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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Transition Period From ______________ To ______________
Commission file number: 0-31153
AP HENDERSON GROUP
(Exact 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)
(213) 538-1203
--------------
Registrant's Telephone Number
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act): Yes [ ] No [X]
As of May 19, 2003, the registrant had 45,000,002 of its common stock
outstanding.
AP HENDERSON GROUP
QUARTERLY REPORT ON FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2003
INDEX
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Balance sheets as of March 31, 2003 (unaudited) and December 31,
2002................................................................3
Statements of income for the three months ended March 31, 2003
and 2002 (unaudited)................................................4
Statements of cash flows for the three months ended March 31, 2003
and 2002 (unaudited)................................................5
Notes to financial statements (unaudited).............................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................8
Item 3. Qualitative and Quantitative Disclosure About Market Risk............12
Item 4. Controls and Procedures..............................................12
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................13
Item 4. Submission of Matters to a Vote of Security Holders..................13
Item 6. Exhibits and Reports on Form 8-K.....................................13
SIGNATURES....................................................................14
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AP HENDERSON GROUP
(FORMERLY MAGNOLIA VENTURES, INC.)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND MARCH 31, 2003
DECEMBER 31, MARCH 31, MARCH 31,
2002 2003 2003
RMB'000 RMB'000 US$'000
--------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents 121,236 313,073 37,544
Accounts receivable, net 6,215 7,169 860
Due from related parties 30,822 31,047 3,723
Inventories 119,595 171,443 20,560
Prepaid expenses and other current assets 53,396 148,385 17,794
--------------- -------------- --------------
Total current assets 331,264 671,117 80,481
Property, plant and equipment, net 171,837 187,811 22,522
Intangible and other assets, net 4,513 3,916 470
Deferred tax assets 2,968 2,968 356
--------------- -------------- --------------
Total assets 510,582 865,812 103,829
=============== ============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 74,096 192,966 23,141
Short-term debts 88,500 336,389 40,340
Due to related parties 41,071 40,980 4,914
Income taxes payable 9,450 1,809 217
Other taxes payable 12,476 12,476 1,496
--------------- -------------- --------------
Total current liabilities 225,593 584,620 70,108
--------------- -------------- --------------
Long-term liabilities
Due to related parties 23,118 21,531 2,582
Long-term debts 145,350 145,350 17,431
--------------- -------------- --------------
Total liabilities 394,061 751,501 90,121
Shareholders' equity
Preferred share - RMB 0.08 (US$ 0.01) par value, 25,000,000
shares authorized, no shares issued and outstanding - - -
Common share - RMB 0.008 (US$ 0.001) par value, 200,000,000
shares authorized, 39,375,000 and 45,000,002 shares issued
and outstanding at December 31, 2002 and March 31, 2002,
respectively 326 360 43
Additional paid-in capital 48,384 48,384 5,802
Retained earnings 63,904 64,434 7,727
Statutory common funds 3,907 1,133 136
--------------- -------------- --------------
Total shareholders' equity 116,521 114,311 13,708
--------------- -------------- --------------
Total liabilities and shareholders' equity 510,582 865,812 103,829
=============== ============== ==============
See accompanying notes to consolidated financial statements
-3-
AP HENDERSON GROUP
(FORMERLY MAGNOLIA VENTURES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003
(UNAUDITED)
2002 2003 2003
RMB'000 RMB'000 US$'000
---------------- ---------------- ----------------
REVENUES
Sales and other operating revenues 115,026 268,884 32,245
OPERATING EXPENSES
Purchases, services and other 99,082 240,650 28,859
Selling, general and administrative expenses 5,394 8,426 1,010
Taxes other than income taxes 9,848 12,607 1,512
---------------- ---------------- ----------------
Total operating expenses 114,324 261,683 31,381
---------------- ---------------- ----------------
Income from operations 702 7,201 864
OTHER INCOME (EXPENSE)
Other income (expense), net 75 (5,104) (613)
---------------- ---------------- ----------------
Total other income (expense) 75 (5,104) (613)
---------------- ---------------- ----------------
Income before income taxes and minority interests 777 2,097 251
Income taxes 376 1,018 122
---------------- ---------------- ----------------
