U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Form 10-K (Mark One) [x] ANNUAL REPORT UNDER SECTION 13 0R 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ________ TO ________ ALLSTATES WORLDCARGO, INC. (Exact Name of Registrant as Specified In Its Charter) New Jersey 22-3487471 (State or Other (I.R.S. Identification Jurisdiction of Number) Incorporation or Organization) 4 Lakeside Drive South, Forked River, New Jersey 08731 (Address of Principal Executive Offices) (Zip Code) 7 Doig Road, Suite 3, Wayne, New Jersey 07470 (Former address of Principal Executive Offices) (Zip Code) (609) 693-5950 (Issuer's Telephone Number) Securities to be registered pursuant to Section 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock $.0001 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K [ X] The number of shares of Common Stock outstanding as of December 15, 2000 was 32,509,872 shares. At December 15, 2000, the voting stock of the registrant had not been publicly quoted. 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 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 22 offices throughout the United States, including Hawaii, and employs 98 people. Allstates has agreements with domestic and international strategic partners and a network of agents throughout the world. Recently, Allstates formed a strategic alliance with an established freight forwarding company located in the United Kingdom, with its principle office in the London Heathrow airport area. This strategic partner replaced the Company's UK branch office, which had done business as Allstates Allcargo (UK) Ltd. since January 1997. The Company decided to discontinue freight operations at its branch office prior to the end of its September 30, 2000 fiscal year end. 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 22 domestic offices, 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 24 full time sales personnel operating from 22 domestic offices. Of the 22 domestic locations, 11 are company-owned, and the remaining 11 are licensees and agents. Allstates has formed strategic alliances in approximately 10 foreign countries with which it shares information, customers and profits. Allstates has several site licensing agreements and has created two divisions that are responsible for certain specialized functions of the Company. One of those divisions is GTD Logistics, which is involved in ground transportation (trucking). The other division is called Allstates Logistics. This division holds Ocean Transportation Intermediary License No. 15364NF, and is responsible for the ocean freight segment of Allstates. In addition, the Company has invested in a new start-up operation, e-tail Logistics, Inc., a New Jersey corporation. To date, e-tail Logistics, Inc. has not conducted any business. 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: . Real-time information which is available to employees and customers, including customer service, operations, sales and accounting . 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 . System tracks shipments from pickup order to delivery; confirms "on-board" and "out for delivery" status . System can produce the following daily, monthly, 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) . System auto rates revenues and costs . System is capable of EDI (Electronic Data Interchange) . System is flexible in customizing reports to meet customer needs . System is "bar-code" capable . System allows customers to dial up and retrieve rate quotes and POD information . 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 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 provides customer cargo tracking, with further enhancements expected in the 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 39 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 November 30, 2000, the Company employed a total of 98 individuals. Allstates Air Cargo, Inc. and subsidiaries accounted for 96 employees (of which 8 are part time), including 49 in operations and customer service, 24 in sales, marketing and related activities, and 23 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 2000, the maximum percentage allowed by the Code was the lesser of 25% of an employees' compensation of which 15% is tax deductible, or $10,500. 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, 2000. 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. 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. ITEM 2. DESCRIPTION OF PROPERTY As of September 30, 2000, 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 under a ten year lease. 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 2001 and fiscal 2003. The Company's facility in the UK is leased for a ten year term and is due to expire in fiscal 2009. The Company is currently seeking an assignment of the lease through a reputable realtor in the London Heathrow area. The total rent expense for company leased facilities is approximately $403,000.00. 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, 2000 were: NORTH AMERICA 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 Reno, Nevada 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 ("Carpenter")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 chlorinated solvents in the groundwater was needed. A Remedial Investigation Work Plan was submitted in November 1999. The NJDEP approved the work plan on November 24, 1999. The approved work was performed by Carpenter in December 1999, as set forth in Carpenter's report dated March 13, 2000. The Carpenter report indicated that benzene contamination was delineated and proposed the installation of one additional monitoring well and natural remediation and monitoring of remaining groundwater contamination. The NJDEP approved the additional work and Carpenter installed and sampled the additional well, the results of which confirmed complete delineation of the benzene contamination. Concentrations of benzene in MW-3, a separate well that Carpenter also sampled, indicated an increase from the prior sampling event. The NJDEP suggested that the increase may be due to sediments collected with the groundwater sample, and recommended that the sampling be repeated. Carpenter is now performing additional samplings. The Company has made claims against its liability insurance carriers for coverage, and is responding to requests for information in connection with its attempts to establish 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. 