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, 2003
[ ] 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)
(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 [ ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act. YES | | NO |X|.
The number of shares of Common Stock outstanding as of December
22, 2003 was 32,509,872 shares.
At December 22, 2003, 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 in 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. Allstates is principally engaged in the business of
providing global freight forwarding and other transportation and
logistics services for its customers. Allstates is
headquartered in Forked River, New Jersey.
The freight forwarding business of Allstates was founded in
1961 by Joseph M. Guido, the Company's Chairman of the Board,
with its first terminal opening in Newark, New Jersey. The
Company provides domestic and international freight forwarding
services to over 1,700 customers utilizing ground
transportation, commercial air carriers, and ocean vessels.
Allstates supplements its freight forwarding services to include
truck brokerage, warehousing and distribution, and other
logistics services. The Company operates 21 branch offices
throughout the United States, and employs 98 people.
Allstates has agreements with domestic and international
strategic partners and a network of agents throughout the world,
and continues to pursue opportunities to forge additional
strategic alliances in order to increase its global market
share. Prior to the end of its September 30, 2000 fiscal year
end, Allstates discontinued freight operations at their United
Kingdom branch, opting instead to form a strategic alliance with
an established UK freight forwarding company to handle its
freight requirements in that area. Allstates has similar
alliance agreements with agents in the European, South American
and Far East markets.
Allstates neither owns nor operates any aircraft or ships.
By not owning or operating its own equipment, Allstates believes
it is able to provide more flexible delivery schedules and
shipment size. In addition, by eliminating the substantial
fixed expenses associated with the ownership of such equipment,
Allstates has been able to effect certain cost savings.
Marketing and Licensing
Allstates markets its services through a network of 21
domestic offices, its strategic alliances, and selected agents
throughout the world. Allstates is a party to several site
licensing agreements in which those licensees have contracted
with the Company to provide exclusive freight forwarding
services, including sales and operating functions, under the
Allstates name. Of the 21 branch locations, 12 are licensees
operations, while 9 are company owned and staffed operations.
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 employs 21 full time sales personnel operating from
the 9 company-owned offices.
Two separate divisions of Allstates are responsible for
certain specialized functions of the Company. GTD Logistics,
through its capacity as a licensed truck broker, arranges for
the procurement of exclusive truckloads. The other division,
Allstates Logistics, holds Ocean Transportation Intermediary
License No. 15364NF, and is responsible for the ocean freight
segment of Allstates.
Information Systems
A primary component of Allstates's business strategy is the
continued development of its advanced information systems.
Allstates has invested substantial management and financial
resources in the development of its information systems in an
effort to provide accurate and timely information to its
management and customers. Allstates continues to upgrade its
information systems. Highlights of the information system are:
. 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
. Accessible to customers via the Company's firewall-
protected web site to track shipments and collect POD
information.
. 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 supports transactions via EDI (Electronic Data
Interchange)
. System is flexible in customizing reports to meet customer
needs
. System is "bar-code" capable
. Qualified customers can create an airway bill file via the
Company web site, which is subsequently uploaded in to the
operating system for processing.
. 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 applications for inventory control provides the
Company with added benefits for its customers. Allstates also
owns its proprietary and customized computer software and
advanced hardware. Allstates's website is functional, providing
for cargo tracking, customer communication, and entry of house
airway bills to qualifying customers.
Allstates's major competitors nationwide are Federal
Express, BAX, EGL Inc., 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
1,700 accounts. Over the 42 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, AT&T, and Polaris.
Employees
As of December 12, 2003, the Company employed a total of 98
individuals. Allstates Air Cargo, Inc. and subsidiaries
accounted for 96 employees (of which 12 are part time),
including 50 in operations and customer service, 21 in sales,
marketing and related activities, and 25 in administration and
finance. The Audiogenesis Systems division has 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 2003, the maximum contribution
allowed by the Code was the lesser of 100% of an employees'
compensation, or $12,000. Participants who attained age 50
prior to the close of the plan year are eligible to make catch-
up contributions of an additional $2,000, after the maximum
contribution has been made. 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% vested 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, 2003.
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.
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
Allstates occupies 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 27,000 square feet. All such
branch locations are company leased properties or properties
leased by licensee owners. Terms for company leased properties
generally run from one to seven years and are scheduled to
expire between fiscal 2004 and fiscal 2008. The total rent
expense for company leased facilities was approximately $554,000
during fiscal 2003. 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, 2003
were:
Miami, Florida
Los Angeles, California
Kenilworth, New Jersey Dallas, Texas
St. Louis, Missouri Houston, Texas
Jacksonville, Florida Indianapolis, Indiana
Pittsburgh, Pennsylvania Minneapolis, Minnesota
Philadelphia, Pennsylvania Raleigh, North Carolina
Atlanta, Georgia San Francisco, California
Baltimore, Maryland San Diego, California
Boston, Massachusetts Wayne, New Jersey
Chicago, Illinois Orlando, Florida
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 leased office
space at the time. 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 conducted two additional sampling
events to confirm groundwater concentrations of benzene in
Monitoring Well 3 ("MW-3"). The sampling results indicated
that concentrations of benzene have sufficiently decreased
to allow case closure with the institution of a
Classification Exception Area ("CEA"). Counsel for
Allstates has confirmed with the New Jersey Department of
Environmental Protection ("DEP") that the sampling results
satisfactorily demonstrate a decreasing trend in benzene
concentrations. At the DEP's request, Carpenter prepared a
CEA proposal, which was submitted to the DEP on October 11,
2001. In the CEA proposal, Carpenter proposed no further
action for the groundwater. The DEP subsequently issued a
No Further Action ("NFA") letter for the soil and
groundwater. Pursuant to the NFA, Allstates was to seal the
monitoring wells at the site. The work was unable to be
completed due to site improvements installed by the current
property owner that rendered the monitoring wells
inaccessible. The property owner indicated conceptual
agreement to pay the additional costs necessary to access
the wells for abandonment, projected by Carpenter at
approximately $2,000. We are awaiting written confirmation
from the property owner that the costs are acceptable and
that the work may proceed.
The NFA also sets forth details of the CEA prepared for the
site that projected when remaining groundwater contaminants
will have fully degraded to meet DEP groundwater quality
standards. Since the NFA was issued, the DEP's technical
regulations were amended to require sampling at the end of
the CEA period to confirm that ground water quality
standards have been achieved. It is unclear whether DEP
will be enforcing this requirement retroactively to cases
such as Allstates where an NFA was issued prior to
promulgation of the regulations. Since the CEA period has
now expired, we are evaluating whether to collect a sample
prior to abandonment of the wells. Should these samples
confirm that contaminants have fully degraded, the CEA would
then be terminated. If groundwater contamination has not
degraded in accordance with the projections, the regulations
will require the submission of a biennial certification
conforming the effectiveness of the CEA. The biennial
certifications will focus primarily on a confirmation by
Allstates, based on inquiries made to local authorities,
that groundwater at the site is not being used. Pursuant to
the 1998 Agreement of Sale with Father Flanagan's Boys Home,
the current owner is to pay Allstates $3,000 per year for
any reporting or monitoring associated with an institutional
control, which includes a CEA. This payment is to continue
for so long as DEP requires the work or for 20 years,
whichever period is the shortest. We anticipate that this
will cover the cost of the reporting.
