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U.S. SECURITIES AND EXCHANGE
COMMISSION WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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 0-31153
AP HENDERSON GROUP
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Nevada 88-0355504
- ---------------------------------------------- ------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
600 Wilshire Blvd., Suite 1252
Los Angeles, California 90017
- ---------------------------------------------- ------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE (213) 538-1203
--------------
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
None N/A
- ---------------------------------------------- -------------------------------
SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
- --------------------------------------------------------------------------------
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
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
90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filed (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting stock held by
non-affiliates of the registrant as of April 11, 2003 was approximately
$7,898,471.
The number of shares of the registrant's common stock outstanding as of April
11, 2003 was 45,000,002.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
ITEM 1. BUSINESS.
UNLESS OTHERWISE INDICATED, ALL REFERENCES TO OUR COMPANY INCLUDE OUR
WHOLLY-OWNED SUBSIDIARIES, AP HENDERSON VENTURES, A NEVADA CORPORATION, AND
JINGBO CHEMICAL (BO XING) CO., LTD., A CHINESE FOREIGN DIRECT INVESTMENT
ENTERPRISE.
ALL OF OUR SALES AND EXPENSES ARE DENOMINATED IN RENMINBI ("RMB"), THE
NATIONAL CURRENCY OF THE PEOPLE'S REPUBLIC OF CHINA. SOLELY FOR THE CONVENIENCE
OF THE READER, THE FINANCIAL INFORMATION AS OF DECEMBER 31, 2002, 2001 AND 2000
AND SEPTEMBER 30, 2002 HAVE BEEN CONVERTED INTO UNITED STATES DOLLARS AT THE
NOON BUYING RATE IN NEW YORK CITY ON SUCH DATES AS CERTIFIED FOR CUSTOMS
PURPOSES BY THE FEDERAL RESERVE BANK OF NEW YORK OF (US$1.00 = RMB 8.2773 AS OF
DECEMBER 31, 2002, = RMB 8.2766 AS OF DECEMBER 31, 2001, = RMB 8.2774 AS OF
DECEMBER 31, 2000 AND = RMB 8.2772 AS OF SEPTEMBER 30, 2002). NO REPRESENTATION
IS MADE THAT THE RMB AMOUNTS COULD HAVE BEEN, OR COULD BE, CONVERTED INTO UNITED
STATES DOLLARS AT THAT RATE OR AT ANY OTHER CERTAIN RATE AS OF THE RESPECTIVE
DATES OR AT ANY OTHER DATE.
ALL SHARE INFORMATION IN THIS REPORT HAS BEEN ADJUSTED TO GIVE EFFECT
TO A 1.875 FOR ONE SPLIT OF OUR COMMON STOCK EFFECTIVE AS OF FEBRUARY 11, 2003.
THE STATEMENTS CONTAINED IN THIS REPORT THAT ARE NOT HISTORICAL ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), INCLUDING
STATEMENTS, WITHOUT LIMITATION, REGARDING OUR EXPECTATIONS, BELIEFS, INTENTIONS
OR STRATEGIES REGARDING THE FUTURE. WE INTEND THAT SUCH FORWARD-LOOKING
STATEMENTS BE SUBJECT TO THE SAFE-HARBOR PROVIDED BY THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS RELATE TO, AMONG
OTHER THINGS: (1) EXPECTED REVENUE AND EARNINGS GROWTH; (2) ESTIMATES REGARDING
THE SIZE OF TARGET MARKETS; AND (3) REGULATION OF OUR INDUSTRIES AND MARKETS BY
THE CHINESE GOVERNMENT. THESE STATEMENTS ARE QUALIFIED BY IMPORTANT FACTORS THAT
COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED BY THE
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE BUT ARE NOT LIMITED TO: (1) OUR
ABILITY TO PURCHASE CRUDE OIL FROM LOCAL SUPPLIERS IN SUFFICIENT QUANTITIES, (2)
OUR ABILITY TO OBTAIN GOVERNMENT APPROVAL TO IMPORT CRUDE OIL AS WE DESIRE, AND
(3) DISRUPTION OF OUR MARKETS AND INDUSTRIES BY CHINA'S ENTRY INTO THE WORD
TRADE ORGANIZATION.
OVERVIEW
AP Henderson Group, via our wholly-owned subsidiary, Jingbo Chemical
(Bo Xing) Company Ltd., is engaged in the business of owning and operating a
petrochemical refinery and agrochemical manufacturing company in the People's
Republic of China ("PRC"). We are one of the largest independent petroleum
refiners and suppliers of transportation fuels, fuel oil, liquefied petroleum
gas (LPG), oxidized asphalt and other petrochemical products in the Shandong
province of the PRC. Our agrochemical division is a major manufacturer and
supplier of insecticide, fungicide, herbicide and other agrochemical products in
the eastern and northeastern parts of China.
We own and operate a combined petrochemical and agrochemical refinery.
Our refinery is located in Chen Hu Town, Bo Xing County, Shandong Province,
256505, People's Republic of China and occupies a total area of 335,000 square
meters. The facility has a combined crude oil primary distillation throughput
capacity of approximately 1,300,000 tons per year. Our refinery has a complex
configuration that enables us to process lower cost sour and heavy sour crude
oil, thus providing us with a cost advantage. We are an independent
petrochemical refinery operator, which means that we do not produce crude oil
nor do we conduct the retail sale or marketing our refined products. We sell our
refined petrochemical products on a wholesale basis primarily in the Shandong
and neighboring provinces. We also manufacture and sell seven lines of
agrochemical products. Our agrochemical products are sold in 18 provinces of the
People's Republic of China, Asian Pacific regions and Africa. In the nine months
ended September 30, 2002, we had total revenue of RMB718.36 million (US$ 86.79
million) with a net profit of RMB32.62 million (US$ 3.94 million).
-1-
BUSINESS DEVELOPMENT
We were organized as a Nevada corporation on June 13, 1994 under the
name Magnolia Ventures, Inc. for the purpose of listing our securities on an
electronic stock exchange and then acquiring an interest in a suitable operating
business. We conducted no operations from the date of our organization until
January 2003, other than the pursuit and analysis of suitable business
acquisitions.
On January 15, 2003, we were the subject of a reverse acquisition by AP
Henderson Ventures, a Nevada corporation ("AP Ventures"), pursuant to which we
acquired all of the outstanding capital shares of AP Ventures in exchange for a
controlling interest in our common shares. At the time of the reorganization, AP
Ventures was known as AP Henderson Group and wholly-owned by Richard Henry.
Pursuant to a share purchase agreement dated January 15, 2003 between Peggy
Melilli, Dennis Melilli, and Sherri Lynn Cooper, our former officers and
directors, on the one hand, and Mr. Henry, on the other hand, Mr. Henry
purchased an aggregate of 33,429,465 shares of our outstanding common stock. The
share purchase agreement also provided that the Melillis and Ms. Cooper would
resign as directors and officers and be replaced with Mr. Henry and Richard Lui.
Immediately after the close of the share purchase agreement, Mr. Henry entered
into a separate securities purchase agreement with us whereby he sold all of the
outstanding capital shares of AP Ventures to us in consideration of our issuance
of 5,625,000 shares of common stock to Mr. Henry. Following the close of these
transactions, AP Ventures changed its corporate name from AP Henderson Group to
AP Henderson Ventures and we changed our corporate name from Magnolia Ventures,
Inc. to AP Henderson Group.
AP Ventures was organized on December 31, 2002 for the purpose of
acquiring all of the capital shares of Jingbo Chemical (Bo Xing) Co., Ltd.
("Jingbo"), a Chinese foreign direct investment enterprise wholly-owned by Mr.
Henry. On December 31, 2002, Mr. Henry transferred all of the capital shares of
Jingbo to AP Ventures in exchange for AP Ventures' issuance of a total of 10,000
common shares. AP Ventures conducted no operations or acquired any assets or
liabilities from the date of its organization to time of its acquisition of
Jingbo.
Jingbo was formed by Mr. Henry in 2002 for the purpose of acquiring
certain operating assets and liabilities of Shandong Jingbo Petrochemical
Company Limited, Shandong Jingbo Agrochemical Company Limited and Shandong
Boxing Lu Nong Chemical Company Limited, which together had been engaged in the
business of owning and operating a petrochemical refinery and agrochemical
manufacturing company in the PRC. Jingbo acquired the operating assets and
liabilities of Shandong Jingbo Petrochemical Company Limited, Shandong Jingbo
Agrochemical Company Limited and Shandong Boxing Lu Nong Chemical Company
Limited on December 31, 2002, immediately prior to AP Ventures' acquisition of
the capital shares of Jingbo.
From the dates of their inception to January 15, 2003, neither Jingbo
nor AP Ventures conducted any operations or engaged in any capital transactions
apart from Jingbo's acquisition of the assets and liabilities of Shandong Jingbo
Petrochemical Company Limited, Shandong Jingbo Agrochemical Company Limited and
Shandong Boxing Lu Nong Chemical Company Limited, and AP Ventures' subsequent
acquisition of the capital shares of Jingbo. As a result, the financial
statements filed as part of this report for purposes of reporting the
acquisition of AP Ventures are those of Shandong Jingbo Petrochemical Company
Limited, Shandong Jingbo Agrochemical Company Limited and Shandong Boxing Lu
Nong Chemical Company Limited.
Our executive offices are located at 600 Wilshire Blvd., Suite 1252,
Los Angeles, California 90017; telephone number (213) 538-1203.
INDUSTRY SEGMENTS
We are engaged in two business segments, namely the manufacturing and
sale of petrochemical and agrochemical products. See Note 23 to the audited
financial statements of Shandong Jingbo Petrochemical Company Limited and
Affiliates as of and for the years ended December 31, 2000 and 2001 and Note 23
to the unaudited combined financial statements of Shandong Jingbo Petrochemical
Company Limited and Affiliates as of and for the nine months ended September 30,
2002 for the financial information concerning our segment operations.
-2-
PETROCHEMICAL DIVISION
GENERAL. Our petrochemical division has over ten lines of products
including gasoline, diesel, liquefied petroleum gas (LPG), fuel oil, propylene,
solvent naphta, oxidized asphalt and other petrochemical products. In recent
years, we have made significant capital investments in facility expansions and
upgrades to improve product quality to meet evolving market demand and
environmental requirements in China. During the year ended December 31, 2002
through February 2003, our capital expenditures for our refining and marketing
segment was RMB 900 million (US$10.9 million). These capital expenditures were
incurred primarily in connection with upgrading our atmospheric vacuum
distillation units from the previous annual capacity of 300,000 tons to
1,300,000 tons. We also enhanced our processing technologies and methods. These
efforts have enabled us to process substantial volumes of both light sour and
heavy sour crude oil. On a company-wide basis, our heavy sour crude oil
processing capacity is approximately 21% of the current throughput. We also
completed the upgrade of the processing capabilities of each our heavy oil
catalytic cracking units, heavy oil viscosity reduction units, solvent oil unit,
gas separation units, gasoline etherealization units and asphalt units.
PETROCHEMICAL PRODUCTS. The principal refined products of our
petrochemical division include:
o LIGHT DIESEL. Our principal refinery products are distillate fuels,
including light diesel and domestic heating oil. Our light diesel is a
distillate fuel oil used in compression-ignition engines. It has
appropriate viscosity, good fluidity, good physical chemistry
capability and appropriate cetane ratio at low temperature.
o FUEL OIL. Our fuel oil is a refined petroleum product used as a fuel
for home or industrial heating and utility boilers. The fuel oil is of
high fuel quality, high combustion quality and good corrosion
resistance.
o UNLEADED GASOLINE. We refine unleaded gasolines with octane ratings of
90 and 93. Our gasolines are used for spark ignition engines blended to
meet the requirements of modern automotive engines. They have a high
octane rating, good resistant to deflagrate capability and good
stability.
o LIQUEFIED PETROLEUM GAS (LPG). The LPG is propane, butane, or
propane-butane mixtures derived from crude oil refining. It is
predominantly used as a domestic and commercial heating fuel. It may be
suitable for automotive applications.
o PROPYLENE. The propylene is a very important base chemical for the
chemical and plastic industries.
o OXIDIZED ASPHALT. The oxidized asphalt is used as a bonding agent in
road building, and in numerous industrial applications, including the
manufacture of roofing.
o SOLVENT NAPHTA. Solvent Naphta is used primarily as a paint solvent,
cleaning fluid, and blendstock in gasoline production.
-3-
The table below sets forth our annual production (tons) of diesel, fuel
oil, gasoline and liquefied petroleum gas (LPG) for the twelve months ended
December 31, 2000 and 2001 and for the nine months ended 2002.
Nine Months
Twelve Months Ended December 31, Ended
-------------------------------- September 30,
2000 2001 2002
--------------- -------------- ----------------
Diesel 95,467 97,182 129,583
Fuel Oil 80,663 80,378 102,119
Gasoline 58,856 65,702 90,613
LPG 10,230 10,879 21,805
OUTSOURCING OF CRUDE OIL. We purchase our crude oil primarily from The
China National Petroleum Corporation ("CNPC") and The China Petroleum and
Chemical Corporation ("Sinopec"), who together are the dominant producers and
refiners of crude oil in the PRC. We receive an allocation of crude oil from
CNPC and Sinopec pursuant to the PRC government's annual crude oil allocation
plan. CNPC and Sinopec set their crude oil median prices each month based on the
average Singapore market FOB prices for crude oil of different grades in the
previous month plus an amount equal to the customs duties payable on the import
of crude oil. In addition, CNPC and Sinopec negotiate a premium or discount to
reflect transportation costs, the differences in oil quality and market supply
and demand. The State Development Planning Commission will mediate if CNPC and
Sinopec cannot agree on the amount of premium or discount.
At the present time, we are not able to import crude oil from sources
outside of the PRC. The import and export of crude oil and refined products is
subject to quota and licensing control by the government of the PRC. Currently,
only a small number of companies have licenses to import and export crude oil
and refined products. The PRC's Ministry of Foreign Trade and Economic
Cooperation is responsible for issuing import and export licenses for products
subject to quotas. We have applied to the Ministry of Foreign Trade and Economic
Cooperation for a license to import up to 1 million tons of crude oil per year.
If we obtain the license, of which there is no assurance, we expect it will be
for an initial term of 12 months and subject to annual renewal. In part as a
result of the PRC's entry into the WTO, we expect that the PRC government will
eventually lift its restrictions that prohibit the direct sale of crude oil and
natural gas by foreign companies in China.
MARKETING AND DISTRIBUTION. We sell our refined products on an
unbranded basis to approximately 380 distributors and retailers through our own
product distribution system and an extensive third-party owned product
distribution system. We have not entered into any supply or production
agreements and all refined products are sold at prevailing market prices for
immediate delivery at our refinery. We do not transport our refined products.
AGROCHEMICAL DIVISION
GENERAL. Our agrochemical division manufactures and sells a diverse
line of products over three product lines, namely insecticides, fungicides and
herbicides. We manufacture these products in the forms of base ingredients
(technical) and concentrates, including suspension concentrates, wettable
powders and emulsifiable concentrates. We also specialize in the manufacturing
of other related environmentally safe products.
The agrochemical division is equipped with a tebufenozide technical
unit with an annual production capacity of 200 tons, an emamectin benzoate
technical unit with an annual production capacity of 50 tons. We utilize leading
technology in producing suspension concentrates, which reaches an annual
production capacity of 10,000 tons. We have also independently developed the
methodology of processing of water dispersible granule, which enables us to
process insecticide, herbicide and fungicide products into various atomic sizes.
We also have an annual processing capacity of 10,000 tons of emulsifiable
concentrate, 2,000 tons of wettable powder concentrate and 500 tons of water
dispersible granule.
-4-
AGRICULTURAL CHEMICAL PRODUCTS. The principal chemical products of the
agrochemical division include, insecticides, fungicides and herbicides. They are
sub-divided into base ingredients (Technical) and concentrates. The concentrates
include suspension concentrate, wettable powder and emulsifiable concentrate.
The table below set out a summary of our agricultural chemical product lines:
Name Type Usage
- --------------------------------------------------------------------------------
Emamectin Benzoate Insecticide It provides good control of
Lepidoptera such as cabbage
worms, soybean worms, cotton
bollworms, tobacco worms,
cabbage armyworms, tobacco
cutworms, apple leaf rollers. It
is especially effective against
beet armyworms and diamondback
moths on vegetables, tea,
tobacco, fruit trees and
cottons.
Tebufenozide Insecticide It is an ecdysone agonist that
acts by binding to the receptor
site of the insect molting
hormone ecdysone. Tebufenozide
is used to control most of the
lepidopteron insects such as
beet armyworms, cabbage
armyworms, tortricid, pine cater
pillar, and etc. It can be
applied to cabbage, cauliflower,
beet, soybean, cotton, tea,
tobacco and fruit trees.
Quizalofop-p-ethyl Herbicide Quizalofop-p-ethyl is a highly
efficient, low toxic, systemic
and selective post-emergence
herbicide. It is used to control
annual grass weeds such as wild
oats, barnyard grass, green
bristlegrass, golden
bristlegrass, common crab grass,
hairy bristlegrass, goose grass,
wire grass, equal aqlopecurus,
Indian love grass and Chinese
sprangleton. osegrass wiregrass,
equal alopecurus, India
lovergrass, Chinese sprangletop
and perennial gramineous weeds.
It can be applied to bermuda
grass, lalang grass, common
reed, potatoes, soybeans, sugar
beets, peanuts, cotton, flax,
vegetables and fruit trees.
Pyrimethanil Fungicide Pyrimethanil is an
anilinopyrimidine fungicides
with low toxicity and high
performance. It is used to
control gray mould on vines,
fruit (such as strawberries,
apples and pears), vegetables
(such as tomatoes and cucumbers)
and ornamentals.
THE PRC OIL AND GAS INDUSTRY (1)
China's economic development over the last two decades has resulted in
steady growth in total energy and petroleum demand. Even though the Asian
financial crisis in 1997 has resulted in an overall slowdown in Asian economies,
China has been able to sustain robust growth compared with the rest of Asia. The
growth has been primarily fueled by government spending program in China. China
currently is the world's third largest oil consumer, behind the United States
and Japan. Consumption of petroleum products totaled 4.975 million barrels per
day ("bbl/d") in 2001, up from 4.796 million bbl/d in 2000. The total U.S.
demand for petroleum was 19.649 million barrels per day in 2001, down from
19.701 million bbl/d in 2000. The total Japan demand for petroleum was 5.421
million bbl/d in 2001, down from 5.528 million bbl/d in 2000. China is expected
to surpass Japan as the second largest world oil consumer within the next decade
and reach a consumption level of 10.5 million bbl/d by 2020, making it a major
player in the world oil market.
- ----------------------
(1) Information contained in this section has been extracted from the Energy
Information Administration/International Energy Annual 2001 and Energy
Information Administration/International Energy Outlook 2002.
-5-
China's petroleum industry has undergone major changes in recent years.
In 1998, the Chinese government reorganized most state owned oil and gas assets
into two vertically integrated firms, the CNPC and Sinopec. Before the
restructuring, CNPC had been engaged mainly in oil and gas exploration and
production, while Sinopec had been engaged in refining and distribution of
petroleum products. In 1998, the Chinese government ordered an asset swap which
transferred some exploration and production assets to Sinopec and some refining
and distribution assets to CNPC. This created two regionally focused firms, The
primary market of CNPC are in the northern and western parts of China, while
Sinopec's primary market is in the southern part of China. Other major state
owned firms in China include the China National Offshore Oil Corporation
("CNOOC"), which handles offshore exploration and production and accounts for
more than 10% of China's domestic crude production, and China National Star
Petroleum, a new company which was created in 1997.