Income before minority interests 401 1,079 129
Income (loss) applicable to minority interests - - -
---------------- ---------------- ----------------
Net income 401 1,079 129
================ ================ ================
Earnings per share data:
Basic & fully diluted earnings per share 0.01 0.02 0.00
================ ================ ================
Weighted average common shares outstanding 39,375,000 44,062,500 44,062,500
================ ================ ================
See accompanying notes to consolidated financial statements
-4-
AP HENDERSON GROUP
(FORMERLY MAGNOLIA VENTURES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003
(UNAUDITED)
2002 2003 2003
RMB'000 RMB'000 US$'000
-------------- --------------- --------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income 401 1,079 129
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,118 3,804 456
Net changes in operating assets and liabilities (38,292) (48,387) (5,802)
-------------- --------------- --------------
Net cash provided by operating activities (34,773) (43,504) (5,217)
-------------- --------------- --------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (30,861) (12,558) (1,506)
-------------- --------------- --------------
Net cash used in investing activities (30,861) (12,558) (1,506)
-------------- --------------- --------------
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from short and long-term debt 32,582 563,247 67,545
Payments on short and long-term debt (5,673) (315,348) (37,817)
-------------- --------------- --------------
Net cash provided by financing activities 26,909 247,899 29,728
-------------- --------------- --------------
Net change in cash and cash equivalents (38,725) 191,837 23,005
Beginning cash and cash equivalents 79,512 121,236 14,539
-------------- --------------- --------------
Ending cash and cash equivalents 40,787 313,073 37,544
============== =============== ==============
See accompanying notes to consolidated financial statements
-5-
AP HENDERSON GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE A -- ORGANIZATION
AP Henderson Group, formerly Magnolia Ventures, Inc. (the "Company"), was
incorporated on June 13, 1994 in the State of Nevada. On January 15, 2003, the
Company consummated an agreement to acquire all of the outstanding capital stock
of AP Henderson Ventures, a Nevada Corporation ("AP Ventures"), in exchange for
5,625,000 shares of the Company's common stock ("AP Ventures Transaction").
Prior to the AP Ventures Transaction, the Company was a non-operating public
company with no operations or assets and 39,375,000 common shares issued and
outstanding; and AP Ventures was a privately held company in the business of
owning and operating a petrochemical refinery and agricultural chemical
manufacturing company in the People's Republic of China ("PRC"). The AP Ventures
Transaction is considered to be a capital transaction in substance, rather than
a business combination. Inasmuch, the AP Ventures Transaction is equivalent to
the issuance of shares by a private company (AP Ventures) for the net
non-monetary assets of a non-operational public company (the Company),
accompanied by a recapitalization. The accounting for the AP Ventures
Transaction is identical to that resulting from a reverse acquisition, except
goodwill or other intangible assets are not recorded. Accordingly, these
financial statements are the historical financial statements of AP Ventures.
Subsequent to the AP Ventures Transaction, the Company changed its name to AP
Henderson Group.
AP Ventures conducts its operations through its subsidiary Jingbo Chemical (Bo
Xing) Company Limited ("Jingbo"), a foreign direct-owned company in the People's
Republic of China ("PRC"). Jingbo has two divisions: a petrochemical division
engaged in the manufacturing and distribution of petrochemical products in the
PRC; and an agrochemical division engaged in the manufacturing and distribution
of agricultural insecticide and chemicals.
On February 11, 2003, the Company effectuated a 1.875 for 1 forward stock-split.
Accordingly, the consolidated financial statements have been retroactively
adjusted to reflect the forward stock-split from the date of the Company's
inception.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States.
The consolidated financial statements are expressed in Renminbi ("RMB"), the
national currency of the PRC. Solely for the convenience of the reader, the
March 31, 2003 consolidated financial statements have been converted into United
States dollars at the noon buying rate in New York City on March 31, 2003 for
cable transfers in RMB as certified for customs purposes by the Federal Reserve
Bank of New York of US$1.00 = RMB 8.3388. 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 on March 31, 2003, or at any other date
and accordingly no currency conversion gain or loss are reflected as a result of
this translation.
