KAHLER REALTY CORP, S-11/A, 1995-09-01

KAHLER REALTY CORP
S-11/A, 1995-09-01
HOTELS & MOTELS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 1995

REGISTRATION NO. 33-82994
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------

AMENDMENT NO. 4
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
KAHLER REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS)
20 SECOND AVENUE SOUTHWEST ROCHESTER, MINNESOTA 55902
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
HAROLD W. MILNER PRESIDENT AND CHIEF EXECUTIVE OFFICER KAHLER REALTY
CORPORATION 20 SECOND AVENUE SOUTHWEST ROCHESTER, MINNESOTA 55902 (507) 285-
2700
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:

TIMOTHY S. HEARN, ESQ. STEVEN R. FINLEY, ESQ.
DORSEY & WHITNEY P.L.L.P.
PILLSBURY CENTER SOUTH GIBSON, DUNN & CRUTCHER

220 SOUTH SIXTH STREET 200 PARK AVENUE

MINNEAPOLIS, MINNESOTA 55402-1498 NEW YORK, NEW YORK 10166-0193

(612) 340-7802 ---------------- (212) 351-4000

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]

If the delivery of this prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]

CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.10 par 1,617,475
value................... shares $11.3125 $18,297,686 $6,310
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</TABLE>
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(1) In addition to these shares, this registration statement covers 8,065,525
shares the $30,246 registration fee for which was paid at the time of
initial filing.

(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(a) on the basis of the average of the high and low
prices per share of the Common Stock of Kahler Realty Corporation as
reported on the Nasdaq National Market on August 28, 1995.

----------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>

KAHLER REALTY CORPORATION

----------------

CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K

<TABLE>
<CAPTION>
FORM S-11 REGISTRATION
STATEMENT ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
--------------------------------- ----------------------
<C> <S> <C>
1. Forepart of Registration Statement
and Outside Front Cover Page of
Prospectus......................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front Cover Page; Available
Information; Table of Contents;
Outside Back Cover Page
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed Outside Front Cover Page; Prospectus
Charges............................ Summary; Risk Factors
4. Determination of Offering Price..... Outside Front Cover Page;
Underwriting
5. Dilution............................ *
6. Selling Security Holders............ *
7. Plan of Distribution................ Outside Front Cover Page;
Underwriting
8. Use of Proceeds..................... Use of Proceeds
9. Selected Financial Data............. Selected Consolidated Financial and
Operating Data of Historical
Kahler; Selected Consolidated Pro
Forma Financial and Operating Data
of Realty
10. Management's Discussion and Analysis
of Financial Condition and Results Management's Discussion and Analysis
of Operations...................... of Pro Forma Financial Data of
Realty; Management's Discussion and
Analysis of Financial Condition and
Results of Operations of Historical
Kahler
11. General Information as to Prospectus Summary; The Spin Off;
Registrant......................... Directors and Executive Officers of
Realty
12. Policy with Respect to Certain Prospectus Summary; Policies and
Activities......................... Objectives with Respect to Certain
Activities
13. Investment Policies of Registrant... Prospectus Summary; Policies and
Objectives with Respect to Certain
Activities; Growth Strategies;
Business and Operating Strategies;
The Hotels
14. Description of Real Estate.......... Prospectus Summary; The Hotels;
Certain Agreements
15. Operating Data...................... The Hotels
16. Tax Treatment of Registrant and Its Prospectus Summary; Distributions;
Security Holders................... Federal Income Tax Considerations
17. Market Price of and Dividends on the
Registrant's Common Equity and Price Range of Common Stock;
Related Stockholder Matters........ Distributions
</TABLE>

--------

*Answer is negative or item is not applicable.
<PAGE>

<TABLE>
<CAPTION>
FORM S-11 REGISTRATION
STATEMENT ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
--------------------------------- ----------------------
<C> <S> <C>
18. Description of Registrant's Description of Capital Stock;
Securities........................ Certain Provisions of Minnesota Law
and Realty's Articles of
Incorporation and Bylaws
19. Legal Proceedings.................. The Hotels
20. Security Ownership of Certain
Beneficial Owners and Management.. Principal Shareholders
21. Directors and Executive Officers... Directors and Executive Officers of
Realty
22. Executive Compensation............. Directors and Executive Officers of
Realty
23. Certain Relationships and Related Certain Relationships and Related
Transactions...................... Transactions
24. Selection, Management and Custody
of Registrant's Investments....... Outside Front Cover Page; Prospectus
Summary; Growth Strategies;
Business and Operating Strategies;
Certain Agreements; Kahler
Management Corporation; Policies
and Objectives with Respect to
Certain Activities
25. Policies with Respect to Certain Risk Factors; Policies and
Transactions...................... Objectives with Respect to Certain
Activities
26. Limitations of Liability........... Description of Capital Stock;
Certain Provisions of Minnesota Law
and Realty's Articles of
Incorporation and Bylaws
27. Financial Statements and Prospectus Summary; Selected
Information....................... Consolidated Financial and
Operating Data of Historical
Kahler; Selected Consolidated Pro
Forma Financial and Operating Data
of Realty; Financial Statements;
Experts
28. Interests of Named Experts and
Counsel........................... *
29. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................... *
</TABLE>
--------
* Answer is negative or item is not applicable.
<PAGE>

SUBJECT TO COMPLETION

SEPTEMBER 1, 1995
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS

8,420,000 SHARES

LOGO
KAHLER REALTY CORPORATION

COMMON STOCK

($.10 PAR VALUE)

Kahler Realty Corporation ("Realty") owns equity interests in 14 hotels and a
mortgage note with equity features in one hotel (the "Hotels") aggregating
3,781 rooms located primarily in the Intermountain and Midwestern regions, with
concentrations in Utah, Idaho and Rochester, Minnesota. Realty intends to
qualify as a real estate investment trust (a "REIT") for federal income tax
purposes beginning in 1996 and pay regular quarterly dividends beginning in the
fourth quarter of 1995. See "Distributions." In order to qualify as a REIT,
prior to the Offering Realty will distribute to its existing shareholders its
hotel management operations and other non-real estate related businesses (the
"Spin Off"). See "The Spin Off." Realty believes that operating as a REIT will
provide it with greater access to capital markets and thereby give it greater
financing flexibility to pursue its growth strategies.

The Common Stock is quoted on the Nasdaq National Market ("Nasdaq") under the
symbol "KHLR." A recent price of the Common Stock on Nasdaq is set forth under
the heading "Price Range of Common Stock." The public offering price of the
Common Stock offered hereby is expected to be $14.00 per share.

SEE "RISK FACTORS" ON PAGES 18 THROUGH 26 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SHARES OF
COMMON STOCK OFFERED HEREBY, INCLUDING RISKS ASSOCIATED WITH:

. the hotel industry, including intense competition, over-building in the
industry, dependence on business travelers and tourism, and the potential
for loss of a franchise;

. historical fluctuation of operating results due to gains or losses on
sales of assets, volatility of the hotel industry and changes in economic
conditions;

. concentration of Hotels in Greater Salt Lake City, Utah, and Rochester,
Minnesota, which makes Realty dependent on local conditions in these
markets;

. hotel renovations and construction, including the potential for cost
overruns and environmental problems, and the need to generate sufficient
funds from Realty's hotels for ongoing capital expenditures and
replacement of furniture, fixtures and equipment;

. Realty's dependence on Kahler Management Corporation to operate the
Hotels;

. the terms of the Spin Off and the Percentage Leases not being established
through arm's-length negotiations and possibly not reflecting fair market
values or terms;

. debt financing, including the risk that the cash flow on a hotel may be
insufficient to meet required payments of principal and interest; and

. Realty not obtaining, or losing, REIT status, which would materially
reduce the amounts available for distribution to shareholders.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) REALTY(2)
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total(3)...................................... $ $ $
--------------------------------------------------------------------------------
</TABLE>

(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.

(2) Before deducting expenses estimated at $1,250,000 payable by Realty.

(3) Realty has granted the Underwriters an option, exercisable within 30 days
after the date of this Prospectus, to purchase up to an additional
1,263,000 shares of Common Stock at the Price to Public per share less
Underwriting Discount, solely to cover over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."

The shares of Common Stock are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the shares of Common Stock will be made at the
offices of Salomon Brothers Inc, Seven World Trade Center, New York, New York,
or through the facilities of The Depository Trust Company, on or about
, 1995.

SALOMON BROTHERS INC DILLON, READ & CO. INC.

The date of this Prospectus is , 1995
<PAGE>

[INSERT MAP]

THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE EXCHANGE ACT. SEE "UNDERWRITING."
<PAGE>

PROSPECTUS SUMMARY

The following Summary is qualified in its entirety by the more detailed
descriptions and financial information and statements, and the notes thereto,
appearing elsewhere in this Prospectus. As used herein, "Realty" refers to
Kahler Realty Corporation giving effect to the Spin Off; "Historical Kahler"
refers to Kahler Realty Corporation without giving effect to the Spin Off;
"KMC" refers to Kahler Management Corporation, a wholly owned subsidiary of
Historical Kahler, 90.5% of the common stock of which is being distributed to
the existing shareholders of Historical Kahler in the Spin Off; and " Common
Stock" refers to the common stock, $.10 par value, of Realty. For definitions
of certain other capitalized or abbreviated terms used in this Prospectus, see
"Certain Definitions." Except as otherwise indicated herein, the information in
this Prospectus (i) gives effect to the consummation of the Spin Off, (ii)
assumes completion of the Offering and use of proceeds to repay certain
indebtedness, and (iii) assumes no exercise of the Underwriters' over-allotment
option. See "Use of Proceeds," "The Spin Off" and "Underwriting."

REALTY

Historical Kahler, a publicly-traded company headquartered in Rochester,
Minnesota, was originally founded in 1917 to provide lodging services for the
nearby Mayo Clinic. The Mayo Clinic is the nation's largest not-for-profit
private medical practice with over 415,000 patient registrations recorded in
1994. Since 1917, Historical Kahler has expanded its hotel operations to
include the ownership and management of full service hotels, conference center
hotels, suite hotels and economy hotels located in eight states throughout the
Intermountain and Midwestern regions of the United States. Upon completion of
the Spin Off and the Offering, Realty will succeed to the hotel ownership,
acquisition and development operations of Historical Kahler and will own equity
interests in 14 hotels and a mortgage note with equity features in one hotel
aggregating 3,781 rooms (the "Hotels").

The Hotels consist of 12 full service hotels, including two suite hotels, and
three conference center hotels. Six of the Hotels operate under franchise
agreements with national hotel companies, including Sheraton(R), Hilton(R),
Holiday Inn(R), Quality Inn(R), and Best Western(R). A majority of the Hotels
are located near major medical, corporate or educational institutions with whom
Realty maintains close working relationships. These institutional relationships
allow Realty to attract a consistent base of hotel customers, including
frequent business travelers, large groups and conventions, and leisure
travelers. Realty has not utilized new franchise affiliations in markets where
these relationships and other factors allow it to develop a sufficient demand
base. Seven of the Hotels located in Utah and Idaho operate under the "Park"
name and Realty's proprietary insignia. The Hotels had an average occupancy
rate of 68.7%, an ADR of $65.99 and REVPAR of $45.34 for the twelve months
ended July 2, 1995 as compared to 65.4%, $65.42 and $42.78, respectively, for
the twelve months ended June 30, 1995 for the U.S. hotel industry as a whole as
reported by Smith Travel Research.

Over the period from 1990 through 1994, a capital-constrained environment for
many hotel owners and operators, Historical Kahler's portfolio of owned and
managed hotels increased by 1,081 rooms, or 34.1%, through acquisitions and the
development of new hotels. Over this period, total lodging revenues increased
at a compound annual growth rate of 17.3% and total lodging gross profit
increased at a compound annual growth rate of 21.0%.

GROWTH OF HISTORICAL KAHLER'S HOTEL PORTFOLIO(1)

(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR COMPOUND
--------------------------------------- ANNUAL
1990 1991 1992 1993 1994 GROWTH
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Number of hotels........... 13 14 16 18 20 N.A.
Number of rooms............ 3,174 3,374 3,699 4,103 4,382 8.4%
Total lodging revenues..... $49,236 $51,021 $58,408 $80,505 $93,243 17.3%
Lodging operating costs and
expenses.................. $38,760 $38,458 $45,053 $60,974 $70,797 16.3%
Total lodging gross
profit(2)................. $10,476 $12,563 $13,355 $19,531 $22,446 21.0%
</TABLE>
--------

(1) Includes hotels in which Historical Kahler does not own a majority interest
and which will not be retained by Realty in the Spin Off. See "Selected
Consolidated Pro forma Financial and Operating Data of Realty" for
information concerning operating and other financial data relating to the
Hotels to be retained by Realty after the Spin Off.

(2) Represents total lodging revenues less lodging operating costs and expenses
before allocation of corporate expense, interest, income taxes,
depreciation and amortization. Realty considers this item to be one measure
of the net cash flow available from Historical Kahler's lodging operations.
However, it does not represent cash generated by operating activities in
accordance with GAAP and should not be considered as an alternative to net
income as a measure of operating performance or to cash flows from
operations, or from investing or financing activities as a measure of
liquidity.

3
<PAGE>

Realty intends to continue this growth through the following strategies: (i)
pursuit of opportunistic acquisitions located in strong and growing markets;
(ii) redevelopment and expansion of existing Hotels; (iii) maintenance of a
regular program of renovation and refurbishment; and (iv) to a limited degree,
pursuit of new hotel development in selected hotel segments and local markets
with attractive projected returns. In pursuing these growth strategies, Realty
intends to focus on its existing markets to take advantage of economies of
scale and on expanding strategic relationships with major local medical,
corporate and educational institutions.

Realty will seek to expand its presence in the Intermountain region based on
its belief that attractive acquisition opportunities still remain. The
Intermountain region of the western United States has been one of the fastest
growing regions of the country in the 1990s. U.S. Census data indicates that
the Intermountain region (Idaho, Utah, Nevada, Wyoming, Montana, Colorado, New
Mexico and Arizona) experienced the strongest population growth in 1994,
increasing by 3.0% as compared to 1.0% for the United States as a whole.
Between 1990 and 1994, Utah's population expanded 10.7% (the nation's fifth
highest increase) and Idaho's grew by 12.5% (the nation's second highest
increase). The recent announcements that Micron Technology, Inc. will build a
major facility in the Greater Salt Lake City area and that the 2002 Winter
Olympic Games will be held there are further evidence of the region's
popularity and growth potential.

Upon completion of the Spin Off and the Offering, the Mayo Foundation and the
executive officers and directors of Realty will retain 8.8% and 5.2% equity
interests in Realty, respectively. John Herrell, the Mayo Foundation's Vice
President and Chief Administrative Officer, will continue as the Chairman of
the Board of Directors of Realty. The executive officers of Realty will consist
of Harold W. Milner, President and Chief Executive Officer, Steven R. Stenhaug,
Senior Vice President, Chief Financial Officer and Treasurer, and Michael J.
Quinn, Senior Vice President, Secretary and General Counsel, who average 16
years of experience in the hotel industry and ten years of experience with
Historical Kahler. Pursuant to the Exchange Agreement, the executive officers
of Realty will acquire from the Mayo Foundation additional shares of Common
Stock in exchange for all of the KMC Common Stock owned by them after the Spin
Off. Realty's executive officers will exercise all options to purchase KMC
Common Stock received by them in the Spin Off (aggregating 6,600 shares) and
will either exchange such shares for Common Stock pursuant to the Exchange
Agreement or sell the shares in the open market. As a result of these
transactions, the executive officers of Realty will increase their equity
ownership in Realty and eliminate any equity ownership in KMC. To further align
their interests with Realty's shareholders, Realty's executive officers have
also agreed not to acquire any capital stock of KMC so long as they are
employed by Realty. See "Certain Relationships and Related Transactions--
Exchange Agreement." Mr. Milner has agreed, subject to certain conditions, not
to sell any shares of Common Stock for a period of three years from the closing
of the Offering. The Mayo Foundation has agreed, subject to certain conditions,
not to sell any shares of Common Stock for a period of one year from the
closing of the Offering. Thereafter, one-third of the shares of Common Stock
owned by the Mayo Foundation will become available for sale at the commencement
of each of the second, third and fourth years following the closing of the
Offering. See "Underwriting."

Upon completion of the Offering, Realty will retain $17.6 million of
outstanding tax-exempt mortgage indebtedness, which will represent less than
10.0% of Realty's total market capitalization. This indebtedness had a weighted
average interest rate of 5.8% (including credit enhancement fees) as of August
1, 1995. Realty is also negotiating to obtain commitments for lines of credit
in an aggregate principal amount of $50 million (the "Lines of Credit") to be
used to fund the acquisition, development and expansion of hotels. Realty
intends to employ conservative financing policies with respect to the
acquisition, development and expansion of hotels. Realty's Board of Directors
has adopted a policy limiting its consolidated indebtedness to 50.0% of
Realty's investment in hotel properties, at cost and before accumulated
depreciation.

Realty is a Minnesota corporation that was incorporated on May 18, 1994.
Realty intends to qualify as a REIT for federal income tax purposes beginning
on January 1, 1996. Realty's executive offices are located at 20 Second Avenue
Southwest, Rochester, Minnesota 55902. Its telephone number is (507) 285-2700.

4
<PAGE>

STRUCTURE AND OWNERSHIP

The following diagram depicts the structure and ownership of Realty and KMC
after the Spin Off and the Offering:

[DIAGRAM APPEARS HERE]

(1) Relates to the University Park Hotel. See "The Hotels--Full Service
Hotels--Intermountain Hotels--University Park Hotel-Salt Lake City, Utah."

(2) Includes 12 Hotels which are wholly owned by Realty, the Ogden Park Hotel
which is 63.8% owned by Realty (84.0% upon conversion of certain
indebtedness held by Realty), and the Provo Park Hotel which is 50.0% owned
by Realty. See "The Hotels."

5
<PAGE>

RISK FACTORS

An investment in the Common Stock involves various risks, and investors
should consider the matters discussed under "Risk Factors." Some of the
significant risks include those associated with:

. the hotel industry, including intense competition, over-building in the
industry, dependence on business travelers and tourism, and the potential
for loss of a franchise, all of which could reduce amounts available for
distribution to shareholders;

. historical fluctuation of operating results due to gains or losses on
sales of assets, volatility of the hotel industry and changes in economic
conditions;

. concentration of Hotels in Greater Salt Lake City, Utah, and in
Rochester, Minnesota, which makes Realty dependent on local conditions in
these markets;

. hotel renovations and construction, including the potential for cost
overruns and environmental problems and the need to generate sufficient
funds from the Hotels for ongoing capital expenditures and replacement of
furniture, fixtures and equipment ("FF&E");

. potential adverse consequences of increasing competition among purchasers
for existing hotels and sites for new hotels, which may reduce the number
of suitable investment opportunities offered to Realty and increase the
cost of acquisitions;

. quarterly fluctuation in Realty's lease revenues under the Percentage
Leases due to the seasonality of the hotel industry;

. Realty's dependence on KMC to operate the Hotels;

. Realty's relationship with the Mayo Foundation and the effect of such
relationship on the operations of Realty, including the dependence of the
Hotels in Rochester, Minnesota on the level of demand for hotel rooms
generated by the Mayo Clinic;

. investments in real estate, such as fluctuation of property values and
illiquidity;

. failure to obtain owner's title insurance policies with respect to
certain Hotels;

. potential uninsured and underinsured losses in the event of earthquakes,
floods and other catastrophes, which could reduce amounts available for
distribution to shareholders;

. potential cost of complying with environmental laws, which could reduce
amounts available for distribution to shareholders;

. potential cost of complying with the Americans with Disabilities Act of
1990, which could reduce amounts available for distribution to
shareholders;

. the terms of the Spin Off and the Percentage Leases not being established
through arm's-length negotiations and possibly not reflecting fair market
values or terms;

. potential conflicts of interest resulting from certain officers and
directors of Realty also serving as officers and directors of KMC;

. debt financing, including the risk that cash flow on a hotel may be
insufficient to meet required payments of principal and interest and the
risk that lenders may require that other hotels, in addition to the hotel
to be financed, serve as collateral for a mortgage, thereby increasing
the risk associated with a default on any one hotel;

. Realty not obtaining, or losing, REIT status, which would materially
reduce the amounts available for distribution to shareholders;

. lack of operating history as a REIT;

. changes in interest rates, which may adversely affect the market price of
the Common Stock;

6
<PAGE>

. holding partial interests in hotel joint ventures, including limitations
on actions with respect to joint ventures due to fiduciary responsibility
to partners;

. dependence of Realty on the efforts of key personnel;

. ability of the Board of Directors of Realty to change Realty's policies
with respect to acquisitions, financing, growth, operations,
distributions and other policies, including continuing qualification as a
REIT, at any time, without shareholder approval;

. possible adverse consequences of limiting ownership of the Common Stock
by a single person or group to no more than 9.8% of the outstanding
shares of Realty's capital stock;

. potential anti-takeover effect of certain provisions contained in
Realty's Articles of Incorporation, such as the Ownership Limitation, the
classification of Realty's Board of Directors, the ability to issue
preferred stock and restrictions under Minnesota law on business
combinations, any of which may discourage a change in control and limit
the opportunity for shareholders to receive a premium over market prices
for their Common Stock; and

. potential inability of KMC to carry out its obligations to Realty due to
the volatility of KMC's earnings.

7
<PAGE>

THE HOTELS

The Hotels are primarily full service hotels catering to a broad range of
customers including frequent business travelers, large groups and conventions,
and leisure travelers. Realty's full service Hotels generally provide a full
range of services and amenities, including convention and banquet facilities,
room service, business centers, fitness centers, swimming pools, gift and
convenience shops, parking facilities and, in most instances, restaurants and
lounges.
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED JULY 2, 1995
-------------------------------------------------
YEAR NUMBER TOTAL PRO FORMA
OPENED OF ROOMS REVENUE RENT/INTEREST(1) OCCUPANCY ADR REVPAR
------- -------- -------- ---------------- --------- ------ ------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C> <C> <C> <C>
FULL SERVICE HOTELS
INTERMOUNTAIN HOTELS
Salt Lake Hilton 1974 351 $ 12,441 $ 3,052 87.0% $61.45 $53.46
Hotel.................
Salt Lake City, UT
University Park Hotel.. 1987 220 7,315 -- (2) 76.7 67.26 51.60
Salt Lake City, UT
Ogden Park Hotel....... 1982 288 6,350 1,652(3) 73.1 54.61 39.91
Ogden, UT
Provo Park Hotel....... 1982 232 6,447 -- (4) 74.6 61.62 45.97
Provo, UT
Olympia Park Hotel..... 1985 204 4,410 996 57.8 65.42 37.82
Park City, UT
Pocatello Park Quality 1978 152 3,773 965 71.7 50.86 36.46
Inn...................
Pocatello, ID
Boise Park Suites 1991 130 2,570 1,156 80.9 62.43 50.51
Hotel.................
Boise, ID
Canyon Springs Park 1980 112 3,089 1,029 79.3 53.19 42.19
Hotel................. ----- -------- -------
Twin Falls, ID
ALL INTERMOUNTAIN
HOTELS............... 1,689 46,395 8,850 75.7 60.09 45.48
----- -------- -------
ROCHESTER, MN HOTELS
The Kahler Hotel....... various(5) 696 17,081 3,664 59.0 63.09 37.24
Kahler Plaza Hotel..... 1989 194 8,631 3,533 74.5 105.77 78.82
Clinic View Inn and
Suites................ various(6) 266 5,544 2,331 58.0 73.00 42.30
Holiday Inn Downtown... 1968 170 3,263 344 62.2 60.11 37.38
----- -------- -------
ALL ROCHESTER HOTELS.. 1,326 34,519 9,872 61.5 72.16 44.37
----- -------- -------
ALL FULL SERVICE
HOTELS.............. 3,015 80,914 18,722 69.5 64.78 44.99
----- -------- -------
CONFERENCE CENTER HOTELS
Sheraton San Marcos
Golf Resort and
Conference Center..... 1987(7) 295 13,164 2,987 70.7 84.34 59.66
Chandler, AZ
Lakeview Conference
Center and Resort..... various(8) 187 9,350 2,071 58.8 81.64 48.00
Morgantown, WV
Green Oaks Inn and
Conference Center..... 1964 284 5,332 1,337 65.2 49.67 32.38
Fort Worth, TX ----- -------- -------
ALL CONFERENCE CENTER
HOTELS.............. 766 27,846 6,395 65.8 71.01 46.70
----- -------- -------
ALL HOTELS......... 3,781 $108,760 $25,117 68.7% $65.99 $45.34
===== ======== =======
</TABLE>
--------

(1) Represents pro forma (i) lease payments by KMC calculated for the twelve
months ended July 2, 1995 using the rent provisions in the Percentage
Leases as if the Percentage Leases were in effect as of the beginning of
that period and (ii) the interest income Realty would have earned for the
twelve months ended July 2, 1995 under the Mortgage Note relating to the
University Park Hotel.

(2) On a pro forma basis, Realty would have received $416,000 of interest on
the Mortgage Note with respect to the University Park Hotel for the twelve
months ended July 2, 1995. After the Spin Off, Realty will hold the
Mortgage Note and continue to consolidate the Hotel's operations as lodging
revenue and expenses. See Note 1 of Notes to Consolidated Financial
Statements of Historical Kahler.

(3) Represents 100% of the pro forma lease payments by KMC as stated in Note 1.
Realty will hold a 63.8% equity interest in the Ogden Park Hotel (84.0%
upon conversion of certain indebtedness held by Realty). No minority
interest has been reflected due to the remote likelihood of Realty's
partners receiving any current or future economic benefits. See Note 3 to
Consolidated Financial Statements of Historical Kahler.

(4) Realty will hold a 50.0% equity interest in the Provo Park Hotel. Realty's
50.0% interest in the pro forma rent from the Provo Park Hotel would have
been $830,000 for the twelve months ended July 2, 1995, which amount (net
of depreciation, amortization and other related expenses) relates to
$574,000 in "Equity income (loss) of affiliates" in Realty's Pro Forma
Condensed Consolidated Statement of Operations.

(5) 350 rooms built in 1926, 228 rooms in 1954 and 162 rooms in 1968. Forty-
four of these rooms have been converted to offices and other uses.

(6) 48 rooms built in 1968, 94 rooms in 1974 and 128 rooms in 1990. Four of
these rooms have been converted to offices and other uses.

(7) Originally constructed in 1912 and reconstructed and reopened in 1987.

(8) Built in stages from 1950 to 1987.

8
<PAGE>

GROWTH STRATEGIES

Realty will seek to increase its Cash Available For Distribution and enhance
shareholder value by taking advantage of strong internal growth opportunities
and by continuing to pursue opportunistic acquisitions, expansion and selected
development of hotels located in strong and growing markets.

OPPORTUNISTIC ACQUISITION STRATEGIES

Focus on Existing Markets

Realty intends to expand its portfolio of hotels through the opportunistic
acquisition of hotels located throughout the United States with a particular
focus on increasing its market share in the Intermountain and Midwestern
regions. Realty believes this strategy of acquiring hotels in existing markets
enables it to benefit from its knowledge of those markets and to take advantage
of economies of scale through the coordinated operation of multiple hotels in a
particular market.

