FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended March 31, 1996
Commission File Number 0-24714
KAHLER REALTY CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota 41-1784272
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
20 SW 2nd Avenue, Rochester, MN 55902
(Address of principal executive offices) (Zip Code)
(507) 285-2700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (2) 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.
Yes X No
The number of shares outstanding of the Registrant's common stock as of
March 31, 1996 was:
Common Stock, $.10 par value - 4,338,882 shares
KAHLER REALTY CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
March 31, 1996
PAGE
NUMBER
Index to Report . . . . . . . . . . . . . . . . . . . . . . 1
Part 1. Financial Information
Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 . . . . . . . . . 2 - 3
Consolidated Statements of Operations -
First Quarter Ended
March 31, 1996 and April 2, 1995 . . . . . . . . . . . 4
Consolidated Statements of Cash Flow -
First Quarter Ended March 31, 1996 and
April 2, 1995. . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . 6 - 9
Management's Discussion and Analysis of Results
of Operations and Financial Condition. . . . . . . . . 9 - 15
Part II. Other Information . . . . . . . . . . . . . . . . 16 - 17
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 18
PART I. FINANCIAL INFORMATION Page 2
KAHLER REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
March 31, December 31,
1996 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,985 $ 923
Receivables:
Trade, less allowance for doubtful
accounts of $253 and $251, respectively 6,164 5,275
Current portion of notes receivable 129 132
Inventories 2,614 2,598
Prepaid expenses 651 323
Total current assets 12,543 9,251
OTHER ASSETS
Notes receivable 1,309 1,361
Investment in affiliates 5,167 5,095
Debt service escrow accounts 3,203 3,198
Intangibles 648 654
Other 2,802 2,224
Total other assets 13,129 12,532
PROPERTY AND EQUIPMENT
Land and improvements 17,065 17,065
Buildings 141,965 141,965
Equipment 51,003 50,660
Formal wear apparel 5,278 4,381
Total 215,311 214,071
Less accumulated depreciation 63,244 61,118
152,067 152,953
Construction in progress 5,255 3,631
Total property and equipment 157,322 156,584
TOTAL ASSETS $ 182,994 $ 178,367
See Notes to Consolidated Financial Statements
PART I. FINANCIAL INFORMATION Page 3
KAHLER REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
March 31, December 31,
1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 9,236 $ 10,110
Due to affiliates 924 738
Accrued liabilities:
Payroll and payroll related 4,184 3,131
Real estate taxes 2,585 1,954
Other taxes 1,215 520
Notes payable 3,050 4,700
Current portion of long-term debt 5,563 3,739
Current portion of subordinated debt
to affiliate 500 500
Total current liabilities 27,257 25,392
LONG-TERM DEBT
Obligations of Kahler Realty Corporation 101,883 99,754
Obligations of Subsidiaries - Nonrecourse
to Kahler Realty Corporation 26,129 26,261
Total long-term debt 128,012 126,015
OTHER LIABILITIES
Pension liability 1,009 1,009
Deferred revenue 116 160
Other 616 618
Total other liabilities 1,741 1,787
COMMITMENTS AND CONTINGENCIES
SUBORDINATED DEBT TO AFFILIATE 1,000 1,000
STOCKHOLDERS' EQUITY
Common stock, par value $.10
Authorized - 70,000,000 shares;
Issued and outstanding - 4,338,882
and 4,293,473, respectively 434 429
Additional paid-in capital 14,180 13,846
Retained earnings 10,886 10,414
Minimum pension liability adjustment (516) (516)
Total stockholders' equity 24,984 24,173
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 182,994 $ 178,367
See Notes to Consolidated Financial Statements
PART I. FINANCIAL INFORMATION Page 4
KAHLER REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(unaudited)
First Quarter Ended
March 31, April 2,
1996 1995
REVENUES
Revenue of owned operations $ 31,535 $ 29,367
Other properties managed and/or partially owned 4,519 4,109
Total revenues $ 36,054 $ 33,476
REVENUE OF OWNED OPERATIONS
Lodging - rooms $ 17,571 $ 15,985
- food and beverage 8,290 7,895
- other 2,768 2,763
Formal wear, laundry & other 2,795 2,686
Interest income 111 38
Total revenue of owned operations 31,535 29,367
OPERATING COSTS AND EXPENSES
Lodging - rooms 4,108 3,767
- food and beverage 6,549 6,225
- other 10,488 9,761
Formal wear, laundry & other 3,214 3,177
Corporate expenses 1,056 1,055
