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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2003, COMMISSION FILE NUMBER 0-1957
UPTOWNER INNS, INC.
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(Exact Name of Registrant as Specified in its Charter)
West Virginia 55-0457171
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
741 5th Avenue, Huntington, West Virginia 25701
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code (304) 525-8162
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Securities registered pursuant to Section 12 (g) of the Act:
1,583,563 shares of common stock - $0.50 par value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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.
X Yes No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes No X
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The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of the 30th day of June 2003, was $791,782. The book value of
stock was used due to the lack of an active market at which to sell the stock.
As of June 30, 2003, the close of the period covered by this report, the
registrant had 1,496,317 shares of its common capital stock issued and
outstanding. The registrant has issued no other stock.
DOCUMENTS INCORPORATED BY REFERENCE
None. An amendment to this Form 10-K will be filed by the registrant
which amendment will provide the information required by Part III, Items 10, 11
and 12 of this form.
UPTOWNER INNS, INC.
For the Year Ended June 30, 2003
Table of Contents
PART I
Page
----
Item 1: Business 3
Item 2: Properties 4-5
Item 3: Legal Proceedings 6
Item 4: Submission of Matters to a Vote of Security Holders 6
PART II
Item 5: Market for Registrant's Common Stock and Related
Security Holder Matters 6
Item 6: Selected Financial Data 6-8
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-16
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 16
Item 8: Financial Statements 17-36
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 37
Item 9A: Controls and Procedures 37-38
PART III
Item 10: Directors and Executive Officers of the Registrant 38
Item 11: Executive Compensation 38
Item 12: Security Ownership of Certain Beneficial Owners
And Management 38
Item 13: Certain Relationships and Related Transactions 39
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports
On Form 8-K 40
Signatures 41
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PART I
ITEM 1. BUSINESS.
(a) Uptowner Inns, Inc.(the "Company" or "registrant"), was incorporated
in the State of West Virginia on July 1, 1961. The registrant had operated a
137-room full service hotel, the Uptowner Inn, built in 1962 by the registrant
and operated by the registrant, until January 2002. The property was sold in
July 2002. In late August 1998, the registrant opened a 135-room Holiday Inn
Hotel & Suites facility adjacent to the Huntington Civic Arena. The franchise
agreement under which it operates generally requires standard fees for
advertising, reservation system, etc.
The hotel clientele are predominantly business travelers due to the
downtown location. The Holiday Inn Hotel & Suites occupancy for the year
averaged 76% with an average room rate of $80. The Holiday Inn Hotel has 135
available rooms per night, or 49,275 available rooms to rent annually. Renting
76% of the 49,275 rooms at an average rate of $80 per night yielded revenue for
available rooms of $22,192 per room annually.
A wholly owned subsidiary of the registrant, Motel and Restaurant
Supply, which was incorporated in the State of West Virginia on July 16, 1966,
has had no activity since 1981.
Neither the registrant nor its subsidiary have experienced bankruptcy,
receivership or similar proceedings; has been involved in a reclassification,
merger or consolidation; has acquired or, except as hereinafter set forth,
disposed of any material amount of assets otherwise than in the ordinary course
of business; or has undertaken any material change in the mode of conducting its
business.
(b) During fiscal 2002, 2001 and 2000 the registrant was engaged in
substantially two lines of businesses, to-wit, the operation of a hotel with
dining facilities, and residential/commercial rentals. The income of the
registrant from rentals did not exceed ten percent of the consolidated revenue
of the registrant and its subsidiaries for years ended June 30, 2002, 2001 and
2000. Consolidated revenue did not exceed $50,000,000, during any of the last
three fiscal years. During fiscal 2003, the residential/commercial rentals line
of business was disposed of. This has been reflected in the financial statements
as a discontinued component and the prior years have been restated to reflect
this presentation.
The hotel industry is highly competitive with the registrant competing
against numerous national hotel franchises in Huntington, West Virginia. As the
Company's operations are generally one business segment, its competition locally
includes Radisson Hotel, Ramada Inn, Comfort Inn, Red Roof Inn, and Hampton Inn.
Seasonality directly affects this business as a result of people not
traveling or vacationing in large numbers in the late fall and winter because of
poor weather at these geographical locations.
At June 30, 2003, the registrant and its subsidiaries employ
approximately 50 employees.
(c) The registrant has no foreign operations.
-3-
ITEM 2. PROPERTIES.
(a) The registrant owned a 137-room, four-story motor hotel known
currently as the Uptowner Inn with a swimming pool and a lounge, located in
downtown Huntington, West Virginia, at 1415 Fourth Avenue. This property was
owned in fee by the registrant. The motor hotel was subject to a mortgage in
favor of the City National Bank, Huntington, West Virginia, in the original
amount of $1,648,107, payable in monthly installments of $17,268 per month,
including interest at 9.42% until December 20, 2002, at which time the variable
rate may have changed. The original note of $2,000,000, along with two (2) other
promissory notes, were refinanced with the above mentioned note on December 20,
1999. This property was sold on July 3, 2002 for $1,770,073.
(b) The registrant owned in fee two lots, used for the over-flow
parking, across the street from its main motor hotel at 1432-34 Fourth Avenue,
in Huntington, West Virginia. These lots were put up for auction on September
12, 2002 along with the parcel of real estate and building listed at item (j).
The sale of these lots closed in January, 2003.
(c) The registrant owned in fee an undeveloped lot acquired for future
development or parking, across an alley from its main motor hotel at 1400 Fifth
Avenue in Huntington, West Virginia. The lot was sold on July 3, 2002 with the
main motor hotel.
(d) The registrant owned in fee two lots immediately west of its motor
hotel, 1401 Fourth Avenue, in Huntington, West Virginia, acquired for future
development and currently used for parking. This property was subject to a first
mortgage in favor of the City National Bank in the original amount of $1,648,107
as noted in Item 2 (a). These lots were sold on July 3, 2002 with the main motor
hotel.
(e) The registrant owned in fee and operated a 40-unit, two-story
apartment building within one city block of the motor hotel, at 1340 Fourth
Avenue, in Huntington, West Virginia. The apartment building was sold at auction
on September 12, 2002, for $361,000, and closed in January, 2003.
(f) The registrant owned in fee a lot acquired and used for parking,
across the street from its main motor hotel at 1420 Fourth Avenue, in
Huntington, West Virginia. This lot was sold at auction on September 12, 2002
along with the three-story building listed at item (g). The sale of this lot
closed in October, 2002.
(g) The registrant owned in fee a lot improved by a three-story building
within one city block of the main motor hotel at 1416-18 Fourth Avenue, in
Huntington, West Virginia. This property was subject to a mortgage in favor of
Betty M. Dove, in the original amount of $76,000, 10% interest, maturing June
2002, the balance of which was $1,031 at June 30, 2002. This property is
utilized for the corporate offices and rental units. This three-story building
was sold at auction on September 3, 2002, for $160,000, and closed in October
2002.
-4-
(h) The registrant owned in fee two vacant lots on the west side of
Huntington approximately 3 miles from the main motor hotel and at an exit for
Interstate 64. This purchase was finalized in October 1988 from an option
entered into in 1983. During fiscal year 2003 one lot was sold. The remaining
lot is currently used as a parking lot.
(i) The registrant purchased a parcel of real estate with a residential
building in January 1990. This property is across an alley from the main motor
hotel and was acquired for future development and parking. This parcel of real
estate was sold at auction on September 3, 2002 with item (g) listed above. The
sale was closed in October, 2002.
(j) The registrant purchased a parcel of real estate with a building
housing residential and commercial tenants in July 1991. This property is across
the street from its main motor hotel and adjacent to other rental properties and
parking facilities. The property has been renovated and is now fully utilized as
rental property. The property is subject to a mortgage in favor of West Virginia
Housing Development Fund in the original amount of $500,000, 5.5% rate of
interest, maturing November 2018, the balance of which is $399,021 at June 30,
2002. The parcel of real estate, building, and the two lots listed in item (b)
were sold at auction on September 12, 2002, for $752,000, and closed in January,
2003.
(k) The registrant owns in fee a Holiday Inn Hotel & Suites, a 135-room
motor hotel, located in downtown Huntington at 800 Third Avenue. The hotel
officially opened for business August 28, 1998. The property is subject to a
mortgage in favor of the Ohio National Life Insurance Company in the original
amount $6,800,000, 8.25% rate of interest and maturing February 2012. The
balance of the note is $6,598,921 at June 30, 2003. The facility is being
marketed for convention and business travelers. It is adjacent to the Huntington
Civic Arena and is used as a major part of marketing for conventions and
meetings in the Tri-State area.
