10-K/A 1 awc10ka-093005.txt ALLSTATES WORLDCARGO, INC. FORM 10-K/A U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Form 10-K/A (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, 2005 [ ] 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 Jurisdiction of (I.R.S. Identification Incorporation or Organization) Number) 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 Rile 12b-2 of the Act. Yes [ ] No [x] The number of shares of Common Stock outstanding as of December 29, 2005 was 32,509,872 shares. At December 29, 2005, 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 opened its first terminal in Newark, New Jersey in 1961. Allstates 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. Allstates operates 22 offices throughout the United States, including the corporate headquarters, and employs 97 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. Allstates currently has strategic alliance agreements with agents in the United Kingdom, 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 branch 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, 14 are licensees operations, while 7 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 16 full time sales and marketing personnel operating from the 7 company-owned offices. Information Systems A primary component of Allstates's business strategy is the continued development of its information systems. Allstates has invested substantial management and financial resources in an effort to provide leading edge technology to customers and employees. Allstates continues to upgrade its information systems. Highlights of the current system are: . Centralized system located in Forked River, New Jersey, with terminals in each office . Real-time customer service, operations, and accounting information available to employees and customers . Customers can track shipments and collect POD information via the Company's firewall-protected website . Tracks shipments from pickup order to delivery, confirms "on- board" and "out for delivery" status . Produces the following daily, monthly, and yearly reports: - Operations (inbound, outbound and on-hand reports) - Sales (revenue, customer client list) - Customer (POD and shipping history reports) - Accounting (P&L reports) . Auto rates revenues and costs . Supports transactions via EDI (Electronic Data Interchange) . Customized reports to meet customer needs . Bar-code capable . Qualified customers can create airway bills via the Company website, which are then uploaded into the operating system for processing . Produces shipping labels and computerized airbills and airline bills During the first half of 2006, Allstates will complete testing and begin the rollout of a new freight tracking system that provides all the features of the current system and adds new features such as: . Microsoft Windows(R)-based freight tracking system with the infrastructure and functionality to process the most complex processes and well as manage significant increases in shipment count . Automatic service performance tracking and reporting . Advanced features for multi-station management, operations, and accounting . Automated event-driven tracking with detailed information about shipments as they pass through the system . Extensive reporting capabilities . Full Internet functionality for customers including web-based tracking, tracing, and shipment entry . Enhanced EDI capabilities . Automatic notifications to operations and sales personnel regarding shipment status . Automatic document distribution to customers via fax and/or email . Electronic forms generation for transmission to customers, carriers, stations, and agents Licensing and Government Regulation The Company's subsidiary, Allstates Logistics, 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. In fiscal 2006, no customer accounted for more than 10% of revenues. Over the 44 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 20, 2005, the Company employed a total of 97 individuals. Allstates Air Cargo, Inc. and subsidiaries accounted for 95 employees (of which 10 are part time), including 52 in operations and customer service, 16 in sales, marketing and related activities, and 27 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 2005, the maximum contribution allowed by the Code was the lesser of 100% of an employees' compensation, or $14,000. Participants who attained age 50 prior to the close of the plan year are eligible to make catch-up contributions of an additional $3,000, 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, 2005. 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 which is due to expire in fiscal 2009. The Company's branch locations, which are located in the vicinity of major metropolitan airports, occupy approximately 1,000 to 51,000 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 2006 and fiscal 2009. The total rent expense for company leased facilities was approximately $552,000 during fiscal 2005. 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, 2005 were: Los Angeles, California Nashville, Tennessee Kenilworth, New Jersey Miami, Florida 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 Dallas, Texas Detroit, Michigan ITEM 3. LEGAL PROCEEDINGS Environmental matter 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 had sufficiently decreased to allow case closure with the institution of a Classification Exception Area ("CEA"). Counsel for Allstates 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. While the property owner agreed to fund the additional costs necessary to access the wells for abandonment, information provided by the owner indicates that the monitoring wells were likely destroyed and that abandonment is not feasible. In order to resolve the matter administratively with DEP, Allstates must proceed through DEP's Notice of Non-Compliance process for lost or destroyed wells. This process requires that the party demonstrate that it made an appropriate effort to find and properly abandon the wells, but that abandonment is not possible. Documentation of this is required with the DEP, and counsel for Allstates is currently gathering information to demonstrate that when the site improvements were installed, the contractors excavated to a depth such that the wells would have been destroyed beyond the ability to be properly abandoned. If DEP accepts the argument, DEP will assess a fine and issue a notice that the wells have been abandoned in non-compliance with the regulations governing well abandonment. Allstates counsel has received written confirmation from the property owner that it would assume the cost of the fine, conservatively estimated at $2,500 to $5,000, as well as the costs to perform the remaining work concerning the well closure issue and the legal fees to resolve the matter. In March 1997, Allstates made claims against liability insurance carriers for coverage. The Company's counsel submitted invoices to the carriers in September 2003, and continues to respond to their requests for information. The Company's counsel is in the process of arranging to meet with the carriers to discuss settlement Joseph M. Guido v. Allstates WorldCargo, Inc., Sam DiGiralomo, Barton C. Theile, and Craig D. Stratton. On October 14, 2004, Joseph M. Guido, the majority shareholder of the Company, who is also employed by the Company as its Chairman, commenced an action against the Company and three of the Company's directors, entitled "Joseph M. Guido v. Allstates WorldCargo, Inc., Sam DiGiralomo, Barton C. Theile, and Craig D. Stratton," in the Superior Court of New Jersey, Chancery Division, Ocean County (the "First Action"). Messrs. DiGiralomo, Theile and Stratton are also employed by the Company as its President and Chief Executive Officer, Executive Vice President and Chief Operating Officer, and Chief Financial Officer, respectively. Mr. Guido alleged that on August 16, 2004, he delivered to the Company's Secretary (1) an executed Written Consent in Lieu of a Special Meeting of the Stockholders of Allstates WorldCargo, Inc. dated August 16, 2004 (the "Guido Consent"), (2) Amended and Restated Bylaws of the Company adopted pursuant to the Guido Consent, and (3) a draft Information Statement pursuant to Section 14(c) of the Securities Exchange Act of 1934 (the "1934 Act"). Mr. Guido alleged that, pursuant to the Guido Consent, he had amended the Company's bylaws to (among other things) expand its Board of Directors from four to seven members, and had appointed three persons (alleged to be independent) to fill the newly created seats. He alleged that the Company was required by law to comply with his demand to notify its shareholders of his action. He also alleged that the three individual defendants, both as directors and officers, owed the Company and its shareholders certain fiduciary duties to direct that appropriate steps be taken by the Company to allegedly comply with applicable law in response to the Guido Consent. Mr. Guido demanded relief enjoining a scheduled special Board of Directors meeting pending Company's performance of acts allegedly required by New Jersey law and by the 1934 Act. Mr. Guido also sought a permanent injunction requiring the Company and its Secretary to prepare and distribute to the Company's shareholders all notices allegedly required by state and federal law in connection with the Guido Consent. Finally, he sought entry of an order requiring the Company to file and serve upon him, within seven days after entry of a permanent injunction, a written report setting forth the manner and form in which the Company complied with the injunctions. The Company (and the three individual defendants) opposed the application for relief upon the grounds that subsequent to his execution of the Guido Consent, Mr. Guido advised one of the individual defendants that he had decided not to proceed with his amendment of the Bylaws or his expansion of the Board of Directors. The Defendants also alleged that Mr. Guido's actions were not in the best interest of the Company, and motivated by self-interest, that because of such concerns, the Company needed time to determine its obligations under the law, and that the purpose of the Special Board Meeting (among others) was to consider issues pertaining to the request by Mr. Guido to file the Schedule 14C presented to the Secretary of the Corporation. On October 28, 2004, Mr. Guido, by his counsel, filed a Notice of Voluntary Dismissal Without Prejudice, dismissing the First Action. The