top priorities. With the PRC government’s support, the consolidation of the industry is accelerating.





Our growth strategy will include expanding our production capacity in certain strategic locations in response to the suggestions in the report. We plan to build new facilities for chilled and frozen pork, as well as new facilities for prepared pork products and cold chain logistic distribution centers. We may also explore opportunities to acquire companies with strong regional brand recognition that produce prepared pork products using high quality facilities. We expect that these new facilities, together with our existing ones, will help us to build “Zhongpin” into a stronger, national brand, increase our market share, revenues and net income and strengthen our ability to take advantage of consolidation opportunities in the meat industry in China.





We put the new facility in Tianjin with a production capacity of approximately 100,000 metric tons for chilled and frozen pork into operation in January 2010. The construction of phase two of the facility, with a production capacity of approximately 36,000 metric tons for prepared pork products started in October 2010. We expect to put it into operation in the second quarter of 2011.




We are 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, Changchun, 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 started in September 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 are 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 started in October 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.




We expect to invest approximately $58.5 million to build a new production, research and development, and training complex in Changge, Henan province excluding the cost of land use rights that we have already obtained. When completed, we anticipate that this new facility will have a production capacity of approximately 100,000 metric tons for prepared pork products. Adjacent to this new production facility, we also plan to develop a center for research and development, training, as well as quality control. Construction for the first phase with a production capacity of approximately 50,000 metric tons for prepared pork products started in the first quarter of 2011 and is scheduled to be completed by the third quarter of 2011, and we expect the second phase, also with a production capacity of approximately 50,000 metric tons for prepared pork products, to be completed by the fourth quarter of 2012. We plan to open the research and development and training center by the fourth quarter of 2012.




21


We are in the progress to set up a joint venture company with Henan Xinda Animal Husbandry Co., Ltd. The new company will provide 20,000 sire boars annually. We expected to obtain the business license for the new company in June 2011. We are building infrastructures for sire boars breeding and plan to start operation in the third quarter of 2011.




Our products are sold under the “Zhongpin” brand name. As of March 31, 2011, our wholesale customers included 32 international and domestic fast food companies in China, 61 processing factories and 1,699 school cafeterias, hotels, factory canteens, army bases, and government departments. As of such date, we also sold directly to 3,378 retail outlets, including supermarkets, within China.




We have established distribution networks in 20 provinces and in the four central government- administered municipalities of Beijing, Shanghai, Tianjin and Chongqing in the North, East, South and Mid-South regions of China, and have also formed strategic business alliances with leading supermarket chains within China.  We also export our products to Europe, Hong Kong as well as other selected countries and regions in Asia.




As of March 31, 2011, we had 7,180 employees, of whom 5,416 were operating personnel, 1,320 were sales personnel, 122 were research and development personnel and 322 were administrative personnel. We are not subject to any collective bargaining agreement and we believe our relationship with our employees is good.




Critical Accounting Policies




Unless otherwise noted, all translations from RMB to U.S. dollars were made at the middle rate published by the People’s Bank of China, or the middle rate, as of March 31, 2011, which was RMB6.5564 to $1.00. We make no representation that the RMB amounts referred to in this Quarterly Report on Form 10-Q could have been or could be converted into U.S. dollars at any particular rate or at all. On May 4, 2011, the middle rate was RMB6.5013 to $1.00.




Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  We continually evaluate our policies and estimation procedures. Estimates are often based on historical experience and on assumptions that are believed to be reasonable under the circumstances, but which could change in the future.  Actual results may differ from these estimates under different assumptions or conditions.




Critical accounting policies are defined as those that are reflective of significant judgments, estimates and uncertainties, and potentially result in materially different results under different assumptions and conditions.  We believe the following are our critical accounting policies:




Revenue Recognition.  Revenues generated from the sale of various meat products and vegetables and fruits are recognized when these products are delivered to customers in accordance with previously-agreed-upon pricing and delivery arrangements, and the collectability of these sales is reasonably assured.  Since the products sold by us are primarily perishable and frozen food products, the right of return is only 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.




