UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
Date
of
Report (Date of Earliest Event Reported): June 6, 2007
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MILLENNIUM
QUEST, INC.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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0-31619
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87-0430320
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(State
of Incorporation)
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(Commission
File No.)
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(IRS
Employer ID No.)
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Beihuan
Road
Junan
County
Shandong,
China 276600
(Address
of Principal Executive Offices)
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(86)
539-7318818
Registrant’s
Telephone Number, Including Area Code:
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(Former
name or former address, if changed since last report)
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Check
the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under
any
of the following provisions (see General Instruction A.2.
below):
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o
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Written
communications pursuant to Rule 425 under the Securities Act (17
CFR.425)
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o
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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o
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act
(17 CFR
240.14d-2(b))
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o
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act
(17 CFR
240.13e-4(c))
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SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
current report contains forward-looking statements that involve substantial
risks and uncertainties. You can identify these statements by forward-looking
words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,”
“may,” “plan,” “potential,” “should,” “will” and “would” or similar words. You
should read statements that contain these words carefully because they discuss
our future expectations, contain projections of our future results of operations
or of our financial position or state other forward-looking information. We
believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able
to
predict accurately or control. The occurrence of the events described in this
current report could have a material adverse effect on our business, results
of
operations and financial position.
USE
OF TERMS
Except
as otherwise indicated by the context, references in this report to “Millennium
Quest” are references to Millennium Quest, Inc., a Delaware corporation and
references to “Lorain Holding” are references to “International Lorain Holding,
Inc.”, a Cayman Islands corporation that is wholly-owned by Millennium Quest,
and Lorain Holding’s direct and indirect Chinese subsidiaries. References to
“we,” “us” or “our” are references to the combined business of Millennium Quest,
Inc., its wholly-owned subsidiary, Lorain Holding, and the direct and indirect
Chinese subsidiaries of Lorain Holding. The terms “Lorain Holding,” “we,” “us”
or “our” do not include the selling stockholders. Unless the context otherwise
requires, the term “Junan Hongrun” means Junan Hongrun Foodstuff CO., LTD. and
its Chinese operating subsidiaries. The term“Luotian
Lorain” means Luotian Green Foodstuff CO., LTD and its Chinese subsidiaries. The
term “Beijing Lorain” means Beijing Green Foodstuff CO., LTD. and its Chinese
subsidiaries. The term “Shandong Lorain” means Shandong Green Foodstuff CO.,
LTD. and its Chinese subsidiaries. The term “Securities Act” means the
Securities Act of 1933, as amended, and the term “Exchange Act” means the
Securities Exchange Act of 1934, as amended, the term “RMB” means Renminbi, the
legal currency of China and the terms “U.S. dollar,” “$” and “US$” mean the
legal currency of the United States. For
all U.S. dollar amounts reported, the company has calculated the dollar amount
on
the
basis that $1 = RMB 7.7409 for
March
31, 2007 in its balance sheet, and $1 = RMB
8.0352 for
its
March 31, 2006 balance sheet, which was determined based on the currency
conversion rate at the end of each such quarter. The conversion rate of $1
=
RMB
7.77136 is
used
for it first quarter 2007 income statement and cash flow items, and $1 = RMB
8.05582 for
its
first quarter 2006 income statement and cash flow items, which is based on
the
average currency conversion rate for each quarter. The detailed description
of
currency conversion is indicated in the audit report. References to “China” and
“PRC” are references to “People’s Republic of China.” References to “Cayman” or
“Cayman Islands” are references to the “Cayman Islands.”
ITEM
8.01 OTHER EVENTS
Following
the reverse acquisition transaction described in our Current Report on Form
8-K,
filed May 9, 2007 (the “Transaction 8-K”), we filed, on May 21, 2007, a
Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, which
contained the quarterly financial information of Millennium Quest which had
not
yet acquired Lorain Holding as of March 31, 2007. That Quarterly Report did
not,
include financial statements for the quarter ended March 31, 2007 of Lorain
Holdings, the accounting acquirer in the reverse acquisition transaction, as
the
reverse acquisition transaction was not consummated until after March 31, 2007
(it closed on May 3, 2007).
2
The
Transaction 8-K included financial statements of Lorain Holdings as of and
through December 31, 2006 (the most current then available), as required by
applicable reporting requirements.
In
order
to provide continuous interim quarterly reporting, we are including herein
our
unaudited condensed consolidated interim financial statements for the three
months ended March 31, 2007, and accompanying “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”, and certain other
disclosures with respect to our fiscal quarter ended March 31, 2007, as
follows.
FINANCIAL
STATEMENTS
Attached
hereto as Exhibit 99.1 are the financial statements of the company for the
quarter ended March 31, 2007.
MANAGEMENT
DISCUSSION AND ANALYSIS
Overview
We
are a
Delaware corporation that was incorporated on February 4, 1986 and we are
headquartered in Shandong Province, China. From our inception in 1986 until
May
3, 2007, when we completed a reverse acquisition transaction with Lorain
Holding, we were a blank check company and did not engage in active business
operations other than our search for, and evaluation of, potential business
opportunities for acquisition or participation.
