10-K 1 awc10k09-06.txt ALLSTATES WORLDCARGO, INC. FORM 10-K U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Form 10-K (Mark One) [x] ANNUAL REPORT UNDER SECTION 13 0R 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2006 [ ] 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 Rule 12b-2 of the Act. Yes [ ] No [x] The number of shares of Common Stock outstanding as of December 29, 2006 was 32,509,872 shares. At December 29, 2006, 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 20 offices throughout the United States, including the corporate headquarters, and employs 89 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 affect certain cost savings. Marketing and Licensing Allstates markets its services through a network of 19 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 19 branch locations, 13 are licensees operations, while 6 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. 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 calendar year 2006, Allstates began 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 Allstates is rolling out the new system on a station-by-station basis. Through the end of December 2006, nine of the Company's stations have converted to the new tracking system. Management expects the full conversion to be completed by June 30, 2007. 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 45 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 16, 2006, the Company employed a total of 85 individuals. Allstates Air Cargo, Inc. and subsidiaries accounted for 83 employees (of which 5 are part time), including 43 in operations and customer service, 13 in sales, marketing and related activities, 3 in management information systems, and 24 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 2006, the maximum contribution allowed by the Code was the lesser of 100% of an employees' compensation, or $15,000. Participants who attained age 50 prior to the close of the plan year are eligible to make catch-up contributions of an additional $5,000, 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, 2006. 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. Company leased properties generally run for an average term of three years and are scheduled to expire between fiscal 2008 and fiscal 2009. The total rent expense for company leased facilities was approximately $636,000 during fiscal 2006. 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, 2006 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 ITEM 3. LEGAL PROCEEDINGS Environmental matter As previously reported, the Company has been involved in an ongoing environmental proceeding pertaining to five underground storage tanks and two above ground storage tanks that were removed from a facility in which the Company leased office space at the time prior to 1997. Also as previously reported, the Company performed certain remedial work and monitoring as required by the New Jersey Department of Environmental Protection (the "NJDEP"), and at the NJDEP's request, the Company submitted proposal that no further action was required. The NJDEP 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. As previously reported, 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 NJDEP'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 was submitted by counsel to the NJDEP 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. Although the NJDEP has acknowledged that a high penalty is unlikely, it cannot estimate the amount of penalty until the time of settlement. Allstates will proceed to resolve the issue administratively pursuant to the Notice of Non- Compliance process. A conservative estimate for the penalty, including some premium assessed by the NJDEP, may be $3,000-$10,000. The law provides for higher penalties, but the NJDEP has not typically assessed significant penalties in this type of matter. Allstates counsel has received written confirmation from the property owner that it would assume the cost of the penalty, conservatively estimated at $3,000 to $10,000, 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. As previously reported, pursuant to the Settlement Agreement that resolved the litigation that was commenced in October 2004 by the Company's majority shareholder (the "Shareholder Litigation"), the By- Laws of the Company were amended to provide that the Board of Directors shall consist of seven members. The number of directors prior to the amendment was four. Also pursuant to the Settlement Agreement, Charles F. Starkey, Alan E. Meyer, and Joseph Buckelew were appointed to fill the vacancies on the Board of Directors created by the expansion of its size. The By-Laws were also amended, pursuant to the Settlement Agreement, to provide for the manner in which vacancies in the Board of Directors were to be filled. The Settlement Agreement also required the parties 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 August 2, 2006, the Company received a Written Consent in Lieu of a Special Meeting of the Stockholders of Allstates WorldCargo, Inc. (the "Written Consent"), signed by the Messrs. Guido, DiGiralomo, Theile, and Stratton, all of whom constitute the holders of a majority of the issued and outstanding shares of stock of the Company, and the parties to the Settlement Agreement. The effect of the Written Consent was to modify the Settlement Agreement by (1) relieving the parties of the obligation to nominate and vote for Messrs. Buckelew, Starkey, and Meyer (or their duly appointed successors) as Directors, (2) removing Messrs. Buckelew, Starkey, and Meyer from the Board of Directors, (3) amending Section 3.02 of the By- Laws to provide that the Board of Directors shall consist of not less than one and not more than ten directors, with the precise number of directors within that range to be set by the Board each year before the annual meeting of shareholders, and with the number of directors immediately following the adoption of the amended Section 3.02 being four, and (4) amending Sections 3.12(b) and 3.12(c) to provide that vacancies in the Board shall be filled by an affirmative vote of the remaining Board. The Written Consent also provided that the By-Laws, as amended, have been adopted by the Shareholders, and may not be amended or repealed by the Board of Directors. Liberty Mutual Insurance Company v. Lightning Freight Inc., GTD Logistics, Inc., and Gilberto Cordova. As previously reported, The Company's subsidiary, GTD Logistics, Inc. ("GTD") was 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 allegedly 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 