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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 SEPTEMBER 30, 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 November 30, 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 SEPTEMBER 30, 2003
INDEX
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of September 30, 2003 (unaudited) and
December 31, 2002...................................................3
Consolidated statements of income for the three and nine months ended
September 30, 2003 and 2002 (unaudited).............................4
Consolidated statements of cash flows for the nine months ended
September 30, 2003 and 2002 (unaudited).............................5
Notes to consolidated financial statements (unaudited)................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................9
Item 3. Quantitative and Qualitative Disclosure About Market Risk............14
Item 4. Controls and Procedures..............................................14
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.....................................15
SIGNATURES....................................................................16
2
AP HENDERSON GROUP
(FORMERLY MAGNOLIA VENTURES, INC.)
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2003
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
2002 2003 2003
RMB'000 RMB'000 US$'000
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents 121,236 523,278 63,218
Accounts receivable, net 6,215 5,200 628
Due from related parties 30,822 30,822 3,724
Inventories 119,595 182,184 22,010
Prepaid expenses and other current assets 53,396 135,728 16,398
------------ ------------ ------------
Total current assets 331,264 877,212 105,978
Property, plant and equipment, net 171,837 240,979 29,113
Intangible and other assets, net 4,513 3,542 428
Deferred tax assets 2,968 2,968 359
------------ ------------ ------------
Total assets 510,582 1,124,701 135,878
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 74,096 285,368 34,476
Short-term debts 88,500 511,477 61,793
Due to related parties 41,071 40,331 4,872
Income taxes payable 9,450 -- --
Other taxes payable 12,476 12,476 1,507
------------ ------------ ------------
Total current liabilities 225,593 849,652 102,648
------------ ------------ ------------
Long-term liabilities
Due to related parties, long-term portion 23,118 19,944 2,410
Long-term debts 145,350 131,954 15,942
------------ ------------ ------------
Total liabilities 394,061 1,001,550 121,000
Minority interests -- -- --
------------ ------------ ------------
394,061 1,001,550 121,000
------------ ------------ ------------
Shareholders' equity
Preferred share - RMB 0.08 (US$ 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 September 30, 2003 326 360 43
Additional paid-in capital 48,384 48,384 5,845
Retained earnings (accumulated deficit) 63,904 69,941 8,450
Statutory common funds 3,907 4,466 540
------------ ------------ ------------
Total shareholders' equity 116,521 123,151 14,878
------------ ------------ ------------
Total liabilities and shareholders' equity 510,582 1,124,701 135,878
============ ============ ============
See accompanying notes to consolidated financial statements
3
AP HENDERSON GROUP
(FORMERLY MAGNOLIA VENTURES, INC.)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2003
THREE MONTHS END SEPTEMBER 30, NINE MONTHS END SEPTEMBER 30,
--------------------------------------- ----------------------------------------
2002 2003 2003 2002 2003 2003
RMB'000 RMB'000 US$'000 RMB'000 RMB'000 US$'000
------------ ------------ ------------ ------------ ------------ ------------
REVENUES
Sales and other operating revenues 416,160 423,268 51,136 718,355 1,056,729 127,666
COST OF REVENUES
Purchases, services and other 347,448 391,941 47,351 598,192 965,269 116,616
------------ ------------ ------------ ------------ ------------ ------------
Gross profit 68,712 31,327 3,785 120,163 91,460 11,050
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses 13,058 10,057 1,216 30,565 27,853 3,366
Taxes other than income taxes 19,131 20,381 2,462 41,532 51,720 6,248
------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses 32,189 30,438 3,678 70,097 79,573 9,614
------------ ------------ ------------ ------------ ------------ ------------
Income from operations 36,523 889 107 48,066 11,887 1,436
OTHER INCOME (EXPENSE)
Other income (expense), net (1,098) 5,252 635 (857) (2,079) (251)
------------ ------------ ------------ ------------ ------------ ------------
Total other income (expense) (1,098) 5,252 635 (857) (2,079) (251)
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes and minority
interests 35,425 6,141 742 47,209 9,808 1,185
Income taxes 11,024 1,734 210 14,170 3,771 456
------------ ------------ ------------ ------------ ------------ ------------
Income before minority interests 24,401 4,407 532 33,039 6,037 729
Income (loss) applicable to minority interests (1,658) -- -- (829) -- --
------------ ------------ ------------ ------------ ------------ ------------
Net income 22,743 4,407 532 32,210 6,037 729
============ ============ ============ ============ ============ ============
Earnings per share data:
Basic and fully diluted earnings per share 0.58 0.10 0.01 0.82 0.14 0.02
============ ============ ============ ============ ============ ============
Weighted average common shares outstanding 39,375,000 44,062,500 39,375,000 39,375,000 44,062,500 39,375,000
============ ============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements
4
AP HENDERSON GROUP
(FORMERLY MAGNOLIA VENTURES, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2003
(UNAUDITED)
2002 2003 2003
RMB'000 RMB'000 US$'000
------------ ------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES
Net income 32,210 6,037 729
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,604 13,797 1,667
Disposal and write-off of property, plamt and equipment 49 -- --
Gain on disposal of subsidiary (1,263) -- --
Net changes in operating assets and liabilities (15,402) 55,566 6,713
------------ ------------ ------------
