To: Shareholders
Presidents Message 1999
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Let me begin with a few remarks on some important events in 1998 before bringing you up to date on current developments at Largo Vista. We had two main objectives in 1998. First, to establish Kunming Xinmao Petrochemical Industrial Co. Ltd. as a solid presence throughout the Yunnan province; and second, to expand into other provinces. We are on the road to success in both objectives. This expansion is possible only through Xinmao?s licenses which effectively covers all of China?s 1.2 Billion population. We have laid the groundwork for future growth by locking in new exclusive territories for Xinmao to cultivate later. Each expansion within and outside of Yunnan province has either involved a pipeline project, a new LPG bottle exchange location, or an acquisition. This activity has received a lot of attention in China, with the result of companies seeking a potential relationship with us making it easier to negotiate.
ACCOUNTING AND FINANCIAL REPORTING
Despite these successes, however, we ran into major obstacles in completing our financials for the year 1998, and this played a factor in depressed stock price. For all practical purposes, these obstacles have now been largely overcome. A few comments may help to clarify matters. In general, Chinese companies do everything in their power to avoid taxes. The accounting is accurate, but there are some important differences between the Chinese system and the Generally Accepted Accounting Principles (GAAP) used in the U.S. The differences must be analyzed and translated, and this has been both difficult and time consuming. In addition, in March of each year, Chinese government auditors check each company financials. If they are not satisfied with the results and the indicated taxes, then an adjustment is negotiated. This process causes additional problems in timing and translations to U.S. GAAP. We had to deal with these problems last year. In May, 1998, Largo Vista sent two CPA?s and our auditor to our headquarters in Kunming. The first trip was to familiarize everyone with operations on both sides. For example, our auditor had to verify several things about our operations, some of them very basic: Did our LPG depot really exist? Did Xinmao really have the largest LPG railcar fleet in the Province? And many other items, as well. Another trip was needed in April,1999 to acknowledge and verify questions accumulated from the first trip. The real task is to show a strong future which is very difficult without the needed write- offs, and at the same time show the real value of the operation which is the licenses that opens all of Mainland China to our LPG operations.
NEW ACCOUNTING AND FINANCIAL REPORTING SYSTEM
We knew that we had to make a major decision about our accounting system if we were going to avoid repeating our old financial reporting problems in the future. We learned about the huge accounting budgets that large foreign companies had set up for their China projects. Largo had a choice to pay those high costs that would eat up its margins, or design our own accounting system. Fortunately, the expertise of an Internet communications company, the Sentio Corporation, makes it possible to interface the Chinese financial system with our own GAAP system. This interface will be designed exclusively for Largo Vista; and with it, our Chinese accountants can be trained to input data in a designed format from where it will be communicated on the internet to U.S. headquarters and mapped to its proper format for U.S. GAAP format. This accounting system will be copyrighted and licensed in China. An added benefit of this arrangement is that most of this system can be adapted for use by other foreign operations in China, enabling them to link to their parent companies via the internet. The remaining portion of their operations can be integrated to fit the requirements of their particular business. Companies, desiring to use the Largo system to solve their financial communication problems, will pay a user fee while saving money over their existing accounting and communication systems. One of the major benefits of the system is that once this format is adjusted to provide a "seamless integration" between domestic and Chinese companies, input will be easy and timely. Our auditors can check it at any time, validate the numbers, and provide financials to interested parties when needed.
ACQUISITIONS
When a reliable accounting system is in place, designed to link Xinmao headquarters in Kunming to Largo Vista?s headquarters in the USA, it will be time to resume our expansion through acquisition strategy, in the comfort that each new acquisition company can be linked into our financial reporting system. As Largo executes this strategy, it is on the path to its goal of becoming the largest LPG company in Mainland China. We believe that we can easily meet that goal by late 2001. At the same time, we also intend to reduce our costs as much as possible. One of our highest priorities is to offer consumers pipeline hookup at zero money down. Currently, our new users pay a hook-up fee, which covers our pipeline costs and give us a profit before the gas flows. This arrangement has worked well for new users who can afford the initial cost of connection to our LPG pipelines, but it limits our sales to potential users who can afford the monthly user fee but not the hook-up fees.
Under the "Zero money down " plan the consumer will pay a slightly higher monthly LPG usage fee that will amortize the hookup costs over an approximate 48 month period. Offering our prospective customers free LPG hook-up will provide our agents with an effective marketing device and enable them to increase sales substantially. Once paid for, the pipeline will produce income for the lifetime of the system estimated at over 40 years.