Depreciation and amortization 2,233 2,036
Total operating costs and expenses 27,648 26,021
GROSS OPERATING PROFIT 3,887 3,346
Interest expense (3,062) (3,050)
Equity in earnings of affiliates 115 154
Gain on sale of assets - 1
INCOME FROM OPERATIONS BEFORE INCOME TAXES 940 451
Provision for income taxes 294 140
NET INCOME $ 646 $ 311
PER COMMON SHARE DATA
Primary income per common share $ .15 $ .07
See Notes to Consolidated Financial Statements
PART I. FINANCIAL INFORMATION Page 5
KAHLER REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
(unaudited)
First Quarter Ended
March 31, April 2,
1996 1995
OPERATIONS:
Net income $ 646 $ 311
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,233 2,036
Common stock issued under employee benefit plans 202 3
Equity in earnings of affiliates (115) (154)
Gain on sale of assets - (1)
Change in current assets and current liabilities:
Receivables (889) (1,027)
Inventories (16) (49)
Prepaid expenses (328) (175)
Accounts payable (688) 1,198
Accrued liabilities 2,379 1,974
Net cash provided by operating activities 3,424 4,116
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (2,873) (1,687)
Proceeds from sale of property and equipment 2 2
Payment received on notes receivable 55 24
Investment in affiliates (51) (16)
Distributions received from affiliates 94 93
Increase in intangible assets (8) -
Increase in other assets (664) (118)
Net cash used in investing activities (3,445) (1,702)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid to common shareholders (174) (125)
Proceeds from issuance of common stock 137 44
Increase in debt service reserve fund (5) -
Payments on subordinated debt due to affiliate - (500)
Proceeds from long-term debt and notes payable 4,257 12
Principal payments on long-term debt (436) (434)
Net payments on lines of credit and notes payable (1,650) (250)
Decrease in other liabilities (46) (10)
Net cash provided (used) by
financing activities 2,083 (1,263)
INCREASE IN CASH 2,062 1,151
CASH AT BEGINNING OF THE PERIOD 923 1,110
CASH AT END OF PERIOD $ 2,985 $ 2,261
See Notes to Consolidated Financial Statements
PART I. FINANCIAL INFORMATION Page 6
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. They do not include all information and footnotes
required by generally accepted accounting principles for complete financial
statements. However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to consolidated financial
statements included in the Annual Report on Form 10-K of Kahler Realty
Corporation and subsidiaries (the Company) for the year ended December 31,
1995. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the first quarter ended March 31, 1996 are
not necessarily indicative of the results that may be expected for the year
ending December 29, 1996.
2. All comparative data reflects application of consistent accounting
principles and contains no prior period adjustments.
3. Revenues of the Company are classified into two components. The Company
uses this presentation to show the total scope of the Company's operatios.
The components of revenue are:
Revenue of owned operations include revenues from lodging properties in
which the Company has an interest greater than 50%, management fees
generated from properties partially-owned (50% or less) and properties
owned by others. Also included are revenues from Anderson's Formal Wear,
Textile Care Services and interest income.
Other properties managed and/or partially-owned includes all revenue of
properties partially-owned (50% or less) by the Company and the properties
managed for others. Under generally accepted accounting principles, this
revenue is not included in revenue of owned operations and the Company's
interest in partially-owned properties is reflected in the Consolidated
Statements of Operations as equity earnings of affiliates.
4. Supplemental disclosure of cash flow information.
Cash paid (received) for:
First Quarter Ended
March 31, 1996 April 2, 1995
Interest paid, net of
amounts capitalized $ 3,343 $ 3,582
Interest received (209) (76)
Income taxes (2) 47
Page 7
PART I. FINANCIAL INFORMATION
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
5. Income per share for the first quarter of 1996 and 1995 is computed on
a primary share basis using the weighted average number of outstanding
common shares plus common stock equivalents aggregating 4,428,000 and
4,299,000 shares, respectively.
