UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT UNDER SECTION 13 0R 13(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT For the transition period from ______________ to ______________
Commission file number 000-24991
____________________
ALLSTATES WORLDCARGO, INC.
-------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
New Jersey
------------------------------------------------------------
(State or other jurisdiction of incorporation)
22-3487471
-------------------------------
(IRS Employer Identification No.)
4 Lakeside Drive South, Forked River, New Jersey, 08731
----------------------------------------------------------
(Address of principal executive offices)
7 Doig Road, Suite 3, Wayne, New Jersey 07470
----------------------------------------------------------
(Former address of principal executive offices)
609-693-5950
--------------------------------------------------
(Registrant's telephone number, including area code)
None
----------------------------------------------------------
(Securities registered pursuant to Section 12(b) of the Act)
Common Stock Par Value $0.0001 Per Share
--------------------------------------
Title of Class
----------------------------------------------------------
(Securities registered pursuant to Section 12(g) of the Act)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [x] No [ ]
Check if there is no disclosure of delinquent filers in response to item 405
of Regulation S-B contained in this form, and that no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in part III of this Form
10-KSB or any amendment to this Form 10-KSB [X]
State issuer's revenues for its most recent fiscal year: $31,229,694
The number of shares of Common Stock outstanding as of December 15, 1999 was
32,509,872 shares.
At December 15, 1999, the voting stock of the registrant had not been
publicly quoted.
Transitional small business format Yes __ No X
1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
- ----------------
Allstates WorldCargo, Inc. (the "Company" or "Allstates") is a New Jersey
Corporation formed on January 14, 1997 as Audiogenesis Systems, Inc.
("Audiogenesis"), pursuant to a corporate reorganization of Genesis Safety
Systems, Inc. ("Genesis"). On August 24, 1999, Audiogenesis acquired 100
percent of the common stock of Allstates Air Cargo, Inc. in a reverse
acquisition, and on November 30, 1999, changed its name to Allstates
WorldCargo, Inc. The Company's business is now comprised of freight
forwarding, distribution and sales of safety equipment, and development and
sales of audio-visual products. Allstates is headquartered in Forked River,
New Jersey.
The freight forwarding business of Allstates was founded by Joseph M.
Guido, the Company's Chairman of the Board, with its first terminal opening
in Newark, New Jersey in 1961. Allstates provides domestic and international
freight forwarding services to over 1,300 customers utilizing ground
transportation, commercial air carriers, and ocean vessels. Allstates
operates 21 offices throughout the United States, including Hawaii, and
employs 101 people. In addition, Allstates has a European branch office
located in London, England that does business as Allstates Allcargo (UK),
Ltd.
Allstates has agreements with domestic and international strategic
partners and a network of agents throughout the world. Recently, Allstates
formed strategic alliances with two established freight forwarding companies.
The first alliance partner (wholly owned by third parties), trading under the
name Allstates Allcargo Belgium N.V., has its principle office at the
Brussels, Belgium airport. The second recent alliance partner is located in
Germany and has its principle office in Frankfurt. Allstates plans to
increase its global market share by forming additional strategic alliances
and effecting selective acquisitions.
Allstates neither owns or nor operates any aircraft or ships. By not
owning or operating its own equipment, Allstates believes it is able to
provide more flexible delivery schedules and shipment size. In addition, by
eliminating the substantial fixed expenses associated with the ownership of
such equipment, Allstates has been able to effect certain cost savings.
MARKETING AND LICENSING
Allstates markets its services through a network of 21 domestic
offices, its UK operation, its European and South American strategic
alliances, and selected agents throughout the world.
Allstates utilizes a combination of professionally prepared
advertising materials, highly trained sales and operations/customer services
professionals, direct mail, assorted promotional items, and audio/visual
presentations. Allstates maintains 23 full time sales personnel operating
from 21 domestic offices. Of the 21 domestic locations, 11 are
company-owned, and the remaining 10 are licensees and agents.
Allstates has formed strategic alliances in approximately 10 foreign
countries with which it shares information, customers and profits.
Allstates has completed several site licensing agreements and has
created two new divisions, one of which is GTD Logistics, which is involved
in ground transportation (trucking). The other division is called
2
<PAGE>
Allstates Logistics. This division holds Ocean Transportation Intermediary
License No. 15364NF, and is responsible for the ocean freight segment of
Allstates.
INFORMATION SYSTEMS
A primary component of Allstates's business strategy is the continued
development of its advanced information systems. Allstates has invested
substantial management and financial resources in the development of its
information systems in an effort to provide accurate and timely information
to its management and customers. Allstates continues to upgrade its
information systems. Highlights of the information system are:
o Real-time information which is available to employees and
customers, including customer service, operations, sales and
accounting
o Centralized system located in Forked River, New
Jersey, with terminals throughout all offices capable of
dial-up by customers (through direct dial-up or via Internet),
including internal and external e-mail
o System tracks shipments from pickup order to delivery; confirms
"on-board" and "out for delivery" status
o System can produce the following daily, monthly, and yearly
reports:
(1) Operations reports (inbound, outbound
and on-hand reports)
(2) Sales reports (revenue, customer
client list)
(3) Customer reports (POD report, shipping
history report)
(4) Accounting reports (P&L reports)
o System auto rates revenues and costs
o System is capable of EDI (Electronic Data Interchange)
o System is flexible in customizing reports to meet customer
needs
o System is "bar-code" capable
o System allows customers to dial up and retrieve rate
quotes and POD information
o System produces shipping labels and computerized
airbills and airline bills
LICENSING AND GOVERNMENT REGULATION
Allstates is the holder of Ocean Transportation Intermediary License
No. 15364NF, and must be in compliance with the regulations governing such
certification. Also, Allstates must be in compliance with the regulations of
the Federal Aviation Administration that apply to the business of Allstates.
Allstates believes that it has the resources, expertise and experience to
continue its compliance with all Federal agencies and regulations.
Allstates relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary technology. For example, Allstates licenses its
software pursuant to signed license agreements, which impose certain
restrictions on the licensees' ability to utilize the software. In addition,
Allstates seeks to avoid disclosure of its trade secrets, including requiring
those persons with access to Allstates's proprietary information to execute
confidentiality agreements with Allstates and restricting access to
Allstates's source code. Allstates seeks to protect its software,
documentation and other written materials under trade secret and copyright
laws, which afford only limited protection.
Despite Allstates's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of Allstates's products or
to obtain and use information that Allstates regards as proprietary. Policing
unauthorized
3
<PAGE>
use of Allstates's products is difficult, and, while Allstates is unable to
determine the extent to which piracy of its software products exists,
software piracy can be expected to be a persistent problem. In addition, the
laws of many countries do not protect Allstates's proprietary rights to as
great an extent as do the laws of the United States. There can be no
assurance that Allstates's means of protecting its proprietary rights will be
adequate or that Allstates's competitors will not independently develop
similar technology.
To date, Allstates has not been notified that Allstates's products infringe
the proprietary rights of third parties, but there can be no assurance that
third parties will not claim infringement by Allstates with respect to
current or future products. Allstates expects that software product
developers will increasingly be subject to infringement claims as the number
of products and competitors in Allstates's industry segment grows and the
functionality of products in different industry segments overlaps. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays or require Allstates to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to Allstates or at all,
which could have a material adverse effect upon Allstates's business,
operating results and financial condition.
COMPETITION
- -----------
Allstates competes with other companies in the same business, some of which
are much larger and have substantially greater resources. There are
approximately 1,500 direct competitors of various sizes throughout the
country. The methods by which Allstates chooses to compete include highly
skilled and experienced upper and middle management, a proprietary
site-licensing program, cost control, professional sales representation,
highly trained operations and customer service personnel, employee and
customer premium awards program, and a wide range of enhanced services. In
addition, the integration of Audiogenesis' experience and expertise with
respect to its audio-visual sales and training division and its applications
for inventory control provides the Company with added benefits for its
customers. Allstates also owns its proprietary and customized computer
software and advanced hardware. Allstates's website is currently under
construction, and should be completed in the near future.
Allstates's major competitors nationwide are Federal Express, BAX, Eagle USA,
and United Parcel Service. At each of Allstates's locations, there are
regional carriers who have strength in the local marketplace. They, for the
most part, all provide air, sea and ground services. Service levels and
pricing vary substantially based upon geographic and customer volume
criteria.
In order to remain competitive, Allstates negotiates with its vendors to
meet the appropriate service and pricing levels in its markets. In addition
to competitive pricing, Allstates strives to provide its customers, with
excellent service, highly trained inside operations personnel, and state of
the art computer services.
CUSTOMERS
- ---------
Allstates has a diverse customer base, with approximately 1,300
accounts. Over the 38 years of its operations, Allstates has done business
with over 25,000 customers. Some of Allstates's major customers over the
years have been J.B. Williams, Raytheon, Giorgio Perfume, Cosmair, Ashton
Tate, Merisel Corporation, Budd Corporation, Home Box Office (a division of
Time-Warner), Sensormatic, and AT&T.
EMPLOYEES
- ---------
As of December 30, 1999, the Company employed a total of 101 individuals.
Allstates Air Cargo, Inc. and subsidiaries accounted for 99 employees (of
which 6 are part time), including 54 in operations and
4
<PAGE>
customer service, 23 in sales, marketing and related activities, and 22 in
administration and finance. The Audiogenesis Systems division had 2 full-
time employees. Allstates's success is highly dependent on its ability to
attract and retain qualified employees. The loss of any of the Company's
senior management or other key sales and marketing personnel could have a
material adverse effect on Allstates's business, operating results and
financial condition.
Pension Plan
- ------------
Effective May 1994, the Company adopted a discretionary non-standardized
401(k) profit sharing plan. The terms of the plan provide for eligible
employees ("participants") who have met certain age and service requirements
to participate by electing to contribute up to the maximum percentage
allowable not to exceed the limits of Internal Revenue Code Section 401(k),
404 and 415 (the "Code"). For 1999, the maximum percentage allowed by the
Code was the lesser of 25% of an employees' compensation of which 15% is tax
deductible, or $10,000. The Company may make matching contributions equal to
a discretionary percentage, as determined by the Company, up to 6% of a
participants' salary. Company contributions vest at the rate of 20% of the
balance at each employees' third, fourth, fifth, sixth, and seventh
anniversary of employment. The employees' contributions are 100% at the time
of deferral. The plan also allows employer discretionary contributions
allocated in accordance with participants' compensation. The Company did not
make any discretionary contributions to the plan for the year ended September
30, 1999.
Audiogenesis Systems Division
- -----------------------------
Sales of Safety Equipment.
