10KSB/A 1 form10ksba.txt FORM 10-KSB/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB/A Amendment No. 1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2001 ------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to ----------- ---------- Commission File Number 0-10176 DOMINION RESOURCES, INC. (Name of small business issuer in its charter) Delaware 22-2306487 -------- ---------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 355 Madison Avenue, Morristown, New Jersey 07960 ------------------------------------------------ (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code (973) 538-4177 -------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value ---------------------------- (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained herein, and no disclosure will be contained, to the best of the issuer's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or in any amendment to this Form 10-KSB. [ ] For the year ended September 30, 2001, the issuer's total revenues were $3,297 On January 11, 2002, the aggregate market value of the voting stock of Dominion Resources Inc. (consisting of Common Stock, $.01 par value) held by non-affiliates of the Issuer was approximately $1,617,000 based upon the high bid price for such Common Stock on said date in the over-the-counter market as reported by the National Quotation Bureau. On such date, there were 9,252,576 shares of Common Stock of the Issuer outstanding. Transitional Small Business Disclosure Format Yes [ ] No [X] PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL: Dominion Resources, Inc. (the "Company") was, commencing February 1996 through September 1999, principally engaged, through a majority-owned subsidiary, Resort Club, Inc. ("Resort Club"), in the business of offering membership interests to the general public which allows its members to vacation in resort condominiums. In September, 1999, the Board of Directors adopted a plan to dispose of the Resort Club through sale or liquidation. In connection with the Company's disposal plan, Resort Club ceased operations as of September, 1999 and is treated in this Annual Report as a discontinued operation. See Note 2 to Notes to Consolidated Financial Statements. From time to time, the Company has acquired real property or other assets where it believes there are favorable investment opportunities. At September 30, 2001, these investments included certain real estate assets including 27 vacant condominium lots located in Great Gorge Village, a condominium development comprising a total of approximately 1,300 units situated adjacent to the ski area and summer participation theme park near Vernon, New Jersey. The Company intends to construct condominiums on these properties for the purpose of making short-term vacation rentals. In that connection, the Company has entered into a joint venture agreement with The Spa at Crystal Springs, Inc. with respect to the joint development of the lots owned by the Company. The Company also owns three condominium units which it is currently renting located in Fort Lee, New Jersey and in addition, the Company also owns an approximately 1,560 square foot building in Selma, Alabama. In March 1996, the Company entered into a $1.75 million secured loan with The RiceX Company ("RiceX"). Subsequently, in December 1998, the Company entered into a Loan Participation Agreement with FoodCeuticals, L.L.C. ("FoodCeuticals") whereby the Company contributed its secured loan, including accrued interest, due from RiceX in the aggregate of approximately $2 million and FoodCeuticals contributed its secured loan due from RiceX in the amount of $1.85 million. FoodCeuticals had made its loan to RiceX in December 1998. RiceX is an agribusiness food technology company which has developed a proprietary process to stabilize rice bran. Its shares of Common Stock are quoted on the OTC Bulletin Board under the symbol "RICX.." In conjunction with its loan to RiceX, FoodCeuticals received an aggregate of 940,679 shares of RiceX's common stock and a warrant to purchase an aggregate of 3,743,540 shares of RiceX's common stock at an exercise price of $0.75 per share. Collectively, the Company's and FoodCeuticals secured loans of $2 million and $1.85 million, respectively, are hereinafter referred to as the Participation Loan. Pursuant to the Loan Participation Agreement, the Company and FoodCeuticals share pro rata as to the Participation Loan, warrants, shares and collateral due, payable or granted under the December 1998 Loan Agreement to the extent that their participation amount bears to the total Participation Loan. As a result, the Company received 409,421 shares of RiceX common stock and a warrant to purchase 1,429,338 shares of RiceX common stock. In November 1999, RiceX repaid the borrowing incurred in 1996 in the amount of $1.75 million, plus accrued interest of approximately $320,750. Pursuant to the Loan Participation Agreement, approximately $912,900 of these proceeds were paid over to FoodCeuticals as its pro-rata share of the loan proceeds. On December 31, 2000, RiceX repaid the $1.85 million note. Approximately $949,000 of the proceeds of this payment was paid to the Company as its pro-rata share of the loan proceeds. The Company continues to hold 88,287 shares of RiceX common stock and the warrant to purchase 1,423,808 shares of RiceX common stock. The Company's joint venture agreement with The Spa at Crystal Springs, Inc. will include the contribution by the Company of its 27 condominium building lots and any additional lots it may acquire within Great Gorge Village, at Vernon, New Jersey. The Spa at Crystal Springs, Inc. will obtain mortgage financing for the development of the properties and make a capital contribution to the joint venture. The Spa at Crystal Springs, Inc. will receive a management fee of approximately 50% of the gross rental income from the condominium units to be constructed. The remaining cash flow, net of debt service and reserves for capital maintenance, from the rental income will be divided equally between the Company and The Spa at Crystal Springs, Inc. The Company will provide administrative services to the venture. The Company is currently engaged in a review of its future business objectives and plans. In that regard, it may dispose of certain of its assets, acquire additional assets or enter into a business combination or other transactions with others or seek to raise additional capital in an effort to fund any of such ventures. On October 5, 1999, the Company entered into an agreement to convert 366,655 shares of the Company's redeemable common stock, par value $0.01 per share for 1,622,000 shares of the Company's common stock, par value $0.01 per share. In the third quarter of fiscal 2001, the Company and the holder of the redeemable common stock agreed to enter into a definitive agreement effective May 15, 2001. As of March 1, 2000, the Company negotiated the sale of its 65% common stock interest in Resort Club. The transaction was effective October 1, 1999 and requires the Company to use its best efforts but is not obligated to restructure certain notes payable to GAR, Inc., which aggregate approximately $11.5 million at September 30, 1999. In addition, the Company agreed to pay down existing mortgages on condominium units owned by Resort Club and fund a deficit of up to $800,000 to enable Resort Club to fulfill its obligations pursuant to its agreements with its members. The sales price for the Resort Club stock is in the form of a royalty payment based on 3% of future gross sales revenue. As a result of the sale, a gain of $10,302,712 was recorded which is broken out as follows: 2 Net liability of Resort Club as of September 30, 1999 $33,523,317 Less: Contingency reserve for mortgages, fulfillment and GAR, Inc. restructuring 2,424,218 Subtotal $31,099,099 Less: Write-down to net realizable value, the Company's notes receivable due from Resort Club 20,796,387 Net gain $10,302,712 For federal income tax purposes, the Company did not include Resort Club, its former 65% owned subsidiary, in its federal consolidated income tax return. Accordingly, the Company did not record an income tax expense in connection with the gain on sale. Such gain was the result of a reduction of net liabilities of Resort Club, which the Company has no obligation to pay. These net liabilities were previously included in the consolidated financial statements of the Company in accordance with the generally accepted accounting principles. For the fiscal years ended September 30, 2001 and September 30, 2000, Resort Club sold two and four memberships, respectively, for an aggregate selling price of $25,050 and $45,212, respectively, for which the Company earned royalty fees of $752 and $1,356, respectively, which the Company fully reserved. The Company's operations are currently limited, and therefore it experiences no competition or seasonal aspects to its activities. ORGANIZATION The Company was incorporated under the laws of the State of Delaware on October 11, 1979. EMPLOYEES The Company has no full time employees. It employs two persons, including its President, on a part time basis. 3 ITEM 2. DESCRIPTION OF PROPERTY The Company's executive offices are at 355 Madison Avenue, Morristown, New Jersey. Subsequent to November 30, 2000, The Company leases the space on a month-to-month basis at a rental of $500 per month. The Company owns an approximately 1,560 square foot office building located in Selma, Alabama. The building is unoccupied and is not in use by the Company. See Item 1. Business for a description of other real estate assets owned by the Company. ITEM 3. LEGAL PROCEEDINGS In October, 1999, the Company received a Letter and Examination Report from the District Director of the Internal Revenue Service that proposed a tax deficiency based on an audit of the Company's consolidated 1995 tax return. The Examination Report proposed adjustments that the Company does not agree to. The adjustments included disallowed deductions from the Company's principal subsidiary in the amount of $5,124,000 which represented accruals and deductions related to membership fulfillment expense and membership product cost. The Internal Revenue Service's position was that these deductions should have been capitalized. Additionally, approximately $498,000 of deductions representing a write down of packaged loans acquired from Resolution Trust Company and certain normal business deductions were disallowed. The Internal Revenue Service also disallowed $830,000 as a compensation deduction related to a former officer's stock redemption, claiming the disallowed deduction should have been classified as treasury stock. The Company is working with the IRS towards a resolution. As part of the proposed resolution, the Company has agreed to certain adjustments to increase net taxable income in the amount of $5,806,659 proposed by the IRS. Concurrently, the IRS has agreed to review certain adjustments proposed by the Company to decrease net taxable income in the amount of $5,794,514 which will substantially reduce or eliminate any additional taxes assessed as a result of the audit. In addition to the above, the Company has available approximately $19,980,000 of Net Operating Losses ("NOL's") which can be carried back to 1996. This amount is available to be carried back two years. Any remaining NOL's after the carry back is available to offset future taxable income. Due to the amended return as well as availability of the NOL's, the Company did not accrue a loss contingency for the IRS claim. 4 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the quarter ended September 30, 2001. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded in the over-the-counter market and quotations appear on the OTC Bulletin Board under the symbol DNIR. The following table sets forth the range of high and low bid and asked quotations for the Common Stock during the past two fiscal years as derived from reports furnished by the National Quotation Bureau, Inc. QUARTER ENDED BID ASKED HIGH LOW HIGH LOW December 31, 1999 $.25 $.25 $.4375 $.4375 March 31, 2000 * * * * June 30, 2000 * * * * September 30, 2000 * * * * December 31, 2000 $.11 $.11 $ .25 $ .25 March 31, 2001 $.15 $.15 $ .53 $ .53 June 30, 2001 $.17 $.17 $ .17 $ .17 September 30, 2001 $.19 $.19 $ .19 $ .19 ------------------- *Quotations for the Common Stock were not published. The above quotations represent prices between dealers and do not include retail mark-ups, mark-downs or commissions. They do not necessarily represent actual transactions. As of December 18, 2001, the number of record holders of the Company's Common Stock was approximately 2,500. The Company has never paid a cash dividend on its Common Stock and anticipated capital requirements make it unlikely that any cash dividends will be paid on the Common Stock in the foreseeable future. 5 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION Introduction The following discussions and analysis of financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and accompanying notes. Results of Operations Fiscal Year 2001 Compared With Fiscal Year 2000 Continuing Operations Total revenues were $3,297 in fiscal 2001 compared with $3,597 in fiscal 2000 or a decrease of $300 or 8.34%. The decrease in revenues was primarily the result of decreased rental income from the company's condominiums in Fort Lee, New Jersey. Other operations expenses were $68,628 in fiscal 2001 compared with $95,400 in fiscal 2000, or a decrease of $26,772 or 28.06 %. The decrease was primarily the result of additional charges incurred in fiscal 2000 relating to moving certain equipment no longer used to storage. General and administrative expenses decreased to $1,061,152 in fiscal 2001 from $1,264,467 in fiscal 2000, or by $203,315 or 16.08 % primarily as a result of lower legal and professional fees. Included in fiscal 2001 is an accrual of $350,000 relating to the settlement of a claim (see Note 9 to Notes to the Consolidated Financial Statements). Included in fiscal 2000, is an accrual relating to an additional assessment from the State of Alabama in the amount of $346,000. Depreciation and amortization was $13,077 in fiscal 2001, compared to $10,775 in fiscal 2000, resulting in an increase of $2,302, or 21.36 %. This decrease was the result of approximately $23,000 of depreciable fixed assets purchased in 2001. Interest income was $50,619 in fiscal 2001, compared with $717,655 in fiscal 2000. The decrease of $667,036 was primarily the result of a reserve of interest income relating to the Stonehill Recreation loan receivable. Interest expense decreased to $450,874 in fiscal 2001, compared with $603,787 in fiscal 2000. The decrease of $152,913 was the result of a decrease in debt and a decrease in the interest rate charged on the indebtedness owing to Berkowitz Wolfman, Inc. 6 During the quarter ended December 31, 2000, the Company purchased a loan participation interest in indebtedness of RiceX, Inc. held by a member of FoodCeuticals, LLC, a limited liability company organized for the purpose of making an investment in and acquiring indebtedness of RiceX. The principal amount of the member's loan participation interest purchased was $91,142, which represented the remaining balance due, after reflecting repayments of principal by RiceX, from an original $200,000 investment. In consideration for agreeing to purchase the loan participation interest, the member also assigned to the Company its interest in 48,866 shares of RiceX common stock and a warrant to purchase 194,470 shares of RiceX common stock which were part of the members' original investment. RiceX repaid the remaining outstanding principal amount of the loan on or about December 31, 2000. During the quarter ended March 31, 2001, the Company recorded receipt of the RiceX shares and warrants at a per share value of $0.31 and $.01, respectively, for an aggregate of $17,215. Amortization of deferred financing costs consists primarily of deferred financing costs associated with the Company obtaining its loans from Binghamton Savings Bank and Public Loan Corp. These costs decreased to $52,082 in fiscal 2001 from $117,034 in fiscal 2000, or a decrease of $64,952. In fiscal 2000, the Company incurred a gain on the sale of its marketable securities of $74,985. In fiscal 2001, the Company incurred debt conversion expense of $214,823 in connection with the conversion of 366,655 shares of the Company's redeemable common stock. As of September 30, 2000, the Company held 39,421 shares of RiceX common stock and a warrant to purchase 1,229,338 shares of RiceX common stock. Based on the market value of the RiceX common stock at September 30, 2000, the Company adjusted the carrying value of these shares and warrants in its financial statements to reflect a valuation allowance of $459,191 which primarily related to an adjustment to the carrying value in the RiceX warrant of $442,562. This arises because the market value of the RiceX common stock at September 30, 2000 was less than the exercise price of the warrants. As of September 30, 2001 there was no material change in the market value of the RiceX common stock. Accordingly, no further adjustments were made to the carrying value of the RiceX shares and warrants during fiscal 2001. Through September 30, 1999, the Company had loaned an aggregate $3.1 million to Stonehill Recreation, the former owner and operator of a multi-purpose spa facility located in the Great Gorge Village, Vernon, New Jersey, of which approximately $2.1 was outstanding at September 30, 2001. These loans are due on demand and are unsecured. During the fiscal year ended September 30, 2000, a secured lender foreclosed against the assets of Stonehill which resulted in ownership of Stonehill's spa facility 7 being transferred to The Spa at Crystal Springs, Inc. ("The Spa at CS") in July 2000. The Company owns, adjacent to the Spa facility, 27 vacant lots on which it is planning to construct residential condominiums. In addition, the Company is negotiating the purchase of approximately 70 additional condominium lots and 3 commercial condominium lots. The Spa at CS agreed, in consideration of the Company entering into a joint venture agreement with it with respect to the joint development of certain real estate lots, to indemnify the Company from loss or damage the Company may suffer as a result of claims, costs or judgments against it arising from loans made to Stonehill Recreation up to the amount of $3.1 million less a real estate tax refund which has been received of $468,726. Such indemnification agreement remains in effect from April 1, 2001 until March 31, 2003. Pursuant to such indemnification agreement, The Spa at CS paid approximately $613,000 to the Company during the year ended September 30, 2001, which includes a real estate tax refund of approximately $469,000. As part of the indemnity agreement, The Spa at CS agreed to limit its secured borrowings to no more than $4.1 million, subject to its ability to use its assets to cross-collateralize indebtedness of entities affiliated with the Spa. Discontinued Operations As of March 1, 2000, the Company negotiated the sale of its 65% common stock interest in Resort Club. The transaction was effective October 1, 1999 and requires the Company to use its best efforts but is not obligated to restructure certain notes payable to GAR, Inc., which aggregate approximately $11.5 million at September 30, 1999. In addition, the Company agreed to pay down existing mortgages on condominium units owned by Resort Club and fund a deficit of up to $800,000 to enable Resort Club to fulfill its obligations pursuant to its agreements with its members. Pursuant to the terms of the transaction, the Company is entitled to receive a 3% royalty payment of the gross revenues of Resort Club. No minimum payment of royalty is required under the agreement and the transaction was not conditioned upon the receipt of any payment under the royalty arrangement. When recording this transaction as a sale, the Company took into consideration that the 3% royalty payment is subordinate to the prior payments under the GAR Notes of approximately $11.5 million. The Company concluded, in view of these obligations, that realization of any royalty payment is remote and not a material part of the transaction. As a result of the sale, a gain of approximately $10.3 million was recorded which is broken out as follows: Net liability of Resort Club as of September 30, 1999 $33,523,317 Less: Contingency reserve for mortgages, fulfillment and GAR, Inc. restructuring 2,424,218 Subtotal $31,099,099 Less: Write-down to net realizable value, the Company's notes receivable due from Resort Club 20,796,387 Net gain $10,302,712 8 For federal income tax purposes, the Company did not include Resort Club, its former 65% owned subsidiary, in its federal consolidated income tax return. Accordingly, the Company did not record an income tax expense in connection with the gain on sale. Such gain was the result of a reduction of net liabilities of Resort Club, which the Company has no obligation to pay. These net liabilities were previously included in the consolidated financial statements of the Company in accordance with the generally accepted accounting principles. For the fiscal years ended September 30, 2001 and September 30, 2000, Resort Club sold two and four memberships, respectively, for an aggregate selling price of $25,050 and $45,212, respectively, for which the Company earned royalty fees of $752 and $1,356, respectively, which the Company fully reserved. Fiscal Year 2000 Compared With Fiscal Year 1999 Continuing Operations Total revenues were $3,597 in fiscal 2000 compared with $23,367 in fiscal 1999 or a decline of $19,770 or 84.61%. The decline in revenues was primarily the result of decreased rental income from the Company's condominiums in Fort Lee, New Jersey. Other operations expenses were $95,400 in fiscal 2000 compared with $24,865 in fiscal 1999, or an increase of $70,535 or 283.67%. The increase was primarily the result of expenses related to moving the Company's brewery equipment located in Vernon, New Jersey to storage. The Company previously had a security interest in the equipment and took possession in lieu of payment. The brewery has not been operational since 1994. General and administrative expenses increased to $1,264,467 in fiscal 2000 from $819,247 in fiscal 1999, or by $445,220 or 54.35% primarily as a result of additional taxes due to the State of Alabama, in the amount of approximately $346,000, offset by decreased legal fees in connection with the GAR restructuring. Depreciation and amortization was $10,775 in fiscal 2000, compared to $14,926 in fiscal 1999, resulting in a decrease of $4,151 or 27.81%. This decrease was the result of certain assets being fully depreciated at September 30, 1999. Interest income was $816,285 in fiscal 2000, compared with $1,448,117 in fiscal 1999. The decrease of $631,832 was primarily the result of reserving interest income from Stonehill Recreation. 9 Interest expense increased to $702,417 in fiscal 2000, compared with $652,009 in fiscal 1999. The increase of $50,408 was the result of the increase in the Berkowitz Wolfman Assoc., Inc. loan and the increased loan facility with Binghamton Savings Bank and increased interest rates. During fiscal 1999, the Company recognized financing fee income of $531,714 in connection with the FoodCeuticals transaction. Amortization of deferred financing costs consists primarily of deferred financing costs associated with the Company obtaining its loans from Binghamton Savings Bank and Public Loan Corp. These costs increased to $117,034 in fiscal 2000 from $102,709 in fiscal 1999, or an increase of $14,321 which was the result of a full year's amortization of costs associated with the Binghamton loan closing on January 15, 1999. In fiscal 2000, the Company incurred a gain on the sale of its marketable securities of $74,985 as compared to a loss on the sale of marketable securities in fiscal 1999 of $38,832. In fiscal 1999, the Company incurred a gain on the sale of Real Estate and RTC Mortgages of $11,764. Discontinued Operations For the period ended September 30, 2000, Resort Club sold four memberships for an aggregate selling price of $45,212 for which the Company earned a royalty fee of $1,356 which the Company fully reserved. Liquidity and Capital Resources During fiscal 2001, the Company had a net loss of $2,536,310. Included in the net loss is depreciation of $13,077, amortization of deferred financing costs of $52,082, a write off of the Stonehill Recreation Note Receivable of $459,861 and debt conversion expense of $214,823 and an income tax expense of $286,944 all of which are non-cash expenses. Also during fiscal 2001, changes in assets and liabilities included a decrease in cash resulting from changes in prepaid expenses and other assets of $25,781, deferred revenue of $35,210, accounts payable and accrued liabilities of $51,504 offset by an increase in other receivables of $66,052 offset by an increase in cash resulting from changes in membership receivables of $618,643. After reflecting the net changes in assets and liabilities, net cash used in operations was approximately $937,300. 