22


We regularly evaluate and monitor the creditworthiness of each of our customers in accordance with the prevailing practice in the meat industry, considering factors such as general economic conditions and industry-specific economic condition in China, historical customer performance, as well as anticipated customer performance.  We maintain a general policy of providing 100% allowance for doubtful accounts in an amount equal to the aggregate amount of those accounts that are not collected within one year plus an amount equal to 5% of the aggregate amount of accounts receivable less than one year old.  After all attempts to collect a receivable have failed, the receivable is written off against the allowance.  We also examine the credit terms of significant customers regularly and ask for more cash deposits if these customers appear to have any indicators of delaying their payments to us.  Such deposits are usually applied towards the outstanding accounts receivable.  With such a practice in place, we did not have any specific bad debt allowance provided against specific customers as of March 31, 2011.




Inventories.  Inventories are stated at the lower of cost, determined on a weighted average basis, and net realizable value.  Work-in-progress and finished goods are composed of direct material, direct labor and an attributable portion of manufacturing overhead.  Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose.




Results of Operations




In 2011, 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.




In 2011, we expect the demand for pork in China and the results of the pork and pork products segment of our business to remain strong.  While supply is expected to be ample, live hog prices increased in the first quarter of 2011 and are expected to increase slightly in the second quarter of 2011, and we expect hog prices to remain at a high level in the second half of 2011. We anticipate that our gross profit margin in 2011 will remain stable.




Comparison of Three Months Ended March 31, 2011 and 2010




Revenue. Total revenue increased from $204.3 million for the three months ended March 31, 2010 to $285.8 million for the three months ended March 31, 2011, which represented an increase of $81.5 million, or approximately 40%. The increase in revenues was primarily due to increased average selling prices of our products in response to the increase of hog prices in the market, and increased sales volume in our meat and meat products segment resulting from the increase in the number of our retail stores, geographic expansion and increased sales to food service distributors in China during the first quarter of 2011.  The following table presents certain information regarding our sales by product division for the three months ended March 31, 2011 and 2010.




Sales by Division(unaudited)Three Months Ended

March 31, 2011


Three Months Ended

March 31, 2010Metric

Tons


Sales

Revenues

(in millions)


Average

Price/

Metric

Ton


Metric

Tons


Sales

Revenues

(in millions)


Average

Price/

Metric

TonPork and Pork ProductsChilled pork


70,099


$
168.6


$
2,405



64,418


$
114.7


$
1,781Frozen pork


32,736



73.5



2,245



32,845



50.4



1,534Prepared pork products


20,114



41.3



2,053



16,047



36.3



2,262Vegetables and Fruits


3,288



2.4



730



3,952



2.9



734Total


126,237


$
285.8


$
2,264



117,262


$
204.3


$
1,742


23


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 quarter of 2011, we increased our sales of chilled pork products by approximately $53.9 million over the amount of our sales of such products in the first quarter of 2010. As shown in the table above, our average price during the first quarter of 2011 was approximately $2,405 per metric ton for chilled pork, compared to $1,781 during the first quarter of 2010, an increase of 35%.  The number of metric tons of chilled pork sold during the first quarter of 2011 increased by 5,681, or 9% from the first quarter of 2010.  Our total revenue increased primarily due to the increase in average selling prices of our chilled products as a result of fluctuations in the market price of pork or pork-related products and changes of our product mix among this product sector. Also the total revenue increased due to successful capacity expansion, increased sales to existing customers, and 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 quarter of 2011, we increased our sales of frozen pork products by approximately $23.1 million over the amount of our sales of such products in the first quarter of 2010. Our average price during the first quarter of 2011 was approximately $2,245 per metric ton for frozen pork compared to $1,534 during the first quarter of 2010, an increase of 46%.  The number of metric tons of frozen pork sold during the first quarter of 2011 decreased by 109, or 0.3% from the first quarter of 2010.  Despite the slight decrease in sales volume, our total revenue still increased due to the significant increase in average price in the first quarter of 2011 as a result of fluctuations in the market price of pork or pork-related products.