For example, Realty has developed a significant presence in the Intermountain
region. In the Greater Salt Lake City market, Realty believes that KMC is
currently the largest hotel operator with 1,295 rooms leased from Realty and an
additional 80 rooms operated for other parties. In Idaho, Realty recently
acquired the Canyon Springs Park Hotel located in Twin Falls and expects to
improve its operating performance through KMC's application of improved
operating strategies. In addition, Realty has a right of first refusal to
acquire a 150-room hotel located in Helena, Montana.

Emphasis on Full Service and Conference Center Hotels

Realty has extensive experience in the acquisition, ownership and development
of major full service and conference center hotels. Realty believes that
substantial opportunities still exist to acquire hotels in this market segment
because (i) growth in hotel room supply particularly in the full service and
conference center sectors has been extremely limited in recent years, (ii)
acquisition costs remain well below replacement cost, (iii) high development
costs and lengthy project lead times create barriers to entry that will limit
new competition, (iv) there are "involuntary" owners (e.g. pension funds,
financial institutions, etc.) motivated to sell, (v) there are valuable "turn-
around" acquisition opportunities, and (vi) financing for inexperienced
operators remains difficult to obtain.

Development and Expansion of Institutional Relationships

In implementing its growth strategies, Realty will focus on markets where it
has an opportunity to develop or expand strategic relationships with major
local medical, corporate or educational institutions. Historical Kahler has
demonstrated its ability to build key strategic relationships and service the
needs of local institutions in many of its existing markets. Realty intends to
continue to acquire, develop and redevelop hotels situated near similar
institutions and to service a large portion of their needs in order to maintain
a consistent level of occupancy and a steady source of meeting and banquet
business to serve as a base for sustained growth in lodging revenues.

. Medical. Historical Kahler was originally founded in 1917 to service the
lodging needs of the Mayo Clinic. The strong relationship with the Mayo
Foundation is evidenced by its significant equity interest in both Realty
and KMC.

. Corporate. Realty's Provo Park Hotel has sales arrangements with Novell,
Inc. and Micron Technology, Inc., two of the area's largest corporate
employers. The Provo Park Hotel is the only "four-diamond" full service
hotel in the Provo area and has the largest supply of available meeting
space servicing Brigham Young University and corporations in the
surrounding area.

9
<PAGE>

. Educational. In the Greater Salt Lake City area, where Realty has an
interest in 1,295 rooms, the University Park Hotel has the exclusive
right to operate as the only hotel in the University of Utah's Research
Park, the University's newly developed business park. As such, the Hotel
serves as the primary source of guest rooms and meeting space for the
University of Utah and surrounding businesses. In addition, in
Morgantown, West Virginia, the Lakeview Resort and Conference Center
provides a substantial portion of the lodging and meeting space needs of
the University of West Virginia.

Turn-around Acquisition Opportunities

Realty will consider acquiring hotels that may be underperforming with
historically low cash flows relative to expenses. In this respect, Realty and
KMC will evaluate any proposed acquisition from both an operational and
ownership standpoint. Once acquired, Realty and KMC may reposition a hotel
through improved management, franchise affiliation, redevelopment and
refurbishment. For example, Historical Kahler began managing the Ogden Park
Hotel in 1989. Between 1990, the Hotel's first full year of operations under
Historical Kahler, and 1994, REVPAR increased from $23.65 to $38.17, a compound
annual growth rate of 12.7%, total revenues increased from $4.1 million to $6.1
million, a compound annual growth rate of 10.4%, and House Profit increased
from $785,000 to $1.8 million, a compound annual growth rate of 23.1%. In
addition, the Hotel's House Profit as a percentage of total revenues increased
from 19.1% to 29.1% over the same period.

"Captive" Acquisition Opportunities

Realty will seek to capitalize on certain "captive" acquisition opportunities
that may arise from its relationship with KMC. In this regard, Realty will rely
on KMC's hotel management operations to assist in evaluating potential markets
for acquisitions and identifying potential third-party acquisition
opportunities that might not be readily available in the open market. Subject
to certain conditions, Realty has an option and a right of first refusal to
acquire any hotel controlled by KMC. See "Certain Agreements--Right of First
Refusal Agreement." Realty has rights of first refusal to acquire the 146-room
Best Western Copper King Inn in Butte, Montana and the 175-room Plaza One in
Rock Island, Illinois, each of which will be manage d and partially owned
by KMC after the Spin Off. In addition, Realty has a right of first refusal to
acquire a

150-room hotel in Helena, Montana. Realty also has a five-year option to
acquire a 107-room Knights Inn(R) in Racine, Wisconsin, and a 104-room Knights
Inn(R) in Port Huron, Michigan, both of which are owned and managed by KMC, for
an aggregate of $4.9 million. "See Certain Agreements--Option Agreement."

DEVELOPMENT STRATEGIES

Realty is experienced in the development of full service and suite hotels,
having developed three such hotels aggregating 645 rooms since 1987. Realty
expects to selectively construct new hotels only in locations where the
projected cash flow generated by the new hotel would justify Realty's
investment. Realty believes the greatest opportunities for new hotel
development currently exist in the suite hotel segment, which generates
attractive cash flows at relatively lower occupancy levels due to the limited
service nature of operations. Consistent with this selective development
strategy, Realty expects to begin construction in October 1995 on a 114-room
all-suite Residence Inn by Marriott(R) located in Provo, Utah which is expected
to open in 1996.

INTERNAL GROWTH STRATEGIES

Improving Fundamentals

Realty believes the Hotels have strong potential for internal growth based
upon the improving fundamentals of the hotel industry and the continued growth
in its existing local markets. The following table outlines the "same-store"
growth achieved by the Hotels.

10
<PAGE>

REALTY "SAME-STORE" PORTFOLIO

<TABLE>
<CAPTION>
FIRST
SIX
MONTHS
1991 1992 1993 1994 1995
---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C>
Number of "Same-Store" Hotels(1).......... 9 10 11 12 13
Total revenues growth..................... 4.7% 4.6% 4.4% 3.6% 4.9%
Total House Profit growth(2).............. 18.3% 6.2% 14.2% 2.7% 10.3%
House Profit as a percentage of total
revenues................................. 25.8% 26.3% 28.8% 28.5% 30.5%
</TABLE>
--------

(1) "Same-Store" Hotels for the period shown at the top of each column is
defined as all Hotels which were operated by Historical Kahler continuously
from the beginning of the previous year to the end of the period shown.

(2) House Profit represents total revenues less operating costs and expenses
before real estate taxes and insurance, ground rent, interest, income
taxes, depreciation and amortization and allocation of corporate expenses.
House Profit is included herein because management uses it as a measure of
hotel operating performance and because management believes that it is
useful in making industry comparisons. However, it does not represent cash
generated by operating activities in accordance with GAAP and should not be
considered as an alternative to net income as a measure of operating
performance or to cash flows from operations, or from investing or
financing activities as a measure of liquidity.

Realty intends to participate in the future growth in revenues at the Hotels
primarily through increased Percentage Rent payable under the terms of the
Percentage Leases. The Percentage Leases permit Realty to participate in an
increasing percentage of the incremental growth in room revenue and food and
beverage revenue generated by the Hotels. The Percentage Leases will have terms
of three, five and seven years which will provide an opportunity for periodic
readjustment of the Percentage Rent formulas to more closely mirror the
underlying operating performance and cash flow generated by the Hotels.

Redevelopment and Expansion

Realty believes that substantial opportunities for internal growth exist
through the redevelopment and expansion of its existing Hotels. Realty will
seek to expand individual Hotels where occupancy and room demand levels
indicate a lack of adequate room supply. Realty is currently expanding the
Provo Park Hotel and Boise Park Suites Hotel, which will add a total of 204
rooms.

Regular Program of Renovation and Refurbishment

Realty believes that a regular program of renovation, capital improvements
and refurbishment of FF&E at the Hotels will contribute to increased ADR and
occupancy, which will result in increased revenue to Realty through the
Percentage Leases. Pursuant to the Percentage Leases, Realty will reserve, on a
quarterly basis, an amount equal to 5.5% of the room revenues of the Hotels to
be used by KMC for the ongoing replacement and refurbishment of FF&E at the
Hotels. Since 1990, Historical Kahler has spent an average of 4.0% of total
room revenues on regular recurring capital expenditures and FF&E refurbishment.

BUSINESS AND OPERATING STRATEGIES

Since 1917, Historical Kahler has developed a strong track record as an owner
and operator of full service hotels. During this time, Historical Kahler
expanded its hotel management operations to include the ownership and
management of resort and conference center hotels, suite hotels and economy
hotels. Upon completion of the Spin Off, KMC will succeed to the hotel
management operations of Historical Kahler and will employ over 3,500
employees, including a corporate staff of 45 supporting senior management and
285 hotel management personnel. Realty intends to follow the established
procedures and guidelines that have contributed to Historical Kahler's success
as a hotel owner and operator and will rely upon KMC to implement these
operating strategies, which include commitment to customer service and value,
reliance on group sales, yield management, quality food and beverage service,
centralized budgeting, forecasting and expense control, and continuous capital
reinvestment.

11
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by Realty...................... 8,420,000 shares
Common Stock to be outstanding after the Offering... 12,772,118 shares (1)
Use of proceeds..................................... Repayment of mortgages,
prepayment penalties and
other indebtedness; and
working capital and
general corporate
purposes
Nasdaq symbol....................................... KHLR
</TABLE>
--------

(1) Includes (i) 138,700 shares of Common Stock issuable upon exercise of
vested options granted to directors, officers and certain employees of
Historical Kahler, and (ii) 2,387 shares of Common Stock issuable to a
retired employee pursuant to deferred incentive plans.

DISTRIBUTIONS

After the Offering, Realty intends to pay regular quarterly dividends to its
shareholders. The dividend for the period commencing with the closing date of
the Offering and ending on December 31, 1995 is expected to be approximately
equivalent to a quarterly dividend of $.32 per share, which, on an annualized
basis, would equal $1.28 per share, or 9.14% of the anticipated public offering
price shown on the cover of this Prospectus. The actual dividend paid for the
quarter ending on December 31, 1995 will be pro rated for the number of days
between the completion of the Offering and the end of the quarter. Realty does
not anticipate adjusting its expected dividend rate if the Underwriters' over-
allotment option is exercised. Realty determined the expected dividend rate
based on its pro forma net income and estimated Cash Available For Distribution
for the twelve months ended July 2, 1995. See "Distributions" for information
regarding the basis for this estimate. Realty expects to maintain this initial
dividend rate for at least twelve months following consummation of the
Offering, unless actual results of operations, economic conditions or other
assumptions differ from those utilized in estimating the Cash Available For
Distribution for the twelve months ended July 2, 1995.

TAX STATUS

Realty will seek to qualify as a REIT for federal income tax purposes
beginning in 1996. As a REIT, Realty generally will not be subject to federal
income tax on income it distributes to shareholders so long as it distributes
at least 95.0% of its REIT taxable income currently and satisfies a number of
organizational and operational requirements to which REITs are subject under
the REIT provisions of the Code. Even if Realty qualifies for taxation as a
REIT, Realty may be subject to certain state and local taxes on its income and
property and federal income and excise taxes on its undistributed income.
Although management of Realty (i) believes that Realty will be organized in
conformity with the requirements for qualification as a

12
<PAGE>

REIT, (ii) believes that Realty's proposed method of operation will enable it
to meet the requirements for qualification and taxation as a REIT, and (iii)
has obtained an opinion from its counsel, based on certain representations and
assumptions, to that effect, Realty is not currently qualified as a REIT. See
"Federal Income Tax Considerations" and "Risk Factors--Tax Risks."

THE SPIN OFF

Prior to the Offering, Historical Kahler will engage in a series of
transactions (the "Spin Off") to facilitate its conversion into a REIT. The
Spin Off will include (i) a series of asset transfers and related transactions
(the "Asset Transfers") to separate certain of Historical Kahler's hotel
interests from its hotel management operations, and (ii) the distribution by
dividend of 90.5% of the KMC Common Stock to the existing shareholders of
Historical Kahler. The Boards of Directors of Historical Kahler and KMC have
unanimously approved the Spin Off. The key elements of the Spin Off are as
follows:

. Asset Transfers. Historical Kahler will transfer to KMC all of its
assets and liabilities related to its hotel management operations and
non-real estate related businesses. As a result of the Asset
Transfers, KMC will assume Historical Kahler's outstanding hotel
management contracts and retain the employees related to Historical
Kahler's hotel management operations. Historical Kahler will also
transfer to KMC equity interests in six hotels that are operated under
management contracts. To satisfy certain requirements relating to REIT
status, the Asset Transfers will also include transfers to KMC of all
of the personal property at The Kahler Hotel, the Holiday Inn
Downtown, the Olympia Park Hotel, the Pocatello Park Quality Inn, the
Boise Park Suites Hotel and the Green Oaks Inn and Conference Center.
In addition, KMC will own and operate certain other non-real estate
related assets owned by Historical Kahler. Following the Asset
Transfers, Realty will retain interests in the 15 Hotels, consisting
of 100.0% equity interests in 12 Hotels, 50.0% and 63.8% equity
interests in two Hotels and a mortgagee's interest in one Hotel
through the Mortgage Note.

. Spin Off Dividend. The Board of Directors of Historical Kahler will
declare a dividend to its shareholders of record on a date
approximately three weeks prior to the Offering (the "Record Date"),
consisting of 90.5% of the issued and outstanding shares of KMC Common
Stock. The dividend will be payable only to existing shareholders of
Historical Kahler as of the Record Date. Realty expects to distribute
the dividend of KMC Common Stock within 60 days after the closing of
the Offering, and payment of the dividend is contingent on completion
of the Offering. After the Spin Off, Realty will own 9.5% of the
outstanding KMC Common Stock.

. Percentage Leases. As part of the Spin Off, Realty will also lease to
KMC pursuant to Percentage Leases the 14 Hotels in which it has an
ownership interest. Realty will continue to hold the Mortgage Note on
one of the Hotels. KMC will manage that Hotel pursuant to a management
contract with the owner of the property.

. Realty and KMC. After the Spin Off, Realty and KMC will have the
following characteristics:

. Realty will be a publicly held corporation in the business of
owning, acquiring and developing hotels and will seek to qualify as
a REIT for federal income tax purposes and operate as a self-
advised REIT beginning in 1996. Realty will not seek to qualify as
a REIT beginning in 1996 unless it has completed the Offering and
the Spin Off.

. KMC will be a publicly held corporation, which will own equity
interests in certain hotels and will continue the other operations
of Historical Kahler that the federal tax laws generally preclude
from being owned or operated by a REIT, including Historical
Kahler's hotel management operations and non-real estate related
businesses (the "KMC Business").

13
<PAGE>

SUMMARY SELECTED FINANCIAL AND OPERATING DATA OF HISTORICAL KAHLER (UNAUDITED)

The following table sets forth summary selected financial and operating data
for Historical Kahler. This table should be read in conjunction with the
Consolidated Financial Statements of Historical Kahler and the Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FIRST
FISCAL YEAR (1) TWELVE SIX MONTHS (1)
------------------------------------------------------- MONTHS ENDED ------------------
1990 1991 1992 1993 1994 JULY 2, 1995 1994 1995
--------- --------- --------- --------- --------- ------------ -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Revenue of owned oper-
ations................ $ 63,323 $ 64,652 $ 74,014 $ 96,979 $ 109,910 $ 115,431 $ 56,345 $ 61,866
Other properties
managed and/or
partially owned....... 27,250 31,506 29,237 17,910 17,490 17,276 8,576 8,362
--------- --------- --------- --------- --------- --------- -------- --------
Total revenues....... $ 90,573 $ 96,158 $ 103,251 $ 114,889 $ 127,400 $ 132,707 $ 64,921 $ 70,228
========= ========= ========= ========= ========= ========= ======== ========
REVENUE OF OWNED OPERA-
TIONS
Lodging................ $ 49,236 $ 51,021 $ 58,408 $ 80,505 $ 93,243 $ 98,902 $ 47,618 $ 53,277
Formal wear, laundry &
other................. 13,055 13,193 14,182 15,277 15,894 15,815 8,444 8,365
Interest income........ 1,032 438 1,424 1,197 773 714 283 224
--------- --------- --------- --------- --------- --------- -------- --------
Total revenue of
owned operations.... 63,323 64,652 74,014 96,979 109,910 115,431 56,345 61,866
--------- --------- --------- --------- --------- --------- -------- --------
OPERATING COSTS AND EX-
PENSES
Lodging................ 38,760 38,458 45,053 60,974 70,797 74,860 35,453 39,516
Formal wear, laundry &
other................. 9,963 10,772 12,092 12,621 13,487 12,961 7,194 6,668
Corporate expenses..... 2,747 2,827 3,225 3,272 3,257 3,477 1,694 1,914
Depreciation and amor-
tization.............. 5,859 5,740 6,492 7,904 8,477 8,617 4,298 4,438
Non-recurring charges
(2)................... -- -- 2,758(2) -- 1,811(2) 1,811(2) -- --
--------- --------- --------- --------- --------- --------- -------- --------
Total operating costs
and expenses........ 57,329 57,797 69,620 84,771 97,829 101,726 48,639 52,536
--------- --------- --------- --------- --------- --------- -------- --------
GROSS OPERATING PROFIT.. 5,994 6,855 4,394 12,208 12,081 13,705 7,706 9,330
Interest expense....... (7,017) (6,764) (7,303) (9,362) (11,207) (12,019) (5,248) (6,060)
Equity earnings (loss)
of affiliates......... (997) (2,326) (688) 27 193 386 98 291
Gain (loss) on sale of
assets................ 2,325 3,005 (693) 6 20 (22) 11 (31)
--------- --------- --------- --------- --------- --------- -------- --------
INCOME (LOSS) FROM
OPERATIONS BEFORE
INCOME TAXES........... 305 770 (4,290) 2,879 1,087 2,050 2,567 3,530
Provision (credit) for
income taxes.......... 119 247 (300) 875 323 647 770 1,094
--------- --------- --------- --------- --------- --------- -------- --------
Income (loss) before
extraordinary item
and changes in ac-
counting principle.... 186 523 (3,990) 2,004 764 1,403 1,797 2,436
Extraordinary item net
of income taxes....... 75 173 2,517 -- -- -- -- --
Cumulative effect of
change in accounting
for nonpension
postretirement
benefits.............. -- -- (250) -- -- -- -- --
--------- --------- --------- --------- --------- --------- -------- --------
NET INCOME (LOSS)....... $ 261 $ 696 $ (1,723) $ 2,004 $ 764 $ 1,403 $ 1,797 $ 2,436
========= ========= ========= ========= ========= ========= ======== ========
Income (loss) per
share (3)............. $ 0.00 $ 0.13 $ (0.59) $ 0.46 $ 0.14 $ 0.28 $ 0.43 $ 0.57
========= ========= ========= ========= ========= ========= ======== ========
OTHER FINANCIAL DATA:
EBITDA (4)............. $ 10,856 $ 10,269 $ 11,398 $ 20,139 $ 20,751 $ 22,708 $ 12,102 $ 14,059
Cash flows from:
Operations (5)........ $ 4,215 $ 7,686 $ 4,427(5) $ 10,417 $ 9,374(5) $ 9,867(5) $ 5,592 $ 6,085
Investing activities.. (12,196) (19,729) (9,797) (14,685) (13,256) (7,083) (9,450) (3,277)
Financing activities.. 7,728 12,024 5,975 4,449 4,008 (2,772) 4,186 (2,594)
HOTEL OPERATING DATA:
Number of hotels--end
of period (6)......... 13 14 16 18 20 21 19 21
Number of rooms--end
of period (6)......... 3,174 3,374 3,699 4,103 4,382 4,532 4,255 4,532
Room nights available.. 1,138,335 1,214,729 1,314,976 1,406,488 1,559,012 1,598,413 772,884 812,285
Occupancy.............. 58.5% 60.9% 61.9% 63.9% 65.2% 65.7% 65.6% 66.5%
ADR.................... $ 61.35 $ 61.71 $ 61.36 $ 63.31 $ 63.75 $ 64.63 $ 65.49 $ 67.10
REVPAR................. $ 35.91 $ 37.56 $ 38.01 $ 40.48 $ 41.58 $ 42.46 $ 42.95 $ 44.63
BALANCE SHEET DATA:
Investment in real es-
tate
(before accumulated
depreciation)......... $109,993 $ 122,659 $ 156,583 $ 196,873 $ 205,028 $205,546 $208,122
Net investment in real
estate................ 71,975 81,259 110,202 142,743 150,747 147,268 149,601
Total assets........... 103,637 114,170 132,392 162,406 168,169 169,414 168,624
Total mortgage debt.... 69,853 81,334 93,710 123,985 124,226 126,526 123,477
Stockholders' equity... 16,147 16,586 14,867 16,366 21,271 18,397 23,679
</TABLE>

(See notes on next page.)

14
<PAGE>

--------

(1) Historical Kahler's fiscal year ends on the Sunday closest to December 31
in each year. Accordingly, the table presents selected financial and
operating data as of the end of and for each of the five fiscal years ended
January 1, 1995 and as of and for the six months ended July 3, 1994 and
July 2, 1995.

(2) Non-recurring charges for fiscal 1992 and 1994 and for the twelve months
ended July 2, 1995 reflect (i) a charge of $2.8 million in 1992 consisting
of a $1.2 million non-cash writedown of a hotel property and a $1.6 million
charge to settle a lawsuit concerning the Sheraton San Marcos Golf Resort
and Conference Center, and (ii) $1.8 million of expenses in 1994 related to
a planned public offering.

(3) Income per share in 1990 and 1991 is computed on a primary and fully
diluted share basis using the weighted average number of outstanding shares
of Common Stock and Common Stock equivalents of 3,218,000 and 3,274,000,
respectively. For 1992, loss per share is computed on a primary share basis
using only the weighted average number of outstanding shares of Common
Stock aggregating 3,341,000. Common Stock equivalents are excluded since
the effect is antidilutive. For 1993 and 1994, income per share is computed
on a primary and fully diluted share basis using the weighted average
number of outstanding shares of Common Stock and Common Stock equivalents
(arising from employee stock plans, deferred stock compensation and a
warrant) aggregating 3,743,000 and 3,956,000, respectively. For the first
six months of 1994 and 1995 and the twelve months ended July 2, 1995,
income per share is computed on a primary and fully diluted share basis
using the weighted average number of outstanding shares of Common Stock and
Common Stock equivalents aggregating 3,785,000, 4,306,000 and 4,306,000
shares, respectively.

(4) EBITDA means income (loss) from operations before income taxes, excluding
gains or losses on sale of assets, non-cash writedowns of real estate
property, interest expense, depreciation and amortization. EBITDA does not
represent cash generated from operating activities in accordance with GAAP,
is not to be considered as an alternative to net income or any other GAAP
measurements as a measure of operating performance and is not necessarily
indicative of cash available to fund all cash needs. Management believes
that EBITDA is a useful measure of cash flow because it indicates the cash
flow available to spend on capital additions to maintain Realty's assets,
to service existing debt or to use at Realty's discretion for other
purposes.

(5) Cash flow from operations for fiscal 1992 and 1994 and for the twelve
months ended July 2, 1995 reflects non-recurring charges of $1.6 million,
$1.8 million and $1.8 million, respectively. Prior to consideration of such
expenses, cash flow from operations would have been $6.0 million for 1992,
$11.2 million for 1994 and $11.7 million for the twelve months ended July
2, 1995. The $1.6 million charge in 1992 relates to the settlement of a
lawsuit, and the 1994 charge represents costs incurred in connection with a
planned public offering. See Note 10 of Notes to Consolidated Financial
Statements of Historical Kahler.

(6) The number of hotels and rooms at July 2, 1995 includes the Hotels (except
for the Canyon Springs Park Hotel, which was acquired after that date) as
well as seven additional hotels managed by Historical Kahler. Historical
Kahler holds 100.0% equity interests in two of these seven hotels and holds
minority ownership interests in two of the other five hotels. KMC will own
the equity interests in and manage these additional hotels following the
Spin Off.

15
<PAGE>

PRO FORMA SUMMARY SELECTED FINANCIAL AND OPERATING DATA FOR REALTY (UNAUDITED)

The following table sets forth unaudited pro forma summary selected financial
and operating data for Realty. The data are presented as if: (i) the Spin Off
and the Offering had occurred as of the beginning of each period presented;
(ii) Realty qualified as a REIT for each period presented; (iii) the net
proceeds of the Offering were used to repay certain outstanding indebtedness as
of the beginning of each period presented; (iv) certain Hotels acquired
subsequent to the beginning of each period presented had been acquired as of
the beginning of each period presented; and (v) the Percentage Leases were
executed and in effect as of the beginning of each period presented. The pro
forma financial information is not necessarily indicative of what the actual
financial position and results of operations of Realty would have been as of
the end of and for the periods presented, and such information does not purport
to represent the future financial position of Realty. This table should be read
in conjunction with the Pro Forma Condensed Consolidated Financial Data of
Realty included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
FIRST
TWELVE SIX MONTHS
FISCAL YEAR MONTHS ENDED ----------------
1994 JULY 2, 1995 1994 1995
----------- ------------ ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Lodging Segment
Percentage Leases(1)............... $24,354 $25,117 $12,752 $13,515
Lodging revenue from University
Park Hotel(2)..................... 7,108 7,315 3,679 3,886
Interest income.................... 10 10 2 2
Equity income of affiliates........ 507 574 248 315
------- ------- ------- -------
Total lodging revenue............ 31,979 33,016 16,681 17,718
Lodging expenses:
Hotels under Percentage
Leases(3)....................... 3,810 3,873 1,942 2,005
University Park Hotel(2)......... 5,870 5,978 3,072 3,180
------- ------- ------- -------
9,680 9,851 5,014 5,185
------- ------- ------- -------
Lodging income before interest,
depreciation, and corporate
expenses.......................... 22,299 23,165 11,667 12,533
------- ------- ------- -------
Other income before interest,
depreciation, and corporate
expenses........................... 25 25 13 13
------- ------- ------- -------
Total income before interest,
depreciation, and corporate
expenses........................... 22,324 23,190 11,680 12,546
Corporate expenses................. (825) (825) (412) (412)
Interest expense................... (953) (1,113) (427) (587)
Depreciation and amortization...... (5,498) (5,512) (2,761) (2,775)
------- ------- ------- -------
Net income(4)....................... $15,048 $15,740 $ 8,080 $ 8,772
======= ======= ======= =======
Income per share(5)................. $ 1.18 $ 1.23 $ 0.63 $ 0.69
======= ======= ======= =======
OTHER FINANCIAL DATA:
Funds From Operations(6)............ $20,671 $21,386 $10,911 $11,626
Cash flows from:
Operations......................... $20,671 $21,386 $10,911 $11,626
Investing activities(7)............ (3,244) (3,323) (1,679) (1,758)
Financing activities(8)............ (16,771) (16,771) (8,375) (8,375)
</TABLE>

<TABLE>
<CAPTION>
JULY 2, 1995
------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Investment in real
estate (before
accumulated
depreciation).......... $168,668
Net investment in real
estate................. 125,684
Total assets.......... 134,279
Total mortgage debt... 17,635
Stockholders' equity.. 112,086
</TABLE>

16
<PAGE>

--------

(1) Represents lease payments from KMC calculated on a pro forma basis by
applying the rent provisions in the Percentage Leases to the historical
revenue of the Hotels for the periods presented.