10 During fiscal 2001, investing activities provided net cash of approximately $1,503,600 and includes primarily the proceeds of the FoodCeuticals loan of $948,655 and proceeds from the Stonehill Recreation Note of $612,926. During fiscal 2001, financing activities used net cash of $578,980 which resulted from the repayment of borrowings. Accordingly, during fiscal 2001, the Company's cash decreased by approximately $12,700. The Company remains liable as guarantor on approximately $823,600 of secured debt of its former subsidiary, Resort Club. These liabilities are currently being paid out of Resort Club membership receivables. To the extent these liabilities are not paid, the Company will remain liable for the balance. The Company obtains the funds to support its activities primarily from collections of the Stonehill Recreation note receivable outstanding at September 30, 2001 in the amount of approximately $2.1 million pursuant to an indemnity agreement with The Spa at CS. The Spa at CS agreed, in consideration of the Company entering into a joint venture agreement with it with respect to the joint development of certain real estate lots, to indemnify the Company from loss or damage the Company may suffer as a result of claims, costs or judgments against it arising from loans made to Stonehill Recreation up to the amount of $3.1 million less a real estate tax refund which has been received of $468,726. Such indemnification agreement remains in effect from April 1, 2001 until March 31, 2003. The loans owing by Stonehill Recreation to the Company are due on demand and are unsecured. Pursuant to such indemnification agreement, The Spa at CS paid approximately $613,000 to the Company during the year ended September 30, 2001, which includes a real estate tax refund in the amount of approximately $469,000. As part of the indemnity agreement, The Spa at CS agreed to limit its secured borrowings to no more than $4.1 million, subject to its ability to use its assets to cross-collateralize indebtedness of entities affiliated with the Spa. During fiscal 2000, the Company's loan with Berkowitz Wolfman increased by approximately $1,490,000 which included accrued interest of approximately $349,000. During the same period the Company repaid the loan by approximately $2,748,000. Included in the amount repaid was the assignment of the Trust Inventory held in the Resort Club Inventory Trust valued at $272,332, Resort Club membership receivables valued at $879,082, after deducting obligations to be paid by Berkowitz Wolfman out of such receivables, and a real estate tax refund of $468,926. At September 30, 2001, the Company was indebted to Berkowitz Wolfman in the amount of approximately $2.4 million. The assignment of the remainder interest in the Trust's condominium units was valued at $272,332 for the purpose of determining the amount to be credited against the debt, representing 11 the parties' estimate at the time of the present value, discounted at 10%, of the value of the future interest in the condominium inventory, based upon the actual remaining years each condominium would be held in the trust. Under the terms of the assignment, this valuation can be subsequently challenged by either party. Accordingly, if this valuation is subsequently challenged and the effect is to reduce the valuation, the Company's obligation to Berkowitz Wolfman may be greater. The note owing to Berkowitz Wolfman was originally due on demand and in December 2000 the due date was extended to December 1, 2001. In the second quarter of fiscal 2001, the due date was further extended to December 1, 2002. At the same time, the interest rate on the note was reduced from 15% to 10% per annum. In consideration for this extension and reduction of the interest rate, the Company made the assignments as described above in the aggregate amount of approximately $1.6 million. Berkowitz Wolfman agreed to pay obligations of Resort Club Aggregating approximately $2.1 million out of the membership receivables assigned to it. Future Business Plans Through fiscal 1999, the Company's primary business operations were in connection with the sale of membership interests through Resort Club. During the third quarter of fiscal 1999, the Company substantially reduced its operating activities with respect to selling new Membership Interests through Resort Club primarily as a result of its inability to obtain financing. At the end of the fiscal year ended September 30, 1999, these operations were treated as discontinued. The Company is currently engaged in a review of its future business objectives and plans. In that regard, it may dispose of certain of its assets, acquire additional assets or enter into a business combination or other transactions with others or seek to raise additional capital in an effort to fund any of such ventures. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1996 With the exception of historical matters, the matters discussed in this Report are "forward-looking statements" as defined under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties. Forward-looking statements made herein include, but are not limited to, the statements in this Report regarding the Company's plans and objectives relating to its products and services, its future economic performance, the Company's future operations, including plans or objectives relating to its intentions to acquire interests and enter into acquisition and other agreements to acquire or invest in and develop other business interests, regarding raising additional capital and the adequacy of that capital to fund the Company's proposed business plans and objectives, and the ability of the Company's management to complete negotiations for the acquisition of targeted business activities, and the terms on which those acquisitions or transactions can be completed. 12 Such statements also include statements relating to the ability of the Company to provide the funds to enable those businesses to adequately develop and pursue their business plans and to the liquidity of the market for the Company's securities and the ability of investors to sell their securities purchased. Forward-looking statements made in this Report include the assumptions made by management as to the future growth and business direction of the Company. If the Company's assumptions are incorrect, the Company may be unsuccessful in developing as a viable business enterprise. The Company's ability to realize revenues from and raise additional capital for the business plans discussed herein cannot be assured. Under such circumstance, an investor's entire investment will be in jeopardy and may be lost. The Company's business plan has evolved over time and the Company expects that its plans will evolve further in the future. These changes create additional risks and uncertainties to the investor. The Company's inability to meet its plans and objectives or the consequences to it from adverse developments in general economic or capital market conditions and its inability to raise additional capital could have a material adverse effect on it. The Company cautions investors that various risk factors accompanying those forward-looking statements are described, among other places, under the caption "Risk Factors" herein. They are also described in the Company's Quarterly Reports on Form 10-QSB/A, and its Current Reports on Form 8-K. These risk factors could cause the Company's operating results, financial condition and ability to fulfill its plans to differ materially from those expressed in any forward-looking statements made in this Report and could adversely affect its financial condition and its ability to pursue its business strategy and plans. RISK FACTORS An investment in the Company's securities involves a high degree of risk, including, but not necessarily limited to, the risk factors described below. Each prospective investor should carefully consider the following risk factors inherent in and affecting the Company and its business before making an investment decision to purchase the Company's securities. No Current Operations or Revenues. The Company has no current operations or source of revenue. The Company has no significant assets or financial resources. All material operations were discontinued in September, 1999. The Company's future is dependent upon its ability to raise additional capital and apply the proceeds to acquire successfully business activities. There is a risk that the Company will be unable to continue as a going concern and consummate a business acquisition. The Company will, in all likelihood, sustain operating expenses without corresponding revenues, at least until the consummation of a business acquisition. This may result in the Company incurring net operating losses that could increase continuously until it can consummate a business acquisition. There can be no assurance that the Company can identify a suitable business opportunity and consummate a business acquisition or that any transaction the Company consummates will be on favorable terms or result in profitable operations. 13 The Company May Not Be Successful in Entering Into Agreements In Order to Pursue its Business Plans. The Company has no arrangement, agreement or understanding with respect to engaging in a merger with, joint venture with or acquisition of, a private or public entity or any interest in such an entity. No assurances can be given that it will successfully identify and evaluate suitable business opportunities or that it will conclude a business acquisition. The Company cannot guarantee that it will be able to negotiate any business transactions on favorable terms. Because of the Company's existing outstanding obligations, it may be unsuccessful in entering into any business transaction. Need for Additional Capital. The Company had cash of $13,346 and liabilities of $4,246,440 including current liabilities of $1,725,436 as of September 30, 2001. In addition to the capital it will require to fund a potential business acquisition, the Company may require additional financing in order to fund the operations of any business it may acquire, as well as repay existing outstanding indebtedness. This financing may consist of the issuance of debt or equity securities. These funds might not be available, if needed, or might not be available on terms acceptable to the Company and may result in dilution to existing investors. The Company remains liable as guarantor on approximately $823,600 of secured debt of its former subsidiary, Resort Club. These liabilities are currently being paid out of Resort Club membership receivables. To the extent these liabilities are not paid, the Company will remain liable for the balance. Dependence on Others For Funds. In order to have funds for its current activities, the Company remains substantially dependent upon The Spa at CS to fulfill its obligations to under an indemnity agreement relating to the Stonehill Recreation note receivable. It also is dependent upon Berkowitz/Wolfman, Inc. for funds from time to time. Berkowitz/Wolfman, Inc. is a creditor of the Company but is not obligated to advance funds to the Company. The failure of The Spa at CS or Berkowitz/Wolfman, Inc. to provide funds to the Company to meet its requirements could materially adversely affect the Company's financial condition and ability to meet its obligations as they come due. Any Business the Company May Possibly Acquire May Never Become Profitable. There can be no assurance that the Company will enter into an acquisition with or acquire an interest in a business having a significant or successful operating history. Any such business may have a history of losses, limited or no potential for earnings, limited assets, negative net worth or other characteristics that are indicative of development stage companies. There can be no assurance that after an acquisition by the Company or the Company acquires an interest, the business can be operated so as to develop significant revenues and cash flow and become profitable. Management May Not Devote a Sufficient Amount of Time to Seeking a Target Business. While seeking a business acquisition, management anticipates devoting no more than approximately eight (8) hours per month. As a result, the Company may expend a considerable period of time identifying and negotiating with an acquisition candidate. This extended period of time may result in continuing losses to the Company. 