We
develop, manufacture and sell convenience foods. Convenience foods like cut
fruit and premixed salads, which are known as lightly processed -- our
convenience foods include ready-to-cook (or RTC) meals, ready-to-eat (or RTE)
meals and meals ready-to-eat (or MREs), chestnut products, and frozen, canned
and bulk foods, in hundreds of varieties. We operate through our indirect
Chinese subsidiaries. Our products are sold in 19 provinces and administrative
regions in China and 23 foreign countries.
Background
and History of Lorain Holding and its Operating Subsidiaries and
Affiliates
Lorain
Holding was incorporated in the Cayman Islands in August 2006. Lorain Holding
presently has two direct, wholly-owned Chinese operating subsidiaries: Luotian
Lorain and Junan Hongrun, one indirect wholly owned operating subsidiary,
Beijing Lorain, and one majority-owned subsidiary, Shandong Lorain, which is
80.2% owned by us (with Shandong Economic Development Investment Co. Ltd. owning
the remaining 19.8% interest). We sometimes refer to these four Chinese
operating subsidiaries as the Lorain Group Companies.
3
Below
is
a structure chart showing the organization of our subsidiaries:
Shandong
Lorain was formed in 1995. Junan Hongrun was formed in 2002. Luotian Lorain
and
Beijing Lorain were both formed in 2003.
4
Recent
Developments
Acquisition
of International Lorain Holding, Inc. and Related Financing
Through
the reverse acquisition of Lorain Holding we acquired all of the issued and
outstanding capital stock of Lorain Holding, which became our wholly-owned
subsidiary, and in exchange for that capital stock we issued to the former
stockholders of Lorain Holding 697,663 shares of our Series B Voting Convertible
Preferred Stock, which shares of preferred stock will be convertible into
16,384,706 shares of our common stock immediately following the effectiveness
of
an amendment to our charter that, among other things, increases the number
of
our authorized shares of common stock from 20,000,000 to 200,000,000 and
effectuates a 1-for-32.84 reverse stock split. We
expect
to file this amendment to our certificate of incorporation on or about the
end
of June, 2007. Upon the consummation of the reverse acquisition, the former
stockholders of Lorain Holding became our controlling stockholders. We have
to
increase our authorized common stock so that there will be enough shares of
authorized common stock available for issuance upon conversion of our Series
B
Voting Convertible Preferred Stock into our common stock.
Upon
the
closing of the reverse acquisition, Timothy P. Halter, our sole director and
officer, submitted his resignation letter pursuant to which he resigned from
all
offices of Millennium Quest that he held effective immediately and from his
position as our director effective on May 12, 2007, the tenth day following
the
mailing by us of an information statement to our stockholders that complies
with
the requirements of Section 14f-1 of the Securities Exchange Act of 1934. Si
Chen, our Chairman, was appointed as our director and Chairman at the closing
of
the reverse acquisition of Lorain Holding and has become our sole director
when
Mr. Halter resigned from the board.
Contemporaneous
with the reverse acquisition, we also completed a private placement transaction
in which we issued and sold to accredited investors 299,050.78 shares of our
Series B Voting Convertible Preferred Stock for gross proceeds of approximately
$19.8 million. These shares of Series B Voting Convertible Preferred Stock
will
convert into 6,990,293 shares of our common stock at the effective time of
the
Amendment.
Contemporaneous
with the reverse acquisition, we also completed a private placement transaction
in which we issued and sold to accredited investors 299,055.78 shares of our
Series B Voting Convertible Preferred Stock and warrants for the purchase of
up
to an aggregate of 1,398,065 shares of our Common Stock for gross proceeds
of
approximately $19.8 million. These shares of Series B Voting Convertible
Preferred Stock will convert into 6,990,401 shares of our common stock at the
effective time of an amendment and restatement of our Restated Certificate
of
Incorporation that will, among other things, increase the number of shares
of
our authorized common stock from 20,000,000 to 200,000,000 shares and effectuate
a 1-for-32.84 reverse stock split. We have to increase our authorized common
stock so that there will be enough shares of authorized common stock available
for issuance upon conversion of our Series B Voting Convertible Preferred
Stock.
5
In
connection with the private placement mentioned above, our majority stockholder,
Mr. Hisashi
Akazawa,
entered
into an escrow agreement with the private placement investors. Pursuant to
the
escrow agreement, Mr. Akazawa agreed to certain “make good” provisions. In the
make good escrow agreement, we established minimum after tax net income
thresholds of $9.266 million for the fiscal year ending December 31, 2007 and
$12.956 million for the fiscal year ending December 31, 2008. If the minimum
after tax net income thresholds for the fiscal year 2007 or for the fiscal
year
2008 are not achieved, then the investors will be entitled to receive additional
shares of our common stock based upon a pre-defined formula agreed to between
the investors and Mr. Akazawa. Mr. Akazawa deposited a total of 299,050.78
shares of our Series B Voting Convertible Preferred Stock, which are convertible
into 6,990.29 shares of our common stock after the reverse stock split, into
escrow with Securities Transfer Corporation under the escrow
agreement.
