SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
XX QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______.
Commission file number 000-24991
____________________
ALLSTATES WORLDCARGO, INC.
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(Exact name of small business issuer as specified in its charter)
New Jersey 22-3487471
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation)
4 Lakeside Drive South, Forked River, New Jersey, 08731
----------------------------------------------------------
(Address of principal executive offices)
609-693-5950
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 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 XX No
---- ----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes No XX
---- ----
The Company had 32,509,872 shares of common stock, par value
$.0001 per share, outstanding as of May 15, 2006.
-1-
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Financial Statements with Supplemental Information
For the Period Ending March 31, 2006 and 2005
Financial Statements:
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of Operations 4
Condensed Consolidated Statements of Stockholders'
Equity 5
Condensed Consolidated Statement of Cash Flows 6
Notes to the Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 8
ITEM 3. CONTROLS AND PROCEDURES 13
PART II. OTHER INFORMATION 13
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3 DEFAULTS ON SENIOR SECURITIES 18
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 18
ITEM 5 OTHER INFORMATION 18
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
2
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
March 31, September 30,
2006 2005
(Unaudited) *
---------- ----------
Current Assets
Cash $ 134,553 $ 180,317
Accounts receivable 10,992,864 10,681,589
Prepaid expenses and
other current assets 314,709 317,991
Deferred tax asset -
current 184,982 184,982
---------- ----------
Total current assets 11,627,108 11,364,879
Property, plant and
equipment 1,917,308 1,598,231
Less: Accumulated
depreciation 1,077,642 999,189
---------- ----------
Net property, plant and
equipment 839,666 599,042
Goodwill, including
acquisition cost, net 535,108 535,108
Other assets 160,998 199,773
---------- ----------
Total assets $13,162,880 $12,698,802
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 6,844,242 $ 6,420,955
Accrued expenses 1,242,653 1,767,391
Short-term bank
borrowings 2,011,360 1,599,500
Notes/leases payable
current portion 90,581 49,888
---------- ----------
Total current liabilities 10,188,836 9,837,734
Deferred tax liability -
non current 102,368 102,368
Long term portion of
notes/leases payable 2,440,259 2,385,015
Stockholders' equity
Common stock 3,251 3,251
Retained earnings 428,166 370,434
---------- ----------
Total stockholders' equity 431,417 373,685
Total liabilities and
stockholders' equity $13,162,880 $12,698,802
========== ==========
* Condensed from audited financial statements.
The accompanying notes are an integral part of these
consolidated financial statements.
3
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2006 2005 2006 2005
Revenue $16,902,604 $15,386,968 $36,394,423 $31,839,722
Cost of transportation 12,092,054 10,520,256 26,400,760 22,241,828
---------- ---------- ---------- ----------
Net revenue 4,810,550 4,866,712 9,993,663 9,597,894
Selling, general and
administrative expenses 4,860,043 4,558,275 9,838,536 9,133,884
---------- ---------- ---------- ----------
Income/(loss) from
operations (49,493) 308,437 155,127 464,010
Other income (expense):
Interest, net (74,379) (58,389) (144,422) (114,411)
Gain/(loss) on sale of
assets
Other income/(expense) 98,223
---------- ---------- ---------- ----------
Income/(loss) before
income tax provision (123,872) 250,048 108,928 349,599
Provision for income
taxes (58,220) 127,659 51,196 162,659
---------- ---------- ---------- ----------
Net income/(loss) (65,652) 122,389 57,732 186,940
========== ========== ========== ==========
Weighted average common
shares - basic 32,509,872 32,509,872 32,509,872 32,509,872
Net income per common
share - basic $ .00 $ .00 $ .00 $ .00
Weighted average common
shares - diluted 32,509,872 32,509,872 32,509,872 32,509,872
Net income per common
share - diluted $ .00 $ .00 $ .00 $ .00
The accompanying notes are an integral part of these
consolidated financial statements.
4
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Common Stock
----------------------
Total
Number Par Retained Stockholder's
of Value Earning Equity
Shares
---------- ------- -------- ---------
Balance at
September 30, 2005 32,509,872 $ 3,251 $ 370,434 $373,685
Consolidated net
profit for the
six months ended 57,732 57,732
March 31, 2006 ---------- ------- -------- ---------
Balance at
March 31, 2006 32,509,872 $ 3,251 $ 428,166 $431,417
========== ======= ======== =========
5
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
2006 2005
----------- -----------
Cash flows from operating
activities:
Net income $ 57,732 $ 186,940
Adjustments to reconcile net
income to net cash used for/
provided by operating activities:
Depreciation 78,452 65,502
Provision for doubtful
accounts 145,203 67,429
Deferred income taxes 161,000
(Increase) decrease in assets:
Accounts receivable (456,477) 275,762
Prepaid expenses and other
assets 14,558 (122,523)
Increase (decrease) in
liabilities:
Accounts payable and
accrued expenses (101,448) (148,047)
----------- -----------
Net cash (used for) / provided by
operating activities (261,980) 486,063
Cash flows from investing
activities:
Purchase of equipment (319,077) (11,089)
Loan to licensee (250,000)
Collection of loan principal 37,881 2,945
Deposits (10,385) 144
----------- -----------
Net cash used for investing
activities (291,581) (258,000)
Cash flows from financing
activities:
Repayments under capital leases (24,130)
Borrowing under capital leases 120,067
Repayments under short-term
bank borrowings (200,000) (800,000)
Borrowing under short-term bank
borrowings 611,860 700,000
----------- -----------
Net cash provided by/(used for)
financing activities 507,797 (100,000)
Net increase (decrease) in cash (45,764) 128,063
Cash at beginning of year 180,317 114,363
----------- -----------
Cash, end of period $ 134,553 $ 242,426
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
6
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
1. The accompanying unaudited condensed consolidated
financial statements have been prepared by Allstates
WorldCargo, Inc. (the "Company") in accordance with the
rules and regulations of the Securities and Exchange
Commission (the "SEC") for interim financial statements and
accordingly do not include all information and footnotes
required under generally accepted accounting principles for
complete financial statements. The financial statements
have been prepared in conformity with the accounting
principles and practices disclosed in, and should be read in
conjunction with, the annual financial statements of the
Company included in the Company's Fiscal year 2005 Form 10-K
filing dated December 29, 2005 (File No. 000-24991). In the
opinion of management, these interim financial statements
contain all adjustments necessary for a fair presentation of
the Company's financial position at March 31, 2006 and
September 30, 2005 and the results of operations for the six
months ended March 31, 2006 and 2005, respectively.