(l) The registrant acquired assets from an entity that is controlled by
the Company's president and stockholder, Carl Midkiff. The assets consist of
land, building, and equipment, located in Proctorville, Ohio, and the terms of
the transaction were no less favorable than a similar transaction would have
been with an unrelated third party. The assets acquired are currently being
rented.
(m) During the fiscal year ended June 30, 2003, the Company abandoned
its plans to construct a Holiday Inn on the Kinetic Park Industrial site due to
unsuitable soil compaction studies. In connection therewith, the Company has
determined that the carrying value of the construction in process and prepaid
franchise fee exceeded its fair value. Accordingly, an impairment loss of
$165,798, which is reported in other expenses, and represents the excess of the
carrying value of $225,798 over the fair value of $60,000 of deposits to be
returned by the seller of the land, has been charged to operations in the fourth
quarter of the fiscal year ended June 30, 2003. The fair value is based on the
amount agreed to between the Company and the seller of the land.
Annual reviews of insurance coverage are done and adequate insurance is
maintained on all properties.
-5-
ITEM 3. LEGAL PROCEEDINGS:
The Company was a defendant in a lawsuit filed by the seller of a parcel
of property which was to be used to construct a Holiday Inn Hotel for breach of
contract and for failure to purchase the land and develop the hotel. The suit
also alleged violations of confidentiality agreements. The Company filed a
countersuit alleging fraud, misrepresentation, and breach of contract. The
Company maintained that the results of the soil compaction studies revealed that
the land was not suitable for its intended purpose. A settlement agreement was
reached in August, 2003. Under the terms of the settlement, the Company will
receive its deposit totaling $60,000 back from the seller and all claims between
the two parties were dismissed. The effects of this settlement have been
reflected in the June 30, 2003 financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
(a) There is presently no active trading market for the Company's
shares, nor are the prices at which common shares have been traded published by
any national securities association or quotation service. The Company is aware
of shares traded in the past two years for between $.50 and $.65 per share.
(b) As of the 30th day of June 2003, the approximate number of record
holders of common stock of the registrant was 1,392.
(c) The registrant has paid no dividends with respect to its common
stock during the past two years.
ITEM 6. SELECTED FINANCIAL DATA.
The following financial information of Uptowner Inns, Inc. and
Subsidiaries is for the years ended June 30, 2003, 2002, 2001, 2000 and 1999 on
a scope similar to that set forth in the report included elsewhere in this
report. These summaries should be read in conjunction with the financial
statements and related notes included elsewhere in this report.
* FINANCIAL INFORMATION NOT RESTATED FOR EFFECTS OF DISCONTINUED OPERATIONS.
-6-
ITEM 6.
UPTOWNER INNS, INC.
SELECTED FINANCIAL DATA
(Cont'd)
* *
2003 2002 2001 2000 1999
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Operating Revenues $ 3,148,792 $ 3,311,361 $ 3,899,075 $ 4,013,489 $ 3,357,351
Income from Operations 350,221 (28,760) 666,458 603,612 546,029
Net Income (Loss) 139,937 (465,518) 14,266 (97,216) 113,029
Net Income (Loss)
per share .09 (.30) .01 (.06) .07
Weighted Average
Number of Shares 1,529,405 1,580,069 1,583,563 1,583,563 1,583,563
Cash Dividends
Per Share - - - - -
Total Assets 8,835,635 11,129,073 10,899,922 11,059,140 11,141,750
Long-Term Debt 6,453,549 8,542,621 6,636,076 6,876,470 6,913,472
The increase in operating revenues and income from operations in 2000
and 2001 were entirely the result of the opening of the new Holiday Inn Hotel
and Suites, which operated for over ten months in 1999 and the full year in
2000, 2001, 2002 and 2003. The decrease in operating revenues in 2002 and 2003
is due largely to the closing of the Uptowner Inn facility in January 2002. The
income from operations decreased in 2002 and increased in 2003. The decrease in
costs and expenses in 2002 and 2003 did not decrease in relation to the decrease
in revenues in 2002, as noted above. The Uptowner Inn location ceased doing
business, but many expenses continued several months later as part of the
process of closing down. The decision was made to close down the Uptowner Inn
facility due to the cash drain for the last several years.
The decrease in net income in 2002 is due to the explanation above,
along with the booking of impaired assets and a tax-deferred asset. During the
fiscal year ended June 30, 2002, the Company initiated a plan to dispose of the
Uptowner Inn Hotel. The sale of the hotel closed July 3, 2002. In connection
therewith, the Company determined that the carrying value of the hotel exceeded
its fair value. Accordingly, an impairment loss of $336,075 is reported in other
expenses, which represents the excess of the carrying value of $2,106,148 over
the fair value of $1,770,073 and has been charged to operations in the fourth
quarter of the fiscal year ended June 30, 2002. The fair value is based on the
actual sales price. An income tax benefit of $132,098 was recognized in fiscal
year ended June 30, 2002 as a result of recording a net deferred tax asset. The
increase in net income in 2003 is due to the net effect of property sales, the
impairment loss on the Kinetic Park project, and the increased revenue generated
by the Holiday Inn Hotel and Suites.
The increase in long-term debt in 2002 is the result of the refinancing
of the Holiday Inn Hotel and Suites. The refinancing was for 6.8 million dollars
at 8.25%, with a twenty-year amortization and a ten-year balloon. The decrease
in long-term debt in 2003 is the result of the sale of rental properties and the
sale of the Uptowner Inn facility, and the retirement of the related debt.
-7-
ITEM 6.
UPTOWNER INNS, INC.
SELECTED FINANCIAL DATA
(Cont'd)
SELECTED QUARTERLY FINANCIAL DATA
6/30/03 3/31/03 12/31/02 9/30/02 6/30/02 3/31/02 12/31/01 9/30/01
------- ------- -------- ------- ------- ------- -------- -------
Total Revenues $812,679 $806,423 $733,195 $796,495 $801,178 $767,036 $788,919 $954,228
Income from Operations (177,296) 34,182 (20,254) 51,451 (418,839) (135,014) (89,368) 32,354
Net Income (Loss) (278,994) 386,391 (19,216) 51,756 (296,997) (123,991) (84,190) 39,660
Net Income (Loss)
per share (.18) .24 (.01) .03 (.19) (.08) (.05) .03
Weighted Average
Number of shares 1,529,405 1,565,400 1,565,400 1,565,400 1,580,069 1,580,069 1,580,069 1,580,069
All selected quarterly financial data has been restated with the income
(loss) from discontinued operations being reported separately.
-8-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
* FINANCIAL INFORMATION NOT RESTATED FOR EFFECTS OF DISCONTINUED OPERATIONS.
ASSETS AND LIABILITIES 2003 2002
- ---------------------- ---- ----
Current Assets $ 1,378,941 $ 2,836,016
Percentage Increase (Decrease) (51.4)% 340.6%
Total Assets 8,835,635 11,129,073
Percentage Increase (Decrease) (20.6)% 2.1%
Total Liabilities 7,083,795 9,487,791
Percentage Increase (Decrease) (25.3)% 8.0%
Current assets decreased in 2003 due to the presentation of the Uptowner
Inn Hotel as property held for sale in 2002. The Hotel sold on July 3, 2002,
thus reducing the current assets. Also, total assets have decreased in 2003 due
to the sale of rental properties and the Uptowner Inn facility. The decrease in
total liabilities in 2003 is the result of the debt retirement related to the
sale of rental properties and the Uptowner Inns facility.
-9-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
REVENUES
2003 2002 2001
---- ---- ----
Total Revenues $ 3,148,792 $ 3,311,361 $ 3,899,075
Percentage Increase (Decrease) (4.9)% (15.1)% *
Motor Inn Revenues 3,002,693 3,105,362 3,629,192
Percentage Increase (Decrease) (3.3)% (14.4)% 8.8%
Percentage of Total Revenues 95.4% 93.8% 93.1%
Food and Beverage 70,177 107,570 189,802
Percentage Increase (Decrease) (34.8)% (43.3)% (48.1)%
Discontinued Operations 273,812 13,251 (3,403)
Percentage Increase (Decrease) 1966.3% 489.4% *
Due to the Holiday Inn Hotel and Suites becoming an established property
within the Huntington market, the occupancy rate at this facility increased from
70% in 2002 to 76% in 2003. Additionally, room revenues from the Uptowner Inn
increased in 2001 due to an increase in the occupancy rate attributable to
increased demand for newly renovated rooms. The decrease in motor inn revenues
in 2002 and 2003 is due largely to the closing of the Uptowner Inn facility in
January 2002. The decision was made to close down the Uptowner Inn facility due
to the cash drain for the last several years.