sought to recover from GTD, and also from the carrier and truck driver, the amount that allegedly expended to cover the loss suffered by its insured, the owner of the contents of the trailer. The Complaint requested damages of not less than $1,400,000. Liberty alleged 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 alleged 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 reached a settlement of the action, pursuant to which GTD paid 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 to California Code of Civil Procedure, which would bar 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, 2006 GTD submitted the settlement payment, thus completing its obligations under the settlement. Jeffrey H. Mims, Chapter 7 Trustee v. Allstates WorldCargo, Inc. As previously reported, the Company was a defendant in an Adversary Proceeding in the bankruptcy case of Mosaic Group US., Inc., pending in the United States Bankruptcy Court for the Northern District of Texas, Bankruptcy Case No. 02-81440. The lawsuit sought to recover 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. In April 2006, the case was settled, with the Company agreeing to pay the total sum of $45,000 in settlement of all claims. The Bankruptcy Court approved that settlement by Order dated May 18, 2006. The Company made the agreed-upon payment, and the case has been concluded. Masterbrush, LLC and B&G Plastics, Inc. v. Allstates Logistics, Inc. and T.H. Weiss, Inc. As previously reported, 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 alleged 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. The case settled in November 2006. Pursuant to the settlement, the case was dismissed against the Company, without any admission of liability on the Company's part. The Company was not, and will not be, required to pay any money to the plaintiffs or any other party." Autosplice, Inc. v. Allstates WorldCargo, Inc. On or about November 30, 2006, a complaint was filed against the Company in the Superior Court of California, County of San Diego, Docket No. GIC876245. In that case, the plaintiff alleges breach of contract and tortious behavior in connection with a shipment of equipment handled by the Company. The plaintiff alleges that it was damaged in the amount of $139,379, which it seeks to recover. The plaintiff has reserved the right to seek punitive damages in the amount of $400,000. The action is only recently commenced, and has not progressed past the service of the Summons and Complaint. The Company intends to contest the matter, and has turned the matter over to its insurance carrier, which has confirmed acceptance for defense and/or settlement. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On August 2, 2006, the Company received a Written Consent in Lieu of a Special Meeting of the Stockholders of Allstates WorldCargo, Inc., resolving that the By-Laws of the Company were to be amended. The action taken by the stockholders was described in detail in the Form 8-K filed by the Company on August 4, 2006, which Form 8-K is incorporated herein by reference. 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, 2006. 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) 2002 2003 2004 2005 2006 STATEMENT OF OPERATIONS DATA Revenues $36,403 $46,293 $54,705 $68,842 $71,217 Income (loss) from operations 534 (326) 727 1,086 449 Net income (loss) 136 (582) 233 603 80 Basic net income (loss) per common share $.00 ($.02) $.01 $.02 $.00 Diluted net income (loss) per common share $.00 ($.02) $.01 $.02 $.00 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 $1,534 $1,050 $1,081 $ 1,527 $1,369 Total assets 8,050 8,287 9,787 12,699 12,807 Liabilities - current 5,477 6,338 7,577 9,838 9,896 Liabilities - long term 2,453 2,412 2,440 2,487 2,457 Total stockholders' equity (deficit) 120 (462) (229) 374 454 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, 2006 2005 2004 -------------------------------- Revenues 100.0% 100.0% 100.0% Cost of transportation 70.9 71.0 67.7 ----- ----- ----- Gross profit 29.1 29.0 32.3 Operating expenses: Personnel costs 9.7 9.8 11.9 License commissions and royalties 12.7 11.5 12.0 Other selling, general and administrative expenses 6.1 6.1 7.1 ----- ----- ----- Total operating expenses 28.5 27.4 31.0 Operating income 0.6 1.6 1.3 Interest expense, net (0.4) (0.4) (0.4) Other income/(expense) 0.1 0.0 0.0 ----- ----- ----- Net income before tax provision 0.3 1.2 0.9 Tax provision (0.2) (0.3) (0.5) ----- ----- ----- Net income 0.1% 0.9% 0.4% REVENUES Fiscal 2006 vs. fiscal 2005 The revenues of Allstates WorldCargo represent gross consolidated sales less customer discounts. Sales increased for the fiscal year ended September 30, 2006 by approximately $2.4 million, or 3.5%, to 71,217,000, over the previous fiscal year ended September 30, 2005, reflecting an overall increase in volume of freight shipped. Domestically-routed freight revenues increased by $1,337,000, or 2.4%, to $56,179,000 over the previous fiscal year, and international freight revenues increased by $1,038,000, or 7.4%, to $15,038,000 over that earned in the prior fiscal year. Domestic sales increased in fiscal 2006 compared to the prior year despite the adverse affect of Allstates' termination of the contractual relationship with our Chicago branch licensee during the second quarter of the year. Although management determined that the termination of the agreement was a necessary and prudent decision, domestic revenue for that branch alone decreased from the previous fiscal year by approximately $2,229,000. The growth in international revenues primarily reflects an increase in air export business. Fiscal 2005 vs. fiscal 2004 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. NET REVENUES Fiscal 2006 vs. fiscal 2005 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, the total cost of transportation was stable for the fiscal year ended September 30, 2006 in comparison to the fiscal year ended September 30, 2005, decreasing by 0.1%, to 70.9% of sales. The cost of transportation percentage on international shipments decreased by 1.4% primarily reflecting growth in higher margin air export freight, while the cost percentage on domestic shipments increased slightly by 0.2% of sales primarily due to the continued growth in selected lower margin distribution business. In absolute terms, cost of transportation increased by $1,636,000, or 3.3%, to $50,494,000 for the fiscal year ended September 30, 2006 compared to the prior fiscal year, reflecting the increase in sales. Gross margins, which are stated as a percentage of net revenues to gross sales, increased to 29.1% of sales for fiscal 2006. Net revenues increased by $740,000, or 3.7%, to $20,723,000 in fiscal 2006 versus fiscal 2005. Fiscal 2005 vs. fiscal 2004 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. SELLING, GENERAL & ADMINISTRATIVE EXPENSES Fiscal 2006 vs. fiscal 2005 Selling, general and administrative expenses include personnel costs, licensee commissions and other costs necessary to operate our business. SG&A expenses increased as a percentage of revenues by 1.1%, to 28.5%, for the fiscal year ended September 30, 2006 when compared to the prior fiscal year ended September 30, 2005. In absolute terms, operating expenses increased by approximately $1,376,000, or 7.3%, to $20,274,000. The increase in operating cost expenditures can be primarily attributed to a combination of higher licensee commission, personnel and facilities costs. 