2. Net income per common share appearing in the statements
of operations for the six months ended March 31, 2006 and
2005, respectively have been prepared in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS
No. 128"). SFAS No. 128 establishes standards for computing
and presenting earnings per share ("EPS") and requires the
presentation of both basic and diluted EPS. As a result
primary and fully diluted EPS have been replaced by basic
and diluted EPS. Such amounts have been computed based on
the profit or (loss) for the respective periods divided by
the weighted average number of common shares outstanding
during the related periods.
7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General Overview
Allstates WorldCargo, Inc. (the "Company" or
Allstates") is a New Jersey Corporation formed on January
14, 1997 as Audiogenesis Systems, Inc. (Audiogenesis"),
pursuant to a corporate reorganization of Genesis Safety
Systems, Inc. On August 24, 1999, Audiogenesis acquired 100
percent of the common stock of Allstates Air Cargo, Inc. in
a reverse acquisition, and on November 30, 1999, changed its
name to Allstates WorldCargo, Inc. Allstates is principally
engaged in the business of providing global freight
forwarding and other transportation and logistics services
for its customers. Allstates is headquartered in Forked
River, New Jersey.
The freight forwarding business of Allstates opened its
first terminal in Newark, New Jersey in 1961. Allstates
provides domestic and international freight forwarding
services to over 1,700 customers utilizing ground
transportation, commercial air carriers, and ocean vessels.
Allstates supplements its freight forwarding services to
include truck brokerage, warehousing and distribution, and
other logistics services. Allstates operates 22 offices
throughout the United States, including corporate
facilities, and as of March 31, 2006 employed 94 people
full time and 14 people part time.
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. The Company is a party to several
site licensing agreements in which those licensees have
contracted with Allstates to provide exclusive freight
forwarding services, including sales and operating
functions, under the Allstates name. Of the 22 offices,
15 are licensee operations, while 7 are company owned
and staffed operations.
Results of Operations
The following table sets forth for the periods
indicated certain financial information derived from the
Company's consolidated statement of operations expressed as
a percentage of net sales:
Three months ended Six months ended
March 31, March 31,
2006 2005 2006 2005
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of transportation 71.5 68.4 72.5 69.9
----- ----- ----- -----
Gross profit 28.5 31.6 27.5 30.1
Operating expenses:
Personnel costs 11.4 10.9 10.3 10.5
License commissions
and royalties 10.6 12.4 10.5 11.9
Other selling, general and
administrative expenses 6.8 6.3 6.3 6.2
----- ----- ----- -----
Total operating expenses 28.8 29.6 27.1 28.6
Operating income (0.3) 2.0 0.4 1.5
Interest expense, net (0.4) (0.4) (0.4) (0.4)
Other expense (0.0) (0.0) 0.3 (0.0)
----- ----- ----- -----
Net income before
tax provision (0.7) 1.6 0.3 1.1
Tax provision 0.3 (0.8) (0.1) (0.5)
----- ----- ----- -----
Net income (0.4)% 0.8% 0.2% 0.6%
===== ===== ===== =====
8
Revenues
Revenues of the Company represents gross consolidated
sales less customer discounts. Total revenues for the
quarter ended March 31, 2006 increased by approximately $1.5
million, or 9.9%, to $16,903,000, over the quarter ended
March 31, 2005, reflecting a higher volume of shipments and
total weight of cargo shipped. Sales for the six month
period ended March 31, 2006 increased by approximately $4.6
million, or 14.3%, to $36,394,000 compared to the six month
period ended March 31, 2005, for the same reasons. The
revenue increase for the three and six month comparative
periods reflect incremental growth at our existing operating
stations. Although no single customer accounted for 10 % of
revenues for either period, the increase in sales is
significantly driven by two customers that accounted for
approximately $1.2 million and $3.5 million in incremental
sales during the three and six month comparative periods.
Domestic revenues increased by approximately $1.3
million or 11.0%, to $13,283,000 during the three-month
period ended March 31, 2006 in comparison to the same period
in the previous year, reflecting higher shipping volume for
the reasons mentioned above. During the six months ended
March 31, 2006, domestic revenues increased by approximately
$3.4 million or 13.1%, to $29,054,000 compared to the same
period in the prior year. International revenues increased
by approximately $200,000 or 5.8%, to $3,619,000, during the
three months ended March 31, 2006 in comparison to the prior
year period. During the six months ended March 31, 2006,
international sales increased comparatively by approximately
$1,180,000 or 19.2%.