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. SELECTED FINANCIAL DATA The following table sets forth, selected consolidated financial data for the Company for the five years ended September 30, 2000. The selected consolidated financial data for the five years are derived from the Company's audited consolidated financial statements. The consolidated financial data set forth below should be read in conjunction with the Company's Consolidated Financial Statements and related Notes and "Management's Discussion and Analysis of Results of Operations and Financial Condition" contained herein. YEAR ENDED SEPTEMBER 30, (in thousands, except per share data) 1996 1997 1998 1999 2000 STATEMENT OF OPERATIONS DATA (1): Net sales $22,390 $25,134 $25,998 $31,230 $33,213 Income (loss) from operations 326 86 276 1,107 424 Income (loss) from continuing 114 (22) 121 480 88 operations Net income (loss) 114 (22) 121 480 (62) Basic net income (loss) per $.00 $.00 $.00 $.01 $.00 common share Diluted net income (loss) per $.00 $.00 $.00 $.01 $.00 common share Weighted average Common shares outstanding 32,510 32,510 32,510 32,510 32,510 - basic Weighted average Common shares outstanding 32,523 32,523 32,523 32,523 32,521 - diluted BALANCE SHEET DATA: Working capital $ 770 $ 479 $ 416 $ 783 $ 598 Total assets 4,903 5,210 5,024 6,070 7,892 Liabilities - current 3,697 4,064 3,808 3,812 5,695 Liabilities - long term 88 101 70 2,564 2,625 Total stockholders' equity 1,119 1,045 1,147 (306) (427) (1) Comparability of the Statement of Operations is affected by the reverse acquisition of Audiogenesis Systems, Inc. on August 24, 1999. Accordingly, the shares issued during the fiscal year ended September 30, 1999 as a result of the reverse acquisition are treated as being outstanding for each fiscal year presented. ITEM 7. 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, ------------------------------- 2000 1999 1998 ----- ----- ----- Revenues 100.0% 100.0% 100.0% Cost of transportation 60.6 60.2 62.7 ----- ----- ----- Gross profit 39.4 39.8 37.3 Selling, general and administrative expenses 38.1 36.3 36.2 ----- ----- ----- Operating income 1.3 3.5 1.1 Income from continuing operations 0.3 1.5 0.5 Loss from discontinued operations, net of tax benefit (0.5)% Net income/(loss) (0.2)% 1.5% 0.5% Revenues Revenues of the Company represents gross consolidated sales less customer discounts. The total sales of Allstates WorldCargo, Inc. increased by $2.0 million, or 6.4%, to $33,213,000 for the fiscal year ended September 30, 2000 in comparison to the fiscal year ended September 30, 1999, primarily reflecting an increase in the number of shipments and the total weight of international cargo shipped, as well as the full year effect of the reverse acquisition of Audiogenesis Systems, Inc. International sales increased by 21.0% from the prior fiscal year, primarily due to the Company's ability to expand its international network of agents and services. The integration of these services with the domestic product that Allstates has traditionally provided has improved the Company's ability to generate international business from its existing domestic customers. Domestic revenues increased by 3.0% in fiscal year 2000 over the previous fiscal year, in spite of the loss of a significant customer account early in the fiscal year. This increase was primarily due to the full year effect of revenues generated by the Audiogenesis Systems division. While no one customer accounted for greater than 10% of the Company's consolidated revenue in fiscal 2000, one customer accounted for approximately 15% of sales for the three months ended September 30, 2000. The Company expects that customer to account for approximately 10% of revenues in fiscal 2001. 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. During fiscal 1999, one customer accounted for approximately 9.0% of total revenues. As indicated above, sales to that customer ceased during the first quarter of fiscal 2000, due to circumstances beyond the Company's control. 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. Gross Profit Gross profit represents the difference between net revenues and the cost of providing transportation services. The cost of sales is composed primarily of amounts paid by the Company to carriers and cartage agents for the transport of cargo. During the fiscal year ended September 30, 2000, the cost of sales as a percentage of revenues increased by 0.4% in comparison to the previous fiscal year, primarily reflecting the higher mix of international sales volume as a percentage of total sales, which generally carries a higher percentage cost of transportation than domestic sales. International revenue accounted for 24.5% of total sales in Fiscal 2000 versus 22.1 % in Fiscal 1999. In absolute terms, the cost of sales increased by $1,345,000, to $20,129,000 in Fiscal 2000, primarily due to the higher volume of international sales. Total gross profit increased by $638,000, to $13,084,000 during the fiscal year. Gross margins were affected to a limited extent during fiscal 2000 by the increased cost of fuel. Certain carriers have begun to add surcharges to their freight bills to cover the higher fuel costs. The Company has itself imposed a surcharge on all transportation charges to its customers in an effort to offset these increased fuel costs. The cost of transportation decreased as a percentage of revenues by 2.5% in fiscal 1999 to 60.2% from 62.7% in the prior fiscal year. This decrease was significantly attributable 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. 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 Selling, general and administrative expenses include all personnel costs, facilities costs, and licensee commissions. As a percentage of sales, SG&A expenses increased 1.8%, to 38.1% during the fiscal year ended September 30, 2000 in comparison the prior fiscal year, primarily attributable to higher licensee commissions resulting from increased gross profits of a significant licensee operation. Operating expenses increased by $1,321,000, or 11.6%, during the fiscal year ended September 30, 2000 versus the previous fiscal year, primarily reflecting the combination of higher administrative personnel expenses associated with the Company's efforts to build its corporate infrastructure and support its future growth plans, the increase in licensee commissions, and the full year effect of the Audiogenesis Systems division. Licensee commissions increased by approximately $1,140,000 in Fiscal 2000 compared to Fiscal 1999. A portion of that increase, approximately $530,000, reflects the full year incremental effect of two licensee operations that replaced company owned locations within their local markets during the fourth quarter of Fiscal 1999. Royalty expense, which is related to the licensee agreements, increased by $72,000 for the same reason. The Company realized an offsetting operating cost savings of approximately $509,000 with the replacement of these company locations with licensee operations, primarily due to the related reduction of personnel and facilities costs. The increase in operating expenses also reflects certain isolated costs incurred by the Company in connection with the reverse acquisition of Allstates Air Cargo by Audiogenesis Systems, Inc. on August 24, 1999. The Company incurred $140,500 as reimbursement to one officer, three employees and three consultants for income taxes due the IRS in connection with non-cash compensation received for their participation in the Company's restructuring. Also, in accordance with Employment Agreements that the Company entered into with three stockholders on August 24, 1999, a bonus equating to 3% of the Fiscal 1999 increase in before-tax profits over Fiscal 1998 was paid within 30 days of the issuance of the Fiscal 1999 audited financial statements. Operating expenses for the Fiscal 2000 included approximately $197,000 of costs incurred by the Audiogenesis Systems division as compared to approximately $22,000 incurred in Fiscal 1999 after the date of the reverse merger. 