The Hong Kong office was leased from Fortune Ocean Ltd., whose directors and shareholders are Andrew Liu, John Liu, and Madam Yap. In February 2010, Fortune Ocean Ltd sold the properties of the Hong Kong Office to a third party. In this connection, the company ceased to pay rent to Fortune Ocean Ltd starting in March 2010. At the same time, the company entered into a tenancy agreement with the new landlord to rent the Hong Kong office.
Starting from December 2007, an additional flat at the existing building of the Hong Kong Office was leased from a third party for office expansion. In December 2009, this lease was ceased and another flat in the same building is leased from another third party for further expansion.
The Fuzhou office is leased from a third party staring from October 2010.
Although recovery is noted in the worldwide economy and financial market, depression of world trade and piracy issue still bothers the shipping industry especially the charters and shipowners. Therefore, in 2011, the company will continue to enhance our credit control and marketing functions.
In order to expand our insurance brokerage business, the company has been looking for investment opportunities in Asia since last year. In December 2010, the company acquired a general insurance broker firm in China for this purpose. We will continue to seek investment opportunities in 2011. In addition, the company does have a plan to hire additional employees in the next twelve months to enhance our operations including operations and supporting functions. However, the plans of investment and employee hiring will depend on the market situation, associated risk factors and our internal resources. There is no assurance that we will able to implement these plans within the foreseeable future.
Income before tax: Income before tax for 2010 was $1,988,339 compared to $1,814,762 for 2009. The increase of $173,577, or approximately 10%, was mainly due to an increase of revenue and other income which was partially offset by an increase in the operating expenses during the year. The reasons for increases in revenue from operations are discussed above, while the increases of operating expense are discussed in the section below. For the other income, the increase was mainly due to an increase of interest and investment incomes. Interest income for 2010 was $90,067 as compared to $5,377 for 2009. The increase of $84,690 or approximately 1575% was mainly because of the secured loan made to a third party during the year. The loan was collected in full before December 31, 2010. Investment income for 2010 was $11,084 as compared to $9,820 for 2009. The increase of $1,264 or approximately 13% was mainly due to the increase of dividend received from the publicly traded equity securities.
Bad debt expenses - increased by $335,449 or 256% from $130,816 in 2009 to $466,265 in 2010. The increase was mainly due to an increase in the provision of doubtful debts in 2010.
Exchange loss - increased by $2,691 or 12% from $22,276 in 2009 to $24,967 in 2010. The increase was mainly because the exchange rate of US dollar against HK dollar in the market throughout 2010 was under HK$7.8 which is used by the company as standard rate in accounting purpose.
Other general and administrative expenses - increased by $218,379 or 45% from $482,426 in 2009 to $700,805 in 2010. In general, the increase was due to the general price inflation, increment of headcount causing office administrative expense and staff medical increased, and the growth of client base causing telecommunication and postage expenses increased. Another reason is that additional consulting and legal expenses were spending due to the acquisition of China firm during the year.
For 2010, cash provided by operating activities totaled $1,974,738 compared to $1,190,680 for 2009. The receipt of funds was primarily due to net income for the year plus increases in deposit and prepayment, fiduciary asset, other receivable, accounts payable, accrued expenses and income tax payable as well as decreases in commission receivable, income tax prepaid, claims payable and other payable.
Due to the company acquiring a new subsidiary during the year, certain assets such as customer list and goodwill were recognized in 2010. As of December 31, 2010, carrying values of such assets were $62,418 and $249,034 respectively.
The consolidated financial statements include the accounts of the Company and all its majority-owned subsidiaries and other entity which require consolidation. Inter-company transactions have been eliminated in consolidation.
In accordance with ASC 810 (SFAS No.167 “Amendments to FASB Interpretation No. 46(R)”), the company consolidates variable interest entities (VIE’s) for which it is the primary beneficiary. The company has evaluated the provisions of ASC 810 and determined that it applies to its interest in China.
According to the requirements of ASC 810, we have evaluated our relationships with SHB. We have concluded that SHB is a VIE, and the company is the primary beneficiary of the VIE. Accordingly, we adopted the provisions of ASC 810 and consolidated SHB into our financial statements as of and for the year ended December 31, 2010.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ALCO, Inc. as of December 31, 2010 and 2009 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2010 AND 2009
Under the current Chinese regulations, there are restrictions on the percentage interest foreign or foreign-invested companies may have in Chinese companies providing insurance brokerage services in China. In addition, the operation by foreign or foreign-invested companies of insurance brokerage business in China is subject to government approval. In order to comply with these restrictions and other Chinese rules and regulations, AL Marine Holdings (Hong Kong) Limited entered into an exclusive agreement with Shanghai Heshili Broker Co. Ltd. Under the agreement, the company provides all management and administration services and financial support to SHB for its operations. SHB is prohibited from entering into any exclusive agreement without the company’s prior approval.
