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, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM
________ TO ________
ALLSTATES WORLDCARGO, INC.
(Exact Name of Registrant as Specified In Its Charter)
New Jersey 22-3487471
(State or Other (I.R.S. Identification
Jurisdiction of Number)
Incorporation or
Organization)
4 Lakeside Drive South, Forked River, New Jersey 08731
(Address of Principal Executive Offices) (Zip Code)
(609) 693-5950
(Issuer's Telephone Number)
Securities to be registered pursuant to Section 12(b) of the
Act: None
Securities to be registered pursuant to Section 12(g) of the
Act:
Common Stock $.0001 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in part III
of this Form 10-K or any amendment to this Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rile 12b-2 of the Act. Yes [ ] No [x]
The number of shares of Common Stock outstanding as of December 22, 2004
was 32,509,872 shares.
At December 22, 2004, the voting stock of the registrant had not been
publicly quoted.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General Overview
Allstates WorldCargo, Inc. (the "Company" or "Allstates") is a
New Jersey Corporation formed in 1997 as Audiogenesis Systems, Inc.
("Audiogenesis"), pursuant to a corporate reorganization of Genesis
Safety Systems, Inc. ("Genesis"). On August 24, 1999, Audiogenesis
acquired 100 percent of the common stock of Allstates Air Cargo, Inc.
in a reverse acquisition, and on November 30, 1999, changed its name
to Allstates WorldCargo, Inc. Allstates is principally engaged in the
business of providing global freight forwarding and other
transportation and logistics services for its customers. Allstates is
headquartered in Forked River, New Jersey.
The freight forwarding business of Allstates was founded in 1961
by Joseph M. Guido, the Company's Chairman of the Board, with its
first terminal opening in Newark, New Jersey. The Company provides
domestic and international freight forwarding services to over 1,700
customers utilizing ground transportation, commercial air carriers,
and ocean vessels. Allstates supplements its freight forwarding
services to include truck brokerage, warehousing and distribution, and
other logistics services. The Company operates 21 offices throughout
the United States, including the corporate headquarters, and employs
93 people.
Allstates has agreements with domestic and international
strategic partners and a network of agents throughout the world, and
continues to pursue opportunities to forge additional strategic
alliances in order to increase its global market share. Allstates
currently has strategic alliance agreements with agents in the United
Kingdom, European, South American and Far East markets.
Allstates neither owns nor operates any aircraft or ships. By
not owning or operating its own equipment, Allstates believes it is
able to provide more flexible delivery schedules and shipment size.
In addition, by eliminating the substantial fixed expenses associated
with the ownership of such equipment, Allstates has been able to
effect certain cost savings.
Marketing and Licensing
Allstates markets its services through a network of 20 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 20 branch
locations, 13 are licensees operations, while 7 are company owned and
staffed operations.
Allstates utilizes a combination of professionally prepared
advertising materials, highly trained sales and operations/customer
services professionals, direct mail, assorted promotional items, and
audio/visual presentations. Allstates employs 17 full time sales and
marketing personnel operating from the 7 company-owned offices.
Two separate divisions of Allstates are responsible for certain
specialized functions of the Company. GTD Logistics, through its
capacity as a licensed truck broker, arranges for the procurement of
exclusive truckloads. The other division, Allstates Logistics, holds
Ocean Transportation Intermediary License No. 15364NF, and is
responsible for the ocean freight segment of Allstates.
Information Systems
A primary component of Allstates's business strategy is the
continued development of its advanced information systems. Allstates
has invested substantial management and financial resources in the
development of its information systems in an effort to provide
accurate and timely information to its management and customers.
Allstates continues to upgrade its information systems. Highlights of
the information system are:
. Real-time information which is available to employees and
customers, including customer service, operations, sales and
accounting
. Centralized system located in Forked River, New Jersey, with
terminals throughout all offices
. Accessible to customers via the Company's firewall-protected web
site to track shipments and collect POD information.
. System tracks shipments from pickup order to delivery; confirms
"on-board" and "out for delivery" status
. System can produce the following daily, monthly, yearly reports:
(1) Operations reports (inbound, outbound and on-hand reports)
(2) Sales reports (revenue, customer client list)
(3) Customer reports (POD report, shipping history report)
(4) Accounting reports (P&L reports)
. System auto rates revenues and costs
. System supports transactions via EDI (Electronic Data
Interchange)
. System is flexible in customizing reports to meet customer needs
. System is "bar-code" capable
. Qualified customers can create an airway bill file via the
Company web site, which is subsequently uploaded in to the operating
system for processing.
. System produces shipping labels and computerized airbills and
airline bills
Licensing and Government Regulation
Allstates is the holder of Ocean Transportation Intermediary
License No. 15364NF, and must be in compliance with the regulations
governing such certification. Also, Allstates must be in compliance
with the regulations of the Federal Aviation Administration that apply
to the business of Allstates. Allstates believes that it has the
resources, expertise and experience to continue its compliance with
all Federal agencies and regulations.
Allstates relies primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect its proprietary technology. For
example, Allstates licenses its software pursuant to signed license
agreements, which impose certain restrictions on the licensees'
ability to utilize the software. In addition, Allstates seeks to avoid
disclosure of its trade secrets, including requiring those persons
with access to Allstates's proprietary information to execute
confidentiality agreements with Allstates and restricting access to
Allstates's source code. Allstates seeks to protect its software,
documentation and other written materials under trade secret and
copyright laws, which afford only limited protection.
Despite Allstates's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of Allstates's
products or to obtain and use information that Allstates regards as
proprietary. Policing unauthorized use of Allstates's products is
difficult, and, while Allstates is unable to determine the extent to
which piracy of its software products exists, software piracy can be
expected to be a persistent problem. In addition, the laws of many
countries do not protect Allstates's proprietary rights to as great an
extent as do the laws of the United States. There can be no assurance
that Allstates's means of protecting its proprietary rights will be
adequate or that Allstates's competitors will not independently
develop similar technology.
To date, Allstates has not been notified that Allstates's
products infringe the proprietary rights of third parties, but there
can be no assurance that third parties will not claim infringement by
Allstates with respect to current or future products. Allstates
expects that software product developers will increasingly be subject
to infringement claims as the number of products and competitors in
Allstates's industry segment grows and the functionality of products
in different industry segments overlaps. Any such claims, with or
without merit, could be time-consuming, result in costly litigation,
cause product shipment delays or require Allstates to enter into
royalty or licensing agreements. Such royalty or licensing agreements,
if required, may not be available on terms acceptable to Allstates or
at all, which could have a material adverse effect upon Allstates's
business, operating results and financial condition.
Competition
Allstates competes with other companies in the same business,
some of which are much larger and have substantially greater
resources. There are approximately 1,500 direct competitors of
various sizes throughout the country. The methods by which Allstates
chooses to compete include highly skilled and experienced upper and
middle management, a proprietary site-licensing program, cost control,
professional sales representation, highly trained operations and
customer service personnel, employee and customer premium awards
program, and a wide range of enhanced services. In addition, the
integration of Audiogenesis' experience and expertise with respect to
its applications for inventory control provides the Company with added
benefits for its customers. Allstates also owns its proprietary and
customized computer software and advanced hardware. Allstates's
website is functional, providing for cargo tracking, customer
communication, and entry of house airway bills to qualifying
customers.
Allstates's major competitors nationwide are Federal Express,
BAX, EGL Inc., and United Parcel Service. At each of Allstates's
locations, there are regional carriers who have strength in the local
marketplace. They, for the most part, all provide air, sea and ground
services. Service levels and pricing vary substantially based upon
geographic and customer volume criteria.
In order to remain competitive, Allstates negotiates with its
vendors to meet the appropriate service and pricing levels in its
markets. In addition to competitive pricing, Allstates strives to
provide its customers, with excellent service, highly trained inside
operations personnel, and state of the art computer services.
Customers
Allstates has a diverse customer base, with approximately 1,700
accounts. In fiscal 2004, no customer accounted for more than 10% of
revenues. Over the 43 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 8, 2004, the Company employed a total of 93
individuals. Allstates Air Cargo, Inc. and subsidiaries accounted for
91 employees (of which 10 are part time), including 49 in operations
and customer service, 17 in sales, marketing and related activities,
and 25 in administration and finance. The Audiogenesis Systems
division has 2 full-time employees. Allstates's success is highly
dependent on its ability to attract and retain qualified employees.
The loss of any of the Company's senior management or other key sales
and marketing personnel could have a material adverse effect on
Allstates's business, operating results and financial condition.
Pension Plan
Effective May 1994, the Company adopted a discretionary non-
standardized 401(k) profit sharing plan. The terms of the plan
provide for eligible employees ("participants") who have met certain
age and service requirements to participate by electing to contribute
up to the maximum percentage allowable not to exceed the limits of
Internal Revenue Code Section 401(k), 404 and 415 (the "Code"). For
2004, the maximum contribution allowed by the Code was the lesser of
100% of an employees' compensation, or $13,000. Participants who
attained age 50 prior to the close of the plan year are eligible to
make catch-up contributions of an additional $3,000, after the maximum
contribution has been made. The Company may make matching
contributions equal to a discretionary percentage, as determined by
the Company, up to 6% of a participants' salary. Company
contributions vest at the rate of 20% of the balance at each
employees' third, fourth, fifth, sixth, and seventh anniversary of
employment. The employees' contributions are 100% vested at the time
of deferral. The plan also allows employer discretionary
contributions allocated in accordance with participants' compensation.
The Company did not make any discretionary contributions to the plan
for the year ended September 30, 2004.
Audiogenesis Systems Division
Sales of Safety Equipment.
Allstates, trading as Audiogenesis Systems, operates a store
which distributes safety equipment under the service mark
SafeTvend(sm) at a major pharmaceutical corporation in the New York
area. Audiogenesis's safety store is located on the customer's
premises, and sells respirators, hard hats, safety glasses, protective
clothing, and other similar products which are used or worn by the
customer's employees to help protect them from industrial accidents
and injuries.