Net Revenues
Net revenues represents the difference between gross
sales and the cost of transportation. The cost of
transportation is composed primarily of amounts paid by the
Company to carriers and cartage agents for the transport of
cargo. Cost of transportation as a percentage of revenues
increased by 3.2%, to 71.5%, for the three months ended
March 31, 2006, and increased by 2.7%, to 72.5% for the six
months then ended, in comparison to the same period in the
previous year. This higher cost of transportation
percentage is primarily due to the continued growth of
significant lower margin business that the Company first
attained during fiscal 2004. The increases in fuel costs as
they affect carrier rates and an increase in deferred
shipments versus priority are additional factors that affect
the cost of transportation. In absolute terms, the cost of
transportation increased by approximately $1.6 million or
14.9%, to $12,092,000 during the three months ended March
31, 2006 over the previous year period. During the six
months ended March 31, 2006, cost of transportation
increased by approximately $4.2 million or 18.7% versus the
comparative period in the prior year, reflecting the
increased sales volume. Gross margins decreased to 28.5%
during the quarter ended March 31, 2006 from 31.6% in the
same quarter of the previous fiscal year, and decreased for
the six month comparative period then ended to 27.5% from
30.1% in the prior year period. Net revenue decreased by
approximately ($56,000) to $4,811,000 for the three months
ended March 31, 2006 versus the same three months of the
prior year, and increased by approximately $396,000 for the
six month comparative period then ended.
Selling, General and Administrative Expenses
As a percentage of sales, operating expenses decreased
by 0.8% for the three months ended March 31, 2006, to 28.8%,
in comparison to the three months ended March 31, 2005,
primarily due to the lower rate of licensee commissions in
relation to sales, as well as the reduction in legal fees.
The overall decrease was offset by personnel costs which
increased as a percentage of sales during the period.
During the six months ended March 31, 2006, operating
expenses decreased by 1.7% in comparison to the same period
of the previous year, to 27.0% of sales, for the same
reason. In absolute terms, operating expenses increased by
approximately $302,000 or 6.6% during the three-month period
ended March 31, 2006 as compared to
9
the same period in the prior fiscal year. Operating
expenses increased by approximately $705,000, or 7.7% during
the six months ended March 31, 2006 over the prior year
period. The increases in SG&A expenses for the three and
six month comparative periods were primarily driven by
higher personnel costs.
Personnel expenses increased for the three and six
month periods ended March 31, 2006 by approximately $261,000
and $413,000, respectively, over the previous year
comparative periods. The higher costs were driven in part
by an increase in headcount of operations and corporate
personnel, necessary to sustain the growth in business
volume. Corporate salary expense was also higher as a
result of new employment agreements that were ratified
during the third quarter of fiscal 2005. In addition,
pursuant to the new employment agreements, the executive
bonus accrual increased by $50,000 and $103,000
respectively, for the three and six month periods over the
amount accrued in the comparative periods of fiscal 2005.
Allstates pays commissions to licensees as compensation
for generating profits to the Company. Licensee commissions
and royalties paid pursuant to licensee agreements decreased
by approximately $113,000 for the three-month period ended
March 31, 2006 in comparison to the same period in the
previous year, and increased for the six months then ended
over the previous year period by approximately $58,000. The
variances in licensee commissions and royalties during the
three and six month comparative periods are reflective of
variances in net revenues at our licensee operations during
the respective periods.
Legal fees, which had increased significantly during
the three and six months ended March 31, 2005, as a result
of Allstates defense and settlement effort related to an
action commenced by a majority shareholder against the
Company, decreased during the three and six months ended
March 31, 2006 in comparison to that period by approximately
$104,000 and $178,000 respectively.
Expenses related to business travel and entertainment
increased by approximately $46,000 during the quarter ended
March 31, 2006 and by approximately $90,000 during the six
months then ended, in comparison to the same period of the
prior year, reflecting the overall increase in business
volume. Fees accrued on behalf of the Company's three newly
appointed Directors amounted to approximately $19,000 for
the three months ended March 31, 2006,and amounted to
$56,000 for the six months then ended, which included
compensation for the fourth quarter of fiscal 2005.
Bad debt expense increased for the three months ended
March 31, 2006 by approximately $50,000, and increased by
approximately $78,000 for the six months then ended. The
comparative increase in expense is due to a combination of
higher sales in fiscal 2006 versus 2005 and a downward
adjustment made during the second quarter of fiscal 2005
which had reduced the expense during that period. MIS fees
increased by approximately $35,000 and $57,000 respectively
for the three and six months ended March 31, 2006 in
comparison to the prior year periods, reflecting the use of
two computer systems during the transition from our older
system to the new system. Such costs include fees for
training and system enhancement on the new Air-Trak computer
system in addition to costs associated with the upkeep of
our current system.
SG&A expenses presented for the three months ended
March 31, 2006 and 2005 are inclusive of expenditures to
related parties totaling $520,809 and $412,112,
respectively. SG&A expenses presented for the six months
ended March 31, 2006 and 2005 are inclusive of expenditures
to related parties totaling $1,026,204 and $784,685,
respectively.