In March 1997, Allstates made claims against liability
insurance carriers for coverage. The Company's counsel
submitted invoices to the carrier in September 2003, and the
Company is awaiting the carriers' response.
In the matter of Allstates WorldCargo, Inc. v. Logistics
Management Resources, Inc. and Daniel Pixler (a/k/a Danny
Pixler), Superior Court of New Jersey, Law Division, Ocean
County, (Docket No. OCN-L-1822-01), in which, the Company
asserted a breach of contract claim seeking damages in the
amount of $702,477, plus interest and attorneys fees, the
parties reached a final settlement in January 2003. The
parties settled the action on the following terms:
Logistics Management Resources, Inc. ("LMRI") agreed to pay
the Company the total sum of $330,000, and (2) defendants
agreed to cause a third party (Trans Logistics, Inc. ("TLI")
to assign to the Company certain accounts receivable with a
face value of approximately $1,600,000, and to deliver to
the Company a warranty duly executed by TLI warranting,
among other things, that it was the sole owner of the
receivables being assigned. LMRI subsequently made the
required payments, and delivered the required assignment and
warranty. The actual value, and the collectability if any,
of the receivables is unknown.
The Company commenced an action entitled "Allstates
WorldCargo, Inc. and Joe Ruiz v. Exel North American
Logistics, Inc." in the Superior Court of New Jersey, Law
Division, Ocean County, and bearing Docket No. OCN-L-2853-
02. In that action, the Company sought a declaratory
judgment in connection with allegations that the defendant
made with respect to certain activities of the Company and
one of its employees. The defendant removed the action to
the United States District Court, District of New Jersey,
where it bore Civil Action No. 02-4730 (GEB). The defendant
also asserted a Counterclaim. Insofar as the Counterclaim
involved the Company, the defendant asserted claims of
misappropriation of trade secrets, tortuous interference
with business relations and contractual relations, unfair
competition, conspiracy to commit trade secret theft, and
conversion. The defendant sought unspecified damages,
injunctive relief, an accounting, and the imposition of a
constructive trust.
The Company vigorously denied the wrongdoing alleged in the
Counterclaim, and vigorously defended against that
Counterclaim. In January 2003, the action was settled by
the exchange of mutual releases, with all parties agreeing
to dismiss their respective claims.
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,
2003. 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 Financial Condition and
Results of Operations" contained herein.
YEAR ENDED SEPTEMBER 30,
(in thousands, except per share data)
1999 2000 2001 2002 2003
STATEMENT OF OPERATIONS DATA
Net sales $31,230 $33,213 $41,239 $36,403 $46,293
Income (loss) from operations 1,107 424 744 534 (326)
Income (loss) from continuing
operations 480 87 408 136 (582)
Net income (loss) 480 (62) 408 136 (582)
Basic net income (loss) per
common share $.01 $.00 $.01 $.00 ($.02)
Diluted net income (loss) per
common share $.01 $.00 $.01 $.00 ($.02)
Weighted average
Common shares outstanding
- - basic 32,510 32,510 32,510 32,510 32,510
Weighted average
Common shares outstanding
- - diluted 32,523 32,521 32,510 32,510 32,510
BALANCE SHEET DATA:
Working capital $783 $ 598 $1,316 $1,534 $1,050
Total assets 6,070 7,892 7,095 8,050 8,287
Liabilities - current 3,812 5,695 4,614 5,477 6,338
Liabilities - long term 2,564 2,625 2,497 2,453 2,412
Total stockholders' equity ( 306) (427) (16) 120 (462)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The public may read and copy any materials we have filed with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Information on the operation of the
Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. The SEC also maintains an internet site that contains
reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The
address of the internet site is http://www.sec.gov. The public
can also contact Mr. Craig Stratton at Allstates WorldCargo, Inc.,
4 Lakeside Drive South, Forked River, New Jersey, 08731, or through
the internet web address http://www.allstatesair.com.
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,
2003 2002 2001
---------------------------------
Revenues 100.0% 100.0% 100.0%
Cost of transportation 65.0 61.3 57.7
Gross profit 35.0 38.7 42.3
Selling, general and administrative
expenses 35.7 37.2 40.5
Operating income (0.7) 1.5 1.8
Net income/(loss) (1.3) 0.4% 1.0%
REVENUES
Fiscal 2003 vs. fiscal 2002
Revenues of the Company represent gross consolidated sales
less customer discounts. For the fiscal year ended September
30, 2003, total revenues increased by $9,890,000, or 27.2%, to
$46,293,000 compared to revenues earned in the previous fiscal
year ended September 30, 2002, reflecting higher freight
shipping volumes. Sales of domestic-routed freight increased by
approximately $6.9 million or 24.9%, to $34,862,000, while
international freight revenues increased by approximately $3.0
million or 34.8%, to $11,431,000.
The growth in revenues in the current fiscal year as
compared to the prior fiscal year is primarily a result of the
improvement in the U.S. economy in 2003, the effect of
additional sales personnel hired in the second half of fiscal
2002, and the full year effect of two company stations that were
opened during the third quarter of fiscal 2002. The addition of
a new licensee location during the second quarter of fiscal 2003
also contributed to the Company's increase in revenues. In
addition, Allstates truck brokerage operation, which in previous
years had exclusively provided logistical support for the
Company's freight forwarding operations, began providing
truckload service to selected customers in fiscal 2003,
accounting for approximately $950,000 in additional revenues.
The Company's largest customer accounted for 7.9% of
consolidated revenues in fiscal 2003. In November 2003, that
customer began to utilize an alternate carrier to provide
freight distribution services. Allstates continued to provide
warehousing and devanning services to that customer during the
quarter ending December 31, 2003, but expects to receive minimal
business thereafter. Included in total revenues is
approximately $1.8 million in billing to one customer for the
arrangement of international chartered aircraft. The Company
was asked to make these arrangements by its customer as an
emergency response to the backlog of ocean freight deliveries
that resulted from the lock out of West Coast ports during the
first quarter of fiscal 2003.
Fiscal 2002 vs. fiscal 2001
Total revenues for the fiscal year ended September 30, 2002
decreased in comparison to sales of the fiscal year ended
September 30, 2001 by $4.8 million, or 11.7%, to $36,403,000,
due to lower volume and weight of cargo shipped. The effect of
the lower shipping volumes were present in both domestic and
international revenues, with domestic sales decreasing by $2.4
million, or 7.9%, and international sales decreasing by $2.4
million, or 22.5% from the previous fiscal year. Domestic and
international revenues totaled $27,922,000 and $8,481,000,
respectively, in fiscal 2002.