Net cash provided by operating activities 26,198 75,400 9,109
------------ ------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (62,501) (82,939) (10,020)
Acquisition of long-term investments (134) -- --
Proceeds from disposal of property, plant and equipment 31 -- --
------------ ------------ ------------
Net cash used in investing activities (62,604) (82,939) (10,020)
------------ ------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Dividends paid (12,984) -- --
Proceeds from short and long-term debt 209,700 422,977 51,101
Payments on short and long-term debt (75,702) (13,396) (1,618)
------------ ------------ ------------
Net cash provided by financing activities 121,014 409,581 49,483
------------ ------------ ------------
Net change in cash and cash equivalents 84,608 402,042 48,571
Beginning cash and cash equivalents 79,512 121,236 14,647
------------ ------------ ------------
Ending cash and cash equivalents 164,120 523,278 63,218
============ ============ ============
See accompanying notes to consolidated financial statements
5
AP HENDERSON GROUP
(FORMERLY MAGNOLIA VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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, 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 consolidated 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 investment company in 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
September 30, 2003 consolidated financial statements have been converted into
United States dollars at the noon buying rate in New York City on September 30,
2003 for cable transfers in RMB as certified for customs purposes by the Federal
Reserve Bank of New York of US$1.00 = RMB 8.2771. 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 September 30, 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
(FORMERLY MAGNOLIA VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 -- NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 149 (SFAS 149), "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS 149 amends SFAS 133 to
provide clarification on the financial accounting and reporting for derivative
instruments and hedging activities and requires similar accounting treatment for
contracts with comparable characteristics. We do not believe the adoption of
SFAS 149, effective primarily for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003, will have
a material effect on our financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 (SFAS 150), "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
150 addresses financial accounting and reporting for certain financial
instruments with characteristics of both liabilities and equity. This statement
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. As required by SFAS 150, we
will adopt this new accounting standard effective July 1, 2003. We do not
believe the adoption of SFAS 150 will have a material impact on our financial
statements.
NOTE D -- INVENTORIES
As of September 30, 2003, inventories consisted of the following:
RMB'000
Raw materials 151,573
Work-in-progress 2,461
Finished goods 28,150
-------------
182,184
=============
7
AP HENDERSON GROUP
(FORMERLY MAGNOLIA VENTURES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(UNAUDITED)
NOTE E -- SHORT-TERM DEBTS
During the first nine months 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 September 30, 2003, short-term debts are
comprised of the following:
RMB'000
Bank loans 485,977
Other borrowings from unrelated parties 25,500
-----------
511,477
===========
As of September 30, 2003, bank loans totaling RMB 485,977,000 were unsecured and
bear interest rates ranging from 3.24% to 5.31% per annum. The company treats
all borrowing that matures within one year as short-term debts.
As of September 30, 2003, 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.
8
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 SEPTEMBER 30, 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 8.2771 AS OF SEPTEMBER 30, 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 WORLD TRADE
ORGANIZATION AND (4) THOSE OTHER FACTORS DISCUSSED ELSEWHERE IN THIS REPORT.
9
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.
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 (collectively referred to as
the "Jingbo Entities"), 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.
The acquisition of Jingbo Entities has proven to be quite a challenge during the
first nine months of fiscal 2003. The challenges that we have been faced with is
dealing with the inherited management style of the Jingbo Entities and
successfully making necessary changes within the management of the Jingbo
Entities. Our ability to make such management changes will directly impact
needed changes in operational results. However, we cannot be assured that such
management changes within the Jingbo Entities will be successful which could
jeopardize our result of operations.
10
RESULTS OF CONSOLIDATED OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
REVENUES. Revenues for the three and nine months ended September 30, 2003
increased by RMB7 million (US$2.6 million) and RMB338 million (US$40.8 million)
or 2% and 47%, respectively, compared to the same periods 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.
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
and nine months ended September 30, 2003 increased by RMB44 million (US$5.3
million) and RMB367 (US$44.3 million) or 13% and 61%, respectively, compared to
the same periods in 2002. The increase, over and above the volume increase, was
due to significant increase of cost of crude, the main raw material to
manufacture petrochemical and agrochemicals. As a result of the recent U.S. led
hostilities in Iraq, we were unable to receive our allocation of crude oil from
state controlled oil producers in the PRC. We purchased crude oil on the open
market from PRC importers who acquired the oil from producers located in Russia.
The cost of the imported crude Russian oil, including the associated
transportation costs, was significantly higher than the costs we had incurred in
2002 or 2001.