Competition
Audiogenesis's SafeTvend(sm) store is subject to competition not
only from companies which would offer similar services on-site at the
customer's premises, but also from direct distributors and
manufacturers of the products which would sell directly to such
company. Virtually all of the competitors have greater financial,
technological, marketing and sales resources than Audiogenesis. There
are numerous organizations of varying sizes that engage in the
business of customized audio-visual presentations, most of these being
advertising agencies and organizations of similar nature. There is
intense competition for such business from a variety of organizations
who have greater financial, technical, marketing and sales resources
than Audiogenesis.
ITEM 2. DESCRIPTION OF PROPERTY
Allstates occupies approximately 7,000 square feet of space in
Forked River, New Jersey for its principal administrative, sales and
marketing support and product development facility under a ten year
lease. The Company's branch locations, which are located in the
vicinity of major metropolitan airports, occupy approximately 1,000 to
27,000 square feet. All such branch locations are company leased
properties or properties leased by licensee owners. Terms for company
leased properties generally run from one to seven years and are
scheduled to expire between fiscal 2005 and fiscal 2008. The total
rent expense for company leased facilities was approximately $557,000
during fiscal 2004. 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, 2004 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 Orlando, Florida
ITEM 3. LEGAL PROCEEDINGS
Environmental matter
The Company is involved in an ongoing environmental proceeding.
In December 1996, five underground storage tanks ("UST's") and two
above ground storage tanks were removed from a facility in which the
Company leased office space at the time. Post-excavation sampling
results confirmed that certain soil contamination remained present
after the removals at the location of two of the UST's. Also, at the
time of the removals, free-floating groundwater contamination was
observed in the area of these two former UST's. During 1999, the
Company engaged Carpenter Environmental Associates ("Carpenter")to
prepare a Preliminary Assessment/Site Investigation Report ("PA/SI
Report"). Carpenter's PA/SI Report stated that the chlorinated
groundwater contamination is emanating from an off-site source. The
New Jersey Department of Environmental Protection approved Carpenter's
PA/SI Report and agreed that no further investigation of the
chlorinated solvents in the groundwater was needed. A Remedial
Investigation Work Plan was submitted in November 1999. The NJDEP
approved the work plan on November 24, 1999. The approved work was
performed by Carpenter in December 1999, as set forth in Carpenter's
report dated March 13, 2000. The Carpenter report indicated that
benzene contamination was delineated and proposed the installation of
one additional monitoring well and natural remediation and monitoring
of remaining groundwater contamination. The NJDEP approved the
additional work and Carpenter installed and sampled the additional
well, the results of which confirmed complete delineation of the
benzene contamination. Concentrations of benzene in MW-3, a separate
well that Carpenter also sampled, indicated an increase from the prior
sampling event. The NJDEP suggested that the increase may be due to
sediments collected with the groundwater sample, and recommended that
the sampling be repeated. Carpenter conducted two additional sampling
events to confirm groundwater concentrations of benzene in Monitoring
Well 3 ("MW-3"). The sampling results indicated that concentrations
of benzene have sufficiently decreased to allow case closure with the
institution of a Classification Exception Area ("CEA"). Counsel for
Allstates has confirmed with the New Jersey Department of
Environmental Protection ("DEP") that the sampling results
satisfactorily demonstrate a decreasing trend in benzene
concentrations. At the DEP's request, Carpenter prepared a CEA
proposal, which was submitted to the DEP on October 11, 2001. In the
CEA proposal, Carpenter proposed no further action for the
groundwater. The DEP subsequently issued a No Further Action ("NFA")
letter for the soil and groundwater. Pursuant to the NFA, Allstates
is to seal the monitoring wells at the site.
The work was unable to be completed due to site improvements installed
by the current property owner that rendered the monitoring wells
inaccessible. The property owner indicated conceptual agreement to
pay the additional costs necessary to access the wells for
abandonment, and has reimbursed Allstates for costs incurred to
address the issue to date. We are awaiting written confirmation from
the property owner of its agreement to fund the remaining work, at
which time that work will be scheduled.
The NFA also sets forth details of the CEA prepared for the site
that projected when remaining groundwater contaminants will have fully
degraded to meet DEP groundwater quality standards. Since the NFA was
issued, the DEP's technical regulations were amended to require
sampling at the end of the CEA period to confirm that ground water
quality standards have been achieved. It is unclear whether DEP will
enforce this requirement to cases such as Allstates where an NFA was
issued prior to promulgation of the regulations. Since the CEA period
has now expired, we are evaluating whether to collect a sample prior
to abandonment of the wells. Should these samples confirm that
contaminants have fully degraded, the CEA would then be terminated.
If groundwater contamination has not degraded in accordance with the
projections, the regulations will require the submission of a biennial
certification conforming the effectiveness of the CEA. The biennial
certifications will focus primarily on a confirmation by Allstates,
based on inquiries made to local authorities, that groundwater at the
site is not being used. Pursuant to the 1998 Agreement of Sale with
Father Flanagan's Boys Home, the current owner is to pay Allstates
$3,000 per year for any reporting or monitoring associated with an
institutional control, which includes a CEA. This payment is to
continue for so long as DEP requires the work or for 20 years,
whichever period is the shortest. We anticipate that this will cover
the cost of the reporting.
In March 1997, Allstates made claims against liability insurance
carriers for coverage. The Company's counsel submitted invoices to
the carriers in September 2003, and continues to respond to their
requests for information. The Company's counsel expects to meet with
the carriers over the next several months to discuss settlement.
Joseph M. Guido, v. Allstates WorldCargo, Inc., Sam DiGiralomo, Barton
C. Theile, and Craig D. Stratton
On October 14, 2004, the 56.91% majority shareholder of the
Company (the "Shareholder") (also employed by the Company as its
Chairman) commenced an action against the Company and three of the
Company's directors, entitled "Joseph M. Guido v. Allstates
WorldCargo, Inc., Sam DiGiralomo, Barton C. Theile, and Craig D.
Stratton," in the Superior Court of New Jersey, Chancery Division,
Ocean County, bearing Docket No. OCN- C -305-04. (Messrs. DiGiralomo,
Theile, and Stratton are also employed by the Company as its President
and Chief Executive Officer, its Executive Vice President and Chief
Operating Officer, and its Chief Financial Officer.) The Shareholder
alleged that in accordance with state law, on August 16, 2004, he had
delivered to the Company's Secretary (1) an executed Written Consent
in Lieu of a Special Meeting of the Stockholders of Allstates
WorldCargo, Inc. dated August 16, 2004 (the "Written Consent"), (2)
Amended and Restated Bylaws of the Company adopted pursuant to the
Written Consent (the "A&R Bylaws"), and (3) a draft Information
Statement pursuant to Section 14(c) of the 1934 Act (the "Draft
Information Statement").
The Shareholder alleged that pursuant to the Written Consent, he
had amended the Company's bylaws to (among other things) expand the
Board of Directors from four members to seven members, and appointed
three persons (alleged to be independent) to fill the newly created
board seats. He alleged that the Company was required by law to
comply with his demand to notify the shareholders of his action, and
that the Company's failure to do so was a violation of the law. He
also alleged that the three individual defendants, both as directors
and officers, owed the Company and it shareholders certain fiduciary
duties and duty of loyalty to direct that "appropriate steps" be taken
by the Company to allegedly comply with New Jersey state law "and
other applicable law" in response to the Written Consent.
The Majority Shareholder demanded temporary, preliminary, and
injunctive relief enjoining a scheduled special Board of Directors
meeting (the "Special Board Meeting") pending Company's performance of
acts allegedly required by New Jersey law and by the 1934 Act. The
Majority Shareholder also sought a permanent injunction requiring the
Company and its Secretary to prepare and distribute to the Company's
shareholders all notices allegedly required by state and federal law
in connection with the Written Consent. Finally, he sought entry of
an Order requiring the Company to file and serve upon him, within
seven days after entry of a permanent injunction, a written report
setting forth the manner and form in which the Company complied with
the injunctions.
The Company (and the three individual defendants) opposed the
application for temporary relief upon the grounds that subsequent to
his execution of the Written Consent, the Majority Shareholder advised
one of the individual defendants that he had decided not to proceed
with his amendment of the Bylaws or his expansion of the Board of
Directors. Defendants also alleged that the Majority Shareholder's
actions were not in the best interest of the Company, and were
motivated by self-interest, that because of such concerns, the Company
needed time to determine its obligations under the law, and that the
purpose of the Special Board Meeting (among others) was to consider
"issues pertaining to the request by [the Majority Shareholder] to
file the Schedule 14C presented to the Secretary of the Corporation."
On October 28, 2004, the parties reached an agreement with regard
to some essential terms of a settlement, pursuant to which (1) the
Company's Board of Directors would not be expanded except by unanimous
consent, (2) the Majority Shareholder and the individual defendants
would enter into a voting agreement pursuant to which each would agree
to vote his respective shares in the Company for the others as
directors of the Company, (3) the Company would enter into new
employment agreements (the precise terms of which were to be agreed
upon) with the individual defendants (the existing employment
agreements being due to expire on December 31, 2004), (4) the parties
would exchange general releases, and (5) the Company would, to the
extent lawfully required by the Majority Shareholder's existing
employment agreement, reimburse him for the attorneys fees he incurred
in connection with the action. It was anticipated that the complete
terms of a Settlement would be agreed upon, and that formal settlement
documents would be prepared and executed. Such formal documentation
is being prepared.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted, during the Fourth Quarter of the Fiscal
Year covered by this report, to a vote of security holders through
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has not yet been publicly traded. The
Company anticipates that its common stock will be listed for quotation
on the NASD OTC Bulletin Board in the near future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, selected consolidated financial data
for the Company for the five years ended September 30, 2004. 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)
2000 2001 2002 2003 2004
STATEMENT OF OPERATIONS DATA
Net sales $33,213 $41,239 $36,403 $46,293 $54,705
Income (loss) from operations 424 744 534 (326) 727
Income (loss) from continuing
operations 87 408 136 (582) 233
Net income (loss)
(62) 408 136 (582) 233
Basic net income (loss) per
common share $.00 $.01 $.00 ($.02) $.01
Diluted net income (loss) per
common share $.00 $.01 $.00 ($.02) $.01
Weighted average
Common shares outstanding
- - basic 32,510 32,510 32,510 32,510 32,510
Weighted average
Common shares outstanding
- - diluted 32,521 32,510 32,510 32,510 32,510
BALANCE SHEET DATA:
Working capital $ 598 $ 1,316 $1,534 $1,050 $1,081
Total assets 7,892 7,095 8,050 8,287 9,787
Liabilities - current 5,695 4,614 5,477 6,338 7,577
Liabilities - long term 2,625 2,497 2,453 2,412 2,440
Total stockholders' equity (427) (16) 120 (462) (229)
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,
2004 2003 2002
---------------------------------
Revenues 100.0% 100.0% 100.0%
Cost of transportation 67.7 65.0 61.3
----- ----- -----
Gross profit 32.3 35.0 38.7
Operating expenses:
Personnel costs 11.9 14.1 15.5
License commissions and royalties 12.0 13.5 13.2
Other selling, general and
administrative expenses 7.1 8.1 8.5
----- ----- -----
Total operating expenses 31.0 35.7 37.2
Operating income 1.3 (0.7) 1.5
Net income/(loss) 0.4% (1.3)% 0.4%
REVENUES
Fiscal 2004 vs. fiscal 2003
Revenues of the Company represent gross consolidated sales less
customer discounts. Sales for the fiscal year ended September 30,
2004 increased $8,412,000, or 18.2%, to $54,705,000, over revenues
earned during the prior fiscal year ended September 30, 2003,
reflecting a higher volume of freight shipped. Revenues earned from
domestic-routed freight increased $9,434,000, or 27.1%, to
$44,296,000, while international freight revenues decreased from the
previous fiscal year by $1,022,000, or (8.9%), to $10,409,000.