The three largest Chinese oil and gas firms, CNPC, Sinopec and CNOOC,
all have successfully carried out initial public offerings of stock within the
last few years, bringing in billions of dollars in foreign capital. CNPC
separated out most of its high quality assets into a subsidiary called CNPC in
early 2000, and carried out its IPO of a minority interest on both the Hong Kong
and New York stock exchanges in April 2000. The IPO raised over $3 billion, with
BP p.l.c. being the largest purchaser at 20% of the shares offered. Sinopec
carried out its IPO in New York and Hong Kong in October 2000, raising about
$3.5 billion. Like the IPO of CNPC, only a minority stake of 15% was offered.
About $2 billion of this amount was purchased by three international oil giants,
ExxonMobil, BP, and Shell. After an earlier failed IPO attempt in September
1999, CNOOC eventually carried out its IPO of a 27.5% stake in February 2001.
Shell bought a large block of shares valued at around $200 million.
Effective December 11, 2001, the PRC has become a member of the World
Trade Organization. Since joining the WTO, China has implemented major market
reforms including a reduction in tariffs for oil markets, permission for
non-state crude oil imports (8.28 million tons for 2002), and the establishment
of petroleum product import quota (22 million tons for 2002). Further
liberalizations are scheduled, including the elimination of petroleum product
import quota (2004) and the liberalization of retail (2005) and wholesale
markets (2007). As the Chinese petroleum market expands, competition among major
domestic companies such as CNPC and Sinopec, as well as with foreign companies,
including major oil companies, are expected to intensify.
REGULATION
OVERVIEW. China's oil and gas industry is subject to extensive
regulation by the PRC government with respect to a number of aspects of
exploration, production, transmission and marketing of crude oil and natural gas
as well as production, transportation and marketing of refined products and
chemical products. The following central government authorities exercise control
over various aspects of China's oil and gas industry:
o The State Economic and Trade Commission has the industry
administration and policy coordination authority over China's oil and gas
industry. It is also responsible for setting import and export quotas for crude
oil and refined products on the basis of overall supply and demand for crude oil
and refined products in China as well as the WTO requirements for China.
o The Ministry of Land and Resources has the authority for granting,
examining and approving oil and gas exploration and production licenses, the
administration of registration and transfer of exploration and production
licenses.
o The Ministry of Foreign Trade and Economic Cooperation has the
authority to examine and approve production sharing contracts and Sino-foreign
equity and cooperative joint venture contracts. It is also responsible for
issuing import and export licenses for crude oil and refined products to oil and
gas companies once they have obtained import or export quotas from the State
Economic and Trade Commission.
o The State Development Planning Commission:
o determines mandatory minimum volumes and applicable
prices of natural gas to be supplied to certain
fertilizer producers;
o publishes guidance prices for natural gas and retail
median guidance prices for certain refined products,
including gasoline and diesel;
o approves investment and finance projects exceeding
certain capital expenditure amounts; and
o approves Sino-foreign equity and cooperative projects
exceeding certain capital amounts.
-6-
IMPORTATION OF CRUDE OIL. The import and export of crude oil and
refined products is subject to quota and licensing control in China. Currently,
only a small number of State authorized companies have licenses to import and
export crude oil and refined products. The State Economic and Trade Commission
sets import and export quotas for crude oil and refined products by taking into
account the supply and demand in China as well as the WTO requirements for
China. The Ministry of Foreign Trade and Economic Cooperation is responsible for
issuing import and export licenses for products subject to quotas. Upon
receiving quota allocation, refining companies or enterprises can import crude
oil through State-authorized import companies.
We have applied to the PRC government for right to import up to 1
million tons of crude oil per year. If we obtain the license, of which there is
no assurance, we expect it will be for an initial term of 12 months and subject
to annual renewal. In part as a result of the PRC's entry into the WTO, we
expect that the PRC government will eventually lift its restrictions that
prohibit the direct sale of crude oil and natural gas by foreign companies in
China.
ENVIRONMENTAL REGULATION. Together with all other chemical refineries
in the PRC, we are subject to numerous national, regional and local
environmental laws and regulations concerning our petrochemical and agrochemical
refinery operations. In particular, these laws and regulations:
o require an environmental evaluation report to be submitted and
approved prior to the commencement refining and chemical projects;
o restrict the type, quantities, and concentration of various
substances that can be released into the environment in connection with refinery
activities; and
o impose criminal and civil liabilities for pollution resulting from
petrochemical and agrochemical operations.
These laws and regulations may also restrict air emissions and
discharges to surface and subsurface water resulting from the operation of
natural gas processing plants, chemical plants, refineries, pipeline systems and
other facilities that we own. In addition, our operations may be subject to laws
and regulations relating to the generation, handling, storage, transportation,
disposal and treatment of waste materials.
The State Environmental Protection Bureau sets national environmental
protection standards and local environmental protection bureaus may set stricter
local standards. The PRC national and local environmental laws and regulations
impose fees for the discharge of waste substances above prescribed levels,
require the payment of fines for serious violations and provide that the PRC
national and local governments may at their own discretion close or suspend any
facility which fails to comply with orders requiring it to cease or cure
operations causing environmental damage.
We are not currently involved in any environmental claims and believes
that our environmental protection systems and facilities are adequate for us to
comply with applicable national and local environmental protection regulations.
EXCHANGE CONTROL. The Renminbi currently is not a freely convertible
currency. We receive all of our revenues in Renminbi. Under the existing foreign
exchange regulations in China, we may undertake current account foreign exchange
transactions, including the payment of dividends, without prior approval from
the State Administration of Foreign Exchange by producing commercial documents
evidencing such transactions, provided that they are processed through Chinese
banks licensed to engage in foreign exchange transactions. The PRC government
has stated publicly that it intends to make the RMB freely convertible in the
future. However, uncertainty exists as to whether the PRC government may
restrict access to foreign currency for current account transactions if foreign
currency becomes scarce in the PRC. We are not aware of any other PRC laws,
decrees or regulations that restrict the export or import of capital or that
affect the remittance of dividends, interest or other payments to non-resident
holders.
-7-
COMPETITION
The market for refined petrochemical products in the PRC is dominated
by CNPC and Sinopec. Together, CNPC and Sinopec account for a approximately 90%
of the sales of all refined petrochemical products in the PRC. Our refinery and
chemical plant is located in the northeastern region of China where the dominant
market share for refined products and chemical products is held by CNPC. In
addition to CNPC and Sinopec, there are approximately 54 petrochemical refinery
operations in the PRC, among which we are one of the largest. We compete
directly with all Sinopec, CNPC and several of the smaller refineries on the
basis of price, quality and customer service. We expect that we will continue to
face competition from, among other competitors, CNPC and Sinopec in increasing
our refined products and chemical products sales throughout the PRC.
We also face competition from imported refined products and chemical
products on the basis of price and quality. As a result of China's entry into
the WTO, we expect that competition from foreign producers of refined products
and chemical products may increase as tariff and non-tariff barriers for
imported refined products and chemical products will be reduced or eliminated
over time, including the opening over time of retail and wholesale markets in
China for refined products and chemical products to foreign competition. Our
ability to compete with foreign producers of refined products and chemical
products will depend on our ability to reduce our production costs and improve
the quality of our products.
PATENTS AND TRADEMARKS
We have applied for 11 patents in the PRC for various proprietary
chemical formulas developed by our agrochemical division.
RESEARCH AND DEVELOPMENT
We incurred research and development expenses of RMB 4,192,000
(US$21,745) for twelve months ended December 31, 2001 and RMB 2,917,000
(US$352,413) for the nine months ended September 30, 2002. Research and
development expenses were incurred primarily by our agrochemical division and
related to development of new agrochemical products.
EMPLOYEES
As of the date of this report, we employ approximately 1,050 employees.
ITEM 2. DESCRIPTION OF PROPERTIES.
Our Chinese refinery operations and executive offices are located in
Chen Hu Town, Bo Xing County, Shandong Province, 256505, People's Republic of
China. The refinery and executive offices consist of 335,000 square meters, of
which 322,120 square meters consist of refinery plant and factories, and 12,880
square meters consist of multi-level office space. Under the current land
ownership system in the PRC, private ownership of real property is not allowed.
However, we have acquired from the PRC the exclusive rights to use, at no cost
to us, the land upon which our facilities are located for periods ranging from
41 to 50 years.
Our executive offices in the United States are located in Los Angeles,
California and consist of approximately 500 square feet, which we lease on a
month to month basis.
ITEM 3. LEGAL PROCEEDINGS.
Neither our company nor our property are subject to any pending legal
proceedings, other than routine litigation incidental to our business
-8-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to the security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET INFORMATION
We have applied to list our common stock on the American Stock
Exchange. Our common stock has been listed on the OTC Bulletin Board since
October 9, 2002. However, as of the date of this report our common stock has not
commenced active trading. We believe that our common stock will not commence
active trading until such time as we obtain a listing on the AMEX.
HOLDERS
As of April 11, 2003, there were 411 record holders of our common
stock.
DIVIDENDS
We have not paid any cash dividends on our common stock since our
inception and do not contemplate paying dividends in the foreseeable future. It
is anticipated that earnings, if any, will be retained for the operation of our
business. All of our revenues are denominated in Renminbi. The Renminbi
currently is not a freely convertible currency. The PRC government has stated
publicly that it intends to make the RMB freely convertible in the future.
However, uncertainty exists as to whether the PRC government may restrict access
to foreign currency for purposes of conducting upstream dividends from our
Chinese operating subsidiary to our publicly held parent corporation. Any such
restrictions could limit our ability to declare or pay dividends on our common
stock.
SALES OF UNREGISTERED SECURITIES
During the fiscal year ended December 31, 2002, we conducted no sales
of unregistered shares of our securities.
EQUITY COMPENSATION PLANS
The following table sets forth certain information as of December 31,
2002 concerning our equity compensation plans:
Number of Common
Shares to Be Issued Upon Weighted- Average Number of Common
Exercise of Outstanding Exercise Price of Shares Remaining
Plan Category Options Outstanding Options Available for Issuance
- -------------------------- -------------------------- ------------------------- ------------------------
Equity compensation plan None N/A N/A
approved by shareholders
Equity compensation plan None N/A N/A
not approved by shareholders
-9-
ITEM 6. SELECTED FINANCIAL DATA.
SUMMARY STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
2000 2001 2002
------------- ------------ -----------------------
Net sales RMB 557,479 RMB 509,280 RMB 718,249
Gross sales 9,493 44,897 53,372
Net income 1,481 30,166 32,616
Pro forma net income 1,481 30,166 32,616
Basic and diluted
net income per share .03 .67 .73
Weighted average
shares outstanding 45,000 45,000 45,000
SUMMARY BALANCE SHEET DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
2000 2001 2002
------------- ------------ -----------------------
Working capital RMB 27,957 RMB 7,647 RMB 183,371
Total assets 117,924 259,220 482,068
Long-term debt (net of current
portions) -0- -0- 190,811
Stockholders' equity 85,300 90,051 124,057
The above summary financial information has been prepared on a pro form
basis to give effect to our reverse acquisition by AP Henderson Ventures
effected on January 15, 2003 and the 1.875 for one forward split of our common
stock effected on February 11, 2003 as if both events had occurred as of January
1, 2000. The summary results of operations and financial condition are those of
Shandong Jingbo Petrochemical Company Limited, Shandong Jingbo Agrochemical
Company Limited and Shandong Boxing Lu Nong Chemical Company Limited. See Notes
to Pro Forma Financial Statements on page F-61.
-10-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
AS NOTED BELOW, WE DID NOT CONDUCT ANY OPERATIONS DURING THE TWELVE
MONTH PERIODS ENDED DECEMBER 31, 2000, 2001 OR 2002. HOWEVER, WE HAVE FILED
ELSEWHERE IN THE REPORT THE HISTORICAL FINANCIAL STATEMENTS OF THE PETROCHEMICAL
AND AGROCHEMICAL REFINERY OPERATIONS ACQUIRED BY US ON JANUARY 15, 2003,
INCLUDING A BALANCE SHEET AS SEPTEMBER 30, 2002 AND STATEMENTS OF INCOME FOR THE
TWELVE MONTHS ENDED DECEMBER 31, 2000 AND 2001 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2002.
THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS RELATES TO THE OPERATIONS AND FINANCIAL CONDITION REPORTED
IN THE FINANCIAL STATEMENTS OF OUR ACQUIRED ASSETS. THE FOLLOWING DISCUSSION AND
ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE AUDITED FINANCIAL STATEMENTS OF
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATES AS OF AND FOR THE
YEARS ENDED DECEMBER 31, 2000 AND 2001 AND THE UNAUDITED COMBINED FINANCIAL
STATEMENTS OF SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATES AS OF
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND RELATED NOTES INCLUDED IN
THIS REPORT.
BACKGROUND
We are engaged in the business of owning and operating a petrochemical
refinery and agrochemical manufacturing company in the People's Republic of
China ("PRC"). We are one of the largest independent petroleum refiners and
suppliers of transportation fuels, fuel oil, liquefied petroleum gas (LPG),
oxidized asphalt and other petrochemical products in the Shandong province of
the PRC. Our agrochemical division is a major manufacturer and supplier of
insecticide, fungicide, herbicide and other agrochemical products in the eastern
and northeastern parts of China.
We own and operate a combined petrochemical and agrochemical refinery.
Our refinery is located in Chen Hu Town, Bo Xing County, Shandong Province,
256505, People's Republic of China and occupies a total area of 335,000 square
meters. The facility has a combined crude oil primary distillation throughput
capacity of approximately 1,300,000 tons per year. Our refinery has a complex
configuration that enables us to process lower cost sour and heavy sour crude
oil, thus providing us with a cost advantage. We are an independent
petrochemical refinery operator, which means that we do not produce crude oil
nor do we conduct the retail sale or marketing our refined products. We sell our
refined petrochemical products on a wholesale basis primarily in the Shandong
and neighboring provinces. We also manufacture and sell seven lines of
agrochemical products. Our agrochemical products are sold in 18 provinces of the
People's Republic of China, Asian Pacific regions and Africa.
REORGANIZATION
We were organized as a Nevada corporation on June 13, 1994 under the
name Magnolia Ventures, Inc. for the purpose of listing our securities on an
electronic stock exchange and then acquiring an interest in a suitable operating
business. We conducted no operations from the date of our organization until
January 2003, other than the pursuit and analysis of suitable business
acquisitions.
On January 15, 2003, we were the subject of a reverse acquisition by AP
Henderson Ventures, a Nevada corporation ("AP Ventures"), pursuant to which we
acquired all of the outstanding capital shares of AP Ventures in exchange for a
controlling interest in our common shares. Following the close of the
transactions, AP Ventures changed its corporate name from AP Henderson Group to
AP Henderson Ventures and we changed our corporate name from Magnolia Ventures,
Inc. to AP Henderson Group.
AP Ventures was organized on December 31, 2002 for the purpose of
acquiring all of the capital shares of Jingbo Chemical (Bo Xing) Co., Ltd.
("Jingbo"), a Chinese foreign direct investment enterprise. On December 31,
2002, AP Ventures acquired all of the capital shares of Jingbo. Jingbo was
formed in 2002 for the purpose of acquiring certain operating assets and
liabilities of Shandong Jingbo Petrochemical Company Limited, Shandong Jingbo
Agrochemical Company Limited and Shandong Boxing Lu Nong Chemical Company
Limited, which together had been engaged in the business of owning and operating
a petrochemical refinery and agrochemical manufacturing company in the PRC.
Jingbo acquired the operating assets and liabilities of Shandong Jingbo
Petrochemical Company Limited, Shandong Jingbo Agrochemical Company Limited and
Shandong Boxing Lu Nong Chemical Company Limited on December 31, 2002,
immediately prior to AP Ventures' acquisition of the capital shares of Jingbo.
-11-
From the dates of their inception to January 15, 2003, neither Jingbo
nor AP Ventures conducted any operations or engaged in any capital transactions
apart from Jingbo's acquisition of the assets and liabilities of Shandong Jingbo
Petrochemical Company Limited, Shandong Jingbo Agrochemical Company Limited and
Shandong Boxing Lu Nong Chemical Company Limited, and AP Ventures' subsequent
acquisition of the capital shares of Jingbo. As a result, the financial
statements filed as part of this report for purposes of reporting the
acquisition of AP Ventures are those of Shandong Jingbo Petrochemical Company
Limited, Shandong Jingbo Agrochemical Company Limited and Shandong Boxing Lu
Nong Chemical Company Limited.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO TWELVE MONTHS ENDED
DECEMBER 31, 2001
REVENUES. Revenues for the twelve months ended December 31, 2001
decreased by RMB48.469 million (US$5.82 million) or 8.6% from the prior twelve
months ended December 31, 2000.
OPERATING EXPENSES. Operating Expenses for the twelve months ended
December 31, 2001 decreased by RMB83.61 million (US$10.10 million) or 15.3% from
the prior twelve months ended December 31, 2000.
GROSS PROFIT. Gross profit for the twelve months ended December 31,
2001 decreased by RMB35.41 million (US$4.27 million) or 21% from the prior
twelve months ended December 31, 2000.
NET INCOME. Net income for the twelve months ended December 31, 2001
increased by RMB28.69 million (US$3.47 million) or 95.1% from the prior twelve
months ended December 31, 2000.
TWELVE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002
REVENUES. Revenues for the nine months ended September 30, 2002
increased by RMB208.9 million (US$25.3 million) or 41% over the twelve month
period ended December 31, 2000.
OPERATING EXPENSES. Operating Expenses for the nine months ended
September 30, 2002 increased by RMB200.5 million (US$24.2 million) or 43% over
the twelve month period ended December 31, 2001.
GROSS PROFIT. Gross profit for the nine months ended September 30, 2002
increased by RMB8.5 million (US$1 million) or 15.9% over the twelve month period
ended December 31, 2001.
NET INCOME. Net income for the nine months ended September 30, 2002
increased by RMB2.45 million (US$296,000) or 7.5% over the twelve month period
ended December 31, 2001.
BACKLOG
We sell our refined products on a purchase order basis rather than
through long-term contracts. Because we typically ship product within 30 days of
order and customers may cancel or reschedule deliveries, we do not consider
backlog to be a reliable indicator of future financial results.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were RMB26,198 million
(US$3.165 million) for the nine months ended September 30, 2002, compared to
RMB23.538 million (US$2.844 million) provided by operating activities in the
fiscal year ended December 31, 2001.
Cash flows provided by investing activities were a negative RMB62.604
million (US$7.563 million) for the nine months ended September 30, 2002,
compared to a negative RMB41.702 million (US$5.039 million) provided by
investing activities in the twelve months ended September 30, 2002.
-12-
We have a US$ 23.1 million line-of-credit agreement with Central Bank.
We believe that existing cash balances, cash generated by operating activities,
and funds available under our credit facility will be sufficient to finance our
operating activities for at least the next 12 months. To the extent that the
funds generated from these sources are insufficient to finance our operating
activities, we would need to raise additional funds through public or private
financing. We cannot assure you that additional financing will be available on
terms favorable to us, or at all.
CRITICAL ACCOUNTING POLICIES
REVENUES
Sales are recognized when the revenue is realized or realizable, and
has been earned. In general, revenue is recognized as when risk and title to the
product transfers to the customer, which usually occurs at the time shipment is
made or as services are rendered.
EXPENSES
Expenses are recognized during the period in which they are incurred.
INVENTORY
Inventory is stated at the lower of cost or market value. The method of
determining cost is used consistently from year to year at each entity level and
varies among first-in-first-out and weighted average cost.