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 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 deferred finance costs 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. The provision for 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 Income from operations decreased during the fiscal year ended September 30, 2000 by approximately $682,000, to $424,000 as compared to the fiscal year ended September 30, 1999 for the reasons indicated. The operating margin decreased by (2.2%) during the same fiscal year, primarily due to the higher selling, general and administrative expenses as described above. 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. Interest income and expense Net interest expense increased by approximately $188,000 during the fiscal year ended September 30, 2000 as compared to the previous fiscal year, primarily due to the note payable to the Estate of A.G. Hoffman, Jr. that the Company assumed from Joseph M. Guido as provided in the terms of the August 24, 1999 reverse acquisition. Interest expense on the note was approximately $175,000 during Fiscal 2000 . Net interest expense decreased for the fiscal year ended September 30, 1999 by approximately $21,000 in comparison to the prior fiscal year, primarily reflecting the full repayment of short-term bank borrowings during the year. Net income/(loss) Income before taxes and discontinued operations decreased by $940,000, to $229,000 for the fiscal year ended September 30, 2000, in comparison to the previous fiscal year. The provision for income tax expense from continuing operations for fiscal 2000 was approximately $142,000. Income from continuing operations decreased $394,000, to $87,000 in fiscal 2000 as compared to the prior fiscal year. The net loss in fiscal 2000 amounted to ($62,000) versus a net profit of $480,000 in fiscal 1999. 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. Discontinued operations Discontinued operations in fiscal 2000 represents the activity of the Company's UK branch office for the three months ended September 30, 2000. Freight operations at the UK branch were terminated effective September 15,2000 and the business was turned over to a local freight agent with whom the Company has forged a strategic alliance agreement. The Company incurred a loss from discontinued operations of $134,000 during this period, net of an income tax benefit of $69,000, as well as an estimated loss on the disposal of Allstates Allcargo (UK) Ltd. of $16,000, net of a tax benefit of $8,000. During the three month period ended September 30, 2000, the UK branch office recognized a gross profit of approximately $73,000 on net revenues of $193,000. Operating expenses totaled approximately $273,000, of which approximately $86,000 related to the closing of the operation. Liquidity and Capital Resources The net amount of cash used for operating activities was approximately $796,000 for the fiscal year ended September 30, 2000 compared to cash flow provided from operations of $1,002,000 for fiscal year 1999. For fiscal 2000, net cash was used primarily to satisfy income tax obligations from fiscal 1999, and to finance the net loss of the UK branch, Allstates Allcargo (UK) Ltd. 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. Cash flow from operations for fiscal 1999 was negatively impacted by the loss generated by the Company's UK subsidiary, Allstates Allcargo (UK) Ltd. At September 30, 2000, the Company had cash and cash equivalents of $116,000 and net working capital of $598,000, compared with cash and cash equivalents of $407,000 and net working capital of $783,000 respectively, at September 30, 1999. The decrease in working capital at September 30, 2000 from the respective period in 1999 is primarily attributable to the net loss at the Company's UK operation. In addition, working capital was negatively impacted by a $200,000 loan provided to an officer of the Company. 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, 2000, capital expenditures amounted to approximately $468,000, of which $276,000 were acquired through notes payable. For the fiscal year ended September 30, 1999, capital expenditures totaled approximately $258,000, of which approximately $174,000 were acquired through notes payable. Prior to the end of fiscal 2000, Allstates extended a $200,000 loan to a shareholder and officer of the Company. The loan is collectible in September 2002, and earns interest at the prevailing rate of the Company's line of credit. During the fiscal years ended September 30, 2000 and 1999, the Company paid approximately $71,000 and $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 (9.25% at September 30, 2000). 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, 2000, $350,000 of the line of credit was restricted as collateral for a letter of credit opened in support of a duty deferment for the Company's UK branch. On November 30, 2000 that portion of the line of credit became unrestricted after the UK customs service released the duty deferment guarantee and the letter of credit was allowed to lapse. Outstanding borrowings on the line of credit totaled $900,000 at September 30, 2000. Historically, the Company's branch location in the United Kingdom relied primarily on its ultimate parent company, Allstates Air Cargo, Inc., for its financial support. The parent company provided cash advances in the form of loans to the UK branch to support its working capital needs and purchase computer equipment. At September 30, 2000, the UK branch had incurred L463,000 in loans payable to the parent (the equivalent of approximately $678,000), which will not be recovered. In April 1997, the parent company had deposited $165,000 (the US$ equivalent of L100,000 at that time) 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 was a requirement to guarantee the payment of VAT and excise taxes to UK Customs on cargo imports, which the Company collects from its customers. In September, 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, and subsequently the amount of L183,000, which included the guarantee deposit funds plus earned interest, was transferred from the original bank to be used for working capital. The agreement allowed the UK branch to draw to a maximum of L100,000 (the equivalent of approximately $146,000 @ September 30, 2000). Interest was calculated on the cleared daily balance of the account, and was payable on the amount owing up to the limit at 3% per annum over the bank's base rate (8.25% at September 30, 2000). The overdraft facility and HM Customs guarantee were collateralized by a $350,000 letter of credit opened at the Company's US bank. In September 2000, the bank overdraft total of L89,000 (the equivalent of approximately $130,000) was paid by the parent company and