Allstates, trading as Audiogenesis Systems, operates a store which
distributes safety equipment under the service mark SafeTvend(sm) at a major
pharmaceutical corporation in the New York area. Audiogenesis's safety store
is located on the customer's premises, and sells respirators, hard hats,
safety glasses, protective clothing, and other similar products which are
used or worn by the customer's employees to help protect them from industrial
accidents and injuries.
Audio-Visual Products
During the 1980's, Audiogenesis developed and had marketed the Genesis
System 1000 Employee Safety Training Program. The system included color
slides, tape cassette, workbook, poster and associated equipment. The System
1000 was copyrighted, and was sold to more than 50 companies, including a
number of "Fortune 500" corporations. The System 1000 products, which
include training presentations for routinely used equipment such as
respirators, continue to be sold by Audiogenesis from time to time. However,
Audiogenesis has no present plans to produce any additional employee safety
training presentations, emphasizing instead audio-visual presentations for
sales and marketing programs.
With the increasing utilization of computers for audio-visual
presentations, Audiogenesis has broadened its safety training business to
include developing, producing and presenting customized audio-visual products
for business presentation. Prior to its acquisition, Audiogenesis produced
for Allstates Air Cargo, a customized audio-visual production with respect to
a sales and marketing presentation. This production included sales and
marketing techniques, explanations, advances, and exposure to such subjects
as a new supplier of telecommunication services, financial services, target
territories and customers, customer evaluation, promotions and incentives,
strategic alliances and their import, how to increase the volume of
international air and ocean freight forwarding, the formation of a trucking
division, enhanced employee benefits, and detailed information involving
domestic site licensing agreements and international partners.
5
<PAGE>
The format used for the presentation involved digital computerized color
projection with sound which was interactive in nature in that several
individuals (management personnel of the customer) presented various segments
of the program and were able to interact with the audience throughout the
presentation.
Audiogenesis plans to begin marketing of its customized presentations by
using direct mail to contact the same customer base that purchased
Audiogenesis's Genesis System 1000 Employee Training Program.
AudioSelectron(sm)
Audiogenesis has developed a prototype belt-worn device which is
designed to treat tinnitus by combining treatment by sound generation which
masks the tinnitus, with stimulation of the affected area with very low
voltage electrical current. The Company has determined to defer any further
development of the AudioSelectron(sm), but will continue to pursue
opportunities for the device that may be beneficial to the Company.
Competition
- -----------
Audiogenesis's SafeTvend(sm) store is subject to competition not only
from companies which would offer similar services on-site at the customer's
premises, but also from direct distributors and manufacturers of the products
which would sell directly to such company. Virtually all of the competitors
have greater financial, technological, marketing and sales resources than
Audiogenesis. There are numerous organizations of varying sizes that engage
in the business of customized audio-visual presentations, most of these being
advertising agencies and organizations of similar nature. There is intense
competition for such business from a variety of organizations who have
greater financial, technical, marketing and sales resources than
Audiogenesis.
6
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
As of September 30, 1999, Allstates occupied approximately 7,000 square feet
of space in Forked River, New Jersey for its principal administrative, sales
and marketing support and product development facility. The Company's
branch locations, which are located in the vicinity of major metropolitan
airports, occupy approximately 1,000 to 15,000 square feet. All such branch
locations are company leased properties or properties leased by licensee
owners. Terms for company leased properties in North America generally run
from one to five years and are scheduled to expire between fiscal 2000 and
fiscal 2004. The Company's facility in the UK is leased for a ten year term
and is due to expire in fiscal 2009. Total rent expense for company leased
facilities is approximately $398,000.00. Allstates believes that its
existing facilities are adequate to support its activities for the
foreseeable future.
The Company's branch locations as of September 30, 1999 were:
NORTH AMERICA
<TABLE>
<S> <C>
Los Angeles, California Honolulu, Hawaii
Newark, New Jersey Houston, Texas
St. Louis, Missouri Indianapolis, Indiana
Kansas City, Missouri Minneapolis, Minnesota
Pittsburgh, Pennsylvania New York, New York
Atlanta, Georgia Philadelphia, Pennsylvania
Baltimore, Maryland Raleigh, North Carolina
Boston, Massachusetts San Francisco, California
Chicago, Illinois Shreveport, Louisiana
Dallas, Texas Wayne, New Jersey
San Diego, California
</TABLE>
UNITED KINGDOM
London, England
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in an ongoing environmental proceeding. In December
1996, five underground storage tanks ("UST's") and two above ground storage
tanks were removed from a facility in which the Company leases office space.
Post-excavation sampling results confirmed that certain soil contamination
remained present after the removals at the location of two of the UST's.
Also, at the time of the removals, free-floating groundwater contamination
was observed in the area of these two former UST's. During 1999, the Company
engaged Carpenter Environmental Associates to prepare a Preliminary
Assessment/Site Investigation Report ("PA/SI Report"). Carpenter's PA/SI
Report stated that the chlorinated groundwater contamination is emanating
from an off-site source. The New Jersey Department of Environmental
Protection approved Carpenter's PA/SI Report and agreed that no further
investigation of the site was needed. A Remedial Action Workplan was
submitted in November 1999. The Company is awaiting approval from the NJDEP.
The Company has made claims against their liability insurance carriers for
coverage. Due to the uncertain nature and extent of any additional remedial
activities that may be required regarding the existing site conditions,
potential future costs cannot be estimated by management or its counsel at
this time. If an adverse judgment is entered, the potential effect on the
consolidated financial position and consolidated results of operations, in
the period in which resolved, cannot be ascertained at this time, but may be
material.
7
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted, during the Fourth Quarter of the Fiscal Year covered
by this report, to a vote of security holders through solicitation of proxies
or otherwise.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has not yet been publicly traded. The Company
anticipates that its common stock will be listed for quotation on the NASD
OTC Bulletin Board in the near future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
The following table sets forth for the periods indicated certain
financial information derived from the Company's consolidated statement of
operations expressed as a percentage of net sales:
Fiscal Year Ended September 30,
1999 1998
----- -----
Revenues 100.0% 100.0%
Cost of transportation 60.2 62.7
----- -----
Gross profit 39.8 37.3
Selling, general and administrative expenses 36.3 36.2
----- -----
Operating income 3.5 1.1
===== =====
Net income 1.5% 0.5%
Fiscal Year Ended September 30, 1999
Revenues of the Company increased by $5.2 million, or 20.1%, to
$31,230,000 for the fiscal year ended September 30, 1999 as compared to the
fiscal year ended September 30, 1998. The increase in revenues in fiscal
1999 is primarily due to an increase in the number of shipments and the total
weight of cargo shipped. The higher number of shipments and increased weight
resulted primarily from additional volume generated through increased
penetration of existing markets and the incremental effect of the addition of
a key licensee operation in the later part of fiscal 1998. Revenues
generated from U.S. freight forwarding operations accounted for approximately
97% of total sales of the Company. One customer accounted for approximately
9.0% of total revenues during fiscal 1999. Due to circumstances beyond the
Company's control, sales to that customer ceased during the first quarter of
fiscal 2000. No other customer accounted for greater than 4% of total
revenues. The Company believes that it can replace the loss of any
significant account from its customer base but there is no guarantee of that
occurring.
8
<PAGE>
The cost of transportation is composed primarily of amounts paid by the
Company to carriers and cartage agents for the transport of cargo. As a
percentage of revenues, the cost of transportation decreased by 2.5% in
fiscal 1999 to 60.2% from 62.7% in the prior fiscal year. This decrease can
be significantly attributed to the favorable impact of the introduction of a
key licensee operation during the later part of fiscal 1998 that had a
generally lower cost of transportation as a percent of revenues. In
addition, a combination of improvements in the Company's methods of providing
customer freight quotes and more favorable rates negotiated with its carriers
provided improved gross margins. Margins may be affected in the future by
increased fuel costs that are passed on to the Company by its carriers. The
Company has been notified recently by some of its international carriers of
their intent to impose surcharges to cover the higher cost of fuel. In
absolute terms, the cost of transportation increased in fiscal 1999 by 15.2%
to $18,783,000 as a result of the increases in the freight shipped. Gross
margins increased to 39.8% in fiscal 1999 from 37.3% in fiscal 1998. Gross
profit increased by 28.4% to $12,446,000 in fiscal 1999 from $9,693,000 in
fiscal 1998.
Selling, general and administrative expenses include all personnel
costs, facilities costs, and licensee commissions. In fiscal 1999, operating
expenses increased slightly as a percentage of revenues by 0.1% from fiscal
1998, to 36.3%, primarily reflecting one time charges incurred by the Company
to bolster its marketing effort. In absolute terms, operating expenses
increased by approximately $1.9 million over the previous fiscal year.
Licensee commissions increased by approximately $1.5 million in fiscal 1999
primarily due to the addition of two licensee operations that replaced
existing company locations in those local markets. Personnel costs, which
include all compensation, employee benefits and payroll taxes, decreased in
total by approximately $0.3 million as compared to the previous year, most
significantly as a result of the cost savings realized from the replacement
of those company locations in favor of the licensee operations. Included in
this net reduction were higher administrative personnel expenses, which
increased in fiscal 1999 versus the previous year as the Company added
personnel to build its corporate infrastructure and support its future growth
plans. Selling expenses increased by $330,000, reflecting costs incurred for
marketing presentation and consulting services that were obtained during the
fiscal year. Accounting fees were higher in fiscal 1999 as compared to the
previous year by approximately $102,000, primarily due to a write off of
$60,000 of capitalized accounting fees that were recorded in prior years.
General insurance expense increased by approximately $95,000, primarily
related to higher cargo insurance costs which resulted from the increased
volume of freight in fiscal 1999. Bad debt expense increased by
approximately $99,000 due to the effect of an extraordinary credit to the
expense that was recorded in fiscal 1998 related to the successful collection
of a significant outstanding receivable.
Operating income increased by approximately $0.8 million to $1,107,000
in fiscal 1999 as compared to fiscal 1998 for the reasons indicated above.
Operating margins increased by 2.4% to 3.5% of revenues due to the lower cost
of transportation as a percentage of revenues as described above.
Income before income taxes increased to $1,170,000 in fiscal 1999 from
$252,000 in 1998. The provision for income taxes for fiscal 1999 was
$689,000 as compared to the provision for income taxes of $131,000 for fiscal
1998. Net income amounted to $480,000 in fiscal 1999 versus $121,000 in
fiscal 1998.