In
connection with the private placement mentioned above, our majority stockholder,
Mr. Hisashi
Akazawa,
and our
Chief Executive Officer, Mr. Si Chen, entered into an escrow agreement with
the
private placement investors. Pursuant to the escrow agreement, Mr. Akazawa
and
Mr. Si Chen agreed to certain “make good” provisions. In the make good escrow
agreement, we established minimum after tax net income thresholds of $9.266
million for the fiscal year ending December 31, 2007 and $12.956 million for
the
fiscal year ending December 31, 2008. If the minimum after tax net income
thresholds for the fiscal year 2007 or for the fiscal year 2008 are not
achieved, then the investors will be entitled to receive additional shares
of
our common stock based upon a pre-defined formula agreed to between the
investors and Mr. Akazawa. Mr. Akazawa deposited a total of 302,336 shares
of
our Series B Voting Convertible Preferred Stock, which are convertible into
7,067,104 shares of our common stock after reverse stock split, into escrow
with
Securities Transfer Corporation under the escrow agreement.
Material
Opportunities and Challenges
Chestnuts
production
Opportunities
related to chestnut supplies
In
last
three years, the price of the raw chestnuts, as a whole, has shown a decrease
each year. Our production costs have decreased accordingly, which has allowed
us
to enhance our production capacity and maintain steady profit margins. In order
to reach the market for high-end customers, we have started to produce organic,
high quality, nutritious, and healthy chestnuts using a newly developed 165-acre
organic chestnut farm in Miyun county of Beijing City.
In
addition, due to the high fluctuation in price and the decreased production
of
chestnuts in South Korea, we have been encountering less competition from our
Korean competitors in recent periods. We realize there is substantial demand
for
Korean-produced chestnuts due to their well-recognized quality. Accordingly,
we
have devoted its research and development efforts to experimentally producing
the chestnuts with the same quality as Korea’s in Junan County of Shandong
province (where the weather and the soil are relatively similar to that of
in
Korea). Currently, we have successfully developed 329 acres of land that we
believe produces chestnuts similar to those in Korea. We will expand this
development to 1647 acres in the near future. We will be able to produce higher
quality chestnuts primarily using domestic materials from our own bases,
enabling us to substitute our domestically grown chestnuts to replace the Korean
supplied of chestnuts in the Chinese market within 5 years. Subsequently, our
costs of raw materials will be significantly decreased which will increase
our
net revenues.
6
Challenges
related to chestnuts supplies
Despite
the decreasing competition from South Korea, we may still face competition
from
North Korean producers if the export embargo prohibiting exports from North
Korea is removed in the future. North Koreans are able to obtain raw chestnuts
at a lower cost than we can and North Korean Competitor could have considerable
impact on us. We have been working on various strategies to prepare for the
potential entry of North Korean competitors into the chestnut market in order
to
be able to maintain our profit margins in the global market.
Vegetable
Production
Opportunities
related to vegetables production
We
have
recently obtained increased market share in the vegetable products market.
Due
to geographical advantages, our two subsidiaries, Shandong Lorain and Junan
Hongrun own the agricultural operation in Shandong Province. Due to the abundant
and various raw materials as well as their lower costs, these two companies
have
fully met the demand for vegetables in its market. In order to secure price
stability and supply of raw materials, as well as increase added-value of
products, our subsidiaries have developed our own vegetable growing base.
Beijing Lorain, located in Beijing and near to the Hebei Province, has developed
some bases for vegetables. In 2007, Beijing Lorain developed 494 acres of an
organic chestnut agricultural operation, 824 acres of assorted vegetables
agricultural operation and 165 acres of Japanese pumpkin agricultural operation.
Challenges
related
to vegetable production
Recently,
we identified quality issues with certain of the raw materials that we acquire
from the farmers that supply us. In order to prevent the sale of low quality
products in the market, we are implementing a stricter quality control and
examination processes. Additionally, we plan to provide education and training
to our contracting farmers with respect to scientific development and management
of agricultural operations so that the products provided by contracted farmers
can meet the requirement of safety and fitness required to meet the increasing
demand for healthy vegetarian products in the market.
Processed
Food Production
Opportunities
in Processed Food Market
In
addition to maintaining our current presence in the chestnut and frozen
vegetable markets, we have endeavored to research and develop new processed
food
products and expand our market share in that area. We are expecting the
processed food market in China to undergo strong growth in the coming years
due
to the favorable characteristics of processed food, such as its flavor, ability
to be stored for long periods of time, abundant supply of raw materials and
ability to be easily distributed. Currently, there are very few producers
providing processed food products in the Chinese market; we are not aware of
any
manufacturer in the market who has the technical ability to operate a production
line to mass produce an array of processed food products necessary to compete
in
the current market. We have produced more than 40 kinds of processed food,
allowing us to sell our products to both consumer and military users in China
and export to Japan and South Korea. Our products have been particularly
successful with military customers. We expect that processed food production
will become one of our major product lines and will make significant
contributions to our revenue and profits in the future. We hope to gain a
significant advantage in the marketplace by becoming the first major producer
of
processed food products in China. Additionally, we expect our processed food
products to become leading brands within China.