The increase in domestic revenues earned in fiscal 2004 over
fiscal 2003 primarily reflects incremental increases in freight
business at certain existing branches, an increase during the year in
the number of branch locations, and the addition of a new large
customer. Furthermore, growth within the Allstates truck brokerage
operation also fueled the increase in domestic sales.
The decrease in international revenues in fiscal 2004 from the
previous year primarily reflects the approximately $1.8 million in
billing in fiscal 2003 to one customer for the arrangement of
international chartered aircraft. The Company was asked to make these
arrangements by its customer as an emergency response to the backlog
of ocean freight deliveries that resulted from the lock out of West
Coast ports during the first quarter of fiscal 2003. After
discounting the billing for that charter service in fiscal 2003,
international revenues would have increased by approximately $766,000.
Fiscal 2003 vs. fiscal 2002
For the fiscal year ended September 30, 2003, total revenues
increased by $9,890,000, or 27.2%, to $46,293,000 compared to revenues
earned in the previous fiscal year ended September 30, 2002,
reflecting higher freight shipping volumes. Sales of domestic-routed
freight increased by approximately $6.9 million or 24.9%, to
$34,862,000, while international freight revenues increased by
approximately $3.0 million or 34.8%, to $11,431,000.
The growth in revenues in fiscal 2003 as compared to fiscal 2002
is primarily a result of the improvement in the U.S. economy in 2003,
the effect of additional sales personnel hired in the second half of
fiscal 2002, and the full year effect of two company stations that
were opened during the third quarter of fiscal 2002. The addition of
a new licensee location during the second quarter of fiscal 2003 also
contributed to the Company's increase in revenues. In addition,
Allstates truck brokerage operation, which in previous years had
exclusively provided logistical support for the Company's freight
forwarding operations, began providing truckload service to selected
customers in fiscal 2003, accounting for approximately $950,000 in
additional revenues.
The Company's largest customer accounted for 7.9% of consolidated
revenues in fiscal 2003. In November 2003, that customer began to
utilize an alternate carrier to provide freight distribution services.
Allstates continued to provide transportation services to that
customer at a significantly reduced level. Included in total revenues
is approximately $1.8 million in billing to one customer for the
arrangement of international chartered aircraft. The Company was
asked to make these arrangements by its customer as an emergency
response to the backlog of ocean freight deliveries that resulted from
the lock out of West Coast ports during the first quarter of fiscal
2003.
GROSS PROFIT
Fiscal 2004 vs. fiscal 2003
Gross profit represents the difference between net revenues and
the cost of providing transportation services. The cost of sales is
composed primarily of amounts paid by the Company to carriers and
cartage agents for the transport of cargo. As a percentage of
revenues, cost of sales increased by 2.7%, to 67.7%, for the fiscal
year ended September 30, 2004 in comparison to the fiscal year ended
September 30, 2003. The higher percentage of transportation costs to
revenues primarily reflects increases in fuel costs as they affect
carrier rates, an increase in deferred shipments versus priority, and
the addition of new lower margin business that the Company attained
during fiscal 2004. In absolute terms, cost of sales increased by
$6,971,000, or 23.2%, to $37,060,000 for the fiscal year ended
September 30, 2004 compared to the prior fiscal year, reflecting the
increase in sales. Gross margins decreased to 32.3% of sales for
fiscal 2004. Gross profit increased by $1,441,000, or 8.9%, to
$17,645,000 in fiscal 2004 versus fiscal 2003.
Fiscal 2003 vs. fiscal 2002
Cost of sales as a percentage of revenues increased by 3.7 %, to
65.0 %, for the fiscal year ended September 30, 2003 as compared to
the fiscal year ended September 30, 2002. The higher cost of sales
percentage reflects the addition of certain lower margin customer
accounts during the year, the low margin percentage effect of the
chartered airline service the Company provided in October, 2002, and
the growth of the Company's truck brokerage business which operates at
lower margins than freight forwarding operations. In absolute terms,
cost of sales increased by approximately $7,776,000, or 34.9%, to
$30,089,000 for the fiscal year ended September 30, 2003 compared to
the fiscal year ended September 30, 2002, due to the higher sales
volume. Gross margins decreased to 35.0% of sales for fiscal 2003.
Gross profits increased by approximately $2,113,000, or 15.0%, to
$16,204,000 for fiscal 2003 versus fiscal 2002.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Fiscal 2004 vs. fiscal 2003
Selling, general and administrative expenses include personnel
costs, licensee commissions and other costs necessary to operate our
business. As a percentage of revenues, SG&A expenses decreased by
4.7%, to 31.0%, for the fiscal year ended September 30, 2004 as
compared to the fiscal year ended September 30, 2003, reflecting the
increase in revenues in relation to fixed operating expenses. In
absolute terms, SG&A expenses increased by approximately $389,000, or
2.4%, to $16,918,000 in fiscal 2004 in comparison to fiscal 2003,
primarily reflecting higher licensee commission expense.
Allstates pays commissions to licensees and independent sales
agents as compensation for generating profits for the Company.
Licensee commissions and royalties pursuant to licensee agreements
increased by approximately $260,000 in fiscal 2004 over the fiscal
2003 expense. This primarily reflects the addition of two new
licensee branch locations and the conversion of one company-owned
branch to a licensee during the year, offset by lower gross profits at
existing licensee branches. Licensee commissions and royalties as a
percentage of revenues decreased by 1.5%, to 12.0% of sales, in fiscal
2004.
Personnel costs as a percentage of sales decreased by 2.2% in
fiscal 2004, to 11.9% of revenues. In absolute terms, total personnel
related expenses in fiscal 2004 approximated fiscal 2003 costs.
Salaries and employee benefits decreased by approximately $228,000 in
fiscal 2004 as compared to the previous year, primarily due to the
reduction in headcount that took place during the last six months of
fiscal 2003 as well as the transfer of a company-owned station to a
licensee operation in February 2004. This was offset by increases in
salesperson commissions and executive bonus expense in fiscal 2004 as
a result of the increase in profit from the prior fiscal year.
Accounting fees increased by approximately $97,000 for fiscal
2004 over fiscal 2003, primarily based on an under accrual of fees as
they related to previous years audits. Liability insurance expenses
increased by approximately $48,000 for fiscal 2004 as compared to
fiscal 2003, primarily relating to the Directors and Officers
liability policy that the Company initiated in the fourth quarter of
fiscal 2003.
Fiscal 2003 vs. fiscal 2002
Operating expenses decreased as a percentage of revenues for the
fiscal year ended September 30, 2003 by 1.5%, to 35.7%, reflecting the
increase in the Company's sales in relation to fixed operating
expenses. In absolute terms, SG&A expenses increased in fiscal 2003
by $2,973,000 or 21.9%, to $16,529,000 compared to the previous fiscal
year. Personnel expenses, which include all employee compensation and
benefit costs, increased by approximately $919,000 over fiscal 2002
costs. This reflects the increase in headcount during the second half
of fiscal 2002 resulting from the opening of two company-owned
stations in Florida, while adding sales and operations staff in other
existing locations in an effort to bolster sales. During the third
quarter of fiscal 2003, Allstates reduced its headcount to compensate
for losses incurred in the first half of the fiscal year.
Licensee commissions and royalties paid pursuant to licensee
agreements increased by approximately $1,497,000 for the fiscal year
ended September 30, 2003 in comparison to the prior fiscal year,
reflecting increased gross profits at certain licensee operations.
Allstates also has agreements with two independent sales agents
whereby the Company pays a percentage of gross profits earned from
revenues they generate, and which accounted for approximately $144,000
in additional expense over the previous fiscal year.
Facilities expenses increased by approximately $169,000 in fiscal
2003 over fiscal 2002, primarily due to increased rental costs related
to the opening of the two Florida locations. One of the two Florida
locations provides warehousing services to one of its customers. Per
an agreement with that customer, the station is guaranteed a minimum
profit, which fully covers the Company's cost of renting that
warehouse space. Insurance expense, including cargo and general
liability, increased by approximately $98,000 reflecting the increase
in revenues and payroll expense during the fiscal year, by which our
premiums are calculated. Automobile allowances increased by
approximately $73,000 during fiscal 2003, reflecting the increase in
saleperson headcount, offset in part by lower depreciation expense as
Allstates has been gradually disposing its company owned automobile
fleet in favor of paying an allowance for the business use of personal
cars. Bad debt expense increased by approximately $60,000 in
comparison to the prior fiscal year, primarily reflecting the higher
revenues.
Operating (loss)/income
Income from operations increased by approximately $1,052,000 for
the fiscal year ended September 30, 2004, to $727,000, versus the
fiscal year ended September 30, 2003, due to the increase in sales
volume and the reduction of operating expenses as a percentage of
revenues. The operating margin increased by 2.0% during fiscal year
2004.