Fiscal Year Ended September 30, 1998
Revenues of the Company increased by $864,000, or 30.4%, to $25,997,000
for the fiscal year ended September 30, 1998 as compared to the fiscal year
ended September 30, 1997. The increase in revenues is primarily attributable
to the full year effect of sales generated from the UK subsidiary, Allstates
Allcargo (UK) Ltd., which began operations in January 1997. Total revenues
generated from U.S. freight forwarding operations
9
<PAGE>
accounted for approximately 97% of total sales of the Company in fiscal 1998.
Sales to international customers increased to $1.1 million or 18.6% of total
U.S. revenues from 14.3% of total U.S. revenues during fiscal 1997,
reflecting the Company's commitment to expand its international markets.
The cost of transportation increased by $576,000 in fiscal 1998 over the
previous fiscal year to $16,305,000 as a result of the increase in sales. As
a percentage of revenues, the cost of transportation was static from the
previous year, increasing slightly by 0.1% in fiscal 1998 to 62.7%,
reflecting the increased sales to international customers, which generally
have lower gross margins than domestic shipments. Gross profit increased by
3.1% to $9,693,000 in fiscal 1998 from $9,405,000 in the previous fiscal
year. Gross margins decreased as a percentage of sales in fiscal 1998 by
0.1% from 37.4% to 37.3%.
Operating expenses include all personnel costs, facilities costs, and
licensee commissions. In fiscal 1998, operating expenses decreased as a
percentage of revenues by 0.9% to 36.2%, as sales grew at a higher rate than
operating expenses. In absolute terms, operating expenses increased by
$98,000 over the previous fiscal year. This net increase in operating
expense is due to a combination of key factors, including the full year
impact of activity at the Company's branch in the UK, which accounted for
approximately $140,000 in additional overhead expenses. Legal expenses
increased by approximately $211,000 during fiscal 1998 as compared to the
prior year, as a result of the Company's involvement in certain legal
matters. Personnel expenses decreased in fiscal 1998 by approximately
$338,000 versus the previous fiscal year primarily due to a restructuring of
sales management responsibilities and the cost savings realized from the
replacement of a company location in favor of a licensee operation that was
introduced in June 1998. The provision for bad debt expense in fiscal 1999
was lower than the prior comparative period due to a favorable reserve
adjustment of approximately $131,000 that was recorded on the fiscal 1998
books subsequent to the legal settlement and collection of outstanding
receivables.
Operating income increased by $190,000 to $276,000 in fiscal 1998 as
compared to fiscal 1997 for the reasons indicated above. Operating margins
increased by 0.8% to 1.1% of revenues primarily due to the lower operating
expenses as a percentage of revenue as described above.
Income before income taxes increased to $252,000 in fiscal 1998 from
$76,000 in fiscal 1997. The provision for income taxes for fiscal 1998 was
$131,000 as compared to a provision for income taxes of $94,000 for fiscal
1997. Net income amounted to $121,000 in fiscal 1998 .
Liquidity and Capital Resources
Cash flows from operations were approximately $1,029,000 for the fiscal
year ended September 30, 1999 compared to $100,000 for fiscal year 1998. In
fiscal 1999, cash was provided primarily by the net income of the Company,
and by an increase in income taxes payable, reflecting the higher earnings
during the year. For fiscal 1998, cash flow was primarily provided by the
net income of the Company and by a decrease in accounts receivable,
reflecting an improved collections effort, offset by a decrease in accounts
payable. Cash flows from operations for both fiscal 1999 and 1998 were
negatively impacted by the losses generated by the Company's UK subsidiary,
Allstates Allcargo (UK) Ltd.
At September 30, 1999, the Company had cash and cash equivalents of
$407,000 and net working capital of $783,000, compared with cash and cash
equivalents of $176,000 and net working capital of $416,000 respectively, at
September 30, 1998. The increase in working capital at September 30, 1999
over the respective period in 1998 is primarily attributable to the earnings
for the year then ended.
10
<PAGE>
The Company's investing activities were primarily comprised of
expenditures for capital equipment, primarily representing purchases of
computer hardware and software, as well as company owned automobiles used by
its sales representatives. For the fiscal year ended September 30, 1999,
capital expenditures amounted to approximately $258,000, of which
approximately $174,000 were acquired through notes payable. For the fiscal
year ended September 30, 1998, capital expenditures totaled approximately
$225,000, of which approximately $114,000 were acquired through notes
payable. In addition, during the fiscal year ended September 30, 1999, the
Company paid approximately $203,000 for the purchase of one share of
Allstates Air Cargo, Inc. stock.
Domestically, the Company has a commercial line of credit with a bank,
pursuant to which the Company may borrow up to $1,350,000, based on a maximum
of 70% of eligible accounts receivable. Per the agreement, interest on
outstanding borrowings accrues at the Wall Street Journal's prime rate of
interest less .25% per annum (8.0% at September 30, 1999). The interest rate
is predicated on the Company maintaining a compensating account balance in a
non-interest bearing account equal to at least 15% of the outstanding
principal balance. If such average compensating balances are not maintained,
the interest rate will increase by 1% over the rate currently accruing. At
September 30, 1999, $350,000 of the line of credit was restricted as
collateral for a letter of credit opened in support of a duty deferment
guarantee and overdraft facility for the Company's UK branch. There were no
outstanding borrowings on the line of credit at September 30, 1999.
The Company's branch location in the United Kingdom relies primarily on
its ultimate parent company, Allstates Air Cargo, Inc., for its financial
support. In the past, the parent company has provided cash advances in the
form of loans to the UK branch to support its working capital needs and
purchase computer equipment. As of September 30, 1999, the UK branch had
L269,000 in loans payable to the parent (the equivalent of approximately
$441,000). In April 1997, the parent company deposited $165,000 (the US$
equivalent of L100,000) in a restricted account in a UK bank, bearing
interest at approximately 5%, as a condition of obtaining a HM Customs and
Excise bond. The bond is a requirement to guarantee the payment of VAT and
excise taxes to UK Customs on cargo imports, which the Company collects from
its customers. As of September 30, 1999, those funds, including interest,
totaled L111,000 (the equivalent of approximately $184,000). On September
27, 1999, the UK branch entered in to an agreement with a new bank to provide
a separate overdraft facility and an HM Customs and Excise bond to replace
the guarantee provided by the original bank. The agreement is effective
through March 31, 2000, and allows the UK branch to draw to a maximum of
L100,000 (the equivalent of approximately $164,000 @ September 30, 1999).
Interest is calculated on the cleared daily balance of the account, and is
payable on the amount owing up to the limit at 3% per annum over the bank's
base rate (8.25% at September 30, 1999). The overdraft facility and HM
Customs guarantee is collateralized by a $350,000 letter of credit opened at
the Company's US bank. As of September 30, 1999, the bank overdraft totaled
L154,494 (the equivalent of approximately $253,000). Subsequent to the
fiscal year end, the guarantee funds on deposit at the original bank were
released by HM Customs and Excise and applied against the overdraft facility
at the new bank.
Year 2000 Compliance
Allstates has addressed the issue of the potential effect that the transition
from the year 1999 to 2000 may have on its critical information systems.
This issue relates to the inability of certain software programs, as well as
the hardware they run on, to properly process date sensitive data for the
year 2000 and thereafter. Computer systems that are not corrected may
experience system failure or a disruption of normal business activities.
11
<PAGE>
The Company has taken several measures to improve its overall data processing
capabilities in the last two years, while preparing for a successful
transition to the Year 2000. In 1998, the Company purchased, as part of its
capital additions budget, an NCR WorldMark 4300 Enterprise Server, which was
confirmed by the manufacturer as Year 2000 compliant. The Company's SCO UNIX
operating system was upgraded to the most up-to-date release during 1999 and
was reported by the product manufacturer to be Year 2000 ready. In September
1999, the most recent version of the underlying database manager, filepro
RDBMS 4.8 was installed and has been confirmed by its manufacturer that it
will not produce errors in processing date data in connection with the year
change. The Company contracted with a third party computer services provider
to perform an analysis of its filepro software and underlying filepro
applications to determine where any risk of failure existed and to make
corrective adjustments. Those modifications were tested in a simulated Year
2000 environment in September 1999 and revealed no notable issues.
Additionally, the Company's e-mail system and faxing software used in system
applications have been upgraded to the most current versions, which have been
confirmed as Year 2000 compliant by the respective manufacturers. Allstates
relies on these systems for the timely communication of information to its
network of agents and business partners.
12
<PAGE>
Throughout 1999, the Company has contacted its significant vendors and
service providers as well as its largest customers to access their state of
readiness with the Year 2000 issue. While the Company cannot verify the
results of its inquiries of third parties, it has not received any
information that would suggest any significant issues with its material
vendors or customers. However, there can be no guarantee that the systems of
other companies on which the Company's business relies will be timely
converted or that failure to convert by another company would not have a
material adverse effect on the Company and its operations.
Allstates does not consider the cost of Year 2000 compliance to be material
to its financial position, cash flow or results of operations. The cost of
software upgrades and testing for Year 2000 compliance have been less than
$40,000, and the Company does not expect any future costs to be material.
Forward Looking Statements
The statements contained in all parts of this document (including the
portion, if any, appended to the Form 10-KSB) including, but not limited to,
those relating to the availability of cargo space; the Company's overseas
presence and the plans for, effects, results and expansion of international
operations and agreements for international cargo; future international
revenue and international market growth; the future expansion and results of
the Company's terminal network; plans for local delivery services and truck
brokerage; future improvements in the Company's information systems and
logistic systems and services; technological advancements; future marketing
results; construction of the new facilities; the effect of litigation; future
costs of transportation; future operating expenses; future margins; any
seasonality of the Company's business; future dividend plans; future
acquisitions and the effects, benefits, results, terms or other aspects of
any acquisition, effects of the Year 2000 issue; Ocean Transportation
Intermediary License; ability to continue growth and implement growth and
business strategy; the ability of expected sources of liquidity to support
working capital and capital expenditure requirements; future expectations;
and any other statements regarding future growth, future cash needs, future
terminals, future operations, business plans, future financial results,
financial targets and goals; and any other statements which are not
historical facts are forward-looking statements. When used in this document,
the words "anticipate," "estimate," "expect," "may," "plans," "project" and
similar expressions are intended to be among the statements that identify
forward-looking statements. Such statements involve risks and uncertainties,
including, but not limited to, those relating to the Company's dependence on
its ability to attract and retain skilled managers and other personnel; the
intense competition within the freight industry; the uncertainty of the
Company's ability to manage and continue its growth and implement its
business strategy; the Company's dependence on the availability of cargo
space to serve its customers; the effects of regulation; results of
litigation; the Company's vulnerability to general economic conditions; the
control by the Company's principal shareholder; risks of international
operations; risks relating to acquisitions; the Company's future financial
and operating results, cash needs and demand for its services; and the
Company's ability to maintain and comply with permits and licenses, as well
as other factors detailed in this document and the Company's other filings
with the Securities and Exchange Commission. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated. The
Company undertakes no responsibility to update for changes related to these
or any other factors that may occur subsequent to this filing.