parties agreed, subject to the terms of definitive settlement agreements, to settle the issue raised in the First Action upon the following terms: (1) the Company's Board of Directors would not be expanded except by unanimous consent, (2) Mr. Guido and the individual defendants would enter into a voting agreement pursuant to which each would agree to vote his respective shares in the Company for the others as directors of the Company, (3) the Company would enter into new employment agreements with the individual defendants (the existing employment agreements being due to expire on December 31, 2004), (4) the parties would exchange general releases and (5) the Company would, to the extent lawfully required by Mr. Guido's existing employment agreement, reimburse him for the attorneys fees he incurred in connection with the action. It was anticipated that the complete terms of a settlement would be agreed upon, and that formal settlement documents would be prepared and executed. Such formal documentation was prepared and delivered to Mr. Guido's counsel on December 27, 2004. Mr. Guido refused to execute formal settlement documentation, and commenced a second action, in the same court and entitled in the same style, seeking the same relief (the "Second Action"). The Defendants answered, denying the allegations, and asserting counterclaims against Mr. Guido and his wife, Teresa Guido. On April 5, 2005, the parties agreed to a full and final settlement of the Second Action, the terms of which were placed on the record in court, and the parties acknowledged to the court, under oath, their obligation to be bound thereby. The material terms of that agreement (referred to as the "Settlement Agreement") were: (1) the Company's Board of Directors would be expanded from four to seven members, and the Court would appoint the three new directors, (2) vacancies thereafter would be filled by vote of the remaining Board members, and in the event of a tie or deadlock in filling any vacancy, the vacancy would be filled by an arbitrator chosen by the Board, (3) Mr. Guido and the individual defendants would enter into a voting agreement pursuant to which each would agree to vote his respective shares of the Company for the others as directors of the Company, (4) the Company would enter into new employment agreements with Mr. Guido and the individual defendants, (5) the parties would exchange general releases and (6) the Company would, to the extent lawfully required by Mr. Guido's previous employment agreement, reimburse him for the attorneys fees he incurred in connection with the action. On May 27, 2005, a final judgment was ordered, granted and entered by the court in accordance with the settlement terms agreed to by the parties on April 5, 2005. Finally, on June 6, 2005, Court declared the new employment agreements, the voting agreement, and the mutual general release to be effective as of April 5, 2005, notwithstanding any lack of signatures. Pursuant to the mutual general release, the Company and each of Mr. Guido, his wife, and Messrs. DiGiralomo, Theile and Stratton each released and forever discharged each and all of the others from any and all causes of actions, known and unknown, then existing. Pursuant to the terms of the settlement, on June 6, 2005, the Company and Messrs. Guido, DiGiralomo, Theile and Stratton (collectively, for purposes of this section, the "Voters") entered into a Voting Agreement whereby each of the Voters agreed to vote all of the capital stock of the Company that each Voter is entitled to vote, for each other as directors of the Company. Further, pursuant to the terms of the Voting Agreement, any action taken to expand or in any way modify the composition of the Board of Directors of the Company from its present constitution shall require the unanimous consent of all of the Voters. Additionally, in the event that shareholder action is taken to alter or amend the Certificate of Incorporation or Bylaws of the Company, the Voters agree to vote all of their shares unanimously in the same manner. If the Voters are unable to reach a unanimous decision, then the proposed change shall be rejected. The Voting Agreement terminates when each of Messrs. Guido, DiGiralomo, Theile and Stratton no longer own, control or hold any shares of capital stock of the Company. For so long as the Voting Agreement remains in effect, the Voters also agreed, with a certain agreed-to exception, not to transfer any of the shares of capital stock of the Company they hold without the prior written consent of all of the Voters, unless the other party to any such transaction agrees in writing to join and be bound by all of the terms of the Voting Agreement. To that end, the Voters agreed to the placement of an additional restrictive legend on all of their shares (including subsequently acquired shares), which restrictive legend shall read: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER, VOTING AND OTHER RESTRICTIONS PURSUANT TO A VOTING AGREEMENT ENTERED INTO BY THE COMPANY, THE HOLDER OF THIS CERTIFICATE AND CERTAIN OTHER STOCKHOLDERS OF THE COMPANY, A COPY OF WHICH IS AVAILABLE FOR INSPECTION AT THE OFFICES OF THE SECRETARY OF THE COMPANY." Finally, during the term of the Voting Agreement, the Voters agreed not to enter into any agreements that would be inconsistent with any of the provisions therein. Also pursuant to the terms of the settlement, on June 6, 2005 the Company and Allstates Air Cargo, Inc., its wholly owned subsidiary, (together, the Employer) entered into individual employment agreements with each of Messrs. DiGiralomo (as President and Chief Executive Officer), Guido (as Chairman), Theile (as Executive Vice President and Chief Operating Officer) and Stratton (as Chief Financial Officer). Messrs. DiGiralomo, Guido, Theile and Stratton are collectively referred to herein as Executives. Each of the employment agreements is effective as of April 5, 2005, and expires on December 31, 2009, but may be extended if agreed to in writing by the parties. Per each of the employment agreements, Mr. DiGiralomo's annual salary shall be $250,000; Mr. Guido's annual salary shall be $370,000; Mr. Theile's annual salary shall be $250,000; and Mr. Stratton's annual salary shall be $185,000. Each of these salaries is subject to an annual increase at the discretion of the Company's Board of Directors. Additionally, each of Messrs. DiGiralomo, Guido and Theile shall receive an annual bonus payment equal to 3% of the increase of the net profits of the Employer from fiscal year end 2003 to the fiscal year end 2004. Each of Messrs. DiGiralomo, Guido, Theile and Stratton remains eligible to participate in the Employer's stock option plan, 401(k) retirement plan and insurance plans. Excluding the above-described salary and bonus information, the material terms of each of the Executives' employment agreements are substantially the same. In the event any Executive dies during the term of his respective employment agreement, then for the longer of the remaining term of the employment agreement or three years, the Employer shall continue to pay the Executive's then current base salary to the Executive's designated beneficiary or estate and will also pay for insurance for any Executive's surviving immediate family. If, within twenty-four months following a "Change of Control" of the Employer, as defined in each of the employment agreements, the Executive voluntarily resigns or retires, the Employer shall pay to the Executive all compensation and benefits due to him up to the date of his termination, including, but not limited to, base salary and any expense reimbursement, and within one month of termination, a lump-sum payment equal to 299% of the Executive's then current base salary, bonus for the fiscal year end 2004 (if applicable), and of the amount reimbursed to the Executive for business-related expenses for the calendar year preceding the termination. Additionally, any options and/or restricted stock granted to the Executive shall become fully vested and registered as of the date of the termination. The Executive shall have the right to exercise all of his options for a period of five years from the date of the termination. Additionally, all then-existing life and health insurance benefits shall continue for the Executive and his immediate family for a period of five years from the date of termination. In the event of a "For Cause" termination, as defined in each of the employment agreements, the Employer shall pay to the Executive all compensation and benefits due to him up to the date of his termination, including but not limited to base salary and expense reimbursement. At any time after 180 days have elapsed from the date of his respective employment agreement, each Executive shall have the right to terminate his employment agreement on 90 days written notice to the Employer. In the event of such termination, the Executive shall be entitled to such compensation that is equal to the "For Cause" termination compensation described above. A termination that is neither a Change of Control termination, a For Cause termination, is due to the Executive's death, nor a termination by the Executive as provided above, is a "Without Cause" Termination. In the event of a Without Cause termination, the Executive shall be entitled to such compensation that is equal to the Change of Control termination compensation described above. Finally, if the Employer breaches any material term of each respective employment agreement or reduces the Executive's respective title or responsibilities, the Executive may, at his option, elect to leave the Employer, in which case he shall be entitled to all of the Change of Control termination compensation described above, except that the lump sum payment to be paid to the Executive would be limited to 100% of the Executive's base salary and bonus (if applicable). On July 6, 2005, to effectuate part of the settlement of the Second Action, the Court entered an Order (the "July 6 Order") that expanded the Company's Board of Directors, effective immediately, from four members to seven. The July 6 Order also appointed, effective immediately, Messrs. Joseph Buckelew, Alan E. Meyer, and Charles F. Starkey, to the Board. On August 24, 2005, upon the Company's Motion for Reconsideration, the Court entered and order amending the July 6 Order (the "First August 24 Order"). Instead of declaring the Board expanded, and appointing Messrs. Buckelew, Meyer, and