Income from operations decreased during the fiscal year ended
September 30, 2003 by approximately $859,000, to a loss of ($326,000),
in comparison to the fiscal year ended September 30, 2002, due to
higher operating expenses incurred. The operating margin decreased by
2.2% during the fiscal year 2003.
Interest expense
Allstate's interest expense obligation consists primarily of the
note payable to the Estate of A.G. Hoffman, Jr. that the Company
assumed from Joseph M. Guido as provided in the terms of the August
24, 1999 reverse acquisition, as well as on borrowings against the
line of credit established with the bank. Interest on the note was
approximately $168,000 and $170,000 during fiscal 2004 and fiscal
2003, respectively.
Interest expense decreased by approximately $9,000 during the
fiscal year ended September 30, 2004 in comparison to the prior year,
reflecting a lower average borrowing rate. Interest expense during
the fiscal year ended September 30, 2003 was consistent with the
previous fiscal year, totaling approximately $226,000. While the
average borrowing rate of interest during fiscal 2003 was lower than
fiscal 2002, the average outstanding borrowings during fiscal 2003
were higher than the previous fiscal year.
Loss on Sale of Assets
Allstates realized a gain on the sales of assets in fiscal 2004
of approximately $3,000, versus a loss of approximately ($27,000) in
fiscal 2003, primarily reflecting the sale of company owned
automobiles.
Other income/(expense)
During the fiscal year ended September 30, 2003, the Company
incurred a charge of approximately $372,000 for the partial write-off
of a third party loan. Per an agreement with that party, Allstates
agreed to accept $330,000 as full payment on the $702,000 loan
receivable.
Net income/(loss)
Net income before taxes increased by approximately $1,472,000, to
$522,000 for the fiscal year ended September 30, 2004, compared to the
previous fiscal year then ended. The Company recorded a tax provision
of approximately $289,000 for fiscal 2004. Net income for fiscal 2004
was $233,000 versus a net loss of ($582,000) in the prior year.
The net income before taxes decreased by approximately
$1,263,000, to a net loss of ($950,000) for the fiscal year ended
September 30, 2003, in comparison to the prior fiscal year ended
September 30, 2002. The Company recorded a tax benefit of $368,000
for fiscal 2003. The net loss for fiscal 2003 was ($582,000) versus
net income of $136,000 in the previous fiscal year.
Liquidity and Capital Resources
Net cash provided by operating activities was approximately
$18,000 for the fiscal year ended September 30, 2004 compared to net
cash provided by operations of approximately $749,000 for the fiscal
year ended September 30, 2003. In fiscal 2004, cash was provided by
the net income of the Company, offset by the net effect of increases
in accounts receivable and accounts payable that reflect the growth
in fiscal 2004 volume over the previous year. In fiscal 2003, cash
was primarily provided by the receipt of loan funds due from a third
party, a refund of federal tax payments, and an increase in accounts
payable, offset by an increase in accounts receivable.
At September 30, 2004, the Company had cash of $114,000 and net
working capital of $1,081,000, compared with cash of $517,000 and net
working capital of $1,050,000 respectively, at September 30, 2003.
The increase in working capital at September 30, 2004 in comparison to
September 30, 2003 is primarily attributable to the Company's net
income during the fiscal year, offset by payments made in connection
with a licensee agreement that Allstates entered in to in fiscal 2004.
During the first quarter of fiscal 2004, Allstates entered into a
licensee agreement with another party that would result in that party
owning the rights to three licensee operations commencing January 31,
2004. As part of the agreement, Allstates WorldCargo paid a sum of
$300,000 to the licensees as a start- up fee. Allstates has
capitalized this expenditure as a leasehold improvement and will
depreciate it over the ten- year life of the contract.
In addition to the leasehold improvement payment, the Company's
other investing activities were primarily comprised of expenditures
for capital equipment, primarily representing purchases of computer
hardware and software. These capital expenditures amounted to
approximately $95,000 during the fiscal year ended September 30, 2004,
while proceeds from the sale of company-owned automobiles totaled
approximately $49,000. For the fiscal year ended September 30, 2003,
capital expenditures totaled approximately $106,000. Proceeds from
the sale of fixed assets, primarily of company-owned automobiles,
amounted to approximately $37,000.
The Company has a commercial line of credit with a bank, pursuant
to which the Company may borrow up to $2,000,000, based on a maximum
of 70% of eligible accounts receivable. Per the agreement, interest
on outstanding borrowings accrues at the Wall Street Journal's prime
rate of interest (4.75% at September 30, 2004). The interest rate is
predicated on the Company maintaining an average compensating account
balance in a non-interest bearing account equal to at least $230,000.
If such average compensating balances are not maintained, the interest
rate will increase by 1% over the rate currently accruing.
Outstanding borrowings on the line of credit at September 30, 2004 and
2003 were $1,100,000 and $1,150,000, respectively.
In September, 2000, Allstates extended an operating loan to an
unrelated freight and warehouse services company, Q Logistics
Solutions, Inc. ("QLS"), as part of an agreement that the Company
entered into to provide customer invoicing and vendor disbursement
services. The loan was secured by a $750,000 promissory note signed
by the borrower, and for which a Form UCC-1 financing statement was
filed. In February 2001, QLS filed for Chapter 11 protection under
the U.S. bankruptcy laws. Pursuant to the bankruptcy proceedings,
another company, unrelated to Allstates WorldCargo, Inc., purchased
the assets of QLS in May 2001. Allstates had outstanding loan
advances of approximately $702,000 to QLS prior to the purchase. As a
contingency of that purchase, Allstates entered in to an agreement
with the other company whereby Allstates assigned the Form UCC-1
filing to them in exchange for their promissory note, secured by a
personal guarantee made by an officer of that company, to pay the full
loan amount of approximately $702,000, plus 9% interest over six
months, beginning in April 2001. The other company subsequently
defaulted on the loan after having made no payments to Allstates. The
Company filed suit against the other company and the guarantor for
breach of contract, and subsequently the parties signed a Stipulation
of Settlement whereby Allstates received a judgement against the other
company for the full amount plus interest and attorney's fees. An
$80,000 payment in lieu of the personal guarantee was placed in escrow
pending legal review of documentation supplied to the Company. In
January, 2003, the parties came to an agreement whereby the other
company would pay Allstates a total of $330,000 in full settlement.
Payments were scheduled to be made over four equal monthly
installments at $82,500 per month, including the release of the escrow
funds. All payments were received by the Company as per the
schedule.
Forward Looking Statements
The Company is making this statement in order to satisfy the "safe
harbor" provisions contained in the Private Securities Litigation
Reform Act of 1995. The statements contained in all parts of this
document (including the portion, if any, appended to the Form 10-K)
including, but not limited to, those relating to the availability of
cargo space; the Company's plans for, effects, results and expansion
of international operations and agreements for international cargo;
future international revenue and international market growth; the
future expansion and results of the Company's terminal network; plans
for local delivery services and truck brokerage; future improvements
in the Company's information systems and logistic systems and
services; technological advancements; future marketing results;
construction of the new facilities; the effect of litigation; future
costs of transportation; future operating expenses; future margins;
any seasonality of the Company's business; future dividend plans;
future acquisitions and the effects, benefits, results, terms or other
aspects of any acquisition; Ocean Transportation Intermediary License;
ability to continue growth and implement growth and business strategy;
the ability of expected sources of liquidity to support working
capital and capital expenditure requirements; future expectations; and
any other statements regarding future growth, future cash needs,
future terminals, future operations, business plans, future financial
results, financial targets and goals; and any other statements which
are not historical facts are forward-looking statements. When used in
this document, the words "anticipate," "estimate," "expect," "may,"
"plans," "project" and similar expressions are intended to be among
the statements that identify forward-looking statements. Such
statements involve risks and uncertainties, including, but not limited
to, those relating to the Company's dependence on its ability to
attract and retain skilled managers and other personnel; the intense
competition within the freight industry; the uncertainty of the
Company's ability to manage and continue its growth and implement its
business strategy; the Company's dependence on the availability of
cargo space to serve its customers; the effects of regulation; results
of litigation; the Company's vulnerability to general economic
conditions; the control by the Company's principal shareholder; risks
of international operations; risks relating to acquisitions; the
Company's future financial and operating results, cash needs and
demand for its services; and the Company's ability to maintain and
comply with permits and licenses, as well as other factors detailed in
this document and the Company's other filings with the Securities and
Exchange Commission. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
The Company undertakes no responsibility to update for changes related
to these or any other factors that may occur subsequent to this
filing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
FINANCIAL STATEMENTS
For the Years Ended September 30, 2004 and 2003
CONTENTS
Page
INDEPENDENT AUDITORS' REPORT F1
FINANCIAL STATEMENTS
Consolidated Balance Sheets F2 -F3
Consolidated Statements of Income (Loss) F4
Consolidated Statements of Earnings Per Share F5
Consolidated Statements of Stockholders' Equity(Deficit) F6
Consolidated Statements of Cash Flows F7
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F8 - F17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Allstates WorldCargo, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets
of Allstates WorldCargo, Inc. and Subsidiaries (a
corporation), as of September 30, 2004 and 2003, and the
related consolidated statements of net income (loss),
earnings per share, stockholders' deficit, and cash flows
for the years then ended. These consolidated financial
statements (see Note 1) are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on
our 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, 2004 and 2003,
and the results of their operations and cash flows for the
years then ended in conformity with accounting principles
generally accepted in the United States of America.