14 Dependence On Part-Time Management. Currently, the Company has no employees other than its officers and Directors. It is the Company's intention to limit its employees to its sole officer, Joseph Bellantoni. Mr. Bellantoni, who is the Company's President and Chief Financial Officer, is engaged in other activities and will devote no more than approximately eight (8) hours per month to the Company's activities. Therefore, the day-to-day operations of any company or business that is acquired by the Company will have to be performed by outside management or management of the acquired company. The Company cannot assure investors that it will be able to obtain experienced and able outside management to run any company or business that may acquire. Possible Government Regulation. Although the Company is subject to the periodic reporting requirements under the Securities Exchange Act of 1934, as amended, and files annual, quarterly and other reports, management believes it will not be subject to regulation under the Investment Company Act of 1940, as amended (the "Investment Company Act"), since it will not be engaged in the business of investing or trading in securities. If the Company engages in a business acquisition which results in it holding passive investment interests in a number of entities, it could be subject to regulation under the Investment Company Act. If so, it would be required to register as an investment company and could be expected to incur significant registration and compliance costs. The Company has obtained no formal determination from the Securities and Exchange Commission (the "SEC" or "Commission") or any opinion of counsel as to its status under the Investment Company Act. A violation of the Act could subject it to material adverse consequences. Continued Control by Existing Management. The Company's management retains significant control and investors may be unable to meaningfully influence the course of action of the Company. The existing management is able to control substantially all matters requiring shareholder approval, including nomination and election of directors and approval or rejection of significant corporate transactions. There is also a risk that the existing management of the Company will pursue an agenda which is beneficial to themselves at the expense of other shareholders. There Is No Assurance Of An Active Public Market For The Company's Common Stock And The Price Of the Company's Common Stock May Be Volatile. Given the relatively minimal public float and trading activity in the Company's securities, there is little likelihood of any active and liquid public trading market developing for its shares. If such a market does develop, the price of the shares may be volatile. Since the shares do not qualify to trade on any exchange or on NASDAQ, if they do actually trade, the only available market will continue to be through the OTC Bulletin Board or in the "pink sheets". It is possible that no active public market with significant liquidity will ever develop. Thus, investors run the risk that investors may never be able to sell their shares. Possible Future Dilution As A Result Of Business Transaction. The Company's business plan is based upon effectuating a business acquisition or other transaction using the proceeds of capital intended to be raised. Any such acquisition transaction may result in the Company issuing securities as part of the transaction. The issuance of previously authorized and un-issued 15 common shares could result in substantial dilution to the Company's shareholders which could possibly result in a change in control or management of the Company. There can be no assurance that additional capital can be raised or an acquisition completed. The Company's Shares Are Subject To Penny Stock Reform Act Of 1990. The Company's securities are subject to certain rules and regulations promulgated by the Commission pursuant to the Securities Enforcement Remedies and Penny Stock Reform Act of 1990 (the "Penny Stock Rules"). Such rules and regulations impose strict sales practice requirements on broker-dealers who sell such securities to persons other than established customers and certain "accredited investors." For transactions covered by the Penny Stock Rules, a broker-dealer must make a special suitability determination for the purchaser and must have received the purchaser's written consent for the transaction prior to sale. Consequently, such rule may affect the ability of broker-dealers to sell the Company's securities and may affect investors' abilities to sell any shares they acquire. The Penny Stock Rules generally define a "penny stock" to be any security not listed on an exchange or not authorized for quotation on the Nasdaq Stock Market and has a market price (as defined by the rules) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. For any transactions by broker-dealers involving a penny stock (unless exempt), the rules require delivery, prior to a transaction in a penny stock, of a risk disclosure document relating to the market for penny stocks. Disclosure is also required to be made about compensation payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stocks. Issuance Of Additional Shares. The Company's Articles of Incorporation currently authorize its Board of Directors to issue up to 25,000,000 shares of Common Stock. Any additional issuances of any of the Company's securities will not require the approval of shareholders and may have the effect of further diluting the equity interest of shareholders. Limited Market for Common Stock. There has been a very limited market for the Company's Common Stock. Accordingly, although quotations for the Company's Common Stock have been, and continue to be, published on the OTC Bulletin Board and the "pink sheets" published by the National Quotation Bureau, Inc., these quotations, in the light of the Company's operating history, continuing losses and financial condition, are not necessarily indicative of the value of the Company. Such quotations are inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. ITEM 7. FINANCIAL STATEMENTS Financial statements are attached hereto. See pages F-1, et seq. 16 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the two fiscal years ended September 30, 2001, the Company has not filed any Current Report on Form 8-K reporting any change in accountants in which there was a reported disagreement on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT The directors and executive officers of the Company are as follows:
NAME AGE PRINCIPAL OCCUPATION DIRECTOR SINCE Joseph R. Bellantoni * 39 Treasurer; Chief Financial Officer; Chief 1995 Executive Officer and Director Maureen Kosminsky 36 Vice President and Secretary -- Paul J. Donahue (+)* 68 Director 1995 Thomas Conlin (+) 67 Director 1996
------------ (*) Member of the Executive Committee. The Executive Committee is responsible for oversight with respect to executive decisions. (+) Member of the Audit Committee. Directors and Executive Officers. Mr. Bellantoni is a Director and President of the Company. Mr. Bellantoni joined the Company as a Director and Treasurer in April, 1995. He devotes approximately 10% of his time to the Company. Mr. Bellantoni was previously employed by Great American Recreation, Inc., the former owner/operator of Vernon Valley/Great Gorge ski area and Action Park located in Vernon, New Jersey, through October 1996. Mr. Bellantoni had been employed by Great American since February 1989, where he became Vice President of Administration in 1993 and Chief Financial Officer in June 1994. Mr. Bellantoni is currently a director and Chief Financial Officer of reorganized Great American, GAR, Inc. From May 1987 to February 1989, Mr. Bellantoni was employed by Jaymont Properties, Inc., an owner, developer, and manager of commercial real estate as a Project Analyst. Prior to working with Jaymont, Mr. Bellantoni was employed by KPMG from November 1983 through May 1987. Maureen Kosminsky is Vice President and Secretary of the Company. 17 Mr. Donahue is currently employed by Ballyowen Golf Club as a Pro Shop Manager. Prior to working at Ballyowen, Mr. Donahue was employed as a Bank Examiner with the State of Florida in 1994 and from 1990 through 1993, he was employed by Midlantic Bank as a Vice President. Mr. Conlin became a Director of the Company in November 1996. He has been engaged in the business of real estate sales for more than the past five years. Prior to his involvement in real estate, Mr. Conlin was a member of the New York Stock Exchange. No Director is a director of any other company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of that Act or any company registered as an investment company under the Investment Company Act of 1940 with the exception of Joseph R. Bellantoni who is also a director of GAR, Inc. Compliance with Section 16(a) of the Exchange Act Based solely on a review of Forms 3 and 4 and any amendments thereto furnished to the Company pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934, or representations that no Forms 5 were required, the Company believes that with respect to fiscal 2000, all Section 16(a) filing requirements applicable to its officers, directors and beneficial owners of more than 10% of its equity securities were timely complied with in fiscal 2000. ITEM 10. EXECUTIVE COMPENSATION The following table sets forth all cash compensation paid or accrued by the Company during the three years ended September 30, 2001 to its Chief Executive Officer and any other executive officer who received compensation in excess of $100,000 in any such fiscal year. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------------------------------------------ BONUS/ANNUAL SECURITIES LONG-TERM NAME AND INCENTIVE UNDERLYING INCENTIVE ALL OTHER PRINCIPAL POSITION YEAR SALARY AWARD OPTIONS PAYOUTS COMPENSATION -------------------------------------------------------------------------------------------------------------------- Joseph R. Bellantoni, Chief 2001 $15,000 $-0- $-0- $-0- $4,800 Executive Officer 2000 $75,000 $-0- $-0- $-0- $ -0- 1999 $100,000 $-0- $-0- $-0- $ -0-
No options were granted or exercised during fiscal 2001. 18 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of December 18, 2001, information with respect to each person (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who is known to the Company to be the beneficial owner of more than five percent of the Company's Common Stock as well as the number of shares of Common Stock beneficially owned by all Directors of the Company and all Directors and officers of the Company as a group. The percentages have been calculated on the basis of treating as outstanding for a particular holder, all shares of the Company's Common Stock outstanding on said date and all shares issuable to such holder in the event of exercise of outstanding options owned by such holder at said date.