Starkey to the Board, the July 6 Order was amended to show that the parties agreed that a Unanimous Written Consent of the Directors of Allstates WorldCargo, Inc. (attached to the First August 24 Order, and referred to as the "Directors' Consent") was consistent with the Settlement Agreement, and shall be deemed signed by Messrs. DiGiralomo, Theile, Stratton, and Guido. Pursuant to the Directors' Consent, the Board of Directors amended Section 3.02 of the Bylaws to provide that the Board of Directors shall consist of seven members. Prior to the amendment, Section 3.02 of the Bylaws provided that the Board of Directors shall consist of not less than one nor more than ten Directors. The precise number of Directors within this range was to be fixed by the Board each year before the annual meeting of shareholders. The number of Directors prior to the amendment was four. Pursuant to the Directors' Consent, the Board of Directors appointed Joseph Buckelew, Alan E. Meyer, C.P.A., and Charles F. Starkey, Esq. to fill the vacancies created by the expansion of the Board, to serve in accordance with the Settlement Agreement. Pursuant to the Directors' Consent, the Board of Directors also amended Sections 3.12(b) and 3.12(c) of the Bylaws. Prior to the amendment described herein, Section 3.12(b) provided that vacancies in the Board may be filled by the affirmative vote of a majority of the remaining Directors then in office, even if their number is insufficient to constitute a quorum. A director so elected was to hold office until a successor is elected and qualified at the next annual meeting of the shareholder. As amended, Section 3.12(b) provides that any vacancy shall be filled in the manner provided therein, and that in the event of a deadlock, or a three-to-three vote, with respect to filling any vacancy, an independent arbitrator appointed by the Board shall select the person to fill the vacancy. The amended Bylaw also provides that any director so appointed pursuant to Section 3.12(b) shall also hold office in accordance with the Settlement Agreement. Prior to the amendment described herein, Section 3.12(c) provided that if a director resigns from the Board effective at some future date, the future vacancy may be filled by the affirmative vote of a majority of the directors then in office, including the director who has resigned, even if their number is insufficient to constitute a quorum. The term of the newly elected director would begin when the resignation becomes effective. A director so elected was to hold office from the effective date of the predecessor's resignation until a successor is elected and qualified at the next annual or special meeting of the shareholders. As amended, Section 3.12(c) provides that any future vacancy shall be filled in the manner provided therein, and that in the event of a deadlock, or a three-to-three vote, with respect to filling any vacancy, an independent arbitrator appointed by the Board shall select the person to fill the vacancy. The amended By-Law also provides that any director so appointed pursuant to Section 3.12(c) shall also hold office in accordance with the Settlement Agreement. In order to ensure that Messrs. Buckelew, Meyer, and Starkey (or their successors duly appointed pursuant to the Bylaws) continue to serve pursuant to the terms of the Settlement Agreement, and not at the pleasure of the majority shareholder, the Court entered a second order on August 24, 2005 (the "Second August 24 Order"), which provides that the parties are required by the Settlement Agreement to nominate and vote for, as Directors, Messrs. Buckelew, Starkey, and Meyer (or their duly appointed successors) at future meetings of the Company's shareholders at which directors are to be chosen. On November 7, 2005, the Court entered a Consent Order pursuant to which Mr. and Mrs. Guido waived any and all rights they might have to pursue reimbursement from the Company and the individual defendants for any and all counsel fees paid or incurred in connection with the matter. Accordingly, there are no issues left outstanding in the matter, and it has been finally concluded. Liberty Mutual Insurance Company v. Lightning Freight Inc., GTD Logistics, Inc., and Gilberto Cordova. The Company's subsidiary, GTD Logistics, Inc. ("GTD") is a defendant in an action pending in Los Angeles Superior Court, Docket No. 326868, brought by Liberty Mutual Insurance Company ("Liberty"), regarding freight brokerage services that GTD provided for a shipment that was allegedly stolen. The tractor trailer hauling the shipment allegedy contained several million dollars of hard disk drives. After the truck and trailer were allegedly stolen, the owner of the contents of the trailer made a claim against UPS Supply Chain Solutions, the shipper, who then made a claim against its insurance company, Liberty. Liberty is seeking to recover from GTD and also the carrier and truck driver the amount that is expended to cover the loss suffered by its insured, the owner of the contents of the trailer. The Complaint requests damages of not less than $1,400,000. Liberty alleges that when GTD agreed to provide brokerage services for the shipment of the cargo, GTD also promised to select a motor carrier with no less than $1 million in cargo insurance coverage, and to select a carrier that would follow certain asset protection rules. Liberty alleges breach of contract and negligence against GTD for failure to comply with these alleged promises. GTD and Lightning Freight, Inc. the carrier, filed Cross-Complains against each other and Gilberto Cordova, the truck driver. Gilberto Cordova never appeared in the matter and the Court entered a default against him. The parties have reached a settlement of the action, pursuant to which GTD will pay the sum of ten thousand dollars ($10,000) in full and complete settlement of all claims. On March 6, 2006 the Court granted the parties' Application for Determination of Good Faith Settlement Pursuant California Code of Civil Procedure, which would bars any other joint tortfeasor or co-obligor from any further claims against GTD arising out of the transaction. The entry of that March 6 Order finalized the settlement of the action, and on March 8 GTD submitted the settlement payment, thus completing its obligations under the settlement. Jeffrey H. Mims, Chapter 7 Trustee v. Allstates WorldCargo, Inc. The Company is presently the defendant in an Adversary Proceeding against Allstates WorldCargo, Inc. in the bankruptcy case of Mosaic Group US., Inc. The lawsuit is for the recovery of an alleged preferential transfer under 11 U.S.C. Sec. 547 in the sum of approximately $191,000, and a post-petition transfer under 11 U.S.C. Sec 549, in the sum of approximately $18,000. The matter is in its initial stages. Masterbrush, LLC and B&G Plastics, Inc. v. Allstates Logistics, Inc. and T.H. Weiss, Inc. On or about December 5, 2005, Masterbrush, LLC ("Masterbrush") and B&G Plastics, Inc. ("B&G") commenced an action against the Company's wholly-owned subsidiary Allstates Logistics, Inc. ("ALI") and T.H. Weiss, Inc. ("Weiss"), alleging various causes of action arising out of the importation by Masterbrush of a quantity of natural bristle paintbrushes produced in China (the "Brushes"). The Complaint alleges that plaintiffs retained ALI to expedite the importation of the Brushes into the United States, that ALI wrongfully failed to advise plaintiffs that the Brushes were subject to federal antidumping duties of 351.92 percent (the "Antidumping Duty") in addition to the 4 percent normal duty, and that by reason of ALI's (alleged) failure to so advise plaintiffs, plaintiffs were required by U.S. Customs to pay the Antidumping Duty, in the amount of $422,281.64. The plaintiffs seek to recover compensatory and consequential damages. The action is only recently commenced, and has not progressed past the service of the Summons and Complaint. The ALI intends to contest the matter. We have not yet formed an opinion of the likelihood of a favorable or unfavorable outcome, or the amount or range of potential loss. 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, 2005. 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) 2001 2002 2003 2004 2005 STATEMENT OF OPERATIONS DATA Net sales $41,239 $36,403 $46,293 $54,705 $68,842 Income (loss) from operations 744 534 (326) 727 1,086 Net income (loss) 408 136 (582) 233 603 Basic net income (loss) per common share $.01 $.00 ($.02) $.01 $.02 Diluted net income (loss) per common share $.01 $.00 ($.02) $.01 $.02 Weighted average Common shares outstanding - basic 32,510 32,510 32,510 32,510 32,510 Weighted average Common shares outstanding - diluted 32,510 32,510 32,510 32,510 32,510 BALANCE SHEET DATA: Working capital $1,316 $1,534 $1,050 $1,081 $1,527 Total assets 7,095 8,050 8,287 9,787 12,699 Liabilities - current 4,614 5,477 6,338 7,577 9,838 Liabilities - long term 2,497 2,453 2,412 2,440 2,487 Total stockholders' equity (16) 120 (462) (229) 374 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 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 total revenues: Fiscal Year Ended September 30, 2005 2004 2003 ------- -------- ------- Revenues 100.0% 100.0% 100.0% Cost of transportation 71.0 67.7 65.0 ------- -------- ------- Gross profit 29.0 32.3 35.0 Operating expenses: Personnel costs 9.8 11.9 14.1 License commissions and royalties 11.5 12.0 13.5 Other selling, general and administrative expenses 6.1 7.1 8.1 ------- -------- ------- Total operating expenses 27.4 31.0 35.7 Operating income 1.6 1.3 (0.7) Interest expense, net (0.4) (0.4) (0.5) Other income/(expense) 0.0 0.0 (0.9) ------- -------- ------- Net income before tax provision 1.2 0.9 (2.1) Tax provision (0.3) (0.5) (0.8) ------- -------- ------- Net income/(loss) 0.9% 0.4% (1.3)% REVENUES Fiscal 2005 vs. fiscal 2004 The revenues of Allstates WorldCargo represent gross consolidated sales less customer discounts. Sales for the fiscal year ended September 30, 2005 increased $14.1 million, or 25.8%, to $68,842,000, over revenues earned during the prior fiscal year ended September 30, 2004, reflecting a higher volume of freight shipped. Revenues earned from domestic-routed freight increased $10.5 million, or 23.8%, to $54,842,000, and international freight revenues increased from the previous fiscal year by $3.6 million, or 34.5%, to $14,000,000. The increase in domestic sales, which accounted for 79.7% of total revenues for fiscal 2005, primarily reflected