In the first quarter of 2011, we increased our sales of prepared pork products by approximately $5.0 million over the amount of our sales of such products in the first quarter of 2010. Our average price during the first quarter of 2011 was approximately $2,053 per metric ton for prepared pork products compared to $2,262 during the first quarter of 2010, a decrease of 9%. The number of metric tons of prepared pork products sold during the first quarter of 2011 increased by 4,067, or 25% from the first quarter of 2010.  This product sector is becoming more important to our business as customers increasingly demand prepared pork products. The average selling price of this product sector dropped because we intentionally increased sales of high volume, middle-end products of this sector, which have lower price, to seize more market share in these products. Even with a lower average selling price, we maintained a high level margin for this sector. We plan to gradually increase sales from prepared pork products by building up our brand recognition and expanding our capacities for this sector.





The sales of meat and vegetable products are closely related to the particular regional markets in which our distribution channels are located. Therefore, the increase in metric tons sold for the first quarter of 2011 was partly attributable to our efforts to expand our distribution channels. The following table sets forth the changes in our distribution channels:




Numbers of Stores and Cities Generating Sales Volume

(unaudited)March 31,


Net


Percentage2011


2010


Change


of ChangeShowcase stores


165



148



17



11
%Branded stores


1,105



1,017



88



9
%Supermarket counters


2,108



2,055



53



3
%Total


3,378



3,220



158



5
%First-tier cities


29



29



—



—Second-tier cities


131



125



6



5
%Third-tier cities


424



393



31



8
%Total


584



547



37



7
%


24




The expansion in our distribution channels and geographical coverage has been a significant factor in the increase in our sales volume. The following table shows our revenues by distribution channel for the first quarter of 2011 and 2010, respectively.




Sales by Distribution Channel

(Dollars in millions)

(unaudited)Three months ended

March 31,


Net

Change


Percentage

of Change2011


2010Retail channels

$
107.7


$
84.6


$
23.1



27
%Wholesalers and distributors


97.4



62.2



35.2



57
%Restaurants and food services


77.2



56.2



21.0



37
%Export


3.5



1.3



2.2



169
%Total

$
285.8


$
204.3


$
81.5



40
%




The increase in sales to different distribution channels was mainly due to the following factors:




·
our production capacity has increased since we completed the expansion project of our facility in Anyang in August 2010 and we maintained our utilization rate for all facilities;





·
we have built up our brand image and brand recognition through general advertising display promotions and sales campaigns;





·
we have increased the number of stores and other channels through which we sell our products; and





·
we believe consumers are placing increased importance on food safety and are willing to pay higher prices for safe food products.




During the three months ended March 31, 2011, revenues from export sales increased to $3.5 million, which represented an increase of $2.2 million, or approximately 169%, as compared to the three months ended March 31, 2010.




Cost of Sales. Our cost of sales primarily includes our costs of raw materials, labor costs and overhead. Of our total cost of sales, our costs of raw materials typically account for approximately 95% to 97%, our overhead typically accounts for 2% to 3.5% and our labor costs typically account for 1.5% to 1.7%, with slight variations from period to period. All of our meat products are derived from the same raw materials, which are live hogs. Our vegetable and fruit products are purchased from 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.


25





Cost of Sales by Division(unaudited)Three Months Ended

March 31, 2011


Three Months Ended

March 31, 2010Metric

Tons


Cost of

Sales

(in millions)


Average

Price/

Metric

Ton


Metric

Tons


Cost of

Sales

(in millions)


Average

Price/

Metric

TonPork and Pork ProductsChilled pork


70,099


$
149.6


$
2,134



64,418


$
102.1


$
1,585Frozen pork


32,736



67.8



2,071



32,845



46.3



1,410Prepared pork products


20,114



30.6



1,521



16,047



28.6



1,782Vegetables and Fruits


3,288



1.9



578



3,952



2.4



607Total


126,237


$
249.9


$
1,980



117,262


$
179.4


$
1,530




Our gross profit margin (gross profit divided by sales revenue) increased from 12.2% for the three months ended March 31, 2010 to 12.6% for the three months ended March 31, 2011. The increase in our gross margin during the first quarter of 2011 was primarily due to (i) our efforts to adjust our production levels and product mix and the percentages of our sales through our different sales channels, (ii) the selling prices of pork and pork products remaining at a high level, and (iii) the willingness of consumers to pay a higher price for high quality products.




