The Hong Kong office was leased from a third party since March 2010. Starting from December 2007, additional flats at the existing building of the Hong Kong Office were leased from third parties for office expansion. As the Company is continuing growth and the existing properties are no longer to meet the Company’s need, the Hong Kong Office will move to a new property in March 2012. The new property is located in Wanchai, Hong Kong with 6,350 sq. ft and is leased from a third party. The leases for the existing office located in Central were not renewed.
For the 2012 fiscal year, the Company will continue to seek to enhance its credit control and marketing functions in order to maintain competitiveness. In addition, in order to expand its insurance brokerage business, the Company has been looking for investment opportunities in Asia since 2009. In December 2010, the Company acquired a general insurance brokerage firm in China as the first step in an effort to grow its business through acquisition. Based upon the results of operation for the 2011 fiscal year, management believes the initial acquisition was successful and is continuing to seek additional suitable investment opportunities in 2012. Furthermore, in order to enhance the Company’s operations and supporting function, we have a plan to upgrade our existing phone system and hire additional employees in the next twelve months.
Revenue: Revenue for 2011 was $6,592,274 as compared to $6,197,680 for 2010. The increase of $412,594 or approximately 7% was mainly due to increases of commission income from existing clients, consulting income, and other revenues. This increase was partially offset by a decrease in enrollment fee income. Commission income is based on a percentage of the premiums paid by the insured, and increased by $388,571 or 6% when compared to last year. 99% of the increase was contributed by SHB while 1% was contributed by ALC and CAC. Total commission income contributed by SHB was $398,434 in 2011, which is approximately 6.2% of the total commission income of the group for 2011. If the contribution from SHB is excluded, commission income of the group for 2011 increased by $3,111 or 0.1% as compared to last year.
Net income before tax and noncontrolling interest: Income before tax and noncontrolling interest for 2011 was $1,758,135 compared to $1,988,339 for 2010. The decrease of $230,204, or approximately 12%, was mainly due to an increase in operating expenses and other 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. Other income and expense decreased to $73,826 in 2011 from $119,687 in 2010. The decrease was mainly due to the fact that a loss was incurred on the disposal of fixed assets for a branch of SHB which was closed, and the fact that an idle vehicle of SHB was sold during the year. Furthermore, other revenues increased to $88,232, which was an increase of $62,265 or 240% as compared to last year. The increase in other revenue was mainly the result of increased commissions from business referral and other business services we provided to clients.
Interest income decreased 95% in 2011 as compared to 2010 primarily because the secured loan to a third party was collected in full in 2010. Investment income increased 19% in 2011 as compared to 2010 mainly as a result of an increase in dividend income received from publicly traded equity securities owned by the Company.
Salaries - increased by $447,130 or 20% from $2,181,906 in 2010 to $2,629,036 in 2011. The increase was mainly due to increases in headcounts and pay rates during the year of 2011. In addition, pursuant to the Restricted Share Stock Compensation Plan which was implemented in June 2010, $99,873 was recognized as stock-based compensation expense in salaries during the year ended December 31, 2011. The amount of stock based compensation increased by $41,260, or approximately 70.4%, in 2011 as compared to 2010.
Travel expenses - increased by $141,012 or 36% from $396,948 in 2010 to $537,960 in 2011. The increase was mainly because of the growth of client base and general price inflation.
Other general & administrative expenses - increased $207,424 or 29% for 2011 as compared to last year. In general, the increase was due to the general price inflation, increases in headcount which caused office administrative expenses and staff medicals expenses to increase, and the growth of our client base causing telecommunication and postage expenses to increase. Another reason is that additional consulting and legal expenses were incurred for the Company’s consulting services and the daily operation of SHB during the period.
prepayment, fiduciary asset, accounts payable, claims payable, other payable and accrued expenses as well as decreases in other receivables, accrued expenses and income tax payable.
For 2011, cash used in investing activities amounted to $1,923,170 compared to $439,921 for 2010. The use of funds was for the loan made to third parties, and purchase of fixed assets which was partially offset by the sale proceeds from disposal of fixed assets.
Cash used by financing activities in 2011 amounted to $96,531, compared to $86,301 for 2010. The use of funds was for the repayment of amount due to minority shareholders and director.
The Company has bank and cash equivalents of approximately $8,203,957 as at December 31, 2011. The Company has sufficient funds to satisfy its financial commitments and working capital requirements for the next twelve months. As of December 31, 2011, the Company had $6,867 of commitments for capital expenditures and off-balance sheet arrangements as well as lease commitments of $1,220,596.
The functional currency of SHB and ALM Shanghai is the Chinese Yuan (“CNY”). The financial statements of SHB and ALM Shanghai are translated into United States dollars in accordance with the Financial Accounting Standards Board (“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 year 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, 2011, the cumulative translation adjustment of $24,965 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, 2011, accumulated other comprehensive income was $37,379.
