UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A-1
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1995
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
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
of incorporation) Identification No. 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)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Name of each exchange on
which registered
Common Stock, $.10 par value per share NASDAQ
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 and, (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to
the best of Registrant's knowledge, in definite proxy or information
statements incorporated by reference in Part III of this Form 10-K/A-1 or
any amendment to this Form 10-K/A-1. [X]
As of March 15, 1996, the Company had 4,334,535 common shares outstanding.
The aggregate market value of 2,727,644 common shares held by non-
affiliates was $37,164,150 based on the closing price in the over-the-
counter market.
DOCUMENTS INCORPORATED BY REFERENCES:
Part III incorporates information by reference from the definitive Proxy
Statement in connection with the Registrant's Annual Meeting of
Shareholders to be held on April 25, 1996.
PART I
Item 1.
Business
(a) General Development of Business
"Kahler" and "Company" are used in this document to reference Kahler
Realty Corporation.
Kahler Realty Corporation is primarily engaged in the business of owning
and managing hotels. The lodging segment accounted for approximately
87% of the Company's revenues in 1995. To supplement its hotel
operations, the Company owns a laundry service, Textile Care Services,
that serves southeastern Minnesota and the Salt Lake City area. The
Company's other major business is Anderson's Formal Wear, a wholesale
and retail formal wear supplier in the midwestern and western states.
The Company intends to continue expanding its hotel operations and seeks
opportunities throughout the United States to own and manage hotel
properties. In acquiring and developing new hotels, the Company intends
to pursue opportunities that offer market niches. The Company seeks
opportunities where its hotels face limited direct competition, such as
hotels whose locations provide a competitive advantage. It also
endeavors to develop lodging facilities that serve and complement large
institutions, such as hospitals and universities.
The Company was incorporated in 1917. The Company's executive offices
are located at 20 Second Avenue Southwest, Rochester, Minnesota 55902
and its telephone number is (507) 285-2700. The approximate number of
employees of the Company as of December 31, 1995 was 3,400.
(b) Financial Information about Industry Segments
The sales and operating profits (losses) of the industry segments for
each of the three years in the period ended December 31, 1995 are set
forth in Note 9 (Segments) of Notes to Consolidated Financial
Statements.
(c) Description of Business Segments
1. Lodging
Kahler is primarily engaged in the business of owning, developing and
managing hotels. At year end, Kahler owned or managed 22 hotels in 11
states, which had a total of 4,647 guest rooms. Kahler has multiple
hotels in its two primary markets: (i) Rochester, Minnesota and (ii) the
intermountain region of Utah, Idaho, Montana and Arizona, as well as
other hotels located throughout the United States. In Rochester,
Minnesota, Kahler owns four hotels with 1,325 rooms, the largest number
of rooms under common management in the area. Kahler has 10 hotels with
2,134 rooms in Utah, Idaho, Montana and Arizona. The five hotels
located in the Greater Salt Lake City area have 1,295 rooms, the largest
number of rooms under common management in that area. Kahler also
operates two hotels with conference centers located in Morgantown, West
Virginia and Fort Worth, Texas. In addition, Kahler owns or manages six
other hotels in Michigan, Wisconsin, West Virginia, Illinois, Minnesota
and Iowa. Kahler's hotels seek to attract a broad range of hotel
customers, including frequent business travelers and large groups or
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conventions, as well as leisure travelers. These hotels belong to the
following segments of the lodging industry: 17 full service hotels, two
limited service hotels and three hotels with conference centers.
Kahler's full service hotels provide a range of services and amenities,
including room service, convention and banquet facilities, swimming
pools and fitness centers, gift and convenience shops, parking
facilities and, in most instances, restaurants and lounges. Kahler's
full service hotels, which include luxury and moderately priced hotels,
seek to attract group conferences and meetings as well as individual
business and leisure travelers. Kahler's limited service hotels provide
a selected range of amenities and services, such as a swimming pool and
limited food and beverage service and primarily serve individual
business travelers and vacationers. Kahler's conference center hotels
are designed to provide high quality, but moderately priced conference
facilities for regional and national conferences and meetings. Two of
these hotels also offer a full range of resort amenities, including golf
courses, swimming pools and athletic facilities. Eleven of the hotels
are operated independently while the other 11 hotels are operated under
Sheraton, Hilton, Holiday Inn, Best Western, Quality Inn and Knights Inn
franchises and licenses.
2. Formal Wear
Anderson's Formal Wear (Andersons) is a wholesale and retail distributor
of men's formal wear. It operates wholesale distribution centers in
Rochester, Minnesota; Denver, Colorado; Kansas City, Kansas and Dallas,
Texas. From these centers, the formal wear is distributed to retail
outlets throughout the Midwest and western United States. It operates
39 retail outlets in Colorado, Iowa, Kansas, Minnesota, Missouri,
Nevada, North Dakota, South Dakota, Texas, Oklahoma and Wisconsin.
Purchases of tuxedos and related accessories come from a number of
different manufacturers. These tuxedos are stored in the four
distribution centers and rented at wholesale cost per affair to more
than 1,500 unaffiliated retail dealers. The consumers order from
catalog pictures or from samples displayed in the stores. The dealers
send the orders to the nearest Andersons distribution center. The week
the tuxedo is needed, it is sent to the dealer where it is held for
customer pickup.
Andersons ships approximately 60% of its product in its own delivery
vehicles. The remainder is shipped via United Parcel Service, bus, mail
and other modes of transportation. The tuxedos are returned from the
dealer to Andersons in the same manner as they were shipped. Each
distribution center has its own cleaning plant. This includes dry
cleaning, laundry, finishing and alterations. The garment processing
takes approximately 66% of the labor cost involved in renting a tuxedo.
The Company's formal wear business supplies a wide variety of tuxedo
styles with 75% to 80% of the business consisting of wedding parties.
The balance of the rental revenue is generated from proms and other
special occasions. Accordingly, the formal wear business is highly
seasonal with peak volumes occurring in April through October.
3. Textile Care Services
This segment is engaged in the business of providing commercial and
institutional laundry and dry cleaning services, as well as providing
linen, uniforms and dust control rental services.
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Textile Care Services provides cleaning and rental services to the
Company's lodging facilities and to medical, institutional and
commercial businesses in Rochester, Minnesota and Salt Lake City, Utah.
Textile Care Services is not dependent on any one particular customer,
although the laundry and dry cleaning operations vary directly with Mayo
Clinic volume and the related volume of the Methodist and St. Mary's
Hospitals at the Rochester location. The long-range plan is to maintain
these accounts and develop additional lodging, medical, institutional
and commercial business.
Item 2.
Properties
(a) Lodging
1. Rochester Hotels
Kahler's four hotels in Rochester, Minnesota with an aggregate of 1,325
guest rooms were founded in 1917 to provide for individuals visiting the
Mayo Clinic in Rochester. The Mayo Clinic is an internationally known
private group practice dedicated to providing diagnosis and treatment of
patient illnesses through a systematic focus on individual needs. The
Mayo Clinic also operates a medical school that provides advanced
education and research programs. As a result of its operations in
Rochester, the Mayo Clinic generates a strong demand for hotel
accommodations by individual visitors seeking medical treatment and
medical conferences organized by the Mayo Clinic. Kahler's hotels are
connected to the Mayo Clinic facilities by skywalk and pedestrian
subways. The level of demand created by the Mayo Clinic is such that
the results of operations of the Rochester hotels are dependent upon the
continued attractiveness of the Mayo Clinic to patients and medical
conferences. In addition, Rochester is the principal development and
manufacturing facility for IBM's Application Systems/400. Although the
Company is the leading provider of hotel rooms in Rochester, its hotels
compete with several other lodging facilities, including a 213 room full
service Radisson Hotel and several other nationally franchised hotels.
The Kahler Hotel - Rochester, Minnesota
This 12 story full service hotel is located directly across from and is
connected by pedestrian subways and skyways to the Mayo Clinic's
facilities, Rochester Methodist Hospital and downtown shopping areas.
In addition, the hotel has convenient access to IBM's Rochester
facilities and is 10 minutes from the Rochester airport. The original
portion of The Kahler Hotel was completed in 1921 with significant
additions completed in 1954 (207) rooms and 1968 (121 rooms). The
Kahler Hotel provides a total of 695 guest rooms and suites. The hotel
has conference and banquet facilities with approximately 15,000 square
feet of space arranged in 15 flexible meeting rooms. The top floor of
the hotel has been remodeled to include a Presidential Suite and a
Concierge club, which provides an executive lounge and complimentary
continental breakfast and evening cocktails. The hotel has four
restaurants, a lounge and room service. In addition the hotel has a
swimming pool, exercise equipment and an indoor shopping arcade of 55
shops, including a pharmacy, car rental office, fashion boutiques and
several novelty and specialty shops.
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Kahler Plaza Hotel - Rochester, Minnesota
This luxury nine story hotel opened in March 1989. The hotel is
accessible on three levels to the adjoining Harold W. Siebens Education
Building of the Mayo Clinic, which includes the Clinic's medical meeting
and education facilities. The hotel is also directly across from and
connected by skyway and pedestrian subway to The Kahler Hotel. The
Kahler Plaza Hotel offers 194 guest room and suite accommodations. In
addition, the hotel has two floors of Concierge Club service, including
complimentary continental breakfast and evening cocktails. The hotel
has approximately 10,000 square feet of meeting and banquet space that
can accommodate up to 400 persons. The hotel offers a restaurant and
lounge, complete room service, as well as an indoor swimming pool,
whirlpool, sauna and exercise room.
Clinic View Inn and Suites - Rochester, Minnesota
This nine story, 266 room moderately priced hotel is directly across the
street and connected by pedestrian subway from Rochester Methodist
Hospital and the Mayo Clinic's cancer and pain treatment center. The
hotel was opened in 1974 and acquired by Kahler in 1980. In April 1991,
a 128 suite addition was added to the facility to meet the market demand
for the extended stay lodging by Mayo Clinic patients and business
guests. During the construction of the suites, the existing hotel space
was extensively renovated. The hotel offers guest rooms and suites.
Each suite has a kitchen area, including a microwave oven, refrigerator,
coffee maker and toaster, and a living room. The hotel offers a
complimentary continental breakfast, restaurant, indoor swimming pool,
whirlpool, sauna and exercise equipment, as well as laundry facilities
and a convenience store. In addition, the hotel has conference
facilities for up to 100 persons.
Holiday Inn Downtown - Rochester, Minnesota
The Holiday Inn Downtown was acquired and substantially renovated by
Kahler in 1983. Various portions of the hotel have been renovated since
1989, including the lobby, guest rooms and restaurant. The hotel
provides 170 moderately priced guest rooms and primarily serves visitors
to the Mayo Clinic and individual business travelers. The hotel
occupies floors two through eight of a 16 story multi-use condominium
building and is located three blocks from the Mayo Clinic and one block
from the Rochester Civic Center. The hotel is connected to the skyway
system, which allows access to the Mayo facilities as well as retail
shopping mall. The hotel offers an executive floor service, including
complimentary continental breakfast and evening cocktails and computer-
assessible phone lines, an informal restaurant, lounge and room service,
a dinner theater, and conference and banquet facilities that can
accommodate up to 200 persons. The hotel operates under a Holiday Inn
franchise.
2. Intermountain Hotels
In the intermountain region, Kahler has interests in 10 hotels with
2,134 rooms in Utah, Idaho, Montana and Arizona. Five of these hotels,
with 1,295 guest rooms are located in the greater Salt Lake City area,
the largest number of hotels under common management in that area. The
Utah hotels provide extensive coverage of the primary business
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destinations in the region as well as access to the nine major ski areas
surrounding Salt Lake City. In April 1987, Kahler entered the Salt Lake
City market by purchasing the partially constructed University Park
Hotel in Salt lake City. In mid-1988, Kahler acquired a 50.0%
partnership interest in and management of the Salt Lake Hilton Hotel.
In 1989, Kahler provided $3.2 million of second mortgage financing and
assumed management of the Ogden Park Hotel in Ogden, Utah. Kahler
purchased the Olympia Park Hotel and Conference Center in Park City,
Utah in 1992. In 1993, Kahler acquired a 50.0% ownership interest and
management contract in the Provo Park Hotel in Provo, Utah, the
remaining 50.0% partnership interest in the Salt Lake City Hilton and a
63.8% general partnership interest in the Ogden Park Hotel. In Idaho,
the Boise Park Suite Hotel was constructed in 1992, the Pocatello Park
Hotel was purchased in March 1994 and the Canyon Springs Park Hotel was
purchased in August 1995. The Sheraton San Marcos Golf Resort and
Conference Center in Chandler, Arizona reopened in 1987 after a major
renovation and the addition of 250 new guest rooms. Kahler had
originally acquired a partnership interest and management contract in
the property. In 1992, Kahler obtained full ownership of the property.
On July 1, 1995 the Company acquired an ownership interest and
management contract in the 150 room Best Western Copper King Park Hotel
in Butte, Montana.
University Park Hotel - Salt Lake City, Utah
This seven story hotel is located in the University of Utah's Research
Park on a 6.9 acre site, approximately 10 minutes from downtown Salt
Lake City, 20 minutes from the airport, and near the University of Utah
and its medical and research facilities. Seven major ski areas are less
than a half hour drive from the hotel. The hotel provides 192 guest
rooms and 28 executive suites. Each suite has a separate living room
with a kitchen area, including a refrigerator. The hotel has a
restaurant and lounge, an indoor swimming pool and fitness center,
conference and banquet facilities, a gift shop and a liquor store. The
hotel is owned by University Inn Associates, a Utah limited partnership.