The net reduction in revenues between the comparative
fiscal years was led by two significant factors. First, sales
from the comparative fiscal year ended September 30, 2001
included domestic and international revenues that were generated
from one customer that accounted for 13.3% of total sales for
that period. Effective October 1, 2001, that customer, in an
effort to minimize their operating costs, began utilizing a
larger alternate freight forwarder to service their
international import freight requirements. That action
effectively accounted for the overall reduction in international
revenues, as import sales to that customer amounted to
approximately $2,438,000 during the previous fiscal year ended
September 30, 2001. Secondly, domestic sales volume in fiscal
2001 included approximately $2.6 million in what was then new
business that was derived from the Company's service agreement
with an unrelated freight and warehouse services company. That
agreement was terminated in May 2001 pursuant to the sales of
the assets of that company to another unrelated company.
Fiscal 2002 sales volumes were adversely affected by the
events of September 11, 2001 as well. The increased level of
caution and uncertainty displayed by many businesses in the wake
of that event was also evident in many of our customers, and led
to lower revenues for the Company in the months following.
GROSS PROFIT
Fiscal 2003 vs. fiscal 2002
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. Cost of
sales as a percentage of revenues increased by 3.7 %, to 65.0 %,
for the fiscal year ended September 30, 2003 as compared to the
fiscal year ended September 30, 2002. The higher cost of sales
percentage reflects the addition of certain lower margin
customer accounts during the year, the low margin percentage
effect of the chartered airline service the Company provided in
October, 2002, and the growth of the Company's truck brokerage
business which operates at lower margins than freight forwarding
operations. In absolute terms, cost of sales increased by
approximately $7,776,000, or 34.9%, to $30,089,000 for the
fiscal year ended September 30, 2003 compared to the fiscal year
ended September 30, 2002, due to the higher sales volume. Gross
margins decreased to 35.0% of sales for fiscal 2003. Gross
profits increased by approximately $2,113,000, or 15.0%, to
$16,204,000 for fiscal 2003 versus fiscal 2002.
Fiscal 2002 vs. fiscal 2001
As a percentage of revenues, cost of sales increased by
3.6%, to 61.3%, for the fiscal year ended September 30, 2002 in
comparison to the fiscal year ended September 30, 2001. The
comparative percentage for fiscal 2001 was lower primarily due
to the effect of the business that was derived from the
Company's service agreement with an unrelated freight and
warehouse services company, for which there was no related cost
of sales on the warehousing portion of that billing. That
agreement, as previously indicated, was terminated in May 2001.
After discounting the effect of that business on the Company's
total transportation costs in fiscal 2001, the cost of sales
percentage increased by 1.0 % in fiscal 2002 in comparison to
fiscal 2001. In absolute terms, cost of sales decreased by
approximately $1,464,000 or 6.2%, to $22,313,000, during the
fiscal year ended September 30, 2002 in comparison to the fiscal
year ended September 30, 2001, reflecting the comparative change
in sales volume between those periods. Gross margins decreased
to 38.7% in fiscal 2002 from 42.3% in fiscal 2001. Gross profit
decreased by 19.3% to $14,090,000 in fiscal 2002 from
$17,462,000 in fiscal 2001.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Fiscal 2003 vs. fiscal 2002
Selling, general and administrative expenses include all
personnel costs, facilities costs, and licensee commissions.
Operating expenses decreased as a percentage of revenues for the
fiscal year ended September 30, 2003 by 1.5%, to 35.7%,
reflecting the increase in the Company's sales in relation to
fixed operating expenses. In absolute terms, SG&A expenses
increased in fiscal 2003 by $2,973,000 or 21.9%, to $16,529,000
compared to the previous fiscal year. Personnel expenses, which
include all employee compensation and benefit costs, increased
by approximately $919,000 over fiscal 2002 costs. This reflects
the increase in headcount during the second half of fiscal 2002
resulting from the opening of two company-owned stations in
Florida, while adding sales and operations staff in other
existing locations in an effort to bolster sales. During the
third quarter of fiscal 2003, Allstates reduced its headcount to
compensate for losses incurred in the first half of the fiscal
year.
Allstates pays commissions to licensees and independent
sales agents as compensation for generating profits for the
Company. Licensee commissions and royalties paid pursuant to
licensee agreements increased by approximately $1,497,000 for
the fiscal year ended September 30, 2003 in comparison to the
prior fiscal year, reflecting increased gross profits at certain
licensee operations. Allstates also has agreements with two
independent sales agents whereby the Company pays a percentage
of gross profits earned from revenues they generate, and which
accounted for approximately $144,000 in additional expense over
the previous fiscal year.
Facilities expenses increased by approximately $169,000 in
fiscal 2003 over fiscal 2002, primarily due to increased rental
costs related to the opening of the two Florida locations. One
of the two Florida locations provides warehousing services to
one of its customers. Per an agreement with that customer, the
station is guaranteed a minimum profit, which fully covers the
Company's cost of renting that warehouse space. Insurance
expense, including cargo and general liability, increased by
approximately $98,000 reflecting the increase in revenues and
payroll expense during the fiscal year, by which our premiums
are calculated. Automobile allowances increased by
approximately $73,000 during fiscal 2003, reflecting the
increase in saleperson headcount, offset in part by lower
depreciation expense as Allstates has been gradually disposing
its company owned automobile fleet in favor of paying an
allowance for the business use of personal cars. Bad debt
expense increased by approximately $60,000 in comparison to the
prior fiscal year, primarily reflecting the higher revenues.
Fiscal 2002 vs. fiscal 2001
SG&A expenses as a percentage of revenues were lower in
fiscal 2002 by 3.3% in comparison to fiscal 2001, decreasing to
37.2% from 40.5%, primarily reflecting comparatively lower
commissions expenses as a percent of revenues during the period.
Allstates paid commissions to salespeople, licensees and
independent agents, as well as a third party entity, as
compensation for generating profits to the Company. In absolute
terms, operating expenses decreased by $3,161,000, or 18.9% in
the fiscal year ended September 30, 2002 as compared to the
previous year, primarily reflecting lower commissions expense,
offset in part by higher personnel and facility related
expenses.
Licensee commissions and royalties paid pursuant to
licensee agreements decreased by $1,258,000 in fiscal 2002,
reflecting lower gross profits generated by certain licensee
operations as compared to the prior fiscal year. This was
significantly driven by the loss of the international portion of
business that was generated by a customer that had accounted for
13.3% of revenues in fiscal 2001. Additionally, during the
comparative fiscal year ended September 30, 2001, the Company
paid approximately $1,851,000 in commissions to an unrelated
freight and warehousing services company pursuant to an
agreement made between them and Allstates. That agreement was
terminated in May 2001. During the third quarter of fiscal
2002, Allstates signed an agreement with an independent sales
agent whereby the Company pays a percentage of gross profits
earned from revenues generated by the agent. Allstates paid
approximately $118,000 in agency commissions in fiscal 2002.