The decrease in food and beverage revenue is largely attributed to the
elimination of the Uptowner Inn lounge facility in January 2002. The Holiday Inn
Hotel and Suites restaurant sales have decreased 15% from 2002 due to the added
restaurants in the downtown area.
-10-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
OPERATING COST AND EXPENSES AND INTEREST EXPENSES
2003 2002 2001
---- ---- ----
Cost of Sales and Other Operating
Department Expenses $ 357,474 $ 428,676 $ 528,565
Percentage increase (decrease) ( 16.6)% ( 18.9)% ( 3.4)%
Salaries 770,769 822,036 939,612
Percentage increase (decrease) ( 6.2)% ( 12.5)% ( 7.5)%
Advertising 246,446 228,713 276,172
Percentage increase (decrease) 7.8% ( 17.2)% 16.6%
Utilities 136,038 227,148 224,468
Percentage increase (decrease) ( 40.1)% 1.2% *
Repairs and Maintenance 88,327 72,683 92,164
Percentage increase (decrease) 21.5% ( 21.1)% *
Taxes and License 261,570 332,428 371,181
Percentage increase (decrease) ( 21.3)% ( 10.4)% *
Insurance and Other 53,762 68,073 61,892
Percentage increase (decrease) ( 21.0)% 10.0% *
Total Cost and Expenses 2,798,571 3,340,121 3,232,617
Percentage increase (decrease) ( 16.2)% 3.3% *
Interest 462,138 582,682 648,789
Percentage increase (decrease) ( 20.7)% ( 10.2)% *
Total cost and expenses increased by 3.3% in 2002 compared to 2001. All
of the individual categories of costs and expenses for 2002 decreased, with the
exception of insurance expense, which increased 10.0%, and utilities expense,
which increased 1.2%. Insurance expense has increased due to the rate increases
passed down by the insurance industry. The decreases in costs and expenses are
due to the closing of the Uptowner Inn Hotel in January 2002. Interest has
decreased due to the refinancing of the Holiday Inn Hotel & Suites.
Total cost and expenses decreased 16.2% in 2003 compared to 2002. All of
the individual categories of costs and expenses for 2003 have decreased, with
the exception of Advertising expense and Repairs & Maintenance expense. As noted
in the above paragraph, the decreases in costs and expenses are due to the
closing of the Uptowner Inn Hotel in January 2002. Cost and expenses should
begin to level out as the property has now been closed for nearly eighteen
months. Advertising expense has increased due the additional revenue generated
by the Holiday Inn Hotel and Suites. Repairs and Maintenance expense has
increased due to needed repairs to the Holiday Inn property, and the prevention
of the hotel looking dated.
-11-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
INCOME (LOSS)
2003 2002 2001
---- ---- ----
$ 139,937 $( 465,518) $ 14,266
Revenues decreased $587,714 in 2002, while revenues have decreased
$162,569 in 2003. Costs and expenses increased $107,504 in 2002, while costs and
expenses have decreased $541,550 in 2003, resulting in a decrease in net income
of $479,784 in 2002, and an increase in net income of $605,455 in 2003.
The decrease in net income in 2002 is due largely to the Uptowner Inn
Hotel continuing to lose market share in the Huntington area and the inevitable
closing of the facility in January 2002. The decision was made to close down the
Uptowner Inn facility due to the cash drain for the last several years. The
Company also booked the impairment of assets and a tax- deferred asset during
the fiscal year ended June 30, 2002. During the fiscal year ended June 30, 2002,
the Company initiated a plan to dispose of the Uptowner Inn Hotel. The sale of
the hotel closed July 3, 2002. In connection therewith, the Company determined
that the carrying value of the hotel exceeded its fair value. Accordingly, an
impairment loss of $336,075 is reported in other expenses, which represents the
excess of the carrying value of $2,106,148 over the fair value of $1,770,073 and
has been charged to operations in the fourth quarter of the fiscal year ended
June 30, 2002. The fair value is based on the actual sales price. An income tax
expense of $21,958 was recognized in fiscal year ended June 30, 2003 as a result
of recording an adjustment to the net deferred tax asset. An income tax benefit
of $132,098 was recognized in fiscal year ended June 30, 2002 as a result of
recording a net deferred tax asset. This deferred tax asset relates primarily to
net operating losses and depreciation differences which were not offset by
valuation allowances. For further discussion, see "Liquidity and Capital
Resources", which follows.
The increase in net income in 2003 is due largely to the gain on sale of
rental property, along with the increased occupancy percentages at the Holiday
Inn Hotel and Suites. During the fiscal year ended June 30, 2003, the Company
sold four of its rental properties. The decision to sell those components was
based on the desire of management to discontinue the residential and commercial
rental business and to focus the efforts and resources of the Company on the
hotel business. The results of operations totaling $273,812 inclusive of a gain
on disposal of $294,136, was reported in discontinued operations in the
accompanying 2003 financial statements. The accompanying 2002 and 2001
financials statements have been restated for comparative purposes totaling
$13,251 and $(3,403), respectively. No income tax was reported on the
discontinued operations due to the utilization of net operating loss
carryforwards. Revenue related to the rental properties totaled $111,907,
$222,307 and $216,071 in 2003, 2002 and 2001, respectively.
-12-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
LIQUIDITY AND CAPITAL RESOURCES
2003 2002
---- ----
Resources available at
June 30, 2003 and 2002
Cash $ 1,161,986 $ 803,660
The liquidity, as measured by current assets divided by current
liabilities, has decreased from 3.00 in 2002 to 2.19 in 2003. This decrease of
liquidity is a result of the Holiday Inn Hotel and Suites refinancing and the
reclassifying of the Uptowner Inn Hotel from property and equipment to property
and equipment held for sale in the fiscal year ended June 30, 2002. On July 3,
2002, the Company closed on the sale of the Uptowner Inn Hotel. Existing loans
with balances totaling $1,633,521 as of June 30, 2002 were paid off upon
closing. In addition, the Company received cash totaling $63,085. In addition,
this liquidity decrease was offset by the sale of three apartment buildings,
which generated $843,004 in cash, and $393,115 in debt retirement.
It is likely that the Company's liquidity position will continue to
decrease in the next two to three years. Management estimates that business will
fall approximately 10% over this time period due to construction work near the
hotel. The construction work for the new Pullman Square project is going on
right next to the hotel, and has caused many guests to leave the Holiday Inn
property due to excessive early morning noise. Many guests have also left due to
the lack of parking that the construction work has caused.
There are also plans to add a new Holiday Inn property in Barboursville,
WV, but will probably be another one to two years before construction for that
site begins. The Company has purchased the franchise agreement from Holiday Inn,
and has also purchased a portion of the land needed for the new construction.
The Company is in the process of obtaining a valuation of the Company's
common stock. The purpose of this valuation is to provide the company's
management with information to consider the feasibility of engaging in a going
private transaction whereby the Company would seek shareholder approval for a
reverse stock split and providing a cash payment for fractional shares of common
stock. If the Company were to engage in such a transaction, the transaction
would have the effect of reducing the number of shareholders from 1,392 to 11
and the company would no longer file reports with the Securities and Exchange
Commission.
-13-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
CRITICAL ACCOUNTING POLICIES
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangible assets to be held
and used are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Determination of recoverability is based on an estimate of undiscounted future
cash flows resulting from the use of the asset and its eventual disposition.
Measurement of an impairment loss for long-lived assets and certain identifiable
intangible assets that management expects to hold and used is based on the fair
value of the asset. Long-lived assets and certain identifiable intangible assets
to be disposed of are reported at the lower of carrying amount or fair value
less costs to sell.
INCOME TAXES
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to different methods of depreciation for book
and tax purposes and net operating loss carryovers. The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. The Company provides a valuation allowance for deferred
tax assets for which it does not consider realization of such assets to be more
likely or not.
RECENT ACCCOUNTING PRONOUNCEMENTS
In May, 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments and for hedging activities
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). The Company is required to adopt SFAS 149 for
contracts entered into or modified after June 30, 2003. The Company does not
expect the adoption of SFAS 149 to have a material impact on its operating
results or financial position.
In July, 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity" ("SFAS 150"). SFAS 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. The Company is required to adopt SFAS 150 for financial
instruments entered into or modified after May 31, 2003, and otherwise for
periods beginning after June 15, 2003. The Company does not expect the adoption
of SFAS 150 to have a material impact on its operating results or financial
position.