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 $1,207,000 in fiscal 2006 over fiscal 2005. The higher expense is primarily due to the change in status of our Newark, NJ branch from a company-owned branch location to a licensee operated station effective April 1, 2006. Licensee commissions and royalties expensed to that station totaled approximately $1,054,000 in fiscal 2006, based on the gross profits generated at that location. On a comparative basis from fiscal 2005, the Company eliminated approximately $830,000 of normal operating expenses at that station, primarily in personnel and facilities related costs. A net increase in gross profits at our other licensee locations accounts for the balance of the increase in licensee commissions. As a percentage of revenues, licensee commissions and royalties increased by 1.2%, to 12.7% of sales, in fiscal 2006. Personnel costs increased overall by approximately $157,000 during the fiscal year ended September 30, 2006, despite a savings in personnel costs at our Newark station of approximately $551,000. The increase primarily reflected higher salary and related expenses for operations and corporate personnel. During the year, Allstates added to headcount of operations personnel at other company stations, as well as corporate personnel, necessary to sustain the growth in business volume and support the Company's infrastructure. Corporate salary expense was also higher due to the full year effect of new employment agreements that were ratified during the third quarter of fiscal 2005. Rent expense increased approximately $85,000 over the previous fiscal year, net of a comparative decrease in rent at the Newark station of approximately $78,000. The increase was driven by new warehouse leases at two of our company stations. Expenses related to business travel and entertainment increased by approximately $76,000 during the fiscal year ended September 30, 2006 in comparison to the same period of the prior year, primarily reflecting the increased business volume. Fees accrued on behalf of the Company's three Directors that were appointed during the fourth quarter of fiscal 2005 amounted to $75,000 for the fiscal year. Those Directors were dismissed by majority vote prior to the end of the 2006 fiscal year. Bad debt expense increased for the fiscal year ended September 30, 2006 in comparison to the previous fiscal year by approximately $108,000. This increase is due in part to a negotiated settlement payment of $45,000 the Company made during the fiscal year for the return of funds received from a customer who had filed for Chapter 11 bankruptcy status in 2005, as well as a $25,000 downward adjustment made to the reserve account during the second quarter of fiscal 2005. MIS fees increased by approximately $94,000 for the fiscal year ended September 30, 2006 in comparison to the prior year period, which is primarily a result of our using two computer systems during the transition from our older system to the new system. Such costs include fees for training, troubleshooting and system enhancement on the new Air-Trak computer system, in addition to costs associated with the maintenance of our current system. Depreciation expense increased by approximately $73,000 in fiscal 2006 versus fiscal 2005 primarily due to Allstates purchase of the Air- Trak related software and hardware. Legal fees decreased by approximately $374,000 during the fiscal year ended September 30, 2006 as compared to fiscal 2005. During fiscal 2005, legal fees were driven to a higher level as a result of Allstates defense and settlement effort related to an action commenced by a majority shareholder against the Company. Fiscal 2005 vs. fiscal 2004 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 $1,979,000, or 11.7%, to $18,897,000 in fiscal 2005 in comparison to fiscal 2004, primarily reflecting higher expense for licensee commissions and legal fees. 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. OPERATING INCOME Income from operations decreased by approximately ($637,000) for the fiscal year ended September 30, 2006, to $449,000, versus the fiscal year ended September 30, 2005, primarily reflecting the increase in operating expenses. The operating margin decreased by (1.0%) during fiscal year 2006, also reflecting the increase in operating expenses as a percent of revenues. Income from operations increased by approximately $359,000 for the fiscal year ended September 30, 2005, to $1,086,000, 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. 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 our bank. Interest on the note was approximately $164,000 and $166,000 during fiscal 2006 and fiscal 2005, respectively. Net interest expense increased by approximately $90,000 during the fiscal year ended September 30, 2006, to $323,000 in comparison to the prior year, reflecting the rise in interest rates during the year applied to higher average outstanding borrowings. Net interest expense during the fiscal year ended September 30, 2005 increased by approximately $16,000 from the previous fiscal year, to $234,000, reflecting a higher average borrowing rate applied to higher average outstanding borrowings. OTHER INCOME Other income totaled approximately $94,000 in fiscal 2006, primarily representing funds received during the year from the final distribution settlement of the Q Logistics Chapter 11 filing that took place in February 2001. NET INCOME Net income before taxes decreased by approximately ($656,000), to $196,000 for the fiscal year ended September 30, 2006, compared to the previous fiscal year then ended. The Company recorded a tax provision of approximately $116,000 for fiscal 2006. Net income after taxes for fiscal 2006 was approximately $80,000 versus net income of $603,000 in the previous fiscal year. 