the overdraft facility was canceled. Update on Year 2000 Computer Issues The Company did not experience any computer or systems problems relating to the Year 2000. Upon review of its internal and external systems during 1999, the Company determined that it did not have any material exposure to such computer problems and that the software and systems required to operate its business and provide services were Year 2000 compliant. As a result, the Company did not incur, and does not expect to incur, any material expenditures relating to Year 2000 systems remediation. Forward Looking Statements The statements contained in all parts of this document (including the portion, if any, appended to the Form 10-K) 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Financial Statements with Supplemental Information For the Fiscal Years Ended September 30, 2000 and 1999 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Financial Statements with Supplemental Information For the Fiscal Years Ended September 30, 2000 and 1999 CONTENTS Page Independent Accountants' Report 1 Financial Statements: Consolidated Balance Sheets 2-3 Consolidated Statement of Operations 4 Consolidated Statements of Stockholders' Equity (Deficit) 5 Consolidated Statements of Cash Flows 6 Notes to the Consolidated Financial Statements 7-18 Supplemental Information: 19 Unaudited Pro Forma Combined Statements of Operations For the Fiscal Year Ended September 30, 1999 20 Notes to the Unaudited Pro Forma Combined Statements of Operations 21 INDEPENDENT ACCOUNTANTS' REPORT To the Board of Directors Allstates WorldCargo, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Allstates WorldCargo, Inc. and Subsidiaries (the "Company"), as of September 30, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit), comprehensive income, and cash flows for the fiscal years 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. 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 an evaluation 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, as of September 30, 2000 and 1999, and the consolidated results of their operations and cash flows for the fiscal years then ended in conformity with generally accepted accounting principles. December 14, 2000 1 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of September 30, Assets 2000 1999 ---- ---- Current Assets Cash $ 115,736 $ 406,842 Accounts Receivable - trade, net of allowance for doubtful accounts of $312,783 and $316,815, respectively 5,757,204 3,920,495 Inventories 30,684 39,139 Prepaid Expenses and Other Assets 285,057 100,006 Deferred Income Taxes - Current Portion 103,840 128,028 ------------ ----------- Total Current Assets 6,292,521 4,594,510 ------------ ----------- Property, Plant and Equipment Buildings and Improvements 210,294 210,294 Vehicles 806,852 652,184 Equipment and Software 606,567 484,979 Furniture and Fixtures 47,541 47,541 ------------ ----------- 1,671,254 1,394,998 Less: Accumulated Depreciation 950,258 869,945 ------------ ----------- Net Property, Plant and Equipment 720,996 525,053 ------------ ----------- Other Assets Deposits 68,217 79,823 Goodwill, net of accumulated amortization of of $68,971 and $5,305, respectively 567,681 631,347 Acquisition Costs, net of accumulated amortization of of $5,052 and $389, respectively 41,586 46,249 Deferred Income Taxes - 9,430 Loans Receivable - Related Parties 201,199 - Other Assets - 183,252 ------------ ----------- Total Other Assets 878,683 950,101 ------------ ----------- Total Assets $ 7,892,200 $6,069,664 ============ ============ 2 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Balance Sheets As of September 30, Liabilities and Stockholders' Equity (Deficit) 2000 1999 Current Liabilities ---- ---- Accounts Payable $ 3,206,463 $ 2,408,239 Accrued Expenses 1,405,221 755,177 Short-Term Bank Borrowings 900,000 Taxes Payable 20,480 526,873 Shareholder Loan Payable 5,000 Current Portion of Notes Payable 162,843 116,245 ---------- --------- Total Current Liabilities 5,695,007 3,811,534 ---------- --------- Long-Term Portion of Notes Payable 2,624,530 2,564,064 ---------- --------- Total Liabilities 8,319,537 6,375,598 ---------- --------- Stockholders' Equity (Deficit) Common Stock, $.0001 par value, 50,000,000 shares authorized, 32,509,872 shares issued and outstanding 3,251 3,251 Accumulated Other Comprehensive Income: Foreign Currency Translation Adjustments ( 3,651) (14,323) Retained Earnings (Deficit) (426,937) (294,862) ---------- --------- Total Stockholders' Equity (Deficit) (427,337) (305,934) ---------- --------- Total Liabilities and Stockholders' Equity (Deficit) $ 7,892,200 $ 6,069,664 ========== ========= - 3 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Statements of Operations For the Fiscal Years Ended September 30, 2000 1999 ---- ---- Revenues (Net of Discounts) $ 33,213,041 $ 31,229,694 Cost of Sales 20,128,628 18,783,408 ------------ ------------ Gross Profit 13,084,413 12,446,286 Selling, General and Administrative Expenses (inclusive of expenditures to related parties totaling $1,037,022 and $1,131,675 for the fiscal years ended September 30, 2000 and 1999, respectively) 12,660,284 11,339,779 ------------ ------------ Income from Operations 424,129 1,106,507 ------------ ------------ Other Income (Expense) Interest Income 10,036 30,169 Interest Expense (221,148) (53,622) Gain (Loss) on Sale of Assets 4,965 (3,624) Other Income 11,159 90,135 ------------ ------------ Total Other Income (Expense) (194,988) 63,058 ------------ ------------ Income Before Income Tax Provision 229,141 1,169,565 Provision for Income Tax Expense (142,348) (689,134) ------------ ------------ Income from Continuing Operations 86,793 480,431 Discontinued Operations: Loss from operations of Allstates Allcargo (UK) Ltd. to be disposed of (net of income tax benefit of $68,779) (133,512) - Estimated loss on disposal of Allstates Allcargo (UK) Ltd., including provision for operating losses of $23,856 during phase-out period (net of income tax benefit of $8,111) (15,745) - ------------ ------------ Net Income (Loss) Applicable to Common Shareholders $ (62,464) $ 480,431 ============ ============ Earnings Per Share - Basic Income from Continuing Operations $ 0.00 $ 0.01 Loss from Discontinued Operations 0.00 0.00 Estimated Loss on Disposal of Allstates Allcargo (UK), Ltd. 0.00 0.00 ------------ ------------ Per Common Share - Basic $ 0.00 $ 0.01 ============ ============ Shares Used in Per Share Calculation - Basic 32,509,872 32,509,872 ============ ============ Earnings Per Share - Diluted Income from Continuing Operations $ 0.00 $ 0.01 Loss from Discontinued Operations 0.00 0.00 Estimated Loss on Disposal of Allstates Allcargo (UK), Ltd. 0.00 0.00 ------------ ------------ Per Common Share - Diluted $ 0.00 $ 0.01 ------------ ------------ Shares Used in Per Share Calculation - Diluted 32,521,201 32,522,872 ============= ============ 4 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) For the Fiscal Years Ended September 30, 2000 and 1999 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, 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. Audio- genesis 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 fiscal year ended September 30, 1999 - - - 60,000 - 60,000 Other Comprehensive Income (Currency Translation Adjustment) for the fiscal year ended September 30, 1999 - - - - (4,499) (4,499) Consolidated net income for the fiscal 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) Adjustment to additional paid in capital & retained earnings resulting from the elimination of investment in subsidiary - - - - - (69,611) (69,611) Other Comprehensive Income (Currency Translation Adjustment) for the fiscal year ended September 30, 2000 - - - - 10,672 10,672 Consolidated net (loss) for the fiscal year ended September 30, 2000 (62,464) (62,464) ---------- ------- ----------- ---------- ------------- ---------- ------------- Balance at September 30, 2000 32,509,872 $3,251 $ - $ - $ (3,651) $ (426,937) $(427,337) ========== ======= =========== ========== ============= =========== ============= * 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. 