Income per share computed on a fully diluted basis is not presented for
the amounts are the same as on a primary share basis.
6. The Board of Directors during the first quarter of 1996 and 1995 declared
quarterly dividends of $.04 and $.03 per share to common shareholders of
record on April 1, 1996 and April 3, 1995, respectively. These dividends
totaling $174 and $125 were paid April 19, 1996 and April 23, 1995.
These dividends have been accounted for as a reduction to retained
earnings.
7. Investment in and advances to affiliates represents the Company's
proportionate share of the affiliates' assets and liabilities as adjusted
to reflect the effect of any basis differences. The Company or its
subsidiaries typically serve as a general partner or limited partner of
the partnership and operate the hotels under long-term management
contracts.
Ownership First Quarter Ended
Equity investments Interests March 31, 1996 April 2, 1995
Provo Park Hotel and
Residence Inn,
Provo, UT 50.0% $ 4,587 $ 3,250
Best Western Copper King
Park Hotel, Butte MT 32.9% 473 -
Kahler Park Hotel,
Hibbing, MN 25.0% 107 106
Quality Hotel Plaza One,
Rock Island, IL 26.6% - -
$ 5,167 $ 3,356
Page 8
PART I. FINANCIAL INFORMATION
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The Company contributed $1.2 million to the Provo Park Hotel during 1995,
which along with funds from a $16.0 million non-recourse loan commitment
and a $1.0 million federal grant will be used to construct a 96 suite
expansion and 17,000 square foot conference center as well as a 114 suite
Residence Inn by Marriott in Provo, Utah. The Company's partner in this
venture contributed land and cash valued at $1.2 million. Construction
of the Residence Inn and the expansion of the Provo Park Hotel is
scheduled to be completed in late 1996 and early 1997, respectively. The
32.9% equity interest in the 150 room Best Western Copper King Park Hotel
was acquired in the third quarter of 1995.
First Quarter Ended
March 31, 1996 April 2, 1995
Combined summarized balance sheet
information for the Company's
affiliates is as follows:
Current assets $ 1,768 $ 766
Noncurrent assets 22,964 15,459
Current liabilities 2,666 1,590
Long-term debt, principally mortgages 13,280 9,186
Other long-term liabilities 1,324 1,283
Owner's equity 7,462 4,166
The Company's income from affiliates
before taxes is as follows:
Management fees $ 109 $ 93
Equity in net earnings 115 154
$ 224 $ 247
Combined summarized operating results
reported by these affiliates
are as follows:
Revenues $ 3,614 $ 3,101
Net loss (100) (86)
Page 9
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
8. On April 1, 1996, the Company acquired the 149 room full service Colonial
Park Hotel in Helena, Montana. The purchase was financed with a first
mortgage of $4.5 million, a note payable to the seller of $1.0 million
and $3.7 million from available cash and lines of credit.
The 108-suite expansion at Boise Park Suite Hotel was completed in April
1996, bringing the total number of suites available to 238.
9. On May 7, 1996, the Company entered into an agreement and Plan of Merger
with Tiger Real Estate Fund, L. P. Reference is made to Part II of this
Quarterly Report on Form 10-Q under Item 5.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
General
The management's discussion and analysis of financial condition and
results of operations set forth below follows the presentation of the
Company's Consolidated Statements of Operations. This discussion should
be read in conjunction with this statement and the other Consolidated
Financial Statements and Notes thereto appearing in this Form 10-Q.
Revenues of the Company are classified into two components which are
defined in Note 3 of the Notes to Consolidated Financial Statements. The
Company uses this presentation to show the total scope of the Company's
operations.
The Company's principal business is the ownership and management of hotel
properties. The following table sets forth certain financial information
from owned operations for the lodging segment, stating the lodging
revenue components as a percentage of total lodging revenue, for the
periods indicated.