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. Liquidity and Capital Resources Net cash used for operating activities was approximately $355,000 for the fiscal year ended September 30, 2006 compared to net cash used for operations of approximately $44,000 for the fiscal year ended September 30, 2005. In fiscal 2006, cash was used primarily to satisfy the Company's accounts payable obligations, resulting in a decrease in accounts payable and accrued expenses of approximately $687,000, as well as to finance the approximately $303,000 increase in accounts receivable, offset by approximately $584,000 of income net of non-cash charges. The increase in accounts receivable relates primarily to the increase in revenue in fiscal 2006 over fiscal 2005. The decrease in accounts payable primarily reflects an accelerated cycle of payments. 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. At September 30, 2006, the Company had cash of $112,000 and net working capital of $1,369,000, compared with cash of $180,000 and net working capital of $1,527,000 respectively, at September 30, 2005. The decrease in working capital at September 30, 2006 compared to September 30, 2005 is primarily attributable to capital expenditures made during the year, offset by the Company's net income as well as the collection of loan proceeds. The Company's investing activities are primarily comprised of expenditures for capital equipment, for the most part 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. During the fiscal year ended September 30, 2006, the Company made approximately $356,000 in purchases toward the new system, of which approximately $120,000 is financed by a three year leasing arrangement. In addition, during the third and fourth quarters of fiscal 2006, Allstates paid a sum of approximately $147,000 to the Newark, NJ licensee as a start-up fee. Allstates has capitalized this expenditure as a leasehold improvement and will depreciate it over a fifteen year period. In total, capital expenditures amounted to approximately $531,000 during the fiscal year ended September 30, 2006. For the fiscal year ended September 30, 2005, capital expenditures totaled approximately $230,000. Proceeds from the sale of fixed assets, primarily of company-owned automobiles, amounted to approximately $49,000. 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. During fiscal 2006, Allstates collected $79,996 of principal on the loan, and collected $41,573 during fiscal 2005. The Company has a commercial line of credit with a bank, which became effective on March 30, 2006, pursuant to which the Company may borrow up to $3,000,000, based on a maximum of 70% of eligible accounts receivable. Per the agreement, which expires February 28, 2007, interest on outstanding borrowings accrues at the banks prime rate of interest (8.25% at September 30, 2006). Allstates previously had a $2,000,000 line of credit with a different bank, which was originally scheduled to expire on January 31, 2007. However, that line of credit was paid off and terminated concurrent with the opening of the line of credit with the new bank. Outstanding borrowings on the lines of credit at September 30, 2006 and 2005 were $2,300,000 and $1,600,000, 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, 2006 Contractual Obligations (dollars in thousands) Payments Due by Fiscal Year Total 2007 2008 2009 Thereafter Long-term Debt (1) 2,337 25 25 25 2,262 Interest on long-term debt (1) 7,644 163 161 159 7,161 Line of Credit (2) 102 102 Capital Lease Obligations (3) 154 82 72 Operating Leases (4) 1,315 574 582 159 Total 11,552 946 840 343 9,423 (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 8.25% interest on $3,000,000 borrowing against revolving line of credit facility, expiring February 28, 2007. (3) Capital lease obligation represents principal and interest on purchase of Air-Trak computer system. Value of financed equipment is approximately $211,000. 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, Pittsburgh, PA, 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 As of September 30, 2006 and 2005 and for the Years Ended September 30, 2006, 2005 and 2004 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS As of September 30, 2006 and 2005 and for the Years Ended September 30, 2006, 2005 and 2004 CONTENTS Page REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1 FINANCIAL STATEMENTS Consolidated Balance Sheets 2 -3 Consolidated Statements of Net Income 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, 2006 and 2005, and the related consolidated statements of net income, stockholders' equity (deficit), and cash flows for the three years ended September 30, 2006, 2005 and 2004. 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 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, 2006 and 2005, and the results of their operations and cash flows for the three years ended September 30, 2006, 2005 and 2004 in conformity with accounting principles generally accepted in the United States of America. Toms River, New Jersey December 13, 2006 1 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2006 and 2005
ASSETS 2006 2005 ----------- ----------- CURRENT ASSETS Cash and Cash Equivalents $ 111,630 $ 180,317 Accounts Receivable, net of allowance for doubtful accounts 10,707,363 10,681,589 Inventories 18,421 29,641 Prepaid Expenses and Other Assets 129,335 127,550 Prepaid Income Taxes 52,297 80,415 Loans Receivable - Licensee - Current Portion 86,190 80,385 Deferred Tax Asset - Current Portion 159,859 184,982 ----------- ----------- Total Current Assets 11,265,095 11,364,879 PROPERTY AND EQUIPMENT, net of accumulated depreciation 892,274 599,042 ----------- ----------- INTANGIBLE AND OTHER ASSETS Deposits 46,511 33,227 Loans Receivable - Licensee 42,241 128,042 Other Receivables 25,346 38,504 Goodwill, including related acquisition costs, net of accumulated amortization 535,108 535,108 ----------- ----------- Total Intangible and Other Assets 649,206 734,881 ----------- ----------- Total Assets $12,806,575 $12,698,802 =========== ===========
See Accompanying Notes and Report of Independent Registered Public Accounting Firm 2 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2006 and 2005