10
Income/Loss from Operations
Operating income decreased during the three months
ended March 31, 2006 by approximately $358,000, to an
operating loss of ($49,000), compared to the same three
month period in the previous year, for the reasons indicated
above. During the six month period ended March 31, 2006,
operating income decreased by approximately $309,000, to
$155,000 compared to the same six month period in the prior
year. The operating margin decreased for the three months
ended March 31, 2006 by 2.3%, to (0.3%) of sales compared to
the prior fiscal year period. In comparison to the
respective period ended March 31, 2005, the operating margin
for the six month period ended March 31, 2006 decreased by
1.1%, to 0.4% of sales.
Interest Expense, net
Interest expense increased for the three and six
months ended March 31, 2006 by approximately $16,000 and
$30,000 respectively, as compared to the same periods in the
previous year, reflecting higher interest rates on higher
average borrowing levels.
Other income
Other income represents funds received during the
period from the final distribution settlement of the Q
Logistics Chapter 11 filing from February 2001.
Net Income/(Loss)
Income before income taxes decreased to a loss of
approximately ($124,000) during the quarter ended March 31,
2006, versus net income of approximately $250,000 during the
same period in the prior year. The Company recorded a tax
benefit of $58,000 for the quarter ended March 31, 2006 as
compared to a tax provision of $128,000 for quarter ended
March 31 31, 2005. The net loss after tax amounted to
approximately ($66,000) or (0.4%) of revenues during the
second quarter of Fiscal 2006 versus net income of $122,000)
or 0.8% of revenues in the second quarter of Fiscal 2005.
Income before income taxes decreased to $109,000 during
the six months ended March 31, 2006, from $350,000 during
the same period in the prior year. The Company recorded a
tax provision of $51,000 for the six months ended March 31,
2006 as compared to a tax provision of $163,000 for six
months ended March 31 2005. Net income after tax amounted
to approximately $58,000 or 0.2% of revenues during the
first two quarters of Fiscal 2006 versus $187,000 or 0.6% of
revenues during the first two quarters of Fiscal 2005.
Liquidity and Capital Resources
Net cash used for operating activities was
approximately $262,000 for the six months ended March 31,
2006 compared to net cash provided by operations of
approximately $486,000 for the six months ended March 31,
2005. For the six months ended March 31, 2006, cash was
used to finance the $456,000 increase in accounts
receivable, and also reflects the decrease in accounts
payable and accrued expenses of $101,000. Net income, net
of non-cash charges totaled $281,000. For the six months
ended March 31, 2005, cash was provided by net income net of
non-cash charges of $481,000 as well as a net decrease in
accounts receivable of $276,000, offset by the a decrease in
accounts payable of $148,000.
11
At March 31, 2006, the Company had cash of $135,000 and
net working capital of $1,438,000, compared with cash of
$242,000 and net working capital of $1,158,000 respectively,
at March 31, 2005. The change in working capital at March
31, 2006 over March 31, 2005 is primarily attributable to
the Company's net income during the preceding twelve months,
offset primarily by expenditures made toward the purchase of
a new computer system.
The Company's investing activities during the six
months ended March 31, 2006 were primarily comprised of
expenditures for capital equipment, primarily representing
purchases of computer hardware for the new computer system.
For the six months ended March 31, 2006, capital
expenditures amounted to approximately $319,000, of which
approximately $120,000 is financed by a three year leasing
arrangement. Capital expenditures amounted to approximately
$11,000 for the six months ended March 31, 2005.
During March 2005, Allstates extended a $250,000 loan
to a licensee to finance their expansion effort. The loan
is being paid back with weekly payments over three years
including interest, at the same rate the Company pays on its
line of credit with the bank. The loan is secured by the
personal guarantees of the licensee principals. Through
March 31, 2006, Allstates has collected $79,454. of
principal on the loan.
The Company has a commercial line of credit with a
bank, pursuant to which the Company may borrow up to
$3,000,000, based on a maximum of 70% of eligible accounts
receivable. Per the agreement, which extends to February
28, 2007, interest on outstanding borrowings accrues at the
Bank's prime rate of interest (7.75% at March 31, 2006).
Outstanding borrowings on the line of credit at March 31,
2006 and 2005 were $2,000,000 and $1,000,000, respectively.
Forward Looking Statements
The Company is making this statement in order to
satisfy the "safe harbor" provisions contained in the
Private Securities Litigation Reform Act of 1995. The
statements contained in all parts of this document
(including the portion, if any, appended to the Form 10-K)
including, but not limited to, those relating to the
availability of cargo space; the Company's plans for,
effects, results and expansion of international operations
and agreements for international cargo; future international
revenue and international market growth; the future
expansion and results of the Company's terminal network;
plans for local delivery services and truck brokerage;
future improvements in the Company's information systems and
logistic systems and services; technological advancements;
future marketing results; the effect of litigation; future
costs of transportation; future operating expenses; future
margins; any seasonality of the Company's business; future
acquisitions and the effects, benefits, results, terms or
other aspects of any acquisition; Ocean Transportation
Intermediary License; ability to continue growth and
implement growth and business strategy; the ability of
expected sources of liquidity to support working capital and
capital expenditure requirements; future expectations; and
any other statements regarding future growth, future cash
needs, future terminals, future operations, business plans,
future financial results, financial targets and goals; and
any other statements which are not historical facts are
forward-looking statements. When used in this document, the
words "anticipate," "estimate," "expect," "may," "plans,"
"project" and similar expressions are intended to be among
the statements that identify forward-looking statements.