(2) Realty will hold the Mortgage Note relating to the University Park Hotel
and will continue to consolidate the Hotel's operations after Realty
becomes a REIT. See Note 1 of Notes to Consolidated Financial Statements
of Historical Kahler.

(3) Lodging expenses for Hotels under Percentage Leases include real estate
and personal property taxes, casualty insurance and land rent under a
ground lease.

(4) During the fiscal period subsequent to the consummation of the Offering,
Realty expects to recognize extraordinary charges of approximately $3.9
million ($4.6 million in prepayment penalties offset in part by principal
reduction of $675,000) associated with the repayment of certain
outstanding debt which has not been included in the Pro Forma Statement of
Operations Data for Realty.

(5) The number of outstanding shares of Common Stock used to compute income
per share for 1994, the twelve months ended July 2, 1995 and the first six
months of 1994 and 1995 is 12,772,118.

(6) In accordance with the resolution adopted by the Board of Governors of
NAREIT, Funds From Operations represents net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt restructuring
or sales of property, and real estate related depreciation and
amortization (excluding amortization of financing costs), and after
adjustments for unconsolidated partnerships and joint ventures. For the
pro forma periods presented, real estate related depreciation and
amortization were the only non-cash adjustments. Funds From Operations are
not considered under generally accepted accounting principles to be an
alternative to net income or other measurements as an indicator of
Realty's operating performance or to cash flows from operating, investing
or financing activities as a measure of liquidity. Realty believes that
Funds From Operations is equivalent to cash flow from operations
determined under GAAP because there are no pro forma working capital
adjustments. Funds From Operations do not reflect cash expenditures for
capital improvements.

(7) Represents 5.5% of pro forma room revenues to be expended for capital
expenditures for the Hotels which are assumed to equal investing
activities on a pro forma basis for the periods presented.

(8) Represents pro forma initial quarterly dividends of $.32 per share and pro
forma principal payments on debt for the periods presented.

17
<PAGE>

RISK FACTORS

Shareholders should carefully consider the following information in
conjunction with the other information contained in this Prospectus before
purchasing Common Stock in the Offering.

HOTEL INDUSTRY RISKS

Operating Risks

The Hotels, and any hotels subsequently acquired or constructed by Realty,
will be subject to all the operating risks common to the hotel industry.
Significant adverse changes in the operations of any one of the Hotels could
have a material adverse effect on the revenues of Realty. The operating risks
include, among other things: competition from other hotels; over-building in
the hotel industry that could adversely affect occupancy, ADRs and REVPAR;
increases in operating costs due to inflation and other factors, which might
not be offset by increased room rates; dependence on business and commercial
travelers and tourism; increases in energy costs and other expenses of travel;
changes in travel patterns; strikes and other labor disturbances of hotel
employees; and adverse effects of general and local economic conditions. These
factors could adversely affect room revenues of the Hotels, which could result
in decreased revenues to Realty under the Percentage Leases and the Mortgage
Note and reduce amounts available for distribution to the shareholders of
Realty.

Volatility of Operations

In the past five years, Historical Kahler's income (loss) from operations
before income taxes has fluctuated due to several factors, including gains or
losses on sales of assets, the volatility of the hotel industry and changes in
general economic conditions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Historical Kahler."

Geographic Concentration

The concentration of five Hotels in and around the Greater Salt Lake City,
Utah, area and four Hotels in Rochester, Minnesota, makes Realty dependent on
factors such as the local economy, local competition, increases in local real
and personal property tax rates and local catastrophes in these communities.
The results of operations of the Hotels in the Rochester area are dependent on
the level of demand generated by the Mayo Clinic for hotel accommodations by
patients and by medical conferences organized by the Mayo Clinic.

Hotel Renovation

Realty may renovate the Hotels and may also renovate hotels which it
subsequently acquires. Hotels in general, including the Hotels, have an ongoing
need for renovations and other capital improvements, particularly in older
structures, including periodic replacement of FF&E. The ability of Realty to
fund these and other capital expenditures and periodic replacement of FF&E will
depend in part on the financial performance of the Hotels. Any inability or
failure to fund these expenditures could have a material adverse effect on
ADRs, occupancy, REVPAR and franchises for the Hotels. The renovation of hotels
also involves certain risks, including the possibility of environmental
problems, cost overruns and delays, market deterioration after commencement of
renovation and the emergence of competition from unanticipated sources.

Hotel Construction and Development

Realty may develop and construct new hotels in locations which have not been
identified. The development and construction of new hotels involve certain
risks, including the possibility of environmental problems, construction cost
overruns and delays, availability of construction and permanent loans on terms
and conditions satisfactory to Realty, lack of market acceptance of the new
hotel, market deterioration after

18
<PAGE>

commencement of development and the emergence of competition after commencement
of development. There can be no assurance that the newly constructed hotels
will perform in accordance with Realty's expectations.

Franchise Risks

Six of the Hotels are operated pursuant to franchise or license agreements
and additional hotels may be or become subject to franchise arrangements. KMC
will hold the franchise or license agreements for the Hotels and will be
responsible for complying with the terms of these agreements. Such franchise or
license arrangements impose financial obligations on hotels generally related
to maintaining the condition of hotels and the payment of franchise fees.
Continuation of such franchises is subject to specified operating standards and
other terms and conditions. Franchisors periodically inspect franchised hotels
to confirm compliance. In addition, franchisors may require Realty to fund
significant capital improvements to the Hotels in the future to maintain such
franchises. The failure of a franchisee to maintain standards or adhere to
terms and conditions imposed by the franchisor may result in the loss of a
license or termination of the franchise or damages as a result of the breach.
It is possible that a franchisor could condition the continuation of a
franchise on the completion of capital improvements or replacement of FF&E
which KMC would determine are too expensive or otherwise unwarranted in light
of general economic conditions or operating results or prospects of the
affected Hotel. The loss of a franchise could have a material adverse effect
upon the operation, financing or value of the Hotel subject to the franchise
because of the loss of associated name recognition, marketing support and
centralized reservation systems. There can be no assurance that an alternative
franchise arrangement could be obtained or that significant expenditures might
not be imposed as a condition to obtaining a new franchise. The loss of a
franchise for one or more of the Hotels could have a material adverse effect on
Realty's revenues under the Percentage Leases and Cash Available For
Distribution to its shareholders. Each franchise agreement or license will give
KMC the right during the term of the agreement to operate the particular Hotel
under the applicable tradename. See "Certain Agreements--Franchise Agreements."

Competition

The hotel industry is highly competitive. The Hotels will compete with other
hotels in their geographic markets. Many competitors of the Hotels have
substantially greater resources than Realty, and Realty may be competing for
hotel investment opportunities with entities that have substantially greater
financial resources. Increasing competition for existing hotels and sites for
new hotels because of improving conditions in the hotel industry will tend to
reduce the number of suitable investment opportunities offered to Realty and
increase the cost of acquisitions in areas with the highest demand.

Seasonality of Hotel Business

The hotel industry is seasonal in nature. This seasonality can be expected to
cause quarterly fluctuations in Realty's lease revenues and may affect Realty's
ability to make distributions to its shareholders. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations of Historical
Kahler--Seasonality."

REALTY'S DEPENDENCE ON KMC

Realty will derive substantially all of its income from the Hotels. Receipt
by Realty of the Base Rent, Percentage Rent and Additional Charges pursuant to
the Percentage Leases and of interest payments on the Mortgage Note will be a
function of the effectiveness of KMC in operating the Hotels and any hotels
that Realty may acquire or develop and elect to lease to KMC in the future. See
"Kahler Management Corporation." Realty is not permitted under the Code to
exercise any control over the operation of the Hotels or the performance of
KMC. See "Federal Income Tax Considerations." In the event that the Hotels do
not perform in accordance with Realty's expectations, Realty's only recourse
will be to seek to replace KMC when the Percentage Leases expire. There can be
no assurance that a replacement for KMC to lease the Hotels can be obtained or
that a replacement will be found on equally favorable terms to Realty.

19
<PAGE>

In addition, KMC will hold in its name (or the name of its designee) the
franchise licenses, liquor licenses and other operating licenses and permits
relating to the Hotels. On a default by KMC resulting in the termination of
any or all of the Percentage Leases, the franchise licenses, liquor licenses
and the operating licenses and permits held by KMC will not automatically be
transferred to a successor operator designated by Realty, and the process of
transferring such licenses and permits to any such successor operator may be
costly and time-consuming. In addition, any default by KMC under any such
franchise licenses, liquor licenses or operating licenses and permits could
result in the loss or suspension of such licenses and permits. Realty may be
adversely affected as a result of any loss, suspension or delay in reinstating
or transferring any such licenses or permits. See "Certain Agreements--
Percentage Leases."

RELATIONSHIP WITH THE MAYO FOUNDATION

The operations of Realty and KMC are significantly affected by their
relationships with the Mayo Foundation. The Chairman of the Board of Directors
of each of Realty and KMC is John H. Herrell, the Vice President and Chief
Administrative Officer of the Mayo Foundation. Following the completion of the
Spin Off and the Offering, the Mayo Foundation will own 8.8% of the
outstanding Common Stock and 23.9% of the outstanding KMC Common Stock (up to
35.5% giving effect to the Exchange Agreement). In addition, the results of
operations of the Hotels in Rochester, Minnesota are highly dependent on the
level of demand for hotel rooms generated by the Mayo Clinic. Realty does not
have a commitment from or arrangement with the Mayo Clinic to provide
hospitality and food services. KMC will purchase on an ongoing basis from
Franklin Heating Station, a Mayo Foundation affiliate, all or a portion of its
requirements for steam, electricity, water and related utility services for
The Kahler Hotel, the Kahler Plaza Hotel and the Clinic View Inn and Suites.
See "Certain Relationships and Related Transactions--Certain Transactions with
the Mayo Foundation" and "--Exchange Agreement."

REAL ESTATE INVESTMENT RISKS

Value and Illiquidity of Real Estate

Real estate investments are relatively illiquid. The ability of Realty to
vary its portfolio in response to changes in economic and other conditions
will be limited. There can be no assurance that Realty will be able to dispose
of an investment, including the Hotels, when it finds disposition advantageous
or necessary or that the sale price of any disposition will recoup or exceed
the amount of Realty's investment.

Lack of Title Insurance; Self-Insurance with Respect to Title Risks

Realty will not obtain updated owner's policies of title insurance on the
Hotels with respect to which it holds owner's policies of title insurance. In
addition, Realty did not originally obtain owner's policies of title insurance
at the time of acquisition for The Kahler Hotel, the Kahler Plaza Hotel,
Clinic View Inn and Suites, Holiday Inn Downtown, Lakeview Resort and
Conference Center and Green Oaks Inn and Conference Center. Based upon
management's review of (i) the existing owner's or lender's title insurance
policies with respect to the Hotels in which Realty owns an equity interest,
which have been issued with respect to all of such Hotels within the last ten
years, (ii) the lender's title insurance policies in favor of Realty for the
real property securing the Mortgage Note, (iii) the updated title reports
obtained by Realty for all of the Hotels, (iv) title opinions prepared by
counsel for Realty for the four Hotels located in Minnesota and the one Hotel
located in West Virginia, and (v) the absence of any knowledge by management
of material title defects, management has determined that the substantial cost
of new owner's and lender's title insurance policies for the full market value
of these properties, or the value of the Mortgage Note, as applicable, is not
warranted. Accordingly, Realty will self-insure against certain risks of title
defects.

Uninsured and Underinsured Losses

There are certain types of losses, generally of a catastrophic nature, such
as earthquakes, acts of war and floods, that may be uninsurable or not
economically insurable. Realty's Board of Directors will determine amounts,
coverage limits and deductibility provisions of insurance, with a view to
maintaining appropriate

20
<PAGE>

property and casualty insurance coverage on Realty's investments at a
reasonable cost and on suitable terms. This may result in insurance coverage
that, in the event of a substantial loss, would not be sufficient to pay the
full current market value or current replacement costs of Realty's lost
investment. In addition, under the Percentage Leases KMC will be responsible
for maintaining comprehensive insurance on each of the Hotels, including
building, rent and business interruption, general liability and employee
dishonesty coverage.

Environmental Matters

Realty may be obligated to pay for the cost of complying with existing
environmental laws, as well as the cost of future environmental legislation,
which may be triggered by, among other things, renovating or expanding a Hotel
or foreclosing on property securing the Mortgage Note. Under various federal,
state and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of, and damages caused by, hazardous or toxic substances
and petroleum products located on or released from such property. Under such
laws, ordinances and regulations, Realty could be liable not only for
environmental conditions relating to the Hotels but also, under certain
circumstances, for conditions relating to the KMC Business, including its
commercial laundry and dry cleaning business. New or updated Phase I
environmental assessments were obtained by Historical Kahler in 1994 on all of
the Hotels in which it then had an interest from various qualified independent
environmental engineers. A Phase I environmental assessment was obtained on the
Canyon Springs Park Hotel by its prior owner in 1992. The purpose of Phase I
assessments is to identify potential environmental contamination that is made
apparent from reviews of the history of the properties, reviews of certain
public records, limited investigations of the sites and surrounding properties,
and inspections for the presence of hazardous or toxic substances, petroleum
products, asbestos containing materials ("ACMs") and underground storage tanks.
The Phase I assessment reports have not revealed any environmental liability
that Realty believes would have a material adverse effect on Realty's business,
assets or results of operations, and Realty is not aware of any such liability.
Nevertheless, it is possible that these reports do not reveal all environmental
liabilities or that there are material environmental liabilities of which
Realty is unaware. It is also possible that new or amended laws or regulations
could be adopted in the future that could impose material costs. See "The
Hotels--Regulatory Matters--Environmental Regulation."

Americans with Disabilities Act and Other Changes in Governmental Rules and
Regulations

Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. While Realty believes that the Hotels are
substantially in compliance with these requirements, a determination that
Realty is not in compliance with the ADA could result in imposition of fines or
an award of damages to private litigants. In addition, changes in governmental
rules and regulations or enforcement policies affecting the use and all
operations of hotels, including changes to zoning codes, building codes and
fire and life-safety codes, may occur. If Realty were required to make
substantial modifications at the Hotels to comply with the ADA or other changes
in governmental rules and regulations, Realty's ability to make expected
distributions to its shareholders could be adversely affected.

Property Taxes; Ground Leases

Under the Percentage Leases, Realty will be responsible for the payment of
real and personal property taxes and assessments (except for any such personal
property taxes on property owned by KMC). The real and personal property taxes
and assessments on the Hotels may increase or decrease as property tax rates
change and as the properties are assessed or reassessed by taxing authorities.
If property taxes increase or assessments are levied, Realty's ability to make
distributions to its shareholders could be adversely affected.

The properties underlying the Green Oaks Inn and Conference Center, the
University Park Hotel, the Provo Park Hotel and the Salt Lake Hilton Hotel are
held pursuant to long term ground leases which expire in 2014, 2025 (with an
option to extend the lease term for an additional ten years), 2031 (with an
option to renew for two additional periods of ten years each) and 2044,
respectively. In each case, the owners of the underlying land are unaffiliated
with KMC or Realty. Realty expects the Provo Park Hotel ground lease to be
purchased for approximately $120,000. Pursuant to the Percentage Leases, Realty
will be responsible for paying directly to the ground lessors all rents due
under the ground leases. A default by Realty under the terms of the applicable
ground lease, including a payment default, could result in a loss of the Hotel
subject

21
<PAGE>

to such ground lease. In addition, upon expiration of any such ground lease,
there can be no assurance that Realty will be able to renew the ground lease on
acceptable terms. Furthermore, in the event of a condemnation of the property
subject to each such ground lease, the ground lessor may be entitled to a
portion of any award received from the condemning authority and may be entitled
to casualty insurance proceeds.

Mortgage Investments

Realty may invest in mortgages as a strategy for ultimately acquiring an
underlying hotel property. In any foreclosure of a mortgage, Realty would be
subject to all the risks normally facing a mortgage lender, including possible
attacks on the priority of the mortgage by other lienholders and possible
delays caused by any bankruptcy of the owner.

CONFLICTS OF INTEREST

The capitalization of Realty and the allocation of interests held by
Historical Kahler between Realty and KMC were not determined by arm's-length
negotiations. Neither company's value has been determined on a property-by-
property basis because the two companies are the successors to an ongoing
business enterprise. Accordingly, no third-party appraisals of the Hotels, the
Mortgage Note or the other property interests have been obtained, no
independent valuations of the businesses of KMC have been obtained, and no
fairness opinion has been obtained in connection with the capitalization and
valuation of either company. The terms of the Spin Off, the Percentage Leases
and the various transactions implementing them likewise were not determined
through arm's-length negotiations. The rent payments under the Percentage
Leases were calculated with reference to historical financial data and
projected operating and financial performance of the Hotels. See "Certain
Agreements--The Percentage Leases."

The management of the Hotels as well as the non-real estate related
businesses of Historical Kahler will be continued by KMC. Certain executive
officers and directors are officers and directors of both Realty and KMC.
Accordingly, these officers and directors may have conflicts of interests with
respect to their obligations as officers and directors of either Realty or KMC
or both, including, for example, in the event that Realty elects to sell a
hotel leased to KMC under a Percentage Lease. The Realty and KMC Boards of
Directors have adopted policies and procedures to limit the involvement of
these officers and directors in conflict situations. These procedures include
requiring these officers and directors to abstain from voting as directors of
either company with respect to matters that present a material conflict of
interest between the companies, and requiring a majority of the independent
directors of each company to approve any contract or transaction that presents
a material conflict of interest. See "Policies and Objectives with Respect to
Certain Activities."

RISKS OF DEBT FINANCING

Realty will be subject to the risks associated with debt financing, including
the risk that cash flow on a given Hotel will be insufficient to meet required
payments of principal and interest. On a pro forma basis, after giving effect
to the Spin Off and the Offering, Realty would have an aggregate of $17.6
million of debt, all of which will be floating interest rate indebtedness.
Increases in interest rates could adversely affect Realty's Cash Available For
Distribution. In addition, Realty is a guarantor of $9.7 million of the
indebtedness of a subsidiary of KMC, which debt is secured by KMC's commercial
laundry facility in Rochester, Minnesota. If the subsidiary of KMC defaults on
this debt, the lender has the right to demand payment of the debt from Realty.

Realty currently has a policy of limiting its consolidated indebtedness to an
amount not more than 50.0% of its consolidated investment in hotels, at cost
and before accumulated depreciation. The organizational documents of Realty do
not limit the amount or percentage of indebtedness that it may incur. Realty is
negotiating to obtain the Lines of Credit in an aggregate principal amount of
$50.0 million to be used to fund the acquisition, development and expansion of
hotels. The Lines of Credit will be secured by first mortgages on certain of
the Hotels. Subject to the limitations described above, Realty may borrow
additional amounts from the same or other lenders in the future, or may issue
corporate debt securities in public or private offerings. All or a portion of
such additional borrowings may be secured by hotels owned by Realty. Lenders
may also require that hotels in addition to the hotel to be financed serve as
collateral for a mortgage, thereby increasing the risk associated with a
default on any one hotel.

22
<PAGE>

TAX RISKS

REIT Qualification

Realty will not be a REIT at the time of the Offering. Realty intends to
elect to be taxed as a REIT and to operate so as to qualify as a REIT for
federal income tax purposes beginning in fiscal 1996. Although Realty has not
requested, and does not expect to request, a ruling from the Internal Revenue
Service (the "Service") that it qualifies as a REIT, it has received an opinion
of its counsel that, based on certain assumptions and representations, it will
so qualify. Shareholders should be aware, however, that opinions of counsel are
not binding on the Service or any court. The REIT qualification opinion only
represents the view of counsel to Realty based on counsel's review and analysis
of existing law, which includes no controlling precedent. Furthermore, both the
validity of the opinion and the continued qualification of Realty as a REIT
will depend on Realty's continuing ability to meet various requirements
concerning, among other things, the ownership of its outstanding stock, the
nature of its assets, the sources of its income, and the amount of its
distributions to the shareholders of Realty. In particular, Realty must satisfy
a requirement that at least 75.0% of the value of its total assets must be
represented by real estate assets, cash and government securities. There has
not been an independent appraisal of the real estate assets to be owned by
Realty to determine whether this test will be satisfied. See "Federal Income
Tax Considerations."

If Realty were to fail to qualify as a REIT in any taxable year, Realty would
not be allowed a deduction for distributions to shareholders in computing its
taxable income and would be subject to federal income tax (including any
applicable minimum tax) on its taxable income at regular corporate rates.
Unless entitled to relief under certain Code provisions, Realty also would be
disqualified from treatment as a REIT for the four taxable years following the
year during which qualification was lost. As a result, Cash Available For
Distribution to the shareholders would be reduced for each of the years
involved. Although Realty currently intends to operate in a manner designed to
qualify as a REIT, it is possible that future economic, market, legal, tax or
other considerations may cause the Board of Directors to revoke the REIT
election. The Board of Directors of Realty may revoke the REIT election of
Realty at any time at the discretion of the Board of Directors without a vote
of shareholders of Realty. A decision to revoke Realty's REIT election would
increase its federal and state income taxes and could adversely affect Realty's
financial condition, results of operations or the market price of the Common
Stock. See "Federal Income Tax Considerations."

Distributions to Shareholders

In order to qualify as a REIT, Realty generally will be required each year to
distribute to its shareholders at least 95.0% of its REIT taxable income
(excluding any net capital gain). In addition, Realty will be subject to a 4.0%
nondeductible excise tax on the amount, if any, by which certain distributions
paid by it with respect to any calendar year are less than the sum of 85.0% of
its ordinary income plus 95.0% of its capital gain net income for the year.

Realty intends to make distributions to its shareholders to comply with the
95.0% distribution requirement and to avoid the nondeductible excise tax.
Realty's income will consist primarily of rental payments on the Percentage
Leases and the interest on the Mortgage Note, and Realty's Cash Available For
Distribution will consist primarily of these payments. Differences in timing
between taxable income and Cash Available For Distribution and seasonality of
the hospitality industry could require Realty to borrow funds on a short-term
basis to meet the 95.0% distribution requirement and to avoid the nondeductible
excise tax. For federal income tax purposes, distributions paid to shareholders
may consist of ordinary income, capital gains, nontaxable return of capital or
a combination thereof. Realty will provide its shareholders with an annual
statement as to the federal income tax status of distributions.

LACK OF OPERATING HISTORY AS A REIT

Realty has no experience operating as a REIT. While the employees of KMC have
substantial experience operating the Hotels, Realty has not previously had to
rely on these individuals as employees of an independent management company to
generate cash flow from the Hotels. In addition, KMC has not

23
<PAGE>

previously operated the Hotels to generate Rents under the Percentage Leases.
There can be no assurance that the operation of the Hotels under the Percentage
Leases will perform to Realty's or KMC's expectations or to the minimum
requirements of the Percentage Leases.

EFFECT OF MARKET INTEREST RATES AND OTHER FACTORS ON PRICE OF COMMON STOCK

One of the factors that may influence the price of the Common Stock in public
trading markets will be the annual yield from distributions by Realty on the
Common Stock as compared to yields on other financial instruments. An increase
in market interest rates will result in higher yields on other financial
instruments, which could adversely affect the market price of the shares of
Common Stock.

The market price of the Common Stock may also be subject to significant
fluctuations in response to numerous other factors, such as variations in
quarterly operating results, government regulatory action and modifications of
tax laws. In addition, the stock market in recent years has experienced extreme
price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of companies. Such broad
fluctuations may adversely affect the market price of the Common Stock.

JOINT VENTURES

Realty holds certain partial interests in hotel joint ventures. These
investments involve risks not otherwise present with respect to hotels that are
wholly owned.

Realty may have certain fiduciary responsibilities to its partners which it
will need to consider when making decisions that affect the joint venture.
Realty will not have sole control of certain major decisions relating to the
joint ventures including certain decisions with respect to sales, refinancing
and the timing and amount of additional capital contributions thereto. Under
certain circumstances, such as a failure to contribute additional capital or
default under a partnership agreement, Realty may lose certain rights or its
entire interest in the joint venture.

If the Service were to challenge successfully the tax status of any
partnership in which Realty held an interest, the affected partnership might be
taxable as a corporation. In that event, the character of Realty's assets and
income would change. Such a change could preclude Realty from qualifying as a
REIT. The imposition of a corporate tax on such a partnership would reduce the
funds available to Realty. See "Federal Income Tax Considerations."

DEPENDENCE ON KEY PERSONNEL

Realty's success will be highly dependent on the continued service of Harold
W. Milner, its President and Chief Executive Officer. Realty does not carry any
key-person life insurance on Mr. Milner. Realty believes that the loss of the
services of Mr. Milner could have a material adverse effect on Realty. Mr.
Milner also serves as an officer and director of KMC. Mr. Milner will enter
into an employment agreement that will require him to devote substantially all
of his time to the operations of Realty. This focus on the operations of Realty
could have a material adverse effect on KMC. Mr. Milner has, however, agreed to
devote such time as is necessary to fulfill his obligations to KMC.

CHANGES IN POLICIES

The major policies of Realty, including its policies with respect to
acquisitions, financing, growth, operations, distributions and continuing
qualification as a REIT, will be determined by its Board of Directors. The
Board of Directors may amend or revise certain of these and other policies from
time to time without a vote of the shareholders of Realty. See "Policies and
Objectives with Respect to Certain Activities." Shareholders have no right or
power to take part in the management of Realty except through the exercise of
voting rights on certain specified matters.

24
<PAGE>

LIMITATION ON ACQUISITION AND CHANGE IN CONTROL

Certain provisions of Realty's Articles of Incorporation and Minnesota law
could have the effect of discouraging attempts to acquire Realty which, in
turn, could deprive shareholders of opportunities to sell their shares of
Common Stock at prices higher than prevailing market prices. In addition, these
provisions may have the effect of precluding acquisition of control of Realty
by a third party without the approval of the Board of Directors, and may make
it more difficult for shareholders to replace the management of Realty or
change the composition of Realty's Board of Directors. See "Certain Provisions
of Minnesota Law and Realty's Articles of Incorporation and Bylaws."

