10-K 1 awc10k09-04.txt ALLSTATES WORLDCARGO, INC. FORM 10-K P/E 9-30-2004 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 Form 10-K (Mark One) [x] ANNUAL REPORT UNDER SECTION 13 0R 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT FOR THE TRANSITION PERIOD FROM ________ TO ________ ALLSTATES WORLDCARGO, INC. (Exact Name of Registrant as Specified In Its Charter) New Jersey 22-3487471 (State or Other (I.R.S. Identification Jurisdiction of Number) Incorporation or Organization) 4 Lakeside Drive South, Forked River, New Jersey 08731 (Address of Principal Executive Offices) (Zip Code) (609) 693-5950 (Issuer's Telephone Number) Securities to be registered pursuant to Section 12(b) of the Act: None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock $.0001 Par Value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ x ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rile 12b-2 of the Act. Yes [ ] No [x] The number of shares of Common Stock outstanding as of December 22, 2004 was 32,509,872 shares. At December 22, 2004, the voting stock of the registrant had not been publicly quoted. PART I ITEM 1. DESCRIPTION OF BUSINESS General Overview Allstates WorldCargo, Inc. (the "Company" or "Allstates") is a New Jersey Corporation formed in 1997 as Audiogenesis Systems, Inc. ("Audiogenesis"), pursuant to a corporate reorganization of Genesis Safety Systems, Inc. ("Genesis"). On August 24, 1999, Audiogenesis acquired 100 percent of the common stock of Allstates Air Cargo, Inc. in a reverse acquisition, and on November 30, 1999, changed its name to Allstates WorldCargo, Inc. Allstates is principally engaged in the business of providing global freight forwarding and other transportation and logistics services for its customers. Allstates is headquartered in Forked River, New Jersey. The freight forwarding business of Allstates was founded in 1961 by Joseph M. Guido, the Company's Chairman of the Board, with its first terminal opening in Newark, New Jersey. The Company provides domestic and international freight forwarding services to over 1,700 customers utilizing ground transportation, commercial air carriers, and ocean vessels. Allstates supplements its freight forwarding services to include truck brokerage, warehousing and distribution, and other logistics services. The Company operates 21 offices throughout the United States, including the corporate headquarters, and employs 93 people. Allstates has agreements with domestic and international strategic partners and a network of agents throughout the world, and continues to pursue opportunities to forge additional strategic alliances in order to increase its global market share. Allstates currently has strategic alliance agreements with agents in the United Kingdom, European, South American and Far East markets. Allstates neither owns nor operates any aircraft or ships. By not owning or operating its own equipment, Allstates believes it is able to provide more flexible delivery schedules and shipment size. In addition, by eliminating the substantial fixed expenses associated with the ownership of such equipment, Allstates has been able to effect certain cost savings. Marketing and Licensing Allstates markets its services through a network of 20 domestic branch offices, its strategic alliances, and selected agents throughout the world. Allstates is a party to several site licensing agreements in which those licensees have contracted with the Company to provide exclusive freight forwarding services, including sales and operating functions, under the Allstates name. Of the 20 branch locations, 13 are licensees operations, while 7 are company owned and staffed operations. Allstates utilizes a combination of professionally prepared advertising materials, highly trained sales and operations/customer services professionals, direct mail, assorted promotional items, and audio/visual presentations. Allstates employs 17 full time sales and marketing personnel operating from the 7 company-owned offices. Two separate divisions of Allstates are responsible for certain specialized functions of the Company. GTD Logistics, through its capacity as a licensed truck broker, arranges for the procurement of exclusive truckloads. The other division, Allstates Logistics, holds Ocean Transportation Intermediary License No. 15364NF, and is responsible for the ocean freight segment of Allstates. Information Systems A primary component of Allstates's business strategy is the continued development of its advanced information systems. Allstates has invested substantial management and financial resources in the development of its information systems in an effort to provide accurate and timely information to its management and customers. Allstates continues to upgrade its information systems. Highlights of the information system are: . Real-time information which is available to employees and customers, including customer service, operations, sales and accounting . Centralized system located in Forked River, New Jersey, with terminals throughout all offices . Accessible to customers via the Company's firewall-protected web site to track shipments and collect POD information. . System tracks shipments from pickup order to delivery; confirms "on-board" and "out for delivery" status . System can produce the following daily, monthly, yearly reports: (1) Operations reports (inbound, outbound and on-hand reports) (2) Sales reports (revenue, customer client list) (3) Customer reports (POD report, shipping history report) (4) Accounting reports (P&L reports) . System auto rates revenues and costs . System supports transactions via EDI (Electronic Data Interchange) . System is flexible in customizing reports to meet customer needs . System is "bar-code" capable . Qualified customers can create an airway bill file via the Company web site, which is subsequently uploaded in to the operating system for processing. . System produces shipping labels and computerized airbills and airline bills Licensing and Government Regulation Allstates is the holder of Ocean Transportation Intermediary License No. 15364NF, and must be in compliance with the regulations governing such certification. Also, Allstates must be in compliance with the regulations of the Federal Aviation Administration that apply to the business of Allstates. Allstates believes that it has the resources, expertise and experience to continue its compliance with all Federal agencies and regulations. Allstates relies primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary technology. For example, Allstates licenses its software pursuant to signed license agreements, which impose certain restrictions on the licensees' ability to utilize the software. In addition, Allstates seeks to avoid disclosure of its trade secrets, including requiring those persons with access to Allstates's proprietary information to execute confidentiality agreements with Allstates and restricting access to Allstates's source code. Allstates seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. Despite Allstates's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of Allstates's products or to obtain and use information that Allstates regards as proprietary. Policing unauthorized use of Allstates's products is difficult, and, while Allstates is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of many countries do not protect Allstates's proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that Allstates's means of protecting its proprietary rights will be adequate or that Allstates's competitors will not independently develop similar technology. To date, Allstates has not been notified that Allstates's products infringe the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement by Allstates with respect to current or future products. Allstates expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in Allstates's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require Allstates to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to Allstates or at all, which could have a material adverse effect upon Allstates's business, operating results and financial condition. Competition Allstates competes with other companies in the same business, some of which are much larger and have substantially greater resources. There are approximately 1,500 direct competitors of various sizes throughout the country. The methods by which Allstates chooses to compete include highly skilled and experienced upper and middle management, a proprietary site-licensing program, cost control, professional sales representation, highly trained operations and customer service personnel, employee and customer premium awards program, and a wide range of enhanced services. In addition, the integration of Audiogenesis' experience and expertise with respect to its applications for inventory control provides the Company with added benefits for its customers. Allstates also owns its proprietary and customized computer software and advanced hardware. Allstates's website is functional, providing for cargo tracking, customer communication, and entry of house airway bills to qualifying customers. Allstates's major competitors nationwide are Federal Express, BAX, EGL Inc., and United Parcel Service. At each of Allstates's locations, there are regional carriers who have strength in the local marketplace. They, for the most part, all provide air, sea and ground services. Service levels and pricing vary substantially based upon geographic and customer volume criteria. In order to remain competitive, Allstates negotiates with its vendors to meet the appropriate service and pricing levels in its markets. In addition to competitive pricing, Allstates strives to provide its customers, with excellent service, highly trained inside operations personnel, and state of the art computer services. Customers Allstates has a diverse customer base, with approximately 1,700 accounts. In fiscal 2004, no customer accounted for more than 10% of revenues. Over the 43 years of its operations, Allstates has done business with over 25,000 customers. Some of Allstates's major customers over the years have been J.B. Williams, Raytheon, Giorgio Perfume, Cosmair, Ashton Tate, Merisel Corporation, Budd Corporation, Home Box Office (a division of Time-Warner), Sensormatic, AT&T, and Polaris. Employees As of December 8, 2004, the Company employed a total of 93 individuals. Allstates Air Cargo, Inc. and subsidiaries accounted for 91 employees (of which 10 are part time), including 49 in operations and customer service, 17 in sales, marketing and related activities, and 25 in administration and finance. The Audiogenesis Systems division has 2 full-time employees. Allstates's success is highly dependent on its ability to attract and retain qualified employees. The loss of any of the Company's senior management or other key sales and marketing personnel could have a material adverse effect on Allstates's business, operating results and financial condition. Pension Plan Effective May 1994, the Company adopted a discretionary non- standardized 401(k) profit sharing plan. The terms of the plan provide for eligible employees ("participants") who have met certain age and service requirements to participate by electing to contribute up to the maximum percentage allowable not to exceed the limits of Internal Revenue Code Section 401(k), 404 and 415 (the "Code"). For 2004, the maximum contribution allowed by the Code was the lesser of 100% of an employees' compensation, or $13,000. Participants who attained age 50 prior to the close of the plan year are eligible to make catch-up contributions of an additional $3,000, after the maximum contribution has been made. The Company may make matching contributions equal to a discretionary percentage, as determined by the Company, up to 6% of a participants' salary. Company contributions vest at the rate of 20% of the balance at each