LIABILITIES AND STOCKHOLDERS' EQUITY 2006 2005 ----------- ----------- CURRENT LIABILITIES Accounts Payable $ 5,810,199 $ 6,420,955 Accrued Expenses 1,690,800 1,767,391 Short-Term Borrowings Under Line of Credit 2,300,000 1,599,500 Current Portion of Obligations Under Capital Leases 69,624 24,888 Current Portion of Long-Term Debt 25,000 25,000 ----------- ----------- Total Current Liabilities 9,895,623 9,837,734 LONG-TERM LIABILITIES Deferred Tax Liability - Non-Current Portion 77,869 102,368 Obligations Under Capital Leases, less current portion 67,677 48,285 Long-Term Debt, less current portion 2,311,730 2,336,730 ----------- ----------- Total Long-Term Liabilities 2,457,276 2,487,383 ----------- ----------- Total Liabilities 12,352,899 12,325,117 ----------- ----------- STOCKHOLDERS' EQUITY Common Stock, $.0001 par value, 50,000,000 shares Authorized, 32,509,872 Shares Issued and Outstanding 3,251 3,251 Retained Earnings 450,425 370,434 ----------- ----------- Total Stockholders' Equity 453,676 373,685 Total Liabilities and Stockholders' Equity $12,806,575 $12,698,802 =========== ===========
See Accompanying Notes and Report of Independent Registered Public Accounting Firm 3 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF NET INCOME For the Years Ended September 30, 2006, 2005 and 2004 2006 2005 2004 ---------- ---------- ---------- REVENUES $71,217,029 $68,841,843 $54,705,311 COST OF TRANSPORTATION 50,494,182 48,858,589 37,060,406 ---------- ---------- ---------- NET REVENUES 20,722,847 19,983,254 17,644,905 OPERATING EXPENSES Personnel Costs 6,896,263 6,739,203 6,536,983 Licensee Commissions and Royalties 9,125,963 7,918,505 6,539,285 Independent Sales Agent Commissions 108,766 201,498 247,398 Selling, General and Administrative Expenses 4,143,080 4,037,984 3,594,389 ---------- ---------- ---------- Total Operating Expenses 20,274,072 18,897,190 16,918,055 ---------- ---------- ---------- Income from Operations 448,775 1,086,064 726,850 ---------- ---------- ---------- OTHER INCOME (EXPENSE) Interest Income 12,571 7,694 - Interest Expense (336,060) (241,526) (217,367) Gain (Loss) on Sale of Equipment (15,360) - 3,071 Loss on Foreign Exchange ( 7,672) - - Other Income 93,606 - 9,093 ---------- ---------- ---------- Total Other Income (Expense) (252,915) (233,832) (205,203) ---------- ---------- ---------- Income Before Provision for Income Tax Expense 195,860 852,232 521,647 Provision for Income Tax Expense 115,869 249,007 288,749 ---------- ---------- ---------- Net Income Applicable to Common Shareholders' $ 79,991 $ 603,225 $ 232,898 ========== ========== ========== Weighted Average Common Shares - Basic 32,509,872 32,509,872 32,509,872 Net Income per Common Share - Basic $ 0.00 $ 0.02 $ 0.01 Weighted Average Common Shares - Diluted 32,509,872 32,509,872 32,509,872 Net Income per Common Share - Diluted $ 0.00 $ 0.02 $ 0.01
See Accompanying Notes and Report of Independent Registered Public Accounting Firm 4 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) For the Years Ended September 30, 2006, 2005 and 2004 Common Stock Retained Total Number of Earnings Stockholders' Shares Par Value (Deficit) Equity (Deficit) --------- --------- ---------- ---------------- Balance at September 30, 2003 32,509,872 $3,251 $(465,689) $( 462,438) Consolidated net income 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 income 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 Consolidated net income for the fiscal year ended September 30, 2006 - - 79,991 79,991 ---------- --------- ---------- ------------- Balance at September 30, 2006 32,509,872 $3,251 $ 450,425 $ 453,676 ========== ========= =========== =============
See Accompanying Notes and Report of Independent Registered Public Accounting Firm 5 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended September 30, 2006, 2005 and 2004 2006 2005 2004 ------------ ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income Applicable to Common Shareholders $ 79,991 $ 603,225 $ 232,898 Adjustments to reconcile net income to net cash provided from (used by) operating activities: Depreciation and Amortization 211,847 138,968 167,202 Provision for Bad Debts 277,282 169,347 187,999 Loss (Gain) on Sale of Equipment 15,360 - (3,071) (Increase) Decrease in: Accounts Receivable (303,055) (2,777,545) (2,035,182) Inventories 11,220 386 ( 1,383) Prepaid Expenses and Other Assets 11,376 (24,121) (15,386) Prepaid Income Taxes 28,117 (80,415) - Deferred Tax Asset - Current Portion 25,123 166,018 139,000 Increase (Decrease) in: Accounts Payable (610,756) 1,146,956 937,377 Accrued Expenses (76,591) 589,013 355,348 Deferred Tax Liability - Non-Current Portion (24,499) 24,368 53,000 ------------ ------------- -------------- Net Cash Provided from (Used by) Operating Activities (354,585) (43,800) 17,802 ------------ ------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of Equipment (530,940) (230,137) (395,292) Proceeds from Sale of Equipment 10,500 - 48,850 Loans to Licensee - (250,000) - Payments from Licensee Loans 79,996 41,573 - Deposits (13,285) 144 5,200 ------------ ------------- -------------- Net Cash Used by Investing Activities (453,729) (438,420) (341,242) ------------ ------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES New Borrowings: Short-Term 1,411,860 1,400,000 200,000 Long-Term 120,067 73,174 - Debt Reduction: Short-Term (711,360) (900,000) (250,000) Long-Term (80,940) (25,000) (28,836) ------------ ------------- -------------- Net Cash Provided from (Used by) Financing Activities 739,627 548,174 (78,836) ------------ ------------- -------------- Net Increase (Decrease) in Cash and Cash Equivalents (68,687) 65,954 (402,276) Cash and Cash Equivalents, Beginning of Year 180,317 114,363 516,639 ------------ ------------- -------------- Cash and Cash Equivalents, End of Year $ 111,630 $ 180,317 $ 114,363 ============ ============= ==============