The hotel is located on a site leased under a land lease expiring in
December 2025, with an option to extend the lease term for an additional
10 years.
Salt Lake Hilton Hotel - Salt Lake City, Utah
The hotel is located near downtown Salt Lake City on the main freeway
access to downtown and is 10 minutes from the airport and 45 minutes to
seven ski areas. The hotel offers 318 guest rooms and 33 suites. The
hotel also offers 23,000 square feet of conference and meeting
facilities that can accommodate up to 1,200 persons. In addition, the
hotel provides executive concierge level service on two floors of the
hotel and has three restaurants, a lounge, room service, an outdoor
swimming pool, an indoor whirlpool area and a fitness center. The hotel
operates under a Hilton franchise agreement.
The majority of the land under the hotel is leased pursuant to a ground
lease that expires in March 2044. A portion of the parking area
currently used by the hotel is leased on a month-to-month basis.
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Best Western Ogden Park Hotel - Ogden, Utah
The hotel is located in downtown Ogden and provides convenient access to
Hill Air Force Base, Weber State University and three ski areas. The
hotel offers 288 guest rooms and suites. Separate living rooms with wet
bars are provided in the suites. In addition, the hotel offers a
complimentary breakfast buffet and executive club service, including
free newspaper, concierge service and complimentary evening hors
d'oeuvres. With over 16,000 square feet of conference space that can
accommodate up to 1,000 persons, the hotel seeks to attract conferences
and groups as well as individual travelers. The hotel has an informal
restaurant, a lounge, room service, liquor store and gift shop, indoor
swimming pool and fitness center. The hotel operates under a Best
Western franchise agreement.
The hotel is owned by Ogden Hotel Associates, a Utah limited partnership
("Associates"). Kahler currently holds a 63.8% general partnership
interest in Associates. Ogden Park Hotel Corporation, Inc., a wholly-
owned subsidiary of Kahler, currently manages the hotel.
Olympia Park Hotel and Conference Center - Park City, Utah
The 204 room hotel is located five minutes from the Park City ski area
and 10 minutes from the Deer Valley ski area and is approximately 30
minutes east of Salt Lake City. The hotel primarily serves ski and
summer vacationers, as well as conferences and group meetings that use
the hotel's 8,000 square feet of conference and banquet facilities. The
hotel's amenities include an atrium, swimming pool, spa and sauna, plus
a restaurant, coffee shop and gift shop.
Provo Park Hotel - Provo, Utah
The nine story hotel is located in downtown Provo near Brigham Young
University and several major corporations including Novell, Micron
Technology, and NuSkin International and is also 15 minutes from the
Sundance ski area. The 232 room hotel has the largest meeting space in
the Provo area with 10 meeting rooms that can accommodate up to 900
persons to serve groups and conventions. The hotel offers a restaurant,
a club, room service, a gift shop and a business center, as well as an
outdoor pool, exercise room and free parking. A substantial remodeling
of the top three floors establishing a concierge level area for business
travelers and the upgrading of all guest rooms as well as the restaurant
and public areas was completed in March 1995.
The hotel is owned by Park Hotels L.C., a Utah Limited Liability Company
(Park Hotels). Kahler currently holds a 50.0% ownership interest in
Park Hotels. Provo of Rochester, Inc., a wholly owned subsidiary of
Kahler, currently manages the hotel.
Park Hotels has a loan commitment for $16 million from a local bank and
a $1.0 million federal grant to construct an additional 96 suites and
conference center with approximately 17,000 square feet of meeting space
adjacent to the existing hotel. In addition, a portion of the loan
proceeds will be used to construct a 114 all-suites Residence Inn by
Marriott in Provo, Utah. The Company's Partner in this venture
contributed land and cash valued at $1.2 million. The Company
contributed $1.2 million in cash. Construction of the Residence Inn by
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Marriott and the expansion of the hotel is expected to be completed in
the fourth quarter of 1996 and early 1997, respectively.
Boise Park Suite Hotel - Boise, Idaho
This four story hotel, located in a downtown business park near the
corporate headquarters of Morrison-Knudson, Boise Cascade, Micron
Technology, Albertson's, Ore-Ida Foods and J. R. Simplot, was
constructed by Kahler in 1992. The hotel has 130 suites that include a
separate living room and kitchen facilities. Among the amenities
offered by the hotel are an outdoor swimming pool, fitness center,
limited food service and a business center, with computer and cellular
phone rental, laser printing, secretarial, fax and copier service. In
addition, the hotel provides meeting facilities that can accommodate up
to 90 persons. The hotel primarily attracts business travelers,
although the hotel attracts a number of leisure travelers on weekends at
discounted room rates. The Company is constructing 108 suites and an
additional 1,347 square feet of meeting space attached to the existing
hotel which will open in February 1996.
Pocatello Park Quality Inn - Pocatello, Idaho
This hotel is located in Pocatello, next to Interstate 15, a major
thoroughfare extending from Los Angeles, California to the Canadian
border. Located on a 6.7 acre site, the hotel has 152 rooms, the second
largest number of rooms in the area. The hotel also has conference
facilities with 10,600 square feet of meeting space capable of
accommodating up to 700 persons, the largest in the area. Amenities
offered at the hotel include an indoor pool and reception area, a
fitness center, two restaurants and a cocktail lounge.
Best Western Canyon Springs Park Hotel - Twin Falls, Idaho
This hotel is located just off of Interstate 84 near the campus of the
College of Southern Idaho and the Snake River Recreation Area. The
hotel has 112 rooms located on a 6.3 acre site. The hotel also has six
meeting rooms with 8,494 square feet of meeting space which can
accommodate up to 750 persons. Amenities at the hotel include an
outdoor pool, a full service restaurant and a coffee shop. The hotel
operates under a Best Western franchise agreement.
Best Western Copper King Park Hotel - Butte, Montana
Kahler currently holds a 32.9% partnership interest and management
contract in this 150 room hotel. The hotel is located near Glacier and
Yellowstone National Parks. The full-service hotel includes bridal and
executive suites. The hotel offers a restaurant, sports bar, indoor
pool, whirlpool, sauna, health club and a variety of meeting rooms
including a grand ballroom which accommodates up to 1,200 people. The
hotel also owns and operates the Copper Dome, a 20,000 square foot
tennis facility adjacent to the hotel which is also used as exhibit
space. The hotel operates under a Best Western franchise agreement.
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Sheraton San Marcos Golf Resort and Conference Center - Chandler
(Greater Phoenix), Arizona
This conference center and resort hotel is located approximately 18
miles southeast of the Phoenix airport. In 1987, Kahler invested
approximately $20 million to restore and substantially rebuild this
historic 75-year old resort. Among the amenities the resort provides
are the oldest 18-hole championship golf course in Arizona, two heated
swimming pools and a tennis complex, three restaurants, a lounge and
room service. The resort also offers 16 conference rooms with 20,000
square feet of meeting space that can serve up to 600 persons. Each of
the 295 guest rooms, suites and villas has a private patio or balcony.
The resort seeks to attract business groups, as well as individual
travelers. The resort is operated under an ITT Sheraton franchise
agreement, except for 45 villas in three buildings located next to the
golf course which are operated separately.
3. Other Hotels
The remaining hotels are located in various states in areas that have
provided opportunities for the Company. Many of these properties enjoy
competitive advantages in their markets due to the type of facilities
provided and their proximity to institutions and attractions that
generate substantial demand for hotel accommodations.
Euro-Suites Hotel - Morgantown, West Virginia
Kahler has a management contract for the operations of this property.
The Euro-Suites Hotel is a 79 suite property located near the University
of West Virginia campus and hospital complex. It is in a hub of major
corporate and government offices and facilities. It has a 60 seat
cocktail lounge, four conference rooms and an exercise facility.
Green Oaks Inn and Conference Center - Fort Worth, Texas
This 284 room hotel is located near the Southwest Regional Navy and Air
Force Training Command and a Lockheed aircraft plant and is
approximately 10 minutes from downtown Fort Worth and 25 minutes from
the Dallas/Fort Worth International Airport. With 16 conference rooms
that can accommodate up to 1,000 persons, the hotel primarily seeks to
attract conferences and group meetings as well as individual business
travelers and visitors to the naval air station and Lockheed aircraft
plant. Amenities at the hotel include two swimming pools, two tennis
courts, an exercise room and access to an adjacent public golf course.
The hotel leases its site pursuant to a ground lease that expires
December 2014.
Kahler Park Hotel - Hibbing, Minnesota
Kahler currently holds a 25% partnership interest and management
contract in this 125 room hotel. The Kahler Park Hotel has a full-
service restaurant, indoor pool and recreation and meeting facilities.
The lodging facility caters to the business and leisure traveler with a
goal of becoming a meeting and social destination.
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Knights Inn - Port Huron, Michigan
This 104 room hotel is a budget priced hotel located at the U.S.-
Canadian border near Lake Huron. The hotel has an outdoor swimming pool
and meeting facilities. The hotel is approximately nine years old and
attracts primarily weekend and vacationing travelers and individual
business travelers. The hotel operates under a Knights Inn franchise
agreement.
Knights Inn - Racine, Wisconsin
This 107 room hotel is a budget priced hotel located between Milwaukee
and Chicago, near Racine, Wisconsin and several beaches and marinas
along Lake Michigan. The hotel is approximately seven years old and
attracts primarily weekend and vacationing travelers as well as business
travelers. The hotel operates under a Knights Inn franchise agreement.
Lakeview Resort and Conference Center - Morgantown, West Virginia
The resort is a full service conference center with resort amenities,
including two 18-hole championship golf courses and a fitness and sports
center with an indoor swimming pool, tennis courts, weight training and
equipment and running track, as well as boating on Cheat Lake and hiking
trails. In addition, the resort offers two restaurants. The resort is
located near Morgantown, West Virginia and is 75 miles south of
Pittsburgh. With conference facilities that can accommodate up to 600
persons, the resort seeks to attract business groups from Pittsburgh and
surrounding areas, as well as visitors to the University of West
Virginia and vacationing golfers. The resort has 187 guest rooms and 72
two-bedroom condominium units.
Quality Hotel Plaza One - Rock Island, Illinois
Kahler currently holds a 26.6% ownership interest and management
contract on this hotel. Plaza One has a scenic location that offers an
overlook of the Mississippi River. The 175 room full-service hotel
recently underwent a $4 million renovation making it a prime location
for corporate travel, group meetings and social events. The hotel
features 3 dining rooms, a bar and meeting rooms to accommodate groups
up to 500 people.
Best Western Red Fox Inn - Waverly, Iowa
Kahler has a management contract for the operation of this property.
The Red Fox Inn is a 127 room full service property. The hotel offers
two dining rooms, two lounges, 12 meeting rooms, an indoor swimming
pool, whirlpool area and an exercise room.
(b) Formal Wear
Anderson's Formal Wear of Rochester - Rochester, Minnesota
Anderson's Formal Wear of Rochester is a distribution center of formal
wear for the upper Midwest geographic area. The warehouse facility has
approximately 16,152 square feet. In addition to providing wholesale
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rentals to numerous retail dealers, the center is a supplier to 16 of
the Company's retail outlets.
Anderson's Formal Wear of Denver - Denver, Colorado
Anderson's Formal Wear of Denver is a distribution center of formal wear
for the western geographic area. The warehouse facility has
approximately 14,877 square feet. In addition to providing wholesale
rentals to numerous retail dealers, the center is a supplier to seven of
the Company's retail outlets.
Anderson's Formal Wear of Dallas - Dallas, Texas
Anderson's Formal Wear of Dallas is a distribution center of formal wear
for the south central geographic area. The warehouse facility has
approximately 14,008 square feet. In addition to providing wholesale
rentals to numerous retail dealers, the center is a supplier to 11 of
the Company's retail outlets.
Anderson's Formal Wear of Kansas - Kansas City, Kansas
Anderson's Formal Wear of Kansas is a distribution center of formal wear
for the central Midwest geographic area. The warehouse facility has
approximately 15,600 square feet. In addition to providing wholesale
rentals to numerous retail dealers, the center is a supplier to five of
the Company's retail outlets.
(c) Textile Care Services
Textile Care Services - Rochester, Minnesota
The laundry facility in Rochester, Minnesota provides commercial and
institutional laundry and dry cleaning services as well as linen and
uniform rental services. This operation provides cleaning and rental
services to all of Kahler's hotels in Rochester. In 1992, Textile Care
Services entered into a 20 year exclusive Service Agreement to provide
laundry services to the Mayo Clinic and Methodist and St. Marys
Hospitals in Rochester and opened a $13 million state-of-the-art
commercial laundry in Rochester in April 1993.
Textile Care Services - Salt Lake City, Utah
In the greater Salt Lake City area, Textile Care Services provides
laundry services for three of Kahler's Salt Lake City hotels as well as
for other hotels, hospitals and other institutional customers.
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Item 3.
Legal Proceedings
The Company believes it is in the final stages of negotiating a
settlement with a telecommunications company, Innkeepers' Telemanagement
& Equipment Corporatiaon ("ITEC"), related to disputed unremitted
telephone revenue and fees of $1.1 million 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 ITEC 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 subject to court or agency review and 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 $267,000, $618,000 and $884,000 for 1993, 1994 and
1995, respectively, and certain other costs as determined by the Court.