INVESTMENT IN AN EQUITY AFFILIATE
Investment in an affiliated entity in which we have the ability to
exercise significant influence, but not control, and generally is an ownership
interest of the investee's voting capital between 20% and 50%, are accounted for
under the equity method of accounting. Accordingly, under the equity method of
accounting, our shares of the investee's earnings or losses are included in the
consolidated statements of income.
-13-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk of loss to future earnings, to fair values or
to future cash flows that may result from changes in the price of a financial
instrument. The value of a financial instrument may change as a result of
changes in interest rates, exchange rates, commodity prices, equity prices and
other market changes. Market risk is attributed to all market sensitive
financial instruments, including long-term debt.
We do not utilize derivative financial instruments or investments in
available-for-sale securities. All cash is held in non-interest bearing
accounts. Accordingly, our exposure to market risk is through our bank debt
which bears interest at variable rates. As of September 30, 2002, our bank debt
consisted of RMB 190.84 million (US$23.1 million) of indebtedness bearing
interest at the prime rate announced by the Central Bank of China from time to
time. An increase in lending rates of 1% would cause our interest expense to
increase by US$231,000.
-14-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
AP HENDERSON GROUP (FORMERLY KNOWN AS MAGNOLIA VENTURES, INC.)
Report of Independent Certified Public Accountants...........................F-1
Balance Sheets at December 31, 2002 and 2001 ................................F-2
Statements of Income for the years ended December 31, 2002, 2001 and 2000
and cumulative from inception (June 13, 1994) to December 31, 2002 ........F-3
Statements of Shareholders' Equity
from inception (June 13, 1994) to December 31, 2002 .......................F-4
Statements of Cash Flows for the years ended December 31, 2002, 2001 and
2000 and cumulative from inception (June 13, 1994) to December 31, 2002 ...F-5
Notes to Financial Statements ...............................................F-6
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED, SHANDONG JINGBO AGROCHEMICAL
COMPANY LIMITED AND SHANDONG BOXING LU NONG CHEMICAL COMPANY LIMITED
Report of Independent Certified Public Accountants ..........................F-9
Combined Balance Sheets as of December 31, 2000 and 2001 ...................F-10
Combined Statements of Income for the years
ended December 31, 2000 and 2001 .........................................F-11
Combined Statements of Changes in Shareholders' Equity
for the years ended December 31, 2000 and 2001 ...........................F-12
Combined Statements of Cash Flows for the years
ended December 31, 2000 and 2001 .........................................F-13
Notes to Combined Financial Statements .....................................F-15
INTERIM FINANCIAL STATEMENTS
Unaudited Combined Balance Sheet as of September 30, 2002 ..................F-34
Unaudited Combined Statement of Income for the nine months
ended September 30, 2002 .................................................F-35
Unaudited Combined Statement of Changes in Shareholders' Equity
for the nine months ended September 30, 2002 .............................F-36
Unaudited Combined Statements of Cash Flows for the nine months
ended September 30, 2002 .................................................F-37
Notes to Unaudited Combined Financial Statements ...........................F-38
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF AP HENDERSON
GROUP (FORMERLY KNOWN AS MAGNOLIA VENTURES, INC.), SHANDONG JINGBO
PETROCHEMICAL COMPANY LIMITED, SHANDONG JINGBO AGROCHEMICAL COMPANY
LIMITED AND SHANDONG BOXING LU NONG CHEMICAL COMPANY LIMITED
Notes to Unaudited Pro Forma Consolidated Financial Statements .............F-61
Unaudited Pro Forma Consolidated Balance Sheet as of September 30, 2002 ....F-62
Unaudited Pro Forma Consolidated Statements of Income for the nine months
ended September 30, 2002 .................................................F-63
Unaudited Pro Forma Consolidated Statements of Income for the year
ended December 31, 2001 ..................................................F-64
-15-
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Board of Directors
Magnolia Ventures, Inc.
Las Vegas, Nevada
I have audited the accompanying balance sheets of Magnolia Ventures, Inc. (A
Development Stage Company) as of December 31, 2002 and 2001, and the related
statements of income, stockholders' equity, and cash flows for the years then
ended and the period June 13, 1994 (inception) through December 31, 2002. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Magnolia Ventures, Inc. (A
Development Stage Company) as of December 31, 2002 and 2001 and the results of
its operations and cash flows for the years then ended, and the period June 13,
1994 (inception) through December 31, 2002, in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 4 to the
financial statements, the Company has no operations and has no established
source of revenue. This raises substantial doubt about its ability to continue
as a going concern. Management's plan in regard to these matters is also
described in Note 4. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ Kyle L. Tingle, CPA. LLC
Kyle L. Tingle, CPA. LLC
January 14, 2003
Henderson, Nevada
F-1
MAGNOLIA VENTURES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
December 31, December 31,
2002 2001
------------- -------------
ASSETS
CURRENT ASSETS
Cash $ 31 $ 31
------------- -------------
Total current assets $ 31 $ 31
------------- -------------
Total assets $ 31 $ 31
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 0 $ 0
Officers advances (Note 7) 43,504 36,506
------------- -------------
Total current liabilities $ 43,504 $ 36,506
------------- -------------
STOCKHOLDERS' EQUITY
Common stock: $.001 par value;
authorized 25,000,000 shares;
issued and outstanding:
21,000,000 shares at December 31, 2001: $ -- $ 21,000
21,000,000 shares at December 31, 2002; 21,000 --
Additional Paid In Capital 0 0
Accumulated deficit during development stage (64,473) (57,475)
------------- -------------
Total stockholders' equity $ (43,473) $ (36,475)
------------- -------------
Total liabilities and stockholders' equity $ 31 $ 31
============= =============
See Accompanying Notes to Financial Statements.
F-2
MAGNOLIA VENTURES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF INCOME
June 13, 1994
Year ended (inception) to
December 31, December 31, December 31, December 31,
2002 2001 2000 2002
------------- ------------- ------------- -------------
Revenues $ 0 $ 0 $ 0 $ 0
Cost of revenue 0 0 0 0
------------- ------------- ------------- -------------
Gross profit $ 0 $ 0 $ 0 $ 0
General, selling and
administrative expenses 6,998 5,056 31,295 46,229
------------- ------------- ------------- -------------
Operating (loss) $ (6,998) $ (5,056) $ (31,295) $ (46,229)
Nonoperating income (expense)
Interest income 0 0 0 656
------------- ------------- ------------- -------------
Net (loss) $ (6,998) $ (5,056) $ (31,295) $ (45,573)
============= ============= ============= =============
Net (loss) per share, basic
and diluted (Note 2) $ (0.00) $ (0.00) $ (0.00) $ (0.00)
============= ============= ============= =============
Average number of shares
of common stock outstanding 21,000,000 21,000,000 21,000,000 21,000,000
============= ============= ============= =============
See Accompanying Notes to Financial Statements.
F-3
MAGNOLIA VENTURES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Common Stock and Capital (Deficit)
In Excess of Par Value During
--------------------------- Development
Shares Amount Stage
------------ ------------ ------------
Balance, December 31, 1998 21,000,000 $ 21,000 $ (21,124)
Net (loss), December 31, 1999 0
------------ ------------ ------------
Balance, December 31, 1999 21,000,000 $ 21,000 $ (21,124)
Net (loss), December 31, 2000 (31,295)
------------ ------------ ------------
Balance, December 31, 2000 21,000,000 $ 21,000 $ (52,419)
Net (loss), December 31, 2001 (5,056)
------------ ------------ ------------
Balance, December 31, 2001 21,000,000 $ 21,000 $ (57,475)
Net (loss), December 31, 2002 (6,998)
------------ ------------ ------------
Balance, December 31, 2002 21,000,000 $ 21,000 $ (64,473)
============ ============ ============
See Accompanying Notes to Financial Statements.
F-4
MAGNOLIA VENTURES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
June 13, 1994
Year ended (inception) to
December 31, December 31, December 31, June 30,
2002 2001 2000 2002
------------ ------------ ------------ ------------
Cash Flows From
Operating Activities
Net (loss) $ (6,998) $ (5,056) $ (31,295) $ (45,573)
Adjustments to reconcile net (loss)
to cash (used in) operating activities:
Changes in assets and liabilities
Increase in accounts payable 0 0 0 0
Increase in officer advances 6,998 5,056 31,295 43,504
------------ ------------ ------------ ------------
Net cash (used in)
operating activities $ 0 $ 0 $ 0 $ (2,069)
------------ ------------ ------------ ------------
Cash Flows From
Investing Activities $ 0 $ 0 $ 0 $ 0
------------ ------------ ------------ ------------
Cash Flows From
Financing Activities
Issuance of common stock 0 0 0 2,100
------------ ------------ ------------ ------------
Net cash (used in)
financing activities $ 0 $ 0 $ 0 $ 2,100
------------ ------------ ------------ ------------
Net increase (decrease)
in cash $ 0 $ 0 $ 0 $ 31
Cash, beginning of period 31 31 31 $ 0
------------ ------------ ------------ ------------
Cash, end of period $ 31 $ 31 $ 31 $ 31
============ ============ ============ ============
See Accompanying Notes to Financial Statements.
F-5
MAGNOLIA VENTURES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business:
- -------------------
Magnolia Ventures, Inc. ("Company") was organized June 13, 1994 under the laws
of the State of Nevada. The Company currently has no operations and, in
accordance with Statement of Financial Accounting Standard (SFAS) No. 7,
"ACCOUNTING AND REPORTING BY DEVELOPMENT STAGE ENTERPRISES," is considered a
development stage company.
A summary of the Company's significant accounting policies is as follows:
- -------------------------------------------------------------------------
Estimates
- ---------
The preparation of financial statements in conformity with generally accepted
accounting principles 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 period.
Actual results could differ from those estimates.
Cash
- ----
For the Statements of Cash Flows, all highly liquid investments with maturity of
three months or less are considered to be cash equivalents. There were no cash
equivalents as of December 31, 2002, 2001, and 2000.
Income taxes
- ------------
Income taxes are provided for using the liability method of accounting in
accordance with SFAS No. 109 "ACCOUNTING FOR INCOME TAXES." A deferred tax asset
or liability is recorded for all temporary differences between financial and tax
reporting. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax basis. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effect of
changes in tax laws and rates on the date of enactment.
Reporting on costs for start-up activities
- ------------------------------------------
Statement of Position 98-5 ("SOP 98-5), "REPORTING ON THE COSTS OF START-UP
ACTIVITIES" which provides guidance on the financial reporting of start-up and
organization costs, requires most costs of start-up activities and organization
costs to be expensed as incurred. With the adoption of SPO 98-5, there has been
little to no effect on the Company's financial statements.
F-6
MAGNOLIA VENTURES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 2. STOCKHOLDERS' EQUITY
Common stock
- ------------
The authorized common stock of the Company consists of 25,000,000 shares with
par value of $0.001. On June 13, 1994, the Company authorized and issued 2,100
shares of its no par value common stock in consideration of $2,100 in cash.
On December 3, 1999, the State of Nevada approved the Company's restated
Articles of Incorporation, which increased its capitalization from 25,000 common
shares to 25,000,000 common shares. The no par value was changed to $0.001 per
share.
On December 3, 1999, the Company's shareholders approved a forward split of its
common stock at one hundred shares for one share of the existing shares. The
number of common stock shares outstanding increased from 2,100 to 210,000. Prior
period information has been restated to reflect the stock split
On February 8, 2000, the Company's shareholders approved a forward split of its
common stock at one hundred shares for one share of the existing shares. The
number of common stock shares outstanding increased from 210,000 to 21,000,000.
Prior period information has been restated to reflect the stock split
Preferred stock
- ---------------
On February 8, 2000, the State of Nevada approved the Company's restated
Articles of Incorporation which created a new class of serial preferred stock,
with a par value of $0.01. The Company has authorized 10,000,000 shares of
Serial Preferred Stock. No shares of Serial Preferred Stock has been issued.
Net loss per common share
- -------------------------
Net loss per share is calculated in accordance with SFAS No. 128, "EARNINGS PER
SHARE." The weighted-average number of common shares outstanding during each
period is used to compute basic loss per share. Diluted loss per share is
computed using the weighted averaged number of shares and dilutive potential
common shares outstanding. Dilutive potential common shares are additional
common shares assumed to be exercised.
Basic net loss per common share is based on the weighted average number of
shares of common stock outstanding of 21,000,000 during 2002, 2001, 2000, and
since inception. As of December 31, 2002, 2001, and 2000, and since inception,
the Company had no dilutive potential common shares.
F-7
MAGNOLIA VENTURES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
NOTE 3. INCOME TAXES
There is no provision for income taxes for the period ended December 31, 2002,
due to the net loss and no state income tax in Nevada, the state of the
Company's domicile and operations. The Company's total deferred tax asset as of
December 31, 2002 is as follows:
Net operating loss carry forward $ 45,573
Valuation allowance $ (45,573)
---------------
Net deferred tax asset $ 0
===============
The net federal operating loss carry forward will expire between 2016 and 2022.
This carry forward may be limited upon the consummation of a business
combination under IRC Section 381.
NOTE 4. GOING CONCERN
The Company's financial statements are prepared in accordance with generally
accepted accounting principles applicable to a going concern. This contemplates
the realization of assets and the liquidation of liabilities in the normal
course of business. Currently, the Company does not have significant cash of
other material assets, nor does it have operations or a source of revenue
sufficient to cover its operation costs and allow it to continue as a going
concern. The officers and directors have committed to advancing certain
operating costs of the Company.
NOTE 5. RELATED PARTY TRANSACTIONS
The Company neither owns nor leases any real or personal property. An officer of
the corporation provides office services without charge. Such costs are
immaterial to the financial statements and accordingly, have not been reflected
therein. The officers and directors for the Company are involved in other
business activities and may, in the future, become involved in other business
opportunities. If a specific business opportunity becomes available, such
persons may face a conflict in selecting between the Company and their other
business interest. The Company has not formulated a policy for the resolution of
such conflicts.
NOTE 6. WARRANTS AND OPTIONS
There are no warrants or options outstanding to acquire any additional shares of
common stock of the Company.
NOTE 7. OFFICERS ADVANCES
The Company has incurred costs while seeking additional capital through a merger
with an existing company. An officer of the Company has advanced funds on behalf
of the Company to pay for these costs. These funds have been advanced interest
free.
F-8
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
-------------------------------------------------
To the Shareholders and Board of Directors
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
(Incorporated in the People's Republic of China with limited liability)
Boxing, Shandong Province, People's Republic of China
We have audited the accompanying combined balance sheets of Shandong Jingbo
Petrochemical Company Limited and Affiliate (the "Company"), as of December 31,
2000 and 2001, and the related combined statements of income, shareholders'
equity and cash flows for the years then ended. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the combined financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statements presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Shandong Jingbo
Petrochemical Company Limited and Affiliate as of December 31, 2000 and 2001,
and of the results of its operations and cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States.
/s/ L.L. Bradford & Company, LLC
L.L. Bradford & Company, LLC
Las Vegas, Nevada
January 24, 2003
F-9
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 2001
2000 2001 2001
RMB'000 RMB'000 US$'000
----------- ----------- -----------
ASSETS
Current assets
Cash and cash equivalents 67,981 79,512 9,607
Accounts receivable, net 1,289 1,581 191
Due from related parties 4,340 30,797 3,721
Inventory 81,968 71,498 8,638
Prepaid expenses and other current assets 26,563 27,198 3,286
----------- ----------- -----------
Total current assets 182,141 210,586 25,443
Property, plant and equipment, net 90,152 112,941 13,646
Investment in an equity affiliate 21,100 21,100 2,549
Intangible and other assets, net 5,664 5,088 615
Deferred tax assets -- 5,345 646
----------- ----------- -----------
Total assets 299,057 355,060 42,899
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 80,826 62,075 7,473
Short-term debts 28,850 61,850 7,500
Due to related parties 31,459 34,333 4,148
Dividends payable -- 18,154 2,194
Income taxes payable 2,167 2,536 306
Other taxes payable 127,341 140,660 16,995
Deferred tax liabilities 214 -- --
----------- ----------- -----------
Total current liabilities 270,857 319,608 38,616
----------- ----------- -----------
Total liabilities 270,857 319,608 38,616
Minority interests 19 2,513 303
----------- ----------- -----------
Shareholders' equity
Paid-in capital 47,081 47,051 5,685
Accumulated deficit (19,162) (18,827) (2,275)
Statutory common funds 262 4,715 570
----------- ----------- -----------
Total shareholders' equity 28,181 32,939 3,980
----------- ----------- -----------
Total liabilities and shareholders' equity 299,057 355,060 42,899
=========== =========== ===========
F-10
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
COMBINED STATEMENTS OF INCOME
AS OF DECEMBER 31, 2000 AND 2001
2000 2001 2001
RMB'000 RMB'000 US$'000
------------- ------------- -------------
REVENUES
Sales and other operating revenues 557,479 509,322 61,537
OPERATING EXPENSES
Purchases, services and other 464,283 383,876 46,381
Employee compensation costs 22,101 23,546 2,845
Depreciation, depletion and amortization 18,637 16,531 1,997
Selling, general and administrative expenses 11,821 12,840 1,551
Impairment loss on valuation of
assets and liabilities 1,296 -- --
Taxes other than income taxes 30,958 33,290 4,022
Other (income) expense, net (1,314) (5,654) (683)
------------- ------------- -------------
Total operating expenses 547,782 464,429 56,113
------------ ------------ ------------
Income from operations 9,697 44,893 5,424
OTHER INCOME (EXPENSE)
Interest income 1,453 1,781 215
Interest expense (1,632) (4,821) (582)
------------- ------------- -------------
Total other income (expense) (179) (3,040) (367)
------------- ------------- -------------
Income before income taxes and minority interests 9,518 41,853 5,057
Income taxes 7,961 10,590 1,280
------------- ------------- -------------
Income before minority interests 1,557 31,263 3,777
Income (loss) applicable to minority interests 128 (1,100) (133)
------------- ------------- -------------
Net income 1,685 30,163 3,644
============= ============= =============
F-11
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AS OF DECEMBER 31, 2000 AND 2001
STATUTORY
PAID-IN ACCUMULATED COMMON
CAPITAL DEFICIT FUNDS TOTAL
RMB'000 RMB'000 RMB'000 RMB'000
------------ ------------ ------------ ------------
Balance at December 31, 1999 26,075 (20,585) -- 5,490
Net income for the year ended
December 31, 2000 -- 1,685 -- 1,685
Contributions 21,006 -- -- 21,006
Transfer to reserves -- (262) 262 --
------------ ------------ ------------ ------------
Balance at December 31, 2000 47,081 (19,162) 262 28,181
Net income for the year ended
December 31, 2001 -- 30,163 -- 30,163
Purchase of shareholders interest
in Company (30) -- -- (30)
Transfer to reserves -- (4,453) 4,453 --
Dividend -- (25,375) -- (25,375)
------------ ------------ ------------ ------------
Balance at December 31, 2001 47,051 (18,827) 4,715 32,939
============ ============ ============ ============
Balance at December 31, 2001 in US$ 5,685 (2,275) 570 3,980
============ ============ ============ ============
F-12
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
2000 2001 2001
RMB'000 RMB'000 US$'000
----------- ----------- -----------
CASH FLOW FROM OPERATING ACTIVITIES
Net income 1,685 30,163 3,644
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 18,637 16,530 1,997
Impairment loss on valuation of assets and liabilities 1,296 -- --
Disposal and write-off property, plant and equipment 1,999 2,959 358
Loss (gain) on dilution of equity interest in subsidiary 16 (1,452) (175)
Changes in operating assets and liabilities:
Change in accounts receivable 2,144 (292) (35)
Change in inventory (9,534) 10,470 1,265
Change in prepaid expenses and other current assets (491) (635) (77)
Change in due from/to related parties 29,044 (23,583) (2,849)
Change in accounts payable and accrued liabilities (37,031) (18,751) (2,266)
Change in income tax liabilities 2,038 369 45
Change in other taxes payable 15,230 13,319 1,609
Change in deferred taxes (2,519) (5,559) (672)
----------- ----------- -----------
Net cash provided by operating activities 22,514 23,538 2,844
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (26,559) (42,168) (5,095)
Acquisition of intangible assets (1,360) -- --
Proceeds from disposal of property, plant and equipment 16,035 466 56
Proceeds from disposal of long-term investment 480 -- --
----------- ----------- -----------
Net cash used in investing activities (11,404) (41,702) (5,039)
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid -- (7,221) (872)
Dividends paid to minority shareholders -- (266) (32)
Proceeds from short-term debt 42,550 80,550 9,732
Payments on short-term debt (32,500) (47,550) (5,745)
Proceeds of contributions from minority shareholders 5,006 4,212 509
Purchase of shareholder interest in Company -- (30) (4)
----------- ----------- -----------
Net cash provided by financing activities 15,056 29,695 3,587
----------- ----------- -----------
Net change in cash and cash equivalents 26,166 11,531 1,393
Cash and cash equivalents, beginning of year 41,815 67,981 8,214
----------- ----------- -----------
Cash and cash equivalents, end of the year 67,981 79,512 9,607
=========== =========== ===========
Supplemental cash flow information:
Interest paid 12,000 2,601 314
=========== =========== ===========
Income taxes paid 8,442 15,780 1,907
=========== =========== ===========
Non-cash financing and investing activities:
Conversion of salaries payable into paid-in capital 16,000 -- --
=========== =========== ===========
Declaration of dividends and unpaid at year end -- 18,154 2,193
=========== =========== ===========
F-13
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
1. BACKGROUND, ORGANIZATION AND NATURE OF OPERATIONS
The accompanying combined financial statements include the
combined accounts of Shandong Jingbo Petrochemical Company Limited and
Shandong Boxing Lu Nong Chemical Company Limited. Such combined group
is collectively referred to as Shandong Jingbo Petrochemical Company
Limited and Affiliate (hereafter referred to as the "Company"). The
combined financial statements have been presented on a combined basis
due to common management and ownership. These entities are expected to
be subject to a business combination. All intercompany balances and
transactions have been eliminated in combination.