Toms River, New Jersey
December 9, 2004
F-1
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2004 and 2003
Assets
2004 2003
---- ----
Current Assets
Cash $ 114,363 $ 516,639
Accounts Receivable, net of allowance for doubtful
accounts of $250,394 and $229,364, respectively 8,073,391 6,226,209
Inventories 30,027 28,644
Prepaid Expenses and Other Assets 89,081 126,547
Deferred Income Taxes - Current Portion 351,000 490,000
------------ -----------
Total Current Assets 8,657,862 7,388,039
------------ -----------
PROPERTY, PLANT AND EQUIPMENT,
net of accumulated depreciation 507,873 325,562
------------ -----------
INTANTIBLE AND OTHER ASSETS
Deposits 33,371 38,571
Loans Receivable 52,853 -
Goodwill, including acquisition costs,
net of accumulated amortization 535,108 535,108
------------ -----------
Total Other Assets 621,332 573,679
------------ -----------
Total Assets $ 9,787,067 $ 8,287,280
============ ============
See accompanying notes and independent auditors' report
F2
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2004 and 2003
Liabilities and Stockholders' Deficit
2004 2003
Current Liabilities ---- ----
Accounts Payable $ 5,274,000 $ 4,336,623
Accrued Expenses 1,178,377 823,029
Short-Term Bank Borrowings Under Line of Credit 1,099,500 1,149,500
Current Portion of Long Term Debt 25,000 28,836
---------- ---------
Total Current Liabilities 7,576,877 6,337,988
---------- ---------
LONG TERM LIABILITIES
Deferred Tax Liability - Non-current portion 78,000 25,000
Long-Term Portion of Notes Payable 2,361,730 2,386,730
---------- ---------
Total Long-Term Liabilities 2,439,730 2,411,730
---------- ---------
Total Liabilities 10,016,607 8,749,718
---------- ---------
STOCKHOLDERS' EQUITY
Common Stock, $.0001 par value, 50,000,000 shares
authorized, 32,509,872 shares issued
and outstanding 3,251 3,251
Retained Deficit (232,791) (465,689)
---------- ---------
Total Stockholders' Deficit (229,540) (462,438)
---------- ---------
Total Liabilities and Stockholders' Deficit $ 9,787,067 $ 8,287,280
========== =========
See accompanying notes and independent auditors' report
F3
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
For the Fiscal Years Ended September 30, 2004 and 2003
2004 2003
---- ----
NET SALES $ 54,705,311 $ 46,293,052
COST OF SALES 37,060,406 30,089,183
------------ ------------
Gross Profit 17,644,905 16,203,869
OPERATING EXPENSES
Selling, General and Administrative 16,918,055 16,529,442
------------ ------------
Income (Loss) from Operations 726,850 (325,573)
------------ ------------
OTHER INCOME (EXPENSE)
Interest Income - 613
Interest Expense (217,367) (226,714)
Gain/(Loss)on Sale of Equipment 3,071 ( 26,534)
Other Income (Expense) 9,093 (371,916)
------------ ------------
Total Other Income (Expense) (205,203) (624,551)
------------ ------------
Income (Loss) Before Tax Provision 521,647 (950,124)
Provision for Income Taxes 288,749 (367,833)
------------ ------------
Net Income (Loss) Applicable to Common Shareholders $ 232,898 (582,291)
============ ============
See accompanying notes and independent auditors' report
F4
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings Per Share
For the Fiscal Years Ended September 30, 2004 and 2003
2004 2003
---- ----
EARNINGS PER SHARE - BASIC
Net Income (Loss) Applicable to Common Shareholders $ 232,898 ( 582,291)
Per Common Share - Basic $ 0.01 $ ( 0.02)
============ ============
Shares Used in Per Share Calculation - Basic 32,509,872 32,509,872
============ ============
Earnings Per Share - Diluted
Net Income (Loss) Applicable to Common Shareholders $ 232,898 ( 582,291)
Per common share - diluted $ 0.01 $ ( 0.02)
============ ============
Shares Used in Per Share Calculation - Diluted 32,509,872 32,509,872
============ ============
See accompanying notes and independent auditors' report
F5
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
For the Fiscal Years Ended September 30, 2004 and 2003
Common Stock
Other Retained Total
Number of Comprehensive Earnings Stockholders'
Shares Par Value Income (Loss) (Deficit) Equity (Deficit)
--------- --------- ------------- ---------- ----------------
Balance at
September 30, 2002 32,509,872 $3,251 $ - $ 116,602 $ 119,853
Consolidated net loss
for the fiscal year
ended September 30, 2003 (582,291) ( 582,291)
---------- ------- ------------ ---------- -------------
Balance at
September 30, 2003 32,509,872 $3,251 $ - $ (465,689) $( 462,438)
Consolidated net gain
for the fiscal year
ended September 30, 2004 232,898 232,898
---------- ------- ------------ ---------- -------------
Balance at
September 30, 2004 32,509,872 $3,251 $ - $ (232,791) $( 229,540)
========== ======= ============ =========== =============
See accompanying notes and independent auditors' report
F6
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Fiscal Years Ended September 30, 2004 and 2003
2004 2003
Cash Flows From Operating Activities: ---- -----
Net Income (loss) Applicable to Common Shareholders $ 232,898 $ (582,291)
Adjustments to reconcile net income (loss) applicable to
common shareholders to net cash provided
by operating activities:
Depreciation 167,202 185,728
Amortization - 1,166
Provision for bad debts 187,999 182,379
(Gain)/Loss on Sale of Equipment (3,071) 26,534
(Increase) Decrease in:
Accounts Receivable (2,035,182) (655,856)
Inventories ( 1,383) ( 4,432)
Prepaid Expenses and Other Assets ( 15,386) 852,366
Deferred Tax Asset 139,000 (420,001)
Increase (Decrease) in:
Accounts Payable 937,377 1,186,058
Accrued Expenses 355,348 ( 23,146)
Deferred Tax Liability 53,000 -
---------- ---------
Net Cash Provided From Operating Activities 17,802 748,505
---------- ---------
Cash Flows From Investing Activities:
Purchase of Equipment (395,292) (106,344)
Proceeds from Sale of Equipment 48,850 36,732
Deposits 5,200 ( 3,693)
---------- ---------
Net Cash Used by Investing Activities (341,242) ( 73,305)
---------- ---------
Cash Flows From Financing Activities:
New borrowings:
Short-Term 200,000 999,500
Long-Term
Debt reduction:
Short-Term ( 250,000) (1,250,000)
Long-Term ( 28,836) ( 81,338)
---------- ---------
Net Cash Used by Financing Activities ( 78,836) ( 331,838)
---------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ( 402,276) 343,362
Cash and Cash Equivalents, Beginning of Year 516,639 173,277
---------- ---------
Cash and Cash Equivalents, End of Year $ 114,363 516,639
========== =========
See accompanying notes and independent auditors' report
F7
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS
Nature of Operations
On August 24, 1999, Audiogenesis Systems, Inc.
(Audiogenesis), entered into a reverse acquisition with
Allstates Air Cargo, Inc. and its subsidiaries
(Allstates). On August 24, 1999, Allstates Air Cargo,
Inc. became a wholly owned subsidiary of Audiogenesis.
On November 4, 1999, Audiogenesis Systems, Inc. filed a
Certificate of Amendment to the Certificate of
Incorporation, officially changing its name to
Allstates WorldCargo, Inc. (WorldCargo). As a result
of this transaction, the sole shareholder of Allstates
Air Cargo, Inc. became a 55.37% shareholder of
WorldCargo. Management has elected to utilize the new
name (Allstates WorldCargo, Inc. and Subsidiaries) for
purposes of these financial statements. The entities
that are included in these consolidated financial
statements are as follows:
Allstates WorldCargo, Inc. (formerly Audiogenesis
Systems, Inc.) - WorldCargo was incorporated in the
State of New Jersey on January 14, 1997, as the result
of a reverse acquisition by Genesis Safety Systems,
Inc. The Company's operations include sales and
distribution of safety equipment, development of audio-
visual products, including safety training program and
sales and marketing presentations, development of a
device to treat tinnitus, and development of an
echolocation device to assist sighted persons in
conditions of low visibility and the blind. The
Company intends to defer any further development of the
tinnitus device, but continues to pursue opportunities
concerning the device. The Company has ceased all
efforts concerning the echolocation device, and has
terminated its license for the intellectual property
underlying the device.
Biowaste Technologies Systems, Inc. - Biowaste
Technologies Systems, Inc. is a wholly owned subsidiary
of WorldCargo. Biowaste was formed on July 1, 1988 for
the purpose of engaging in the business of the
management of infectious waste. Biowaste is in the
developmental stage, and no revenues have been produced
to date. Presently, such subsidiary is inactive, and
the Company does not anticipate that it will become
active in the near future.
Allstates Air Cargo, Inc. - Allstates Air Cargo, Inc.
was incorporated in the state of New Jersey on October
3, 1962. The Company provides domestic and
international airfreight forwarding services.
Allstates maintains operating facilities throughout the
United States and has agents in Europe and South
America.
Allstates Allcargo (US), Inc. - Allstates Allcargo
(US), Inc. is a wholly owned subsidiary of Allstates
Air Cargo, Inc. Allstates Allcargo (US), Inc. owned
100% of Allstates Allcargo (UK), Ltd., a corporation
organized under the laws of England prior to the
dissolution of Allstates Allcargo (UK), Ltd. during the
year ended September 30, 2000. All appropriate foreign
currency translation adjustments have been made for
purposes of these financial statements.
Allstates Logistics, Inc. - Allstates Logistics, Inc.
is also a wholly owned subsidiary of Allstates Air
Cargo, Inc. Allstates Logistics was incorporated in
the State of New Jersey in December 1997, and provides
ocean freight services to its customers.
GTD Logistics, Inc. - GTD Logistics, Inc. was
incorporated in the State of New Jersey on October 27,
1998. GTD Logistics is a wholly owned subsidiary of
Allstates Air Cargo, Inc. GTD Logistics is also in the
business of freight forwarding.
F-8
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS (Continued)
e-tail Logistics, Inc. - e-tail Logistics, Inc. was
incorporated in the State of New Jersey on February 11,
2000. e-tail Logistics is a majority owned subsidiary
of WorldCargo.
Reverse Acquisition
For purposes of these consolidated financial
statements, the purchase of Allstates Air Cargo, Inc.
by Allstates WorldCargo, Inc. is treated as a reverse
acquisition under the purchase method of accounting, as
outlined in Accounting Principles Board Opinion No. 16.
For accounting purposes, Allstates Air Cargo, Inc. is
considered the acquirer in the reverse acquisition.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
For purposes of the accompanying consolidated financial
statements, Allstates Air Cargo, Inc. is considered the
accounting "Parent" company and Allstates WorldCargo,
Inc. is considered a subsidiary. Therefore, these
consolidated financial statements include the combined
assets and liabilities of Allstates Air Cargo, Inc. and
its subsidiaries as of September 30, 2004 and 2003.
