SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
FILED BY THE REGISTRANT [X]
FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
[ ] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12
UPTOWNER INNS, INC.
- --------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- --------------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT IF OTHER THAN REGISTRANT)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(I)(1) and
0-11.
1) Title of each class of securities to which transaction
applies:
--------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
--------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------
5) Total fee paid:
--------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
Amount Previously Paid:_________________________________________________________
Form, Schedule or Registration Statement No.:___________________________________
Filing Party:___________________________________________________________________
Date Filed:_____________________________________________________________________
UPTOWNER INNS, INC.
741 5th AVENUE
HUNTINGTON, WEST VIRGINIA 25701
(304) 525-8162
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 11, 2004
As a shareholder of Uptowner Inns, Inc. ("Uptowner" or the "company"),
you are hereby given notice of and invited to attend in person or by proxy the
Special Meeting of Shareholders of Uptowner to be held at the offices of the
company at 800 Third Avenue, Huntington, West Virginia, on June 11, 2004, at
10:00 a.m., local time, for the following purposes:
1. To approve and adopt a one for 25,000 reverse stock split that would
result in (a) shareholders receiving one share of new common stock,
$1.00 par value (the "New Common Stock") for each 25,000 shares of
common stock owned as of the effective date, and (b) shareholders
owning less than 25,000 shares of the company's common stock
receiving cash in lieu of any fractional share they would otherwise
be entitled to receive as a result of the reverse stock split at a
rate of $1.07 per share on a pre-split basis (the "Reverse Stock
Split").
2. To approve and adopt the following amendment to the Articles
of Incorporation (the "Articles of Incorporation") of Uptowner:
RESOLVED, that Article IV of the Articles of Incorporation of the
Corporation be amended to read, in its entirety, as follows:
IV. The amount of the total authorized capital of the Corporation
shall be Two Hundred Dollars ($200), which shall consist of Two
Hundred (200) shares of Common Stock, par value $1.00 per share.
3. To have the proxies vote in accordance with the recommendation of
management as to any other matters, which may properly come before
the Special Meeting or any adjournments thereof and which relate
only to matters not known by the company a reasonable time before
solicitation of this proxy.
The board of directors has fixed the close of business on May 13, 2004,
as the record date (the "Record Date") for determining shareholders entitled to
notice of and to vote at such meeting and any adjournment thereof. Only
shareholders at the close of business on the Record Date are entitled to notice
of and to vote at such meeting. For the reasons set forth in the Proxy
Statement, the board of directors unanimously recommends that you vote for
approval of the Reverse Stock Split. SHAREHOLDERS WHO DO NOT VOTE FOR THE
PROPOSAL, WHO DELIVER, BEFORE THE VOTE IS TAKEN, WRITTEN NOTICE OF THE
SHAREHOLDER'S INTENT TO DEMAND PAYMENT IF THE TRANSACTION IS CONSUMMATED, AND
WHO FOLLOW THE PROCEDURES SET FORTH ON APPENDIX I TO THE PROXY STATEMENT, WILL
HAVE APPRAISAL RIGHTS UNDER WEST VIRGINIA LAW.
You are cordially invited to attend the meeting. However, whether or
not you expect to attend the meeting, it is very important for your shares to be
represented at the meeting. We respectfully request that you date, execute and
mail promptly the enclosed proxy in the enclosed stamped envelope for which no
additional postage is required if mailed in the United States. A proxy may be
revoked by a shareholder by notifying the secretary of Uptowner in writing at
any time prior to its use, by executing and delivering a subsequently dated
proxy or by personally appearing at the Special Meeting and casting your vote,
each as specified in the enclosed Proxy Statement.
By Order of the Board of Directors
/s/ Carl E. Midkiff
---------------------
Carl E. Midkiff
President and Chief Executive Officer
Dated: May 21, 2004
YOUR VOTE IS IMPORTANT. PLEASE EXECUTE AND RETURN PROMPTLY
THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED.
-2-
UPTOWNER INNS, INC.
741 5th AVENUE
HUNTINGTON, WEST VIRGINIA 25701
(304) 525-8162
PROXY STATEMENT
FOR THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 11, 2004
To Our Shareholders:
This Proxy Statement is furnished to the shareholders of Uptowner Inns,
Inc. ("Uptowner" or the "company") for use at the Special Meeting of
Shareholders on June 11, 2004 (the "Special Meeting"), or at any adjournment or
adjournments thereof, for the purposes set forth in the accompanying Notice of
Special Meeting of Shareholders. The enclosed proxy is solicited on behalf of
the board of directors of Uptowner and can be revoked at any time prior to the
voting of the proxy (as provided herein). Unless a contrary choice is indicated,
all duly executed proxies received by Uptowner will be voted as follows:
1. To approve and adopt a one for 25,000 reverse stock split that would
result in (a) shareholders receiving one share of new common stock,
$1.00 par value (the "New Common Stock") for each 25,000 shares of
common stock owned as of the effective date, and (b) shareholders
owning less than 25,000 shares of the company's common stock
receiving cash in lieu of any fractional share they would otherwise
be entitled to receive as a result of the reverse stock split at a
rate of $1.07 per share on a pre-split basis (the "Reverse Stock
Split").
2. To approve and adopt the following amendment to the Articles
of Incorporation (the "Articles of Incorporation") of Uptowner:
RESOLVED, that Article IV of the Articles of Incorporation of the
Corporation be amended to read, in its entirety, as follows:
IV. The amount of the total authorized capital of the Corporation
shall be Two Hundred Dollars ($200), which shall consist of Two
Hundred (200) shares of Common Stock, par value $1.00 per share.
3. The proxies will be voted in accordance with the recommendation of
management as to any other matters, which may properly come before
the Special Meeting or any adjournments thereof and which relate
only to matters not known by the company a reasonable time before
solicitation of this proxy.
The record date of shareholders entitled to vote at the Special Meeting
was taken at the close of business on May 13, 2004 (the "Record Date"). The
approximate date on which this Proxy Statement and the enclosed proxy are first
being sent to shareholders is May 21, 2004. The mailing address of Uptowner is
741 5th Avenue, Huntington, West Virginia 25701. Form 10-K for the fiscal year
ended June 30, 2003 as well as Form 10-Qs for the Quarter ended September 30,
2003, December 31, 2003, and March 31, 2004, are enclosed with this Proxy
Statement as Appendix IV and are incorporated by reference herein.
Shareholders who do not vote in favor of the proposal who deliver,
before the vote is taken, written notice of the shareholder's intent to demand
payment if the transaction is consummated and who comply with the provisions of
West Virginia Code Sections 31D-13-1302, et seq. will have appraisal rights with
respect to their shares. Those Code sections are attached as Appendix I to this
Proxy Statement.
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement or related Schedule 13E-3,
and if given or made, such information or representation should not be relied
upon as having been authorized by Uptowner.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE TRANSACTION PROPOSED HEREIN OR
DETERMINED IF THIS PROXY STATEMENT IS TRUTHFUL OR COMPLETE. THE COMMISSION HAS
NOT PASSED UPON THE FAIRNESS OR MERITS OF THE TRANSACTIONS CONTEMPLATED HEREBY,
NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
By Order of the Board of Directors
/s/ Carl E. Midkiff
---------------------
Carl E. Midkiff
President and Chief Executive Officer
Dated: May 21, 2004
-2-
TABLE OF CONTENTS
PAGE
SUMMARY OF TERMS OF REVERSE STOCK SPLIT................................. 1
SUMMARY OF FINANCIAL INFORMATION........................................ 3
SPECIAL FACTORS......................................................... 3
Purpose and Reasons for the Reverse Stock Split.................... 3
Background......................................................... 7
Alternatives Considered by the Board of Directors.................. 11
Valuation.......................................................... 12
Standard of Value.................................................. 14
Premise of Value................................................... 14
Purpose of Report.................................................. 14
Approach, Limiting Conditions, and Information Considered.......... 14
Approaches To Valuation............................................ 15
Reconciliation of Valuation Estimates.............................. 17
Fairness of the Reverse Stock Split Proposal....................... 18
Certain Effects of Reverse Stock Split Proposal on Uptowner's
Shareholders....................................................... 23
Federal Income Tax Consequences.................................... 29
GENERAL INFORMATION..................................................... 32
Voting Procedures and Revocability of Proxies...................... 32
Persons Making the Solicitation.................................... 33
PROPOSAL -- REVERSE STOCK SPLIT AND RELATED
AMENDMENT TO UPTOWNER'S ARTICLES OF INCORPORATION....................... 34
General............................................................ 34
Payment for Shares................................................. 34
Vote Required...................................................... 35
Source and Amount of Funds or Other Consideration; Expenses of
Transaction........................................................ 35
MANAGEMENT.............................................................. 35
Information with Respect to the Directors and Executive Officers... 35
Committees of the Board of Directors............................... 37
Report of Carl Midkiff Concerning the Audit........................ 37
Directors' Compensation............................................ 38
Board of Directors Report on Executive Compensation................ 38
Section 16(a) Beneficial Ownership Reporting Compliance............ 38
Executive Compensation and Other Information....................... 39
INFORMATION ABOUT UPTOWNER INNS, INC.................................... 39
General............................................................ 39
Property........................................................... 40
Security Ownership of Certain Beneficial Owners and Management..... 42
OTHER MATTERS........................................................... 43
FORWARD-LOOKING STATEMENTS.............................................. 43
AVAILABLE INFORMATION................................................... 43
DOCUMENTS INCORPORATED BY REFERENCE..................................... 44
-i-
APPENDICES -
Appendix I - West Virginia Code, Article 13. Appraisal Rights, Sections
31D-13-1301 to - 03; Sections 31D-13-1320 to - 26; Sections
31D-13-1330 and - 1331.
Appendix II - Valuation of Uptowner Inns, Inc. as of June 30, 2003
Appendix III - Articles of Amendment to Articles of Incorporation of
Uptowner Inns, Inc.
Appendix IV - Form 10-K for the fiscal year ended June 30, 2003 and Form
10-Qs for the Quarter ended September 30, 2003, December
31, 2003, and March 31, 2004.
-ii-
SUMMARY OF TERMS OF REVERSE STOCK SPLIT
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO BETTER
UNDERSTAND THE TERMS AND CONDITIONS OF THE REVERSE STOCK SPLIT, AS WELL AS THE
CONSEQUENT AMENDMENTS TO OUR ARTICLES OF INCORPORATION, YOU SHOULD CAREFULLY
READ THIS ENTIRE DOCUMENT, ITS ATTACHMENTS AND THE OTHER INFORMATION TO WHICH WE
REFER.
- The board of directors of Uptowner has unanimously approved, and
recommended that the shareholders approve, a 1-for-25,000 reverse
split of the Existing Common Stock. Each 25,000 shares of
Existing Common Stock outstanding immediately prior to the
completion of the Reverse Stock Split will be automatically
converted into one share of New Common Stock (see "Background"
on Page 7).
- No new certificates representing fractional shares of the New
Common Stock will be issued. Instead, each fractional share will
be purchased by Uptowner for a cash payment equal to $1.07 per
share on a pre-split basis. The $1.07 per share payment reflects
the proportionate value of $1,600,000. This valuation is based
upon the valuation conducted by Somerville & Company PLLC
attached hereto as Appendix II (See "Background" on page 7;
"Valuation" on Page 12; and "Fairness of the Reverse Stock
Split Proposal" on page 18).
- As a result of the Reverse Stock Split, persons who hold fewer
than 25,000 shares of Existing Common Stock (i.e. all of
Uptowner's unaffiliated shareholders) immediately prior to the
Reverse Stock Split will have their entire interest in the New
Common Stock purchased by Uptowner and will no longer be holders
of New Common Stock (see "Certain Effects of Reverse Stock Split
Proposal on Uptowner's Shareholders" on page 23).
- The principal purpose of the Reverse Stock Split is to reduce the
number of shareholders of record of Uptowner's Common Stock to
fewer than 300, enabling Uptowner to terminate its status as a
reporting company under the Exchange Act, and thereby eliminate
the significant expenses associated with being a reporting
company (see "Purpose and Reasons for the Reverse Stock Split" on
page 3).
- The principal advantage of the Reverse Stock Split to Uptowner
and its affiliated shareholders is the direct and indirect
expense savings that are expected to be realized by termination
of Uptowner's reporting company status (see "Purpose and Reasons
for the Reverse Stock Split" on page 3).
- A principal advantage of the Reverse Stock Split to shareholders
who held fewer than 25,000 shares of Existing Common Stock is
that Uptowner will purchase their fractional shares of New Common
Stock thereby creating a liquidity event for all of Uptowner's
unaffiliated shareholders (see "Certain Effects of Reverse
Stock Split Proposal on Uptowner's Shareholders" on page 23).
-1-
- The principal disadvantages of the Reverse Stock Split are that
most of Uptowner's shareholders will cease to be shareholders
following the Reverse Stock Split and will not receive certain
benefits of the Reverse Stock Split (see "Certain Effects of
Reverse Stock Split Proposal on Uptowner's Shareholders" on page
23).
- Approval of the Reverse Stock Split and the amendment to the
Articles of Incorporation to effect the Reverse Stock Split will
require approval by holders of a majority of the outstanding
shares of Existing Common Stock (see "Proposal--Reverse Stock
Split and Related Amendments to Uptowner's Articles of
Incorporation--Vote Required" on page 35).
- Each shareholder whose fractional share is repurchased by
Uptowner will recognize gain or loss for federal income tax
purposes measured by the difference between the shareholder's
basis in the fractional share and the cash consideration received
for the fractional share. The gain or loss will be capital gain
or loss if the share was held as a capital asset (see "Federal
Income Tax Consequences" on page 29).
- Under the West Virginia Business Corporation Act, shareholders
have appraisal rights and the right to demand payment for their
shares upon complying with the requirements under the Act (see
"Certain Effects of Reverse Stock Split Proposal on Uptowner's
Shareholders Appraisal Rights" on page 29).
- Each of Uptowner's board of directors and affiliates (i.e., Carl
E. Midkiff, Hobart Adkins, Richard Monga, Charles D. Robinson,
Prestige Property, Inc., Violet Midkiff and the Violet Midkiff
Irrevocable Trust) has concluded that the Reverse Stock Split is
fair to Uptowner's shareholders, including the unaffiliated
shareholders of Uptowner from a financial point of view. This
conclusion was based on the valuation performed by Sommerville &
Company, P.L.L.C. and based upon the analysis of several factors
described in detail in the section of this Proxy Statement titled
"Fairness of the Reverse Stock Split Proposal" (see "Fairness of
the Reverse Stock Split Proposal" on page 18).
- The affirmative vote of a majority of the Company's shareholders
is assured because members of the board and management who hold
or control 54.09% of the shares outstanding are expected to vote
in favor of the transaction.
SUMMARY FINANCIAL INFORMATION
Set forth below is summary financial information of Uptowner as of
and for the periods indicated below which have been derived from the financial
statements contained in Uptowner's Annual Report on Form 10-K for the fiscal
year ended June 30, 2003, and for the nine months ended March 31, 2004. The
information presented below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in the company's Form 10-K for the year ended June 30, 2003, and Form
10-Q for the nine months ended March 31, 2004. The financial information that
follows is qualified in its entirety by reference to these reports and other
documents, including the financial statements and related notes contained
therein.
AT OR FOR THE NINE MONTHS
ENDED MARCH, 30 AT OR FOR THE YEAR ENDED JUNE 30
2004 2003 2003 2002 2001
---- ---- ---- ---- ----
Current assets $ 423,559 $ 1,480,926 $ 1,378,941 $ 2,836,016 $ 643,660
Noncurrent assets 8,207,707 7,688,622 7,456,694 8,293,057 10,256,262
Current liabilities 584,172 616,666 630,246 945,170 2,146,937
Noncurrent liabilities 6,331,885 6,492,670 6,453,549 8,542,621 6,636,076
Gross revenues 2,231,973 2,336,113 3,148,792 3,311,361 3,899,075
Income (loss) from continuing operations (95,294) 65,407 (133,875) (478,769) 17,669
Income per common share from continuing operations $ (.02) $ .04 $ (.09) $ (.30) $ .01
Net income per common share (.02) .27 (.09) (.29) .01
Ratio of earnings to fixed charges .91 2.02 .71 .18 1.03
Book value per share 1.15 1.31 1.15 1.04 1.34
SPECIAL FACTORS
PURPOSE AND REASONS FOR THE REVERSE STOCK SPLIT
Although Uptowner has over 1,500 shareholders, Uptowner is more similar to
a closely held company with a small shareholder base than a publicly held
company. For instance, Uptowner's revenues have historically been in the $3.1
million to $4.0 million range, and the company only has one operating asset
which consists of a Holiday Inn in Huntington, West Virginia. Further, over 50%
of Uptowner's outstanding common stock is held or controlled by Carl E. Midkiff.
For instance, Mr. Midkiff owns 261,974 of the company's 1,493,642 shares
directly and 545,161 shares indirectly. Of those shares representing indirect
beneficial ownership, 162,562 shares are owned by Carl Midkiff's mother, Violet
Midkiff, that, due to a power of attorney, are voted by Carl Midkiff. The same
is true of 101,645 shares owned by Violet Midkiff jointly with others including
Carl Midkiff's two minor sons. Carl Midkiff's wife and minor sons own 30,000
shares. Prestige Properties, Inc., an entity owned by Carl Midkiff, owns 40,727
shares. The Violet Midkiff Irrevocable Trust owns 200,000 shares and the Wade
Midkiff Irrevocable Trust owns 10,007 shares. Carl Midkiff serves as the trustee
of the trusts. Carl Midkiff owns 220 shares jointly with another individual.
By virtue of its nature of being a "small" company and operated as such,
Mr. Midkiff and the other three directors have found that compliance with the
various rules and regulations under the Securities and Exchange Act of 1934 (the
"Exchange Act") to be unduly costly in light of the size, structure and nature
of Uptowner's business and shareholder base. Accordingly, the primary reason for
the Reverse Stock Split is to relieve Uptowner of the costs and burdens of
remaining a public company and reduce the costs associated with servicing many
small shareholder accounts.
The board of directors believes that there are considerable costs and
burdens to Uptowner in remaining a public reporting company. To comply with its
obligations under the Exchange Act, Uptowner incurs direct and indirect costs
associated with compliance with the filing and reporting requirements imposed on
public companies. Examples of direct costs savings from termination of
registration of common shares include: lower printing and mailing costs; reduced
-2-
reporting and disclosure requirements due to the company's private status; and
reduction in direct expenses such as word processing and preparing electronic
filings in the EDGAR format prescribed by the Securities and Exchange Commission
(the "SEC" or the "Commission"). Uptowner has determined that there will be a
reduction in audit and legal fees, and additional savings in directors' fees and
other personnel costs once Uptowner is no longer subject to the reporting
requirements of the Exchange Act. Uptowner also incurs indirect costs as a
result of executive time expended to prepare and review such Exchange Act
filings. Ceasing registration of the Common Stock is expected to reduce
substantially many of these out-of-pocket costs.
Uptowner also expects the Reverse Stock Split to reduce the cost of
servicing shareholder accounts. The costs of printing and mailing materials to
shareholders increases for each shareholder account, regardless of the number of
shares held by the shareholder. Many of Uptowner's shareholders hold a
relatively small number of shares, and the cost of servicing such accounts is
disproportionate to the size of the holdings. Based on its experience, Uptowner
believes that total annual savings of approximately $75,000 in previously
estimated costs of continuing as a public company may be realized by going
private. This amount, however, is just an estimate, and the actual savings to be
realized may be higher or lower than this estimate.
In addition, Uptowner's management wishes to reduce the liability
associated with being a public company under the federal securities laws on both
Uptowner and Uptowner's management. The Exchange Act imposes liability on a
company and its management for material misstatements and omissions in a
company's periodic reports and for failure to maintain appropriate procedures
and controls to ensure compliance with and full and fair disclosure in a public
company's reports filed with the SEC and those reports submitted to
shareholders. In addition to legal action that could be brought by federal and
state securities law enforcement agencies, plaintiffs' lawyers, in some
instances, could also bring legal actions against the company and its management
for violations of federal and state securities laws as well as breaches of
fiduciary duty. The company's management is unaware of any potential claims that
could be brought by third parties. Management wishes to reduce Uptowner's and
management's exposure to this type of potential liability. A going-private
transaction would alleviate this liability concern for Uptowner, management and
the affiliated shareholders.
The foregoing represents the reasons of Uptowner, Carl E. Midkiff, Hobart
A. Adkins, Richard Monga and Charles D. Robinson for undertaking the Reverse
Stock Split. Due to health reasons, Violet Midkiff has relied on Carl Midkiff's
advice in this regard and adopts these reasons for the transaction. Because Carl
Midkiff controls Prestige Properties, Inc. and the Violet Midkiff Irrevocable
Trust, these entities adopt the foregoing reasons as well. At the time these
persons considered the Reverse Stock Split, they believed that it was the time
to engage in the Reverse Stock Split because the company had engaged in the sale
of certain real estate owned by it and had the financial resources to fund the
purchase of the fractional shares resulting from the Reverse Stock Split. At
that time (October 2003), the company filed a Schedule 13E-3 and preliminary
proxy statement with the SEC. Uptowner's board of directors was hopeful to
engage in the Reverse Stock Split in January of 2004, but due to various
comments received from the SEC and Uptowner's attempts to respond to those
comments, the regulatory process took much longer than expected. Accordingly,
at the end of February 2004, the opportunity arose for the company to purchase
property in Barboursville, West Virginia. To consummate this purchase, the
company utilized the funds that were previously reserved to engage in the
Reverse Stock Split. The purchase of the Barboursville, West Virginia property
will allow the company to pursue adding a new Holiday Inn although the company
has not yet obtained construction financing for this project. It is expected
that construction for the site will not begin for another year (assuming
adequate financing, site approvals and a mutually agreeable franchise agreement
with Holiday Inn). The earliest that the Holiday Inn will be completed (if
everything goes well) will be 26 months. The company purchased the property for
$808,200 on February 25, 2004.
Barboursville, West Virginia, is approximately 10 miles from the City of
Huntington, West Virginia, both of which are in Cabell County. The unemployment
rate (a preliminary calculation) for Cabell County in March 2004, according to
the U.S. Department of Labor, was 6%. This compares with a national average
unemployment rate of 5.7%. Additionally, according to the U.S. Census, the
median household income in West Virginia in 1999 was $29,696 as compared to a
national average of $41,994. The percentage of persons below the poverty level
in West Virginia was 17.9% compared with a national average of 12.4%. The
hotel's proposed market area includes some areas that the U.S. Small Business
Administration has classified as low income geographic areas.
In the immediate area where the proposed hotel is to be located, the
nearby Best Western Hotel has been under three different franchises and filed
for bankruptcy twice in the last 10 years. The former Gateway Hotel in
Barboursville also filed for bankruptcy. Numerous motels and hotels are present
in the Interstate 64 corridor (approximately 50 miles) between Huntington and
Charleston, West Virginia, where the new hotel would be located and accordingly,
significant competition will exist.
In light of the foregoing, Management views opening a new hotel at this
time as a very risky venture in light of the fact of the economically depressed
economy in the proposed hotel's market area as well as the abundance of hotel
and motel rooms available within the same area. However, management believes
that the possibility exists that the hotel could perform well due to the high
volume of traffic near the proposed hotel site.
Because the company utilized the funds that it planned on using for the
Reverse Stock Split to purchase the foregoing property, the company has entered
into a stock pledge and loan agreement with First Sentry Bank, Inc., the
proceeds of which will be used to fund the Reverse Stock Split. The term of the
loan is for five years and the collateral for the loan is Mr. Midkiff's stock in
Uptowner and his personal guaranty. The stated and effective interest rates are
2% over prime. The loan will be repaid from the company's working capital.
Neither the purchase of the Barboursville, West Virginia, property nor the
availability of such property influenced the board of directors or Carl E.
Midkiff in connection with entering into a going private transaction at this
time. Because this transaction was not in existence at the time of the
valuation, the valuation of Somerville does not contemplate the effect of this
transaction on the company. However, neither the board of directors nor Carl E.
Midkiff considered this transaction in determining the fairness of the Reverse
Stock Split to unaffiliated shareholders due to the risky nature of the proposed
hotel (e.g., whether Uptowner will obtain all necessary approvals to build the
hotel, whether the hotel will be constructed within or close to budget, and
whether there is any demand for such a hotel in the Barboursville area).
During the last 40 years, the company has routinely bought and sold
property and has built three hotels. At the end of April and while on a trip to
Honduras, Mr. Midkiff spotted a dive resort for sale and took the opportunity to
begin negotiations for the purchase of the resort. Uptowner has placed a
refundable $110,000 deposit toward the $2,600,000 purchase price while it
decides whether to purchase the resort. The board of directors approved the
transaction on May 12, 2004, and Uptowner hopes to close the transaction by June
15, 2004. A downpayment of $850,000 will be paid with the balance being seller
financed at an interest rate of 7 1/2% and amortized over 20 years. Uptowner
will mortgage the Barboursville property to finance the downpayment, and Mr.
Midkiff will personally guarantee the loan for the downpayment and the seller
financed portion of the transaction. This opportunity presented itself due to
the declining health of the sellers. Because of the personal guarantees
required, this transaction would not be entered into if Uptowner remained a
public company, as Mr. Midkiff would not be willing to take this personal risk
without other shareholders taking such risk as well.
The potential purchase of the Honduras property did not influence the
board or Carl E. Midkiff in connection with entering into a going private
transaction. Because the potential transaction was not in existence at the time
of the valuation, the valuation of Somerville does not contemplate the effect of
this transaction on the company. Neither the board nor Mr. Midkiff considered
this transaction in determining the fairness of the Reverse Stock Split to
unaffiliated shareholders. This transaction is risky because neither the
company nor management has any experience operating a resort hotel, a dive
resort or property located in a foreign country. Additionally, management will
oversee this property from Huntington, West Virginia, and will rely on and trust
others for the day-to-day management of this property. Further, management has
no experience with the laws or regulations involved in owning and operating a
property in Honduras. Management will be relying on the representations of the
sellers regarding the past performance of the property.
Due to the speculative nature of this venture as outlined above and due to
the fact the company would not engage in such a project if the company remained
a public company due to lenders requiring personal guarantees, management
determined that a new fairness determination was not necessary. Additionally,
the increased debt as a result of financing the project will decrease Uptowner's
cash flow. Accordingly, management did not view an update of the valuation
taking into account this transaction as either warranted or helpful to
unaffiliated shareholders.
For the reasons set forth under "Fairness of the Reverse Stock Split
Proposal," Uptowner, Carl E. Midkiff, Hobart A. Adkins, Richard Monga, Charles
D. Robinson, Violet Midkiff, Prestige Property, Inc. and the Violet Midkiff
Irrevocable Trust believe the reverse stock split is both procedurally and
substantively fair to Uptowner's unaffiliated shareholders.
If the Reverse Stock Split is approved and implemented, Uptowner
believes that the number of shareholders of record of Uptowner's common shares
will be fewer than 300 and will number four. Uptowner intends to terminate the
registration of its New Common Stock under the Exchange Act pursuant to Section
12(g)(4) of the Exchange Act. Following the Reverse Stock Split, the decision by
Uptowner to terminate Exchange Act registration upon implementation of the
Reverse Stock Split does not require shareholder approval and will not be voted
on at the Special Meeting. Uptowner's duty to file periodic reports with the
SEC, such as quarterly and annual reports, will be suspended once Uptowner has
fewer than 300 shareholders of record and has filed the appropriate form with
the SEC. Uptowner plans to file, immediately after shareholder approval, the
form necessary to terminate its SEC reporting obligations. Upon making such
filing, Uptowner will become a private company, and there will be no opportunity
for a public market for Uptowner's securities to develop.
In consideration of the aforementioned reasons, Uptowner's board of
directors on October 17, 2003, approved, subject to approval by Uptowner's
shareholders, a proposal to effect the Reverse Stock Split and to approve the
amendment to Uptowner's Articles of Incorporation.
No unaffiliated representative has been retained to act solely on
behalf of unaffiliated shareholders for purposes of negotiating the terms of the
Reverse Stock Split. Additionally, the board made no specific provision to grant
unaffiliated shareholders access to Uptowner's corporate files, except as may be
required by the West Virginia Business Corporation Act, or to
-3-
obtain counsel. Uptowner has obtained a valuation from the accounting firm of
Somerville & Company, P.L.L.C. ("Somerville"). Somerville provides non-auditing
services for Uptowner.
BACKGROUND
Uptowner was founded by a gentleman named R. P. Holley in the early
1960's. He sold shares in the company throughout West Virginia with many
investors investing less than $100. Thus, that is the reason the company has
over 1,500 shareholders. In the early 1970's, certain management issues arose
necessitating the founder's removal from the company. In order to protect her
investment, Ms. Violet Midkiff assumed the role of President of Uptowner. In
1980, Ms. Midkiff joined with others and engaged in a tender offer of the
company's shares. The company, which was the "bidder" in that tender offer, was
AAA Realty, Inc. Ms. Midkiff and her group sought to obtain a 20% to 30%
interest in Uptowner so as to exercise control of the company. That tender offer
resulted in a tender of approximately 294,000 shares. Thereafter, and from time
to time, Ms. Midkiff or her affiliates (including Carl E. Midkiff) purchased
shares of Uptowner when approached (unsolicited) by Uptowner shareholders. In
2000, Violet Midkiff resigned as President of Uptowner due to very serious
health concerns, and her son, Carl Midkiff, became President of the company at
that time.
At a board of directors' meeting in July 2002, the board discussed the
cost of the company's compliance with the requirements of being an SEC reporting
company and the associated liabilities and addressed the issue of the
feasibility of terminating the company's reporting obligations under the
Exchange Act. Additionally, the board discussed providing shareholders with an
opportunity to liquidate their holdings. The board noted that the company's
shareholder base was made up of a substantial number of shareholders owning less
than 100 shares, as shareholders owning less than 100 shares held approximately
20% of the company's outstanding shares of common stock. At that meeting, the
board authorized the company's chief executive officer to engage the law firm,
Jackson Kelly PLLC, to study the legal ramifications of and to determine the
best method for the company to terminate its Exchange Act reporting obligations.
Jackson Kelly PLLC advised Carl Midkiff that the first step the company needed
to take was to retain an independent accounting firm to audit the company's
books and records. The company had dismissed its auditors effective June 17,
2002, due to differences of opinion as to auditing fees. The prior auditor's
reports 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. Form 8-Ks were filed with the
SEC reflecting this dismissal and the engagement of the accounting firm
Sullivan, Ware & Hall, PLLC, on July 29, 2002, to serve as the company's
independent auditors. Jackson Kelly PLLC then advised the company that it needed
to become current with its Exchange Act reports before seeking to engage in a
going private transaction. Due to the prior auditor's resignation, the company
had not filed any Exchange Act reports since filing its 2001 Form 10-K on
November 2, 2001. In addition, since the early 1980s, none of Carl Midkiff,
Violet Midkiff nor Violet Midkiff Irrevocable Trust had ever filed any reports
under Regulation 13D-G under the Exchange Act nor had any director or executive
officer ever filed any reports under Section 16 of the Exchange Act. Much of
this failure to file arose from these individuals not having legal counsel well-
versed in securities law requirements since the early 1980s. Further, Violet
Midkiff has experienced significant health concerns over the years, and the
current board has only been involved with the company for three years. After
Uptowner filed its various late Exchange Act reports and additional reports, in
July 2003, Carl Midkiff revisited the issue of going private with Jackson Kelly
PLLC.
After reviewing the various methods of reducing the company's
shareholder base, Uptowner's management authorized Jackson Kelly PLLC to begin
preparing the documentation for a Reverse Stock Split. See "Alternatives
Considered By the Board of Directors." Pursuant to the advice of Jackson Kelly
PLLC, the company engaged Somerville to prepare a valuation of the company's
stock with a view to engaging in a reverse stock split to reduce the number of
the company's shareholders to below 300.
Upon completing a draft of the company's 13E-3 Transaction Statement
and Proxy Statement, Jackson Kelly PLLC advised the company's management to call
a special meeting of the company's board of directors to review these documents
and to review the valuation prepared by Somerville and the methodologies used to
arrive at that valuation. At a board of directors' meeting on October 17, 2003,
management discussed the draft of the company's 13E-3 Transaction Statement and
Proxy Statement as well as the evaluation. Management and the board reiterated
its view that Uptowner may expend substantial amounts to maintain its present
status as a public company while Uptowner and its shareholders are deriving few,
if any, benefits therefrom, since Uptowner's Common Stock is not actively
traded. The board considered the advantages and disadvantages of being a private
company.
At that meeting, Jackson Kelly PLLC discussed with the board a reverse
stock split as well as other options for taking Uptowner private. Additionally,
representatives of Somerville reviewed the valuation report and discussed the
various methodologies used. After discussion with legal counsel and Somerville,
the board determined that a Reverse Stock Split was feasible in Uptowner's
current situation.
The board discussed the fairness of the Reverse Stock Split to the
shareholders who will receive New Common Stock. See "Fairness of the Reverse
Stock Split Proposal" below. Because of the estimated cost savings associated
with no longer being a public company, the amount to be received by unaffiliated
shareholders, the lack of any past or likely future liquidity event and the
absence of an active trading market, the board concluded that a Reverse Stock
Split would be fair to unaffiliated shareholders. Uptowner has not solicited any
third party offers to merge or acquire Uptowner, nor did it authorize any member
of the board of directors or unaffiliated party to do so.