5 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Fiscal Years Ended September 30, 2000 1999 Cash Flows From Operating Activities: ---- ----- Net Income $ 86,793 $ 480,431 Adjustments to Reconcile Net Income to Net Cash Provided from (Used in) Operating Activities: Depreciation 240,620 187,659 Amortization 68,329 5,694 Provision for Uncollectible Accounts Receivable 166,204 112,095 Loss from Discontinued Operations (133,512) - Loss on Disposal of Discontinued Operations (15,745) - (Gain) Loss on Sale of Equipment (4,965) (3,624) Compensation Paid Through Stock Issuance 28,000 Deferred Income Taxes 33,618 62,134 (Increase) Decrease in Operating Assets: Accounts Receivable (2,002,913) (202,954) Inventories 8,455 (15,657) Prepaid Expenses and Other Assets (185,051) (12,870) Increase (Decrease) in Operating Liabilities: Accounts Payable and Accrued Expenses 1,448,266 (165,380) Taxes Payable (506,393) 526,873 ---------- --------- Net Cash Provided From (Used by) Operating Activities (796,294) 1,002,401 ---------- --------- Cash Flows From Investing Activities: Purchase of Equipment (191,992) (83,554) Proceeds from Sale of Equipment 35,973 29,688 Cash Received from Reverse Merger - 7,684 Acquisition Costs - (20,638) Loans to Shareholders (200,000) - Release of Customs and Excise Bond 183,252 - Deposits 11,607 26,893 Purchase of Treasury Stock of Subsidiary (70,810) (202,597) ---------- --------- Net Cash (Used by) Investing Activities (231,970) (242,524) ---------- --------- Cash Flows From Financing Activities: Repayments Under Notes Payable (168,514) (184,209) Repayments Under Short-Term Bank Borrowings (150,000) (470,000) Borrowing Under Short-Term Bank Borrowings 1,050,000 70,000 Repayments of Shareholder Loans Payable (5,000) - Deferred Financing Costs - 60,000 ---------- --------- Net Cash Provided From (Used by) Financing Activities 726,486 (524,209) ---------- --------- Net Increase (Decrease) in Cash and Cash Equivalents (301,778) 235,668 Currency Translation Adjustments 10,672 (4,499) Cash and Cash Equivalents, Beginning of Year 406,842 175,673 ---------- --------- Cash and Cash Equivalents, End of Year $ 115,736 $ 406,842 ========== ========= 6 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 1. Organization and Nature of Business On August 24, 1999, Audiogenesis Systems, Inc. (Audiogenesis), entered in a reverse acquisition with Allstates Air Cargo, Inc. and is 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. Allstates WorldCargo, Inc. (formerly known as Audiogenesis Systems, Inc.) - Allstates WorldCargo, Inc. 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 program 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 Allstates WorldCargo, Inc. 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 airfreight 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. e-tail Logistics, Inc. - e-tail Logistics, Inc. was incorporated in the state of New Jersey on February 11, 2000. e-tail Logistics is a majority owned subsidiary of Allstates WorldCargo, Inc. e-tail Logistics, is in the business of web site design. 7 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 1. Organization and Nature of Business (cont'd) Reverse Acquisition For purposes of these financial statements, the purchase of Allstates Air Cargo, Inc. by Allstates WorldCargo, Inc. (formerly known as 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 acquirer in the reverse acquisition. The consolidated statement of operations for Allstates WorldCargo, Inc. and Subsidiaries for the fiscal year ended September 30, 1999, includes a full year of revenues and expenses of Allstates Air Cargo, Inc. and its subsidiaries combined with the revenues and expenses for Allstates WorldCargo, 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, 2000 and 1999. The statement of operations includes the income and expenses of Allstates Air Cargo, Inc. and its subsidiaries for the full fiscal year ended September 30, 2000 and 1999 and the income and expenses of Audiogenesis Systems, Inc. for the full fiscal year ended September 30, 2000 and the period from August 24, 1999 through September 30, 1999. All material intercompany payables, receivables, revenues and expenses have been eliminated for purposes for 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. 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. At varying times during the fiscal years ended September 30, 2000 and 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. Fair Value of Financial Statements The carrying values 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. 8 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 2. Summary of Significant Accounting Policies (cont'd) Inventory For both financial reporting an income tax purposes, inventory is stated on the cost basis. Cost is determined using the first-in, first-out method. Property, Plant and Equipment Property and equipment consists principally of building and improvements, vehicles, computers and software, office equipment, and furniture and fixtures and 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 (deficit). 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. 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. Reclassifications Certain 1999 amounts have been reclassified to conform with 2000 presentation. 9 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 2. Summary of Significant Accounting Policies (cont'd) Earnings per Share (continued) EPS is calculated by dividing net income (loss) 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. acquired a controlling interest in Allstates WorldCargo, Inc. (formerly known as 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, 2000 and 1999 was $166,204 and $112,095, respectively. 