Ownership Limitation

In order for Realty to satisfy the REIT provisions of the Code, not more than
50.0% in value of its outstanding capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities). For the purpose of preserving Realty's compliance with the
REIT provisions of the Code, the Ownership Limitation (described under
"Description of Capital Stock--Restrictions on Transfer") provides that no
person may own (or may be deemed to own by virtue of the attribution provisions
of the Code) more than 9.8% (in value or in number of shares, whichever is more
restrictive) of the outstanding capital stock of Realty. Generally, the capital
stock owned by affiliated owners will be aggregated for purposes of the
Ownership Limitation. In addition, no transfers are permitted that would result
in the capital stock of Realty being beneficially owned (within the meaning of
the applicable provisions of the Code) by less than 100 persons. These
provisions may have the effect of precluding acquisition of control of Realty
by a third party. See "Description of Capital Stock--Restrictions on Transfer."

Staggered Board

Realty's directors are classified into three groups, whose terms expire in
1996, 1997 and 1998, respectively. Directors for each group will be elected for
a three year term upon the expiration of that group's term. The staggered terms
of directors may affect the shareholders' ability to change control of Realty
even if a change in control were in the shareholders' interest. See "Directors
and Executive Officers of Realty" and "Certain Provisions of Minnesota Law and
Realty's Articles of Incorporation and Bylaws--Staggered Board of Directors."

Capital Stock

Realty's Articles of Incorporation authorize the Board of Directors to issue
up to 70 million shares of Common Stock and 10 million shares of preferred
stock and to establish the preferences and rights of any shares of preferred
stock issued. See "Description of Capital Stock--Preferred Stock." If the Board
of Directors of Realty determines to raise additional equity capital, the Board
has the authority, without shareholder approval, to issue additional shares of
Common Stock, preferred stock or other capital stock of Realty in any manner
(and on such terms and for such consideration) as it deems appropriate,
including in exchange for property. Existing shareholders have no preemptive
right to purchase shares issued in any offering, and any such offering might
cause a dilution of a shareholder's investment in Realty. Although Realty has
no current intention to issue shares of preferred stock in the foreseeable
future, the issuance of preferred stock could have the effect of delaying or
preventing a change in control of Realty even if a change in control were in
the shareholders' interest. No shares of preferred stock will be issued or
outstanding as of the close of the Offering.

Minnesota Anti-Takeover Statutes

As a Minnesota corporation, Realty is subject to various provisions of the
MBCA, which impose certain restrictions and require certain procedures with
respect to certain takeover offers and business combinations,

25
<PAGE>

including but not limited to, combinations with interested shareholders and
share repurchases from certain shareholders. A special meeting of shareholders
of Realty for the purpose of considering any action to facilitate or effect
directly or indirectly a business combination, including any action to change
or otherwise affect the composition of Realty's Board of Directors for that
purpose, may be called by the chief executive officer, chief financial
officer, two or more directors or 25% or more of the voting power of all
shares entitled to vote. See "Certain Provisions of Minnesota Law and Realty's
Articles of Incorporation and Bylaws--Minnesota Anti-Takeover Statutes."

VOLATILITY OF KMC'S EARNINGS

KMC's ability to carry out its obligations to Realty is, in part, a function
of KMC's ability to earn sufficient amounts to effectively carry out its
operations and make provisions for future expansion. KMC's lodging revenues
will be subject to the various risks described above under "--Hotel Industry
Risks" with respect to the operations of Realty. KMC's principal sources of
revenue will be any net earnings on the Hotels after payment of rent on the
Percentage Leases, management fees under its management contracts and revenues
from its commercial laundry and formal wear businesses. In addition, KMC's
earnings will be subject to the risks associated with the commercial laundry
and formal wear businesses. Due to the formal wear business, KMC's operating
results will be highly seasonal. KMC had pro forma losses of $2.4 million and
$2.0 million for the year ended January 1, 1995 and the twelve months ended
July 2, 1995, respectively. For the first six months of 1995, KMC had a pro
forma loss of $342,000. The failure of KMC to continue operations could have a
material adverse effect on the business, financial condition and results of
operations of Realty. See "Kahler Management Corporation."

REALTY

Historical Kahler, a publicly-traded company headquartered in Rochester,
Minnesota, was originally founded in 1917 to provide lodging services for the
nearby Mayo Clinic. The Mayo Clinic is the nation's largest not-for-profit
private medical practice with over 415,000 patient registrations recorded in
1994. Since 1917, Historical Kahler has expanded its hotel operations to
include the ownership and management of full service hotels, conference center
hotels, suite hotels and economy hotels located in eight states throughout the
Intermountain and Midwestern regions of the United States. Upon completion of
the Spin Off and the Offering, Realty will succeed to the hotel ownership,
acquisition and development operations of Historical Kahler and will own
equity interests in 14 Hotels and a mortgage note with equity features in one
Hotel aggregating 3,781 rooms.

A majority of the Hotels are located near major medical, corporate or
educational institutions with whom Realty maintains close working
relationships. Realty seeks to attract a broad range of hotel customers,
including frequent business travelers, large groups and conventions, and
leisure travelers. The Hotels consist of 12 full service hotels, including two
suite hotels, and three conference center hotels. Six of the Hotels operate
under franchise agreements with national hotel companies, including
Sheraton(R), Hilton(R), Holiday Inn(R), Quality Inn(R), and Best Western(R).
Seven of the Hotels located in Utah and Idaho operate under the "Park" name
and Realty's proprietary insignia. The Hotels had an average occupancy rate of
68.7%, an ADR of $65.99 and REVPAR of $45.34 for the twelve months ended July
2, 1995 as compared to 65.4%, $65.42 and $42.78, respectively, for the twelve
months ended June 30, 1995 for the U.S. hotel industry as a whole as reported
by Smith Travel Research.

Over the period from 1990 through 1994, a capital-constrained environment
for many hotel owners and operators, Historical Kahler's portfolio of owned
and managed hotels increased by 1,081 rooms, or 34.1%, through acquisitions
and the development of new hotels. Over this period, total lodging revenues
increased at a compound annual growth rate of 17.3% and total lodging gross
profit increased at a compound annual growth rate of 21.0%.

26
<PAGE>

GROWTH OF HISTORICAL KAHLER'S HOTEL PORTFOLIO(1)

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
FISCAL YEAR COMPOUND
--------------------------------------- ANNUAL
1990 1991 1992 1993 1994 GROWTH
------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Number of hotels........... 13 14 16 18 20 N.A.
Number of rooms............ 3,174 3,374 3,699 4,103 4,382 8.4%
Total lodging revenues..... $49,236 $51,021 $58,408 $80,505 $93,243 17.3%
Lodging operating costs and
expenses.................. $38,760 $38,458 $45,053 $60,974 $70,797 16.3%
Total lodging gross
profit(2)................. $10,476 $12,563 $13,355 $19,531 $22,446 21.0%
</TABLE>
--------

(1) Includes hotels in which Historical Kahler does not own a majority
interest and which will not be retained by Realty in the Spin Off. See
"Selected Consolidated Pro forma Financial and Operating Data of Realty"
for information concerning operating and other financial data relating to
the Hotels to be retained by Realty after the Spin Off.

(2) Represents total lodging revenues less lodging operating costs and
expenses before allocation of corporate expense, interest, income taxes,
depreciation and amortization. Realty considers this item to be one
measure of the net cash flow available from Historical Kahler's lodging
operations. However, it does not represent cash generated by operating
activities in accordance with GAAP and should not be considered as an
alternative to net income as a measure of operating performance or to cash
flows from operations, or from investing or financing activities as a
measure of liquidity.

Realty intends to continue this growth through the following strategies: (i)
pursuit of opportunistic acquisitions located in strong and growing markets;
(ii) redevelopment and expansion of existing Hotels; (iii) maintenance of a
regular program of renovation and refurbishment; and (iv) to a limited degree
pursuit of new hotel development in selected hotel segments and local markets
with attractive projected returns. In pursuing these growth strategies, Realty
intends to focus on its existing markets to take advantage of economies of
scale and on expanding strategic relationships with major local medical,
corporate and educational institutions.

Realty will seek to expand its presence in the Intermountain region based on
its belief that attractive acquisition opportunities still remain. The
Intermountain region of the western United States has been one of the fastest
growing regions of the country in the 1990s. U.S. Census data indicates that
the Intermountain region (Idaho, Utah, Nevada, Wyoming, Montana, Colorado, New
Mexico and Arizona) experienced the strongest population growth in 1994,
increasing by 3.0% as compared to 1.0% for the United States as a whole.
Between 1990 and 1994, Utah's population expanded 10.7% (the nation's fifth
highest increase) and Idaho's grew by 12.5% (the nation's second highest
increase). Realty believes that favorable conditions for growth in the
Intermountain region are attributable to the area's abundant space, relatively
stable and well educated labor pool, low labor costs, high quality of life and
an excellent transportation and communications infrastructure. The recent
announcements that Micron Technology, Inc. will build a major facility in the
Greater Salt Lake City area and that the 2002 Winter Olympic Games will be
held there are further evidence of the region's popularity and growth
potential.

In order to qualify as a REIT, Realty may not operate any of the Hotels. As
a result, Historical Kahler will engage in a series of transactions to
facilitate its conversion to REIT status, which will include the distribution
by dividend of 90.5% of the KMC Common Stock to the existing shareholders of
Historical Kahler. See "The Spin Off." The Hotels will be leased by Realty to
KMC pursuant to the Percentage Leases, which will permit Realty to participate
substantially in future growth in revenues at the Hotels. KMC will succeed to
and continue to develop certain operations of Historical Kahler that the
federal tax laws generally preclude from being owned and operated by a REIT,
including Historical Kahler's hotel management operations and its non-real
estate related businesses.

27
<PAGE>

Realty will increase their equity ownership in Realty and eliminate any equity
ownership in KMC. To further align their interests with Realty's shareholders,
Realty's executive officers have also agreed not to acquire any capital stock
of KMC so long as they are employed by Realty. See "Certain Relationships and
Related Transactions--Exchange Agreement." Mr. Milner has agreed, subject to
certain conditions, not to sell any shares of Common Stock for a period of
three years from the closing of the Offering. The Mayo Foundation has agreed,
subject to certain conditions, not to sell any shares of Common Stock for a
period of one year from the closing of the Offering. Thereafter, one-third of
the shares of Common Stock owned by the Mayo Foundation will become available
for sale at the commencement of each of the second, third and fourth years
following the closing of the Offering. See "Underwriting."

Upon completion of the Offering, Realty will retain $17.6 million of
outstanding tax-exempt mortgage indebtedness, which will represent less than
10% of Realty's total market capitalization. This indebtedness had a weighted
average interest rate of 5.8% (including credit enhancement fees) as of August
1, 1995. Realty is also negotiating to obtain commitments for the Lines of
Credit in an aggregate principal amount of $50 million to be used to fund the
acquisition, development and expansion of hotels. Realty intends to employ
conservative financing policies with respect to the acquisition, development
and expansion of hotels. Realty's Board of Directors has adopted a policy
limiting its consolidated indebtedness to 50.0% of Realty's investment in
hotel properties, at cost and before accumulated depreciation.

USE OF PROCEEDS

The net proceeds to Realty from the Offering are estimated to be
approximately $108.4 million ($124.8 million if the Underwriters' over-
allotment option is exercised in full), after deducting the underwriting
discount and the estimated offering expenses payable by Realty, assuming an
offering price of $14.00 per share. Realty intends to use the net proceeds as
described in the following table:

<TABLE>
<S> <C>
Repayment of indebtedness, net (see table below)............ $ 95,897,000
Repayment of Canyon Springs Park Hotel debt(1).............. 5,750,000
Payment of prepayment penalties............................. 4,574,000
Working capital and general corporate purposes.............. 2,157,000
------------
Net proceeds.............................................. $108,378,000
============
</TABLE>
--------

(1) On August 1, 1995, Historical Kahler acquired the Canyon Springs Park
Hotel in Twin Falls, Idaho for $5.8 million. Historical Kahler financed
the acquisition with a $3.8 million note payable to the seller secured by
a first mortgage on the property (bearing interest at 7.72% and maturing
in August 2000), a $400,000 note payable (bearing interest at prime,
currently 8.75%) and $1.6 million from available cash and lines of credit.
Due to the date of the acquisition, this debt is not reflected in the
table below.

The following table summarizes the indebtedness being repaid from the
proceeds of the Offering:

<TABLE>
<CAPTION>
PRINCIPAL
PROPERTY PLEDGED AS BALANCE AS OF
COLLATERAL MATURITY DATE INTEREST RATE JULY 2, 1995
------------------- ------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Kahler Plaza Hotel...... November 1997 10% + 2% room revenue $15,377
Clinic View Inn......... May 2000 9.75% + 2% room revenue 14,580
Sheraton San Marcos Golf
Resort and Conference
Center................. December 2000 7.5% + added interest 12,700
The Kahler Hotel........ December 2003 Prime + 1% 12,203
Salt Lake Hilton Hotel.. June 2003 Prime + 0.5% 11,785
Ogden Park Hotel........ August 1999 Prime + 0.5% 5,190
Lakeview Conference
Center and Resort...... September 1996 Prime + 1.125% 4,549
Olympia Park Hotel...... August 2013 Prime + 2% 3,853
Boise Park Suites Hotel. March 1997 Prime + 1% 4,058
Pocatello Park Quality
Inn.................... April 2014 Prime + 1.5% 3,614
The Kahler Hotel........ December 2003 12% 2,855
Lakeview Conference
Center and Resort,
Knights Inns........... June 2004 Prime 648
Lines of Credit......... May and June 1996 Prime + 1% 4,100
Miscellaneous........... Various dates through Various 310
October 1999
Subordinated Debt....... January 1998 Prime + 1% 1,500
-------
Total............................................................. $97,322
Less debt service reserve fund.................................... (750)
Less discounts.................................................... (675)
-------
$95,897
=======
</TABLE>

28
<PAGE>

Pending such uses, the net proceeds will be invested in short-term, interest-
bearing, investment-grade securities that are consistent with Realty's
intention to qualify as a REIT, including government and government agency
securities, certificates of deposit, interest-bearing bank deposits and
mortgage loan participations.

Actual amounts to be repaid and related prepayment penalties may differ from
the amounts set forth above due to timing of payments. In addition, Realty is
considering reissuing the $12.7 million of tax-exempt revenue bonds secured by
the Sheraton San Marcos Golf Resort and Conference Center if it is able to do
so on terms more favorable to Realty than the anticipated terms of the Lines of
Credit. Realty anticipates that the bonds would be credit enhanced and would
bear interest at a variable rate determined monthly. Realty anticipates that
the combined credit enhancement and interest costs of the bonds would be
comparable to the interest that Realty would earn from reinvesting the bond
proceeds pending use thereof. Realty does not currently have any binding
agreement with respect to any such refinancing.

PRICE RANGE OF COMMON STOCK

The Common Stock is quoted on Nasdaq under the symbol "KHLR". The following
table sets forth, for the periods indicated, the high and low sales prices of
the Common Stock.

<TABLE>
<CAPTION>
FISCAL 1993 HIGH LOW
----------- ------- ------
<S> <C> <C>
1st Quarter.................................................. $ 4 1/8 $2 3/4
2nd Quarter.................................................. 6 4
3rd Quarter.................................................. 7 1/2 6 1/4
4th Quarter.................................................. 7 3/4 6 1/2
FISCAL 1994
-----------
1st Quarter.................................................. $10 1/4 $6 1/2
2nd Quarter.................................................. 10 3/4 9
3rd Quarter.................................................. 14 1/2 9 1/4
4th Quarter.................................................. 14 3/4 8 3/8
FISCAL 1995
-----------
1st Quarter.................................................. $ 8 7/8 $7 1/2
2nd Quarter.................................................. 11 1/2 7
3rd Quarter (through August 29, 1995)........................ 14 1/8 10 1/4
</TABLE>

At August 29, 1995, Historical Kahler had approximately 531 shareholders of
record and 4,215,906 shares of Common Stock outstanding. On August 30, 1995,
the last reported sales price of the Common Stock on Nasdaq was $13 per share.

DISTRIBUTIONS

Since July 1, 1993, Historical Kahler has paid a quarterly cash dividend to
holders of its Common Stock. The amount of such dividend was $0.02 per share
per quarter until the fourth quarter of 1994 when it was increased to $0.03 per
share. Prior to July 1993, Historical Kahler had not paid cash dividends since
1984.

29
<PAGE>

On a pro forma basis, the expected dividends would represent 76.3% of Pro
Forma Funds From Operations and 92.5% of estimated Cash Available For
Distribution for the twelve months ended July 2, 1995. Realty determined the
expected dividend rate based on its pro forma net income and its estimate of
Cash Available For Distribution for the twelve months ended July 2, 1995.
Realty believes that this pro forma financial information constitutes a
reasonable basis for setting the expected dividend rate. Realty expects to
maintain this initial dividend rate for at least twelve months following
consummation of the Offering, unless actual results of operations, economic
conditions or other assumptions differ from those utilized in estimating the
Cash Available For Distribution for the twelve months ended July 2, 1995. The
estimate of Cash Available For Distribution is being made solely for the
purpose of setting the expected dividend rate and is not intended to be a
projection or prediction of the results that Realty will realize from its
operations. The actual Cash Available For Distribution that Realty will
realize will be affected by a number of factors, including revenues received
by the Hotels, rent payments under the Percentage Leases, interest payments on
the Mortgage Note, operating expenses of Realty, the interest expense incurred
on its borrowing and capital expenditures. Realty must rely on KMC to generate
sufficient cash flow from the operations of the Hotels to meet its rent and
interest obligations. No assurance can be given that Realty's estimate will
prove accurate. Actual results may vary substantially from the estimate.

The following table sets forth the adjustments made to Realty's pro forma
net income for the twelve months ended July 2, 1995, for the purpose of
estimating its Cash Available For Distribution for the twelve months ended
July 2, 1995:

<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE)
<S> <C>
Pro forma net income for the twelve months ended July
2, 1995............................................. $15,740
Pro forma depreciation and amortization (1).......... 5,477
Adjustment for unconsolidated joint venture deprecia-
tion................................................ 168
-------
Pro forma Funds From Operations for the twelve months
ended July 2, 1995.................................. 21,385
Adjustments:
Less: Estimated capital expenditures for the twelve
months ended July 2, 1995 (2)................... (3,323)
Loan amortization payments for the twelve months
ended July 2, 1995................................ (420)
-------
Estimated Cash Available For Distribution for the
twelve months ended
July 2, 1995 (3).................................... $17,642
=======
Expected annual dividends............................ $16,319
=======
Expected annual dividends per share (4).............. $ 1.28
=======
Expected dividend payout ratio based upon estimated
Cash Available For Distribution for the twelve
months ended July 2, 1995 (5)....................... 92.5%
</TABLE>
--------

(1) Includes real estate related depreciation of $5.5 million and real estate
related amortization of $22,000.

(2) Estimated capital expenditures represents a calculation of Realty's
obligation under the Percentage Leases to fund an amount equal to 5.5% of
pro forma room revenues of the Hotels for the twelve months ended July 2,
1995. The Percentage Leases obligate Realty to fund periodic capital
improvements to the Hotels and the replacement and refurbishment of FF&E
at the Hotels in an amount equal to 5.5% of room revenue for each fiscal
quarter on a cumulative basis. Based upon the current condition of the
Hotels and the capital expenditures made thereon during the past three
years, Realty believes this amount will be sufficient for periodic capital
improvements and for replacements and refurbishment of FF&E for the
Hotels. Realty also is obligated under the Percentage Leases to maintain
the underground utilities and structural elements of the Hotels. See
"Certain Agreements--The Percentage Leases." Under the Percentage Leases,
KMC is responsible for all other maintenance of the leased Hotels.

(3) Cash Available For Distribution equals net income (computed in accordance
with GAAP) excluding gains (or losses) from debt restructuring and sales
of property, and real estate related depreciation and amortization
(excluding amortization of financing costs) and after adjustments for
unconsolidated partnerships and joint ventures, and less adjustments for
capital expenditures (including expenditures for furniture, fixtures and
equipment) and principal payments on debt. Cash Available For Distribution
does not represent cash generated from operating activities in accordance
with GAAP. Cash Available For Distribution should not be considered as an
alternative to net income as an indicator of Realty's operating
performance.

30
<PAGE>

(4) Based on 12,772,118 shares of Common Stock outstanding upon completion of
the Offering.

(5) Calculated by dividing the expected annual dividends per share by the
estimated Cash Available For Distribution for the twelve months ended July
2, 1995. Realty also considers Funds From Operations to be one measure of
the performance of an equity REIT. In accordance with the resolution
adopted by the Board of Governors of NAREIT, Funds From Operations
represents net income (loss) (computed in accordance with GAAP), excluding
gains (or losses) from debt restructuring or sales of property, and real
estate related depreciation and amortization (excluding amortization of
financing costs), and after adjustments for unconsolidated partnerships and
joint ventures. For the pro forma periods presented, real estate related
depreciation and amortization were the only non-cash adjustments. Funds
From Operations are not considered under generally accepted accounting
principles to be an alternative to net income or other measurements as an
indicator of Realty's operating performance or to cash flows from
operating, investing or financing activities as a measure of liquidity. The
expected dividend payout ratios based upon estimated Funds From Operations
is equal to 76.3% for the twelve months ended July 2, 1995.

To qualify as a REIT, Realty must distribute to its shareholders by the end
of 1996 all of its current and accumulated earnings and profits through the end
of 1995. Realty currently estimates that it will have no current and
accumulated earnings and profits remaining as of December 31, 1995. The
estimated current and accumulated earnings and profits of Realty through the
end of 1995 is based on, among other things, an estimate of the tax basis and
fair market value of the shares of KMC Common Stock to be distributed in the
Spin Off and estimates of Realty's earnings and dividends through the end of
1995. No assurance can be given that Realty's estimates will prove accurate.
The actual tax basis of the shares of KMC Common Stock distributed in the Spin
Off and the actual earnings and dividends of Realty for 1995 may vary
substantially from the estimates. In that event, Realty may determine that it
will have some pre-1996 earnings and profits remaining as of December 31, 1996,
and that it will have to make a Special Distribution to its shareholders by the
end of 1996 to ensure the elimination of all such earnings and profits. If a
Special Distribution is required, Realty anticipates that it will make the
Special Distribution either by increasing the amount of its regular quarterly
dividends, or by paying a special dividend or dividends to its shareholders
before December 31, 1996, or by some combination of the foregoing. Realty
expects that it will use available cash balances and, if necessary, borrowings
to fund a Special Distribution.

The dividends paid to shareholders during the twelve months following
consummation of the Offering will constitute a return of capital that is not
considered taxable income to shareholders under the Code to the extent these
dividends exceed current and accumulated earnings and profits as determined for
federal income tax purposes. Realty currently estimates that approximately 9.0%
of these dividends will represent a return of capital for federal income tax
purposes. Realty has computed the estimated return of capital based on its
estimate of current and accumulated earnings and profits of Realty through the
end of 1995 and on Realty's pro forma earnings and profits for the twelve
months ended July 2, 1995. As discussed above, Realty's actual earnings and
profits may vary substantially from its estimates.

In order to maintain its qualification as a REIT, Realty also must make
annual distributions to its shareholders of at least 95.0% of its REIT taxable
income (which does not include net capital gains). See "Federal Income Tax
Considerations--Requirements for Qualification--Distribution Requirements." On
a pro forma basis, for the twelve-month period ended July 2, 1995, Realty would
be required to make minimum cash distributions aggregating approximately
$14,953 million or $1.17 per share, in order to maintain its qualification as a
REIT. Under certain circumstances, Realty may be required to make distributions
in excess of Cash Available For Distribution in order to meet these
distribution requirements. In this event, Realty would be required to borrow
the amount of the deficiency or sell assets to obtain the cash necessary to
make distributions to retain its qualifications as a REIT for federal income
tax purposes.

The actual timing and amount of distributions made by Realty will be
determined by the Board of Directors of Realty and will depend on a number of
factors, including Realty's actual cash flow and financial condition, the
actual amount of Cash Available For Distribution, the capital expenditure
requirements for Realty's properties, the annual distribution requirements
under the REIT provisions of the Code and such other factors as the Board of
Directors may deem relevant. Actual distributions may vary significantly from
the anticipated distributions.

31
<PAGE>

PRO FORMA CAPITALIZATION

The following table sets forth the short term debt and capitalization of
Historical Kahler as of July 2, 1995 and the pro forma short term debt and
capitalization of Realty as of July 2, 1995 adjusted to give effect to (i) the
Spin Off, (ii) the issuance and sale of 8,420,000 shares of the Common Stock at
an assumed offering price of $14.00 per share and after deducting the
underwriting discount and the estimated offering expenses payable by Realty and
(iii) the repayment of approximately $95.9 million of outstanding indebtedness.
See "Use of Proceeds" and the Pro Forma Condensed Consolidated Financial Data
of Realty included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JULY 2, 1995
-------------------------
(UNAUDITED)
HISTORICAL PRO FORMA
KAHLER REALTY
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Notes payable.................................... $ 4,100 $ --
----------- -----------
Long-term debt, including current portion........ 124,977 17,635
----------- -----------
Stockholders' equity
Common stock, par value $.10, authorized,
70,000,000 shares; issued and outstanding,
4,211,031 shares; pro forma, 12,631,031 shares
as adjusted (1)............................... 421 1,263
Additional paid-in capital..................... 13,250 120,786
Retained earnings.............................. 10,175 (9,963)
Minimum pension liability adjustment........... (167) --
----------- -----------
Total stockholders' equity................... 23,679 112,086
----------- -----------
Total capitalization....................... $ 152,756 $ 129,721
=========== ===========
</TABLE>
--------

(1) Excludes (i) 138,700 shares of Common Stock issuable upon exercise of
vested options granted to directors, officers and certain employees of
Historical Kahler, and (ii) 2,387 shares of Common Stock issuable to a
retired employee pursuant to deferred incentive plans.

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA OF HISTORICAL KAHLER

The following table sets forth selected consolidated financial and operating
data for Historical Kahler. The operating data for Historical Kahler for the
five fiscal years ended January 1, 1995 have been derived from the audited
financial statements of Historical Kahler. The operating data for Historical
Kahler for the first six months of 1994 and 1995 have been derived from the
unaudited financial statements of Historical Kahler and include all adjustments
(consisting solely of normal, recurring adjustments) that the executive
officers of Historical Kahler consider necessary to present fairly the
information set forth therein. Interim results of operations are not
necessarily indicative of the results of operations for a full fiscal year.
This table should be read in conjunction with the Consolidated Financial
Statements of Historical Kahler and the Notes thereto included elsewhere in
this Prospectus.