Next, the board considered the ratio of the Reverse Stock Split.
Discussion was had regarding the company's shareholder base. The board
considered the various "groupings" of shareholders based upon the number of
shareholders with certain ownership interests and noted that approximately 20%
of the shareholders owned 100 shares or less.
Management recommended that a ratio of 1-to-10,000 would reduce the
record shareholder population below 300 while allowing adequate margin for any
increase in the number of shareholders that might occur prior to the
effectiveness of a Reverse Stock Split (for example, as a result of holders with
shares in "street name" requesting that share certificates be issued in their
own name, or persons other than current shareholders purchasing shares). Also,
this ratio would eliminate the cost of servicing many small shareholder
accounts, and would eliminate all of the non-affiliated shareholders plus a few
affiliated shareholders. Mr. Midkiff advised that he believed that all
non-affiliated shareholders and the affiliated shareholders owning less than
10,000 shares would welcome an opportunity to liquidate their investment. He was
concerned that any ratio that did not eliminate all of the unaffiliated
shareholders would cause any unaffiliated shareholders remaining as shareholders
to seek to have their investment liquidated as well. Accordingly, the board's
goal in choosing the ratio was to eliminate all unaffiliated shareholders. Mr.
Midkiff based his belief upon the number of shareholders who, over the years,
had approached the company requesting repurchases of their shares. Additionally,
other shareholders have, from time to time, mentioned to Mr. Midkiff that they
would appreciate an opportunity to have Uptowner repurchase their shares.
Additionally, management believed that the 1-to-10,000 Reverse Stock Split ratio
would result in Mr. Midkiff, his family members and businesses owned by him to
be the remaining shareholders of Uptowner. This was considered as well, and Mr.
Midkiff noted that it has been he and his family who have had the most risk with
the company. Primarily, lenders have required Mr. Midkiff or his entities to
personally guaranty any loans made to Uptowner, and Mr. Midkiff and the board
agreed that non-affiliated shareholders have not shared the same risk and that
they would be unlikely in the future, if requested by a lender, to personally
guaranty company loans. Accordingly, the board determined that it was in the
best interests of both Uptowner and the unaffiliated shareholders to establish a
ratio that provided the unaffiliated shareholders with an opportunity to receive
cash for their shares.
At the time of the October 17, 2003 meeting, management believed that a
1-to-10,000 ratio would eliminate all of the unaffiliated shareholders.
However, on March 26, 2004, as a result of discussions with the SEC and
reviewing the company's shareholder list, the company realized that its largest
unaffiliated shareholder would remain. Recently, that shareholder had expressed
an interest in selling her shares to the company. In light of this, the board
via an agreement in lieu of special meeting dated April 5, 2004, determined the
exchange ratio to be 1-to-25,000. This increase in the ratio would result in
"cash out" of all unaffiliated shareholders.
Uptowner and its board of directors are proposing the Reverse Stock
Split at this time because the cost of remaining a public company is
significant, especially in relation to the remaining net assets and status of
Uptowner. Additionally, the company was able to obtain financing for the Reverse
Stock Split due to the sale during the last year of certain real property
enabling the company to reduce its outstanding debt.
The construction of what is known as "The Pullman Square Project" did not
impact the desire or decision of management or Carl E. Midkiff, Hobart A.
Adkins, Charles D. Robinson, Violet Midkiff, Violet Midkiff Irrevocable Trust or
Prestige Property, Inc. to engage in a going private transaction at this time.
That project involves the construction of a movie theater and five restaurants
approximately 40 yards away from the hotel. The construction noise and the
reduction of hotel parking because of the construction, management believes, has
caused a reduction in hotel revenues due to decreased occupancy rates.
Completion of the project is expected in mid-to-late 2005. Management expects a
modest increase in occupancy due to the decrease in the noise level but does not
believe that the type of business (movie and restaurant) will generate a
significant increase in hotel occupancy. The only construction which has begun
is the construction of a parking garage. To management's knowledge and at this
time, no leases have been entered into with respect to any of the targeted
businesses. Again, the company is engaging in the transaction at this time
because it has sufficient cash (through financing) to do so.
-4-
After the completion of the discussions, the Reverse Stock Split and
all corporate actions necessary in connection therewith were approved
unanimously by the board of directors, which directed that the Reverse Stock
Split be submitted for approval at a meeting of Uptowner's shareholders.
Failure to approve the Reverse Stock Split will continue Uptowner's
costs of being a public company with minimal corresponding benefit.
If the shareholders approve the Reverse Stock Split, Uptowner intends
to file an amendment to Uptowner's Articles of Incorporation with the Secretary
of State of the State of West Virginia in substantially the form attached hereto
as Appendix III. The Reverse Stock Split will become effective on the date the
amendment is filed with the Secretary of State of the State of West Virginia, or
such later date as is specified in the filing (the "Effective Date"). Uptowner
expects the amendment to become effective as soon as practicable following the
Special Meeting.
ALTERNATIVES CONSIDERED BY THE BOARD OF DIRECTORS
The board of directors and Carl E. Midkiff, Hobart A. Adkins, Charles
D. Robinson and Richard Monga (in their individual capacities) considered
alternative transactions to reduce the number of shareholders but ultimately
determined that the Reverse Stock Split was the preferred method. The board of
directors and Carl E. Midkiff, Hobart A. Adkins, Charles D. Robinson and Richard
Monga (in their individual capacities) considered the following alternative
strategies:
ISSUER TENDER OFFER. The board of directors and Carl E. Midkiff, Hobart
A. Adkins, Charles D. Robinson and Richard Monga (in their individual
capacities) considered an issuer tender offer to repurchase shares of Uptowner's
outstanding Existing Common Stock. The results of an issuer tender offer would
be unpredictable, however, due to its voluntary nature. The board was uncertain
as to whether this alternative would result in shares being tendered by a
sufficient number of record holders so as to permit Uptowner to reduce the
number of shareholders below 300, to reduce its administrative costs related to
servicing shareholders who own a relatively small number of shares and to
terminate its SEC reporting requirements. The board was also uncertain as to
whether many holders of a small number of shares would make the effort to tender
their shares. In addition, the board and Carl E. Midkiff, Hobart A. Adkins,
Charles D. Robinson and Richard Monga (in their individual capacities)
considered the cost of completing the tender offer, which could be significant
in relation to the value of the shares sought to be purchased.
PURCHASE OF SHARES IN THE OPEN MARKET. There is a limited trading
market for the Existing Common Stock with little liquidity; therefore, the board
of directors and Carl E. Midkiff, Hobart A. Adkins, Charles D. Robinson and
Richard Monga (in their individual capacities) believe it would be highly
unlikely that shares could be acquired by Uptowner from a sufficient number of
holders to accomplish the board's objectives.
CONTINUING AS IS. Finally, the board of directors and Carl E. Midkiff,
Hobart A. Adkins, Charles D. Robinson and Richard Monga (in their individual
capacities) considered taking no action to reduce the number of shareholders of
Uptowner. However, due to Uptowner's significant costs of compliance under the
Exchange Act, especially in relation to Uptowner's overall expenses, the board
believes that taking no action at this time is not in the best interests of
Uptowner.
-5-
Because Uptowner is an operating company that historically has operated at
a loss and it would be unlikely that a sale could generate a per share price
equal to or greater than $1.07, the board and Carl E. Midkiff, Hobart A. Adkins,
Charles D. Robinson and Richard Monga (in their individual capacities) did not
give serious consideration to identifying a third party to acquire Uptowner's
assets or stock in a merger or similar transaction.
The board of directors and Carl E. Midkiff, Hobart A. Adkins, Charles D.
Robinson and Richard Monga (in their individual capacities) have determined that
the Reverse Stock Split is the most expeditious and economical method of
changing Uptowner's status from that of a reporting company to that of a
non-reporting company. Uptowner has not sought, and has not received, any
proposals for the merger or consolidation of Uptowner, or for the sale or other
transfer of all or any substantial portion of Uptowner's assets, or for the
securities of Uptowner that would enable the holder thereof to exercise control
of Uptowner. See "Background."
Due to health reasons, Violet Midkiff relied upon and adopted Carl E.
Midkiff's analysis and conclusion regarding the above alternatives.
Additionally, because Mr. Midkiff owns Prestige Properties, Inc. and is the
trustee of the Violet Midkiff Irrevocable Trust these entities adopt Mr.
Midkiff's analysis and conclusion in this regard.
VALUATION
Attached as Appendix II to this Proxy Statement is the valuation of the
company prepared by Somerville. Somerville is a full-service accounting firm
located in Huntington, West Virginia. The firm was founded in 1932 by Nathan
Goff Somerville as a sole proprietorship known as Somerville Audit Company with
the goal of building a practice across the Tri-State area of West Virginia,
Kentucky and Ohio. During the late 1940's, several partners joined the firm, and
in 1952 upon Mr. Somerville's death, the remaining partners formed the
partnership Somerville, which continues to exist today as a professional limited
liability company. Over the years the firm has had 17 partners, 15 of whom have
been with the firm their entire careers. The current members of the firm all
began as entry level staff with Somerville. Members of the firm are known
throughout professional and community organizations for their leadership and
active participation. Ten past and present partners/members have been presidents
of the West Virginia Society of Certified Public Accountants. The firm generates
fees primarily from work in the healthcare, banking, wholesale, retail,
manufacturing and non-profit areas as well as estate and financial planning,
business valuation and litigation support.
The firm's business valuation team is headed by a Certified Valuation
Analyst. Utilizing its knowledge of valuation theory/application, its expertise
in accounting, tax, finance and economics, they determine the value of tangible
and intangible assets held by businesses and individuals. The firm offers
services in the following areas:
- Litigation support and expert testimony;
- Buy/sell agreements;
- Mergers and acquisitions;
- Minority interests;
- Estate valuations;
- Gift valuations;
- Asset allocation.
Susan K. Richardson, CPA, CVA, performed the valuation on behalf of
Somerville. Ms. Richardson graduated from Marshall University in December 1982.
She is presently licensed to practice as a certified public accountant in West
Virginia and Kentucky. Her continuing education hours, an average of 79 hours
per year over the last five years, focus on tax, business valuation and
litigation support services.
During 1993, she formally completed the instructional and testing
requirements and obtained an additional certification by the National
Association of Certified Valuation Analysts ("NACVA"). Following the original
requirements to obtain the certification, the Association requires 12 hours of
continuing education annually to maintain certification as a valuation analyst.
STATEMENT OF QUALIFICATIONS
SUSAN K. RICHARDSON, CPA, CVA
Academic and Professional Credentials
Bachelor of Arts, Marshall University, 1982
Certified Public Accountant - 1983, Licensed to practice in West
Virginia and Kentucky
Certified Valuation Analyst, National Association of Certified
Valuation Analysts (NACVA), 1994
Position and Experience
Partner, Somerville & Company, CPAs
Manager/Partner in charge of the management consulting
services practice area since 1988
Professional Affiliations
National Association of Certified Valuation Analysts
National Association of Forensic Economists
Institute of Business Appraisers
American Institute of Certified Public Accountants
Member, Partnership Taxation Committee, 1994-1997
CPA Associates International, Inc.
Member, Federal Taxation Committee, 1994-1997 and 2000-2003
West Virginia Society of Certified Public Accountants
Director-at-Large, 1995-1998
Chairman, Careers in Accounting Project Group 2001-2004
Various other local and regional professional and community
organizations
Uptowner selected Somerville to conduct the valuation because that firm is
familiar with the company's business by virtue of the fact that it has served as
the company's internal accountants since the fall of 2000. Following is a
summary of the valuation report included in its entirety at Appendix II.
STANDARD OF VALUE
Based on management's desire to reach an offering price that would be fair
to all concerned, as well as advice of counsel with regard to West Virginia
statutes governing transactions involving minority shareholders in West Virginia
corporations, Somerville selected "Fair Value" as defined in the West Virginia
Code as the appropriate standard of value to be used in the valuation report.
The term "Fair Value" is defined in the West Virginia Code as follows:
.... "Fair Value" means the value of the corporation's shares
determined: Immediately before the effectuation of the corporate
action to which the shareholder objects; using customary and current
valuation concepts and techniques generally employed for similar
businesses in the conduct of the transaction requiring appraisal;
and without discounting for lack of marketability or minority
status...
PREMISE OF VALUE
The value estimate reached is based on a "going concern" basis. Management
has clearly expressed the intention of continuing the business in its current
form and has no expectation of either a liquidation or any type of sale or
merger which would affect current operations continuing as they exist.
PURPOSE OF THE REPORT
The attached report was to determine the fair value (on a minority
interest basis) of the common stock of Uptowner as of June 30, 2003. The report
will be used to assist the company with planning a reverse stock split of one
for 25,000 shares, with a mandatory buyout of all those shareholders with less
than 25,000 shares and all odd lots of those who hold over 25,000 shares.
APPROACH, LIMITING CONDITIONS, AND INFORMATION CONSIDERED
The approach was to determine and estimate the value, which would provide
a fair and reasonable return on investment to an investor or owner, in view of
the facts available to us at the time. Both internal and external factors
influencing the value of the company were reviewed, analyzed and interpreted.
Internal factors include the company's financial position, results of operations
and the size and marketability of the interest being valued. External factors
include, among other things, the status of the overall economy, as well as the
hospitality industry, specifically, and the position of the company relative to
that industry.
The estimate of value rendered in the report is based on information
provided in whole or in part by the owners and management of the company and
also third parties. This information consists primarily of copies of audited
historical financial statements, depreciation schedules, and a real estate
appraisal, performed by Robert K. Withers, MAI, RM. Both the financial
statements and the summary report prepared by Mr. Withers are presented as
exhibits to the report. Further, management discussed its outlook for the
company for 2003 and beyond. It should be noted, however, as is typical of
companies of this size, projections were not prepared and are therefore, not
available to be presented as an exhibit to the report.
Somerville has not audited or attempted to confirm the information
provided for accuracy or completeness. It relied upon the representations of
management concerning the value and useful condition of all equipment used in
the business, real estate, investments and any other assets or liabilities
except as specifically stated to the contrary in the report. Somerville has not
attempted to confirm whether or not all assets of the business are free and
clear of liens and encumbrances, or that the company has good title to all
assets.
To restate, the report was prepared on a "going concern" basis. The
valuation estimate reached in the report assumes that the existing management of
the company will maintain the character and integrity of the company through any
sale, reorganization or reduction of any manager's participation in the existing
activities of the company.
APPROACHES TO VALUATION
There are three main approaches to valuing small closely held businesses.
Under these approaches there are several different valuation methods. The
following is a discussion of each approach and certain methods under these
approaches.
INCOME APPROACH. The income approach gives primary consideration to an
investment's earnings. The theory being that an investment is worth the present
value of all reasonably expected future returns. This approach is most commonly
applied by using a capitalized current earnings method or a discounted future
earnings method.
The discounted future returns method under the income approach was not
selected. Any forecasted future earnings or cash flow would have been extremely
speculative in view of the company's operating history. Additionally, a
capitalized current earnings calculation does not consider the underlying asset
value currently in place where there is more than a minimal investment in
tangible assets. However, for the purpose of understanding the expected return
on investment, a willing buyer might realize the normalized unweighted after tax
earnings for the five years ended June 30, 2003 and were reviewed. Because this
calculation yielded a negative value, this method was not selected.
ASSET APPROACH. The asset approach values an investment based on the
current value of its assets and liabilities. In valuing businesses, this
approach is commonly used when the subject business is a holding company or if
the company has not established a positive earnings history.
Due to the significantly lower profitability (as compared to industry
statistics) of the operation historically, the asset approach was selected. The
asset approach does not consider historical or possible future earnings when
determining the value of a given business. After considering adjustments to fair
value (see detailed discussion later), the adjusted net asset approach yielded a
value of $1,750,000 for 100% of the subject company without any further
discounts for lack of marketability or minority position.
Another method, sometimes used if appropriate, under the asset approach, is
an analysis of the liquidation value of the company. Because the report was
presented on a "going concern" basis, a full analysis of liquidation value was
not undertaken. As a sanity check however, liquidation value would ultimately be
something less than the adjusted net assets approach discussed above.
Liquidation value would consider realizable value of the assets less costs of
disposal and any costs incurred in winding up the business of the Corporation.
Without going into a detailed analysis, these costs would certainly reduce the
adjusted net assets to a smaller amount. Because the premise of value was "going
concern," had a full analysis of liquidation value been undertaken, no weight
would have been assigned to it in the final reconciliation of valuation
estimates.
MARKET APPROACH. The market approach determines the value of an investment
by using information obtained from actual sales of similar investments. This
method is widely used in valuing real property and in certain industries where
comparable sales can be discovered. This method has limited applicability in
valuing a smaller business due to the lack of information available from actual
sales of similar small businesses. Transaction data from The Institute of
Business Appraisers and private business sales transaction records as published
by "Pratt's Stats" were reviewed. Because it is nearly impossible to ascertain
whether these other company transactions represent sales of companies similar in
nature to the subject company, this method was not selected.
Further, it is also necessary to review prior transactions in the company's
own stock. Over the past 20 years, the following stock sales have occurred:
Date Number of Shares Price Per Share
---- ---------------- ---------------
February 1984 264,158 $ 0.65
June 1992 28,102 0.65
September 1998 30,049 0.65
November 2001 36,060 0.65
November 2002 15,552 0.65
These sales account for nearly 24% of the total outstanding stock of Uptowner.
Additionally, there have been other miscellaneous sales over the last 30 years,
with prices in the $0.50 to $0.65 range.
Because of the volume of shares changing hands and the stability of the
price in view of the lack of profitability of the enterprise, consideration of
these sales should have an impact on the final determination of "fair value."
The value of the company computed at $0.65 per share is $972,606, without
further discounts for marketability or minority interest position.
HYBRID APPROACHES, RULES OF THUMB AND AGREEMENTS IN PLACE. Hybrid
approaches include excess earnings methods, which combine characteristics of
income approaches and asset approaches. The earnings in excess of a reasonable
rate of return are capitalized and added to the current value of the business'
assets. Rules of thumb are simple formulas developed for various industries. In
some cases, buy-sell agreements, retirement arrangements or other agreements may
be in place and bear consideration in the calculation of the value of a company.
A method of valuation we reviewed to estimate the fair market of Uptowner
are the widely recognized "capitalization of excess earnings - return on assets"
methods.
The capitalization of excess earnings - return on assets method is an
income and asset based approach to valuation where the adjusted net tangible and
intangible assets of the business entity are valued independently. These
component assets are comprised of the fair market value of the total assets of
the business less the total liabilities as of the date of the valuation. The
intangible assets are valued by capitalizing the excess earnings of the
business, where the excess earnings represent the earnings of the business in
excess of the earnings that provide a reasonable rate of return on the adjusted
net assets of the business.
The adjusted average net income after tax of $15,458 was reduced by the
average adjusted net assets of $1,571,840 multiplied by the risk-free rate of
4.8%. Because the average net income is negative, this method produces skewed
results. It does, however, give an indication of the impact that the negative
profitability has on the value of the business. Carrying this method through its
normal calculation using a capitalization rate of 25.6 produced a value of
$1,360,000 without any further discounts for lack of marketability or minority
interest rates.
RECONCILIATION OF VALUATION ESTIMATES
The estimate of the fair market value of 100% of the common stock of
Uptowner as of June 30, 2003 determined under the various methods as explained
above is as follows:
1. Adjusted Net Assets Method $1,750,000
2. Prior Sales of Company Stock 972,606
3. Capitalization of Excess Earnings-Reasonable Rate Method 1,360,000
The history of the company over the last five years has been erratic. It is well
established that while an asset-based method of valuation applies in the case of
corporations that are essentially holding companies, an earnings-based method is
appropriate for corporations that are active operating companies. Noting that
the fixed assets are the largest contributor to total asset value, we must also
take into consideration the corporation's status as an operating company.
Furthermore, it is necessary to look at prior arms-length transactions in the
company's stock. For these reasons, a value that takes into consideration both
underlying asset value as well as the profitability and the trading history of
the company is deemed appropriate.
Because the Capitalization of Excess Earnings is a skewed calculation due
to the negative earnings history, no weight was given to it although it serves
as a secondary checkpoint that the overall value of the company stock is, in
reality, something less than the book value of the assets. Recognizing that
although the net assets are a strong indicator of value, there would be
considerable costs incurred to convert this value to cash to the shareholders,
and it seems appropriate to reflect this situation in the final estimate of
value. Furthermore, prior transactions over a long period of years are also a
strong indicator of true value to the shareholders. It is the opinion of
Somerville that the prior transactions in the company stock reflect a
substantial marketability discount, and therefore should be accorded less weight
in the overall conclusion. Based on the instructions of management and its
counsel, this valuation is to be stated without discounts. Therefore, the
conclusion was reached by assigning an 80% weight to the net asset method and a
20% weight to the prior sales of stock and rounded to $1,600,000.
Finally, as stated in the letter to Uptowner Inns, Inc. dated October 24th
2003, Somerville & Company, P.L.L.C. consents to the inclusion in the required
filings with Securities and Exchange Commission, our valuation report of
Uptowner Inns, Inc. dated September 26, 2003.
FAIRNESS OF THE REVERSE STOCK SPLIT PROPOSAL
SUBSTANTIVE FAIRNESS DECISION. The board of directors believes that the
Reverse Stock Split, taken as a whole, is substantively and procedurally fair to
and in the best interests of Uptowner and, separately, to its unaffiliated
shareholders. The shareholders that will remain after the Reverse Stock Split
are affiliated shareholders of Uptowner, and three of these affiliated
shareholders are family members of Carl Midkiff (i.e. spouse and two minor
children). Additionally, each of the following individuals who are affiliates of
Uptowner believe that the Reverse Stock Split, taken as a whole, is
substantively and procedurally fair to and in the best interests of Uptowner
and, separately, to its unaffiliated shareholders: Carl E. Midkiff, Hobart A.
Adkins, Charles D. Robinson, Richard Monga, Prestige Property, Inc., Violet
Midkiff and the Violet Midkiff Irrevocable Trust (the "Affiliated Persons").
Please refer to "Purpose and Reasons for the Reverse Stock Split" for a
description of the nature of each person's affiliation with the company. Mr.
Adkins, Mr. Monga and Mr. Robinson serve on the company's board with Mr.
Midkiff. In determining the fairness of the Reverse Stock Split, the board of
directors and Carl Midkiff, in his individual capacity, considered a number of
factors prior to approval of the proposed transaction. The other Affiliated
Persons relied on the analysis of the management of Uptowner and Carl Midkiff
(in his individual capacity) and the valuation of Somerville, and each of the
Affiliated Persons expressly adopt the conclusion and analyses of the company
and Carl Midkiff and the conclusions and analyses presented in the valuation of
Somerville.
-6-
The board of directors and Carl Midkiff (in his individual capacity)
recognized the concerns of shareholders owning fewer than 25,000 shares of
Existing Common Stock. The Reverse Stock Split will allow such shareholders to
liquidate their holdings at a fair value, and without brokerage or other
transaction costs by receiving cash for their interest.
Affiliated shareholders receiving New Common Stock are expected to
benefit from the reduction of direct and indirect costs borne by Uptowner to
maintain its public company status. In addition, shareholders holding a number
of shares not evenly divisible by 25,000 will receive a cash payment for the
portion of their interest that would otherwise be represented by a fractional
share, without incurring brokerage or other transactions costs.
The board of directors of Uptowner by unanimous vote on October 17,
2003, with no member of the board of directors dissenting or abstaining from
such approval, adopted a resolution declaring the terms and conditions of the
Reverse Stock Split to be advisable, and directing that a proposed amendment to
the Articles of Incorporation of Uptowner effecting the Reverse Stock Split and
reducing Uptowner's authorized capital proportionately be submitted to
shareholders of Uptowner for consideration. The board and Carl Midkiff (in his
individual capacity) considered the following factors in reaching their
conclusion:
- The status of Uptowner as a small business and the cost relative
to the small amount of revenues generated of being an Exchange
Act reporting Company. The board of directors believes that there
are considerable costs and burdens to Uptowner in remaining a
public reporting company. To comply with its obligations under
the Exchange Act, Uptowner incurs direct and indirect costs
associated with compliance with the filing and reporting
requirements imposed on public companies. Examples of direct
cost savings from termination of registration of common shares
include: lower printing and mailing costs; reduced reporting and
disclosure requirements due to the company's private status; and
reduction in direct expenses such as word processing and
preparing electronic filings in the Edgar format prescribed by
the SEC. As a result, there will be a reduction in audit and
legal fees and other personnel costs once Uptowner is no longer
subject to the reporting requirements of the Exchange Act.
- The cost savings expected as a result of reducing the cost of
servicing shareholder accounts is approximately $75,000.
- The limited trading market and liquidity of the Existing Common
Stock. Uptowner's common stock is not traded on any established
market, and it is very difficult for shareholders to liquidate
their holdings. The primary opportunity to sell shares has been
for shareholders to approach the company or the Midkiffs about
possible sales of stock to them.
- Reduction of liability associated with being a public company
under the federal securities laws on both Uptowner and Uptowner's
management. The Exchange Act imposes liability on a company's
management for material misstatements and omissions and a
company's periodic reports and for failure to maintain
appropriate procedures and controls to ensure compliance with and
full and fair disclosure in a public company's reports filed with
the SEC and those reports submitted to shareholders.
- Potential liability to third parties. In addition to legal
action that could be brought by federal and state securities law
enforcement agencies, plaintiffs' lawyers, in some instances,
could also bring legal actions against the company and its
management for violations of federal and state securities law as
well as breaches of fiduciary duty.
- The opportunity afforded, in the absence of a trading market, by
the Reverse Stock split for holders of even a small number of
shares to receive a cash payment for their interest without
brokerage costs. Approximately 20% of Uptowner's shareholders own
100 shares or less of the company's common stock. Accordingly, a
going private transaction would afford these shareholders the
ability to liquidate their investment without incurring brokerage
costs. Practically, the only market available for the company's
shares are shares that the company agrees to repurchase when the
company is approached by shareholders seeking such a purchase.
- The board and Mr. Midkiff (in his individual capacity) believed
that the payment of $1.07 per pre-split share is fair in light of
(a) the valuation and the conclusions contained in the valuation
received from Somerville, attached to this Proxy Statement as
Appendix II, (See "Valuation") and (b) the prior transactions in
the company's stock as follows:
Date Number of Shares Price Per Share Dividends
---- ---------------- --------------- ---------
February 1984 264,158 $0.65 $0.00
June 1992 28,102 $0.65 $0.00
September 1998 30,049 $0.65 $0.00
November 2001 36,060 $0.65 $0.00
November 2002 15,552 $0.65 $0.00
**December 2002 269,180 $0.50-0.65 $0.00
** Represents most recent trades
The board and Mr. Midkiff agreed and adopted the conclusions in
Somerville's valuation report. Specifically, the board and Mr.
Midkiff concurred that a combination of the net asset approach
(which is also a net book value approach) with some reduction in
the amount arrived at under that report for consideration given
to prior, current and historical sales of the company's stock
resulted in a fair value for Uptowner's stock. As noted in the
valuation report, due to the significantly lower profitability
(as compared to industry statistics) of the operation of the
company historically, substantial weight was given to the net
asset approach. As noted in the report, and of which the board
of directors and Carl Midkiff agree, approximately a 20% weight
was given to a review of prior stock transactions.
- Consistent with the foregoing, the board and Mr. Midkiff (in his
individual capacity) considered the $1.07 payment to be fair
based upon the value of the company computed at $0.65 per share
(the most recent share price) is $972,606 without discounts for
marketability or minority interest position. The board and Mr.
Midkiff weighted the recent sale price analysis at 20%. The
value of the company under the adjusted net asset approach (i.e.
book value approach) which is $1,750,000 was considered and
weighted at 80% thereby arriving at $1.07 per share, which equals
$1,600,000 without discounts for marketability or minority
interest position.
-7-
- Neither the board of directors nor Mr. Midkiff considered
liquidation value because pursuant to the advice of Somerville
and as noted under "Approaches to Valuation" it was determined
that liquidation value would have been less than net asset value
(net book value) due to costs associated with winding up the
business and costs of disposal of assets. Accordingly, neither
the board nor Mr. Midkiff thought it prudent to expend Uptowner's
funds to have the financial advisor calculate liquidation value.
- Recent stock purchase prices were given the same weight as
historical prices as the range of purchase prices was between .50
cents and .65 cents a share for recent purchases. These recent
purchase occurred during December 2002.
- Neither the board of directors nor Mr. Midkiff considered any
firm offers for the company because there have been no offers,
much less firm offers, for a merger, consolidation, sale of
substantially all of the assets or a purchase of the company's
securities during the last 20 years of which management is aware.
- The anticipated increased cost of compliance and potential legal
exposure with the additional requirements on public companies
under the Sarbanes-Oxley Act of 2002 and related SEC regulations.
- The fact that at the 1-for-25,000 ratio, the Reverse Stock Split
would not significantly impact control of Uptowner, and that
Uptowner expects that it would continue to have approximately
four shareholders that would own approximately 100% of New Common
Stock following the Reverse Stock Split, including Mr. Midkiff,
Violet Midkiff (including stock owned by her minor
grandchildren), the Violet Midkiff Irrevocable Trust and Prestige
Properties, Inc. Prior to the Reverse Stock Split, these
shareholders own or control 54.04% of the company's common stock.
This percentage includes shares held or controlled by Carl
Midkiff but excludes shares held by Mr. Adkins and Mr. Robinson.
Accordingly, the board of directors did not view the Reverse
Stock Split as significantly impacting control of Uptowner.
- The board and Mr. Midkiff also considered the transaction to be
fair to unaffiliated shareholders because other than sporadic
repurchases of shares by the company, there is no market for the
shares and the board of directors and Mr. Midkiff believe that
all unaffiliated shareholders would welcome an opportunity to
receive cash for their investment; and, accordingly, the
1-for-25,000 ratio was arrived at out of concern that if the
ratio had been smaller, a number of unaffiliated shareholders
would have been disappointed if they had been unable to liquidate
their investment, and the board of directors and Mr. Midkiff
believe that it is fair and in the best interests of the
unaffiliated shareholders to establish the ratio at 1-for-25,000.
- The board of directors and Uptowner recognize that the hotel
operates in what may be considered an economically depressed area
(Cabell County, West Virginia) and also must compete with other
hotel and motel franchises that are more strategically located to
capitalize on visibility and higher volume traffic flow.
In addition to the foregoing, determining the substantive fairness of
the Reverse Stock Split to unaffiliated shareholders, the board of directors and
Carl Midkiff (in his individual capacity) relied almost exclusively upon the
conclusions reached in the valuation report of Somerville and expressly adopt
the conclusions and analyses contained therein which conclusions and analyses
are summarized under "Approaches to Valuation" and "Reconciliation of Valuation
Estimates" and relied upon the fact that shareholders have appraisal rights
under West Virginia law. The board and Mr. Midkiff also considered the foregoing
factors, but the conclusions contained in Somerville's valuation received
practically all of the weight in their fairness determination.
PROCEDURAL FAIRNESS DISCUSSION. In considering the fairness of the
transaction, it is also incumbent upon the board of directors to consider
whether the transaction is procedurally fair as well as substantively fair.
Procedural fairness involves the fairness of the process by which the
transaction has been approved. The process will be deemed fair if one or more
of certain procedural safeguards are in place. Those safeguards are as follows:
whether an independent committee of the board of directors was formed; whether
the independent committee had access to its own financial and legal advisors;
whether an independent shareholder representative was retained; whether the
financial advisor had any conflict of interest; the independence of the board of
directors as a whole; and whether the transaction is subject to the approval of
the majority of the minority shareholders.
Most of these procedural safeguards are not present. However, the
transaction received unanimous approval from the board of directors. Two of the
four-member board are not employees of the company. However, the company did not
form an independent committee of the board of directors because these
non-employee directors have long-term relationships with Mr. Midkiff that are
personal or business in nature, and one could argue that a committee made up of
these non-employee directors would not necessarily be independent. An
independent shareholder representative was not retained because of the potential
cost involved of providing such an independent shareholder representative with
its own financial and legal advisors. The board did not make the transaction
subject to a majority of the minority of the unaffiliated shareholders because
historically, only 6% of the minority shareholders respond to company
communications.
It should be noted that the board of directors and the affiliated
persons believe that Somerville, the financial advisor retained by the company
to provide the valuation, did not have any conflict of interest and has provided
the company with an unbiased valuation of the company's shares of common stock.
The board of directors, Carl Midkiff (in his individual capacity) and
each Affiliated Person believes that the Reverse Stock Split is fair from a
procedural point of view because under the West Virginia Business Corporation
Act, shareholders are granted appraisal rights which, if a shareholder does not
vote in favor of the proposal and follows the appraisal procedures set forth in
West Virginia Code Sections 31D-12-1301 to 31D-13-1326, will have the right to
obtain fair value for his or her shares as determined through a judicial
proceeding. Accordingly, if a shareholder does not believe $1.07 per share
represents fair value, he or she may seek a court determination of fair value as
long as the appraisal procedures are followed under the West Virginia Business
Corporation Act. A court could find that the fair value of the shares is either
higher or lower than that being offered in the Reverse Stock Split. Due to the
foregoing appraisal rights, Uptowner, Carl Midkiff (in his individual capacity)
and the Affiliated Persons believe that the transaction is procedurally fair to
unaffiliated shareholders even though the proposal has not been conditioned upon
the affirmative vote of a majority of the outstanding shares owned by
unaffiliated shareholders and even though an unaffiliated representative has not
been retained to act solely on behalf of the unaffiliated security holders. The
presence of appraisal rights is the basis for the Company, Carl Midkiff (in his
individual capacity) and the Affiliated Persons believing that the transaction
is fair from a procedural point of view as appraisal rights give the
unaffiliated shareholders to seek a higher price for their shares. All members
of the board of directors of Uptowner and the other Affiliated Persons believe
the transaction is procedurally and substantively fair to the unaffiliated
shareholders based on the foregoing.