The consolidated financial statements have been prepared in accordance with
Securities and Exchange Commission requirements for interim financial
statements. Therefore, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. The financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Company's annual report on Form 10-K/A for the year ended December 31, 2002.
The results of operations for the interim periods shown in this report are not
necessarily indicative of results to be expected for the full year. In the
opinion of management, the information contained herein reflects all adjustments
necessary to make the results of operations for the interim periods a fair
statement of such operation. All such adjustments are of a normal recurring
nature.
-6-
AP HENDERSON GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
2. INVENTORIES
Inventories are 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.
NOTE C -- INVENTORIES
As of March 31, 2003, inventories consisted of the following:
RMB'000
Raw materials 84,584
Work-in-progress 23,016
Finished goods 63,843
---------------
171,443
===============
NOTE D - SHORT-TERM DEBTS
During the first quarter of fiscal year 2003, the Company increased its
short-term debts as result of new loans obtained from various financial
institutions in the PRC. As of March 31, 2003, short-term debts are comprised of
the following:
RMB'000
Bank loans 310,889
Other borrowings from unrelated parties 25,500
-----------
336,389
===========
As of March 31, 2003, bank loans totaling RMB 310,889,000 were unsecured. Bank
loan of RMB 252,889,000 was unsecured and bears interest rate ranging from 3.24%
to 5.31% per annum for the three months ended March 31, 2003. All bank loans
mature within one year.
Other borrowings from unrelated parties are unsecured and bear interest at bank
rate in the PRC ranging from 5.24% to 5.85% per annum for the three months ended
March 31, 2003.
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 AND MARCH 31,
2003 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 AND =
RMB 8.3388 AS OF MARCH 31, 2003). 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, (3)
DISRUPTION OF OUR MARKETS AND INDUSTRIES BY CHINA'S ENTRY INTO THE WORD TRADE
ORGANIZATION AND (4) THOSE OTHER FACTORS DISCUSSED ELSEWHERE IN THIS REPORT.
BACKGROUND
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 of 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.
-8-
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
transaction, 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.
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. Our acquisition of AP Ventures is
considered to be a capital transaction in substance, rather than a business
combination, inasmuch as the transaction is equivalent to the issuance of shares
by a private company (AP Ventures) for the net non-monetary assets of a
non-operational public company, accompanied by a recapitalization. The
accounting for our acquisition of AP Ventures is identical to that resulting
from a reverse acquisition, except goodwill and other intangible assets are not
recorded. Accordingly, our financial statements are the historical financial
statements of AP Ventures.
RESULTS OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THE THREE MONTHS
ENDED MARCH 31, 2002
REVENUES. Revenues for the three months ended March 31, 2003 increased
by RMB154 million (US$18.5 million) or 134% compared to the same period in 2002.
The increase was due primarily to an expansion of our petrochemical refinery
facility in Shandong Province, PRC. In 2002, we increased our petrochemical
refinery operations from a distillation throughout capacity of 300,000 tons
annually to a capacity of 1,300,000 tons annually. Revenues from the sale of
petrochemical products for the three months ended March 31, 2003 increased by
RMB150 million (US$17.9 million) or 130% compared to the same period in 2002.
Revenues from the sale of agrochemical products for the three months ended March
31, 2003 increased by RMB3.5 million (US$423 thousand) or 372% compared to the
same period in 2002.
PURCHASES, SERVICES AND OTHER. Purchases, services and others represent
our cost of goods in the refinery of our petrochemical products and manufacture
of our agrochemical products. Expenses for purchases, services and others for
the three months ended March 31, 2003 increased by RMB142 million (US$16.98
million) or 142.9% compared to the same period in 2002. The increase was due to
the overall increase in revenue.
GROSS PROFIT. Gross profit increased by RMB12.3 million (US$1.47
million) due to the increase in overall sales. However, gross profit as a
percentage of revenue declined from 13.86% in the first quarter of 2002 to 10.5%
during the first quarter of 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended March 31, 2003 increased by
RMB3 million (US$364 thousand) or 56% compared to the same period in 2002.
However, selling, general and administrative expenses as a percentage of revenue
declined from 4.7% in the first quarter of 2002 to 3.1% during the first quarter
of 2003 as a result of a cost cutting program instituted in the latter part of
2002.