32
<PAGE>

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA OF HISTORICAL KAHLER
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST
FISCAL YEAR (1) TWELVE SIX MONTHS (1)
------------------------------------------------------- MONTHS ENDED ------------------
1990 1991 1992 1993 1994 JULY 2, 1995 1994 1995
--------- --------- --------- --------- --------- ------------ -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND HOTEL OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Revenue of owned oper-
ations................ $ 63,323 $ 64,652 $ 74,014 $ 96,979 $ 109,910 $ 115,431 $ 56,345 $ 61,866
Other properties
managed and/or
partially owned....... 27,250 31,506 29,237 17,910 17,490 17,276 8,576 8,362
--------- --------- --------- --------- --------- --------- -------- --------
Total revenues....... $ 90,573 $ 96,158 $ 103,251 $ 114,889 $ 127,400 $ 132,707 $ 64,921 $ 70,228
========= ========= ========= ========= ========= ========= ======== ========
REVENUE OF OWNED OPERA-
TIONS
Lodging................ $ 49,236 $ 51,021 $ 58,408 $ 80,505 $ 93,243 $ 98,902 $ 47,618 $ 53,277
Formal wear, laundry &
other................. 13,055 13,193 14,182 15,277 15,894 15,815 8,444 8,365
Interest income........ 1,032 438 1,424 1,197 773 714 283 224
--------- --------- --------- --------- --------- --------- -------- --------
Total revenue of
owned operations.... 63,323 64,652 74,014 96,979 109,910 115,431 56,345 61,866
--------- --------- --------- --------- --------- --------- -------- --------
OPERATING COSTS AND EX-
PENSES
Lodging................ 38,760 38,458 45,053 60,974 70,797 74,860 35,453 39,516
Formal wear, laundry &
other................. 9,963 10,772 12,092 12,621 13,487 12,961 7,194 6,668
Corporate expenses..... 2,747 2,827 3,225 3,272 3,257 3,477 1,694 1,914
Depreciation and amor-
tization.............. 5,859 5,740 6,492 7,904 8,477 8,617 4,298 4,438
Non-recurring charges
(2)................... -- -- 2,758(2) -- 1,811(2) 1,811(2) -- --
--------- --------- --------- --------- --------- --------- -------- --------
Total operating costs
and expenses........ 57,329 57,797 69,620 84,771 97,829 101,726 48,639 52,536
--------- --------- --------- --------- --------- --------- -------- --------
GROSS OPERATING PROFIT.. 5,994 6,855 4,394 12,208 12,081 13,705 7,706 9,330
Interest expense....... (7,017) (6,764) (7,303) (9,362) (11,207) (12,019) (5,248) (6,060)
Equity earnings (loss)
of affiliates......... (997) (2,326) (688) 27 193 386 98 291
Gain (loss) on sale of
assets................ 2,325 3,005 (693) 6 20 (22) 11 (31)
--------- --------- --------- --------- --------- --------- -------- --------
INCOME (LOSS) FROM
OPERATIONS BEFORE
INCOME TAXES........... 305 770 (4,290) 2,879 1,087 2,050 2,567 3,530
Provision (credit) for
income taxes.......... 119 247 (300) 875 323 647 770 1,094
--------- --------- --------- --------- --------- --------- -------- --------
Income (loss) before
extraordinary item
and changes in ac-
counting principle.... 186 523 (3,990) 2,004 764 1,403 1,797 2,436
Extraordinary item net
of income taxes....... 75 173 2,517 -- -- -- -- --
Cumulative effect of
change in accounting
for nonpension
postretirement
benefits.............. -- -- (250) -- -- -- -- --
--------- --------- --------- --------- --------- --------- -------- --------
NET INCOME (LOSS)....... $ 261 $ 696 $ (1,723) $ 2,004 $ 764 $ 1,403 $ 1,797 $ 2,436
========= ========= ========= ========= ========= ========= ======== ========
Income (loss) per
share (3)............. $ 0.00 $ 0.13 $ (0.59) $ 0.46 $ 0.14 $ 0.28 $ 0.43 $ 0.57
========= ========= ========= ========= ========= ========= ======== ========
OTHER FINANCIAL DATA:
EBITDA (4)............. $ 10,856 $ 10,269 $ 11,398 $ 20,139 $ 20,751 $ 22,708 $ 12,102 $ 14,059
Cash flows from:
Operations (5)........ $ 4,215 $ 7,686 $ 4,427(5) $ 10,417 $ 9,374(5) $ 9,867(5) $ 5,592 $ 6,085
Investing activities.. (12,196) (19,729) (9,797) (14,685) (13,256) (7,083) (9,450) (3,277)
Financing activities.. 7,728 12,024 5,975 4,449 4,008 (2,772) 4,186 (2,594)
HOTEL OPERATING DATA:
Number of hotels--end
of period (6)......... 13 14 16 18 20 21 19 21
Number of rooms--end
of period (6)......... 3,174 3,374 3,699 4,103 4,382 4,532 4,255 4,532
Room nights available.. 1,138,335 1,214,729 1,314,976 1,406,488 1,559,012 1,598,413 772,884 812,285
Occupancy.............. 58.5% 60.9% 61.9% 63.9% 65.2% 65.7% 65.6% 66.5%
ADR.................... $ 61.35 $ 61.71 $ 61.36 $ 63.31 $ 63.75 $ 64.63 $ 65.49 $ 67.10
REVPAR................. $ 35.91 $ 37.56 $ 38.01 $ 40.48 $ 41.58 $ 42.46 $ 42.95 $ 44.63
BALANCE SHEET DATA:
Investment in real es-
tate
(before accumulated
depreciation)......... $109,993 $ 122,659 $ 156,583 $ 196,873 $ 205,028 $205,546 $208,122
Net investment in real
estate................ 71,975 81,259 110,202 142,743 150,747 147,268 149,601
Total assets........... 103,637 114,170 132,392 162,406 168,169 169,414 168,624
Total mortgage debt.... 69,853 81,334 93,710 123,985 124,226 126,526 123,477
Stockholders' equity... 16,147 16,586 14,867 16,366 21,271 18,397 23,679
</TABLE>

(See notes on next page.)

33
<PAGE>

--------

(1) Historical Kahler's fiscal year ends on the Sunday closest to December 31
in each year. Accordingly, the table presents selected financial and
operating data as of the end of and for each of the five fiscal years
ended January 1, 1995 and as of and for the six months ended July 3, 1994
and July 2, 1995.

(2) Non-recurring charges for fiscal 1992 and 1994 and for the twelve months
ended July 2, 1995 reflect (i) a charge of $2.8 million in 1992 consisting
of a $1.2 million non-cash writedown of a hotel property and a $1.6
million charge to settle a lawsuit concerning the Sheraton San Marcos Golf
Resort and Conference Center, and (ii) $1.8 million of expenses in 1994
related to a planned public offering.

(3) Income per share in 1990 and 1991 is computed on a primary and fully
diluted share basis using the weighted average number of outstanding
shares of Common Stock and Common Stock equivalents of 3,218,000 and
3,274,000, respectively. For 1992, loss per share is computed on a primary
share basis using only the weighted average number of outstanding shares
of Common Stock aggregating 3,341,000. Common Stock equivalents are
excluded since the effect is antidilutive. For 1993 and 1994, income per
share is computed on a primary and fully diluted share basis using the
weighted average number of outstanding shares of Common Stock and Common
Stock equivalents (arising from employee stock plans, deferred stock
compensation and a warrant) aggregating 3,743,000 and 3,956,000,
respectively. For the first six months of 1994 and 1995 and the twelve
months ended July 2, 1995, income per share is computed on a primary and
fully diluted share basis using the weighted average number of outstanding
shares of Common Stock and Common Stock equivalents aggregating 3,785,000,
4,306,000 and 4,306,000 shares, respectively.

(4) EBITDA means income (loss) from operations before income taxes, excluding
gains or losses on sale of assets, non-cash writedowns of real estate
property, interest expense, depreciation and amortization. EBITDA does not
represent cash generated from operating activities in accordance with
GAAP, is not to be considered as an alternative to net income or any other
GAAP measurements as a measure of operating performance and is not
necessarily indicative of cash available to fund all cash needs.
Management believes that EBITDA is a useful measure of cash flow because
it indicates the cash flow available to spend on capital additions to
maintain Realty's assets, to service existing debt or to use at Realty's
discretion for other purposes.

(5) Cash flow from operations for fiscal 1992 and 1994 and for the twelve
months ended July 2, 1995 reflects non-recurring charges of $1.6 million,
$1.8 million and $1.8 million, respectively. Prior to consideration of
such expenses, cash flow from operations would have been $6.0 million for
1992, $11.2 million for 1994 and $11.7 million for the twelve months ended
July 2, 1995. The $1.6 million charge in 1992 relates to the settlement of
a lawsuit, and the 1994 charge represents costs incurred in connection
with a planned public offering. See Note 10 of Notes to Consolidated
Financial Statements of Historical Kahler.

(6) The number of hotels and rooms at July 2, 1995 includes the Hotels (except
for the Canyon Springs Park Hotel, which was acquired after that date) as
well as seven additional hotels managed by Historical Kahler. Historical
Kahler holds 100.0% equity interests in two of these seven hotels and
holds minority ownership interests in two of the other five hotels. KMC
will own the equity interests in and manage these additional hotels
following the Spin Off.

34
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS OF HISTORICAL KAHLER

The management's discussion and analysis of financial condition and results
of operations set forth below is based on the Consolidated Financial Statements
of Historical Kahler. This discussion does not reflect the Spin Off and,
accordingly, it includes the financial condition and results of operations
related to the business of Realty as well as the KMC Business. The financial
results of Historical Kahler will not be comparable to the future operating
results of Realty and of KMC. The following discussion should be read in
conjunction with (i) the Consolidated Financial Statements of Historical Kahler
and Notes thereto, (ii) the Pro Forma Condensed Consolidated Financial Data of
Realty and KMC and the respective Notes thereto, and (iii) Management's
Discussion and Analysis of Pro Forma Financial Data of Realty, all appearing
elsewhere in this Prospectus.

Historical Kahler's principal business is the ownership and management of
hotel properties. Revenues from lodging are primarily derived from the revenues
of hotels consolidated in Historical Kahler's financial statements, interest
income on mortgage notes held by Historical Kahler with respect to hotels
managed by Historical Kahler and equity earnings (loss) on hotels in which
Historical Kahler owns a minority interest. The Consolidated Financial
Statements include the accounts of all wholly or majority owned hotels and the
lodging revenues of the University Park Hotel. See Note 1 to the Consolidated
Financial Statements of Historical Kahler. Except for the University Park
Hotel, ownership of 50.0% or less of a hotel is accounted for under the equity
method.

The following table sets forth, as percentages of total lodging revenue, the
principal components of Historical Kahler's lodging operations for the periods
indicated.

<TABLE>
<CAPTION>
FIRST
FISCAL YEAR SIX MONTHS
------------------- ------------
1992 1993 1994 1994 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Room revenue............................. 57.1% 57.2% 58.0% 58.6% 58.8%
Food and beverage revenue................ 29.7 31.3 31.5 30.4 30.2
Other lodging revenue.................... 13.2 11.5 10.5 11.0 11.0
----- ----- ----- ----- -----
Total lodging revenue.................. 100.0% 100.0% 100.0% 100.0% 100.0%
Lodging expenses......................... 77.1 75.7 75.9 74.5 74.2
----- ----- ----- ----- -----
Lodging income before interest,
depreciation and corporate expenses..... 22.9% 24.3% 24.1% 25.5% 25.8%
===== ===== ===== ===== =====
</TABLE>

The following table sets forth certain additional operating data for the
hotels owned and managed by Historical Kahler:

<TABLE>
<CAPTION>
FIRST
FISCAL YEAR SIX MONTHS
------------------------------- ----------------
1992 1993 1994 1994 1995
--------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Number of Hotels--end of
period................. 16 18 20 19 21
Number of rooms--end of
period................. 3,699 4,103 4,382 4,255 4,532
Room nights available... 1,314,976 1,406,488 1,559,012 772,884 812,285
Occupancy............... 61.9% 63.9% 65.2% 65.6% 66.5%
ADR..................... $61.36 $63.31 $63.75 $65.49 $67.10
REVPAR.................. $38.01 $40.48 $41.58 $42.95 $44.63
</TABLE>

35
<PAGE>

RESULTS OF OPERATIONS

Comparison of First Six Months 1994 to First Six Months 1995

REVENUE FROM OWNED OPERATIONS. Total lodging revenue increased 11.9% from
$47.6 million in the first six months of 1994 to $53.3 million in the
comparable 1995 period. This improvement resulted primarily from a $1.61 or
2.5% increase in ADR from $65.49 in the first six months of 1994 to $67.10 in
the first six months of 1995 and an increase in occupancy from 65.6% in the
first six months of 1994 to 66.5% in the first six months of 1995. Also, the
acquisition of the Pocatello Park Quality Inn and the Green Oaks Inn and
Conference Center provided an increase in lodging revenue of $3.6 million.
Historical Kahler's hotels in the Intermountain states of Utah and Idaho and
the conference center hotel in Arizona primarily generated the increase in ADR
and occupancy. Lodging revenue from food and beverage increased 10.9% from
$14.5 million in the first six months of 1994 to $16.1 million in the first six
months of 1995 primarily as a result of improved occupancy levels and the
acquisition of the Pocatello Park Quality Inn and the Green Oaks Inn and
Conference Center.

OPERATING COSTS AND EXPENSES. Lodging expenses increased 11.5% from $35.5
million in the first six months of 1994 to $39.5 million in the first six
months of 1995. As a percentage of lodging revenue, however, lodging expenses
decreased from 74.5% in the first six months of 1994 to 74.2% in the first six
months of 1995. This change was primarily the result of increased ADRs and a
higher gross operating margin in food and beverage as described above. Lodging
income before interest, depreciation and corporate expenses increased from
$12.2 million or 25.5% of total lodging revenue in the first six months of 1994
to $13.8 million or 25.8% of total lodging revenue in the first six months of
1995.

Corporate expenses, primarily administrative and general expenses, increased
13.0% from $1.7 million for the first six months of 1994 to $1.9 million in the
first six months of 1995. This increase is primarily a result of an increase in
employee related expenses and professional fees. Depreciation and amortization
increased 3.3% from $4.3 million in the first six months of 1994 to $4.4
million in the first six months of 1995 due primarily to the hotel
acquisitions.

GROSS OPERATING PROFIT. Gross operating profit increased 21.1% from $7.7
million in the first six months of 1994 to $9.3 million in the first six months
of 1995 primarily due to the acquisition of the Pocatello Park Quality Inn and
the Green Oaks Inn and Conference Center as mentioned above. As a percentage of
total revenue of owned operations, gross operating profit increased from 13.7%
in the first six months of 1994 to 15.1% in the first six months of 1995 due
primarily to the strong economies from the hotels in the Intermountain states
of Utah and Idaho and the conference center hotel in Arizona.

INTEREST EXPENSE. Interest expense increased 15.5% from $5.2 million in the
first six months of 1994 to $6.1 million in the first six months of 1995. The
increase is attributable to the increase in prime lending rate and the debt
associated with the acquisition of the Pocatello Park Quality Inn.

Comparison of 1993 to 1994 Operations

REVENUE FROM OWNED OPERATIONS. Total lodging revenue increased 15.8% from
$80.5 million in 1993 to $93.2 million in 1994. This increase resulted
primarily from the acquisitions of hotels in 1993 and 1994. Additional revenue
resulted from increased occupancy levels from 63.9% in 1993 to 65.2% in 1994
and increased ADR from $63.31 in 1993 to $63.75 in 1994. The increased
occupancy resulted primarily from improved levels in the Intermountain region
hotels.

OPERATING COSTS AND EXPENSES. Lodging expenses increased 16.1% from $61.0
million in 1993 to $70.8 million in 1994. This increase also relates to the
hotel acquisitions in 1993 and 1994. As a percentage of lodging revenue,
lodging expenses increased from 75.7% in 1993 to 75.9% in 1994.

Corporate expenses, primarily administrative and general expenses, remained
level at $3.3 million from 1993 to 1994, but declined from 3.4% to 3.0% as a
percentage of total revenue of owned operations.

36
<PAGE>

Depreciation and amortization increased 7.2% from $7.9 million in 1993 to $8.5
million in 1994 due primarily to the hotel acquisitions in 1993 and 1994 and
the new laundry facility which opened in April 1993 in Rochester, Minnesota.

The non-recurring charge of $1.8 million in 1994 represents expenses related
to a planned public offering and conversion of Historical Kahler into a REIT
which was not completed due to unfavorable market conditions. The after-tax
impact of such charge was approximately $1.3 million.

GROSS OPERATING PROFIT. Gross operating profit decreased by $127,000 from
$12.2 million in 1993 to $12.1 million in 1994. Excluding the $1.8 million of
non-recurring charges, Historical Kahler 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% from $9.4 million in
1993 to $11.2 million in 1994. The increase in the amount of interest expense
can be attributed to increased indebtedness incurred in connection with 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 contributed approximately $720,000 of this $1.8 million increase.

PROVISION FOR INCOME TAXES. At January 2, 1994 and January 1, 1995,
Historical Kahler had prepaid income tax charges net of deferred income tax
credits of $393,000 and $513,000, respectively. Historical Kahler 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 deferred tax asset is dependent upon the offset of these
credits against future federal tax payments if future taxable income exceeds
the alternative minimum tax levels. Also, these credits could generate a refund
by carrying back net operating losses if Historical Kahler incurred such losses
in the future. Further analysis of the tax provision is presented in Note 11 of
Notes to Consolidated Financial Statements of Historical Kahler.

Comparison of 1992 to 1993 Operations

REVENUE FROM OWNED OPERATIONS. Lodging revenues increased by $22.1 million or
37.8% from $58.4 million in 1992 to $80.5 million in 1993. This increase is
primarily the result of having the additional properties acquired in 1992
(Boise Park Suites, Sheraton San Marcos and Olympia Park Hotels) for the full
year of 1993 and the additional hotels acquired in 1993 (Salt Lake Hilton and
Ogden Park Hotels). Increased occupancy and average room rates also contributed
to the revenue increase.

OPERATING COSTS AND EXPENSES. Total operating costs and expenses, excluding
non-recurring charges, increased from $66.9 million in 1992 to $84.8 million in
1993, but as a percentage of total revenue of owned operations declined from
90.3% in 1992 to 87.4% in 1993.

Similarly, lodging costs increased 35.3% from $45.1 million in 1992 to $61.0
million in 1993, but as a percentage of lodging revenue declined from 77.1% in
1992 to 75.7% in 1993. This improvement was a direct result of increased
occupancy and rates during the year plus improved cost control.

Corporate expenses for 1993 remained approximately the same as in 1992, but
as a percentage of total revenue of owned operations corporate expenses
declined from 4.3% in 1992 to 3.4% in 1993.

Depreciation and amortization increased 21.7% from $6.5 million in 1992 to
$7.9 million in 1993 due primarily to the 1993 hotel acquisitions. Depreciation
and amortization declined, however, as a percentage of total revenue of owned
operations from 8.8% in 1992 to 8.2% in 1993.

The non-recurring charge of $2.8 million in 1992 consists of a $1.2 million
non-cash writedown of a hotel property and a $1.6 million charge to settle a
lawsuit concerning the Sheraton San Marcos Golf Resort and Conference Center.

37
<PAGE>

GROSS OPERATING PROFIT. Gross operating profit increased by $7.8 million from
$4.4 million in 1992 to $12.1 million in 1993. As a percentage of total revenue
of owned operations, gross operating profit increased from 5.9% in 1992 to
12.6% in 1993. Lodging, formal wear operations and the 1992 non-recurring
charges were the major contributors to this improvement.

INTEREST EXPENSE. Interest expense increased 28.2% from $7.3 million in 1992
to $9.4 million in 1993. This increase is attributable to the debt associated
with the laundry facility opened in April 1993 and new properties acquired in
1993.

OTHER ITEMS. The loss on sale of assets of $693,000 in 1992 includes a
$397,000 loss relating to discontinued operations at a Wisconsin Dells hotel, a
$400,000 writedown of assets and reserve for demolition of the old laundry
facility in Rochester, offset by a gain of $104,000 on the sale of customer
contracts related to the closing of formal wear operations in San Jose.

The 1992 extraordinary item of $2.5 million, net of income tax of $278,000,
relates to the extinguishment of debt and was recorded simultaneously with the
writedown of a hotel property.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOWS FROM OPERATIONS. Net cash from operations increased 8.8% from $5.6
million in the first six months of 1994 to $6.1 million in the first six months
of 1995. Net cash from operations decreased, however, from $10.4 million in
1993 to $9.4 million in 1994. The decrease was primarily attributable to the
after-tax charge of $1.3 million resulting from costs incurred in connection
with a planned public offering and conversion of Historical Kahler into a REIT.

CASH FLOWS FROM INVESTING ACTIVITIES. Capital expenditures decreased from
$8.7 million in the first six months of 1994 to $3.2 million in the first six
months of 1995. Capital expenditures in the first six months of 1994 consisted
of $5.2 million used for acquisition of the Pocatello Park Quality Inn with
most of the rest used for refurbishment of existing properties and purchase of
formal wear garments. Expenditures in the first six months of 1995 were used to
remodel and refurbish existing hotels, purchase laundry and formal wear
equipment and purchase garments.

Capital expenditures for 1993 and 1994 totaled $12.2 million and $13.5
million, respectively. In 1993, approximately $9.3 million was used on the
construction of the new laundry facility in Rochester, while approximately $2.2
million was used for refurbishment of existing hotels and $700,000 for the
purchase of garments. In 1994, approximately $7.8 million was used for
acquisition and renovation of the Pocatello Park Quality Inn, land for the
expansion of the Boise Park Suites Hotel, acquisition of Green Oaks Inn and
Conference Center and completion of the laundry facility in Rochester. In
addition, approximately $4.5 million was used for refurbishment of existing
hotels and $1.2 for the purchase of formal wear garments.

In June 1995, Historical Kahler signed a purchase agreement relating to the
acquisition of the Canyon Springs Park Hotel for $5.8 million. In addition to
this acquisition, which was completed in August 1995, and Historical Kahler's
customary refurbishing expenditures, management estimates that $5.2 million
will be used to expand the Boise Park Suites Hotel from 130 rooms to 243 rooms.
Historical Kahler has a loan commitment for construction and permanent
financing to fund the estimated $4.9 million cost of expansion.

Notes receivable, including current portion, declined from $5.1 million at
1993 year end to $1.6 million at 1994 year end, principally due to the
acquisition of the Green Oaks Inn and Conference Center in December 1994. See
Note 3 of Notes to Consolidated Financial Statements of Historical Kahler for a
summary of the acquisition.

CASH FLOWS FROM FINANCING ACTIVITIES. In the first six months of 1995,
Historical Kahler made a scheduled $500,000 payment on its subordinated debt,
normal principal retirements of $976,000 and $1.2 million repayment on its
lines of credit and short-term notes. In the first six months of 1994, normal
principal retirements of $1.2 million were made. Net cash provided from
proceeds of new long-term debt of $3.7 million and net borrowing under line-of-
credit agreements of $1.7 million relates to the cash requirements for the
acquisition of Pocatello Park Quality Inn.

38
<PAGE>

At January 1, 1995, Historical Kahler had notes payable of $5.3 million due
in 1995. Of this amount, $4.3 million relates to amounts outstanding on $4.5
million of available lines of credit. The banks providing these lines of credit
normally extend the lines one year at a time. Historical Kahler has received
the extension of all its lines of credit through June 1996. The remaining $1.0
million at January 1, 1995 was a note payable due in June 1995 which was repaid
from working capital.

At January 1, 1995, Historical Kahler had approximately $75 million of
variable rate debt and $57 million of fixed rate debt. Historical Kahler's
variable rate debt is generally indexed to the prime rate, ranging from prime
to 2% in excess of prime. Historical Kahler believes that its net cash provided
by operating activities along with other financing sources will be sufficient
to fund its capital requirements.

Historical Kahler received proceeds of approximately $1.4 million in 1994
from the issuance of Common Stock in connection with the exercise of warrants
and stock options. Stockholders' equity increased $4.9 million during fiscal
1994 to $21.3 million at January 1, 1995, principally as a result of such
proceeds and conversion of approximately $3.3 million of preferred stock.

INFLATION

Management believes that, during the five years ended January 1, 1995 and the
six months ended July 2, 1995, inflation has not had a material effect on the
assets or operations of Historical Kahler.

SEASONALITY

Historical Kahler's hotel operations have been seasonal in nature, reflecting
higher occupancy rates during the first and third quarters. The higher
occupancy rates during the first quarter are due to increased seasonal demand
at the Sheraton San Marcos Golf Resort and Conference Center and the Greater
Salt Lake City area hotels due to winter skiing. The third quarter typically
has higher occupancy rates due to summer vacation travel.

OTHER

Historical Kahler is involved in various litigation in the normal course of
business. Historical Kahler does not expect the outcome of such litigation to
have a material adverse effect on its consolidated financial statements. See
"The Hotels--Legal Proceedings."

39
<PAGE>

SELECTED CONSOLIDATED PRO FORMA FINANCIAL AND

OPERATING DATA OF REALTY

The following table sets forth unaudited pro forma selected financial and
operating data for Realty. The data are presented as if: (i) the Spin Off and
the Offering had occurred as of the beginning of each period presented; (ii)
Realty qualified as a REIT for each period presented; (iii) the net proceeds of
the Offering were used to repay certain outstanding indebtedness as of the
beginning of each period presented; (iv) certain Hotels acquired subsequent to
the beginning of each period presented had been acquired as of the beginning of
each period presented; and (v) the Percentage Leases were executed and in
effect as of the beginning of each period presented. The pro forma financial
information is not necessarily indicative of what the actual financial position
and results of operations of Realty would have been as of the end of and for
the periods presented, and such information does not purport to represent the
future financial position of Realty. This table should be read in conjunction
with the Pro Forma Condensed Consolidated Financial Data of Realty included
elsewhere in this Prospectus.

40
<PAGE>

--------

(1) Represents lease payments from KMC calculated on a pro forma basis by
applying the rent provisions in the Percentage Leases to the historical
revenue of the Hotels for the periods presented.

(3) Lodging expenses for Hotels under Percentage Leases include real estate
and personal property taxes, casualty insurance and land rent under a
ground lease.

(5) The number of outstanding shares of Common Stock used to compute income
per share for 1994, the twelve months ended July 2, 1995 and the first
six months of 1994 and 1995 is 12,772,118.

(6) In accordance with the resolution adopted by the Board of Governors of
NAREIT, Funds From Operations represents net income (loss) (computed in
accordance with GAAP), excluding gains (or losses) from debt
restructuring or sales of property, and real estate related depreciation
and amortization (excluding amortization of financing costs), and after
adjustments for unconsolidated partnerships and joint ventures. For the
pro forma periods presented, real estate related depreciation and
amortization were the only non-cash adjustments. Funds From Operations
are not considered under generally accepted accounting principles to be
an alternative to net income or other measurements as an indicator of
Realty's operating performance or to cash flows from operating, investing
or financing activities as a measure of liquidity. Realty believes that
Funds From Operations is equivalent to cash flow from operations
determined under GAAP because there are no pro forma working capital
adjustments. Funds From Operations do not reflect cash expenditures for
capital improvements.

(7) Represents 5.5% of pro forma room revenues to be expended for capital
expenditures for the Hotels which are assumed to equal investing
activities on a pro forma basis for the periods presented.

(8) Represents pro forma initial quarterly dividends of $.32 per share and
pro forma principal payments on debt for the periods presented.

41
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL DATA OF REALTY

The management's discussion and analysis of pro forma financial data set
forth below should be read in conjunction with the Pro Forma Condensed
Consolidated Financial Data of Realty and of KMC, Management's Discussion and
Analysis of Financial Condition and Results of Operations of Historical Kahler,
and the Consolidated Financial Statements of Historical Kahler and Notes
thereto, all appearing elsewhere in this Prospectus.