13
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Financial Statements with Supplemental Information
For the Fiscal Years Ended September 30, 1999 and 1998
CONTENTS Page
Independent Accountants' Report 1
Financial Statements:
Consolidated Balance Sheets 2 - 3
Consolidated Statements of Operations 4
Consolidated Statements of Stockholders' Equity (Deficit) 5
Consolidated Statements of Cash Flows 6
Notes to the Financial Statements 7 - 16
Supplemental Information: 17
Unaudited Pro Forma Combined Statements of Operations
For the Fiscal Year Ended September 30, 1999 18
For the Fiscal Year Ended September 30, 1998 19
Notes to the Unaudited Pro Forma Combined Statements
of Operations 20
13
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors
Allstates WorldCargo, Inc. and Subsidiaries
(formerly known as Audiogenesis Systems, Inc.
and Subsidiaries)
We have audited the accompanying consolidated balance sheet of
Allstates WorldCargo, Inc. and Subsidiaries (the "Company") ,
formerly known as Audiogenesis Systems, Inc. and Subsidiaries, as
of September 30, 1999, and the related statement of
operations, stockholders' equity (deficit), and cash flows for
the fiscal year then ended. These consolidated financial
statements (see Note 1) are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on
our audit. The accompanying consolidated financial statements
of Allstates Air Cargo, Inc. and Subsidiaries as of and for
the fiscal year ended September 30, 1998 were audited by other
auditors whose report thereon dated May 19, 1999, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Allstates WorldCargo, Inc. and
Subsidiaries (formerly known as Audiogenesis Systems, Inc.
and Subsidiaries) as of September 30, 1999, and the
consolidated results of their operations and cash flows for
the year then ended in conformity with generally accepted
accounting principles.
/s/ Cowan, Gunteski & Co., P.A.
January 6, 2000
F-1
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Consolidated Balance Sheets
As of September 30,
Assets
1999 1998
---- ----
Current Assets
Cash $406,842 $175,673
Accounts Receivable - trade,
net of allowance for doubtful
accounts of $316,815 and
$410,501, respectively 3,920,495 3,796,346
Inventories 39,139 -
Prepaid Expenses and
Other Assets 100,006 85,659
Deferred Income Taxes -
Current Portion 128,028 165,502
---------- ---------
Total Current Assets 4,594,510 4,223,180
---------- ---------
Property, Plant and Equipment
Buildings and Improvements 210,294 210,294
Vehicles 652,184 633,287
Equipment and Software 484,979 354,192
Furniture and Fixtures 47,541 36,780
---------- ---------
1,394,998 1,234,553
Less: Accumulated Depreciation 869,945 757,104
---------- ---------
Net Property, Plant and Equipment 525,053 477,449
---------- ---------
Other Assets
Deposits 79,823 104,759
Goodwill, net of accumulated
amortization of $5,305 631,347 -
Acquisition Costs, net of
accumulated amortization of $389 46,249 -
Deferred Income Taxes 9,430 34,090
Other Assets 183,252 184,629
---------- ---------
Total Other Assets 950,101 323,478
---------- ---------
Total Assets $6,069,664 $5,024,107
========== =========
F-2
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Consolidated Balance Sheets
As of September 30,
Liabilities and Stockholders' Equity (Deficit)
1999 1998
---- ----
Current Liabilities
Accounts Payable $2,408,239 $2,824,374
Accrued Expenses 755,177 482,063
Short-Term Bank Borrowings - 400,000
Taxes Payable 526,873 -
Shareholder Loan Payable 5,000 -
Current Portion of Notes Payable 116,245 101,084
--------- ---------
Total Current Liabilities 3,811,534 3,807,521
--------- ---------
Long-Term Portion of Notes Payable 2,564,064 69,618
--------- ---------
Total Liabilities 6,375,598 3,877,139
--------- ---------
Stockholders' Equity (Deficit)
Common Stock, $.0001 par value,
50,000,000 shares authorized,
32,509,872 and 18,000,000
shares issued and outstanding,
respectively 3,251 1,800
Additional Paid In Capital - 4,200
Deferred Financing Costs - (60,000)
Accumulated Other
Comprehensive Income:
Foreign currency
translation adjustments (14,323) (9,824)
Retained Earnings (Deficit) (294,862) 1,210,792
--------- ---------
Total Stockholders' Equity (Deficit) (305,934) 1,146,968
--------- ---------
Total Liabilities and
Stockholders' Equity (Deficit) $6,069,664 $5,024,107
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Consolidated Statements of Operations
For the Fiscal Years Ended September 30,
1999 1998
---- ----
Revenues (Net of Discounts) $31,229,694 $25,997,927
Cost of Sales 18,783,408 16,304,751
---------- ----------
Gross Profit 12,446,286 9,693,176
Selling, General and Administrative Expenses 11,339,779 9,416,799
---------- ----------
Income from Operations 1,106,507 276,377
---------- ----------
Other Income (Expense)
Interest Income 30,169 9,512
Interest Expense (53,622) (54,061)
Loss on Sale of Assets (3,624) -
Other Income 90,135 19,733
---------- ----------
Total Other Income (Expense) 63,058 (24,816)
---------- ----------
Income Before Income Tax Provision 1,169,565 251,561
Provision for Income Taxes (689,134) (130,954)
---------- ----------
Net Income Applicable to
Common Shareholders $480,431 $120,607
========== ==========
Net Income from Continuing Operations
Per Common Share - Basic $0.01 $0.00
========== ==========
Shares Used in
Per Share Calculation - Basic 32,509,872 32,509,872
========== ==========
Net Income from Continuing Operations
Per Common Share - Diluted $0.01 $0.00
========== ==========
Shares Used in Per Share
Calculation - Diluted 32,522,872 32,522,872
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Consolidated Statements of Stockholders' Equity (Deficit)
For the Fiscal Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock
Additional Deferred Other Retained Total
Number of Paid in Financing Comprehensive Earnings Stockholders'
Shares Par Value Capital Costs Income (Loss) (Deficit) Equity (Deficit)
---------- ---------- --------- --------- --------- ---------- ----------------
Balance at
September 30, 1997* 18,000,000 $1,800 $4,200 $(50,000) $(1,447) $1,090,185 $1,044,738
Deferred
Financing Costs (10,000) (10,000)
Net income for
the year ended
September 30, 1998 120,607 120,607
Other Comprehensive
Income (Currency
Translation
Adjustment) for the
year ended September
30, 1998 (8,377) (8,377)
Balance at September
30, 1998 * 18,000,000 1,800 4,200 (60,000) (9,824) 1,210,792 1,146,968
---------- ------- --------- --------- --------- ---------- -----------
Issuance of common
stock for the
acquisition of
Audiogenesis Systems,
Inc. (reverse
acquisition)
inclusive of
the net income for
the subsidiary
(i.e. Audiogenesis
Systems, Inc.)
through August 24,
1999 (Date of
Acquisition) included
in accumulated
deficit 14,509,872 1,451 1,290,224 - - (1,256,833) 34,842
Adjustment to
additional paid
in capital &
retained earnings
resulting from the
elimination of
investment in
subsidiary - - (1,294,424) - - (729,252) (2,023,676)
Deferred financing
costs expensed for
the year ended
September 30, 1999 - - - 60,000 - - 60,000
Other Comprehensive
Income (Currency
Translation
Adjustment)
for the year ended
September 30, 1999 - - - - (4,499) - (4,499)
Consolidated net income
for the year ended
September 30, 1999 - - - - - 480,431 480,431
---------- ------- --------- --------- --------- ---------- -----------
Balance at
September 30, 1999 32,509,872 $3,251 $- $- $(14,323) $(294,862) $(305,934)
========== ======== ========= ========== ========= ========== ===========
</TABLE>
* Common stock of Allstates Air Cargo, Inc. at October 1, 1998, was 210
shares issued and outstanding with a book value of $6,000 and no par value.
As a result of the reverse acquisition, the common stock of Allstates Air
Cargo, Inc. has been restated to equal the number of shares and the par value
of Audiogenesis Systems, Inc. for the shares acquired by the pre-acquisition
100% shareholder of Allstates Air Cargo, Inc. as if the reverse acquisition
had occurred on October 1, 1997.
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Consolidated Statements of Cash Flows
For the Fiscal Years Ended September 30,
1999 1998
---- ----
Cash flows from operating activities:
Net Income $480,431 $120,607
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation 187,659 179,012
Amortization 5,694 -
Provision for doubtful account 112,095 6,703
(Gain) Loss on sale of equipment (3,624) 2,328
Compensation paid through stock issuance 28,000 -
Deferred income taxes 62,134 34,347
(Increase) decrease in assets:
Accounts receivable (202,954) 255,856
Inventories (15,657) -
Prepaid expenses and other assets (12,870) (50,773)
Deposits 26,893 (84,245)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (165,380) (339,174)
Interest payable, related party - (20,384)
Taxes payable 526,873 (4,379)
--------- ---------
Net cash provided by
operating activities 1,029,294 99,898
--------- ---------
Cash flows from investing activities:
Purchase of equipment (83,554) (110,924)
Proceed from sale of equipment 29,688 42,343
Cash received from reverse merger 7,684 -
Acquisition costs (20,638) -
Purchase of treasury stock of subsidiary (202,597) -
--------- ---------
Net cash used in investing activities (269,417) (68,581)
--------- ---------
Cash flows from financing activities:
Repayments under notes payable (184,209) (157,944)
Repayments under short-term bank borrowings (470,000) (280,000)
Borrowing under short-term bank borrowings 70,000 400,000
Deferred financing costs 60,000 (10,000)
--------- ---------
Net cash used in financing activities (524,209) (47,944)
--------- ---------
Net increase (decrease) in cash
and cash equivalents 235,668 (16,627)
Currency translation adjustments (4,499) (8,678)
Cash and cash equivalents, beginning of year 175,673 200,978
--------- ---------
Cash and cash equivalents, end of year $406,842 $175,673
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
September 30, 1999 and 1998
1. Organization and Nature of Business
On August 24, 1999, Audiogenesis Systems, Inc. (Audiogenesis),
entered into a reverse acquisition with Allstates Air Cargo, Inc.
and its subsidiaries (Allstates). On August 24, 1999, Allstates Air
Cargo, Inc. became a wholly-owned subsidiary of Audiogenesis. On
November 4, 1999, Audiogenesis Systems, Inc. filed a Certificate
of Amendment to the Certificate of Incorporation, officially
changing its name to Allstates WorldCargo, Inc. (WorldCargo). As a
result of this transaction, the sole shareholder of Allstates Air
Cargo, Inc. became a 55.37% shareholder of WorldCargo. Management
has elected to utilize the new name (Allstates WorldCargo, Inc.) for
purposes of these financial statements. The entities that are
included in these financial statements are as follows:
Audiogenesis Systems, Inc. Audiogenesis was incorporated in the
state of New Jersey on January 14, 1997 as the result of a reverse
acquisition by Genesis Safety Systems, Inc. The Company's
operations include sales and distribution of safety equipment,
development of audio-visual products, including safety training
programs and sales and marketing presentations, development of a
device to treat tinnitus, and development of an echolocation device
to assist sighted persons in conditions of low visibility and the
blind. The Company intends to defer any further development of the
tinnitus device, but continues to pursue opportunities concerning
the device. The Company has ceased all efforts concerning the
echolocation device, and has terminated its license for the
intellectual property underlying the device.