Page 10
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
First Quarter
1996 1995
Room revenue 61.4% 60.0%
Food and beverage revenue 29.0 29.6
Other - Golf, rents, phone, etc. 9.1 9.8
- Management fees .5 .6
Total lodging revenues 100.0 100.0
Lodging operating expenses 73.9 74.1
Lodging operating income before interest,
depreciation and corporate expenses 26.1% 25.9%
The Company's operations have benefitted from the addition of a new
management contract and the acquisition of a new property. The Company
acquired a 32.9% interest in and management contract with the 150 room
Best Western Copper King Park Hotel in Butte, Montana in July, 1995. In
August 1995, the Company acquired the Best Western Canyon Springs Park
Hotel in Twin Falls, Idaho, a 112 room property.
The following table sets forth certain operating data for the hotels
owned and managed by the Company:
Hotel Operating Data: First Quarter
1996 1995
Number of hotels, quarter end 22 20
Room nights available 430,938 406,066
Occupancy 62.9% 64.6%
Average daily room rate per occupied room $ 74.41 $ 69.88
Average daily revenue per available room (REVPAR) $ 46.82 $ 45.15
REVPAR for the Company's hotels, which are comparable quarter to quarter,
is as follows:
First Quarter
1996 1995
Intermountain States $ 66.39 $ 61.10
Rochester, Minnesota $ 42.65 $ 39.56
All Hotels $ 48.13 $ 45.16
Results of Operations
For this discussion, reference to 1996 represents the first quarter of
1996 and reference to 1995 represents the first quarter of 1995.
Page 11
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
Lodging
Total lodging revenue increased 7.5% to $28.6 million in 1996 from $26.6
million in 1995. This improvement resulted primarily from a $4.53 or
6.5% increase in the average daily room rate. Also, the acquisition of
the Canyon Springs Park Hotel provided an increase in revenues of $681
as compared to 1995. The Company's hotels in the intermountain west
states of Utah and Idaho, and the conference center hotel in Arizona
primarily generated the increase in average daily room rate. This is a
result of strong economies in these areas and good marketing efforts by
the Company.
Lodging revenue from food and beverage increased 5.0% to $8.3 million in
1996 from $7.9 million in 1995 primarily as a result of the acquisition
of the new hotel mentioned above. Gross operating margin decreased to
21.0% in 1996 from 21.2% in 1995.
As a percentage of lodging revenue, lodging operating expenses decreased
in 1996 to 73.9% as compared to 74.1% in 1995. This change was primarily
the result of increased average daily room rates.
Lodging operating income before interest, depreciation and corporate
expenses in 1996 increased to 26.1% of total lodging revenue from 25.9%
in 1995.
Formal Wear, Laundry and Other
Formal wear revenue increased 4.9% in 1996 to $1,120 from $1,068 in 1995.
Increased promotions and a new telemarketing program contributed to this
improvement.
Formal wear operating expenses decreased as a percentage of formal wear
revenues to 169.2% in 1996 from 172.2% in 1995. For the formal wear
business the first quarter is the slowest quarter of the year. The
operating expense ratio is not a good indicator of operations for this
time period because of the significant fixed cost impact and costs
associated with preparation for the upcoming prom and wedding seasons.
Laundry revenue increased 4.4% to $1,516 in 1996 from $1,452 in 1995.
This increase was primarily the result of an increase in revenues at the
Rochester facility of approximately 4.7%.
Page 12
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
Laundry operating expenses decreased as a percentage of laundry revenue
to 75.9% in 1996 from 81.7% in 1995. This decrease was primarily due to
improved labor efficiencies associated with the laundry facility in
Rochester. Productivity measured in pounds produced per labor hour
increased to 98.4 in 1996 as compared to 87.5 in 1995. Also contributing
to this improvement was a decrease in processing costs, primarily in
utilities and chemical expenses.
Interest Income
Interest income for 1996 increased $73 from 1995. This increase relates
primarily to the San Marcos debt service escrow accounts.
Depreciation and Amortization
Depreciation and amortization increased to $2.2 million in the first
quarter of 1996 from $2.0 million in the first quarter of 1995. The
primary reason for the increase in the amount of depreciation and
amortization is due to the hotel acquisition.