Personnel expenses were higher by approximately $69,000 in
the fiscal year ended September 30, 2002 compared to the fiscal
year ended September 30, 2001, led by a net increase in sales
salaries. During the third quarter of fiscal 2002, Allstates
opened and staffed two company-owned stations in Florida, where
there had been no presence in recent years, and also increased
sales staff in other existing locations. Salesperson headcount
increased to 26 at September 30, 2002 versus 16 at September 30,
2001. Offsetting the increase in sales salaries is the effect
of cost reducing steps that the Company took, beginning in the
fourth quarter of fiscal 2001 through the second quarter of
fiscal 2002. In response to lower sales volumes during that
period, Allstates reduced headcount at two locations,
consolidated the operations of one of its offices with another
station, and eliminated three positions within the corporate
staff.
Operating (loss)/income
Income from operations decreased during the fiscal year
ended September 30, 2003 by approximately $859,000, to a loss of
($326,000), in comparison to the fiscal year ended September 30,
2002, due to higher operating expenses incurred. The operating
margin decreased by 2.2% during fiscal year 2003.
Income from operations decreased during the fiscal year
ended September 30, 2002 by approximately $210,000, to $534,000,
in comparison to the fiscal year ended September 30, 2001 for
the reasons indicated. Operating margins decreased by 0.3%
during the fiscal year 2002.
Interest expense
Allstate's interest expense obligation consists primarily
of 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, as well as on
borrowings against the line of credit established with the bank.
Interest on the note was approximately $170,000 and $171,000
during fiscal 2003 and fiscal 2002, respectively.
Interest expense during the fiscal year ended September 30,
2003 was consistent with the previous fiscal year, totaling
approximately $226,000. While the average borrowing rate of
interest during fiscal 2003 was lower than fiscal 2002, the
average outstanding borrowings during fiscal 2003 were higher
than the previous fiscal year. Interest expense decreased by
approximately $19,000 during the fiscal year ended September 30,
2002 as compared to the prior fiscal year, reflecting a lower
borrowing rate of interest on the Company's line of credit,
offset by higher average outstanding borrowings.
Loss on Sale of Assets
Allstates realized a loss on the sale of assets in fiscal
2003 of approximately ($27,000), versus a loss of approximately
($6,000) in fiscal 2002, reflecting the sale of company owned
automobiles. In comparison to fiscal 2002, during the fiscal
year ended September 30, 2001 Allstates realized a gain on the
sale of property that the Company co-owned with the Chairman,
Joseph Guido. The property was sold on January 11, 2001 and
the proceeds of the sale were allocated between Mr. Guido and
Allstates WorldCargo. The Company's portion of the net proceeds
after closing costs was $184,005.98, of which a gain of
approximately $153,000 was realized. The total gain on the sale
of assets for the year ended September 30, 2001 was approximately
$157,000.
Other expense
During the quarter ended March 31, 2003, the Company
incurred a charge of approximately $372,000 for the partial
write-off of a third party loan. Per an agreement with that
party, Allstates agreed to accept $330,000 as full payment on
the $702,000 loan receivable.
Net income/(loss)
The net income before taxes decreased by approximately
$1,263,000, to a net loss of ($950,000) for the fiscal year
ended September 30, 2003, in comparison to the prior fiscal year
ended September 30, 2002. The Company recorded a tax benefit of
$368,000 for fiscal 2003. The net loss for fiscal 2003 was
($582,000) versus net income of $136,000 in the previous fiscal
year.
Income before taxes decreased by $383,000, to $313,000 for
the fiscal year ended September 30, 2002, as compared to the
previous fiscal year. The provision for income taxes was
approximately $177,000 for fiscal 2002. Net income totaled
$136,000 for the fiscal year ended September 30, 2002 versus
$408,000 for the fiscal year ended September 30, 2001.
Liquidity and Capital Resources
Net cash provided by operating activities was approximately
$749,000 for the fiscal year ended September 30, 2003 compared
to net cash used for operations of approximately $914,000 for
the fiscal year ended September 30, 2002. In fiscal 2003, cash
was primarily provided by the receipt of loan funds due from a
third party, a refund of federal tax payments, and an increase
in accounts payable, offset by an increase in accounts
receivable. In fiscal 2002, cash was primarily used to finance
the increase in accounts receivable, offset by the net income of
the Company as well as the increase in accounts payable.
At September 30, 2003, the Company had cash and cash
equivalents of $517,000 and net working capital of $1,050,000,
compared with cash and cash equivalents of $173,000 and net
working capital of $1,534,000 respectively, at September 30,
2002. The decrease in working capital at September 30, 2003 in
comparison to September 30, 2002 is primarily attributable to
the Company's net loss during the fiscal year, which includes
the partial write-off of a third party loan.
The Company's investing activities were primarily comprised
of expenditures for capital equipment, primarily representing
purchases of computer hardware and software. For the fiscal year
ended September 30, 2003, capital expenditures totaled
approximately $106,000. Proceeds from the sale of fixed assets,
primarily of company-owned automobiles, amounted to
approximately $37,000. For the fiscal year ended September 30,
2002, Allstates spent approximately $136,000 on capital
expenditures, and receiving approximately $37,000 in proceeds
from the sale of company automobiles. Prior to the end of fiscal
2000, Allstates extended a $200,000 loan to a shareholder and
officer of the Company. The loan was paid in full to the
Company in September 2002 as per the loan agreement.
The Company has a commercial line of credit with a bank,
pursuant to which the Company may borrow up to $2,000,000, 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 (4.00% at September
30, 2003). The interest rate is predicated on the Company
maintaining an average compensating account balance in a non-
interest bearing account equal to at least $230,000. If such
average compensating balances are not maintained, the interest
rate will increase by 1% over the rate currently accruing.
Outstanding borrowings on the line of credit at September 30,
2003 and 2002 were $1,150,000 and $1,400,000, respectively.
In September, 2000, Allstates extended an operating loan to
an unrelated freight and warehouse services company, Q Logistics
Solutions, Inc. ("QLS"), as part of an agreement that the
Company entered into to provide customer invoicing and vendor
disbursement services. The loan was secured by a $750,000
promissory note signed by the borrower, and for which a Form UCC-
1 financing statement was filed. In February 2001, QLS filed
for Chapter 11 protection under the U.S. bankruptcy laws.