Shandong Jingbo Petrochemical Company Limited ("Petrochemical
Company") was established in September 1988 as a State Owned Enterprise
in the Shandong Province of the People's Republic of China (the "PRC").
In September 2000, Petrochemical Company restructured its capital
structure to a limited liability company. Petrochemical Company is
principally engaged in the manufacturing and distribution of
petrochemical products in the PRC.
Shandong Jingbo Agrochemical Company Limited ("Agrochemical
Company") was established in February 1997 in the Shandong Province of
the PRC as a limited liability company. The capital structure of
Agrochemical Company was reorganized in September 2000 and April 2001,
whereby as of December 31, 2001, approximately 57% ownership interest
was held by Petrochemical Company. Accordingly, Agrochemical Company is
a subsidiary of Petrochemical Company and has been consolidated in the
accompanying combined financial statements. Agrochemical Company is
principally engaged in the manufacturing and distribution of
agricultural insecticide and chemicals. On April 5, 2002, Company
returned all of its capital contributed by Petrochemical Company to
them and ceased to be a subsidiary of Petrochemical Company.
Shandong Bo Xing Lu Nong Chemical Company Limited ("Lu Nong
Chemical Company") was established in April 2000 in the Shandong
Province of the PRC as a limited liability company. Lu Nong Chemical
Company was principally engaged in the manufacture of agricultural
insecticide primarily for Agrochemical Company. On April 5, 2002, Lu
Nong Chemical Company transferred its assets, liabilities and business
to Agrochemical Company and ceased to operate as a separate limited
liability company.
The Company is subject to, among others, the following operating risks:
(a) Country risk
As all of the Company's operations are conducted in
the PRC, the Company is subject to special considerations and
significant risks not typically associated with companies
operating in the United States of America. These risks
include, among others, the political, economic and legal
environments and foreign currency exchange. The Company's
results may be adversely affected by changes in the political
and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
In addition, all of the Company's revenue is
denominated in the PRC's currency of Renminbi ("RMB"), which
must be converted into other currencies before remittance out
of the PRC. Both the conversion of RMB into foreign currencies
and the remittance of foreign currencies abroad require
approval of the PRC government.
F-15
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
1. BACKGROUND, ORGANIZATION AND NATURE OF OPERATIONS (continued)
(b) Credit risk
The carrying amounts of accounts receivable included
in the balance sheets represent the Company's exposure to
credit risk in relation to its financial assets. No other
financial assets carry a significant exposure to credit risk.
The Company performs ongoing credit evaluations of
each customer's financial condition. It maintains allowances
for doubtful accounts and such allowances in the aggregate
have not exceeded management's estimations.
(c) Interest rate risk
The Company is exposed to the risk arising from
changing interest rates, which may affect the ability of
repayment of existing debts and viability of securing future
debt instruments within the PRC.
2. BASIS OF PRESENTATION
The financial statements are presented on the combined basis
for the fiscal years 2000 and 2001 and have been prepared in accordance
with accounting principles generally accepted in the United States ("US
GAAP"). The combined financial statements include the consolidated
financial statements of Petrochemical Company and its subsidiary,
Agrochemical Company, for the years ended December 31, 2001 and 2000
and financial statements of Lu Nong Chemical Company for the year ended
December 31, 2001 and period from April 29, 2000 to December 31, 2000.
The combined financial statements are expressed in Renminbi
("RMB"), the national currency of the PRC. Solely for the convenience
of the reader, the December 31, 2001 financial statements have been
converted into United States dollars at the noon buying rate in New
York City on December 31, 2001 for cable transfers in Renminbi as
certified for customs purposes by the Federal Reserve Bank of New York
of US$1.00 = RMB 8.2766. No representation is made that the Renminbi
amounts could have been, or could be, converted into United States
dollars at that rate or at any other certain rate on December 31, 2001,
or at any other date and accordingly no currency conversion gain or
loss are reflected as a result of this translation.
The preparation of the combined financial statements in
conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and
liabilities. Actual results could differ from these estimates.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
(a) Basis of consolidation
The combined financial statements include the
consolidated financial statements of the Petrochemical Company
and its subsidiary. The results of operations of its
subsidiary are included in the combined statements of income,
and the portion attributable to minority interests is excluded
from the combined income from operations and reported
separately as income applicable to minority interest on the
combined statements of income. All significant intercompany
balances and transactions have been eliminated.
F-16
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(b) Definition of fiscal year
The Company's fiscal year end is December 31.
(c) Investment in an equity affiliate
Investment in an affiliated entity in which the
Company has the ability to exercise significant influence, but
not control, and generally is an ownership interest of the
investee's voting capital between 20% and 50%, are accounted
for under the equity method of accounting. Accordingly, under
the equity method of accounting, the Company's share of the
investee's earnings or losses are included in the consolidated
statements of income. As of December 31, 2001, the equity
affiliate has not yet commenced operations and anticipates
operations to commence in 2002.
(d) Foreign currency translation
The functional currency of the Company is Renminbi
("RMB"). Transactions denominated in foreign currencies are
translated into RMB at the unified exchange rates quoted by
the People's Bank of China prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in
foreign currencies are translated into RMB using the
applicable unified exchange rates prevailing at the balance
sheet dates. The resulting exchange differences are included
in the determination of income.
The Company did not enter into any hedge contracts
during any of the periods presented. No foreign currency
exchange gains or losses were capitalized for any periods
presented.
(e) Fair value of financial instruments
The carrying amounts for the Company's cash and cash
equivalents, accounts receivable, due to/from related parties,
accounts payable and accrued liabilities, income taxes
payable, other taxes payable, deferred tax assets/liabilities
and short-term debts approximate fair value due to the
short-term maturity of these instruments.
The Company had no derivative financial instruments
in any of the years presented.
(f) Property, plant and equipment
Property, plant and equipment are initially recorded
at cost less accumulated depreciation, depletion and
amortization. Cost represents the purchase price of the asset
and other costs incurred to bring the asset into existing use.
Depreciation, depletion and amortization to write-off
the cost of each asset to their residual values over their
estimated useful lives are calculated using the straight-line
method.
F-17
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(f) Property, plant and equipment (continued)
The Company uses the following useful lives for
depreciation, depletion and amortization purposes:
Land use rights over the land use right period of 27-50 years
Buildings 25-40 years
Plant and machinery 3-30 years
Equipment and motor vehicles 5-15 years
No depreciation is provided for construction in
progress until they are completed and put in use. Interest and
other costs on borrowings to finance the construction of
property, plant and equipment are capitalized during the
period of time that is required to complete and prepare the
property for its intended use.
The Company accounts for property, plant and
equipment in accordance with Statement of Financial Accounting
Standard ("SFAS") No.121, "Accounting for the Impairment of
Long-lived Assets to be Disposed of" which requires impairment
loss to be recognized on the long-lived assets when the sum of
expected future cash flows (undiscounted and without interest
charges) resulted from the use of the asset and its eventual
disposition is less than the carrying amount of the asset.
Otherwise, an impairment loss is not recognized. Measurement
of the impairment loss for long-lived assets is based on the
fair value of the assets.
Gains and losses on disposal of property, plant and
equipment are determined by reference to their carrying
amounts.
Costs for planned major maintenance activities,
primarily related to refinery turnarounds, are expensed as
incurred except for costs of components that result in
improvements and betterments which are capitalized as part of
property, plant and equipment and depreciated over their
useful lives, which is generally the period until the next
scheduled major maintenance.
(g) Intangible assets
Acquisition costs on patents, trademarks, licenses
and other intangibles are capitalized and amortized using the
straight-line method over their useful lives, generally over 3
to 10 years. The Company does not capitalize internally
generated intangible assets. The carrying amount of each
intangible asset is reviewed annually and adjusted for
impairment where it is considered necessary. An impairment
loss is recognized whenever the carrying amount of an asset
exceeds its recoverable amount. Events and circumstances that
would trigger an impairment assessment include a significant
decrease in the market value of an asset, a significant change
in the manner or extent that an asset is used including a
decision to abandon acquired products, services or
technologies, a significant adverse change in operations or
business climate affecting the asset, and historical operating
or cash flow losses expected to continue for the foreseeable
future associated with the asset. An asset is considered
impaired when the undiscounted cash flows projected to be
generated from the asset over its remaining useful life is
less than the recorded amount of that asset. Impairment losses
are measured based on the difference between the asset's fair
value and carrying amount and are recorded as impairment
write-downs in the consolidated statements of operations in
F-18
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
the period that an indicator of impairment arises. Measurement
of fair value is based on estimated expected future cash
flows, including terminal value cash flows expected to result
from the disposition of the asset at the end of its useful
life, discounted at our weighted average cost of capital.
Weighted average cost of capital is based on historical risk
premiums required by investors for companies of our size,
industry and capital structure and includes risk factors
specific to us. In some instances, the measurement of fair
value includes a factor, if appropriate, for market
comparables, representing our estimate of the value that a
buyer is willing to pay for similar assets in terms of
products and services, customer base, risks and earnings
capabilities.
(h) Inventory
Inventory is stated at the lower of cost or market
value. The method of determining cost is used consistently
from year to year at each entity level and varies among
first-in-first-out and weighted average cost.
(i) Accounts receivable
Accounts receivable are carried at original invoiced
amounts less any allowance for doubtful accounts. Such
allowance provision for accounts receivable is established if
there is an uncertainty that the Company will be unable to
collect such amounts.
(j) Cash and cash equivalents
Cash and cash equivalents include interest bearing
and non-interest bearing bank deposits, money market accounts,
short-term certificates of deposit with original maturities of
three months or less.
(k) Income taxes
The Company is subject to PRC income taxes on an
entity basis on income arising in or derived from the tax
jurisdiction in which they operate.
For the years ended December 31, 2000 and 2001, all
of the Company's income was generated in the PRC, which was
subject to PRC income taxes at 33% (30% state income tax and
3% local income tax).
The Company accounts for its income taxes in
accordance with Statement of Financial Accounting Standards
No. 109, which requires recognition of deferred tax assets and
liabilities for future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and any tax credit carryforwards available. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
The Company also incurs various other taxes, which
are not income taxes. Taxes other than income taxes, which
arise from operating expenses, primarily comprised of
consumption tax, resource tax, urban construction tax,
education surcharges and business tax. Any unpaid amounts are
reflected on the combined balance sheets as other taxes
payable.
F-19
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(l) Revenues
Sales are recognized when the revenue is realized or
realizable, and has been earned. In general, revenue is
recognized as when risk and title to the product transfers to
the customer, which usually occurs at the time shipment is
made or as services are rendered.
(m) Expenses
Expenses are recognized during the period in which
they are incurred.
(n) Research and development expenses
Research and development expenditures are charged to
expenses as incurred. Research and development expenses were
RMB 180,000 and RMB 4,192,000 for the years ended December 31,
2000 and 2001, respectively.
(o) Retirement benefit plans
The Company contributes to various employee
retirement benefit plans organized by municipal and provincial
governments under which it is required to make monthly
contributions to these plans at rates prescribed by the
related municipal and provincial governments. The municipal
and provincial governments undertake to assume the retirement
benefit obligations of all existing and future retired
employees of the Company. Contributions to these plans are
charged to expense as incurred.
(p) New accounting developments
In July 2001, the Financial Accounting Standards
Board issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. They also issued
SFAS No. 143, Accounting for Obligations Associated with the
Retirement of Long-Lived Assets, and SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, in August
and October 2001, respectively.
SFAS No. 141 requires all business combinations
initiated after June 30, 2001 be accounted for under the
purchase method. SFAS No. 141 supersedes Accounting Principles
Board ("APB") Opinion No. 16, Business Combinations, and SFAS
No. 38, Accounting for Pre-acquisition Contingencies of
Purchased Enterprises, and is effective for all business
combinations initiated after June 30, 2001.
SFAS No. 142 addresses the financial accounting and
reporting for acquired goodwill and other intangible assets.
Under the new rules, the Company is no longer required to
amortize goodwill and other intangible assets with indefinite
lives, but will be subject to periodic testing for impairment.
SFAS No. 142 supersedes APB Opinion No. 17, Intangible Assets.
Effective January 1, 2002, the Company will adopt SFAS No. 142
and is evaluating the effect that such adoption may have on
its results of operations and financial position. The Company
expects that the provisions of SFAS No. 142 will not have a
material impact on its results of operations and financial
position upon adoption.
F-20
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(p) New accounting developments (continued)
SFAS No. 143 establishes accounting standards for the
recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. It also provides
accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS No. 143 is
effective in fiscal years beginning after June 15, 2002, with
early adoption permitted. The Company expects that the
provisions of SFAS No. 143 will not have a material impact on
its results of operations and financial position upon
adoption. The Company plans to adopt SFAS No. 143 effective
January 1, 2003.
SFAS No. 144 establishes a single accounting model
for the impairment or disposal of long-lived assets, including
discontinued operations. SFAS No. 144 superseded SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and APB Opinion No. 30,
Reporting the Results of Operations-- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions.
The provisions of SFAS No. 144 are effective in fiscal years
beginning after December 15, 2001, with early adoption
permitted, and in general are to be applied prospectively. The
Company plans to adopt SFAS No. 144 effective January 1, 2002
and does not expect that the adoption will have a material
impact on its results of operations and financial position.
In November 2002, FIN No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an interpretation of SFAS
No. 5, 57, and 107 and rescission of FASB Interpretation No.
34," was issued. FIN 45 clarifies the requirements of SFAS No.
5, "Accounting for Contingencies," relating to a guarantor's
accounting for, and disclosure of, the issuance of certain
types of guarantees. The adoption of the provisions of FIN 45
did not have a material impact on the Company's results of
operations, financial position or cash flows.
On January 17, 2003, FIN 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB 51," was
issued. The primary objectives of FIN 46 are to provide
guidance on the identification and consolidation of variable
interest entities, or VIE's, which are entities for which
control is achieved through means other than through voting
rights. The Company does not have any VIEs.
4. EMPLOYEE COMPENSATION COSTS
Year Ended December 31,
2000 2001
RMB'000 RMB'000
Wages and salaries 20,282 21,543
Social security costs 1,819 2,003
----------- -----------
22,101 23,546
=========== ===========
Social security costs represent contributions to funds for
staff welfare organized by the municipal and provincial governments
including contributions to the retirement benefit plans (see Note 21).
F-21
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
5. INCOME TAXES
Year Ended December 31,
2000 2001
RMB'000 RMB'000
PRC current tax 10,480 16,149
Deferred tax (Note 13) (2,519) (5,559)
--------------- ---------------
7,961 10,590
=============== ===============
In accordance with the relevant PRC income tax rules and
regulations, the enacted PRC income tax rate applicable to the Company
is 33% for the years ended December 31, 2000 and 2001.
The tax on the Company's income before income taxes differs
from the theoretical amount that would arise using the basic tax rate
in the PRC applicable to the Company as follows:
Year Ended December 31,
2000 2001
RMB'000 RMB'000
Income before income taxes 9,518 41,853
=============== ===============
Tax calculated at a tax rate of 33% 3,141 13,811
Impairment loss on valuation (net of tax effects) 428 -
Non assessable and non deductible items
of income and expenses (net of tax effects) 4,392 (3,221)
--------------- ---------------
Income taxes 7,961 10,590
=============== ===============
6. CASH AND CASH EQUIVALENTS
At December 31,
2000 2001
RMB'000 RMB'000
Cash at bank and in hand 67,631 79,262
Certificates of deposit 350 250
--------------- ---------------
67,981 79,512
=============== ===============
F-22
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
7. ACCOUNTS RECEIVABLE
At December 31,
2000 2001
RMB'000 RMB'000
Accounts receivables 1,658 2,273
Less: Allowance for doubtful accounts (369) (692)
--------------- ---------------
Accounts receivable, net 1,289 1,581
=============== ===============
Year Ended December 31,
2000 2001
RMB'000 RMB'000
Allowance for doubtful accounts:
Balance at beginning of year -- 369
Additions to allowance for doubtful accounts 369 323
--------------- ---------------
Balance at end of year 369 692
=============== ===============
8. INVENTORY
At December 31,
2000 2001
RMB'000 RMB'000
Inventory consists of the following:
Raw materials 38,575 22,093
Work-in-progress 9,639 8,148
Finished goods 33,754 41,257
--------------- ---------------
81,968 71,498
=============== ===============
9. PREPAID EXPENSES AND OTHER CURRENT ASSETS
At December 31,
2000 2001
RMB'000 RMB'000
Other receivables 9,667 7,998
Less: Allowance for doubtful accounts (4,427) (4,618)
--------------- ---------------
5,240 3,380
Deposits for purchase of raw materials,
machinery and equipment 20,087 14,759
Prepayment for construction work 888 734
Prepaid expenses 313 7,555
Other current assets 35 770
--------------- ---------------
26,563 27,198
=============== ===============
F-23
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
10. PROPERTY, PLANT AND EQUIPMENT
Machinery
and Motor Land Construction
Buildings equipment vehicle use rights in progress Total
--------- --------- --------- --------- --------- ---------
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Year ended December 30, 2000
Cost or valuation
At beginning of the year 42,333 75,453 4,251 6,259 8,264 136,560
Additions 1,133 8,225 2,777 -- 13,624 25,759
Transfers 12,662 1,147 -- 671 (14,480) --
Disposals and write-offs (15,022) (928) (1,848) -- (2,920) (20,718)
Impairment loss on
valuation and related
adjustment -- (940) -- -- -- (940)
--------- --------- --------- --------- --------- ---------
At end of the year 41,106 82,957 5,180 6,930 4,488 140,661
--------- --------- --------- --------- --------- ---------
Accumulated depreciation
At beginning of the year 4,084 27,013 2,675 -- -- 33,772
Depreciation 1,389 15,675 786 124 -- 17,974
Disposal and write-offs -- (226) (1,205) -- -- (1,431)
Impairment loss on
valuation and related
adjustment -- 194 -- -- 194
--------- --------- --------- --------- --------- ---------
At end of the year 5,473 42,656 2,256 124 -- 50,509
--------- --------- --------- --------- --------- ---------
Net book value
At end of the year 35,633 40,301 2,924 6,806 4,488 90,152
========= ========= ========= ========= ========= =========
Year ended December 31, 2001
Cost or valuation
At beginning of the year 41,106 82,957 5,180 6,930 4,488 140,661
Additions 7,833 11,740 727 -- 21,868 42,168
Transfers -- 293 -- -- (293) --
Disposals and write-offs -- (1,510) (560) -- (2,473) (4,543)
--------- --------- --------- --------- --------- ---------
At end of the year 48,939 93,480 5,347 6,930 23,590 178,286
--------- --------- --------- --------- --------- ---------
Accumulated depreciation
At beginning of the year 5,473 42,656 2,256 124 -- 50,509
Depreciation 1,549 13,455 860 90 -- 15,954
Disposal and write-offs -- (636) (482) -- -- (1,118)
--------- --------- --------- --------- --------- ---------
At end of the year 7,022 55,475 2,634 214 -- 65,345
--------- --------- --------- --------- --------- ---------
Net book value
At end of the year 41,917 38,005 2,713 6,716 23,590 112,941
========= ========= ========= ========= ========= =========
F-24
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
Land use rights and buildings are located in the PRC, where
private ownership of land is not allowed. Rather, entities acquire the
rights to use land for a designated term. As of December 31, 2001, the
Company had rights to use five parcels of land for periods ranging from
40 to 51 years up to 2041 to 2052.