The consolidated statements of net income (loss)
include the income and expenses of Allstates Air Cargo,
Inc. and its subsidiaries for the years ended September
30, 2004 and 2003. All material intercompany payables,
receivables, revenues and expenses have been eliminated
for purposes of this consolidation.
Use of Estimates
The preparation of the consolidated financial
statements in conformity with accounting principles
generally accepted in the United States of America
requires management to make estimates and assumptions
that affect the amounts reported in the financial
statements and accompanying notes. Actual results
could differ from those estimates.
Concentration of Credit Risk
The Company maintains cash balances at several banks.
Accounts at each institution are insured by the Federal
Deposit Insurance Corporation (FDIC) up to $100,000.
At varying times during the years ended September 30,
2004 and 2003, the Company had a cash balance on
deposit with one bank that exceeded the $100,000
balance insured by the FDIC. Management considers the
risk of loss to be minimal.
Cash Equivalents
For purposes of the consolidated statements of cash
flows, the Company considers all highly liquid
investments with original maturities of three months or
less to be cash equivalents.
Fair Value of Consolidated Financial Statements
The carrying values of cash, accounts receivable,
accounts payable, accrued expenses, taxes payable,
notes payable and other current liabilities
approximates fair value because of the relatively short
maturity of these instruments.
F-9
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Inventories
For both financial reporting and income tax purposes,
inventory is stated on the cost basis. Cost is
determined using the first-in, first-out method.
Depreciation
Property, plant and equipment consist principally of
building and improvements, vehicles, computers and
software, office equipment, and furniture and fixtures
which are stated at historical cost. Depreciation is
provided on the straight-line method over the estimated
useful lives of the assets, which are generally three
to fifteen years. Expenditures for maintenance and
repairs, which do not extend the economic useful life
of the related assets, are charged to operations as
incurred. Gains or losses on disposal of equipment are
reflected in the statements of income (loss).
Depreciation expense for the years ended September 30,
2004 and 2003 was $167,202 and $185,728, respectively.
Income Taxes
The Company follows the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS 109). SFAS 109 requires
recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that
have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities
and assets are determined based on the difference
between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for
the year in which the differences are expected to
reverse.
Advertising
The Company expenses advertising costs as they are
incurred. Advertising expenses for the years ended
September 30, 2004 and 2003 were $41,217 and $28,121,
respectively.
Revenue Recognition
Revenues are recognized at the time the freight departs
the terminal of origin. This method approximates
recognizing revenues when shipment is completed.
Earnings per Share
The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS No. 128)
which establishes standards for computing and
presenting earnings per share ("EPS") and requires the
presentation of both basic and diluted EPS. As a
result, primary and fully diluted EPS have been
replaced by basic and diluted EPS. EPS is calculated by
dividing net income by the weighted-average number of
outstanding shares of Common Stock for each year.
Bad Debts
The Company uses the allowance method to account for
uncollectible accounts receivable. The allowance for
doubtful accounts is based on prior years' experience
and is estimated by management. Bad debt recoveries
are charged against the allowance account as realized.
Bad debt expense for the years ended September 30, 2004
and 2003 was $187,999 and $182,379, respectively.
F-10
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are summarized by major
classifications as follows:
2004 2003
Leasehold
Equipment $361,835 $ 48,062
Vehicles 56,525 315,789
Equipment and
Software 902,192 857,239
Furniture and
Fixtures 47,542 47,542
---------- ---------
1,368,094 1,268,632
Less Accumulated
Depreciation 860,221 943,070
---------- ---------
$ 507,873 $ 352,562
========== =========
NOTE 4 - AMORTIZATION OF GOODWILL AND ACQUISITION COSTS
Commencing with the fiscal year beginning October 1,
2001, the Company implemented Statement of Financial
Accounting Standards Statement No. 142, "Accounting for
Goodwill and Intangible Assets", which no longer allows
for the amortization of goodwill. The new statement
requires the Company to conduct an annual goodwill
impairment test and write off any decrease in the fair
value of the goodwill in the period of such declined
value. Pursuant to the Company's impairment tests
conducted for the years ended September 30, 2004 and
2003, no write off of the carrying value is deemed
necessary.
Effective January 1, 2003, the Company ceased
amortizing the costs associated with the acquisition of
Audiogenesis by Allstates and will include such costs
in its annual goodwill impairment test as discussed
above. Amortization expense for the years ended
September 30, 2004 and 2003 were $-0- and $1,166,
respectively.
F-11
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
NOTE 5 - LONG-TERM DEBT
The Company's notes payable balance at September 30,
2004 and 2003 consist of the following:
2004 2003
Notes payable from Joseph M. Guido to
the Estate of
A.G. Hoffman, Jr., assumed by the
Company, in the
aggregate originally totaled
$2,511,730, with repayment
over 101 years at annual principal
payments of
$25,000 plus interest at 7% per year.
All or any
of the notes may be paid at any time
before maturity
without any prepayment penalty. In
the event of a
default under the notes by the
Company, Joseph M.
Guido remains personally liable for
the notes, and
the 101 shares of Allstates Air
Cargo, Inc. common
stock held as security under the
notes (representing
48.1% of the issued and outstanding
common stock
of Allstates Air Cargo, Inc.) may be
sold at public or
private sale. $2,386,730 $2,411,730
Notes Payable to Fleet Bank in
the aggregate
originally totaled $76,903, with
repayment over 36
months with monthly payments
inclusive of interest
ranging from 7.90% to 8.50%.
These loans are
secured by the vehicles which
they relate. - 3,836
--------- ---------
2,386,730 2,415,566
Less: Current Portion 25,000 28,836
----------- ----------
$2,361,730 $2,386,730
=========== ===========
Future maturities for long-term debt as of September
30, 2004 is as follows:
For the fiscal years ended September 30, 2005 25,000
2006 25,000
2007 25,000
2008 25,000
2009 25,000
Thereafter 2,261,730
_________
Total $2,386,730
=========
NOTE 6 - LINE OF CREDIT
Allstates Air Cargo, Inc. has a $2,000,000 line of
credit agreement with a bank, which expires January 31,
2005. Interest on outstanding borrowings currently
accrues at the Wall Street Journal's (WSJ) prime rate
of interest per annum (4.75% as of September 30, 2004).
The interest rate is predicated upon the Company
maintaining a compensating account balance in a non-
interest bearing account equal to at least $230,000.
If, at any time, the Company fails to maintain the
compensating balance, the interest rate will increase by
1% over the WSJ's prime rate at the time of failure.
The balance outstanding on the line of credit as of
September 30, 2004 and 2003 was $1,099,500 and
$1,149,500, respectively.
F-12
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
NOTE 6 - LINE OF CREDIT (Continued)
Loan collateral includes the Company's accounts
receivable and the unlimited, unconditional guarantees
of Joseph M. Guido, Teresa Guido and Allstates Allcargo
(US), Inc.
NOTE 7 - PROVISION FOR INCOME TAXES
A reconciliation of income tax at the statutory rate to
the Company's effective rate is as follows:
2004 2003
---- ----
Expected Federal
statutory rate 0.00%* 0.000%
Expected State statutory
rates (average) 8.893% 8.893%
------- -------
Total expected 8.893% 8.893%
statutory rate
State Franchise Tax and
Miscellaneous Book to Tax
Adjustments -9.654% -2.253%
Deferred income tax
expense (benefit):
Federal 29,138% -35.040%
State 7.668% -10.310%
------- -------
Income Tax Expense (Benefit) -
Effective Tax Rate 55,353% -38.710%
* Due to Net Operating Loss in September 30,2003, and the net
operating loss carryforward in September 30, 2004. Expected
Federal statutory rate is deemed to be 0%.
The Company's provision for income taxes as of
September 30, 2004 and 2003 consist of the following:
2003 2002
---- ----
Current Income Tax Expense
Federal $ (6,318) $ -
State 103,067 62,980
------- -------
Total - Current 96,749 62,980
------- -------
Deferred Income Tax (Benefit) Expense
Federal 152,000 (332,901)
State 40,000 (97,912)
------ ------
Total - Deferred 192,000 (430,813)
------ -------
TOTALS $288,749 $(367,833)
======== =======
The tax effect of temporary differences that make up
the significant components of the deferred tax asset
for financial reporting purposes at September 30, 2004
and 2003 are as follows:
F-13
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
NOTE 7 - PROVISION FOR INCOME TAXES (Continued)
2004 2003
---- ----
Deferred Tax Assets
--------------------
Accounts Receivable $ 107,500 $ 101,000
Defferred Payable 43,900 -
Net operating loss 199,600 389,000
-------- --------
Totals $ 351,000 $ 490,000
------ ======== ========
Deferred Tax Liabilities
------------------------
Depreciable and
amortizable assets $ 78,000 $ 25,000
======== ========
At September 30, 2004 and 2003, the Company has a
future income tax benefit for net write offs of its
investment account in one of its Subsidiaries
(Allstates Allcargo (U.S.) Inc.). The estimated future
income tax benefit of this transaction is approximately
$127,000. For financial statement purposes, a 100%
valuation allowance has been recorded by management in
the amount of $127,000 as of September 30, 2004 and
2003, and therefore, this future estimated tax benefit
is not reflected in these financial statements.
NOTE 8 - NET OPERATING LOSS CARRYFORWARD
Allstates WorldCargo, Inc. (formerly known as
Audiogenesis System, Inc.) generated net operating
losses prior to its acquisition of Allstates Air Cargo,
Inc. As a result of the reverse acquisition, the
ownership structure of Worldcargo changed as of August
24, 1999; thereby limiting and reducing the future
utilization of the Worldcargo net operating loss
carryforwards. These pre-reverse acquisition net
operating loss carryforwards will be limited and
reduced based upon the Federal and New Jersey change in
ownership net operating loss carryforward rules. Any
net operating loss carryforwards to future tax years
after limitation and reduction will generally be
available to offset future taxable income of WorldCargo
only, and will not be available to offset any future
income of Allstates Air Cargo, Inc. or any other
affiliated corporation. The income tax provisions do
not include any of these pre-reverse acquisition net
operating losses.