Name of Beneficial Owner (1) Number of Shares Beneficially Percentage of Outstanding Common ------------------------ ------------------------------ -------------------------------- Owned(2) Stock ----- ----- Joseph R. Bellantoni - 0 - - 0 - Paul J. Donahue - 0 - - 0 - Thomas Conlin - 0 - - 0 - All Officers and Directors as a Group - 0 - - 0 - (three persons) Amos Phillips 1,111,111 12.0% Venturetek, LP 555,555 6.0% Kinder Investments 555,555 6.0%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since October 1, 1998, the Company has not been a party to any material transaction with any officer, Director or holder of more than 5% of the outstanding common stock of the Company. PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K Page ---- (a) (1) Financial Statements. Independent Auditors' Report S-1 Consolidated Balance Sheet - September 30, 2001 S-2-3 Consolidated Statements of Operations years ended September 30, 2001 and 2000 S-4 Consolidated Statements of Stockholders' Deficit - years ended September 30, 2001 and 2000 S-5 Consolidated Statements of Cash Flows - years ended September 30, 2001 and 2000 S-6-7 Notes to Consolidated Financial Statements S-8-21 19 (2) FINANCIAL STATEMENT EXHIBITS - NONE (b) Reports on Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended September 30, 2001. (c) Exhibits: 3 (a) Certificate of Incorporation of Registrant and Amendment No.1 thereto (1) (b) Certificate of Amendment dated June 24, 1992 to Certificate of Incorporation reducing the authorized shares of Common Stock to 25,000,000, increasing the par value to $.01 per share and effecting a one-for-four reverse stock split (2) (c) By-laws of Registrant (1) 4 (d) Specimen Common Stock Certificate, $.01 par value (2) 10(h) Consulting Agreement and First Amendment to the Consulting Agreement dated November 11, 1989 between the Registrant and Gene W. Mulvihill (3) 10(i) Resort Club Inventory Trust dated as of June 15, 1999 among Resort Club, Inc., Comet Management, L.L.C. and Resort Club Fulfillment Corporation (filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended September 30, 2000) 10(j) Amendment dated as of June 15, 1999 to Resort Club Inventory Trust (filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended September 30, 2000) 10(k) Agreement dated as of July 1, 1999 among Diamond Leasing and Management Corp., Dominion Resources, Inc., and Resort Club, Inc. (filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended September 30, 2000) 10(l) Agreement dated as of June 15, 1999 between Resort Club, Inc. and Resort Club Inventory Trust (filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended September 30, 2000) 10(m) Campground and Amenities Trust dated as of June 15, 1999 between Resort Club Inventory Trust and Resort Club, Inc. (filed as an exhibit to the Company's Annual Report on Form 10-KSB for the year ended September 30, 2000) ----------- (1) Filed as an exhibit to the Registration Statement on Form S-1 (File No. 2-66471) of the Registrant and incorporated herein by reference. (2) Filed as an exhibit to the Registrant's annual report on Form 10-KSB for the year ended September 30, 1992 and incorporated herein by reference. (3) Filed as an exhibit to the Registrant's annual report on Form 10-K for the year ended September 30, 1989 and incorporated herein by reference. 22. Subsidiaries of Registrant: NAME STATE OF INCORPORATION ---- ---------------------- Dominion Cellular, Inc. New Jersey Diamond Leasing and Management Corp. Delaware Diamond World Funding Corp. New Jersey 20 (d) Financial statements omitted from annual report to shareholders filed herewith - None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DOMINION RESOURCES, INC. Dated: May 7, 2002 By: /s/ Joseph R. Bellantoni -------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, 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 /s/ Joseph R. Bellantoni Treasurer, Chief Financial May 7, 2002 ------------------------ Officer, Chief Executive Joseph R. Bellantoni Officer and Director /s/ Maureen Kosminsky Vice President and Secretary May 7, 2002 ------------------------ Maureen Kosminsky /s/ Paul J. Donahue Director May 7, 2002 ------------------------ Paul J. Donahue /s/ Thomas Conlin Director May 7, 2002 ------------------------ Thomas Conlin 21 INDEPENDENT AUDITORS' REPORT Dominion Resources, Inc. and Subsidiaries Morristown, New Jersey We have audited the accompanying consolidated balance sheet of Dominion Resources, Inc. and Subsidiaries as of September 30, 2001, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the two fiscal years ended September 30, 2001. These consolidated financial statements 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the 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 financial statements referred to above present fairly, in all material respects, the financial position of Dominion Resources, Inc. and Subsidiaries as of September 30, 2001, and the results of its operations and cash flows for the two fiscal years ended September 30, 2001, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has no material revenues, has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Liebman, Goldberg, & Drogin, L.L.P. Garden City, New York December 26, 2001 (May 2, 2002 as to Notes 1,2,4,8 and 11) S-1 DOMINION RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET SEPTEMBER 30, 2001 ASSETS Current assets: Cash and cash equivalents $ 13,346 Investment in marketable securities 554 Other receivables 5,494 Mortgage receivables 33,043 RTC Mortgages 8,361 Prepaid expenses and other assets 33,266 Total current assets 94,064 Property, equipment, furniture, and fixtures, net of accumulated depreciation and amortization (Note 1) 157,181 Other assets: Mortgage receivables 150,422 Other receivables 44,267 Note Receivable - Stonehill Recreation (Note 4) 2,056,000 Investment in RiceX, Inc. (Note 5) 41,827 Joint Venture - Condominiums at Stonehill 495,941 Real estate - Fort Lee Properties 137,328 Total other assets 2,925,785 Total assets $3,177,030 See accompanying notes S-2 DOMINION RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (CONTINUED) SEPTEMBER 30, 2001 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued liabilities (Note 6) $ 1,461,798 Secured Debt, current portion (Note 8) 248,999 Notes payable, (Note 8) 14,639 Total current liabilities 1,725,436 Long-term liabilities: Secured Debt, net of current maturities (Note 8) 2,494,460 Notes Payable (Note 8) 26,544 Total long-term liabilities 2,521,004 Commitments and contingencies (Note 9) Stockholders' deficit: Common stock, $0.01 par value; Authorized - 25,000,000 shares; issued and outstanding - 9,252,576 shares 92,526 Additional paid-in capital 7,093,087 Accumulated deficit (6,813,251) Accumulated Other Comprehensive Loss (40,859) Less: 1,350,646 shares held in treasury (1,400,913) Total stockholders' deficit (1,069,410) Total liabilities and stockholders' deficit $ 3,177,030 See accompanying notes S-3 DOMINION RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000 ---- ---- Revenues Other revenue $ 3,297 $ 3,597 Total revenues 3,297 3,597 Expenses: Other operations 68,628 95,400 General and administrative expenses 1,061,152 1,264,467 Depreciation and amortization 13,077 10,775 Total expenses 1,142,857 1,370,642 Loss from operations (1,139,560) (1,367,045) Other income (expenses): Interest income 50,619 717,655 Interest expense (450,874) (603,787) RiceX 17,215 0 Amortization of deferred financing costs (52,082) (117,034) Gain on sale of marketable securities -0- 74,985 Debt conversion expense (214,823) -0- Unrealized loss on valuation of RiceX investment -0- (459,191) Bad debt expense (459,861) (532,922) Total other income (expenses) (1,109,806) (920,294) Loss from continuing operations before income taxes (2,249,366) (2,287,339) Income taxes (Note 7) 286,944 -0- Loss from continuing operations (2,536,310) (2,287,339) Discontinued Operations: Gain on sale of Resort Club less applicable taxes of $-0- -0- 10,302,712 Net income from discontinued operations -0- 10,302,712 Net income (loss) $ (2,536,310) $ 8,015,373 Loss per common share - continuing operations $ (0.31) $ (0.30) Income per common share - discontinued operations $ 0.00 $ 1.35 Net income (loss)per common share $ (0.31) $ 1.05 Weighted average number of share used in computing net income (loss) per share 8,243,825 7,630,576
See accompanying notes S-4 DOMINION RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED SEPTEMBER 30, 2001 and 2000
Capital Common Par in Excess Accum Other Treasury Stock Value of Par Deficit Comprehensive Loss Stock Total ----- ----- ------ ------- ------------------ ----- ----- Balance - September 30, 1999 7,630,576 $76,306 $5,819,484 $(12,292,314) 0 $(1,400,913) $(7,797,437) Net Income 8,015,373 8,015,373 Unrealized losses on securities (34,836) (34,836) Balance - September 30, 2000 7,630,576 76,306 5,819,484 (4,276,941) (34,836) (1,400,913) 183,100 Conversion of Redeemable Common Stock 1,622,000 16,220 1,273,603 1,289,823 Net Loss (2,536,310) (2,536,310) Unrealized Losses on Securities (6,023) (6,023) Balance - September 30, 2001 9,252,576 $92,526 $7,093,087 $(6,813,251) (40,859) $(1,400,913) $(1,069,410)
See accompanying notes S-5 DOMINION RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000
2001 2000 ---- ---- Cash flows from operating activities: Net income (loss) $ (2,536,310) $ 8,015,373 Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation and amortization 13,077 10,775 Amortization of deferred financing costs 52,082 117,034 Amortization of interest income -0- (60,017) Gain on sale of Resort club -0- (10,302,712) Bad debt expense 459,861 532,922 Debt conversion expense 214,823 -0- Income tax benefit 286,944 -0- Unrealized loss on valuation of RiceX investment -0- 459,191 Changes in assets and liabilities: Membership receivables 618,643 988,618 Other receivables 66,052 202,845 Prepaid expenses and other assets (25,781) (106) Accounts payable and accrued liabilities (51,504) (91,729) Deferred revenue (35,210) (140,841) Net cash (used in) operating activities (937,323) (268,647) Cash flows from investing activities: Sale of Marketable Securities 702 31,012 Investment in real estate and real estate related activities (18,459) 1,122 RiceX Note Receivable -0- 1,750,000 RiceX Loan Participation 948,655 (948,655) RiceX Investment (17,215) 329,593 Stonehill Recreation note receivable 612,926 45 Capital Expenditures (23,032) (39,706) Net cash provided by investing activities 1,503,577 1,123,411 Cash flows from financing activities: Repayment of borrowings (578,980) (835,802) Purchase of redeemable common stock -0- (75,000) Net cash(used in) financing activities (578,980) (910,802) Decrease in cash and cash equivalents (12,726) (56,038) Cash and cash equivalents, October 1, 26,072 82,110 Cash and cash equivalents, September 30, $ 13,346 $ 26,072