The Company has recorded an estimate of the loss that could result from
the unfavorable resolution of this uncertainty. 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. The Company
refinanced this mortgage in January 1996 as discussed in Note 5 of the
Company's Consolidated Financial Statements.
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.
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 year ended December 31, 1995.
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PART II
Item 5.
Market for the Registrant's Common Equity and Related Stockholder
Matters
a. Kahler Realty Corporation's common shares are traded on the
national market system of The NASDAQ Stock Market Inc. (NASDAQ),
(NASDAQ), under the symbol KHLR.
Quarterly high and low closing prices on the NASDAQ national market
system are shown below.
1996 1995 1994 1993
Sale Price Sale Price Sale Price Sale Price
Quarter High Low High Low High Low High Low
First $13.63 $11.00 $ 8.88 $ 7.50 $11.00 $ 6.50 $ 4.63 $ 2.75
Second 14.50 16.75 11.50 7.00 11.25 9.00 6.50 4.00
Third 16.50 16.88 14.13 10.25 14.75 11.25 8.00 5.75
Fourth 13.75 10.00 14.75 8.25 8.25 6.50
* Through July 12, 1996
b. As of July 1, 1996, 4,348,141 common shares were issued and
outstanding and held by approximately 484 shareholders of record.
c. Quarterly dividends for the years 1993, 1994, 1995 and the first
quarter of 1996 were as follows:
Quarter 1996 1995 1994 1993
First $0.04 $0.03 $0.02 $0.00
Second 0.04 0.03 0.02 0.02
Third 0.04 0.02 0.02
Forth 0.04 0.03 0.02
-13-
Item 6.
Selected Financial Data
FIVE YEAR SUMMARY OF OPERATIONS
(Dollars in thousands, except per share amounts)
KAHLER REALTY CORPORATION AND SUBSIDIARIES 1995 1994 1993 1992 1991
REVENUES
Revenue of owned operations $ 121,772 $ 109,910 $ 96,979 $ 74,014 $ 64,652
Other properties managed and/or partially owned 18,113 17,490 17,910 29,237 31,506
Total revenues $ 139,885 $ 127,400 $ 114,889 $ 103,251 $ 96,158
REVENUE OF OWNED OPERATIONS
Lodging $ 105,356 $ 93,243 $ 80,505 $ 58,408 $ 51,021
Formal wear, laundry & other 15,912 15,894 15,277 14,182 13,193
Interest income 504 773 1,197 1,424 438
Total revenue of owned operations 121,772 109,910 96,979 74,014 64,652
OPERATING COSTS AND EXPENSES
Lodging 79,318 70,797 60,974 45,053 38,458
Formal wear, laundry & other 12,801 13,487 12,621 12,092 10,772
Corporate expenses 3,901 3,257 3,272 3,225 2,827
Depreciation and amortization 8,919 8,477 7,904 6,492 5,740
Non-recurring charges 526 1,811 - 2,758 -
Total operating costs and expenses 105,465 97,829 84,771 69,620 57,797
GROSS OPERATING PROFIT 16,307 12,081 12,208 4,394 6,855
Interest expense (13,115) (11,207) (9,362) (7,303) (6,764)
Equity in earnings (loss) of affiliates 533 193 27 (688) (2,326)
Gain (Loss) on sale of assets (11) 20 6 (693) 3,005
INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 3,714 1,087 2,879 (4,290) 770
Provision (Credit) for income taxes 697 323 875 (300) 247
Income (Loss) before extraordinary item
and change in accounting principle 3,017 764 2,004 (3,990) 523
Extraordinary item net of income taxes - - - 2,517 173
Cumulative effect of change in accounting
for nonpension postretirement benefits - - - (250) -
NET INCOME (LOSS) $ 3,017 $ 764 $ 2,004 $ (1,723) $ 696
PER COMMON SHARE DATA
Primary income (loss) before extraordinary item
and change in accounting principle $ .70 $ .14 $ .49 $ (1.27) $ .08
Plus: extraordinary item - - - .75 .05
Less: change in accounting principle - - - (.07) -
Income (Loss) per common share $ .70 $ .14 $ .49 $ (.59) $ .13
Fully diluted income (loss) per common share $ .69 $ .14 $ .46 $ (.59) $ .13
Weighted average shares outstanding 4,329,000 3,956,000 3,525,000 3,341,000 3,274,000
OTHER INFORMATION
Capital expenditures $ 14,540 $ 13,523 $ 12,190 $ 11,583 $ 14,782
Total assets 178,367 169,069 162,406 132,392 114,170
Long-term debt 126,015 122,359 120,773 91,289 78,600
Redeemable convertible preferred stock - - 3,267 3,220 3,174
Stockholders' equity 24,173 21,271 16,366 14,867 16,586
-14-
Item 7.
Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
Total Revenues
Total revenues include the revenue of owned operations and other properties
partially owned and/or managed by the Company. The Company uses this
presentation in order to show the total scope of the Company's operations.
Components of revenue are described in Note 1 of Notes to Consolidated
Financial Statements.
The primary business of the Company is the operation and management of
hotel properties in 11 states, primarily Minnesota, Utah and Idaho. As an
adjunct to its hotels, the Company operates commercial laundries in
Rochester and Salt Lake City which provide services to the Company's hotels
and other third parties in their respective locations. The Company's other
business activities include operating a wholesale and retail formal wear
business.
Total revenues have increased by 9.8% , 10.9% and 11.3% in 1995, 1994 and
1993, respectively. Acquisitions in the lodging segment account for most
of these increases. The following are significant events that have
affected operations of the Company during the past three years:
. Acquired the Canyon Springs Park Hotel, Twin Falls, ID (112 rooms) -
August 1995
. Acquired a 32.9% ownership interest and management contract of the
Copper King Park Hotel, Butte, MT (150 rooms) - July 1995
. Entered into a management contract for the Red Fox Inn, Waverly, IA
(127 rooms) - December 1994
. Acquired the Green Oaks Inn and Conference Center, Fort Worth, TX
(284 rooms) - December 1994
. Acquired the Pocatello Park Quality Inn, Pocatello, ID (152 rooms) -
March 1994
. Acquired a 50% ownership interest and management contract of the
Provo Park Hotel, Provo, UT (232 rooms) - September 1993
. Acquired a 63.75% general partnership interest in the Ogden Park
Hotel, Ogden, UT (288 rooms) - August 1993
. Acquired a 26.6% ownership interest and management contract of the
Plaza One Hotel, Rock Island, IL (175 rooms) - July 1993
. Acquired its partner's 50% interest in the Salt Lake Hilton Hotel,
Salt Lake City, UT (351 rooms) - May 1993
. Opened a new 88,000 square foot laundry facility, Textile Care
Services, Rochester, MN (19 million pound annual capacity) - April
1993
The following table sets forth certain operating data for the hotels owned
and managed by Kahler:
Owned and Managed Hotels
Year End 1995 1994 1993
Number of Hotels 22 20 18
Room Nights Available 1,669,835 1,560,874 1,406,488
Occupancy 65.9% 65.1% 63.9%
Average Daily Room Rate
per Occupied Room $ 65.48 $ 63.75 $ 63.31
Average Daily Revenue
per Available Room $ 43.13 $ 41.53 $ 40.48
-15-
COMPARISON OF 1995 TO 1994 OPERATIONS
Revenue From Owned Operations
Total lodging revenue increased by 13.0% to $105.4 million in 1995 from
$93.2 million in 1994. Room revenues for 1995 and 1994 were $61.2 and
$54.1 million, respectively. This increase is primarily the result of the
additional properties and management contracts acquired in 1994 and 1995.
Food, beverage and other lodging revenues increased by 12.7% to $44.1
million in 1995 from $39.1 million in 1994 due primarily to property
acquisitions as previously described.
In total, formal wear, laundry and other revenues remained the same, $15.9
million, in 1995 as in 1994. Formal wear revenues increased by 5.0% to
$9.4 million in 1995 from $8.9 million in 1994. This was offset by the
decrease in laundry revenues to $5.9 million in 1995 from $6.3 million in
1994. The decrease in laundry revenues is primarily the result of the
Company downsizing and eliminating laundry services that were unprofitable
at the Utah facility.
The decrease of $269,000 in interest income is due primarily to the
acquisition of the Green Oaks Inn & Conference Center at the end of 1994.
Prior to the acquisition, the Company held a mortgage receivable and
recognized interest income. Offsetting this decrease was an increase in
interest from a guarantee agreement with the mortgagor of the Salt Lake
Hilton Hotel.
Operating Costs and Expenses
Lodging expenses in 1995 increased $8.5 million or 12.0% over 1994. This
increase also relates primarily to property acquisitions. As a percentage
of revenues, lodging expenses decreased .6% from 75.9% in 1994 to 75.3% in
1995. The following table shows the principal components of lodging
revenues with lodging expenses and income presented as a percentage of
revenues.
YEAR END 1995 1994 1993
Room revenue 58.1% 58.0% 57.2%
Food and beverage revenue 30.9 31.5 31.3
Other revenue 11.0 10.5 11.5
Total lodging revenue 100.0 100.0 100.0
Lodging expenses 75.3 75.9 75.7
Lodging income before interest,
depreciation and corporate expenses 24.7% 24.1% 24.3%
Operating costs and expenses for formal wear, laundry and other decreased
by 5.1% to $12.8 million in 1995 from $13.5 million in 1994. Formal wear
operating expenses increased $710,000 or 10.2% from 1994 to 1995. The
increase relates primarily to increased operating costs and expenses in the
retail segment of the business and administrative expenses. As a
percentage of revenue, formal wear expenses increased to 82.0% in 1995 from
78.1% in 1994. Laundry operating expenses decreased by $1.4 million or
23.7% when comparing 1995 with 1994. This improvement is due to solving
start up inefficiencies and problems in the new laundry facility in
Rochester, Minnesota and discontinuing unprofitable laundry services at the
Utah facility. Productivity measured in pounds produced per labor hour at
the Rochester facility increased to 93.1 in 1995 as compared to 66.6 in
1994, a 39.8% improvement.
-16-
Corporate expenses increased to $3.9 million in 1995 from $3.3 million in
1994. The increase is primarily due to increased professional fees and
employee related expenses. Comparing 1995 to 1994, depreciation and
amortization increased to $8.9 million from $8.5 million. This is
primarily the result of acquiring new hotel properties as previously
mentioned.
The non-recurring charges of $526,000 and $1.8 million in 1995 and 1994,
respectively, relate to expenses incurred in connection with planned
secondary offerings and conversion of the Company into a real estate
investment trust. Neither offering was completed as a result of general
market conditions.
Gross Operating Profit
Gross operating profit increased $4.2 million or 35% to $16.3 million in
1995 from $12.1 million in 1994.
Interest Expense
Interest expense for the year 1995 increased by $1.9 million over 1994.
This increase is attributed to the increase in the prime lending rate
during 1995 and debt associated with the acquisitions of the Pocatello Park
Quality Inn and the Best Western Canyon Springs Park Hotel. Additionally,
the Company has recorded an estimate of the added interest potentially due
as a result of litigation against the holders of a mortgage on a Hotel as
discussed in Note 7 of Notes to Consolidated Financial Statements.
Equity In Earnings of Affiliates
Equity earnings for 1995 was $533,000 compared with $193,000 in 1994. For
1995 the Company received equity earnings of $659,000 from the Provo Park
Hotel and incurred equity losses of $86,000 and $40,000 from the Kahler
Park Hotel and the Copper King Park Hotel, respectively. For 1994, the
Company received equity earnings of $452,000 from the Provo Park Hotel and
incurred equity losses of $168,000 from the Plaza One Hotel and of $91,000
from the Kahler Park Hotel.
Provision for Income Taxes
Provision for Income Taxes at year end 1995 and 1994, the Company had
prepaid income tax charges net of deferred income tax credits of $687,000
and $513,000, respectively. The Company has based the value of the net
prepaid tax asset primarily on the alternative minimum tax credits which,
under current law, have no expiration dates. The ultimate realization of
the net prepaid tax asset is dependent upon the offset of these credits
against future federal tax payments if future taxable income exceeded the
alternative minimum tax levels. The decrease in the Company's effective
tax rate from 1994 to 1995 is the result of benefits realized in 1995 from
items fully reserved for in prior years. Further analysis of the tax
provision is presented in Note 10 of Notes to Consolidated Financial
Statements.
Other Items
On January 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards (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 values of the Company's long-lived assets was required at January
1, 1996 as a result of adopting the provisions of SFAS 121.
-17-
On December 31, 1995 the Company adopted the provisions of SFAS 107
"Disclosures about Fair Value of Financial Instruments". Management has
determined that fair values of the Company's financial instruments
approximate the carrying values of those instruments except for notes
receivable and long-term debt as discussed in Notes 2 and 5 of Notes to
Consolidated Financial Statements, respectively.
On November 24, 1995 the Company retained Montgomery Securities as
financial advisor to assist the Company's Board of Directors in exploring
the strategic alternatives available to enhance shareholder value. As one
alternative, the Company is presently considering a public sale of its
shares simultaneously with its conversion to a real estate investment
trust. As other possible alternatives, the Company, with Montgomery's
assistance, will also explore a possible sale of part or all its assets as
well as the continued operation of the Company in its present corporate
form.
