"...From the Website...":
Highlights of Largo Vista
DESCRIPTION OF BUSINESS
INTRODUCTION
Largo Vista Group, Ltd., a Nevada corporation ("Largo Vista,"), operates through its wholly owned subsidiary, Everlasting International Ltd. ("Everlasting"), a Nevada corporation. Everlasting operates and owns a 66.67% interest in a joint venture company in China, operated under the name "Kunming Xinmao Petrochemical Industry Co. Ltd." ("Xinmao or the Company"). Xinmao is principally engaged in the business of purchasing and reselling liquid petroleum gas ("LPG") in the retail and wholesale markets to both residential and commercial consumers in Yunnan Province of South China. Xinmao operates a storage depot and has office headquarters in the City of Kunming. All of the Company's property and equipment is located in China.
Largo Vista was originally incorporated on January 16, 1987 in Nevada under the name, "The George Group". On January 9, 1989, The George Group acquired Waste Service Technologies, Inc. ("WST"), an Oregon corporation. On the same day The George Group filed a name change in Nevada and changed its name to WST. WST's plan of business was to become an environmental service company. It listed its stock and began trading on OTC Bulletin Board.
On April 15, 1994, WST acquired Largo Vista, Inc., a California corporation, and on the same day filed a name change in Nevada to change WST's name to Largo Vista Group, Ltd. At the time of acquisition Largo Vista filed a change of name with the OTC Bulletin Board and received a new CUSIP number and symbol ("LGOV"). Largo Vista originally planned to develop housing in China, but, after shipping two factory built homes to China, never fully implemented the plans due to unanticipated financing, environmental and regulatory complications.
On December 26, 1996, Largo Vista acquired Everlasting International Ltd. ("Everlasting"), a Nevada Corporation, which owns a 66.67% interest in Kunming Xinmao Petrochemical Industry Co., Ltd. ("Xinmao"), mentioned above. Everlasting acquired this asset from Proton Technology Corporation Limited, a Bahamas Corporation ("Proton").
The historical chain-of-ownership of the asset is as follows: The Hong Kong Company, formed under the laws of Hong Kong, was initially owned by one individual, Tan Mau Tak. On November 8, 1995, Deng Shan, an individual, purchased the Hong Kong Company from Chan Mau Tak. On December 20, 1996, the Hong Kong Co. was acquired from Deng Shan by Proton with majority shareholder being Deng Shan. On December 21, 1996, Proton transferred 100% of its interest in the Hong Kong Company to Everlasting
International Ltd., a Nevada Corporation. On April 29,1997, Largo Vista shareholders consented to an acquisition and plan of reorganization executed on December 26, 1996, wherein Largo Vista purchased 100% of the stock of Everlasting from Proton Technology in a stock exchange transaction.
Organization of the Subsidiary
Xinmao, in operation and providing uninterrupted service to consumers since 1992, is in its third year of operation as a subsidiary of Largo Vista. Xinmao is the largest privately owned LPG distribution company in its area of coverage based upon the number of end users.
Organization Chart
LVG: Largo Vista Group, Ltd.
Owns 100% EIL
Owns 100% LVI
Subsidiaries
EIL LVI
Everlasting Largo Vista, Inc.
International, Ltd.
No Operations Presently
Owns 66.67% of "Xinmao"
"Xinmao"
Kunming Xinmao Petrochemical Industry Co., Ltd., a
Chinese Joint Venture JV Partners:
"Xinmao" - 66.67%
Government Partner
33.33%
Note: Government Partner is "Kunming Fuel General Co."
LARGO VISTA GROUP, LTD.
EVERLASTING INTERNATIONAL, LTD.
(100% Owned Subsidiary of Largo Vista holding a)
66.67% Interest in theJoint Venture
KUNMING XINMAO PETROCHEMICAL INDUSTRY CO., LTD.
in which a) 33.3% Interest is held by KUNMING FUEL GENERAL CO. (Chinese Government Joint Venture Partner)
BUSINESS
Terms of Xinmao Joint Venture
The Kunming Xinmao Petrochemical Co., Ltd. ("Xinmao") is a Joint Venture formed under the laws of the People's Republic of China.
Term: Twenty years, commencing on August 28, 1992.