Such statements involve risks and uncertainties, including,
but not limited to, those relating to the Company's
dependence on its ability to attract and retain skilled
managers and other personnel; the intense competition within
the freight industry; the uncertainty of the Company's
ability to manage and continue its growth and implement its
business strategy; the Company's dependence on the
availability of cargo space to serve its
customers; the effects of regulation; results of litigation;
the Company's vulnerability to general economic
conditions; the control by the Company's principal
shareholder; risks of international operations; risks
relating to acquisitions; the Company's future financial and
operating results, cash needs and demand for its services;
and the Company's ability to maintain and comply with
permits and licenses, as well as other
12
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 3 CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The
Company's principal executive officer and principal
financial officer, based on their evaluation of the
Company's disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) as of a date within 90
days prior to the filing of this Quarterly Report on Form
10Q, concluded that the Company's disclosure controls and
procedures are adequate and effective for the purposes set
forth in the definition in the Exchange Act rules.
(b) Changes in Internal Controls. There were no significant
changes in the Company's internal controls or in other
factors that could significantly affect the Company's
internal controls subsequent to the date of the evaluation.
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Joseph M. Guido v. Allstates WorldCargo, Inc., Sam
DiGiralomo, Barton C. Theile, and Craig D. Stratton.
On October 14, 2004, Joseph M. Guido, the majority
shareholder of the Company, who is also employed by the
Company as its Chairman, commenced an action against the
Company and three of the Company's directors, entitled
"Joseph M. Guido v. Allstates WorldCargo, Inc., Sam
DiGiralomo, Barton C. Theile, and Craig D. Stratton," in the
Superior Court of New Jersey, Chancery Division, Ocean
County (the "First Action"). Messrs. DiGiralomo, Theile and
Stratton are also employed by the Company as its President
and Chief Executive Officer, Executive Vice President and
Chief Operating Officer, and Chief Financial Officer,
respectively.
Mr. Guido alleged that on August 16, 2004, he delivered to the
Company's Secretary (1) an executed Written Consent in Lieu
of a Special Meeting of the Stockholders of Allstates
WorldCargo, Inc. dated August 16, 2004 (the "Guido
Consent"), (2) Amended and Restated Bylaws of the Company
adopted pursuant to the Guido Consent, and (3) a draft
Information Statement pursuant to Section 14(c) of the
Securities Exchange Act of 1934 (the "1934 Act"). Mr. Guido
alleged that, pursuant to the Guido Consent, he had amended
the Company's bylaws to (among other things) expand its
Board of Directors from four to seven members, and had
appointed three persons (alleged to be independent) to fill the
newly created seats. He alleged that the Company was
required by law to comply with his demand to notify its
shareholders of his action. He also alleged that the three
individual defendants, both as directors and officers, owed the
Company and its shareholders certain fiduciary duties to direct
that appropriate steps be taken by the Company to allegedly
comply with applicable law in response to the Guido Consent.
Mr. Guido demanded relief enjoining a scheduled special
Board of Directors meeting pending Company's performance
of acts allegedly required by New Jersey law and by the 1934
Act. Mr. Guido also sought a permanent injunction requiring
the Company and its Secretary to prepare and distribute to the
Company's shareholders all notices allegedly required by state
and federal law in connection with the Guido Consent. Finally,
he sought entry
13
of an order requiring the Company to file and serve upon him,
within seven days after entry of a permanent injunction, a
written report setting forth the manner and form in which the
Company complied with the injunctions.
The Company (and the three individual defendants) opposed
the application for relief upon the grounds that subsequent to
his execution of the Guido Consent, Mr. Guido advised one of
the individual defendants that he had decided not to proceed
with his amendment of the Bylaws or his expansion of the
Board of Directors. The Defendants also alleged that Mr.
Guido's actions were not in the best interest of the Company,
and motivated by self-interest, that because of such concerns,
the Company needed time to determine its obligations under
the law, and that the purpose of the Special Board Meeting
(among others) was to consider issues pertaining to the request
by Mr. Guido to file the Schedule 14C presented to the
Secretary of the Corporation.
On October 28, 2004, Mr. Guido, by his counsel, filed a
Notice of Voluntary Dismissal Without Prejudice, dismissing
the First Action. The parties agreed, subject to the terms of
definitive settlement agreements, to settle the issue raised in
the First Action upon the following terms: (1) the Company's
Board of Directors would not be expanded except by
unanimous consent, (2) Mr. Guido and the individual
defendants would enter into a voting agreement pursuant to
which each would agree to vote his respective shares in the
Company for the others as directors of the Company, (3) the
Company would enter into new employment agreements with
the individual defendants (the existing employment
agreements being due to expire on December 31, 2004), (4)
the parties would exchange general releases and (5) the
Company would, to the extent lawfully required by Mr.
Guido's existing employment agreement, reimburse him for
the attorneys fees he incurred in connection with the action. It
was anticipated that the complete terms of a settlement would
be agreed upon, and that formal settlement documents would
be prepared and executed. Such formal documentation was
prepared and delivered to Mr. Guido's counsel on December
27, 2004.
Mr. Guido refused to execute formal settlement
documentation, and commenced a second action, in the same
court and entitled in the same style, seeking the same relief
(the "Second Action"). The Defendants answered, denying
the allegations, and asserting counterclaims against Mr. Guido
and his wife, Teresa Guido.
On April 5, 2005, the parties agreed to a full and final
settlement of the Second Action, the terms of which were
placed on the record in court, and the parties acknowledged to
the court, under oath, their obligation to be bound thereby.