Biowaste Technologies Systems, Inc. Biowaste is a wholly owned
subsidiary of Audiogenesis. Biowaste was formed on July 1, 1988 for
the purpose of engaging in the business of the management of
infectious waste. Biowaste is in the developmental stage, and no
revenues have been produced to date. Presently, such subsidiary is
inactive, and the Company does not anticipate that it will become
active in the near future.
Allstates Air Cargo, Inc. Allstates was incorporated in the state
of New Jersey on October 3, 1962. The Company provides domestic
and international air freight forwarding services. Allstates
maintains operating facilities throughout the United States and has
offices or agents in Europe and South America.
Allstates Allcargo (US), Inc. Allstates Allcargo (US), Inc. is a
wholly owned subsidiary of Allstates Air Cargo, Inc. Allstates
Allcargo (US), Inc. owns 100% of Allstates Allcargo (UK), Ltd., a
corporation organized under the laws of England. All appropriate
foreign currency translation adjustments have been made for purposes
of these financial statements.
Allstates Logistics, Inc. Allstates Logistics is also a wholly
owned subsidiary of Allstates Air Cargo, Inc. Allstates Logistics
was incorporated in the state of New Jersey in December 1997, and
provides ocean freight services to its customers.
GTD Logistics, Inc. GTD Logistics, Inc. was incorporated in the
state of New Jersey on October 27, 1998. GTD Logistics is a wholly
owned subsidiary of Allstates Air Cargo, Inc. GTD Logistics is also
in the business of freight forwarding.
F-7
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
September 30, 1999 and 1998
1. Organization and Nature of Business (cont'd)
Reverse Acquisition
For purposes of these financial statements, the purchase of
Allstates Air Cargo, Inc. by Audiogenesis Systems, Inc. is treated
as a reverse acquisition under the purchase method of accounting, as
outlined in Accounting Principles Board Opinion No. 16. For
accounting purposes, Allstates Air Cargo, Inc. is considered the
acquiror in the reverse acquisition. The statement of operations
for WorldCargo for the fiscal year ended September 30, 1999, includes
a full year of revenues and expenses of Allstates Air Cargo, Inc. and
its subsidiaries for the period from the date of acquisition,
August 24, 1999, through September 30, 1999.
2. Summary of Significant Accounting Policies
Principles of Consolidation
For purposes of the accompanying financial statements, Allstates Air
Cargo, Inc. is considered the accounting "Parent" company and Audiogenesis
Systems, Inc. is considered the subsidiary. Therefore, these financial
statements include the combined assets and liabilities of Allstates Air
Cargo, Inc. and its subsidiaries as of September 30, 1999. The statement
of operations includes the income and expenses of Allstates Air Cargo,
Inc. and its subsidiaries for the complete year ended September 30, 1999
and the income and expenses of Audiogenesis Systems, Inc. for the period
from August 24, 1999 through September 30, 1999. All material
intercompany payables, receivables, revenues and expenses have been
eliminated for purposes of this consolidation.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
Reclassifications
Certain items presented in the financial statements for the fiscal
year ended September 30, 1998 have been reclassified to conform to
the current year presentation.
Concentration of Credit Risk
The Company maintains cash balances at several banks. Accounts at
each institution are insured by the Federal Deposit Insurance
Corporation (FDIC) up to $100,000. As of September 30, 1999, the
Company had a cash balance on deposit with one bank that exceeded
the $100,000 balance insured by the FDIC. Management considers the
risk of loss to be minimal.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers
all highly liquid investments with original maturities of three
months or less to be cash equivalents.
F-8
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
September 30, 1999 and 1998
2. Summary of Significant Accounting Policies (cont'd)
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, accounts payable,
accrued expenses, taxes payable, notes payable and other current
liabilities approximates fair value because of the relatively short
maturity of these instruments.
Inventory
For both financial reporting and income tax purposes, inventory is
stated at the cost basis. Cost is determined using the first-in,
first-out method.
Property, Plant and Equipment
Property and equipment consist principally of buildings and
improvements, vehicles, computers and software, office equipment,
and furniture and fixtures are stated at historical cost.
Depreciation is provided on the straight-line method over the
estimated useful lives of the assets, which are generally three to
fifteen years. Expenditures for maintenance and repairs, which do
not extend the economic useful life of the related assets, are
charged to operations as incurred. Gains or losses on disposal of
equipment are reflected in the statement of operations.
Income Taxes
The Company follows the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
Translation of Foreign Currencies
Assets and liabilities of the affiliate whose functional currency is
British pounds are translated at year-end. Rates of exchanges for
revenues and expenses are translated using a weighted average method
during the applicable year. Resulting translation adjustments and
the related income tax effects are accumulated in the currency
translation adjustment component of stockholders' equity. Currency
translation gains and losses are recognized in income currently.
Revenue Recognition
Revenues are recognized at the time the freight departs the terminal
of origin. This method approximates recognizing revenues when
shipment is completed.
F-9
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
September 30, 1999 and 1998
2. Summary of Significant Accounting Policies (cont'd)
Earnings per Share
During the fiscal year ended September 30, 1999, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS No. 128"). SFAS No. 128 establishes standards for computing and
presenting earnings per share ("EPS") and requires the presentation of
both basic and diluted EPS. As a result primary and fully diluted EPS
have been replaced by basic and diluted EPS. Prior year's EPS have been
restated to conform to the standards established by SFAS No. 128.
EPS is calculated by dividing net income by the weighted-average number of
outstanding shares of Common Stock for each year. As a result of the
reverse acquisition in which the sole shareholder of Allstates Air Cargo,
Inc. (formerly known as Audiogenesis Systems, Inc. acquired a
controlling interest in Audiogenesis Systems, Inc., the
shares issued during the fiscal year ended September 30, 1999 are treated
as being outstanding for each fiscal year presented.
3. Bad Debts
The Company uses the allowance method to account for uncollectible
accounts receivable. The allowance for doubtful accounts is based on
prior years' experience and is estimated by management. Bad debt
recoveries are charged against the allowance account as realized. Bad
debt expense for the years ended September 30, 1999 and 1998 was $112,095
and $182,267, respectively.
4. Property, Plant and Equipment
Property, plant and equipment costs consist of the following as of
September 30, 1999:
Accumulated Net Book Depreciable
Cost Depreciation Value Lives
Buildings
and Improvements $ 210,294 $ 178,311 $ 31,983 10 - 15 years
Vehicles 652,184 366,340 285,844 5 years
Equipment and
Software 484,979 280,148 204,831 3 - 5 years
Furniture and
Fixtures 47,541 45,146 2,395 5 - 7 years
--------- ---------- ----------
Totals $1,394,998 $ 869,945 $ 525,053
=========== ========== ==========
Depreciation expense charged to income from operations for the
years ended September 30, 1999 and 1998 was $187,659 and
$179,012, respectively.
5. Customs and Excise Bond
On April 14, 1997, Allstates Air Cargo, Inc. pledged $165,573 as a
condition of obtaining a HM Customs and Excise bond. The purpose of the
bond is to guarantee payment of value added taxes and excise taxes that
the Company's affiliate will collect from its customers. The cash pledged
is maintained in a certificate of deposit in a financial institution
earning interest at approximately 5%. The certificate of deposit matured
on April 14, 1999 and was renewed for one year. As of September 30, 1999
and 1998, the cost basis of the asset plus earned interest approximated
the fair market value totaling $183,252 and $174,410, respectively. These
amounts have been included in Other Assets.
F-10
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
September 30, 1999 and 1998
6. Amortization of Goodwill and Acquisition Costs
The excess of cost over the fair value of net assets acquired (goodwill)
is being amortized on the straight-line basis over a ten year period.
Amortization expense for the years ended September 30, 1999 and 1998 is
$5,305 and $0, respectively.
The costs associated with the acquisition of Audiogenesis by Allstates are
being amortized on the straight-line basis over a ten-year period.
Amortization expense for the years ended September 30, 1999 and 1998 is
$389 and $0, respectively.