SHB is 100% beneficially owned by a Chinese party. An agency agreement is entered into between the Chinese party and ALM HK. Under this agreement, the Chinese party is holding the shares of SHB on behalf of ALM HK. The company does not have any direct ownership interest in SHB.
In accordance with ASC 810 (SFAS No.167 “Amendments to FASB Interpretation No. 46(R)”), the company consolidates variable interest entities (VIEs) for which it is the primary beneficiary. The company has evaluated the provisions of ASC 810 and determined that it applies to its interest in China.
The consolidated financial statements have been prepared in accordance with US GAAP and the instructions to Form 10-K and Regulation S-K. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary to present fairly the financial position, results of operations and cash flows at December 31, 2010 and 2009 for all periods presented have been made.
Income tax expense is based on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences between assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. In accordance with FASB Accounting Standards Codification TM No. 740, " Income Taxes”, these deferred taxes are measured by applying currently enacted tax laws. The Company's effective tax rate for December 31, 2010 and 2009 was 20.08% and 17.36%, respectively. The Company did not provide any current or deferred income tax provision or benefit for any period presented to date because book income is substantially equal to taxable income, with only minor timing differences with regard to the depreciation of fixed assets. Management has determined that any deferred tax asset or liability is inconsequential, and not material to the financial statements.
The Hong Kong Monetary Authority (“HKMA”), Hong Kong's central bank, maintains a Linked Exchange Rate System since 1983. The HKMA operates Convertibility Undertakings on both the strong side and the weak side of the Linked Rate of US$1: HK$7.8. In fact, the exchange rate for HK$ to US dollars has varied by only 100ths during 2010 and 2009. Thus, the consistent exchange rate used has been 7.80 HK$ per each US dollar. Since there have been no greater fluctuations in the exchange rate, there is no gain or loss from foreign currency translation and no resulting other comprehensive income or loss.
Foreign currency transactions are those that required settlement in a currency other than HK$. Gain or loss from foreign currency transactions, or exchange loss, are recognized in income in the period they occur.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for the consolidation of VIEs. This amendment requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity for financial reporting purposes. The amendment requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This amendment was effective for the Company beginning January 1, 2010. The Company adopted the amendment January 1, 2010 and it did not have any impact on the Company’s financial position or results of operations.
In October 2009, the FASB issued authoritative guidance about the accounting for revenue contracts containing multiple elements, allowing the use of companies’ estimated selling prices as the value for deliverable elements under certain circumstances and to eliminate the use of the residual method for allocation of deliverable elements. This guidance is effective for the Company beginning January 1, 2011. The Company does not expect that this standard will have a significant impact on its financial position or results of operations.
Cash balances are held principally at one financial institution and are not insured. The Company believes it mitigates its risk by investing in or through major financial institutions. Recoverability is dependent upon the performance of the institution.
When the Company receives a premium from a customer, it debits the lump sum amount into one bank account and establishes a schedule to keep track of the amount of premium payable to the insurer. At the monthly closing, the Company reclassifies the amount of premium payable to insurers as fiduciary assets. Also, when the Company receives a claim on behalf of a policyholder, it debits fiduciary assets and credits claims payable and other payables, if necessary. The fiduciary assets balance for December 31, 2010 and 2009 are as follows:
The following are the Company’s investments owned and securities sold short by level within the fair value hierarchy at December 31, 2010 and 2009 are as follows:
Room 505, Bank of America Tower, Hong Kong (Hong Kong Office)
For the Hong Kong Office of Room 505, Bank of America Tower, the initial term of the lease is two years beginning November 15, 2009 with a minimum lease commitment of $64,000. This lease arrangement has a three-month rent free period from November 15, 2009 to February 14, 2010. In addition, when the lease is ended in 2011, the company has an option to renew the lease for two years (from November 15, 2011 to November 14, 2013) at the prevailing market rent.
For the Fuzhou Office, the initial term of the lease is two years beginning August 1, 2010 with a minimum lease commitment of $31,972. This lease arrangement has a one-month rent free period from August 1 to August 31, 2010. In addition, the lease arrangement has no renewal option.
On February 25, 2011, the company subsidiary Chang An Consultants Ltd., declared dividends of$321,795. The company has paid $128,718 to the noncontrolling shareholders in February 2011.