-9-
TAXES OTHER THAN INCOME TAXES. Taxes other than income taxes represent
a value added tax charged by the PRC on the sale of our petrochemical and
agrochemical products. The percentage amount of the tax varies by product. Taxes
other than income taxes for the three months ended March 31, 2003 increased by
RMB2.7 million (US$331 thousand) or 28% compared to the same period in 2002.
However, taxes other than income taxes expressed as a percentage of revenue
declined from 8.6% in the first quarter of 2002 to 4.7% during the first quarter
of 2003 as a result of our production and sale of products with lower tax rates.
INCOME FROM OPERATIONS. Income from operations for the three months
ended March 31, 2003 increased by RMB6.5 million (US$779 thousand) or 926%
compared to the same period in 2002. Income from operations expressed as a
percentage of revenue increased from 0.61% in the first quarter of 2002 to 2.7%
during the first quarter of 2003 as a result of our reduction of selling,
general and administrative expenses and sale of products with lower value added
tax rates.
OTHER INCOME (EXPENSES). Other income (expenses) for the three months
ended March 31, 2003 increased by RMB5.2 million (US$621 thousand) compared to
the same period in 2002. This increase primarily relates to interest expense
approximating RMB4.5 million related to short-term and long-term debts, which
increased significantly compared to the previous year period as a result of
increased capital expenditures and operational expansion.
NET INCOME. Net income for the three months ended March 31, 2003
increased by RMB678 thousand (US$81 thousand) or 169% compared to the same
period in 2002. Net income expressed as a percentage of revenue was
substantially the same in the first quarter of 2002 (0.35%) compared to the
first quarter of 2003 (0.4%).
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of an entity's ability to meet potential cash
requirements, including planned capital expenditures. We have historically met
our capital requirements through cash flows from operations and debt financing
with local financial institutions.
Cash flows used by operating activities were RMB43.5 million (US$5.2
million) for the three months ended March 31, 2003, compared to RMB34.8 (US$4.2
million) used by operating activities for the same period in 2002.
Cash flows used in investing activities were RMB12.5 million (US$1.5
million) for the three months ended March 31, 2003, compared to RMB30.9 million
(US$3.7 million) used in investing activities for the same period in 2002.
Cash flows provided by financing activities were RMB248 million
(US$29.7 million) for the three months ended March 31, 2003, compared to RMB26.9
million (US$3.2 million) provided by financing activities for the same period in
2002.
As of March 31, 2003, we had working capital of RMB86 million (US$10.4
million). 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 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.
-10-
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.
FACTORS AFFECTING OPERATING RESULTS
Our results of operations and the period-to-period comparability of our
financial results are affected by a number of external factors, including
changes in the prices of crude oil, refined products, and chemical products and
fluctuations in exchange rates and interest rates.
INDUSTRIAL RISK. Like other crude oil refinery companies in the PRC,
our business activities are subject to regulation and control of the PRC
government in many aspects such as the grant of production licenses, special
taxes relating to our industry and environmental and safety standards, all of
which may affect our business operations. We receive an allocation of crude oil
from state controlled oil producers in the PRC, The China National Petroleum
Corporation and The China Petroleum and Chemical Corporation, who together are
the dominant producers and refiners of crude oil in 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. At the present time, we are not able to
import crude oil from sources outside of the PRC. 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. For the foregoing reasons, we may be subject to
substantial restrictions when implementing our business strategy, developing and
expanding our business or attempting to maximize our profitability. Any future
change in the PRC government's policies on the crude oil and natural gas
industry may also affect our business operations.
CRUDE OIL PRICES. Our results of operations are substantially
influenced by crude oil prices. Since 2001, the PRC government has published
benchmark prices for crude oil in China, which are adjusted on a monthly basis
to equal Singapore market FOB prices for similar grades of crude oil,
supplemented by an amount equal to the customs duty payable on the import of
crude oil. Our suppliers have set our crude oil median prices monthly based on
the Singapore market FOB prices for crude oil. Our actual realized crude oil
prices include a premium on, or discount from, the median prices which primarily
reflects transportation costs, differences in oil quality and market supply and
demand conditions.
