SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED June 30, 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
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(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 August 11, 2006.
ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Financial Statements with Supplemental Information
For the Period Ending June 30, 2006 and 2005
Financial Statements:
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of Operations 4
Condensed Consolidated Statements of Stockholders'
Equity (Deficit) 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................. 12
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
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ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
ASSETS
June 30, September 30,
2006 2005
(Unaudited) *
Current Assets
Cash $ 647,285 180,317
Accounts receivable
9,454,190 10,681,589
Prepaid expenses and
other current assets 357,686 317,991
Deferred tax asset -
current 161,230 184,982
---------- ----------
Total current assets 10,620,391 11,364,879
Property, plant and
equipment 2,085,420 1,598,231
Less: Accumulated
depreciation 1,135,934 999,189
---------- ----------
Net property, plant and
equipment 949,486 599,042
Goodwill, including
acquisition cost, net 535,108 535,108
Other assets
135,810 199,773
---------- ----------
Total assets $12,240,795 $12,698,802
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 5,163,921 $ 6,420,955
Accrued expenses 1,793,436 1,767,391
Short-term bank
borrowings 2,300,000 1,599,500
Notes/leases payable -
current portion 92,572 49,888
Income tax payable 25,709
---------- ----------
Total current liabilities 9,375,638 9,837,734
Deferred tax liability -
non current 113,196 102,368
Long term portion of
notes/leases payable 2,397,601 2,385,015
Stockholders' equity
Common stock 3,251 3,251
Retained earnings 351,109 370,434
---------- ----------
Total stockholders' equity 354,360 373,685
Total liabilities and
stockholders' equity $12,240,795 $12,698,802
========== ==========
* Condensed from audited financial statements.
The accompanying notes are an integral part of these
consolidated financial statements.
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ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2006 2005 2006 2005
Revenues $16,970,407 $18,662,615 $53,364,830 $50,502,337
Cost of transportation 11,864,752 13,332,804 38,265,512 35,574,632
---------- ---------- ---------- ----------
Net revenue 5,105,655 5,329,811 15,099,318 14,927,705
Selling, general and
administrative expenses 5,049,832 4,952,378 14,888,368 14,086,262
---------- ---------- ---------- ----------
Income/(loss) from
operations 55,823 377,433 210,950 841,443
Other income (expense):
Interest, net (87,460) (55,670) (231,882) (170,081)
assets
Other income/ 98,223
---------- ---------- ---------- ----------
Income/(loss) before
income tax provision (31,637) 321,763 77,291 671,362
Provision for income
taxes 45,420 157,000 96,616 319,659
---------- ---------- ---------- ----------
Net income/(loss) $ (77,057) $ 164,763 $ (19,325) $ 351,703
========== ========== ========== ==========
Weighted average common
shares - basic 32,509,872 32,509,872 32,509,872 32,509,872
Net income per common
share - basic $ .00 $ .01 $ .00 $ .01
Weighted average common
shares - diluted 32,509,872 32,509,872 32,509,872 32,509,872
Net income per common
share - diluted $ .00 $ .01 $ .00 $ .01
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
Number Retained Total
of Par Earnings Stockholders'
Shares Value Equity
___________ ______ _________ _________
Balance at 32,509,872 $ 3,251 $370,434 $373,685
September 30, 2005
Consolidated net
loss for the nine
months ended June (19,325) (19,325)
30, 2006
___________ ______ _________ _________
Balance at
June 30, 2006 32,509,872 $ 3,251 $351,109 $ 354,360
=========== ====== ========= =========
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ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
June 30,
2006 2005
Cash flows from operating
activities:
Net income/(loss) $ (19,325) $ 351,703
Adjustments to reconcile net
income to net cash used for/
provided by operating activities:
Depreciation 136,744 99,983
Provision for doubtful
accounts 232,429 113,331
Deferred income taxes 34,580 196,000
(Increase) decrease in assets:
Accounts receivable 994,970 (1,776,470)
Prepaid expenses and other
assets (24,883) 1,370
Increase (decrease) in
liabilities:
Accounts payable and
accrued expenses (1,230,987) 1,501,574
Income taxes payable 25,709 43,343
--------- ---------
Net cash provided by
operating activities 149,237 530,834
Cash flows from investing
activities:
Purchase of equipment (487,189) (101,412)
Loan to licensee (250,000)
Collection of loan principal 59,535 20,689
Deposits (10,385) 144
--------- ---------
Net cash used for investing
activities (438,039) (330,579)
Cash flows from financing
activities:
Repayments under capital leases (39,797)
Borrowing under capital leases 120,067
Repayments under notes payable (25,000) (25,000)
Repayments under short-term
bank borrowings (411,360) (800,000)
Borrowing under short-term bank
borrowings 1,111,860 1,100,000
--------- ---------
Net cash provided byr
financing activities 755,770 275,000
Net increase in cash 466,968 475,255
Cash at beginning of year 180,317 114,363
--------- ---------
Cash, end of period $647,285 $589,618
The accompanying notes are an integral part of
these consolidated financial statements.