Interest Expense
Interest expense remained at $3.1 million in 1996 from 1995. An increase
in the amount of interest expense is attributed to the debt associated
with the acquisition of Canyon Springs Park Hotel, offset by a decrease
in the prime lending rate.
Equity Earnings of Affiliates
Equity earnings of affiliates was $115 in 1996 compared with $154 in
1995. This activity can be further understood by referencing Footnote
7 of the Notes to Consolidated Financial Statements. For 1996, the
Company received equity earnings of $230 from Provo Park Hotel and
incurred an equity loss of $29 and $86 from the Kahler Park Hotel and
Copper King Hotel, respectively. For 1995, the Company received equity
earnings of $177 from Provo Park Hotel and incurred an equity loss of $23
from Kahler Park Hotel.
Page 13
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
Net Income
In 1996, net income increased to $646 from net income of $311 in 1995.
The increase was due primarily to increased revenues and operating
margins in all operating segments.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities decreased $692 over 1995 to
$3,424 for 1996. This change relates primarily to the changes in current
liabilities.
Negative working capital provides the Company with an interest free
source of capital. Since the Company principally sells services (rather
than goods) for cash, the Company does not need working capital.
Negative working capital is common in the lodging industry.
Capital Expenditures
Capital expenditures for 1996 and 1995 totaled approximately $2,873 and
$1,687, respectively. In 1996 and 1995, the money was used to remodel
and refurbish existing hotels, purchase laundry and formal wear equipment
and purchase garments.
Investment in and Advances to Affiliates
The Company received a $94 and $93 distribution from the Provo Park Hotel
in 1996 and 1995, respectively. The investment of $51 and $16 made to
affiliates in 1996 and 1995 respectively, relates to Kahler Park Hotel.
See Footnote 7 of Notes to Consolidated Financial Statements for further
discussion.
Financing
In 1996, net cash provided from proceeds of new long-term debt of $2.1
million and $2.0 million relates to the Boise Park Suite Hotel expansion
and the acquisition of the Colonial Park Hotel, respectively.
Page 14
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
The Company also refinanced the San Marcos mortgage in the amount of
$13.6 million. The initial variable tax-exempt interest rate, including
a credit enhancement fee, was approximately 6.0%. To facilitate this
refinancing, the Company placed $1.5 million in escrow with the trustee
of the present mortgage.
In 1995 the Company made a scheduled $500 payment on it's subordinated
debt. The scheduled payment in 1996 of $500 will occur in the second
quarter.
Inflation
Operators of hotels in general possess the ability to adjust room rates
quickly. However, competitive pressures have limited and may in the
future limit the Company's ability to raise rates in the response to
inflation. Industry-wide average daily room rates have generally failed
to match inflation since 1987.
Seasonality
The Company's hotel operations historically have been seasonal in nature,
reflecting higher occupancy rates during the first and third quarters.
The higher occupancy rates during the first quarter are due to increased
seasonal demand at the Sheraton San Marcos Golf Resort and Conference
Center and the greater Salt Lake City area hotels due to winter skiing.
The third quarter typically has higher occupancy rates due to summer
vacation travel. In addition, the formal wear segment is highly
seasonal with the greatest amount of rentals during the second quarter
which typically includes higher demand for high school proms and
weddings.
Other
On May 7, 1996, the Company entered into an agreement and Plan of Merger
with Tiger Real Estate Fund, L.P. Reference is made to Part II of this
Quarterly Report on Form 10-Q under Item 5.
Page 15
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
The Company is negotiating a settlement with a telecommunications company
related to disputed unremitted telephone revenue and fees at 10 of its
hotels (the "Hotels"). Proposed terms of this settlement provide for the
lease by the Company of $1.5 million of new telephone switches and
equipment from the telecommunications company over the remaining term of
the amended existing telephone service agreements. The Company would
have the option to acquire all telephone switches and equipment in the
Hotels at the end of the telephone service agreement term. However,
while this settlement has been agreed to in principle by the parties, it
has not yet been executed. If completed, this settlement is not expected
to have a material adverse impact on the Company's Consolidated Financial
Statements.