incremental growth in freight business at certain existing branches, including the full year effect of sales generated from one branch location that was added midway though the previous fiscal year. The growth in domestic freight business was further augmented by the addition one new customer during the fiscal year that accounted for 2.8% of sales during the year. International sales showed positive growth in a majority of our branch locations during fiscal 2005 as compared to fiscal 2004. Fiscal 2004 vs. fiscal 2003 Sales for the fiscal year ended September 30, 2004 increased $8,412,000, or 18.2%, to $54,705,000, over revenues earned during the prior fiscal year ended September 30, 2003, reflecting a higher volume of freight shipped. Revenues earned from domestic-routed freight increased $9,434,000, or 27.1%, to $44,296,000, while international freight revenues decreased from the previous fiscal year by $1,022,000, or (8.9%), to $10,409,000. The increase in domestic revenues earned in fiscal 2004 over fiscal 2003 primarily reflects incremental increases in freight business at certain existing branches, an increase during the year in the number of branch locations, and the addition of a new large customer. Furthermore, growth within the Allstates truck brokerage operation also fueled the increase in domestic sales. The decrease in international revenues in fiscal 2004 from the previous year primarily reflects the approximately $1.8 million in billing in fiscal 2003 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. After discounting the billing for that charter service in fiscal 2003, international revenues would have increased by approximately $766,000. NET REVENUES Fiscal 2005 vs. fiscal 2004 Net revenues represents the revenues of the Company after subtracting the cost of arranging transportation services to our customers, which we refer to as cost of transportation. The cost of transportation is composed primarily of amounts paid by the Company to carriers and cartage agents for the transport of cargo. As a percentage of revenues, cost of transportation increased by 3.2%, to 71.0%, for the fiscal year ended September 30, 2005 in comparison to the fiscal year ended September 30, 2004. The higher percentage of transportation costs to revenues primarily reflects increases in fuel costs as they affect carrier rates, an increase in deferred shipments versus priority, and the addition of and growth in existing lower margin business that represents a significant portion of the Company's revenue growth over the previous fiscal year. In absolute terms, cost of transportation increased by $11.8 million, or 31.8%, to $48,859,000 for the fiscal year ended September 30, 2005 compared to the prior fiscal year, reflecting the increase in sales. Gross margins, which are stated as a percentage of net revenues to revenues, decreased to 29.0% of sales for fiscal 2005. Net revenues increased by $2.3 million, or 13.3%, to $19,983,000 in fiscal 2005 versus fiscal 2004. Fiscal 2004 vs. fiscal 2003 Cost of transportation increased as a percentage of revenues by 2.7%, to 67.7%, for the fiscal year ended September 30, 2004 in comparison to the fiscal year ended September 30, 2003. The higher percentage of transportation costs to revenues primarily reflects increases in fuel costs as they affect carrier rates, an increase in deferred shipments versus priority, and the addition of new lower margin business that the Company attained during fiscal 2004. In absolute terms, cost of transportation increased by $6,971,000, or 23.2%, to $37,060,000 for the fiscal year ended September 30, 2004 compared to the prior fiscal year, reflecting the increase in sales. Gross margins decreased to 32.3% of sales for fiscal 2004. Net revenues increased by $1,441,000, or 8.9%, to $17,645,000 in fiscal 2004 versus fiscal 2003. SELLING, GENERAL & ADMINISTRATIVE EXPENSES Fiscal 2005 vs. fiscal 2004 Selling, general and administrative expenses include personnel costs, licensee commissions and other costs necessary to operate our business. As a percentage of revenues, SG&A expenses decreased by 3.6%, to 27.4%, for the fiscal year ended September 30, 2005 as compared to the fiscal year ended September 30, 2004, reflecting the increase in revenues in relation to fixed operating expenses. In absolute terms, SG&A expenses increased by approximately $1,980,000, or 11.7%, to $18,898,000 in fiscal 2005 in comparison to fiscal 2004, primarily reflecting higher expense for licensee commissions and legal fees. Allstates pays commissions to licensees and independent sales agents as compensation for generating profits for the Company. Licensee commissions and royalties pursuant to licensee agreements increased by approximately $1,379,000 in fiscal 2005 over fiscal 2004, primarily reflecting higher gross profits at our licensee locations. As a percentage of revenues, licensee commissions and royalties decreased by 0.5%, to 11.5% of sales, in fiscal 2005. Legal fees increased during the fiscal year ended September 30, 2005 in comparison to the same period of the prior year by approximately $564,000. The increased expense primarily reflects Allstates defense and settlement effort related to an action commenced by the majority shareholder against the Company during the fourth quarter of fiscal 2004. Personnel expenses increased for the fiscal year ended September 30, 2005 by approximately $202,000 over the fiscal year ended September 30, 2004. This increase primarily reflects higher operations personnel salaries necessary to sustain the growth in business volume. In addition, corporate salary expense was higher, primarily the result of new employment agreements that were ratified during the third quarter of fiscal 2005, as well as the full year effect of the addition of a Director of MIS during the third quarter of fiscal 2004. Salesperson salaries decreased from the prior fiscal year due to a reduction in sales headcount, but were offset by an increase in sales commissions due to increased volume at company owned stations. Cargo insurance increased by approximately $94,000 in fiscal 2005 over the previous fiscal year as a reflection of the increased freight volume. Accounting fees declined by approximately $91,000 in comparison to the prior fiscal year, in which the Company had recorded additional expense to catch up with under-accruals of previous year audit fees. Telephone and communications expense decreased by approximately $113,000 from the previous year, primarily reflecting reduced rates for long distance and frame relay service. Fiscal 2004 vs. fiscal 2003 As a percentage of revenues, SG&A expenses decreased by 4.7%, to 31.0%, for the fiscal year ended September 30, 2004 as compared to the fiscal year ended September 30, 2003, reflecting the increase in revenues in relation to fixed operating expenses. In absolute terms, SG&A expenses increased by approximately $389,000, or 2.4%, to $16,918,000 in fiscal 2004 in comparison to fiscal 2003, primarily reflecting higher licensee commission expense. Allstates pays commissions to licensees and independent sales agents as compensation for generating profits for the Company. Licensee commissions and royalties pursuant to licensee agreements increased by approximately $260,000 in fiscal 2004 over the fiscal 2003 expense. This primarily reflects the addition of two new licensee branch locations and the conversion of one company-owned branch to a licensee during the year, offset by lower gross profits at existing licensee branches. Licensee commissions and royalties as a percentage of revenues decreased by 1.5%, to 12.0% of sales, in fiscal 2004. Personnel costs as a percentage of sales decreased by 2.2% in fiscal 2004, to 11.9% of revenues. In absolute terms, total personnel related expenses in fiscal 2004 approximated fiscal 2003 costs. Salaries and employee benefits decreased by approximately $228,000 in fiscal 2004 as compared to the previous year, primarily due to the reduction in headcount that took place during the last six months of fiscal 2003 as well as the transfer of a company-owned station to a licensee operation in February 2004. This was offset by increases in salesperson commissions and executive bonus expense in fiscal 2004 as a result of the increase in profit from the prior fiscal year. Accounting fees increased by approximately $97,000 for fiscal 2004 over fiscal 2003, primarily based on an under accrual of fees as they related to previous years audits. Liability insurance expenses increased by approximately $48,000 for fiscal 2004 as compared to fiscal 2003, primarily relating to the Directors and Officers liability policy that the Company initiated in the fourth quarter of fiscal 2003. OPERATING INCOME/(LOSS) Income from operations increased by approximately $358,000 for the fiscal year ended September 30, 2005, to $1,085,000, versus the fiscal year ended September 30, 2004, primarily reflecting the increase in sales volume, offset by higher costs of transportation as a percent of revenues. The operating margin increased by 0.3% during fiscal year 2005. Income from operations increased by approximately $1,052,000 for the fiscal year ended September 30, 2004, to $727,000, versus the fiscal year ended September 30, 2003, due to the increase in sales volume and the reduction of operating expenses as a percentage of revenues. The operating margin increased by 2.0% during fiscal year 2004. NET 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 $166,000 and $168,000 during fiscal 2005 and fiscal 2004, respectively. Net interest expense increased by approximately $16,000 during the fiscal year ended September 30, 2005 in comparison to the prior year, reflecting a higher average borrowing rate applied to higher average outstanding borrowings. Interest expense during the fiscal year ended September 30, 2004 decreased by approximately $9,000 from the previous fiscal year, reflecting a lower average borrowing rate. NET INCOME/(LOSS) Net income before taxes increased by approximately $331,000, to $852,000 for the fiscal year ended September 30, 2005, compared to the previous fiscal year then ended. The Company recorded a tax provision of approximately $249,000 for fiscal 2005. Net income for fiscal 2005 was $603,000 versus net income of $233,000 in the previous fiscal year. Net income before taxes increased by approximately $1,472,000, to $522,000 for the fiscal year ended September 30, 2004, compared to the previous fiscal year then ended. The