Amounts included in the statements of operations, statements of changes in shareholders’ equity and statements of cash flows for the year: US$0.15443:CNY1 (for SHB) and US$0.15638:CNY1 (for ALM Shanghai)
Commission revenue is recognized as of the effective date of the insurance policy or the date the customer is billed, whichever is later. At that date, the earnings process has been completed, and the Company can reliably estimate the impact of policy cancellations based upon historical cancellation experience adjusted by known circumstances. The Company keeps a
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 18
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2011 AND 2010
We have audited the accompanying consolidated balance sheets of ALCO, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2011 and 2010 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.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ALCO, Inc. and its subsidiaries as of December 31, 2011 and 2010 and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
10,348,000 shares issued and outstanding at December 31, 2011 and 10,342,000 shares issued and outstanding at December 31, 2010
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010
As a result of our contractual arrangements with SHB above, we bear the risks of, and enjoy the rewards associated with, and therefore are the primary beneficiary of our investments in SHB, and we have begun to consolidate its results of operations in our consolidated financial statements commencing in the fiscal year 2011.
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.
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, 2011.
The company’s VIE consolidated net assets were US$847,174 at December 31, 2011.
Certain accounting principles, which are stipulated by US GAAP, are not applicable in the HKAS. The difference between HKAS accounts of the Company and its US GAAP financial statements is immaterial.
Allowances are applied to commissions and other receivables where events or changes in circumstance indicate that the balances may not be collectible. The identification of doubtful debts requires the use of judgment and estimates as mentioned above. Where the expectation on or the actual recoverability of commissions and other receivables is different from the original estimate,
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, 2011 and 2010 was 19.76% and 20.08%, 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 Company adopted Statement of ASC No. 820, “Fair Value Measurements and Disclosures,” effective January 1, 2008. The provisions of ASC 820 are to be applied prospectively.
ASC 820 clarifies that fair value is an estimate of the exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., the exit price at the measurement date). Under ASC 820, fair value measurements are not adjusted for transaction cost. ASC 820 provides for use of a fair value hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three levels:
Unobservable inputs. Unobservable inputs reflect the assumptions that the Company develops based on available information about what market participants would use in valuing the asset or liability.
Long-lived assets, including fixed assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In reviewing for impairment, the carrying value of such assets is compared to the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition. If such cash flows are not sufficient to support the asset’s recorded value, an impairment charge is recognized to reduce the carrying value of the long-lived asset to its estimated fair value. The determination of future cash flows, as well as the estimated fair value of long-lived assets, involves significant estimates on the part of management. In order to estimate the fair value of a long-lived asset, the Company may engage a third-party to assist with the valuation. If there is a material change in economic conditions or other circumstances influencing the estimate of future cash flows or fair value, the Company could be required to recognize impairment charges in the future.
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 2011 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.
The functional currency of SHB and ALM Shanghai is the Chinese Yuan (“CNY”). The financial statements of SHB and ALM Shanghai 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$0.15638:CNY1 (for ALM Shanghai from August (company set up date) to December 2011)
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Depreciation expense for 2011 and 2010 was $91,271 and $40,836 respectively. Loss on disposal of fixed assets for the year ended December 31, 2011 and 2010 were $31,767 and $10,051 respectively.
An impairment analysis on the goodwill was completed at December 31st of each year with no impairment at December 31, 2011 and 2010. None of the goodwill is expected to be deductible for income tax purposes. During the year ended December 31, 2011, certain assets and liabilities of SHB amounting to $40,728 were identified. Thus, fair values of the assets, liabilities, and goodwill have been adjusted as follows:
The above estimated fair values of assets acquired and liabilities assumed are provisional and are based on the information that was available as of the Acquisition Date. Measurement period adjustments reflect new information obtained about facts and circumstances that existed as of the Acquisition Date. The Company considers that information gathered to date provides a
reasonable basis for estimating the fair values of assets acquired and liabilities assumed. The Company has finalize the valuation and complete the purchase price allocation.
Intangible asset is in relation to the acquired customer list with a useful life of 3 years. Amortization expense for the year ended December 31, 2011 of the intangible asset is $21,293. An impairment analysis on the customer list was completed at December 31st of each year with no impairment at December 31, 2011 and 2010.
The unaudited pro forma information of the Company set forth below gives effect to the acquisition of SHB 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.
As at December 2011, the outstanding balance of the loan is as follows:
mentioned above and the fair value of the Company’s stock on the date of the grant award is $2.79 per share. When determining the risk-free rate of this award, Hong Kong unsecured long term loan rate, 7.25%, in effect at the time of grant is used in the calculation.
During the year ended December 31, 2011 and 2010, the Company recognized $99,873 and $58,613 respectively, of stock-based compensation expense.
On February 1, 2012, the Company subsidiary Chang An Consultants Ltd., declared dividends of approximately $321,795. The company has paid $128,718 to the noncontrolling shareholders.