After evaluating the substantive and procedural fairness of the Reverse
Stock Split, the board concluded that the Reverse Stock Split is the most
expeditious, efficient, cost effective and fair method to convert Uptowner from
a reporting company to a privately held non-reporting company.
On October 17, 2003, the board of directors determined that the
purchase price of $1.07 per whole share of New Common Stock (reflects a
$1,600,000 pre-split valuation of Existing Common Stock) for fractional shares
of Uptowner's Existing Common Stock is fair from a financial point of view to
the holders of Existing Common Stock of Uptowner. This determination was
primarily based on the valuation.
Although no agreement (either express or implied) exists regarding the
voting of shares, Uptowner believes that each executive officer and director of
Uptowner will vote all shares of Existing Common Stock of Uptowner they own or
control for the proposed Reverse Stock Split and related Articles to Uptowner's
Articles of Incorporation. These shares represent approximately 54.09% of the
voting power on the Record Date.
CERTAIN EFFECTS OF REVERSE STOCK SPLIT PROPOSAL ON UPTOWNER'S SHAREHOLDERS
RIGHTS, PREFERENCES AND LIMITATIONS. There are no differences between
the respective rights, preferences or limitations of the Existing Common Stock
and the New Common Stock. There will be no differences with respect to dividend,
voting, liquidation or other rights associated with Uptowner's Common Stock
before and after the Reverse Stock Split.
-8-
If the Reverse Stock Split is approved, the interests of holders of
Existing Common Stock will change. Each share of Existing Common Stock which
would upon completion of the Reverse Stock Split represent a fractional share of
New Common Stock will be automatically converted into the right to receive from
Uptowner, in lieu of fractional shares of New Common Stock, cash in the amount
of $1.07 for each share of Existing Common Stock on a pre-split basis.
If the Reverse Stock Split is effected, shareholders owning fewer than
25,000 shares of Existing Common Stock will no longer have any equity interest
in Uptowner and will not participate in future increases or decreases to
Uptowner's net assets in liquidation. Further, the shareholders who will
continue to have an equity interest in Uptowner after the Reverse Stock Split
will own a security the liquidity of which will be reduced.
The Reverse Stock Split will not have a different effect on shares of
Existing Common Stock held by affiliates as it will for non-affiliates. Both
affiliates and non-affiliates who own 25,000 shares or more will receive one
share for each 25,000 shares owned and will receive $1.07 on a pre-split basis
for fractional shares. Due to their share ownership, Carl Midkiff, Prestige
Property, Inc., Violet Midkiff and the Violet Midkiff Irrevocable Trust will
remain as shareholders after the Reverse Stock Split.
FINANCIAL IMPACT. Uptowner estimates that after the Reverse Stock Split
is effected, the number of shares of New Common Stock outstanding will be
approximately 29 shares in the hands of approximately four shareholders of
record. The total number of fractional shares to be purchased (exclusive of an
undetermined number of fractional shares held in "street name") is estimated to
be approximately 768,642 at a cost of $822,447. The cost of the Reverse Stock
Split transaction will come from a loan from First Sentry Bank, Inc.
APPRAISAL RIGHTS. Pursuant to West Virginia Code Section 31D-13-1302, a
company shareholder may have appraisal rights as to all or any part of the
shares of company common stock registered in that shareholder's name, provided
the shareholder does not vote in favor of the Reverse Stock Split and complies
with the procedures outlined in West Virginia Code Sections 31D-13-1303 through
and including Section 31D-13-1326.
Under West Virginia Code Section 31D-13-1321, a shareholder who wishes
to exercise appraisal rights must deliver to the company before any vote is
taken on the Reverse Stock Split, written notice of that shareholder's intent to
demand payment if the proposed Reverse Stock Split is consummated. Also, that
shareholder must not vote, or cause to or permit to be voted, any shares of that
shareholder's Common Stock in favor of the proposed Reverse Stock Split. A
shareholder who does not satisfy these requirements is not entitled to appraisal
rights.
If the proposed Reverse Stock Split becomes effective, the company must
deliver a written appraisal notice in the requisite form to all shareholders who
satisfied the foregoing requirements. That notice must be sent no earlier than
the date the Reverse Stock Split becomes effective and no later than 10 days
after the Effective Date. That form would require a shareholder asserting
appraisal rights to certify whether or not beneficial ownership of that
-9-
shareholder's shares for which appraisal rights are asserted was acquired before
the date of this Proxy Statement and that the shareholder did not vote for the
Reverse Stock Split.
This form will state where it must be returned and where certificates
for shares must be deposited and the date by which those certificates must be
deposited. The form will also indicate the company's estimate of the fair value
of the shares and that, if requested in writing, the company will provide, to
the shareholders so requesting, within 10 days after the date specified in which
the form must be returned, the number of shareholders who returned the forms by
the specified date and the total number of shares owned by them. The form will
also state the date by which the notice to withdraw from the appraisal process
must be received.
A shareholder who receives notice and who wishes to exercise appraisal
rights must certify on the form sent by the company whether beneficial ownership
of the shares was acquired before the required date set forth above. If a
shareholder fails to make this certification, the company may elect to treat the
shareholder's shares as after-acquired shares that were not entitled to
appraisal rights. A shareholder who does not execute and return the form and, in
the case of certificated shares, deposit the shareholder's share certificates
where required, each by the date set forth in the notice, is not entitled to
payment.
The company shall pay in cash to those shareholders who comply with the
requirements set forth in the West Virginia Code the amount the company
estimates to be the fair value of their shares, plus interest. Any payment must
be accompanied by financial statements of the company, a statement of the
company's estimate of the fair value of the shares and a statement that
shareholders who have perfected their appraisal rights have the right to demand
further payment and that if any shareholder does not make demand for further
payment within the time specified, that shareholder is deemed to have accepted
the payment in full of satisfaction of the company's obligations under the West
Virginia Code regarding appraisal rights.
The company may elect to withhold payment from any shareholder who did
not certify the beneficial ownership of all of the shareholder's shares as set
forth above. If the company elects to withhold to such payment, it must, within
30 days, notify all shareholders who are seeking appraisal and from whom the
company has elected to withhold payment along with the following information:
the company's financial statements; the company's estimate of fair value; that
such shareholder may accept the company's estimate of fair value, plus interest,
in full satisfaction of such shareholder's demands or demand appraisal under the
West Virginia Code; that those shareholders who wish to accept the offer must
notify the bank of their acceptance within 30 days; and that those shareholders
who do not satisfy the requirements for demanding appraisal under the provisions
of the West Virginia Code will be deemed to have accepted the company's offer.
A shareholder who is paid but who is dissatisfied with the amount of
the payment must notify the company in writing of that shareholder's estimate of
the fair value of the shares and demand payment of that estimate, plus interest,
unless any payment is already made. Any shareholder offered a payment by the
company and who is dissatisfied with that offer must reject that offer and
demand payment of the shareholder's stated estimate of the fair value of the
shares, plus interest. A shareholder who fails to notify the company in writing
of that
-10-
shareholder's demand to be paid within 30 days after receiving the company's
payment or offer of payment waives the right to demand payment and is entitled
only to the payment offered by the company. THE FOREGOING SUMMARY IN THIS
SECTION OF THE PROXY STATEMENT ENTITLED "APPRAISAL RIGHTS" DOES NOT PURPORT TO
BE A COMPLETE STATEMENT OF THE RIGHTS OF SHAREHOLDERS SEEKING APPRAISAL AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE PROVISIONS OF WEST VIRGINIA CODE
SECTIONS 31D-13-1302 TO AND INCLUDING 31D-13-1326, THE FULL TEXT OF WHICH IS
ATTACHED AS APPENDIX II TO THIS PROXY STATEMENT.
TERMINATION OF REGISTRATION WITH SEC. The Existing Common Stock is
currently registered under the Exchange Act. Such registration may be
terminated, under SEC rules, upon application of Uptowner to the SEC if Uptowner
has fewer than 300 record holders of its Common Stock. Uptowner intends to make
an application for termination of registration of the New Common Stock
immediately after shareholder approval of the Reverse Stock Split. Termination
of the registration of the New Common Stock under the Exchange Act would
substantially reduce the information required to be furnished by Uptowner to its
shareholders and to the SEC and would make certain provisions of the Exchange
Act, such as the filing of annual and quarterly reports and Proxy Statements, no
longer applicable to Uptowner.
With respect to the executive officer and directors of Uptowner, upon
termination of registration of the New Common Stock under the Exchange Act, the
executive officers, directors and other affiliates would no longer be subject to
many of the reporting requirements and restrictions of the Exchange Act,
including the reporting and short-swing profit recapture provisions of Section
16 thereof, as well as many of the provisions of the Sarbanes-Oxley Act of 2002.
Upon termination of Exchange Act registration, Uptowner will continue to be
subject to the general anti-fraud provisions of federal and applicable state
securities laws.
BENEFITS. The Reverse Stock Split is expected to result in the
following benefits to Uptowner, its remaining shareholders, and those persons
who will cease to be shareholders of Uptowner upon completion of the Reverse
Stock Split:
- The termination of Uptowner's reporting obligations under the
Exchange Act will result in a reduction in Uptowner's previously
estimated costs. Uptowner expects to use any amounts saved as a
result of termination of Exchange Act registration to increase
the company's working capital. Uptowner expects to terminate its
reporting obligations under the Exchange Act immediately after
the Reverse Stock Split is approved by the Company's shareholder.
- The Reverse Stock Split affords shareholders owning fewer than
25,000 shares of Existing Common Stock the opportunity to realize
fair value for their shares. In the absence of the Reverse Stock
Split, even if a more active trading market developed for the
Existing Common Stock, such holders would nonetheless realize
less net value for their shares since the sale of their shares
would ordinarily involve disproportionately high brokerage
commissions.
- The percentage ownership of New Common Stock of the remaining
shareholders of Uptowner following the Reverse Stock Split will
increase due to the repurchase of fractional shares by Uptowner.
- Termination of Uptowner as a reporting company under the Exchange
Act will reduce the potential liabilities associated with being a
public company under federal and state securities laws.
The table below illustrates the effect of the Reverse Stock Split on
each Affiliated Shareholder's respective interest in Uptowner's net book value
and net earnings.
PRIOR TO TRANSACTION
6/30/03 Y-T-D 6/30/03
Interest in Interest in
Shares NBV Earnings
------ --- --------
*Carl Midkiff (includes shares owned
by Mr. Midkiff's spouse and two
minor children and, jointly by
Mr. Midkiff) 302,201 20.23% $ 354,397 $ (27,093)
Hobart Adkins 100 0.01% $ 175 $ (13)
David Robinson 702 0.05% $ 876 $ (67)
Richard Monga -- 0.00% $ -- $ --
Prestige Properties 40,727 2.72% $ 47,650 $ (3,641)
Violet Midkiff (including shares
owned by her minor grandchildren) 264,207 17.69% $ 309,901 $ (23,683)
Violet Midkiff Irrevocable Trust 200,000 13.39% $ 234,571 $ (17,926)
---------- ---------- ---------- ----------
Subtotal 807,937 54.09% $ 947,570 $ (72,413)
All Other 685,705 45.91% $ 804,270 $ (61,462)
---------- ---------- ---------- ----------
Total Shares 1,493,642 100.00% $1,751,840 $ (133,875)
AFTER TRANSACTION
Proforma
6/30/03 Y-T-D 6/30/03
Interest in Interest in
Shares NBV * Earnings
------ ----- --------
**Carl Midkiff 10 34.48% $ 320,454 $ (46,160)
Hobart Adkins -- 0.00% $ -- $ --
David Robinson -- 0.00% $ -- $ --
Richard Monga -- 0.00% $ -- $ --
Prestige Properties 1 3.45% $ 32,064 $ (4,619)
Violet Midkiff (including shares
owned by her minor grandchildren) 10 34.48% $ 320,455 $ (46,160)
Violet Midkiff Irrevocable Trust 8 27.59% $ 256,420 $ (36,936)
---------- ---------- ---------- ----------
Subtotal 29 100.00% $ 929,393 $ (133,875)
All Other 0 0.00% $ 0 $ --
---------- ---------- ---------- ----------
Total Shares 29 100.00% $ 929,393 $ (133,875)
* Adjusted for transaction
** Not all of the 302,201 shares owned or controlled by Mr. Midkiff will be
converted in the Reverse Stock Split due to 40,227 of those shares being
owned by his children and wife and by him jointly in increments smaller than
25,000. These shares will become fractional shares and cashed out pursuant
to the Reverse Stock Split.
-11-
DETRIMENTS. The Reverse Stock Split is expected to result in the
following detriments to Uptowner, its remaining shareholders, and those persons
who will cease to be shareholders of Uptowner upon completion of the Reverse
Stock Split:
- If the Reverse Stock Split is approved, it is estimated that
approximately 1,391 shareholders, owning in the aggregate
approximately 768,642 shares of Existing Common Stock, will cease
to be shareholders of Uptowner and will no longer hold an equity
interest in Uptowner. Such shareholders, therefore, will not
share in future increases in Uptowner's net assets or in future
dividends, if any, and will no longer have the right to vote on
any corporate matter. Such shareholders also will be deprived of
the ability to liquidate their shares of Existing Common Stock at
a time and for a price of their choosing (assuming a purchaser
for such shares could be found).
- Termination of registration of the shares of New Common Stock
under the Exchange Act will reduce substantially the information
required to be furnished by Uptowner to its shareholders and will
make certain provisions of the Exchange Act, such as the
short-swing profit recovery provisions of Section 16(b) of the
Exchange Act, the requirement of furnishing a proxy or
information statement in connection with certain shareholder
meetings pursuant to Section 14(a) of the Exchange Act, and the
requirements of Rule 13e-3 promulgated by the SEC under the
Exchange Act with respect to "going private" transactions no
longer applicable to Uptowner and its executive officer and
directors. In addition, termination of such registration will
deprive "affiliates" of Uptowner of the ability to dispose of
such securities pursuant to Rule 144 promulgated under the
Securities Act.
- If the Reverse Stock Split is approved and, as contemplated, the
shares of New Common Stock are deregistered under the Exchange
Act, it is anticipated that a market for the New Common Stock
will not be available by market makers.
- Shareholders owning whole shares, rather than fractions of a
share, after the Reverse Stock Split will not be entitled to
receive any cash payment for their whole shares of New Common
Stock, but will receive cash only for their fractional share.
- If the Reverse Stock Split is approved and implemented, Uptowner
intends to terminate the registration of its New Common Stock
under the Exchange Act pursuant to Section 12(g)(4) immediately
after filing the articles of amendment to Uptowner's articles of
incorporation. As a result, Uptowner's duty to file periodic
reports with the SEC, such as quarterly and annual reports will
be suspended immediately after filing the appropriate form with
the SEC, which Uptowner plans to file immediately after the
shareholders' meeting.
BENEFICIAL OWNERS OF COMPANY STOCK. The Reverse Stock Split will affect
shareholders holding Uptowner stock in street name through a nominee (such as a
bank or broker). Nominees may have different procedures, and shareholders
holding Uptowner stock in street name should contact their nominees to determine
how they are affected by the Reverse Stock Split.
DIRECTORS AND OFFICERS. The directors and officers of Uptowner
immediately prior to the Reverse Stock Split will remain the directors and
officers of Uptowner immediately following the effectiveness of the Reverse
Stock Split.
-12-
FEDERAL INCOME TAX CONSEQUENCES
The following section describes the material U.S. federal income tax
consequences of the Reverse Stock Split to unaffiliated and affiliated
shareholders who hold the Existing Common Stock as a capital asset within the
meaning of Section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code"). The following is based upon the Code, its legislative history, existing
and proposed regulations thereunder and published rulings and decisions, all as
currently in effect as of the date hereof, and all of which are subject to
change, possibly with retroactive effect. Tax considerations under state, local
and foreign laws are not addressed in this proxy statement. All shareholders
should consult with their own tax advisors as to the tax consequences of the
Reverse Stock Split in their particular circumstances, including any Uptowner
shareholders who hold their Existing Common Stock other than as a capital asset
and persons who acquired their Existing Common Stock as compensation and
including the applicability and effect of the alternative minimum tax and any
state, local or foreign and other tax laws and of changes in those laws.
UPTOWNER. It is anticipated that no gain or loss will be recognized by
Uptowner as a result of the redemption of Existing Common Stock or the issuance
of New Common Stock pursuant to the Reverse Stock Split.
SHAREHOLDERS GENERALLY. A shareholder who receives cash in lieu of
fractional shares or through the exercise of appraisal rights will be treated
as if the cash were received in redemption of that shareholder's New Common
Stock subject to Section 302 of the Code. Under Section 302 of the Code, a
redemption of New Common Stock pursuant to the Reverse Stock Split or the
exercise of appraisal rights will, as a general rule, be treated as a sale or
exchange if the redemption (a) results in a "complete termination" of the
shareholder's interest in Uptowner, (b) is "substantially disproportionate" with
respect to the shareholder or (c) is "not essentially equivalent to a dividend"
with respect to the shareholder.
In determining whether any of these Section 302 tests is satisfied,
shareholders must take into account not only New Common Stock that they actually
own, but also any New Common Stock they are "deemed" to own under the
constructive ownership rules set forth in Section 318 of the Code. Pursuant to
these constructive ownership rules, a shareholder will be deemed to own stock
that is actually or constructively owned by certain members of his or her family
(spouse, children, grandchildren and parents) and other related parties
including, for example, certain entities in which such shareholder has a direct
or indirect interest (including partnerships, estates, trusts and corporations),
as well as shares of stock that such shareholder (or a related person) has the
right to acquire upon exercise of an option or conversion right. In addition, if
a shareholder lives in a community property state, the community property laws
of that state may have an effect on the constructive ownership rules. Section
302(c)(2) of the Code provides certain exceptions to the family attribution
rules for the purpose of determining a "complete termination." If a shareholder
intends to rely upon these exceptions, the shareholder must file a "waiver of
family attribution" statement with his tax return and must comply with certain
other requirements set forth in the Code and the Income Tax Regulations
promulgated thereunder (the "Regulations").
The redemption of a shareholder's shares of New Common Stock will result
in a "complete termination" of a shareholder's interest in Uptowner if either
(a) all New Common Stock actually and constructively owned by Uptowner is
redeemed or sold pursuant to the Reverse Stock Split or the exercise of
appraisal rights or (b) all of the New Common Stock actually owned by the
shareholder is redeemed or sold pursuant to the Reverse Stock Split or the
exercise of dissenter's rights and the shareholder is eligible to waive, and
does effectively waive in accordance with Section 302(c) of the Code,
attribution of all New Common Stock which otherwise would be considered to be
constructively owned by such shareholder. Such waiver of attribution applies
only to New Common Stock that would be attributed to a shareholder from members
of such shareholder's family.
The redemption of a shareholder's New Common Stock will be "substantially
disproportionate" with respect to such shareholder if the percentage of New
Common Stock actually and constructively owned by such shareholder immediately
following the Reverse Stock Split is less than 80% of the percentage of New
Common Stock actually and constructively owned by such shareholder immediately
prior to the Reverse Stock Split and is less than 50% of the total New Common
Stock outstanding after the Reverse Stock Split. Waiver of family attribution is
not available in applying the "substantially disproportionate" test.
Even if the redemption of a shareholder's New Common Stock fails to
satisfy the "complete termination" test and the "substantially disproportionate"
test described above, the redemption of a shareholder's New Common Stock may
nevertheless satisfy the "not essentially equivalent to a dividend" test if the
shareholder's redemption of New Common Stock pursuant to the Reverse Stock Split
results in a "meaningful reduction" in such shareholder's proportionate New
Common Stock interest in Uptowner. Whether the receipt of cash by a shareholder
will be considered "not essentially equivalent to a dividend" will depend upon
such shareholder's particular facts and circumstances. No general guidelines
indicating the facts and circumstances under which a redemption will be
considered to produce a meaningful reduction in proportionate interest have been
provided by the courts or issued by the Internal Revenue Service (the
"Service"). However, the Service has clearly stated its position that if no
reduction in percentage interest occurs, none of the Section 302 tests will be
satisfied. Waiver of family attribution is not available in the context of the
"not essentially equivalent to a dividend" test.
UNAFFILIATED SHAREHOLDERS.
Complete Redemption -- Any shareholder owning less than 25,000 shares of
Existing Common Stock will have all of their shares actually owned redeemed in
the Reverse Stock Split. Generally, under Section 302(b)(3) of the Code and
subject to the constructive ownership rules of Section 318 of the Code discussed
above, the deemed redemption of the New Common Stock should be treated as a
complete termination of the shareholder's interest in Uptowner. For any
shareholder whose interest in Uptowner is completely terminated pursuant to the
Reverse Stock Split, the deemed redemption of the New Common Stock should be
treated as a sale or exchange of property.
As a result, such Uptowner shareholder will generally recognize capital
gain or loss measured by the difference between the amount of cash received and
the holder's adjusted tax basis for the shares. This capital gain or loss will
generally be long-term capital gain or loss if, as of the date of the exchange,
the holding period for such shares is greater than one year. Long-term capital
gain of a non-corporate holder is generally subject to tax at a maximum federal
tax rate of 15%. The current maximum federal income tax rate on ordinary income
and short-term capital gains is 35%.
Shareholder Receiving Cash and Stock -- Any shareholder owning more than
25,000 shares of Existing Common Stock will receive 1 share of New Common Stock
for each 25,000 shares plus cash in lieu of any fractional shares which may be
issued to such shareholder. Such shareholder should not recognize any gain or
loss on the exchange of shares of Existing Common Stock for shares of New Common
Stock. See, Code Section 1036 and Rev. Rul. 77-19, 1977-1 C. B. 84.
In assessing whether the redemption of a shareholder's shares of New
Common Stock satisfies the "substantially disproportionate" test or the "not
essentially equivalent to a dividend" test described above, it should be
emphasized that the Reverse Stock Split will substantially reduce the number of
outstanding shares of New Common Stock. As a result, if a shareholder retains a
portion of its New Common Stock, the shareholder's percentage interest in New
Common Stock of Uptowner may not be reduced even if the shareholder receives
cash for a substantial portion of its Uptowner Common Stock. In such case, the
Service has clearly stated that if no reduction in percentage interest occurs,
none of the Section 302 tests will be satisfied. If a shareholder is able to
satisfy the Section 302 tests, the redemption will be treated as a sale or
exchange as described in the complete redemption above.
With respect to shares of New Common Stock treated as redeemed, if a
shareholder cannot satisfy any of the three tests described above and to the
extent Uptowner has sufficient current and/or accumulated earnings and profits,
such shareholder will be treated as having received a dividend which will be
includible in gross income (and treated as ordinary income) in an amount equal
to that portion of the cash received with respect to the deemed redemption of
the New Common Stock. In addition, the shareholder's basis in such New Common
Stock disposed of will not offset the amount of cash received, but instead will
be reallocated to shares of New Common Stock still held by such shareholder or,
although the matter is not free from doubt, if no shares are actually owned,
reallocated to those shares constructively owned, under certain circumstances.
Dividends of a non-corporate holder are generally subject to tax at a maximum
federal tax rate of 15%. Currently, it is anticipated that Uptowner will not
have current or accumulated earnings and profits. Reference is made to the
retained earnings section of Uptowner's balance sheet contained in the Form 10-K
for the fiscal year ended June 30, 2003, and the Form 10-Q for the quarter ended
December 31, 2003, both attached as Appendix IV. However, if there were
substantial income during the year, this result could change. Management does
not anticipate any such substantial income.
To the extent that a portion of the cash received with respect to the
deemed redemption of the shares of New Common Stock exceeds the current and/or
accumulated earnings and profits of Uptowner attributable to the retained and
(deemed) redeemed shares of New Common Stock, such excess will first be treated
as a non-taxable return of capital to the extent of the basis attributable to
such retained and (deemed) redeemed shares and then as a capital gain. Such
capital gain will be short-term or long-term depending on the holding period for
the retained shares. If a shareholder acquired shares of New Common Stock at
different times and/or at different prices, the application of the rules for
basis reduction, gain recognition and type of capital gain is unclear.
AFFILIATED SHAREHOLDERS. It is anticipated that the treatment of
affiliated shareholders will be substantially the same as outlined above
for Unaffiliated Shareholders.
REPORTING AND WITHHOLDING. Cash payments made pursuant to the reverse
stock split will be reported to the extent required by the Code to Uptowner
shareholders and the Internal Revenue Service. The payments will ordinarily not
be subject to withholding of federal income tax. However, backup withholding of
such tax at a rate of 31% may apply to certain shareholders by reason of the
events specified in section 3406 of the Code and related Treasury Regulations,
which include failure of an Uptowner shareholder to certify to Uptowner the
shareholder's taxpayer identification number or social security number. Uptowner
may require Uptowner shareholders to establish an exemption from backup
withholding or to make arrangements satisfactory to Uptowner with respect to
backup withholding. An Uptowner shareholder who does not provide Uptowner with
his or her taxpayer identification number may be subject to penalties imposed by
the IRS. Withholding may also apply to Uptowner shareholders who are otherwise
exempt from such withholding, such as a foreign person, if that person fails to
properly document its status as an exempt recipient.
GENERAL INFORMATION
VOTING PROCEDURES AND REVOCABILITY OF PROXIES
This Proxy Statement is being furnished in connection with the
solicitation by the board of directors of Uptowner, a West Virginia corporation,
of proxies to be voted at the Special Meeting of Shareholders of Uptowner to be
held at the offices of Uptowner, at 800 Third Avenue, Huntington, West Virginia
25701, on June 11, 2004, at 10:00 a.m., local time, and at any postponement or
adjournment thereof. The only shareholders entitled to vote at the Special
Meeting are the holders of record at the close of business on the Record Date.
On the Record Date there were 1,493,642 outstanding shares of Existing Common
Stock. Each outstanding share of Existing Common Stock is entitled to one vote
on each matter to come before the Special Meeting.
At the Special Meeting, the shareholders of Uptowner will vote (i) to
approve the amendment to Uptowner's Articles of Incorporation to effect the
proposed one-for 25,000 Reverse Stock Split, and (ii) to transact such other
business as may properly come before the Special Meeting, as set forth in the
preceding Notice of Special Meeting.
The holders of a majority of the outstanding shares of Existing Common
Stock present, in person or by proxy, and entitled to vote at the Special
Meeting will constitute a quorum for the transaction of business at the Special
Meeting. If a quorum should not be present, the Special Meeting may be adjourned
from time to time until a quorum is obtained. Abstentions and broker non-votes
are considered for purposes of determining the presence or absence of a quorum
for the transaction of business. Abstentions and broker non-votes will have the
effect of a vote against the Reverse Stock Split and the related amendment to
Uptowner's Articles of Incorporation. Shareholders are urged to sign the
accompanying form of proxy and return it promptly.
When a signed proxy card is returned with choices specified with
respect to voting matters, the shares represented are voted by proxies
designated on the proxy card in accordance with the shareholder's instructions.
If a signed proxy card is returned and the shareholder has
-13-
made no specifications with respect to voting matters, the shares will be voted
for the proposed Reverse Stock Split described in this Proxy Statement and, at
the discretion of the designated proxies, on any other matter that may properly
come before the Special Meeting or any adjournment. Uptowner does not know of
any business that will be presented for consideration at the Special Meeting
other than the Reverse Stock Split and related Amendment to Uptowner's Articles
of Incorporation. However, if any other business should come before the Special
Meeting, it is the intention of the designated proxies to vote on any such
business in accordance with the recommendation of management.
Any shareholder of Uptowner has the unconditional right to revoke his
or her proxy at any time prior to the voting thereof by (i) notifying the
Secretary of Uptowner in writing at Uptowner's principal executive office, (ii)
executing and delivering a subsequent proxy, or (iii) personally appearing at
the Special Meeting and casting a vote in person. However, no revocation shall
be effective unless and until notice of such revocation has been received by
Uptowner at or prior to the Special Meeting.
PERSONS MAKING THE SOLICITATION
The enclosed proxy is solicited on behalf of the board of directors of
Uptowner. The chief executive officer may participate in the solicitation but
will not receive any separate or additional compensation in connection
therewith. The cost of soliciting proxies in the accompanying form will be borne
by Uptowner. Proxies may also be solicited personally or by telephone by
directors and officers of Uptowner, without additional compensation therefor.
Upon request, Uptowner will reimburse brokers, dealers, banks and trustees or
their nominees, for reasonable expenses incurred by them in forwarding proxy
material to beneficial owners of shares of Existing Common Stock.
PROPOSAL--REVERSE STOCK SPLIT AND RELATED
AMENDMENT TO UPTOWNER'S ARTICLES OF INCORPORATION
GENERAL
The board of directors has unanimously adopted a resolution approving,
and recommending to shareholders for approval, an amendment to Uptowner's
Articles of Incorporation to effect the proposed one-for 25,000 Reverse Stock
Split. The form of amendment is attached hereto as Appendix III.
If the shareholders approve the Reverse Stock Split, Uptowner intends
to file the amendment to Uptowner's Articles of Incorporation with the Secretary
of State of West Virginia. The Reverse Stock Split will become effective on the
date the amendment is filed with the Secretary of State of West Virginia.
Uptowner expects the amendment to become effective as soon as practicable
following the Special Meeting.
Uptowner had 1,493,642 shares of Existing Common Stock outstanding as
of the Record Date. If the Reverse Stock Split is approved and implemented, each
share of Existing Common
-14-
Stock will automatically be reclassified into one twenty-five thousandeth of a
fully paid and non-assessable share of New Common Stock without any further
action on the part of the shareholders. Assuming no change in the number of
outstanding shares from the Record Date if the Reverse Stock Split is approved,
the currently outstanding shares of Existing Common Stock will be converted into
approximately 29 shares of New Common Stock.
PAYMENT FOR SHARES
Within 10 days after the Effective Date, Uptowner will mail to the
holders of fractional shares a notice of the filing of the Articles of Amendment
and a letter of transmittal containing instructions with respect to the
submission of shares of Existing Common Stock to Uptowner. No certificates or
scrip representing fractional shares of New Common Stock shall be issued in
connection with the Reverse Stock Split. Instead, shareholders holding a number
of shares of Existing Common Stock not evenly divisible by 25,000, and
shareholders holding fewer than 25,000 shares of Existing Common Stock, upon
surrender of their old certificates, will receive cash in lieu of fractional
shares of New Common Stock. The price payable by Uptowner for Existing Common
stock will be determined by multiplying the Existing Common Stock by $1.07.
Payment for fractional shares will be determined by multiplying the fraction of
New Common Stock by $1.07. Holders of shares will be entitled to receive, and
Uptowner will be obligated to make payment for, cash in lieu of shares only by
transmitting stock certificate(s) for shares of Existing Common Stock to
Uptowner, together with the properly executed and completed letter of
transmittal and such evidence of ownership of such shares as Uptowner may
require.
Any holder of record of fewer than 25,000 shares of Existing Common
Stock who desires to retain an equity interest in Uptowner after the Effective
Date may do so by purchasing, prior to the Effective Date, a sufficient number
of shares of Existing Common Stock such that the total number of shares held of
record in his name immediately prior to the Reverse Stock Split is equal to or
greater than 25,000. However, due to the limited trading market for Uptowner's
Existing Common Stock it is possible that a shareholder desiring to retain an
equity interest in Uptowner may not be able to purchase enough shares to retain
an equity interest in Uptowner at a fair price or at all.
VOTE REQUIRED
Approval of the Reverse Stock Split and amendment to the Articles of
Incorporation will require approval and amendment to the Articles of
Incorporation by a majority of the shares of Existing Common Stock that were
outstanding on the Record Date. Accordingly, the Reverse Stock Split will be
approved if at least 746,822 shares of Existing Common Stock are voted in favor
of the Reverse Stock Split. Affiliates of the company (primarily Carl Midkiff)
own or control 54.09% and it is expected that these shares will be voted in
favor of the Reverse Stock Split and the amendment to the Articles of
Incorporation although no agreements have been entered into in this regard.
-15-
SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION; EXPENSES OF TRANSACTION
The total amount of funds needed to cash out the fractional shares is
estimated to be $822,447. Uptowner estimates incurring the following costs and
expenses to structure and complete the Reverse Stock Split:
Filing fees $ 350
Legal expenses 70,000
Accounting expenses 15,000
Printing and mailing costs 25,000
Other miscellaneous costs 5,000
---------
Total $ 115,350
---------
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE REVERSE STOCK SPLIT AND THE RELATED AMENDMENT TO UPTOWNER'S ARTICLES
OF INCORPORATION.
MANAGEMENT
INFORMATION WITH RESPECT TO THE DIRECTORS AND EXECUTIVE OFFICERS
For each member of the board of directors and Uptowner's executive
officers, there follows information given by each concerning his or her
principal occupation and business experience for the past five years, his or her
age and his or her length of service as a director of Uptowner. The address and
telephone for each person named in the table is in care of Uptowner Inns, Inc.,
741 5th Avenue, Huntington, West Virginia 25701, Telephone (304) 525-8162.