General Provisions: Government Partner has a general responsibility to support Everlasting in its duties.
The Joint Venture is an independent entity with an independent accounting system. An audit of the Joint Venture's financial records is conducted annually by an auditor registered in China. Fiscal year of Joint Venture is January 1 to December 31.
Everlasting is, subject to the terms and conditions of an operating agreement set forth below, responsible for the general management of Xinmao including: Procurement of equipment and raw materials, equipment installation, testing and technical training, hiring a management staff, production and technical processes and other duties entrusted to it.
This Operating Agreement was made between the Government Partner and the Hong Kong Company on August 28, 1992, for a term of ten years, ending on August 28, 2002. Everlasting, as purchaser of the Hong Kong Company, is responsible to manage the day-to-day operations of Xinmao and assume sole< responsibility for its profits and losses.
Each party under Chinese law would normally participate in the profits and losses of the Joint Venture according to its proportionate share of contribution. However, this provision was changed by the Operating Agreement, which provides that Xinmao is to pay the Government Partner 9 million Yuan (RMB) during the term of the Agreement as follows:
3.5 million Yuan for the first 3 years; 1.5 million Yuan per year for the 4th and 5th years; 500,000 Yuan per year from the 6th through the 10th years
The Company negotiated this agreement to provide flexibility and encourage future investment and expansion by precluding the payment of large a sum of money to the Government Partner. In addition, the Government Partner has indicated a willingness to sell to Largo Vista an additional 28.33 % which would result in Largo Vista owning 95% and the government partner owning 5%
of the joint venture.
Government License Held
The Xinmao Company holds a unique license issued by Chinese Central Government (National Industrial and Commercial Registration Administration of China). This license is most valuable because it permits the Company to operate across provincial borders; whereas, competitors of the Company are restricted to the geographic area in which they are located. In addition, the license permits the Company to process domestic crude oil and sell its by-products; to process and sell LPG to retail domestic and industrial customers; to manufacture cylinders, stoves, water heaters, and cigarette lighters and their accessories; and to provide services in inspection and maintenance of stoves and cylinders for safety and quality.
Xinmao is a Sino-Foreign Joint Venture registered with the government as having foreign ownership. This registration permits foreign investment to legally flow into China, and allows funds to legally flow out of China including loan repayments, interest payments and dividends. Xinmao is one of the few known Sino-Foreign Joint Ventures licensed to sell petroleum products in the retail market.
Xinmao also holds a general contractors license intended for construction of pipeline projects. As a part of its overall strategy to expand its LPG market in China, management intends to expand its business in the future beyond its current core business of purchasing and reselling LPG, utilizing its various licensing authorities.
The Product
LPG is used by about 500 million people worldwide. As a form of energy it is considered a very efficient fuel because in a liquid state it provides a significant supply of energy in a comparatively small volume. LPG is recognized for its transportability and ease-of-use. It is a clean and environmentally friendly source of energy that has a variety of residential, commercial, industrial and transportation uses. It can be used at home for cooking and heating, replacing wood, kerosene, coal and other environmentally unfriendly sources of energy. In fact, environmental concerns have caused the outlaw of the use of coal in most larger cities in China. Since LPG is one of the only viable sources of energy for cooking and heating in Southern China, management believes the China LPG market is ripe for growth and expansion.
Most Chinese consumers have used of wood and coal all of their life
primarily for cooking only; however, they are slowly beginning to realize the ease and convenience of also using LPG for heating and heating water. Most consumers obtain LPG in 15 kg. cylinders, very similar to those used for gas barbecues in the U.S. As LPG delivery systems, such as pipelines, make use more convenient and simple, LPG consumption per capita should increase significantly. In addition, management believes there will be future opportunities in drying tobacco and operating factory machinery and vehicles.
Markets The China LPG market is broken down into three segments for purposes of analysis:
1.Distribution method from the major LPG companies,
2.Method of delivery to the consumer, and
3.Black Market dealers
The Primary market segment is according to distribution method - that is either retail-direct or wholesale-indirect. Retail distribution is accomplished by the ten major LPG companies that deal directly with the end user. Xinmao distributes to both retail and wholesale customers, and to both residential and commercial users. However, retail customers are far more profitable than wholesale because sales prices are higher and there are no middleman costs. The Company is implementing strategies to develop more retail users.