Pursuant to the bankruptcy proceedings, another company,
unrelated to Allstates WorldCargo, Inc., purchased the assets of
QLS in May 2001. Allstates had outstanding loan advances of
approximately $702,000 to QLS prior to the purchase. As a
contingency of that purchase, Allstates entered in to an
agreement with the other company whereby Allstates assigned the
Form UCC-1 filing to them in exchange for their promissory note,
secured by a personal guarantee made by an officer of that
company, to pay the full loan amount of approximately $702,000,
plus 9% interest over six months, beginning in April 2001. The
other company subsequently defaulted on the loan after having
made no payments to Allstates. The Company filed suit against
the other company and the guarantor for breach of contract, and
subsequently the parties signed a Stipulation of Settlement
whereby Allstates received a judgement against the other company
for the full amount plus interest and attorney's fees. An
$80,000 payment in lieu of the personal guarantee was placed in
escrow pending legal review of documentation supplied to the
Company. In January, 2003, the parties came to an agreement
whereby the other company would pay Allstates a total of
$330,000 in full settlement. Payments were scheduled to be made
over four equal monthly installments at $82,500 per month,
including the release of the escrow funds. All payments were
received by the Company as per the schedule.
Forward Looking Statements
The Company is making this statement in order to satisfy the
"safe harbor" provisions contained in the Private Securities
Litigation Reform Act of 1995. 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 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;
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
For the Fiscal Years Ended September 30, 2003 and 2002
CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F2 -F3
Consolidated Statements of Income (Loss) F4
Consolidated Statements of Earnings Per Share F5
Consolidated Statements of Stockholders' Equity(Deficit) F6
Consolidated Statements of Cash Flows F7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F8 - F17
INDEPENDENT AUDITORS' 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 (a
corporation), as of September 30, 2003 and 2002, and the
related consolidated statements of net income (loss),
earnings per share, stockholders' equity (deficit), and cash
flows for the 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 audits.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
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, 2003 and 2002,
and the results of their operations and cash flows for the
years then ended in conformity with accounting principles
generally accepted in the United States of America.
Toms River, New Jersey
December 16, 2003
F1
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2003 and 2002
Assets
2003 2002
---- ----
Current Assets
Cash and cash equivalents $ 516,639 $ 173,277
Accounts Receivable, net of allowance for doubtful
accounts of $229,364 and $185,640, respectively 6,226,209 5,752,732
Inventories 28,644 24,212
Prepaid Expenses and Other Assets 126,547 978,914
Deferred Income Taxes - Current Portion 490,000 81,999
------------ -----------
Total Current Assets 7,388,039 7,011,134
------------ -----------
PROPERTY, PLANT AND EQUIPMENT,
net of accumulated depreciation 325,562 468,211
------------ -----------
INTANTIBLE AND OTHER ASSETS
Deposits 38,571 34,877
Goodwill, including acquisition costs,
net of accumulated amortization 535,108 536,273
------------ -----------
Total Other Assets 573,679 571,150
------------ -----------
Total Assets $ 8,287,280 $ 8,050,495
============ ============
See accompanying notes and independent auditors' report
F2
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2003 and 2002
Liabilities and Stockholders' Equity (Deficit)
2003 2002
Current Liabilities ---- ----
Accounts Payable $ 4,336,623 $ 3,150,565
Accrued Expenses 823,029 846,173
Short-Term Bank Borrowings 1,149,500 1,400,000
Current Portion of Notes Payable 28,638 80,720
---------- ---------
Total Current Liabilities 6,337,988 5,477,458
---------- ---------
LONG TERM LIABILITIES
Deferred Tax Liability - Non-current portion 25,000 37,000
Long-Term Portion of Notes Payable 2,386,730 2,416,184
---------- ---------
Total Long-Term Liabilities 2,411,730 2,453,184
---------- ---------
Total Liabilities 8,749,718 7,930,642
---------- ---------
STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock, $.0001 par value, 50,000,000 shares
authorized, 32,509,872 shares issued
and outstanding 3,251 3,251
Retained Earnings (Deficit) (465,689) 116,602
---------- ---------
Total Stockholders' Equity (Deficit) (462,438) 119,853
---------- ---------
Total Liabilities and Stockholders' Equity (Deficit) $ 8,287,280 $ 8,050,495
========== =========
See accompanying notes and independent auditors' report
F3
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
For the Fiscal Years Ended September 30, 2003 and 2002
2003 2002
---- ----
NET SALES $ 46,293,052 $ 36,403,360
COST OF SALES 30,089,183 22,312,966
------------ ------------
Gross Profit 16,203,869 14,090,394
OPERATING EXPENSES
Selling, General and Administrative 16,529,442 13,556,680
------------ ------------
Income from Operations (325,573) 533,714
------------ ------------
OTHER INCOME (EXPENSE)
Interest Income 613 10,403
Interest Expense (226,714) (226,322)
Gain on Sale of Assets ( 26,534) ( 6,133)
Other Income (371,916) 1,506
------------ ------------
Total Other Income (Expense) (624,551) (220,546)
------------ ------------
Income (Loss) Before Tax Provision (950,124) 313,168
Provision for Income Taxes (367,833) 177,195
------------ ------------
Net Income Applicable to Common Shareholders $ (582,291) 135,973
============ ============
See accompanying notes and independent auditors' report
F4
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings Per Share
For the Fiscal Years Ended September 30, 2003 and 2002
2003 2002
---- ----
EARNINGS PER SHARE - BASIC
Net Income (Loss) Applicable to Common Shareholders $ ( 582,291) 135,973
Per Common Share - Basic $ ( 0.02) $ 0.00
============ ============
Shares Used in Per Share Calculation - Basic 32,509,872 32,509,872
============ ============
Earnings Per Share - Diluted
Net Income (Loss) Applicable to Common Shareholders $ ( 582,291) 135,973
Per common share - diluted $ ( 0.02) $ 0.00
============ ============
Shares Used in Per Share Calculation - Diluted 32,509,872 32,509,872
============ ============
See accompanying notes and independent auditors' report
F5
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the Fiscal Years Ended September 30, 2003 and 2002
Common Stock
Other Retained Total
Number of Comprehensive Earnings Stockholders'
Shares Par Value Income (Loss) (Deficit) Equity (Deficit)
--------- --------- ------------- ---------- ----------------
Balance at
September 30, 2001 32,509,872 $3,251 $ - $ ( 19,371) $( 16,120)
Consolidated net gain
for the fiscal year
ended September 30, 2002 135,973 135,973
---------- ------- ------------ ---------- -------------
Balance at
September 30, 2002 32,509,872 $3,251 $ - $ 116,602 $ 119,853
Consolidated net loss
for the fiscal year
ended September 30, 2003 (582,291) ( 582,291)
---------- ------- ------------ ---------- -------------
Balance at
September 30, 2003 32,509,872 $3,251 $ - $ (465,689) $( 462,438)
========== ======= ============ =========== =============
See accompanying notes and independent auditors' report
F6
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Fiscal Years Ended September 30, 2003 and 2002
2003 2002
Cash Flows From Operating Activities: ---- -----
Net Income (loss) Applicable to Common Shareholders $ (582,291)$ 135,973
Adjustments to reconcile net income (loss) applicable to
common shareholders to net cash provided
by operating activities:
Depreciation 185,728 220,568
Amortization 1,166 4,664
Provision for bad debts 182,379 122,040
Loss on Sale of Equipment 26,534 6,133
(Increase) Decrease in:
Accounts Receivable (655,856)(1,710,340)
Inventories ( 4,432) ( 533)
Prepaid Expenses and Other Assets 852,366 (157,372)
Deferred Income Taxes (420,001) 69,000
Increase (Decrease) in:
Accounts Payable 1,186,058 588,304
Accrued Expenses ( 23,146) (170,095)
Taxes Payable - ( 22,116)
---------- ---------
Net Cash Provided From (Used by) Operating Activities 748,505 (913,774)
---------- ---------
Cash Flows From Investing Activities:
Purchase of Equipment (106,344) (136,007)
Proceeds from Sale of Equipment 36,732 36,503
Loans to shareholders - 200,000
Deposits ( 3,693) ( 6,046)
---------- ---------
Net Cash Provided from Investing Activities ( 73,305) 94,450
---------- ---------
Cash Flows From Financing Activities:
New borrowings:
Short-Term 999,500 500,000
Long-Term
Debt reduction:
Short-Term (1,250,000) -
Long-Term ( 81,338) (131,324)
---------- ---------
Net Cash Provided From (Used by) Financing Activities ( 331,838) 368,676
---------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 343,362 (450,648)
Currency Translation Adjustments -
Cash and Cash Equivalents, Beginning of Year 173,277 623,925
---------- ---------
Cash and Cash Equivalents, End of Year $ 516,639 173,277
========== =========
See accompanying notes and independent auditors' report
F7
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
Nature of Operations
On August 24, 1999, Audiogenesis Systems, Inc.