Company recorded a tax provision of approximately $289,000 for fiscal 2004. Net income for fiscal 2004 was $233,000 versus a net loss of ($582,000) in the prior year. Liquidity and Capital Resources Net cash used for operating activities was approximately $44,000 for the fiscal year ended September 30, 2005 compared to net cash provided by operations of approximately $18,000 for the fiscal year ended September 30, 2004. In fiscal 2005, cash was used to finance the $2.8 million increase in accounts receivable, offset by the related $1.7 million increase in accounts payable and accrued expenses, and the $0.9 million of income net of non-cash charges of the Company. The increase in accounts receivable relates primarily to the increase in revenue. The increase in accounts payable is primarily due to the increase in sales volume and our normal cycle of payments. In fiscal 2004, cash was provided by $0.6 million from income net of non-cash charges, and a $1.3 million increase in accounts payable and accrued expenses, offset by a $2.0 million increase in accounts receivable. The increases in accounts receivable and accounts payable reflect the increase in sales volume from the previous year. At September 30, 2005, the Company had cash of $180,000 and net working capital of $1,527,000, compared with cash of $114,000 and net working capital of $1,081,000 respectively, at September 30, 2004. The increase in working capital at September 30, 2005 over September 30, 2004 is primarily attributable to the Company's net income during the fiscal year, offset by a combination of the long term portion of a loan made to a licensee during the second quarter of fiscal 2005, as well as expenditures made toward the purchase of a new computer system. During March 2005, Allstates extended a $250,000 loan to a licensee to finance their expansion effort. The loan is being paid back with weekly payments over three years including interest, at the same rate the Company pays on its line of credit with the bank. The loan is secured by the personal guarantees of the licensee principals. Through September 30, 2005, Allstates has collected $41,573. of principal on the loan. In addition to aforementioned loan, the Company's other investing activities were primarily comprised of expenditures for capital equipment, primarily representing purchases of computer hardware and software. During the fourth quarter of fiscal 2005, Allstates initiated the purchase and implementation of a new computer system. Through September 30, 2005, the Company has made approximately $174,000 in purchases toward the new system. Total capital expenditures amounted to approximately $230,000 during the fiscal year ended September 30, 2005. For the fiscal year ended September 30, 2004, capital expenditures totaled approximately $95,000. Proceeds from the sale of fixed assets, primarily of company-owned automobiles, amounted to approximately $49,000. 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 (6.75% at September 30, 2005). 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, 2005 and 2004 were $1,600,000 and $1,100,000, respectively. The Company's current and anticipated use of cash is and will continue to be to fund working capital and capital expenditures. Allstates believes that cash flows from collections of accounts receivable and the line of credit with its bank will be sufficient to fund the Company's working capital and cash requirements for at least the next 12 months. We will pursue increased borrowing availability from lending institutions to meet our long-term cash requirements, and believe that the Company has a sufficient borrowing base to accomplish that. The following table summarizes our significant contractual obligations as of September 30, 2005 Contractual Obligations (dollars in thousands) Payments Due by Fiscal Year Total 2006 2007 2008 Thereafter ------ ---- ---- ---- ---------- Long-term Debt (1) 2,362 25 25 25 2,287 Interest on long-term debt (1) 7,796 164 163 161 7,308 Line of Credit (2) 185 135 50 Capital Lease Obligations (3) 228 74 82 72 Operating Leases (4) 1,971 669 704 598 ------ ---- ---- ---- ---------- Total 12,542 1,067 1,024 856 9,595 (1) Long term debt represents a note payable from Joseph M. Guido to the Estate of A.G. Hoffman Jr, assumed by the Company, in the aggregate total of $2,511,730, with repayment over 101 years at annual principal payments of $25,000 plus interest at 7% per year. Allstates assumed this obligation as part of the consideration paid to Mr. Guido in the August 24, 1999 reverse acquisition in which Allstates (then known as Audiogenesis Sytems, Inc.) acquired from Mr. Guido 100 percent of the stock of Allstates Air Cargo, Inc ("AAC"). The debt owed by Mr. Guido to the Hoffman estate arose from the buy/sell agreement between Mr. Guido and his former partner in AAC, A.G. Hoffman, and represents the amount that Mr. Guido was required to pay the Hoffman estate upon Mr. Hoffman's death for Mr. Hoffman's share in AAC. (2) Assumes 7.5% interest on $2,000,000 borrowing against revolving line of credit facility, expiring January 28, 2007 (3) Capital lease obligation represents principal and interest on purchase of Air-Trak computer system. Value of financed equipment is approximately $197,000. Lease interest ranges from 11.37% to 12.96%. (4) Operating leases primarily relates to the lease of space used for our operations in Forked River, NJ., Kenilworth, NJ, Baltimore, MD, Pittsburgh, PA, Wayne, NJ, Jacksonville, FL, Miami, FL, and St. Louis, MO. 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; the effect of litigation; future costs of transportation; future operating expenses; future margins; any seasonality of the Company's business; 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 SUPPLEMENTAL DATA ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS For the Years Ended September 30, 2005, 2004 and 2003 CONTENTS Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1 FINANCIAL STATEMENTS Consolidated Balance Sheets 2 -3 Consolidated Statements of Net Income (Loss) 4 Consolidated Statements of Stockholders' Equity (Deficit) 5 Consolidated Statements of Cash Flows 6 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7- 17 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors Allstates WorldCargo, Inc. and Subsidiaries Lacey, New Jersey We have audited the accompanying consolidated balance sheets of Allstates WorldCargo, Inc. and Subsidiaries (a corporation), as of September 30, 2005 and 2004, and the related consolidated statements of net income (loss), stockholders' equity (deficit), and cash flows for the years ended September 30, 2005, 2004 and 2003. These consolidated financial statements (see Note 2) are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Allstates WorldCargo, Inc. and Subsidiaries, as of September 30, 2005 and 2004, and the results of their operations and cash flows for the years ended September 30, 2005, 2004 and 2003 in conformity with accounting principles generally accepted in the United States of America. /s/ COWAN, GUNTESKI & CO., PA Toms River, New Jersey February 27, 2006 F-1 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2005 and 2004
ASSETS 2005 2004 ----------- ----------- CURRENT ASSETS Cash and Cash Equivalents $ 180,317 $ 114,363 Accounts Receivable, net of allowance for doubtful account 10,681,589 8,073,391 Inventories 29,641 30,027 Prepaid Expenses and Other Assets 127,550 89,081 Prepaid Income Taxes 80,415 - Loans Receivable - Licensee - Current Portion 80,385 - Deferred Tax Asset - Current Portion 184,982 351,000 ----------- ----------- Total Current Assets 11,364,879 8,657,862 ----------- ----------- PROPERTY AND EQUIPMENT, net of accumulated depreciation 599,042 507,873 ----------- ----------- INTANGIBLE AND OTHER ASSETS Deposits 33,227 33,371 Loans Receivable - Licensee 128,042 - Other Receivables 38,504 52,853 Goodwill, including related acquisition costs, net of accumulated amortization 535,108 535,108 ----------- ----------- Total Intangible and Other Assets 734.881 621,332 ----------- ----------- Total Assets $12,698,802 $ 9,787,067 =========== ===========
See accompanying Notes and Report of Independent Registered Public Accounting Firm F2 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2005 and 2004
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2005 2004 ----------- ----------- CURRENT LIABILITIES Accounts Payable $ 6,420,955 $ 5,274,000 Accrued Expenses 1,767,391 1,178,377 Short-Term Borrowings Under Line of Credit 1,599,500 1,099,500 Current Portion of Obligations Under Capital Leases 24,888 - Current Portion of Long-Term Debt 25,000 25,000 ----------- ----------- Total Current Liabilities 9,837,734 7,576,877 ----------- ----------- LONG-TERM LIABILITIES Deferred Tax Liability - Non-Current Portion 102,368 78,000 Obligations Under Capital Leases, less current portion 48,285 - Long-Term Debt, less current portion 2,336,730 2,361,730 ----------- ----------- Total Long-Term Liabilities 2,487,383 2,439,730 ----------- ----------- Total Liabilities 12,325,117 10,016,607 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) 370,434 (232,791) ----------- ----------- Total Stockholders' Equity (Deficit) 373,685 (229,540) ----------- ----------- Total Liabilities and Stockholders' Equity (Deficit) $12,698,802 $ 9,787,067 =========== ===========
See accompanying Notes and Report of Independent Registered Public Accounting Firm F3 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET INCOME (LOSS) For the Years Ended September 30, 2005, 2004 and 2003 2005 2004 2003 ---------- ---------- ---------- REVENUES $ 68,841,843 $ 54,705,311 $ 46,293,052 Cost of Transportation 48,858,589 37,060,406 30,089,183 ---------- ---------- ---------- Net Revenues 19,983,254 17,644,905 16,203,869 OPERATING EXPENSES Personnel Costs 6,739,203 6,536,983 6,544,154 Licensee Commissions and Royalties 7,918,505 6,539,285 6,279,002 Independent Sales Agent Commissions 201,498 247,398 261,743 Selling, General and Administrative Expenses 4,037,984 3,594,389 3,444,543 ---------- ---------- ---------- Total Operating Expenses 18,897,190 16,918,055 16,529,442 ---------- ---------- ---------- Income (Loss) from Operations 1,086,064 726,850 (325,573) ---------- ---------- ---------- OTHER INCOME (EXPENSE) Interest Income 7,694 - 613 Interest Expense (241,526) (217,367) (226,714) Loss on Sale of Equipment - 3,071 ( 26,534) Other Income (Expense) - 9,093 (371,916) ---------- ---------- ---------- Total Other Income (Expense) (233,832) (205,203) (624,551) Income (Loss) Before Tax Provision 852,232 521,647 (950,124) Provision for Income Tax (Benefit) Expense 249,007 288,749 (367,833) ---------- ---------- ---------- Net Income (Loss) Applicable to Common Shareholders $ 603,225 $ 232,898 $ (582,291) ========== ========== ========== Weighted Average Common Shares - Basic 32,509,872 32,509,872 32,509,872 Net Income (Loss) per Common Share - Basic $ 0.02 $ 0.01 $ (0.02) Weighted Average Common Shares - Diluted 32,509,872 32,509,872 32,509,872 Net Income (Loss) per Common Share - Diluted $ 0.02 $ 0.01 $ (0.02)