The second market segment is according to the delivery vehicle used by the user, such as bottle or cylinder, pipeline, or tank truck.
The bottle users may be either retail, purchasing directly from a major LPG company, or wholesale, purchasing indirectly from a distributor of a major LPG company. Bottle customers purchase LPG in 15 kg. cylinders or bottles that must, by law, be filled to a minimum of 13.5 kg which is considered full. Bottle users include residential, and commercial customers. Residential consumption is by far the largest, with commercial restaurants and caterers following second. There has been little industrial use of LPG to date.
Pipeline users are considered retail-direct users. LPG flows directly into a household via pipes from a central storage tank that is replenished as necessary by a major LPG company. Pipeline users are billed according to usage based on a meter in their living unit.
Tank truck or bulk sales are made to wholesale distributors who operate small bottle filling stations. These distributors represent lower profit margins but volume makes-up some of the difference. Bulk sales are encouraged to cultivate the small wholesale distributors because of the potential of acquiring their customer base in the future.
A third market segment, although temporary, must be considered because of the negative impact it has on the LPG market. This segment is comprised of the many small independent distributors and individuals who operate illegally in what is referred to as the "black market" - most operating without a license, violating safety laws, and unfairly profiting by short- filling LPG bottles. These abusers create problems of unfair competition for the Company. The Kunming LPG Administration is aware of these abuses, but, unless a blatant case is presented to it, it is ignoring the problems until the market consolidates to a greater degree.
LPG consumption has been growing at a remarkable rate since the beginning of 1990's. In 1990, LPG consumption was slightly over 2 million tons, while in 1996, nearly 7.4 million tons. The average annual growth rate in this period was more than 20%, and growth from 1994 to 1995 reached almost 33%. Even though LPG consumption has been developing very fast in the past decade, LPG consumption per capita is still very low, partly due to the large population in China. At present it is around only 6 kg nationwide which is small in comparison to 100kg in its Asian neighbors such as Japan and South Korea, for example. LPG development in China also shows geographical variance. South China has led the nation in terms of per capita consumption at nearly 35 kg. East China follows with per capita consumption of about 10kg. North China is far less, only half of that in East China. And still in many places inland, the LPG consumption per capita is negligible.
The majority of dollars invested in the China LPG market have been invested in large "mega" depots by the major oil companies. Little to no focus has been placed on the retail end-user market. Put simply, the LPG "storage" infrastructure is in place, but it is overbuilt because the retail market has not been cultivated at the same pace. Management's primary objective is the development of this retail consumer base.
From the mega-depots on the east and southeast coast of China, LPG is shipped to smaller inland storage depots via railroad tank car. LPG is then pumped into large storage tanks until it is distributed in bottles, pipelines or tank trucks to end users and distributors.
Inland infrastructure development has not kept pace with coastal development. Inland depot storage capacity must be expanded to serve the customers in waiting for LPG service. More efficient distribution methods are also needed. The bottle exchange system is labor intensive - a factor that does not significantly affect overhead yet, but will have greater future impact as salaries increase.
Distribution of LPG via pipelines directly to end-users is very efficient, but one drawback is the cost to install pipeline service to each household, which is approximately $185 US. Some more affluent customers can afford to pay the installation fee up front, but most of these have already purchased pipeline service. Some new construction projects permit the cost of installation to be incorporated into the cost of the home. However, most customers can not afford the up-front fee, but are willing and able to pay extra each month based on usage. Xinmao has seven pipeline projects either completed or under construction.
Distribution of LPG
There are four basic levels of LPG distribution:
Major LPG companies
Major LPG Distributors
Medium LPG Distributors
Small Independent LPG Distributors
The Major LPG companies are characterized by the following: they purchase LPG directly from refineries or major oil companies, they must be licensed, have railroad tank cars and storage depots, and typically serve over 10,000 retail customers. These companies depend on distribution networks to get LPG to the consumers.
Major distributors are licensed and generally serve more that 4,000 but less than 10,000 customers directly, but do not typically have any railroad tank cars, and have little or no storage capacity.
Medium Distributors are licensed and generally serve more than 1,500 but less than 4,000 customers directly, have no storage capacity.