Repair and maintenance costs were RMB 880,000 and RMB
1,456,000 for the years ended December 31, 2000 and 2001, respectively.
In accordance with the PRC regulations Petrochemical Company
and Agrochemical Company, a valuation of the property, plant and
equipment and other assets and liabilities (also referred to as
"revaluation") was carried out as of September 30, 2000 by a firm of
independent valuers registered in the PRC. The revaluation identified
certain property, plant and equipment acquired during the year ended
December 31, 2000 and with a net carrying value in excess of the
appraised value of RMB 1,134,000, which, was recorded as an expense for
the year ended December 31, 2000. The valuation was performed in order
to determine the fair value of the net assets of Petrochemical Company
and Agrochemical Company and establish the corresponding adjustments to
paid in capital and capital reserve in accordance with regulations in
the PRC. The valuation was based on depreciated replacement costs,
which will be carried out as and when necessary in the PRC.
11. INVESTMENT IN AN EQUITY AFFILIATE
At December 31,
2000 2001
RMB'000 RMB'000
Investment in an equity affiliate, at cost 21,100 21,100
================== ==================
Details of the equity affiliate are as follows:
Country of Equity
establishment Registered interest Principal
Name of company And operation capital held Activities
--------------- ------------- ------- ---- ----------
Shandong Jingbo The People's RMB 50,000,000 42.2% Production and
Thermoelectrical Republic sales
Company Limited of China of electrical
power and heat
Shandong Jingbo Thermoelectrical Company Limited has not
commenced operation as at December 31, 2001 however, operations did
commenced in 2002.
F-25
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
12. INTANGIBLE AND OTHER ASSETS
Intangible and other assets consist of the following at December 31:
2000 2001
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---- ------------ --- ---- ------------ ---
RMB'000 RMB'000 RMB'000 RMB'000 RMB'000 RMB'000
Trademark 3,838 (145) 3,693 3,838 (572) 3,266
Other intangibles 1,198 (11) 1,187 1,198 (144) 1,054
-------- -------- -------- -------- -------- --------
Intangible assets 5,036 (156) 4,880 5,036 (716) 4,320
Other assets 800 (16) 784 800 (32) 768
-------- -------- -------- -------- -------- --------
5,836 (172) 5,664 5,836 (748) 5,088
======== ======== ======== ======== ======== ========
Amortization on intangible assets was RMB 647,000 and RMB
559,000 for the years ended December 31, 2000 and 2001, respectively.
Other assets represented long-term prepaid advertising.
13. DEFERRED INCOME TAX ASSETS AND LIABILITIES
Deferred income taxes are calculated on temporary difference
under the liability method using a principal tax rate of 33%.
The movements in the deferred income tax assets and
liabilities account are as follows:
Year Ended December 31,
2000 2001
---- ----
RMB'000 RMB'000
At beginning of year (2,733) (214)
Income statement credit 2,519 5,559
---------- ----------
At end of year (214) 5,345
========== ==========
14. SHORT-TERM DEBTS
At December 31,
2000 2001
---- ----
RMB'000 RMB'000
Bank loans 28,350 61,350
Other borrowings from unrelated parties 500 500
---------- ----------
28,850 61,850
========== ==========
Bank loans are secured by the Company's property, plant and
equipment with net book value of RMB 41,361,000, and bear interest at
prevailing lending rates in the PRC ranging from 5.58% to 5.85% and
5.24% to 5.85% per annum for the years ended December 31, 2000 and 2001
respectively. All bank loans have maturities within one year.
F-26
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
Other borrowings from unrelated parties are unsecured and bear
interest at bank rate in the PRC ranging from 5.58% to 5.85% and 5.24%
to 5.85% per annum for the years ended December 31, 2000 and 2001
respectively.
15. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At December 31,
2000 2001
---- ----
RMB'000 RMB'000
Trade payables 28,403 20,683
Salaries and welfare payable 4,744 8,085
Accrued expenses 173 1,783
Dividends payable by a subsidiary to minority shareholders -- 956
Interest payable 2,498 3,040
Payables for construction-in-progress 9,787 5,293
Deposits received from staff 4,387 4,600
Deposits from customers 13,971 3,266
Provisions 8,525 8,525
Others 8,338 5,844
----------- -----------
80,826 62,075
=========== ==========
16. OTHER TAXES PAYABLE
Details of other taxes payable are as follow:
At December 31,
2000 2001
---- ----
RMB'000 RMB'000
Value-added tax 45,682 46,774
Consumption tax 77,545 84,340
Surtaxes 3,987 6,212
Withholding tax 127 3,334
----------- -----------
127,341 140,660
=========== ==========
(a) Value-Added Tax ("VAT")
The Company is subject to VAT, which is levied at the general
rates of 6% to 17% on gross sales of the Company's products.
An input credit is available whereby VAT paid on the purchases
of semi-finished products or raw materials can be used to
offset the VAT on sales to determine the net VAT payable.
VAT payable at December 31, 2000 and 2001 included brought
forward balances of RMB 45,186,000 and RMB 45,110,000,
respectively, from previous years, as the PRC authority has
not requested payment of these outstanding amounts.
F-27
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
16. OTHER TAXES PAYABLE (continued)
(b) Consumption Tax ("CT")
The Company is subject to CT at fixed rates of RMB 277.6 per
ton and RMB 117.6 per ton for domestic sales of gasoline and
diesel oil, respectively.
CT payable at December 31, 2000 and 2001 included brought
forward balances of RMB 62,341,000 and RMB 77,542,000,
respectively, from previous years, as the PRC authority has
not requested payment of these outstanding amounts.
(c) Surtaxes
The Company is subject to the following surtaxes:
- Urban Construction Tax levied at 5% of CT and net VAT
payable;
- Education Surcharges levied at 3% of CT and net VAT
payable.
- Property Tax levied at 1.2% of the cost of property
constructed.
(d) Withholding taxes
The Company is required to withhold personal income tax in
respect of dividends paid to individual equity holders and
business tax in respect of payments to contractors for
construction services.
17. PAID IN CAPITAL
Paid in capital represents the combined registered and paid up
capital of Petrochemical Company and Lu Nong Chemical Company.
During fiscal year 2001, the Company declared RMB 25,375,000
in dividends and paid RMB 7,221,000. As of December 31, 2001, the
Company has dividends payable totaling RMB 18,154,000.
18. STATUTORY COMMON FUNDS
Statutory Statutory
common common
reserve fund welfare fund Total
------------ ------------ -----
RMB'000 RMB'000 RMB'000
Balance at January 1, 2000 - - -
Transfer from accumulated deficit
to reserves 172 86 258
Transfer from accumulated deficit
to reserves by a subsidiary 3 1 4
---------- ---------- ----------
Balance at December 31, 2000 175 87 262
Transfer from accumulated deficit
to reserves 2,600 1,301 3,901
Transfer from accumulated deficit
To reserves by a subsidiary 368 184 552
---------- ---------- ----------
Balance at December 31, 2001 3,143 1,572 4,715
========== ========== ===========
F-28
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
(a) Pursuant to PRC regulations and the Company's Articles of
Organization, the Company is required to transfer 10% of its
net income, as determined under the PRC accounting
regulations, to a statutory common reserve fund until such
fund equals 50% of the Company's registered capital. The
transfer to this reserve must be made prior to any
distribution of dividends to the Company's shareholders.
The statutory common reserve fund shall only be used to makeup
for previous years' losses, to expand the Company's production
operations, or to increase the capital of the Company.
Additionally, the Company may convert its statutory common
reserve fund into capital and issue bonus capital to existing
shareholders in proportion to their original shareholdings,
provided approval by a resolution of shareholders' general
meeting and the balance of the reserve fund after such issue
is not less than 25% of the registered capital.
(b) Pursuant to the PRC regulations and the Company's Articles of
Organization, the Company is required to transfer 5% to 10% of
its net income, as determined under the PRC accounting
regulations, to the statutory common welfare fund. This fund
can only be used to provide staff welfare facilities and other
collective benefits to the Company's employees. This fund is
non-distributable other than in liquidation. The Company
currently transfers 5% of the net income, as provided under
the PRC accounting regulations, for the years ended December
31, 2000 and 2001 to the statutory common welfare fund.
19. COMMITMENTS
(a) Operating lease commitments
Under a lease agreement, the Company has committed to
pay determined rental to a PRC government for the period from
July 1996 to 2010. Future minimum lease payments as of
December 31, 2000 and 2001 under these arrangements are
analyzed as follows:
2000 2001
---- ----
RMB'000 RMB'000
- first year after 2000 and 2001 61 67
- second year after 2000 and 2001 67 74
- third year after 2000 and 2001 74 81
- fourth year after 2000 and 2001 81 90
- fifth year after 2000 and 2001 90 98
- thereafter 601 503
-------- --------
974 913
======== ========
Operating lease expenses approximated RMB 56,000 and
RMB 61,000 for the years ended December 31, 2000 and 2001,
respectively.
(b) Capital commitments
For the years ended December 31, 2000 and 2001, the
Company entered into various construction contracts. As of
December 31, 2000 and 2001, remaining commitments related to
these construction contracts approximated RMB 4,379,000 and
RMB 3,641,000, respectively.
F-29
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
20. RELATED PARTY TRANSACTIONS
Parties are considered to be related if they are subject to
common control or common significant influence, common ownership,
direct or indirect ownership between parties, or transactions with
employees.
The Company's significant related party transactions affecting
the results of operations are as follows:
Year Ended December 31,
2000 2001
RMB'000 RMB'000
Purchase of material from Shandong Jingbo
Printing Limited 239 1,030
================== ==================
Services received from Shandong Jingbo
Thermoelectrical Company Limited - 158
================== ==================
Interest income earned from short-term
advances to Shandong Jingbo
Thermoelectrical Company Limited - 192
================== ==================
Interest expenses paid to loans from
Shareholders 61 367
================== ==================
Due from/to related parties as of December 31, 2000 and 2001
are as follow:
At December 31,
2000 2001
RMB'000 RMB'000
Due from related parties
Employee advances 803 2,644
Shandong Jingbo Thermoelectrical Company Limited 3,537 28,153
------------------ ------------------
Total due from related parties 4,340 30,797
================== ==================
Due to related parties:
Loans from shareholders 10,000 12,312
Loans from employees 21,459 22,021
------------------ ------------------
Total due to related parties 31,459 34,333
================== ==================
Amounts due from related parties are interest free, unsecured
and without predetermined repayment terms.
F-30
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
20. RELATED PARTY TRANSACTIONS (continued)
Amounts due to shareholders are interest free, unsecured and
without predetermined repayment terms.
Amounts due to employees are unsecured, interest bearing at
7.2% per annum and without predetermined repayment terms.
21. RETIREMENT PLAN
As stipulated by the regulations of the PRC government, the
Company operates a defined contribution retirement plans for their
employees. The PRC government is responsible for the pension liability
to these retired employees. The Company is required to make specified
contributions to the state-sponsored retirement plan at 20% of the
basic salary cost of their employees. Employees of the PRC companies
are required to contribute 6% and 5% of their basic salary for the
years ended December 31, 2001 and 2000 respectively, with the maximum
amount of contribution of 8%. For the years ended December 31, 2000 and
2001, contributions made by the Company approximated RMB 765,415 and
RMB 1,050,000, respectively.
22. SEGMENT FINANCIAL INFORMATION
The Company is engaged in two business segments, namely,
petrochemical and agrochemical.
Description of products by segment
----------------------------------
The petrochemical segment is engaged in the manufacturing and
sales of petrochemical products in the PRC.
The agrochemical segment is engaged in the manufacturing and
sales of agricultural chemical products in the PRC.
All assets and operations of the Company are located in the
PRC, which is considered as one geographic location in an economic
environment with similar risks and returns.
Measurement of segment income or loss and segment assets
--------------------------------------------------------
The Company evaluates performance and allocates resources
based on results from operations. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Inter-segment sales and transfers
between reportable segments are not material for any periods presented.
F-31
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
22. SEGMENT INFORMATION (continued)
Factors management used to identify the Company's reportable segments
---------------------------------------------------------------------
The Company's reportable segments are business units that
offer different products.
Operating segment information
-----------------------------
Year ended December 31
------------------------
2000 2001
---- ----
RMB'000 RMB'000
Net sales:
Petrochemical
Net sales to unaffiliated customers 530,478 481,509
----------- -----------
Agrochemical
Net sales to unaffiliated customers 27,001 27,813
----------- -----------
Total consolidated net sales 557,479 509,322
=========== ===========
Depreciation, depletion and amortization expenses:
Petrochemical 16,930 14,461
Agrochemical 1,707 2,070
----------- -----------
Total consolidated depreciation, depletion
and amortization expenses 18,637 16,531
=========== ===========
Segment income/(loss):
Petrochemical 14,967 35,775
Agrochemical (5,254) 7,666
----------- -----------
Total segment income 9,713 43,441
Reconciling items:
Corporate income/(expenses) (16) 1,452
Interest income 1,453 1,781
Interest expenses (1,632) (4,821)
----------- -----------
Total consolidated income before income taxes 9,518 41,853
=========== ===========
Segment assets:
Petrochemical 248,091 288,422
Agrochemical 50,966 66,638
----------- -----------
Total consolidated assets 299,057 355,060
=========== ===========
F-32
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(EXPRESSED IN RENMINBI UNLESS OTHERWISE STATED)
22. SEGMENT INFORMATION (continued)
Expenditure for additions to long-lived assets:
Petrochemical 20,932 30,564
Agrochemical 4,827 11,604
----------- -----------
Total consolidated expenditure for
additions to long-lived assets 25,759 42,168
=========== ===========
Long-lived assets of reportable segments and corporate assets
consisted of property, plant and equipment located in the PRC.
Major customers
---------------
Major customers of the Company with sales exceeding 10% of the
total consolidated net sales are as follows.
Year ended December 31
----------------------
2000 2001
---- ----
Shendian Electric Industrial Holdings Limited 11.35% --
======== ========
Shandong Haihua Holdings Company Limited -- 17.77%
======== ========
23. SUBSEQUENT EVENTS
(a) On April 5, 2002, Lu Nong Chemical Company transferred its
assets and liabilities and business to Agrochemical Company
and was de-registered thereafter. On the same date,
Agrochemical Company returned to Petrochemical Company all the
capital it had contributed and ceased to be a subsidiary of
the Company.
(b) On December 31, 2002, Petrochemical Company and Agrochemical
Company reorganized whereby operational assets and liabilities
of both companies were transferred to Jingbo Chemical (Bo
Xing) Company Limited ("Boxing"), a newly formed foreign
direct-owned company in the PRC. Concurrently, AP Henderson
Ventures ("Ventures"), a newly formed Nevada corporation,
acquired the outstanding capital of Boxing in exchange for
10,000 shares of Ventures' common stock. On January 15, 2003,
Ventures completed a reverse acquisition with Magnolia
Ventures, Inc. ("Magnolia"), a publicly traded non-operational
Nevada corporation, pursuant to which Magnolia acquired all of
the outstanding shares of Ventures capital stock in exchange
for a controlling interest of Magnolia. The accounting for
these transactions are identical to that resulting from a
reverse-acquisition, except that no goodwill or other
intangible assets shall be recorded. Accordingly, the
financial statements of Magnolia will be the historical
financial statements of Boxing, formerly the operations of
Petrochemical Company and Agrochemical Company.
In January 2003, Magnolia changed its name to AP Henderson
Group and effectuated a 1.875 for one stock split of its
outstanding shares of common stock.