POSITION WITH TERM PRINCIPAL OCCUPATION FOR PAST
NAME AGE THE COMPANY EXPIRES FIVE YEARS
- ---------------- --- ----------------------- ------- -------------------------------
Hobart A. Adkins 47 Director Since 2001 2004 Owner of Quality Exhaust, Inc.;
Secretary of the Board President, 31st Street
Enterprises, Inc. (Business
includes auto repair and
exhaust repair)
Richard Monga 38 Director Since 2001 2004 General Manager of Uptowner
Inns, Inc. (1997-present);
Prior Experience: General
Manager, separate Holiday Inn
property
-16-
POSITION WITH TERM PRINCIPAL OCCUPATION FOR PAST
NAME AGE THE COMPANY EXPIRES FIVE YEARS
- ------------------ --- ---------------------- ------- -------------------------------
Carl E. Midkiff 52 Director Since 1997 2004 President, CEO and Chairman of
President, CEO, the Board of Uptowner Inns,
Chairman of the Board Inc.; Owner and Manager of
Hazmat Environmental
Contractors, Inc. (1995-2001);
Owner and Manager of Prestige
Properties, Inc. (2000-present)
(Owns and manages residential
rental properties)
Charles D. Robinson 48 Director Since 2001; 2004 Insurance Agent and Vice
Treasurer of the Board President of Insurance Systems,
Inc.
Other than Mr. Midkiff and Mr. Robinson, there are no other executive
officers of Uptowner.
During the past five years, none of the above named persons has been
convicted in a criminal proceeding or has been a party to any judicial or
administrative proceeding that resulted in a judgment, decree or final order
enjoining him from future violations of, or prohibiting activities subject to,
federal or state securities laws, or a finding of any violation of federal or
state securities laws. All of the above named persons are citizens of the United
States.
The board of directors met three times during the fiscal year ended
June 30, 2003.
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors currently has no committees and the entire board
served in the capacity of the Compensation Committee and the Audit Committee.
REPORT OF CARL MIDKIFF CONCERNING THE AUDIT
Carl Midkiff oversees the company's financial reporting process. Mr.
Midkiff has the primary responsibility for the financial statements and the
reporting process, including the systems of internal controls. In fulfilling his
oversight responsibilities for fiscal 2003, Mr. Midkiff reviewed the audited
financial statements in the Form 10-K with the company's auditors including a
discussion of the quality, not just the acceptability, of the accounting
principles, the reasonableness of significant judgments and the clarity and
disclosures in the financial statements.
-17-
Mr. Midkiff reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited financial
statements with generally accepted accounting principles, his judgments as to
the quality, not just the acceptability, of the company's accounting principles
and such other matters as are required to be discussed under generally accepted
auditing standards.
In reliance on the reviews and discussions referred to above, Mr.
Midkiff recommended to the board of directors (and the board has approved) that
the audited financial statements be included in the Form 10-K for the fiscal
year ended June 30, 2003, for filing with the SEC. Mr. Midkiff and the board
have also approved the selection of the company's independent auditors.
Based upon the review and discussions referred to above, the board of
directors recommended that the audited financial statements for the fiscal year
ended June 30, 2003, be included in the company's Annual Report on Form 10-K and
filed with the SEC.
September 15, 2003
Hobart A. Adkins
Richard Monga
Carl E. Midkiff
Charles D. Robinson
This report shall not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, unless the company specifically incorporates
this report by reference. They will not otherwise be filed under such Acts.
AUDIT FEES AND ALL OTHER FEES. For the year ended June 30, 2003,
Uptowner paid Sullivan, Ware & Hall, PLLC $18,000 for audit fees and $9,662 for
all other fees. The board has considered that the provision of the non-audit
services noted above is compatible with maintaining Sullivan, Ware & Hall,
PLLC's independence.
In reliance on the reviews and discussions referred to above, the board
determined that the audited financial statements be included in the Annual
Report on Form 10-K for the fiscal year ended June 30, 2003 for filing with the
Securities and Exchange Commission. The board has selected Sullivan, Ware & Hall
PLLC as independent auditors of Uptowner for the fiscal year ended June 30,
2003.
DIRECTORS' COMPENSATION
Board members receive $500 for each board meeting of the Company they
attend. In the fiscal year ended June 30, 2003, the board of directors of the
Company received $300 each, in the aggregate, for all board of directors'
meeting attended.
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
Mr. Midkiff's salary is determined annually by the board of directors
based on several objective and subjective factors. The board considers
industry-wide salary information for
-18-
executives in the hotel industry which is compiled through surveys conducted by
recognized publications in the hotel industry. Members of the board of directors
also subjectively apply their own familiarity of the local market for business
executives to ensure Mr. Midkiff's annual salary is set at an appropriate level
considering the local business climate, Mr. Midkiff's expertise in the hotel
business, the cost to replace Mr. Midkiff with another executive with equivalent
experience and the success of the company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
company's directors and executive officers, and persons who own more than 10% of
the registered class of the company's equity securities, to make stock ownership
and transaction filings with the Securities and Exchange Commission and to
provide copies to the company. Each of Carl Midkiff, Violet Midkiff, MMS Limited
Partnership, Prestige Property, Inc. and Violet Midkiff Irrevocable Trust either
directly or indirectly own beneficially more than 10% of the company's common
stock. Additionally, Carl Midkiff, Charles Robinson and Hobart Adkins are
directors and executive officers owning shares of the company's common stock. On
January 23, 2004, Carl Midkiff, Violet Midkiff, Hobart Adkins, Charles Robinson,
Prestige Property, Inc., MMS Limited Partnership and The Violet Midkiff
Irrevocable Trust filed a Form 3 and Carl Midkiff, Charles Robinson, Prestige
Property, Inc. and MMS Limited Partnership filed a Form 4. Previously these
individuals had made no filings as required by Section 16 of the Exchange Act
and their respective Form 3's represent the first Section 16 report for each of
these persons. Carl Midkiff is delinquent on twelve reports representing
eighteen transactions not reported on a timely basis. Violet Midkiff is
delinquent on forty-two reports representing forty-seven transactions. Hobart
Adkins is delinquent on one report representing one transaction. Charles
Robinson is delinquent on two reports representing two transactions. MMS Limited
Partnership is delinquent on two reports representing two transactions. Prestige
Property, Inc. is delinquent on one report representing one transaction. Violet
Midkiff Irrevocable Trust is delinquent on one report representing one
transaction.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF COMPENSATION. The table below reflects information
concerning the annual compensation for services in all capacities to the
corporation for the fiscal years ended June 30, 2003, 2002 and 2001, of those
persons who were, as of June 30, 2003, (a) the chief executive officer, and (b)
the four other most highly compensated executive officers to the extent that
such persons total annual salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION (1)
------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION
--------------------------- ----------- ------ ----- ------------
Carl E. Midkiff, President 2003 $86,000 $52,348 $ 0
and Chief Executive Officer 2002 $45,923 $38,668 $ 0
2001 $38,912 $51,796 $ 0
(1) Does not include perquisites and other personal benefits, the amount of
which are not shown because the aggregate amount of such compensation
during the years presented did not exceed the lesser of $50,000 or 10% of
total salary and bonus reported for such executive officer. The company
provides Mr. Midkiff with the use of a vehicle.
The company does not maintain any form of stock option, stock
appreciation rights, or other long-term compensation plans. There are no
employment or change in control agreements.
-19-
INFORMATION ABOUT UPTOWNER INNS, INC.
GENERAL
Uptowner was incorporated in the State of West Virginia on July 1,
1961. Uptowner had operated a 137-room full service hotel, the Uptowner Inn,
built in 1962 by Uptowner and operated by Uptowner until January 2002. The
property was sold in July 2002. In late August 1998, Uptowner 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 79% with an average room rate of $80. This yielded a revenue for
available rooms of $20,736.
A wholly owned subsidiary of Uptowner, Motel and Restaurant Supply,
which was incorporated in the State of West Virginia on July 16, 1966, has had
no activity since 1981.
Neither Uptowner 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.
During fiscal 2003, Uptowner 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 Uptowner from rentals did not
exceed ten percent of the consolidated revenue of Uptowner 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.
The hotel industry is highly competitive with Uptowner 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
pool weather at these geographical locations.
At September 30, 2003, Uptowner and its subsidiaries employ
approximately 50 employees.
-20-
PROPERTY
Uptowner has no foreign operations.
A description of the properties Uptowner owns follows:
(a) Uptowner 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 4th Avenue. This property was owned
in fee by Uptowner. 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 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) Uptowner owned in fee two lots used for the overflow parking,
across the street from its main motor hotel at 1432-34 4th 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).
(c) Uptowner owned in fee an undeveloped lot acquired for future
development or parking across an alley from its main motor hotel at 1400 5th
Avenue in Huntington, West Virginia. The lot was sold on July 3, 2002 with the
main motor hotel.
(d) Uptowner owned in fee two lots immediately west of its motor
hotel, 1401 4th 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 City National Bank in the original amount of $1,648,107.
These lots were sold on July 3, 2002 with the main motor hotel.
(e) Uptowner owned in fee and operated a 40-unit, two-story
apartment building within one city block of the motor hotel, at 1340 4th Avenue,
in Huntington, West Virginia. The apartment building was sold at auction on
September 12, 2002 for $361,000.
(f) Uptowner owned in fee a lot acquired and used for parking
across the street from its main motor hotel at 1420 4th 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).
(g) Uptowner owned in fee a lot improved by a three-story building
within one city block of the main motor hotel at 1416-18 4th 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.
-21-
(h) Uptowner owns in fee a vacant lot on the west side of
Huntington approximately three 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. The property is currently used as a parking lot until it
is deemed beneficial to build and operate a motel in that location.
(i) Uptowner purchased a parcel of real estate with a residential
building in January 1990. This property 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.
(j) Uptowner 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.
(k) Uptowner owns in fee a Holiday Inn Hotel & Suites, a 135-room
motor hotel located in downtown Huntington at 800 3rd 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 of $6,800,000, 8.25% rate of interest and maturing February 2012. The
balance of the note was $6,743,270 as of June 30, 2002. 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) Uptowner acquired assets from an entity that is controlled by
the company's president and shareholder, 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.
Liabilities were assumed of $272,935 and a promissory note issued for $91,565.
The balance of the liability assumed is $-0- at June 30, 2002 and the balance of
the promissory note is $-0- at June 30, 2002.
-22-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of June 15, 2003,
relating to the beneficial ownership of the common stock by (a) each person or
group known by the company to own beneficially more than 5% of the outstanding
common stock; (b) each of the company's directors; and (c) all directors and
executive officers of the company as a group. Ownership includes direct and
indirect (beneficial) ownership as defined by SEC rules.
AMOUNT AND NATURE OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS
---------------- ------------------------ ----------------
Hobart A. Adkins 100 Direct *
Carl E. Midkiff 261,974 Direct 54.04%
545,161 Indirect (2)
Violet Midkiff 264,207 Direct (3) 17.69%
Charles D. Robinson 702 Direct *
All Directors and Executive Officers 807,937 Indirect 54.09%
As a Group
(1) For purposes of this table, beneficial ownership has been determined in
accordance with the provisions of Rule 13d-3 of the Securities Exchange
Act of 1934 under which, in general, a person is deemed to be the
beneficial owner of a security if he has or shares the power to dispose
of or direct the disposition of the security, or if he has the right to
acquire beneficial ownership of the security within 60 days.
(2) Consists of 162,562 shares owned by Violet Midkiff, Carl Midkiff's
mother over which Carl Midkiff exercises voting power; 101,645 shares
owned by Violet Midkiff as a joint tenant with right of survivorship
with others (including Wade Midkiff and Lewis Midkiff, the minor sons
of Carl Midkiff);
-23-
40,727 shares owned by Prestige Properties, Inc., a corporation owned
by Carl Midkiff and his immediate family; 200,000 shares owned by the
Violet Midkiff Irrevocable Trust of which Carl Midkiff is the trustee;
10,000 shares owned by Lewis Midkiff of which Carl Midkiff acts as
custodian; 10,000 shares owned by Wade Midkiff of which Carl Midkiff
acts as custodian; 10,007 shares owned by the Wade Midkiff Irrevocable
Trust of which Carl Midkiff is the trustee; 10,000 shares owned by
Elizabeth Midkiff who is Carl Midkiff's wife; and 220 shares owned
by Carl Midkiff jointly, with another individual.
(3) Included in the shares owned indirectly by Carl Midkiff as described
in Note 2.
* Less than one percent.
OTHER MATTERS
The board of directors is not aware of any matter to be presented for
action at the meeting other than the matters set forth herein. Should any other
matter requiring a vote of shareholders arise, the proxies in the enclosed form
confer upon the person or persons entitled to vote the shares represented by
such proxies discretionary authority to vote the same in accordance with their
best judgment in the interest of Uptowner.
FORWARD-LOOKING STATEMENTS
This Proxy Statement contains forward-looking statements. Additional
written or oral forward-looking statements may be made by us from time to time
in filings with the SEC or otherwise. The words "believe," "expect,"
"anticipate," "estimate," "project," and similar expressions identify
forward-looking statements, which speak only as of the date the statement was
made. Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Further events
and actual results could differ materially than those set forth in, contemplated
by, or underlying the forward-looking statements. Statements in this Proxy
Statement describe factors that could contribute to or cause such differences.
We caution you not to place undo reliance on any forward-looking
statements made by, or on behalf of, Uptowner in this Proxy Statement or in any
of our filings with the SEC or otherwise. Additional information with respect to
factors that may cause the results to differ materially from those contemplated
by forward-looking statements is included in our current and subsequent filings
with the SEC. See "Available Information."
AVAILABLE INFORMATION
Uptowner is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the SEC. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, DC 20549. Copies of such materials can also be obtained at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, N.W.,
-24-
Judiciary Plaza, Washington, DC 20549. In addition, such reports, proxy
statements and other information are available from the SEC's Internet Website
at http://www.sec.gov.
DOCUMENTS INCORPORATED BY REFERENCE
Copies of Uptowner's Annual Report to Shareholders on Form 10-K for
fiscal year ended June 30, 2003 (File No. 0-1957) and Quarterly Reports on Forms
10-Q for the Quarters ended September 30, 2003, December 31, 2003, and March 31,
2004 are incorporated herein by reference pursuant to the requirements of
Schedule 13E-3 and Schedule 14A. Copies of these reports are enclosed with this
Proxy Statement. Copies of past reports are available for review from the EDGAR
filings obtained through the SEC's Internet Website (http://www.sec.gov).
By order of the Board of Directors
Carl E. Midkiff
President and Chief Executive Officer
May 21, 2004
-25-
APPENDIX I
ARTICLE 13.
APPRAISAL RIGHTS.
PART I. RIGHT TO APPRAISAL AND PAYMENT FOR SHARES.
SECTION 31D-13-1301. DEFINITIONS.
In this article:
(1) "Affiliate" means a person that directly or indirectly through
one or more intermediaries controls, is controlled by or is under common control
with another person or is a senior executive. For purposes of subdivision (4),
subsection (b), section one thousand three hundred two of this article, a person
is deemed to be an affiliate of its senior executives.
(2) "Beneficial shareholder" means a person who is the beneficial
owner of shares held in a voting trust or by a nominee on the beneficial owner's
behalf.
(3) "Corporation" means the issuer of the shares held by a
shareholder demanding appraisal and, for matters covered in sections one
thousand three hundred twenty-two, one thousand three hundred twenty-three, one
thousand three hundred twenty-four, one thousand three hundred twenty-five, one
thousand three hundred twenty-six, one thousand three hundred thirty and one
thousand three hundred thirty-one of this article, includes the surviving entity
in a merger.
(4) "Fair value" means the value of the corporation's shares
determined:
(A) Immediately before the effectuation of the corporate action to
which the shareholder objects;
(B) Using customary and current valuation concepts and techniques
generally employed for similar businesses in the context of the transaction
requiring appraisal; and
(C) Without discounting for lack of marketability or minority
status except, if appropriate, for amendments to the articles pursuant to
subdivision (5), subsection (a), section one thousand three hundred two of this
article.
(5) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the rate of interest on judgments
in this state on the effective date of the corporate action.
(6) "Preferred shares" means a class or series of shares whose
holders have preference over any other class or series with respect to
distributions.
-1-
(7) "Record shareholder" means the person in whose name shares are
registered in the records of the corporation or the beneficial owner of shares
to the extent of the rights granted by a nominee certificate on file with the
corporation.
(8) "Senior executive" means the chief executive officer, chief
operating officer, chief financial officer and anyone in charge of a principal
business unit or function.
(9) "Shareholder" means both a record shareholder and a beneficial
shareholder.
SECTION 31D-13-1302. RIGHT TO APPRAISAL.
(a) A shareholder is entitled to appraisal rights, and to obtain
payment of the fair value of that shareholder's shares, in the event of any of
the following corporate actions:
(1) Consummation of a merger to which the corporation is a party:
(A) If shareholder approval is required for the merger by section one thousand
one hundred four, article eleven of this chapter and the shareholder is entitled
to vote on the merger, except that appraisal rights may not be available to any
shareholder of the corporation with respect to shares of any class or series
that remain outstanding after consummation of the merger; or (B) if the
corporation is a subsidiary and the merger is governed by section one thousand
one hundred five, article eleven of this chapter;
(2) Consummation of a share exchange to which the corporation is a
party as the corporation whose shares will be acquired if the shareholder is
entitled to vote on the exchange, except that appraisal rights may not be
available to any shareholder of the corporation with respect to any class or
series of shares of the corporation that is not exchanged;
(3) Consummation of a disposition of assets pursuant to section
one thousand two hundred two, article twelve of this chapter if the shareholder
is entitled to vote on the disposition;
(4) An amendment of the articles of incorporation with respect to
a class or series of shares that reduces the number of shares of a class or
series owned by the shareholder to a fraction of a share if the corporation has
the obligation or right to repurchase the fractional share so created; or
(5) Any other amendment to the articles of incorporation, merger,
share exchange or disposition of assets to the extent provided by the articles
of incorporation, bylaws or a resolution of the board of directors.
(b) Notwithstanding subsection (a) of this section, the
availability of appraisal rights under subdivisions (1), (2), (3) and (4),
subsection (a) of this section are limited in accordance with the following
provisions:
(1) Appraisal rights may not be available for the holders of
shares of any class or series of shares which is:
-2-
(A) Listed on the New York stock exchange or the American stock
exchange or designated as a national market system security on an interdealer
quotation system by the national association of securities dealers, inc.; or
(B) Not so listed or designated, but has at least two thousand
shareholders and the outstanding shares of a class or series has a market value
of at least twenty million dollars, exclusive of the value of the shares held by
its subsidiaries, senior executives, directors and beneficial shareholders
owning more than ten percent of the shares.
(2) The applicability of subdivision (1), subsection (b) of this
section is to be determined as of:
(A) The record date fixed to determine the shareholders entitled
to receive notice of, and to vote at, the meeting of shareholders to act upon
the corporate action requiring appraisal rights; or
(B) The day before the effective date of the corporate action if
there is no meeting of shareholders.
(3) Subdivision (1), subsection (b) of this section is not
applicable and appraisal rights are to be available pursuant to subsection (a)
of this section for the holders of any class or series of shares who are
required by the terms of the corporate action requiring appraisal rights to
accept for the shares anything other than cash or shares of any class or any
series of shares of any corporation, or any other proprietary interest of any
other entity, that satisfies the standards set forth in subdivision (1), section
(b) of this section at the time the corporate action becomes effective.
(4) Subdivision (1), subsection (b) of this section is not
applicable and appraisal rights are to be available pursuant to subsection (a)
of this section for the holders of any class or series of shares where any of
the shares or assets of the corporation are being acquired or converted, whether
by merger, share exchange or otherwise, pursuant to the corporate action by a
person, or by an affiliate of a person, who: (A) Is, or at any time in the
one-year period immediately preceding approval by the board of directors of the
corporate action requiring appraisal rights was, the beneficial owner of twenty
percent or more of the voting power of the corporation, excluding any shares
acquired pursuant to an offer for all shares having voting power if the offer
was made within one year prior to the corporate action requiring appraisal
rights for consideration of the same kind and of a value equal to or less than
that paid in connection with the corporate action; or (B) for purpose of voting
their shares of the corporation, each member of the group formed is deemed to
have acquired beneficial ownership, as of the date of the agreement, of all
voting shares of the corporation beneficially owned by any member of the group.
(c) Notwithstanding any other provision of section one thousand
three hundred two of this article, the articles of incorporation as originally
filed or any amendment to the articles of incorporation may limit or eliminate
appraisal rights for any class or series of preferred shares,
-3-
but any limitation or elimination contained in an amendment to the articles of
incorporation that limits or eliminates appraisal rights for any of the shares
that are outstanding immediately prior to the effective date of the amendment or
that the corporation is or may be required to issue or sell pursuant to any
conversion, exchange or other right existing immediately before the effective
date of the amendment does not apply to any corporate action that becomes
effective within one year of that date if the action would otherwise afford
appraisal rights.
(d) A shareholder entitled to appraisal rights under this article
may not challenge a completed corporate action for which appraisal rights are
available unless the corporate action:
(1) Was not effectuated in accordance with the applicable
provisions of articles ten, eleven or twelve of this chapter or the
corporation's articles of incorporation, bylaws or board of directors'
resolution authorizing the corporate action; or
(2) Was procured as a result of fraud or material
misrepresentation.
SECTION 31D-13-1303. ASSERTION OF RIGHTS BY NOMINEES AND BENEFICIAL OWNERS.
(a) A record shareholder may assert appraisal rights as to fewer
than all the shares registered in the record shareholder's name but owned by a
beneficial shareholder only if the record shareholder objects with respect to
all shares of the class or series owned by the beneficial shareholder and
notifies the corporation in writing of the name and address of each beneficial
shareholder on whose behalf appraisal rights are being asserted. The rights of a
record shareholder who asserts appraisal rights for only part of the shares held
of record in the record shareholder's name under this subsection are to be
determined as if the shares as to which the record shareholder objects and the
record shareholder's other shares were registered in the names of different
record shareholders.
(b) A beneficial shareholder may assert appraisal rights as to
shares of any class or series held on behalf of the shareholder only if the
shareholder:
(1) Submits to the corporation the record shareholder's written
consent to the assertion of the rights no later than the date referred to in
paragraph (D), subdivision (2), subsection (b), section one thousand three
hundred twenty-two of this article; and
(2) Does so with respect to all shares of the class or series that
are beneficially owned by the beneficial shareholder.
PART II. PROCEDURE FOR EXERCISE OF APPRAISAL RIGHTS.
SECTION 31D-13-1320. NOTICE OF APPRAISAL RIGHTS.
(a) If proposed corporate action described in subsection (a),
section one thousand three hundred two of this article is to be submitted to a
vote at a shareholders' meeting, the
-4-
meeting notice must state that the corporation has concluded that shareholders
are, are not or may be entitled to assert appraisal rights under this article.
If the corporation concludes that appraisal rights are or may be available, a
copy of this article must accompany the meeting notice sent to those record
shareholders entitled to exercise appraisal rights.
(b) In a merger pursuant to section one thousand one hundred five,
article eleven of this chapter, the parent corporation must notify in writing
all record shareholders of the subsidiary who are entitled to assert appraisal
rights that the corporate action became effective. The notice must be sent
within ten days after the corporate action became effective and include the
materials described in section one thousand three hundred twenty-two of this
article.
SECTION 31D-13-1321. NOTICE OF INTENT TO DEMAND PAYMENT.
(a) If proposed corporate action requiring appraisal rights under
section one thousand three hundred two of this article is submitted to a vote at
a shareholders' meeting, a shareholder who wishes to assert appraisal rights
with respect to any class or series of shares:
(1) Must deliver to the corporation before the vote is taken
written notice of the shareholder's intent to demand payment if the proposed
action is effectuated; and
(2) Must not vote, or cause or permit to be voted, any shares of
the class or series in favor of the proposed action.
(b) A shareholder who does not satisfy the requirements of
subsection (a) of this section is not entitled to payment under this article.
SECTION 31D-13-1322. APPRAISAL NOTICE AND FORM.
(a) If proposed corporate action requiring appraisal rights under
subsection (a), section one thousand three hundred two of this article becomes
effective, the corporation must deliver a written appraisal notice and form
required by subdivision (1), subsection (b) of this section to all shareholders
who satisfied the requirements of section one thousand three hundred twenty-one
of this article. In the case of a merger under section one thousand one hundred
five, article eleven of this chapter, the parent must deliver a written
appraisal notice and form to all record shareholders who may be entitled to
assert appraisal rights.
(b) The appraisal notice must be sent no earlier than the date the
corporate action became effective and no later than ten days after that date and
must:
(1) Supply a form that specifies the date of the first
announcement to shareholders of the principal terms of the proposed corporate
action and requires the shareholder asserting appraisal rights to certify: (A)
Whether or not beneficial ownership of those shares for which appraisal rights
are asserted was acquired before that date; and (B) that the shareholder did not
vote for the transaction;
-5-
(2) State:
(A) Where the form must be sent and where certificates for
certificated shares must be deposited and the date by which those certificates
must be deposited, which date may not be earlier than the date for receiving the
required form under of this subdivision;
(B) A date by which the corporation must receive the form which
date may not be fewer than forty nor more than sixty days after the date the
appraisal notice and form required by subsection (a) of this section are sent
and state that the shareholder is deemed to have waived the right to demand
appraisal with respect to the shares unless the form is received by the
corporation by the specified date;
(C) The corporation's estimate of the fair value of the shares;
(D) That, if requested in writing, the corporation will provide,
to the shareholder so requesting, within ten days after the date specified in
paragraph (B) of this subdivision the number of shareholders who return the
forms by the specified date and the total number of shares owned by them; and
(E) The date by which the notice to withdraw under section one
thousand three hundred twenty-three of this article must be received, which date
must be within twenty days after the date specified in paragraph (B) of this
subdivision; and
(3) Be accompanied by a copy of this article.
SECTION 31D-13-1323. PERFECTION OF RIGHTS; RIGHT TO WITHDRAW.
(a) A shareholder who receives notice pursuant to section one
thousand three hundred twenty-two of this article and who wishes to exercise
appraisal rights must certify on the form sent by the corporation whether the
beneficial owner of the shares acquired beneficial ownership of the shares
before the date required to be set forth in the notice pursuant to subdivision
(1), subsection (b), section one thousand three hundred twenty-two of this
article. If a shareholder fails to make this certification, the corporation may
elect to treat the shareholder's shares as after-acquired shares under section
one thousand three hundred twenty-five of this article. In addition, a
shareholder who wishes to exercise appraisal rights must execute and return the
form and, in the case of certificated shares, deposit the shareholder's
certificates in accordance with the terms of the notice by the date referred to
in the notice pursuant to paragraph (B), subdivision (2), subsection (b),
section one thousand three hundred twenty-two of this article. Once a
shareholder deposits the shareholder's certificates or, in the case of
uncertified shares, returns the executed forms, that shareholder loses all
rights as a shareholder, unless the shareholder withdraws pursuant to subsection
(b) of this section.
(b) A shareholder who has complied with subsection (a) of this
section may decline to exercise appraisal rights and withdraw from the appraisal
process by so notifying the
-6-
corporation in writing by the date set forth in the appraisal notice pursuant to
paragraph (E), subdivision (2), subsection (b), section one thousand three
hundred twenty-two of this article. A shareholder who fails to withdraw from the
appraisal process by that date may not withdraw without the corporation's
written consent.
(c) A shareholder who does not execute and return the form and, in
the case of certificated shares, deposit the shareholder's share certificates
where required, each by the date set forth in the notice described in subsection
(b), section one thousand three hundred twenty-two of this article, is not
entitled to payment under this article.
SECTION 31D-13-1324. PAYMENT.
(a) Except as provided in section one thousand three hundred
twenty-five of this article, within thirty days after the form required by
paragraph (B), subdivision (2), subsection (b), section one thousand three
hundred twenty-two of this article is due, the corporation shall pay in cash to
those shareholders who complied with subsection (a), section one thousand three
hundred twenty-three of this article the amount the corporation estimates to be
the fair value of their shares, plus interest.
(b) The payment to each shareholder pursuant to subsection (a) of
this article must be accompanied by:
(1) Financial statements of the corporation that issued the shares
to be appraised, consisting of a balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for that
year and the latest available interim financial statements, if any;
(2) A statement of the corporation's estimate of the fair value of
the shares, which estimate must equal or exceed the corporation's estimate given
pursuant to paragraph (C), subdivision (2), subsection (b), section one thousand
three hundred twenty-two of this article; and
(3) A statement that shareholders described in subsection (a) of
this section have the right to demand further payment under section one thousand
three hundred twenty-six of this article and that if any shareholder does not
make a demand for further payment within the time period specified, shareholder
is deemed to have accepted the payment in full satisfaction of the corporation's
obligations under this article.
SECTION 31D-13-1325. AFTER-ACQUIRED SHARES.
(a) A corporation may elect to withhold payment required by
section one thousand three hundred twenty-four of this article from any
shareholder who did not certify that beneficial ownership of all of the
shareholder's shares for which appraisal rights are asserted was acquired
-7-
before the date set forth in the appraisal notice sent pursuant to subdivision
(1), subsection (b), section one thousand three hundred twenty-two of this
article.
(b) If the corporation elected to withhold payment under
subsection (a) of this section, it must, within thirty days after the form
required by paragraph (B), subdivision (2), subsection (b), section one thousand
three hundred twenty-two of this article is due, notify all shareholders who are
described in subsection (a) of this section:
(1) Of the information required by subdivision (1), subsection
(b), section one thousand three hundred twenty-four of this article;
(2) Of the corporation's estimate of fair value pursuant to
subdivision (2), subsection (b), section one thousand three hundred twenty-four
of this article;
(3) That they may accept the corporation's estimate of fair value,
plus interest, in full satisfaction of their demands or demand appraisal under
section one thousand three hundred twenty-six of this article;
(4) That those shareholders who wish to accept the offer must
notify the corporation of their acceptance of the corporation's offer within
thirty days after receiving the offer; and
(5) That those shareholders who do not satisfy the requirements
for demanding appraisal under section one thousand three hundred twenty-six of
this article are deemed to have accepted the corporation's offer.
(c) Within ten days after receiving the shareholder's acceptance
pursuant to subsection (b) of this section, the corporation must pay in cash the
amount it offered under subdivision (2), subsection (b) of this section to each
shareholder who agreed to accept the corporation's offer in full satisfaction of
the shareholder's demand.
(d) Within forty days after sending the notice described in
subsection (b) of this section, the corporation must pay in cash the amount it
offered to pay under subdivision (2), subsection (b) of this section to each
shareholder described in subdivision (5), subsection (b) of this section.
SECTION 31D-13-1326. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR
OFFER.
(a) A shareholder paid pursuant to section one thousand three
hundred twenty-four of this article who is dissatisfied with the amount of the
payment must notify the corporation in writing of that shareholder's estimate of
the fair value of the shares and demand payment of that estimate plus interest
and less any payment due under section one thousand three hundred twenty-four of
this article. A shareholder offered payment under section one thousand three
hundred twenty-five of this article who is dissatisfied with that offer must
reject the offer and demand payment of the shareholder's stated estimate of the
fair value of the shares plus interest.
-8-
(b) A shareholder who fails to notify the corporation in writing
of that shareholder's demand to be paid the shareholder's stated estimate of the
fair value plus interest under subsection (a) of this section within thirty days
after receiving the corporation's payment or offer of payment under sections one
thousand three hundred twenty-four or one thousand three hundred twenty-five of
this article, respectively, waives the right to demand payment under this
section and is entitled only to the payment made or offered pursuant to those
respective sections.
PART III. JUDICIAL APPRAISAL OF SHARES.
SECTION 31D-13-1330. COURT ACTION.
(a) If a shareholder makes demand for payment under section one
thousand three hundred twenty-six of this article which remains unsettled, the
corporation shall commence a proceeding within sixty days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the proceeding within
the sixty-day period, it shall pay in cash to each shareholder the amount the
shareholder demanded pursuant to section one thousand three hundred twenty-six
of this article plus interest.
(b) The corporation shall make all shareholders, whether or not
residents of this state, whose demands remain unsettled parties to the
proceeding as in an action against their shares, and all parties must be served
with a copy of the petition. Nonresidents may be served by registered or
certified mail or by publication as provided by law.
(c) The jurisdiction of the court in which the proceeding is
commenced is plenary and exclusive. The court may appoint one or more persons as
appraisers to receive evidence and recommend a decision on the question of fair
value. The appraisers have the powers described in the order appointment them,
or in any amendment to it. The shareholders demanding appraisal rights are
entitled to the same discovery rights as parties in other civil proceedings.
There is no right to a jury trial.
(d) Each shareholder made a party to the proceeding is entitled to
judgment: (1) For the amount, if any, by which the court finds the fair value of
the shareholder's shares, plus interest, exceeds the amount paid by the
corporation to the shareholder for the shares; or (2) for the fair value, plus
interest, of the shareholder's shares for which the corporation elected to
withhold payment under section one thousand three hundred twenty-five of this
article.
SECTION 31D-13-1331. COURT COSTS AND COUNSEL FEES.
(a) The court in an appraisal proceeding commenced under section
one thousand three hundred thirty of this article shall determine all costs of
the proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
shareholders demanding appraisal, in amounts the court finds equitable, to the
extent the
-9-
court finds the shareholders acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this article.