Small Independent Distributors are those who may or may not be licensed, and have no relationship or loyalty to any major company or distributor, and usually serve less than 1,500 customers.
Since all of these distributors serve a customer base, Xinmao is actively recruiting them on an ongoing basis.
The majority of Xinmao's customer base is serviced with the help of agents and entity users. Xinmao has eight agents that are independent dealers who exclusively represent the Company in an outlying county area that is difficult for the Company to access on a regular basis. The consumers serviced by the agent pay retail prices. The Company pays the agent a fee for his services and the agent carries his own overhead expenses. As the LPG market was developing in the early 1990's, the Company was seeking to develop a customer base in the most efficient and effective manner possible; and, as a result, began to cultivate the "entity user"... Entity users were companies in other industries, already providing housing for their employees, that desired to provide a convenience to their workers by distributing LPG as an additional service. These entity users developed into distribution outlets that benefited the Company by providing free receiving, storage and LPG distribution service to consumers who paid retail prices. As the market further developed, the entity user also began to be a distribution outlet to other consumers in the local area that were not affiliated with the entity company. Today, the Company is actively seeking to cultivate and develop additional entity users to expand the consumer base. Today Xinmao has 125 entity users.
In 1997, under the leadership of Largo Vista management, several innovations were added to the distribution process. First, there was a time delay between the sale of the LPG and receipt of the cash from the sale. The Company responded with the "coupon program" whereby the consumer, first purchased a special coupon from the bank and presented it as payment as he exchanged an empty bottle of LPG for a full one. The bank then remitted to the Company. The Bank of Agriculture, one of the largest in China with over 1,000 branches in the province, has successfully worked with the Company for over two years in this program and the bank is pleased with exposure to a new customer base.
Second, also in 1997, the Company implemented the first consumer insurance program. This insurance, written by the largest insurance company in China, guaranteed the consumer who either made a non-refundable prepayment for LPG by purchasing a coupon that the LPG would be at a fixed price, immediately available, and a guaranteed quality and quantity.
These two innovations, the coupon program and the consumer insurance protection program, were the first of their kind in China. In the future the Company intends to implement a third innovation for the pipeline distribution system which will be a prepaid "smart card", that will be inserted into a meter in the consumer's home. This precludes cash flow and collection problems. Distribution of the prepaid smart card will be similar to the coupon program in concert with the Bank of Agriculture.
The bulk of Xinmao's retail customers are located in the Yunnan Province central cities of Kunming, Lunan, Chengong, Yiliang, Jinnin, Annin, and Eshan. As the population thins out in the suburbs, distribution networks take-over and service most customers. The rural areas are exclusively serviced by smaller distributors.
Finally, there are a number of other minor distributors who purchase from Xinmao and other major companies, who have solicited their own customer base over a period of time and have generated customer loyalty through relationship.
Raw Materials
The Chinese market is unique compared to other Asian countries. Japan and Korea seek security of supply through regular term contracts supported by long-term relationships, but, in China, low price and bargaining is the driving force for LPG purchases.
Xinmao has been able to consistently purchase LPG at low prices due to high volume of orders. When purchasing LPG, Xinmao must weigh various factors including quality of LPG, price, and transportation costs. It generally purchases from domestic sources inside China where prices are very low, but transportation costs are higher. On occasion Xinmao also purchases LPG from foreign companies such as Mobil Oil Hong Kong and Caltex.
Cost of goods can fluctuate widely and rapidly and can cause cash flow problems. The Company is researching the feasibility of obtaining a much larger storage facility that would permit it to purchase large quantities of LPG when prices are favorable, and sell it when prices are higher.
Pricing and Competition
The LPG industry in Yunnan Province consists of ten major LPG companies that have railroad tank cars, depot storage facilities, and sell LPG in both the retail and wholesale markets. All ten companies depend on a network of distributors to help reach and serve the needs of their customers. Competition is based principally on price and service, with some based on relationship and reputation. Nine of these companies are government owned and operated to some degree, leaving Xinmao as the only privately owned and operated company.
LPG retail market prices have been relatively unstable during the past two years, characterized by over supply and cut-throat competition. This was precipitated by environmental concerns that prompted the passing new regulations by the Kunming City Government that outlaw the use of coal. Other larger cities are following suit with similar clean air regulations, leaving LPG as the major viable energy alternative for cooking, heating, and hot water.