-14-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
RELATED PARTY TRANSACTIONS
During the fiscal year ended June 30, 2003, the Company sold three of
its commercial rental properties to a company partially owned by Uptowner Inns,
Inc.'s Chairman of the Board of Directors, President and Chief Executive Officer
and a director who are also stockholders for $1.113 million. The transaction
resulted in the payoff of an existing note payable with an outstanding balance
of $393,115, receipt of cash totaling $702,759 and a gain on the sale totaling
$362,731. As of June 30, 2003, Uptowner Inns, Inc. has a receivable from this
company totaling $4,798 for insurance premiums paid on the sold properties
(reported as due from related parties).
The Company's Chairman of the Board of Directors, President and Chief
Executive Officer, who is a stockholder of the Company, also controls other
companies and partnerships. During the fiscal year ended June 30, 2002, the
Company purchased an interest in one of the corporations and two of the
partnerships for a total investment of $39,891. The investments are accounted
for at cost and are reported as non-current non-marketable securities in the
accompanying 2003 and 2002 financial statements. In addition, as of June 30,
2003 and 2002, the Company has an accounts receivable due from the related
corporation totaling $5,446. As of June 30, 2003, the Company also had a note
receivable due from the related corporation totaling $300,000. The note was due
June 1, 2003 and carries an interest rate of 10%.
During the fiscal years ended June 30, 2003 and 2002, the Company paid
$66,359 and $92,290, respectively, to an insurance company which is partially
owned by a member of the Board of Directors. The payments represent premium
payments for the Company's business insurance (i.e., property and liability,
auto, crime, etc.) and are expensed over the term of the policy.
The mother of the Company's Chairman of the Board of Directors,
President and Chief Executive Officer, who held that position until July 2002,
resides in the Company's hotel. The lodging and meals are provided at no cost.
In addition, she receives compensation totaling $40,000 per year for two years
as part of a compensation package for her retirement.
During the year ended June 30, 2001, the Company acquired land and a
building from an entity that was controlled by the Company's Chief Executive
Officer and stockholder. The cost of the land and building totaling $329,500 is
reported as property and equipment in the accompanying 2003 and 2002 financial
statements. In addition, an investment which consisted of undeveloped land was
acquired in the amount of $35,000 and was reported at cost. Liabilities were
assumed of $272,935 and a promissory note issued for $91,565. The investment in
the undeveloped land was sold in fiscal year ended June 30, 2002 for $35,575 and
resulted in a gain of $575. The liabilities assumed and the promissory note were
paid in full in fiscal year ended June 30, 2002. Beginning in fiscal year ended
June 30, 2002, the land and building was leased to an outside party under an
operating lease expiring March, 2007.
During the fiscal year ended June 30, 2001, the Company renegotiated a
loan with a former stockholder. The refinancing of this debt resulted in a
waiver of interest of $60,161 and is reflected in the statement of operations
for the fiscal year ended June 30, 2001. As of June 30, 2003 and 2002, the
balance of the note payable is $-0- and $3,540, respectively, and is included in
Note 3.
The Company had a note payable due an entity that is controlled by a
major stockholder. The balance of the note at June 30, 2003 and 2002 is $-0-.
Interest expense for the fiscal years ended June 30, 2003, 2002, and 2001
totaled $-0-, $4,342 and $3,753, respectively.
-15-
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Cont'd)
FORWARD-LOOKING STATEMENTS
Certain matters disclosed herein may be deemed to be forward-looking
statements that involve risks and uncertainties, including the facilities
utilization, costs associated with maintaining the operations, liquidity issues,
and other risks. Actual strategies and results in future time periods may differ
materially from those currently expected. Such forward-looking statements
represent management's judgment as of the current date. The registrant
disclaims, however, any intent or obligation to update such forward-looking
statements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company does not anticipate significant market risk. The fair value
of the Corporation's long-term debt is estimated based on the rates currently
available to the Company for debt with similar terms and remaining maturities.
The estimated fair value for long-term debt as of June 30, 2003, and 2002 was
$6,607,000 and $8,670,000, respectively.
-16-
UPTOWNER INNS, INC. AND SUBSIDIARY
ITEM 8. FINANCIAL STATEMENTS
Financial Statements:
Uptowner Inns, Inc. and Subsidiaries
Opinion of Independent Certified Public Accountant for the
Year Ended June 30, 2003
Year Ended June 30, 2002
Year Ended June 30, 2001
Consolidated Balance Sheets as of June 30, 2003 and 2002
Consolidated Statement of Operations for the
Year Ended June 30, 2003, 2002 and 2001
Consolidated Statement of Stockholders' Equity for the
Year Ended June 30, 2003, 2002 and 2001
Consolidated Statement of Cash Flows for the
Year Ended June 30, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
-17-
INDEPENDENT AUDITORS' REPORT
Board of Directors
Uptowner Inns, Inc. and Subsidiary
Huntington, West Virginia
We have audited the accompanying consolidated balance sheets of Uptowner
Inns, Inc. and Subsidiary as of June 30, 2003 and 2002 and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated statements of income,
stockholders' equity, and cash flows of Uptowner Inns, Inc. for the year ended
June 30, 2001, was audited by other auditors, whose report dated August 27,
2001, expressed an unqualified opinion on these statements.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Uptowner Inns, Inc. and Subsidiary as of June 30, 2003 and 2002, and the
consolidated results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ SULLIVAN, WARE & HALL, P.L.L.C
Certified Public Accountants
Huntington, West Virginia
July 28, 2003
-18-
INDEPENDENT AUDITORS' REPORT
Board of Directors
Uptowner Inns, Inc. and Subsidiary
Huntington, West Virginia
We have audited the accompanying consolidated balance sheet of Uptowner Inns,
Inc. and Subsidiary as of June 30, 2001, and the related consolidated statements
of operations, stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit. The consolidated financial statements of Uptowner Inns, Inc. as of
June 30, 2000, and for the two years ended June 30, 2000, were audited by other
auditors, whose report dated November 28, 2000, expressed an unqualified opinion
on those statements.
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Uptowner Inns, Inc. and Subsidiary as of June 30, 2001, and the consolidated
results of its operations and cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ J.D. CLOUD & CO. L.L.P.