See Accompanying Notes and Report of Independent Registered Public Accounting Firm 6 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2006 and 2005 NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS Nature of Operations On August 24, 1999, Audiogenesis Systems, Inc. (Audiogenesis) acquired 100 percent of the common stock of Allstates Air Cargo, Inc. (Air Cargo) in a reverse acquisition. As a result of the transaction, Air Cargo became a wholly-owned subsidiary of Audiogenesis, and the former sole shareholder of Air Cargo became a 56.91% shareholder of Audiogenesis. On November 4, 1999, Audiogenesis filed a Certificate of Amendment to its Certificate of Incorporation, changing its name to Allstates WorldCargo, Inc. (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 (under the name Audiogenesis Systems, Inc.) pursuant to a corporate reorganization of Genesis Safety Systems, Inc. (Genesis). On January 14, 1997, the Company's operations included sales and distribution of safety equipment, development of audio-visual products, including safety training programs and sales and marketing presentations, development of a device to treat tinnitus, and development of an echolocation device to assist sighted persons in conditions of low visibility and the blind. The Company ceased all efforts concerning the the tinnitus 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. was 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. 7 NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS (Continued) 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. 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, 2006 and 2005. The consolidated statements of net income include the income and expenses of Allstates Air Cargo, Inc. and its subsidiaries for the years ended September 30, 2006, 2005 and 2004. All material intercompany payables, receivables, revenues and expenses have been eliminated for purposes of this consolidation. Basis of Accounting The Company prepares its consolidated financial statements on the accrual method of accounting, recognizing income when earned and expenses when incurred. 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. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Fair Value of Consolidated Financial Statements 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. 8 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Fair Value of Consolidated Financial Statements (Continued) 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. 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. Inventory 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. Property and Equipment and Depreciation Property and equipment are recorded at cost and depreciated using the straight-line method for financial reporting purposes. Depreciation expense for the years ended September 30, 2006, 2005 and 2004 is $211,847, $138,968 and 167,202, respectively. Repair and maintenance expenditures which do not extend the useful lives of the related assets are expensed as incurred. Gains or losses on the disposal of equipment are reflected in the statements of income. 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, 2006, 2005 and 2004 were $29,930, $32,993 and $41,217, respectively. 9 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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. 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, 2006 and 2005 was $314,731 and $263,202, 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, 2006, 2005 and 2004 was $277,282, $169,347 and $187,999, respectively. 10 NOTE 3 - PROPERTY AND EQUIPMENT Property and equipment are summarized by major classifications as follows: 2006 2005 Leasehold Improvement $462,989 $368,112 Vehicles 13,374 56,525 Equipment and Software 1,429,333 1,126,053 Furniture and Fixtures 53,124 47,542 --------- ---------- 1,958,820 1,598,232 Less: Accumulated Depreciation 1,066,546 999,190 --------- ---------- $892,274 $599,042 ========= ========== Computer equipment with a cost of $210,515 is held under a capital leases. 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, which commenced on March 21, 2005 and will continue 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 in a timely basis thus far. 11 NOTE 5 - AMORTIZATION OF GOODWILL AND ACQUISITION COSTS Commencing with the fiscal year beginning October 1, 2001, the Company implemented Statement of Financial Accounting Standards Statement No. 142, "Accounting for Goodwill and Intangible Assets", which no longer allows for the amortization of goodwill. The new statement requires the Company to conduct an annual goodwill impairment test and write off any decrease in the fair value of the goodwill in the period of such declined value. Pursuant to the Company's impairment tests conducted for the years ended September 30, 2006, 2005 and 2004, 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. There is no amortization expense for the years ended September 30, 2006, 2005 and 2004. NOTE 6 - OBLIGATIONS UNDER CAPITAL LEASES 2006 2005 Lease payable to VAResources, Inc., due in monthly installments of $2,662 including interest at 11.37%, due June 2008, secured by computer equipment. $48,285 $73,173 Lease payable to US Express Leasing, due in monthly installments of $1,742 including interest at 11.85%, due September 2008, secured by computer equipment. 39,986 - Lease payable to GE Capital, due in monthly installments of $2,180 including interest at 12.96%, due in September 2008, secured by computer equipment. 49,030 - --------- ---------- 137,301 73,173 Less: Current Portion 69,624 24,888 --------- ---------- $67,677 $48,285 ========= ========== Future minimum payments under capital leases as of September 30, 2006 are as follows: 2007 $82,454 2008 71,809 -------- Total Minimum Lease Payments 154,263 Less: Amount Representing Interest 16,962 -------- $137,301 ======== 12 NOTE 7 - LONG-TERM DEBT The Company's notes payable balance at September 30, 2006 and 2005 consist of the following: 2006 2005 Notes payable from Joseph M. Guido to the Estate of A.G. Hoffman, Jr., assumed by the Company, in the aggregate total of $2,511,730, with repayment over 101 years at annual principal payments of $25,000 plus interest at 7% per year. All or any of the notes may be paid at any time before maturity without any prepayment penalty. In the event of a default under the notes by the Company, Joseph M. Guido remains personally liable for the notes, and the the 101 shares of Allstates Air Cargo, Inc. common stock held as security under the notes (representing 48.1% of the issued and outstanding common stock of Allstates Air Cargo, Inc.) may be sold at public or private sale. $2,311,730 $2,336,730 Less: Current Portion 25,000 25,000 ---------- ---------- $2,286,730 $2,311,730 Future maturities for long-term debt as of September 30, 2006 is as follows: 2007 $25,000 2008 25,000 2009 25,000 2010 25,000 2011 25,000 Thereafter 2,186,730 --------- $2,311,730 ========= NOTE 8 - LINE OF CREDIT Allstates Air Cargo, Inc. has a $3,000,000 line of credit agreement with PNC Bank, which expires February 28, 2007. Interest on the outstanding borrowings accrue at the prime rate of interest per annum, which approximated 8 1/4% at September 30, 2006. The interest rate is predicated upon the Company maintaining their primary depository account with the bank. If the Company fails to comply with this agreement, the interest rate would be increased by 1% over the prime rate of interest. The loan is collateralized by all assets of the Company. The balance outstanding on the line of credit as of September 30, 2006 and 2005 was $2,300,000 and $0, respectively. 