No companies were prepared to supply a sufficient amount of LPG to this new consumer market, but all companies reacted to the huge new demand.
The difference between Xinmao and the other nine government companies is that the primary objective of Xinmao is to make a profit while profit is secondary to the government companies primary objective is to ensure supply LPG. The nine government companies, whose primary objective was to supply LPG to consumers, are characterized by a lack of management and financial expertise, and by large work staffs that operate very inefficiently. These entities ordered an excess supply of LPG and had to cut prices to deplete the excess. This began the spiraling downward price market in which Xinmao was forced to compete. These pressures have eased, and Xinmao is negotiating with the government agencies and some companies in an effort to bring stability back to the market along with higher prices and profitable margins.
Black Market. In the residential wholesale market, many independent, "black market" dealers sprung-up and have been operating without a license, and have ignored safety regulations that require inspection and pressure testing of each bottle every five years. Another flagrant violation of consumer fairness is the practice of short-filling bottles. The "black market" dealer fills the bottle with 10 kg. of LPG, and sells it representing it has 13.5 kg. of LPG. Short-filling has permitted the Company's competition to charge lower prices and unfairly compete with Xinmao. This practice of cheating the consumer has been prevalent over the past several years. Xinmao is now challenging customers to be aware of what they are paying for by implementation of a "weight comparison program". The program permits the consumer to actually weigh the bottles to expose the "short-fill" problem.
As of April 15, 1999, the Kunming LPG Administration established "minimum pricing" regulations which set a base price for both wholesale bulk sales, and wholesale and retail bottle sales. This regulation will help stop the uncontrolled cut-throat pricing competition that occurred over the past 24 months. It will be incumbent upon the nine participating major LPG companies to form task forces to assist the LPG Administrator in enforcing these regulations. The "short-fill" practice is now illegal under new "minimum price" regulations, which require all wholesalers to sell a 13.5 kg. bottle for no less than 36 RMB, and retail distributors for no less than 42 RMB.
Xinmao competes with others on both reputation and service. To differentiate itself from its competition, Xinmao stresses a long-term relationship both with the residential user, and with the distributor, to help them bring-in and keep new customers. The Company wants its distributors and their customers to be a part of the "Xinmao Family". The Company offers more than claims about its service. Its reputation is excellent and is backed-up by a record of uninterrupted service since 1992. Consumers and distributors know that they can rely on Xinmao to deliver and that they will receive honest weights and measures.
Insurance Xinmao sells a solid image of reliability, service, safety, and seven years of uninterrupted service to its customers - and backs it up with insurance. The Company provides consumer insurance, written by the Peoples Insurance Company of China (PICC) which is owned by the government. The insurance guarantees that a customer who paid in advance that the LPG would be at a
fixed price, immediately available, and a guaranteed quality and quantity. This innovation has given the customer new confidence, since in the past many companies collected in advance, and then went out of business, leaving the customer empty handed.
Government Regulation
The LPG industry is regulated on a day-to-day basis by the Kunming LPG Administration, which oversees all companies licensed to do business, and enforces rules and regulations in the market place. The LPG Administration faces many problems in this rapidly emerging, chaotic market, including the existence of many unlicensed small distributors, violations of safety regulations, and bottles of LPG short-filled by as much as 25%. In April 1999, the local LPG Administration met with Xinmao and eight of the other largest licensed companies in the area, and together set minimum price policies intended to provide positive margins over cost. The LPG Administration has also attempted to correct some of the more flagrant violations, but has also overlooked them to some extent, waiting for one or two companies to emerge as the survivors of the competition, proving that they are financially able to carry the responsibility of uninterrupted supply to consumers. Xinmao is poised to be the survivor, requiring only an infusion of capital to give the LPG Administration the confidence it needs to begin to enforce regulations more aggressively.
Patents, Trademarks & Licenses
The Company maintains no patents or trademarks.