General and Administrative Expenses. General and administrative expenses increased from $6.1 million for the three months ended March 31, 2010 to $6.4 million for the three months ended March 31, 2011 which represented an increase of $0.3 million, or approximately 5%.  As a percentage of revenues, general and administrative expenses decreased from 3.0% for the three months ended March 31, 2010 to 2.3% for the three months ended March 31, 2011.




The increase in general and administrative expenses during the three months ended March 31, 2011 was primarily the result of a $0.1 million increase in intangible assets amortization expense due to more land use rights we purchased for company expansion, and a $0.2 million increase in insurance expenses.




Selling Expenses. Selling expenses increased from $4.3 million for the three months ended March 31, 2010 to $6.3 million for the three months ended March 31, 2011, which represented an increase of $2.0 million, or approximately 47%. The increase in selling expenses was primarily the result of our increased sales of pork and pork products and was primarily due to a $0.7 million increase in salary expenses and a $0.9 million increase in transportation expenses. As a percentage of revenue, selling expenses increased from 2.1% for the three months ended March 31, 2010 to 2.2% for the three months ended March 31, 2011.




Interest Expense (net of interest income). Interest expense increased from $1.4 million for the three months ended March 31, 2010 to $5.4 million for the three months ended March 31, 2011, which represented an increase of $4.0 million, or approximately 286%. The increase in interest expense net of interest income was primarily due to (i) higher interest rates for the first quarter of 2011 compared to same period of the prior year because the People’s Bank of China increased interest rates, (ii) higher outstanding loan balances as of March 31, 2011 compare to March 31, 2010 and (iii) the fact that we cashed more bank notes before maturity in the first quarter of 2011.




Other Income, Exchange Gain and Government Subsidies. Other income, exchange gain and government subsidies decreased from $1.2 million for the three months ended March 31, 2010 to $1.0 million for the three months ended March 31, 2011,which represented a decrease of $0.2 million, or approximately 17%. We have experienced an increase in government subsidies of approximately $0.5 million for the three months ended March 31, 2011 because by expanding into new regional markets and constructing new facilities in new areas, we have recently qualified to apply for more government subsidies.  The PRC government provides subsidies to support businesses in the agriculture and related industries, such as ours.  Our business, including hog breeding, pork processing, vegetable and fruit processing and cold-chain logistics as well as related food safety and technological innovations, all enjoy policy support from the PRC government. We expect to continue to receive government subsidies in future periods, as the PRC government continues its policy of promoting agriculture and related industries.




26


Income Taxes. The effective tax rate in China on income generated from the sale of prepared products is 25% and there is no income tax on income generated from the sale of raw products, including raw meat products and raw vegetable and fruit products. The increase of $0.5 million in the provision for income taxes for the three months ended March 31, 2011 over the three months ended March 31, 2010 resulted from the increased sales of prepared meat products.




Segment Information




Under generally accepted accounting principles in the United States, we operate in only one segment: meat production.  Our vegetable and fruit operations, both financially and operationally, do not represent a significant enough portion of our business to constitute a separate segment.  However, our product lines have been divided into two divisions: pork and pork products, and vegetables and fruits.




Our pork and pork products division is involved primarily in the processing of live hogs into fresh, frozen and processed pork products. Our pork and pork products division markets its products domestically to our retail stores, food retailers, food service distributors, restaurant operators and noncommercial food service establishments, such as schools, hotel chains, healthcare facilities, the military and other food processors, as well as to international markets on a limited basis.




Our vegetables and fruits division is involved primarily in the processing of fresh vegetables and fruits. We contract with more than 100 farms in Henan province and nearby areas to produce high-quality vegetable varieties and fruits suitable for export. The proximity of the contracted farms to our operations ensures freshness from harvest to processing. We contract to grow more than 35 categories of vegetables and fruits, including asparagus, sweet corn, broccoli, mushrooms, lima beans, strawberries and capsicum.




The following tables show our sales in metric tons and production processed in metric tons by division for the three months ended March 31, 2011 and 2010 and the percentage increases for each division between periods.




