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 moved 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 old office located in Central were not renewed.
ALCO’s current total monthly rental payment for the facilities mentioned as above is approximately US$44,298. We intend to renew these leases upon their expiration.
There are three major tasks in the plan of operations for 2012. The first one is enhancing the credit control and marketing functions, the second one is expanding the company’s insurance brokerage business, and the third one is enhancing the operations and supporting functions. After reviewing the operation performance of last year, we can conclude that the plan is completed and successful.
For the credit control, management believes that the enhancements are operated effectively because the receivable turnover ratio for ALC and CAC was improved from 9.79 in the full year of 2011 to 20.53 in 2012, which means that the average collection period for outstanding receivables dropped from 37 days in 2011 to 18 days in 2012. Regarding the marketing function, more resources, including both additional personnel and IT applications, were allocated during 2012. For the business expansion, the Company acquired an insurance brokerage firm in Singapore in October 2012, which will help the Company to enhance its customer base. For the Company’s operations and supporting functions, we have upgraded our telephone system since March 2012. The new system facilitates our customers to contact us in a more convenient way.
Consulting income for 2012 decreased to $53,582 from $96,714 in 2011. The decrease of $43,132 or 45% was because demand for consulting services decreased. In addition, one of the major clients set up their own in-house consulting team, contributing to the decrease in the demand of consulting service. In addition, enrollment fee for 2012 was $6,611 as compared to $14,166 for 2011. The decrease was mainly due to the decreases of customer’s demand and enrollment. In addition, website advertising for 2012 was $14,000. It was maintained at the same level with last year.
Net income before tax and noncontrolling interest: Income before tax and noncontrolling interest for 2012 was $728,675 compared to $1,758,135 for 2011. The decrease of $1,029,460, or approximately 59%, was mainly due to a decrease of revenue and an increase in operating expenses during the year. The reasons for decreases in revenue are discussed above, while the increases of operating expense are discussed in the section below. Other income decreased to $43,245 in 2012 from $73,826 in 2011. The decrease was mainly due to the fact that the result of decreased commissions from business referral and other business services we provided to clients. In addition, amount of the disposal of fixed assets in 2011 was high due to the fact that a branch of SHB was closed, and an idle vehicle of SHB was sold in 2011. However, the Company had no such disposal in 2012.
Interest income increased 3% in 2012 as compared to 2011 primarily because of the appreciation of Chinese Yuan (“CNY”), gave rise to higher interest income from the cash which is deposited in CNY currency. Investment income increased 10% in 2012 as compared to 2011 mainly as a result of an increase in dividend income received from publicly traded equity securities owned by the Company.
Operating expenses: Total operating expenses were $5,321,113 for 2012, as compared to $4,907,965 for 2011. The increase of $413,148 or 8% was mainly due to increases in salaries, rents, depreciation and amortization and other general and administrative expenses, which were partially offset by a decrease in travel and bad debt expenses during the year. The reasons for the changes in the major items are as follows:
Bad debt (recovery) expenses - decreased by $182,561 or 103% from $177,348 in 2011 to ($5,213) in 2012. The decrease was mainly because the provision of doubtful debts dropped during the year, as such, there was an adjustment of over-provision for prior years.
Furthermore, because the provision of legal cost for the legal proceeding was made, and certain operating expenses such as accrued travelling expenses, which were higher than last year, were accrued in 2012, accrued expenses for 2012 increased by $107,606 or 108% as compared to last year. As of December 31, 2012, there was $1,917 of 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, since 2008, the Company has purchased publicly traded equity securities with high dividend yields for long term investment purpose. As of December 31, 2012, the market value of the equity securities was $382,110, which represents an increase of $120,256 or approximately 46% as compared to the market value of $261,854 for the last year. The increase of $120,256 or 46% was mainly due to the change of fair values between December 31, 2012 and December 31, 2011, and the addition of equity securities which were acquired during the year.
Due to the fact that the Company acquired a subsidiary in 2012, certain assets such as customer list and goodwill were recognized in the same year. As of December 31, 2012, the carrying value of customer lists was $55,720 and the carrying value of goodwill was $288,171.
ALCO’s main subsidiaries, ALC, CAC and ESA use the Hong Kong dollar as its currency. The exchange rate for HK$ to US dollars has varied by very little during the period between 2002 and 2012. 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.
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 policy cancellation reserve fund to use if policies are cancelled. Subsequent commission adjustments are recognized upon notification from the insurance companies. Fee income is recognized as services are rendered.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2012 AND 201119
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2012 AND 2011
We have audited the accompanying consolidated balance sheets of ALCO, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2012 and 2011 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, 2012 and 2011 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.
10,342,000 shares issued and outstanding at December 31, 2012 and 10,348,000 shares issued and outstanding at December 31, 2011
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 (“ALM HK”), a corporation principally engaged in the investment holding. ALM HK owns 100% of AL Marine Consulting Services (Shanghai) Ltd (“ALM Shanghai”), a corporation principally engaged in the investment holding. ALM Shanghai, 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. AL Marine owns 82% of Kim Insurance Brokers Pte Ltd (“KIM”), a corporation principally engaged in the business of general insurance brokerage in Singapore.