GROSS PROFIT. Gross profit decreased by RMB37 million (US$4.4 million) for the
three months ended September 30, 2003 compared to the same period in 2002,
respectively, due primarily to the increased costs of crude oil. Gross profit
decreased by RMB 29 million (US$3.5 million) for the nine months ended September
30, 2002 or 24% for the nine months ended September 30, 2003 due to primarily to
the increased costs of crude oil in the second and third quarter of 2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three and nine months ended September 30, 2003
decreased by RMB3 million (US$362 thousand) and RMB3 million (US$362 thousand)
or 23% and 9%, respectively, compared to the same periods in 2002. Selling,
general and administrative expenses as a percentage of revenue declined from 3%
in the third quarter of 2002 to 2% during the third quarter of 2003 as a result
of increase in revenue without incurring additional expense.
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 and nine months ended September 30, 2003 increased by
RMB1 million (US$121 thousand) and RMB10 (US$1.2 million) or 7% and 25%,
respectively, compared to the same periods in 2002. However, taxes other than
income taxes expressed as a percentage of revenue remained at 5% in both the
third quarter of 2002 and 2003.
INCOME FROM OPERATIONS. Income from operations for the three and nine months
ended September 30, 2003 decreased by RMB36 million (US$4.3 million) and RMB36
million (US$4.3 million) or 98% and 75%, respectively, compared to the same
period in 2002. Income from operations expressed as a percentage of revenue
decreased from 9% in the third quarter of 2002 to 1% during the third quarter of
2003 due primarily to the increased costs of crude oil.
OTHER INCOME (EXPENSES). Other income (expenses) for the three and nine months
ended September 30, 2003 increased (decreased) by RMB6 million (US$725 thousand)
and RMB(1) million (US$121 thousand) compared to the same periods in 2002. This
changes primarily relates to interest expense during the three and nine months
ended September 30, 2003 approximating RMB5 million (US$604 thousand) and RMB10
million (US$1.2 million), respectively, related to short-term and long-term
debts, which increased significantly compared to the previous year periods as a
result of increased capital expenditures and operational expansion.
NET INCOME. Net income for the three and nine months ended September 30, 2003
decreased by RMB18 million (US$2.2 million) and RMB26 million (US$3.1 million)
or 81% and 82%, respectively, compared to the same periods in 2002 due primarily
to the increased costs of crude oil in the third quarter of 2003.
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. As set forth in the section of gross profit,
the Company has experienced an increase in the cost of crude, this situation may
continue and possibly worsen. Should this happen, it could have adverse impact
on the Company's liquidity.
11
Cash flows provided by operating activities were RMB75 million (US$9.0 million)
for the nine months ended September 30, 2003, compared to RMB26 million (US$3.1
million) provided by operating activities for the same period in 2002. Increases
in accounts payable is due to an overall increase in raw crude oil purchase. The
accounts payable increase is no indication of any problems with the Company
creditor to ship product and/or perform services.
Cash flows used in investing activities were RMB83 million (US$10.0 million) for
the nine months ended September 30, 2003, compared to RMB63 million (US$7.6
million) used in investing activities for the same period in 2002.
Cash flows provided by financing activities were RMB409 million (US$49.4
million) for the nine months ended September 30, 2003, compared to RMB121
million (US$14.6 million) provided by financing activities for the same period
in 2002.
As of September 30, 2003, we had working capital of RMB28 million (US$3.4
million), as compared RMB66 million (US$8.0 million), a decrease of RMB38
million (US$4.6 million). We believe that we will need working capital in
addition to existing cash balances, cash generated by operating activities, and
funds available under our credit facility in order to finance our operating
activities for at least the next 12 months. Our need for additional capital will
be determined, in large part, by our ability to resume the purchase of crude oil
from state controlled oil producers in the PRC in accordance with our previously
determined government allocations. However, as of the date of this report, we
have no commitments for the sale of our securities. If we are unable to raise
the required capital, there may be a severe impact on our financial condition
that could jeopardize our result of operations. We cannot assure you that
additional financing will be available on terms favorable to us.
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.
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.
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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 September 30, 2003, our bank debt consisted of RMB511
million (US$61.7 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$617 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
ITEM NO. DESCRIPTION METHOD OF FILING
- -------------------------------------
31.1 Certifications of the Chief Executive Officer and Chief Financial Officer,
as required pursuant to Section 302 of the Sarbanex-Oxley Act of 2002.
*32.1 Certifications of the Chief Executive Officer and Chief Financial Officer,
as required pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Pursuant to Commission Release No. 33-8238, this certification will be treated
as "accompanying" this Quarterly Report on Form 10-Q and not "filed" as part of
such report for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended, and this certification will not be deemed to be incorporated by
reference into any filing under Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, except for the extent that the
registrant specifically incorporates it by reference.
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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: DECEMBER 9, 2003 BY: /S/ RICHARD HENRY
--------------------------------------
RICHARD HENRY,
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
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