7
Challenges
in Processed Food Market
Due
to
the advancement of processing technology, we will face high costs to conduct
research and development to develop new products to meet the preferences and
requirements in various target markets. We expect the testing process to be
very
complicated and we must tailor our research to varying raw materials, seasonings
and ingredients. We expect the research and development process to have
financial risks and to increase our expenses. Although the process will increase
our expenses, the research and development will not immediately increase our
revenues, if ever. There is also a threat that other producers will enter the
market while we are in the research and development stage, lured by the same
potential profits we are seeking. It is our goal to develop new products and
implement successful marketing strategies to allow us to maintain our current
position as a market leader, but we are also concerned that our competitors
might attempt to replace us if we are not able to continue to expand our market
share, to leverage our selling network, and establish our brand name in the
market.
RESULTS
OF OPERATIONS
Three
Months Ended March 31, 2007 Compared to Three Months Ended March 31,
2006
The
following table summarizes the results of our operations during the three-month
periods ended March 31, 2007 and ended March 31, 2006.
All
amounts, other than percentages, in U.S. dollars
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Item
|
3-Month
Period Ended
on
3/31/2007
|
3-Month
Period Ended
on
3/31/2006
|
|||||||||||
|
In
Thousands
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As
a percentage of net revenues
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In
Thousands
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As
a percentage of net revenues
|
||||||||||
|
Revenues
|
11,899
|
100
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%
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5,588
|
100
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%
|
|||||||
|
Cost
of Goods Sold
|
(8,953
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)
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-75.24
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%
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(4,287
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)
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-76.72
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%
|
|||||
|
Gross
Profit
|
2,946
|
24.76
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%
|
1,301
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23.28
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%
|
|||||||
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Selling
and Marketing Expenses
|
(126
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)
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-1.06
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%
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(297
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)
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-5.31
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%
|
|||||
8
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Item
|
3-Month
Period Ended
on
3/31/2007
|
3-Month
Period Ended
on
3/31/2006
|
|||||||||||
|
In
Thousands
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As
a percentage of net revenues
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In
Thousands
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As
a percentage of net revenues
|
||||||||||
|
General
and Administrative Expenses
|
(360
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)
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-3.03
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%
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(362
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)
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-6.48
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%
|
|||||
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Total
Expenses
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(486
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)
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-4.095
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(659
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)
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-11.79
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%
|
||||||
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Finance
costs, net
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(566
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)
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-4.75
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%
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(364
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)
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-6.52
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%
|
|||||
|
Government
grant
|
8
|
0.06
|
%
|
3
|
0.05
|
%
|
|||||||
|
Other
income
|
26
|
0.03
|
%
|
59
|
0.00
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%
|
|||||||
|
Other
expenses
|
(4
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)
|
-0.04
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%
|
(31
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)
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-0.54
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%
|
|||||
|
Income
Before Income Taxes and Minority Interest
|
1,924
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16.17
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%
|
309
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5.54
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%
|
|||||||
|
Income
Taxes
|
(330
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)
|
-2.77
|
%
|
(79
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)
|
-1.42
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%
|
|||||
|
Minority
interests
|
(66
|
)
|
-0.56
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%
|
15
|
0.27
|
%
|
||||||
|
Net
Income
|
1,528
|
12.84
|
%
|
245
|
4.39
|
%
|
|||||||
Revenues.
Revenues increased $6.31
million, or 112.9%, to $11.9 million for the three months ended March 31, 2007
from $5.59 million for the same period in 2006. This increase was attributable
to the increased sales from the enhancement of our product marketing campaign
during the spring festival in China.
Cost
of Goods Sold. Our
cost of goods sold increased $4.66 million, or 108.6% to $8.95 million for
the
three months ended March 31, 2007 from $4.29 million for the same period in
2006. This increase was due to the increase of sales volume. As a percentage
of
revenues, the cost of goods sold decreased to 75.24% during the three months
ended March 31, 2007 from 76.72% in the same period of 2006. The
cost
of good sold as a percentage of revenues decreased because chestnuts represented
a larger portion of our sales in the first quarter of 2007 compared to the
first
quarter of 2006 and chestnuts have a better profit margin than many of our
other
products.
Gross
Profit.
Our gross profit increased $1.64 million, or 126.4% to $2.94 million for the
three months ended March 31, 2007 from $1.30 million for the same period in
2006. Gross profit as a percentage of revenues was 24.76% for the three months
ended March 31, 2007, an increase of
1.48% from 23.28% for the same period of 2006. This increase was attributable
to
the increased sales in 2007, as compared to the year 2006.
Selling
and Marketing Expenses.
Selling and marketing expenses decreased $0.17 million, or 56.7% to $0.13
million for the three months ended March 31, 2007 from $0.30 million for the
same period in 2006. As a percentage of revenues, selling and marketing expenses
decreased to 1.06% for the three months ended March 31, 2007 from 5.31% for
the
same period of 2006. The percentage decrease of
selling and marketing expenses was primarily a result of the
decreased transportation costs from increased domestic sales in 2007 as compared
to the higher transportation costs in more export sales in 2006.
General
and Administrative Expenses. General
and administrative expenses decreased $0.002 million, or 0.55% to $0.36 million
for the three months ended March 31, 2007 from $0.362 million for the same
period of 2006. As a percentage of revenues, general and administrative expenses
decreased to 3.03% for the three months ended March 31, 2007 from 6.48% for
the
same period of 2006. The percentage decrease of general and administrative
expenses was primarily a result of efficient
controls of our general and administrative expenses.