Certified Public Accountants
August 27, 2001
Cincinnati, Ohio
-19-
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND 2002
ASSETS
2003 2002
---- ----
CURRENT ASSETS
Cash $ 1,161,986 $ 751,180
Cash - escrow -0- 52,480
Accounts receivable (less allowance for
doubtful accounts of $3,000 in 2003
and 2002) 127,648 57,421
Due from officers, directors and employees 1,550 -0-
Due from related parties 10,244 5,446
Note receivable + related party 30,000 -0-
Inventories 4,483 6,145
Prepaid expenses 43,030 61,173
Deferred tax asset -0- 132,098
Property and equipment held for sale -0- 1,770,073
--------- -----------
TOTAL CURRENT ASSETS 1,378,941 2,836,016
--------- -----------
PROPERTY AND EQUIPMENT
Land 820,553 1,202,786
Buildings and improvements 6,005,920 7,385,301
Furniture, equipment, and vehicles 1,400,047 1,276,650
Construction in progress 211,870 42,567
--------- -----------
8,438,390 9,907,304
Less: Accumulated depreciation and
amortization 1,345,436 1,842,424
--------- -----------
TOTAL PROPERTY AND
EQUIPMENT - NET 7,092,954 8,064,880
NONMARKETABLE SECURITIES 14,144 40,035
OTHER ASSETS
Deferred tax asset 110,140 -0-
Deposits and other 239,456 188,142
--------- -----------
TOTAL OTHER ASSETS 349,596 188,142
--------- -----------
TOTAL ASSETS $ 8,835,635 $ 11,129,073
========= ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-20-
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, 2003 AND 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002
---- ----
LIABILITIES
CURRENT LIABILITIES
Accounts payable $ 163,427 $ 181,386
Accrued liabilities 120,958 134,024
Taxes other than federal income tax 192,571 327,869
Unearned revenue -0- 48,461
Current portion of long-term debt 153,290 253,430
----------- -----------
TOTAL CURRENT LIABILITIES 630,246 945,170
----------- -----------
LONG-TERM LIABILITIES
Notes payable 6,453,549 8,542,621
----------- -----------
TOTAL LIABILITIES 7,083,795 9,487,791
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Stockholders' equity
Common stock, $.50 par value;
authorized - 5,000,000 shares;
issued - 1,583,563 shares 791,782 791,782
Additional paid-in capital 1,032,290 1,032,290
Retained (deficit) earnings (32,744) (172,681)
Treasury stock, at cost (87,246 shares in 2003
and 15,552 shares in 2002) (39,488) (10,109)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 1,751,840 1,641,282
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 8,835,635 $ 11,129,073
========= ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-21-
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
REVENUES
Rooms $ 3,002,693 $ 3,105,362 $ 3,629,192
Food and beverage 70,177 107,570 189,802
Telephone 17,471 43,925 50,489
Rent 29,690 7,402 425
Other 28,761 47,102 29,167
--------- --------- ---------
TOTAL OPERATING REVENUES 3,148,792 3,311,361 3,899,075
--------- --------- ---------
COSTS AND EXPENSE
Operating departments
Cost of sales 128,153 160,319 195,016
Salaries 770,769 822,036 939,612
Other 229,321 268,357 333,549
General and administrative 396,266 373,910 318,612
Advertising 246,446 228,713 276,172
Utilities 136,038 227,148 224,468
Repairs and maintenance 88,327 72,683 92,164
Taxes and licenses 261,570 332,428 371,181
Depreciation and amortization 322,121 450,379 419,951
Insurance - related party 53,762 68,073 61,892
Impairment loss 165,798 336,075 -0-
---------- ---------- -------------
TOTAL COSTS AND EXPENSES 2,798,571 3,340,121 3,232,617
--------- --------- ---------
OPERATING INCOME (LOSS) 350,221 (28,760) 666,458
---------- ---------- ----------
OTHER INCOME (EXPENSES)
Gain on sale of assets -0- 575 -0-
Interest expense (inclusive of $4,342 and
$3,753 paid to related parties in 2002 and
2001, respectively, and net of waiver of
related party interest of $60,161 in 2001) (462,138) (582,682) (648,789)
---------- ---------- ---------
TOTAL OTHER INCOME (EXPENSES) (462,138) (582,107) (648,789)
---------- ---------- ----------
(LOSS) INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (111,917) (610,867) 17,669
INCOME TAXES (BENEFIT) 21,958 (132,098) -0-
---------- ---------- -------------
(LOSS) INCOME FROM CONTINUING
OPERATIONS (133,875) (478,769) 17,669
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-22-
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
DISCONTINUED OPERATIONS
Income from operations of discontinued
component (including gain on disposal of
$294,136 in 2003 of which $362,731
was from a related party. Also including
$12,729, $10,144 and $8,331 paid
to a related party in 2003, 2002, and 2001,
respectively for insurance premiums) $ 273,812 $ 13,251 $ (3,403)
Income tax -0- -0- -0-
--------- ---------- --------
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS 273,812 13,251 (3,403)
--------- ---------- --------
NET INCOME $ 139,937 $ (465,518) $ 14,266
========= ========== =======
NET INCOME (LOSS) PER SHARE $ 0.09 $ (0.30) $ 0.01
========= ========== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-23-
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
Additional Retained
Common Paid-in Earnings Treasury
Stock Capital (Deficit) Stock Totals
----- ------- --------- ----- ------
Balance - June 30, 2000 $ 791,782 $ 1,032,290 $ 278,571 $ -0- $ 2,102,643
Net Income -0- -0- 14,266 -0- 14,266
--------- ------------ --------- ------- ----------
Balance - June 30, 2001 791,782 1,032,290 292,837 -0- 2,116,909
Net (Loss) -0- -0- (465,518) -0- (465,518)
Purchase of common stock -0- -0- -0- (10,109) (10,109)
--------- ------------ --------- ------- ----------
Balance - June 30, 2002 791,782 1,032,290 (172,681) (10,109) 1,641,282
Net Income -0- -0- 139,937 -0- 139,937
Purchase of common stock -0- -0- -0- (29,379) (29,379)
--------- ------------ --------- ------- ----------
Balance - June 30, 2003 $ 791,782 $ 1,032,290 $ (32,744) $ (39,488) $ 1,751,840
========= ============ ========= ======= ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-24-
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ 139,937 $ (465,518) $ 14,266
-------- -------- --------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities
Provision for uncollectible accounts -0- 10,592 -0-
Depreciation and amortization 343,947 498,816 468,109
Gain on sale of assets (294,136) (575) -0-
Impairment loss 165,798 336,075 -0-
Deferred income taxes 21,958 (132,098) -0-
(Increase) decrease in current assets:
Accounts receivable (70,227) 4,817 (12,859)
Due from officers, directors and employees (1,550) -0- -0-
Due from related parties (4,798) (5,446) -0-
Inventories 1,662 1,570 4,251
Prepaid expenses (12,786) (72,209) 16,701
Deposits and other assets (96,314) (46,305) -0-
Increase (decrease) in current liabilities:
Accounts payable (17,959) (51,202) (125,654)
Accrued liabilities (13,066) (66,460) 25,439
Taxes other than federal income taxes (135,298) 14,389 (124,040)
Unearned revenue (48,461) 48,461 -0-
-------- -------- --------
TOTAL ADJUSTMENTS (161,230) 540,425 251,947
-------- -------- --------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (21,293) 74,907 266,213
-------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES
Loans made to related party (30,000) -0- -0-
Purchase of nonmarketable securities -0- (40,035) -0-
Payments on notes receivable -0- -0- 47,899
Proceeds from sale of fixed assets 3,143,696 35,575 -0-
Capital expenditures (541,377) (203,180) (161,535)
---------- -------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 2,572,319 (207,640) (113,636)
--------- -------- --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-25-
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2003, 2002 AND 2001
2003 2002 2001
---- ---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of long-term debt $ -0- $ 6,800,000 $ 100,000
Principal payments of long-term debt (2,189,212) (6,040,410) (413,729)
Purchase of treasury stock (3,488) (10,109) -0-
---------- ----------- -----------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (2,192,700) 749,481 (313,729)
---------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents 358,326 616,748 (161,152)
Cash and cash equivalents at beginning
of year 803,660 186,912 348,064
---------- ----------- -----------
Cash and cash equivalents at end
of year $ 1,161,986 $ 803,660 $ 186,912
========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest $ 575,192 $ 759,823 $ 826,622
========== =========== ===========
Income taxes $ -0- $ -0- $ -0-
========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
In fiscal year ended June 30, 2003, the Company received 64,719 shares of
its own stock as a result of the liquidation of a related partnership in
which it owned a 24.5% interest in. The Company's basis in the related
partnership was $25,891. As such, nonmarketable securities were reduced
and Treasury stock was increased by $25,891.
In fiscal year ended June 30, 2001, the Company purchased land and a
building for $364,500. In conjunction with the acquisition, liabilities
were assumed for $272,935 and a note was issued for $91,565.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
-26-
UPTOWNER INNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
Uptowner Inns, Inc. and its subsidiary after elimination of all
material intercompany balances and transactions. The wholly owned
subsidiary has had no activity since 1981.
BUSINESS ACTIVITY
The Company operated two (2) motor inns in Huntington, West
Virginia, known as Holiday Inn Hotel and Suites and Uptowner Inns.
The Holiday Inn Hotel & Suites includes dining and banquet
facilities and both motor inns included a lounge. The Uptowner
Inns facility was closed in January, 2002 and was sold in July,
2002. In addition, the Company operated apartment buildings and
rental properties located in Huntington, West Virginia and
Proctorville, Ohio. During the year ended June 30, 2003, the
apartment buildings and rental properties located in Huntington,
West Virginia were sold.
REVENUE RECOGNITION
The Company generally recognizes revenue when persuasive evidence
of an arrangement exists, delivery of services has occurred, the
fee is fixed or determinable, and collectibility is probable. Cash
payments received in advance are recorded as deferred revenue.
INVENTORIES
Inventories are stated at the lower of cost or market on the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost with depreciation being
provided on the straight-line method over the estimated useful
lives of the assets as follows:
Building and improvements 10 - 40 years
Furniture and equipment 3 - 10 years
Vehicles 5 years
Repairs, maintenance and renewals are charged to operations as
incurred, and expenditures for significant betterments and
renewals are capitalized.
IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets and certain identifiable intangible assets to be
held and used are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Determination of recoverability is
based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its eventual disposition.
Measurement of an impairment loss for long-lived assets and
certain identifiable intangible assets that management expects to
hold and use is based on the fair value of the asset. Long-lived
assets and certain identifiable intangible assets to be disposed
of are reported at the lower of carrying amount or fair value less
costs to sell.
-27-
UPTOWNER INNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NONMARKETABLE SECURITIES
Nonmarketable securities, which consists primarily of an
affiliated corporation and one (2003) and two (2002) affiliated
partnership(s) are stated at cost which does not exceed estimated
net realizable value.