F-33
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
COMBINED BALANCE SHEETS
AS OF SEPTEMBER 30, 2002
(UNAUDITED)
RMB'000 US$'000
---------- ----------
ASSETS
Current assets
Cash and cash equivalents 164,120 19,828
Accounts receivable, net 17,138 2,071
Due from related parties 41,967 5,070
Inventory 48,216 5,825
Prepaid expenses and other current assets 115,443 13,947
---------- ----------
Total current assets 386,884 46,741
Property, plant and equipment, net 165,189 19,957
Investment in an equity affiliate 21,234 2,565
Intangible and other assets, net 4,657 563
---------- ----------
Total assets 577,964 69,826
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 112,710 13,616
Short-term debts 5,010 605
Due to related parties 41,959 5,069
Dividends payable 4,891 591
Income taxes payable 4,831 584
Other taxes payable 151,047 18,249
---------- ----------
Total current liabilities 320,448 38,714
---------- ----------
Long-term debts 190,838 23,056
---------- ----------
Total liabilities 511,286 61,770
Minority interest -- --
---------- ----------
Shareholders' equity
Paid-in capital 48,712 5,885
Retained earnings 14,059 1,699
Statutory common funds 3,907 472
---------- ----------
Total shareholders' equity 66,678 8,056
---------- ----------
Total liabilities and shareholders' equity 577,964 69,826
========== ==========
Conversion rate from RMB to US$ 8.2772
F-34-
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
COMBINED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
RMB'000 US$'000
------------ ------------
REVENUES
Sales and other operating revenues 718,355 86,787
OPERATING EXPENSES
Purchases, services and other 598,192 72,270
Employee compensation costs 10,175 1,229
Depreciation, depletion and amortization 10,604 1,281
Selling, general and administrative expenses 9,786 1,182
Taxes other than income taxes 41,532 5,018
Other (income) expense, net (5,225) (631)
------------ ------------
Total operating expenses 665,064 80,349
------------ ------------
Income from operations 53,291 6,438
OTHER INCOME (EXPENSE)
Interest income 810 98
Interest expense (6,426) (776)
------------ ------------
Total other income (expense) (5,616) (678)
Loss from equity affiliate (466) (56)
------------ ------------
Income before income taxes and minority interests 47,209 5,704
Income taxes 14,170 1,712
------------ ------------
Income before minority interests 33,039 3,992
Loss applicable to minority interests (829) (100)
------------ ------------
Net income 32,210,000 3,892
============ ============
Conversion rate from RMB to US$ 8.2772
F-35
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
STATUTORY
PAID-IN ACCUMULATED COMMON
CAPITAL DEFICIT FUNDS TOTAL
RMB'000 RMB'000 RMB'000 RMB'000
------------ ------------ ------------ ------------
Balance at December 31, 2001 47,051 (18,827) 4,715 32,939
Net income for the period ended
September 30, 2002 -- 32,210 -- 32,210
Combination of Shandong Jingbo
Agrochemical Company Limited 15,115 (2,213) -- 12,902
Contribution of Shandong Bo Xing
Lunong Chemical Company Limited
assets and liabilities (13,454) 3,431 (808) (10,831)
Dividend -- (542) -- (542)
------------ ------------ ------------ ------------
Balance at December 31, 2001 48,712 14,059 3,907 66,678
============ ============ ============ ============
Balance at December 31, 2001 in US$ 5,885 1,699 472 8,056
============ ============ ============ ============
Conversion rate from RMB to US$ 8.2772
F-36
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
RMB'000 US$'000
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income 32,210 3,891
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 10,604 1,281
Disposal and write-off property, plant and equipment 49 6
Gain on disposal of subsidiary (1,263) (153)
Changes in operating assets and liabilities:
Change in accounts receivable (15,557) (1,880)
Change in inventory 23,282 2,813
Change in prepaid expenses and other current assets (88,245) (10,660)
Change in accounts payable and accrued liabilities 50,635 6,117
Change in income tax liabilities 2,295 277
Change in dividends payable 10,387 1,255
Change in other taxes payable 5,345 646
Change in deferred taxes (3,544) (428)
------------ ------------
Net cash provided by operating activities 26,198 3,165
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (62,501) (7,551)
Acquisition of long-term investments (134) (16)
Proceeds from disposal of property, plant and equipment 31 4
------------ ------------
Net cash used in investing activities (62,604) (7,563)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid (12,984) (1,569)
Proceeds from short-term debt 14,352 1,734
Proceeds from long-term debt 195,348 23,601
Payments on short-term debt (71,192) (8,601)
Payments on long-term debt (4,510) (545)
------------ ------------
Net cash provided by financing activities 121,014 14,620
------------ ------------
Net change in cash and cash equivalents 84,608 10,222
Cash and cash equivalents, beginning of year 79,512 9,606
------------ ------------
Cash and cash equivalents, end of the year 164,120 19,828
============ ============
Conversion rate from RMB to US$ 8.2772
F-37
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
1. BACKGROUND, ORGANIZATION AND NATURE OF OPERATIONS
The accompanying combined financial statements include the
accounts of Shandong Jingbo Petrochemical Company Limited, Shandong
Boxing Lunong Chemical Company Limited and Shandong Jingbo Agrochemical
Company Limited. Such combined group is collectively referred to as
Shandong Jingbo Petrochemical Company Limited and Affiliate (hereafter
referred to as the "Company"). The combined financial statements have
been presented on a combined basis due to common management and
ownership. These entities are expected to be subject to a business
combination. All intercompany balances and transactions have been
eliminated in combination.
Shandong Jingbo Petrochemical Company Limited ("Petrochemical
Company") was established in September 1988 as a State Owned Enterprise
in the Shandong Province of the People's Republic of China (the "PRC").
In September 2000, Petrochemical Company restructured its capital
structure to a limited liability company. Petrochemical Company is
principally engaged in the manufacturing and distribution of
petrochemical products in the PRC.
Shandong Jingbo Agrochemical Company Limited ("Agrochemical
Company") was established in February 1997 in the Shandong Province of
the PRC as a limited liability company. Agrochemical Company is
principally engaged in the manufacturing and distribution of
agricultural insecticide and chemicals. The capital structure of
Agrochemical Company was reorganized in September 2000 and April 2001,
whereby as of December 31, 2001, Petrochemical Company held
approximately 57% ownership interest. Accordingly, Agrochemical Company
was a subsidiary of Petrochemical Company and has been consolidated in
the accompanying combined financial statements up through April 5,
2002. On April 5, 2002, Company returned all of its capital contributed
by Petrochemical Company to them and ceased to be a subsidiary of
Petrochemical Company ("de-consolidation").
Shandong Bo Xing Lu Nong Chemical Company Limited ("Lunong
Chemical Company") was established in April 2000 in the Shandong
Province of the PRC as a limited liability company. Lunong Chemical
Company was principally engaged in the manufacture of agricultural
insecticide primarily for Agrochemical Company. On April 5, 2002,
Lunong Chemical Company transferred its assets, liabilities and
business to Agrochemical Company and ceased to operate as a separate
limited liability company ("de-registration").
F-38
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
1. BACKGROUND, ORGANIZATION AND NATURE OF OPERATIONS (continued)
The Company is subject to, among others, the following operating risks:
(a) Country risk
As all of the Company's operations are conducted in
the PRC, the Company is subject to special considerations and
significant risks not typically associated with companies
operating in the United States of America. These risks
include, among others, the political, economic and legal
environments and foreign currency exchange. The Company's
results may be adversely affected by changes in the political
and social conditions in the PRC, and by changes in
governmental policies with respect to laws and regulations,
anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
In addition, all of the Company's revenue is
denominated in the PRC's currency of Renminbi ("RMB"), which
must be converted into other currencies before remittance out
of the PRC. Both the conversion of RMB into foreign currencies
and the remittance of foreign currencies abroad require
approval of the PRC government.
(b) Credit risk
The carrying amounts of accounts receivable included
in the balance sheets represent the Company's exposure to
credit risk in relation to its financial assets. No other
financial assets carry a significant exposure to credit risk.
The Company performs ongoing credit evaluations of
each customer's financial condition. It maintains allowances
for doubtful accounts and such allowances in the aggregate
have not exceeded management's estimations.
(c) Interest rate risk
The Company is exposed to the risk arising from
changing interest rates, which may affect the ability of
repayment of existing debts and viability of securing future
debt instruments within the PRC.
F-39
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
2. BASIS OF PRESENTATION
The financial statements are presented on the combined basis
and have been prepared in accordance with accounting principles
generally accepted in the United States ("US GAAP"). The combined
financial statements include the financial statements of Lunong
Chemical Company for the period from January 1, 2002 through April 5,
2002 (date of de-registration and transfer of its assets, liabilities
and operations to Agrochemical Company); consolidated financial
statements of Petrochemical Company and its subsidiary, Agrochemical
Company for the period from January 1, 2002 through April 5, 2002 (date
of de-consolidation); and the financial statements of Agrochemical
Company from April 6, 2002 through September 30, 2002.
The combined financial statements are expressed in Renminbi
("RMB"), the national currency of the PRC. Solely for the convenience
of the reader, the September 30, 2002 financial statements have been
converted into United States dollars at the noon buying rate in New
York City on September 30, 2002 for cable transfers in Renminbi as
certified for customs purposes by the Federal Reserve Bank of New York
of US$1.00 = RMB 8.2772. No representation is made that the Renminbi
amounts could have been, or could be, converted into United States
dollars at that rate or at any other certain rate on September 30,
2002, or at any other date and accordingly no currency conversion gain
or loss are reflected as a result of this translation.
The preparation of the combined financial statements in
conformity with US GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and
liabilities. Actual results could differ from these estimates.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
(a) Basis of consolidation
The combined financial statements include the
consolidated financial statements of the Petrochemical Company
and its subsidiary. The results of operations of its
subsidiary are included in the combined statements of income,
and the portion attributable to minority interests is excluded
from the combined income from operations and reported
separately as income applicable to minority interest on the
combined statements of income. All significant intercompany
balances and transactions have been eliminated.
(b) Definition of fiscal year
The Company's fiscal year end is December 31.
F-40
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(c) Investment in an equity affiliate
Investment in an affiliated entity in which the
Company has the ability to exercise significant influence, but
not control, and generally is an ownership interest of the
investee's voting capital between 20% and 50%, are accounted
for under the equity method of accounting. Accordingly, under
the equity method of accounting, the Company's shares of the
investee's earnings or losses are included in the consolidated
statements of income.
(d) Foreign currency translation
The functional currency of the Company is Renminbi
("RMB"). Transactions denominated in foreign currencies are
translated into RMB at the unified exchange rates quoted by
the People's Bank of China prevailing at the dates of the
transactions. Monetary assets and liabilities denominated in
foreign currencies are translated into RMB using the
applicable unified exchange rates prevailing at the balance
sheet dates. The resulting exchange differences are included
in the determination of income.
The Company did not enter into any hedge contracts
during any of the periods presented. No foreign currency
exchange gains or losses were capitalized for any periods
presented.
(e) Fair value of financial instruments
The carrying amounts for the Company's cash and cash
equivalents, accounts receivable, due to/from related parties,
accounts payable and accrued liabilities, income taxes
payable, other taxes payable, deferred tax assets/liabilities
and short-term debts approximate fair value due to the
short-term maturity of these instruments. The fair value
recognition for long-term debts is disclosed in Note 17.
The Company had no derivative financial instruments
in any of the years presented.
(f) Property, plant and equipment
Property, plant and equipment are initially recorded
at cost less accumulated depreciation, depletion and
amortization. Cost represents the purchase price of the asset
and other costs incurred to bring the asset into existing use.
Depreciation, depletion and amortization to write-off
the cost of each asset to their residual values over their
estimated useful lives are calculated using the straight-line
method.
F-41
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(f) Property, plant and equipment (continued)
The Company uses the following useful lives for
depreciation, depletion and amortization purposes:
Land use rights over the land use right period of 27-50 years
Buildings 25-40 years
Plant and machinery 3-30 years
Equipment and motor vehicles 5-15 years
No depreciation is provided for construction in
progress until they are completed and put in use. Interest and
other costs on borrowings to finance the construction of
property, plant and equipment are capitalized during the
period of time that is required to complete and prepare the
property for its intended use.
The Company accounts for property, plant and
equipment in accordance with Statement of Financial Accounting
Standard ("SFAS") No.121, "Accounting for the Impairment of
Long-lived Assets to be Disposed of" which requires impairment
loss to be recognized on the long-lived assets when the sum of
expected future cash flows (undiscounted and without interest
charges) resulted from the use of the asset and its eventual
disposition is less than the carrying amount of the asset.
Otherwise, an impairment loss is not recognized. Measurement
of the impairment loss for long-lived assets is based on the
fair value of the assets.
Gains and losses on disposal of property, plant and
equipment are determined by reference to their carrying
amounts.
Costs for planned major maintenance activities,
primarily related to refinery turnarounds, are expensed as
incurred except for costs of components that result in
improvements and betterments which are capitalized as part of
property, plant and equipment and depreciated over their
useful lives, which is generally the period until the next
scheduled major maintenance.
F-42
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(g) Intangible assets
Acquisition costs on patents, trademarks, licenses
and other intangibles are capitalized and amortized using the
straight-line method over their useful lives, generally over 3
to 10 years. The Company does not capitalize internally
generated intangible assets. The carrying amount of each
intangible asset is reviewed annually and adjusted for
impairment where it is considered necessary. An impairment
loss is recognized whenever the carrying amount of an asset
exceeds its recoverable amount. Events and circumstances that
would trigger an impairment assessment include a significant
decrease in the market value of an asset, a significant change
in the manner or extent that an asset is used including a
decision to abandon acquired products, services or
technologies, a significant adverse change in operations or
business climate affecting the asset, and historical operating
or cash flow losses expected to continue for the foreseeable
future associated with the asset. An asset is considered
impaired when the undiscounted cash flows projected to be
generated from the asset over its remaining useful life is
less than the recorded amount of that asset. Impairment losses
are measured based on the difference between the asset's fair
value and carrying amount and is recorded as impairment
write-downs in the consolidated statements of operations in
the period that an indicator of impairment arises. Measurement
of fair value is based on estimated expected future cash
flows, including terminal value cash flows expected to result
from the disposition of the asset at the end of its useful
life, discounted at our weighted average cost of capital.
Weighted average cost of capital is based on historical risk
premiums required by investors for companies of our size,
industry and capital structure and includes risk factors
specific to us. In some instances, the measurement of fair
value includes a factor, if appropriate, for market
comparables, representing our estimate of the value that a
buyer is willing to pay for similar assets in terms of
products and services, customer base, risks and earnings
capabilities.
(h) Inventory
Inventory is stated at the lower of cost or market
value. The method of determining cost is used consistently
from year to year at each entity level and varies among
first-in-first-out and weighted average cost.
(i) Accounts receivable
Accounts receivable are carried at original invoiced
amounts less any allowance for doubtful accounts. Such
allowance provision for accounts receivable is established if
there is an uncertainty that the Company will be unable to
collect such amounts.
F-43
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(j) Cash and cash equivalents
Cash and cash equivalents include interest bearing
and non-interest bearing bank deposits, money market accounts,
short-term certificates of deposit with original maturities of
three months or less.
(k) Income taxes
The Company is subject to PRC income taxes on an
entity basis on income arising in or derived from the tax
jurisdiction in which they operate.
For the nine months ended September 30, 2002, all of
the Company's income was generated in the PRC, which was
subject to PRC income taxes at 33% (30% state income tax and
3% local income tax).
The Company accounts for its income taxes in
accordance with Statement of Financial Accounting Standards
No. 109, which requires recognition of deferred tax assets and
liabilities for future tax consequences attributable to
differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax
bases and any tax credit carryforwards available. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period
that includes the enactment date.
The Company also incurs various other taxes, which
are not income taxes. Taxes other than income taxes, which
arise from operating expenses, primarily comprised of
consumption tax, resource tax, urban construction tax,
education surcharges and business tax. Any unpaid amounts are
reflected on the combined balance sheets as other taxes
payable.
(l) Revenues
Sales are recognized when the revenue is realized or
realizable, and has been earned. In general, revenue is
recognized as when risk and title to the product transfers to
the customer, which usually occurs at the time shipment is
made or as services are rendered.
(m) Expenses
Expenses are recognized during the period in which
they are incurred.
F-44
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(n) Research and development expenses
Research and development expenditures are charged to
expenses as incurred. Research and development expenses were
RMB 2,917,000 for the nine months ended September 30, 2002.
(o) Retirement benefit plans
The Company contributes to various employee
retirement benefit plans organized by municipal and provincial
governments under which it is required to make monthly
contributions to these plans at rates prescribed by the
related municipal and provincial governments. The municipal
and provincial governments undertake to assume the retirement
benefit obligations of all existing and future retired
employees of the Company. Contributions to these plans are
charged to expense as incurred.
(p) New accounting developments
In July 2001, the Financial Accounting Standards
Board issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. They also issued
SFAS No. 143, Accounting for Obligations Associated with the
Retirement of Long-Lived Assets, and SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, in August
and October 2001, respectively.
SFAS No. 141 requires all business combinations
initiated after June 30, 2001 be accounted for under the
purchase method. SFAS No. 141 supersedes Accounting Principles
Board ("APB") Opinion No. 16, Business Combinations, and SFAS
No. 38, Accounting for Pre-acquisition Contingencies of
Purchased Enterprises, and is effective for all business
combinations initiated after June 30, 2001.
SFAS No. 142 addresses the financial accounting and
reporting for acquired goodwill and other intangible assets.
Under the new rules, the Company is no longer required to
amortize goodwill and other intangible assets with indefinite
lives, but will be subject to periodic testing for impairment.
SFAS No. 142 supersedes APB Opinion No. 17, Intangible Assets.
Effective January 1, 2002, the Company will adopt SFAS No. 142
and is evaluating the effect that such adoption may have on
its results of operations and financial position. The Company
expects that the provisions of SFAS No. 142 will not have a
material impact on its results of operations and financial
position upon adoption.
F-45
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(p) New accounting developments (continued)
SFAS No. 143 establishes accounting standards for the
recognition and measurement of an asset retirement obligation
and its associated asset retirement cost. It also provides
accounting guidance for legal obligations associated with the
retirement of tangible long-lived assets. SFAS No. 143 is
effective in fiscal years beginning after June 15, 2002, with
early adoption permitted. The Company expects that the
provisions of SFAS No. 143 will not have a material impact on
its results of operations and financial position upon
adoption. The Company plans to adopt SFAS No. 143 effective
January 1, 2003.
SFAS No. 144 establishes a single accounting model
for the impairment or disposal of long-lived assets, including
discontinued operations. SFAS No. 144 superseded SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and APB Opinion No. 30,
Reporting the Results of Operations-- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions.
The provisions of SFAS No. 144 are effective in fiscal years
beginning after December 15, 2001, with early adoption
permitted, and in general are to be applied prospectively. The
Company plans to adopt SFAS No. 144 effective January 1, 2002
and does not expect that the adoption will have a material
impact on its results of operations and financial position.
In November 2002, FIN No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others an interpretation of SFAS
No. 5, 57, and 107 and rescission of FASB Interpretation No.
34," was issued. FIN 45 clarifies the requirements of SFAS No.
5, "Accounting for Contingencies," relating to a guarantor's
accounting for, and disclosure of, the issuance of certain
types of guarantees. The adoption of the provisions of FIN 45
did not have a material impact on the Company's results of
operations, financial position or cash flows.
On January 17, 2003, FIN 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB 51," was
issued. The primary objectives of FIN 46 are to provide
guidance on the identification and consolidation of variable
interest entities, or VIE's, which are entities for which
control is achieved through means other than through voting
rights. The Company does not have any VIEs.
F-46
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
4. EMPLOYEE COMPENSATION COSTS
Employee compensation costs for the nine months ended
September 30, 2002 comprised of the following:
RMB'000
Wages and salaries 8,761
Social security costs 1,414
---------------
10,175
===============
Social security costs represent contributions to funds for
staff welfare organized by the municipal and provincial governments
including contributions to the retirement benefit plans (see Note 22).
5. INCOME TAXES
Income taxes for the nine months ended September 30, 2002 are
comprised of the following:
RMB'000
PRC current tax 8,825
Deferred tax charge (Note 13) 5,345
---------------
14,170
===============
In accordance with the relevant PRC income tax rules and
regulations, the enacted PRC income tax rate applicable to the Company
is 33% for the nine month ended September 30, 2002.