Pursuant to a ruling received by the Internal Revenue
Service, effective October 1, 1999, the operating
losses incurred by Allstates Allcargo (UK), LTD. may be
offset against taxable income of Allstates WorldCargo,
Inc. in the consolidated filing of its Federal income
tax returns. For tax purposes only, Allstates Allcargo
US Inc. will treat the foreign subsidiary Allstates
Allcargo (UK), LTD. as a disregarded entity and not as
a subsidiary. Therefore, the tax provisions included in
these consolidated financial statements utilize the
operating loss for the fiscal year 2001 incurred by
Allstates Allcargo (UK), Ltd. in calculating the
Federal tax liability. There are no gains or losses in
fiscal year 2002 since the foreign entity, Allstates
Allcargo (UK), LTD., was dissolved.
NOTE 9 - PENSION PLAN
Effective May 1994, the Company adopted a discretionary
non-standardized 401(k) profit sharing plan. The terms
of the plan provide for eligible employees who have met
certain
F-14
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
NOTE 9 - PENSION PLAN (Continued)
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 $13,000 and
$12,000 for the calendar years ended 2004 and 2003,
respectively. The Company may make matching
contributions equal to a discretionary percentage, as
determined by the Company, up to 6% of a participant's
salary. Contributions to the plan for the years ended
September 30, 2004 and 2003 totaled $43,493and $31,378,
respectively. The plan also allows employer
discretionary contributions allocated in accordance
with participants' compensation. The Company did not
make any discretionary contributions to the plan for
the years ended September 30, 2004 and 2003.
NOTE 10 - RELATED PARTY TRANSACTIONS
Allstates Air Cargo, Inc. leases office space located
in Forked River, New Jersey from a majority stockholder
of the Company. Rent expense under these leases
totaled $81,600 and $81,600 for the years ended
September 30, 2004 and 2003, respectively.
The Company has entered into royalty agreements for
selected licensee locations with an officer and
director of the Company, whereby the Company agrees to
pay the officer a royalty equal to 5% of the gross
profit per the contract. Royalty payments to this
individual for the years ended September 30, 2004 and
2003 totaled $454,607 and $431,789, respectively.
The Company entered into Employment Agreements with
four of the Company's stockholders. The Employment
Agreements are effective through December 31, 2004.
The following is a summary of the terms of these
agreements:
Annual Stock
Position Salary Bonus Options
-------- -------- ------ --------
Chairman of the $329,811 3% of fiscal Yes
Board year increase
in net profits
President/Chief $216,000 3% of fiscal Yes
Executive year increase
Officer in net profits
Executive Vice $213,948 3% of fiscal Yes
President/ year increase
Chief Operating in net profits
Officer
Chief Financial $148,077 Discretionary Yes
Officer
NOTE 11 - STOCK OPTION PLAN
On October 16, 2000, the Company filed a Form S-8
registration statement with the Securities and Exchange
Commission, registering 4,500,000 shares of common
stock with a $.0001 par value. The shares are
registered on behalf of the Company, and will be issued
pursuant to the Company's "2000 Stock Option and Stock
Issuance Plan". As of September 30, 2004, no stock
options have been issued.
F-15
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
NOTE 12 - DESCRIPTION OF LEASING ARRANGEMENTS
The Company leases certain terminal facilities and its
corporate headquarters under operating leases that
expire over the next five years. These operating
leases provide the Company with the option to renew
it's lease at the fair rental value at the end of the
lease term. Management expects that leases will be
renewed or replaced by other leases in the normal
course of business.
Future minimum lease payments under all leases with
initial or remaining noncancellable lease terms in
excess of one year are as follows as of September 30,
2004:
Years Ending
September 30,
--------------------
2005 481,552
2006 320,266
2007 275,388
2008 157,965
2009 27,200
Thereafter -
--------
Total $1,262,371
==========
Rent expense under operating leases for the years ended
September 30, 2004 and 2003 was $554,321 and $462,284
respectively.
NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for: 2003 2002
-------------- ----- -----
Income Taxes $ 52,355 $115,091
======== ========
Interest $217,367 $226,714
======== ========
NOTE 14 - LITIGATION
On October 14, 2004, the 56.91% majority shareholder of
the Company (the "Shareholder") (also employed by the
Company as its Chairman) commenced an action against
the Company and three of the Company's directors,
entitled "Joseph M. Guido v. Allstates WorldCargo,
Inc., Sam DiGiralomo, Barton C. Theile, and Craig D.
Stratton," in the Superior Court of New Jersey,
Chancery Division, Ocean County, bearing Docket No. OCN
- C - 305-04. (Messrs. DiGiralamo, Theile, and Stratton
are also employed by the Company as its President and
Chief Executive Officer, its Executive Vice President
and Chief Operating Officer, and its Chief Financial
Officer.) The Shareholder alleged that in accordance
with state law, on August 16, 2004, he had delivered to
the Company's Secretary (1) an executed Written Consent
in Lieu of a Special Meeting of the Stockholders of
Allstates WorldCargo, Inc. dated August 16, 2004 (the
"Written Consent"), (2) Amended and Restated Bylaws of
the Company adopted pursuant to the Written Consent
(the "A&R Bylaws"), and (3) a draft Information
Statement pursuant to Section 14(c) of the 1934 Act
(the "Draft Information Statement").
F-16
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004 and 2003
NOTE 14 - LITIGATION (Continued)
The Shareholder alleged that pursuant to the Written
Consent, he had amended the Company's bylaws to (among
other things) expand the Board of Directors from four
members to seven members, and appointed three persons
(alleged to be independent) to fill the newly created
board seats. He alleged that the Company was required
by law to comply with his demand to notify the
shareholders of his action, and that the Company's
failure to do so was a violation of the law. He also
alleged that the three individual defendants, both as
directors and officers, owed the Company and its
shareholders certain fiduciary duties and duty of
loyalty to direct that "appropriate steps" be taken by
the Company to allegedly comply with New Jersey state
law "and other applicable law" in response to the
Written Consent.
The Majority Shareholder demanded temporary,
preliminary, and injunctive relief enjoining a
scheduled special Board of Directors meeting (the
"Special Board Meeting") pending Company's performance
of acts allegedly required by New Jersey law and by the
1934 Act. The Majority Shareholder also sought a
permanent injunction requiring the Company and its
Secretary to prepare and distribute to the Company's
shareholders all notices allegedly required by state
and federal law in connection with the Written Consent.
Finally, he sought entry of an Order requiring the
Company to file and serve upon him, within seven days
after entry of a permanent injunction, a written report
setting forth the manner and form in which the Company
complied with the injunctions.
The Company (and the three individual defendants)
opposed the application for temporary relief upon the
grounds that subsequent to his execution of the Written
Consent, the Majority Shareholder advised one of the
individual defendants that he had decided not to
proceed with his amendment of the bylaws or his
expansion of the Board of Directors. Defendants also
alleged that the Majority Shareholder's actions were
not in the best interest of the Company, and were
motivated by self-interest, that because of such
concerns, the Company needed time to determine its
obligations under the law, and that the purpose of the
Special Board Meeting (among others) was to consider
"issues pertaining to the request by [the Majority
Shareholder] to file the Schedule 14C presented to the
Secretary of the Corporation."
On October 28, 2004, the parties reached an agreement
with regard to some essential terms of a settlement,
pursuant to which (1) the Company's Board of Directors
would not be expanded except by unanimous consent, (2)
the Majority Shareholder and the individual defendants
would enter into a voting agreement pursuant to which
each would agree to vote his respective shares in the
Company for the others as directors of the Company, (3)
the Company would enter into new employment agreements
(the precise terms of which were to be agreed upon)
with the individual defendants (the existing employment
agreements being due to expire on December 31, 2004),
(4) the parties would exchange general releases, and
(5) the Company would, to the extent lawfully required
by the Majority Shareholder's existing employment
agreement, reimburse him for the attorney's fees he
incurred in connection with the action. It was
anticipated that the complete terms of a settlement
would be agreed upon, and that formal settlement
documents would be prepared and executed. Such formal
documentation is being prepared.
F-17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
- ---- --- --------
Joseph M. Guido 70 Chairman of the Board
Sam DiGiralomo 61 President, CEO, Director
Barton C. Theile 58 Executive Vice President, COO,
Director
Craig Stratton 53 CFO, Secretary, Treasurer,
Director
None of the above persons is related to any other of the above-named
persons by blood or marriage.
Based upon a review of filings with the Securities and Exchange
Commission and written representations that no other reports were
required, the Company believes that all of the Company's directors
and executive officers complied during fiscal 2003 with the reporting
requirements of Section 16(a) of the Securities Exchange Acts of
1934.
JOSEPH M. GUIDO, Chairman of the Board, is the founder of Allstates
Air Cargo, Inc., having served as its President and CEO from 1961 to
August 1999. Mr. Guido became Chairman of the Board of the Company
upon the acquisition of Allstates Air Cargo, Inc. on August 24, 1999.
Prior to forming Allstates Air Cargo, Inc., Mr. Guido served as a
freight supervisor with American Airlines, and as a sales and station
manager for Air Cargo Consolidators.
SAM DIGIRALOMO, became President, CEO and a director of the Company
upon the acquisition of Allstates Air Cargo, Inc. on August 24, 1999.
Prior to such acquisition, Mr. DiGiralomo had served as the President,
Treasurer, CEO and a director of Audiogenesis Systems, Inc. since it
was formed in January, 1997. From July 1981 through January 1997, Mr.
DiGiralomo had been the President of the predecessor of Audiogenesis
Systems, Inc., Genesis Safety Systems, Inc. Mr. DiGiralomo has more
than 20 years of management and marketing experience. He has
lectured at various trade associations and universities, and designed
and authored several employee training programs.
BARTON C. THEILE, became Executive Vice President, COO and a director
of the Company upon the acquisition of Allstates Air Cargo, Inc. on
August 24, 1999. Prior to such acquisition, Mr. Theile had served
Allstates Air Cargo, Inc., as a sales representative, operations
manager, Executive Vice President and COO over a period of 19 years.
In addition to his experience at Allstates, Mr. Theile was President
of Cargo Logistics Group, LLC. Mr. Theile has been involved in sales,
marketing operations and administration in the transportation industry
for over 25 years.
