ALCO rents a portion of its facilities from companies owned by the directors of ALCO and rents a portion of its facilities from third parties. As of December 31, 2010, ALCO leased approximately 6,084 square feet of office space for its operations. Its current leased properties are:
In order to deal with the worldwide financial and shipping turmoil began in 2008, the company implemented a plan in 2009 and 2010 to improve our cost competitiveness and enhance the credit control and marketing function. From the result of 2009 and 2010, it clearly shows that ALCO’s plan is successful.
Revenue: Revenue for 2010 was $6,205,647 as compared to $5,041,711 for 2009. The increase of $1,163,936 or approximately 23% was mainly due to increases of commission income fee from the existing clients and enrollment fee income. This increase was partially offset by a decrease in consulting income. Commission income is based on a percentage of the premiums paid by the insured. Because of an increase in insurance call and premium rates in the market, commission income increased by $1,217,351 or 25%. On the other hand, consulting income for 2010 decreased to $69,500 from $134,882 in 2009. The decrease of $65,382 or 48% was because demand for consulting services decreased. Furthermore, enrollment fee for 2010 was $17,357 as compared to $5,894 for 2009. The increase was mainly due to the increases of customer’s demand and enrollment. In addition, website advertising and other revenues for 2010 were maintained at the similar with last year. They were $14,000 and $25,967 respectively.
Operating expenses: Total operating expenses were $4,318,459 for 2010, as compared to $3,241,749 for 2009. The increase of $1,076,710 or 33% was mainly due to increases in salaries, travel expenses, rents, bad debt expense, depreciation, exchange loss and other general and administrative expenses during the year. The reasons for the increases in the major items are as follows:
Salaries - increased by $385,227 or 21% from $1,796,679 in 2009 to $2,181,906 in 2010. The increase was mainly due to increases in headcounts and pay rates during the year of 2010. In addition, the Restricted Share Stock Compensation Plan is implemented in June 2010, $58,613 was recognized as stock-based compensation expense in salaries during the year ended December 31, 2010.
Travel expenses - increased by $106,985 or 37% from $289,963 in 2009 to $396,948 in 2010. The increase was mainly because of the growth of client base and general price inflation.
Rents - increased $21,840 or 5% from $484,892 in 2009 to $506,732 in 2010. The increase was mainly due to the company set up an office in Fuzhou, China and rented a temporary office during the renovation of the Hong Kong office in late 2010.
Depreciation - increased by $6,139 or 18% from $34,697 in 2009 to $40,836 in 2010. The increase was primarily due to the addition of fixed assets during the whole year of 2010.
For 2010, cash used in investing activities amounted to $439,921 compared to $123,279 for 2009. The use of funds was for the purchase of the subsidiary in China and fixed assets such as office equipment and leasehold improvement.
For 2010, cash used by financing activities amounted to $86,301, compared to $43,772 for 2009. The use of funds was for the repayment of obligations under finance leases, and amount due to minority shareholders and director.
As of December 31, 2010, commission receivable was $208,843 as compared to $658,795 for the same period in 2009, while trade accounts payable and other payable were $879,087 and $240,370 respectively, as compared to December 31, 2009 balances of $625,385 and $144,092. Each of these changes was due to the timing of commissions received from customers and making payments to insurers at the year end. In addition, because the credit control was tightened during 2010, commission receivable for 2010 was significantly reduced by $449,952 or 68%. In addition, because rate of insurance premium paid by customers to insurers was raised, cash and cash equivalents and fiduciary asset increased during the year ended December 31, 2010. Furthermore, because certain claims received from insurers on behalf of customers were repaid, the claim payable significantly decreased as compared to the year end of 2009. As of December 31, 2010, there was $1,917 deferred revenue included in the liabilities. This item is in relation to the income received in advance for the website advertising.
Because the interest rate is maintained at a very low level in the recent years, the company purchased publicly traded equity securities with high dividend yield since 2008 for long term investment purpose. As of December 31, 2010, the market value of the equity securities was $340,401. It decreased by $28,959 as compared to $369,360 for the last year. The decrease was mainly because the market value of such equity securities dropped at the year-end date of December 2010 when compared to the year-end date of December 2009.
The Company has bank and cash equivalents of approximately $8,051,872 as at December 31, 2010. The Company has sufficient funds to satisfy its financial commitments and working capital requirements for the next twelve months. As of December 31, 2010, the Company had $0 of commitments for capital expenditures and off-balance sheet arrangements as well as lease commitments of $514,902.