INCOME TAXES
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to different
methods of depreciation for book and tax purposes and net
operating loss carryovers. The deferred tax assets and liabilities
represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and
liabilities are recovered or settled. The Company provides a
valuation allowance for deferred tax assets for which it does not
consider realization of such assets to be more likely than not.
PER SHARE COMPUTATIONS
Income per share computations are based on the weighted average
number of common shares outstanding during the year. The weighted
average number of shares outstanding was 1,529,405 for 2003,
1,580,069 for 2002 and 1,583,563 for 2001.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash equivalents
include time deposits, certificates of deposit, and all highly
liquid debt instruments with original maturities of three months
or less.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
ADVERTISING
Advertising costs are charged to operations as incurred.
AMORTIZATION
The costs of franchise rights acquired are being amortized on the
straight-line method over their remaining contractual lives. Fees
and other expenses associated with the debt refinancing are being
amortized on the straight-line method over the life of the loan.
Amortization expense charged to operations for the fiscal years
ending June 30, 2003, 2002, and 2001was $25,929, $59,428, and
$27,571, respectively.
-28-
UPTOWNER INNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 1 -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
In May, 2003, the FASB issued Statement of Financial Accounting
Standards No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends
and clarifies financial accounting and reporting for derivative
instruments and for hedging activities under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). The Company is required to adopt SFAS 149 for
contracts entered into or modified after June 30, 2003. The
Company does not expect the adoption of SFAS 149 to have a
material impact on its operating results or financial position.
In July, 2003, the FASB issued Statement on Financial Accounting
Standards No. 150, "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity" ("SFAS 150")
SFAS 150 establishes standards for how an issuer classifies and
measures in its statement of financial position certain financial
instruments with characteristics of both liabilities and equity.
The Company is required to adopt SFAS 150 for financial
instruments entered into or modified after May 31, 2003, and
otherwise for periods beginning after June 15, 2003. The Company
does not expect the adoption of SFAS 150 to have a material
impact on its operating results or financial position.
NOTE 2 - IMPAIRMENT OF ASSETS
During the fiscal year ended June 30, 2003, the Company abandoned
its plans to construct a Holiday Inn Hotel on the Kinetic Park
Industrial site due to unsuitable soil compaction studies. In
connection therewith, the Company has determined that the carrying
value of the construction in process and prepaid franchise fee
exceeded its fair value. Accordingly, an impairment loss of
$165,798, which is reported in other expenses, and represents the
excess of the carrying value of $225,798 over the fair value of
$60,000 of deposits to be returned by the seller of the land, has
been charged to operations in the fourth quarter of the fiscal
year ended June 30, 2003. The fair value is based on the amount
agreed to between the Company and the seller of the land.
During the fiscal year ended June 30, 2002, the Company initiated
a plan to dispose of the Uptowner Inn Hotel. The sale of the hotel
closed July 3, 2002. In connection therewith, the Company
determined that the carrying value of the hotel exceeded its fair
value. Accordingly, an impairment loss of $336,075, which
represents the excess of the carrying value of $2,106,148 over the
fair value of $1,770,073, has been charged to operations in the
fourth quarter of the fiscal year ended June 30, 2002. The fair
value is based on the actual sales price.
-29-
UPTOWNER INNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 3 - LONG-TERM DEBT
The long-term debt of the Company at June 30, 2003 and 2002
consisted of:
2003 2002
---- ----
Notes payable to financial institutions:
8.7% installment note due a financial institution, secured by
a vehicle, payable at $634 per month including interest,
until July, 2004 $ 7,918 $ 14,525
Note due a financial institution, secured by deed of trust,
payable at $17,268 per month including interest, interest rate
9.42% as of June 30, 2002, variable interest rate based upon the
three year constant maturity Treasury Bill rate (change will not
occur more often than every three years)
until December, 2014* -0- 1,503,581
Other notes payable:
8.25% note due the Ohio National Life Insurance Company, secured
by a deed of trust including equipment, furniture and fixtures
and an assignment of rents, principal and interest payable at
$57,941 per month with one final payment of the
balance due in February, 2012. 6,598,921 6,743,270
10% mortgage note due an individual, secured by a deed of
trust, payable at $733 per month, including interest, until
July, 2002 -0- 1,031
2% note due City of Huntington, secured by a second deed of
trust, payable at $2,024 per month, including interest, until
January, 2008 -0- 129,940
10% note due an individual, unsecured, payable at $100 per
month, including interest, until July, 2003 -0- 1,143
5.5% mortgage note due to the West Virginia Housing
Development Fund, secured by a deed of trust, payable at
$3,070 per month, including interest, until November, 2008** -0- 399,021
6% note due an individual, payable at $3,559, including
interest, until July, 2002 -0- 3,540
-------------- --------------
6,606,839 8,796,051
Less current portion 153,290 253,430
-------------- --------------
Long-term portion $ 6,453,549 $ 8,542.621
============== ==============
-30-
UPTOWNER INNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 3 - LONG-TERM DEBT (CONTINUED)
* As part of the debt agreement, deposits will be made monthly
into an escrow account to be used as a reserve for repairs
and capital improvements. At June 30, 2003 and 2002, the
balance in the escrow account is $-0- and $20,000,
respectively.
** As part of the debt agreement, various escrows are required
to cover real estate taxes, hazard insurance, replacement
reserve, other interest and replacement reserve interest. At
June 30, 2003 and 2002, the balance in the escrow is $-0- and
$32,480, respectively.
Maturities of long-term debt during the next five years ending
June 30 and thereafter are as follows:
2004 $ 153,290
2005 170,780
2006 184,729
2007 200,559
2008 217,745
Thereafter 5,679,736
---------
Total $ 6,606,839
=========
NOTE 4 - RELATED PARTY TRANSACTIONS
During the fiscal year ended June 30, 2003, the Company sold three
of its commercial rental properties to a company partially owned
by Uptowner Inns, Inc.'s Chairman of the Board of Directors,
President and Chief Executive Officer and a director who are also
stockholders for $1.113 million. The transaction resulted in the
payoff of an existing note payable with an outstanding balance of
$393,115, receipt of cash totaling $702,759 and a gain on the sale
totaling $362,731. As of June 30, 2003, Uptowner Inns, Inc. has a
receivable from this company totaling $4,798 for insurance
premiums paid on the sold properties (reported as due from related
parties).
The Company's Chairman of the Board of Directors, President and
Chief Executive Officer, who is a stockholder of the Company, also
controls other companies and partnerships. During the fiscal year
ended June 30, 2002, the Company purchased an interest in one of
the corporations and two of the partnerships for a total
investment of $39,891. The investments are accounted for at cost
and are reported as non-current non-marketable securities in the
accompanying 2003 and 2002 financial statements. During the fiscal
year ended June 30, 2003, one of the partnerships was liquidated.
As a result of the liquidation, the Company received 64,719 shares
of its own stock as a liquidation distribution. The Company's
basis in the partnership was $25,891. In addition, as of June 30,
2003 and 2002, the Company has an accounts receivable due from the
related corporation totaling $5,446. As of June 30, 2003, the
Company also had a note receivable due from the related
corporation totaling $30,000. The note was due June 1, 2003 and
carries an interest rate of 10%.
-31-
UPTOWNER INNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 4 - RELATED PARTY TRANSACTIONS (CONTINUED)
During the fiscal years ended June 30, 2003 and 2002, the
Company paid $66,359, and $92,290, respectively, to an insurance
company which is partially owned by a member of the Board of
Directors. The payments represent premium payments for the
Company's business insurance (i.e., property and liability,
auto, crime, etc.) and are expensed over the term of the policy.
The mother of the Company's Chairman of the Board of Directors,
President and Chief Executive Officer, who held that position
until July, 2002, resides in the Company's hotel. The lodging
and meals are provided at no cost. In addition, she receives
compensation totaling $40,000 per year for two years as part of
a compensation package for her retirement.
During the year ended June 30, 2001, the Company acquired land
and a building from an entity that was controlled by the
Company's Chief Executive Officer and stockholder. The cost of
the land and building totaling $329,500 is reported as property
and equipment in the accompanying 2003 and 2002 financial
statements. In addition, an investment which consisted of
undeveloped land was acquired in the amount of $35,000 and was
reported at cost. Liabilities were assumed of $272,935 and a
promissory note issued for $91,565. The investment in the
undeveloped land was sold in fiscal year ended June 30, 2002 for
$35,575 and resulted in a gain of $575. The liabilities assumed
and the promissory note were paid in full in fiscal year ended
June 30, 2002. Beginning in fiscal year ended June 30, 2002, the
land and building was leased to an outside party under an
operating lease expiring March, 2007.
