10-Q 1 aphenderson_10q-063003.txt 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 JUNE 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 August 18, 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 JUNE 30, 2003 INDEX ----- PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Consolidated balance sheets as of June 30, 2003 (unaudited) and December 31, 2002...................................................3 Consolidated statements of income for the three and six months ended June 30, 2003 and 2002 (unaudited)..................................4 Consolidated statements of cash flows for the six months ended June 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..........................................8 Item 3. Quantitative and Qualitative Disclosure About Market Risk............12 Item 4. Controls and Procedures..............................................12 PART II OTHER INFORMATION 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

-3- AP HENDERSON GROUP (FORMERLY MAGNOLIA VENTURES, INC.) CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

-4- AP HENDERSON GROUP (FORMERLY MAGNOLIA VENTURES, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2003 (UNAUDITED)

-5- AP HENDERSON GROUP (FORMERLY MAGNOLIA VENTURES, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 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 June 30, 2003 consolidated financial statements have been converted into United States dollars at the noon buying rate in New York City on June 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 8.2776. 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 June 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 JUNE 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 June 30, 2003, inventories consisted of the following: RMB'000 Raw materials 34,897 Work-in-progress 16,701 Finished goods 74,884 ------------- 126,482 ============= NOTE E - 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 June 30, 2003, short-term debts are comprised of the following: RMB'000 Bank loans 115,963 Other borrowings from unrelated parties 25,500 ----------- 141,463 =========== As of June 30, 2003, bank loans totaling RMB 141,463,000 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 June 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. -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 JUNE 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 8.2776 AS OF JUNE 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. -8- 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, 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 AND SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 REVENUES. Revenues for the three and six months ended June 30, 2003 increased by RMB177 million (US$21.4 million) and RMB331 million (US$40 million) or 95% and 110%, 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. Revenues from the sale of petrochemical products for the three and six months ended June 30, 2003 increased by RMB175 million (US$21 million) and RMB325 (US$39 million) or 96% and 110%, respectively, compared to the same periods in 2002. Revenues from the sale of agrochemical products for the three and six months ended June 30, 2003 increased by RMB2.7 million (US$326 thousand) and RMB6.3 million (US$761 thousand) or 60% and 112%, respectively, compared to the same periods in 2002. -9- 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 six months ended June 30, 2003 increased by RMB181 million (US$22 million) and RMB323 (US$39 million) or 119% and 129%, 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 RMB3.6 million (US$435 thousand) for the three months ended June 30, 2003 compared to the same period in 2002, respectively, due primarily to the increased costs of crude oil. Gross profit increased by RMB 8.7 million (US$1.1 million) for the six months ended June 30, 2002 to 9% for the six months ended June 30, 2003 due to primarily to the increased costs of crude oil in the second quarter of 2003. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses for the three and six months ended June 30, 2003 changed by RMB2.7 million (US$326 thousand) and RMB289 thousand (US$34 thousand) or 23% and 2%, respectively, compared to the same periods in 2002. Selling, general and administrative expenses as a percentage of revenue declined from 6% in the second quarter of 2002 to 3% during the second 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 six months ended June 30, 2003 increased by RMB6.2 million (US$749 thousand) and RMB8.9 (US$1.1 million) or 49% and 40%, respectively, compared to the same periods in 2002. However, taxes other than income taxes expressed as a percentage of revenue declined from 7% in the second quarter of 2002 to 5% during the second 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 and six months ended June 30, 2003 decreased by RMB7 million (US$846 thousand) and RMB545 thousand (US$66 thousand) or 65% and 5%, respectively, compared to the same period in 2002. Income from operations expressed as a percentage of revenue decreased from 6% in the second quarter of 2002 to 1% during the second quarter of 2003 due primarily to the increased costs of crude oil. OTHER INCOME (EXPENSES). Other income (expenses) for the three and six months ended June 30, 2003 decreased by RMB2 million (US$242 thousand) and RMB8 million (US$966 thousand) compared to the same periods in 2002. This decrease primarily relates to interest expense during the three and six months ended June 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 six months ended June 30, 2003 decreased by RMB7.7 million (US$930 thousand) and RMB7 million (US$846 thousand) or 93% and 81%, respectively, compared to the same periods in 2002 due primarily to the increased costs of crude oil in the second 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. Cash flows provided by operating activities were RMB439 million (US$53 million) for the six months ended June 30, 2003, compared to RMB52 million (US$6.3 million) used by operating activities for the same period in 2002. Increaes in accounts payable is due to the PRC's conventional fiscal cycle. The account 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 RMB67 million (US$8.1 million) for the six months ended June 30, 2003, compared to RMB45 million (US$5.4 million) used in investing activities for the same period in 2002. Cash flows provided by financing activities were RMB53 million (US$6 million) for the six months ended June 30, 2003, compared to RMB149 million (US$18 million) provided by financing activities for the same period in 2002. As of June 30, 2003, we had working capital of RMB47 million (US$5.7 million), as compared RMB103.7 million (US$12.8 million), a decrease of RMB56.7 million (US$7.1 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, or at all. -10- 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. 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. -11- 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 June 30, 2003, our bank debt consisted of RMB153 million (US$18.5 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$185 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. -12- 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. (b) Reports on Form 8-K On May 20, 2003, we filed a current repot on Form 8-K to report the issuance of a press release announcing our financial results for fiscal year 2002. -13- 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: AUGUST 18, 2003 BY: /S/ RICHARD HENRY --------------------------------------- RICHARD HENRY, PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER -14-

AP HENDERSON GROUP 10-Q