(b) The court in an appraisal proceeding may also assess the fees
and expenses of counsel and experts for the respective parties, in amounts the
court finds equitable.
(1) Against the corporation and in favor of any or all
shareholders demanding appraisal if the court finds the corporation did not
substantially comply with the requirements of sections one thousand three
hundred twenty, one thousand three hundred twenty-two, one thousand three
hundred twenty-four or one thousand three hundred twenty-five of this article;
or
(2) Against either the corporation or a shareholder demanding
appraisal, in favor of any other party, if the court finds that the party
against whom the fees and expenses are assessed acted arbitrarily, vexatiously,
or not in good faith with respect to the rights provided by this article.
(c) If the court in an appraisal proceeding finds that the
services of counsel for any shareholder were of substantial benefit to other
shareholders similarly situated, and that the fees for those services should not
be assessed against the corporation, the court may award to counsel reasonable
fees to be paid out of the amounts awarded the shareholders who were benefited.
(d) To the extent the corporation fails to make a required payment
pursuant to sections one thousand three hundred twenty-four, one thousand three
hundred twenty-five or one thousand three hundred twenty-six of this article,
the shareholder may sue directly for the amount owed and, to the extent
successful, are to be entitled to recover from the corporation all costs and
expenses of the suit, including counsel fees.
C0769960
-10-
APPENDIX II
VALUATION
OF
UPTOWNER INNS, INC.
AS OF JUNE 30, 2003
SEPTEMBER 26, 2003
-1-
VALUATION
OF
UPTOWNER INNS, INC.
AS OF JUNE 30, 2003
- - - -
SEPTEMBER 26, 2003
- - - -
Mr. Carl Midkiff, President
Uptowner Inns, Inc.
741 Fifth Avenue
Huntington, WV 25701
Dear Carl:
We have prepared and enclosed, herewith, our valuation report of Uptowner Inns,
Inc. dated September 26, 2003. The purpose of the valuation is to render an
opinion as to the fair market value of the common stock of Uptowner Inns, Inc.
as of June 30, 2003.
The term "fair value" is defined in the West Virginia Code as follows:
" "Fair value" means the value of the corporation's shares
determined: Immediately before the effectuation of the corporate
action to which the shareholder objects; using customary and
current valuation concepts and techniques generally employed for
similar businesses in the conduct of the transaction requiring
appraisal; and without discounting for lack of marketability or
minority status..."
Our report is based on historical and prospective financial information provided
to us by management and other third parties. Had we audited or reviewed the
underlying data, matters may have come to our attention which would have
resulted in our using amounts different from those provided. Accordingly, we
take no responsibility for the underlying data presented in this report. Users
of this valuation report should be aware that business valuations are based on
future earnings potential that may or may not materialize. Therefore, the actual
results achieved during the projection period will vary from the projections
used in this valuation, and the variations may be material.
Based on our study and analytical review procedures, we have concluded that a
reasonable estimate of the fair value of one hundred percent (100%) of the
common stock of Uptowner Inns, Inc. as of June 30, 2003 is $1,600,000., or $1.07
per share based on 1,496,317 shares issued and outstanding net of treasury
stock. We have no present or contemplated financial interest in Uptowner Inns,
Inc. Our fees for this valuation are based upon our normal hourly billing rates
for this type of work, and are in no way contingent upon the results of our
findings. We have no responsibility to update this report for events and
circumstances occurring subsequent to the date of this report.
This report has been prepared for the specific purpose of setting a value for
Uptowner Inns, Inc.'s common stock, as of June 30, 2003, which will be used to
establish an exchange rate for a reverse stock split. This report is not to be
copied or made available to any persons without the express written consent of
Somerville & Company, P.L.L.C.
By /s/ Susan K. Richardson, CPA, CVA
Susan K. Richardson, CPA, CVA
September 26, 2003
-3-
TABLE OF CONTENTS
PAGE
----
I. INTRODUCTION
Purpose--------------------------------------------------------------- 6
Approach-------------------------------------------------------------- 6
Limiting Conditions--------------------------------------------------- 6
II. COMPANY BACKGROUND
General--------------------------------------------------------------- 7
Competition----------------------------------------------------------- 8
Management and Ownership---------------------------------------------- 8
III. ECONOMIC OUTLOOK
National-------------------------------------------------------------- 9 - 10
West Virginia--------------------------------------------------------- 11
IV. INDUSTRY OVERVIEW
General History of the Hospitality Industry--------------------------- 12
National Industry Outlook--------------------------------------------- 13 - 14
Local Outlook--------------------------------------------------------- 15
Management's Outlook-------------------------------------------------- 16 - 17
V. FINANCIAL REVIEW
Overview-------------------------------------------------------------- 18
Balance Sheet--------------------------------------------------------- 18
Income Statement------------------------------------------------------ 18
VI. COMPARATIVE ANALYSIS
Overview-------------------------------------------------------------- 19
Balance Sheet Comparison---------------------------------------------- 19
Income Statement Comparison------------------------------------------- 20
Comparative Analysis Summary------------------------------------------ 20
VII. NATURE OF THE SECURITY
Overview-------------------------------------------------------------- 21
Control--------------------------------------------------------------- 21
Marketability--------------------------------------------------------- 21
VIII. APPROACHES TO VALUATION
Income Approach------------------------------------------------------- 22
Asset Approach-------------------------------------------------------- 22
Market Approach------------------------------------------------------- 22 - 23
Hybrid Approaches, Rules of Thumb
and Agreements in Place--------------------------------------- 24
IX. METHODS OF VALUATION EXPLAINED
Overview-------------------------------------------------------------- 25
Normalizing Adjustments----------------------------------------------- 25
Adjustments to Net Assets--------------------------------------------- 25
Capitalization of Earnings-------------------------------------------- 25
Determination of Capitalization Rate---------------------------------- 25
Build-Up of Capitalization Rate--------------------------------------- 26
X. RECONCILIATION OF VALUATION ESTIMATES-------------------------------------- 27
APPENDICES
APPENDIX A VALUATION METHODS
APPENDIX B FINANCIAL STATEMENT SUMMARIES - ADJUSTED
APPENDIX C FINANCIAL STATEMENT ADJUSTMENTS
APPENDIX D FINANCIAL STATEMENT SUMMARIES - HISTORICAL
APPENDIX E COMPARATIVE RATIOS - RMA
APPENDIX F ILLUSTRATIVE GRAPH OF REVENUES AND SALARY EXPENSE
APPENDIX G SUMMARY APPRAISAL REPORT
APPENDIX H AUDITED FINANCIAL STATEMENTS
APPENDIX I VALUATION ANALYST'S QUALIFICATIONS
INTRODUCTION
Purpose:
Uptowner Inns, Inc. operates a hotel known as the Holiday Inn Hotel and
Suites. The Holiday Inn Hotel & Suites includes dining, lounge and banquet
facilities. The Company, located in Huntington, West Virginia, is organized as a
Corporation (type "C"), and has been in this business for approximately 40
years.
This report is to determine the fair market value (on a minority
interest basis) of the common stock of Uptowner Inns, Inc. as of June 30, 2003.
This report will be used to assist the Corporation with planning a reverse stock
split of one for 25,000, with a mandatory buyout of all those shareholders with
less than 25,000 shares and all odd lots of those who hold over 25,000 shares.
Approach:
Our approach has been to determine an estimate of the value, which
would provide a fair and reasonable return on investment to an investor or
owner, in view of the facts available to us at the time. Our opinion is based
on, among other things, our estimate of the risks facing the Company and return
on investment which would be required on alternative investments with similar
levels of risk.
Both internal and external factors influencing the value of the Company
were reviewed, analyzed and interpreted. Internal factors include the Company's
financial position, results of operations and the size and marketability of the
interest being valued. External factors include, among other things, the status
of the overall economy as well as the hospitality industry, specifically, and
the position of the Company relative to that industry.
This report has been prepared in accordance with standards established
by the National Association of Certified Valuation Analysts.
Limiting Conditions:
The estimate of value rendered in this report is based on information
provided in whole or in part by the owners and management of the Company and
also third parties. We have not audited or attempted to confirm this information
for accuracy or completeness. We have relied upon the representations of the
owner and management concerning the value and useful condition of all equipment
used in the business, real estate, investments and any other assets or
liabilities except as specifically stated to the contrary in this report. We
have not attempted to confirm whether or not all assets of the business are free
and clear of liens and encumbrances, or that the Company has good title to all
assets.
Somerville & Company, P.L.L.C. does not purport to be a guarantor of
value. Valuation of closely held companies is an imprecise science, with value
being a question of opinion and reasonable people can differ in their estimates
of value. Somerville & Company, P.L.L.C. has, however, performed conceptually
sound and commonly accepted methods of valuation in determining the estimate of
value included in this report.
The valuation estimate included in this report assumes that the
existing management of the Company will maintain the character and integrity of
the Company through any sale, reorganization or reduction of any
owners/managers' participation in the existing activities of the Company.
-6-
COMPANY BACKGROUND
General:
Uptowner Inns, Inc. currently operates one (1) hotel in Huntington,
West Virginia. The Corporation was incorporated on July 1, 1961. The Company is
structured as a corporation (type "C") and has been since its inception. The
original board of directors consisted of several prominent business leaders;
however, Robert P. Holley, the original president, was the only individual who
owned over 2% of the stock. Mr. Holley's ownership percentage was approximately
20%. Mr. Holley's background in sales set the stage for the creation of the
Uptowner Inns, Inc., and the offer to the community to purchase stock in this
new company. As a result of this move to sell Uptowner Inns, Inc. stock, the
Company ended up with over 1,000 shareholders, some with as few as five (5)
shares. It was the large number of shareholders that mandated the Company follow
SEC regulations.
Uptowner Inns, Inc. built their first two (2) hotels in the downtown
areas of Huntington and Parkersburg, West Virginia in the early 1960's. Uptowner
Inns, Inc. entered the hospitality business at the right time, as the industry
was getting ready to enter some very profitable and good years. These first two
(2) hotels were financially successful in the early years and dividends were
also paid out. With the success of the first two (2) hotels, Bob Holley began a
franchising program and sold two (2) franchises before realizing the Company did
not have the resources to promote or service these franchises.
In the late 1960's, Uptowner Inns, Inc. expanded to Augusta, Georgia
and St. Petersburg, Florida, purchasing two (2) hotels in the downtown areas.
The properties in Georgia and Florida started losing money at such a rapid rate,
the cash flow of the profitable hotels in West Virginia was soon depleted. In
1971 with the Company in danger of collapse, the board of directors dismissed
Bob Holley as President.
The next 15 years, between 1971 and 1985, were a time of survival with
little potential for growth. The board of directors hired Violet Midkiff as the
Company's President to replace Bob Holley, Uptowner Inns, Inc. held on to the
Georgia and Florida properties for several years, before selling them to cut
their losses. The sale of the two (2) properties came only after they drained
the Company of most of their resources. By 1985, the Huntington and Parkersburg
properties had physically deteriorated, resulting in decreased occupancies and
profits.
In the mid 1980's, Uptowner Inns, Inc. was on the brink of bankruptcy
with occupancy percentages falling below 30%. Violet Midkiff turned to her son,
Carl Midkiff, for help getting the property headed back in the right direction.
Mr. Midkiff established a plan to remodel the Huntington hotel and acquire a
Holiday Inn franchise. The franchise was enough to bring profitability back to
Uptowner Inns, Inc. during the early 1990's. Mr. Midkiff's ideas on growth soon
started receiving resistance from management, and he left Uptowner Inns, Inc. to
pursue other interests. The hotel soon went back to a survival state, doing well
to break even.
In 1995, Carl Midkiff once again became involved with Uptowner Inns,
Inc. He built a new hotel in Huntington at a different downtown location. The
new Holiday Inn Hotel and Suites property opened in September 1998 under the
management of Richard Monga. The new property achieved profitability in the
second full month of operation and has been profitable ever since.
In 2000, Violet Midkiff retired when diagnosed with Alzheimer's. Carl
Midkiff took over as President of Uptowner Inns, Inc. in 2000, and to date,
still holds the office of President. Mr. Midkiff sold the old property in July
2002.
-7-
COMPANY BACKGROUND
Competition
The Company has several major competitors, as follows:
- Radisson Hotel, Huntington, West Virginia
- Hampton Inn, Huntington, West Virginia
- Ramada Limited, Huntington, West Virginia
The Company also has approximately 5 to 10 other small sized
competitors.
The Company perceives that its major strengths are:
- excellent location of property
- capable management
- excellent product
The Company perceives that its major weaknesses are as follows:
- lack of capital
- due to the number of shareholders, Company is subject to
SEC filing regulations
Management and Ownership:
The majority shareholder of the Company is Carl E. Midkiff, who is
actively involved in its management as President and Chief Operating Officer.
Uptowner Inns, Inc. is organized as a corporation (type "C") and is
closely held among family members under the following stock ownership
percentages:
Shareholder Number of Shares Percent
----------- ---------------- -------
Carl E. Midkiff 271,974 Direct 17.17%
Violet Midkiff 162,262 Direct 10.25%
Various Family Members 418,238 Direct & Indirect 26.41%
Prestige Properties 40,727 Direct 2.57%
(Controlled by Carl Midkiff)
Treasury Stock 87,246 5.51%
All others 603,116 38.09%
Total shares outstanding 1,583,563 100.00%
-8-
ECONOMIC OUTLOOK
National
GENERAL ECONOMIC OVERVIEW
According to preliminary estimates released by the Department of
Commerce's Bureau of Economic Analysis, Real Gross Domestic Product ("GDP"), the
output of goods and services produced by labor and property located in the
United States, increased at an annualized rate of 1.9% during the first quarter
of 2003. While better than an expected 1.6% growth rate, many analysts believe
economic growth will come at a slow rate. The military action, in Iraq and the
aftermath of the war, have also caused a great deal of uncertainty for
businesses. Annualized growth in GDP for the fourth quarter of 2002 was revised
to 1.4%, higher than the preliminary estimated rate of 0.7%. First quarter GDP
reflected an increase in personal consumption expenditures, residential
structures, net exports of goods and services, and government spending. These
gains were partly offset by a decrease in nonresidential structures and change
in private inventories.
After leaving the federal funds target rate unchanged at 1.75% from
December 2001 through November 2002, the Federal Reserve (the "Fed") lowered the
rate in December 2002 to 1.25%. This was the first cut by the Fed after cutting
rates 11 times during 2001. The rate has been unchanged in 2003. The Fed is
closely monitoring economic growth, financial markets, and labor data for signs
of continued slow economic growth. The Fed, seeking to give another boost to the
economy and to keep the threat of deflation stabilized, cut interest rates to
1958 lows in late June 2003.
The Conference Board reported that the Composite Index of Leading
Economic Indicators ("LEI"), the government's primary forecasting gauge,
increased 1.0% in May 2003 to 111.6 after a decrease of 0.2% in March and an
increase of 0.1% in April. The index attempts to gauge economic activity six (6)
to nine (9) months in advance. Multiple consecutive moves in the same direction
are said to be indicative of the general direction of the economy. In May, eight
(8) of the ten (10) leading economic indicators increased. The positive
contributors to the leading index, from largest to smallest, were real money
supply, index of consumer expectations, stock prices, average weekly initial
claims for unemployment insurance (inverted), vendor performance, building
permits, average weekly manufacturing hours, and manufacturers' new orders for
consumer goods and materials. The negative contributors were manufacturers' new
orders, nondefense capital goods, and Interest rate spread 10 year Treasury
bonds less federal funds. In May, the Coincident Index gained 0.1% while the
Lagging Index fell 0.1%. In its data release, the Conference Board indicated
that "it is possible that the two (2) consecutive increases (April 2003 and May
2003) reflect the beginning of an upward trend, thereby ending the flat trend
that began in early 2002." The Fed's hope is that, "a long-awaited pick up in
growth - still not clearly evident in daily economic data but widely forecasted
- - soon will materialize, again with help from the Bush administration's latest
US $350-billion of tax cuts."
The Dow Jones Industrial Average finished the quarter 3.02% lower than
its fourth quarter 2002 close, while the S&P declined 3.6% for the quarter. The
NASDAQ increased 0.4% during the first quarter of 2003.
-9-
ECONOMIC OUTLOOK
National
HOTEL INDUSTRY
The travel and hospitality industry was hit with two (2) major blows
during the first quarter of 2003: the outbreak of war in Iraq and the SARS
epidemic from North Asia. The fourth quarter of 2002 suffered similar blows with
the September 11 anniversary scare, and the ongoing threat of war in Iraq.
SOURCE: "The National Economic Review" 1st Quarter 2003
Bureau of Economic Analysis June 2003
-10-
ECONOMIC OUTLOOK
West Virginia
GENERAL ECONOMIC OVERVIEW
West Virginia's Gross State Product (GSP), the value of outputs of
goods and services located in the state, averaged a growth rate of 3.8% during
the 90s while the US total GSP averaged 5.7% for the same time period. West
Virginia's GSP increased 2.5% during 2001 compared to a 3.5% increase
nationally. Recent projections by West Virginia University indicated that West
Virginia is expected to grow at a rate of 2.8% per year through calendar year
2007. These figures could change depending on how the national economy grows
between 2003 and 2007.
West Virginia's unemployment rate was 6.1% in December 2002, 5.4% in
January 2003, 6.0% in February 2003, 5.7% in March 2003, and 6.0% in April 2003.
The rate has been somewhat sporadic the last several months, but equaled that of
the national unemployment rate at the end of April 2003.
West Virginia has extensive natural resources and is among the nation's
leaders when it comes to producing bituminous coal. Natural gas, stone, cement,
salt, and oil are also important elements of West Virginia's natural resources.
Major glass, chemical, and high-technology industries are among those utilizing
West Virginia's natural resources.
SOURCE: West Virginia Economic Summary June 2003
-11-
INDUSTRY OVERVIEW
GENERAL HISTORY OF THE HOSPITALITY INDUSTRY
At the beginning of the twentieth century, the hotel industry was made
up of small, independent operators. With the change in transportation and the
necessity of long-distance travel, national chains started to become popular and
became a good alternative to the independent operators. According to one
analyst, "Chains allow customers to interact with the same organization when
traveling across country, which reduces uncertainty and improves expectation of
good service from patronizing a hotel." In 1900, less than 1% of all hotels were
part of a chain hotel. By 1930, chains owned approximately 15%, and by 1980,
chains owned more than 50%. Hotel chains changed the complexity of the
hospitality industry, adding new opportunities for managers and those people who
specialized in a certain area. These new opportunities led the way for the
creation of management companies.
The next big change in the industry came in the 1980's with the
overbuilding of chain hotels all around the country. Most markets became heavily
saturated with an increased amount of room supply, with little or no growth in
room demand. By 1990, the chain owned properties fell to approximately 45%. By
the early 1990's, development of new properties was kept at a minimum, which
left management companies competing for fewer hotels and existing hotels. Hotel
owners then had more leverage to negotiate management fees. By the mid 1990s,
many chains merged and reorganized giving them a higher percentage of ownership.
By 2000, chains owned approximately 60% of all properties.
The recession that began in early 2001 once again slowed the
hospitality industry. Companies had to find a way to cut costs and increase
productivity as travel began to weaken. Those companies who have been able to
maintain their profit margins by cutting expenses are the properties that have
remained on top during the slow economic growth that has brought us to 2003.
Because these companies have found new ways to be profitable with less revenues,
these same properties will be the ones that flourish as the economy starts to
grow.
SOURCE: AFL-CIO Working For America Institute, "U.S. Hotels & Their Workers:
Room For Improvement" (C) 2003
-12-
INDUSTRY OVERVIEW
NATIONAL INDUSTRY OUTLOOK
After three (3) year of declining occupancy percentages, stability
appears to be returning to the hotel industry. Most forecasts for 2003 show the
decline in occupancy will end, but little, if any, growth is being projected. In
their Forecasts & Analyses for the Hospitality Industry, PricewaterHouseCoopers
states,
"In 2003, a strengthening corporate sector will stimulate a slight
rebound in lodging demand from the business segment, while further
increases from leisure demand are expected to moderate. PwC forecasts
that demand will recover to its last peak level (achieved in the fourth
quarter of 2000) by the third quarter. With supply growth at its
slowest since 1993, the demand increases will allow occupancy to
advance 0.7 percentage points to 60.0 percent in 2003. At this
occupancy level, price competition will still remain intense. (The last
time occupancies were lower than the prevailing occupancies in the
three-year period from 2001 to 2003 was during the period from 1969 to
1971.) The weakness in ADR (Average Daily Rate) is most evident in the
upper upscale segment and upscale segment where occupancies have fallen
between five and six occupancy points from 2000 to 2002.
PricewaterhouseCoopers expects the condition to persist at least
through 2003. Even with the expected sales and profit improvement in
2003, corporations will continue to control travel costs. Therefore PwC
forecasts only 0.9 percent gain in nominal ADR in 2003."
The midscale properties with food and beverage segments have suffered
more than any other segment, and is not forecasted to gain much ground in 2003.
Even though the midscale properties are projected to gain 0.2% in occupancy
percentages, the average daily rates will decrease due to the price competition
discussed in the PricewaterhouseCoopers forecast.
PricewaterhouseCoopers added to their forecast several scenarios that
involved the possibility of war in Iraq and the duration of that war. (All PwC
forecasts were completed prior to the war in Iraq.) PwC projected that occupancy
percentages would only increase to 59.6% in a brief war scenario.
Industry room supply increased 1.8% in 2002 while room demand only
increased by 0.8%. With the sluggish economy, the industry is fortunate that
more hotels were not constructed during 2002. Many operators and investors are
planning to start construction in 2003, with many properties ready to go online
during 2004 and 2005; the timeframe when the economy should be in a full growth
mode.
For now, as growth is going to continue to be slow, it appears that the
battle for market share is the way to go. This will continue to be a problem for
the midscale hotels with food and beverage facilities. As the upper scale
properties compete with each other, rates are expected to drop, pulling many
midscale customers to the lower end of the upper scale market, once again
leaving the midscale properties losing occupancy percentage points.
-13-
INDUSTRY OVERVIEW
NATIONAL INDUSTRY OUTLOOK (Cont'd)
One other concern that faces the hospitality industry is how safe do
travelers feel after the September 11, 2001 attacks, the war in Iraq, and the
continued uncertainty of terrorist attacks in the United States. A recent study,
done by PricewaterhouseCoopers shows a direct correlation between the rise in US
security alerts with occupancy percentage in the week following such change in
alert status. In most cases, occupancy percentages fell drastically after the
security alert had been raised, showing that travelers are still very much aware
of the dangers that still exist from possible terrorist attacks.
SOURCE PricewaterhouseCoopers Forecasts & Analyses for the Hospitality
Industry February 2003
Ernst & Young Lodging Forecast 2003 Edition
Smith Travel Research 2002 U.S. Lodging Industry Results
"The National Economic Review" 1st Quarter 2003
-14-
INDUSTRY OVERVIEW
LOCAL OUTLOOK
The hospitality industry in the Huntington area has always been a
little volatile due to new property construction, old properties closing down,
businesses leaving town, and the constant struggle to bring new business into
the state. Smith Travel Research compares the Holiday Inn Hotel and Suites with
five (5) other similar properties located in the Huntington and Charleston area,
and issues their findings through the STAR Report. The STAR Report provides
comparison information for this six (6) property competitive set, along with
comparisons to the entire West Virginia market, Southern West Virginia market,
upscale properties, and also the midscale chains.
The local market forecast is similar to the National outlook in the
sense that little growth is expected. In the short term, battling for market
share is going to be the main objective. During the twelve month period ending
April 30, 2003, the Holiday Inn Hotel and Suites had a 14.4% market share, and a
market penetration of 123.3%, a 2.5% increase over the same twelve (12) month
period ending April 30, 2002. This information is based on the six (6) hotels
within the Holiday Inn Hotel and Suites competitive market set, and compiled by
Smith Travel Research.
SOURCE Smith Travel Research STAR Summary Report April, 2003
-15-
MANAGEMENT'S OUTLOOK FOR YEAR 2003 AND BEYOND
Historically, the Holiday Inn has established itself as the premier
hotel for corporate business in the Huntington area.
The Pullman Square Project is going to be a multi use retail and
entertainment complex at the Southside of the Hotel, only 40 yards away.
1. Construction started in July 2003 and completion of the project is
projected in 2005.
2. As part of the project, the city of Huntington acquired 40% of the
Holiday Inn parking lot at a sales price of $1.
3. The foundation work for the project started in August 2003 and
construction and development will continue for a period of two (2) to
three (3) years.
As a result of the above development, the following financial impact
has been noticed by management.
1. August 2003 vs August 2002
The room revenue in August 2003 (income statement) was $22,304. lower
than room revenue for the same period, August 2002. This is an 8.3%
decline in room revenue from the previous year. In the area of food and
beverage, the decline was $1,297. or 19.1% from the previous year. The
total revenue in August 2003 declined by $25,036. or 8.9%. Net income
for the same period declined by $23,551. or 31.4%.
2. September 2003 vs. September 2002
The projected room revenue for September 2003 will be $14,600. lower
than September 2002, a decline of 6%. The overall decline in total
revenue is projected to be 7-8% lower than September 2002.
The following reasons are attributed to this declining trend.
1. The guest parking at the Holiday Inn Hotel and Suites has been reduced
to 103 parking spaces or by 42%. This has a severe impact on guests
choosing to stay at the hotel as it causes inconvenience. Prior to July
2003, parking at the hotel was a major competitive advantage, and this
advantage no longer exists.
2. With construction commencing in July 2003, noise from the construction
has become a serious issue of contention for our guests. The
construction site, which is only 40 yards from the hotel, starts at
7:00-7:15 A.M. and has become an irritating factor for our corporate
guests. The Corporate clientele is seeking a peaceful and harmonious
environment. When construction begins at 7:00 A.M., the guests are
irritated with the construction and do not want to continue their
loyalty to the hotel. We are experiencing a loss of at least eight-ten
(8-10) guests per week that voice their opinion but there are others
who just do not return to the hotel.
-16-
MANAGEMENT'S OUTLOOK FOR YEAR 2003 AND BEYOND
3. The construction will continue for at least two (2) years. In these two
(2) years, we will experience an occupancy decline of at least 10%. The
breakeven point for the hotel is 61% in occupancy points and over and
above 61% occupancy is considered profit. In the past, hotel occupancy
has averaged 72-74%. With an occupancy decline of at least 10%,
management hopes to hold the average occupancy levels at 60-63%. With
this projection, the profits will be eliminated and the hotel will
function at breakeven level or 1% or 2% higher. This decrease in the
hotel operating results will flow through directly to the corporate
financial statements reflecting far less than attractive results of
operations in the near future.
Synopsis
1. As is evident with August and September 2003 income statements, the
Holiday Inn Hotel & Suites is on its way to a declining occupancy and
our conservative projections is a 10% decline in occupancy.
2. The rate structure as yet has only experienced a 1% decline. If a
decline in occupancy continues and is greater than 10%, then management
will have to reduce its rates, in order to stop revenue from declining
at a quicker rate.
3. Management can forecast the decline in occupancy for the next two (2)
years from data available in August and September 2003, but to project
for 2004 and 2005 is almost impossible due to other extraneous factors
in the market.
4. To project the time frame to recapture lost market after three (3)
years is impossible. It is easier for a new hotel to capture new
business than it is for an older hotel to recapture lost market share.
-17-
FINANCIAL REVIEW
Overview
Our financial review of the Company included the review and analysis of
the Company's independently audited year-end balance sheets and income
statements for the period from June 30, 1999 through June 30, 2003. In our
opinion, the period covered [five (5) years] in our review and analysis, is
adequate to identify any existing financial and operational trends that would
affect our estimate of value.
For purposes of this valuation, we have summarized the data from the
past five (5) years' audited financial statements and reflected the appropriate
adjustments to restate the results of operations for fiscal years ending June
30, 2001, 2002 and 2003 due to the discontinuation of the long-term rental
segment during 2002 and 2003. Due to the lack of readily available detailed
information, as well as the dated quality of the information, the years ending
in 1999 and 2000 were not restated for this purpose. The resulting adjusted
figures were then compared to normal industry data of publicly held companies
and similar data of the Company for the last five years.
Included in Exhibits B & D are various summaries of financial data that
were generated in our financial review and analysis process. The following are
what we consider representative of the financial position and results of
operations of Uptowner Inns, Inc., as of the date of valuation and for the five
(5) year period analyzed.
Balance Sheet
Uptowner Inns, Inc., as of June 30, 2003, had a stable balance sheet as
evidenced by a constant debt to equity ratio through the year ended June 2003.
The current and quick ratios improved dramatically in 2002 when the Company
began disposing of the long-term rental segment of operations and now will
exceed industry comparisons. The Company's total asset turnover ratio, which
measures the efficiency with which the Company operates, has remained fairly
stable over the five (5) year period being analyzed although below industry
averages.
Income Statement
Hotel revenue has been steadily decreasing from a high of nearly $3.9
million in 2001 to approximately $3.1 million in the fiscal year ended 2003.
Current management projections are not optimistic with regard to an increase in
these revenues in the near future due to ongoing heavy construction on
neighboring properties. For at least the short run, one (1) to two (2) years,
management anticipates flat or slightly declining revenues and overall profits.
Salaries expense, the single largest component of operating expenses at
nearly 25%, has remained very stable over the five (5) years with a high of
25.32% and a low of 24.10% of sales in 2000 and 2001, respectively (Appendix F).
It should also be noted that the Company has significant net operating
loss carryovers, which will be available to shelter profits should they be
generated in the future.
-18-
COMPARATIVE ANALYSIS
Overview
In order to gain a better perspective as to the financial position and
results of operations of Uptowner Inns, Inc., it is necessary to compare the
Company's performance to the other companies in its industry. To accomplish this
purpose, we have selected information contained in the "Annual Statement
Studies" published by the Risk Management Association, formerly Robert Morris
Associates (RMA). Risk Management Association compiles and publishes financial
data on various industries including Restaurant/Lodging - Hotels and Motels.
Even though the data published by Risk Management Association is not totally
consistent with the data reported by Uptowner Inns, Inc., it is generally
accepted as being representative of the industries on which it reports and,
therefore, is a reasonable source of financial data for a comparative analysis
of Uptowner Inns, Inc.
Balance Sheet Comparison
In comparing various adjusted balance sheet items of Uptowner Inns,
Inc. to RMA's "Annual Statement Studies", several differences are evident. The
Company has a different asset mix than the companies that make up the median of
the RMA data. The Company carries a higher current asset to total asset
percentage and a slightly higher cash position. The Company's investment in net
fixed assets is in line with the industry at 80.28% of total assets compared to
the industry average of 80.50%.
The Company's capital structure varies from that which is common in the
industry. Total debt as a percent of assets is 80.17% compared to the industry
at 89%. Correspondingly, the Company carries a higher percentage of equity to
assets than the industry.
The Company's net worth as a percent of total assets steadily declined
from about 19.19% to 14.75% in 2002. This was followed by a big jump in 2003 to
19.83% of total assets following the disposition of a segment of the business
and settlement of pending legal claims related to the discontinuation of plans
to build a second hotel in the area. These ratios compare favorably to the
industry median of 11.0%. Although its interest coverage ratio continues to be
somewhat below industry statistics, its current and quick ratios are well above
2003 averages at 2.19 and 2.18, respectively, as compared to .70 and .50,
respectively, for the industry as a whole.
-19-
COMPARATIVE ANALYSIS
Income Statement Comparison
The Company's adjusted operating expenses as a percent of sales are at
a five (5) year low of 94.22% of sales in 2003. Over the most recent five (5)
years, the Company's adjusted before-tax return on assets and equity has
averaged (0.66%) and (3.78%), respectively, both of which are significantly
below levels currently reported by RMA. It should be noted that averages for the
past five (5) years are severely skewed by the operating loss recorded for
fiscal 2002. The adjusted pre-tax return on assets and equity reported for
fiscal 2003 were 0.54% and 3.18%, respectively.
Comparative Analysis Summary
In summary, the Company's asset mix and liability mix is somewhat
different than the industry median. The Company's operating performance has been
well below the industry over the most recent five years, but its financial
position and liquidity ratios have remained fairly stable or slightly improved
over the last several years. Thus, with management's attention directed toward
overcoming the past and coping with adverse circumstances related to the nearby
construction, the Company is striving for a brighter future.
-20-
NATURE OF THE SECURITY
Overview
Before estimates of value can be made, the nature of the security being
valued and the expected income of the subject security must be discussed. The
value of a security is influenced by many of its characteristics, including
control and marketability.
Control
The market value of publicly traded securities normally reflects the
minority interest being traded. The price of a successful tender offer seeking
control is usually higher than previous minority trades and reflects the value
of the premium for control. The intention of this report is to estimate the
value of a non-controlling interest in Uptowner Inns, Inc. However, the purpose
of this report is to determine the "fair value" at which the Corporation will
establish an exchange rate for a reverse stock split of the Company's common
stock. Chapter 31D-13-1301 of the West Virginia Code defines "fair value" as
follows:
" "Fair value" means the value of the corporation's shares
determined: Immediately before the effectuation of the corporate
action to which the shareholder objects; using customary and
current valuation concepts and techniques generally employed for
similar businesses in the conduct of the transaction requiring
appraisal; and without discounting for lack of marketability or
minority status..."
Therefore, no discount for minority ownership is included.