(Audiogenesis), entered into a reverse acquisition with
Allstates Air Cargo, Inc. and its subsidiaries
(Allstates). On August 24, 1999, Allstates Air Cargo,
Inc. became a wholly owned subsidiary of Audiogenesis.
On November 4, 1999, Audiogenesis Systems, Inc. filed a
Certificate of Amendment to the Certificate of
Incorporation, officially changing its name to
Allstates WorldCargo, Inc. (WorldCargo). As a result
of this transaction, the sole shareholder of Allstates
Air Cargo, Inc. became a 55.37% shareholder of
WorldCargo. Management has elected to utilize the new
name (Allstates WorldCargo, Inc. and Subsidiaries) for
purposes of these financial statements. The entities
that are included in these consolidated financial
statements are as follows:
Allstates WorldCargo, Inc. (formerly Audiogenesis
Systems, Inc.) - WorldCargo 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
Technologies Systems, Inc. is a wholly owned subsidiary
of WorldCargo. 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 Air Cargo, Inc.
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 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. owned
100% of Allstates Allcargo (UK), Ltd., a corporation
organized under the laws of England prior to the
dissolution of Allstates Allcargo (UK), Ltd. during the
year ended September 30, 2000. All appropriate foreign
currency translation adjustments have been made for
purposes of these financial statements.
Allstates Logistics, Inc. - Allstates Logistics, Inc.
is also a wholly owned subsidiary of Allstates Air
Cargo, Inc. Allstates Logistics was incorporated in
the State of New Jersey in December 1997, and provides
ocean freight services to its customers.
GTD Logistics, Inc. - GTD Logistics, Inc. was
incorporated in the State of New Jersey on October 27,
1998. GTD Logistics is a wholly owned subsidiary of
Allstates Air Cargo, Inc. GTD Logistics is also in the
business of freight forwarding.
F-8
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS (Continued)
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 WorldCargo.
Reverse Acquisition
For purposes of these consolidated financial
statements, the purchase of Allstates Air Cargo, Inc.
by Allstates WorldCargo, 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
For purposes of the accompanying consolidated financial
statements, Allstates Air Cargo, Inc. is considered the
accounting "Parent" company and Allstates WorldCargo,
Inc. is considered a subsidiary. Therefore, these
consolidated financial statements include the combined
assets and liabilities of Allstates Air Cargo, Inc. and
its subsidiaries as of September 30, 2003 and 2002.
The statements of income (loss) include the income and
expenses of Allstates Air Cargo, Inc. and its
subsidiaries for the years ended September 30, 2003 and
2002. All material intercompany payables, receivables,
revenues and expenses have been eliminated for purposes
of this consolidation.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles
generally accepted in the United States of America
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 years ended September 30,
2003 and 2002, 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 consolidated statements 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 Consolidated 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.
F-9
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Inventories
For both financial reporting and income tax purposes,
inventory is stated on the cost basis. Cost is
determined using the first-in, first-out method.
Depreciation
Property, plant and equipment consist principally of
building and improvements, vehicles, computers and
software, office equipment, and furniture and fixtures
which 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 statements of income (loss).
Depreciation expense for the years ended September 30,
2003 and 2002 was $185,728 and $220,568, respectively.
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.
Advertising
The Company expenses advertising costs as they are
incurred. Advertising expenses for the years ended
September 30, 2003 and 2002 were $28,121 and $19,544,
respectively.
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
The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS No. 128)
which 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. EPS is calculated by
dividing net income by the weighted-average number of
outstanding shares of Common Stock for each year.
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, 2003
and 2002 was $182,379 and $122,040, respectively.
F-10
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized by major
classifications as follows:
2003 2002
Leasehold
Equipment $ 48,062 $ 47,015
Vehicles 315,789 517,707
Equipment and
Software 857,239 791,303
Furniture and
Fixtures 47,542 47,542
---------- ---------
1,268,632 1,403,657
Less Accumulated
Depreciation 943,070 935,446
---------- ---------
$ 352,562 $ 468,211
========== =========
NOTE 4 - AMORTIZATION OF GOODWILL AND ACQUISITION COSTS
Commencing with the fiscal year beginning October 1,
2001, the Company implemented Statement of Financial
Accounting Standards Statement No. 142, "Accounting for
Goodwill and Intangible Assets", which no longer allows
for the amortization of goodwill. The new statement
requires the Company to conduct an annual goodwill
impairment test and write off any decrease in the fair
value of the goodwill in the period of such declined
value. Pursuant to the Company's impairment tests
conducted for the years ended September 30, 2003 and
2002, no write off of the carrying value is deemed
necessary.
Effective January 1, 2003, the Company ceased
amortizing the costs associated with the acquisition of
Audiogenesis by Allstates and will include such costs
in its annual goodwill impairment test as discussed
above. Amortization expense for the years ended
September 30, 2003 and 2002 were $1,166 and $4,664,
respectively.