Realty owns 14 Hotels and holds a Mortgage Note with respect to one Hotel.
Realty's principal sources of revenue are the payments of rent from KMC under
the Percentage Leases and interest income on the Mortgage Note. Percentage
Rents are based upon room revenue of the Hotels, and, depending on the type of
hotel, food and beverage revenue. In addition, the results of operations for
the University Park Hotel are consolidated in Realty's results of operations.
See Note L to the Pro Forma Condensed Consolidated Statement of Operations of
Realty for the twelve months ended July 2, 1995.

PRO FORMA RESULTS OF OPERATIONS

Comparison of Pro Forma First Six Months 1994 to Pro Forma First Six Months
1995

Pro forma total lodging revenue increased 6.2% from $16.7 million in the
first six months of 1994 to $17.7 million in the first six months of 1995. Pro
forma lease revenue increased 6.0% from $12.8 million in the first six months
of 1994 to $13.5 million in the first six months of 1995. Occupancy on a
historical basis for the Hotels increased from 68.8% in the first six months of
1994 to 69.5% in the comparable 1995 period. ADR on a historical basis
increased 3.4% from $67.06 in the first six months of 1994 to $69.31 in the
first six months of 1995.

Pro forma lodging expense increased 3.4% from $5.0 million in the first six
months of 1994 to $5.2 million in the first six months of 1995. Corporate
expenses were $412,000 for both six month periods. Interest expense increased
37.5% from $427,000 in the first six months of 1994 to $587,000 in the first
six months of 1995. Depreciation and amortization for the 1994 and 1995 periods
was $2.8 million.

Pro forma net income increased 8.6% from $8.1 million in the first six months
of 1994 to $8.8 million in the first six months of 1995.

Fiscal Year Ended 1994

Pro forma total lodging revenue for Realty in 1994 was $32.0 million. This
pro forma revenue primarily consists of $24.4 million of pro forma rent under
the Percentage Leases and $7.1 million of lodging revenue reflecting the
consolidation of the University Park Hotel. Lodging expenses of $9.7 million
included $3.8 million for the Hotels leased to KMC to pay real estate and
personal property taxes, casualty insurance and land rent and $5.9 million for
the University Park Hotel to pay operating expenses related to operation of the
Hotel.

Pro forma corporate expenses in 1994 were $825,000 for general and
administrative expenses. Realty initially will have three executive officers
and one full time employee. Realty anticipates hiring one additional employee
after the Offering. Pro forma interest expense for Realty in 1994 would have
been $953,000 as a result of a reduction in interest expense of $9.0 million
from the application of the net proceeds from the Offering to repay outstanding
mortgage and other indebtedness.

Pro forma net income for Realty in 1994 was $15.0 million primarily due to
the reduction in interest expense as a result of the Offering, the elimination
of corporate income taxes as a result of qualification as a REIT, and the
inclusion of the results of operations for the Canyon Springs Park Hotel as if
the Hotel had been acquired as of the beginning of 1994.

42
<PAGE>

PRO FORMA LIQUIDITY AND CAPITAL RESOURCES

On a pro forma basis, Realty will have aggregate debt of approximately $17.6
million, which will consist of tax-exempt revenue bonds carrying an interest
rate including credit enhancement fees of approximately 5.8% (weighted average
as of August 1, 1995). A credit enhancement agreement for $8.7 million expires
in September 1998. A credit enhancement agreement for $8.9 million expires in
June 2000. In addition, Realty is a guarantor of $9.7 million of the
indebtedness of a subsidiary of KMC, which debt is secured by KMC's commercial
laundry facility in Rochester, Minnesota. If the subsidiary of KMC defaults on
this debt, the lender has the right to demand payment of the debt from Realty
and to put the debt to the Mayo Foundation. In that event, the Mayo Foundation
can either pursue Realty for reimbursement as guarantor or foreclose on the
commercial laundry facility, which is the sole laundry facility serving the
Mayo Clinic's facilities in Rochester, Minnesota. KMC has agreed to indemnify
Realty for amounts paid under this guaranty.

Realty intends to acquire or construct additional hotel properties in the
future. In connection with these acquisitions or construction projects, Realty
may incur additional secured or unsecured indebtedness. Park Hotels L.C., a
Utah limited liability company ("Park Hotels") in which Realty owns a 50%
equity interest, has a loan commitment for $15.6 million to build an additional
96 suites and conference center at the Provo Park Hotel and a new 114 room
Residence Inn by Marriott in Provo, Utah. See "The Hotels--Full Service
Hotels--Intermountain Hotels--Provo Park Hotel-Provo, Utah." Realty may also
incur additional indebtedness to meet distribution requirements imposed on a
REIT under the Code to the extent working capital and cash flow from Realty's
investments are insufficient to make these distributions.

Realty has existing lines of credit of $5.0 million which bear interest at
the prime rate plus 1.0% and which expire in the second quarter of 1996. Realty
is negotiating to obtain the Lines of Credit in an aggregate principal amount
of $50.0 million to be used to fund the acquisition, development and expansion
of hotels. The Lines of Credit will be secured by first mortgages on certain of
the Hotels. It is anticipated that the Lines of Credit will have initial terms
of one to two years. Thereafter, it is anticipated that some of the Lines of
Credit may be extended while others may convert into term loans. Borrowings
under the Lines of Credit are anticipated to bear interest at the prime rate
plus 0.5% or prime rate plus 0.75%. Realty in the future may seek to increase
the amount of its credit facilities, negotiate additional credit facilities, or
issue corporate debt instruments. Debt incurred or issued by Realty may be
secured or unsecured, long-term or short-term, with fixed or variable interest
rates and may be subject to such other terms as the Board of Directors of
Realty deems prudent.

Pursuant to the Percentage Leases, Realty is obligated to reserve an amount
equal to 5.5% of room revenue of the Hotels leased to KMC for each fiscal
quarter on a cumulative basis. This amount may be used by KMC, subject to
approval by Realty, for periodic capital improvements to the Hotels or for
periodic replacement or refurbishment of FF&E at the Hotels. Under the
Percentage Leases, Realty is also required to maintain the underground
utilities and structural elements of the Hotels. The executive officers of
Realty believe that these amounts will be sufficient to fund necessary
expenditures on the Hotels for the foreseeable future. Realty anticipates
entering into a similar arrangement with respect to future hotels which it
acquires.

43
<PAGE>

GROWTH STRATEGIES

Realty will seek to increase its Cash Available For Distributions and
enhance shareholder value by taking advantage of strong internal growth
opportunities available within its portfolio of existing Hotels and by
continuing to pursue opportunistic acquisitions, expansion and selected
development of hotels located in strong and growing markets. In pursuing its
growth strategies, Realty will focus on its existing markets to take advantage
of certain economies of scale developed by Historical Kahler and on developing
strategic relationships with major local medical, corporate and educational
institutions. Realty will also maintain conservative financial policies with
respect to the implementation of each of these growth strategies.

OPPORTUNISTIC ACQUISITION STRATEGIES

Focus on Existing Markets

Realty believes that the Intermountain and Midwestern regions offer strong
growth opportunities. Since 1992, Realty has acquired 50.0% or more of the
equity in, and assumed the management of, four Hotels and constructed a fifth
Hotel in the Intermountain regions. The following table provides certain
financial data for these Hotels:

<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED JULY 2, 1995
------------------------------------------------------------------
BOISE PARK OLYMPIA PARK PROVO PARK POCATELLO PARK CANYON SPRINGS
HOTEL SUITES HOTEL HOTEL HOTEL(1) QUALITY INN PARK HOTEL(2)
----- ------------ ------------ ---------- -------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Date acquired or opened. 2/92 10/92 9/93 3/94 8/95
Original capital
invested(3)............ $5,632 $5,728 $3,525 $6,085 $5,750
Revenue................. 2,570 5,221 6,447 3,773 --
Property income before
income taxes(4)........ 538 327 303 298 --
Cash flows from:
Operations............ 1,047 687 829 330 --
Investing activities.. (1,177) (214) (638) (547) --
Financing activities.. 204 (337) 0 309 --
Property earnings before
interest, income taxes,
depreciation and
amortization(5)........ 1,094 1,051 933 950 --
Capital reserve(6)...... 131 185 107 111 --
</TABLE>
--------

(1) Property earnings before interest, income taxes, depreciation and
amortization, and capital reserve with respect to the Provo Park Hotel
reflect Realty's 50.0% equity interest in the hotel. Property earnings
before interest, taxes, depreciation and amortization includes a
management fee of approximately $242,000.

(2) The Canyon Springs Park Hotel was acquired by Historical Kahler on August
1, 1995.

(3) Original capital invested represents Realty's purchase price, construction
costs or mortgage funding with respect to each Hotel, plus the cost of
those capital improvements that were planned at the time of the
acquisition that are now in use at the respective Hotel.

(4) Does not include an allocation of corporate expense.

(5) Property earnings before interest, income taxes, depreciation and
amortization does not represent cash generated from operating activities
in accordance with GAAP, is not to be considered as an alternative to net
income or any other GAAP measurements as a measure of operating
performance and is not necessarily indicative of cash available to fund
all cash needs. Management believes property earnings before interest,
taxes, depreciation and amortization is a useful measure of cash flow from
a property because it indicates the cash flow available to the property's
owner to spend on capital additions to maintain the property, to service
existing debt on the property or to use at the owner's discretion for
other purposes. Management considers this number to be a useful measure of
Realty's return on the original capital invested in a hotel.

(6) Represents 5.5% of room revenues for the periods presented to allow for
continuing capital expenditures.

44
<PAGE>

Realty intends to continue to expand its portfolio of hotels through the
opportunistic acquisition of hotels located throughout the United States with a
particular focus on markets in the Intermountain and Midwestern regions.
Examples of this strategy include the following:

. With the purchase of the Olympia Park and Provo Park Hotels in 1992 and
1993, respectively, Realty has developed a significant presence in the
Greater Salt Lake City market, where Realty believes that KMC is
currently the largest hotel operator with 1,295 rooms leased from Realty
and an additional 80 rooms operated for other parties.

. After building the Boise Park Suites Hotel in 1992 and acquiring the
Pocatello Park Quality Inn in 1994, Realty expanded its presence in Idaho
with the recent acquisition of the Canyon Springs Park Hotel located in
Twin Falls, Idaho, at a cost of $5.8 million. Realty expects to improve
the operating performance of this Hotel through KMC's application of
improved operating strategies.

. KMC currently operates a 146 room hotel located in Butte, Montana. Realty
has a right of first refusal to acquire this hotel as well as a 150-room
hotel in Helena, Montana.

Realty believes this strategy of acquiring hotels in existing markets enables
it to benefit from its knowledge of those markets and to take advantage of
economies of scale that have been developed by Historical Kahler through the
coordinated operation of multiple hotels in a particular market.

Emphasis on Full Service and Conference Center Hotels

. the growth in hotel room supply, particularly in the full service and
conference center sectors, has been extremely limited in recent years;

. the acquisition cost for full service hotels remains well below
replacement cost in Realty's targeted markets;

. the high development costs and lengthy lead times for full service hotels
create barriers to entry that will limit new competition;

. the presence of "involuntary" owners of hotel assets (e.g., pension
funds, financial institutions, individuals, etc.) may create motivated
sellers, thereby creating buying opportunities;

. there are few experienced full service hotel operators, with developed
economies of scale, providing valuable "turn-around" acquisition
opportunities for acquirors who are experienced in the operation of full
service hotels; and

. despite the gradual improving liquidity of U.S. hotel assets, financing
for hotel assets, especially new construction of large full service
hotels, remains very difficult to obtain, and substantial acquisition
opportunities still exist for experienced buyers with demonstrated access
to capital.

Development and Expansion of Institutional Relationships

In implementing its growth strategies, Realty will focus upon markets where
it has an opportunity to develop or expand strategic relationships with major
local medical, corporate or educational institutions. Historical Kahler has
demonstrated its ability to build key strategic relationships and service the
needs of local institutions in many of its existing markets. Realty intends to
continue to acquire, develop and redevelop hotels situated near similar
institutions and to service a large portion of their needs in order to maintain
a consistent level of occupancy and a steady source of meeting and banquet
business to serve as a base for sustained growth in lodging revenues.

45
<PAGE>

. Corporate. Realty's Provo Park Hotel has sales arrangements with Novell,
Inc. and Micron Technology, Inc., two of the area's largest corporate
employers. The Provo Park Hotel is the only "four-diamond" full service
hotel in the Provo area, and has the largest supply of available meeting
space servicing Brigham Young University and corporations in the
surrounding area.

. Educational. In the Greater Salt Lake City area, where Realty has an
interest in 1,295 rooms, the University Park Hotel has the exclusive
right to operate as the only hotel in the University of Utah's Research
Park, the University's newly developed business park. As such, the Hotel
serves as the primary source of guest rooms and meeting space for the
University of Utah and surrounding businesses. Realty currently is in
discussions with the University of Utah regarding a potential expansion
of the Hotel and the construction of a major conference center for the
University which would be adjacent to the Hotel. In addition, in
Morgantown, West Virginia, the Lakeview Resort and Conference Center
provides a substantial portion of the lodging and meeting space needs of
the University of West Virginia.

Acquisition Criteria

In assessing available acquisition opportunities, Realty does not maintain
fixed financial criteria for the evaluation of the operating histories of
potential acquisitions but rather examines each potential acquisition on a case
by case basis. Realty generally focuses on acquiring hotels that fit the
following acquisition criteria:

. full service, suite and conference center hotels with ample meeting space
and efficient layouts;

. centrally-located hotels located in close proximity to major medical,
corporate or educational institutions, where the location provides a
strategic competitive advantage in the local market;

. hotels that have limited direct competition and high-cost barriers to
entry;

. hotels with acquisition cost below replacement cost;

. hotels in existing markets, particularly in the Intermountain and
Midwestern regions, permitting Realty to take advantage of existing
economies of scale;

. hotels likely to avoid functional obsolescence; and

. hotels with excess land providing opportunities for future development.

Turn-around Acquisition Opportunities

Realty will consider acquiring hotels that may be underperforming with
historically low cash flows relative to expenses and may have become available
due to a lack of experienced hotel management. In determining the offering
price for such hotels, Realty will consider the potential for increasing the
hotel's cash flow by implementing detailed hotel operating plans to control
costs and achieve aggressive sales goals. Realty and KMC will evaluate any
proposed acquisition from both an operational and ownership standpoint. Once
acquired, Realty and KMC may reposition a hotel through improved management,
franchise affiliation, redevelopment and refurbishment. For example, Historical
Kahler began managing the Ogden Park Hotel in 1989. Between 1990, the Hotel's
first full year of operations under Historical Kahler, and 1994, REVPAR
increased from $23.65 to $38.17, a compound annual growth rate of 12.7%, total
revenues increased from $4.1 million to $6.1 million, a compound annual growth
rate of 10.4%, and house profit increased from $785,000 to $1.8 million, a
compound annual growth rate of 23.1%. In addition, the Hotel's House Profit as
a percentage of total revenues increased from 19.1% to 29.1% over the same
period.

46
<PAGE>

"Captive" Acquisition Opportunities

Realty will seek to capitalize on certain "captive" acquisition
opportunities that may arise from its relationship with KMC. In this regard,
Realty will rely on KMC's hotel management operations to assist in evaluating
potential markets for acquisitions and identifying potential third-party
acquisition opportunities that might not be readily available in the open
market. Subject to certain conditions, Realty has a right of first refusal to
acquire any hotel controlled by KMC. See "Certain Agreements--Right of First
Refusal Agreement." Realty has rights of first refusal to acquire the 146-room
Best Western Copper King Inn in Butte, Montana and the 175-room Plaza One in
Rock Island, Illinois, each of which will be managed and partially owned by
KMC after the Spin Off. In addition, Realty has a right of first refusal to
acquire a 150-room hotel in Helena, Montana. Realty also has a five year
option to acquire a 107-room Knights Inn in Racine, Wisconsin, and a 104-room
Knights Inn in Port Huron, Michigan, both of which are owned and managed by
KMC, for an aggregate of $4.9 million.

DEVELOPMENT STRATEGIES

. strong and growing markets with solid economic and demographic
fundamentals;

. markets with limited growth in existing supply and high sustained
occupancies;

. markets with consistent periods of unaccommodated room demand; and

. markets with high-cost barriers to entry.

Realty believes the greatest opportunities for new hotel development
currently exist in the suite hotel segment, which is currently characterized
by strong room demand and superior operating margins that generally generate
attractive cash flows at relatively lower occupancy levels due to the limited
service nature of operations. Consistent with this selective development
strategy, Realty expects to begin construction in October 1995 on a 114-room
all-suite Residence Inn by Marriott in Provo, Utah, which is expected to open
in 1996.

INTERNAL GROWTH STRATEGIES

Improving Fundamentals

REALTY "SAME-STORE" PORTFOLIO

(1) "Same-Store" Hotels for the period shown at the top of each column is
defined as all Hotels which were operated by Historical Kahler
continuously from the beginning of the previous year to the end of the
period shown.

(2) House Profit represents total revenues less operating costs and expenses
before real estate taxes and insurance, ground rent, interest, income
taxes, depreciation and amortization and allocation of corporate expenses.
House Profit is included herein because management uses it as a measure of
hotel operating performance and because management believes that it is
useful in making industry comparisons. However, it does not represent cash
generated by operating activities in accordance with GAAP and should not
be considered as an alternative to net income as a measure of operating
performance or to cash flows from operations, or from investing or
financing activities as a measure of liquidity.

47
<PAGE>

Redevelopment and Expansion

Realty believes that substantial opportunities for internal growth exist
through the redevelopment and expansion of its existing Hotels. Realty will
seek to expand individual hotels where occupancy and room demand levels
indicate a lack of adequate room supply. Realty believes that the expansion of
existing hotels in certain markets may offer an attractive alternative to new
development due to the following:

. less lead time is required for redevelopment and expansion than for new
development;

. redevelopment and expansion incur less project/construction risk than new
development;

. redevelopment and expansion generally costs less than new development;
and

. financing of redevelopment and expansion projects can be easier to obtain
than new development financing.

Realty is currently expanding the Boise Park Suites Hotel and Provo Park
Hotel, which expansions are expected to be completed in 1996 and will add a
total of 204 rooms.

Regular Program of Renovation and Refurbishment

Realty believes that a regular program of renovation, capital improvements
and refurbishment of FF&E at the Hotels will contribute to increased ADR and
occupancy, which will result in increased revenue to Realty through the
Percentage Leases. Pursuant to the Percentage Leases, Realty will reserve, on a
quarterly basis, an amount equal to 5.5% of the room revenues of the Hotels to
be used by KMC for the ongoing replacement and refurbishment of FF&E at the
Hotels. Since 1990, Historical Kahler has spent on average 4.0% of total room
revenues on regular recurring capital expenditures and FF&E refurbishment.

In determining major renovation schedules for its existing hotels, Realty
evaluates the potential opportunity to increase a hotel's projected ADR,
occupancy and other revenue through a renovation relative to the level of
planned investment. In this regard, Realty looks for opportunities to make
improvements that will result in immediate and substantial improvements to the
operating performance of the Hotels. Examples of recent major renovation
programs include:

<TABLE>
<CAPTION>
RENOVATION DESCRIPTION OF MAJOR
HOTEL DATE ITEMS TOTAL COST
----- ---------- ---------------------- ----------
<C> <C> <S> <C>
Lakeview Conference Center ongoing Room renovations, food $ 922,000
and beverage equipment
and fire alarm system
The Kahler Hotel 1994 Room renovations, $2,300,000
banquet rooms,
electronic door locks
and ramp improvements
Provo Park Hotel 1994 Room renovations, $1,000,000
restaurant renovation,
signage and
miscellaneous
Pocatello Park Quality Inn 1994 Room renovations, $ 750,000
restaurant and banquet
rooms, air
conditioning equipment
and miscellaneous
</TABLE>

48
<PAGE>

CONSERVATIVE FINANCING POLICIES

In pursuing each of these growth strategies outlined above, Realty will
employ conservative financing policies. Realty's preference is to acquire
100.0% of the equity interest in hotels; however Historical Kahler has
sometimes acquired partial equity or mortgage interests accompanied by
contractual rights to acquire a substantial equity interest in a particular
hotel, as is the case in the University Park Hotel. Realty intends to acquire
such interests in hotels in the future only in cases where such interests
provide the most advantageous method for participating in the ownership of a
hotel that Realty considers to be an attractive acquisition target. In these
cases, Realty will seek to obtain an option or right of first refusal with
respect to the acquisition of a substantial equity position in such a hotel as
a condition of sale.

The acquisition or development of hotels may be financed, in whole or in
part, with excess cash flow, issuance of additional equity, debt or hybrid
securities or future borrowings. In addition, Realty is currently negotiating
to obtain commitments for the Lines of Credit in an aggregate principal amount
of $50.0 million which may be used for the acquisition, development, renovation
or expansion of hotels. The Lines of Credit are expected to be secured by
certain hotels. In addition, Realty's Board of Directors has adopted a policy
that limits the consolidated indebtedness of Realty to 50.0% of Realty's
consolidated investment in hotel properties, at cost and before accumulated
depreciation.

BUSINESS AND OPERATING STRATEGIES

Since 1917, Historical Kahler has developed a strong record as an owner and
operator of full service hotels. During this time, Historical Kahler expanded
its hotel management operations to include the management of resort and
conference center hotels, suite hotels and economy hotels. Upon completion of
the Spin Off, KMC will succeed to the hotel management operations of Historical
Kahler and will employ over 3,500 employees including a corporate staff of 45
supporting senior management and 285 hotel management personnel. The average
tenure of Historical Kahler's General Managers and Directors of Sales are eight
and seven years, respectively, which has allowed Historical Kahler to maintain
strong relationships with its employees, local demand generators and hotel
guests.

Realty intends to follow the established procedures and guidelines that have
contributed to Historical Kahler's success as a hotel owner and operator and
will rely upon KMC to implement these operating strategies, which include the
following:

. Commitment to Customer Service and Value. KMC's primary responsibility is
to maintain guest satisfaction by providing quality lodging services and
value to guests of the Hotels. In order to monitor customer satisfaction,
senior management of KMC personally review guest feedback obtained from
comment cards and questionnaires given to hotel and restaurant guests as
well as planners of meetings, conventions, and banquets. KMC will
continue to monitor its guests' satisfaction and expectations of guest
services and amenities through focus groups. Recent enhancements in
response to these programs include the addition of microwaves,
refrigerators and coffee-makers in guest rooms at certain of the Hotels.

. Reliance on Group Sales. Realty has developed a significant presence in
its existing markets as a leading operator of full service and conference
center hotels. Realty's full service and conference center Hotels are
capable of accommodating group functions of approximately 500 people and
700 people, respectively. Approximately 45.0% of the total demand in
these Hotels is attributable to group business. Comparing the Hotels
which Realty owned continuously from 1989 through 1994, the number of
group room nights consumed increased 28.9% from 192,446 in 1989 to
248,059 in 1994. Realty believes that a strong presence in the meeting
and group business enables a hotel to book room nights during off-peak
periods which maximizes occupancy and revenues.

. Yield Management. In accordance with these operating strategies, KMC
aggressively pursues group bookings while implementing a program of yield
management policies in conjunction with the rooms

49
<PAGE>

department and the sales and marketing force in order to diversify the
demand base of customers and optimize ADR and occupancy at the Hotels. As
a result, the performance of KMC and the Hotels are measured through
increases in both revenues and operating profitability. KMC reviews
historical and current relationships among ADRs, occupancies, group
bookings and reservations in order to set appropriate pricing strategies
that seek to maximize REVPAR.

. Quality Food and Beverage Service. As part of its operating strategies
related to the operation of major full service and conference center
hotels that cater to large group functions, Historical Kahler has always
emphasized its strength in restaurant and banquet services. Realty
believes lodging revenues are maximized by seeking a diverse demand base
of commercial, meeting and group and leisure demand which generate high
levels of food and beverage revenues in addition to room revenue. In
1994, Historical Kahler's food and beverage revenues constituted 31.5% of
total lodging revenues, compared with a 26.5% industry average in the
full service segment. Of those revenues, Historical Kahler generated a
departmental profit of 20.9%, while typical full service hotels generated
only a 17.8% departmental profit. (Smith Travel Research--1995 HOST
Study).

. Centralized Budgeting, Forecasting, and Expense Control. Realty believes
that KMC is able to operate more effectively than many franchised
competitors because it has both regional and centralized support services
whereby senior management constantly monitors revenue and expense trends.
Senior management of KMC review annual operating budgets and marketing
plans and attend monthly meetings to review recent performance and to
revise the following month's forecast. When necessary, KMC allocates
resources to properties to maintain a consistent product quality and
service.

. Continuous Capital Reinvestment. From 1990 through 1994, Historical
Kahler has spent approximately $12.7 million on regular recurring capital
expenditures and FF&E refurbishments at the Hotels, which equates to 2.3%
of total lodging revenues or 4.0% of total room revenues. Under the terms
of the Percentage Leases, Realty will be required to reserve, on a
quarterly basis, 5.5% of total room revenues to be used for the ongoing
refurbishment and replacement of FF&E at the Hotels. KMC will submit to
Realty, on an annual basis, capital reinvestment schedules which detail
proposed room and facilities refurbishments and FF&E replacement for the
Hotels based upon feedback from guests, employees, property managers and
property inspection reports from franchisors on the franchised
properties. KMC reviews each of the Hotels for potential revenue-
enhancing upgrades, renovations, and refurbishment projects including
additional guest services and amenities such as business centers,
concierge floors and in-room refrigerators. Based on information provided
by KMC, Realty reviews investment returns of such projects to decide upon
the feasibility and timing. To maximize operational savings, the
purchasing of capital items, which include linens, paper goods,
toiletries, furniture and hotel equipment, are centralized by KMC to
achieve economies of scale.

THE HOTEL INDUSTRY

OVERBUILDING IN THE 1980S

According to Smith Travel Research, the lodging industry experienced a
substantial increase in the supply of new hotel rooms during the 1980s. In each
of the twelve years during the period 1980 through 1991, the increase in supply
of hotel rooms exceeded the increase in demand for rooms. The total room supply
(average daily rooms available for the year) in the United States increased by
approximately 750,000 or 32.0% from approximately 2.3 million in 1980 to
approximately 3.1 million in 1991. During the same period, room demand
increased by only 14.2%, and as a result, the industry's average annual
occupancy rate decreased from 70.6% in 1980 to 60.9% in 1991. From 1986 to
1991, the hotel industry experienced losses and numerous individual hotel
failures largely as a result of the disparity in the growth of room supply and
the demand for rooms. In addition to the absorption of the largest supply
imbalance in the U.S. hotel sector's recent history, these losses were further
exacerbated by the impact of the ensuing economic recession and the Persian
Gulf War.