In December 1994 the Company received notice of default relating to bond
indebtedness on one of its wholly-owned hotels. In January 1995 the
Company brought suit against the bondholders. The Company is seeking
declaratory judgment regarding the proper interpretation of the
calculation of added interest. In January 1996 the Superior Court of
Arizona (the "Court") ruled against the Company. The Company plans to
vigorously appeal the Court's decision. The appellate court will hear
the Company's suit in its entirety and is not restricted in any way by
the Court's decision. If the bondholders are found judicially correct,
the Company would owe $267, $618 and $884 for 1993, 1994 and 1995,
respectively, and certain other costs as determined by the Court. In
1995, the Company recorded an estimate of the loss that could result from
the unfavorable resolution of this uncertainty. No additional loss was
recorded in the first quarter of 1996. While the Company believes it has
a meritorious case in appeal, the ultimate resolution of the matter,
which is expected to take longer than one year, could result in a loss
greater or less than what is presently accrued.
Additionally, the Company is involved in various litigation in the normal
course of business. The Company does not expect the outcome of the
matters described above to have a material adverse effect on the
Company's Consolidated Financial Statements.
On January 1, 1996, the Company adopted the provisions of SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". Measurement of impairment losses on long-
lived assets are based on the estimated fair value of the assets.
Properties held for sale under SFAS 121 will continue to be reflected at
the lower of historical cost or estimated fair value less anticipated
selling costs. No adjustment of the carrying value of the Company's
long-lived assets was required at January 1, 1996 as a result of adopting
the provisions of SFAS 121.
Page 16
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
PART II. OTHER INFORMATION
Item 5. Other Information
On May 7, 1996, Kahler Realty Corporation (the "Company"), Tiger Real
Estate Fund, L.P., a Delaware limited partnership ("Tiger") and Tiger
Real Estate Acquisition Corp., a Minnesota corporation and a subsidiary
of Tiger (the "Purchaser"), entered into an Agreement and Plan of Merger
dated as of May 6, 1996 (the "Merger Agreement"), pursuant to which,
among other things, (i) the Purchaser would merge with and into the
Company (the "Merger") and (ii) each then outstanding share of common
stock, par value $.10 per share, of the Company ("Common Stock"), other
than dissenting shares and shares which would be canceled and retired and
cease to exist as a result of the Merger, would be converted into $17.00
per share in cash. The Merger is subject to, among other things, the
approval of the stockholders of the Company, regulatory and third party
approvals and other customary conditions. A copy of the Merger Agreement
is attached hereto as Exhibit No. 2.1 and is incorporated herein by
reference. A copy of the Company's and Tiger's joint press release dated
May 7, 1996 is attached hereto as Exhibit No. 20.1 and is incorporated
herein by reference.
By voting agreements dated as of May 6, 1996, between the Purchaser and
the Company's two principal stockholders (the "Voting Agreements"), the
Company's two principal stockholders agreed to vote approximately 19.9%
of the Company's outstanding common stock in favor of the transactions
contemplated by the Merger Agreement which are submitted for shareholder
approval pursuant to the Merger Agreement. Copies of the Voting
Agreements are attached hereto as Exhibit Nos. 99.1 and 99.2 and are
incorporated herein by reference.
The foregoing summaries of the Merger Agreement, the Voting Agreements
and the joint press release do not purport to be complete and are
qualified in their entirety by reference to such exhibits.
Page 17
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
(Dollars in thousands except per share data)
First Quarter Ended
March 31, 1996
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2 Agreement and Plan of Merger, dated as of May 6, 1996,
among Tiger, the Purchaser and the Company.
27 Financial Data Schedule.
99.1 Voting Agreement, dated as of May 6, 1996, between
Purchaser and Harold W. Milner.
99.2 Voting Agreement, dated as of May 6, 1996, between
Purchaser and the Mayo Foundation.
99.3 Joint Press Release, dated May 7, 1996.
(b) Reports on Form 8-K
None.
Page 18
KAHLER REALTY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
First Quarter Ended
March 31, 1996
SIGNATURE
Pursuant to the requirements 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 on May 14, 1996.
KAHLER REALTY CORPORATION
By: Harold W. Milner By: Steven R. Stenhaug
Harold W. Milner Steven R. Stenhaug
President, CEO Senior Vice President-
Treasurer