The material terms of that agreement (referred to as the
"Settlement Agreement") were:
(1) the Company's Board of Directors would be expanded
from four to seven members, and the Court would appoint the
three new directors, (2) vacancies thereafter would be filled by
vote of the remaining Board members, and in the event of a tie
or deadlock in filling any vacancy, the vacancy would be filled
by an arbitrator chosen by the Board, (3) Mr. Guido and the
individual defendants would enter into a voting agreement
pursuant to which each would agree to vote his respective
shares of the Company for the others as directors of the
Company, (4) the Company would enter into new employment
agreements with Mr. Guido and the individual defendants, (5)
the parties would exchange general releases and (6) the
Company would, to the extent lawfully required by Mr.
Guido's previous employment agreement, reimburse him for
the attorneys fees he incurred in connection with the action.
On May 27, 2005, a final judgment was ordered, granted and
entered by the court in accordance with the settlement terms
agreed to by the parties on April 5, 2005. Finally, on June 6,
2005, Court declared the new employment agreements, the
voting agreement, and the mutual general release to be
effective as of April 5, 2005, notwithstanding any lack of
signatures. Pursuant to the mutual general release, the
Company and each of Mr. Guido, his wife, and Messrs.
DiGiralomo, Theile and Stratton each released and forever
discharged each and all of the others from any and all causes
of actions, known and unknown, then existing.
14
Pursuant to the terms of the settlement, on June 6, 2005, the
Company and Messrs. Guido, DiGiralomo, Theile and Stratton
(collectively, for purposes of this section, the "Voters")
entered into a Voting Agreement whereby each of the Voters
agreed to vote all of the capital stock of the Company that
each Voter is entitled to vote, for each other as directors of the
Company. Further, pursuant to the terms of the Voting
Agreement, any action taken to expand or in any way modify
the composition of the Board of Directors of the Company
from its present constitution shall require the unanimous
consent of all of the Voters. Additionally, in the event that
shareholder action is taken to alter or amend the Certificate of
Incorporation or Bylaws of the Company, the Voters agree to
vote all of their shares unanimously in the same manner. If
the Voters are unable to reach a unanimous decision, then the
proposed change shall be rejected. The Voting Agreement
terminates when each of Messrs. Guido, DiGiralomo, Theile
and Stratton no longer own, control or hold any shares of
capital stock of the Company.
For so long as the Voting Agreement remains in effect, the
Voters also agreed, with a certain agreed-to exception, not to
transfer any of the shares of capital stock of the Company they
hold without the prior written consent of all of the Voters,
unless the other party to any such transaction agrees in writing
to join and be bound by all of the terms of the Voting
Agreement. To that end, the Voters agreed to the placement
of an additional restrictive legend on all of their shares
(including subsequently acquired shares), which restrictive
legend shall read:
"THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
TRANSFER, VOTING AND OTHER RESTRICTIONS
PURSUANT TO A VOTING AGREEMENT ENTERED
INTO BY THE COMPANY, THE HOLDER OF THIS
CERTIFICATE AND CERTAIN OTHER STOCKHOLDERS
OF THE COMPANY, A COPY OF WHICH IS AVAILABLE
FOR INSPECTION AT THE OFFICES OF THE
SECRETARY OF THE COMPANY."
Finally, during the term of the Voting Agreement, the Voters
agreed not to enter into any agreements that would be
inconsistent with any of the provisions therein.
Also pursuant to the terms of the settlement, on June 6, 2005
the Company and Allstates Air Cargo, Inc., its wholly owned
subsidiary, (together, the Employer) entered into individual
employment agreements with each of Messrs. DiGiralomo (as
President and Chief Executive Officer), Guido (as Chairman),
Theile (as Executive Vice President and Chief Operating
Officer) and Stratton (as Chief Financial Officer). Messrs.
DiGiralomo, Guido, Theile and Stratton are collectively
referred to herein as Executives. Each of the employment
agreements is effective as of April 5, 2005, and expires on
December 31, 2009, but may be extended if agreed to in
writing by the parties. Per each of the employment
agreements, Mr. DiGiralomo's annual salary shall be
$250,000; Mr. Guido's annual salary shall be $370,000; Mr.
Theile's annual salary shall be $250,000; and Mr. Stratton's
annual salary shall be $185,000. Each of these salaries is
subject to an annual increase at the discretion of the
Company's Board of Directors. Additionally, each of Messrs.
DiGiralomo, Guido and Theile shall receive an annual bonus
payment equal to 3% of the increase of the net profits of the
Employer from the fiscal year end 2003 to the fiscal year end
2004. Each of Messrs. DiGiralomo, Guido, Theile and
Stratton remains eligible to participate in the Employer's stock
option plan, 401(k) retirement plan and insurance plans.
Excluding the above-described salary and bonus information,
the material terms of each of the Executives' employment
agreements are substantially the same. In the event any
Executive dies during the term of his respective employment
agreement, then for the longer of the remaining term of the
employment agreement or three years, the Employer shall
continue to pay the Executive's then current base salary to the
Executive's designated beneficiary or estate and will also pay
for insurance for any Executive's surviving immediate family.