CRAIG STRATTON, became CFO, Secretary, Treasurer and a director of the
Company upon the acquisition of Allstates Air Cargo, Inc. on August
24, 1999. Prior to such acquisition, Mr. Stratton served as Chief
Financial Officer for Allstates Air Cargo, Inc. since November 1997.
Before joining Allstates, for three years, Mr. Stratton held the
position of Corporate Controller for Programmer's Paradise, Inc. a
cataloger and distributor of technical software. From 1990 through
1994, he was Controller for Baronet Corporation, an importer and
distributor of leather goods accessories. From 1981 through 1990, he
was employed by the finance department of Contel IPC, a specialty
telephone systems manufacturer and service provider, where he held
various positions of increasing responsibility in corporate
accounting, including an appointment to Assistant Controller in 1987.
In 1973, Mr. Stratton received his B.S. in accounting, and in 1980 he
earned his MBA. Mr. Stratton has been a CPA since 1986.
Audit Committee and Code of Ethics
The Company does not presently have an audit committee, nor a Code of
Ethics for its principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, because the Company is not a listed
company, and therefore is not required to do so.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
EXECUTIVE COMPENSATION
Summary Compensation Table
Annual Compensation Long term compensation
----------------------- --------------------------
Name and Year Salary Bonus Other Awards All
Principal ($) ($) Annual Restrict- Options/ LTIP Other
Position Compen- ed Stock SARs(#) Pay- Compensa-
sation ($) ($) outs($) tion ($)
- ---------- ---- ------- ----- --------- --------- --------- ------ --------
J. 2004 329,811 81,600(1)
Guido, 2003 311,818 81,600(1)
Chairman 2002 311,818 81,600(1)
of the
Board
Sam 2004 216,000 526,957(3)
DiGiralomo, 2003 208,000 413,864(2)
President, 2002 208,000 319,595(2)
CEO
B. Theile, 2004 213,948 23,013(5)
COO, 2003 206,316 9,271(4)
Exec. VP 2002 207,922 4,188(6)
Craig
Stratton, 2004 148,077 7,800(7)
CFO, 2003 129,039 7,800(7)
Secretary, 2002 125,266 5,850(7)
Treasurer
(1) Rental income from leasing of Forked River corporate office
(2) Royalties paid in connection with site licensing agreements
(3) Royalties paid in connection with site licensing agreements
($454,607), and reimbursement of income taxes due IRS in connection
with insurance settlement ($72,350).
(4) Car allowance for use of personal auto ($7,800) and commission
paid for management services to GTD Logistics, Inc. ($1,471)
(5) Car allowance for use of personal auto ($7,800) and commission
paid for management services to GTD Logistics, Inc. ($15,213)
(6) Commission paid for management services to GTD Logistics, Inc.
(7) Car allowance for use of personal auto
On August 24, 1999, the Company entered into Employment Agreements
with three of the Company's stockholders, and in 2001, entered into an
agreement with a fourth stockholder. The Employment Agreements are
effective for the term beginning with inception through December 31,
2004. The following is a summary of the terms of these agreements:
Annual
Name/Position Salary Bonus
Joseph M. Guido,
Chairman of
The Board $308,000 3% of fiscal year
increase in net profits
Sam DiGiralomo,
President/Chief
Executive Officer $208,000 3% of fiscal year
increase in net profits
Barton M. Theile,
Executive Vice President/
Chief Operating Officer $207,922 3% of fiscal year
increase in net profits
Craig D. Stratton,
Chief Financial Officer $154,000 At the discretion of
the Board of Directors
Under the terms of their respective employment agreements, each
individual has agreed to work full time. The agreements also provide
for health and life insurance benefits, participation in the Company's
401(k) plan, disability benefits, expense reimbursements,
indemnification from civil or criminal actions arising out of the
Executive's employment, financial and tax advice, tax "gross-up"
provisions, severance pay (equal to 100% of compensation for a period
of five years), and payments in the event of a change of control.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth the beneficial ownership of the
Common Stock of the Company as of December 20, 2004 by each person who
was known by the Company to beneficially own more than 5% of the
common stock, by each director and executive officer who owns shares
of common stock and by all directors and executive officers as a
group:
No. of Shares
Title Name and Address and Percent
of of Beneficial Owner Nature of of
Class Beneficial Class(1)
Ownership
Common Joseph M. Guido 18,500,000(2) 56.91%
4 Lakeside Drive South
Forked River, NJ 08731
Common Sam DiGiralomo 4,850,000 14.92%
7 Doig Road, Suite 3
Wayne, NJ 07470
Common Barton C. Theile 500,000 1.54%
4 Lakeside Drive South
Forked River, NJ 08731
Common Craig D. Stratton 200,000 0.61%
4 Lakeside Drive South
Forked River, NJ 08731
All Officers and Directors as a Group 24,050,000 73.98%
__________________
(1) Based upon 32,509,872 shares outstanding as of December 22, 2004.
(2) Comprised of 18,250,000 shares owned by Joseph Guido and 250,000
shares owned by Teresa Guido, wife of Joseph Guido.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company's $2,000,000 line of credit, which expires January
31, 2005, is personally guaranteed by Joseph M. Guido, Chairman of the
Board of the Company, and Teresa Guido, his wife.
The Company leased real estate in one location from Joseph M.
Guido during Fiscal 2004. Rent expense under this lease totaled
$81,600 for the year ended September 30, 2004. 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, Orlando, Atlanta,
Raleigh and Nashville licensee locations. Royalty payments to Mr.
DiGiralomo for the year ended September 30, 2004 totaled $454,607.
Pursuant to the Stock Purchase Agreement and Plan of
Reorganization between Audiogenesis Systems, Inc. and Allstates Air
Cargo, Inc., the Company assumed 101 Notes payable from Joseph M.
Guido to the Estate of A.G. Hoffman, Jr., aggregating $2,511,730 in
principal, with repayment over 101 years at annual principal payments
of $25,000 plus interest at 7% per year. All or any of the notes may
be paid at any time before maturity without any prepayment penalty. In
the event of a default under the notes by the Company, Joseph M. Guido
remains personally liable for the notes and the 101 shares of
Allstates Air Cargo, Inc. common stock held as security under the
notes (representing 48.1% of the issued and outstanding common stock
of Allstates Air Cargo, Inc.) may be sold at public or private sale.
The Company's former legal counsel, Stephen M. Robinson, Esq.,
beneficially owns 1,200,000 shares of common stock. Mr. Robinson
retired from practice in July, 2003.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our independent auditing firm during the fiscal years ended
September 30, 2004 and September 30, 2003 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 the Company an
aggregate of $102,824 and $75,580 during fiscal 2004 and 2003
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,
2004 and 2003, 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 2004 and 2003
for tax services rendered by Cowan, Gunteski and Co. were $24,599
and $27,437, respectively.
All other fees. During the fiscal years ended September 30, 2004
and 2003, Cowan, Gunteski and Co. did not provide or bill for
other services that were not included above.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K
(a) The following exhibits are filed pursuant to Item 601 of
Regulation S-K.
Exhibit Description
No.
3.01* Articles of Incorporation of Audiogenesis Systems,
Inc. dated January 14, 1997 filed as an exhibit to
Registrant's Registration Statement on Form 10-SB,
filed October 23, 1998
3.02* By-laws of Registrant, filed as an exhibit to
Registrant's Registration Statement on Form 10-SB,
filed October 23, 1998
10.01* Echlocation Technology License Agreements, filed as
an exhibit to Registrant's Registration Statement on
Form 10-SB, filed October 23, 1998
10.02* Agreement with Allstates Air Cargo, Inc. dated
9/18/98, filed as an exhibit to Registrant's
Registration Statement on Form 10-SB, filed October
23, 1998
10.03* Promissory Note to Marshall E. Levine Ph.D. Profit
Sharing Plan, filed as an exhibit to Registrant's
Registration Statement on Form 10-SB, filed October
23, 1998
10.04* Genesis Safety Systems, Inc. Stock Option Plan, filed
as an exhibit to Amendment No. 1 to Registrant's
Registration Statement on Form 10-SB, filed March 11,
1999
10.05* Stock Purchase Agreement and Plan of Reorganization
dated June 30, 1999, filed as an exhibit to
Registrant's Form 8-K filed July 12, 1999
10.06* Employment Agreement with Joseph M. Guido, , filed as
an exhibit to Registrant's Form 8-K filed September
9, 1999
10.07* Employment Agreement with Sam DiGiralomo, filed as an
exhibit to Registrant's Form 8-K filed September 9,
1999
10.08* Employment Agreement with Barton C. Theile, filed as
an exhibit to Registrant's Form 8-K filed September
9, 1999
10.09* Certificate of Amendment to the Certificate of
Incorporation of Registrant changing the name of the
corporation from Audiogenesis Systems, Inc. to
Allstates WorldCargo, Inc., filed as an exhibit to
Registrant's Form 8-K filed December 1, 1999
11.01+ Statement re: Computation of Earnings per Share
21.01* List of Subsidiaries of Registrant, filed as an
exhibit to Registrant's Registration Statement on
Form 10-SB, filed October 1, 1999
31.1+ Certification of Registrant's Chief Executive
Officer, Sam DiGiralomo, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2+ Certification of Registrant's Chief Financial
Officer, Craig D. Stratton, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1+ Certification of Registrant's Chief Executive
Officer, Sam DiGiralomo, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2+ Certification of Registrant's Chief Financial
Officer, Craig D. Stratton, pursuant to Section 906of
the Sarbanes-Oxley Act of 2002.
__________________
* Filed previously, incorporated herein by reference
+ Filed herewith
(b) Reports on Form 8-K: No reports on Form 8-K were filed during
the last quarter of the period covered by this report.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLSTATES WORLDCARGO, INC.
BY: /s/ Sam DiGiralomo
President and CEO
DATED: December 29, 2004
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the date indicated.
Signature Title Date
By: /s/ Joseph M. Guido Chairman of the Board of December 29, 2004
Directors
By: /s/ Sam DiGiralomo President, CEO and December 29, 2004
Director
By: /s/ Barton C. Theile Executive Vice President, December 29, 2004
COO and Director
By: /s/ Craig D. Stratton Secretary, Treasurer, and December 29, 2004
Chief Financial Officer
(Principal Financial
Officer and Principal
Accounting Officer)