F-11
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
NOTE 5 - LONG-TERM DEBT
The Company's notes payable balance at September 30,
2003 and 2002 consist of the following:
2003 2002
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. $2,411,730 $2,436,730
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 to $843 with
interest ranging
from 0.90% to 3.90%. These loans
are secured
by the vehicles to which they
relate. - 30,716
Notes Payable to Fleet 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. 3,836 29,458
--------- ---------
2,415,566 2,496,904
Less: Current Portion 28,836 80,720
----------- ----------
$2,386,730 $2,416,184
=========== ===========
Future maturities for long-term debt as of September
30, 2003 is as follows:
For the fiscal years ended September 30, 2004 26,836
2005 25,000
2006 25,000
2007 25,000
2008 25,000
Thereafter 2,286,730
_________
Total $2,415,566
=========
F-12
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
NOTE 6 - LINE OF CREDIT
Allstates Air Cargo, Inc. has a $2,000,000 line of
credit agreement with Sun National Bank, which expires
February 28, 2004. Interest on outstanding borrowings
currently accrues at the Wall Street Journal's (WSJ)
prime rate of interest per annum (4. % as of September
30, 2003). The interest rate is predicated upon the Company
maintaining a compensating account balance in a non-
interest bearing account equal to at least $230,000.
If, at any time, the Company fails to maintain the
compensating balance, the interest rate will increase by
1% over the WSJ's prime rate at the time of failure.
The balance outstanding on the line of credit as of
September 30, 2003 and 2002 was $1,149,500 and $1,400,000,
respectively.
Loan collateral includes the Company's accounts
receivable and the unlimited, unconditional guarantees
of Joseph Guido, Teresa Guido and Allstates Allcargo
(US), Inc.
NOTE 7 - PROVISION FOR INCOME TAXES
A reconciliation of income tax at the statutory rate to
the Company's effective rate is as follows:
2003 2002
---- ----
Expected Federal
statutory rate 0.00% 34.000%
Expected State statutory
rates (average) 8.893% 8.893%
------- -------
Total expected 8.893% 42.893%
statutory rate
Miscellaneous Book to Tax
Adjustments -2.253% -8.344%
Deferred income tax
expense (benefit):
Federal -35.040% 17.186%
State -10.310% 4.847%
------- -------
Income Tax Expense (Benefit) -
Effective Tax Rate -38.710% 56.582%
======= ========
The Company's provision for income taxes as of
September 30, 2003 and 2002 consist of the following:
2003 2002
---- ----
Current Income Tax Expense
Federal $ - $ 50,775
State 62,980 57,420
------- -------
Total - Current 62,980 108,195
------- -------
Deferred Income Tax (Benefit) Expense
Federal (332,901) 53,318
State (97,912) 15,682
------ ------
Total - Deferred (430,813) 69,000
------ -------
TOTALS $(367,833) $177,195
======== =======
F-13
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
NOTE 7 - PROVISION FOR INCOME TAXES (Continued)
The tax effect of temporary differences that make up
the significant components of the deferred tax asset
for financial reporting purposes at September 30, 2003
and 2002 are as follows:
2003 2002
---- ----
Deferred Tax Assets
--------------------
Accounts Receivable $ 101,000 $ 81,999
Net operating loss 389,000 -
-------- --------
Totals $ 490,000 $ 81,999
------ ======== ========
Deferred Tax Liabilities
------------------------
Depreciable and
amortizable assets $ 25,000 $ 37,000
======== ========
At September 30, 2003 and 2002, the Company has a
future income tax benefit for net write offs of its
investment account in one of its Subsidiaries
(Allstates Allcargo (U.S.) Inc. The estimated future
income tax benefit of this transaction is approximately
$127,000. For financial statement purposes, a 100%
complete valuation allowance has been recorded by
management in the amount of $127,000 as of September
30, 2003 and 2002, and therefore, this future estimated
tax benefit is not reflected in these financial
statements.
NOTE 8 - NET OPERATING LOSS CARRYFORWARD
Allstates WorldCargo, Inc. (formerly known as
Audiogenesis System, Inc.) generated net operating
losses prior to its acquisition of Allstates Air Cargo,
Inc. As a result of the reverse acquisition, the
ownership structure of Worldcargo changed as of August
24, 1999; thereby limiting and reducing the future
utilization of the Worldcargo 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 WorldCargo
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.
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. For tax purposes only, Allstates Allcargo
US Inc. will treat the foreign subsidiary Allstates
Allcargo (UK), LTD. as a disregarded entity and not as
a subsidiary. Therefore, the tax provisions included in
these consolidated financial statements utilize the
operating loss for the fiscal year 2001 incurred by
Allstates Allcargo (UK), Ltd. in calculating the
Federal tax liability. There are no gains or losses in
fiscal year 2002 since the foreign entity, Allstates
Allcargo (UK), LTD., was dissolved.
F-14
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
NOTE 9 - 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 100% of an
employees' qualified compensation or $12,000 and
$11,000 for the calendar years ended 2003 and 2002,
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. Contributions to the plan for the years ended
September 30, 2003 and 2002 totaled $31,378 and
$34,234, respectively. 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, 2003 and 2002.
NOTE 10 - RELATED PARTY TRANSACTIONS
Allstates Air Cargo, Inc. leases office space located
in Forked River, New Jersey from a majority stockholder
of the Company. Rent expense under these leases
totaled $81,600 and $81,600 for the years ended
September 30, 2003 and 2002, respectively.
The Company has entered into royalty agreements for
selected 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 expense for the
years ended September 30, 2003 and 2002 totaled
$431,789 and $319,595, respectively.
The Company entered into Employment Agreements with
four of the Company's stockholders. The Employment
Agreements are effective through December 31, 2004.
The following is a summary of the terms of these
agreements:
Annual Stock
Position Salary Bonus Options
-------- -------- ------ --------
Chairman of the $311,818 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 $206,316 3% of fiscal Yes
President/ year increase
Chief Operating in net profits
Officer
Chief Financial $129,039 Discretionary Yes
Officer
NOTE 11 - STOCK OPTION PLAN
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". As of September 30, 2003, no stock
options have been issued.
F-15
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
NOTE 12 - DESCRIPTION OF LEASING ARRANGEMENTS
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 it's 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.
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,
2003:
Years Ending
September 30,
--------------------
2004 533,979
2005 477,512
2006 315,478
2007 272,988
2008 157,165
Thereafter 27,200
--------
Total $1,784,322
==========
Rent expense under operating leases for the years ended
September 30, 2003 and 2002 was $554,321 and $462,284
respectively.
The Company sublets office space and has recorded $0
and $6,300 of rental income for the years ended
September 30, 2003 and 2002, respectively.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for: 2003 2002
-------------- ----- -----
Income Taxes $115,091 $259,194
======== ========
Interest $226,714 $226,322
======== ========
NOTE 14 - LITIGATION
Allstates Worldcargo, Inc. v. Logistics Management
Resources, Inc. and Daniel Pixler
Q Logistic Solutions, Inc. (Q Logistics), an unrelated
third party, borrowed $702,469 from Worldcargo during
the fiscal year ended September 30, 2001,
collateralized by Q Logistics accounts receivable to be
repaid from the collections of such accounts
receivable. Worldcargo filed a Form UCC-1 financing
statement protecting its interest in the balance owed
from Q Logistics. In February 2001, Q Logisitics filed
for Chapter 11 protection under U.S. bankruptcy laws.