See accompanying notes S-6 DOMINION RESOURCES, INC. AND SUBSIDIARIES SUPPLEMENTARY SCHEDULE OF NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 2001 2000 ---- ---- Gain on sale of Resort Club (Note 2) -0- (10,302,712) Membership receivables (Note 2) -0- (1,456,917) Accrued Interest and other receivables (Note 2) -0- (1,065,472) Prepaid expenses and other assets (Note 2) -0- (235,566) Accounts Payable and accrued expenses (Note 2) -0- (673,311) Fixed assets (Note 2) -0- (91,412) Debt (Note 2) -0- 13,825,390 Membership Receivables (Notes 2&8) (1,701,989) -0- Real estate related activities (Notes 2&8) (272,332) -0- Accounts Payable (Notes 2&8) 822,907 -0- Debt (Notes 2&8) 1,151,414 -0- Common Stock (Note 10) (16,220) -0- Additional Paid In Cap (Note 10) (1,273,603) -0- Accumulated deficit (Note 10) 214,823 -0- Redeemable Common Stock (Note 10) 1,075,000 -0- Total Non-Cash Operating, Investing and Financing Activities $ -0- $ -0- See accompanying notes S-7 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 1. Summary of Significant Accounting Policies Nature of Business Dominion Resources, Inc. (the "Company") was incorporated under the laws of the State of Delaware on October 11, 1979. From time to time, the Company has acquired real property or other assets where it believes there are favorable investment opportunities. Principles of Consolidation The accompanying consolidated financial statements include the accounts of Dominion Resources, Inc. and the accounts of all majority-owned subsidiaries, hereinafter referred to as the "Company". The consolidated balance sheet is a classified presentation, which distinguishes between current and non-current assets and liabilities. The Company believes that a classified balance sheet provides a more meaningful presentation consistent with the business cycles of the Company's operations. All significant inter-company accounts and transactions have been eliminated in consolidation. Going Concern The Company's consolidated financial statements are prepared in conformity with generally accepted accounting principles, which contemplates continuation of the Company as a going concern. For the year ended September 30, 2001 the Company incurred a net loss of $2,536,310. In addition, the Company used net cash from operating activities of $937,323. As of September 30, 2001, the Company's current liabilities exceeded its current assets by $1,631,372 and it had no material revenues. These factors create uncertainty whether the Company can continue as a going concern. The Company's plans to mitigate the effects of the uncertainties of the Company's continued existence are: 1) to raise additional equity capital; 2) to restructure its existing debt; and 3) to develop a business plan which will generate positive operating cash flow. Management believes that these plans can be effectively implemented in the next twelve-month period. The Company's ability to continue as a going concern is dependent on the implementation and success of these plans. The financial statements do not include any adjustments in the event the Company is unable to continue as a going concern. S-8 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 1. Summary of Significant Accounting Policies (Continued) Property, Equipment, Furniture, and Fixtures Property, equipment, furniture, and fixtures are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of seven years for furniture, fixtures and equipment, and thirty years for buildings and improvements. Property, equipment, furniture, and fixtures consisted of the following at September 30, 2001: Buildings and improvements $127,502 Furniture, fixtures and equipment 134,215 Subtotal 261,717 Less: Accumulated depreciation and amortization 104,536 Net property, equipment, furniture, and fixtures $157,181 Depreciation expense for the years ended September 30, 2001 and 2000 is $13,077 and $10,775, respectively. Earnings Per Common Share The Company adopted Financial Standards Board (FASB) Statement No. 128, "Earnings per Share". The statement established standards for computing and presenting earnings per share (EPS). It replaced the presentation of primary EPS with a basic EPS and also requires dual presentation of basic and diluted EPS on the face of the income statement. Basic income/(loss) per share was computed by dividing the Company's net income/(loss) by the weighted average number of common shares outstanding during the period. The weighted average number of common shares used to calculate income/(loss) per common share for the years ended September 30, 2001 and 2000 was 8,243,825 and 7,630,576 respectively. Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Concentration of Credit Risk The Company currently maintains cash accounts with financial institutions, which at various times may exceed the maximum insured by the Federal Depository Insurance Corporation. S-9 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 1. Summary of Significant Accounting Policies (Continued) Investments Investment securities, which consist principally of common stock, are accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard requires that debt and equity securities be classified as either trading, available-for-sale or held-to-maturity. As of September 30, 2001 all of the Company's securities were available for sale. Securities classified as available for sale are recorded at fair value. Unrealized gains and losses, net of the related tax effects, on available for sale securities are excluded from earnings and are reported in stockholders' equity as a component of accumulated other comprehensive earnings (loss) until realized. The cost of securities sold is based on the specific identification method. Unrealized losses that are other than temporary are recognized in earnings. A loss is recognized to the extent by which the fair market value of the investment security has declined below its carrying value and the value is other than a temporary impairment. Comprehensive Income (Loss) SFAS No. 130 "Reporting Comprehensive Income," requires unrealized gains and losses on the Company's available for sale securities to be included in Other Comprehensive Income. The Company has recorded unrealized losses on securities as Other Comprehensive Loss in the amount of $6,023 and $34,836 for the years ended September 30, 2001 and 2000, respectively. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Fair Value of Financial Instruments SFAS No. 107 "Disclosures about Fair Value of Financial Instruments", requires disclosures of the fair value information whether or not recognized in the balance sheet where it is practicable to estimate that value. The carrying value of cash, cash equivalents, receivables and notes payable approximate fair value. S-10 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 1. Summary of Significant Accounting Policies (Continued) Rental Income The Company owns three condominium units in Fort Lee, New Jersey. The Company purchased a note and mortgage on these units in December 1995. The Company acquired the fee ownership of these units in July 1996 through a deed in lieu of foreclosure. The Company is holding these units for resale. Two of the units had been rented on a month - to - month basis. As of September 30, 2001, these two units were not rented. The third unit, which is rent controlled, is currently rented for $300 per month. The Company recognizes rental income as it is received. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation 2. Discontinued Operations - Resort Club In September, 1999, the Board of Directors adopted a plan to dispose of the Resort Club through sale or liquidation. In connection with the Company's disposal plan, Resort Club ceased operations as of September 1999. Net liabilities of the Resort Club at September 30, 1999 are as follows: 1999 ---- Cash $ 72,642 Member receivables, net 1,266,167 Accounts receivable other, net 179,798 Other assets 235,566 Fixed assets, net 91,412 Accounts payable and accrued liabilities (1,560,157) Secured debt (2,193,797) Unsecured debt (11,631,593) Net liabilities $(13,539,962) S-11 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 2. Discontinued Operations - Resort Club (continued) Net assets exclude approximately $3,500,000 of membership receivables that were credited against advances that were made from its former parent and affiliated corporation, Dominion Resources, Inc. and Diamond Leasing and Management Corp., a subsidiary of Dominion Resources, Inc. Net liabilities of Resort Club exclude debt owed to Dominion Resources, Inc. and Diamond Leasing and Management Corp., of approximately $19,983,000 as of September 30, 1999. At the time Resort Club was a subsidiary, this debt and corresponding receivable had been eliminated in the consolidated financial statements of the Company. Of the outstanding indebtedness of Resort Club as of September 30, 1999 aggregating approximately $15,386,000, the Company, including its subsidiaries were liable on an aggregate of approximately $1,394,000 of the secured debt of it former subsidiary, Resort Club. To the extent these liabilities of approximately $1,394,000 were not paid out of the liquidated assets of Resort Club, the Company would remain liable for the balance. Resort Club Accommodation Inventory Held in Trust Management determined that in order to adequately assure to the members the availability of the Resort Club accommodations, title to certain of the resort condominium properties needed to be conveyed to and held by a trustee. A trustee holds fee simple title and leasehold interests to 42 condominium units including 27 units that are the subject of mortgages aggregating as of September 30, 1999 approximately $1,194,000. These mortgages will be repaid out of the net member receivables of Resort Club aggregating approximately $1,266,000 as of September 30, 1999. The trustee will administer the collection of the annual maintenance assessments from membership owners, which will be applied to the payment of insurance, taxes, maintenance fees and capital improvements. Under the trust agreement, the Company has the right to rent unused inventory and collect rental income. However, the Company has not collected such income. Such income is used to cover the deficiency in meeting the annual maintenance and operating expenses of the properties. It is unlikely, because of the magnitude of the deficiency, that any such rental collections will ever be collected by the Company. Under the trust agreement, the Company has the right to replace the Trustee of the Trust on thirty days notice. Under the terms of the trust, the trust assets will revert to the Company upon the expiration of the term of the trust and from time to time prior thereto to the extent the assets are not required by the Trust to fulfill the availability requirements of members. The trust will continue until the expiration date of the last membership interest, estimated to occur primarily in 2023 to 2024. The condominiums in trust have been recorded on the Company's books in the amount of $272,000 as of September 30, 2000. In fiscal 2001 the Company transferred its interest in the Trust assets