13 NOTE 8 - LINE OF CREDIT (Continued) Allstates Air Cargo, Inc. had a $2,000,000 line of credit agreement with Sun National Bank, which was originally scheduled to expire on January 31, 2007, however the line of credit was paid off and terminated effective March 31, 2006 concurrent with the opening of the line of credit agreement with PNC Bank mentioned above. Interest on the outstanding borrowings accrued at the Wall Street Journal's (WSJ) prime rate of interest per annum. The interest rate was predicated upon the Company maintaining a compensating account balance in a non-interest bearing account equal to at least $230,000. Loan collateral includes the Company's accounts receivable and the unlimited, unconditional guarantees of Joseph M. Guido, Teresa Guido and Allstates Allcargo (US), Inc. If, at any time, the Company failed to maintain the compensating balance, the interest rate would increase by 1% over the WSJ's prime rate at the time of failure. The balances outstanding on the line of credit as of September 30, 2006 and 2005 was $0 and $1,599,500, respectively. NOTE 9 - PROVISION FOR INCOME TAXES A reconciliation of income tax at the statutory rate to the Company's effective rate is as follows: 2006 2005 2004 -------- -------- ------- Expected Federal statutory rate 39.000% 0.000%* 0.000%* Expected State statutory rates (average) 6.975% 6.975% 8.893% -------- -------- ------- Total expected statutory rate 45.975% 6.975% 8.893% State Franchise Tax and Miscellaneous Book to Tax Adjustments 12.866% -0.096% 9.654% Deferred income tax expense (benefit): Federal -7.805% 17.664% 29.138% State 8.124% 4.676% 7.668% -------- -------- ------- Income Tax Expense (Benefit) - Effective Tax Rate 59.160% 29.219% 55.353%
* Due to the net operating loss carryforwards available for the years ended September 30, 2005 and 2004, the expected Federal statutory rate is deemed to be 0%. The Company's provision for income taxes for 2006 and 2005 consist of the following: 2006 2005 2004 ------- ------- ------- Current: Federal $61,000 $17,850 $(6,318) State 54,245 40,768 103,067 Deferred: Federal (15,287) 150,541 152,000 State 15,911 39,848 40,000 ------- ------- ------- $115,869 $249,007 $288,749 ======= ======= ======= 14 NOTE 9 - PROVISION FOR INCOME TAXES (Continued) The Company's total deferred tax asset (liability) and deferred tax asset (liability) valuation allowances at September 30, 2006 and 2005 are as follows: 2006 2005 Deferred Tax Asset - Current: Bad Debt Allowance $135,335 $113,177 Deferred Payable - 15,050 Net Operating Losses 24,524 56,755 -------- -------- $159,859 $184,982 ======== ======== Deferred Tax Liabilities - Noncurrent: Depreciable and Amortizable Assets $77,869 $102,368 ======== ======== As of September 30, 2005, the Company wrote off its investment in Allstates Allcargo (US), Inc. for income tax purposes. The income tax benefit of this transaction was approximately $136,000 and was reflected in the September 30, 2005 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 were no gains or losses in fiscal year 2002 since the foreign entity, Allstates Allcargo (UK), LTD., was dissolved. 15 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 $15,000, $14,000 and $13,000 for the calendar years ended 2006, 2005 and 2004, 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, 2006, 2005 and 2004 totaled $41,242, $50,426 and $43,493, 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, 2006, 2005 and 2004. 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 this lease totaled $81,600 for all three of the years ended September 30, 2006, 2005 and 2004. 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, 2006, 2005 and 2004 totaled $585,731, $566,281 and $454,607, 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 Emeritus $370,000 3% of fiscal year Yes increase in net profits President/Chief Executive Yes Officer $250,000 3% of fiscal year increase in net profits Executive Vice President/ Yes Chief Operating Officer $250,000 3% of fiscal year increase in net profits Chief Financial Officer $185,000 Discretionary Yes 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, 2006, no stock options have been issued. 16 NOTE 14 - DESCRIPTION OF LEASING ARRANGEMENTS The Company leases certain terminal facilities and its corporate headquarters under operating leases that expire over the next three 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, 2006: 2007 $575,967 2008 465,549 2009 78,703 ---------- $1,120,219 Rent expense under operating leases for the years ended September 30, 2006, 2005 and 2004 were $636,443, $551,749 and $554,321, respectively. NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION Cash was expended for interest in the amounts of $418,947, $242,403 and $217,367 in 2006, 2005 and 2004, respectively. Cash was expended for income taxes in the amounts of $87,127, $138,429 and $52,355, respectively 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 paint brushes 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. The plaintiffs seek to recover compensatory and consequential damages. In November 2006, the case was settled and the Complaint was dismissed without any admission of liability or payment of any money by the Company. 17 NOTE 16 - LITIGATION (Continued) 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 reached a settlement of the action, pursuant to which GTD paid 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 to California Code of Civil Procedure, which would bar any other joint tortfeasor or co-obligor from any further claims against GTD arising out of the transaction. The entry of that March 6, 2006 Order finalized the settlement of the action, and on March 8, 2006 GTD submitted the settlement payment, thus completing its obligations under the settlement. Autosplice, Inc. v. Allstates Worldcargo, Inc. On or about November 30, 2006, a complaint was filed about the Company. In the case, the plaintiff alleges breach of contract and tortuous behavior in connection with a shipment of equipment handled by the Company. The plaintiff alleges that it was damaged in the amount of $139,379, which it seeks to recover. The plaintiff has reserved the right to seek punitive damages in the amount of $400,000. The action has only recently commenced and has not progressed past the