9
Income
Before Income Taxes and Minority Interest. Income
before income taxes and minority interest increased $1.61 million or 519.35%
to
$1.92 million for the three months ended March 31, 2007 from $0.31 million
for
the same period of 2006. Income before income taxes and minority interest as
a
percentage of revenues increased to 16.17% for the three months ended March
31,
2007 from 5.54% for the same period of 2006. The increase was primarily a result
of the increase of gross profit and the
decrease of selling expenses and general and administrative expenses in 2007,
as
compared to the year of 2006.
Income
Taxes.
Income taxes increased $0.25 million to $0.33 million for the three months
ended
March 31, 2007 from $0.08 million for the same period of 2006. The increase
of
tax paid was primarily a result of the increase of profit in 2007, as compared
to the year of 2006.
On
March
16, 2007, the National People’s Congress of the PRC determined to adopt a new
corporate income tax law in its fifth plenary session. The new corporate income
tax law unifies the application, scope, tax rate, tax deduction and preferential
policy for both domestic and foreign-invested enterprises. The new
corporate income tax law will be effective on January 1, 2008. According
to the new corporate income tax law, the applicable income tax rate for our
operating subsidiaries may be subject to change. As the implementation
detail has not yet been announced, we cannot be sure of the potential impact
of
such new corporate income tax law on our financial position and operating
results.
Net
Income. Net
income increased $1.28 million, or 512% to $1.53 million for the three months
ended March 31, 2007 from $0.25 million for the same period of 2006, as a result
of the factors described above.
Liquidity
and Capital Resources
General
As
of March 31, 2007, we had cash and cash equivalents (including restricted cash)
of $8.45 million and $0, respectively. The following table provides detailed
information about our net cash flow for all financial statements periods
presented in this report.
|
|
Cash
Flow (in thousands)
|
||||||
|
|
Three
Months Ended March 31,
|
||||||
|
|
2007
|
2006
|
|||||
|
Net
cash provided by (used in) operating activities
|
$7,256
|
$4,842
|
|||||
|
Net
cash provided by (used in) investing activities
|
$2,027
|
$1,874
|
|||||
|
Net
cash provided by (used in) financing activities
|
$(3,151
|
)
|
$(2,624
|
)
|
|||
|
Net
cash flow
|
$6,132
|
$4,092
|
|||||
10
Operating
Activities
Net
cash
provided by operating activities was $7.26 million for the three months period
ended March 31, 2007, which is an increase of $2.42 million from $4.84 million
for the same period of 2006. The increase of
the
cash provided by operating activities was primarily a result of the increase
of
net income, depreciation and inventories in 2007, as compared to the year of
2006.
Investing
Activities
Our
main
uses of cash for investment activities are payments
for the acquisition of property, plants and equipment.
Net
cash
provided by investing activities for the three months period ended March 31,
2007 was $2.03 million, which is an increase of $0.16 million from net cash
provided by investing activities of $1.87 million for the same period of 2006.
The increase was primarily due to the purchase of plants and equipment in 2007.
Financing
Activities
Net
cash
used in financing activities for the three months period ended March 31, 2007
was $3.15 million, which is an increase of $0.53 million from $2.62 million
net
cash used in financing activities during the same period of 2006. The increase
of the cash used in financing activities was primarily a result of the increase
of bank loan repayments.
Loan
Facilities
As
of
March 31, 2007, the amounts and maturity dates for our bank loans were as
follows:
All
amounts, other than percentages, in thousands of U.S. dollars.
|
Banks
|
Amounts
|
Beginning
|
Ending
|
Duration
|
|
Junan
County Agriculture Bank
|
0.61
|
06/30/2004
|
06/29/2007
|
36
months
|
|
Junan
County Agriculture Bank
|
0.61
|
6/30/2004
|
6/29/2007
|
36
months
|
|
Junan
County Agriculture Bank
|
103.35
|
5/31/2006
|
5/30/2007
|
12
months
|
|
Junan
County Agriculture Bank
|
258.37
|
08/31/2006
|
06/29/2007
|
10
months
|
|
Junan
County Agriculture Bank
|
28.42
|
10/10/2006
|
10/09/2007
|
12
months
|
|
Junan
County Agriculture Bank
|
581.33
|
10/31/2006
|
10/30/2007
|
12
months
|
|
Junan
County Agriculture Bank
|
258.37
|
11/03/2006
|
11/02/2007
|
12
months
|
|
Junan
County Agriculture Bank
|
658.84
|
11/16/2006
|
11/15/2007
|
12
months
|
|
Junan
County Agriculture Bank
|
116.27
|
11/26/2006
|
05/12/2007
|
6
months
|
|
Junan
County Agriculture Bank
|
38.76
|
11/26/2006
|
05/12/2007
|
6
months
|
|
Junan
County Agriculture Bank
|
465.06
|
12/06/2006
|
12/05/2007
|
12
months
|
|
Junan
County Agriculture Bank
|
490.90
|
12/06/2006
|
12/05/2007
|
12
months
|
|
Junan
County Construction Bank
|
387.55
|
05/09/2006
|
05/09/2007
|
12
months
|
|
Junan
County Construction Bank
|
387.55
|
08/31/2006
|
08/31/2007
|
12
months
|
|
Junan
County Construction Bank
|
324.25
|
09/08/2006
|
09/07/2007
|
12
months
|
11
|
Banks
|
Amounts
|
Beginning
|
Ending
|
Duration
|
|
Junan
County Industrial and Commercial Bank
|
219.61
|
12/14/2006
|
12/15/2007
|
12
months
|
|
Junan
County Industrial and Commercial Bank
|
612.33
|
12/11/2006
|
12/10/2007
|
12
months
|
|
Junan
County Industrial and Commercial Bank
|
714.39
|
12/11/2006
|
11/15/2007
|
12
months
|
|
Junan
County Industrial and Commercial Bank
|
516.74
|
01/12/2007
|
01/11/2008
|
12
months
|
|
Junan
County Industrial and Commercial Bank
|
129.18
|
01/11/2007
|
01/10/2008
|
12
months
|
|
Bank
of China, Junan Branch
|
13.42
|
09/19/2006
|
05/19/2009
|
8
months
|
|
International
Trust & Investment Co., Ltd.