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ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 2006 and
September 30, 2005 and the results of operations for the
nine months ended June 30, 2006 and 2005, respectively.
2. Net income per common share appearing in the statements
of operations for the nine months ended June 30, 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 June 30, 2006, employed 80 full-time
and 7 part-time 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. 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 Nine Months Ended
June 30, June 30,
2006 2005 2006 2005
---- ---- ---- ----
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of transportation 69.9 71.4 71.7 70.4
---- ---- ---- ----
Gross profit 30.1 28.6 28.3 29.6
Operating expenses:
Personnel costs 9.2 9.0 10.0 9.9
License commissions
and royalties 13.7 11.6 11.5 11.7
Other selling,
general and
administrative
expenses 6.9 6.0 6.4 6.3
---- ---- ---- ----
Total operating expenses 29.8 26.6 27.9 27.9
Operating income 0.3 2.0 0.4 1.7
Interest expense, net (0.5) (0.3) (0.4) (0.4)
Other income (0.0) (0.0) 0.2 (0.0)
Net income before
tax provision (0.2) 1.7 0.2 1.3
Tax provision (0.3) (0.8) (0.2) (0.6)
---- ---- ---- ----
Net income (0.5)% 0.9% 0.0% 0.7%
==== ==== ==== ====
-8-
Revenues
Revenues of the Company represents gross consolidated
sales less customer discounts. Total revenues for the
quarter ended June 30, 2006 decreased by approximately $1.7
million, or 9.1%, to $16,970,000, over the quarter ended
June 30, 2005, reflecting a decrease in the volume of
shipments and total weight of cargo shipped. Sales for the
nine month period ended June 30, 2006 increased by
approximately $2.9 million, or 5.7%, to $53,365,000
compared to the nine month period ended June 30, 2005,
reflecting higher shipping volume during the period. The
lower shipping volume during the three months ended June 30,
2006 which resulted in the decrease in revenues reflects a
sluggish shipping environment during the quarter, compared
to the same quarter of the previous fiscal year which had
showed robust shipping activity. In addition, prior to the
start of the three month period, Allstates had terminated
the contractual agreement of one of our licensee operations,
which accounted for approximately $950,000 of reduced
revenues. The increase in revenues for the nine months
ended June 30, 2006 is significantly driven by two customers
that accounted for approximately $1.2 million and $3.5
million in incremental sales during the three and nine month
comparative periods.
Domestic revenues decreased by approximately $940,000
or (6.5)%, to $13,548,000 during the three-month period
ended June 30, 2006 in comparison to the same period in the
previous year, reflecting lower shipping volume for the
reasons mentioned above. During the nine months ended June
30, 2006, domestic revenues increased by approximately $2.4
million or 6.1%, to $42,603,000 compared to the same period
in the prior year. International revenues decreased by
approximately $752,000 or (18.0)%, to $3,422,000, during the
three months ended June 30, 2006 in comparison to the prior
year period. During the nine months ended June 30, 2006,
international sales increased comparatively by approximately
$428,000 or 4.1%, to $10,762,000.
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
decreased by 1.5%, to 69.9%, for the three months ended June
30, 2006, and increased by 1.3%, to 71.7% for the nine
months then ended, in comparison to the same period in the
previous year. This higher cost of transportation
percentage during the nine month comparative period is
primarily due to the continued growth of significant lower
margin business that the Company attained during fiscal
2004. The Company realized improved cost of transportation
percentages in this significant business during the three
months ended June 30, 2006, which contributed to an overall
improvement during the period. 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 decreased by approximately $1.5 million or
11.0%, during the three months ended June 30, 2006 over the
previous year period. During the nine months ended June 30,
2006, cost of transportation increased by approximately $2.7
million or 7.6%, versus the comparative period in the prior
year, reflecting the increased sales volume. Gross margins
increased to 30.1% during the quarter ended June 30, 2006
from 28.6% in the same quarter of the previous fiscal year,
and decreased for the nine month comparative period then
ended to 28.3% from 29.6% in the prior year period. Net
revenue decreased by approximately ($224,000) to $5,106,000
for the three months ended June 30, 2006 versus the same
three months of the prior year, and increased by
approximately $171,000, to $15,099,000 for the nine month
comparative period then ended.