to Berkowitz Wolfman as a reduction in principal of an outstanding note and as consideration for modifying the loan (see Note 8). S-12 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 2. Discontinued Operations - Resort Club (continued) As of March 1, 2000, the Company negotiated the sale of its 65% interest in Resort Club. The transaction is effective October 1, 1999, and requires the Company to use its best efforts but is not obligated to restructure certain notes payable to GAR, Inc. and others, which aggregate approximately $11,483,000 at September 30, 1999. In addition, the Company agreed to pay down existing mortgages on condominium units owned by Resort Club and fund a deficit of up to $800,000 to enable Resort Club to fulfill its obligations pursuant to its agreements with members. Pursuant to the terms of the transaction, the Company is entitled to receive a 3% royalty payment of the gross revenues of Resort Club. No minimum payment of royalty is required under the agreement and the transaction was not conditioned upon the receipt of any payment under the royalty arrangement. When recording this transaction as a sale, the Company took into consideration that the 3% royalty payment is subordinate to the prior payments under the GAR Notes of approximately $11.5 million. The Company concluded, in view of these obligations, that realization of any royalty payment is remote and not a material part of the transaction. As a result of the sale, a gain of $10,302,712 was recorded which is broken out as follows: Net liability of Resort Club as of September 30, 1999 $33,523,317 Less: Contingency reserve for mortgages, fulfillment and GAR, Inc. restructuring 2,424,218 Subtotal 31,099,099 Less: Write-down to net realizable value, the Company's notes receivable due from Resort Club 20,796,387 Net gain $10,302,712 For Federal Income tax purposes, the Company did not include Resort Club, its former 65% owned subsidiary, in its Federal consolidated income tax return. Accordingly, the Company did not record an income tax expense in connection with the gain on sale. Such gain was the result of a reduction of net liabilities of Resort Club, which the Company has no obligation to pay. These net liabilities were previously included in the consolidated financial statements of the Company in accordance with the generally accepted accounting principles. For the years ended September 30, 2001 and 2000, Resort Club sold two and four memberships for an aggregate selling price of $25,050 and $45,212,respectively. Accordingly, the Company earned a royalty fee of $752 and $1,356, respectively, which the Company fully reserved. During the second quarter of fiscal 2001 the Company transferred its remaining interest in Resort Club membership receivables to Berkowitz Wolfman in the amount of $879,082 as a reduction in principal and as consideration for modifying the loan(see Note 8). Membership receivables were recorded net of certain obligations assumed by Berkowitz Wolfman including the repayment of secured debt of approximately $1,630,724 and funding of the Trust fulfillment deficit of approximately $480,000. The Company is a guarantor of approximately $823,600 of the secured debt. S-13 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 3. Related Party Transactions Since October 1, 1998, the Company has not been a party to any material transactions with any officers, directors or holders of more than 5% of the outstanding common stock of the Company. 4. Note Receivable- Stonehill Recreation Corporation Through September 30, 1999, the Company had loaned an aggregate $3,128,787 to Stonehill Recreation, the former owner and operator of a multipurpose spa facility located in the Great Gorge Village, Vernon, New Jersey. These loans are due on demand and are unsecured. During the year ended September 30, 2000, a secured lender foreclosed against the assets of Stonehill, which resulted in ownership of Stonehill's spa facility being transferred to The Spa at Crystal Springs, Inc. ("The Spa at CS") in July 2000. The Company owns 27 condominium lots in Vernon, New Jersey. In addition, the Company is negotiating the purchase of approximately 70 additional condominium lots and 3 commercial condominium lots. The Spa at CS agreed, in consideration of the Company entering into a joint venture agreement with it with respect to the joint development of certain real estate lots, to indemnify the Company from loss or damage the Company may suffer as a result of claims, costs or judgments against it arising from loans made to Stonehill Recreation up to the amount of $3.1 million less a real estate tax refund which has been received in the amount of $468,726. Such indemnification agreement remains in effect from April 1, 2001 until March 31, 2003. The loans owing by Stonehill Recreation to the Company are due on demand and are unsecured. Pursuant to such indemnification agreement, The Spa at CS paid approximately $613,000 to the Company during the year ended September 30, 2001, which includes a real estate tax refund of approximately $469,000. As part of the indemnity agreement, The Spa at CS agreed to limit its secured borrowings to no more than $4.1 million, subject to its ability to use its assets to cross-collateralize indebtedness of entities affiliated with the Spa. Because the indemnity does not cover interest, the Company recorded a discount of approximately $459,900 in order to yield an effective interest rate of 9.5% assuming a balloon payment on March 31, 2003. For the year ended September 30, 2001 the Company recorded $106,590 of original issue discount interest which it fully reserved. Accordingly, the carrying value of the Stonehill Recreation note receivable as of September 30, 2001 was approximately $2,056,000. 5. RiceX Note In March 1996, the Company entered into a $1.75 million secured loan with The RiceX Company ("RiceX"). Subsequently, in December 1998, the Company entered into a Loan Participation Agreement with FoodCeuticals, L.L.C. ("FoodCeuticals") whereby the Company contributed its secured loan, including accrued interest, due from RiceX in the aggregate of approximately $2 S-14 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 5. RiceX Note (continued) million and FoodCeuticals contributed its secured loan due from RiceX in the amount of $1.85 million. FoodCeuticals had made its loan to RiceX in December 1998. RiceX is an agribusiness food technology company, which has developed a proprietary process to stabilize rice bran. Its shares of Common Stock are quoted on the OTC Bulletin Board under the symbol "RICX". In conjunction with its loan to RiceX, FoodCeuticals received an aggregate of 940,679 shares of RiceX's common stock and a warrant to purchase an aggregate of 3,743,540 shares of RiceX's common stock at an exercise price of $0.75 per share. Collectively, the Company's and FoodCeuticals secured loans of $2 million and $1.85 million, respectively, are hereinafter referred to as the Participation Loan. Pursuant to the Loan Participation Agreement, the Company and FoodCeuticals share pro rata as to the Participation Loan, warrants, shares and collateral due, payable or granted under the December 1998 Loan Agreement to the extent that their participation amount bears to the total Participation Loan. As a result, the Company received 409,421 shares of RiceX common stock and a warrant to purchase 1,429,338 shares of RiceX common stock. In November 1999, RiceX repaid the borrowing incurred in the amount of $1.75 million, plus accrued interest of approximately $320,750. Pursuant to the Loan Participation Agreement, approximately $912,900 of these proceeds were paid over to Foodceuticals as its pro-rata share of the loan proceeds. On December 31, 2000 RiceX repaid the $1.85 million note. Approximately $949,000 of the proceeds of this payment was paid to the Company as its pro-rata share of the loan proceeds. As of September 30, 2000, the Company held 39,421 shares of RiceX common stock and a warrant to purchase 1,229,338 shares of RiceX common stock. Based on the market value of the RiceX common stock at September 30, 2000, the Company adjusted the carrying value of these shares and warrants in its financial statements to reflect a valuation allowance of $459,191 which primarily related to an adjustment to the carrying value in the RiceX warrant of $442,562. This arises because the market value of the RiceX common stock at September 30, 2000 was less than the exercise price of the warrants. As of September 30, 2001 there was no material change in the market value of the RiceX common stock. Accordingly, no further adjustments were made to the carrying value of the RiceX shares and warrants during fiscal 2001. During the second quarter of fiscal 2001 the Company completed a transaction for the purchase of 48,866 shares and a warrant to purchase 194,470 shares of RiceX Common Stock from FoodCeuticals, LLC. S-15 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 6. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities at September 30, 2001 consist of the following: Accounts payable $ 22,130 Accrued reserve to former president 350,000 Accrued real estate taxes 55,326 Accrued condo association fees 80,110 Accrued income taxes 921,214 Accrued interest 33,018 $1,461,798 The accrued income taxes of $921,214 represent unpaid taxes including interest and penalties due the state of Alabama, which remain unpaid. 7. Income Taxes The tax expense (benefit) for the years ended September 30, 2001 and 2000 consists of the following components: 2001 2000 ---- ---- Current Federal $ 286,944 $(43,118) State -0- (22,213) 286,944 (65,331) Deferred Federal -0- -0- State -0- -0- -0- -0- $ 286,944 $(65,331) The income tax benefit for the year does not bear the expected relationship between pretax loss and the federal corporate income tax rate of 34% because of the direct effect of state and local income taxes. The reconciliation between the actual and expected federal tax is as follows: Federal corporate tax rate of 34% and applicable AMT applied to pretax loss $ 286,944 $(39,155) State and local taxes, net of federal benefit -0- (20,418) Effect of non-deductible entertainment -0- (5,758) Effect of tax vs. book depreciation -0- -0- Effect of capital loss carry forward -0- -0- Effect of NOL limitation -0- -0- Total tax benefit $ 286,944 $(65,331) S-16 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 7. Income Taxes (continued) Deferred income taxes as reported on the balance sheet consists of: September 30, -------------------------- 2001 2000 ----------- ----------- Deferred tax assets $ 6,597,923 $ 5,733,308 Deferred tax liabilities -0- -0- Valuation allowance (6,597,923) (5,733,308) $ -0- $ -0- As of September 30, 2001 the Company had net operating losses (NOL) of approximately $19,980,000. This amount is available to be carried back two years to offset past taxable income. Any remaining NOL after the carry back is available to offset future taxable income. The carry forwards begin to expire for the year ended September 30, 2001. The company has provided a full 100% valuation allowance on the deferred tax assets as at September 30, 2001 and 2000 to reduce such deferred income tax assets to zero as it is the management's belief that realization of such amounts do not meet the criteria required by generally accepted accounting principles. Management will review the valuation allowance required periodically and make adjustments as warranted. The Company had previously recorded an income tax benefit from an income tax receivable in the amount of $286,944. During the year ended September 30, 2001, the Company has determined the refund receivable will not be forthcoming and has charged operations accordingly. 