50
<PAGE>

Realty believes that the oversupply in the hotel industry resulted from
special circumstances in the early 1980s, including the increased availability
of financing from banks, savings and loan institutions, insurance companies and
high yield bonds, and certain income tax incentives prior to the Tax Reform Act
of 1986 which were favorable for the development of hotels.

Recovery

Since 1992, the conditions in the hotel industry have improved as evidenced
by increasing profits, improving room supply and demand balance and increasing
occupancies and ADRs. The following charts graphically depict the positive
effect of minimal new room supply and steadily increasing demand over the last
three years:

HOTEL INDUSTRY STATISTICS

TOTAL U.S. HOTEL ROOMS

[CHARTS APPEAR HERE]

-----------------------------------
Supply and Demand Growth
----------------------------------- -----------------
Room Supply Room Demand Average Occupancy
----------- ----------- -----------------
1990 3.55% 2.17% 1990 62.3%
1991 2.50% -0.24% 1991 60.6%
1992 1.35% 3.08% 1992 61.7%
1993 1.04% 3.32% 1993 63.0%
1994 1.39% 4.50% 1994 65.0%

----------------- -----------------
ADR REVPAR
----------------- -----------------
1990 $58.45 1990 $36.31
1991 $58.81 1991 $35.47
1992 $59.64 1992 $36.59
1993 $61.67 1993 $38.75
1994 $64.09 1994 $41.47

Source: Smith Travel Research

According to Smith Travel Research, ADR and REVPAR for all U.S. hotels have
increased, versus the comparable period for the prior year, during each of the
past 14 quarters through March 31, 1995. In 1994, room demand increased by
4.5%, and room supply increased by 1.4%. This significant outpacing of demand
to supply growth has resulted in rapidly rising occupancy levels which
generally provide well-positioned hotels with greater pricing flexibility,
resulting in strong room rate increases especially at hotels practicing yield
management where historically lower rated room nights are displaced with higher
rated demand. According to Smith Travel Research, REVPAR for the U.S. hotel
industry increased by 4.4% in 1993 and 7.3% in 1994, outpacing the rate of
inflation, 3.0% and 2.6%, respectively, as measured by the Consumer Price Index
("CPI").

51
<PAGE>

THE HOTELS

<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED JULY 2, 1995
-------------------------------------------------
YEAR NUMBER TOTAL PRO FORMA
OPENED OF ROOMS REVENUE RENT/INTEREST(1) OCCUPANCY ADR REVPAR
------- -------- -------- ---------------- --------- ------ ------
(DOLLARS IN THOUSANDS, EXCEPT ADR AND REVPAR)
<S> <C> <C> <C> <C> <C> <C> <C>
FULL SERVICE HOTELS
INTERMOUNTAIN HOTELS
Salt Lake Hilton 1974 351 $ 12,441 $ 3,052 87.0% $61.45 $53.46
Hotel.................
Salt Lake City, UT
University Park Hotel.. 1987 220 7,315 -- (2) 76.7 67.26 51.60
Salt Lake City, UT
Ogden Park Hotel....... 1982 288 6,350 1,652(3) 73.1 54.61 39.91
Ogden, UT
Provo Park Hotel....... 1982 232 6,447 -- (4) 74.6 61.62 45.97
Provo, UT
Olympia Park Hotel..... 1985 204 4,410 996 57.8 65.42 37.82
Park City, UT
Pocatello Park Quality 1978 152 3,773 965 71.7 50.86 36.46
Inn...................
Pocatello, ID
Boise Park Suites 1991 130 2,570 1,156 80.9 62.43 50.51
Hotel.................
Boise, ID
Canyon Springs Park 1980 112 3,089 1,029 79.3 53.19 42.19
Hotel................. ----- -------- -------
Twin Falls, ID
ALL INTERMOUNTAIN
HOTELS............... 1,689 46,395 8,850 75.7 60.09 45.48
----- -------- -------
ROCHESTER, MN HOTELS
The Kahler Hotel....... various(5) 696 17,081 3,664 59.0 63.09 37.24
Kahler Plaza Hotel..... 1989 194 8,631 3,533 74.5 105.77 78.82
Clinic View Inn and
Suites................ various(6) 266 5,544 2,331 58.0 73.00 42.30
Holiday Inn Downtown... 1968 170 3,263 344 62.2 60.11 37.38
----- -------- -------
ALL ROCHESTER HOTELS.. 1,326 34,519 9,872 61.5 72.16 44.37
----- -------- -------
ALL FULL SERVICE
HOTELS.............. 3,015 80,914 18,722 69.5 64.78 44.99
----- -------- -------
CONFERENCE CENTER HOTELS
Sheraton San Marcos
Golf Resort and 1987(7) 295 13,164 2,987 70.7 84.34 59.66
Conference Center.....
Chandler, AZ
Lakeview Conference
Center and Resort..... various(8) 187 9,350 2,071 58.8 81.64 48.00
Morgantown, WV
Green Oaks Inn and 284 5,332 1,337
Conference Center..... 1964 ----- -------- ------- 65.2 49.67 32.38
Fort Worth, TX
ALL CONFERENCE CENTER
HOTELS.............. 766 27,846 6,395 65.8 71.01 46.70
----- -------- -------
ALL HOTELS......... 3,781 $108,760 $25,117 68.7% $65.99 $45.34
===== ======== =======
</TABLE>
--------

(2) On a pro forma basis, Realty would have received $416,000 of interest on
the Mortgage Note with respect to the University Park Hotel for the twelve
months ended July 2, 1995. After the Spin Off, Realty will hold the
Mortgage Note and continue to consolidate the Hotel's operations as
lodging revenue and expenses. See Note 1 of Notes to Consolidated
Financial Statements of Historical Kahler.

(3) Represents 100% of the pro forma lease payments by KMC as stated in Note
1. Realty will hold a 63.8% equity interest in the Ogden Park Hotel (84.0%
upon conversion of certain indebtedness held by Realty). No minority
interest has been reflected due to the remote likelihood of Realty's
partners receiving any current or future economic benefits. See Note 3 to
Consolidated Financial Statements of Historical Kahler.

(5) 350 rooms built in 1926, 228 rooms in 1954 and 162 rooms in 1968. Forty-
four of these rooms have been converted to offices and other uses.

(6) 48 rooms built in 1968, 94 rooms in 1974 and 128 rooms in 1990. Four of
these rooms have been converted to offices and other uses.

(7) Originally constructed in 1912 and reconstructed and reopened in 1987.

(8) Built in stages from 1950 to 1987.

52
<PAGE>

FULL SERVICE HOTELS

Realty has interests in 12 full service Hotels located in the Intermountain
region (in the Greater Salt Lake City, Utah area, and in Boise, Pocatello and
Twin Falls, Idaho) and in Rochester, Minnesota. Realty operates both luxury and
moderately-priced full service Hotels containing from 130 to 351 guest rooms,
except for The Kahler Hotel, which has 696 rooms. Ten of Realty's full service
Hotels offer at least 8,000 square feet of meeting and banquet space. Realty's
full service Hotels generally provide a full 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. The full service Hotels seek to attract
corporate and association conferences and meetings as well as individual
guests. Individual travelers accounted for approximately 55.0% of occupied room
nights at full service Hotels in 1994, with group meetings representing
approximately 45.0% of room nights. Realty's full service Hotels are generally
located near identified sources of demand for the full range of services
offered by these Hotels, such as major medical facilities, large corporate
facilities and major universities. The following table sets forth selected room
rate and occupancy information for Realty's full service Hotels.

<TABLE>
<CAPTION>
FIRST
FISCAL YEAR SIX MONTHS
-------------------------------------- --------------
FULL SERVICE HOTELS 1990 1991 1992 1993 1994 1994 1995
------------------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
INTERMOUNTAIN HOTELS:
Salt Lake Hilton Hotel
Salt Lake City, UT
Number of Rooms...... 351 353 351 351 351 351 351
ADR.................. $53.53 $54.42 $55.70 $57.36 $57.47 $56.49 $64.25
Occupancy............ 76.0% 77.6% 77.8% 83.6% 88.5% 92.0% 89.0%
REVPAR............... $40.69 $42.22 $43.34 $47.96 $50.84 $51.96 $57.18
University Park Hotel
Salt Lake City, UT
Number of Rooms...... 220 220 220 220 220 220 220
ADR.................. $58.66 $61.00 $63.78 $65.00 $65.68 $67.70 $70.71
Occupancy............ 67.9% 65.0% 68.0% 68.9% 75.9% 77.6% 79.2%
REVPAR............... $39.85 $39.66 $43.35 $44.76 $49.86 $52.55 $56.02
Ogden Park Hotel
Ogden, UT
Number of Rooms...... 287 287 288 288 288 288 288
ADR.................. $46.74 $41.90 $44.62 $49.31 $53.38 $54.97 $54.62
Occupancy............ 50.6% 68.5% 74.0% 71.5% 71.5% 72.1% 75.2%
REVPAR............... $23.63 $28.70 $33.02 $35.25 $38.18 $37.87 $41.32
Provo Park Hotel (1)
Provo, UT
Number of Rooms...... -- -- -- -- 232 232 232
ADR.................. -- -- -- -- $57.86 $57.64 $65.06
Occupancy............ -- -- -- -- 74.3% 75.0% 75.6%
REVPAR............... -- -- -- -- $42.97 $43.22 $49.21
Olympia Park Hotel (2)
Park City, UT
Number of Rooms...... -- -- -- 206 206 206 204
ADR.................. -- -- -- $66.42 $63.71 $76.75 $79.12
Occupancy............ -- -- -- 53.2% 55.7% 59.1% 63.4%
REVPAR............... -- -- -- $35.31 $35.49 $45.37 $50.15
Pocatello Park Quality
Inn (3)
Pocatello, ID
Number of Rooms...... -- -- -- -- -- -- 152
ADR.................. -- -- -- -- -- -- $50.52
Occupancy............ -- -- -- -- -- -- 70.8%
REVPAR............... -- -- -- -- -- -- $35.79
</TABLE>

53
<PAGE>

<TABLE>
<CAPTION>
FIRST
FISCAL YEAR SIX MONTHS
----------------------------------------- ----------------
FULL SERVICE HOTELS 1990 1991 1992 1993 1994 1994 1995
(CONT'D) ------ ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Boise Park Suites
Hotel (4)
Boise, ID
Number of Rooms...... -- -- -- 130 130 130 130
ADR.................. -- -- -- $ 58.73 $61.31 $ 61.44 $ 63.64
Occupancy............ -- -- -- 76.0% 81.0% 82.8% 82.6%
REVPAR............... -- -- -- $ 44.63 $49.66 $ 50.85 $ 52.54
ALL INTERMOUNTAIN
HOTELS(5)
Number of Rooms...... 858 860 859 1,195 1,427 1,427 1,577
ADR.................. $53.14 $51.94 $ 53.89 $ 58.09 $ 59.07 $ 60.58 $ 63.95
Occupancy............ 65.5% 71.3% 74.0% 71.9% 75.4% 77.4% 77.6%
REVPAR............... $34.78 $37.05 $ 39.89 $ 41.76 $ 44.53 $ 46.73 $ 49.60
ROCHESTER HOTELS:
The Kahler Hotel
Number of Rooms...... 693 693 693 690 690 690 696
ADR.................. $62.11 $64.75 $ 60.61 $ 61.68 $ 63.58 $ 63.55 $ 62.53
Occupancy............ 55.8% 56.0% 59.6% 60.1% 59.9% 57.8% 56.1%
REVPAR............... $34.67 $36.27 $ 36.09 $ 37.07 $ 38.06 $ 36.73 $ 35.11
Kahler Plaza Hotel
Number of Rooms...... 194 194 194 194 194 194 194
ADR.................. $93.01 $98.55 $102.68 $105.60 $104.00 $105.99 $109.45
Occupancy............ 65.1% 72.8% 70.7% 72.6% 73.5% 73.0% 75.0%
REVPAR............... $60.57 $71.74 $ 72.64 $ 76.64 $ 76.44 $ 77.38 $ 82.13
Clinic View Inn and
Suites
Number of Rooms...... 142 270 266 266 266 266 266
ADR.................. $60.23 $65.40 $ 68.86 $ 71.36 $ 72.73 $ 72.66 $ 73.22
Occupancy............ 69.4% 56.0% 59.9% 61.8% 60.0% 59.5% 55.5%
REVPAR............... $41.83 $36.60 $ 41.24 $ 44.11 $ 43.62 $ 43.25 $ 40.63
Holiday Inn Downtown
Number of Rooms...... 170 170 170 170 170 170 170
ADR.................. $54.40 $55.93 $ 55.86 $ 58.15 $ 59.90 $ 60.19 $ 60.66
Occupancy............ 59.8% 64.5% 69.1% 64.4% 63.6% 62.3% 59.5%
REVPAR............... $32.51 $36.09 $ 38.59 $ 37.48 $ 38.09 $ 37.52 $ 36.10
ALL ROCHESTER HOTELS
Number of Rooms...... 1,199 1,327 1,323 1,320 1,320 1,320 1,326
ADR.................. $66.23 $69.79 $ 68.52 $ 70.59 $ 71.87 $ 72.37 $ 73.00
Occupancy............ 59.5% 59.6% 62.5% 62.8% 62.4% 61.0% 59.2%
REVPAR............... $39.40 $41.62 $ 42.82 $ 44.36 $ 44.82 $ 44.12 $ 43.22
ALL FULL SERVICE
HOTELS(5)
Number of Rooms...... 2,057 2,187 2,182 2,515 2,747 2,747 2,903
ADR.................. $60.45 $61.89 $ 62.15 $ 64.23 $ 64.62 $ 65.43 $ 67.49
Occupancy............ 62.0% 64.3% 67.0% 67.1% 69.1% 69.5% 69.2%
REVPAR............... $37.47 $39.80 $ 41.67 $ 43.12 $ 44.67 $ 45.48 $ 46.69
</TABLE>
--------

(1) Does not include data for the partial period from September 1, 1993 (the
date of acquisition of the Hotel) to January 2, 1994.

(2) Does not include data for the partial period from October 14, 1992 (the
date of acquisition of the Hotel) to January 3, 1993.

(3) Does not include data for the partial period from March 17, 1994 (the date
of acquisition of the Hotel) to January 1, 1995 or from March 17, 1994 to
July 3, 1994.

(4) Does not include data for the partial period from January 27, 1992 (the
date of acquisition of the Hotel) to January 3, 1993.

(5) Does not include information for the Canyon Springs Park Hotel, which
Historical Kahler acquired on August 1, 1995.

54
<PAGE>

Intermountain Hotels

The Intermountain region of the western United States has been one of the
fastest growing regions of the country in the 1990s. U.S. Census data indicates
that the Intermountain region (Idaho, Utah, Nevada, Wyoming, Montana, Colorado,
New Mexico and Arizona) experienced the strongest population growth in 1994,
increasing by 3.0% as compared to 1.0% for the United States as a whole. In
addition, the region experienced substantial growth in employment in 1994,
increasing by 17.4% as compared to 7.3% for the United States as a whole. The
region has continued its steady growth into 1995 and continues to lead the
United States in growth in total nonfarm payrolls and employment in the
manufacturing sector, increasing by 2.8% and 2.2%, respectively, through June
1995.

Between 1990 and 1994, Utah's population expanded 10.7% (the nations's fifth
highest increase) and Idaho's grew by 12.5% (the nation's second highest
increase). In particular, according to U.S. Census data, population in the
greater Salt Lake City metropolitan area increased by 9.4% between 1990 and
1994. According to the U.S. Bureau of Labor Statistics, nonfarm employment
increased at an annual compound rate of 4.1% over the same period.

[CHART APPEARS HERE]

<TABLE>
<CAPTION>
Population--Salt Lake City Nonfarm Employment in Salt Lake City

Years Years
1990 1991 1992 1993 1994 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1,076,600 1,100,300 1,127,300 1,154,500 1,178,312 494,480 506,430 521,000 548,100 581,370

Source: U.S. Census Source: U.S. Bureau of labor Statistics
</TABLE>

The recent decision by Micron Technology, Inc. to locate its new $1.3 billion
semiconductor fabrication facility in the Greater Salt Lake City area and the
recent decision by the International Olympic Organizing Committee to award the
2002 Winter Olympic Games to the Greater Salt Lake City area are further
evidence of the region's increasing popularity and growth potential.

Realty believes that the favorable conditions for growth in the Intermountain
region are attributable to several factors, including:

.the region's relatively abundant space and low property costs;

.relatively stable and well educated labor pool;

.low labor costs;

.high quality of life; and

.growing network of transportation and communications infrastructure.

55
<PAGE>

In the Intermountain region, Realty has interests in eight Hotels with a
total of 1,689 rooms, located in Utah and Idaho. Five of these Hotels, with a
total of 1,295 rooms, are located in the Greater Salt Lake City area. Upon
completion of the Provo Park Hotel expansion and the Residence Inn by Marriott
planned in Provo, Realty believes that KMC will have an interest in
approximately 9.0% of the total available rooms in the Greater Salt Lake City
area, making KMC the largest hotel operator in that area with 1,295 rooms
leased from Realty and an additional 80 rooms operated for other parties. The
Utah Hotels provide extensive coverage of the primary business destinations in
the region as well as access to the nine major ski areas surrounding Salt Lake
City.

. In April 1987, Realty entered the Salt Lake City market by purchasing and
completing construction of the University Park Hotel.

. In mid-1988, Realty acquired a 50.0% partnership interest in and
management of the Salt Lake Hilton Hotel.

. In 1989, Realty provided $3.2 million of second mortgage financing and
assumed management of the Ogden Park Hotel in Ogden, Utah.

. In 1992, Realty purchased the Olympia Park Hotel and Conference Center in
Park City, Utah.

. In 1993, Realty acquired a 50.0% ownership and management contract in the
Provo Park Hotel in Provo, Utah, the remaining 50.0% partnership interest
in the Salt Lake City Hilton Hotel and a 63.8% general partnership
interest in the Ogden Park Hotel.

In Idaho, Realty owns three Hotels: a 130 suite Hotel in Boise which is
currently being expanded by 108 rooms and is scheduled for completion in
February 1996, a 152 room Hotel in Pocatello and a 112 room Hotel in Twin
Falls. The Boise Park Suites Hotel was constructed by Realty in 1992, and the
Pocatello Park Hotel was purchased by Realty in 1994. The Canyon Springs Park
Hotel in Twin Falls was acquired in August 1995 for $5.8 million.

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, which is
approximately ten minutes from downtown Salt Lake City, 20 minutes from the
airport, and is near the University of Utah and its medical and research
facilities. Approximately a half-hour drive from the University Park Hotel are
the Alta, Brighton, Deer Valley, Park City, Park West, Solitude and Snowbird
ski areas. The University Park Hotel provides 192 guest rooms and 28 executive
suites at rates from $99 to $130. Each room offers cable television, with
complimentary premium movie channel service, while each suite has a separate
living room with a kitchen area, including a refrigerator. The University Park
Hotel has a restaurant and lounge, an indoor swimming pool and fitness center,
conference and banquet facilities aggregating 10,205 square feet, plus a gift
shop and liquor store. Realty currently is working with the University of Utah
on plans to expand the Hotel and construct a meeting and conference center
adjacent to the Hotel to service the growing needs of the University.

Realty's interest in the University Park Hotel is derived from a Mortgage
Note with equity features.

The University Park Hotel is owned by University Inn Associates, a Utah
limited partnership ("UIA"). The Hotel is located on a site leased under a
ground lease expiring in December 2025, with an option to extend the lease term
for an additional ten years. KMC will hold a 24.0% general partnership interest
in UIA. Following the Spin Off, KMC will manage the University Park Hotel under
a management agreement with UIA.

Realty holds a $4.6 million Mortgage Note from UIA that is secured by a
second mortgage on the University Park Hotel. The Mortgage Note bears interest
at 9.0% per year with payments of interest only until maturity on the earlier
of October 31, 2005 or the termination of KMC's management contract with UIA.
The Mortgage Note is nonrecourse to UIA and may not be prepaid. After September
30, 1998, Realty has an option to convert the outstanding balance of the
Mortgage Note into a 60.0% partnership interest in UIA. Before Realty can
exercise this option to convert the Mortgage Note, UIA's management contract
with KMC must be replaced with a Percentage Lease in order to satisfy certain
REIT provisions of the Code. The agreement granting the conversion option to
Realty also grants Realty a right of first refusal on the sale of any
partnership interest in UIA or on the sale of any interest in the University
Park Hotel.

56
<PAGE>

The University Park Hotel is subject to a first mortgage in favor of the
trustee for $8.9 million of tax-exempt revenue bonds that were issued by the
State of Utah to finance the construction of the Hotel. The bonds bear interest
at a variable rate determined monthly. The interest rate on the bonds for
August 1995 was 4.25%. The bonds are secured by a third-party guaranty that
expires in June 2000. UIA currently pays a credit enhancement fee equal to
1.75% of the outstanding principal balance of the bonds for this guaranty.
Realty has issued a $1.0 million guarantee that secures UIA's reimbursement
obligation under the third party guarantee.

SALT LAKE HILTON HOTEL-SALT LAKE CITY, UTAH. This Hotel, situated in downtown
Salt Lake City, is on the main freeway access to and from downtown and is ten
minutes from the airport and 45 minutes to seven ski areas. The Salt Lake
Hilton Hotel offers 318 guest rooms and 33 suites at rates from $105 to $135.
Each room offers cable television, with complimentary premium movie channel
service. To attract group meetings and conferences, as well as individual
business travelers, the Salt Lake Hilton Hotel offers 23,000 square feet of
conference and meeting facilities that can accommodate up to 1,200 persons. In
addition, the Salt Lake Hilton 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
Salt Lake Hilton Hotel operates under a Hilton franchise agreement.

The Salt Lake Hilton Hotel is located on a site, the primary portion of which
is leased under a ground lease that expires in March 2044. A portion of the
parking area used by the Salt Lake Hilton Hotel is leased on a month-to-month
basis. Realty owns the remainder of the site not covered by the ground leases.

OGDEN PARK HOTEL-OGDEN, UTAH. This Hotel is located in downtown Ogden and
provides convenient access to downtown Ogden, the Internal Revenue Service,
Weber State University, three ski areas and Hill Air Force Base. The Ogden Park
Hotel offers 271 guest rooms and 17 suites at rates from $69 to $101. Cable
television service is included in all rooms, while separate living rooms with
wet bars are provided in the suites. In addition, the Ogden Park 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 Ogden Park Hotel seeks to attract conferences and groups as well
as individual travelers. Major hotel room demand generators in Ogden include
Thiokol Corp., the Internal Revenue Service, the U.S. Forest Service and Morton
International. The Ogden Park Hotel has a restaurant, a lounge, room service,
liquor store and gift shop, indoor swimming pool and fitness center. The Ogden
Park Hotel operates under a Best Western franchise agreement.

Realty has a majority equity interest in the Ogden Park Hotel and a mortgage
note with equity features.

The Ogden Park Hotel is owned by Ogden Hotel Associates, a Utah limited
partnership ("Associates"). Realty holds a 63.8% general partnership interest
in Associates (84% upon conversion of the mortgage note). Due to its equity
interest and the mortgage note, Realty expects to receive virtually all of the
economic benefit from the Ogden Park Hotel for the foreseeable future. See Note
3 to Consolidated Financial Statements of Historical Kahler.

Realty holds a $3.2 million mortgage note from Associates that is secured by
a second mortgage on the Ogden Park Hotel. As of July 2, 1995, the mortgage
note had approximately $1.1 million of accrued, but unpaid interest, which was
accrued in accordance with the terms of the mortgage note. The mortgage note
bears interest payable quarterly at a variable rate of the prime rate plus
1.5%, is due August 1, 1998 and may not be prepaid until after the mortgage
note converts to a participating basis, except upon an "approved sale."
Pursuant to an option agreement executed at the time the mortgage note was
made, Realty has the option at the due date to convert the mortgage note to
equity in the Ogden Park Hotel through the formation of a joint venture to
which Associates would contribute its interest in the Ogden Park Hotel and
Realty would contribute the mortgage note. Upon exercise of this option, Realty
would receive 60.0% of the equity of the joint venture in exchange for the
outstanding principal balance of the mortgage note plus additional equity of
the joint venture for the exchange of accrued, but unpaid interest, if any.

The Ogden Park Hotel is subject to a first mortgage in favor of the trustee
for $8.7 million of tax-exempt revenue bonds that were issued by the City of
Ogden to finance the construction of the Hotel. The bonds bear interest at a
variable rate determined monthly. The interest rate on the bonds for August
1995 was 4.2%.

57
<PAGE>

The bonds are secured by a letter of credit issued by West One Bank, Boise,
Idaho ("West One") that expires September 15, 1998, but is automatically
renewable at Realty's option for five consecutive one year periods if certain
financial and other covenants are met. If the letter of credit is not renewed
or replaced, the bonds are subject to mandatory redemption. Associates
currently pays a fee equal to 1.25% of the outstanding principal balance of the
bonds for this letter of credit. West One has as additional collateral two
separate $1.0 million letters of credit guaranteed by Realty.

Pursuant to an agreement executed at the time the mortgage note was made,
between Realty, Associates and West One, Realty's loan and its security
therefor are fully subordinated to the interests of West One. In addition,
Realty agreed that it will not accept any interest payments on its loan unless
certain conditions exist, including that the obligations of Associates to West
One and to the tax-exempt bondholders are current, that payments of real estate
taxes are current, and that the Ogden Park Hotel is achieving annualized debt
service coverage of at least 1.0 to 1.0. If the annualized debt service
coverage is less than the specified ratio, Realty is required to make an annual
adjustment to the interest payments on its loan to bring the coverage into
balance. The excess cash flow of Associates after payment of the current year's
operating expenses, debt service, and capital additions and a working capital
reserve of $100,000 (maximum of $300,000 over the loan term) will be applied
(i) 75.0% towards the accrued interest on Realty's mortgage note, and (ii)
25.0% towards the principal repayment on the first mortgage.

OLYMPIA PARK HOTEL AND CONFERENCE CENTER-PARK CITY, UTAH. This 204 room Hotel
is located five minutes from the Park City ski area and ten minutes from the
Deer Valley ski area and is approximately 30 minutes east of Salt Lake City.
Room rates range from $139 in season during the winter to $89 during the
summer. The Olympia Park 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 Olympia Park Hotel's amenities
include an atrium, swimming pool, spa and sauna, plus a restaurant, coffee shop
and gift shop.

PROVO PARK HOTEL-PROVO, UTAH. This nine story Hotel is located in downtown
Provo near Brigham Young University and several major corporations including
Novell Inc., Micron Technology, Inc. and NuSkin International and is a 15
minute drive to Sundance ski area. The 232 room Provo Park Hotel has the
largest meeting space in the Provo area with ten meeting rooms aggregating
10,296 square feet that can accommodate up to 900 persons to serve groups and
conventions. Room rates at the Provo Park Hotel range from $75 to $95. The
Provo Park 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 to establish a concierge level
area for business travelers and an upgrading of all guest rooms as well as the
restaurant and public areas was completed in March 1995. The remodeling cost
approximately $1.0 million.