SFAS 123, "Accounting for Stock-Based Compensation," was issued in October
1995. Adoption of SFAS 123 is required for fiscal years beginning after
December 15, 1995. The Company intends to continue to account for stock-
based compensation under the provisions of Accounting Principals Board
Opinion No. 25. The adoption of SFAS 123 is not expected to have a
material effect on the Company's Consolidated Financial Statements.
On January 2, 1995 the Company adopted the provisions of SFAS 114,
"Accounting by Creditors for Impairment of a Loan". The Company also
adopted the provisions of SFAS 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures". The adoption of SFAS 114
and 118 had no effect on the Company's financial position or results of
operations as of or for the year ended December 31, 1995.
COMPARISON OF 1994 TO 1993 OPERATIONS
Revenue From Owned Operations
Total lodging revenue increased 15.8% to $93.2 million in 1994 from $80.5
million in 1993. This increase resulted primarily from the acquisitions of
hotels in 1993 and 1994. In addition, increased room revenue resulted
primarily from the improved occupancy from the hotels in the intermountain
region. Formal wear, laundry and other revenues increased 4.0% or $617,000
to $15.9 million in 1994 from $15.3 million in 1993. Of this, formal wear
revenues accounted for $457,000 of the increase. The increase in formal
wear revenues to $8.9 in 1994 from $8.5 million in 1993 resulted from an
increase in the volume of units shipped of 2.2% and an increase in revenue
per unit of 3.0%. Both laundry and other revenues increased slightly in
1994 from 1993.
Interest income decreased by $424,000 in 1994. This resulted primarily
from decreases in interest income on Kahler's mortgage note on the Green
Oaks Inn and Conference Center, a guarantee agreement with the mortgagor of
the Salt Lake Hilton, and the consolidation of the Ogden Park Hotel which
eliminated the recognition of interest on the Company's note.
Operating Costs and Expenses
Lodging expenses increased 16.1% to $70.8 million in 1994 from $61.0
million in 1993. This increase also relates to the hotel acquisitions in
1993 and 1994 as previously described. As a percentage of revenue,
lodging expenses increased to 75.9% as compared to 75.7% in 1993.
Expenses for formal wear, laundry and other increased 6.9% to $13.5 million
from $12.6 million in 1993. As a percentage of revenue, formal wear
expenses increased to 78.2% in 1994 from 77.9% in 1993 and laundry expenses
-18-
increased to 94.5% in 1994 from 87.2% in 1993. The new laundry which
opened in April 1993 in Rochester, Minnesota continued to experience start
up inefficiencies causing the facility to operate below its expected levels
of performance. During 1994 the facility processed an average of 66.6
pounds per direct labor hour. When comparing production of the facility
in January 1994 with December 1994, the pounds processed per direct labor
hour were 61.4 and 82.7 respectively. This improvement will be reflected
in the 1995 laundry operations along with additional improvement from the
implementation of productivity programs and increased familiarity with the
equipment.
Corporate expenses for 1994, primarily administrative and general expenses
were $3.3 million, consistent with 1993, and declined as a percentage of
revenue by .4%. Depreciation and amortization increased 7.2% to $8.5
million in 1994 from $7.9 million in 1993. The primary reason for the
increase in the amount of depreciation and amortization is due to the hotel
acquisitions in 1993 and 1994 and the new laundry facility.
The non-recurring charge of $1.8 million in 1994 represents expenses
related to a planned secondary offering and conversion of the Company into
a real estate investment trust which was not completed due to unfavorable
market conditions. The after tax impact is approximately $1.3 million.
Gross Operating Profit
Gross operating profit decreased by $127,000 to $12.1 million in 1994 from
$12.2 million in 1993. Excluding the $1.8 million of non-recurring
charges, the Company would have had 1994 gross operating profit of $13.9
million, a 13.8% increase over 1993.
Interest Expense
Interest expense increased by 19.7% to $11.2 million in 1994 from $9.4
million in 1993. The increase in the amount of interest expense can be
attributed to the hotel acquisitions in 1993 and 1994, the new laundry
facility and increases in the prime interest rate during 1994. Increases in
the prime interest rate during 1994 increased interest expense by
approximately $700,000 as compared to 1993.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows from Operations
Net cash provided by operating activities increased to $13.3 million in
1995 from $9.4 million in 1994, an increase of 40.7%. Improvements in
operating income, along with a reduction in non-recurring charges were the
primary contributors to this improvement.
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 large amounts of working
capital. Negative working capital is common in the lodging industry.
-19-
Cash Flows from Investing Activities
Capital expenditures for 1995 and 1994 totaled $14.5 million and $13.5
million, respectively. In 1995, the acquisition of the Best Western Canyon
Springs Park Hotel for $5.75 million, the construction of a 108 suite
addition to the Boise Park Suite Hotel for $3.6 million, garment purchases
for $1.1 million and approximately $4.1 million for refurbishing and
improvements to other properties make up the $14.5 million. In 1994,
approximately $7.8 million was used for acquisition and renovation of the
Pocatello Park Hotel, land for the expansion of the Boise Park Suite Hotel,
acquisition of Green Oaks Inn and Conference Center and the completion of
the laundry facility in Rochester. In addition, approximately $4.5 million
was used for refurbishment of existing hotels and $1.2 million for the
purchase of formal wear garments.
The Company made investments in affiliates in 1995 of $1.2 million to the
Provo Park Hotel and $600,000 to the Best Western Copper King Park Hotel.
In 1996, management estimates that in addition to its customary
refurbishing expenditures, an additional $9.2 million will be used to
purchase the 149 room full service Colonial Inn Hotel in Helena, Montana.
This acquisition will be financed through a mortgage note payable to a
bank, a note payable to the seller and internally generated funds.
Cash Flows from Financing Activities
In 1995, the principal increases in long-term debt resulted from the
acquisition of the Canyon Springs Park Hotel for $4.2 million and the $2.4
million used for the expansion of the Boise Park Suite Hotel. At year end,
the Company had a $2.5 million loan commitment which is expected to fund a
substantial portion of the remaining construction costs to be paid for the
Boise expansion.
At December 31, 1995 notes payable consist of $4.1 million drawn on various
lines of credit with a maximum available of $5.0 million and a short-term
note payable of $600,000. The banks providing these lines of credit
normally provide for extensions of the lines one year at a time. The
Company anticipates the extension of all its lines of credit. The
remaining $600,000 note is due in September 1996 and is anticipated to be
repaid from operating cash flow or available lines of credit.
The Company increased its debt service escrow by $1.5 million in order to
facilitate the refinancing of the San Marcos mortgage.
The Company has approximately $94 million of variable rate debt and $42
million of fixed rate debt. The Company's variable rate debt is generally
indexed to the prime rate, and calls for interest payments which range from
prime to 2% in excess of prime. Of the $94 million variable rate debt, $31
million is tax exempt bonds which carried an effective rate interest rate
of 5.8% in January 1996. The Company is sensitive to interest rate
changes; however, the Company believes that cash provided by operating
activities along with other financing sources will be sufficient to fund
its capital requirements.
Inflation
Management believes that inflation during the three years ended December
31, 1995 did not have a material effect on its assets or operations.
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.
-20-
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
The Company believes it is in the final stages of 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
$267,000, $618,000 and $884,000 for 1993, 1994 and 1995, respectively, and
certain other costs as determined by the Court. The Company has recorded
an estimate of the loss that could result from the unfavorable resolution
of this uncertainty. 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. The Company refinanced this mortgage in January 1996 as
discussed in Note 5 of the Company's Consolidated Financial Statements.
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.
Item 8.
Financial Statements and Supplementary Data
(a) 1. Financial Statements of Kahler
Realty Corporation Page
. Consolidated Statements of Operations F-1
. Consolidated Balance Sheets F-2, F-3
. Consolidated Statements of Cash Flows F-4
. Consolidated Statements of Stockholders' Equity F-5
. Notes to Consolidated Financial Statements F-6 thru F-19
. Independent Auditors' Report F-20
(a) 2. Supplementary Data - Financial Statements of
Park Hotels, L.C.
Page
. Balance Sheets SD-1
. Statements of Operations SD-2
. Statements of Cash Flows SD-3
. Statements of Changes in Members' Equity SD-4
. Notes to Financial Statements SD-5 thru SD-7
. Independent Auditors' Report SD-8
-21-
Item 9.
Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10.
Directors and Executive Officers of the Registrant
(a) The identification of directors is incorporated herein by
reference to the Company's Proxy Statement relating to the
Annual Meeting of Shareholders to be held on April 25, 1996,
under the caption "The Election of Directors".
(b) The executive officers of the Company are:
Harold W. Milner, 61, President and Chief Executive Officer of
Kahler since March 12, 1985.
Michael P. Gehling, 33, Vice President, Engineering since
February 1991. From January 1989 until February 1991, Mr.
Gehling was Director of Engineering, responsible for the
Company's engineering and energy standards.
Thomas R. Gintz, 45, Vice President, Purchasing and Design
since February 1993. From November 1982 until February 1993,
Mr. Gintz was Director of Purchasing responsible for capital
asset procurement projects, specifying and coordinating
interior design.
Michael R. Hinckley, 60, Senior Vice President of Marketing
since January 1987.
James E. Hinrichs, 56, Vice President, Accounting since July
1985.
Kevin L. Molloy, 46, Senior Vice President , Operations since
October 1985.
James D. Porrett, 42, Vice President, Textile Care Services
since February 1993. From October 1984 until February 1993, Mr.
Porrett was General Manager of Textile Care Services
responsible for Textile Care Laundry operations in Minnesota
and Utah.
Michael J. Quinn, 47, Senior Vice President, Secretary and
General Counsel since April 1993. From July 1989 until April
1993, Mr. Quinn was Vice President, Secretary and General
Counsel responsible for legal matters for the Corporation and
all subsidiaries.
Steven R. Stenhaug, 37, Senior Vice President, Treasurer since
April 1993. From July 1985 until April 1993, Mr. Stenhaug was
Vice President, Treasurer responsible for corporate banking,
credit and investment functions of the Company.
Philip D. Thorpe, 61, Vice President Real Estate Management
since April 1988.
-22-
Paul R. Tieskoetter, 37, Controller since July 1985.
Simon W. Workman, 59, Vice President, Corporate Human Resources
since February 1993. From June 1992 until February 1993, Mr.
Workman was Manager of Corporate Personnel. From January 1982
until June 1992, Mr. Workman was manager of Headquarters Human
Resource at Control Data Corporation.
Item 11.
Executive Compensation
Information pertaining to executive compensation is incorporated herein
by reference the Company's Proxy Statement relating to the Annual
Meeting of Shareholders to be held on April 25, 1996, under the caption
"Executive Compensation".
Item 12.
Security Ownership of Certain Beneficial Owners and Management
Information pertaining to security ownership of certain beneficial
owners and management is incorporated herein by reference the Company's
Proxy Statement relating to the Annual Meeting of Shareholders to be
held on April 25, 1996, under the caption "Beneficial Ownership of
Shares".
Item 13.
Certain Relationships and Related Transactions
Information pertaining to certain relationships and related transactions
is incorporated herein by reference the Company's Proxy Statement
related to the Annual Meeting of Shareholders to be held on April 25,
1996, under the caption "Transactions with Management and Principal
Shareholders".
PART IV
Item 14.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements of Kahler Realty Corporation
Included in Part II of this report. (See Item 8.)
(a) 2. Supplemental Data - Financial Statements of Park Hotels, L.C.
Included in Part II of this report. (See Item 8.)
(a) 3. Financial Statement Schedules
Included in Part IV of this report:
. Independent Auditors' Report on Schedule - page 25
. Schedule II-Valuation and Qualifying Accounts - page 26
-23-
Other schedules are omitted because of the absence of conditions
under which they are required or because the required
information is given in the footnotes to the consolidated
financial statements.
(b) Reports on Form 8-K
Report on Form 8-K, "Other Events" was filed on December 4, 1995.
On November 24, 1995, the Company announced that Montgomery
Securities had been retained as financial advisor to assist the
Company's Board of Directors in exploring the strategic
alternatives available to enhance shareholder value.
(c) Index to Exhibits - page 26
-24-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused Amendment #1 to Form
10K to be signed on its behalf by the undersigned thereunto duly
authorized.
KAHLER REALTY CORPORATION
(Registrant)
Dated: July 24, 1996 Harold W. Milner (Sigd)
Harold W. Milner
President, CEO and Director
-25-
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Kahler Realty Corporation and Subsidiaries
Under date of February 16, 1996, we reported on the consolidated balance
sheets of Kahler Realty Corporation and Subsidiaries as of December 31,
1995 and January 1, 1995, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the years in
the three-year period ended December 31, 1995, as contained in the 1995
annual report to stockholders. In connection with our audits of the
aforementioned consolidated financial statements, we also audited the
related consolidated financial statement schedule listed in the Index at
Item 14(a)3. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion on
this financial statement schedule based on our audits.
In our opinion, this schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Chicago, Illinois
February 16, 1996
-26-
INDEX TO EXHIBITS (Note 1)
(3) Articles of Incorporation and Bylaws
(3.1) Amended and Restated Articles of Incorporation of Kahler Realty
Corporation (Note 3).
(3.2) Bylaws of Kahler Realty Corporation (Note 2).
(4) Instruments defining rights of security holders, including indentures
(4.1) Specimen Common Stock Certificate (Note 2).
(10) Material Contracts
(10.1) Form of Kahler Corporation Amended and Restated 1987 Stock Option
Plan (Note 2).
(10.2) Form of Kahler Corporation Amended and Restated 1982 Incentive
Stock Option Plan (Note 2).