7. Notes Payable
The following is a summary of long-term debt as of September 30,
1999 and 1998:
1999 1998
---- ----
Notes Payable from Joseph M. Guido to the Estate
of A.G. Hoffman, Jr., assumed by the Company, in
the aggregate total of $2,511,730, with
repayment over 101 years at annual principal
payments of $25,000 plus interest at 7% per
year. All or any of the notes may be paid at
any time before maturity without any prepayment
penalty. In the event of a default under the
notes by the Company, Joseph M. Guido remains
personally liable for the notes, and the 101
shares of Allstates Air Cargo, Inc. common stock
held as security under the notes (representing
48.1% of the issued and outstanding common
stock of Allstates Air Cargo, Inc.) may be sold
at
public or private sale. $2,511,730 $ -0-
Notes Payable to First Union in the aggregate
total $122,683, with repayment over 36 months at
monthly principal payments ranging from $523.52
to $744.79 plus interest ranging from 7.50% to
7.70%. These loans are secured by the vehicles
to
which they relate. 37,220 98,393
Notes Payable to GMAC in the aggregate total
$176,227, with repayment over 36 months at
monthly principal payments ranging from $513.00
to $638.02 plus interest ranging from 1.90% to
2.90%. These loans are secured by the vehicles
to
which they relate. 124,359 72,309
Note Payable to Virginia Commonwealth University
(VCU) for $10,000, due in monthly payments of
$1,000 of principal only. Loan matures on April
15, 2000. Note payable represents payment in
full for the mutual termination of the
Echolocation License Agreement between
Audiogenesis and
VCU. 7,000 -0-
--------- ---------
Totals $2,680,309 $ 170,702
Less: Current Portion of Notes Payable 116,245 101,084
--------- ---------
Long-Term Portion of Notes Payable $2,564,064 $ 69,618
========== ==========
F-11
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
September 30, 1999 and 1998
7. Notes Payable (cont'd)
Maturities
For the years ended September 30, 2000 $ 116,245
2001 79,718
2002 47,616
2003 25,000
2004 25,000
Thereafter 2,386,730
---------
Total $2,680,309
==========
8. Short-Term Bank Borrowing
Allstates Air Cargo, Inc. has a $1,350,000 line of credit agreement with
a bank, which expires December 31, 2000. Interest on outstanding
borrowings currently accrues at the Wall Street Journal's (WSJ) prime rate
of interest less 1/4% per annum (8.25% as of September 30, 1999). The
interest rate is predicated upon the Company maintaining a compensating
account balance in a non-interest bearing account equal to at least 15% of
the outstanding principal balance. If, at any time, the Company fails to
maintain the compensating balance, the interest rate will increase by %
over the WSJ's prime rate at the time of failure. The balance outstanding
on the line of credit as of September 30, 1999 and 1998 was $0 and
$400,000, respectively.
Loan collateral includes the Company's accounts receivable and the
unlimited, unconditional guarantees of Joseph Guido, Teresa Guido and
Allstates Allcargo (US), Inc.
9. Income Taxes
The Company's provision for income taxes as of September 30, 1999 and
1998 consisted of the following:
1999 1998
---- ----
Current
Federal $474,000 $ 73,675
State 153,000 22,932
------- --------
Total - Current 627,000 96,607
------- --------
Deferred
Federal 52,814 27,909
State 9,320 6,438
------- --------
Total - Deferred 62,134 34,347
------- --------
TOTALS $689,134 $130,954
======= ========
The tax effect of temporary differences that make up the significant
components of the deferred tax asset for financial reporting purposes at
September 30, 1999 and 1998 are as follows:
1999 1998
---- ----
Deferred Tax Assets
Accounts Receivable $128,028 $165,502
Equipment 9,430 34,090
-------- --------
Deferred Tax Assets $137,458 $199,592
========= =========
F-12
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
September 30, 1999 and 1998
9. Income Taxes (cont'd)
Net Operating Loss Carryforward
Audiogenesis generated net operating losses prior to its acquisition of
Allstates Air Cargo, Inc. As a result of the reverse acquisition, the
ownership structure of Audiogenesis changed as of August 24, 1999; thereby
limiting and reducing the future utilization of the Audiogenesis net
operating loss carryforwards. These pre-reverse acquisition net operating
loss carryforwards will be limited and reduced based upon the Federal and
New Jersey change in ownership net operating loss carryforward rules. Any
net operating loss carryforwards to future tax years after limitation and
reduction will generally be available to offset future taxable income of
Allstates WorldCargo, Inc. (formerly known as Audiogenesis Systems, Inc.)
only, and will not be available to offset any future income
of Allstates Air Cargo, Inc. or any other affiliated corporation. The
income tax provisions do not include any of the Audiogenesis pre-reverse
acquisition net operating losses. In addition, the income tax provisions
in these financial statements do not utilize the current year operating
loss of the Allstates Allcargo (UK), Ltd. subsidiary operations. The
deferred tax asset as a result of this carryforward has been offset in
full by a valuation allowance.
10. Pension Plan
Effective May 1994, the Company adopted a discretionary non-
standardized 401(k) profit sharing plan. The terms of the plan
provide for eligible employees who have met certain age and service
requirements to participate by electing to contribute up to the
lesser of 25% of an employees' qualified compensation of which 15%
is tax deductible, or $10,000. The Company may make matching
contributions equal to a discretionary percentage, as determined by
the Company, up to 6% of a participants' salary. The Company did not
make a discretionary contribution to the plan for the years ended
September 30, 1999 and 1998. The plan also allows employer
discretionary contributions allocated in accordance with
participants' compensation. The Company did not make any
discretionary contributions to the plan for the years ended September
30, 1999 and 1998.
11. Related Party Transactions
Allstates Air Cargo, Inc. leases real estate in two locations from
a majority stockholder of the Company. Rent expense under these
leases totaled $92,500 and $90,300 for the years ended September 30,
1999 and 1998, respectively.
The Company has entered into royalty agreements for its Los Angeles
and Chicago licensee locations with an officer and director of the
Company, whereby the Company agrees to pay the officer a royalty
equal to 5% of the gross profit per the contract. Royalty payments
to this individual for the years ended September 30, 1999 and 1998
totaled $143,253 and $0, respectively.
F-13
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
September 30, 1999 and 1998
11. Related Party Transactions (cont'd)
On August 24, 1999, the Company entered into Employment Agreements
with three of the Company's stockholders. The Employment
Agreements are effective for the term beginning August 24, 1999
through December 31, 2004. The following is a summary of the
terms of these agreements:
Annual Stock
Position Salary Bonus Options
-------- ------- ----------------- -----------
Chairman of
The Board $308,000 3% of fiscal year Yes*
Increase in net profits
President/Chief
Executive Officer $208,000 3% of fiscal year Yes*
Increase in net profits
Executive
Vice President/
Chief Operating
Officer $207,922 3% of fiscal year Yes*
Increase in net profits
* No options have been granted to date. Options are to be
granted when and if the Company adopts a stock option plan.
Prior to August 24, 1999, the Company issued 4,500,000 shares of
common stock to one officer, three employees and three consultants
for their participation in the Company's restructuring as a result
of the reverse acquisition. The Company recorded $26,000 of non-cash
acquisition costs and $156,000 of non-cash compensation expense
related to this transaction.
The Company has an unsecured, non-interest bearing loan from a
shareholder. Principal amount outstanding as of September 30, 1999
and 1998 are $5,000 and $0, respectively. Loan is payable and due
upon demand.
12. Stock Option Plan
The Company adopted a non-qualified stock option plan which was
terminated effective December 31, 1999. The following shares have
been reserved to be issued to the holders of certain options which
remained outstanding after a reverse acquisition transaction by
Genesis Safety Systems, Inc. (predecessor of Audiogenesis Systems,
Inc.) pursuant to the anti-dilution provisions of such options. Such
shares will be issued, at no cost to the option holders, only in the
event that such option holders exercise their options in the
Company's predecessor. No options were exercised during the fiscal
years ended September 30, 1999 and 1998.
# of Options Expiration
------------ ----------
3,000 11/27/00
10,000 07/31/00
F-14
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
September 30, 1999 and 1998
13. Leases
The Company leases certain terminal facilities and its corporate
headquarters under operating leases that expire over the next ten years.
These operating leases provide the Company with the option to renew its'
lease at the fair rental value at end of the lease term. Management
expects that leases will be renewed or replaced by other leases in the
normal course of business. In September 1998, the Company's affiliate
leased terminal facilities in the U.K. for approximately $80,000 annually
for ten years. The affiliate currently subleases a portion of the space
for approximately $21,600 annually.
Future minimum lease payments under all leases with initial or remaining
noncancellable lease terms in excess of one year are as follows as of
September 30, 1999:
Years Ending
September 30,
2000 $ 394,363
2001 269,230
2002 222,515
2003 207,715
2004 207,715
Thereafter 740,275
---------- ----------
Total $2,041,813
==========
Rent expense under operating leases for the years ended
September 30, 1999 and 1998 was $397,783 and $365,968,
respectively.
The Company sublets office space and has recorded $34,032 and
$17,360 of rental income for the years ended September 30,
1999 and 1998, respectively.
14. Supplemental Cash Flow Disclosures
1999 1998
Cash paid for: ---- ----
Income Taxes $166,735 $100,986
======== ========
Interest $ 36,281 $ 75,411
======== ========
Noncash Investing and Financing Activities
(a) Equipment acquired through notes payable for the years
ended September 30, 1999 and 1998 totaled $174,086 and $113,867,
respectively.
(b) The Company assumed $2,511,730 of debt owed to the Estate
of Hoffman, which represents a portion of the Company's
investment in its subsidiary at September 30, 1999.
(c) The Company recorded goodwill in the amount of $636,652 as
a result of the acquisition. Additionally, the Company recorded
$5,305 of related amortization expense for the fiscal year ended
September 30, 1999.
F-15
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
Notes to the Consolidated Financial Statements
September 30, 1999 and 1998
15. Litigation
In March 1999, the Company settled a lawsuit against the United
States Government (the "Government") for delinquent accounts
receivable. The Government paid Allstates Air Cargo, Inc. $282,000
in satisfaction of the full outstanding receivable.
In April 1999, the Company reached a favorable settlement with certain
former employees arising out of their activities in leaving the Company's
employ and establishing a business to act as an exclusive sales agent for
a competing air freight forwarder.
On December 15, 1999, the Company also reached a favorable settlement
agreement with the competing air freight forwarder mentioned above. The
action has not been formally discontinued, as the written Stipulation of
Settlement has not yet been signed by all of the required signatories.
On July 22, 1999, the Company settled a case with a former employee
involving the former employee's claims for breach of contract, sex
discrimination and sexual harassment. The Company paid the employee
$17,500 in settlement of this case.
The Company is involved in an on-going environmental proceeding. In
December 1996, five underground storage tanks ("UST's") and two
aboveground storage tanks were removed from a facility in which the
Company leases office space. Post-excavation sampling results confirmed
that certain soil contamination remained present after the removals at the
location of two of the UST's. Also, at the time of the removals, free-
floating groundwater contamination was observed in the area of these two
former UST's. During 1999, the Company engaged Carpenter Environmental
Associates to prepare a Preliminary Assessment/Site Investigation Report
("PA/SI Report"). Carpenter's PA/SI Report stated that the chlorinated
groundwater contamination is emanating from an off-site source. The New
Jersey Department of Environmental Protection approved Carpenter's PA/SI
report and agreed that no further investigation of the site was needed.
A Remedial Action Workplan was submitted in November 1999. The Company is
awaiting approval from the NJDEP. The Company has made claims against
their liability insurance carriers for coverage. Due to the uncertain
nature and extent of any additional remedial activities that may be
required regarding the existing site conditions, management or its counsel
cannot estimate potential future costs at this time. If an adverse
judgment is entered, the potential effect on the consolidated financial
position and consolidated results of operations, in the period in which
resolved, cannot be ascertained at this time, but may be material.