employees' third, fourth, fifth, sixth, and seventh anniversary of employment. The employees' contributions are 100% vested at the time of deferral. The plan also allows employer discretionary contributions allocated in accordance with participants' compensation. The Company did not make any discretionary contributions to the plan for the year ended September 30, 2004. Audiogenesis Systems Division Sales of Safety Equipment. Allstates, trading as Audiogenesis Systems, operates a store which distributes safety equipment under the service mark SafeTvend(sm) at a major pharmaceutical corporation in the New York area. Audiogenesis's safety store is located on the customer's premises, and sells respirators, hard hats, safety glasses, protective clothing, and other similar products which are used or worn by the customer's employees to help protect them from industrial accidents and injuries. Competition Audiogenesis's SafeTvend(sm) store is subject to competition not only from companies which would offer similar services on-site at the customer's premises, but also from direct distributors and manufacturers of the products which would sell directly to such company. Virtually all of the competitors have greater financial, technological, marketing and sales resources than Audiogenesis. There are numerous organizations of varying sizes that engage in the business of customized audio-visual presentations, most of these being advertising agencies and organizations of similar nature. There is intense competition for such business from a variety of organizations who have greater financial, technical, marketing and sales resources than Audiogenesis. ITEM 2. DESCRIPTION OF PROPERTY Allstates occupies approximately 7,000 square feet of space in Forked River, New Jersey for its principal administrative, sales and marketing support and product development facility under a ten year lease. The Company's branch locations, which are located in the vicinity of major metropolitan airports, occupy approximately 1,000 to 27,000 square feet. All such branch locations are company leased properties or properties leased by licensee owners. Terms for company leased properties generally run from one to seven years and are scheduled to expire between fiscal 2005 and fiscal 2008. The total rent expense for company leased facilities was approximately $557,000 during fiscal 2004. Allstates believes that its existing facilities are adequate to support its activities for the foreseeable future. The Company's branch locations as of September 30, 2004 were: Los Angeles, California Nashville, Tennessee Kenilworth, New Jersey Miami, Florida St. Louis, Missouri Houston, Texas Jacksonville, Florida Indianapolis, Indiana Pittsburgh, Pennsylvania Minneapolis, Minnesota Philadelphia, Pennsylvania Raleigh, North Carolina Atlanta, Georgia San Francisco, California Baltimore, Maryland San Diego, California Boston, Massachusetts Wayne, New Jersey Chicago, Illinois Orlando, Florida ITEM 3. LEGAL PROCEEDINGS Environmental matter The Company is involved in an ongoing environmental proceeding. In December 1996, five underground storage tanks ("UST's") and two above ground storage tanks were removed from a facility in which the Company leased office space at the time. Post-excavation sampling results confirmed that certain soil contamination remained present after the removals at the location of two of the UST's. Also, at the time of the removals, free-floating groundwater contamination was observed in the area of these two former UST's. During 1999, the Company engaged Carpenter Environmental Associates ("Carpenter")to prepare a Preliminary Assessment/Site Investigation Report ("PA/SI Report"). Carpenter's PA/SI Report stated that the chlorinated groundwater contamination is emanating from an off-site source. The New Jersey Department of Environmental Protection approved Carpenter's PA/SI Report and agreed that no further investigation of the chlorinated solvents in the groundwater was needed. A Remedial Investigation Work Plan was submitted in November 1999. The NJDEP approved the work plan on November 24, 1999. The approved work was performed by Carpenter in December 1999, as set forth in Carpenter's report dated March 13, 2000. The Carpenter report indicated that benzene contamination was delineated and proposed the installation of one additional monitoring well and natural remediation and monitoring of remaining groundwater contamination. The NJDEP approved the additional work and Carpenter installed and sampled the additional well, the results of which confirmed complete delineation of the benzene contamination. Concentrations of benzene in MW-3, a separate well that Carpenter also sampled, indicated an increase from the prior sampling event. The NJDEP suggested that the increase may be due to sediments collected with the groundwater sample, and recommended that the sampling be repeated. Carpenter conducted two additional sampling events to confirm groundwater concentrations of benzene in Monitoring Well 3 ("MW-3"). The sampling results indicated that concentrations of benzene have sufficiently decreased to allow case closure with the institution of a Classification Exception Area ("CEA"). Counsel for Allstates has confirmed with the New Jersey Department of Environmental Protection ("DEP") that the sampling results satisfactorily demonstrate a decreasing trend in benzene concentrations. At the DEP's request, Carpenter prepared a CEA proposal, which was submitted to the DEP on October 11, 2001. In the CEA proposal, Carpenter proposed no further action for the groundwater. The DEP subsequently issued a No Further Action ("NFA") letter for the soil and groundwater. Pursuant to the NFA, Allstates is to seal the monitoring wells at the site. The work was unable to be completed due to site improvements installed by the current property owner that rendered the monitoring wells inaccessible. The property owner indicated conceptual agreement to pay the additional costs necessary to access the wells for abandonment, and has reimbursed Allstates for costs incurred to address the issue to date. We are awaiting written confirmation from the property owner of its agreement to fund the remaining work, at which time that work will be scheduled. The NFA also sets forth details of the CEA prepared for the site that projected when remaining groundwater contaminants will have fully degraded to meet DEP groundwater quality standards. Since the NFA was issued, the DEP's technical regulations were amended to require sampling at the end of the CEA period to confirm that ground water quality standards have been achieved. It is unclear whether DEP will enforce this requirement to cases such as Allstates where an NFA was issued prior to promulgation of the regulations. Since the CEA period has now expired, we are evaluating whether to collect a sample prior to abandonment of the wells. Should these samples confirm that contaminants have fully degraded, the CEA would then be terminated. If groundwater contamination has not degraded in accordance with the projections, the regulations will require the submission of a biennial certification conforming the effectiveness of the CEA. The biennial certifications will focus primarily on a confirmation by Allstates, based on inquiries made to local authorities, that groundwater at the site is not being used. Pursuant to the 1998 Agreement of Sale with Father Flanagan's Boys Home, the current owner is to pay Allstates $3,000 per year for any reporting or monitoring associated with an institutional control, which includes a CEA. This payment is to continue for so long as DEP requires the work or for 20 years, whichever period is the shortest. We anticipate that this will cover the cost of the reporting. In March 1997, Allstates made claims against liability insurance carriers for coverage. The Company's counsel submitted invoices to the carriers in September 2003, and continues to respond to their requests for information. The Company's counsel expects to meet with the carriers over the next several months to discuss settlement. Joseph M. Guido, v. Allstates WorldCargo, Inc., Sam DiGiralomo, Barton C. Theile, and Craig D. Stratton On October 14, 2004, the 56.91% majority shareholder of the Company (the "Shareholder") (also employed by the Company as its Chairman) commenced an action against the Company and three of the Company's directors, entitled "Joseph M. Guido v. Allstates WorldCargo, Inc., Sam DiGiralomo, Barton C. Theile, and Craig D. Stratton," in the Superior Court of New Jersey, Chancery Division, Ocean County, bearing Docket No. OCN- C -305-04. (Messrs. DiGiralomo, Theile, and Stratton are also employed by the Company as its President and Chief Executive Officer, its Executive Vice President and Chief Operating Officer, and its Chief Financial Officer.) The Shareholder alleged that in accordance with state law, on August 16, 2004, he had delivered to the Company's Secretary (1) an executed Written Consent in Lieu of a Special Meeting of the Stockholders of Allstates WorldCargo, Inc. dated August 16, 2004 (the "Written Consent"), (2) Amended and Restated Bylaws of the Company adopted pursuant to the Written Consent (the "A&R Bylaws"), and (3) a draft Information Statement pursuant to Section 14(c) of the 1934 Act (the "Draft Information Statement"). The Shareholder alleged that pursuant to the Written Consent, he had amended the Company's bylaws to (among other things) expand the Board of Directors from four members to seven members, and appointed three persons (alleged to be independent) to fill the newly created board seats. He alleged that the Company was required by law to comply with his demand to notify the shareholders of his action, and that the Company's failure to do so was a violation of the law. He also alleged that the three individual defendants, both as directors and officers, owed the Company and it shareholders certain fiduciary duties and duty of loyalty to direct that "appropriate steps" be taken by the Company to allegedly comply with New Jersey state law "and other applicable law" in response to the Written Consent. The Majority Shareholder demanded temporary, preliminary, and injunctive relief enjoining a scheduled special Board of Directors meeting (the "Special Board Meeting") pending Company's performance of acts allegedly required by New Jersey law and by the 1934 Act. The Majority Shareholder also sought a permanent injunction requiring the Company and its Secretary to prepare and distribute to the Company's shareholders all notices allegedly required by state and federal law in connection with the Written Consent. Finally, he sought entry of an Order requiring the Company to file and serve upon him, within seven days after entry of a permanent injunction, a written report setting forth the manner and form in which the Company complied with the injunctions. The Company (and the three individual defendants) opposed the application for temporary relief upon the grounds that subsequent to his execution of the Written Consent, the Majority Shareholder advised one of the individual defendants that he had decided not to proceed with his amendment of the Bylaws or his expansion of the Board of Directors. Defendants also alleged that the Majority Shareholder's actions were not in the best interest of the Company, and were motivated by self-interest, that because of such concerns, the Company needed time to determine its obligations under the law, and that the purpose of the Special Board Meeting (among others) was to consider "issues pertaining to the request by [the Majority Shareholder] to file the Schedule 14C presented to the Secretary of the Corporation." On October 28, 2004, the parties reached an agreement with regard to some essential terms of a settlement, pursuant to which (1) the Company's Board of Directors would not be expanded except by unanimous consent, (2) the Majority Shareholder and the individual defendants would enter into a voting agreement pursuant to which each would agree to vote his respective shares in the Company for the others as directors of the Company, (3) the Company would enter into new employment agreements (the precise terms of which were to be agreed upon) with the individual defendants (the existing employment agreements being due to expire on December 31, 2004), (4) the parties would exchange general releases, and (5) the Company would, to the extent lawfully required by the Majority Shareholder's existing employment agreement, reimburse him for the attorneys fees he incurred in connection with the action. It was anticipated that the complete terms of a Settlement would be agreed upon, and that formal settlement documents would be prepared and executed. Such formal documentation is being prepared. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted, during the Fourth Quarter of the Fiscal Year covered by this report, to a vote of security holders through solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock has not yet been publicly traded. The Company anticipates that its common stock will be listed for quotation on the NASD OTC Bulletin Board in the near future. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth, selected consolidated financial data for the Company for the five years ended September 30, 2004. The selected consolidated financial data for the five years are derived from the Company's audited consolidated financial statements. The consolidated financial data set forth below should be read in conjunction with the Company's Consolidated Financial Statements and related Notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein. YEAR ENDED SEPTEMBER 30, (in thousands, except per share data) 2000 2001 2002 2003 2004 STATEMENT OF OPERATIONS DATA Net sales $33,213 $41,239 $36,403 $46,293 $54,705 Income (loss) from operations 424 744 534 (326) 727 Income (loss) from continuing operations 87 408 136 (582) 233 Net income (loss) (62) 408 136 (582) 233 Basic net income (loss) per common share $.00 $.01 $.00 ($.02) $.01 Diluted net income (loss) per common share $.00 $.01 $.00 ($.02) $.01 Weighted average Common shares outstanding - basic 32,510 32,510 32,510 32,510 32,510 Weighted average Common shares outstanding - diluted 32,521 32,510 32,510 32,510 32,510 BALANCE SHEET DATA: Working capital $ 598 $ 1,316 $1,534 $1,050 $1,081 Total assets 7,892 7,095 8,050 8,287 9,787 Liabilities - current 5,695 4,614 5,477 6,338 7,577 Liabilities - long term 2,625 2,497 2,453 2,412 2,440 Total stockholders' equity (427) (16) 120 (462) (229) ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The public may read and copy any materials we have filed with SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of the internet site is http://www.sec.gov. The public can also contact Mr. Craig Stratton at Allstates WorldCargo, Inc., 4 Lakeside Drive South, Forked River, New Jersey, 08731, or through the internet web address http://www.allstatesair.com. Results of Operations The following table sets forth for the periods indicated certain financial information derived from the Company's consolidated statement of operations expressed as a percentage of total revenues: Fiscal Year Ended September 30, 2004 2003 2002 --------------------------------- Revenues 100.0% 100.0% 100.0% Cost of transportation 67.7 65.0 61.3 ----- ----- ----- Gross profit 32.3 35.0 38.7 Operating expenses: Personnel costs 11.9 14.1 15.5 License commissions and royalties 12.0 13.5 13.2 Other selling, general and administrative expenses 7.1 8.1 8.5 ----- ----- ----- Total operating expenses 31.0 35.7 37.2 Operating income 1.3 (0.7) 1.5 Net income/(loss) 0.4% (1.3)% 0.4% REVENUES Fiscal 2004 vs. fiscal 2003 Revenues of the Company represent gross consolidated sales less customer discounts. Sales for the fiscal year ended September 30, 2004 increased $8,412,000, or 18.2%, to $54,705,000, over revenues earned during the prior fiscal year ended September 30, 2003, reflecting a higher volume of freight shipped. Revenues earned from domestic-routed freight increased $9,434,000, or 27.1%, to $44,296,000, while international freight revenues decreased from the previous fiscal year by $1,022,000, or (8.9%), to $10,409,000. The increase in domestic revenues earned in fiscal 2004 over fiscal 2003 primarily reflects incremental increases in freight business at certain existing branches, an increase during the year in the number of branch locations, and the addition of a new large customer. Furthermore, growth within the Allstates truck brokerage operation also fueled the increase in domestic sales. The decrease in international revenues in fiscal 2004 from the previous year primarily reflects the approximately $1.8 million in billing in fiscal 2003 to one customer for the arrangement of international chartered aircraft. The Company was asked to make these arrangements by its customer as an emergency response to the backlog of ocean freight deliveries that resulted from the lock out of West Coast ports during the first quarter of fiscal 2003. After discounting the billing for that charter service in fiscal 2003, international revenues would have increased by approximately $766,000. Fiscal 2003 vs. fiscal 2002 For the fiscal year ended September 30, 2003, total revenues increased by $9,890,000, or 27.2%, to $46,293,000 compared to revenues earned in the previous fiscal year ended September 30, 2002, reflecting higher freight shipping volumes. Sales of domestic-routed freight increased by approximately $6.9 million or 24.9%, to $34,862,000, while international freight revenues increased by approximately $3.0 million or 34.8%, to $11,431,000. The growth in revenues in fiscal 2003 as compared to fiscal 2002 is primarily a result of the improvement in the U.S. economy in 2003, the effect of additional sales personnel hired in the second half of fiscal 2002, and the full year effect of two company stations that were opened during the third quarter of fiscal 2002. The addition of a new licensee location during the second quarter of fiscal 2003 also contributed to the Company's increase in revenues. In addition, Allstates truck brokerage operation, which in previous years had exclusively provided logistical support for the Company's freight forwarding operations, began providing truckload service to selected customers in fiscal 2003, accounting for approximately $950,000 in additional revenues. The Company's largest customer accounted for 7.9% of consolidated revenues in fiscal 2003. In November 2003, that customer began to utilize an alternate carrier to provide freight distribution services. Allstates continued to provide transportation services to that customer at a significantly reduced level. Included in total revenues is approximately $1.8 million in billing to one customer for the arrangement of international chartered aircraft. The Company was asked to make these arrangements by its customer as an emergency response to the backlog of ocean freight deliveries that resulted from the lock out of West Coast ports during the first quarter of fiscal 2003. GROSS PROFIT Fiscal 2004 vs. fiscal 2003 Gross profit represents the difference between net revenues and the cost of providing transportation services. The cost of sales is composed primarily of amounts paid by the Company to carriers and cartage agents for the transport of cargo. As a percentage of revenues, cost of sales increased by 2.7%, to 67.7%, for the fiscal year ended September 30, 2004 in comparison to the fiscal year ended September 30, 2003. The higher percentage of transportation costs to revenues primarily reflects increases in fuel costs as they affect carrier rates, an increase in deferred shipments versus priority, and the addition of new lower margin business that the Company attained during fiscal 2004. In absolute terms, cost of sales increased by $6,971,000, or 23.2%, to $37,060,000 for the fiscal year ended September 30, 2004 compared to the prior fiscal year, reflecting the increase in sales. Gross margins decreased to 32.3% of sales for fiscal 2004. Gross profit increased by $1,441,000, or 8.9%, to $17,645,000 in fiscal 2004 versus fiscal 2003. Fiscal 2003 vs. fiscal 2002 Cost of sales as a percentage of revenues increased by 3.7 %, to 65.0 %, for the fiscal year ended September 30, 2003 as compared to the fiscal year ended September 30, 2002. The higher cost of sales percentage reflects the addition of certain lower margin customer accounts during the year, the low margin percentage effect of the chartered airline service the Company provided in October, 2002, and the growth of the Company's truck brokerage business which operates at lower margins than freight forwarding operations. In absolute terms, cost of sales increased by approximately $7,776,000, or 34.9%, to $30,089,000 for the fiscal year ended September 30, 2003 compared to the fiscal year ended September 30, 2002, due to the higher sales volume. Gross margins decreased to 35.0% of sales for fiscal 2003. Gross profits increased by approximately $2,113,000, or 15.0%, to $16,204,000 for fiscal 2003 versus fiscal 2002. SELLING, GENERAL & ADMINISTRATIVE EXPENSES Fiscal 2004 vs. fiscal 2003 Selling, general and administrative expenses include personnel costs, licensee commissions and other costs necessary to operate our business. As a percentage of revenues, SG&A expenses decreased by 4.7%, to 31.0%, for the fiscal year ended September 30, 2004 as compared to the fiscal year ended September 30, 2003, reflecting the increase in revenues in relation to fixed operating expenses. In absolute terms, SG&A expenses increased by approximately $389,000, or 2.4%, to $16,918,000 in fiscal 2004 in comparison to fiscal 2003, primarily reflecting higher licensee commission expense. Allstates pays commissions to licensees and independent sales agents as compensation for generating profits for the Company. Licensee commissions and royalties pursuant to licensee agreements increased by approximately $260,000 in fiscal 2004 over the fiscal 2003 expense. This primarily reflects the addition of two new licensee branch locations and the conversion of one company-owned branch to a licensee during the year, offset by lower gross profits at existing licensee branches. Licensee commissions and royalties as a percentage of revenues decreased by 1.5%, to 12.0% of sales, in fiscal 2004. Personnel costs as a percentage of sales decreased by 2.2% in fiscal 2004, to 11.9% of revenues. In absolute terms, total personnel related expenses in fiscal 2004 approximated fiscal 2003 costs. Salaries and employee benefits decreased by approximately $228,000 in fiscal 2004 as compared to the previous year, primarily due to the reduction in headcount that took place during the last six months of fiscal 2003 as well as the transfer of a company-owned station to a licensee operation in February 2004. This was offset by increases in salesperson commissions and executive bonus expense in fiscal 2004 as a result of the increase in profit from the prior fiscal year. Accounting fees increased by approximately $97,000 for fiscal 2004 over fiscal 2003, primarily based on an under accrual of fees as they related to previous years audits. Liability insurance expenses increased by approximately $48,000 for fiscal 2004 as compared to fiscal 2003, primarily relating to the Directors and Officers liability policy that the Company initiated in the fourth quarter of fiscal 2003. Fiscal 2003 vs. fiscal 2002 Operating expenses decreased as a percentage of revenues for the fiscal year ended September 30, 2003 by 1.5%, to 35.7%, reflecting the increase in the Company's sales in relation to fixed operating expenses. In absolute terms, SG&A expenses increased in fiscal 2003 by $2,973,000 or 21.9%, to $16,529,000 compared to the previous fiscal