Marketability
The income value methods of valuation are based on comparisons with
current values of securities traded on national exchanges. There are, however,
certain marketability differences between Uptowner Inns, Inc. securities and
publicly traded securities. An owner of publicly traded securities can know at
all times the market value of his holding. He can sell that holding on virtually
a moment's notice and receive cash, net of brokerage fees, within several
working days.
Such is not the case with Uptowner Inns, Inc. Consequently, liquidating
a position in the Company could be a more costly and time-consuming process than
liquidating stock in publicly traded firms. A marketability discount would be
warranted. In this instance, due to the purpose for which this report is
prepared, no marketability discount is applied.
-21-
APPROACHES TO VALUATION
There are three (3) main approaches to valuing small closely held
businesses. Under these approaches there are several different valuation
methods. The following is a discussion of each approach and certain methods
under these approaches.
Income Approach
The income approach gives primary consideration to an investment's
earnings. The theory being that an investment is worth the present value of all
reasonably expected future returns. This approach is most commonly applied by
using a capitalized current earnings method or a discounted future earnings
method.
The discounted future returns method under the income approach was not
selected. Any forecasted future earnings or cash flow would have been extremely
speculative in view of the Company's operating history. Additionally, a
capitalized current earnings calculation does not consider the underlying asset
value currently in place where there is more than a minimal investment in
tangible assets. However, for the purpose of understanding the expected return
on investment, a willing buyer might realize the normalized unweighted after tax
earnings for the five (5) years ended June 30, 2003 were reviewed. Because this
calculation yielded a negative value, this method was not selected.
Asset Approach
The asset approach values an investment based on the current value of
its assets and liabilities. In valuing businesses, this approach is commonly
used when the subject business is a holding company or if the company has not
established a positive earnings history.
Due to the significantly lower profitability (as compared to industry
statistics) of the operation historically, the asset approach was selected. The
asset approach does not consider historical or possible future earnings when
determining the value of a given business. After considering adjustments to fair
value (see detailed discussion later), the adjusted net asset approach yielded a
value of $1,750,000. for 100% of the subject company without any further
discounts for lack of marketability or minority position.
Market Approach
The market approach determines the value of an investment by using
information obtained from actual sales of similar investments. This method is
widely used in valuing real property and in certain industries where comparable
sales can be discovered. This method has limited applicability in valuing a
smaller business due to the lack of information available from actual sales of
similar small businesses. Transaction data from The Institute of Business
Appraisers and private business sales transaction records as published by
"Pratt's Stats" were reviewed. Because it is nearly impossible to ascertain
whether these other company transactions represent sales of companies similar in
nature to the subject company, this method was not selected.
-22-
APPROACHES TO VALUATION
Further, it is also necessary to review prior transactions in the
Company's own stock. Over the past twenty (20) years, the following stock sales
have occurred:
Date Number of Shares Price per Share
---- ---------------- ---------------
February 1984 264,158 $0.65
June 1992 28,102 0.65
September 1998 30,049 0.65
November 2001 36,060 0.65
November 2002 15,552 0.65
These sales account for nearly 24% of the total outstanding stock of Uptowner
Inns, Inc. Additionally, there have been other miscellaneous sales over the last
30 years, with prices in the $0.50 to $0.65 range.
Because of the volume of shares changing hands and the stability of the
price in view of the lack of profitability of the enterprise, consideration of
these sales should have an impact on the final determination of "fair value".
The value of the Company computed at $0.65 per share is $972,606., without
further discounts for marketability or minority interest position.
-23-
APPROACHES TO VALUATION
Hybrid Approaches, Rules of Thumb and Agreements in Place
Hybrid approaches include excess earnings methods, which combine
characteristics of income approaches and asset approaches. The earnings in
excess of a reasonable rate of return are capitalized and added to the current
value of the business' assets. Rules of thumb are simple formulas developed for
various industries. In some cases, buy-sell agreements, retirement arrangements
or other agreements may be in place and bear consideration in the calculation of
the value of a company.
A method of valuation we reviewed to estimate the fair market of
Uptowner Inns, Inc. are the widely recognized "capitalization of excess earnings
- - return on assets" methods.
The capitalization of excess earnings - return on assets method is an
income and asset based approach to valuation where the adjusted net tangible and
intangible assets of the business entity are valued independently. These
component assets are comprised of the fair market value of the total assets of
the business less the total liabilities as of the date of the valuation. The
intangible assets are valued by capitalizing the excess earnings of the
business, where the excess earnings represent the earnings of the business in
excess of the earnings that provide a reasonable rate of return on the adjusted
net assets of the business.
The adjusted average net income after tax of ($15,458.) was reduced by
the average adjusted net assets of $1,571,840. multiplied by the risk free rate
of 4.8%. Because the average net income was negative, this method produces
skewed results. It does, however, give an indication of the impact that the
negative profitability has on the value of the business. Carrying this method
through its normal calculation using a capitalization rate of 25.6 produced a
value of $1,360,000. without any further discounts for lack of marketability or
minority interest status.
-24-
METHODS OF VALUATION EXPLAINED
Overview:
Our financial review of the Company included the review and analysis of
the Company's audited financial statements for the periods from June 30, 1999
through June 30, 2003. In our opinion, the period covered in our review and
analysis, five (5) years, is adequate to identify any existing financial and
operational trends that would affect our estimate of value. (See Appendix A for
detailed calculations of the valuation methods included in this presentation.)
Normalizing Adjustments
In June 2003, the Company sold four (4) 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 as well as the sale have been removed from the historical information
and the years ended 2001, 2002 and 2003 have been restated without including
these discontinued operations.
Adjustments to Net Assets:
In June 1996, an appraisal of the Holiday Inn property was conducted by
Robert Withers, MAI, RM. Although this appraisal was performed prior to the
construction phase, an expected value was given for the property at a stabilized
occupancy as of April 1, 1999. Mr. Withers concluded on a prospective market
value of $6,650,000. in full operation.
As of June 30, 2003, the net book value of the hotel property was
$6,217,300. Considering that the property is no longer new and the costs that
would be incurred in the process of disposing of the property would far exceed
any positive adjustment to book value, no adjustment was deemed necessary.
Capitalization of Earnings:
The capitalization of earnings method is an income-based approach to
valuation where the net cash flow or net earnings of the business entity are
valued. For purposes of this analysis, the most recent five (5) years average
earnings after tax were capitalized using a capitalization rate determined under
the "Build-up Method" as described below. Past earnings have been erratic and
the Company is not operating profitably.
Determination of Capitalization Rate:
To arrive at a capitalization rate, we constructed a "Build-up" model
utilizing the methodologies described by Shannon Pratt based on long-term
government bond rates as adjusted for equity risk and equity size premia (as
stated in Ibbotson Associates, "Stocks, Bonds, Bills and Inflation: 2003
Yearbook - Valuation Edition"). Additional adjustments were applied for industry
risk, specific company risk and estimated sustainable growth rate. The result
obtained was then compared to James H. Schildt's Risk Premium for Discounting
Projected Income Streams. With reference to both sources, a capitalization rate
of 25.6% for current year's net income was selected.
-25-
METHODS OF VALUATION EXPLAINED
BUILD-UP OF CAPITALIZATION RATE
Risk-free rate of return (20 year U. S. Treasury Bond) 4.8
Equity risk premium (SBBI Yearbook) 7.0
Small stock risk premium (SBBI Yearbook- Micro. Cap, Decile 10b) 9.16
Industry risk premium (SBBI Yearbook) (1.09)
Specific company risk premium 5.5
Discount rate for net cash flow 25.37
Increment to convert to net earnings capitalization rate 4.0
Less: Expected sustainable growth rate (3.0)
Capitalization rate for next year's earnings 26.37
Capitalization rate for current year's earnings [26.37/(1+g)] 25.60
-26-
RECONCILIATION OF VALUATION ESTIMATES
The estimate of the fair market value of 100% of the common stock of
Uptowner Inns, Inc. as of June 30, 2003 determined under the various methods as
explained above is as follows:
1. Adjusted Net Assets Method $1,750,000.
2. Prior Sales of Company Stock 972,606.
3. Capitalization of Excess Earnings - Reasonable Rate Method 1,360,000.
The history of the Company over the last five (5) years has been
erratic. It is well established that while an asset-based method of valuation
applies in the case of corporations that are essentially holding companies, an
earnings-based method is appropriate for corporations that are active operating
companies. Noting that the fixed assets are the largest contributor to total
asset value, we must also take into consideration the corporation's status as an
operating company. Furthermore, it is necessary to look at prior arms length
transactions in the Company's stock. For these reasons, a value that takes into
consideration both underlying asset value as well as the profitability and the
trading history of the company is deemed appropriate.
Based on analysis of the above methods, it is our opinion that the fair
market value of 100% of the common stock of Uptowner Inns, Inc., without
discounting, as of June 30, 2003 is:
ONE MILLION, SIX HUNDRED THOUSAND DOLLARS
$1,600,000.
Or
ONE DOLLAR AND SEVEN CENTS PER SHARE
$1.07 PER SHARE
-27-
APPENDIX A
VALUATION METHODS
UPTOWNER INNS, INC. AND SUBSIDIARY
BUSINESS VALUATION
ADJUSTED NET ASSETS METHOD VALUATION SUMMARY
VALUATION SUMMARY (ALL VALUES CALCULATED AND ROUNDED IN DOLLARS)
Value of Business: $ 1,751,840
+
Valuation Adjustment (+/-): 0
Total Value of Business: 1,751,840
/
Shares Outstanding: 1,496,317
Per Share Value: 1.170768
+
Discount/Premium %: 0.00 %
Adjusted Per Share Value: 1.170768
X
1,496,317.00
Number of Shares Being Valued: $ 1,751,840
Value of Shares Being
Valued: SAY $ 1,750,000
UPTOWNER INNS, INC. AND SUBSIDIARY
BUSINESS VALUATION
ADJUSTED NET ASSETS - SUB SCHEDULE
Beginning Adjustment Adjusted
------------ ------------ ------------
Assets
Current Assets
Cash 1,161,986.00 0.00 1,161,986.00
Accounts Receivable 127,648.00 0.00 127,648.00
Inventory 4,483.00 0.00 4,483.00
Other Current Assets
Notes Receivable 41,794.00 0.00 41,794.00
Prepaid Expenses 43,030.00 0.00 43,030.00
Deferred Tax Asset 0.00 0.00 0.00
PP&E Held for Sale 0.00 0.00 0.00
------------ ------------ ------------
Total Other Current Assets 84,824.00 0.00 84,824.00
------------ ------------ ------------
Total Current Assets 1,378,941.00 0.00 1,378,941.00
Fixed Assets
Property, Plant & Equipment 6,272,401.00 0.00 6,272,401.00
Land 820,553.00 0.00 820,553.00
Other Fixed Assets 0.00 0.00 0.00
------------ ------------ ------------
Total Fixed Assets 7,092,954.00 0.00 7,092,954.00
Other Assets
Deposits 239,456.00 0.00 239,456.00
Other
Nonmarketable Securities 14,144.00 0.00 14,144.00
Deferred Tax Asset 110,140.00 0.00 110,140.00
------------ ------------ ------------
Total Other 124,284.00 0.00 124,284.00
------------ ------------ ------------
Total Other Assets 363,740.00 0.00 363,740.00
---------- ---- ----------
Total Assets 8,835,635.00 0.00 8,835,635.00
============ ============ ============
Liabilities & Equity
Current Liabilities
Notes Payable (Short Term) 0.00 0.00 0.00
Accounts Payable 163,427.00 0.00 163,427.00
Accrued Liabilities 120,958.00 0.00 120,958.00
Other Current Liabilities
Accrued Taxes 192,571.00 0.00 192,571.00
Current Portion LTD 153,290.00 0.00 153,290.00
------------ ------------ ------------
Total Other Current Liabilities 345,861.00 0.00 345,861.00
------------ ------------ ------------
Total Current Liabilities 630,246.00 0.00 630,246.00
Beginning Adjustment Adjusted
------------ ------------ ------------
Long-Term Liabilities
Notes Payable 6,453,549.00 0.00 6,453,549.00
Other Long-Term Liabilities 0.00 0.00 0.00
------------ ------------ ------------
Total Long-Term Liabilities 6,453,549.00 0.00 6,453,549.00
Total Liabilities 7,083,795.00 0.00 7,083,795.00
Stockholders Equity
Common Stock 791,782.00 0.00 791,782.00
Paid-In Capital 1,032,290.00 0.00 1,032,290.00
Retained Earnings -32,744.00 0.00 -32,744.00
Other Equity -39,488.00 0.00 -39,488.00
------------ ------------ ------------
Total Stockholders Equity 1,751,840.00 0.00 1,751,840.00
------------ ------------ ------------
Total Liabilities & Equity 8,835,635.00 0.00 8,835,635.00
============ ============ ============
UPTOWNER INNS, INC. AND SUBSIDIARY
BUSINESS VALUATION
EXCESS EARNINGS - REASONABLE RATE METHOD VALUATION SUMMARY
Projected Earnings Amount: -15,457.80
Adjusted Net Assets: 1,751,840
Adjustment to Net Assets: 0
Total Adjusted Net Assets: 1,751,840
Reasonable Rate of Return: 4.80 %
Reasonable Rate of Return on Assets: 84,088
Excess Earnings Over Reasonable Rate: -99,546.12
Capitalization Rate: 25.60 %
Intangible Value: -388,852
Adjusted Net Assets: 1,751,840
Adjustment to Net Assets: 0
VALUATION SUMMARY (ALL VALUES CALCULATED AND ROUNDED IN DOLLARS)
Value of Business: $ 1,362,988
+
Valuation Adjustment (+/-): 0
Total Value of Business: 1,362,988
/
Shares Outstanding: 1,496,317
Per Share Value: 0.910895
+
Discount/Premium %: 0.00 %
Adjusted Per Share Value: 0.910895
X
1,496,317.00
Number of Shares Being Valued: $ 1,362,988
Value of Shares Being
Valued: SAY $ 1,360,000
UPTOWNER INNS, INC. AND SUBSIDIARY
BUSINESS VALUATION
SCHEDULE OF UNWEIGHTED AVERAGE PROJECTED EARNINGS
EXCESS EARNINGS - REASONABLE RATE
Type of Earnings: Net Income
Year Amount
---- ------
1999 113,029.00
2000 -97,216.00
2001 17,669.00
2002 -142,694.00
2003 31,923.00
----------
Unweighted Average Projected Earnings: -15,457.80
APPENDIX B
FINANCIAL STATEMENT SUMMARIES - ADJUSTED
UPTOWNER INNS, INC. AND SUBSIDIARY
ADJUSTED BALANCE SHEET SUMMARY
For Year Ended June:
(in $'s) 1999 2000 2001 2002 2003
Assets
Current Assets
Cash 322,663 348,064 186,912 803,660 1,161,986
Accounts Receivable 86,647 59,971 72,830 57,421 127,648
Inventory 11,197 11,966 7,715 6,145 4,483
Other Current Assets
Notes Receivable 83,271 47,899 0 5,446 41,794
Prepaid Expenses 65,309 65,093 48,392 61,173 43,030
Deferred Tax Asset 0 0 0 132,098 0
PP&E Held for Sale 0 0 327,811 1,770,073 0
Total Other Current Assets 148,580 112,992 376,203 1,968,790 84,824
Total Current Assets 569,087 532,993 643,660 2,836,016 1,378,941
Fixed Assets
Property, Plant, & Equipment 9,294,700 8,876,128 8,595,173 6,862,094 6,272,401
Land 1,480,612 1,480,612 1,519,252 1,202,786 820,553
Total Fixed Assets 10,775,312 10,356,740 10,114,425 8,064,880 7,092,954
Other Assets
Deposits 117,896 169,407 141,837 188,142 239,456
Other
Nonmarketable Securities 0 0 0 40,035 14,144
Deferred Tax Asset 0 0 0 0 110,140
Total Other 0 0 0 40,035 124,284
Total Other Assets 117,896 169,407 141,837 228,177 363,740
Total Assets 11,462,295 11,059,140 10,899,922 11,129,073 8,835,635
Liabilities & Equity
Current Liabilities
Accounts Payable 591,840 358,242 232,588 181,386 163,427
Accrued Liabilities 179,605 175,045 200,484 182,485 120,958
Other Current Liabilities
Accrued Taxes 312,513 437,520 313,480 327,869 192,571
Current Portion - LTD 1,265,006 1,109,220 1,400,385 253,430 153,290
Total Other Current Liabilities 1,577,519 1,546,740 1,713,865 581,299 345,861
Total Current Liabilities 2,348,964 2,080,027 2,146,937 945,170 630,246
Long-Term Liabilities
Notes Payable 6,913,472 6,876,470 6,636,076 8,542,621 6,453,549
Total Long-Term Liabilities 6,913,472 6,876,470 6,636,076 8,542,621 6,453,549
Total Liabilities 9,262,436 8,956,497 8,783,013 9,487,791 7,083,795
Stockholders Equity
Common Stock 791,782 791,782 791,782 791,782 791,782
Paid-In Capital 1,032,290 1,032,290 1,032,290 1,032,290 1,032,290
Retained Earnings 375,787 278,571 292,837 -172,681 -32,744
Other Equity 0 0 0 -10,109 -39,488
Total Stockholders Equity 2,199,859 2,102,643 2,116,909 1,641,282 1,751,840
Total Liabilities & Equity 11,462,295 11,059,140 10,899,922 11,129,073 8,835,635
UPTOWNER INNS, INC. AND SUBSIDIARY
ADJUSTED BALANCE SHEET AS A PERCENT OF ASSETS
For Year Ended June:
(in %'s) 1999 2000 2001 2002 2003
Assets
Current Assets
Cash 2.81 3.15 1.71 7.22 13.15
Accounts Receivable 0.76 0.54 0.67 0.52 1.44
Inventory 0.10 0.11 0.07 0.06 0.05
Other Current Assets
Notes Receivable 0.73 0.43 0.00 0.05 0.47
Prepaid Expenses 0.57 0.59 0.44 0.55 0.49
Deferred Tax Asset 0.00 0.00 0.00 1.19 0.00
PP&E Held for Sale 0.00 0.00 3.01 15.90 0.00
Total Other Current Assets 1.30 1.02 3.45 17.69 0.96
Total Current Assets 4.96 4.82 5.91 25.48 15.61
Fixed Assets
Property, Plant, & Equipment 81.09 80.26 78.86 61.66 70.99
Land 12.92 13.39 13.94 10.81 9.29
Total Fixed Assets 94.01 93.65 92.79 72.47 80.28
Other Assets
Deposits 1.03 1.53 1.30 1.69 2.71
Other
Nonmarketable Securities 0.00 0.00 0.00 0.36 0.16
Deferred Tax Asset 0.00 0.00 0.00 0.00 1.25
Total Other 0.00 0.00 0.00 0.36 1.41
Total Other Assets 1.03 1.53 1.30 2.05 4.12
Total Assets 100.00 100.00 100.00 100.00 100.00
Liabilities & Equity
Current Liabilities
Accounts Payable 5.16 3.24 2.13 1.63 1.85
Accrued Liabilities 1.57 1.58 1.84 1.64 1.37
Other Current Liabilities
Accrued Taxes 2.73 3.96 2.88 2.95 2.18
Current Portion - LTD 11.04 10.03 12.85 2.28 1.73
Total Other Current Liabilities 13.76 13.99 15.72 5.22 3.91
Total Current Liabilities 20.49 18.81 19.70 8.49 7.13
Long-Term Liabilities
Notes Payable 60.31 62.18 60.88 76.76 73.04
Total Long-Term Liabilities 60.31 62.18 60.88 76.76 73.04
Total Liabilities 80.81 80.99 80.58 85.25 80.17
Stockholders Equity
Common Stock 6.91 7.16 7.26 7.11 8.96
Paid-In Capital 9.01 9.33 9.47 9.28 11.68
Retained Earnings 3.28 2.52 2.69 -1.55 -0.37
Other Equity 0.00 0.00 0.00 -0.09 -0.45
Total Stockholders Equity 19.19 19.01 19.42 14.75 19.83
Total Liabilities & Equity 100.00 100.00 100.00 100.00 100.00
UPTOWNER INNS, INC. AND SUBSIDIARY
ADJUSTED INCOME STATEMENT SUMMARY
For Year Ended June:
(in $'s) 1999 2000 2001 2002 2003 Average
Sales
Net Sales $
Hotel Revenue 3,122,081 3,791,881 3,898,650 3,303,959 3,119,102 3,447,135
Rental Revenue 235,270 221,608 425 7,402 29,690 98,879
Total Net Sales 3,357,351 4,013,489 3,899,075 3,311,361 3,148,792 3,546,014
Cost Of Goods Sold 220,034 233,351 195,016 160,319 128,153 187,375
Gross Profit 3,137,317 3,780,138 3,704,059 3,151,042 3,020,639 3,358,639
Operating Expenses
Other Salaries & Wages 841,724 1,016,332 939,612 822,036 770,769 878,095
Insurance 63,321 66,342 61,892 68,073 53,762 62,678
Selling Expenses 181,349 236,758 276,172 228,713 246,446 233,888
Depreciation & Amort. 396,964 428,358 419,951 450,379 322,121 403,555
Interest Expense 677,000 700,828 648,789 582,682 462,138 614,287
Other Operating Expenses
Other Departmental Exp. 227,548 313,566 333,549 268,357 229,321 274,468
G & A Expenses 233,684 341,713 318,612 373,910 396,266 332,837
Utilities Expense 205,282 231,631 224,468 227,148 136,038 204,913
Repair & Maintenance 73,821 122,343 92,164 72,683 88,327 89,868
Taxes & Licenses 367,595 419,483 371,181 332,428 261,570 350,451
Total Other Operating Expenses 1,107,930 1,428,736 1,339,974 1,274,526 1,111,522 1,252,537
Total Operating Expenses 3,268,288 3,877,354 3,686,390 3,426,409 2,966,758 3,445,040
Income From Operations -130,971 -97,216 17,669 -275,367 53,881 -86,401
Other Income/Expense
Gain/Loss on Sale 244,000 0 0 575 0 48,915
Total Other Income/Expense 244,000 0 0 575 0 48,915
Earnings Before Tax 113,029 -97,216 17,669 -274,792 53,881 -37,486
Income Tax Expense 0 0 0 -132,098 21,958 -22,028
Net Income/Loss $ 113,029 -97,216 17,669 -142,694 31,923 -15,458
UPTOWNER INNS, INC. AND SUBSIDIARY
ADJUSTED INCOME STATEMENT AS A PERCENT OF SALES
For Year Ended June:
(in %'s) 1999 2000 2001 2002 2003 Average
Sales
Net Sales
Hotel Revenue 92.99 94.48 99.99 99.78 99.06 97.26
Rental Revenue 7.01 5.52 0.01 0.22 0.94 2.74
Total Net Sales 100.00 100.00 100.00 100.00 100.00 100.00
Cost Of Goods Sold 6.55 5.81 5.00 4.84 4.07 5.26
Gross Profit 93.45 94.19 95.00 95.16 95.93 94.74
Operating Expenses
Other Salaries & Wages 25.07 25.32 24.10 24.82 24.48 24.76
Insurance 1.89 1.65 1.59 2.06 1.71 1.78
Selling Expenses 5.40 5.90 7.08 6.91 7.83 6.62
Depreciation & Amort. 11.82 10.67 10.77 13.60 10.23 11.42
Interest Expense 20.16 17.46 16.64 17.60 14.68 17.31
Other Operating Expenses
Other Departmental Exp. 6.78 7.81 8.55 8.10 7.28 7.71
G & A Expenses 6.96 8.51 8.17 11.29 12.58 9.50
Utilities Expense 6.11 5.77 5.76 6.86 4.32 5.76
Repair & Maintenance 2.20 3.05 2.36 2.19 2.81 2.52
Taxes & Licenses 10.95 10.45 9.52 10.04 8.31 9.85
Total Other Operating Expenses 33.00 35.60 34.37 38.49 35.30 35.35
Total Operating Expenses 97.35 96.61 94.55 103.47 94.22 97.24
Income From Operations -3.90 -2.42 0.45 -8.32 1.71 -2.49
Other Income/Expense
Gain/Loss on Sale 7.27 0.00 0.00 0.02 0.00 1.46
Total Other Income/Expense 7.27 0.00 0.00 0.02 0.00 1.46
Earnings Before Tax 3.37 -2.42 0.45 -8.30 1.71 -1.04
Income Tax Expense 0.00 0.00 0.00 -3.99 0.70 -0.66
Net Income/Loss 3.37 -2.42 0.45 -4.31 1.01 -0.38
UPTOWNER INNS, INC. AND SUBSIDIARY
ADJUSTED INCOME STATEMENT GROWTH RATES
In (%'s) 2000 2001 2002 2003 Average
Sales
Net Sales
Hotel Revenue 21.45 2.82 -15.25 -5.60 0.86
Rental Revenue -5.81 -99.81 1,641.65 301.11 459.28
Cost Of Goods Sold 6.05 -16.43 -17.79 -20.06 -12.06
Gross Profit 20.49 -2.01 -14.93 -4.14 -0.15
Operating Expenses
Other Salaries & Wages 20.74 -7.55 -12.51 -6.24 -1.39
Insurance 4.77 -6.71 9.99 -21.02 -3.24
Selling Expenses 30.55 16.65 -17.18 7.75 9.44
Depreciation & Amort. 7.91 -1.96 7.25 -28.48 -3.82
Interest Expense 3.52 -7.43 -10.19 -20.69 -8.70
Other Operating Expenses
Other Departmental Exp. 37.80 6.37 -19.54 -14.55 2.52
G & A Expenses 46.23 -6.76 17.36 5.98 15.70
Utilities Expense 12.84 -3.09 1.19 -40.11 -7.29
Repair & Maintenance 65.73 -24.67 -21.14 21.52 10.36
Taxes & Licenses 14.12 -11.51 -10.44 -21.32 -7.29
Total Operating Expenses 18.64 -4.93 -7.05 -13.41 -1.69
Income From Operations 25.77 118.17 -1,658.48 119.57 -348.74
Other Income/Expense
Gain/Loss on Sale -100.00 N/A N/A -100.00 -50.00
Earnings Before Tax -186.01 118.17 -1,655.22 119.61 -400.86
Income Tax Expense N/A N/A N/A 116.62 29.15
Net Income -186.01 118.17 -907.60 122.37 -213.26
UPTOWNER INNS, INC. AND SUBSIDIARY
ADJUSTED RATIO ANALYSIS
For Year Ended June: 1999 2000 2001 2002 2003 Average
GROWTH
Sales Growth N/A 19.54 -2.85 -15.07 -4.91 -0.82
Operating Earnings Growth (% N/A 25.77 118.17 -1,658.48 119.57 -348.74
Net Earnings Growth (%) N/A -186.01 118.17 -907.60 122.37 -213.26
COST CONTROL
Cost Of Sales/Sales (%) 6.55 5.81 5.00 4.84 4.07 5.26
Gross Margin(%) 93.45 94.19 95.00 95.16 95.93 94.74
Operating Expenses/Sales (%) 97.35 96.61 94.55 103.47 94.22 97.24
Operating Margin (%) -3.90 -2.42 0.45 -8.32 1.71 -2.49
Interest Expense/Sales (%) 20.16 17.46 16.64 17.60 14.68 17.31
TURNOVER
Receivable Turnover (X) N/A 54.75 58.72 50.85 34.03 49.59
Inventory Turnover (X) N/A 20.15 19.82 23.13 24.12 21.80
Sales/Net Fixed Assets (X) N/A 0.38 0.38 0.36 0.42 0.39
Sales/Total Assets (X) N/A 0.36 0.36 0.30 0.32 0.33
BEFORE-TAX PROFITABILITY
Return On Sales (%) 3.37 -2.42 0.45 -8.30 1.71 -1.04
Return On Assets (%) N/A -0.86 0.16 -2.49 0.54 -0.66
Return On Equity (%) N/A -4.52 0.84 -14.62 3.18 -3.78
AFTER-TAX PROFITABILITY
Return On Sales (%) 3.37 -2.42 0.45 -4.31 1.01 -0.38
Return On Assets (%) N/A -0.86 0.16 -1.30 0.32 -0.42
Return On Equity (%) N/A -4.52 0.84 -7.59 1.88 -2.35
RISK
Total Debt/Assets (%) 80.81 80.99 80.58 85.25 80.17 81.56
Long Term Debt/Equity (%) 314.27 327.04 313.48 520.48 368.39 368.73
Total Debt/Equity (%) 421.05 425.96 414.90 578.07 404.36 448.87
Current Ratio (X) 0.24 0.26 0.30 3.00 2.19 1.20
Quick Ratio (X) 0.24 0.25 0.30 2.99 2.18 1.19
Interest Coverage (X) 1.17 0.86 1.03 0.53 1.12 0.94
APPENDIX C
NORMALIZING ADJUSTMENTS
UPTOWNER INNS, INC. AND SUBSIDIARY
ADJUSTMENT REGISTER
FOR YEAR ENDED JUNE, 2003
(In $'s)
DESCRIPTION DEBIT CREDIT
--------------------------- ------- ------
Adjustment: 1
Income for Discontinued Operations 273,812
Retained Earnings 108,014
Impairment Loss 165,798
TO REMOVE NON-OPERATING AND NON-RECURRING ITEMS OF INCOME AND EXPENSE.
UPTOWNER INNS, INC. AND SUBSIDIARY
ADJUSTMENT REGISTER
FOR YEAR ENDED JUNE, 2002
(In $'s)
DESCRIPTION DEBIT CREDIT
--------------------------- ------- ------
Adjustment: 1
Rental Revenue 222,308
Impairment Loss 336,075
Insurance 10,144
Income for Discontinued Operations 13,251
Utilities Expense 14,400
Repair & Maintenance 15,814
G & A Expenses 22,723
Taxes & Licenses 25,766
Depreciation & Amort. 48,437
Interest Expense 71,773
Impairment Loss 336,075
TO RESTATE 2001 AND 2002 FOR OPERATIONS DISCONTINUED DURING 2003.
Adjustment: 2
Income for Discontinued Operations 13,251
Retained Earnings 322,824
Impairment Loss 336,075
TO REMOVE NON-OPERATING AND NON-RECURRING ITEMS OF INCOME AND EXPENSE.
UPTOWNER INNS, INC. AND SUBSIDIARY
ADJUSTMENT REGISTER
FOR YEAR ENDED JUNE, 2001
(In $'s)
DESCRIPTION DEBIT CREDIT
--------------------------- ------- ------
Adjustment: 1
Rental Revenue 216,071
Income for Discontinued Operations 3,403
Insurance 8,331
Repair & Maintenance 11,461
Utilities Expense 19,884
G & A Expenses 21,477
Taxes & Licenses 26,248
Depreciation & Amort. 48,158
Interest Expense 83,915
TO RESTATE 2001 AND 2002 FOR OPERATIONS DISCONTINUED DURING 2003.
Adjustment: 2
Retained Earnings 3,403
Income for Discontinued Operations 3,403
TO REMOVE NON-OPERATING AND NON-RECURRING ITEMS OF INCOME AND EXPENSE.
APPENDIX D
FINANCIAL STATEMENT SUMMARIES - HISTORICAL
The summarized historical financial information presented following is included
solely to assist in the development of the value conclusion presented in this
report, and it should not be used to obtain credit or for any other purpose.
Because of the limited purpose of this presentation, it may be incomplete and
contain departures from generally accepted accounting principles. The presented
information has been summarized from financial statements compiled by us.