F-16
SUPPLEMENTAL INFORMATION
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
BASIS OF PRESENTATION TO UNAUDITED PRO FORMA
COMBINED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1998 and 1999
The Unaudited Pro Forma Combined Statements of Operations gives effect to the
merger of Audiogenesis Systems, Inc. ("Audiogenesis") and Allstates Air
Cargo, Inc. ("Allstates") as a recapitalization of Allstates with
Allstates as the acquiror (reverse acquisition). This event has been
presented as if it had occurred at the beginning of each year. The Unaudited
Pro Forma Combined Statements of Operations gives effect to the merger under
the purchase method of accounting in accordance with Accounting Principles
Board Opinion No. 16. In the opinion of management, all significant
adjustments necessary to reflect the effects of the merger have been made.
The Unaudited Pro Forma Combined Statements of Operations is presented for
comparative purposes only and is not necessarily indicative of what the actual
combined financial position of Audiogenesis and Allstates would have been,
nor does it purport to represent the future combined financial position of
ASI and Allstates. This Unaudited Pro Forma Combined Statement of Operations
should be read in conjunction with, and is qualified in its entirety by, the
financial statements and notes thereto referenced into the 10K.
F-17
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
Pro Forma WorldCargo
Audiogenesis Allstates Merger Pro Forma
Historical Historical Adjustments Combined
----------- ----------- ---------- ------------
Revenues $710,523 $31,195,581 $(330,000)(A) $31,576,104
Cost of revenues 211,212 18,765,807 - 18,977,019
--------- ----------- ---------- ------------
Gross profit 499,311 12,429,774 (330,000) 12,599,085
--------- ----------- ---------- ------------
Operating expenses:
Selling, general
and administrative 397,411 11,317,580 (271,645)(B) 11,443,346
Research and development 25,000 - - 25,000
--------- ----------- ---------- ------------
Total operating expenses 422,411 11,317,580 (271,645) 11,468,346
--------- ----------- ---------- ------------
Income from operations 76,900 1,112,194 ( 58,355) 1,130,739
Other income (expense):
Interest income - 30,169 - 30,169
Interest expense (5,175) ( 53,622) (164,471)(C) (223,268)
Loss on sale of assets - ( 3,624) - ( 3,624)
Other income (loss) 149,880 90,135 - 240,015
--------- ----------- ---------- ------------
Income before income taxes 221,605 1,175,252 (222,826) 1,174,031
Income tax provision - 692,088 ( 85,443)(D) 606,645
--------- ----------- ---------- ------------
Net income (loss) $221,605 $ 483,164 $(137,383) $ 567,386
========= =========== ========== ============
Weighted average of
common shares
outstanding 18,000,000 14,509,872(E) 32,509,872
=========== ========== ============
Net income per common share $ 0.03 $ 0.02
=========== ============
F-18
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999
Pro Forma WorldCargo
Audiogenesis Allstates Merger Pro Forma
Historical Historical Adjustments Combined
----------- ----------- ---------- ------------
Revenues $475,275 $25,997,927 $ - $26,473,202
Cost of revenues 197,429 16,304,751 - 16,502,180
--------- ----------- ---------- ------------
Gross profit 277,846 9,693,176 - 9,971,022
--------- ----------- ---------- ------------
Operating expenses:
Selling, general and
administrative 339,019 9,416,799 63,660 (F) 9,819,478
Research and development 100,000 - - 100,000
--------- ----------- ---------- ------------
Total operating expenses 439,019 9,416,799 63,660 9,919,478
--------- ----------- ---------- ------------
Income from operations (161,173) 276,377 ( 63,660) 51,544
Other income (expense):
Interest income - 9,512 - 9,512
Interest expense (14,669) ( 54,061) (179,200)(G) (247,930)
Other income (loss) - 19,733 - 19,733
--------- ----------- ---------- ------------
Income before income taxes 175,842) 251,561 (242,860) (167,141)
Income tax provision - 130,954 ( 73,472)(H) 57,482
--------- ----------- ---------- ------------
Net income (loss) $(175,842) $ 120,607 $(169,388) $( 224,623)
========= =========== ========== ============
Weighted average of common
shares outstanding 18,000,000 14,509,872(I) $32,509,872
=========== ========== ============
Net income per common share $ 0.01 $ (0.01)
=========== ============
F-19
<PAGE>
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
(Formerly Known as Audiogenesis Systems, Inc. and Subsidiaries)
NOTES TO UNAUDITED PRO FORMA COMPARATIVE
COMBINED STATEMENT OF OPERATIONS
For the Fiscal Years Ended September 30, 1999 and 1998
A. Eliminates intercompany transactions.
B. Eliminates intercompany transactions and charges eleven months of
amortization of goodwill.
C. Represents interest on the assumed note payable of $2,560,000 for eleven
months at 7%.
D. Represents the tax adjustment for the additional interest expense.
E. Recapitalizes Allstates' shares to 18,000,000, the equivalent number of
shares received in the transaction and shows the shares retained by ASI's
shareholders as issued for the reverse acquisition.
F. Represents one year of amortization of goodwill.
G. Represents interest on the assumed note payable of $2,560,000 for one
year at 7%.
H. Represents the tax adjustment for the additional interest expense.
I. Recapitalizes Allstates' shares to 18,000,000, the equivalent number of
shares received in the transaction and shows the shares retained by ASI's
shareholders as issued for the reverse acquisition.
F-20
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Fallon & Fallon LLP, the independent accountant which was previously engaged
as the principal accountant to audit the Registrant's financial statements,
was replaced on September 30, 1999 with the accounting firm of Cowan,
Gunteski & Co., P.A. The reason for the replacement was based solely on
Registrant's determination that its anticipated accounting requirements
subsequent to the acquisition of Allstates Air Cargo, Inc. necessitated a
larger accounting firm with more personnel regularly engaged in securities-
related accounting matters. Such change in the certifying accountant was not
due to any disagreement between the Registrant and its former independent
accountant or the declination of such accountant to stand for re-election.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
NAME AGE POSITION
- ------------------------------------------------------------------
Joseph M. Guido 64 Chairman of the Board
Sam DiGiralomo 56 President, CEO, Director
Barton C. Theile 53 Executive Vice President, COO, Director
Craig Stratton 48 CFO, Secretary, Treasurer, Director
None of the above persons is related to any other of the above-named persons
by blood or marriage.
Based upon a review of filings with the Securities and Exchange Commission
and written representations that no other reports were required, the Company
believes that all of the Company's directors and executive officers complied
during fiscal 1999 with the reporting requirements of Section 16(a) of the
Securities Exchange Acts of 1934.
JOSEPH M. GUIDO, Chairman of the Board, is the founder of Allstates Air
Cargo, Inc., having served as its President and CEO since 1961. Mr. Guido
became Chairman of the Board of the Company upon the acquisition of Allstates
Air Cargo, Inc. on August 24, 1999. Prior to forming Allstates Air Cargo,
Inc., Mr. Guido served as a freight supervisor with American Airlines, and as
a sales and station manager for Air Cargo Consolidators.
SAM DIGIRALOMO, became President, CEO and a director of the Company upon the
acquisition of Allstates Air Cargo, Inc. on August 24, 1999. Prior to such
acquisition, Mr. DiGiralomo had served as the President, Treasurer, CEO and a
director of Audiogenesis Systems, Inc. since it was formed in January, 1997.
From July 1981 through January 1997, Mr. DiGiralomo had been the President of
the predecessor of Audiogenesis Systems, Inc., Genesis Safety Systems, Inc.
Mr. DiGiralomo has more than 20 years of management and marketing experience.
He has lectured at various trade associations and universities, and designed
and authored several employee training programs. Mr. DiGiralomo is a member
of the American Society of Safety Engineers.
14
<PAGE>
BARTON C. THEILE, became Executive Vice President, COO and a director of the
Company upon the acquisition of Allstates Air Cargo, Inc. on August 24, 1999.
Prior to such acquisition, Mr. Theile had served Allstates Air Cargo, Inc.,
as a sales representative, operations manager, and Executive Vice President
over a period of 19 years. In addition to his experience at Allstates, Mr.
Theile was President of Cargo Logistics Group, LLC. Mr. Theile has been
involved in sales, marketing operations and administration in the
transportation industry for over 25 years.
CRAIG STRATTON, became CFO, Secretary, Treasurer and a director of the
Company upon the acquisition of Allstates Air Cargo, Inc. on August 24, 1999.
Prior to such acquisition, Mr. Stratton served as Chief Financial Officer
for Allstates Air Cargo, Inc. since November 1997. Before joining
Allstates, for three years, Mr. Stratton held the position of Corporate
Controller for Programmer's Paradise, Inc. a cataloger and distributor of
technical software. From 1990 through 1994, he was Controller for Baronet
Corporation, an importer and distributor of leather goods accessories. From
1981 through 1990, he was employed by the finance department of Contel IPC, a
specialty telephone systems manufacturer and service provider, where he held
various positions of increasing responsibility in corporate accounting,
including an appointment to Assistant Controller in 1987. In 1973, Mr.
Stratton received his B.S. in accounting, and in 1980 he earned his MBA. Mr.
Stratton has been a CPA since 1986.
15
<PAGE>
ITEM 10. MANAGEMENT REMUNERATION AND TRANSACTIONS
<PAGE>
EXECUTIVE COMPENSATION
<TABLE>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Annual Compensation Long term compensation
----------------------- --------------------------
Name and Year Salary Bonus Other Awards All
Principal ($) ($) Annual Restrict- Options/ LTIP Other
Position Compen- ed Stock SARs(#) Pay- Compensa-
sation ($) ($) outs($) tion ($)
- ---------- ---- ------- ----- -------- --------- --------- ------ --------
J. 1999 317,821 92,500(1) 202,597(2)
Guido, 1998 294,920 111,600(3)
Chairman 1997 283,415 20,000 85,800(1)
of the
Board
Sam 1999 80,200(4) 143,253(5) 120,000(7)
DiGiralomo, 1998 65,000(4) 26,486(5)
President, 1997 65,000(4)
CEO
B. Theile, 1999 189,411 4,920(6) 20,000(7)
COO, 1998 152,328
Exec. VP 1997 0
Craig
Stratton, 1999 100,826 8,000(7)
CFO, 1998 77,221
Secretary, 1997 0
Treasurer
</TABLE>
__________________
(1) Rental income from leasing of Newark branch location and Forked River
corporate office
(2) Proceeds from sale to Allstates Air Cargo, Inc. of one share Allstates
Air Cargo, Inc. stock
(3) Rental income from leasing of Newark branch location and Forked River
corporate office ($90,300), and interest paid in 1996 loan to company
($21,300)
(4) Employed by Audiogenesis Systems, Inc. on part time basis at $65,000
per year
(5) Commissions paid for consulting services in connection with site
licensing agreements
(6) Commission paid for management services to GTD Logistics, Inc.