(10.3) Form of Kahler Corporation Amended and Restated Stock Option Plan
for Non-Employee Directors (Note 2).
(10.4) Form of Kahler Realty Corporation 1994 Stock Option Plan (Note
2).
(10.5) Form of Kahler Realty Corporation 1994 Non-Employee Directors
Stock Option Plan (Note 2).
(10.6) Form of Kahler Realty Corporation 1994 Retainer Stock Payment
Plan for Non-Employee Directors (Note 2).
(10.7) Form of Indemnity Agreement between Kahler Realty Corporation and
its directors and officers (Note 2).
(10.8) Option Agreement dated August 31, 1989 among Ogden Hotel
Associates, Pearson Enterprises Management Company, BG Hotel
Properties, Inc and Ogden Park Hotel Corporation, Inc. (Note 2).
(10.9) Option Agreement dated September 26, 1990 among University Inn
Associates U.P., Inc., Century Center Ltd., Latsco Development
Ltd., Leroy Robert Allen, John A. Dahlstrom, J. Derek Dahlstrom,
Boyer Hotels, Inc., Park O. Inc., ROCK INV, and Kahler
Corporation (Note 2).
(10.10) Employment Agreements - Harold W. Milner, President and Chief
Executive Officer; Kevin L. Molloy, Senior Vice President,
Operations; Michael R. Hinckley, Senior Vice President,
Marketing; Steven R. Stenhaug, Senior Vice President, Treasurer;
Michael J. Quinn, Senior Vice President, Secretary and General
Counsel (Note 3).
(11) Statement re: Computation of Per Share Earnings (Note 3)
(21) Subsidiaries of the Registrant (Note 3)
(23) Consent of Independent Auditors' for S-8 Amendment (Note 4)
(27) Financial Data Schedule (Note 3)
Note 1 Copies of exhibits will be supplied upon request. There is no
charge for a copy of Kahler's 1994 Annual Report to Stockholders
(Exhibit 13). Other exhibits will be provided at $.25 per page
requested.
Note 2 Incorporated by reference to exhibits in the Company's
Registration Statement on Form S-11, Registration No. 33-82994,
as filed on September 12, 1994.
Note 3. Copies of these documents were filed in the original 1995 Annual
Report on Form 10-K.
Note 4. A copy of this document is filed with this amendment of Form 10-K.
-27-
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
For Years Ended December 31, 1995, January 1, 1995
and January 2, 1994 1995 1994 1993
REVENUES
Revenue of owned operations $121,772 $109,910 $ 96,979
Other properties managed and/or
partially owned 18,113 17,490 17,910
Total revenues $139,885 $127,400 $114,889
REVENUE OF OWNED OPERATIONS
Lodging - rooms $ 61,249 $ 54,108 $ 46,026
- food and beverage 32,554 29,339 25,185
- other 11,553 9,796 9,294
Formal wear, laundry & other 15,912 15,894 15,277
Interest income 504 773 1,197
Total revenue of owned operations 121,772 109,910 96,979
OPERATING COSTS AND EXPENSES
Lodging - rooms 15,180 13,523 11,388
- food and beverage 25,697 23,221 19,801
- other 38,441 34,053 29,785
Formal wear, laundry & other 12,801 13,487 12,621
Corporate expenses 3,901 3,257 3,272
Depreciation and amortization (Note 9) 8,919 8,477 7,904
Aborted offering costs (Note 9) 526 1,811 -
Total operating costs and expenses 105,465 97,829 84,771
GROSS OPERATING PROFIT 16,307 12,081 12,208
Interest expense (13,115) (11,207) (9,362)
Equity in earnings of affiliates (Note 4) 533 193 27
Gain (Loss) on sale of assets (11) 20 6
INCOME FROM OPERATIONS BEFORE INCOME TAXES 3,714 1,087 2,879
Provision for income taxes 697 323 875
NET INCOME $ 3,017 $ 764 $ 2,004
PER COMMON SHARE DATA
Primary income per common share $ .70 $ .14 $ .49
Fully diluted income per common share $ .69 $ .14 $ .46
See Notes to Consolidated Financial Statements
F-1
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
December 31, 1995 and January 1, 1995 1995 1994
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 923 $ 1,110
Receivables:
Trade, less allowance for doubtful
accounts of $251 and $252, respectively 5,275 5,333
Current portion of notes receivable 132 150
Inventories 2,598 2,498
Prepaid expenses 323 265
Total current assets 9,251 9,356
OTHER ASSETS
Notes receivable (Notes 2 and 4) 1,361 1,423
Investments in affiliates (Note 4) 5,095 3,279
Debt service escrow accounts (Notes 5 and 7) 3,198 1,650
Intangibles 654 791
Other 2,224 1,823
Total other assets 12,532 8,966
PROPERTY AND EQUIPMENT
Land and improvements 17,065 16,349
Buildings 141,965 136,967
Equipment 50,660 46,977
Formal wear apparel 4,381 4,735
Total 214,071 205,028
Less accumulated depreciation 61,118 54,281
152,953 150,747
Construction in progress (Note 5) 3,631 -
Total property and equipment 156,584 150,747
TOTAL ASSETS $ 178,367 $ 169,069
See Notes to Consolidated Financial Statements
F-2
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
December 31, 1995 and January 1, 1995 1995 1994
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Notes 7 and 9) $ 10,110 $ 8,392
Due to affiliates (Note 4) 738 167
Accrued liabilities:
Payroll and payroll related 3,131 2,473
Real estate taxes 1,954 1,996
Other taxes 520 806
Notes payable (Note 5) 4,700 5,300
Current portion of long-term debt (Note 5) 3,739 2,767
Current portion of subordinated debt
to affiliate (Note 6) 500 500
Total current liabilities 25,392 22,401
LONG-TERM DEBT (Note 5)
Obligations of Kahler Realty Corporation 99,754 95,842
Obligations of Subsidiaries - Nonrecourse
to Kahler Realty Corporation 26,261 26,517
Total long-term debt 126,015 122,359
OTHER LIABILITIES
Pension liability (Note 8) 1,009 734
Deferred revenue 160 137
Other 618 667
Total other liabilities 1,787 1,538
COMMITMENTS AND CONTINGENCIES (Note 7)
SUBORDINATED DEBT TO AFFILIATE (Note 6) 1,000 1,500
REDEEMABLE CONVERTIBLE PREFERRED STOCK - -
Authorized - 10,000,000 shares
Issued and Outstanding - None
STOCKHOLDERS' EQUITY (Note 6)
Common stock, par value $.10
Authorized - 70,000,000 shares;
Issued and outstanding - 4,293,473 and
4,167,598 shares, respectively 429 417
Additional paid-in capital 13,846 13,030
Retained earnings 10,414 7,991
Minimum pension liability adjustment (Note 8) (516) (167)
Total stockholders' equity 24,173 21,271
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 178,367 $ 169,069
See Notes to Consolidated Financial Statements
F-3
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
For Years Ended December 31, 1995, January 1, 1995
and January 2, 1994 1995 1994 1993
OPERATIONS:
Net income $ 3,017 $ 764 $ 2,004
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,919 8,477 7,904
Common stock issued under employee
benefit plans 303 6 130
Unrecognized gain (loss) on defined
benefit pension plan (349) 60 (168)
Equity in earnings of affiliates (533) (193) (27)
(Gain) Loss on sale of assets 11 (20) (6)
Change in current assets and liabilities:
Receivables 58 (962) (533)
Inventories (100) (144) (115)
Prepaid expenses (58) (32) 57
Accounts payable 1,673 1,493 74
Accrued liabilities 330 (15) 929
Net cash provided by operating activities 13,271 9,434 10,249
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property and equipment (14,540) (13,523) (12,190)
Proceeds from sale of property and equipment 34 125 146
Payments received on notes receivable 79 250 614
Investment in affiliates (Note 4) (1,856) - (3,365)
Distributions received from affiliates 574 374 330
Decrease (Increase) in intangible assets 40 (374) (15)
Increase in other assets (565) (108) (205)
Net cash used by investing activities (16,234) (13,256) (14,685)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 525 1,352 119
Purchase of common stock - - (62)
Dividends paid to common shareholders (594) (349) (205)
Dividends paid to preferred shareholders - (224) (319)
Payments on subordinated debt due to affiliate (500) - -
Construction payables 616 - -
Increase in debt service escrow accounts (1,548) (900) -
Proceeds from long-term debt and notes payable 6,943 3,833 11,864
Principal payments on long-term debt (2,315) (2,692) (3,087)
Net borrowings (payments) on lines of credit
and notes payable (600) 2,850 (3,500)
Increase (Decrease) in other liabilities 249 78 (193)
Net cash provided by financing activities 2,776 3,948 4,617
INCREASE (DECREASE) IN CASH (187) 126 181
CASH AT BEGINNING OF THE PERIOD 1,110 984 803
CASH AT END OF THE PERIOD $ 923 $ 1,110 $ 984
See Notes to Consolidated Financial Statements
F-4
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands, except per share amounts)
Minimum
For Years Ended January 31, 1995, COMMON STOCK Additional Pension
January 1, 1995 and Number Paid-in Retained Liability
January 2, 1994 of Shares Amount Capital Earnings Adjustment Total
BALANCES January 3, 1993 3,361,102 $ 336 $ 8,270 $ 6,320 $ (59) $ 14,867
Net income 2,004 2,004
Dividends paid to preferred stockholders (319) (319)
Dividends paid to common
stockholders ($0.06 per share) (205) (205)
Unrecognized loss on defined
benefit pension plan (168) (168)
Common stock issued 75,608 8 241 249
Purchase of common stock (10,912) (1) (61) (62)
BALANCES, January 2, 1994 3,425,798 343 8,450 7,800 (227) 16,366
Net income 764 764
Dividends paid to preferred stockholders (224) (224)
Dividends paid to common
stockholders ($0.09 per share) (349) (349)
Unrecognized gain on defined
benefit pension plan 60 60
Common stock issued 741,800 74 4,580 4,654
BALANCES, January 1, 1995 4,167,598 417 13,030 7,991 (167) 21,271
Net income 3,017 3,017
Dividends paid to common
stockholders ($0.14 per share) (594) (594)
Unrecognized loss on defined
benefit pension plan (349) (349)
Common stock issued (Note 6) 125,875 12 816 828
BALANCES, December 31, 1995 4,293,473 $ 429 $ 13,846 $ 10,414 $ (516) $ 24,173
See Notes to Consolidated Financial Statements
F-5
KAHLER REALTY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
Years Ended December 31, 1995, January 1, 1995 and January 2, 1994
Note 1. Business and Significant Accounting Policies
Description of business
The primary business of Kahler Realty Corporation (the Company) is the
operation and management of hotel properties in 11 states, primarily
Minnesota, Utah and Idaho. As an adjunct to its hotels, the Company
operates commercial laundries in Rochester and Salt Lake City which provide
services to the Company's hotels and other third parties in their
respective locations. The Company's other business activities include
operating a wholesale and retail formal wear business.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. Investments of 50% or less in owned
affiliates in which the Company possesses significant influence are not
consolidated but are accounted for under the equity method. The Company owns
24% of a partnership which owns the University Park Hotel and a $4,620, 9%
mortgage note with an option to convert the note into additional equity
interest in the hotel in 1998. Should the Company exercise its option to
convert, the Company would own 69.6% of the hotel. The Company
consolidates the assets and liabilities of the hotel which approximated
$10,391 and $9,412 at December 31, 1995, and $10,714 and $9,463 at January
1, 1995, respectively. All material intercompany transactions and balances
have been elininated.
Reclassifications
The consolidated financial statements for prior years reflect certain
reclassifications to conform with classifications adopted in 1995. These
reclassifications have no effect on net income or stockholders' equity as
previously reported.
Revenues
Revenues of the Company are classified into two components. The Company
uses this presentation to show the total scope of the Company's operations.
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. Investments of 50% or less in owned
affiliates in which the Company possesses signifiant influence are not
consolidated but accounted for under the equity method.
F-6
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents. The
Company includes the current portion of debt service escrow accounts in
cash and cash equivalents. Amounts in these accounts were $336 and $416 at
December 31, 1995 and January 1, 1995, respectively, and will be used to
pay accrued interest on certain of the hotel mortgages.
Inventories
Inventories are stated primarily at the lower of average cost or market.
Notes receivable
Notes receivable are carried at their unpaid balance net of unamortized
contract discounts. The Company evaluates the collectibility of its notes
receivable (including accrued interest) by estimating the probability of
loss utilizing projections of loan and property performance, factors
related to the borrower, terms of the notes, other supply and demand
factors and overall economic conditions.
On January 2, 1995 the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) 114, "Accounting by Creditors for
Impairment of a Loan". The Company also adopted the provisions of SFAS
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosures". The adoption of SFAS 114 and 118 had no effect on the
Company's financial position or results of operations as of or for the year
ended December 31, 1995.
Fair value of financial instruments
On December 31, 1995 the Company adopted the provisions of SFAS 107
"Disclosures about Fair Value of Financial Instruments". Management has
determined that fair values of the Company's financial instruments
approximate the carrying values of those instruments except for notes
receivable and long-term debt as discussed in Notes 2 and 5, respectively.
Property and equipment
Property and equipment are recorded at cost. Depreciation of property,
equipment and formal wear apparel is computed on the straight-line method
over their estimated useful lives. Depreciation expense was $8,658,
$8,197 and $7,588 for the years 1995, 1994 and 1993, respectively.