UPTOWNER INNS, INC. AND SUBSIDIARY
HISTORICAL BALANCE SHEET SUMMARY
For Year Ended June:
(in $'s) 1999 2000 2001 2002 2003
Assets
Current Assets
Cash 322,663 348,064 186,912 803,660 1,161,986
Accounts Receivable 86,647 59,971 72,830 57,421 127,648
Inventory 11,197 11,966 7,715 6,145 4,483
Other Current Assets
Notes Receivable 83,271 47,899 0 5,446 41,794
Prepaid Expenses 65,309 65,093 48,392 61,173 43,030
Deferred Tax Asset 0 0 0 132,098 0
PP&E Held for Sale 0 0 327,811 1,770,073 0
Total Other Current Assets 148,580 112,992 376,203 1,968,790 84,824
Total Current Assets 569,087 532,993 643,660 2,836,016 1,378,941
Fixed Assets
Property, Plant, & Equipment 9,294,700 8,876,128 8,595,173 6,862,094 6,272,401
Land 1,480,612 1,480,612 1,519,252 1,202,786 820,553
Total Fixed Assets 10,775,312 10,356,740 10,114,425 8,064,880 7,092,954
Other Assets
Deposits 117,896 169,407 141,837 188,142 239,456
Other
Nonmarketable Securities 0 0 0 40,035 14,144
Deferred Tax Asset 0 0 0 0 110,140
Total Other 0 0 0 40,035 124,284
Total Other Assets 117,896 169,407 141,837 228,177 363,740
Total Assets 11,462,295 11,059,140 10,899,922 11,129,073 8,835,635
Liabilities & Equity
Current Liabilities
Accounts Payable 591,840 358,242 232,588 181,386 163,427
Accrued Liabilities 179,605 175,045 200,484 182,485 120,958
Other Current Liabilities
Accrued Taxes 312,513 437,520 313,480 327,869 192,571
Current Portion - LTD 1,265,006 1,109,220 1,400,385 253,430 153,290
Total Other Current Liabilities 1,577,519 1,546,740 1,713,865 581,299 345,861
Total Current Liabilities 2,348,964 2,080,027 2,146,937 945,170 630,246
Long-Term Liabilities
Notes Payable 6,913,472 6,876,470 6,636,076 8,542,621 6,453,549
Total Long-Term Liabilities 6,913,472 6,876,470 6,636,076 8,542,621 6,453,549
Total Liabilities 9,262,436 8,956,497 8,783,013 9,487,791 7,083,795
Stockholders Equity
Common Stock 791,782 791,782 791,782 791,782 791,782
Paid-In Capital 1,032,290 1,032,290 1,032,290 1,032,290 1,032,290
Retained Earnings 375,787 278,571 292,837 -172,681 -32,744
Other Equity 0 0 0 -10,109 -39,488
Total Stockholders Equity 2,199,859 2,102,643 2,116,909 1,641,282 1,751,840
Total Liabilities & Equity 11,462,295 11,059,140 10,899,922 11,129,073 8,835,635
UPTOWNER INNS, INC. AND SUBSIDIARY
HISTORICAL BALANCE SHEET AS A PERCENT OF ASSETS
For Year Ended June:
(in %'s) 1999 2000 2001 2002 2003
Assets
Current Assets
Cash 2.81 3.15 1.71 7.22 13.15
Accounts Receivable 0.76 0.54 0.67 0.52 1.44
Inventory 0.10 0.11 0.07 0.06 0.05
Other Current Assets
Notes Receivable 0.73 0.43 0.00 0.05 0.47
Prepaid Expenses 0.57 0.59 0.44 0.55 0.49
Deferred Tax Asset 0.00 0.00 0.00 1.19 0.00
PP&E Held for Sale 0.00 0.00 3.01 15.90 0.00
Total Other Current Assets 1.30 1.02 3.45 17.69 0.96
Total Current Assets 4.96 4.82 5.91 25.48 15.61
Fixed Assets
Property, Plant, & Equipment 81.09 80.26 78.86 61.66 70.99
Land 12.92 13.39 13.94 10.81 9.29
Total Fixed Assets 94.01 93.65 92.79 72.47 80.28
Other Assets
Deposits 1.03 1.53 1.30 1.69 2.71
Other
Nonmarketable Securities 0.00 0.00 0.00 0.36 0.16
Deferred Tax Asset 0.00 0.00 0.00 0.00 1.25
Total Other 0.00 0.00 0.00 0.36 1.41
Total Other Assets 1.03 1.53 1.30 2.05 4.12
Total Assets 100.00 100.00 100.00 100.00 100.00
Liabilities & Equity
Current Liabilities
Accounts Payable 5.16 3.24 2.13 1.63 1.85
Accrued Liabilities 1.57 1.58 1.84 1.64 1.37
Other Current Liabilities
Accrued Taxes 2.73 3.96 2.88 2.95 2.18
Current Portion - LTD 11.04 10.03 12.85 2.28 1.73
Total Other Current Liabilities 13.76 13.99 15.72 5.22 3.91
Total Current Liabilities 20.49 18.81 19.70 8.49 7.13
Long-Term Liabilities
Notes Payable 60.31 62.18 60.88 76.76 73.04
Total Long-Term Liabilities 60.31 62.18 60.88 76.76 73.04
Total Liabilities 80.81 80.99 80.58 85.25 80.17
Stockholders Equity
Common Stock 6.91 7.16 7.26 7.11 8.96
Paid-In Capital 9.01 9.33 9.47 9.28 11.68
Retained Earnings 3.28 2.52 2.69 -1.55 -0.37
Other Equity 0.00 0.00 0.00 -0.09 -0.45
Total Stockholders Equity 19.19 19.01 19.42 14.75 19.83
Total Liabilities & Equity 100.00 100.00 100.00 100.00 100.00
UPTOWNER INNS, INC. AND SUBSIDIARY
HISTORICAL INCOME STATEMENT SUMMARY
For Year Ended June:
(in $'s) 1999 2000 2001 2002 2003 Average
Sales
Net Sales
Hotel Revenue $ 3,122,081 3,791,881 3,898,650 3,303,959 3,119,102 3,447,135
Rental Revenue 235,270 221,608 216,496 229,710 29,690 186,555
Total Net Sales 3,357,351 4,013,489 4,115,146 3,533,669 3,148,792 3,633,690
Cost Of Goods Sold 220,034 233,351 195,016 160,319 128,153 187,375
Gross Profit 3,137,317 3,780,138 3,920,130 3,373,350 3,020,639 3,446,315
Operating Expenses
Other Salaries & Wages 841,724 1,016,332 939,612 822,036 770,769 878,095
Insurance 63,321 66,342 70,223 78,217 53,762 66,373
Selling Expenses 181,349 236,758 276,172 228,713 246,446 233,888
Depreciation & Amort. 396,964 428,358 468,109 498,816 322,121 422,874
Interest Expense 677,000 700,828 732,704 654,455 462,138 645,425
Other Operating Expenses
Other Departmental Exp. 227,548 313,566 333,549 268,357 229,321 274,468
G & A Expenses 233,684 341,713 340,089 396,633 396,266 341,677
Utilities Expense 205,282 231,631 244,352 241,548 136,038 211,770
Repair & Maintenance 73,821 122,343 103,625 88,497 88,327 95,323
Taxes & Licenses 367,595 419,483 397,429 358,194 261,570 360,854
Impairment Loss 0 0 0 0 165,798 33,160
Total Other Operating Expenses 1,107,930 1,428,736 1,419,044 1,353,229 1,277,320 1,317,252
Total Operating Expenses 3,268,288 3,877,354 3,905,864 3,635,466 3,132,556 3,563,907
Income From Operations -130,971 -97,216 14,266 -262,116 -111,917 -117,592
Other Income/Expense
Gain/Loss on Sale 244,000 0 0 575 0 48,915
Income for Discontinued 0 0 0 0 273,812 54,762
Operations
Impairment Loss 0 0 0 -336,075 0 -67,215
Total Other Income/Expense 244,000 0 0 -335,500 273,812 36,462
Earnings Before Tax 113,029 -97,216 14,266 -597,616 161,895 -81,130
Income Tax Expense 0 0 0 -132,098 21,958 -22,028
Net Income/Loss $ 113,029 -97,216 14,266 -465,518 139,937 -59,102
UPTOWNER INNS, INC. AND SUBSIDIARY
HISTORICAL INCOME STATEMENT AS A PERCENT OF SALES
For Year Ended June:
(in %'s) 1999 2000 2001 2002 2003 Average
Sales
Net Sales
Hotel Revenue 92.99 94.48 94.74 93.50 99.06 94.95
Rental Revenue 7.01 5.52 5.26 6.50 0.94 5.05
Total Net Sales 100.00 100.00 100.00 100.00 100.00 100.00
Cost Of Goods Sold 6.55 5.81 4.74 4.54 4.07 5.14
Gross Profit 93.45 94.19 95.26 95.46 95.93 94.86
Operating Expenses
Other Salaries & Wages 25.07 25.32 22.83 23.26 24.48 24.19
Insurance 1.89 1.65 1.71 2.21 1.71 1.83
Selling Expenses 5.40 5.90 6.71 6.47 7.83 6.46
Depreciation & Amort. 11.82 10.67 11.38 14.12 10.23 11.64
Interest Expense 20.16 17.46 17.81 18.52 14.68 17.73
Other Operating Expenses
Other Departmental Exp. 6.78 7.81 8.11 7.59 7.28 7.51
G & A Expenses 6.96 8.51 8.26 11.22 12.58 9.51
Utilities Expense 6.11 5.77 5.94 6.84 4.32 5.80
Repair & Maintenance 2.20 3.05 2.52 2.50 2.81 2.61
Taxes & Licenses 10.95 10.45 9.66 10.14 8.31 9.90
Impairment Loss 0.00 0.00 0.00 0.00 5.27 1.05
Total Other Operating Expenses 33.00 35.60 34.48 38.30 40.57 36.39
Total Operating Expenses 97.35 96.61 94.91 102.88 99.48 98.25
Income From Operations -3.90 -2.42 0.35 -7.42 -3.55 -3.39
Other Income/Expense
Gain/Loss on Sale 7.27 0.00 0.00 0.02 0.00 1.46
Income for Discontinued 0.00 0.00 0.00 0.00 8.70 1.74
Operations
Impairment Loss 0.00 0.00 0.00 -9.51 0.00 -1.90
Total Other Income/Expense 7.27 0.00 0.00 -9.49 8.70 1.29
Earnings Before Tax 3.37 -2.42 0.35 -16.91 5.14 -2.10
Income Tax Expense 0.00 0.00 0.00 -3.74 0.70 -0.61
Net Income/Loss 3.37 -2.42 0.35 -13.17 4.44 -1.49
UPTOWNER INNS, INC. AND SUBSIDIARY
HISTORICAL INCOME STATEMENT GROWTH RATES
In (%'s) 2000 2001 2002 2003 Average
Sales
Net Sales
Hotel Revenue 21.45 2.82 -15.25 -5.60 0.86
Rental Revenue -5.81 -2.31 6.10 -87.08 -22.27
Cost Of Goods Sold 6.05 -16.43 -17.79 -20.06 -12.06
Gross Profit 20.49 3.70 -13.95 -10.46 -0.05
Operating Expenses
Other Salaries & Wages 20.74 -7.55 -12.51 -6.24 -1.39
Insurance 4.77 5.85 11.38 -31.27 -2.32
Selling Expenses 30.55 16.65 -17.18 7.75 9.44
Depreciation & Amort. 7.91 9.28 6.56 -35.42 -2.92
Interest Expense 3.52 4.55 -10.68 -29.39 -8.00
Other Operating Expenses
Other Departmental Exp. 37.80 6.37 -19.54 -14.55 2.52
G & A Expenses 46.23 -0.48 16.63 -0.09 15.57
Utilities Expense 12.84 5.49 -1.15 -43.68 -6.63
Repair & Maintenance 65.73 -15.30 -14.60 -0.19 8.91
Taxes & Licenses 14.12 -5.26 -9.87 -26.98 -7.00
Impairment Loss N/A N/A N/A N/A N/A
Total Operating Expenses 18.64 0.74 -6.92 -13.83 -0.35
Income From Operations 25.77 114.67 -1,937.35 57.30 -434.90
Other Income/Expense
Gain/Loss on Sale -100.00 N/A N/A -100.00 -50.00
Income for Discontinued Operations N/A N/A N/A N/A N/A
Impairment Loss N/A N/A N/A 100.00 25.00
Earnings Before Tax -186.01 114.67 -4,289.09 127.09 -1,058.33
Income Tax Expense N/A N/A N/A 116.62 29.15
Net Income -186.01 114.67 -3,363.13 130.06 -826.10
UPTOWNER INNS, INC. AND SUBSIDIARY
HISTORICAL RATIO ANALYSIS
For Year Ended June:
1999 2000 2001 2002 2003 Average
GROWTH
Sales Growth N/A 19.54 2.53 -14.13 -10.89 -0.74
Operating Earnings Growth (% N/A 25.77 114.67 -1,937.35 57.30 -434.90
Net Earnings Growth (%) N/A -186.01 114.67 -3,363.13 130.06 -826.10
COST CONTROL
Cost Of Sales/Sales (%) 6.55 5.81 4.74 4.54 4.07 5.14
Gross Margin(%) 93.45 94.19 95.26 95.46 95.93 94.86
Operating Expenses/Sales (%) 97.35 96.61 94.91 102.88 99.48 98.25
Operating Margin (%) -3.90 -2.42 0.35 -7.42 -3.55 -3.39
Interest Expense/Sales (%) 20.16 17.46 17.81 18.52 14.68 17.73
TURNOVER
Receivable Turnover (X) N/A 54.75 61.97 54.26 34.03 51.25
Inventory Turnover (X) N/A 20.15 19.82 23.13 24.12 21.80
Sales/Net Fixed Assets (X) N/A 0.38 0.40 0.39 0.42 0.40
Sales/Total Assets (X) N/A 0.36 0.37 0.32 0.32 0.34
BEFORE-TAX PROFITABILITY
Return On Sales (%) 3.37 -2.42 0.35 -16.91 5.14 -2.10
Return On Assets (%) N/A -0.86 0.13 -5.43 1.62 -1.13
Return On Equity (%) N/A -4.52 0.68 -31.80 9.54 -6.53
AFTER-TAX PROFITABILITY
Return On Sales (%) 3.37 -2.42 0.35 -13.17 4.44 -1.49
Return On Assets (%) N/A -0.86 0.13 -4.23 1.40 -0.89
Return On Equity (%) N/A -4.52 0.68 -24.77 8.25 -5.09
RISK
Total Debt/Assets (%) 80.81 80.99 80.58 85.25 80.17 81.56
Long Term Debt/Equity (%) 314.27 327.04 313.48 520.48 368.39 368.73
Total Debt/Equity (%) 421.05 425.96 414.90 578.07 404.36 448.87
Current Ratio (X) 0.24 0.26 0.30 3.00 2.19 1.20
Quick Ratio (X) 0.24 0.25 0.30 2.99 2.18 1.19
Interest Coverage (X) 1.17 0.86 1.02 0.09 1.35 0.90
APPENDIX E
COMPARATIVE RATIOS - RMA
UPTOWNER INNS, INC. AND SUBSIDIARY
HISTORICAL COMPARATIVE ANALYSIS
FOR YEAR ENDED JUNE 2003
Client Industry Difference Initial Indicator
GENERAL
Number of Companies 1.00 557.00
Total Assets ($000's) 8,835.64 4,566.00 4,269.64
BALANCE SHEET ITEMS
Current Assets as a % of Assets 15.61 9.60 6.01 Positive
Cash as a % of Assets 13.15 5.60 7.55 Positive
Accounts Receivable as a % of Assets 1.44 1.80 -0.36 Negative
Inventory as a % of Assets 0.05 0.80 -0.75 Negative
Fixed Assets as a % of Assets 80.28 80.50 -0.22 Negative
Current Liabilities as a % of Assets 7.13 14.60 -7.47 Positive
Long-Term Debt as a % of Assets 73.04 70.50 2.54 Negative
Total Debt as a % of Assets 80.17 89.00 -8.83 Positive
Net Worth as a % of Assets 19.83 11.00 8.83 Positive
INCOME STATEMENT ITEMS
Annual Sales ($000's) 3,148.79 2,876.00 272.79
Gross Profit as a % of Sales 95.93 0.00 95.93 Positive
Operating Expense as a % of Sales 99.48 83.20 16.28 Negative
Operating Profit as a % of Sales -3.55 16.80 -20.35 Negative
Income Before Tax as a % of Sales 5.14 3.60 1.54 Positive
TURNOVER RATIOS
Accounts Receivable (X) 34.03 64.10 -30.07 Negative
Inventory (X) 24.12 0.00 24.12 Positive
Fixed Asset (X) 0.42 0.60 -0.18 Negative
Total Asset (X) 0.32 0.50 -0.18 Negative
PROFITABILITY
Pre-Tax Return on Assets (%) 1.62 1.60 0.02 Positive
Pre-Tax Return on Equity (%) 9.54 13.20 -3.66 Negative
RISK
Current Ratio (X) 2.19 0.70 1.49 Positive
Quick Ratio (X) 2.18 0.50 1.68 Positive
Interest Coverage Ratio (X) 1.35 1.40 -0.05 Negative
Total Debt/Equity (X) 4.04 9.00 -4.96 Positive
APPENDIX F
ILLUSTRATIVE GRAPH OF REVENUES AND SALARY EXPENSE
[GRAPHIC DEPICTING CHART OF THREE (3) YEARS (2001, 2002 & 2003)
HOTEL REVENUES & SALARIES]
APPENDIX G
SUMMARY APPRAISAL REPORT
APPRAISAL REPORT
APPRAISAL OF
THE PROPOSED
HOLIDAY INN HOTEL & SUITES
THIRD AVENUE & EIGHTH STREET
HUNTINGTON, WEST VIRGINIA
PREPARED FOR
UPTOWNER INNS, INC. AND/OR ITS ASSIGNS
REPORT DATE: JULY 30, 1996
FINAL INSPECTION DATE: JULY 17, 1996
"AS IS" VALUATION DATE: JULY 17, 1996
"AT COMPLETION" VALUATION DATE: APRIL 1, 1997
"AT STABILIZED OCCUPANCY" VALUATION DATE: APRIL 1, 1999
PREPARED BY
ROBERT K. WITHERS, MAI, RM
WITHERS & CO.
APPRAISERS ~ REALTORS
414 ELEVENTH STREET
HUNTINGTON, WEST VIRGINIA 25701
(304) 529-2659
Copyright (C) 1996 by Withers & Co.
All rights reserved.
[LETTERHEAD FOR WITHERS & CO., APPRAISERS ~ REALTORS]
414 Eleventh Street Robert K. Withers, MAI, RM
Huntington, WV 25701
Tel 304-529-2659
Fax 304-529-1421
July 30, 1996
Uptowner Inn, Inc. and/or its assigns
c/o Mr. Carl E. Midkiff
1415 Fourth Avenue
Huntington, WV 25701
RE: Holiday Inn Hotel & Suites (Proposed)
Third Avenue & Eighth Street
Huntington, W. Va.
Dear Mr. Midkiff:
In response to your request, I have inspected and appraised the
above-referenced property, which is a proposed 135-room Holiday Inn to be built
on a 2.5-acre corner site across Eighth Street from the Huntington Civic Center.
The purpose of the appraisal is to estimate the current market value, the
prospective market value of the property on April 1, 1997, when construction is
projected to be completed, and the prospective market value on April 1, 1999,
when stabilized occupancy is projected to occur.
From the examination and study made, I have formed the opinion subject to
the Statement of Assumptions and Limiting Conditions and to the Certificate of
Appraisal within the appraisal report, that:
1. On the valuation date, July 17, 1996, the CURRENT MARKET VALUE "AS IS"
WAS ONE MILLION ONE HUNDRED THOUSAND DOLLARS ($1,100,000) and consisted of the
site only.
2. On the valuation date, April 1, 1997, THE PROSPECTIVE MARKET VALUE "AT
COMPLETION" WOULD BE:
FIVE MILLION FIVE-HUNDRED FORTY-FIVE THOUSAND DOLLARS
($5,545,000),
Mr. Carl E. Midkiff
July 30, 1996
Page 2
allocated as follows:
Site $1,100,000
Improvements 4,445,000
----------
Total real estate $5,545,000
3. On the valuation date of April 1, 1999, THE PROSPECTIVE MARKET VALUE
"AT STABILIZED OCCUPANCY" would be:
SIX MILLION SIX-HUNDRED FIFTY THOUSAND DOLLARS
(6,650,000),
allocated as follows:
Site $1,100,000
Improvements 5,550,000
----------
Total real estate $6,650,000
The enclosed report, which I have prepared for your review, describes the
property and the valuation process as well. It was prepared in compliance with
the Uniform Standards of Professional Appraisal Practice (USPAP) and is a
Self-Contained Appraisal Report as specified under Standards Rule 2-2(a) of the
USPAP. Also, it is a Complete Appraisal as defined therein in that it was
performed without invoking the USPAP's Departure Provision (deleting one or more
approaches to value without proper justification). I believe I meet the
Competency Provision of the USPAP as within the last five years, for example, I
have appraised in excess of 10 motel properties.
Mr. Carl E. Midkiff
July 30, 1996
Page 3
Thank you for the opportunity to be of service and please call if you have
any questions.
Respectfully submitted,
By /s/ Robert K. Withers, MAI, RM
Robert K. Withers, MAI, RM
State Certified General
Real Estate Appraiser
Certificate No. 040
RKW/tam
Enclosures
APPENDIX H
AUDITED FINANCIAL STATMENTS
[The information required under Appendix H is incorporated by reference to the
previous Uptowner Inns, Inc. SEC filings of Form 10K]
APPENDIX I
VALUATION ANALYST'S QUALIFICATIONS
APPENDIX I
STATEMENT OF QUALIFICATIONS
SUSAN K. RICHARDSON, CPA, CVA
Academic and Professional Credentials
Bachelor of Arts, Marshall University, 1982
Certified Public Accountant - 1983, Licensed to practice in West Virginia
and Kentucky
Certified Valuation Analyst, National Association of Certified Valuation
Analysts (NACVA), 1994
Position and Experience
Partner, Somerville & Company, CPAs
Manager/Partner in charge of the management consulting services practice
area since 1988
Professional Affiliations
National Association of Certified Valuation Analysts
National Association of Forensic Economists
Institute of Business Appraisers
American Institute of Certified Public Accountants
Member, Partnership Taxation Committee, 1994-1997
CPA Associates International, Inc.
Member, Federal Taxation Committee,1994-1997 and 2000-2003
West Virginia Society of Certified Public Accountants
Director-at-Large, 1995-1998
Chairman, Careers in Accounting Project Group 2001-2004
Various other local and regional professional and community organizations
APPENDIX III
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
UPTOWNER INNS, INC.
Pursuant to the provisions of Section 1005, Article 10, Chapter 31D of
the Code of West Virginia, the undersigned Corporation adopts the following
Articles of Amendment to its Articles of Incorporation:
FIRST: The name of the Corporation is Uptowner Inns, Inc.
SECOND: The following amendment of the Articles of Incorporation was
adopted by the shareholders of the Corporation on _________ ___, 2004, in the
manner prescribed by Section 1003, Article 10, Chapter 31D:
RESOLVED, that Article IV of the Articles of Incorporation of
the Corporation be amended to read, in its entirety, as follows:
IV. The amount of the total authorized capital of the
Corporation shall be Two Hundred Dollars ($200), which shall consist
of Two Hundred (200) shares of Common Stock, par value $1.00 per
share.
THIRD: The amendment of the Articles of Incorporation was adopted to
implement a reverse stock split of 1-for 25,000 shares of the common stock of
the Corporation. Upon the filing of these Articles of Amendment, each share of
existing common stock will automatically be reclassified into one twenty-five
thousandeth of a fully paid and non-assessable share of the new common stock
without any further action on the part of the shareholders. No certificates or
scrip representing fractional shares of the new common stock shall be issued in
connection with the reverse stock split. Within ten days
-1-
of the filing of these Articles of Amendment, the Corporation will mail to the
shareholders holding fewer than 25,000 shares of common stock or holding a
number of shares not evenly divisible by 25,000, a notice of the filing of the
Articles of Amendment and a letter of transmittal containing instructions with
respect to submission of shares of common stock to the Corporation. Upon
surrender of their old certificates, such shareholders will receive $1.07 per
share on a pre-split basis.
FOURTH: The amendment of the Articles of Incorporation was adopted on
__________ ___, 2004.
FIFTH: The amendment was duly approved by the shareholders in the
manner required by Section 1003, Article 10, Chapter 31D. The number of shares
of the Corporation outstanding at the time of such adoption was __________, and
the number of shares entitled to vote thereon was __________. The number of
shares voted for such amendment was ______, and the number of shares that voted
against such amendment was ________.
DATED: _____________ ______, 2004.
UPTOWNER INNS, INC.,
By:______________________________
Carl Midkiff
Its President
and
______________________________
Hobart Adkins
Its Secretary
-2-
STATE OF WEST VIRGINIA,
COUNTY OF CABELL, to-wit:
Taken, subscribed and sworn to before the undersigned authority by
____________________, as President of UPTOWNER INNS, INC., this ___ day of
_____________, 200___.
My commission expires __________________________________.
_______________________________
NOTARY PUBLIC
STATE OF WEST VIRGINIA,
COUNTY OF CABELL, to-wit:
Taken, subscribed and sworn to before the undersigned authority by
____________________, as Secretary of UPTOWNER INNS, INC., this ___ day of
_____________, 200___.
My commission expires __________________________________.
_______________________________
NOTARY PUBLIC
Articles of Amendment Prepared By:
Christina T. Brumley, Esq.
JACKSON KELLY PLLC
1600 Laidley Tower
P. O. Box 553
Charleston, West Virginia 25322
-3-
APPENDIX IV
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2003 and
FORMS 10-Q FOR THE QUARTERS ENDED SEPTEMBER 30, 2003,
DECEMBER 31, 2003, AND MARCH 31, 2004
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.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
West Virginia 55-0457171
- -----------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
741 5th Avenue, Huntington, West Virginia 25701
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code (304) 525-8162
---------------------
Securities registered pursuant to Section 12 (g) of the Act:
1,583,563 shares of common stock - $0.50 par value
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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
--------- ---------
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
-----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes No X
--------- --------
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
-2-
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
---- ---- ---- ---- ----
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:
<Table>
<Caption>
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
==========
</Table>
-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-
Exhibit 21
UPTOWNER INNS, INC. AND SUBSIDIARIES
Exhibit 21 - Subsidiaries of Uptowner Inns, Inc.
* Motel & Restaurant Supply
100% Owned Subsidiary
Incorporated in the State of West Virginia
* Represents a Corporation which had no activity during
fiscal year June 30, 2003, 2002 or 2001
Exhibit 31.1
CERTIFICATION
I, Carl Midkiff, certify that:
1. I have reviewed this annual report on Form 10-K of Uptowner Inns,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected, or is reasonably likely to
affect, the registrant's internal controls over financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls.
Date: September 29, 2003 /s/ Carl Midkiff
--------------------------------------------
Carl Midkiff, President and
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, David Robinson, certify that:
1. I have reviewed this annual report on Form 10-K of Uptowner Inns,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected, or is reasonably likely to
affect, the registrant's internal controls over financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information in; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's internal
controls.
Date: September 29, 2003 /s/ David Robinson
---------------------------------------
David Robinson, Treasurer
(Principal Accounting and Financial
Officer)
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Uptowner Inns, Inc. (the
"Company") on Form 10-K for the period ending June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Chief Executive Officer of the Company, certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/S/ CARL MIDKIFF
-------------------------------------
Carl Midkiff, President and Chief
Executive Officer
September 29, 2003
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Uptowner Inns, Inc. (the "Company") on
Form 10-K for the period ending June 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), the undersigned, Chief
Financial Officer of the Company, certifies, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/S/ DAVID ROBINSON
---------------------------------------
David Robinson, Treasurer
(Principal Accounting and Financial
Officer)
September 29, 2003
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-K/A
(AMENDMENT NO. 1)
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.
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
WEST VIRGINIA 55-0457171
- -------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
741 5th AVENUE, HUNTINGTON, WEST VIRGINIA 25701
- -------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code (304) 525-8162
-------------------
Securities registered pursuant to Section 12 (g) of the Act:
1,583,563 SHARES OF COMMON STOCK - $0.50 PAR VALUE
- -------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the 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
--- ---
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.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes X No
--- ---
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.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are directors of the company.
PRINCIPAL OCCUPATION FOR
NAME AGE POSITION WITH THE COMPANY PAST FIVE YEARS
- ---- --- ------------------------- ---------------
Hobart A. Adkins 48 Director Since 2001; Secretary of the Board Owner of Quality Exhaust,
Inc.; President, 31st
Street Enterprises, Inc.
(Business includes auto
repair and exhaust repair)
Richard Monga 39 Director Since 2001 General Manager of
Uptowner Inns, Inc.
(1997-Present);
General Manager, separate
Holiday Inn property
(1996-1997)
Carl E. Midkiff 53 Director Since1997; President, CEO, Chairman President, CEO and
of the Board Chairman of the Board of
Uptowner Inns, Inc.; Owner
and Manager of Hazmat
Environmental Contractors,
Inc. (1995-2001); Owner
and Manager of Prestige
Properties, Inc.
(2000-Present) (Owns and
manages residential rental
properties)
Charles D. Robinson 49 Director Since 2001; Treasurer of the Board Insurance Agent and Vice
President of Insurance
Systems, Inc. (1980-2003)
The following are the executive officers of the company.
NAME AND OFFICE HELD OFFICE HELD SINCE COMPANY EMPLOYEE SINCE AGE
- -------------------- ----------------- ---------------------- ---
Carl E. Midkiff, President and Chief 2001 08/01/99 53
Executive Officer
Hobart A. Adkins, Secretary 2001 03/27/01 48
Charles D. Robinson, Treasurer 2001 03/27/01 49
2
BOARD INFORMATION
NUMBER OF MEETINGS
The board of directors met three times during the fiscal year ended
June 30, 2003. All of the company's directors attended 100% of all board and
committee meetings during the fiscal year ended June 30, 2003.
BOARD COMMITTEES
The board of directors has not established formal committees as the
entire board serves in these capacities. Carl Midkiff performs the audit
committee functions and carries out these functions under a written charter.
REPORT OF CARL MIDKIFF CONCERNING THE AUDIT - Carl Midkiff oversees the
company's financial reporting process. Mr. Midkiff has the primary
responsibility for the financial statements and the reporting process, including
the systems of internal controls. In fulfilling his oversight responsibilities
for fiscal 2003, Mr. Midkiff reviewed the audited financial statements in the
Form 10-K with the company's auditors including a discussion of the quality, not
just the acceptability, of the accounting principles, the reasonableness of
significant judgments and the clarity and disclosures in the financial
statements.
Mr. Midkiff reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited financial
statements with generally accepted accounting principles, his judgments as to
the quality, not just the acceptability, of the company's accounting principles
and such other matters as are required to be discussed under generally accepted
auditing standards.
In reliance on the reviews and discussions referred to above, Mr.
Midkiff recommended to the board of directors (and the board has approved) that
the audited financial statements be included in the Form 10-K for the fiscal
year ended June 30, 2003, for filing with the SEC. Mr. Midkiff and the board
have also approved the selection of the company's independent auditors.
Based upon the review and discussions referred to above, the board of
directors recommends that the audited financial statements for the fiscal year
ended June 30, 2003, be included in the company's Annual Report on Form 10-K and
filed with the SEC.
October 21, 2003
Hobart A. Adkins
Richard Monga
Carl E. Midkiff
Charles D. Robinson
This report shall not be deemed to be incorporated by reference into
any filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, unless the company specifically incorporates
this report by reference. They will not otherwise be filed under such Acts.
AUDIT FEES - The fees billed by Sullivan, Ware & Hall, PLLC, for
professional services rendered for the audit of the annual financial statements
for the fiscal year ended June 30, 2003, and for the reviews of the financial
statements included in the Quarterly Reports on Form 10-Q for that fiscal year,
were $27,662. There were no services rendered regarding financial information
systems design and implementation.
3
BOARD COMPENSATION
Directors receive $100.00 for each board meeting of the company they
attend. In the fiscal year ended June 30, 2003, the board of directors of the
company received $200.00 each, in the aggregate, for all board of directors'
meetings attended and all fees paid.
ITEM 11. EXECUTIVE COMPENSATION
BOARD OF DIRECTORS REPORT ON EXECUTIVE COMPENSATION
Mr. Midkiff's salary is determined annually by the board of directors
based on several objective and subjective factors. The board considers
industry-wide salary information for executives in the hotel industry which is
compiled through surveys conducted by recognized publications in the hotel
industry. Members of the board of directors also subjectively apply their own
familiarity of the local market for business executives to ensure Mr. Midkiff's
annual salary is set at an appropriate level considering the local business
climate, Mr. Midkiff's expertise in the hotel business, the cost to replace Mr.
Midkiff with another executive with equivalent experience and the success of the
company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
company's directors and executive officers, and persons who own more than 10% of
the registered class of the company's equity securities, to make stock ownership
and transaction filings with the Securities and Exchange Commission and to
provide copies to the company. The company is currently reviewing the stock
ownership and transaction filings of its directors and executive officers. The
company is aware that certain reports were due prior to June 30, 2002, that were
not filed by Mr. Midkiff, Violet Midkiff, Mr. Adkins, Mr. Monga and Mr.
Robinson. Other than these reports, the company is not aware of any filings that
would have been required to have been made since June 30, 2002.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Compensation. The table below reflects information
concerning the annual compensation for services in all capacities to the
corporation for the fiscal years ended June 30, 2003, 2002, and 2001, of those
persons who were, as of June 30, 2003, (a) the chief executive officer, and (b)
the four other most highly compensated executive officers to the extent that
such persons' total annual salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION (1)
-----------------------------------------------------
NAME AND PRINCIPAL OTHER ANNUAL
POSITION FISCAL YEAR SALARY BONUS COMPENSATION
- ------------------ ----------- ------ ----- ------------
Carl E. Midkiff, President and 2003 $86,000.00 $52,348.00 $1,100
Chief Executive Officer 2002 $45,923.18 $38,668.85 $ 0
2001 $38,912.04 $51,796.10 $ 0
(1) Does not include perquisites and other personal benefits, the amount of
which are not shown because the aggregate amount of such compensation during the
years presented did not exceed the lesser of $50,000 or 10% of total salary and
bonus reported for such executive officer. The company provides Mr. Midkiff with
the use of a vehicle.
The company does not maintain any form of stock option, stock
appreciation rights or other long-term compensation plans. There are no
employment or change in control agreements.
4
ITEM 12. SECURITY OWNWERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of October 15, 2003,
relating to the beneficial ownership of the common stock by (a) each person or
group known by the company to own beneficially more than 5% of the outstanding
common stock; (b) each of the company's directors; and (c) all directors and
executive officers of the company as a group. Ownership includes direct and
indirect (beneficial) ownership as defined by SEC rules.