year. Personnel expenses, which include all employee compensation and benefit costs, increased by approximately $919,000 over fiscal 2002 costs. This reflects the increase in headcount during the second half of fiscal 2002 resulting from the opening of two company-owned stations in Florida, while adding sales and operations staff in other existing locations in an effort to bolster sales. During the third quarter of fiscal 2003, Allstates reduced its headcount to compensate for losses incurred in the first half of the fiscal year. Licensee commissions and royalties paid pursuant to licensee agreements increased by approximately $1,497,000 for the fiscal year ended September 30, 2003 in comparison to the prior fiscal year, reflecting increased gross profits at certain licensee operations. Allstates also has agreements with two independent sales agents whereby the Company pays a percentage of gross profits earned from revenues they generate, and which accounted for approximately $144,000 in additional expense over the previous fiscal year. Facilities expenses increased by approximately $169,000 in fiscal 2003 over fiscal 2002, primarily due to increased rental costs related to the opening of the two Florida locations. One of the two Florida locations provides warehousing services to one of its customers. Per an agreement with that customer, the station is guaranteed a minimum profit, which fully covers the Company's cost of renting that warehouse space. Insurance expense, including cargo and general liability, increased by approximately $98,000 reflecting the increase in revenues and payroll expense during the fiscal year, by which our premiums are calculated. Automobile allowances increased by approximately $73,000 during fiscal 2003, reflecting the increase in saleperson headcount, offset in part by lower depreciation expense as Allstates has been gradually disposing its company owned automobile fleet in favor of paying an allowance for the business use of personal cars. Bad debt expense increased by approximately $60,000 in comparison to the prior fiscal year, primarily reflecting the higher revenues. Operating (loss)/income Income from operations increased by approximately $1,052,000 for the fiscal year ended September 30, 2004, to $727,000, versus the fiscal year ended September 30, 2003, due to the increase in sales volume and the reduction of operating expenses as a percentage of revenues. The operating margin increased by 2.0% during fiscal year 2004. Income from operations decreased during the fiscal year ended September 30, 2003 by approximately $859,000, to a loss of ($326,000), in comparison to the fiscal year ended September 30, 2002, due to higher operating expenses incurred. The operating margin decreased by 2.2% during the fiscal year 2003. Interest expense Allstate's interest expense obligation consists primarily of the note payable to the Estate of A.G. Hoffman, Jr. that the Company assumed from Joseph M. Guido as provided in the terms of the August 24, 1999 reverse acquisition, as well as on borrowings against the line of credit established with the bank. Interest on the note was approximately $168,000 and $170,000 during fiscal 2004 and fiscal 2003, respectively. Interest expense decreased by approximately $9,000 during the fiscal year ended September 30, 2004 in comparison to the prior year, reflecting a lower average borrowing rate. Interest expense during the fiscal year ended September 30, 2003 was consistent with the previous fiscal year, totaling approximately $226,000. While the average borrowing rate of interest during fiscal 2003 was lower than fiscal 2002, the average outstanding borrowings during fiscal 2003 were higher than the previous fiscal year. Loss on Sale of Assets Allstates realized a gain on the sales of assets in fiscal 2004 of approximately $3,000, versus a loss of approximately ($27,000) in fiscal 2003, primarily reflecting the sale of company owned automobiles. Other income/(expense) During the fiscal year ended September 30, 2003, the Company incurred a charge of approximately $372,000 for the partial write-off of a third party loan. Per an agreement with that party, Allstates agreed to accept $330,000 as full payment on the $702,000 loan receivable. Net income/(loss) Net income before taxes increased by approximately $1,472,000, to $522,000 for the fiscal year ended September 30, 2004, compared to the previous fiscal year then ended. The Company recorded a tax provision of approximately $289,000 for fiscal 2004. Net income for fiscal 2004 was $233,000 versus a net loss of ($582,000) in the prior year. The net income before taxes decreased by approximately $1,263,000, to a net loss of ($950,000) for the fiscal year ended September 30, 2003, in comparison to the prior fiscal year ended September 30, 2002. The Company recorded a tax benefit of $368,000 for fiscal 2003. The net loss for fiscal 2003 was ($582,000) versus net income of $136,000 in the previous fiscal year. Liquidity and Capital Resources Net cash provided by operating activities was approximately $18,000 for the fiscal year ended September 30, 2004 compared to net cash provided by operations of approximately $749,000 for the fiscal year ended September 30, 2003. In fiscal 2004, cash was provided by the net income of the Company, offset by the net effect of increases in accounts receivable and accounts payable that reflect the growth in fiscal 2004 volume over the previous year. In fiscal 2003, cash was primarily provided by the receipt of loan funds due from a third party, a refund of federal tax payments, and an increase in accounts payable, offset by an increase in accounts receivable. At September 30, 2004, the Company had cash of $114,000 and net working capital of $1,081,000, compared with cash of $517,000 and net working capital of $1,050,000 respectively, at September 30, 2003. The increase in working capital at September 30, 2004 in comparison to September 30, 2003 is primarily attributable to the Company's net income during the fiscal year, offset by payments made in connection with a licensee agreement that Allstates entered in to in fiscal 2004. During the first quarter of fiscal 2004, Allstates entered into a licensee agreement with another party that would result in that party owning the rights to three licensee operations commencing January 31, 2004. As part of the agreement, Allstates WorldCargo paid a sum of $300,000 to the licensees as a start- up fee. Allstates has capitalized this expenditure as a leasehold improvement and will depreciate it over the ten- year life of the contract. In addition to the leasehold improvement payment, the Company's other investing activities were primarily comprised of expenditures for capital equipment, primarily representing purchases of computer hardware and software. These capital expenditures amounted to approximately $95,000 during the fiscal year ended September 30, 2004, while proceeds from the sale of company-owned automobiles totaled approximately $49,000. For the fiscal year ended September 30, 2003, capital expenditures totaled approximately $106,000. Proceeds from the sale of fixed assets, primarily of company-owned automobiles, amounted to approximately $37,000. The Company has a commercial line of credit with a bank, pursuant to which the Company may borrow up to $2,000,000, based on a maximum of 70% of eligible accounts receivable. Per the agreement, interest on outstanding borrowings accrues at the Wall Street Journal's prime rate of interest (4.75% at September 30, 2004). The interest rate is predicated on the Company maintaining an average compensating account balance in a non-interest bearing account equal to at least $230,000. If such average compensating balances are not maintained, the interest rate will increase by 1% over the rate currently accruing. Outstanding borrowings on the line of credit at September 30, 2004 and 2003 were $1,100,000 and $1,150,000, respectively. In September, 2000, Allstates extended an operating loan to an unrelated freight and warehouse services company, Q Logistics Solutions, Inc. ("QLS"), as part of an agreement that the Company entered into to provide customer invoicing and vendor disbursement services. The loan was secured by a $750,000 promissory note signed by the borrower, and for which a Form UCC-1 financing statement was filed. In February 2001, QLS filed for Chapter 11 protection under the U.S. bankruptcy laws. Pursuant to the bankruptcy proceedings, another company, unrelated to Allstates WorldCargo, Inc., purchased the assets of QLS in May 2001. Allstates had outstanding loan advances of approximately $702,000 to QLS prior to the purchase. As a contingency of that purchase, Allstates entered in to an agreement with the other company whereby Allstates assigned the Form UCC-1 filing to them in exchange for their promissory note, secured by a personal guarantee made by an officer of that company, to pay the full loan amount of approximately $702,000, plus 9% interest over six months, beginning in April 2001. The other company subsequently defaulted on the loan after having made no payments to Allstates. The Company filed suit against the other company and the guarantor for breach of contract, and subsequently the parties signed a Stipulation of Settlement whereby Allstates received a judgement against the other company for the full amount plus interest and attorney's fees. An $80,000 payment in lieu of the personal guarantee was placed in escrow pending legal review of documentation supplied to the Company. In January, 2003, the parties came to an agreement whereby the other company would pay Allstates a total of $330,000 in full settlement. Payments were scheduled to be made over four equal monthly installments at $82,500 per month, including the release of the escrow funds. All payments were received by the Company as per the schedule. Forward Looking Statements The Company is making this statement in order to satisfy the "safe harbor" provisions contained in the Private Securities Litigation Reform Act of 1995. The statements contained in all parts of this document (including the portion, if any, appended to the Form 10-K) including, but not limited to, those relating to the availability of cargo space; the Company's plans for, effects, results and expansion of international operations and agreements for international cargo; future international revenue and international market growth; the future expansion and results of the Company's terminal network; plans for local delivery services and truck brokerage; future improvements in the Company's information systems and logistic systems and services; technological advancements; future marketing results; construction of the new facilities; the effect of litigation; future costs of transportation; future operating expenses; future margins; any seasonality of the Company's business; future dividend plans; future acquisitions and the effects, benefits, results, terms or other aspects of any acquisition; Ocean Transportation Intermediary License; ability to continue growth and implement growth and business strategy; the ability of expected sources of liquidity to support working capital and capital expenditure requirements; future expectations; and any other statements regarding future growth, future cash needs, future terminals, future operations, business plans, future financial results, financial targets and goals; and any other statements which are not historical facts are forward-looking statements. When used in this document, the words "anticipate," "estimate," "expect," "may," "plans," "project" and similar expressions are intended to be among the statements that identify forward-looking statements. Such statements involve risks and uncertainties, including, but not limited to, those relating to the Company's dependence on its ability to attract and retain skilled managers and other personnel; the intense competition within the freight industry; the uncertainty of the Company's ability to manage and continue its growth and implement its business strategy; the Company's dependence on the availability of cargo space to serve its customers; the effects of regulation; results of litigation; the Company's vulnerability to general economic conditions; the control by the Company's principal shareholder; risks of international operations; risks relating to acquisitions; the Company's future financial and operating results, cash needs and demand for its services; and the Company's ability to maintain and comply with permits and licenses, as well as other factors detailed in this document and the Company's other filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated. The Company undertakes no responsibility to update for changes related to these or any other factors that may occur subsequent to this filing. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES FINANCIAL STATEMENTS For the Years Ended September 30, 2004 and 2003 CONTENTS Page INDEPENDENT AUDITORS' REPORT F1 FINANCIAL STATEMENTS Consolidated Balance Sheets F2 -F3 Consolidated Statements of Income (Loss) F4 Consolidated Statements of Earnings Per Share F5 Consolidated Statements of Stockholders' Equity(Deficit) F6 Consolidated Statements of Cash Flows F7 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS F8 - F17 INDEPENDENT AUDITORS' REPORT To the Board of Directors Allstates WorldCargo, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of Allstates WorldCargo, Inc. and Subsidiaries (a corporation), as of September 30, 2004 and 2003, and the related consolidated statements of net income (loss), earnings per share, stockholders' deficit, and cash flows for the years then ended. These consolidated financial statements (see Note 1) are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Allstates WorldCargo, Inc. and Subsidiaries, as of September 30, 2004 and 2003, and the results of their operations and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Toms River, New Jersey December 9, 2004 F-1 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2004 and 2003 Assets 2004 2003 ---- ---- Current Assets Cash $ 114,363 $ 516,639 Accounts Receivable, net of allowance for doubtful accounts of $250,394 and $229,364, respectively 8,073,391 6,226,209 Inventories 30,027 28,644 Prepaid Expenses and Other Assets 89,081 126,547 Deferred Income Taxes - Current Portion 351,000 490,000 ------------ ----------- Total Current Assets 8,657,862 7,388,039 ------------ ----------- PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation 507,873 325,562 ------------ ----------- INTANTIBLE AND OTHER ASSETS Deposits 33,371 38,571 Loans Receivable 52,853 - Goodwill, including acquisition costs, net of accumulated amortization 535,108 535,108 ------------ ----------- Total Other Assets 621,332 573,679 ------------ ----------- Total Assets $ 9,787,067 $ 8,287,280 ============ ============

See accompanying notes and independent auditors' report F2 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2004 and 2003 Liabilities and Stockholders' Deficit 2004 2003 Current Liabilities ---- ---- Accounts Payable $ 5,274,000 $ 4,336,623 Accrued Expenses 1,178,377 823,029 Short-Term Bank Borrowings Under Line of Credit 1,099,500 1,149,500 Current Portion of Long Term Debt 25,000 28,836 ---------- --------- Total Current Liabilities 7,576,877 6,337,988 ---------- --------- LONG TERM LIABILITIES Deferred Tax Liability - Non-current portion 78,000 25,000 Long-Term Portion of Notes Payable 2,361,730 2,386,730 ---------- --------- Total Long-Term Liabilities 2,439,730 2,411,730 ---------- --------- Total Liabilities 10,016,607 8,749,718 ---------- --------- STOCKHOLDERS' EQUITY Common Stock, $.0001 par value, 50,000,000 shares authorized, 32,509,872 shares issued and outstanding 3,251 3,251 Retained Deficit (232,791) (465,689) ---------- --------- Total Stockholders' Deficit (229,540) (462,438) ---------- --------- Total Liabilities and Stockholders' Deficit $ 9,787,067 $ 8,287,280 ========== =========

See accompanying notes and independent auditors' report F3 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Statements of Income (Loss) For the Fiscal Years Ended September 30, 2004 and 2003 2004 2003 ---- ---- NET SALES $ 54,705,311 $ 46,293,052 COST OF SALES 37,060,406 30,089,183 ------------ ------------ Gross Profit 17,644,905 16,203,869 OPERATING EXPENSES Selling, General and Administrative 16,918,055 16,529,442 ------------ ------------ Income (Loss) from Operations 726,850 (325,573) ------------ ------------ OTHER INCOME (EXPENSE) Interest Income - 613 Interest Expense (217,367) (226,714) Gain/(Loss)on Sale of Equipment 3,071 ( 26,534) Other Income (Expense) 9,093 (371,916) ------------ ------------ Total Other Income (Expense) (205,203) (624,551) ------------ ------------ Income (Loss) Before Tax Provision 521,647 (950,124) Provision for Income Taxes 288,749 (367,833) ------------ ------------ Net Income (Loss) Applicable to Common Shareholders $ 232,898 (582,291) ============ ============

See accompanying notes and independent auditors' report F4 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Statements of Earnings Per Share For the Fiscal Years Ended September 30, 2004 and 2003 2004 2003 ---- ---- EARNINGS PER SHARE - BASIC Net Income (Loss) Applicable to Common Shareholders $ 232,898 ( 582,291) Per Common Share - Basic $ 0.01 $ ( 0.02) ============ ============ Shares Used in Per Share Calculation - Basic 32,509,872 32,509,872 ============ ============ Earnings Per Share - Diluted Net Income (Loss) Applicable to Common Shareholders $ 232,898 ( 582,291) Per common share - diluted $ 0.01 $ ( 0.02) ============ ============ Shares Used in Per Share Calculation - Diluted 32,509,872 32,509,872 ============ ============

See accompanying notes and independent auditors' report F5 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (Deficit) For the Fiscal Years Ended September 30, 2004 and 2003 Common Stock Other Retained Total Number of Comprehensive Earnings Stockholders' Shares Par Value Income (Loss) (Deficit) Equity (Deficit) --------- --------- ------------- ---------- ---------------- Balance at September 30, 2002 32,509,872 $3,251 $ - $ 116,602 $ 119,853 Consolidated net loss for the fiscal year ended September 30, 2003 (582,291) ( 582,291) ---------- ------- ------------ ---------- ------------- Balance at September 30, 2003 32,509,872 $3,251 $ - $ (465,689) $( 462,438) Consolidated net gain for the fiscal year ended September 30, 2004 232,898 232,898 ---------- ------- ------------ ---------- ------------- Balance at September 30, 2004 32,509,872 $3,251 $ - $ (232,791) $( 229,540) ========== ======= ============ =========== =============

See accompanying notes and independent auditors' report F6 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Fiscal Years Ended September 30, 2004 and 2003 2004 2003 Cash Flows From Operating Activities: ---- ----- Net Income (loss) Applicable to Common Shareholders $ 232,898 $ (582,291) Adjustments to reconcile net income (loss) applicable to common shareholders to net cash provided by operating activities: Depreciation 167,202 185,728 Amortization - 1,166 Provision for bad debts 187,999 182,379 (Gain)/Loss on Sale of Equipment (3,071) 26,534 (Increase) Decrease in: Accounts Receivable (2,035,182) (655,856) Inventories ( 1,383) ( 4,432) Prepaid Expenses and Other Assets ( 15,386) 852,366 Deferred Tax Asset 139,000 (420,001) Increase (Decrease) in: Accounts Payable 937,377 1,186,058 Accrued Expenses 355,348 ( 23,146) Deferred Tax Liability 53,000 - ---------- --------- Net Cash Provided From Operating Activities 17,802 748,505 ---------- --------- Cash Flows From Investing Activities: Purchase of Equipment (395,292) (106,344) Proceeds from Sale of Equipment 48,850 36,732 Deposits 5,200 ( 3,693) ---------- --------- Net Cash Used by Investing Activities (341,242) ( 73,305) ---------- --------- Cash Flows From Financing Activities: New borrowings: Short-Term 200,000 999,500 Long-Term Debt reduction: Short-Term ( 250,000) (1,250,000) Long-Term ( 28,836) ( 81,338) ---------- --------- Net Cash Used by Financing Activities ( 78,836) ( 331,838) ---------- --------- Net Increase (Decrease) in Cash and Cash Equivalents ( 402,276) 343,362 Cash and Cash Equivalents, Beginning of Year 516,639 173,277 ---------- --------- Cash and Cash Equivalents, End of Year $ 114,363 516,639 ========== =========

See accompanying notes and independent auditors' report F7 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 and 2003 NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS Nature of Operations On August 24, 1999, Audiogenesis Systems, Inc. (Audiogenesis), entered into a reverse acquisition with Allstates Air Cargo, Inc. and its subsidiaries (Allstates). On August 24, 1999, Allstates Air Cargo, Inc. became a wholly owned subsidiary of Audiogenesis. On November 4, 1999, Audiogenesis Systems, Inc. filed a Certificate of Amendment to the Certificate of Incorporation, officially changing its name to Allstates WorldCargo, Inc. (WorldCargo). As a result of this transaction, the sole shareholder of Allstates Air Cargo, Inc. became a 55.37% shareholder of WorldCargo. Management has elected to utilize the new name (Allstates WorldCargo, Inc. and Subsidiaries) for purposes of these financial statements. The entities that are included in these consolidated financial statements are as follows: Allstates WorldCargo, Inc. (formerly Audiogenesis Systems, Inc.) - WorldCargo was incorporated in the State of New Jersey on January 14, 1997, as the result of a reverse acquisition by Genesis Safety Systems, Inc. The Company's operations include sales and distribution of safety equipment, development of audio- visual products, including safety training program and sales and marketing presentations, development of a device to treat tinnitus, and development of an echolocation device to assist sighted persons in conditions of low visibility and the blind. The Company intends to defer any further development of the tinnitus device, but continues to pursue opportunities concerning the device. The Company has ceased all efforts concerning the echolocation device, and has terminated its license for the intellectual property underlying the device. Biowaste Technologies Systems, Inc. - Biowaste Technologies Systems, Inc. is a wholly owned subsidiary of WorldCargo. Biowaste was formed on July 1, 1988 for the purpose of engaging in the business of the management of infectious waste. Biowaste is in the developmental stage, and no revenues have been produced to date. Presently, such subsidiary is inactive, and the Company does not anticipate that it will become active in the near future. Allstates Air Cargo, Inc. - Allstates Air Cargo, Inc. was incorporated in the state of New Jersey on October 3, 1962. The Company provides domestic and international airfreight forwarding services. Allstates maintains operating facilities throughout the United States and has agents in Europe and South America. Allstates Allcargo (US), Inc. - Allstates Allcargo (US), Inc. is a wholly owned subsidiary of Allstates Air Cargo, Inc. Allstates Allcargo (US), Inc. owned 100% of Allstates Allcargo (UK), Ltd., a corporation organized under the laws of England prior to the dissolution of Allstates Allcargo (UK), Ltd. during the year ended September 30, 2000. All appropriate foreign currency translation adjustments have been made for purposes of these financial statements. Allstates Logistics, Inc. - Allstates Logistics, Inc. is also a wholly owned subsidiary of Allstates Air Cargo, Inc. Allstates Logistics was incorporated in the State of New Jersey in December 1997, and provides ocean freight services to its customers. GTD Logistics, Inc. - GTD Logistics, Inc. was incorporated in the State of New Jersey on October 27, 1998. GTD Logistics is a wholly owned subsidiary of Allstates Air Cargo, Inc. GTD Logistics is also in the business of freight forwarding. F-8 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 and 2003 NOTE 1 - ORGANIZATION AND NATURE OF BUSINESS (Continued) e-tail Logistics, Inc. - e-tail Logistics, Inc. was incorporated in the State of New Jersey on February 11, 2000. e-tail Logistics is a majority owned subsidiary of WorldCargo. Reverse Acquisition For purposes of these consolidated financial statements, the purchase of Allstates Air Cargo, Inc. by Allstates WorldCargo, Inc. is treated as a reverse acquisition under the purchase method of accounting, as outlined in Accounting Principles Board Opinion No. 16. For accounting purposes, Allstates Air Cargo, Inc. is considered the acquirer in the reverse acquisition. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation For purposes of the accompanying consolidated financial statements, Allstates Air Cargo, Inc. is considered the accounting "Parent" company and Allstates WorldCargo, Inc. is considered a subsidiary. Therefore, these consolidated financial statements include the combined assets and liabilities of Allstates Air Cargo, Inc. and its subsidiaries as of September 30, 2004 and 2003. The consolidated statements of net income (loss) include the income and expenses of Allstates Air Cargo, Inc. and its subsidiaries for the years ended September 30, 2004 and 2003. All material intercompany payables, receivables, revenues and expenses have been eliminated for purposes of this consolidation. Use of Estimates The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Concentration of Credit Risk The Company maintains cash balances at several banks. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $100,000. At varying times during the years ended September 30, 2004 and 2003, the Company had a cash balance on deposit with one bank that exceeded the $100,000 balance insured by the FDIC. Management considers the risk of loss to be minimal. Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Fair Value of Consolidated Financial Statements The carrying values of cash, accounts receivable, accounts payable, accrued expenses, taxes payable, notes payable and other current liabilities approximates fair value because of the relatively short maturity of these instruments. F-9 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 and 2003 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Inventories For both financial reporting and income tax purposes, inventory is stated on the cost basis. Cost is determined using the first-in, first-out method. Depreciation Property, plant and equipment consist principally of building and improvements, vehicles, computers and software, office equipment, and furniture and fixtures which are stated at historical cost. Depreciation is provided on the straight-line method over the estimated useful lives of the assets, which are generally three to fifteen years. Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations as incurred. Gains or losses on disposal of equipment are reflected in the statements of income (loss). Depreciation expense for the years ended September 30, 2004 and 2003 was $167,202 and $185,728, respectively. Income Taxes The Company follows the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Advertising The Company expenses advertising costs as they are incurred. Advertising expenses for the years ended September 30, 2004 and 2003 were $41,217 and $28,121, respectively. Revenue Recognition Revenues are recognized at the time the freight departs the terminal of origin. This method approximates recognizing revenues when shipment is completed. Earnings per Share The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128) which establishes standards for computing and presenting earnings per share ("EPS") and requires the presentation of both basic and diluted EPS. As a result, primary and fully diluted EPS have been replaced by basic and diluted EPS. EPS is calculated by dividing net income by the weighted-average number of outstanding shares of Common Stock for each year. Bad Debts The Company uses the allowance method to account for uncollectible accounts receivable. The allowance for doubtful accounts is based on prior years' experience and is estimated by management. Bad debt recoveries are charged against the allowance account as realized. Bad debt expense for the years ended September 30, 2004 and 2003 was $187,999 and $182,379, respectively. F-10 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 and 2003 NOTE 3 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are summarized by major classifications as follows: 2004 2003 Leasehold Equipment $361,835 $ 48,062 Vehicles 56,525 315,789 Equipment and Software 902,192 857,239 Furniture and Fixtures 47,542 47,542 ---------- --------- 1,368,094 1,268,632 Less Accumulated Depreciation 860,221 943,070 ---------- --------- $ 507,873 $ 352,562 ========== ========= NOTE 4 - AMORTIZATION OF GOODWILL AND ACQUISITION COSTS Commencing with the fiscal year beginning October 1, 2001, the Company implemented Statement of Financial Accounting Standards Statement No. 142, "Accounting for Goodwill and Intangible Assets", which no longer allows for the amortization of goodwill. The new statement requires the Company to conduct an annual goodwill impairment test and write off any decrease in the fair value of the goodwill in the period of such declined value. Pursuant to the Company's impairment tests conducted for the years ended September 30, 2004 and 2003, no write off of the carrying value is deemed necessary. Effective January 1, 2003, the Company ceased amortizing the costs associated with the acquisition of Audiogenesis by Allstates and will include such costs in its annual goodwill impairment test as discussed above. Amortization expense for the years ended September 30, 2004 and 2003 were $-0- and $1,166, respectively. F-11 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 and 2003 NOTE 5 - LONG-TERM DEBT The Company's notes payable balance at September 30, 2004 and 2003 consist of the following: 2004 2003 Notes payable from Joseph M. Guido to the Estate of A.G. Hoffman, Jr., assumed by the Company, in the aggregate originally totaled $2,511,730, with repayment over 101 years at annual principal payments of $25,000 plus interest at 7% per year. All or any of the notes may be paid at any time before maturity without any prepayment penalty. In the event of a default under the notes by the Company, Joseph M. Guido remains personally liable for the notes, and the 101 shares of Allstates Air Cargo, Inc. common stock held as security under the notes (representing 48.1% of the issued and outstanding common stock of Allstates Air Cargo, Inc.) may be sold at public or private sale. $2,386,730 $2,411,730 Notes Payable to Fleet Bank in the aggregate originally totaled $76,903, with repayment over 36 months with monthly payments inclusive of interest ranging from 7.90% to 8.50%. These loans are secured by the vehicles which they relate. - 3,836 --------- --------- 2,386,730 2,415,566 Less: Current Portion 25,000 28,836 ----------- ---------- $2,361,730 $2,386,730 =========== ===========

Future maturities for long-term debt as of September 30, 2004 is as follows: For the fiscal years ended September 30, 2005 25,000 2006 25,000 2007 25,000 2008 25,000 2009 25,000 Thereafter 2,261,730 _________ Total $2,386,730 ========= NOTE 6 - LINE OF CREDIT Allstates Air Cargo, Inc. has a $2,000,000 line of credit agreement with a bank, which expires January 31, 2005. Interest on outstanding borrowings currently accrues at the Wall Street Journal's (WSJ) prime rate of interest per annum (4.75% as of September 30, 2004). The interest rate is predicated upon the Company maintaining a compensating account balance in a non- interest bearing account equal to at least $230,000. If, at any time, the Company fails to maintain the compensating balance, the interest rate will increase by 1% over the WSJ's prime rate at the time of failure. The balance outstanding on the line of credit as of September 30, 2004 and 2003 was $1,099,500 and $1,149,500, respectively. F-12 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 and 2003 NOTE 6 - LINE OF CREDIT (Continued) Loan collateral includes the Company's accounts receivable and the unlimited, unconditional guarantees of Joseph M. Guido, Teresa Guido and Allstates Allcargo (US), Inc. NOTE 7 - PROVISION FOR INCOME TAXES A reconciliation of income tax at the statutory rate to the Company's effective rate is as follows: 2004 2003 ---- ---- Expected Federal statutory rate 0.00%* 0.000% Expected State statutory rates (average) 8.893% 8.893% ------- ------- Total expected 8.893% 8.893% statutory rate State Franchise Tax and Miscellaneous Book to Tax Adjustments -9.654% -2.253% Deferred income tax expense (benefit): Federal 29,138% -35.040% State 7.668% -10.310% ------- ------- Income Tax Expense (Benefit) - Effective Tax Rate 55,353% -38.710% * Due to Net Operating Loss in September 30,2003, and the net operating loss carryforward in September 30, 2004. Expected Federal statutory rate is deemed to be 0%. The Company's provision for income taxes as of September 30, 2004 and 2003 consist of the following: 2003 2002 ---- ---- Current Income Tax Expense Federal $ (6,318) $ - State 103,067 62,980 ------- ------- Total - Current 96,749 62,980 ------- ------- Deferred Income Tax (Benefit) Expense Federal 152,000 (332,901) State 40,000 (97,912) ------ ------ Total - Deferred 192,000 (430,813) ------ ------- TOTALS $288,749 $(367,833) ======== ======= The tax effect of temporary differences that make up the significant components of the deferred tax asset for financial reporting purposes at September 30, 2004 and 2003 are as follows: F-13 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 and 2003 NOTE 7 - PROVISION FOR INCOME TAXES (Continued) 2004 2003 ---- ---- Deferred Tax Assets -------------------- Accounts Receivable $ 107,500 $ 101,000 Defferred Payable 43,900 - Net operating loss 199,600 389,000 -------- -------- Totals $ 351,000 $ 490,000 ------ ======== ======== Deferred Tax Liabilities ------------------------ Depreciable and amortizable assets $ 78,000 $ 25,000 ======== ======== At September 30, 2004 and 2003, the Company has a future income tax benefit for net write offs of its investment account in one of its Subsidiaries (Allstates Allcargo (U.S.) Inc.). The estimated future income tax benefit of this transaction is approximately $127,000. For financial statement purposes, a 100% valuation allowance has been recorded by management in the amount of $127,000 as of September 30, 2004 and 2003, and therefore, this future estimated tax benefit is not reflected in these financial statements. NOTE 8 - NET OPERATING LOSS CARRYFORWARD Allstates WorldCargo, Inc. (formerly known as Audiogenesis System, Inc.) generated net operating losses prior to its acquisition of Allstates Air Cargo, Inc. As a result of the reverse acquisition, the ownership structure of Worldcargo changed as of August 24, 1999; thereby limiting and reducing the future utilization of the Worldcargo net operating loss carryforwards. These pre-reverse acquisition net operating loss carryforwards will be limited and reduced based upon the Federal and New Jersey change in ownership net operating loss carryforward rules. Any net operating loss carryforwards to future tax years after limitation and reduction will generally be available to offset future taxable income of WorldCargo only, and will not be available to offset any future income of Allstates Air Cargo, Inc. or any other affiliated corporation. The income tax provisions do not include any of these pre-reverse acquisition net operating losses. Pursuant to a ruling received by the Internal Revenue Service, effective October 1, 1999, the operating losses incurred