Sales by Division

(in metric tons)Three Months Ended

March 31,2011


2010


Net Change


% Change(Unaudited)


(Unaudited)Pork and Pork ProductsChilled pork


70,099



64,418



5,681



9
%Frozen pork


32,736



32,845



(109
)


0
%Prepared pork products


20,114



16,047



4,067



25
%Vegetables and Fruits


3,288



3,952



(664
)


17
%Total


126,237



117,262



8,975



8
%


27





Production by Division

(in metric tons)Three Months Ended

March 31,2011


2010


Net Change


% Change(Unaudited)


(Unaudited)Pork and Pork ProductsChilled pork


70,695



64,385



6,310



10
%Frozen pork


35,266



40,478



(5,212
)


(13
)%Prepared pork products


20,610



15,874



4,736



30
%Vegetables and Fruits


3,227



3,899



(672
)


(17
)%Total


129,798



124,636



5,162



4
%




Additional Operating Data




In assessing our existing operations and planning our future growth and the development of our business, management considers, among other factors, our revenue growth and growth in sales volume by market segment, as well as our sales by distribution channel and geographic market coverage.




The following table sets forth information with respect to the number of products we offered, the number of stores in our retail network and the number of provinces and cities in China in which we offered and sold our products as of March 31, 2011 and December 31, 2010, 2009 and 2008.




December 31,March 31, 2011


2010


2009


2008Number of products


433



429



392



314Number of retail stores


3,378



3,326



3,205



3,061Expansion of Market CoverageNumber of provinces


24



24



24



24Number of first-tier cities


29



29



29



29Number of second-tier cities


131



130



120



106Number of third-tier cities


424



421



383



324




Liquidity and Capital Resources




As of March 31, 2011 and December 31, 2010, we had cash and cash equivalents of $177.6 million and $84.2 million, respectively. As of March 31, 2011, our working capital was approximately $90.9 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.




28


For the three months ended March 31, 2011, net cash provided by operating activities was $9.9 million, which represented an increase of $2.8 million as compared to the net cash provided by operating activities of $7.1 million for the same period of 2010. Of the $2.8 million increase, net income accounted for $3.6 million, non-cash items accounted for $1.3 million and changes in operating assets and liabilities accounted for negative $2.1 million. Of the non-cash items, depreciation and amortization accounted for $1.4 million of change due to the fact that more plants, equipment and machinery were put into use.




Cash flow from changes in operating assets and liabilities decreased by approximately $2.1 million, as compared to the changes in operating assets and liabilities of $20.7 million for the same period of the prior year. The $2.1 million decrease is primarily contributed by a $4.9 million decrease in cash flow from inventories, a $2.1 million decrease in cash flow from purchase deposits due to the fact that we paid more purchase deposits in the first quarter of 2011 to support our expansion, offset by a $5.6 million increase in cash flow due to the increase in accounts payable .




Net cash used in investing activities was $68.4 million for the three months ended March 31, 2011, which represented an increase of $50.9 million as compared to the net cash of $17.5 million used in investing activities for the same period of the prior year. We spent $16.1 million more on the deposit for land use rights and $42.2 million more on restricted cash so that we can use more bank notes to pay for our purchases during the three months ended March 31, 2011 compared to the same period of 2010.




Net cash provided by financing activities was $151.0 million during the three months ended March 31, 2011, an increase of $153.2 million compared to the net cash used in financing activities of $2.2 million for the same period of the prior year. We received $80.9 million more in net proceeds from bank notes, $30.7 million more in net proceeds from short-term bank loans, and $66.4 million more in net proceeds from issuing new shares of common stock during the three months ended March 31, 2011. We repaid $25.2 million long-term bank loans during the three months ended March 31, 2011.




As of March 31, 2011, Henan Zhongpin had short-term and long-term bank and government loans in the aggregate amount of $201.9 million with interest rates ranging from 5.00 % to 7.00% per annum, as follows.