Amount and Nature of
Name and Address Beneficial Ownership (1) Percent of Class
- ---------------- ------------------------ ----------------
Hobart A. Adkins 100 Direct *
Carl E. Midkiff 60,111 Direct 54.80%
807,669 Indirect
Violet Midkiff 462,777 Direct 29.23%
Charles D. Robinson 100 Direct *
All Directors and Executive Officers 867,669 Indirect 55.36%
as a Group
(1) For purposes of this table, beneficial ownership has been determined in
accordance with the provisions of rule 13d-3 of the Securities Exchange Act of
1934 under which, in general, a person is deemed to be the beneficial owner of a
security if he has or shares the power to dispose of or direct the disposition
of the security, or if he has the right to acquire beneficial ownership of the
security within 60 days.
(2) Consists of 161,792 shares owned by Violet Midkiff, Carl Midkiff's mother
which Carl Midkiff exercises voting power; 100,985 shares owned by Violet
Midkiff, Wade Midkiff and Lewis Midkiff as joint tenants with right of
survivorship (Wade Midkiff and Lewis Midkiff are the minor sons of Carl Midkiff
and Violet Midkiff is Carl Midkiff's mother); 264,158 shares owned by MMS
Limited Partnership of which an entity owned by Carl Midkiff is general partner
and Carl Midkiff is a limited partner owning 75% of the limited partnership;
40,727 shares owned by Prestige Property, Inc., a corporation owned by Carl
Midkiff and his immediate family; 200,000 shares owned by the Violet Midkiff
Irrevocable Trust of which Carl Midkiff is the trustee; 10,000 shares owned by
Lewis Midkiff of which Carl Midkiff acts as custodian; 10,000 shares owned by
Wade Midkiff of which Carl Midkiff acts as custodian; 10,007 shares owned by the
Wade Midkiff Irrevocable Trust of which Carl Midkiff is the trustee; and 10,000
shares owned by Elizabeth Midkiff who is Carl Midkiff's wife.
* Less than one percent.
5
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
October 27, 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
October 27, 2003
By /s/ David Robinson
----------------------------------
David Robinson, Treasurer and
Director (Principal Financial and
Accounting Officer)
October 27, 2003
By /s/ Hobard Adkins
----------------------------------
Hobart Adkins, Secretary
October 27, 2003
By /s/ Carl Midkiff
----------------------------------
Carl Midkiff, President and Chief
Executive Officer
October 27, 2003
6
EXHIBIT 31.1
CERTIFICATION
I, Carl Midkiff, certify that:
1. I have reviewed this annual report on Form 10-K of Uptowner Inns,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected, or is reasonably likely to
affect, the registrant's internal controls over financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls.
Date: October 27, 2003 /s/ Carl Midkiff
-------------------------------
Carl Midkiff, President and
Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, David Robinson, certify that:
1. I have reviewed this annual report on Form 10-K of Uptowner Inns,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under our supervision to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of the
period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
fourth fiscal quarter that has materially affected, or is reasonably likely to
affect, the registrant's internal controls over financial reporting; and
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the registrant's board of directors
(or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the
design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information in; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls.
Date: October 27, 2003 /s/ David Robinson
---------------------------------
David Robinson, Treasurer
(Principal Accounting and Financial
Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Uptowner Inns, Inc. (the
"Company") on Form 10-K for the period ending June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Chief Executive Officer of the Company, certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Carl Midkiff
---------------------------------
Carl Midkiff, President and Chief
Executive Officer
October 27, 2003
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Uptowner Inns, Inc. (the
"Company") on Form 10-K for the period ending June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Chief Financial Officer of the Company, certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ David Robinson
-----------------------------------
David Robinson, Treasurer
(Principal Accounting and Financial
Officer)
October 27, 2003
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED DECEMBER 31, 2003, COMMISSION FILE NUMBER 0-1957
UPTOWNER INNS, INC.
(Exact Name of Registrant as Specified in its Charter)
West Virginia 55-0457171
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
741 5th Avenue, Huntington, West Virginia 25701
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code (304) 525-8162
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
- ------- -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
- ------- -------
Indicate the number of Shares outstanding of each of the Issuer's classes of
Common Stock, as of the close of January 16, 2003.
Class Outstanding at December 31, 2003
------ -------------------------------
Common Stock - $.50 par value 1,493,642 shares
- 1 -
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 2003 and JUNE 30, 2003
ASSETS
December 31, June 30,
2003 2003
(Unaudited) (a)
Current Assets:
Cash $ 1,019,812 $ 1,161,986
Accounts and notes receivable 155,050 139,442
Inventories 4,710 4,483
Prepaid expenses 49,900 43,030
Notes receivable 30,000 30,000
Total current assets 1,259,472 1,378,941
Property, Plant and Equipment:
Land 820,553 820,553
Building and improvements 6,005,920 6,005,920
Furniture and equipment 1,471,045 1,400,047
Construction in progress 281,137 211,870
Less accumulated
depreciation
and amortization 1,501,566 1,345,436
Property, plant and
equipment - net 7,077,089 7,092,954
Other Assets:
Other assets 295,480 363,740
Total other assets 295,480 363,740
Total Assets $ 8,632,041 $ 8,835,635
- 2 -
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 2003 and JUNE 30, 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
2003 2003
(Unaudited) (a)
Current Liabilities:
Accounts payable $ 137,731 $ 163,427
Accrued liabilities 50,094 120,958
Taxes other than Federal
income taxes 164,033 192,571
Current portion of long-term
debt 153,290 153,290
Total current liabilities 505,148 630,246
Long-Term Liabilities:
Notes and mortgages payable 6,373,275 6,453,549
Total liabilities 6,878,423 7,083,795
Stockholders' Equity:
Common stock - par value
$.50 per share; 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 earnings (deficit) (29,629) (32,744)
Treasury stock, at cost (89,921
and 87,246 Shares) (40,825) (39,488)
Total stockholders' equity 1,753,618 1,751,840
Total Liabilities and
Stockholders' Equity $ 8,632,041 $ 8,835,635
(a) Financial information as of June 30, 2003 has been derived from the audited,
consolidated financial statements of the registrant.
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
- 3 -
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
For the periods of three and six months ended December 31, 2003 and 2002
Three Months Ended Six Months Ended
2003 2002 2003 2002
Revenues: * *
Rooms $ 680,517 $ 698,160 $ 1,438,075 $ 1,455,668
Food and beverage 18,931 21,370 36,544 42,911
Telephone 3,225 4,577 6,841 10,137
Rents 4,000 2,000 8,030 12,974
Other 4,071 7,088 10,000 8,000
Total revenues 710,744 733,195 1,499,490 1,529,690
Costs and Expenses:
Operating Departments:
Cost of sales 28,745 32,454 59,590 64,156
Salaries and wages 169,275 188,082 364,663 389,281
Other 58,892 66,066 124,827 128,679
General and Administrative 87,252 80,487 154,139 132,756
Advertising 52,998 56,759 113,929 121,735
Utilities 31,319 29,689 64,283 64,278
Repairs and Maintenance 16,045 17,250 33,406 37,974
Interest 135,174 144,750 271,123 275,805
Taxes and licenses 57,043 60,331 121,646 127,253
Insurance 16,800 8,655 33,600 17,564
Depreciation and Amortization 78,065 68,927 156,130 139,015
Total costs and expenses 731,608 753,450 1,497,336 1,498,496
Operating income (loss) (20,864) (20,255) 2,154 31,194
Interest income - - 961 56
Income from continuing operations (20,864) (20,255) 3,115 31,250
Discontinued operations
Income from operations of
the discontinued component - 1,039 - 1,288
Net Income before Income
Taxes (20,864) (19,216) 3,115 32,538
Income Taxes - - - -
Net Income $ (20,864) $(19,216) $ 3,115 $ 32,538
Earnings per Share $ (.01) $ (.01) $ .00 $ .02
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
* Financial information restated for effects of discontinued operations.
- 4 -
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the six months ended December 31, 2003 and 2002
2003 2002
Cash Flows From Operating Activities:
Net income $ 3,115 $ 32,538
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 156,130 161,138
Gain on sale of asset - (15,359)
(Increase) decrease in other assets 68,259 17,589
(Increase) decrease in current assets:
Accounts receivable (15,608) (82,809)
Inventories (227) (128)
Prepaid expenses (6,870) 30,720
Increase (decrease) in current liabilities:
Accounts payable (25,695) 121,005
Accrued liabilities (70,864) (61,524)
Taxes other than Federal income tax (28,538) (55,993)
Total adjustments 76,587 114,639
Net Cash Provided by (Used in)
Operating Activities 79,702 147,177
- 5 -
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the six months ended December 31, 2003 and 2002
2003 2002
Cash Flows From Investing Activities:
Proceeds from sale of real estate $ - $ 1,930,072
Capital Expenditures (140,265) (197,774)
Net cash provided by (used in)
investing activities (140,265) 1,732,298
Cash Flows From Financing Activities:
Purchase of Treasury Stock (1,337) -
Payment on notes and mortgages (80,274) (1,709,421)
Net cash used in
financing activities (81,611) (1,709,421)
Net Increase in Cash
and Cash Equivalents (142,174) 170,054
Cash and Cash Equivalents at Beginning of Year 1,161,986 803,660
Cash and Cash Equivalents at End of Period $ 1,019,812 973,714
Supplemental Disclosures of Cash Flow Information:
Cash Paid During The Period For:
Interest $ 271,123 $ 249,133
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
- 6 -
UPTOWNER INNS, AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
1. BASIS OF PRESENTATION
The financial statements presented reflect Uptowner Inns, Inc. and its
consolidated subsidiary, Motel and Restaurant Supply.
The foregoing statements are unaudited; however, in the opinion of management,
all adjustments (comprising only normal recurring accruals) necessary for a fair
presentation of the financial statements have been included. The results of
operations for interim periods are not necessarily indicative of the results
that may be expected for a full year or any other interim period. A summary of
the Corporation's significant accounting policies is set forth in Note 1 to the
Consolidated Financial Statements in the Corporation's Annual Report to
shareholders and Form 10-K for June 30, 2003.
- 7 -
UPTOWNER INNS, AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
2. CONTINGENCY
None
- 8 -
UPTOWNER INNS, INC. AND SUBSIDIARY
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters disclosed herein may be forward-looking statements that
involve risks and uncertainties, including the facilities utilization, costs
associated with maintaining the operations, liquidity issues, and other risks.
You can identify these statements by such forward-looking words as "may,"
"will," "expect," "plan" and similar words. Actual strategies and results in the
future may differ materially from those management currently expects.
Forward-looking statements represent management's judgment as of the current
date. The Company disclaims, however, any intent or obligation to update any
forward-looking statements contained in this Form 10-Q.
RESULTS OF OPERATION
THREE MONTHS ENDED DECEMBER 31, 2003 AND 2002
The Holiday Inn Hotel and Suites room revenues decreased 2.5% in the
three months ended December 31, 2003 relative to the comparable period in 2002.
The Holiday Inn Hotel and Suites' average occupancy percentage for the three
months ended December 31, 2003 was 69.38%, a small decrease of 1.17% relative to
the comparable period in 2002. Although this is a minor decrease, management
faults the nearby construction work for the loss of income. The 11.4% decrease
in food and beverage revenues in the quarter ended December 31, 2003 relative to
the comparable period in 2002, is largely due to the complimentary meals
provided to hotel guests as an incentive to stay at the property.
Total cost and expenses have decreased a modest 2.9%. The 8.4% increase
in general and administrative expenses is due in large part to the increased
accounting and legal fees related to the going private transaction, discussed
later in the Liquidity section of this Form 10Q. Salaries and wages expense have
decreased 10%, showing that with the loss of revenue, management has done a good
job controlling labor cost. The depreciation expense has increased due to the
addition of fixed assets in fiscal year ended June 30, 2003. Insurance expense
also continues to increase.
No provision for income tax expense for the three months ended December
31, 2003 is reflected due to the large amount of net operating loss carryforward
($ 994,955) to be applied to taxable income, which has been provided for in
previous periods and included in deferred tax assets.
- 9 -
RESULTS OF OPERATION, CON'T.
SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
Room revenues have decreased slightly by 1.2% in the six months ended
December 31, 2003 relative to the comparable period in 2002. Food and Beverage
revenues have decreased by 14.8% in the six months ended December 31, 2003
relative to the comparable period in 2002. These differences, as well as the
variances in expenses, are due to the explanations above for the three month
period ending December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity, as measured by current assets divided by current
liabilities, has increased from 2.19 at June 30, 2003 to 2.49 at December 31,
2003.
Although liquidity has increased for this time period, it is likely
that the Company's liquidity position will gradually 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. The Company has already taken action to cut
expenses to help make up for the shortfall in business. Consideration is also
being given to adding a Director of Sales to assist the General Manager in
bringing in new business. The breakeven point for the hotel is 61% in occupancy
points and over and above the 61% occupancy is considered profit. In the past,
hotel occupancy has averaged 72-74%. With an occupancy decline of 10%,
management hopes to hold the average occupancy levels at 60-63%. With this
projection, the profits will be eliminated and the hotel will function at
breakeven level or 1% or 2% higher.
There are also plans for the Company to add a new Holiday Inn property
in Barboursville, WV, but it 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 planning to finance the new hotel with
a 15 year amortization at approximately 7.25%. The projected start time for
construction is July, 2005.
The Company obtained a valuation of the Company's common stock. The
purpose of the valuation was to provide the Company's management with
information to be used in a going private transaction whereby the Company is
seeking shareholder approval for a 10,000 for 1 reverse stock split and
providing a cash payment for fractional shares of common stock. The transaction
would have the effect of reducing the number of shareholders from 1,392 to 8 and
the Company would no longer file reports under the Securities and Exchange Act
of 1934. The Company expects the transaction to occur in the spring of 2004, and
approximates the transaction to cost $731,497. The funds for this transaction
will be obtained from working capital.
- 10 -
LIQUIDITY AND CAPITAL RESOURCES, CONT'D.
ITEM 4: CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiary) required to be
included in the Company's periodic SEC filings.
- 11 -
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Currently, two lawsuits have been filed against Uptowner Inns, Inc.
involving the same claimed acts of negligence. On November 5, 2003, a lawsuit
was filed in the Circuit Court of Cabell County, West Virginia styled McFarland
v. Piepenbrink and Uptowner Inns, Inc., Civil Action No.:03-C-0625; and, on
January 14, 2004, a lawsuit was filed in the Circuit Court of Cabell County,
West Virginia, styled Jeter v. Piepenbrink and Uptowner Inns, Inc., Civil Action
No.:04-C-0039; In both cases the Plaintiffs seek judgment for unspecified
damages against each of the Defendants compensating the Plaintiff for injuries
and damages suffered after falling from a deck located on property owned by
Defendant Piepenbrink. The lawsuit involves property which was conveyed to
Defendant Piepenbrink by Rez.com, Inc. in July, 2001. This property was conveyed
to Rez.com, Inc. by Uptowner Inns, Inc. in July, 1998. The incident in question
occurred on or about May 10, 2003, well after this property was conveyed by the
company to Rez.com, Inc., and accordingly, the company believes that it has no
liability to Plaintiff. As such, the company intends to defend this litigation
vigorously. Currently, the company is in process of answering the complaints and
conducting preliminary discovery.
- 12 -
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 Certification pursuant to 18 U.S.C. Section 302 of the
Sarbanes-Oxley Act of 2002 for Carl E. Midkiff, Chief
Executive Officer.
31.2 Certification pursuant to 18 U.S.C. Section 302 of the
Sarbanes-Oxley Act of 2002 for David Robinson, Chief
Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes- Oxley
Act of 2002 for Carl E. Midkiff, Chief Executive
Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes- Oxley
Act of 2002 for David Robinson, Chief Financial Officer.
b. The Company was not required to file Form 8-K for the quarter ended
December 31, 2003.
- 13 -
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 E. Midkiff,
CEO and Secretary
February 16, 2004
By /s/ David Robinson,
CFO and Treasurer
February 16, 2004
- 14 -
Exhibit 31.1
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Carl E. Midkiff, Chief Executive Officer, certify that:
1. I have reviewed this report on Form 10-Q of Uptowner Inns,
Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiary is
made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
- 1 -
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors:
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ Carl E. Midkiff
Chief Executive Officer
February 16, 2004
- 2 -
Exhibit 31.2
CERTIFICATIONS
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, David Robinson, Chief Financial Officer, certify that:
1. I have reviewed this report on Form 10-Q of Uptowner Inns,
Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiary is
made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
- 1 -
5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors:
a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated
in this quarterly report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
/s/ David Robinson
Chief Financial Officer
February 16, 2004
- 2 -
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Uptowner Inns, Inc. (the
"Company") on Form 10-Q for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Chief Executive Officer of the Company, certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Carl E. Midkiff
Chief Executive Officer
February 16, 2004
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Uptowner Inns, Inc. (the
"Company") on Form 10-Q for the period ending December 31, 2003 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Chief Financial Officer of the Company, certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ David Robinson
Chief Financial Officer
February 16, 2004
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 2004, COMMISSION FILE NUMBER 0-1957
UPTOWNER INNS, INC.
(Exact Name of Registrant as Specified in its Charter)
West Virginia 55-0457171
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
741 5th Avenue, Huntington, West Virginia 25701
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including area code (304) 525-8162
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
Indicate the number of Shares outstanding of each of the Issuer's classes of
Common Stock, as of the close of May 14, 2004.
Class Outstanding at March 31, 2004
------ -------------------------------
Common Stock - $.50 par value 1,493,642 shares
- 1 -
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AT MARCH 31, 2004 and JUNE 30, 2003
ASSETS
March 31, June 30,
2004 2003
(Unaudited) (a)
Current Assets:
Cash $ 156,771 $1,161,986
Accounts and notes receivable 175,340 139,442
Inventories 4,417 4,483
Prepaid expenses 57,031 43,030
Notes receivable 30,000 30,000
Total current assets 423,559 1,378,941
Property, Plant and Equipment:
Land 820,553 820,553
Building and improvements 6,005,920 6,005,920
Furniture and equipment 1,500,706 1,400,047
Construction in progress 1,168,998 211,870
Less accumulated
depreciation
and amortization 1,579,631 1,345,436
Property, plant and
equipment - net 7,916,546 7,092,954
Other Assets:
Other assets 291,161 363,740
Total other assets 291,161 363,740
Total Assets $ 8,631,266 $8,835,635
- 2 -
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AT MARCH 31, 2004 and JUNE 30, 2003
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
2004 2003
(Unaudited) (a)
Current Liabilities:
Accounts payable $ 177,730 $ 163,427
Accrued liabilities 58,523 120,958
Taxes other than Federal
income taxes 194,629 192,571
Current portion of long-term
debt 153,290 153,290
Total current liabilities 584,172 630,246
Long-Term Liabilities:
Notes and mortgages payable 6,331,885 6,453,549
Total liabilities 6,916,057 7,083,795
Stockholders' Equity:
Common stock - par value
$.50 per share; 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 earnings (deficit) (68,038) (32,744)
Treasury stock, at cost (89,921
and 87,246 Shares) (40,825) (39,488)
Total stockholders' equity 1,715,209 1,751,840
Total Liabilities and
Stockholders' Equity $ 8,631,266 $ 8,835,635
(a) Financial information as of June 30, 2003 has been derived from the
audited, consolidated financial statements of the registrant.
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
- 3 -
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENT (UNAUDITED)
For the periods of three and nine months ended March 31, 2004 and 2003
Three Months Ended Nine Months Ended
2004 2003 2004 2003
Revenues:
Rooms $ 687,381 $ 770,142 $ 2,125,456 $ 2,225,810
Food and beverage 18,679 17,718 55,223 60,628
Telephone 6,570 3,628 13,412 13,765
Rents 11,853 6,024 19,882 14,025
Other 8,000 8,911 18,000 21,885
Total revenues 732,483 806,423 2,231,973 2,336,113
Costs and Expenses:
Operating Departments:
Cost of sales 33,841 31,993 93,430 96,147
Salaries and wages 172,213 205,713 536,876 594,993
Other 60,583 48,957 185,410 177,636
General and Administrative 95,893 81,521 250,032 214,277
Advertising 56,119 61,828 170,048 183,563
Utilities 38,093 42,240 102,376 106,518
Repairs and Maintenance 18,961 25,219 52,368 63,193
Interest 134,334 135,208 405,457 411,013
Taxes and licenses 65,989 62,479 187,636 189,733
Insurance 16,800 8,155 50,400 25,719
Depreciation and Amortization 78,065 68,927 234,195 207,944
Total costs and expenses 770,891 772,240 2,268,228 2,270,736
Operating income (loss) (38,408) 34,183 (36,255) 65,377
Interest income - (26) 961 30
Income from continuing operations (38,408) 34,157 (35,294) 65,407
Discontinued operations
Income from operations of the
discontinued component, including
gain on disposal of $363,963-3mo;
$379,321-9 mo for 2003 - 352,235 - 353,523
Net Income (Loss) before
Income Taxes (38,408) 386,392 (35,294) 418,930
Income Taxes - - - -
Net Income (Loss) $ (38,408) $ 386,392 $ (35,294) $ 418,930
Earnings (Loss) per Share $ (.03) $ .25 $ (.02) $ .27
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
- 4 -
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the nine months ended March 31, 2004 and 2003
2004 2003
Cash Flows From Operating Activities:
Net income (loss) $ (35,294) $ 418,930
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 234,195 231,568
Gain on sale of asset - (379,321)
(Increase) decrease in other assets 72,579 8,991
(Increase) decrease in current assets:
Accounts receivable (35,898) (177,387)
Inventories 66 423
Prepaid expenses (14,001) (955)
Increase (decrease) in current liabilities:
Accounts payable 14,303 15,245
Accrued liabilities (62,435) (85,219)
Taxes other than Federal income tax 2,058 (158,236)
Total adjustments 210,867 (544,891)
Net Cash Provided by (Used in)
Operating Activities 175,573 (125,961)
- 5 -
UPTOWNER INNS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the nine months ended March 31, 2004 and 2003
2004 2003
Cash Flows From Investing Activities:
Proceeds from sale of real estate $ - $ 3,044,147
Capital Expenditures (1,057,787) (531,033)
Net cash provided by (used in)
investing activities (1,057,787) 2,513,114
Cash Flows From Financing Activities:
Purchase of Treasury Stock (1,337) -
Payment on notes and mortgages (121,664) (2,150,092)
Net cash used in
financing activities (123,001) (2,150,092)
Net Increase (Decrease) in Cash
and Cash Equivalents (1,005,215) 237,061
Cash and Cash Equivalents at Beginning of Year 1,161,986 803,660
Cash and Cash Equivalents at End of Period $ 156,771 $ 1,040,721
Supplemental Disclosures of Cash Flow Information:
Cash Paid During The Period For:
Interest $ 405,457 $ 438,380
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
- 6 -
UPTOWNER INNS, AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
1. BASIS OF PRESENTATION
The financial statements presented reflect Uptowner Inns, Inc. and its
consolidated subsidiary, Motel and Restaurant Supply.
The foregoing statements are unaudited; however, in the opinion of management,
all adjustments (comprising only normal recurring accruals) necessary for a fair
presentation of the financial statements have been included. The results of
operations for interim periods are not necessarily indicative of the results
that may be expected for a full year or any other interim period. A summary of
the Corporation's significant accounting policies is set forth in Note 1 to the
Consolidated Financial Statements in the Corporation's Annual Report to
shareholders and Form 10-K for June 30, 2003.
- 7 -
UPTOWNER INNS, AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
2. CONTINGENCY
None
- 8 -
UPTOWNER INNS, INC. AND SUBSIDIARY
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters disclosed herein may be forward-looking statements that
involve risks and uncertainties, including the facilities utilization, costs
associated with maintaining the operations, liquidity issues, and other risks.
You can identify these statements by such forward-looking words as "may,"
"will," "expect," "plan" and similar words. Actual strategies and results in the
future may differ materially from those management currently expects.
Forward-looking statements represent management's judgment as of the current
date. The Company disclaims, however, any intent or obligation to update any
forward-looking statements contained in this Form 10-Q.
RESULTS OF OPERATION
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
The Holiday Inn Hotel and Suites room revenues decreased 10.7% in the
three months ended March 31, 2004 relative to the comparable period in 2003. The
Holiday Inn Hotel and Suites' average occupancy percentage for the three months
ended March 31, 2004 was 70.42%, a decrease of 7.98% relative to the comparable
period in 2003. Management faults the nearby construction work and the decline
in group business for the loss of income. Food and beverage revenues increased
5.4% in the quarter ended March 31, 2004 relative to the comparable period in
2003. Management credits increased weekend group business for the small
improvement in food and beverage revenue.
Total cost and expenses have decreased a very modest .2%. The 17.6%
increase in general and administrative expenses is due in large part to the
increased legal fees related to the going private transaction, discussed later
in the Liquidity section of this Form 10Q. Salaries and wages expense have
decreased 16.3%, showing that with the loss of revenue, management has done a
good job controlling labor cost. The depreciation expense has increased due to
the addition of fixed assets in fiscal year ended June 30, 2003. Insurance
expense also continues to increase.
- 9 -
RESULTS OF OPERATION, CON'T.
NINE MONTHS ENDED MARCH 31, 2004 AND 2003
Room revenues have decreased by 4.5% in the nine months ended March 31,
2004 relative to the comparable period in 2003. Food and Beverage revenues have
decreased by 8.9% in the nine months ended March 31, 2004 relative to the
comparable period in 2003. This decrease is largely due to the complimentary
meals provided to hotel guests as an incentive to stay at the property.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity, as measured by current assets divided by current liabilities,
has decreased from 2.19 at June 30, 2003 to .73 at March 31, 2004.
Liquidity has decreased significantly for this time period due to the cash
purchase of land in Barboursville, WV for the site of a new Holiday Inn property
(discussed in the following paragraph). It is likely that the Company's
liquidity position will gradually 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 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. The Company has already taken action to cut expenses to help make up
for the shortfall in business. Consideration is also being given to adding a
Director of Sales to assist the General Manager in bringing in new business. The
breakeven point for the hotel is 61% in occupancy points and over and above the
61% occupancy is considered profit. In the past, hotel occupancy has averaged
72-74%. With an occupancy decline of 10%, management hopes to hold the average
occupancy levels at 60-63%. With this projection, the profits will be eliminated
and the hotel will function at breakeven level or 1% or 2% higher.
There are also plans for the Company to add a new Holiday Inn property in
Barboursville, WV, but it 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 the land needed for the new
construction. The Company paid $808,000 for the land on February 25, 2004. The
Company is planning to finance the new hotel with a 15 year amortization at
approximately 7.25%. The projected start time for construction is July, 2005.
During the last 40 years, the company has routinely bought and sold
property and has built three hotels. At the end of April and while on a trip to
Honduras, Mr. Midkiff spotted a dive resort for sale and took the opportunity to
begin negotiations for the purchase of the resort. Uptowner has placed a
refundable $110,000 deposit toward the $2,600,000 purchase price while it
decides whether to purchase the resort. The board of directors approved the
transaction on May 12, 2004, and Uptowner hopes to close the transaction by June
15, 2004.
- 10 -
LIQUIDITY AND CAPITAL RESOURCES, CON'T.
A downpayment of $850,000 will be paid with the balance being seller financed at
an interest rate of 7-1/2% and amortized over 20 years. Uptowner will mortgage
the Barboursville property to finance the downpayment, and Mr. Midkiff will
personally guarantee the loan for the downpayment and the seller financed
portion of the transaction.
The Company obtained a valuation of the Company's common stock. The
purpose of the valuation was to provide the Company's management with
information to be used in a going private transaction whereby the Company is
seeking shareholder approval for a 25,000 for 1 reverse stock split and
providing a cash payment for fractional shares of common stock. The transaction
would have the effect of reducing the number of shareholders from 1,392 to 4 and
the Company would no longer file reports under the Securities and Exchange Act
of 1934. The Company expects the transaction to occur in the spring of 2004, and
approximates the transaction to cost $822,447. The company has not yet obtained
financing for this project.
ITEM 4: CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company (including its consolidated subsidiary) required to be
included in the Company's periodic SEC filings.
- 11 -
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Currently, two lawsuits have been filed against Uptowner Inns, Inc.
involving the same claimed acts of negligence. On November 5, 2003, a lawsuit
was filed in the Circuit Court of Cabell County, West Virginia styled McFarland
v. Piepenbrink and Uptowner Inns, Inc., Civil Action No.:03-C-0625; and, on
January 14, 2004, a lawsuit was filed in the Circuit Court of Cabell County,
West Virginia, styled Jeter v. Piepenbrink and Uptowner Inns, Inc., Civil Action
No.:04-C-0039; In both cases the Plaintiffs seek judgment for unspecified
damages against each of the Defendants compensating the Plaintiff for injuries
and damages suffered after falling from a deck located on property owned by
Defendant Piepenbrink. The lawsuit involves property which was conveyed to
Defendant Piepenbrink by Rez.com, Inc. in July, 2001. This property was conveyed
to Rez.com, Inc. by Uptowner Inns, Inc. in July, 1998. The incident in question
occurred on or about May 10, 2003, well after this property was conveyed by the
company to Rez.com, Inc., and accordingly, the company believes that it has no
liability to Plaintiff. As such, the company intends to defend this litigation
vigorously. Currently, the company is in process of answering the complaints and
conducting preliminary discovery.
- 12 -
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
31.1 Certification pursuant to 18 U.S.C. Section 302 of the
Sarbanes-Oxley Act of 2002 for Carl E. Midkiff, Chief
Executive Officer.
31.2 Certification pursuant to 18 U.S.C. Section 302 of the
Sarbanes-Oxley Act of 2002 for David Robinson, Chief
Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes- Oxley
Act of 2002 for Carl E. Midkiff, Chief Executive
Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes- Oxley
Act of 2002 for David Robinson, Chief Financial
Officer.
b. The Company was not required to file Form 8-K for the quarter ended
March 31, 2004.
- 13 -
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 E. Midkiff,
-------------------
CEO and Secretary
May 13, 2004
By /s/ David Robinson,
------------------
CFO and Treasurer
May 13, 2004
- 14 -
Exhibit 31.1
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Carl E. Midkiff, Chief Executive Officer, certify that:
1. I have reviewed this report on Form 10-Q of Uptowner Inns, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiary is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
- 1 -
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ Carl E. Midkiff
- -------------------
Chief Executive Officer
May 13, 2004
- 2 -
Exhibit 31.2
CERTIFICATIONS
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, David Robinson, Chief Financial Officer, certify that:
1. I have reviewed this report on Form 10-Q of Uptowner Inns, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiary is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
- 1 -
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of the registrant's board of directors:
a) all significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
/s/ David Robinson
- ------------------
Chief Financial Officer
May 13, 2004
- 2 -
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Uptowner Inns, Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Chief Executive Officer of the Company, certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Carl E. Midkiff
- -------------------
Chief Executive Officer
May 13, 2004
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Uptowner Inns, Inc. (the
"Company") on Form 10-Q for the period ending March 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, Chief Financial Officer of the Company, certifies, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ David Robinson
- ------------------
Chief Financial Officer
May 13, 2004
UPTOWNER INNS, INC.
741 5th AVENUE
HUNTINGTON, WEST VIRGINIA 25701
(304) 525-8162
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE
BOARD OF DIRECTORS FOR THE
SPECIAL MEETING OF SHAREHOLDERS,
JUNE 11, 2004
Carl Midkiff and David Robinson, or either one of them, with full power
to act alone and with full power of substitution, are hereby authorized to
represent and to vote stock of the undersigned in Uptowner Inns, Inc., at the
Special Meeting of Shareholders to be held June 11, 2004.
Unless otherwise specified on this proxy, the shares represented by
this proxy will be voted "FOR" the propositions listed on the reverse side and
described more fully in the proxy statement of Uptowner Inns, Inc., distributed
in connection with this Special Meeting. If any other business is presented at
said meeting, this proxy shall be voted in accordance with recommendations of
the board of directors.
PLEASE MARK, SIGN, DATE AND MAIL THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
UPTOWNER INNS, INC.
PLEASE MARK VOTE IN BOX IN THE FOLLOWING MANNER
USING DARK INK ONLY.
The board of directors recommends a vote "FOR" the listed propositions.
1. To approve and adopt a one for 25,000 reverse stock split that would result
in (a) shareholders receiving one share of new common stock, $1.00 par
value (the "New Common Stock") for each 25,000 shares of common stock owned
as of the effective date, and (b) shareholders owning less than 25,000
shares of the company's common stock receiving cash in lieu of any
fractional share they would otherwise be entitled to receive as a result of
the reverse stock split at a rate of $1.07 per share on a pre-split basis
(the "Reverse Stock Split").
For [ ] Against [ ] Abstain [ ]
2. To approve and adopt the following amendment to the Articles of
Incorporation (the "Articles of Incorporation") of Uptowner:
RESOLVED, that Article IV of the Articles of Incorporation of the
Corporation be amended to read, in its entirety, as follows:
IV. The amount of the total authorized capital of the Corporation
shall be Two Hundred Dollars ($200), which shall consist of Two
Hundred (200) shares of Common Stock, par value $1.00 per share.
For [ ] Against [ ] Abstain [ ]
3. To have the proxies vote in accordance with the recommendation of
management as to any other matters, which may properly come before the
Special Meeting or any adjournments thereof and which relate only to
matters not known by the company a reasonable time before solicitation of
this proxy.
For [ ] Against [ ] Abstain [ ]
Dated: _______________________, 2004
____________________________________
____________________________________
Signature(s)
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title. If more than
one trustee, all should sign.
C0810690