The tax on the Company's income before income taxes differs
from the theoretical amount that would arise using the basic tax rate
in the PRC applicable to the Company for the nine months ended
September 30, 2002 are as follow:
RMB'000
Income before income taxes 47,209
Tax calculated at a tax rate of 33% 15,579
Non assessable and non-deductible items
of income and expenses (1,409)
---------------
Tax charge 14,170
===============
F-47
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
6. CASH AND CASH EQUIVALENTS
Cash and cash equivalents as of September 30, 2002 are as
follow:
RMB'000
Cash at bank and in hand 164,069
Certificates of deposit 51
----------------
164,120
================
7. ACCOUNTS RECEIVABLE
Accounts receivable as of September 30, 2002 are as follow:
RMB'000
Accounts receivable 17,823
Less : Allowance for doubtful receivables (685)
---------------
Accounts receivable, net 17,138
===============
Allowance for doubtful accounts as of September 30, 2002 are
as follow:
RMB'000
Balance at beginning of period 692
Additions to allowance for doubtful accounts (7)
---------------
Balance at end of period 685
===============
8. INVENTORY
Inventory as of September 30, 2002 is as follows:
RMB'000
Inventory consists of the following:
Raw materials 14,116
Work-in-progress 10,163
Finished goods 23,937
---------------
48,216
===============
F-48
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
9. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets as of September 30,
2002 are as follow:
RMB'000
Other receivables 7,657
Less : Allowance for doubtful accounts (4,620)
---------------
3,037
Deposits for purchase of raw materials and
machinery and equipment 101,708
Prepayment for construction work 2,562
Prepaid expenses 6,451
Other current assets 1,685
---------------
112,406
===============
10. PROPERTY, MACHINERY AND EQUIPMENT
Machinery
and Motor Land Construction
Buildings equipment vehicle use rights in progress Total
--------- --------- --------- --------- --------- ---------
RMB'000 RMB'000 RMB'0000 RMB'000 RMB'000 RMB'000
For the nine months ended September 30, 2002
Cost or valuation
At beginning of the period 48,939 93,665 5,162 6,930 23,590 178,286
Additions 5,990 29,817 7,273 -- 19,421 62,501
Transfers 11,964 18,553 -- -- (30,517) --
Reclassification (606) 606 -- -- -- --
Disposals and write-offs -- (125) (354) -- -- (479)
--------- --------- --------- --------- --------- ---------
At end of the period 66,287 142,516 12,081 6,930 12,494 240,308
--------- --------- --------- --------- --------- ---------
Accumulated depreciation
At beginning of the period 7,022 55,727 2,382 214 -- 65,345
Charge for the period 1,400 7,575 1,170 28 -- 10,173
Reclassification 41 (47) 6 -- -- --
Disposals and write-offs -- (99) (300) -- -- (399)
--------- --------- --------- --------- --------- ---------
At end of the period 8,463 63,156 3,258 242 -- 75,119
--------- --------- --------- --------- --------- ---------
Net book value
At end of the period 57,824 79,360 8,823 6,688 12,494 165,189
========= ========= ========= ========= ========= =========
f-49
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
10. PROPERTY, MACHINERY AND EQUIPMENT (continued)
Land use rights and buildings are located in the PRC, where
private ownership of land is not allowed. Rather, entities acquire the
rights to use land for a designated term. As of September 30, 2002, the
Company had rights to use five parcels of land for periods ranging from
40 to 51 years up to 2041 to 2052.
Repair and maintenance costs were RMB 15,581,000 for the nine
months ended September 30, 2002.
11. INVESTMENT IN AN EQUITY AFFILIATE
Investment in an equity affiliate as of September 30, 2002 is
as follows:
RMB'000
Investments in an equity affiliate, at cost 21,100
===============
Share of net assets at end of period 20,634
Other investments 600
---------------
21,234
===============
Details of the equity affiliate are as follows: RMB'000
Country of Equity
establishment Registered interest Principal
Name of company and operation Capital held activities
--------------- ------------- ------- ---- ----------
Shandong Jingbo The People's RMB 50,000 42.2% Production and
Thermoelectrical Republic sales
Company Limited of China of electrical
power and heat
Share of net loss of investment in an equity affiliate for the
nine months ended September 30, 2002 included in retained earnings of
the Company was RMB 466,000.
F-50
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
12. INTANGIBLE AND OTHER ASSETS
September 30, 2002
Accumulated
Cost Amortization Net
---- ------------ ---
RMB'000 RMB'000 RMB'000
Trademark 3,838 (891) 2,947
Technical know-how 1,198 (244) 954
-------- -------- --------
Intangible assets 5,036 (1,135) 3,901
Other assets 800 (44) 756
-------- -------- --------
5,836 (1,179) 4,657
======== ======== ========
Amortization on intangible assets was RMB 419,000 for the nine
months ended September 30, 2002.
Other assets represented long-term prepaid advertising.
13. DEFERRED INCOME TAX ASSETS
Deferred income taxes are calculated on temporary difference
under the liability method using a principal tax rate of 33%.
The movements in the deferred income tax assets account for
the nine months ended September 30, 2002 are as follows:
RMB'000
At beginning of period 5,345
Income statement credit/(charge) (5,345)
---------------
At end of period -
===============
F-51
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
14. SHORT-TERM DEBTS
Short-term debts as of September 30, 2002 are as follow:
RMB'000
Other borrowings from unrelated parties 500
Current portion of long-term debt (Note 16) 4,510
---------------
5,010
===============
Other borrowings from unrelated parties are unsecured and bear
interest at bank rate in the PRC ranging from 5.04% to 6.435% per annum
for the nine months ended September 30, 2002.
15. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Period ended
September 30,
2002
RMB'000
Trade payables 43,569
Salaries and welfare payable 1,907
Accrued expenses 434
Dividends payable by a subsidiary to minority
shareholders -
Interest payable 3,716
Payables for construction-in-progress 1,966
Deposits received from staff 16,225
Deposits from customers 22,069
Provisions 8,525
Bills payable 5,000
Others 9,299
---------------
159,560
===============
F-52
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
16. OTHER TAXES PAYABLE
Details of other taxes payable are as follow:
RMB'000
Value-added tax 61,550
Consumption tax 86,564
Surtaxes 1,814
Withholding tax 1,119
-------------
151,047
=============
(a) Value-Added Tax ("VAT")
The Company is subject to VAT, which is levied at the general
rates of 6% to 17% on gross sales of the Company's products.
An input credit is available whereby VAT paid on the purchases
of semi-finished products or raw materials can be used to
offset the VAT on sales to determine the net VAT payable.
VAT payable at September 30, 2002 included brought forward
balances of RMB 45,762,000 from previous years, as the PRC
authority has not requested payment of these outstanding
amounts.
(b) Consumption Tax ("CT")
The Company is subject to CT at fixed rates of RMB 277.6 per
ton and RMB 117.6 per ton for domestic sales of gasoline and
diesel oil, respectively.
CT payable at September 30, 2002 included brought forward
balances of RMB 79,750,000 from previous years, as the PRC
authority has not requested payment of these outstanding
amounts.
(c) Surtaxes
The Company is subject to the following surtaxes:
- Urban Construction Tax levied at 5% of CT and net VAT
payable;
- Education Surcharges levied at 3% of CT and net VAT
payable.
- Property Tax levied at 1.2% of the cost of property
constructed.
(d) Withholding taxes
The Company is required to withhold personal income tax in
respect of dividends paid to individual equity holders and
business tax in respect of payments to contractors for
construction services.
F-53
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
17. LONG-TERM DEBTS
Long-term debts as of September 30, 2002 are as follow:
RMB'000
Bank loans, secured 190,838
==============
The bank loans are secured by the Company's property, plant
and equipment with net book value of RMB 150,879,000, and bear interest
at the rate ranging from 5.04% to 6.435% per annum. Bank loans totaling
RMB 17,288,000 repayable within five years over 60 monthly installments
consisting of both principal and interest. Bank loans totaling RMB
173,550,000 is an interest only loan with the principal amount maturing
in December 2010.
Maturities of long-term debts at September 30, 2002 were as
follows:
RMB'000
2003 4,510
2004 4,510
2005 4,510
2006 3,758
2007 -
Thereafter 173,550
---------------
190,838
===============
18. PAID-IN CAPITAL
Paid in capital represents the combined registered and paid-in
capital of Petrochemical Company and Agrochemical Company.
As discussed in Note 1, Agrochemical Company de-consolidated
from Petrochemical Company on April 5, 2002. Consequently, Agrochemical
Company's financial statements are combined with accompanying combined
financial statements from April 6, 2002 through September 30, 2002. As
a result, Agrochemical Company's capital and accumulated deficit of RMB
15,115,000 and RMB (2,213,000), respectively, were combined as of April
6, 2002.
As discussed in Note 1, Lunong Chemical Company de-registered
on April 5, 2002 and the assets and liabilities of Lunong Chemical
Company were transferred to Agrochemical Company at the historical
amounts on that same date. Lunong Chemical Company's shareholders
equity was comprised of paid-in capital of RMB 13,454,000, accumulated
deficit of RMB 3,431,000, and statutory common funds of RMB 808,000,
which was accounted for as contributed capital.
F-54
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
STATUTORY COMMON FUNDS
Statutory Statutory
Common common
reserve fund welfare fund Total
------------ ------------ -----
RMB'000 RMB'000 RMB'000
Balance at December 31, 2001 3,143 1,572 4,715
Lunong Chemical Company
(de-registration) (539) (269) (808)
---------------- ---------------- ---------------
Balance at September 30, 2002 2,604 1,303 3,907
================ ================ ===============
(a) Pursuant to PRC regulations and the Company's Articles of
Organization, the Company is required to transfer 10% of its
net income, as determined under the PRC accounting
regulations, to a statutory common reserve fund until such
fund equals 50% of the Company's registered capital. The
transfer to this reserve must be made prior to any
distribution of dividends to the Company's shareholders.
The statutory common reserve fund shall only be used to makeup
for previous years' losses, to expand the Company's production
operations, or to increase the capital of the Company.
Additionally, the Company may convert its statutory common
reserve fund into capital and issue bonus capital to existing
shareholders in proportion to their original shareholdings,
provided approval by a resolution of shareholders' general
meeting and the balance of the reserve fund after such issue
is not less than 25% of the registered capital.
(b) Pursuant to the PRC regulations and the Company's Articles of
Organization, the Company is required to transfer 5% to 10% of
its net income, as determined under the PRC accounting
regulations, to the statutory common welfare fund. This fund
can only be used to provide staff welfare facilities and other
collective benefits to the Company's employees. This fund is
non-distributable other than in liquidation. The Company
currently transfers 5% of the net income, as provided under
the PRC accounting regulations to the statutory common welfare
fund. No transfer to reserve had been made for the nine months
ended September 30, 2002.
F-55
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
19. COMMITMENTS
(a) Operating lease commitments
Under a lease agreement, the Company has committed to
pay predetermined rental to a PRC government for the period
from 8 July 1996 to 2010. Future minimum lease payments as of
September 30, 2002 under these arrangements are analyzed as
follows:
RMB'000
- 2003 70
- 2004 76
- 2005 83
- 2006 92
- 2007 101
- thereafter 475
--------------
897
==============
Operating lease expenses for buildings were RMB
67,000 for the nine months ended September 30, 2002.
(b) Capital commitments
During the nine months ended September 30, 2002, the
Company entered into various construction contracts. As of
September 30, 2002, remaining commitments related to these
construction contracts totaled RMB 2,570,000.
20. RELATED PARTY TRANSACTIONS
Parties are considered to be related if they are subject to
common control or common significant influence, common ownership,
direct or indirect ownership between parties, or transactions with
employees.
F-56
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
21. RELATED PARTY TRANSACTIONS (continued)
The Company's significant related party transactions affecting
the operational results for the nine months ended September 30, 2002
are as follows:
RMB'000
Sales to Shandong Jingbo Logistic Centre
Company Limited 197
===========
Interest expenses paid to short-term
advances from Shandong Jingbo Logistic
Centre Company Limited 378
===========
Interest expenses paid to loans from
Shareholders 436
===========
Due from/to related parties as of September 30, 2002 are as
follow:
RMB'000
Due from related parties
Employee advances 10,337
Technology Development Centre 14,694
Shandong Boxing Kelung Chemical Company Limited
35
Shandong Jingbo Thermoelectrical Company Limited 16,901
-----------
Total due from related parties 41,967
===========
Due to related parties:
Loans from shareholders 4,891
Loans from employees 23,167
Shandong Jingbo Logistic Company Limited 14,467
Shandong Jingbo Food Technology Company
Limited 4,000
Shandong Jingbo Printing Company Limited 325
-----------
Total due to related parties 46,850
===========
F-57
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
21. RELATED PARTY TRANSACTIONS (continued)
Amounts due from related parties are interest free, unsecured
and without predetermined repayment terms.
Amounts due to shareholders are interest free, unsecured and
without predetermined repayment terms.
Amounts due to employees are unsecured, interest bearing at
7.2% per annum and without predetermined repayment terms.
22. RETIREMENT PLAN
As stipulated by the regulations of the PRC government, the
Company operates a defined contribution retirement plans for their
employees. The PRC government is responsible for the pension liability
to these retired employees. The Company is required to make specified
contributions to the state-sponsored retirement plan at 20% of the
basic salary cost of their employees. Employees of the PRC companies
are required to contribute 6% and 5% of their basic salary for the nine
months ended September 30, 2002, with the maximum amount of
contribution of 8%. For the nine months ended September 30, 2002,
contributions made by the Company approximated RMB 740,000.
23. SEGMENT INFORMATION
The Company is engaged in two business segments, namely,
petrochemical and agrochemical.
Description of products by segment
----------------------------------
The petrochemical segment is engaged in the manufacturing and
sales of petrochemical products in the PRC.
The agrochemical segment is engaged in the manufacturing and
sales of agricultural chemical products in the PRC.
All assets and operations of the Company are located in the
PRC, which is considered as one geographic location in an economic
environment with similar risks and returns.
Measurement of segment income or loss and segment assets
--------------------------------------------------------
The Company evaluates performance and allocates resources
based on results from operations. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. Inter-segment sales and transfers
between reportable segments are not material for any periods presented.
F-58
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
23. SEGMENT INFORMATION (continued)
Factors management used to identify the Company's reportable segments
---------------------------------------------------------------------
The Company's reportable segments are business units that
offer different products.
Operating segment information
-----------------------------
Nine
months ended
September 30,
2002
--------------
RMB'000
Net sales:
Petrochemical
Net sales to unaffiliated customers 673,094
--------------
Agrochemical
Net sales to unaffiliated customers 45,261
--------------
Total consolidated net sales 718,355
==============
Depreciation, depletion and amortization expenses:
Petrochemical 7,824
Agrochemical 2,780
--------------
Total consolidated depreciation, depreciation
and amortization expenses 10,604
==============
Segment income:
Petrochemical 41,589
Agrochemical 9,973
--------------
Total segment income 51,562
Reconciling items:
Corporate (expenses)/income 1,263
Interest income 810
Interest expenses (6,426)
--------------
Total consolidated income before income taxes
and discontinued operations 47,209
==============
Segment assets:
Petrochemical 482,954
Agrochemical 95,010
--------------
Total consolidated assets 577,964
==============
F-59
SHANDONG JINGBO PETROCHEMICAL COMPANY LIMITED AND AFFILIATE
NOTES TO THE COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(UNAUDITED)
(EXPRESSED IN RENMINBI, UNLESS OTHERWISE STATED)
23. SEGMENT INFORMATION (continued)
Operating segment information (continued)
-----------------------------
Nine
months ended
September 30,
2002
--------------
Expenditure for additions to long-lived assets:
Petrochemical 47,787
Agrochemical 14,714
--------------
Total consolidated expenditure for
additions to long-lived assets 62,501
==============
Long-lived assets of reportable segments and corporate assets
consisted of property, plant and equipment located in the PRC.
Major customers
---------------
For the nine months ended September 30, 2002, the Company did
not have any major customers with sales exceeding 10% of the total
combined net sales.
24. SUBSEQUENT EVENTS
On December 31, 2002, Petrochemical Company and Agrochemical
Company reorganized whereby operational assets and liabilities of both
companies were transferred to Jingbo Chemical (Bo Xing) Company Limited
("Boxing"), a newly formed foreign direct-owned company in the PRC.
Concurrently, AP Henderson Ventures ("Ventures"), a newly formed Nevada
corporation, acquired the outstanding capital of Boxing in exchange for
10,000 shares of Ventures' common stock. On January 15, 2003, Ventures
completed a reverse acquisition with Magnolia Ventures, Inc.
("Magnolia"), a publicly traded non-operational Nevada corporation,
pursuant to which Magnolia acquired all of the outstanding shares of
Ventures capital stock in exchange for a controlling interest of
Magnolia. The accounting for these transactions are identical to that
resulting from a reverse-acquisition, except that no goodwill or other
intangible assets shall be recorded. Accordingly, the financial
statements of Magnolia will be the historical financial statements of
Boxing, formerly the operations of Petrochemical Company and
Agrochemical Company.
In January 2003, Magnolia changed its name to AP Henderson Group and effectuated
a 1.875 for one stock split of its outstanding shares of common stock.
F-60
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On January 15, 2003, AP Henderson Ventures, a Nevada corporation ("AP
Ventures"), completed a reverse acquisition of the AP Henderson Group (the
"Registrant"), a Nevada corporation formerly known as Magnolia Ventures, Inc.,
pursuant to which the Registrant acquired all of the outstanding shares of AP
Ventures capital stock in exchange for a controlling interest in the Registrant
(the "Reorganization").
AP Ventures was organized on December 31, 2002 for the purpose of acquiring all
of the capital shares of Jingbo Chemical (Bo Xing) Co., Ltd. ("Jingbo"), a
Chinese foreign direct investment enterprise. On December 31, 2002, the owner of
all of the capital shares of Jingbo transferred those capital shares to AP
Ventures in exchange for AP Ventures' issuance of a total of 10,000 common
shares. AP Ventures conducted no operations or acquired any assets or
liabilities from the date of its organizations to time of its acquisition of
Jingbo.
Jingbo was formed in 2002 for the purpose of acquiring certain operating assets
and liabilities of Shandong Jingbo Petrochemical Company Limited, Shandong
Jingbo Agrochemical Company Limited and Shandong Boxing Lu Nong Chemical Company
Limited, which together had been engaged in the business of owning and operating
a petrochemical refinery and agrochemical manufacturing company in the People's
Republic of China. Jingbo acquired the operating assets and liabilities of
Shandong Jingbo Petrochemical Company Limited, Shandong Jingbo Agrochemical
Company Limited and Shandong Boxing Lu Nong Chemical Company Limited on December
31, 2002, immediately prior to AP Ventures' acquisition of the capital shares of
Jingbo. Jingbo conducted no operations or acquired any assets or liabilities
from the date of its organizations to time of its acquisition of the operating
assets and liabilities of Shandong Jingbo Petrochemical Company Limited,
Shandong Jingbo Agrochemical Company Limited and Shandong Boxing Lu Nong
Chemical Company Limited Jingbo.
The adjustments to the historical financial statements reflect the effect of the
recording of the reverse merger of the Registrant and the previously
privately-held AP Ventures and the retroactive effect of the forward split of
the Registrant's common stock effected on February 11, 2003. The reported
results of operations and financial condition are those of Shandong Jingbo
Petrochemical Company Limited, Shandong Jingbo Agrochemical Company Limited and
Shandong Boxing Lu Nong Chemical Company Limited inasmuch as neither AP Ventures
nor Jingbo had any operations or capital transactions other than their
above-described acquisitions. The adjustments eliminate the results of
operations for the Registrant for the periods before the reverse acquisition of
the Registrant by AP Ventures, combine the balance sheets of both entities and
reflect the shareholders' equity/deficit as if the transaction had occurred at
the date of the pro forma statements.