4. Property, Plant and Equipment Property, plant and equipment costs consist of the following as of September 30, 2000: Accumulated Net Book Useful Cost Depreciation Value Lives Buildings and Improvements $210,294 $179,444 $30,850 10-15 Years Vehicles 806,852 339,918 466,934 5 Years Equipment and Software 606,567 385,377 221,190 3-5 Years Furniture and Fixtures 47,541 45,519 2,022 5-7 Years ---------- --------- --------- Totals $1,671,254 $950,258 $720,996 ========== ========= ========= Depreciation expense charged to income from operations for the years ended September 30, 2000 and 1999 was $240,620 and $187,659, 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 was to guarantee payment of value added taxes and excise taxes that the Company's affiliate would collect from its customers. The cash pledged was maintained in a certificate of deposit in a financial institution earning interest at approximately 5%. On September 27, 1999, the Company's affiliate entered into an agreement with a new bank to provide a separate overdraft facility and a HM Customs and Excise Bond to replace the guarantee provided by the original bank. During November 1999, the guaranteed funds on deposit at the original bank were released and applied against the overdraft facility at the new bank. 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, 2000 and 1999 is $63,666 and $5,305, respectively. 10 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 6. Amortization of Goodwill and Acquisition Costs (cont'd) The costs associated with the acquisition of Allstates WorldCargo, Inc (formerly known as Audiogenesis Systems, Inc.) by Allstates Air Cargo, Inc. are being amortized on the straight-line basis over a ten-year period. Amortization expense for the years ended September 30, 2000 and 1999 is $4,663 and $389, respectively. 7. 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 (9.25% as of September 30, 2000). The interest rate is predicted 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 3/4% over the WSJ's prime rate at the time of failure. The balance outstanding on the line of credit as of September 30, 2000 and 1999 was $900,000 and $0, respectively. Loan collateral includes the Company's accounts receivable and the unlimited, unconditional guarantees of Joseph Guido, Teresa Guido and Allstates Allcargo (US), Inc. 8. Notes Payable The following is a summary of long-term debt as of September 30, 2000 and 1999: 2000 1999 Notes payable from Joseph M. Guido to the Estate of A.G. Hoffman, Jr., assumed by the Company, in the aggregate originally totaled $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. $2,486,730 $2,511,730 Notes payable to First Union in the aggregate originally totaled $122,683, with repayment over 36 months at monthly principal payments ranging from $532.52 to $744.79 plus interest ranging from 7.50% to 7.70%. The loans are secured by vehicles to which they relate. 11,811 37,220 ------------ ----------- Subtotal - To next page $2,498,541 $2,548,950 11 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 8. Notes Payable (cont'd) 2000 1999 Subtotal - From Prior Page $2,498,541 $2,548,950 Notes Payable to GMAC in the aggregate originally totaled $354,985, with repayment over 36 months at monthly payments, inclusive of interest, ranging from $513.00 to $843.57 with interest ranging from 0.90% to 3.90%. These loans are secured by the vehicles to which they relate. 220,916 124,359 Notes Payable to Summit Bank in the aggregate originally totaled $76,903, with repayment over 36 months with monthly payments inclusive of interest ranging from 7.90% to 8.50%. These loans are secured by the vehicles which they relate. 67,916 - Note Payable to Virginia Commonwealth University (VCU) for $10,000, due in monthly payments of $1,000 of principal only. The loan matured on April 15, 2000. The note payable represents payment in full for the mutual termination of the Echolocation License Agreement between Audiogenesis and VCU. - 7,000 ----------- ---------- Totals 2,787,373 2,680,309 Less: Current Portion of Notes Payable 162,843 116,245 ----------- ---------- Long-Term Portion of Notes Payable $2,624,530 $2,564,064 =========== =========== Maturities ---------- For the fiscal years ended September 30, 2001 $162,843 2002 135,053 2003 77,746 2004 25,000 2005 25,000 Thereafter 2,361,731 _________ Total $2,787,373 ========= 12 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 9. Income Taxes A reconciliation of income taxes at the statutory rate to the Company's effective rate is as follows: 2000 1999 ---- ---- Expected Federal statutory rate 34.000% 34.000% Expected State statutory 8.893% 8.893% rates (average) ------- ------- Total expected 42.893% 42.893% statutory rate Disallowed utilization of net operating loss incurred from continuing operations of Allstates Allcargo (UK), Ltd. for State income tax 4.556% 10.717% purposes Deferred income tax expense: Federal 11.337% 4.516% State 3.334% 0.797% ------- ------- Income Tax Expense - 62.120% 58.923% Effective Tax Rate ======= ======== The Company's provision for income taxes as of September 30, 2000 and 1999 consisted of the following: 2000 1999 ---- ---- Current Income Tax (Benefit) Expense Federal (33,528) 474,000 State 65,367 153,000 ------- ------- Total - Current 31,839 627,000 ------- ------- Deferred Income Tax (Benefit) Expense Federal 25,979 52,814 State 7,640 9,320 ------ ------ Total - Deferred 33,619 62,134 ------ ------- TOTALS $ 65,458 689,134 ======== ======= 2000 1999 Income Tax Expense on Continuing Operations $142,348 $689,134 Income Tax (Benefit) on Discontinued Operations (68,779) - Income Tax (Benefit) on Disposal of Discontinued Operations (8,111) - --------- -------- Total Income Tax Expense $ 65,458 $689,134 ========= ======== 13 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 9. Income Taxes (cont'd) The tax effect of temporary differences that make up the significant components of the deferred tax asset for financial reporting purposes at September 30, 2000 and 1999 are as follows: 2000 1999 ---- ---- Deferred Tax Assets -------------------- Accounts Receivable $103,840 $128,028 Equipment - 9,430 -------- -------- Totals $103,840 $137,458 ------ ======== ======== Net Operating Loss Carryforward Allstates WorldCargo, Inc (formerly known as Audiogenesis Systems, Inc.) generated net operating losses prior to its acquisition off Allstates Air Cargo, Inc. As a result of the reverse acquisition, the ownership structure of Allstates WorldCargo, Inc. 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. 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 these pre-reverse acquisition net operating losses. In addition, for the fiscal year 1999, the income tax provisions in these financial statements do not utilize the current year operating loss of the Allstates Allcargo (UK), Ltd. Subsidiary operations. Accordingly, the deferred tax asset as a result of this carryforward has been offset in full by a valuation allowance for the fiscal year 1999. Pursuant to a ruling received by the Internal Revenue Service, effective October 1, 1999, the operating losses incurred by Allstates Allcargo (UK), Ltd. may be offset against taxable income of Allstates WorldCargo, Inc. in the consolidated filing of its Federal income tax returns. Therefore, the tax provisions included in these financial statements utilize the operating loss for the fiscal year 2000 incurred by Allstates Allcargo (UK), Ltd. in calculating the Federal tax liability. 