In preparing financial statements that conform to generally accepted accounting principles, management makes estimates and assumptions that may affect the reported amount of assets and liabilities. Actual results could differ from these estimates.
ALCO’s main subsidiaries, ALC, CAC and ESA use the Hong Kong dollar as its currency. The exchange rate for HK$ to US dollars has varied by very little during the period between 2002 and 2010. 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. There were no material gains or losses recognized as a result of translating foreign currencies to the U.S. or Hong Kong dollar. No assurance can be given as to the future value of foreign currency and how fluctuations in such value could affect ALCO’s earnings.
Functional currency of SHB is the local currency, the Chinese Yuan (“CNY”). The financial statements of SHB are translated into United States dollars in accordance with FASB Accounting Standards Codification TM (ASC) No. 830, " Foreign Currency Matters”, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for the equity. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income. At December 31, 2010, the cumulative translation adjustment of $23,600 was classified as an item of other comprehensive income in the shareholders’ equity section of the consolidated balance sheet. For the year ended December 31, 2010, accumulated other comprehensive income was $103,784.
We have audited the accompanying consolidated balance sheets of ALCO, Inc., as of December 31, 2010 and 2009 and the related statements of operations and comprehensive income, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
10,342,000 shares issued and outstanding at December 31, 2010 and 10,150,000 shares issued and outstanding at December 31, 2009
ALCO, Inc. (“ALCO,” “we,” “us,” the “Company”) was incorporated in Nevada on June 7, 1999 as Seahorse, Inc. and changed its name to Lotus Capital Corp. on September 20, 2004. The Company changed its name to ALCO, Inc. on February 13, 2006.
The Company is principally engaged in the marine insurance brokerage business in the Asia Pacific region, through its wholly owned subsidiary, AL Marine Holdings (BVI), Ltd., a British Virgin Islands corporation ("AL Marine").
AL Marine is the 100% owner of Andrew Liu and Co., Ltd., a corporation principally engaged in the business of marine insurance brokerage in Asia. AL Marine owns 60% of Chang An Consultants Ltd., a joint venture with China Changjiang National Shipping Corporation (“CSC Group”) that serves as a vehicle for the provision of marine insurance brokerage and other marine business services by AL Marine. AL Marine owns 85% of EdushipAsia Ltd. In 2005 and 2004, EdushipAsia Ltd was appointed as an exclusive agent by the Institute of Chartered Shipbrokers (UK) (“ICS”) to set up ICS’s first distant learning centre in Shanghai, PRC. AL Marine owns 100% of AL Marine Holdings (Hong Kong) Limited, a corporation principally engaged in the investment holding. AL Marine Holdings (Hong Kong) Limited (“ALM HK”), through an agency arrangement, owns 100% of Shanghai Heshili Broker Co. Limited (“SHB”), a corporation principally engaged in the business of general insurance brokerage 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 810and consolidated SHB into our financial statements as of and for the year ended December 31, 2010.
The company’s VIE consolidated net assets were US$852,123 at December 31, 2010.
Financial instruments which subject the Company to concentrations of credit risk consist principally of accounts receivable and cash. Exposure to losses on receivables is dependent on each customer's financial condition. The Company controls its exposure to credit risk through a process of credit approvals, credit limits and monitoring procedures, establishing allowances for anticipated losses.
The preparation of financial statements in conformity with US GAAP 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 revenue and expenses during the reporting period. Actual results, when ultimately realized could differ from those estimates.
Property, plant and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in the income statement in the year of disposition.
The functional currency of SHB is the Chinese Yuan (“CNY”). The financial statements of SHB are translated into United States dollars in accordance with FASB Accounting Standards Codification TM (ASC) No. 830, " Foreign Currency Matters”, using year-end rates of exchange for assets and liabilities, and average rates of exchange for the period for revenues, costs, and expenses and historical rates for the equity. Translation adjustments resulting from the process of translating the local currency financial statements into U.S. dollars are included in determining comprehensive income.
Amounts included in the statements of operations, statements of changes in shareholders’ equity and statements of cash flows for the year: US$0.14714:CNY1
In January 2010, the FASB issued authoritative guidance which requires additional disclosures about transfers between Levels 1 and 2 of the fair value hierarchy and disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. This guidance was effective for the Company January 1, 2010, except for the Level 3 activity disclosures, which are effective for fiscal years beginning after December 15, 2010. The adoption of this guidance, which is related to disclosure only, did not have a material impact on the Company’s financial position or results of operations.
The Company does not believe that there are any new pronouncements that have been recently issued that might have a material impact on its consolidated financial statements other than those which have been disclosed.