(7) Excess stock compensation valued at $.04 per share
On August 24, 1999, the Company entered into Employment Agreements with three
of the Company's stockholders. The Employment Agreements are effective for
the term beginning August 24, 1999 through December 31, 2004. The
following is a summary of the terms of these agreements:
Annual
Name/Position Salary Bonus
- ------------- ------ ------
Joseph M. Guido,
Chairman of
The Board $308,000 3% of fiscal year
Increase in net profits
16
<PAGE>
Sam DiGiralomo,
President/Chief
Executive Officer $208,000 3% of fiscal year
Increase in net profits
Barton M. Theile,
Executive Vice President/
Chief Operating Officer $207,922 3% of fiscal year
Increase in net profits
Under the terms of their respective employment agreements, Mr. Guido, Mr.
DiGiralomo and Mr. Theile have agreed to work full time. The agreements also
provide for health and life insurance benefits, participation in the
Company's 401(k) plan, disability benefits, expense reimbursements,
indemnification from civil or criminal actions arising out of the Executive's
employment, financial and tax advice, tax "gross-up" provisions, severance
pay (equal to 100% of compensation for a period of five years), and payments
in the event of a change of control.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of the Common
Stock of the Company as of February 28, 1999 by each person who was known
by the Company to beneficially own more than 5% of the common stock, by
each director and executive officer who owns shares of common stock and by
all directors and executive officers as a group:
Title Name and Address No. of Shares Percent of
of class of Beneficial Owner and nature of class (1)
Beneficial Ownership
- -------- ------------------- ----------------------- -----------
Common Joseph Guido
4 Lakeside Drive South
Forked River, NJ 08731 18,500,000(2) 56.91%
Common Sam DiGiralomo
7 Doig Road, Suite 3
Wayne, NJ 07470 5,000,000 15.38%
Common Barton C. Theile
4 Lakeside Drive South
Forked River, NJ 08731 500,000 1.54%
Common Craig D. Stratton
4 Lakeside Drive South
Forked River, NJ 08731 200,000 0.62%
Common All officers & directors
as a group (4 persons) 25,200,000 74.44%
- -----------------
(1) Based upon 32,509,872 shares outstanding as of December 17, 1999.
(2) Comprised of 18,250,000 shares owned by Joseph Guido and 250,000 shares
owned by Teresa Guido, who are husband and wife
17
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following shares have been reserved to be issued to certain non-
affiliate holders of options which remained outstanding after a reverse
acquisition transaction by Genesis Safety Systems, Inc. (predecessor of
Audiogenesis Systems, Inc.) pursuant to the anti-dilution provisions of such
options. Such shares will be issued, at no cost to the option holders, only
in the event that such option holders exercise their options in the Company's
predecessor.
# Options Terminates:
------------ ----------
10,000 7/31/00
3,000 11/27/00
On June 22, 1998 and June 29, 1998, the Company borrowed $12,000 and $1,500,
respectively, from Sam DiGiralomo, President of the Company, under promissory
notes bearing interest at 8% per annum. Such notes have been satisfied in
full.
On September 18, 1998, the Company entered into an agreement with Allstates
Air Cargo, Inc. to develop customized audio-visual products. The controlling
shareholder of Allstates Air Cargo, Inc. was Joseph Guido, Chairman of the
Board of the Company. The Company believes that the terms of such agreement
were the same as would be negotiated through arms-length bargaining with an
unaffiliated purchaser. The Company has fulfilled its obligations under such
agreement.
The Company's $1,350,000 line of credit, which expires December 31,
2000, is personally guaranteed by Joseph M. Guido, Chairman of the Board of
the Company, and Teresa Guido, his wife.
The Company leases real estate in two locations from Joseph M. Guido.
Rent expense under these leases totaled $92,500 for the year ended September
30, 1999. The Company believes that such leases are commensurate with the
terms which could be obtained from an unaffiliated third party.
Prior to his becoming President, CEO and a director of the Company, the
Company entered into royalty agreements for its Los Angeles and Chicago
licensee locations with Sam DiGiralomo, whereby the Company agreed to pay Mr.
DiGiralomo a royalty equal to 5% of the gross profit per the contract.
Royalty payments to Mr. DiGiralomo for the year ended September 30, 1999
totaled $143,253.
Pursuant to the Stock Purchase Agreement and Plan of Reorganization
between Audiogenesis Systems, Inc. and Allstates Air Cargo, Inc., the Company
assumed 101 Notes payable from Joseph M. Guido to the Estate of A.G. Hoffman,
Jr., aggregating $2,511,730 in principal, with repayment over 101 years at
annual principal payments of $25,000 plus interest at 7% per year. All or any
of the notes may be paid at any time before maturity without any prepayment
penalty. In the event of a default under the notes by the Company, Joseph M.
Guido remains personally liable for the notes and the 101 shares of Allstates
Air Cargo, Inc. common stock held as security under the notes (representing
48.1% of the issued and outstanding common stock of Allstates Air Cargo,
Inc.) may be sold at public or private sale.
The Company's legal counsel, Stephen M. Robinson, Esq., beneficially
owns 1,200,000 shares of common stock.
18
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed pursuant to Item 601 of Regulation S-B.
<TABLE>
<S> <C>
Exhibit No. Description of Document
- ----------- -----------------------
3.01* Articles of Incorporation of Audiogenesis Systems,
Inc. dated January 14, 1997 filed as an exhibit to Registrant's
Registration Statement on Form 10-SB, filed October 23, 1998
3.02* By-laws of Audiogenesis Systems, Inc. filed as an exhibit to
Registration Statement on Form 10-SB, filed October 23, 1998
10.01* Echolocation Technology License Agreements filed as an exhibit
to Registration Statement on Form 10-SB, filed October 23, 1998
10.02* Agreement with Allstates Air Cargo, Inc. dated 9/18/98 filed as
an exhibit to Registration Statement on Form 10-SB, filed
October 23, 1998
10.03* Promissory Note to Marshall E. Levine Ph.D. Profit Sharing Plan
filed as an exhibit to Registration Statement on Form 10-SB,
filed October 23, 1998
10.04* Genesis Safety Systems, Inc. Stock Option Plan, filed as an
exhibit to Amendment No. 1 to Registration Statement on Form
10-SB, filed March 11, 1999
10.05* Stock Purchase Agreement and Plan of Reorganization
dated June 30, 1999, filed as an exhibit to Registrant's Form
8-K filed July 12, 1999
10.06* Employment Agreement with Joseph M. Guido, filed as an exhibit
to Registrant's Form 8-K filed September 9, 1999
10.07* Employment Agreement with Sam DiGiralomo, filed as an exhibit
to Registrant's Form 8-K filed September 9, 1999
10.08* Employment Agreement with Barton C. Theile, filed as an exhibit
to Registrant's Form 8-K filed September 9, 1999
10.09* Certificate of Amendment to the Certificate of Incorporation
of Registrant changing the name of the corporation from
Audiogenesis Systems, Inc. to Allstates WorldCargo, Inc.,
filed as an exhibit to Registrant's Form 8-K filed
December 1, 1999
21.01* List of Subsidiaries of Registrant filed as an exhibit to
Registration Statement on Form 10-SB, filed October 23, 1998
27.01+ Financial Data Schedule
*Filed previously, incorporated herein by reference
+Filed herewith
(b) Reports on Form 8-K:
Report on Form 8-K filed July 12, 1999, date of earliest event June 29, 1999;
filed with respect to (i) Item 2 - the termination of the Echolocation
License between VCU-IPF/VCU and the Company, and (ii) Item 5 - the Stock
Purchase Agreement and Plan of Reorganization with Allstates Air Cargo, Inc.
and its sole shareholder
Report on Form 8-K filed August 17, 1999, with respect to Item 7 - amending
the report filed July 12, 1999 to include financial statements
19
<PAGE>
Report on Form 8-K filed September 9, 1999, date of earliest event August 24,
1999; filed with respect to Item 1, Item 2, and Item 5 - with respect to the
closing of the Stock Purchase Agreement and Plan of Reorganization with
Allstates Air Cargo, Inc. and its sole shareholder
Report on Form 8-K filed September 30, 1999, date of earliest event September
30, 1999; filed with respect to Item 4 - the change of independent accountant
from Fallon & Fallon, P.A. to Cowan, Gunteski & Co., P.A.
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALLSTATES WORLDCARGO, INC.
BY: /s/ SAM DIGIRALOMO
---------------------------------
Sam DiGiralomo, President and CEO
DATED: January 12, 2000
---------------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the date indicated.
Signature Title Date
- --------- ----- ----
BY: /s/ Joseph M. Guido Chairman of the Board of January 12,2000
--------------------- Directors ----------------
Joseph M. Guido
BY: /s/ Sam DiGiralomo President, CEO and Director January 12,2000
--------------------- ----------------
Sam DiGiralomo
BY: /s/ Barton C. Theile Exec. Vice President, COO January 12,2000
--------------------- and Director ----------------
Barton C. Theile
BY: /s/ Craig D. Stratton Secretary, Treasurer, January 12,2000
--------------------- CFO and Director ----------------
Craig D. Stratton
21
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001072293
<NAME> ALLSTATES WORLDCARGO, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 406,842
<SECURITIES> 0
<RECEIVABLES> 4,237,310
<ALLOWANCES> 316,815
<INVENTORY> 39,139
<CURRENT-ASSETS> 4,594,510
<PP&E> 1,394,998
<DEPRECIATION> 869,945
<TOTAL-ASSETS> 6,069,664
<CURRENT-LIABILITIES> 3,811,534
<BONDS> 0
0
0
<COMMON> 3,251
<OTHER-SE> (309,185)
<TOTAL-LIABILITY-AND-EQUITY> 6,069,664
<SALES> 31,229,694
<TOTAL-REVENUES> 31,229,694
<CGS> 18,783,408
<TOTAL-COSTS> 11,339,779
<OTHER-EXPENSES> (90,135)
<LOSS-PROVISION> 3,624
<INTEREST-EXPENSE> 23,453
<INCOME-PRETAX> 1,169,565
<INCOME-TAX> 689,134
<INCOME-CONTINUING> 480,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 480,431
<EPS-BASIC> .01
<EPS-DILUTED> .01
</TABLE>