|
1,291.84
|
06/14/2005
|
06/13/2008
|
36
months
|
|
Linyi
Commercial Bank
|
20.00
|
02/12/2007
|
04/11/2007
|
2
months
|
|
Linyi
Commercial Bank
|
34.96
|
02/07/2007
|
04/06/2007
|
2
months
|
|
Linyi
Commercial Bank
|
19.98
|
02/07/2007
|
04/06/2007
|
2
months
|
|
Linyi
Commercial Bank
|
45.94
|
02/07/2007
|
04/06/2007
|
2
months
|
|
Linyi
Commercial Bank
|
19.98
|
02/07/2007
|
04/06/2007
|
2
months
|
|
Linyi
Commercial Bank
|
25.00
|
02/06/2007
|
04/05/2007
|
2
months
|
|
Linyi
Commercial Bank
|
19.00
|
02/06/2007
|
04/05/2007
|
2
months
|
|
Junan
County Agriculture Bank
|
2.15
|
09/04/2006
|
07/20/2007
|
10
months
|
|
Junan
County Agriculture Bank
|
241.57
|
11/18/2006
|
05/15/2007
|
6
months
|
|
Linyi
Commercial Bank
|
581.33
|
02/07/2007
|
02/06/2008
|
12
months
|
|
Linyi
Commercial Bank
|
607.16
|
02/09/2007
|
02/01/2008
|
12
months
|
|
Linyi
Commercial Bank
|
310.04
|
04/30/2006
|
10/20/2007
|
18
months
|
|
Linyi
Commercial Bank
|
193.78
|
11/30/2006
|
11/29/2007
|
12
months
|
|
Linyi
Commercial Bank
|
387.55
|
03/25/2007
|
05/25/2007
|
2
months
|
|
Junan
Agricultural Development Bank
|
581.33
|
07/20/2006
|
07/19/2007
|
12
months
|
|
Junan
Agricultural Development Bank
|
710.51
|
09/05/2006
|
09/04/2007
|
12
months
|
|
Junan
County Industrial and Commercial Bank
|
302.29
|
02/05/2007
|
04/23/2007
|
2
months
|
|
Junan
County Industrial and Commercial Bank
|
400.47
|
02/05/2007
|
08/01/2007
|
6
months
|
|
Junan
County Industrial and Commercial Bank
|
633.00
|
12/26/2006
|
04/26/2007
|
4
months
|
|
Junan
County Industrial and Commercial Bank
|
1,278.92
|
03/23/2007
|
06/21/2007
|
3
months
|
|
Beijing
Miyun County Shilipu Rural Financial Institution
|
1,918.38
|
09/28/2006
|
09/27/2007
|
12
months
|
|
Beijing
Miyun County Shilipu Rural Financial Institution
|
645.92
|
09/25/2006
|
09/26/2007
|
12
months
|
|
China
Agricultural Bank, Miyun Branch
|
258.37
|
07/19/2006
|
07/18/2007
|
12
months
|
|
Agricultural
Development Department of Luotian Government
|
645.92
|
09/05/2006
|
09/05/2007
|
12
months
|
|
China
Agricultural Bank, Luotian Square Branch
|
258.37
|
09/30/2006
|
09/15/2008
|
24
months
|
|
China
Agricultural Bank, Luotian Square Branch
|
96.89
|
12/11/2006
|
12/11/2010
|
60
months
|
|
Junan
County Industrial and Commercial Bank
|
452.14
|
01/31/2007
|
01/18/2008
|
12
months
|
|
Junan
County Industrial and Commercial Bank
|
516.74
|
01/31/2007
|
01/18/2008
|
12
months
|
|
Junan
County Industrial and Commercial Bank
|
1,291.84
|
03/06/2007
|
03/05/2008
|
12
months
|
|
Total
|
20,097.26
|
12
As
shown
in the above table, we have $20.1 million in loans maturing on or before the
end
of March 31, 2007. We plan to repay this debt either as it matures or refinance
this debt with other debt.
We
believe that our currently available working capital, after receiving the
aggregate proceeds of our capital raising activities and the credit facilities
referred to above, should be adequate to sustain our operations at our current
levels through at least the next twelve months.