Seasonal Factors
Northern China is subject to a wide range of seasonality ranging from snow in the winter to hot, humid summers. However, moving south, the seasons and temperatures do not fluctuate as much as in the north. The Xinmao Company operates in Yunnan Province which, being at an elevation of approximately 5,500 feet, is known for its moderate and even climate year around - being slightly cooler in the winter, requiring some heating, while the summer weather is warm and pleasant. As a result, seasonal factors do not play a significant role in the Company's business.
Government Contracts
The Company has government approval for the exclusive development of pipeline projects in the counties of Lunan, Fuming, Yiliang, Yuxi, and a part of Kunming.
Environmental Factors
Between 1996 and 1998, environmental concerns over clean air and streets, have prompted a general movement within the Chinese Government from the Central Government to the provinces and the major cities to phase-out the use of coal as an energy source for cooking and heating. As coal is phased- out a void is left which is being filled by liquid petroleum gas (LPG) because it is a clean burning, efficient and transportable energy substitute. It is expected that continued efforts will be made to replace other unclean burning fuels with LPG, especially in automobiles and industrial applications, since it is the only viable alternative fuel resource available to Southern China.
The economic growth of China with its huge population, emerging middle class, and growing consumer sector are trends that management anticipates will increase the Company's revenues from Xinmao as well as other anticipated projects. China's young, developing LPG market presents challenges of improving sales strategies, seeking lowest-cost sources of goods, implementing efficient management techniques, and developing the efficiency and effectiveness of human resources.
World geopolitical uncertainties, such as the United States bombing of the Chinese consulate in Belgrade, Yugoslavia resulted in a short period (4-5 days) of unrest and negative reactions toward Americans in China; however, no long term difficulties have been experienced and management does not anticipate any serious detriment to prospects for the Company's success in China because of the nature of the service a utility company provides that is in continual demand, and the fact that foreign ownership is not readily ascertainable by consumers.
Additionally, the Company is searching for joint venture partners in various potential LPG projects in the Yunnan Province and in other provinces. Investment by joint venture partners will be perceived as financial strength by the local LPG Administration, and management anticipates stronger enforcement of licensing and safety regulations, which should reduce unfair competition currently experienced by the Company.
Year 2000 Issue
Many computer Systems in use today may be unable to correctly process data or may not operate at all after December 31, l999 because those systems recognize the year within a date only by the last two digits. Some computer programs may interpret the year "00" as 1900, instead of as 2000, causing errors in calculations or the value "00" may be considered invalid by the computer program, causing the system to fail.
In the U.S., the Company maintains its financial data on a PC system utilizing generic accounting software, both of which have been guaranteed by the manufacturer as Y2K compliant. In China, due to government regulations, the Company maintains a manual record system. During first quarter 2000, in China, management expects to begin maintaining financial and other information on both a manual and PC system, totally shifting to a PC system as government regulations permit. The Company does not believe it will either experience, or that it has significant exposure to, Year 2000 problems, and neither does it expect that the Year 2000 issue will have a material cost or impact on Company operations. The Company's primary contingency plan depends upon the use of manual back-up systems, and alternative supply sources such as major oil companies.
These contingency plans are intended to mitigate the impact of third party Year 2000 noncompliance. Outside of manual backup, the Company does not plan to implement further contingency plans. However, there can be no assurance that the systems of key suppliers and other companies on which the Company relies will not have an adverse effect on the Company including, (1) the inability to obtain products or services used in business operations, (2) the inability to deliver goods or services sold to customers
Forward - Looking Statements
Investors are cautioned that certain statements contained in this document, including but not limited to those under the caption Management's Discussion and Analysis as well as some statements by the Company in periodic press releases and some oral statements of Company officials during presentations about the Company, are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of l998 (the "Act"). Forward-looking statements include words such as "expects", "anticipates", "intends", "plans", "believes", "estimates", or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible future company actions, which may be provided by management are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks,uncertainties, and assumptions about the Company, economic and market factors and the industries in which the Company does business, among other things. These statements are not guaranties of future performance and the company has no specific intention to update these statements. Actual events and results may differ materially and detrimentally from those expressed or forecasted in forward-looking statements.
Certain of the important factors that could cause actual results to differ materially and negatively from the Company's expectations, among others, include continued instability in pricing and unprofitable competition in China, a slow down in the trend in sales of LPG during the remainder of the year, an inability to obtain sufficient working capital, and new Gove |