During the fiscal year ended June 30, 2001, the Company
renegotiated a loan with a former stockholder. The refinancing
of this debt resulted in a waiver of interest of $60,161 and is
reflected in the statement of operations for the fiscal year
ended June 30, 2001. As of June 30, 2003 and 2002, the balance
of the note payable is $-0- and $3,540, respectively and is
included in Note 3.
The Company had a note payable due an entity that is controlled
by a major stockholder. The balance of the note at June 30, 2003
and 2002 is $-0-. Interest expense for the fiscal years ended
June 30, 2003, 2002, and 2001 totaled $-0-, $4,342 and $3,753,
respectively.
NOTE 5 - INCOME TAXES
The provision (benefit) for income taxes for 2003, 2002 and 2001
consists of the following:
2003 2002 2001
---- ---- ----
Current tax expense (benefit) $ -0- $ -0- $ -0-
Deferred tax expense (benefit) 21,958 (132,098) -0-
------ -------- ---
Total Income Tax Expense (Benefit) $ 21,958 $ (132,098) $ -0-
====== ======== ===
-32-
UPTOWNER INNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 5 - INCOME TAXES (CONTINUED)
A reconciliation of income tax at the statutory rate to the Company's effective rate is as follows:
2003 2002 2001
---- ---- ----
Federal income tax expense (benefit)
computed at statutory rate 34.0% (34.0)% 34.0%
Depreciation (213.8) 0.0 0.0
Gain on sale of property 133.6 0.0 0.0
Other .1 .8 8.1
Impairment 0.0 19.1 0.0
Valuation allowance 59.7 (8.0) (42.1)
------- ------ -----
Effective Tax Rate (Benefit) 13.6% (22.1)% 0.0%
======= ====== =====
The following temporary differences gave rise to the deferred tax asset at June 30, 2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
Net operating loss carryforward $ 249,651 $ (70,248) $ 4,101
Contribution carryforward 3,418 (1,785) (668)
Excess of financial accounting over
tax prepaid franchise amortization (1,764) (1,340) (2,755)
Excess tax over financial accounting
depreciation (326,052) (10,764) 5,325
Change in valuation allowance 96,705 (47,961) (6,003)
--------- --------- -------
Total $ 21,958 $ (132,098) $ -0-
========= ======== =======
The components of deferred tax assets and deferred tax liabilities are as follows as of June 30:
2003 2002 2001
---- ---- ----
Deferred tax assets:
Net operating loss carryforward $ 349,849 $ 599,499 $ 529,249
Contribution carryforward -0- 3,418 1,634
Franchise rights 5,859 4,095 -0-
-------- -------- ---------
Total Deferred Tax Asset 355,708 607,012 530,883
Deferred tax liabilities:
Depreciation (138,769) (464,820) (472,828)
-------- -------- --------
216,939 142,192 58,055
Valuation allowance (106,799) (10,094) (58,055)
-------- -------- --------
Net Deferred Tax Asset $ 110,140 $ 132,098 $ -0-
======== ======== =========
-33-
UPTOWNER INNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 5 - INCOME TAXES (CONTINUED)
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will be realized.
Management considered the scheduled reversal of deferred tax
assets and liabilities, projected future taxable income, and
certain distinct tax and operating strategies in making this
assessment. The amount of the net deferred tax asset determined
to be realized was measured by calculating the tax effect of tax
and operating strategies, which included the sale of one of the
Company's hotels and the majority of it's rental properties.
Based on these assessments, management determined that it is
more likely than not that $110,140, $132,098 and $-0- of such
deferred tax assets will be realized for the fiscal years ended
June 30, 2003, 2002 and 2001, respectively. Thus, the total
valuation allowance for deferred tax assets as of June 30, 2003,
2002 and 2001 was $106,799, $10,094 and $58,055, respectively.
Therefore, the valuation allowance for deferred tax assets
increased $96,705 for the fiscal year ended June 30, 2003 and
decreased $47,961 and $6,003 for the fiscal years ended June 30,
2002 and 2001, respectively. If changes occur in the assumptions
underlying management's tax and operating strategies or in the
scheduling of the reversal of the Company's deferred tax assets
and liabilities, the valuation allowance may need to be adjusted
in the future.
In fiscal years ended June 30, 2003 and 2001, the Company
utilized $734,262 and $13,408 of the net operating loss
carryforwards, and has reduced the unused net operating loss
carryforwards accordingly.
The Company has available at June 30, 2003, unused net operating
loss carryforwards that may be applied against future taxable
income and that expire as follows:
Unused Net Operating Loss
Expiration Date Carryforwards
--------------- -------------
June 30, 2005 $ 73,005
June 30, 2006 147,900
June 30, 2007 78,505
June 30, 2008 18,147
June 30, 2009 70,932
June 30, 2011 3,816
June 30, 2012 1,150
June 30, 2013 199,619
June 30, 2019 54,375
June 30, 2020 165,986
June 30, 2021 1,341
June 30, 2022 214,194
----------
Total $ 1,028,970
==========
-34-
UPTOWNER INNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 6 - COMMITMENTS AND CONTINGENCIES
On June 26, 2003, Uptowner Inns, Inc. entered into a franchise
agreement for the construction of a new Holiday Inn Hotel in the
amount of $55,000. This agreement states specific requirements
for completion of the hotel and approval before opening no later
than November 30, 2005. The total estimated cost to purchase the
land and construct the hotel is approximately $7.3 million.
The Company was a defendant in a lawsuit filed by the seller of
a parcel of property which was to be used to construct a Holiday
Inn Hotel for breach of contract and for failure to purchase the
land and develop the hotel. The suit also alleges violations of
confidentiality agreements. The Company filed a countersuit
alleging fraud, misrepresentation, and breach of contract. The
Company maintained that the results of soil compaction studies
revealed that the land was not suitable for its intended
purpose. A settlement agreement was reached in August, 2003 (See
Note 2 and 7).
The Company maintains cash balances at local banks. Accounts at
these financial institutions are insured by the Federal Deposit
Insurance Corporation up to $100,000. At times, cash balances
were in excess of federally insured limits.
NOTE 7 - SUBSEQUENT EVENTS
In August, 2003, a settlement agreement was signed by the
Company and the seller of a parcel of property which was to be
used to construct a Holiday Inn Hotel (See Note 6). Under the
terms of the settlement, the Company will received its deposit
totaling $60,000 back from the seller and all claims between the
two parties were dismissed. The effects of this settlement have
been reflective in the accompanying June 30, 2003 financial
statements.
NOTE 8 - DISCONTINUED OPERATIONS
During the fiscal year ended June 30, 2003, the Company sold
four of its rental properties. The decision to sell these
components was based on the desire of management to discontinue
the residential and commercial rental business and to focus the
efforts and resources of the Company on the hotel business. The
results of operations totaling $273,812 inclusive of a gain on
disposal of $294,136, was reported in discontinued operations in
the accompanying 2003 financial statements. The accompanying
2002 and 2001 financial statements have been restated for
comparative purposes totaling $13,251 and $(3,403),
respectively. No income tax was reported on the discontinued
operations due to the utilization of net operating loss
carryforwards. Revenue related to the rental properties totaled
$111,907, $222,307 and $216,071 in 2003, 2002 and 2001,
respectively.
-35-
UPTOWNER INNS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
NOTE 9 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Management has estimated the fair value of its financial
instruments as of June 30, 2003, and 2002 using available market
information or other appropriate valuation methodologies.
Considerable judgement, however, is required in interpreting
market data to develop the estimates of fair value. Accordingly,
the estimates presented in this disclosure are not necessarily
indicative of the amounts the Company would realize in a current
market exchange. The following methods and assumptions were used
in estimating its fair value disclosures for financial
instruments:
The carrying amounts for cash; accounts receivable; due from
officers, directors, employees and related parties; note
receivable related party; and accounts payable approximate fair
value because of the short maturity of those instruments.
For nonmarketable securities, there are no quoted market prices
available for those or similar investments. A reasonable
estimate of fair value could not be made without incurring
excessive costs. Therefore, it was not practicable to determine
fair value.
The fair value of the Corporation's long-term debt is estimated
based on the rates currently available to the Company for debt
with similar terms and remaining maturities. The estimated fair
value for long-term debt as of June 30, 2003 and 2002 was
$6,607,000 and $8,670,000, respectively.
-36-
UPTOWNER INNS, INC. AND SUBSIDIARY
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective June 17, 2002, the registrant, without the approval of
the registrant's board of directors, dismissed its independent public auditors,
J.D. Cloud & Co. L.L.P. ("Cloud"). Cloud served as the registrant's independent
certified public accountant pursuant to an engagement letter dated July 13,
2001, and audited the registrant's financial statements for the fiscal year
ended June 30, 2001, but was not retained by the registrant to audit the
registrant's financial statements for the fiscal year ended June 30, 2002.