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 $10,500 and $10,000 for the fiscal years ended September 30, 2000 and 1999, respectively. The Company may make matching contributions equal to a discretionary percentage, as determined by the Company, up to 6% of a participant's salary. The Company did not make a discretionary contribution to the plan for the years ended September 30, 2000 and 1999. 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, 2000 and 1999. 14 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 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 $98,600 and $92,500 for the fiscal years ended September 30, 2000 and 1999, 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, 2000 and 1999 totaled $214,500 and $143,253, respectively. 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 $308,000 3% of fiscal Yes* Board year increase in net profits President/Chief $208,000 3% of fiscal Yes* Executive year increase Officer in net profits Executive Vice $207,922 3% of fiscal Yes* President/ year increase Chief Operating in net profits Officer 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 $16,000 of non-cash acquisition costs, $28,000 of non-cash employee compensation expense and $128,000 of non-cash, non- employee compensation expense related to this transaction. The Company has an unsecured loan to a shareholder. The principal amounts outstanding as of September 30, 2000 and 1999 are $200,000 and $-0-, respectively. The loan receivable is due in full on September 10, 2002 and interest payments of 9 1/4% per annum are due annually. The Company had an unsecured, non-interest bearing loan from a shareholder. The principal amounts outstanding as of September 30, 2000 and 1999 were $-0- and $5,000, respectively. The loan payable was due upon demand and was non-interest bearing. The initial stock issuance of e-tail Logistics, Inc. to its' minority investors were issued to related parties and are recorded on the books of Allstates WorldCargo, Inc. and Subsidiaries in loans receivable - related parties for $1,199 and $-0- for the fiscal years ended September 30, 2000 and 1999, respectively. The loans are payable and due upon demand. 15 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 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, 2000 and 1999. # of Options Expiration ------------ ---------- 3,000 11/27/00 10,000 7/31/00 13. Subsequent Event On October 16, 2000, the Company filed a Form S-8 registration statement with the Securities and Exchange Commission, registering 4,500,000 shares of common stock with a $.0001 par value. The shares are registered on behalf of the Company, and will be issued pursuant to the Company's "2000 Stock Option and Stock Issuance Plan". 14. 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 the 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, 2000: Fiscal Years Ending September 30, -------------------- 2001 $ 260,794 2002 225,215 2003 208,915 2004 164,100 2005 164,100 Thereafter 670,675 -------- Total $1,693,799 ========== Rent expense under operating leases for the fiscal years ended September 30, 2000 and 1999 was $403,244 and $397,783, respectively. The Company sublets office space and has recorded $54,000 and $34,032 of rental income for the years ended September 30, 2000 and 1999, respectively. 16 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 15. Supplemental Cash Flow Disclosures Cash paid for: 2000 1999 -------------- ----- ----- Income Taxes $711,990 $166,735 ======== ======== Interest $151,215 $ 36,281 ======== ======== Noncash Investing and Financing Activities (a) Equipment acquired through notes payable for the years ended September 30, 2000 and 1999 totaled $275,578 and $174,086, 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 $63,666 and $5,305 of related amortization expense for the fiscal years ended September 30, 2000 and 1999, respectively. (d) Loans receivable totaling $1,199 and $-0- for the fiscal years ended September 30, 2000 and 1999, respectively, resulted from issuance of stock to minority shareholders. 16. Discontinued Operations In May 2000, the Company adopted an informal plan to sell/dispose of Allstates Allcargo (UK), Ltd. The Company formally discontinued its operating activities on September 15, 2000. In the coming year, the Company will deal with the collection of receivables and the sale of fixed assets. The estimated loss on the disposal of the discontinued operations of $15,745 (net of income tax benefit of $8,111) represents unbilled amounts due to vendors and the estimated remaining occupancy costs of the Company's leased space (net of its current and prospective future subtenant). None of these estimated costs related to the loss on the disposal of the discontinued operations were paid as of September 30, 2000. Operating results of Allstates Allcargo (UK), Ltd. for the nine months ended June 30, 2000 are included in the income from continuing operations in the accompanying financial statements. Net sales of Allstates Allcargo, (UK), Ltd., for the period commencing July 1, 2000 ("the measurement date") through September 30, 2000 were $193,354. This amount was not included in the gross revenues in the accompanying financial statements. 17. 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. 17 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Notes to the Consolidated Financial Statements September 30, 2000 and 1999 17. Litigation (Continued) In April 1999, the Company reached a favorable settlement with certain former employees arising out 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 reached a favorable settlement agreement with the sole remaining defendant, the competing air freight forwarder, and the action was formally discontinued by the filing of a Stipulation of Settlement with the Court in January, 2000. 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 Environment 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. The NJDEP approved a Remedial Investigation Workplan on November 24, 1999. The approved work was performed by Carpenter in December, 1999. In its' report dated March 13, 2000, Carpenter indicated that benzene contamination was delineated and proposed the installation of one additional monitoring well and natural remediation and monitoring of remaining groundwater contamination. The NJDEP approved the additional work and Carpenter installed and sampled the additional well, the results of which confirmed complete delineation of the benzene contamination. Concentrations of benzene in MW-3, which Carpenter also sampled, indicated an increase from the prior sampling event. NJDEP suggested that the increase may have been due to sediments collected with the groundwater sample and recommended that the sampling be repeated. Carpenter is, therefore, repeating that sampling event to confirm groundwater concentrations. Carpenter anticipated conducting two more rounds of groundwater sampling to demonstrate a decreasing trend in benzene concentration. Previously, Carpenter had proposed that soils in excess of NJDEP