If, within twenty-four months following a "Change of
Control" of the Employer, as defined in each of the
employment agreements, the Executive voluntarily resigns or
retires, the Employer shall pay to the Executive all
compensation and benefits due to him up to the date of his
termination, including, but not limited to, base salary and any
expense reimbursement, and within one month of termination,
a lump-sum payment equal to 299% of the Executive's then
current base salary, bonus for the fiscal year end 2004, and of
the amount reimbursed to the Executive for business-related
expenses for the
15
calendar year preceding the termination. Additionally, any
options and/or restricted stock granted to the Executive shall
become fully vested and registered as of the date of the
termination. The Executive shall have the right to exercise all
of his options for a period of five years from the date of the
termination. Additionally, all then-existing life and health
insurance benefits shall continue for the Executive and his
immediate family for a period of five years from the date of
termination. In the event of a "For Cause" termination, as
defined in each of the employment agreements, the Employer
shall pay to the Executive all compensation and benefits due
to him up to the date of his termination, including but not
limited to base salary and expense reimbursement. At any time
after 180 days have elapsed from the date of his respective
employment agreement, each Executive shall have the right to
terminate his employment agreement on 90 days written
notice to the Employer. In the event of such termination, the
Executive shall be entitled to such compensation that is equal
to the "For Cause" termination compensation described above.
A termination that is neither a Change of Control termination,
a For Cause termination, is due to the Executive's death, nor a
termination by the Executive as provided above, is a "Without
Cause" Termination. In the event of a Without Cause
termination, the Executive shall be entitled to such
compensation that is equal to the Change of Control
termination compensation described above. Finally, if the
Employer breaches any material term of each respective
employment agreement or reduces the Executive's respective
title or responsibilities, the Executive may, at his option, elect
to leave the Employer, in which case he shall be entitled to all
of the Change of Control termination compensation described
above, except that the lump sum payment to be paid to the
Executive would be limited to 100% of the Executive's base
salary and bonus (if applicable).
On July 6, 2005, to effectuate part of the settlement of the
Second Action, the Court entered an Order (the "July 6
Order") that expanded the Company's Board of Directors,
effective immediately, from four members to seven. The July
6 Order also appointed, effective immediately, Messrs. Joseph
Buckelew, Alan E. Meyer, and Charles F. Starkey, to the
Board.
On August 24, 2005, upon the Company's Motion for
Reconsideration, the Court entered and order amending the
July 6 Order (the "First August 24 Order"). Instead of
declaring the Board expanded, and appointing Messrs.
Buckelew, Meyer, and Starkey to the Board, the July 6 Order
was amended to show that the parties agreed that a Unanimous
Written Consent of the Directors of Allstates WorldCargo,
Inc. (attached to the First August 24 Order, and referred to as
the "Directors' Consent") was consistent with the Settlement
Agreement, and shall be deemed signed by Messrs.
DiGiralomo, Theile, Stratton, and Guido.
Pursuant to the Directors' Consent, the Board of Directors
amended Section 3.02 of the Bylaws to provide that the Board
of Directors shall consist of seven members. Prior to the
amendment, Section 3.02 of the Bylaws provided that the
Board of Directors shall consist of not less than one nor more
than ten Directors. The precise number of Directors within
this range was to be fixed by the Board each year before the
annual meeting of shareholders. The number of Directors
prior to the amendment was four.
Pursuant to the Directors' Consent, the Board of Directors
appointed Joseph Buckelew, Alan E. Meyer, C.P.A., and
Charles F. Starkey, Esq. to fill the vacancies created by the
expansion of the Board, to serve in accordance with the
Settlement Agreement.
Pursuant to the Directors' Consent, the Board of Directors also
amended Sections 3.12(b) and 3.12(c) of the Bylaws. Prior to
the amendment described herein, Section 3.12(b) provided that
vacancies in the Board may be filled by the affirmative vote of
a majority of the remaining Directors then in office, even if
their number is insufficient to constitute a quorum. A director
so elected was to hold office until a successor is elected and
qualified at the next annual meeting of the shareholder. As
amended, Section 3.12(b) provides that any vacancy shall be
filled in the manner provided therein, and that in the event of a
deadlock, or a three-to-three vote, with respect to filling any
vacancy, an independent arbitrator appointed by the Board
shall select the person to fill the vacancy. The amended
Bylaw also provides that any director so appointed pursuant to
Section 3.12(b) shall also hold office in accordance with the
Settlement Agreement.Prior to the amendment described
herein, Section 3.12(c) provided that if a director resigns from
the Board effective at some future date, the future vacancy
may be filled by the affirmative vote of a majority of the
directors then
16
in office, including the director who has resigned, even if their
number is insufficient to constitute a quorum. The term of the
newly elected director would begin when the resignation
becomes effective. A director so elected was to hold office
from the effective date of the predecessor's resignation until a
successor is elected and qualified at the next annual or special
meeting of the shareholders. As amended, Section 3.12(c)
provides that any future vacancy shall be filled in the manner
provided therein, and that in the event of a deadlock, or a
three-to-three vote, with respect to filling any vacancy, an
independent arbitrator appointed by the Board shall select the
person to fill the vacancy. The amended By-Law also
provides that any director so appointed pursuant to Section
3.12(c) shall also hold office in accordance with the
Settlement Agreement.
In order to ensure that Messrs. Buckelew, Meyer, and Starkey
(or their successors duly appointed pursuant to the Bylaws)
continue to serve pursuant to the terms of the Settlement
Agreement, and not at the pleasure of the majority
shareholder, the Court entered a second order on August 24,
2005 (the "Second August 24 Order"), which provides that the
parties are required by the Settlement Agreement to nominate
and vote for, as Directors, Messrs. Buckelew, Starkey, and
Meyer (or their duly appointed successors) at future meetings
of the Company's shareholders at which directors are to be
chosen.