Selling, General and Administrative Expenses
As a percentage of sales, operating expenses increased
by 3.4% for the three months ended June 30, 2006, to 29.8%,
in comparison to the three months ended June 30, 2005,
driven by a higher rate of licensee commissions in relation
to sales, as well as higher personnel and facilities costs.
Operating expenses held at 27.9% of sales during the nine
months ended June 30, 2006 in comparison to the prior year
period. In absolute terms, operating expenses increased by
approximately $97,000 or 2.0% during the three-month period
ended June 30, 2006 as compared to
-9-
the same period in the prior fiscal year, led by higher
licensee commissions. Operating expenses increased by
approximately $802,000, or 5.7% during the nine months ended
June 30, 2006 over the prior year period. The increases in
SG&A expenses for the nine month comparative period were
primarily driven by higher personnel costs, increased
licensee commissions, and an increase in bad debt expense.
Personnel expenses decreased during the three month
period ended June 30, 2006 by approximately $114,000 over
the previous year comparative period, primarily due to the
reversal of the executive bonus that had accrued over the
first six months of the fiscal year. Personnel expenses
also decreased as a result of the conversion of the
Company's Newark, New Jersey branch location to a licensee
operation at the beginning of the quarter. Personnel costs
increased by approximately $308,000 during the nine months
ended June 30, 2006, primarily driven 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.
Allstates pays commissions to licensees as compensation
for generating profits to the Company. Licensee commissions
and royalties paid pursuant to licensee agreements increased
by approximately $157,000 for the three-month period ended
June 30, 2006 in comparison to the same period in the
previous year, and increased for the nine months then ended
over the previous year period by approximately $213,000.
The conversion of the Newark branch location to a licensee
operation at the beginning of the quarter accounted for the
increases in the three and nine month periods.
Expenses related to business travel and entertainment
increased by approximately $96,000 during the nine months
ended June 30, 2006 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 June 30, 2006,and amounted to $75,000
for the nine months then ended, which included compensation
for the fourth quarter of fiscal 2005.
Bad debt expense increased for the three months ended
June 30, 2006 by approximately $41,000, and increased by
approximately $119,000 for the nine months then ended. The
increase during the three month period reflects a negotiated
settlement payment the Company made during the quarter for
the return of funds received from a customer who had filed
for Chapter 11 bankruptcy status in 2005. The comparative
increase in bad debt expense during the nine month period is
due to a combination of higher sales in fiscal 2006 versus
fiscal 2005 and a downward adjustment made during the second
quarter of fiscal 2005. MIS fees increased by approximately
$16,000 and $73,000 respectively for the three and nine
months ended June 30, 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.
Legal fees, which had increased significantly during
the three and nine months ended June 30, 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 nine months ended
June 30, 2006 in comparison to that period by approximately
$42,000 and $219,000 respectively.
SG&A expenses presented for the three months ended June
30, 2006 and 2005 are inclusive of expenditures to related
parties totaling $394,519 and $445,779, respectively.
SG&A expenses presented for the nine months ended June 30,
2006 and 2005 are inclusive of expenditures to related
parties totaling $1,420,724 and $1,212,519, respectively.
-10-
Income from Operations
Operating income decreased during the three months
ended June 30, 2006 by approximately $322,000, to 56,000
compared to the same three month period in the previous
year, for the reasons indicated above. During the nine
month period ended June 30, 2006, operating income decreased
by approximately $630,000, to $211,000 compared to the same
nine month period in the prior year. The operating margin
decreased for the three months ended June 30, 2006 by
(1.7%), to 0.3% of sales compared to the prior fiscal year
period. In comparison to the respective period ended June
30, 2005, the operating margin for the nine month period
ended June 30, 2006 decreased by 1.3%, to 0.4% of sales.
Interest Expense, net
Interest expense increased for the three and nine
months ended June 30, 2006 by approximately $31,000 and
$62,000 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 ($32,000) during the quarter ended June 30,
2006, versus net income of approximately $322,000 during the
same period in the prior year. The Company recorded a tax
provision of $45,000 for the quarter ended June 30, 2006 as
compared to a tax provision of $157,000 for quarter ended
June 30, 2005. The net loss after tax amounted to
approximately ($77,000) or (0.5%) of revenues during the
third quarter of Fiscal 2006 versus net income of $165,000
or 0.9% of revenues in the third quarter of Fiscal 2005.