Obligations
under Material Contracts
Below
is a table setting forth our material contractual obligations as of March 31,
2007:
|
|
|
Payments
due by period
|
||||||||||||||
|
|
|
Total
|
|
Less
than 1 year
|
|
1-3
years
|
|
3-5
years
|
|
More
than 5 years
|
||||||
|
Long-term
debt obligations
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
||||||
|
Capital
Lease obligations
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
||||||
|
Operating
lease obligations
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
$
|
0
|
|||||||
|
Purchase
obligations
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
$
|
0
|
|||||||
|
Other
Long-term Liabilities Reflected on Registrant’s Balance Sheet under
GAAP
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
$
|
0
|
|||||||
|
Total
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
$
|
0
|
||||||
We
do not have any material contractual obligations as of March 31,
2007.
Critical
Accounting Policies
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures
of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that require the more significant judgments and estimates
in the preparation of financial statements, including the
following:
|
·
|
Method
of Accounting -- We
maintain our general ledger and journals with the accrual method
accounting for financial reporting purposes. The financial statements
and
notes are representations of management. Accounting policies adopted
by us
conform to generally accepted accounting principles in the United
States
of America and have been consistently applied in the presentation
of
financial statements, which are compiled on the accrual basis of
accounting.
|
|
·
|
Use
of estimates -- The
preparation of the financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Management
makes these estimates using the best information available at the
time the
estimates are made; however, actual results could differ materially
from
those estimates.
|
13
|
·
|
Principles
of consolidation -- The
consolidated financial statements are presented in US Dollars and
include
the accounts of the Company and its commonly controlled entity. All
significant inter-company balances and transactions are eliminated
in
combination.
|
As
of
March 31, 2007, the particulars of the commonly controlled entities are as
follows:
|
Name
of company
|
Place
of incorporation
|
Attributable
equity interest %
|
Registered
capital
|
||
|
Shandong
Green Foodstuff CO., LTD.
|
PRC
|
80.2%
|
RMB
100,860,000
|
||
|
Luotian
Green Foodstuff CO., LTD
|
PRC
|
100%
|
RMB
10,000,000
|
||
|
Junan
Hongrun Foodstuff CO., LTD.
|
PRC
|
100%
|
RMB
19,000,000
|
||
|
Beijing
Green Foodstuff CO., LTD.
|
PRC
|
100%
|
RMB
10,000,000
|
Accounting
for the Impairment of Long-Lived Assets -- The long-lived assets held and used
by us are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of assets may not be recoverable. It is
reasonably possible that these assets could become impaired as a result of
technology or other industry changes. Determination of recoverability of assets
to be held and used is by comparing the carrying amount of an asset to future
net undiscounted cash flows to be generated by the assets.
If
such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of
the carrying amount or fair value less costs to sell.
During
the reporting years, there was no impairment loss.
Revenue
recognition -- Our
revenue recognition policies are in compliance with Staff Accounting Bulletin
(SAB) 104. Sales revenue is recognized at the date of shipment to customers
when
a formal arrangement exists, the price is fixed or determinable, the delivery
is
completed, we have no other significant obligations and collectibility is
reasonably assured. Payments received before all of the relevant criteria for
revenue recognition are satisfied are recorded as unearned revenue.
Our
revenue consists of invoiced value of goods, net of a value-added tax (VAT).
No
product return or sales discount allowance is made as products delivered and
accepted by customers are normally not returnable and sales discount is normally
not granted after products are delivered.
14
Recent
accounting pronouncements
In
July
2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109, which clarifies the accounting for
uncertainty in tax positions. This Interpretation requires that the Company
recognizes in its consolidated financial statements the impact of a tax position
if that position is more likely than not of being sustained on audit, based
on
the technical merits of the position. The provisions of FIN 48 are effective
for
the Company on January 1, 2007, with the cumulative effect of the change in
accounting principle, if any, recorded as an adjustment to opening retained
earnings.
In
September 2006, the FASB issued SFAS 157, Fair Value Measurements, which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting pronouncements that
require or permit fair value measurements, where fair value is the relevant
measurement attribute. The standard does not require any new fair value
measurements. SFAS 157 is effective for financial statements issued for fiscal
year beginning after November 15, 2007, and interim periods within those fiscal
year.
In
September 2006, the SEC issued SAB No. 108, which provides guidance on the
process of quantifying financial statement misstatements. In SAB No. 108, the
SEC staff establishes an approach that requires quantification of financial
statement errors, under both the iron-curtain and the roll-over methods, based
on the effects of the error on each of the Company’s financial statements and
the related financial statement disclosures. SAB No.108 is generally effective
for annual financial statements in the first fiscal year ending after November
15, 2006. The transition provisions of SAB No. 108 permits existing public
companies to record the cumulative effect in the first year ending after
November 15, 2006 by recording correcting adjustments to the carrying values
of
assets and liabilities as of the beginning of that year with the offsetting
adjustment recorded to the opening balance of retained earnings.
The
management of the Company does not anticipate that the adoption of these three
standards will have a material impact on these consolidated financial
statements.
Seasonality
Our
operating results and operating cash flows historically have been subject to
seasonal variations. Our raw materials are mostly fresh agricultural products.