On November 7, 2005, the Court entered a Consent Order
pursuant to which Mr. and Mrs. Guido waived their right to
pursue reimbursement from the defendants of any and all
counsel fees paid or incurred in connection with the matter.
Accordingly, there are no issues left outstanding in the matter,
and it has been finally concluded.
Liberty Mutual Insurance Company v. Lightning Freight Inc.,
GTD Logistics, Inc., and Gilberto Cordova.
The Company's subsidiary, GTD Logistics, Inc. ("GTD") is a
defendant in an action pending in Los Angeles Superior Court,
Docket No. 326868, brought by Liberty Mutual Insurance
Company ("Liberty"), regarding freight brokerage services
that GTD provided for a shipment that was allegedly stolen.
The tractor trailer hauling the shipment allegedy contained
several million dollars of hard disk drives. After the truck and
trailer were allegedly stolen, the owner of the contents of the
trailer made a claim against UPS Supply Chain Solutions, the
shipper, who then made a claim against its insurance
company, Liberty. Liberty is seeking to recover from GTD
and also the carrier and truck driver the amount that is
expended to cover the loss suffered by its insured, the owner
of the contents of the trailer. The Complaint requests damages
of not less than $1,400,000.
Liberty alleges that when GTD agreed to provide brokerage
services for the shipment of the cargo, GTD also promised to
select a motor carrier with no less than $1 million in cargo
insurance coverage, and to select a carrier that would follow
certain asset protection rules. Liberty alleges breach of
contract and negligence against GTD for failure to comply
with these alleged promises. GTD and Lightning Freight, Inc.
the carrier, filed Cross-Complains against each other and
Gilberto Cordova, the truck driver. Gilberto Cordova never
appeared in the matter and the Court entered a default against
him.
The parties have reached a settlement of the action, pursuant
to which GTD will pay the sum of ten thousand dollars
($10,000) in full and complete settlement of all claims. On
March 6, 2006 the Court granted the parties' Application for
Determination of Good Faith Settlement Pursuant California
Code of Civil Procedure, which would bars any other joint
tortfeasor or co-obligor from any further claims against GTD
arising out of the transaction. The entry of that March 6 Order
finalized the settlement of the action, and on March 8 GTD
submitted the settlement payment, thus completing its
obligations under the settlement.
Jeffrey H. Mims, Chapter 7 Trustee v. Allstates WorldCargo,
Inc.
On or about May 25, 2005, the Company was made a
defendant in an Adversary Proceeding brought by the
bankruptcy trustee of Mosaic Group US., Inc, to recover an
alleged preferential transfer under 11 U.S.C. Sec. 547 in the
sum of approximately $191,000, and a post-petition transwer
under 11 U.S.C. Sec. 549, in the sum of approximately
$18,000. The parties reached a settlement in April 2006,
pursuant to which the bankruptcy trustee agreed to accept the
$45,000 in full settlement of all claims. The settlement is
subject to the approval of the Bankruptcy Court, and a motion
seeking such approval was filed on or about April 26, 2006.
No hearing will be conducted on the motion unless written
objections are filed by the close of business on May 15, 2006,
in which case a hearing will be held on May 19, 2006; if there
are no written objections, the relief requested shall be deemed
unopposed, and an order granting the requested relief will be
entered. As of the date hereof, there have been no written
objections filed. The Company has already made the
settlement payment, which payment is being held in escrow by
the trustee's attorney.
17
Masterbrush, LLC and B&G Plastics, Inc. v. Allstates
Logistics, Inc. and T.H. Weiss, Inc.
On or about December 5, 2005, Masterbrush, LLC
("Masterbrush") and B&G Plastics, Inc. ("B&G") commenced
an action against the Company's wholly-owned subsidiary
Allstates Logistics, Inc. ("ALI") and T.H. Weiss, Inc.
("Weiss"), alleging various causes of action arising
out of the importation by Masterbrush
of a quantity of natural bristle paintbrushes produced in China
(the "Brushes").
The Complaint alleges that plaintiffs retained ALI to expedite
the importation of the Brushes into the United States, that ALI
wrongfully failed to advise plaintiffs that the Brushes were
subject to federal antidumping duties of 351.92 percent (the
"Antidumping Duty") in addition to the 4 percent normal duty,
and that by reason of ALI's (alleged) failure to so advise
plaintiffs, plaintiffs were required by U.S. Customs to pay the
Antidumping Duty, in the amount of $422,281.64. The
plaintiffs seek to recover compensatory and consequential
damages.
In March 2006, Weiss filed a Motion for Summary Judgment
seeking to dismiss the action, alleging that plaintiffs failed to
exhaust their administrative remedies with the United States
Bureau of Customs and Border Patrol. On or about May 5,
2006, the Court denied that motion.
The action is in its initial discovery stage.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
NONE
ITEM 3 DEFAULTS ON SENIOR SECURITIES
NONE
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
ITEM 5 OTHER INFORMATION
NONE
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
18
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934,
the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALLSTATES WORLDCARGO, INC.
BY: /s/ SAM DIGIRALOMO DATED: May 15, 2006
Sam DiGiralomo, President and CEO
BY: /s/ Craig D. Stratton DATED: May 15, 2006
Craig D. Stratton, CFO, Secretary,
Treasurer and Principal Financial Officer
19