cleanup criteria be left in place under a Deed Notice, because those soils could not be remediated due to site constraints. The Company proposed to the NJDEP that neither further delineation of soils, nor a Deed Notice, should be required, because sample results are below NJDEP's residential cleanup criteria. The NJDEP has agreed. NJDEP confirmed that No Further Action ("NFA") as to soils at the site would be granted unless benzene concentrations in the groundwater fail to decrease. The Company had made claims against their liability carriers for coverage. Due to the uncertain nature and extent of any additional investigatory or remedial activities that may be required regarding the existing site conditions, potential future costs cannot be estimated at this time. 18 SUPPLEMENTAL INFORMATION ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES BASIS OF PRESENTATION TO UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS For the Fiscal Year Ended September 30, 1999 The Unaudited Pro Forma Combined Statements of Operations of Allstates WorldCargo, Inc. and Subsidiaries 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 Audiogenesis 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 in the 10K. 19 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Unaudited Pro Forma Combined Statement of Operations For the Fiscal 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 admin 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 ============= ============ 20 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMPARATIVE COMBINED STATEMENT OF OPERATIONS For the Fiscal Year Ended September 30, 1999 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. 21 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position - ---- --- --------- Joseph M. Guido 66 Chairman of the Board Sam DiGiralomo 57 President, CEO, Director Barton C. Theile 54 Executive Vice President, COO, Director Craig Stratton 49 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 2000 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 from 1961 to. 1999. 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. 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, Executive Vice President and COO 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. Mr. Stratton had served as Chief Financial Officer for Allstates Air Cargo, Inc. from November 1997. For the three years prior to joining Allstates, 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. ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS EXECUTIVE COMPENSATION Summary Compensation Table 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. 2000 311,082 27,540 108,600(1) Guido, 1999 317,821 92,500(2) 202,597(3) Chairman 1998 294,320 111,600(4) of the Board Sam 2000 208,000 27,540 214,500(6) 98,000(8) DiGiralomo, 1999 80,200(5) 143,253(6) 120,000(7) President, 1998 65,000(5) 26,486(6) CEO B. Theile, 2000 207,922 27,540 9,833(9) 16,500(8) COO, 1999 189,411 4,920(9) 20,000(7) Exec. VP 1998 152,328 Craig Stratton, 2000 110,734 6,500(8) CFO, 1999 100,826 8,000(7) Secretary, 1998 77,221 Treasurer ____________ (1) Rental income from leasing of Newark branch location and Forked River corporate office ($98,600), and proceeds of sale of personal automobile to the Company ($10,000) (2) Rental income from leasing of Newark branch location and Forked River corporate office (3) Proceeds from sale to Audiogenesis Systems, Inc. of one share Allstates Air Cargo, Inc. stock (4) 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) (5) Employed by Audiogenesis Systems, Inc. on part time basis at $65,000 per year (6) Commissions paid for consulting services in connection with site licensing agreements (7) Excess stock compensation valued at $.04 per share (8) Reimbursement for income taxes due the IRS in connection with excess stock compensation (9) Commission paid for management services to GTD Logistics, Inc. 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 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 12. 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: No. of Shares Title Name and Address and Percent of of Beneficial Owner Nature of of Class Beneficial Class(1) Ownership - ------- --------------------------- ------------- --------- Common Joseph M. Guido 18,500,000(2) 56.91% 4 Lakeside Drive South Forked River, NJ 08731 Common Sam DiGiralomo 5,000,000 15.38% 7 Doig Road, Suite 3 Wayne, NJ 07470 Common Barton C. Theile 500,000 1.54% 4 Lakeside Drive South Forked River, NJ 08731 Common Craig D. Stratton 200,000 0.62% 4 Lakeside Drive South Forked River, NJ 08731 All Officers and Directors as a Group 24,200,000 74.44% __________________ (1) Based upon 32,509,872 shares outstanding as of December 15, 2000. (2) Comprised of 18,250,000 shares owned by Joseph Guido and 250,000 shares owned by Teresa Guido, wife of Joseph Guido. ITEM 13. 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 --------- ---------- 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 $98,600 for the year ended September 30, 2000. 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. During fiscal 2000, a similar royalty agreement was made for its Minneapolis licensee location. Royalty payments to Mr. DiGiralomo for the year ended September 30, 2000 totaled $214,500. 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. In September 2000, the Company extended a personal loan of $200,000 to Sam DiGiralomo. The loan, which is backed by a promissory note, is payable after twenty four months, with quarterly interest payments at the Company's prevailing bank loan rate. The Company's legal counsel, Stephen M. Robinson, Esq., beneficially owns 1,200,000 shares of common stock. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following exhibits are filed pursuant to Item 601 of Regulation S-B. Exhibit Description No. 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 Registrant, filed as an exhibit to Registrant's Registration Statement on Form 10-SB, filed October 23, 1998 10.01* Echolocation Technology License Agreements, filed as an exhibit to Registrant's 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 Registrant's 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 Registrant's 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 Registrant's 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 Registrant's Registration Statement on Form 10-SB, filed October 1, 1999 27.01+ Financial Data Schedule __________________ * Filed previously, incorporated herein by reference +Filed herewith (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report. 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: December 28, 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 Joseph M. Guido Chairman of the Board of December 28, 2000 Directors By: /s/ Sam DiGiralomo Sam DiGiralomo President, CEO and December 28, 2000 Director By: /s/ Barton C. Theile Executive Vice President, Barton C. Theile COO and Director December 28, 2000 Secretary, Treasurer, and Chief Financial Officer By: /s/ Craig D. Stratton (Principal Financial Craig D. Stratton Officer and Principal December 28, 2000 Accounting Officer)