Cloud's reports on the consolidated financial statements of the registrant for
the fiscal year ended June 30, 2001, did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty,
audit scope or accounting principles. There have been no disagreements between
the registrant and Cloud on any matter of accounting principles or practices,
consolidated financial statement disclosure or audit scope or procedure. The
registrant's predecessor auditors, Somerville & Company, P.L.L.C., issued
unqualified opinions for the registrant's financial statements for the fiscal
years ended June 30, 2000, and June 30, 1999.
On June 17, 2002, the registrant signed an engagement letter
with Diamond, Leftwich and Co., PLLC. On June 24, 2002, Diamond, Leftwich and
Co., PLLC, resigned. On July 29, 2002, the registrant engaged Sullivan, Ware &
Hall, P.L.L.C., as its independent certified public accountants to audit the
registrant's financial statements for the fiscal year ended June 30, 2002. There
were no disagreements between the registrant and Diamond, Leftwich and Co.,
PLLC, on any matter of accounting principles or practices, consolidated
financial statement disclosure or audit scope or procedure.
ITEM 9A. CONTROLS AND PROCEDURES
The company's chief executive officer and chief financial
officer, based on their evaluation as of the end of the period covered by this
report, of the company's disclosure controls and procedures (as defined in Rule
13(a)-14(e) of the Securities Exchange Act of 1934), have concluded that the
company's disclosure controls and procedures are adequate and effective for
purposes of Rule 13(a)-14(c) and timely, alerting them to material information
relating to the company required to be included in the company's filings with
the Securities and Exchange Commission under the Securities Exchange Act of
1934.
There are no significant changes in the company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
Appearing as exhibits to this annual report on Form 10-K,
certificates of the chief executive officer and chief financial officer appear.
This form of certification is required in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002. This section of the annual report on Form 10-K is
the information concerning the controls evaluation referred to in the Section
302 certifications. This information should be read in conjunction with those
certifications for a more complete understanding of the topics presented.
Disclosure controls and procedures that a company designs with
the objective of ensuring that information required to be disclosed in their
reports filed under the Securities Exchange Act of 1934 (such as this Form
10-K), is recorded, processed, summarized and reported within the time period
specified under the SEC's rules and forms. Disclosure controls are also designed
with the objective of ensuring that such information is accumulated and
communicated to management, including the CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure. Internal controls are procedures
that a company designs with the objective of providing reasonable assurance that
transactions are properly authorized, assets are safeguarded against
unauthorized or improper use and transactions are property recorded and reported
all to permit the preparation of a company's financial statements in conformity
with generally accepted accounting principles.
-37-
UPTOWNER INNS, INC. AND SUBSIDIARY
ITEM 9A. (Cont'd)
The company's management, including the CEO and CFO, does not
expect that our disclosure controls or internal controls will prevent all error
and fraud. A control system, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments and
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of control also is based in
part upon certain assumptions about the likelihood of future events and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate.
Based upon the controls evaluation conducted by our CEO and
CFO, they have concluded that, subject to the limitations noted above, the
company's disclosure controls are effective to ensure that material information
relating to the Company and its subsidiaries is made known to management,
including the CEO and CFO, particularly during the period when our periodic
reports are being prepared, and that our internal controls are effective to
provide reasonable assurance that our financial statements are fairly presented
in conformity with generally accepted accounting principles.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10, Part III, will be provided
by amendment to this Form 10-K to be filed no later than 120 days after the end
of the company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11, Part III, will be provided
by amendment to this Form 10-K to be filed no later than 120 days after the end
of the company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12, Part III, will be provided
by amendment to this Form 10-K to be filed no later than 120 days after the end
of the company's fiscal year.
-38-
UPTOWNER INNS, INC. AND SUBSIDIARY
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the fiscal year ended June 30, 2003, the Company sold
three of its commercial rental properties to a company partially owned by
Uptowner Inns, Inc.'s Chairman of the Board of Directors, President and Chief
Executive Officer and a director who are also stockholders for $1.113 million.
The transaction resulted in the payoff of an existing note payable with an
outstanding balance of $393,115, receipt of cash totaling $702,759 and a gain on
the sale totaling $362,731. As of June 30, 2003, Uptowner Inns, Inc. has a
receivable from this company totaling $4,798 for insurance premiums paid on the
sold properties (reported as due from related parties).
The Company's Chairman of the Board of Directors, President and
Chief Executive Officer, who is a stockholder of the Company, also controls
other companies and partnerships. During the fiscal year ended June 30, 2002,
the Company purchased an interest in one of the corporations and two of the
partnerships for a total investment of $39,891. The investments are accounted
for at cost and are reported as non-current non-marketable securities in the
accompanying 2003 and 2002 financial statements. In addition, as of June 30,
2003 and 2002, the Company has an accounts receivable due from the related
corporation totaling $5,446. As of June 30, 2003, the Company also had a note
receivable due from the related corporation totaling $300,000. The note was due
June 1, 2003 and carries an interest rate of 10%.
During the fiscal years ended June 30, 2003 and 2002, the
Company paid $66,359 and $92,290, respectively, to an insurance company which is
partially owned by a member of the Board of Directors. The payments represent
premium payments for the Company's business insurance (i.e., property and
liability, auto, crime, etc.) and are expensed over the term of the policy.
The mother of the Company's Chairman of the Board of Directors,
President and Chief Executive Officer, who held that position until July 2002,
resides in the Company's hotel. The lodging and meals are provided at no cost.
In addition, she receives compensation totaling $40,000 per year for two years
as part of a compensation package for her retirement.
During the year ended June 30, 2001, the Company acquired land
and a building from an entity that was controlled by the Company's Chief
Executive Officer and stockholder. The cost of the land and building totaling
$329,500 is reported as property and equipment in the accompanying 2003 and 2002
financial statements. In addition, an investment which consisted of undeveloped
land was acquired in the amount of $35,000 and was reported at cost. Liabilities
were assumed of $272,935 and a promissory note issued for $91,565. The
investment in the undeveloped land was sold in fiscal year ended June 30, 2002
for $35,575 and resulted in a gain of $575. The liabilities assumed and the
promissory note were paid in full in fiscal year ended June 30, 2002. Beginning
in fiscal year ended June 30, 2002, the land and building was leased to an
outside party under an operating lease expiring March, 2007.
During the fiscal year ended June 30, 2001, the Company
renegotiated a loan with a former stockholder. The refinancing of this debt
resulted in a waiver of interest of $60,161 and is reflected in the statement of
operations for the fiscal year ended June 30, 2001. As of June 30, 2003 and
2002, the balance of the note payable is $-0- and $3,540, respectively, and is
included in Note 3.
The Company had a note payable due an entity that is controlled
by a major stockholder. The balance of the note at June 30, 2003 and 2002 is
$-0-. Interest expense for the fiscal years ended June 30, 2003, 2002, and 2001
totaled $-0-, $4,342 and $3,753, respectively.
-39-
PART IV
UPTOWNER INNS, INC. AND SUBSIDIARY
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) Financial Statements - See Index to Consolidated Financial Statements
on page 17 of this Form 10-K:
(A)(2) Financial Statement Schedules
None
(A)(3) Exhibits:
(3.1) Articles of Incorporation (Incorporated by reference to
Exhibit 3 to the Registrant's S-1 Registration Statement
No. 2-90194).
(3.2) Bylaws (Incorporated by reference to Exhibit 3 to the
Registrant's S-1 Registration Statement No. 2-90194).
(21) Subsidiaries of Uptowner Inns, Inc.
(31.1) Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 for Carl Midkiff.
(31.2) Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 for David Robinson.
(32.1) Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for Carl Midkiff.
(32.2) Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 for David Robinson.
-40-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) UPTOWNER INNS, INC.
By /s/ Carl Midkiff
--------------------------------------------------
Carl Midkiff, President and Chief Executive
Officer
September 29, 2003
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By /s/ Richard Monga
-------------------------------------------------
Richard Monga, Vice President and
Director
September 29, 2003
By /s/ David Robinson
-------------------------------------------------
David Robinson, Treasurer and Director
(Principal Financial and Accounting
Officer)
September 29, 2003
By /s/ Hobart Adkins
--------------------------------------------------
Hobart Adkins, Secretary
September 29, 2003
By /s/ Carl Midkiff
--------------------------------------------------
Carl Midkiff, President and Chief Executive
Officer
September 29, 2003
-41-