Income before income taxes decreased to approximately
$77,000 during the nine months ended June 30, 2006, from a
net profit of approximately $671,000 during the same period
in the prior year. The Company recorded a tax provision of
$97,000 for the nine months ended June 30, 2006 as compared
to a tax provision of $320,000 for nine months ended June
30, 2005. The net loss after tax amounted to approximately
($19,000) or (0.0%) of revenues during the first three
quarters of Fiscal 2006 versus $352,000 or 0.7% of revenues
during the first three quarters of Fiscal 2005.
Liquidity and Capital Resources
Net cash provided by operating activities was
approximately $149,000 for the nine months ended June 30,
2006 compared to net cash provided by operations of
approximately $531,000 for the nine months ended June 30,
2005. For the nine months ended June 30, 2006, cash was
provided by the net income of the Company and the $995,000
decrease in accounts receivable, offset by a $1,231,000
decrease in accounts payable. Net income, net of non-cash
charges totaled $384,000. For the nine months ended June
30, 2005, cash was provided by the net income of the company
as well as an increase in accounts payable of $1,502,000,
offset by an increase in accounts receivable of $1,776,000.
-11-
At June 30, 2006, the Company had cash of $647,000 and
net working capital of $1,245,000, compared with cash of
$590,000 and net working capital of $1,249,000 respectively,
at June 30, 2005. Working capital at June 30, 2006 versus
June 30, 2005 was affected by the Company's net income, net
of non-cash charges, 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 nine
months ended June 30, 2006 were primarily comprised of
expenditures for capital equipment, primarily representing
purchases of computer hardware for the new computer system.
For the nine months ended June 30, 2006, capital
expenditures amounted to approximately $487,000, of which
approximately $120,000 is financed by a three year leasing
arrangement. Capital expenditures amounted to approximately
$101,000 for the nine months ended June 30, 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
June 30, 2006, Allstates has collected $101,108 of
principal on the loan, including $59,535 during fiscal 2006.
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 (8.00% at June 30, 2006).
Outstanding borrowings on the line of credit at June 30,
2006 and 2005 were $2,300,000 and $1,599,500, 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-
<PAGE
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
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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.
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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
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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
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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 Mr. Guido, the majority
shareholder, the Court entered a second order on August 24,
2005 (the "Second August 24 Order"), which provides that Messrs. Guido,
DiGiralomo, Theile, and Stratton 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.
Note: On August 2, 2006, the Company received a Written
Consent in Lieu of a Special Meeting of the Stockholders
of Allstates WorldCargo, Inc. (the "August 2006 Written
Consent"), signed by the Messrs. Guido, DiGiralomo,
Theile, and Stratton, all of whom constitute the holders
of a majority of the issued and outstanding shares of
stock of the Company, and the parties to the Settlement
Agreement. The effect of the August 2006 Written
Consent was to modify the Settlement Agreement by (1)
removing Messrs. Buckelew, Starkey, and Meyer from the
Board of Directors, (2) amending Section 3.02 of the By-
Laws to provide that the Board of Directors shall
consist of not less than one and not more than ten
directors, with the precise number of directors within
that range to be set by the Board each year before the
annual meeting of shareholders, and with the number of
directors immediately following the adoption of the
amended Section 3.02 being four, and (3) amending
Sections 3.12(b) and 3.12(c) to provide that vacancies
in the Board shall be filled by an affirmative vote of
the remaining Board. The actions taken in the August
2006 Written Consent will become effective immediately
upon the passage of 20 days from the mailing of an
Information Statement to all stockholders of the Company
pursuant to Regulation 14C of the Exchange Act of 1934.
Upon the effectiveness of the August 2006 Written
Consent, the Board will consist of Messrs. DiGiralomo,
Theile, Stratton, and Guido.
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 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. On May 18,
2006, the Bankruptcy Court Entered an Order approving the settlement.
The Company made the
settlement payment, and the matter has been concluded.
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.
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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
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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: August 14, 2006
Sam DiGiralomo, President and CEO
BY: /s/ Craig D. Stratton DATED: August 14, 2006
Craig D. Stratton, CFO, Secretary,
Treasurer and Principal Financial Officer
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