Therefore, we are subject to production seasonality by product, though we are
able to maintain overall year-round production. Specifically, the main
processing season for chestnut products is from the latter half of August to
the
next January. During the busy season, our chestnut production lines are running
with full capacity. Other than this period, we still maintain a small amount
of
chestnut production by using frozen chestnuts. However, this pattern may change,
as a result of new market opportunities or new product
introductions.
15
Off-Balance
Sheet Arrangements
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Interest
Rate Risk
We
are
exposed to interest rate risk primarily with respect to our short-term bank
loans. Although the interest rates are fixed for the terms of the loans, the
terms are typically 12 months and interest rates are subject to change upon
renewal. Since April 28, 2006, China People’s Bank has increased the interest
rate of RMB bank loans with a term of 6 months or less by 0.27%, and loans
with
a term of 6 to 12 months by 0.54%. The new interest rates are 5.67% and 6.39%
for RMB bank loans with a term 6 months or less and loans with a term of 6-12
months, respectively. The change in interest rates has no impact on our bank
loans that were made before April 28, 2006. A hypothetical 1.0% increase in
the
annual interest rates for all of our credit facilities at March 31, 2006 would
decrease net income before provision for income taxes by approximately $230,000
for the six months ended December 31, 2006. Management monitors the banks’
interest rates in conjunction with our cash requirements to determine the
appropriate level of debt balances relative to other sources of funds. We have
not entered into any hedging transactions in an effort to reduce our exposure
to
interest rate risk.
Foreign
Exchange Risk
While
our
reporting currency is the U.S. Dollar, all of our consolidated revenues and
consolidated costs and expenses are denominated in Renminbi. All of our assets
are denominated in RMB except for cash. As a result, we are exposed to foreign
exchange risk as our revenues and results of operations may be affected by
fluctuations in the exchange rate between U.S. Dollars and RMB. If the RMB
depreciates against the U.S. Dollar, the value of our RMB revenues, earnings
and
assets as expressed in our U.S. Dollar financial statements will decline. We
have not entered into any hedging transactions in an effort to reduce our
exposure to foreign exchange risk.
Inflation
Inflationary
factors such as increases in the cost of our product and overhead costs may
adversely affect our operating results. Although we do not believe that
inflation has had a material impact on our financial position or results of
operations to date, a high rate of inflation in the future may have an adverse
effect on our ability to maintain current levels of gross margin and selling,
general and administrative expenses as a percentage of net revenues, if the
selling prices of our products do not increase with these increased costs.
16
CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures.
We
maintain a system of disclosure controls and procedures. The term “disclosure
controls and procedures,” as defined by regulations of the SEC, means controls
and other procedures that are designed to ensure that information required
to be
disclosed in the reports that we file or submit to the Securities and Exchange
Commission (the “SEC”) under the Exchange Act, is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules,
regulations and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file or submit to the SEC under
the
Exchange Act is accumulated and communicated to the our management, including
our principal executive officer and our principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Si
Chen,
our Chief Executive Officer, and Huanxiang Sheng, our Chief Financial Officer,
have evaluated the design and operating effectiveness of our disclosure controls
and procedures as of March 31, 2007. Based upon their evaluation, these
executive officers have concluded that our disclosure controls and procedures
are effective as of March 31, 2007.
Internal
Control Over Financial Reporting.
We
also
maintain internal control over financial reporting. The term “internal control
over financial reporting,” as defined by regulations of the SEC, means a process
designed by, or under the supervision of, our principal executive and principal
financial officers, or persons performing similar functions, and effected by
the
our board of directors, management and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting procedures in the U.S. (“GAAP”), and includes those policies
and procedures that:
|
•
|
Pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of our
assets;
|
|
•
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with GAAP, and
that our
receipts and expenditures are being made only in accordance with
authorizations of our management and directors;
and
|
|
•
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have
a material effect on our consolidated financial
statements.
|
Changes
in Internal Control Over Financial Reporting.
There
has
not been any change in our internal control over financial reporting that has
materially affected or is reasonably likely to materially affect our internal
control over financial reporting.
17
OTHER
INFORMATION
LEGAL
PROCEEDINGS
From
time
to time, we have disputes that arise in the ordinary course of business.
Currently, there are no material legal proceedings to which we are a party,
or
to which any of our property is subject, that we expect to have a material
adverse effect on our financial condition.
DEFAULTS
UPON SENIOR SECURITIES
There
were no defaults upon senior securities in the quarter ended March 31,
2007.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of security holders in the quarter ended March
31, 2007.
OTHER
INFORMATION
N/A
ITEM
9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a)
Financial Statements of Business Acquired
Filed
herewith are the followings:
1.
Unaudited consolidated financial statements of Lorain Holdings for the three
months ended March 31, 2007.
18
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
| Date: June 6, 2007 | ||
| MILLENNIUM QUEST, INC. | ||
| |
|
|
| By: | /s/ Si Chen | |
|
Si
Chen
Chief
Executive Officer
|
||
EXHIBIT
INDEX
| Exhibit Number |
Exhibit
Description
|
| 99.1 |
Unaudited
consolidated financial statements of Lorain Holdings for the three
months ended March 31, 2007.
|