See accompanying Notes and Report of Independent Registered Public Accounting Firm F4 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) For the Fiscal Years Ended September 30, 2005, 2004 and 2003 Common Stock Retained Total Number of Earnings Stockholders' Shares Par Value (Deficit) Equity (Deficit) --------- --------- ---------- ---------------- Balance at October 1, 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) Consolidated net gain for the fiscal year ended September 30, 2004 232,898 232,898 ---------- --------- ---------- ------------- Balance at September 30, 2004 32,509,872 $3,251 $(232,791) $( 229,540) Consolidated net gain for the fiscal year ended September 30, 2005 603,225 603,225 ---------- --------- ---------- ------------- Balance at September 30, 2005 32,509,872 $3,251 $ 370,434 $ 373,685 ========== ========= =========== =============
See accompanying Notes and Report of Independent Registered Public Accounting Firm F5 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended September 30, 2005 and 2004 2005 2004 2003 ------------ ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income Applicable to Common Shareholders $ 603,225 $ 232,898 $ (582,291) Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 138,968 167,202 186,894 Provision for Bad Debts 169,347 187,999 182,379 Loss on Sale of Equipment - (3,071) 26,534 (Increase) Decrease in: Accounts Receivable (2,777,545) (2,035,182) (655,856) Inventories 386 (1,383) (4,432) Prepaid Expenses and Other Assets (24,121) (15,386) 852,366 Prepaid Income Taxes (80,415) - - Deferred Tax Asset - Current Portion 166,018 139,000 (420,001) Increase (Decrease) in: Accounts Payable 1,146,956 937,377 1,186,058 Accrued Expenses 589,013 355,348 (23,146) Deferred Tax Liability - Non-Current Portion 24,368 53,000 - ------------ ------------- -------------- Net Cash Provided from (Used by) Operating Activities (43,800) 17,802 748,505 ------------ ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Equipment (230,137) (395,292) (106,344) Proceeds from Sale of Equipment - 48,850 36,732 Loans to Licensees (250,000) - - Payments from Licensees Loans 41,573 - - Deposits 144 5,200 (3,693) ------------ ------------- -------------- Net Cash Used by Investing Activities (438,420) (341,242) (73,305) ------------ ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES New Borrowings: Short-Term 1,400,000 200,000 999,500 Long-Term 73,174 - - Debt Reduction: Short-Term (900,000) (250,000) (1,250,000) Long-Term (25,000) (28,836) (81,338) ------------ ------------- -------------- Net Cash Provided from (Used by) Financing Activities 548,174 (78,836) (331,838) ------------ ------------- -------------- Net Increase (Decrease) in Cash and Cash Equivalents 65,954 (402,276) 343,362 Cash and Cash Equivalents, Beginning of Year 114,363 516,639 173,277 ------------ ------------- -------------- Cash and Cash Equivalents, End of Year $ 180,317 $ 114,363 $ 516,639 ============= ============== ==============
See accompanying Notes and Report of Independent Registered Public Accounting Firm F6 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005, 2004 and 2003 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 consolidated 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. During the fiscal year ended September 30, 2005, management unanimously determined that the stock of Allstates Allcargo (US), Inc. is worthless and no future business activities will be conducted through this entity. Consequently, Allstates Allcargo (US), Inc. will be statutorily merged into Allstates Air Cargo, Inc. during the year ended September 30, 2006. 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. 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. NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS (Continued) 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, 2005, 2004 and 2003. The consolidated statements of net income (loss) include the income and expenses of Allstates Air Cargo, Inc. and its subsidiaries for the years ended September 30, 2005, 2004 and 2003. 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 various times during the years ended September 30, 2005, 2004 and 2003, the Company had a cash balance on deposit with one bank that exceeded the $100,000 balance insured by the FDIC. 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. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fair Value of Consolidated Financial Statements Current Assets and Liabilities 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. Non-Current Assets and Liabilities Loan Receivable - Licensee and Other Receivables The fair value of the Loan Receivable - Licensee and Other Receivables is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated fair value of the Loan Receivable approximates its book value. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value of Consolidated Financial Statements (Continued) Deposits The fair value of deposits is the amount payable on demand at the reporting date. Long-Term Debt Rates currently available to financial institutions for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. The estimated fair value of the long-term debt approximates book value. 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. Depreciation expense for the years ended September 30, 2005, 2004 and 2003 was $138,968, $167,202 and $185,728, 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, 2005, 2004 and 2003 were $32,993, $41,217 and $28,121, respectively. Revenue Recognition Revenues and the associated freight transportation costs are recognized at the time the freight departs the terminal of origin for domestic shipments. International air revenues and freight consolidation costs are recognized when shipments are tendered to a carrier for transport to a foreign destination. This method is permissible under Emerging Issues Task Force Issue No. 91-9, "Revenue and Expense Recognition for Freight Services in Progress". Ocean freight consolidation revenues are recognized when the shipment reaches its destination. Revenues of the Audiogenesis Systems division, which involves the sale of safety equipment over the counter, are recognized at point of sale. Trade Receivables Accounts receivable are uncollateralized customer obligations due under normal trade terms generally requiring payment within 30 days from the invoice date. Follow-up correspondence is made if unpaid accounts receivable go beyond 30 days. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Trade Receivables (Continued) Payments of accounts receivable are allocated to the specific invoices identified on the customers remittance advice or, if unspecified, are applied to the earliest unpaid invoices. Trade accounts receivable are stated at the amount management expects to collect from outstanding balances. The carrying amounts of accounts receivable are reduced by a valuation allowance that reflects management's best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances that exceed the due date by several days and based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Changes in the valuation allowance have not been material to the financial statements. The valuation allowance for accounts receivable at September 30, 2005, 2004 and 2003 was $263,202, $250,394 and $229,364, respectively. 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, 2005, 2004 and 2003 was $169,347, $187,999 and $182,379, respectively. NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment are summarized by major classifications as follows: 2005 2004 2003 ---------- --------- ---------- Leasehold Equipment $368,112 $ 361,835 $ 48,062 Vehicles 56,525 56,525 315,789 Equipment and Software 1,126,053 902,192 857,239 Furniture and Fixtures 47,542 47,542 47,542 ---------- --------- ---------- 1,598,232 1,368,094 1,268,632 Less Accumulated Depreciation 999,190 860,221 943,070 ---------- --------- ---------- $ 599,042 $ 507,873 $ 325,562 ========== ========= ========== Computer equipment with a cost of $88,808 is held under a capital lease and depreciation of the assets will commence in the first quarter of fiscal year 2006. NOTE 4 - LOANS AND OTHER RECEIVABLES Loans Receivable - Licensee In March 2005, the Company extended a $250,000 loan to a licensee. The purpose of the loan was to expand the operations of the licensee, with the intended impact of increasing the revenue and profits of the Company. In the past, Allstates has occasionally provided prepaid advances against earned commissions of some of its licensees to help with their short term needs. Such advances, which are considerably smaller in amount, are deducted from their weekly commission payment and are fully recouped within three to six months. However, because of the larger dollar amount involved and the payoff period of three years, the Company required that the licensee's principals execute a promissory note as well as their personal guarantees. The terms of the Note include the payment of the $250,000 loan, with payments due weekly, commencing on March 21, 2005 and continuing for a three year period with successive payments each Monday thereafter, together with interest at the rate charged to Allstates for its bank line of credit. In the event the interest rate paid by Allstates on its line of credit is increased or decreased, the interest rate upon the Note shall increase or decrease by an equal amount and be effective on the first Monday following the date of change. Such loan payments due from the licensee are deducted from the amounts due from Allstates to the licensee for earned commissions. Because that licensee consistently generates sufficient commission monies each week to cover the payments, as well as the personal guarantees of the principals, the collectibility of the loan receivable at the balance sheet date is assured. Therefore, management does not deem an allowance against