FUTURE GROWTH
China has made, and is continuing to make, remarkable progress in economic development, and this has led to more energy consumption. This progress is reflected in China?s coal output, which ranks second in the world, but coal consumption has also become a major source pollution. As I?ve noted in past letters, the Chinese government has responded with environmental protection laws making it illegal to use coal or wood. Since LPG is the only viable fuel alternative, the effect should be very positive for Xinmao and Largo Vista. Government reports (Sinopec 1998) estimate that nearly to 20 million qualified users are waiting for LPG service. This fact alone, coupled with Chinese clean air laws, assures Xinmao?s growth well into the next century and makes our market potential almost unlimited for the next twenty years. I have also commented in past letters that Xinmao is the only licensed importer and retailer into the region, which makes our delivery operations very attractive to large energy companies. These companies will soon have to address the downstream LPG retail business to assure profits for their large investments in depots in China, and this means increased business for Largo Vista. To date the biggest use of LPG is for cooking; but, with the development of pipelines increasing, LPG will also be used for heating. Since environment is such a great concern, the Company is also investigating other uses for LPG in the industrial and automotive sectors.
XINMAO?S STANDARDS
Xinmao?s relationship with major Chinese banks along with its insurance program has led to an invitation by Chinese government authorities to help address problems in the LPG industry by participating in the formulation of new regulations. Our input at these meetings has resulted in the first regulation, effective April 15, 1999 that stops undercutting and provides a positive margin by setting a minimum wholesale contract price and retail bottled LPG price. Any violator of this regulation would be penalized 10,000 RMB. In the first month, two violators have been penalized. (stops undercutting and provides a positive margin base)
PIPELINE BENIFITS
Largo Vista is constantly looking to expand products and services. Our LPG pipelines and service are already bringing direct benefits to the people of China, modernizing their living standards and bringing county towns closer to city-hood. As a result, the typical homeowner enjoys the increased prestige, convenience and higher home value of a LPG serviced home. As part of our expansion, we are currently looking into the possibility of bringing drinking water into every home along with LPG. The addition of a water pipeline to every LPG pipeline project will cost little, but enhance convenience and home value even more. The average Chinese family spends 50 RMB ($6 USD) per month on bottled water. We believe that Xinmao can effectively bring down that cost to a combined lower monthly average than Chinese families now pay, which would still allow them to pay a slightly higher LPG price and permit us to amortize our pipeline costs. Our projections show full payback on pipeline construction cost in 36 months. The Bank of Agriculture will collateralize the pipeline for a line of credit on other new pipeline projects. These pipelines have an estimated income life of over forty years with very nominal maintenance the first ten years.
REPRESENTATIVE OFFICE
We are strategically setting up a Largo Vista Group China Representative office in the city of Wuhan. This office will provide opportunities to investors interested in China, and will help U.S. and European companies follow through with mergers and acquisitions. This office will conduct due diligence evaluation of the opportunities. Such projects as a nation-wide low frequency license for a telecommunications system and our HIV test system is currently being evaluated in China and once approved, will be coordinated with our China office and through our manager of International trade and business development. Largo Vista has also recently taken a number of counter top water filters to China for evaluation and approval. Along with the water filters, we have presented the positive results of previous tests of water samples taken from 4 location in mainland China. If approvals go well we will immediately import two to three thousand units and start selling through our marketing network.
POLITICS
Most of us have found the constant news stories about China hard to ignore, with the media comments on most favored nation status, human rights, and allegations of spying and illegal donations. Everyone is a expert on what should or should not be done, especially if it happens to be election time. The question always comes up: does this effect our operations in China. The answer is a flat no.
We are a utility company operating lawfully in China. The demand for our service is essentially independent of international political events. Our customers use LPG primarily for cooking. Since LPG is very effective and in great demand, any interruption in LPG service to Chinese citizens would cause considerable social disorder, something the government does not at all want. Xinmao has operated for over seven years without interruptions of service and with the full support of the government. In fact, the Chinese government has invited us to be as large as we can be as long as we give good reliable service.
LARGO VISTA?S FUTURE
As President and acting CEO, I know very well the concerns of our shareholders. As a major shareholder myself, I am 110 % committed to our company. Our growth in China is real, and our future is truly unlimited. We have tried to do everything possible to make Largo Vista a safe investment, and we intend to stick to that goal by simply doing good lawful business in China. We fully expect that in the near future, our progress will be reflected in a share price that gratifies our shareholders. We have sacrificed to set new standards for LPG service in that country, which are now just starting to be recognized. These standards secure our future there in any direction we decide to go. We have made many friends in China, and we join its government in the common goal of raising the living standard of the Chinese people. LGOV is obviously not a day trade. It?s a long term hold on a penny stock that should not be sold just because it doubles in price. Our reporting status is only the starting point I am certain that 1999 will be a very interesting year by reason of our many acquisitions and huge growth. U.S. investors are going to discover us sooner or later.
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Daniel Mendez
President and CEO
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