by Allstates Allcargo (UK), LTD. may be offset against taxable income of Allstates WorldCargo, Inc. in the consolidated filing of its Federal income tax returns. For tax purposes only, Allstates Allcargo US Inc. will treat the foreign subsidiary Allstates Allcargo (UK), LTD. as a disregarded entity and not as a subsidiary. Therefore, the tax provisions included in these consolidated financial statements utilize the operating loss for the fiscal year 2001 incurred by Allstates Allcargo (UK), Ltd. in calculating the Federal tax liability. There are no gains or losses in fiscal year 2002 since the foreign entity, Allstates Allcargo (UK), LTD., was dissolved. NOTE 9 - PENSION PLAN Effective May 1994, the Company adopted a discretionary non-standardized 401(k) profit sharing plan. The terms of the plan provide for eligible employees who have met certain F-14 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 and 2003 NOTE 9 - PENSION PLAN (Continued) Effective May 1994, the Company adopted a discretionary non-standardized 401(k) profit sharing plan. The terms of the plan provide for eligible employees who have met certain age and service requirements to participate by electing to contribute up to the lesser of 100% of an employees' qualified compensation or $13,000 and $12,000 for the calendar years ended 2004 and 2003, respectively. The Company may make matching contributions equal to a discretionary percentage, as determined by the Company, up to 6% of a participant's salary. Contributions to the plan for the years ended September 30, 2004 and 2003 totaled $43,493and $31,378, respectively. The plan also allows employer discretionary contributions allocated in accordance with participants' compensation. The Company did not make any discretionary contributions to the plan for the years ended September 30, 2004 and 2003. NOTE 10 - RELATED PARTY TRANSACTIONS Allstates Air Cargo, Inc. leases office space located in Forked River, New Jersey from a majority stockholder of the Company. Rent expense under these leases totaled $81,600 and $81,600 for the years ended September 30, 2004 and 2003, respectively. The Company has entered into royalty agreements for selected licensee locations with an officer and director of the Company, whereby the Company agrees to pay the officer a royalty equal to 5% of the gross profit per the contract. Royalty payments to this individual for the years ended September 30, 2004 and 2003 totaled $454,607 and $431,789, respectively. The Company entered into Employment Agreements with four of the Company's stockholders. The Employment Agreements are effective through December 31, 2004. The following is a summary of the terms of these agreements: Annual Stock Position Salary Bonus Options -------- -------- ------ -------- Chairman of the $329,811 3% of fiscal Yes Board year increase in net profits President/Chief $216,000 3% of fiscal Yes Executive year increase Officer in net profits Executive Vice $213,948 3% of fiscal Yes President/ year increase Chief Operating in net profits Officer Chief Financial $148,077 Discretionary Yes Officer NOTE 11 - STOCK OPTION PLAN On October 16, 2000, the Company filed a Form S-8 registration statement with the Securities and Exchange Commission, registering 4,500,000 shares of common stock with a $.0001 par value. The shares are registered on behalf of the Company, and will be issued pursuant to the Company's "2000 Stock Option and Stock Issuance Plan". As of September 30, 2004, no stock options have been issued. F-15 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 and 2003 NOTE 12 - DESCRIPTION OF LEASING ARRANGEMENTS The Company leases certain terminal facilities and its corporate headquarters under operating leases that expire over the next five years. These operating leases provide the Company with the option to renew it's lease at the fair rental value at the end of the lease term. Management expects that leases will be renewed or replaced by other leases in the normal course of business. Future minimum lease payments under all leases with initial or remaining noncancellable lease terms in excess of one year are as follows as of September 30, 2004: Years Ending September 30, -------------------- 2005 481,552 2006 320,266 2007 275,388 2008 157,965 2009 27,200 Thereafter - -------- Total $1,262,371 ========== Rent expense under operating leases for the years ended September 30, 2004 and 2003 was $554,321 and $462,284 respectively. NOTE 13 - SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for: 2003 2002 -------------- ----- ----- Income Taxes $ 52,355 $115,091 ======== ======== Interest $217,367 $226,714 ======== ======== NOTE 14 - LITIGATION On October 14, 2004, the 56.91% majority shareholder of the Company (the "Shareholder") (also employed by the Company as its Chairman) commenced an action against the Company and three of the Company's directors, entitled "Joseph M. Guido v. Allstates WorldCargo, Inc., Sam DiGiralomo, Barton C. Theile, and Craig D. Stratton," in the Superior Court of New Jersey, Chancery Division, Ocean County, bearing Docket No. OCN - C - 305-04. (Messrs. DiGiralamo, Theile, and Stratton are also employed by the Company as its President and Chief Executive Officer, its Executive Vice President and Chief Operating Officer, and its Chief Financial Officer.) The Shareholder alleged that in accordance with state law, on August 16, 2004, he had delivered to the Company's Secretary (1) an executed Written Consent in Lieu of a Special Meeting of the Stockholders of Allstates WorldCargo, Inc. dated August 16, 2004 (the "Written Consent"), (2) Amended and Restated Bylaws of the Company adopted pursuant to the Written Consent (the "A&R Bylaws"), and (3) a draft Information Statement pursuant to Section 14(c) of the 1934 Act (the "Draft Information Statement"). F-16 ALLSTATES WORLDCARGO, INC. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS September 30, 2004 and 2003 NOTE 14 - LITIGATION (Continued) The Shareholder alleged that pursuant to the Written Consent, he had amended the Company's bylaws to (among other things) expand the Board of Directors from four members to seven members, and appointed three persons (alleged to be independent) to fill the newly created board seats. He alleged that the Company was required by law to comply with his demand to notify the shareholders of his action, and that the Company's failure to do so was a violation of the law. He also alleged that the three individual defendants, both as directors and officers, owed the Company and its shareholders certain fiduciary duties and duty of loyalty to direct that "appropriate steps" be taken by the Company to allegedly comply with New Jersey state law "and other applicable law" in response to the Written Consent. The Majority Shareholder demanded temporary, preliminary, and injunctive relief enjoining a scheduled special Board of Directors meeting (the "Special Board Meeting") pending Company's performance of acts allegedly required by New Jersey law and by the 1934 Act. The Majority Shareholder also sought a permanent injunction requiring the Company and its Secretary to prepare and distribute to the Company's shareholders all notices allegedly required by state and federal law in connection with the Written Consent. Finally, he sought entry of an Order requiring the Company to file and serve upon him, within seven days after entry of a permanent injunction, a written report setting forth the manner and form in which the Company complied with the injunctions. The Company (and the three individual defendants) opposed the application for temporary relief upon the grounds that subsequent to his execution of the Written Consent, the Majority Shareholder advised one of the individual defendants that he had decided not to proceed with his amendment of the bylaws or his expansion of the Board of Directors. Defendants also alleged that the Majority Shareholder's actions were not in the best interest of the Company, and were motivated by self-interest, that because of such concerns, the Company needed time to determine its obligations under the law, and that the purpose of the Special Board Meeting (among others) was to consider "issues pertaining to the request by [the Majority Shareholder] to file the Schedule 14C presented to the Secretary of the Corporation." On October 28, 2004, the parties reached an agreement with regard to some essential terms of a settlement, pursuant to which (1) the Company's Board of Directors would not be expanded except by unanimous consent, (2) the Majority Shareholder and the individual defendants would enter into a voting agreement pursuant to which each would agree to vote his respective shares in the Company for the others as directors of the Company, (3) the Company would enter into new employment agreements (the precise terms of which were to be agreed upon) with the individual defendants (the existing employment agreements being due to expire on December 31, 2004), (4) the parties would exchange general releases, and (5) the Company would, to the extent lawfully required by the Majority Shareholder's existing employment agreement, reimburse him for the attorney's fees he incurred in connection with the action. It was anticipated that the complete terms of a settlement would be agreed upon, and that formal settlement documents would be prepared and executed. Such formal documentation is being prepared. F-17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position ---- --- -------- Joseph M. Guido 70 Chairman of the Board Sam DiGiralomo 61 President, CEO, Director Barton C. Theile 58 Executive Vice President, COO, Director Craig Stratton 53 CFO, Secretary, Treasurer, Director None of the above persons is related to any other of the above-named persons by blood or marriage. Based upon a review of filings with the Securities and Exchange Commission and written representations that no other reports were required, the Company believes that all of the Company's directors and executive officers complied during fiscal 2003 with the reporting requirements of Section 16(a) of the Securities Exchange Acts of 1934. JOSEPH M. GUIDO, Chairman of the Board, is the founder of Allstates Air Cargo, Inc., having served as its President and CEO from 1961 to August 1999. Mr. Guido became Chairman of the Board of the Company upon the acquisition of Allstates Air Cargo, Inc. on August 24, 1999. Prior to forming Allstates Air Cargo, Inc., Mr. Guido served as a freight supervisor with American Airlines, and as a sales and station manager for Air Cargo Consolidators. SAM DIGIRALOMO, became President, CEO and a director of the Company upon the acquisition of Allstates Air Cargo, Inc. on August 24, 1999. Prior to such acquisition, Mr. DiGiralomo had served as the President, Treasurer, CEO and a director of Audiogenesis Systems, Inc. since it was formed in January, 1997. From July 1981 through January 1997, Mr. DiGiralomo had been the President of the predecessor of Audiogenesis Systems, Inc., Genesis Safety Systems, Inc. Mr. DiGiralomo has more than 20 years of management and marketing experience. He has lectured at various trade associations and universities, and designed and authored several employee training programs. BARTON C. THEILE, became Executive Vice President, COO and a director of the Company upon the acquisition of Allstates Air Cargo, Inc. on August 24, 1999. Prior to such acquisition, Mr. Theile had served Allstates Air Cargo, Inc., as a sales representative, operations manager, Executive Vice President and COO over a period of 19 years. In addition to his experience at Allstates, Mr. Theile was President of Cargo Logistics Group, LLC. Mr. Theile has been involved in sales, marketing operations and administration in the transportation industry for over 25 years. CRAIG STRATTON, became CFO, Secretary, Treasurer and a director of the Company upon the acquisition of Allstates Air Cargo, Inc. on August 24, 1999. Prior to such acquisition, Mr. Stratton served as Chief Financial Officer for Allstates Air Cargo, Inc. since November 1997. Before joining Allstates, for three years, Mr. Stratton held the position of Corporate Controller for Programmer's Paradise, Inc. a cataloger and distributor of technical software. From 1990 through 1994, he was Controller for Baronet Corporation, an importer and distributor of leather goods accessories. From 1981 through 1990, he was employed by the finance department of Contel IPC, a specialty telephone systems manufacturer and service provider, where he held various positions of increasing responsibility in corporate accounting, including an appointment to Assistant Controller in 1987. In 1973, Mr. Stratton received his B.S. in accounting, and in 1980 he earned his MBA. Mr. Stratton has been a CPA since 1986. Audit Committee and Code of Ethics The Company does not presently have an audit committee, nor a Code of Ethics for its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, because the Company is not a listed company, and therefore is not required to do so. ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS EXECUTIVE COMPENSATION Summary Compensation Table Annual Compensation Long term compensation ----------------------- -------------------------- Name and Year Salary Bonus Other Awards All Principal ($) ($) Annual Restrict- Options/ LTIP Other Position Compen- ed Stock SARs(#) Pay- Compensa- sation ($) ($) outs($) tion ($) ---------- ---- ------- ----- --------- --------- --------- ------ -------- J. 2004 329,811 81,600(1) Guido, 2003 311,818 81,600(1) Chairman 2002 311,818 81,600(1) of the Board Sam 2004 216,000 526,957(3) DiGiralomo, 2003 208,000 413,864(2) President, 2002 208,000 319,595(2) CEO B. Theile, 2004 213,948 23,013(5) COO, 2003 206,316 9,271(4) Exec. VP 2002 207,922 4,188(6) Craig Stratton, 2004 148,077 7,800(7) CFO, 2003 129,039 7,800(7) Secretary, 2002 125,266 5,850(7) Treasurer

(1) Rental income from leasing of Forked River corporate office (2) Royalties paid in connection with site licensing agreements (3) Royalties paid in connection with site licensing agreements ($454,607), and reimbursement of income taxes due IRS in connection with insurance settlement ($72,350). (4) Car allowance for use of personal auto ($7,800) and commission paid for management services to GTD Logistics, Inc. ($1,471) (5) Car allowance for use of personal auto ($7,800) and commission paid for management services to GTD Logistics, Inc. ($15,213) (6) Commission paid for management services to GTD Logistics, Inc. (7) Car allowance for use of personal auto On August 24, 1999, the Company entered into Employment Agreements with three of the Company's stockholders, and in 2001, entered into an agreement with a fourth stockholder. The Employment Agreements are effective for the term beginning with inception through December 31, 2004. The following is a summary of the terms of these agreements: Annual Name/Position Salary Bonus Joseph M. Guido, Chairman of The Board $308,000 3% of fiscal year increase in net profits Sam DiGiralomo, President/Chief Executive Officer $208,000 3% of fiscal year increase in net profits Barton M. Theile, Executive Vice President/ Chief Operating Officer $207,922 3% of fiscal year increase in net profits Craig D. Stratton, Chief Financial Officer $154,000 At the discretion of the Board of Directors Under the terms of their respective employment agreements, each individual has agreed to work full time. The agreements also provide for health and life insurance benefits, participation in the Company's 401(k) plan, disability benefits, expense reimbursements, indemnification from civil or criminal actions arising out of the Executive's employment, financial and tax advice, tax "gross-up" provisions, severance pay (equal to 100% of compensation for a period of five years), and payments in the event of a change of control. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the beneficial ownership of the Common Stock of the Company as of December 20, 2004 by each person who was known by the Company to beneficially own more than 5% of the common stock, by each director and executive officer who owns shares of common stock and by all directors and executive officers as a group: No. of Shares Title Name and Address and Percent of of Beneficial Owner Nature of of Class Beneficial Class(1) Ownership Common Joseph M. Guido 18,500,000(2) 56.91% 4 Lakeside Drive South Forked River, NJ 08731 Common Sam DiGiralomo 4,850,000 14.92% 7 Doig Road, Suite 3 Wayne, NJ 07470 Common Barton C. Theile 500,000 1.54% 4 Lakeside Drive South Forked River, NJ 08731 Common Craig D. Stratton 200,000 0.61% 4 Lakeside Drive South Forked River, NJ 08731 All Officers and Directors as a Group 24,050,000 73.98% __________________ (1) Based upon 32,509,872 shares outstanding as of December 22, 2004. (2) Comprised of 18,250,000 shares owned by Joseph Guido and 250,000 shares owned by Teresa Guido, wife of Joseph Guido. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company's $2,000,000 line of credit, which expires January 31, 2005, is personally guaranteed by Joseph M. Guido, Chairman of the Board of the Company, and Teresa Guido, his wife. The Company leased real estate in one location from Joseph M. Guido during Fiscal 2004. Rent expense under this lease totaled $81,600 for the year ended September 30, 2004. The Company believes that this lease is commensurate with the terms which could be obtained from an unaffiliated third party. Prior to his becoming President, CEO and a director of the Company, the Company entered into royalty agreements for its Los Angeles and Chicago licensee locations with Sam DiGiralomo, whereby the Company agreed to pay Mr. DiGiralomo a royalty equal to 5% of the gross profit per the contract. Similar royalty agreements have since been executed and are active which encompass its Minneapolis, San Francisco, Indianapolis, Philadelphia, Boston, Orlando, Atlanta, Raleigh and Nashville licensee locations. Royalty payments to Mr. DiGiralomo for the year ended September 30, 2004 totaled $454,607. Pursuant to the Stock Purchase Agreement and Plan of Reorganization between Audiogenesis Systems, Inc. and Allstates Air Cargo, Inc., the Company assumed 101 Notes payable from Joseph M. Guido to the Estate of A.G. Hoffman, Jr., aggregating $2,511,730 in principal, with repayment over 101 years at annual principal payments of $25,000 plus interest at 7% per year. All or any of the notes may be paid at any time before maturity without any prepayment penalty. In the event of a default under the notes by the Company, Joseph M. Guido remains personally liable for the notes and the 101 shares of Allstates Air Cargo, Inc. common stock held as security under the notes (representing 48.1% of the issued and outstanding common stock of Allstates Air Cargo, Inc.) may be sold at public or private sale. The Company's former legal counsel, Stephen M. Robinson, Esq., beneficially owns 1,200,000 shares of common stock. Mr. Robinson retired from practice in July, 2003. Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Our independent auditing firm during the fiscal years ended September 30, 2004 and September 30, 2003 was Cowan, Gunteski and Co., who have audited our financial statements since fiscal 1999. All audit and permissible non-audit services provided by Cowan, Gunteski and Co. are pre-approved by the Allstates Board of Directors, as the Company is not required to have an audit committee at the present time. The fees of Cowan, Gunteski and Co. billed to the Company for each of the last two fiscal years for audit services and other services are shown below: Audit fees. Cowan, Gunteski and Co. billed the Company an aggregate of $102,824 and $75,580 during fiscal 2004 and 2003 for professional services rendered for the audit of the Company's financial statements and the review of the interim financial statements included in the Company's quarterly reports. Audit-related fees. During the fiscal years ended September 30, 2004 and 2003, Cowan, Gunteski and Co. did not provide or bill for any audit-related services that were not covered under audit fees. Tax fees. The aggregate fees billed during fiscal 2004 and 2003 for tax services rendered by Cowan, Gunteski and Co. were $24,599 and $27,437, respectively. All other fees. During the fiscal years ended September 30, 2004 and 2003, Cowan, Gunteski and Co. did not provide or bill for other services that were not included above. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following exhibits are filed pursuant to Item 601 of Regulation S-K. Exhibit Description No. 3.01* Articles of Incorporation of Audiogenesis Systems, Inc. dated January 14, 1997 filed as an exhibit to Registrant's Registration Statement on Form 10-SB, filed October 23, 1998 3.02* By-laws of Registrant, filed as an exhibit to Registrant's Registration Statement on Form 10-SB, filed October 23, 1998 10.01* Echlocation Technology License Agreements, filed as an exhibit to Registrant's Registration Statement on Form 10-SB, filed October 23, 1998 10.02* Agreement with Allstates Air Cargo, Inc. dated 9/18/98, filed as an exhibit to Registrant's Registration Statement on Form 10-SB, filed October 23, 1998 10.03* Promissory Note to Marshall E. Levine Ph.D. Profit Sharing Plan, filed as an exhibit to Registrant's Registration Statement on Form 10-SB, filed October 23, 1998 10.04* Genesis Safety Systems, Inc. Stock Option Plan, filed as an exhibit to Amendment No. 1 to Registrant's Registration Statement on Form 10-SB, filed March 11, 1999 10.05* Stock Purchase Agreement and Plan of Reorganization dated June 30, 1999, filed as an exhibit to Registrant's Form 8-K filed July 12, 1999 10.06* Employment Agreement with Joseph M. Guido, , filed as an exhibit to Registrant's Form 8-K filed September 9, 1999 10.07* Employment Agreement with Sam DiGiralomo, filed as an exhibit to Registrant's Form 8-K filed September 9, 1999 10.08* Employment Agreement with Barton C. Theile, filed as an exhibit to Registrant's Form 8-K filed September 9, 1999 10.09* Certificate of Amendment to the Certificate of Incorporation of Registrant changing the name of the corporation from Audiogenesis Systems, Inc. to Allstates WorldCargo, Inc., filed as an exhibit to Registrant's Form 8-K filed December 1, 1999 11.01+ Statement re: Computation of Earnings per Share 21.01* List of Subsidiaries of Registrant, filed as an exhibit to Registrant's Registration Statement on Form 10-SB, filed October 1, 1999 31.1+ Certification of Registrant's Chief Executive Officer, Sam DiGiralomo, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2+ Certification of Registrant's Chief Financial Officer, Craig D. Stratton, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1+ Certification of Registrant's Chief Executive Officer, Sam DiGiralomo, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2+ Certification of Registrant's Chief Financial Officer, Craig D. Stratton, pursuant to Section 906of the Sarbanes-Oxley Act of 2002. __________________ * Filed previously, incorporated herein by reference + Filed herewith (b) Reports on Form 8-K: No reports on Form 8-K were filed during the last quarter of the period covered by this report. SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLSTATES WORLDCARGO, INC. BY: /s/ Sam DiGiralomo President and CEO DATED: December 29, 2004 In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Signature Title Date By: /s/ Joseph M. Guido Chairman of the Board of December 29, 2004 Directors By: /s/ Sam DiGiralomo President, CEO and December 29, 2004 Director By: /s/ Barton C. Theile Executive Vice President, December 29, 2004 COO and Director By: /s/ Craig D. Stratton Secretary, Treasurer, and December 29, 2004 Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

ALLSTATES WORLDCARGO INC 10-K