29





Bank

Amount

Borrowed


Interest Rate

Maturity DateShort-term LoansChina Everbright Bank

$
7,626,136



5.56
%
11/11/2011China Construction Bank


7,626,136



5.04
%
07/25/20116,100,909



5.00
%
11/11/2011China CITIC Bank


4,575,682



6.36
%
06/25/2011Agriculture Development Bank of China


4,370,006



6.06
%
07/08/20113,050,455



5.31
%
09/28/2011China Minsheng Bank


2,135,318



6.36
%
01/26/20122,440,364



6.36
%
03/16/2012China Merchants Bank


4,575,682



6.06
%
08/31/20114,575,682



6.06
%
12/13/20116,863,523



6.06
%
07/30/20112,287,841



6.06
%
08/10/20114,575,682



6.16
%
07/26/2011Xuchang Commercial Bank


3,050,455



5.45
%
05/11/2011Rabobank Nederland


7,626,136



6.16
%
06/21/20117,626,136



5.88
%
06/30/2011Zhongyuan Trust Co., Ltd.


24,403,636



5.96
%
09/28/2011City Finance –short-term


30,503



0.00
%
ExtendableTotal

$
103,540,282Long-term Loan-Current portionCanadian Government Transfer Loan


145,671



6.02
%
11/15/2011China Construction Bank


7,626,136



5.85
%
06/10/2011Rabobank Nederland


4,575,682



6.10
%
07/09/2011Agriculture Bank of China


1,525,227



6.45
%
12/27/20111,525,227



6.45
%
03/18/2012Total

$
15,397,943Long-term LoansChina Construction Bank


6,100,909



4.86
%
06/29/2013Agriculture Bank of China


1,525,227



6.45
%
03/18/20131,525,227



6.45
%
03/18/20142,287,841



6.45
%
12/27/2014762,614



6.45
%
09/17/2012762,614



6.45
%
09/17/20139,913,977



6.45
%
12/17/20142,287,841



6.45
%
12/27/20122,287,841



6.45
%
12/27/20133,813,068



6.45
%
12/27/20147,626,136



6.45
%
06/30/201210,676,591



6.45
%
06/30/20131,525,227



6.45
%
06/30/20143,813,068



6.10
%
12/10/201310,829,114



6.10
%
02/03/2013China Merchants Bank


3,050,455



6.45
%
11/26/20124,575,682



6.45
%
11/26/20136,863,522



6.45
%
11/26/2014Changge Old Town


1,556,467



7.00
%
ExtendableCanadian Government Transfer Loan


1,197,757



*

11/15/2041Total

$
82,981,178





* 22% 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 as of March 31, 2011, $45.8 million aggregate principal amount of loans was guaranteed by our subsidiaries in China and $22.9 million aggregate principal amount of loans was guaranteed by Henan Huanghe Enterprises Group Co., Ltd., a group corporation that is not affiliated with our company or with any of our subsidiaries.




In April 2011, Henan Zhongpin signed a strategic cooperation frame agreement (the "Agreement") with China Construction Bank, Henan Branch (“CCB Henan”). Under the Agreement, CCB Henan agreed to provide approximately RMB 10 billion ($1.5 billion) in loans and financial services to assist our growth. We need to negotiate separately with CCB Henan about interest rates and other terms for any loans under the Agreement.




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In December 2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 25 million ($3.8 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 (6.10% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable on December 10, 2013.  Borrowings under the loan agreement are secured by the land use right, property and plant of Henan Zhongpin.




In September 2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 75 million ($11.4 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.45% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on September 17, 2012, 2013 and December 27, 2014.  Borrowings under the loan agreement are guaranteed by our wholly owned subsidiary, Yongcheng Zhongpin Food Company Limited.




In July 2010, Tianjin Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Tianjin Zhongpin may borrow up to RMB 300 million ($45.8 million). Tianjin Zhongpin drew down RMB 50 million ($7.6 million) in July 2010 and RMB 80 million ($12.2 million) in November 2010. All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.45% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments in June 2012, 2013, 2014 and 2015.  Borrowings under the loan agreement are secured by the land use right, property and plant of Tianjin Zhongpin.




In June 2010, Henan Zhongpin entered into a loan agreement with China Construction Bank pursuant to which Henan Zhongpin borrowed RMB 40 million ($6.1 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 (4.86% per annum on March 31, 2011 and adjustable on the anniversary of date of the agreement based on the prime rate published by the People’s Bank of China for loans with the same or similar terms) and are payable on June 29, 2013.  Borrowings under the loan agreement are secured by the land use right, property and plant of Henan Zhongpin.