Mandatory contributions are made to the Hong Kong's Mandatory Provident Fund (MPF), based on a percentage of the employees' basic salaries. The cost of these payments are charged to the profit and loss accounts as they become payable in accordance with the rule of the MPF Scheme. The employer contributions vest fully with the employees when contributed into the MPF Scheme.
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. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income (losses) in the years in which those temporary differences are expected to be realized or settled.
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 2012 and 2011. 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.
As discussed in Part I, Item 3 of this Form 10-K under the heading “Legal Proceedings”, and in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 16, “Commitments and Contingencies”, ALCO’s subsidiary, ALC, is subject to a legal proceeding that has not been resolved and that has arisen in the ordinary course of business. The Company records a liability when it is probable that a loss has been incurred and the amount is reasonably estimable. There is significant judgment required in both the probability determination and as to whether an exposure can be reasonably estimated.
In the opinion of management, there is not a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies for legal and other contingencies. However, the outcome of this legal proceeding brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such as outcome to be remote, if the legal proceeding is resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.
Unrealized gain of $102,552 and unrealized loss of $91,370 for the investments were recognized in the other comprehensive income for 2012 and 2011, respectively. All these gain and loss are related to the investments listed in the Hong Kong Stock Exchange.
On August 4, 2012, ALC entered into a loan extension agreement with JMISCL and JXISCL. Under the extension agreement, the payable due date is extended for another year to August 4, 2013. All terms and conditions of the loan agreement remain unchanged.
Due to director represents loans payable that are unsecured, non-interest bearing and have no fixed terms of repayment, therefore, deemed payable on demand.
On June 1, 2012, the board of directors approved and the Company granted an award of 13,500 shares of restricted stock to a key employee of the Company. The award was made pursuant to the 2010 Restricted Share Stock Compensation Plan mentioned as above. The aggregate value of this award was $22,275, as determined by multiplying the number of shares by the fair value of the Company’s stock on June 1, 2012, the date of grant. The fair value is calculated based on the same approach mentioned above and the fair value of the Company’s stock on the date of grant is $1.65 per share. When determining the risk-free rate of this award, Hong Kong unsecured long term loan rate, 8.25%, in effect at the time of grant is used in the calculation.
Based on the Company’s evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.
For the Hong Kong Office in Wanchai, the initial term of the lease is three years and five months beginning January 30, 2012 with a minimum lease commitment of $781,538. This lease arrangement has a 50 days rent free period from January 30, 2012 to March 19, 2012. When the lease is ended in June 2015, the Company can renew the lease for two years (from July 1, 2015 to June 30, 2017) at the prevailing market rent.
For the Fuzhou Office, the initial term of the lease is two years beginning August 16, 2012 with a minimum lease commitment of $69,637. This lease arrangement has no renewal option and rent holiday.
For the Dalian Office, the initial term of the lease is one year beginning January 15, 2013 with a minimum lease commitment of $10,161. This lease arrangement has no renewal option and rent holiday.
On February 1, 2012, the Company’s subsidiary, Chang An Consultants Ltd., declared dividends of approximately $314,103, as a result, the Company paid $125,640 to the non-controlling shareholders.
In connection with the acquisition of KIM, the Company’s non-controlling interest increased by $63,265, details of which is set out in Note 7.
ALCO’s subsidiary, ALC, is subject to a legal proceeding that has not been resolved and that has arisen in the ordinary course of business. On September 16, 2012, a shipowner named Eastshine Limited filed a civil claim against five parties, including ALC, in the Qingdao Maritime Court (“QMC”) in China, claiming losses suffered of CNY 9.9 million (approximately US$1.6 million) due to the allegedly wrongful arrest of a vessel named Tongli Yantai. Although ALC had no direct relationship with the Plaintiff in the business for the vessel, ALC was the insurance broker of one of the parties named in the legal proceeding, and assisted in resolving the vessel arresting matter. As a result, the Plaintiff has included ALC as one of the defendants in the legal action. In the opinion of management, there is a remote possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to loss contingencies. In addition, because the claims asserted in the legal proceeding are covered by an insurance policy with a policy limit of HK$75 million (approximately US$9.6 million) any one claim and in the aggregate, ALC’s liability to the claim above is limited to HK$150,000 (approximately US$19,230) and this amount is fully reserved in the book of 2012. However, the outcome of this legal proceeding brought against the Company is subject to significant uncertainty. Therefore, although management considers the likelihood of such as outcome to be remote, if the legal proceeding was resolved against the Company in a reporting period for amounts in excess of management’s expectations, the Company’s consolidated financial statements for that reporting period could be materially adversely affected.
The Company's business operations are mainly conducted in the PRC and are subject to significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency limitations.