Interest of $76 related to certain hotels under construction has been
capitalized and is included in property and equipment at December 31, 1995.
The estimated useful lives are:
Land improvements 5 to 25 years
Buildings 20 to 50 years
Equipment 5 to 20 years
Formal wear apparel 4 years
The Company records a provision for impairment of the carrying value of its
real estate investments whenever the estimated future cash flows from a
property's operations and projected sale are less than the property's net
carrying value. Management believes that the estimates and assumptions
used are appropriate in evaluating the carrying value of the Company's
properties presented currently in the balance sheet, however, changes in
market conditions and circumstances could occur in the near term which will
cause these estimates to change.
F-7
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 values of the Company's long-lived assets was
required at January 1, 1996 as a result of adopting the provisions of SFAS
121.
Deferred financing costs
Deferred financing costs were $1,425 and $1,309, net of accumulated
amortization, at December 31, 1995 and January 1, 1995, respectively.
These amounts are included in other assets and amortized over the life of
the respective loans.
Income taxes
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes", which, among other things, requires an asset
and liability approach in accounting for deferred income taxes. (See Note
10)
Intangibles
Intangibles represent pre-opening costs, organization costs, franchise
rights and an intangible pension asset relating to the Company's defined
benefit plan. Pre-opening costs include certain costs incurred during the
property's break-in period which consist of marketing, employee training
and the excess of expenses over revenues. The cost of these intangible
assets are as follows:
1995 1994 Expected Life
Pre-opening costs $ 57 $ 163 3 years
Organization costs 145 132 5 years
Franchise rights 125 139 8 to 20 years
327 434
Accumulated amortization (166) (210)
161 224
Intangible pension asset 493 567
$ 654 $ 791
Income per common share
For 1995, 1994 and 1993, income per share is computed on a primary share
basis using the weighted average number of outstanding common shares and
equivalents (arising from employee stock plans, deferred stock compensation
and a warrant) aggregating 4,329,000, 3,956,000 and 3,525,000,
respectively.
Income per share is computed on a fully diluted basis using the weighted
average number of outstanding common shares plus stock equivalents
aggregating 4,355,000 and 3,743,000 for 1995 and 1993, respectively. In
1994 the effect is the same as on a primary share basis.
Use of estimates
Preparation of the Consolidated Financial Statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of certain
assets and liabilities, disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Fiscal year
The Company's fiscal year ends on the Sunday closest to December 31.
F-8
Note 2. Notes Receivable
Notes receivable consist of contracts for deeds and first mortgages bearing
interest at rates ranging from 8% to 10%. One loan aggregating $454 is
considered impaired under provisions of SFAS 118 at December 31, 1995.
Accordingly, no interest income has been recognized on this loan during
1995. The Company has determined no reserve for impairment is necessary
for its notes receivable at December 31, 1995 under provisions of SFAS 114.
The fair value of the non-current portion of notes receivable at December
31, 1995 approximated carrying value. The fair value of the non-current
portion of notes receivable are determined by discounting the scheduled
loan payments to maturity using current market rates commensurate with the
risks and terms to maturity of those instruments.
Total maturities of notes receivable for each of the next five years are
approximately $132, $467, $385, $31 and $478, respectively.
Note 3. Acquisitions
On August 1, 1995 the Company acquired the Best Western Canyon Springs Park
Hotel, a 112 room full service property in Twin Falls, Idaho, for $5,750.
The purchase was financed with new long term-debt of $3,750, a note payable
to the seller of $400 and $1,600 from available cash and lines of credit.
On July 1, 1995 the Company paid $600 for a 32.9% equity interest in the
150 room full service Best Western Copper King Park Hotel in Butte,
Montana. The Company, which accounts for this investment under the equity
method of accounting, used internally generated funds to make this
investment. The Company subsequently entered into a management contract
with the property.
On December 31, 1994 the Company acquired the Green Oaks Inn and Conference
Center, a 284 room hotel property in Fort Worth, Texas which it has managed
since 1990 and had owned prior to that year. At the time of acquisition
the Company held a mortgage receivable of $2,783 net of deferred revenue of
$522. The Company purchased this property for $438 in cash, the
cancellation of the mortgage receivable and related accrued interest
receivable of $136 and the assumption of negative working capital and a
capital lease.
In March 1994, the Company acquired the Quality Inn Pocatello Park, a 152
room full service hotel property in Pocatello, Idaho for $5,224. This
purchase was financed with new long-term debt of $3,700. The Company's
lines of credit and internally generated funds were utilized to finance the
balance of the purchase price.
The pro forma results listed below are unaudited and reflect the impact of
the purchase price accounting adjustments on the Company's Consolidated
Statements of Operations assuming the aforementioned acquisitions occurred
at the beginning of each year presented.
1995 1994
Revenue of owned operations $123,628 $118,077
Net income 3,277 1,196
Income per common share:
Primary .76 .25
Fully diluted .75 .25
F-9
Note 4. Investment in Affiliates
As of December 31, 1995 and January 1, 1995 the Company's investment in
affiliates, accounted for under the equity method of accounting, are as
follows:
Ownership
Interest 1995 1994
Park Hotels, L.C., Provo, UT 50.0% $4,450 $3,165
Best Western Copper King Park Hotel,
Butte, MT (Note 3) 32.9% 560 -
Kahler Park Hotel, Hibbing, MN 25.0% 85 114
Quality Hotel Plaza One,
Rock Island, IL 26.6% - -
$5,095 $3,279
The Company or its subsidiaries typically have an interest in an affiliated
partnership or limited liability company and operate the hotels under long-
term management contracts. The Company also held notes receivable from
affiliates of $572 and $574 at December 31, 1995 and January 1, 1995,
respectively.
The Company contributed $1,200 to the Park Hotels, L.C. during 1995, which
along with funds from a $16,000 non-recourse loan commitment and a $1,000
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 $1,200. 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 Company's income from affiliates before taxes is as follows:
1995 1994 1993
Management fees $ 540 $ 381 $ 268
Equity in earnings 533 193 27
$1,073 $ 574 $ 295
Combined summarized balance sheet information for the Company's affiliates
is as follows:
1995 1994
Current assets $ 1,431 $ 654
Noncurrent assets 20,710 15,629
Current liabilities 2,194 1,595
Long-term debt, principally mortgages 12,076 9,162
Other long-term liabilities 1,663 1,273
Owners' equity 6,208 4,253
Combined summarized operating results reported by these affiliates are as
follows:
1995 1994 1993
Revenues $13,782 $11,099 $ 8,056
Net income (loss) 422 (87) (236)
F-10
Note 5. Financing
Notes payable consists of $4,100 drawn on various lines of credit with a
maximum available of $5,000 at December 31, 1995 and a short-term note
payable of $600. The lines of credit and note payable carry an interest
rate of prime plus 1%, mature at various dates throughout 1996 and are
secured by property and equipment, inventory and accounts receivable. The
Company anticipates the extension of all its lines of credit. The prime
rate at December 31, 1995 and January 1, 1995 was 8.75% and 8.5%,
respectively.
Outstanding long-term debt, which is secured by substantially all property
and equipment, is summarized as follows:
Obligations of Kahler Realty Corporation
Security/Secured
Property Interest Rate Maturity 1995 1994
Mortgages
Kahler Plaza Hotel 10.0% plus 2.0%
of room sales Nov 1997 $ 15,300 $ 15,455
Clinic View Inn 9.75% plus 2.0%
of room sales May 2000 14,531 14,654
San Marcos 7.5% plus added
interest* Dec 2000 13,600 13,600
Kahler Hotel Prime plus 1.0% Dec 2003 12,038 12,421
Mortgages under $10
million - secured
by ten hotel
properties and a Ranging from Ranging from
commercial laundry prime to 12.0% 1996 to 2014 46,937 41,441
Notes payable Prime to 11.0% Various dates
through Sept
1997 291 290
Capitalized leases 12.2% to 12.93% May 1997 26 46
Subtotal 102,723 97,907
Less current maturities 2,969 2,065
99,754 95,842
Obligations of Subsidiaries - Nonrecourse to Kahler Realty Corporation
Security/Secured
Property Interest Rate Maturity 1995 1994
Mortgages
Mortgages under $10 Tax-exempt variable
million - secured by rate of 3.55% to Ranging from
six hotel properties prime plus 0.5% 2003 to 2015 26,813 26,908
Special assessments 7.5% to 12.0% December 1997 111 158
Capitalized leases 0.0% to 14.3% August 1994
to June 1998 107 153
Subtotal 27,031 27,219
Less current maturities 770 702
26,261 26,517
Total indebtedness 129,754 125,126
Less current maturities 3,739 2,767
$126,015 $122,359
* Added interest is defined as approximately 67% of Excess Cash Flow as
defined. (See Note 7)
F-11
The fair value of long-term debt at December 31, 1995 was approximately
$122,744 as compared to a carrying value of $126,015. The fair values of
long-term debt were determined by discounting the scheduled loan payments to
maturity using borrowing rates currently available to the Company for bank
loans of similar term and maturity.
Total maturities of long-term debt, excluding capital lease obligations, in
each of the next five years are approximately $3,668, $18,619, $3,808,
$8,325 and $20,512, respectively.
At December 31, 1995 the Company has arranged for the issuance of a letter
of credit aggregating $1,000 as additional collateral for one of the
nonrecourse obligations listed above.
Under certain financial debt covenants, the Company is required to maintain
certain levels of net worth, debt to equity, cash flow and other ratios.
Waivers of certain covenants have been obtained as of December 31, 1995 and
January 1, 1995.
The laundry facility in Rochester Minnesota was financed with a $10,000
loan. In the event of default by the Company on this loan the lender can
require the Company's largest shareholder to purchase the loan at its
outstanding balance.
On January 19, 1996, the Company refinanced the San Marcos mortgage in the
amount of $13,600. The initial variable tax-exempt interest rate,
including a credit enhancement fee, was approximately 6.0%. To facilitate
this refinancing, the Company placed $1,548 in escrow with the trustee of
the present mortgage in November, 1995. These funds will be held by the
trustee pending resolution of the litigation discussed in Note 7.
Note 6. Stockholders' Equity
Preferred stock
The Company has 10,000,000 shares authorized and no shares outstanding as
of December 31, 1995 and January 1, 1995. The Board of Directors is
authorized to determine the series and number of preferred shares to be
issued and any related designations, powers, preferences, rights,
qualifications, limitations or restrictions.
Common stock
Common stock has been issued under deferred compensation, incentive stock
option, employee retirement and stock purchase plans and upon conversion of
preferred stock, and a common stock warrant.
Stock option plans
Under certain stock option plans, incentive stock options may be granted to
key employees or non-employee directors at not less than 100% of the fair
market value of the Company's stock on the date of grant and options not
qualifying as incentive stock options may be granted to non-employees
providing valuable services to the Company at not less than 50% of the fair
market value of the Company's stock on the date of grant. None of these
shares have been granted at less than market value. Total number of shares
authorized under these plans are 931,350. Key employee options expire five
years after the date of grant and vest 25% per year commencing one year
after the date of grant. Non-employee director options expire ten years
after the date of grant and vest after one year. Activity under the plans
is summarized below:
F-12
Number Option Price
of Shares Per Share
Balance, January 3, 1993 436,600 $ 2.88 - $ 9.88
Granted 157,500 5.75 - 7.50
Exercised (29,900) 2.88 - 5.00
Canceled (68,900) 3.00 - 9.88
Balance, January 2, 1994 495,300 2.88 - 7.50
Granted 113,700 8.50 - 11.75
Exercised (186,075) 2.88 - 7.50
Canceled (5,000) 3.00 - 7.50
Balance, January 1, 1995 417,925 2.88 - 11.75
Granted 125,000 7.88 - 12.88
Exercised (105,500) 2.88 - 11.75
Canceled (5,875) 3.00 - 11.75
Balance, December 31, 1995 431,550 $ 3.00 - $12.88
At December 31, 1995 178,744 options were exercisable and 499,800 shares
were available for grant.
Subordinated debt to affiliate
In January 1992, the Company issued a $2,000 subordinated note to the
Company's largest shareholder. The subordinated note requires annual
principal payments of $500 per year each April 21, matures in 1998 and
carries an interest rate of prime plus 1%. As of December 31, 1995 the
balance was $1,500. The Company has the right to repay the note in cash or
with common stock equal to 120% of the subordinated note at any time.
Note 7. Commitments and Contingencies
The Company believes it is in the final stages of negotiating a settlement
with a telecommunications company related to disputed unremitted telephone
revenue and fees at ten of its hotels (the Hotels). Proposed terms of this
settlement provide for the lease by the Company of $1,500 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 it's 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. The Company has recorded an estimate of
the loss that could result from the unfavorable resolution of this
uncertainty. 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. The Company refinanced this mortgage in January 1996 as
discussed in Note 5.
F-13
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.
Operating leases
The Company leases warehouse and retail store facilities for its formal
wear operations and land for three of its hotels under various operating
lease agreements which call for minimum lease payments and contingent rents
based upon percentages of revenues. Operating lease expense was $1,629,
$1,550 and $1,474, including contingent rentals of $516, $486, and $410 for
1995, 1994, and 1993, respectively.
Future minimum lease payments under operating leases total $6,651 with
annual payments of $997, $681, $409, $234 and $190 due in each of the next
five years, respectively.