Pursuant to the bankruptcy proceedings, another
unrelated third party, Logistics Management Resources,
Inc. (LMRI) purchased the assets of Q Logistics in May
2001. As a contingency of that purchase, Worldcargo
entered in to an agreement with the LMRI whereby
Allstates assigned the Form UCC-1 filing to them in
exchange for their promissory note, secured by a
personal guarantee made by an officer of LMRI (Daniel
Pixler), to pay the full loan amount totaling $702,469
plus interest over six months, beginning in April 2001.
LMRI defaulted on the loan and has made no payments to
date. Worldcargo brought action against LMRI asserting
breach of contract.
F-16
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003 and 2002
NOTE 14 - LITIGATION (Continued)
In January 2003, the parties settled the action on the
following terms: LMRI agreed to pay the Company the
total sum of $330,000, and the defendants agreed to
cause a third party, Trans Logistics, Inc. ("TLI") to
assign to the Company certain accounts receivable with
a face value of approximately $1,600,000, and to
deliver to the Company a warranty duly executed by TLI
warranting, among other things, that it was the sole
owner of the receivables being assigned. LMRI
subsequently made the required payments, and delivered
the required assignment and warranty. The actual
value, and the collectability, if any, of the
receivables is unknown.
NOTE 15 - BREACH OF LOAN COVENANT
The line of credit agreement with Sun National Bank contains
a covenant pertaining to maintenance of a Debt Service Coverage
Ratio. At September 30, 2003, the Company was in breach of the
Debt Service Coverage Ratio covenant. Under the terms of the
agreement, the bank may call the loan if the Company is in
violation of any restrictive covenant. As of December 16, 2003,
the bank has not waived the covenant.
F-17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
Joseph M. Guido 69 Chairman of the Board
Sam DiGiralomo 60 President, CEO, Director
Barton C. Theile 57 Executive Vice President, COO,
Director
Craig Stratton 52 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 2003 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 August 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. Prior to such acquisition, Mr. Stratton
served as Chief Financial Officer for Allstates Air Cargo, Inc.
since November 1997. Before joining Allstates, for three
years, Mr. Stratton held the position of Corporate Controller
for Programmer's Paradise, Inc. a cataloger and distributor of
technical software. From 1990 through 1994, he was Controller
for Baronet Corporation, an importer and distributor of leather
goods accessories. From 1981 through 1990, he was employed by
the finance department of Contel IPC, a specialty telephone
systems manufacturer and service provider, where he held various
positions of increasing responsibility in corporate accounting,
including an appointment to Assistant Controller in 1987. In
1973, Mr. Stratton received his B.S. in accounting, and in 1980
he earned his MBA. Mr. Stratton has been a CPA since 1986.
Audit Committee and Code of Ethics
- ----------------------------------
The Company does not presently have an audit committee, nor a Code
of Ethics for its principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, because the Company is not a listed
company, and therefore is not required to do so.
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. 2003 311,818 81,600(1)
Guido, 2002 311,818 81,600(1)
Chairman 2001 311,818 87,600(2)
of the
Board
Sam 2003 208,000 413,864(3)
DiGiralomo, 2002 208,000 319,595(3)
President, 2001 208,000 405,433(3)
CEO
B. Theile, 2003 206,316 9,271(4)
COO, 2002 207,922 4,188(5)
Exec. VP 2001 207,922 19,273(5)
Craig
Stratton, 2003 129,039 7,800(6)
CFO, 2002 125,266 5,850(6)
Secretary, 2001 120,263
Treasurer
____________
(1) Rental income from leasing of Forked River corporate office
(2) Rental income from leasing of Newark branch location and
Forked River corporate office
(3) Royalties paid in connection with site licensing agreements
(4) Car allowance for use of personal auto ($7,800) and
commission paid for management services to GTD Logistics, Inc.
($1,471)
(5) Commission paid for management services to GTD Logistics,
Inc.
(6) Car allowance for use of personal auto
On August 24, 1999, the Company entered into Employment
Agreements with three of the Company's stockholders, and in
2001, entered into an agreement with a fourth stockholder. The
Employment Agreements are effective for the term beginning with
inception 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 $311,818 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 $206,316 3% of fiscal year
Increase in net profits
Craig D. Stratton,
Chief Financial Officer $140,000 At the discretion of
the Board of Directors
Under the terms of their respective employment agreements, each
individual has 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 December 20, 2003 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 4,850,000 14.92%
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 0.61%
4 Lakeside Drive South
Forked River, NJ 08731
All Officers and Directors as a Group 24,050,000 73.98%
__________________
(1) Based upon 32,509,872 shares outstanding as of December
22, 2003.
(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 Company's $2,000,000 line of credit, which expires
February 28, 2004, is personally guaranteed by Joseph M. Guido,
Chairman of the Board of the Company, and Teresa Guido, his
wife.
The Company leased real estate in one location from Joseph
M. Guido during Fiscal 2003. Rent expense under this lease
totaled $81,600 for the year ended September 30, 2003. The
Company believes that this lease is 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. Similar royalty
agreements have since been executed which encompass its
Minneapolis, San Francisco, Dallas, Indianapolis, Philadelphia,
Orlando and Boston licensee locations. Royalty payments to Mr.
DiGiralomo for the year ended September 30, 2003 totaled
$413,864.
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 Di Giralomo. The loan, which was made pursuant
to a promissory note, was payable after twenty four months, with
quarterly interest payments at the Company's prevailing bank
loan rate. In September 2002, the loan was paid in full to the
Company.
The Company's former legal counsel, Stephen M. Robinson,
Esq., beneficially owns 1,200,000 shares of common stock. Mr.
Robinson retired from practice in July, 2003.
ITEM 13. 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* Echlocation 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
11.01+ Statement re: Computation of Earnings per Share
21.01* List of Subsidiaries of Registrant, filed as an
exhibit to Registrant's Registration Statement on
Form 10-SB, filed October 1, 1999
31.1 Certification of Registrant's Chief Executive Officer, Sam
DiGiralomo, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Registrant's Chief Financial Officer,
Craig D. Stratton, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Registrant's Chief Executive Officer,
Sam DiGiralomo, pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of the Registrant's Chief Financial Officer,
Craig D. Stratton, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
__________________
* 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: _____________________________________
Sam DiGiralomo, President and CEO
DATED: December 29,2003
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:
Joseph M. Guido Chairman of the Board of December
Directors 29,2003
By:
Sam DiGiralomo President, CEO and December
Director 29,2003
By: Executive Vice President,
Barton C. Theile COO and Director December
29,2003
Secretary, Treasurer, and
Chief Financial Officer
By: (Principal Financial
Craig D. Stratton Officer and Principal December
Accounting Officer) 29,2003