the loan receivable to be necessary. Other Receivables On May 6, 2004, Allstates filed a complaint in Superior Court against a third party freight brokerage company and its principal owner for accounts receivable monies due them. On May 27, 2004, a Stipulation of Settlement was executed whereby the parties agreed on a settlement in which the defendants, jointly and severally, agreed to pay Allstates the full sum of $71,763 in sixty equal monthly installments of $1,196 each. The payment schedule is interest-free, provided checks are received in a timely manner. The schedule called for the first payment to become due on July 15, 2004, with subsequent payments to be due on the fifteenth day of the remaining months. All scheduled payments have been received on a timely basis thus far. NOTE 5 - AMORTIZATION OF GOODWILL AND RELATED 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, 2005, 2004 and 2003, 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, 2005, 2004 and 2003 were $-0-, $-0- and $1,166, respectively. NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES Lease payable to VAResources, Inc., due in 2005 2004 2003 monthly installments of $2,662 including ------ ------ ------ interest at 11.37%, due June 2008, $ 73,173 $ - $ - secured by computer equipment Less current portion 24,888 - - ------- ------ ------ $ 48,285 $ - $ - Future minimum payments under capital leases as of September 30, 2005 are as follows: 2006 $ 31,940 2007 31,940 2008 21,293 ---------- Total minimum lease payments 85,173 Less amount representing interest 12,000 ---------- $ 73,173 ========== NOTE 7 - LONG-TERM DEBT The Company's notes payable balance at September 30, 2005 and 2004 consist of the following: 2005 2004 2003 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. Allstates assumed this obligation as part of the consideration paid to Mr. Guido in the August 24, 1999 reverse acquisition in which Allstates (then known as Audiogenesis Systems, Inc.) acquired from Mr. Guido 100 percent of the stock of Allstates Air Cargo, Inc. ("AAC"). The debt owed by Mr. Guido to the Hoffman estate arose from the buy/sell agreement between Mr. Guido and his former partner in AAC, A.G. Hoffman, and represents the amount that Mr. Guido was required to pay the Hoffman estate upon Mr. Hoffman's death for Mr. Hoffman's share in AAC. $2,361,730 $2,386,730 $2,411,730 Notes Payable to Bank of America in the aggregate originally totaled $76,903, with repayment over 36 months with monthly payments inclusive of interest ranging from 7.90% and 8.50%. These loans are secured by the vehicles which they relate. - - 3,836 Less: Current Portion 25,000 25,000 25,000 ----------- ---------- ---------- $2,336,730 $2,361,730 $2,390,566 =========== =========== ==========
Future maturities for long-term debt as of September 30, 2005 is as follows: For the fiscal years ended September 30, 2006 25,000 2007 25,000 2008 25,000 2009 25,000 2010 25,000 Thereafter 2,236,730 _________ Total $2,361,730 ========= NOTE 8 - LINE OF CREDIT Allstates Air Cargo, Inc. has a $2,000,000 line of credit agreement with a bank, which expires January 28, 2007. Interest on outstanding borrowings currently accrues at the Wall Street Journal's (WSJ) prime rate of interest per annum (6.75% as of September 30, 2005). The interest rate is predicated upon the Company maintaining a compensating account balance in a non- interest bearing account equal to at least 10% of the outstanding principal balance. 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, 2005, 2004 and 2003 was $1,599,500, $1,099,500 and $1,149,500, respectively. Loan collateral includes the Company's accounts receivable and the unlimited, unconditional guarantees of Joseph M. Guido, Teresa Guido and Allstates Allcargo (US), Inc. NOTE 9 - PROVISION FOR INCOME TAXES A reconciliation of income tax at the statutory rate to the Company's effective rate is as follows: 2005 2004 2003 ---- ---- ---- Expected Federal statutory rate 0.00%* 0.000% 0.000% Expected State statutory rates (average) 6.975% 8.893% 8.893% ------- ------- ------ Total expected 6.975% 8.893% 8.893% statutory rate State Franchise Tax and Miscellaneous Book to Tax Adjustments -0.096% 9.654% -2.253% Deferred income tax expense (benefit): Federal 17.664% 29.138% -35.040% State 4.676% 7.668% -10.310% ------- ------- ------- Income Tax Expense (Benefit) - Effective Tax Rate 29.219% 55.353% -38.710% * Due to the net operating loss generated for the year ended September 30, 2003 and the corresponding carryforwards in September 30, 2005 and 2004, the expected Federal statutory rate is deemed to be 0%. The Company's provision for income taxes as of September 30, 2005, 2004 and 2003 consist of the following: 2005 2004 2003 ---- ---- ---- Current Income Tax Expense Federal $ 17,850 $ (6,318) $ - State 40,768 103,067 62,980 ------- ------- ------- Total - Current 58,618 96,749 62,980 ------- ------- ------- Deferred Income Tax (Benefit) Expense Federal 150,541 152,000 (332,901) State 39,848 40,000 ( 97,912) ------ ------ ------- Total - Deferred 190,389 192,000 (430,813) ------ ------- ------- TOTALS $249,007 $288,749 $(367,833) ======== ======= ======= NOTE 9 - 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, 2005, 2004 and 2003 are as follows: 2005 2004 2003 ---- ---- ---- Deferred Tax Assets -------------------- Accounts Receivable $ 113,177 $ 107,500 $ 101,000 Defferred Payable 15,050 43,900 - Net operating loss 56,755 199,600 389,000 -------- -------- -------- Totals $ 184,982 $ 351,000 $ 490,000 ------ ======== ======== ======== Deferred Tax Liabilities ------------------------ Depreciable and amortizable assets $102,368 $ 78,000 $ 25,000 ======== ======== ======== At September 30, 2004 and 2003, the Company had 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 was approximately $127,000. For consolidated financial statement purposes, a 100% valuation allowance was recorded by management in the amount of $127,000 as of September 30, 2004 and 2003, and therefore, this future estimated tax benefit is not reflected in these consolidated financial statements. As of September 30, 2005, the Company will write off its investment in Allstates Allcargo (US), Inc. for income tax purposes. The current income tax benefit of this transaction is approximately $136,000 and is reflected in the current year tax accrual. NOTE 10 - 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. NOTE 11 - 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 $14,000, $13,000 and $12,000 for the calendar years ended 2005, 2004 and 2003, 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, 2005, 2004 and 2003 totaled $50,426, $43,493 and $31,378, 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, 2005, 2004 and 2003. NOTE 12 - 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, $81,600 and $81,600 for the years ended September 30, 2005, 2004 and 2003, 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 payments to this individual for the years ended September 30, 2005, 2004 and 2003 totaled $566,281, $454,607 and $431,789, respectively. The Company entered into Employment Agreements with four of the Company's stockholders. The Employment Agreements are effective through December 31, 2009. The following is a summary of the terms of these agreements: Annual Stock Position Salary Bonus Options -------- -------- ------ -------- Chairman of the $370,000 3% of fiscal Yes Board year increase in net profits of fiscal year 2004 over fiscal year 2003 President/Chief $250,000 3% of fiscal Yes Executive year increase Officer in net profits of fiscal year 2004 over fiscal year 2003 Executive Vice $250,000 3% of fiscal Yes President/ year increase Chief Operating in net profits of Officer fiscal year 2004 over fiscal year 2003 Chief Financial $185,000 Discretionary Yes Officer NOTE 13 - 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, 2005, no stock options have been issued. NOTE 14 - DESCRIPTION OF LEASING ARRANGEMENTS The Company leases certain terminal facilities and its corporate headquarters under operating leases that expire over the next four years. These operating leases provide the Company with the option to renew its lease at the fair rental value at the end of the lease term. Management expects that leases will be renewed or replaced by other leases in the normal course of business. 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, 2005: Years Ending September 30, -------------------- 2006 585,627 2007 575,967 2008 465,549 2009 78,703 Thereafter - -------- Total $1,705,846 ========== Rent expense under operating leases for the years ended September 30, 2005, 2004 and 2003 was $551,749, $554,321 and $462,284, respectively. NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for: 2005 2004 2003 -------------- ----- ----- ----- Income Taxes $138,429 $ 52,355 $115,091 ======== ======== ======== Interest $242,403 $217,367 $226,714 ======== ======== ======== NOTE 16 - LITIGATION The following lawsuits exist between the Company, its Subsidiaries and other third parties: Masterbrush, LLC and B&G Plastics, Inc. v. Allstates Logistics, Inc., and T.H. Weiss, Inc. On or about December 5, 2005, Masterbrush, LLC ("Masterbrush") and B&G Plastics, Inc. ("B&G") commenced an action against the Company's wholly-owned subsidiary Allstates Logistics, Inc. ("ALI") and T.H. Weiss, Inc. ("Weiss"), alleging various causes of action arising out of the importation by Masterbrush of a quantity of natural bristle paintbrushes produced in China (the "Brushes"). The Complaint alleges that plaintiffs retained ALI to expedite the importation of the Brushes into the United States, that ALI wrongfully failed to advise plaintiffs that the Brushes were subject to federal antidumping duties of 351.92 percent (the "Antidumping Duty") in addition to the 4 percent normal duty, and that by reason of ALI's (alleged) failure to so advise plaintiffs, plaintiffs were required by U.S. Customs to pay the Antidumping Duty, in the amount of $422,282. The plaintiffs seek to recover compensatory and consequential damages. NOTE 16 - LITIGATION (Continued) The action is only recently commenced, and has not progressed past the service of the Summons and Complaint. The ALI intends to contest the matter. As of the date of these financial statements, an opinion of the likelihood of a favorable or unfavorable outcome, or the amount or range of potential loss has not been formed. Liberty Mutual Insurance Company v. Lightning Freight Inc., GTD