In April 2010, in connection with the purchase of a piece of land from Changge Old Town,  Changge Old Town extended a loan to Henan Zhongpin with a principal amount of RMB 10.2 million ($1.6 million) and bearing interest at the rate of 7.00% per annum payable on June 30, 2010 and each anniversary thereafter. Such loan does not have a fixed term and the principal amount of the loan should be repaid by Henan Zhongpin upon six months prior written notice from Changge Old Town.




In March 2010, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 53 million ($8.1 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.45% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on March 18, 2011, 2012, 2013 and 2014 and December 27, 2014.  Borrowings under the loan agreement are secured by the land use right, property and plant of Henan 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 ($10.8 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 (6.10% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable on February 3, 2013.  Borrowings under the loan agreement are secured by the land use right, property and plant of Henan Zhongpin.




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In December 2009, Henan Zhongpin entered into a loan agreement with Agriculture Bank of China pursuant to which Henan Zhongpin borrowed RMB 70 million ($10.7 million). All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.45% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on December 27, 2011, 2012, 2013 and 2014.  Borrowings under the loan agreement are secured 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 95 million ($14.5 million). The first 50% of the loan was drawn down in November 2009 and the remaining 50% of the loan was drawn down in March 2010. All amounts borrowed under the loan agreement bear interest at a floating rate that is based on the prime rate published by the People’s Bank of China for loans with the same or similar terms on the drawdown date (6.45% per annum on March 31, 2011 and adjustable in the month immediately following the publishing of rate adjustments by the People’s Bank of China during the term of the loan) and are payable in installments on November 26, 2012, 2013 and 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 ($7.6 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 (5.85% per annum on March 31, 2011 and adjustable on the anniversary date of the agreement based on the prime rate published by the People’s Bank of China for loans with the same or similar terms) and are payable on June 10, 2011.  Borrowings under the loan agreement are secured by the land use right, property and plant of Henan Zhongpin.




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 ($12.2 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 (6.10% per annum on March 31, 2011). 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.  As of March 31, 2011, $4.6 million of the principal amount of the loan remained outstanding.




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.  As of March 31, 2011, Rabobank has waived the right to enforce any and all covenants against Henan Zhongpin on this term loan going forward.




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 November 15, 2041.  Borrowings under the loan agreement are guaranteed by the Financing Department of Henan province.





We believe our existing cash and cash equivalents, together with our ability to secure bank borrowings, will be sufficient to finance our investment in new facilities, with budgeted capital expenditures of approximately $132.7 million over the next 12 months, and to satisfy our working capital needs. We intend to satisfy our short-term debt obligations that mature over the next 12 months through additional short-term bank loans, in most cases by rolling the maturing loans into new short-term loans with the same lenders as we have done in the past.


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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, 2010.





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 China, with the exception of our export business and limited overseas purchases of raw materials.  Most of our sales and purchases are conducted within China in RMB, which is the official currency of China.  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 China.




Interest Rate Risk. We are exposed to interest rate risk through our short-term and long-term loans. We have $103.5 million short-term bank loans and $83.0 million long-term bank loans outstanding as of March 31, 2011, and we have not used any derivative financial instruments or engaged in any interest rate hedging activities to manage our interest rate risk exposure. Our future interest expense on short-term or long-term bank loans may increase or decrease due to changes in market interest rates. We monitor interest rates in conjunction with our cash requirements to determine the appropriate level of bank loans relative to other sources of funds.




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.




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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.


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Part II – Other Information





Item 1.       Legal Proceedings





None.





Item 1A.    Risk Factors





During the three months ended March 31, 2011, 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, 2010.





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





(a)           None.





(b)           None.





Item 6.   Exhibits





The exhibits required by this item are set forth on the Exhibit Index attached hereto.


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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.





Zhongpin Inc.(Company)Date:  May 9, 2011By:
/s/ Xianfu ZhuXianfu ZhuChief Executive OfficerBy:
/s/ Feng WangFeng WangChief Financial Officer


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Exhibit Index





Exhibit

Number

Exhibit Title31.1*

Certification of our Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*

Certification of our Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*

Certification of our Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*

Certification of our Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.





*
Filed herewith


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