In February 2010, Fortune Ocean Ltd, a corporation owned by directors of the company, sold the properties of Room 501, 502A and 502B of the Hong Kong Office to a third party. In this connection, the company ceased to rent the properties from Fortune Ocean Ltd starting in March 2010. The amount of US$23,077 due from Fortune Ocean Ltd is the rental deposit and has not been returned to the company yet.
Depreciation expense for 2010 and 2009 was $40,836 and $34,697 respectively.
On December 16, 2010, the company acquired Shanghai Heshili Broker Co. Limited (“SHB”). The total amount of cash paid was $852,223. In accordance with the purchase acquisition accounting, the company initially allocated the consideration to the net tangible and identifiable intangible assets, based on their estimated fair values as of the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and identifiable intangible assets. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date. The company has finalized its purchase price allocation.
Intangible asset is in relation to the acquired customer list with a useful life of 3 years. The fair value of goodwill will be under the company’s annual goodwill impairment testing staring in next year. None of the goodwill is expected to be deductible for income tax purposes.
The unaudited pro forma information of the Company set forth below gives effect to the acquisition of Shanghai Heshili Broker Co. Limited as if it had been consummated as of the beginning of the applicable period. The unaudited pro forma information has been derived from the historical consolidated financial statement of the Company and of SHB. The unaudited pro forma information is for illustrative purposes only.
Unrealized loss of $40,029 and gain of $126,156 for the investments were recognized in the other comprehensive income for2010 and 2009, respectively. All these gain and loss are related to the investments listed in the Hong Kong Stock Exchange.
On July 27, 2010, the company subsidiary Andrew Liu & Company Limited (“ALC”) entered into a loan agreement and a mortgage with its client, HK Huajinyuan Shipping Co., Limited (“HKHS”). Under the loan agreement and the mortgage, ALC will make available to HKHS an on demand loan facility in the principal amount of up to US$3,500,000. The loan is interest bearing and secured by a vessel owned by HKHS. The loan is payable in full at any time upon demand. Furthermore, HKHS is required to perform, observe, and comply with certain covenants, terms and conditions including, but not limited to, the requirement to keep the vessel operationally seaworthy, fit for service and in compliance with all related laws and regulations such as ISM Code, the ISPS Code, the MARPOL and all other laws and regulations including all Environmental Laws and Environmental Authorizations. Moreover, HKHS cannot create or permit to subsist any security interest over the vessel except certain conditions that are in relation to the ordinary course of business. As of December 31, 2010, the loan has been fully repaid and recognized interest income of $87,500 in 2010.
The aggregate value of this award was $310,860, as determined by multiplying the number of shares times the fair value of the Company’s stock on June 1, 2010, the date of the grant award. The fair value is based on discounted free cash flow analyses, which involve management’s best estimate of future revenue, operation expenses, investing activities, and financing activities. In the valuation, the free cash flow is projected for five years and is determined by using the company’s historical figures such as revenue and operation expenses which are compounded annually with 5% growth rate. Free cash flow occurring beyond the five-year projection period is assumed to be in perpetuity and determined by using the Perpetuity Growth Model in which the project net cash flow is divided by the risk-free rate. The sums of the five-year free cash flow together with the perpetual free cash flow are then discounted by the risk-free rate. As a result, the fair value of the Company’s stock on the date of the grant award is $1.57 per share. When determining the risk-free rate, Hong Kong unsecured long term loan rate, 7.25%, in effect at the time of grant is used in the calculation.
The Company rents office space in Hong Kong and Shanghai from companies owned by directors of the Company. The relevant rent expenses consist of following:
The Company has six material operating lease commitments for its facilities. The initial term of the lease arrangement for Director Quarter is two years beginning July 19, 2010 with a minimum lease commitment of $191,538. For the Shanghai Office, the initial term of the lease is two years beginning July 3, 2009 with a minimum lease commitment of $18,998. For the SHB Office, the initial term of the lease is one year beginning January 1, 2011 with a minimum lease commitment of $27,400. All the lease arrangements mentioned above have no renewal option and rent holiday.
For the Hong Kong Office of Room 501 and 502, Bank of America Tower, the initial term of the lease is two years beginning March 1, 2010 with a minimum lease commitment of $180,994. This lease arrangement has no rent holiday but have a renewal option that, when the lease is ended in February 2012, the company can renew the lease for two years (from March 1, 2012 to February 28, 2014) at the prevailing market rent.
On February 1, 2010, the company subsidiary Chang An Consultants Ltd., declared dividends of approximately $192,000. The company has paid $76,923 to the noncontrolling shareholders.