service of the Summons and Complaint. The Company intents to contest the matter, and has turned the matter over to its insurance carrier, which has confirmed acceptance for defense and/or settlement. The Company's internal counsel has not yet formed an opinion of the likelihood of a favorable or unfavorable outcome, or the amount or range of potential loss. 18 NOTE 17 - QUARTERLY RESULTS OF OPERATIONS (Unaudited) The following table presents summarized quarterly results for the fiscal year ended September 30, 2006: Q1 Q2 Q3 Q4 (dollars in thousands) Revenues $19,492 $16,903 $16,970 $17,852 Net Revenues (after transportation costs) 5,183 4,810 5,106 5,624 Net Income (Loss) After Taxes 123 (66) (77) 100 Basic Net Income per Common Share $0.00 ($0.00) ($0.00) $0.00 Diluted Net Income per Common Share $0.00 ($0.00) ($0.00) $0.00 The following table presents summarized quarterly results for the fiscal year ended September 30, 2005: Q1 Q2 Q3 Q4 (dollars in thousands) 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 $0.01 $0.01 Diluted Net Income per Common Share $0.00 $0.00 $0.01 $0.01 The following table presents summarized quarterly results for the fiscal year ended September 30, 2004: Q1 Q2 Q3 Q4 (dollars in thousands) Revenues $13,458 $12,096 $14,566 $14,586 Net Revenues (after transportation costs) 4,431 3,970 4,679 4,564 Net Income (Loss) After Taxes 155 (76) 165 (11) Basic Net Income per Common Share $0.00 $(0.00) $0.01 $(0.00) Diluted Net Income per Common Share $0.00 $(0.00) $0.01 $(0.00) 19 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 72 Chairman Emeritus, Director Sam DiGiralomo 63 President, CEO, Director Barton C. Theile 60 Executive Vice President, COO, Director Craig Stratton 55 CFO, Secretary, Treasurer, Director None of the above persons is related to any other of the above-named persons by blood or marriage. Based upon a review of filings with the Securities and Exchange Commission and written representations that no other reports were required, the Company believes that all of the Company's directors and executive officers complied during fiscal 2006 with the reporting requirements of Section 16(a) of the Securities Exchange Acts of 1934. JOSEPH M. GUIDO, Chairman Emeritus, and a director of the Company, 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. 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 ($) ---------- ---- ------- ----- --------- --------- --------- ------ -------- Joseph 2006 370,000 44,153 86,700(1) M. 2005 339,233 44,153 88,200(2) Guido, 2004 329,811 81,600(3) Chairman Emeritus Sam 2006 250,000 44,153 585,731(4) DiGiralomo 2005 228,677 44,153 566,281(4) President, 2004 216,000 526,957(5) Barton 2006 250,000 44,153 7,631(6) Theile, 2005 227,674 44,153 23,023(7) COO, 2004 213,948 23,013(8) Exec. VP Craig 2006 185,000 7,200(9) Stratton, 2005 169,262 7,500(9) CFO, 2004 148,077 7,800(9) Secretary, Treasurer
(1) Rental income from leasing of Forked River corporate office ($79,500), and car allowance for use of personal vehicle ($7,200) (2) Rental income from leasing of Forked River corporate office ($81,600), and car allowance for use of personal vehicle ($6,600) (3) Rental income from leasing of Forked River corporate office (4) Royalties paid in connection with site licensing agreements (5) Royalties paid in connection with site licensing agreements ($454,607), and reimbursement of income taxes due IRS in connection with insurance settlement ($72,350). (6) Car allowance for use of personal auto ($7,200) and commission paid for management services to GTD Logistics, Inc. ($431) (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 ($7,800) and commission paid for management services to GTD Logistics, Inc. ($15,213) (9) 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 Chairman increase in net profits from Emeritus fiscal year end 2003 to fiscal year end 2004 Sam DiGiralomo, $250,000 3% of President/Chief increase in net profits from Executive Officer fiscal year end 2003 to fiscal year end 2004 Barton C. Theile, $250,000 3% of Executive VP/ increase in net profits from Chief Operating Officer 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 28, 2006 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 23,560,000 72.46% __________________ (1) Based upon 32,509,872 shares outstanding as of December 28, 2006. (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 leased real estate in one location from Joseph M. Guido during Fiscal 2006. Rent expense under this lease totaled $79,500 for the year ended September 30, 2006. 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, Atlanta, Raleigh, Nashville and Newark licensee locations. Royalty payments to Mr. DiGiralomo for the year ended September 30, 2006 totaled $585,731. 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, 2006 and September 30, 2005 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 $75,555 and $80,167 during fiscal 2006 and 2005 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, 2006 and 2005, 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 2006 and 2005 for tax services rendered by Cowan, Gunteski and Co. were $31,040 and $24,723, respectively. All other fees. The aggregate fees billed during fiscal 2006 and 2005 for all other services rendered by Cowan, Gunteski and Co. were $10,196 and $0, respectively, for professional services rendered for the audit of the Allstates WorldCargo 401(k) Savings Plan. 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 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 (The Company's SEC file number reference is Commission File No. 000-24991) 10.06+ Employment Agreement with Joseph M. Guido, 10.07+ Employment Agreement with Sam DiGiralomo 10.08+ Employment Agreement with Barton C. Theile 10.09+ Employment Agreement with Craig D. Stratton 10.10* 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 (The Company's SEC file number reference is Commission File No. 000-24991) 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: Form 8-K filed July 6, 2006 Item 8.01, Other Events. Form 8-K filed August 4, 2006, Item 5.03, Amendment to By-Laws, Item 8.01, Other Events. 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: December 29, 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 Emeritus and December 29, 2006 Director By: /s/ Sam DiGiralomo President, CEO and December 29, 2006 Director By: /s/ Barton C. Theile Executive Vice President, December 29, 2006 COO and Director By: /s/ Craig D. Stratton Secretary, Treasurer, and December 29, 2006 Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)