8. Debt Secured Debt At September 30, 2001, the Company is obligated to Berkowitz Wolfman Assoc., Inc. in the amount of $2,420,984 including accrued interest arising out of cash advances. During the second quarter of fiscal 2001, the Company entered into an agreement with Berkowitz Wolfman whereby in consideration for assigning all the Company's right, title and interest to the remainder interest in the Resort Club Inventory Trust, Resort Club membership receivables and an assignment of a real estate tax refund, the due date of the Berkowitz Wolfman note payable was extended to December 1, 2002 and the interest rate was decreased from 15% to 10%. Pursuant to the terms of the agreement, the principal amount of the Berkowitz Wolfman note payable was decreased by $1,620,340 resulting from the assignment of the Trust Inventory valued at $272,332, net Membership Receivables in the amount of $879,082 and the real estate tax refund of $468,926. The assignment of the remainder interest in the Trust's condominium units was valued at $272,332 for the purpose of determining the amount to be credited against the debt, representing the parties' estimate at the time of the present value, discounted at 10%, of the value of the future interest in the condominium inventory, based upon the actual remaining years each condominium would be held in the trust. Under the terms of the assignment, this valuation can be subsequently challenged by either party. Accordingly, if this valuation is subsequently challenged and the effect is to reduce the valuation, the Company's obligation to Berkowitz Wolfman may be greater. S-17 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 8. Debt (continued) On May 18, 1997 the Company entered into a loan agreement with Binghamton Savings Bank ("Binghamton"), the Company's primary lender in the principal amount of $2,000,000. Subsequently, the Company entered into two additional loan agreements on August 6, 1997 and January 15, 1999. Pursuant to the terms of the third loan agreement interest is payable at 12.25% with monthly principal payments of $50,000 with the remaining principal balance due on March 13,2000. The Company has continued to make the $50,000 principal payments subsequent to March 13, 2000 through June 2001 to Binghamton. As of September 30, 2001, the principal balance outstanding on this loan was $245,000. Secured Debt as of September 30, 2001 is summarized as follows: Building and land, 9%, principal and interest of $901 payable monthly to August 2004, balloon payment of $65,216 at September 20, 2004 $ 77,475 Loan Agreement, 10% interest due December 1, 2002 2,420,984 Loan Agreements dated May 18, 1997, August 6, 1997, and January 15, 1999, 12.25% interest due monthly with monthly principal payments of $50,000, balance due March 13, 2000 245,000 Total mortgages 2,743,459 Less total current portion 248,999 Total non-current portion $ 2,494,460 Notes Payable Note Payable to bank, payable in monthly installments of $832.03 including interest at 9.25%, final payment due September 2005. Other Information Aggregate principal reductions of debt as of September 30, 2001 are summarized as follows (000's omitted): Secured Notes Fiscal Year Debt Payable Total ----------- ---- ------- ----- 2002 $ 248,999 $ 14,639 $ 263,638 2003 $ 4,375 $ 6,635 $ 11,010 2004 and thereafter $2,490,085 $ 19,909 $2,509,994 S-18 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 9. Commitments and Contingencies The Company's executive offices are at 355 Madison Avenue, Morristown, New Jersey. The Company is a tenant under a lease, which expired on November 30, 2000 with a total rent of $500 per month. Subsequent to November 30, 2000, the Company continues to lease the space on a month-to-month basis. In October 1999, the Company received a Letter and Examination Report from the District Director of the Internal Revenue Service ("IRS") that proposed a tax deficiency based on an audit of the Company's consolidated 1995 tax return. The Examination Report proposed adjustments that the Company does not agree to. The adjustments included disallowed deductions from the Company's principal subsidiary in the amount of $5,124,000, which represented accruals and deductions related to membership fulfillment expense and membership product cost. The IRS's position was that these deductions should have been capitalized. Additionally, approximately $498,000 of deductions representing a write down of packaged loans acquired from Resolution Trust Company and certain normal business deductions were disallowed. The IRS also disallowed $830,000 as a compensation deduction related to a former officer's stock redemption, claiming the disallowed deduction should have been classified as treasury stock. The Company is working with the IRS towards a resolution. As part of the proposed resolution, the Company has agreed to certain adjustments to increase net taxable income in the amount of $5,806,659 proposed by the IRS. Concurrently, the IRS has agreed to review certain adjustments proposed by the Company to decrease net taxable income in the amount of $5,794,514 which will substantially reduce or eliminate any additional taxes assessed as a result of the audit. In addition to the above, the Company has available approximately $19,980,000 of Net Operating Losses ("NOL's") which can be carried back to 1996. This amount is available to be carried back two years. Any remaining NOL's after the carry back is available to offset future taxable income. Due to the amended return as well as availability of the NOL's, the Company did not accrue a loss contingency for the IRS claim. S-19 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 AND 2000 9. Commitments and Contingencies (continued) The Company is in dispute with Debra Tierney ("Tierney"), the Company's former President with respect to the purchase price paid by the Company to Tierney and her family for their shares of the Company's Common Stock. On or about February 16, 1996, Tierney and the Company confirmed that, the Company would repurchase all of the Company's shares of Common Stock owned by the Tierneys. Pursuant to the terms of the agreement, the Company purchased 943,411 shares of the Company's Common Stock from the Tierneys at a purchase price equal to $500,000 in cash and 182,500 shares of PriCellular Common Stock. During the third quarter of fiscal 2001, the company negotiated a tentative agreement with Tierney. Pursuant to the terms of the tentative agreement, the Company will be obligated to make cash payment in the amount of $183,094, assign a mortgage receivable in the principal amount of $100,000, and conveyance of title to five condominiums. Accordingly, the Company accrued a $350,000 reserve in connection with this transaction. 10. Common Stock On October 5, 1999, the Company entered into an agreement to convert 366,655 of the Company's redeemable common stock, par value $.01 per share for 1,622,000 shares of the Company's common stock, par value $.01 per share. In the third quarter of fiscal 2001, the Company and the holder of the Company's redeemable common stock have agreed to enter into a definitive agreement effective May 15, 2001. Non-qualified Stock Option Plan and Option to Purchase Common Stock The Company has adopted a non-qualified stock option plan and reserved 125,000 shares for issuance pursuant thereto. Options are non-transferable; expire if not exercised after five years; may not be exercised until after the completion of one year of service with the Company by the employee; are exercisable at the rate of one-fifth of the shares optioned per year and are issuable to employees in such amounts and at such prices as determined by the Board of Directors, provided that no single employee may be granted options to purchase more than 7,500 shares and persons owning more than 10% of the Company's outstanding shares are excluded from participation in the plan. Options are protected against dilution resulting from stock recapitalization. As of September 30, 2001, no options had been issued under the plan. S-20 DOMINION RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2001 and 2000 11. Joint Venture - Condominiums at Stonehill As of March 31, 2001, the Company has invested $495,941 in a joint venture with The Spa at Crystal Springs, Inc. The Company's investment is in the form of the conveyance of 27 condominium lots to the joint venture carried on the Company's balance sheet as of March 31, 2001 at $495,941. The carrying value of the Company's investment at March 31, 2001 was based on cost. The Spa has agreed to contribute to the venture in cash an amount equal to the fair market value of the Company's contribution of the lots, or $495,941. The joint venture, known as Condominiums at Stonehill is to be utilized as a vehicle to rent condominiums, when constructed, on a daily fee basis to third party individuals visiting the Mountain Creek resort area and the Crystal Springs Golf and Spa Resort located in Sussex County, New Jersey. Both the Company and the Spa at Crystal Springs, Inc. each have a 50% interest in the joint venture. The Company's investment will be accounted for under the equity method. Under APB No. 18, the Company is required to recognize its share of income and loss from the Joint Venture by the application of the equity method. As of September 30, 2001 there has been no activity by the Joint Venture and therefore the Company has not recognized any share of income or loss from the Joint Venture. 12. Subsequent Events (Unaudited) Not Covered By Independent Auditor's Report Pursuant to the terms of the third loan agreement with Binghamton, the balance of the loan was due on March 13,2000. Subsequent to March 13, 2000, the Company has continued to make the minimum $50,000 principal payments through June 2001. As of September 30, 2001 the principal balance of the loan was $245,000. The Company is in negotiations with Binghamton with respect to restructuring the minimum monthly repayment. The Company believes it will be successful in such negotiations. In January 2002, a lawsuit was filed against the Company for non payment of association fees on the Company's condominium units in Fort Lee, New Jersey. The Company disagrees with the amounts assessed by the association and plans to defend the lawsuit. S-21