F-61
AP HENDERSON GROUP
PRO FORMA
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2002
(UNAUDITED)
(AMOUNTS EXPRESSED IN THOUSANDS)
Historical
-------------------------- Pro Forma
AP Henderson Magnolia Consolidated Pro Forma Consolidated
Group (a)(b) Ventures, Inc. Total Adjustments Balance
------------ ------------ ------------ ------------ ------------
ASSETS
Current assets
Cash and cash equivalents $ 19,828 $ -- $ 19,828 $ (5,996) (c) $ 13,832
Accounts receivable, less allowance
for doubtful accounts 2,071 -- 2,071 2,071
Due from related parties 5,070 -- 5,070 5,070
Inventories 5,825 -- 5,825 5,825
Prepaid expenses and other current assets 13,947 -- 13,947 (260) (c) 13,687
------------ ------------ ------------ ------------
Total current assets 46,741 -- 46,741 40,485
Property, plant and equipment, less
accumulated depreciation,
depletion and amortization 19,957 -- 19,957 (2,307) (c) 17,650
Long term investments 2,565 -- 2,565 (2,565) (c) --
Intangible and other assets 563 -- 563 (39) (c) (524)
Deferred tax assets -- -- -- --
------------ ------------ ------------ ------------
Total assets $ 69,826 $ -- $ 69,826 $ 58,659
============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term debt $ 605 $ 41 $ 646 $ 646
Accounts payable and accrued liabilities 13,616 1 13,617 1,961 (c) 11,656
Due to related parties 5,069 -- 5,069 5,069
Dividends payable 591 -- 591 591
Income tax payable 584 -- 584 18 (c) 566
Other taxes payable 18,249 -- 18,249 15,166 (c) 3,083
------------ ------------ ------------ ------------
Total current liabilities 38,714 42 38,756 21,611
Long term debts 23,056 -- 23,056 23,056
------------ ------------ ------------ ------------
Total liabilities 61,770 42 61,812 44,667
Shareholders' equity
Capital 5,885 39 (e) 5,924 5,886 (d) 44
(6)(e)(f)
Additional paid-in capital -- -- -- (5,960)(c) 11,846
(5,886)(c)
Retained earnings 1,699 (81) 1,618 6 (e)(f) 1,630
(18)(c)
Statutory reserves fund 472 -- 472 472
------------ ------------ ------------ ------------
Total shareholders' equity 8,056 (42) 8,014 13,992
------------ ------------ ------------ ------------ ------------
Total liabilities and shareholders' equity $ 69,826 $ -- $ 69,826 $ -- $ 58,659
============ ============ ============ ============ ============
(a) These amounts reflect the combined results of operations and financial
condition of Shandong Jingbo Petrochemical Company Limited, Shandong Jingbo
Agrochemical Company Limited and Shandong Boxing Lu Nong Chemical Company
Limited.
(b) These amounts have been converted from the Peoples Republic of China's
Reminbi currency into US $ using a conversion factor of 8.276.
(c) Assets and liabilities that have been spun-off on December 31, 2002 as a
result of a reorganization.
(d) Pro forma adjustments to properly reflect the common stock at the par value
of $0.001.
(e) Shares issued as a result of the merger of AP Henderson with Magnolia
Ventures, Inc.
(f) Shares have been retroactively adjusted to reflect a forward stocksplit of
1.875 to 1.00.
F-62
AP HENDERSON GROUP
PRO FORMA
CONSOLIDATED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
(AMOUNTS EXPRESSED IN THOUSANDS)
Historical
----------------------------- Pro Forma
AP Henderson Magnolia Consolidated Pro Forma Consolidated
Group (a)(b) Ventures, Inc. Total Adjustments Total
------------- ------------- ------------- ------------- -------------
Revenues
Sales and other operating revenues $ 86,787 $ -- $ 86,787 $ -- $ 86,787
Operating expenses
Purchases, services and other (72,270) -- (72,270) -- (72,270)
Employee compensation costs (1,229) -- (1,229) -- (1,229)
Depreciation, depletion and amortization (1,281) -- (1,281) -- (1,281)
Selling, general and adminstrative expenses (1,182) 6 (1,176) -- (1,176)
Taxes other than income taxes (5,018) -- (5,018) -- (5,018)
Other (income)/expense, net 631 -- 631 6 (c) 637
------------- ------------- ------------- ------------- -------------
Total operating expenses (80,349) 6 (80,343) 6 (80,337)
Income from operations 6,438 (6) 6,444 (6) 6,450
Finance costs
Interest income 98 -- 98 -- 98
Interest expense (776) -- (776) -- (776)
------------- ------------- ------------- ------------- -------------
Total finance costs (678) -- (678) -- (678)
Loss from equity affiliate (56) -- (56) 56 (d) --
------------- ------------- ------------- ------------- -------------
Income before income taxes 5,704 (6) 5,710 50 5,772
Income taxes (1,712) -- (1,712) (18)(d) (1,730)
------------- ------------- ------------- ------------- -------------
Income before minority interests 3,992 (6) 3,998 68 4,042
Loss applicable to minority interests (100) -- (100) -- (100)
------------- ------------- ------------- ------------- -------------
Net income $ 3,892 $ (6) $ 3,898 $ 68 $ 3,942
============= ============= ============= ============= =============
Earnings per share:
Basic and fully diluted earnings per share (not expressed in thousands) $ 0.09
=============
Weighted average outstanding shares used in calculation 45,000
=============
(a) These amounts reflect the combined results of operations and financial
condition of Shandong Jingbo Petrochemical Company Limited, Shandong Jingbo
Agrochemical Company Limited and Shandong Boxing Lu Nong Chemical Company
Limited.
(b) These amounts have been converted from the Peoples Republic of China's
Reminbi currency into US $ using a conversion factor of 8.276.
(c) Pro forma adjustments to reflect the value of shares issued as a result of
the merger of AP Henderson with Magnolia Ventures, Inc.
(d) Pro forma adjustments related to certain assets spun-off as of 12/31/02 as a
result of a reorganization.
F-63
AP HENDERSON GROUP
PRO FORMA
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2001
(UNAUDITED)
(AMOUNTS EXPRESSED IN THOUSANDS)
Historical
----------------------------- Pro Forma
AP Henderson Magnolia Consolidated Pro Forma Consolidated
Group (a) Ventures, Inc. Total Adjustments Total
------------- ------------- ------------- ------------- -------------
Revenues
Sales and other operating revenues $ 61,537 $ -- $ 61,537 $ -- $ 61,537
Operating expenses
Purchases, services and other (46,381) -- (46,381) -- (46,381)
Employee compensation costs (2,845) -- (2,845) -- (2,845)
Depreciation, depletion and amortization (1,997) -- (1,997) -- (1,997)
Selling, general and administrative expenses (1,551) (5) (1,556) -- (1,556)
Impairment loss -- -- -- -- --
Taxes other than income taxes (4,022) -- (4,022) -- (4,022)
Other (income)/expense, net 683 -- 683 6 (b) 689
------------- ------------- ------------- ------------- -------------
Total operating expenses (56,113) (5) (56,118) 6 (56,112)
Income from operations 5,424 (5) 5,419 (6) 5,425
Finance costs
Interest income 215 -- 215 -- 215
Interest expense (582) -- (582) -- (582)
------------- ------------- ------------- ------------- -------------
Total finance costs (367) -- (367) -- (367)
Loss from equity affiliate -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Income before income taxes 5,057 (5) 5,052 (6) 5,058
Income taxes (1,280) -- (1,280) -- (1,280)
------------- ------------- ------------- ------------- -------------
Income before minority interests 3,777 (5) 3,772 (6) 3,778
Loss applicable to minority interests (133) -- (133) -- (133)
------------- ------------- ------------- ------------- -------------
Net income $ 3,644 $ (5) $ 3,639 $ (6) $ 3,645
============= ============= ============= ============= =============
Earning before income taxes, depreciation and amortization (EBITDA) calculation:
Net income $ 3,645
Add:
Depreciation, depletion and amortization 1,997
Income taxes 1,280
-------------
EBITDA $ 6,922
=============
Earnings before income taxes (EBIT) calculcation:
Net income $ 3,645
Add:
Income taxes 1,280
-------------
EBIT $ 4,925
=============
Earnings per share:
Basic and fully diluted earnings per share (not expressed in thousands) $ 0.08
=============
Weighted average outstanding shares used in calculation 45,000
=============
(a) These amounts have been converted from the Peoples Republic of China's
Reminbi currency into US $ using a conversion factor of 8.276.
(b) Pro forma adjustments to reflect the value of shares issued as a result of
the merger of AP Henderson with Magnolia Ventures, Inc.
F-64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
Set forth below are our directors and officers, including key executive
officers of our wholly-owned operating subsidiary, Jingbo Chemical (Bo Xing)
Company Ltd.
NAME AGE POSITION
- ------------------------- ------- -------------------------------------------------------
Richard Henry 48 Chairman of the Board, President, Chief Executive
Officer and Chief Financial Officer
Yun Sheng Ma 39 President of Jingbo Chemical
Qing Ling Shi 36 Vice President of Operations of Jingbo Chemical
Xing Lin Wang, Ph. D 38 Vice President of Agrochemical Division of Jingbo
Chemical
Li Jun Cao 44 Vice President of Finance and Chief Financial Officer
of Jingbo Chemical
Richard Lui 37 Director
Mr. Henry has been the Chairman of the Board, President, Chief
Executive Officer and Chief Financial Officer of AP Henderson Group since
January 15, 2003. Mr. Henry is the founder of Jingbo Chemical (Bo Xing) Company
Ltd. and has served as a director of Jingbo Chemical since its founding in
September 2002. Mr. Henry has served as President of American Home Furniture
Industries, Inc., a manufacturer of home furniture, for the last ten years. Mr.
Henry also serves as Chairman of the Board of Holland House Furniture
Industries, Inc., a position he has held for three years, and President of Bally
Leather (China ) Industries, Inc., a position he has held for the last year.
Mr. Ma has served as President of Jingbo Chemical since December 2002.
Mr. Ma previously served as Chief Executive Officer of Shandong Jingbo
Petrochemical Limited from January 2000 to December 2002, and Chief Executive
Officer of Shandong Bo Xing Lubricant Factory from April 1995 to December 1999.
Mr. Shi has served as Vice President of Operations of Jingbo Chemical
since December 2002. From January 2000 to December 2002, Mr. Shi was Vice
President of Shandong Jingbo Petrochemical Limited. Mr. Shi served as Vice
President and Chief Engineer of Shandong Bo Xing County Lubricant Factory from
March 1995 to December 1999.
Mr. Wang has served as Vice President of the Agrochemical Division of
Jingbo Chemical since December 2002. From April 2002 to December 2002, Mr. Wang
served as President of Shandong Jingbo Agrochemical Limited. Mr. Wang also
served as Vice President of Shenzen Rui De Feng Company from May 1998 to
February 2002.
Mr. Cao has served as Vice President of Finance and Chief Financial
officer of Jingbo Chemical since December 2002. Mr. Cao previously served as
Vice President of Finance and Chief Financial Officer of Shandong Jingbo
Petrochemical Limited from December 2000 to December 2002. From January 1999 to
December 2000, Mr. Cao was Executive Assistant of Shandong Bo Xing County
Lubricant Factory.
-16-
Mr. Lui has served as a director of AP Henderson Group since January
15, 2003. Mr. Lui has served as President of Morgan Capital International, Inc.,
a Los Angeles, California based financial and management consulting company,
since July 2002. From September 1997 to July 2002, Mr. Lui was the President of
GlobalLink Securities, Inc. a NASD member broker-dealer.
All directors serve for a one-year term and until their successors are
duly elected and qualified. All officers serve at the discretion of the Board of
Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our officers, directors and
persons who beneficially own more than 10% of a registered class of our equity
securities to file reports of securities ownership and changes in such ownership
with the SEC. Officers, directors and greater than 10% beneficial owners are
also required by rules promulgated by the SEC to furnish us with copies of all
Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to us,
or written representations that no Form 5 filings were required, we believe that
during the fiscal year ended December 31, 2002, each of our former officers and
directors, each of whom was also a ten percent (10%) shareholder, complied with
the Section 16(a) filing requirements applicable to our officers, directors and
greater than 10% beneficial owners.
-17-
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth the cash and non-cash compensation
earned during fiscal 2002, 2001 and 2000 by our chief executive officer and our
four other executive officers, all of whom received or earned cash and non-cash
salary and bonus of more than US$100,000 for fiscal 2002. In reviewing the
table, please keep in mind that:
o The executive officers identified below are officers of Jingbo
Chemical (Bo Xing) Company Ltd., which was acquired by us on
January 15, 2003, and the reported compensation was earned
while employed by Jingbo Chemical or its predecessors;
o All of our paid compensation was denominated in Renminbi
("RMB"), the national currency of the Peoples' Republic of
China. Solely for the convenience of the reader, the
compensation information has been converted into United States
dollars at the noon buying rate in New York City as of the
last date of the specified year (US$1.00 = RMB 8.2773 as of
December 31, 2002, US$1.00 = RMB 8.2766 as of December 31,
2001 and US$1.00 = RMB 8.2774 as of December 31, 2000; and
o During 2000 through 2002, our officers and directors were
Peggy Melilli, Dennis Melilli, and Sherri Lynn Cooper, all of
whom resigned on January 15, 2203 and none of whom were paid
any compensation during 2000, 2001 or 2002.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------------- ------------------------------
OTHER COMMON SHARES
ANNUAL RESTRICTED UNDERLYING
SALARY BONUS COMPENSATION STOCK OPTIONS GRANTED ALL OTHER
NAME AND POSITION YEAR ($) ($) ($) AWARDS ($) (# SHARES) COMPENSATION
----------------- ---- ------ ----- ------------ ---------- ---------- ------------
Richard Henry, President 2002 -0- -0- -0- -0- -0- -0-
and Chief Executive 2001 -0- -0- -0- -0- -0- -0-
Officer 2000 -0- -0- -0- -0- -0- -0-
Ma Yun Sheng, President 2002 $ 60,406 $33,827 -0- -0- -0- -0-
of Jingbo Chemical Ltd. 2001 $483,249 -0- -0- -0- -0- -0-
2000 $386,599 -0- -0- -0- -0- -0-
Shi Qing Ling, Vice 2002 $ 24,162 $13,289 -0- -0- -0- -0-
President of Operations 2001 $ 27,746 -0- -0- -0- -0- -0-
of Jingbo Chemical Ltd. 2000 $181,218 -0- -0- -0- -0- -0-
Wang Xing Lin, Ph. D, 2002 $ 30,203 $16,310 -0- -0- -0- -0-
Vice President of 2001 $144,974 -0- -0- -0- -0- -0-
Agrochemical Division of 2000 $120,812 -0- -0- -0- -0- -0-
Jingbo Chemical Ltd.
Cao Li Jun, Vice 2002 $ 12,081 $ 6,041 -0- -0- -0-
President of Finance and 2001 $169,137 -0- -0- -0- -0- -0-
Chief Financial Officer 2000 $138,934 -0- -0- -0- -0- -0-
of Jingbo Chemical Ltd.
-18-
OPTION/SAR GRANTS IN 2002 FISCAL YEAR
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------------------------------------
NUMBER OF
SECURITIES
UNDERLYING % OF TOTAL OPTIONS/SARS EXERCISE OR
OPTIONS/SARS GRANTED TO EMPLOYEES IN BASE PRICE
NAME GRANTED (#) FISCAL YEAR ($/SH) EXPIRATION DATE
- ------------------------- --------------------- ------------------------- --------------- -----------------
NONE
AGGREGATED OPTION/SAR EXERCISES IN 2002 FISCAL YEAR
AND FY-END OPTION/SAR VALUES
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS/SARS AT
OPTIONS/SARS AT FY-END ($)
FY-END (#)
NAME SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ EXERCISABLE/
ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------- ------------------ ------------------ ----------------- ------------------
NONE
COMPENSATION OF DIRECTORS. At the present time, directors receive no
compensation for serving as directors, however, we may in the future begin to
compensate our non-officer directors. All directors receive reimbursement for
out-of-pocket expenses in attending Board of Directors meetings. From time to
time, we may engage certain members of the Board of Directors to perform
services on our behalf and we will compensate such persons for the services
which they perform.
-19-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of April 11, 2003 by:
o each person who is known by us to be the beneficial owner of
more than five percent (5%) of our issued and outstanding
shares of common stock;
o each of our directors and executive officers; and
o all directors and executive officers as a group.
In reviewing the table, please keep in mind, that the percentage
amounts for each reported party are based on 45,000,002 common shares issued and
outstanding as of April 11, 2003. The address of each individual is 600 Wilshire
Blvd., Suite 1252, Angeles, California 90017.
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OWNED
- -------------------------------------------- ------------------------------------------- --------------------
Richard Henry 39,054,465 86.79%
Richard Lui 1,432,125 3.18%
All officers and directors as a group (two
persons) 40,486,590 89.97%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Our Chairman of the Board, Richard Henry, has advanced to us
approximately US$350,000 for certain transactional costs and expenses associated
with the reorganization described in Part 1, Item 1 "Business - Business
Development." The advances are non interest bearing and payable on demand.
ITEM 14. CONTROLS AND PROCEDURES.
During the 90-day period prior to the filing date of this report,
management, including the our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon, and as of the date of that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures were effective, in all material
respects, to ensure that information required to be disclosed in the reports we
file and submit under the Exchange Act are recorded, processed, summarized and
reported as and when required.
There have been no significant changes in our internal controls or in
other factors which could significantly affect internal controls subsequent to
the date our management carried out their evaluation. There were no significant
deficiencies or material weaknesses identified in the evaluation and therefore,
no corrective actions were taken.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
-----------------------------------------------
(1) FINANCIAL STATEMENTS:
See index to financial statements on page 15.
-20-
(2) FINANCIAL STATEMENT SCHEDULES:
All financial statement schedules have been omitted because
the required information is included in our consolidated financial
statements or the related notes, or is not applicable.
(3) EXHIBITS
The exhibits to this Annual Report on Form 10-K are listed in
the Exhibit Index contained on page E-1 of this report.
(b) REPORTS ON FORM 8-K:
--------------------
None.
(c) EXHIBITS:
--------
The response to this portion of Item 15 is included as a
separate section of this Annual Report on Form 10-K.
(d) FINANCIAL STATEMENT SCHEDULES:
------------------------------
The response to this portion of Item 15 is included as a
separate section of this Annual Report on Form 10-K.
-21-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AP HENDERSON GROUP
Date: April 14, 2003 By: /S/ RICHARD HENRY
---------------------------------------
Richard Henry, President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/S/ RICHARD HENRY Chairman of the Board, President, Chief April 14, 2003
- --------------------------- Executive Officer and Chief Financial
Richard Henry Officer
/S/ RICHARD LUI Director April 14, 2003
- ---------------------------
Richard Lui
-22-
CERTIFICATIONS
I, Richard Henry, certify that:
1. I have reviewed this annual report on Form 10-K of AP Henderson Group
("registrant"):
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/S/ RICHARD HENRY
- -----------------
Richard Henry
Chief Financial Officer
-23-
I, Richard Henry, certify that:
1. I have reviewed this annual report on Form 10-K of AP Henderson Group
("registrant"):
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
/S/ RICHARD HENRY
Richard Henry
Chief Executive Officer
-24-
AP HENDERSON GROUP
Exhibit Index to Annual Report
------------------------------
on Form 10-K
------------
For the fiscal year ended December 31, 2002
ITEM
NO. DESCRIPTION METHOD OF FILING
- ---------- ------------------------------------------------------- -----------------------------------------------
2.1 Securities Purchase Agreement dated January 15, 2003 Incorporated by reference to Exhibit 2.1 to
between Richard Henry and AP Henderson Group AP Henderson Group's Current Report on Form
8-K dated January 15, 2003 and filed with the
Securities and Exchange Commission on January
30, 2003.
3.1 Amended and Restated Articles of Incorporation Filed herewith.
3.2 Bylaws Incorporated by reference to Exhibit 3.2 to
AP Henderson Group's (f/k/a/Magnolia
Ventures, Inc.) Form 10-SB Registration
Statement filed with the Securities and
Exchange Commission on July 26, 2000.
4.1 Specimen of Common Stock Certificate Filed herewith.
21.1 List of Subsidiaries Filed herewith.
99 Section 906 Certification Filed herewith.
E-1