Capital leases
The Company leases furniture and equipment under capital leases. Future
minimum lease payments under these capital leases total $171 with annual
payments of $100, $54, $17, $0 and $0 due in each of the next five years,
respectively. Of the $171 of total minimum lease payments, $38 represents
interest.
The following is an analysis of property under capital leases:
1995 1994
Furniture & equipment $ 465 $ 465
Less accumulated amortization (239) (164)
$ 226 $ 301
Amortization of leased equipment is classified with depreciation expense.
Telephone service agreements
In March, 1990 the Company sold all telephone switches and related
equipment at the Hotels to a telecommunications company. Each of the
Hotels subsequently entered into telephone service agreements with the same
telecommunications company which call for contingent payments based upon
telephone usage. Expenses incurred pursuant to these service agreements
were $2,316, $1,766 and $1,705 in 1995, 1994 and 1993, respectively. These
agreements expire in February, 2000.
Other
The Company plans on opening a 108 suite expansion to its hotel in Boise,
Idaho, in early 1996. At December 31, 1995, the Company had a $2,455 loan
commitment which is expected to fund a substantial portion of the remaining
expansion costs to be paid.
In January 1996 the Company entered into an agreement to purchase the 149
room full service Colonial Inn Hotel in Helena, Montana at a cost of
$9,200. This acquisition will be financed through a mortgage note payable
to a bank, a note payable to the seller and internally generated funds.
F-14
Note 8. Retirement Plans
The Company has a defined benefit plan covering union employees at
properties located in Rochester, Minnesota. Pension contributions and
expenses for this plan are determined based on the actuarial cost of
current service and amortization of prior service costs over a 20-year
period.
Net periodic pension cost for the defined benefit plan included the
following components:
1995 1994 1993
Service costs-benefits earned during
the period $ 97 $ 80 $ 68
Interest cost on projected benefit
obligation 219 179 171
Return on assets-actual (122) 8 (95)
Net amortization and deferral 53 (102) 5
Net periodic pension cost $ 247 $ 165 $ 149
The following table sets forth the Plan's funded status at December 31,
1995 and January 1, 1995:
1995 1994
Actuarial present value of vested
benefit obligation $ 3,124 $ 2,503
Accumulated benefit obligation $ 3,200 $ 2,564
Projected benefit obligation $ 3,200 $ 2,564
Fair market value of plan assets* 1,795 1,498
Unfunded projected benefit obligation 1,405 1,066
Unrecognized net liability at date of
initial application (34) (40)
Unrecognized prior service cost (459) (527)
Unrecognized net loss (516) (167)
Adjustment to recognize minimum liability 1,009 734
Pension liability $ 1,405 $ 1,066
*Plan assets consist primarily of equity and fixed income securities.
The Company has recognized an additional liability as the accumulated
benefit obligation exceeded the fair value of the plan assets. An
intangible asset was recognized up to the amount of unrecognized prior
service cost. As of December 31, 1995 the additional liability exceeded
the unrecognized prior service cost and the unrecognized transition
liability by $516. This amount has been recorded as a reduction of
stockholders' equity.
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.25% and 8.5% in
1995 and 1994, respectively. The expected long-term rate of return on
assets was 8%.
The Company has a defined contribution plan covering substantially all
other employees. The funding of the defined contribution plan is
determined by the Board of Directors.
Total expense for both plans was $497, $215 and $336 for 1995, 1994 and
1993, respectively.
F-15
The Company provides postretirement benefits to a fixed number of retired
employees relating to service provided prior to 1992. At December 31, 1995
and 1994 the estimated liability was $175 and $200, respectively.
Note 9. Segments
The Company's principal business activity is the operation and management
of hotel properties. Fees from managed properties are primarily based on a
percent of revenues of the managed property. The Company's other business
activities include a wholesale and retail formal wear business and
institutional laundries. Intersegment transactions including laundry
revenues of $2,050, $1,857, and $1,437 in 1995, 1994 and 1993,
respectively, have been eliminated from the table below. Operating income
represents revenue less operating expenses, excluding general corporate
expenses. Identifiable assets are those used in the operation of each
segment. Capital expenditures include non-cash lodging acquisitions of
$2,783 in 1994 and $28,079 in 1993, respectively. General corporate
assets consist primarily of cash, notes and other investments.
The following tables summarize the Company's segment information:
REVENUE OF OWNED OPERATIONS 1995 1994 1993
Lodging $105,356 $ 93,243 $ 80,505
Laundry 5,890 6,304 6,200
Formal Wear 9,373 8,924 8,467
Other 649 666 610
Interest income 504 773 1,197
$121,772 $109,910 $ 96,979
OPERATING INCOME
Lodging $ 19,316 $ 16,304 $ 13,794
Laundry 584 (389) 331
Formal Wear 363 539 323
Other 12 11 (65)
Non-recurring charges (526) (1,811) -
Corporate expenses (3,946) (3,346) (3,372)
Interest income 504 773 1,197
GROSS OPERATING PROFIT 16,307 12,081 12,208
Interest expense (13,115) (11,207) (9,362)
Equity in earnings of affiliates 533 193 27
Gain(Loss) on sale of assets (11) 20 6
INCOME FROM OPERATIONS BEFORE
INCOME TAXES $ 3,714 $ 1,087 $ 2,879
IDENTIFIABLE ASSETS
Lodging $155,479 $145 602 $135,955
Laundry 14,155 14,703 14,819
Formal Wear 3,872 4,024 3,909
Other 1,613 1,634 1,616
Corporate 3,248 3,106 6,107
$178,367 $169,069 $162,406
F-16
CAPITAL EXPENDITURES
Lodging $ 13,024 $ 13,859 $ 30,073
Laundry 140 846 9,368
Formal Wear 1,265 1,464 789
Other 38 74 1
Corporate 73 63 38
$ 14,540 $ 16,306 $ 40,269
DEPRECIATION AND AMORTIZATION
Lodging $ 6,722 $ 6,142 $ 5,737
Laundry 759 736 462
Formal Wear 1,326 1,411 1,547
Other 67 99 58
Corporate 45 89 100
$ 8,919 $ 8,477 $ 7,904
During the fourth quarters of 1995 and 1994, the Company recorded non-
recurring charges of $526 and $1,811 related to expenses incurred in
connection with planned secondary offerings and conversion of the Company
into a real estate investment trust. Neither offering was completed as a
result of general market conditions.
The Company regularly furnishes laundry, hospitality and food services to
the Company's largest shareholder, the Mayo Foundation (Mayo), and its
affiliates at competitive prices. The Company purchases, at competitive
prices, steam, electricity, water and related utility services from a Mayo
affiliate. These activities are summarized below.
1995 1994 1993
Revenue
Laundry sales $ 3,576 $ 3,333 $ 2,885
Food services 1,001 951 1,173
Operating costs and expenses
Utilities $ 1,497 $ 1,870 $ 1,946
Interest 153 162 140
The consolidated balance sheet includes receivables and payables to Mayo
summarized as follows:
1995 1994
Receivables $ 521 $ 424
Payables (including accrued interest) 182 209
Note 10. Provision for Income Taxes
Provision for income taxes consists of the following:
1995 1994 1993
Federal tax, paid or currently payable $ 622 $ 350 $ 671
State tax, paid or currently payable 110 93 204
Net deferred credits (prepaid charges) (174) (120) -
Tax benefit of stock options 139 - -
Tax provision $ 697 $ 323 $ 875
F-17
The difference between the U.S. Federal Statutory rate and the effective
tax rate is as follows:
1995 1994 1993
Statutory tax rate 34.0% 34.0% 34.0%
Changes in the valuation allowance (12.4) (15.0) (10.2)
Generation of general business credits (3.7) - -
Other permanent differences (0.8) 5.4 1.0
State taxes, before valuation allowance
and net of federal income tax 1.7 5.3 5.6
Effective tax rate 18.8% 29.7% 30.4%
Deferred tax assets and liabilities are classified as current and
noncurrent on the basis of the classification of the related asset or
liability for financial reporting. Prepaid and deferred taxes are recorded
for temporary differences between the book value of assets and liabilities
for financial reporting purposes and tax purposes.
Temporary differences comprising the net prepaid taxes included in other
assets on the Consolidated Balance Sheet at December 31, 1995 and January
1, 1995 are as follows:
1995
Temporary Differences Assets Liabilities Total
Allowance for doubtful accounts $ 81 $ - $ 81
Accrued employee benefits 504 - 504
Other - (180) (180)
Current 585 (180) 405
Depreciation and amortization 6 (1,910) (1,904)
Deferred revenues 1,658 (105) 1,553
Installment gains - (399) (399)
Property valuation allowances - (70) (70)
Joint ventures 1,003 (142) 861
Accrued employee benefits 242 - 242
Noncurrent 2,909 (2,626) 283
Other Components
Alternative minimum tax credits 1,563 - 1,563
General business credits 631 - 631
Valuation allowance (2,195) - (2,195)
(1) - (1)
Net prepaid tax asset $ 3,493 $ (2,806) $ 687
1994
Temporary Differences Assets Liabilities Total
Allowance for doubtful accounts $ 75 $ - $ 75
Accrued employee benefits 360 - 360
Other 13 (129) (116)
Current 448 (129) 319
Depreciation and amortization - (775) (1,049)
Deferred revenues 1,596 (108) 1,488
Installment gains 8 (427) (419)
Property valuation allowances - (90) 184
Joint ventures 589 (81) 508
Accrued employee benefits 264 - 264
Noncurrent 2,457 (1,481) 976
F-18
Other Components
Alternative minimum tax credits 1,068 - 1,068
General business credits 587 - 587
NOL carryforwards 218 - 218
Valuation allowance (2,655) - (2,655)
(782) - (782)
Net prepaid tax asset $ 2,123 $ (1,610) $ 513
The Company has based the value of the net prepaid tax asset primarily on
the alternative minimum tax credits which, under current law, have no
expiration dates. The ultimate realization of the net prepaid tax asset is
dependent upon the offset of these credits against future federal tax
payments if future taxable income exceeded the alternative minimum tax
levels.
The total valuation allowance at the end of 1995 was $2,195. The net
change in the total valuation allowance for the years ended 1995 and 1994
was a decrease of $460 and an increase of $398, respectively. In assessing
the realizability of prepaid tax assets, management considers whether it is
more likely than not that some portion or all of the net prepaid tax assets
will not be realized. Also, management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. In order to fully realize the net
prepaid tax asset, the Company will need to generate future regular tax.
Taxable income for the years ended 1995 (estimated) and 1994 was
approximately $273 and $937, respectively. Based upon the levels of
historical taxable income and projections for future taxable income,
management believes it is more likely than not the Company will realize the
benefits of the net prepaid tax asset, net of the existing valuation
allowance at December 31, 1995. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of taxable income during future periods are reduced.
Note 11. Supplemental disclosure of cash flow information and non-cash
financing and investing activities
1995 1994 1993
Interest paid, net of amounts capitalized $ 12,354 $ 10,968 $ 9,307
Interest received (444) (753) (1,026)
Income taxes paid 1,083 520 889
The Company acquired certain hotel interests in 1995 and 1994 as described
in Note 3.
Note 12. Other Matters
On November 24, 1995 the Company retained Montgomery Securities as
financial advisor to assist the Company's Board of Directors in exploring
the strategic alternatives available to enhance shareholder value. As one
alternative, the Company is presently considering a public sale of its
shares simultaneously with its conversion to a real estate investment
trust. As other possible alternatives, the Company with Montgomery's
assistance, will also explore a possible sale of part or all of its assets
as well as the continued operation of the Company in its present corporate
form.
F-19
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Kahler Realty Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Kahler
Realty Corporation and Subsidiaries as of December 31, 1995 and January 1,
1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated 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.
We conducted our audits 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 audits
provide 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 Kahler Realty Corporation and Subsidiaries as of December 31,
1995 and January 1, 1995, and the results of their operations and their
cash flows for each of the years in the three-year period ended December
31, 1995 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Chicago, Illinois
February 16, 1996
F-20
PARK HOTELS, L. C.
BALANCE SHEETS
December 31, 1995 and 1994
ASSETS
1995 1994
CURRENT ASSETS
Cash and cash equivalents (Note 4) $ 802,122 $ 118,601
Receivables, less allowance for doubtful
accounts of $4,000 and $2,000, respectively 98,184 95,857
Inventories 83,646 87,828
Prepaid expenses 7,780 4,252
Total current assets 991,732 306,538
DEFERRED COSTS 534,633 77,338
PROPERTY AND EQUIPMENT
Land 1,652,000 -
Buildings 4,608,749 4,608,749
Furniture and equipment 2,420,876 2,267,883
Total 8,681,625 6,876,632
Less accumulated depreciation 690,414 374,989
7,991,211 6,501,643
Construction in progress 535,863 -
Total property and equipment 8,527,074 6,501,643
TOTAL ASSETS $10,053,439 $ 6,885,519
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 533,291 $ 366,175
Accrued liabilities:
Payroll and payroll related liabilities 91,700 112,077
Property and other taxes 85,236 76,399
Total current liabilities 710,227 554,651
LONG-TERM DEBT (Notes 2 and 4)
Mortgage payable 443,173 -
Members' notes payable - 6,228,000
443,173 6,228,000
COMMITMENTS AND CONTINGENCIES (Note 3)
MEMBERS' EQUITY 8,900,039 102,868
TOTAL LIABILITIES AND MEMBERS' EQUITY $10,053,439 $ 6,885,519
See Notes to Financial Statements
SD-1
PARK HOTELS, L.C.