REFINED PRODUCT PRICES. The State Development Planning Commission sets
wholesale and retail prices for our major refined products (gasoline, diesel,
LPG, fuel oil and kerosene). Since June 2000, the State Development Planning
Commission has adjusted such retail median prices on a monthly basis to reflect
the FOB Singapore, Rotterdam and New York trading prices for gasoline and diesel
in the previous month, supplemented by transportation costs and taxes. We set
our retail prices within an 8% floating range of the published median gasoline
and diesel guidance prices. We determine the prices of other refined products
with reference to the published median guidance prices of gasoline and diesel.
SARS. In March 2003, several countries, including China, experienced an
outbreak of a new and highly contagious form of atypical pneumonia now known as
"severe acute respiratory syndrome" or "SARS." The severity of the outbreak in
certain municipalities, such as Beijing, and provinces, such as Guangdong
Province, has affected general commercial activity. While the long-term impact
of the SARS outbreak is unclear at this time, the prolonged existence of SARS
could have a negative impact on the PRC economy and, in turn, have a material
adverse effect on our results of operations
CHINA ECONOMY AND POLITICAL SITUATION. The PRC government recently
underwent substantial reforms after the National People's Congress meeting in
March 2003. The PRC government has reiterated its policy of furthering reforms
in the socialist market economy. No assurance can be given that these changes
will not have an adverse effect on business conditions in China generally or on
our business in particular.
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ITEM 3. 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 both interest and
non-interest bearing account. However, we do not believe that our cash account
would have significant impact as a result of changes in interest rate since we
do not rely on earnings from our cash accounts for cash flow. Accordingly, our
exposure to market risk is through our bank debt which bears interest at
variable rates. As of March 31, 2003, our bank debt consisted of RMB 424 million
(US$50.8 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$51 thousand.
ITEM 4. CONTROLS AND PROCEDURES.
During the 90-day period prior to the filing date of this report,
management, including 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.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2003, we issued 5,625,000 shares (post-split) of our common
stock to Richard Henry in exchange for his transfer to us of all of the issued
and outstanding capital shares of AP Ventures. The issuance was conducted
pursuant to Section 4(2) of the Securities Act. There were no underwriters
involved in the transaction.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 8, 2003, a special meeting of our stockholders was held for
purposes of seeking stockholder approval of (i) an amendment to our articles of
incorporation for purposes of (a) increasing our authorized common stock to 200
million shares and preferred stock to 50 million shares, (b) effecting a 1.875
for one split of our outstanding common shares, and (c) changing our corporate
name to "AP Henderson Group"; and (ii) an amendment to our bylaws to allow our
board of directors to change the number of authorized directors. Out of a total
of 45,000,002 shares (post-split) of common stock issued, outstanding and
entitled to vote at the meeting, approximately 42,499,965 common shares
(post-split) were present at the meeting in person or by proxy. All of the
matters put before the stockholders were approved with 42,499,965 (post-split)
common shares voting in favor of all matters, with no votes against and no
abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Item No. Description Method of Filing
- ----------------- ------------------------------ -------------------
99.1 Section 906 Certification Filed herewith
(b) Reports on Form 8-K
On January 30, 2003, we filed a current report on Form 8-K to report
(i) the changes in control described elsewhere in this quarterly report and (ii)
the proposed change in corporate name and forward spilt of our common shares as
described in Item 4 above.
On March 31, 2003, we filed an amendment to our current report on Form
8-K dated January 30, 2003 to report certain historical and pro forma financial
statements relating to our acquisition of AP Ventures.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AP HENDERSON GROUP
(Registrant)
Dated: May 20, 2003 By: /s/ Richard Henry
---------------------------------------
Richard Henry,
President, Chief Executive Officer
and Chief Financial Officer
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CERTIFICATIONS
I, Richard Henry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AP Henderson Group
("registrant"):
2. Based on my knowledge, this quarterly 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 periods covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 20, 2003
/s/ Richard Henry
- --------------------------
Richard Henry,
Chief Financial Officer
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CERTIFICATIONS
I, Richard Henry, certify that:
1. I have reviewed this quarterly report on Form 10-Q of AP Henderson Group
("registrant"):
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 20, 2003
/s/ Richard Henry
- ----------------------------
Richard Henry
Chief Executive Officer
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