Logistics, Inc. and Gilberto Cordova GTD Logistics ("GTD") is being represented in a matter involving claims by Liberty Mutual Insurance Company ("Liberty") regarding freight brokerage services that GTD provided for a shipment that was stolen. The tractor trailer hauling the shipment allegedly contained several million dollars of hard disk drives. After the truck and trailer were stolen, the owner of the contents of the trailer made a claim against UPS Supply Chain Solutions, the shipper, who then made a claim against its insurance company, the plaintiff in this case. Liberty is seeking to recover from GTD and also the carrier and truck driver the amount that it expended to cover the loss suffered by its insured, the owner of the contents of the trailer. The Complaint requests damages of not less than $1,400,000. Liberty alleges that when GTD agreed to provide brokerage services for the shipment of the cargo, GTD also promised to select a motor carrier with no less than $1 million in cargo insurance coverage, and to select a carrier that would follow certain asset protection rules. Plaintiff alleges breach of contract and negligence against GTD for failure to comply with these alleged promises. GTD and Lightning Freight, Inc., the carrier, filed Cross-Complaints against each other and Gilberto Cordova, the truck driver. Gilberto Cordova never appeared in the matter and the Court entered a default against him. The parties have reached a settlement of the action, pursuant to which GTD will pay the sum of ten thousand dollars ($10,000) in full and complete settlement of all claims. On March 6, 2006 the Court granted the parties' Application for Determination of Good Faith Settlement Pursuant California Code of Civil Procedure, which would bars any other joint tortfeasor or co-obligor from any further claims against GTD arising out of the transaction. The entry of that March 6 Order finalized the settlement of the action, and on March 8 GTD submitted the settlement payment, thus completing its obligations under the settlement. Note 17 - QUARTERLY RESULTS OF OPERATIONS (Unaudited) The following table presents summarized quarterly results for the fiscal year ended September 30, 2005: (dollars in thousands) Q1 Q2 Q3 Q4 Revenues 16,453 15,387 18,663 18,340 Net revenues (after transportation costs) 4,731 4,867 5,330 5,056 Net income after taxes 65 122 165 252 Basic net income per common share 0.00 0.00 .01 .01 Diluted net income per common share 0.00 0.00 .01 .01 The following table presents summarized quarterly results for the fiscal year ended September 30, 2004: Q1 Q2 Q3 Q4 Revenues 13,458 12,096 14,566 14,586 Net revenues (after transportation costs) 4,431 3,970 4,679 4,564 Net income after taxes 155 (76) 165 (11) Basic net income per common share 0.00 (0.00) .01 (0.00) Diluted net income per common share 0.00 (0.00) .01 (0.00) 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 71 Chairman of the Board Sam DiGiralomo 62 President, CEO, Director Barton C. Theile 59 Executive Vice President, COO, Director Craig Stratton 54 CFO, Secretary, Treasurer, Director Joseph Buckelew 76 Director Alan Meyer 61 Director Charles F. Starkey 70 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 2005 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. 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. JOSEPH BUCKELEW, became a director on July 6, 2005. Mr. Buckelew is presently the President of Commerce Bank/Shore Division and Vice Chairman of Commerce insurance Services. He is also currently Vice Chairman of the New Jersey Sports and Exposition Authority. Mr. Buckelew is presently on the Board of Directors of Commerce Bank/Shore, N.A. and a former Vice Chairman of the Board of Directors of Jersey Shore Savings & Loan Association. He is the former Chairman of the Ocean County Board of Elections and of the Ocean County Pollution Control Financing Authority. He is also Chairman of the Ocean County College Foundation and a Member of the Committee and Vice Chairman of the Kimball Medical Center Foundation, Inc. Mr. Buckelew served as Chairman of the New Jersey highway Authority for seven years. He is also on the Board of Trustees of Saint Barnabas Health Care System. ALAN MEYER, became a director on July 6, 2005. Mr. Meyer is a certified public accountant, and has for the past five years, been a principal in the firm of Hutchins Farrell, Meyer & Allison PA, Certified Public Accountants. CHARLES F. STARKEY, became a director on July 6, 2005. Mr. Starkey is a partner in the law firm of Starkey, Kelly, Bauer & Kenneally. In 1961 he received his J.D. degree from Seton Hall University, and was an assistant prosecutor of Ocean County from 1964 to 1967. He served as a Commissioner, New Jersey Highway Authority from 1976 to 1986. He also served as Special Counsel for the Township of Lakewood and as Township Attorney for Brick Township. 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. 2005 339,233 44,153 88,200(2) Guido, 2004 329,811 81,600(1) Chairman 2003 311,818 81,600(1) of the Board Sam 2005 228,677 44,153 566,281(3) DiGiralomo, 2004 216,000 526,957(4) President, 2003 208,000 413,864(3) CEO B. Theile, 2005 227,674 44,153 23,023(7) COO, 2004 213,948 23,013(6) Exec. VP 2003 206,316 9,271(5) Craig Stratton, 2005 169,262 7,500(8) CFO, 2004 148,077 7,800(8) Secretary, 2003 129,039 7,800(8) Treasurer
(1) Rental income from leasing of Forked River corporate office (2) Rental income from leasing of Forked River corporate office ($81,600), and car allowance for use of personal vehicle ($6,600) (3) Royalties paid in connection with site licensing agreements (4) Royalties paid in connection with site licensing agreements ($454,607), and reimbursement of income taxes due IRS in connection with insurance settlement ($72,350). (5) Car allowance for use of personal auto ($7,800) and commission paid for management services to GTD Logistics, Inc. ($1,471) (6) Car allowance for use of personal auto ($7,800) and commission paid for management services to GTD Logistics, Inc. ($15,213) (7) Car allowance for use of personal auto ($7,500) and commission paid for management services to GTD Logistics, Inc. ($15,523) (8) Car allowance for use of personal auto On June 6, 2005, the Company entered into individual employment agreements with each of the Executives. The employment agreements are effective as of April 5, 2005, and expire on December 31, 2009, but may be extended if agreed to in writing by the parties. The following is a summary of the terms of these agreements: Annual Name/Position Salary Bonus Joseph M. Guido, $370,000 3% of fiscal year Chairman of increase in net profits The Board from fiscal year end 2003 to fiscal year end 2004 Sam DiGiralomo, $250,000 3% of fiscal year President/Chief increase in net profits Executive Officer from fiscal year end 2003 to fiscal year end 2004 Barton M. Theile, $250,000 3% of fiscal year Executive Vice President/ increase in net profits Chief Operating Officer from fiscal year end 2003 to fiscal year end 2004 Craig D. Stratton, $185,000 At the discretion of Chief Financial Officer 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, 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, 2005 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 19,010,000(2) 58.47% 4 Lakeside Drive South Forked River, NJ 08731 Common Sam DiGiralomo 3,850,000 11.84% 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 72.46% __________________ (1) Based upon 32,509,872 shares outstanding as of December 28, 2005. (2) Comprised of 18,250,000 shares owned by Joseph Guido and 760,000 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 January 31, 2006, 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 2005. Rent expense under this lease totaled $81,600 for the year ended September 30, 2005. 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 and are active which encompass its Minneapolis, San Francisco, Indianapolis, Philadelphia, Boston, Dallas, Atlanta, Raleigh, Detroit and Nashville licensee locations. Royalty payments to Mr. DiGiralomo for the year ended September 30, 2005 totaled $566,281. 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. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Our independent auditing firm during the fiscal years ended September 30, 2005 and September 30, 2004 was Cowan, Gunteski and Co., who have audited our financial statements since fiscal 1999. All audit and permissible non-audit services provided by Cowan, Gunteski and Co. are pre-approved by the Allstates Board of Directors, as the Company is not required to have an audit committee at the present time. The fees of Cowan, Gunteski and Co. billed to the Company for each of the last two fiscal years for audit services and other services are shown below: Audit fees. Cowan, Gunteski and Co. billed us an aggregate of $80,167 and $102,824 during fiscal 2005 and 2004 for professional services rendered for the audit of the Company's financial statements and the review of the interim financial statements included in the Company's quarterly reports. Audit-related fees. During the fiscal years ended September 30, 2005 and 2004, Cowan, Gunteski and Co. did not provide or bill for any audit-related services that were not covered under audit fees. Tax fees. The aggregate fees billed during fiscal 2005 and 2004 for tax services rendered by Cowan, Gunteski and Co. were $24,723 and $24,599, respectively. All other fees. During the fiscal years ended September 30, 2005 and 2004, Cowan, Gunteski and Co. did not provide or bill for other services that were not included above. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following exhibits are filed pursuant to Item 601 of Regulation S-K. 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 Registrant's Chief Executive Officer, Sam DiGiralomo, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2+ Certification of Registrant's Chief Financial Officer, Craig D. Stratton, pursuant to Section 906of 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: /s/ Sam DiGiralomo President and CEO DATED: May 17, 2006 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date By: /s/ Joseph M. Guido Chairman of the Board of May 17, Directors 2006 By: /s/ Sam DiGiralomo President, CEO and May 17, Director 2006 By: /s/ Barton C. Theile Executive Vice President, May 17, COO and Director 2006 By: /s/ Craig D. Secretary, Treasurer, and May 17, Stratton Chief Financial Officer 2006 (Principal Financial Officer and Principal Accounting Officer)