STATEMENTS OF OPERATIONS
For Years Ended December 31, 1995 and 1994 and for the Period from
August 31, 1993 (date of formation) to December 31, 1993
1995 1994 1993
REVENUES
Lodging $ 4,147,914 $ 3,627,437 $ 973,357
Food and beverage 2,172,501 1,963,224 622,872
Other 530,509 501,068 155,457
Interest income 16,095 10,047 3,731
Total revenues 6,867,019 6,101,776 1,755,417
OPERATING COSTS AND EXPENSES
Rooms 880,984 843,684 254,171
Food and beverage 1,713,223 1,555,457 498,865
Other 331,997 366,965 113,246
Total direct operating
costs and expenses 2,926,204 2,766,106 866,282
Selling, general and
administrative 1,233,198 1,122,199 316,669
Property insurance, rent,
maintenance and energy costs 587,789 637,055 197,973
Real estate and personal
property taxes 119,157 119,920 34,437
Management fee to affiliate(Note 4) 332,714 231,542 51,199
Depreciation and amortization 350,427 320,330 96,133
Interest expense to Members 641,484 747,361 249,119
Total indirect operating
costs and expenses 3,264,769 3,178,407 945,530
Total operating costs
and expenses 6,190,973 5,944,513 1,811,812
NET INCOME (LOSS) $ 676,046 $ 157,263 $ (56,395)
See Notes to Financial Statements
SD-2
PARK HOTELS, L.C.
STATEMENTS OF CASH FLOWS
For Years Ended December 31, 1995 and 1994 and for the Period from
August 31, 1993 (date of formation) to December 31, 1993
1995 1994 1993
CASH FLOW FROM OPERATIONS
Net income (loss) $ 676,046 $ 157,263 $ (56,395)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 350,427 320,330 96,133
Change in current assets
and current liabilities:
Receivables, net (2,327) 72,052 (167,909)
Inventories 4,182 (5,444) (82,384)
Prepaid expenses (3,528) (2,747) (1,505)
Accounts payable 167,116 162,385 203,691
Accrued liabilities (11,540) 5,433 183,141
Net cash provided by
operating activities 1,180,376 709,272 174,772
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property
and equipment (Note 5) (1,490,856) (736,192) (6,140,439)
Payments for deferred costs (75,515) (5,595) (113,217)
Net cash used by
investing activities (1,566,371) (741,787) (6,253,656)
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' contributions
(Notes 2 & 5) 1,828,500 - 2,000
Members' distributions (785,375) - -
Payments for financing fees (416,782) - -
Proceeds from Members' notes
payable (Note 2) - - 6,228,000
Proceeds from issuance of
long-term debt 443,173 - -
Net cash provided (used)
by financing activities 1,069,516 - 6,230,000
INCREASE (DECREASE) IN CASH 683,521 (32,515) 151,116
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 118,601 151,116 -
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 802,122 $ 118,601 $ 151,116
See Notes to Financial Statements
SD-3
PARK HOTELS, L.C.
STATEMENTS OF CHANGES IN MEMBERS' EQUITY
For Years Ended December 31, 1995 and 1994 and for the Period from
August 31, 1993 (date of formation) to December 31, 1993
Kahler
ESNET Realty Total
Initial contributions,
August 31, 1993 (Note 1) $ 1,000 $ 1,000 $ 2,000
Net loss (28,198) (28,197) (56,395)
BALANCES, December 31, 1993 (27,198) (27,197) (54,395)
Net income 78,632 78,631 157,263
BALANCES, December 31, 199 51,434 51,434 102,868
Net income 338,023 338,023 676,046
Members' contributions 629,000 1,199,500 1,828,500
Land contribution (Note 5) 850,000 - 850,000
Member loans converted
to Equity (Note 2) 3,114,000 3,114,000 6,228,000
Members' distributions (532,438) (252,937) (785,375)
BALANCES, December 31, 1995 $ 4,450,019 $ 4,450,020 $ 8,900,039
See Notes to Financial Statements
SD-4
PARK HOTELS, L.C.
NOTES TO FINANCIAL STATEMENTS
For Years Ended December 31, 1995 and 1994 and for the Period from
August 31, 1993 (date of formation) to December 31, 1993
Note 1. Organization and summary of significant accounting policies
Organization
Park Hotels, L.C. (the Company) was formed pursuant to the Utah Limited
Liability Company Act on August 31, 1993 to own and operate a hotel located
in Provo, Utah. The Company has two members within one class. Kahler Realty
Corporation, a Minnesota corporation (Kahler) and ESNET Properties, a Utah
limited liability company (ESNET) (collectively referred to as the Members),
each have a 50% interest in the Company. The Company will continue in
business until January 1, 2030, unless dissolved prior to that date.
The Members cannot be held liable under a judgement, decree, or order of a
court, or in any other manner, for a debt, obligation, or liability of the
Company. A Member may have a negative capital account. A negative capital
account does not represent a liability of such member to the Company unless
the Company is being terminated, in which such event the member would be
required to restore its capital account to zero.
At the time of formation, the Members each contributed cash of $1,000 and
loaned the Company $3,114,000 pursuant to promissory notes (the Notes). The
Company simultaneously purchased the Provo Park Hotel (the Hotel). The Hotel
is a nine story hotel located in downtown Provo, Utah. The Hotel has 232
rooms and 10,296 square feet of meeting space. A substantial remodeling was
completed in March 1995 at a cost of approximately $1.0 million.
In November 1995, the Members agreed to release their security interest in
the Hotel and canceled the notes so that the Company could obtain a loan
commitment to finance the expansion of the Hotel and the construction of a
114-suite hotel (as discussed below). The Notes were converted to equity
upon cancellation.
In December 1995 the Company began construction on a 96 suite expansion and
17,000 square foot conference center. Prior to beginning construction, the
Company acquired land adjacent to the Hotel which will be used for the
expansion of the Hotel and construction of the conference center as well as
the land under the Hotel previously leased by the Company (Note 3). The
land, which cost $802,000, was purchased with funds contributed by the
Members. The expansion is scheduled for completion in early 1997 and will be
financed by a portion of the proceeds from a construction loan and a federal
grant (Note 2).
The Company is also constructing a 114 suite Residence Inn by Marriott in
Provo, Utah. The land for this hotel was contributed by a Member of the
Company (Note 5). Construction began in December 1995 and is scheduled to be
completed in the fourth quarter of 1996, and will be financed by a portion of
the proceeds from a construction loan and a federal grant (Note 2).
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.
SD-5
Deferred costs
Deferred costs represent financing, organization, pre-opening and franchise
costs. Financing costs include costs related to obtaining the $16 million
dollar loan described in Note 2. These costs will be amortized over the life
of the loan. Pre-opening costs include certain costs incurred during the
Hotel's break-in period which consist of marketing and employee training.
The amounts of these deferred costs are as follows:
1995 1994 Expected Life
Financing fees $ 416,782 $ - 7 years
Organization costs 98,653 63,738 5 years
Pre-opening costs 55,074 55,074 3 years
Franchise rights 40,600 - 20 years
611,109 118,812
Accumulated amortization (76,476) (41,474)
$ 534,633 $ 77,338
The Company has entered into a franchise agreement (the Agreement) for its
hotel under construction permitting it to use the Residence Inn by Marriott
name, and to receive reservation and advertising services. The Agreement
expires in 2015. The Company has the option to renew the agreement for an
additional ten years. Fees incurred pursuant to the Agreement will
approximate 4% of gross room revenue.
Inventories
Inventories are stated primarily at the lower of average cost or market.
Property and equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over their estimated useful lives. Depreciation
expense was $315,425, $286,404 and $88,585 for the years 1995 and 1994 and
the period from August 31, 1993 to December 31, 1993, respectively. Interest
of $2,474 has been capitalized and is included in property and equipment at
December 31, 1995. The estimated useful lives used in computing depreciation
are as follows:
Buildings 18 - 50 years
Furniture and equipment 5 - 10 years
The Company records a provision for impairment of the carrying value of its
real estate investments whenever the estimated future cash flows from a
property's operations and projected sale are less than the property's net
carrying value. Management believes that the estimates and assumptions used
are appropriate in evaluating the carrying value of the Company's properties
presented currently in the balance sheet; however, changes in market
conditions and circumstances could occur in the near term which will cause
these estimates to change.
On January 1, 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 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. Any long-lived assets held for sale
under SFAS 121 will be reflected at the lower of historical cost or estimated
fair value less anticipated selling costs. No adjustment of the carrying
values of the Company's long-lived assets was required at January 1, 1996 as
a result of adopting the provisions of SFAS No. 121.
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Use of estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Income taxes
The Company is a limited liability company and limited liabiliaty companies
are taxed as partnerships. The Members are required to report on their
individual tax returns allocable shares of income, gains, losses, deductions
and credits of the Company. Accordingly, no provision for income taxes is
reflected in the financial statements of the Company.
The following unaudited information is a reconciliation of financial net
income (loss) to taxable income (loss):
1995 1994 1993
Financial net income $ 676,046 $ 157,263 $ (56,395)
Adjustments:
Depreciation (289,623) (294,647) (21,324)
Other timing differences 6,651 45,447 12,000
Permanent differences 2,183 3,043 879
Taxable income (loss) $ 395,257 $ (88,894) $ (64,840)
Note 2. Long-Term Debt
Outstanding debt, which is secured substantially by all property and
equipment, is summarized as follows:
1995 1994
Mortgage payable, prime plus 1%,
due monthly including interest,
through the year 2003 (1) $ 443,173 $ -
Members' notes payable, 12%,
interest paid quarterly (2) - 6,228,000
$ 443,173 $ 6,228,000
(1) The Company obtained a $16 million construction loan from a local bank
and a $1.0 million federal grant to finance its construction of an additional
96 suites and conference center at its existing Hotel and its construction of
a 114 room all-suites Residence Inn by Marriott in Provo, Utah.
Substantially all remaining construction costs will be funded by this debt.
Upon completion of construction, the Company can convert the construction
loan into a permanent loan which matures in 2003. The interest rate can be
fixed for a one, three or five year period based upon Treasury rates at the
conversion date.
(2) In November 1995, the Members agreed to release their security interest
in the hotel and canceled the notes so that the Company could obtain a loan
commitment to finance the expansion of the hotel and the construction of a
114-suite hotel. The Notes were converted to equity upon cancellation.
Based on borrowing rates currently available to the Company for bank loans of
similar term and maturity, the fair value of the Company's long-term debt
approximates its carrying value. Maturities of long-term debt are $ -0-,
$378,857, $64,316, in 1996, 1997 and 1998, respectively.
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Note 3. Commitments and Contingencies
The Hotel was held pursuant to a ground lease with the City of Provo prior to
acquiring the land under the Hotel in 1995 (Note 1). The Company leases a
parking garage from the City of Provo. This lease matures in November, 2031
and has two ten year renewal options. The agreement also provides the Company
with an option to purchase the parking garage for $250,000 after December 31,
2005 and before January 1, 2008.
The Company leases a parking garage and equipment under lease agreements
which call for minimum lease payments and contingent rents based upon
percentages of revenues. Operating lease expense was $36,700, $32,718 and
$15,002 which includes contingent rentals of $11,996, $-0- and $-0- for 1995,
1994 and for the period from August 31, 1993 to December 31, 1993,
respectively.
Future minimum lease payments under operating leases total $95,402 with
annual payments of $19,404, $19,404, $19,404, $19,404 and $17,787 due in each
of the next five years, respectively.
Note 4. Related Party Transactions
The Company has a management contract with an affiliate of Kahler which
expires August 23, 2003. The management fee is equal to 3% of gross revenues
and 15% of cash flow after a capital addition reserve and a preferred return
to the Members.
The Company made interest payments to the Members of $641,484, $747,361 and
$249,119 for 1995, 1994 and 1993, respectively.
The Company invests excess cash with Kahler pursuant to the management
contract described above. The interest earned on this excess cash is
computed using a money market rate on instruments in excess of $50,000 plus
1%. Cash invested with Kahler was $773,641 and $89,304 at December 31, 1995
and 1994.
Note 5. Supplemental Disclosure of Cash Flow Information and Non-Cash
Financing and Investing Activities
1995 1994 1993
Interest paid $ 641,484 $ 747,361 $ 249,119
On November 14, 1995 the Company received a contribution of land from ESNET,
a member of the Company. The value assigned to the land by the Members on
the date of the contribution was $850,000, which was the cost recorded on the
financial statement of ESNET in connection with the acquisition of the land.
The Company has accounted for the $850,000 land contribution as an increase
in the land value under property and equipment and an increase in Members'
equity.
In November 1995 the Members converted their notes to equity as discussed in
Notes 1 and 2.
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KPMG Pat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Members
Park Hotels, L.C.
We have audited the accompanying balance sheets of Park Hotels, L.C., an
unconsolidated venture of Kahler Realty Corporation as of December 31, 1995
and December 31, 1994 and the related statements of operations, changes in
members' equity, and cash flows for the years ended December 31, 1995 and
1994 and for the period from August 31, 1993 (date of formation) to December
31, 1993. 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.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Park Hotels, L.C. as of
December 31, 1995 and December 31, 1994, and the results of its operations
and its cash flows for the years ended December 31, 1995 and 1994 and for the
period from August 31, 1993 (date of formation) to December 31, 1993, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Chicago, Illinois
February 16, 1996
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