The Provo Park Hotel is held pursuant to a 50 year ground lease (with an
option to renew for two additional periods of ten years each) with the City of
Provo held by Park Hotels. Realty currently owns 50.0% of the outstanding
equity of Park Hotels with the remaining 50.0% interest held by a third party.
Park Hotels leases the Provo Park Hotel to an affiliate of KMC, and KMC manages
the Hotel. Realty expects to purchase the ground lease for approximately
$120,000 with the proceeds from the financing described below.

Park Hotels has a loan commitment for $15.6 million from a local bank and a
federal grant for $1.0 million to build an additional 96 suites and conference
center with approximately 17,000 square feet of meeting space. In addition, the
loan proceeds will be used to construct a 114 room all-suites Residence Inn by
Marriott in Provo, Utah. Construction of this expansion and the Residence Inn
by Marriott is expected to be completed in 1996.

BOISE PARK SUITES HOTEL-BOISE, IDAHO. This four story Hotel, located in a
business park near the corporate headquarters for Boise Cascade Corp.,
Albertson's, Inc., Micron Technology, Inc., Ore-Ida Foods, Inc., J. R. Simplot
Co. and Morrison-Knudson Corp., was constructed by Realty in 1992. The Boise
Park Suites Hotel currently has 130 suites that include a separate living room
with kitchen facilities. The room

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<PAGE>

rate for a suite at the Boise Park Suites Hotel is $110. Among the amenities
offered by the Boise Park Suites Hotel are an outdoor swimming pool, fitness
center, limited food service and a business center, with computer and cellular
phone rental, laser printing, secretarial service and fax and copier service.
In addition, the Boise Park Suites Hotel provides meeting facilities
aggregating 837 square feet that can accommodate up to 90 persons. The Boise
Park Suites Hotel primarily attracts business travelers, as well as leisure
travelers on weekends at discounted room rates. Realty is constructing an
additional 108 suites and an additional 1,347 square feet of meeting space,
which are scheduled to open in early 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
121,000 square foot Pocatello Park Quality Inn has 152 rooms, the second
largest number of rooms in the area. The Pocatello Park Quality Inn also has
conference facilities aggregating 10,600 square feet capable of accommodating
600 to 700 people, which are the largest in the area. Room rates at the
Pocatello Park Quality Inn range from $59 to $125. Amenities at the Pocatello
Park Quality Inn include an indoor pool and reception area, a fitness center,
two restaurants and a cocktail lounge.

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 Canyon Springs Park Hotel is a two-story building
with 112 rooms located on a 6.3 acre site. The Canyon Springs Park Hotel has
six meeting rooms with an aggregate of 8,494 square feet of meeting space which
can accommodate up to 750 people. Room rates at the Canyon Springs Park Hotel
range from $62 to $66. Amenities at the Hotel include an outdoor pool, a full
service restaurant and a coffee shop. The Canyon Springs Park Hotel operates
under a Best Western franchise agreement.

Realty acquired the Canyon Springs Park Hotel for $5.8 million in August
1995. Realty also has an option to acquire 4.4 acres of land adjacent to the
Canyon Springs Park Hotel for $580,000. This option expires in February 1996.

Rochester Hotels

Realty owns four Hotels in Rochester, Minnesota with an aggregate of 1,326
guest rooms, representing nearly 60% of the total supply of full service rooms
in Rochester. Historical Kahler was founded in 1917 to provide lodging 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 operates a medical school and also provides advanced
education for the continuing training of medical personnel. The Mayo Clinic
also does extensive medical research. As a result of its operations based in
Rochester, the Mayo Clinic generates a strong demand for hotel accommodations
by individual visitors seeking medical treatment and their relatives as well as
medical conferences organized by the Mayo Clinic. In addition, Rochester is the
principal development and manufacturing facility for IBM's Application
Systems/400.

Realty's Hotels are connected to the Mayo Clinic facilities by skyways 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. See "Risk Factors--Hotel Industry Risks--Geographic
Concentration." Although Realty 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 to the Mayo
Clinic's facilities, Rochester Methodist Hospital and downtown shopping areas.
In addition, The Kahler Hotel has convenient access to IBM's Rochester
facilities and is ten minutes from the Rochester airport. The Kahler Hotel
provides guest rooms and suites at room rates from $46 to $1,500. Each room
offers cable television and in-room movie service. The Kahler Hotel has
conference and banquet facilities with approximately 15,000 square feet of
space arranged in 15

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<PAGE>

flexible meeting rooms. The Kahler Hotel has four restaurants, a lounge, room
service, an indoor 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.

The original portion of The Kahler Hotel was completed in 1926 with
significant additions completed in 1954 and 1968. A $2.3 million renovation of
the guest rooms and public areas was completed in 1994. As part of this
renovation, the top floor of The Kahler 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.

KAHLER PLAZA HOTEL-ROCHESTER, MINNESOTA. This luxury nine story Hotel opened
in March 1989. The Kahler Plaza Hotel is accessible on three levels to the
adjoining Harold W. Siebens Education Building of the Mayo Clinic, which
includes the Clinic's principal medical meeting and education facilities. The
Kahler Plaza Hotel is also directly across the street from and connected by
skyway and the pedestrian subway to The Kahler Hotel. The Kahler Plaza Hotel
offers guest room and suite accommodations at prices ranging from $118 to
$1,700. Each room has cable television and in-room movie service. In addition,
the Kahler Plaza Hotel has two floors of Concierge Club service, including
complimentary continental breakfast and evening cocktails. The Kahler Plaza
Hotel has approximately 10,000 square feet of meeting and banquet space that
can accommodate up to 400 persons. The Kahler Plaza 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 moderately
priced Hotel is located directly across the street and connected by pedestrian
subway from Rochester Methodist Hospital and the Mayo Clinic's cancer and pain
treatment center. The Clinic View Inn was opened in 1974 and acquired by Realty
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, their
families and business guests. During the construction of the suites, the
existing hotel space was extensively renovated. The Clinic View Inn and Suites
offers guest rooms and suites at rates ranging from $65 for guest rooms to $95
for suites. Each suite has a kitchen area, including a microwave oven,
refrigerator, coffee maker and toaster, and a living room. The guest rooms and
suites have cable television with complimentary premium movie channel service.
The Clinic View Inn offers a restaurant, indoor swimming pool, whirlpool, sauna
and exercise equipment, as well as laundry facilities and a convenience store.
In addition, the Clinic View Inn and Suites has conference facilities
aggregating 1,440 square feet for up to 100 persons.

HOLIDAY INN DOWNTOWN-ROCHESTER, MINNESOTA. Located three blocks from the Mayo
Clinic and one block from the Rochester Civic Center, the Holiday Inn Downtown
occupies floors two through eight of a 16 story multi-use condominium building.
This Hotel provides moderately priced guest rooms and primarily serves visitors
to the Mayo Clinic and individual business travelers. The Holiday Inn Downtown
is connected to the skyway system, which allows access to the Mayo facilities
as well as a retail shopping mall. Room rates range from $60 to $86. The
Holiday Inn Dowtown's guest rooms have cable television with complimentary
premium movie channel service. The Holiday Inn Downtown offers an executive
floor service, including complimentary continental breakfast and evening
cocktails and computer-accessible phone lines; an informal restaurant, lounge
and room service; a dinner theater; and conference and banquet facilities
aggregating 7,886 square feet that can accommodate up to 200 persons. The
Holiday Inn Downtown operates under the Holiday Inn franchise. The Holiday Inn
Downtown was acquired and substantially renovated by Realty in 1983. Various
portions of the Holiday Inn Downtown have been renovated since 1989, including
the lobby, guest rooms and restaurant.

CONFERENCE CENTER HOTELS

Realty owns conference center and resort Hotels in Chandler (Greater
Phoenix), Arizona, Morgantown, West Virginia and Fort Worth, Texas. These
Hotels offer large meeting and conference facilities and convention support
services. The Hotels are designed to provide high quality conference facilities
at moderately priced room rates. Two of the Hotels also offer a full range of
resort amenities, including golf

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<PAGE>

courses and swimming pools and athletic facilities such as fitness centers and
tennis courts. These conference centers and resorts seek to attract regional
and national conferences and meetings. Group meetings represented approximately
64% of occupied room nights at these Hotels in 1994. The following table sets
forth selected room rate and occupancy information for the conference center
Hotels:

<TABLE>
<CAPTION>
FIRST
FISCAL YEAR SIX MONTHS
-------------------------------------- --------------
CONFERENCE CENTER HOTELS 1990 1991 1992 1993 1994 1994 1995
------------------------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Sheraton San Marcos Golf
Resort and Conference
Center
Chandler, AZ
Number of Rooms........ 294 296 295 295 295 295 295
ADR.................... $70.08 $70.16 $66.79 $72.44 $80.72 $88.35 $94.39
Occupancy.............. 53.7% 57.8% 60.9% 66.6% 69.5% 79.2% 81.7%
REVPAR................. $37.64 $40.52 $40.70 $48.27 $56.08 $69.99 $77.15
Lakeview Resort and
Conference Center
Morgantown, WV
Number of Rooms........ 187 187 187 187 187 187 187
ADR.................... $85.32 $86.21 $86.13 $81.07 $83.69 $82.53 $78.54
Occupancy.............. 61.4% 56.9% 56.0% 61.3% 57.1% 56.2% 59.5%
REVPAR................. $52.39 $49.05 $48.26 $49.67 $47.82 $46.37 $46.72
Green Oaks Inn and
Conference Center
Fort Worth, TX
Number of Rooms........ 282 282 284 284 284 284 284
ADR.................... $54.52 $51.05 $49.58 $50.40 $49.78 $51.85 $51.37
Occupancy.............. 56.1% 54.3% 56.6% 60.6% 61.0% 58.5% 66.9%
REVPAR................. $30.61 $27.70 $28.04 $30.55 $30.36 $30.34 $34.38
ALL CONFERENCE CENTER
HOTELS
Number of Rooms........ 763 765 766 766 766 766 766
ADR.................... $68.43 $67.33 $65.17 $66.63 $70.33 $75.13 $76.06
Occupancy.............. 56.5% 56.2% 58.1% 63.1% 63.3% 65.9% 70.8%
REVPAR................. $38.66 $37.87 $37.87 $42.04 $44.53 $49.52 $53.86
</TABLE>

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, Realty invested approximately $20.0
million to restore and substantially rebuild this historic 75-year old resort.
Among the amenities the Sheraton San Marcos Resort provides are the oldest 18-
hole championship golf course in Arizona, two heated swimming pools and a
tennis complex, plus three restaurants, a lounge and room service. The Sheraton
San Marcos 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 and
suites has a private patio or balcony and includes complimentary cable
television service. Room rates for the resort's guest rooms and suites range
from $98 to $450. The Sheraton San Marcos Resort seeks to attract business
groups, as well as individual travelers. The Sheraton San Marcos Resort is
operated under a Sheraton Hotel franchise agreement.

Lakeview Resort and Conference Center-Morgantown, West Virginia

The Lakeview Resort is located near Morgantown, West Virginia and is 75 miles
south of Pittsburgh. This 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
equipment and running track, as well as boating on Cheat Lake and hiking
trails. In addition, the Lakeview Resort offers two restaurants. With
conference facilities aggregating 22,000 square feet 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 Lakeview Resort has 187 guest rooms and 72 two-bedroom
condominium units at rates ranging from $89 to $375. Realty currently is
undertaking a $922,000 renovation project at this Hotel.

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<PAGE>

Green Oaks Inn and Conference Center-Fort Worth, Texas

This Hotel is located near the Southwest Regional Navy and Air Force Training
Command and a Lockheed Corp. aircraft plant and is approximately ten minutes
from downtown Fort Worth and 25 minutes from Dallas/Fort Worth Airport. Room
rates at the Green Oaks Inn and Conference Center range from $61 to $98. With
16 conference rooms aggregating 12,592 square feet that can accommodate up to
1,000 persons, the Green Oaks Inn and Conference Center 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 Green Oaks Inn and Conference Center include two swimming pools, two tennis
courts, an exercise room and access to an adjacent public golf course. The
Green Oaks Inn and Conference Center is owned by Realty subject to a ground
lease that expires in December 2014.

REGULATORY MATTERS

Permits and Licenses

A number of states regulate the licensing of hotels and restaurants,
including liquor license grants, by requiring registration, disclosure
statements and compliance with specific standards of conduct. In addition,
various federal and state regulations mandate certain disclosures and practices
with respect to the sales of license agreements and the licensor/licensee
relationship. Realty believes that each of the Hotels has the necessary permits
and approvals to operate its respective business. The relevant licenses have
been issued to the individual Hotels. Realty believes that the Spin Off will
not affect such licenses.

Environmental Regulation

Under various federal, state and local laws and regulations, a current or
past owner or operator of real estate may be liable for the cost of removal or
remediation of, and damages caused by, certain hazardous or toxic substances or
petroleum products located on or released or potentially released from such
property. Such laws often impose such liability without regard to whether the
owner or operator knew of, or was responsible for, the presence or possible
presence of hazardous or toxic substances or petroleum products. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment
of hazardous or toxic substance or petroleum products at another property may
be liable for the cost of removal or remediation of, and damages caused by such
materials. The costs of remediation or removal of such substance, or
compensation for damages caused thereby, may be substantial. The presence of
such substances, or the failure to promptly remediate such substances, may
adversely affect the ability to sell such real estate or to borrow using such
real estate as collateral. As the owner of the Hotels, Realty may be liable for
any such costs. As a successor to Historical Kahler Realty could be liable not
only for environmental conditions relating to the prior operation of the
Hotels, but also for conditions relating to the KMC Business, including its
commercial laundry and dry cleaning business.

New or updated Phase I environmental assessments were obtained by Historical
Kahler in 1994 on all of the Hotels in which it then had an interest from
various qualified independent environmental engineers. A Phase I environmental
assessment was also obtained on the Canyon Springs Park Hotel by its previous
owner in 1992. The purpose of Phase I assessments is to identify potential
environmental contamination that is made apparent from reviews of the history
of the properties, reviews of certain public records, limited investigations of
the sites and surrounding properties, and inspections for the presence of
hazardous or toxic substances, petroleum products, ACMs and underground storage
tanks. These assessments also evaluate the potential for liabilities for
compliance with environmental regulations. The Phase I reports have not
revealed any environmental liability that the management of Realty believes
would have a material adverse effect on Realty's business, assets or results of
operations. Realty is not aware of any basis for such liability. Nevertheless,
it is possible that these reports do not reveal all environmental liabilities
or that there are material environmental liabilities of which Realty is
unaware. The Phase I audits included a review of the history of each Hotel,
reviews of certain public records, preliminary investigations of the sites and

62
<PAGE>

surrounding properties, screening for the presence of hazardous substances,
toxic substances and underground storage tanks, and the preparation and
issuance of a written report. The Phase I audits did not include certain
physical procedures, such as soil sampling or ground water analysis.

No assurances can be given that (i) future or amended laws, ordinances or
regulations or more stringent interpretations or enforcement policies
thereunder will not impose any material environmental liability or compliance
costs or (ii) the environmental condition of the Hotels will not be affected by
changes (of which Realty is unaware) occurring subsequent to the date of the
Phase I assessments, by the condition of properties in the vicinity of the
Hotels (such as the presence of leaking underground storage tanks) or by the
acts or omissions of third parties unrelated to Realty.

Based on the information contained in the Phase I assessments and management
supervision of compliance with environmental laws, Realty believes that the
Hotels are in compliance in all material respects with all federal, state and
local ordinances and regulations regarding hazardous or toxic substances,
petroleum products, ACMs and other environmental matters. Realty has not been
notified by any governmental authority of any material noncompliance, liability
or claim relating to hazardous or toxic substances or other environmental
matters in connection with any of its present or former properties.

Asbestos Containing Materials

Certain federal, state and local laws, regulations and ordinances govern the
use, removal, encapsulation or disturbance of ACMs when ACMs are in poor
condition or in the event of building remodeling, renovation or demolition.
These laws, and certain common law principles, may impose liability for the
release of ACMs and may permit third parties to seek recovery from owners or
operators of real estate for personal injury or other loss or damage associated
with ACMs. Realty believes that the Hotels are in compliance in all material
respects with all federal, state and local ordinances and regulations regarding
ACMs. Realty has not been notified by any governmental authority of any
material noncompliance, liability or claim relating to ACMs in connection with
any of its current or former properties.

Americans with Disabilities Act

The Hotels and any newly developed or acquired hotels must comply with Title
III of the ADA to the extent that such properties are "public accommodations"
or "commercial facilities" as defined by ADA. Compliance with the ADA
requirements could require removal of structural barriers to handicapped access
in certain public areas of the Hotels where such removal is readily achievable.
Noncompliance could result in a judicial order requiring compliance, an
imposition of fines or an award of damages to private litigants. If required
changes involve a greater expenditure than Realty currently anticipates, or if
the changes must be made on a more accelerated basis than Realty anticipates,
Realty's ability to make expected distributions could be adversely affected.
Realty believes that the Hotels are in compliance in all material respects with
the ADA requirements. Realty has not been notified by any governmental
authority of any material noncompliance, liability or claim relating to the
ADA.

COMPETITION

Each of the Hotels is located in a developed area that includes other hotels.
The markets in which the Hotels are located are competitive, with many hotels
in each market. Realty believes that no competitor has a dominant position in
any market. Many competitors of the Hotels have substantially greater resources
than Realty. Realty has the largest number of rooms under common management in
the Greater Salt Lake City area and in Rochester, Minnesota. These
concentrations of hotels enable Realty to benefit from its knowledge of those
markets and to obtain economies of scale through the coordinated operation of
multiple hotels in those markets. An increase in the number of competitive
hotels in one of Realty's two primary markets could have a material adverse
effect on occupancy and ADRs of the Hotels in those markets or of hotels
acquired in the future in those areas. There are five hotels in Salt Lake City
with an aggregate of 2,639 rooms which

63
<PAGE>

are the principal competitors of the two Hotels in Salt Lake City. In addition,
there are approximately 20 other hotels in Salt Lake City with over 100 rooms
which represent an aggregate of approximately 3,449 rooms. There is one hotel
in Provo, Utah with 78 rooms which is the principal competitor of the Provo
Park Hotel because of its location and the nature of its national franchise. In
addition, there are four other hotels in Provo with over 100 rooms which
represent an aggregate of approximately 456 rooms. There are four hotels in
Ogden, Utah with an aggregate of 462 rooms which are the principal competitors
of the Ogden Park Hotel. In addition, there is one other hotel in Ogden with
over 100 rooms which has 110 rooms. The four Hotels in Rochester, Minnesota are
located in close proximity of each other and may compete for business. Four
unrelated hotels in Rochester with an aggregate of 591 rooms are the principal
competitors of the four Hotels in Rochester. In addition, there are seven other
hotels in Rochester with over 100 rooms which represent an aggregate of
approximately 968 rooms.

Realty may be competing for investment opportunities with entities which have
substantially greater financial resources than Realty. These entities generally
may be able to accept more risk than Realty can prudently manage, including
risks with respect to the creditworthiness of a hotel operator or the
geographic proximity of its investments. Competition generally may reduce the
number of suitable investment opportunities offered to Realty and increase the
bargaining power of property owners seeking to sell.

LEGAL PROCEEDINGS

Realty is in the discovery stage of litigation with a telecommunications
company relating to disputed unremitted telephone revenue and fees at ten of
the Hotels. Realty has denied all claims and has made counterclaims relating to
breach of contract and intends to pursue all available alternatives. The
outcome of this dispute is uncertain.

In December 1994, notice of default relating to bond indebtedness was given
on one of Realty's wholly owned properties. A group of bondholders have claimed
Realty incorrectly calculated "added interest" for the year 1993 in the amount
of approximately $267,000. Realty denies the claim. If the bondholders were
found to be correct in this claim, Realty would owe this amount for 1993 and an
additional $618,000 for 1994.

Additionally, Realty is involved in various routine litigation arising in the
ordinary course of business, substantially all of which is expected to be
covered by liability insurance. Realty does not expect the outcome of the
matters described above to have a material adverse effect on Realty's
consolidated financial statements.

Realty, Mr. Milner, its President and Chief Executive Officer, and Mr.
Stenhaug, its Senior Vice President, Chief Financial Officer and Treasurer, are
subject to a 1993 order and consent decree of the Securities and Exchange
Commission concerning allegedly improper accounting and disclosure practices
employed by Historical Kahler during fiscal years 1988 through 1990. In 1988,
1989 and 1990, Historical Kahler's independent auditors issued unqualified
opinions on Historical Kahler's financial statements. Under the terms of the
decree, Realty, Mr. Milner and Mr. Stenhaug, without admitting any wrongdoing,
have agreed to permanently cease and desist from causing any violation and any
future violation of certain sections of the Exchange Act and rules thereunder
governing Realty's disclosure and accounting practices. See Note 13 of Notes to
Consolidated Financial Statements of Historical Kahler.

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<PAGE>

CERTAIN AGREEMENTS

THE PERCENTAGE LEASES

Each of the Hotels (other than the University Park Hotel) is leased by Realty
to KMC under a separate Percentage Lease. All of the Percentage Leases include
cross-default provisions. Each Percentage Lease contains, among other things,
the provisions described below, and Realty intends that future leases with
respect to its hotels will contain substantially similar provisions, although
Realty's Board of Directors may, in its discretion, alter any of these
provisions with respect to any particular lease, provided that no such
alteration may cause the lease not to be treated as a true lease for federal
tax purposes or cause the rental payments received under the lease to cease to
qualify as "rents from real property" under the Code provisions applicable to
REITs.

Percentage Lease Terms

The Percentage Leases will have initial terms of three, five or seven years
and will be subject to earlier termination upon the occurrence of certain
events or contingencies described herein, including the provisions described
below under "--Damage to Hotels," "--Condemnation of Hotels," "--Termination of
Percentage Leases on Disposition of the Hotels" and "--Events of Default."

Amounts Payable under the Percentage Leases

During the term of each Percentage Lease, KMC is obligated to pay (i) the
greater of Base Rent or Percentage Rent and (ii) certain other amounts,
including interest accrued on any late payments or charges (the "Additional
Charges"). Base Rent is an annual fixed rental per Hotel, which accrues and is
required to be paid monthly in advance of the first day of each month. As
reflected in the table below, Percentage Rent is calculated by multiplying
fixed percentages by gross room revenue for each of the Hotels and by
multiplying fixed percentages by gross food and beverage revenue for each of
the Hotels, except for the Boise Park Suites Hotel, for which Percentage Rents
will be based solely on room revenues because of the limited service nature of
that Hotel. Percentage Rent is due quarterly within 45 days of the end of each
quarter, with a reconciling payment to be made within 90 days after the end of
each calendar year to reflect the actual Percentage Rent due with respect to
such calendar year based on the revenue of the Hotel.

Under the Percentage Leases, as of January 1, 1997 and the first day of each
year thereafter, the Base Rent and Percentage Rent thresholds for each year
will be adjusted to reflect any year-to-year change in the CPI.

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<PAGE>

The table below sets forth (i) the date of expiration of the initial lease
term, (ii) the annual Base Rent, (iii) Percentage Rent formulas and (iv) the
pro forma Percentage Rent that would have been paid for each Hotel pursuant to
the terms of the Percentage Leases based on pro forma revenues for the twelve
months ended July 2, 1995, as if Realty had owned the Hotels and the Percentage
Leases had been in effect since July 3, 1994. For each Hotel, pro forma
Percentage Rent for the twelve month period would have been greater than Base
Rent, and the amounts shown below represent such pro forma Percentage Rent and
the applicable Base Rent.

<TABLE>
<CAPTION>
PRO FORMA
PERCENTAGE RENT
FOR
THE TWELVE MONTHS
YEAR OF ANNUAL ENDED JULY 2,
HOTEL EXPIRATION(1) BASE RENT ANNUAL PERCENTAGE RENT FORMULA 1995
----- ------------- --------- ------------------------------ -----------------
(IN THOUSANDS) (IN THOUSANDS)
<C> <C> <S> <C> <C>
The Kahler Hotel 2002 $ 2,588 18% of room revenue up to $ 3,664
Rochester, MN $5,500,000, plus
60% of room revenue in excess of
$5,500,000, plus
6% of food and beverage revenue.
Kahler Plaza Hotel 2000 2,163 40% of room revenue up to 3,533
Rochester, MN $1,200,000, plus
65% of room revenue in excess of
$1,200,000, plus
12% of food and beverage revenue.
Clinic View Inn and Suites 1998 1,622 32% of room revenue up to 2,331
Rochester, MN $1,250,000, plus
65% of room revenue in excess of
$1,250,000 plus
10% of food and beverage revenue.
Holiday Inn Downtown 1998 264 9% of room revenue up to 344
Rochester, MN $2,000,000, plus
50% of room revenue in excess of
$2,000,000, plus
1% of food and beverage revenue.
Salt Lake Hilton Hotel 1998 1,481 22% of room revenue up to 3,052
Salt Lake City, UT $4,000,000, plus
55% of room revenue in excess of
$4,000,000, plus
12% of food and beverage revenue.
Ogden Park Hotel 2000 1,250 21% of room revenue up to 1,652
Ogden, UT $2,500,000 plus
60% of room revenue in excess of
$2,500,000 plus
6% of food and beverage revenue.
Provo Park Hotel 1998 500(2) 33% of room revenue up to 830(2)
Provo, UT $3,000,000 plus
62% of room revenue in excess of
$3,000,000 plus
6% of food and beverage revenue.
Olympia Park Hotel 2000 861 17% of room revenue up to 996
Park City, UT $2,000,000, plus
60% of room revenue in excess of
$2,000,000, plus
12% of food and beverage revenue.
Pocatello Park Quality Inn 2002 725 22% of room revenue up to 965
Pocatello, ID $1,000,000, plus
65% of room revenue in excess of
$1,000,000, plus
5% of food and beverage revenue.
Boise Park Suites Hotel 1998 622 28% of room revenue up to 1,156
Boise, ID $1,000,000, plus
63% of room revenue in excess of
$1,000,000.
Canyon Springs Park Hotel 1998 550 30% of room revenue up to $550,000 1,029
Twin Falls, ID plus
65% of room revenue in excess of
$550,000 plus
8% of food and beverage revenue.
Sheraton San Marcos 2000 1,601 21% of room revenue up to 2,987
Golf Resort and $4,000,000, plus
Conference Center 61% of room revenue in excess of
Chandler, AZ $4,000,000, plus
15% of food and beverage revenue.
Lakeview Resort and 2002 1,259 37% of room revenue up to 2,071
Conference Center $2,000,000, plus
Morgantown, WV 63% of room revenue in excess of
$2,000,000, plus
14% of food and beverage revenue.
Green Oaks Inn and 2002 725 37% of room revenue up to 1,337
Conference Center $3,000,000 plus
Ft. Worth, TX 55% of room revenue in excess of
$3,000,000, plus
2% of food and beverage revenue.
------- -------
$16,211 $25,947
======= =======
</TABLE>
--------

(1) Each Percentage Lease will expire on the anniversary of the Effective Date
in the year shown.

(2) Realty holds a 50.0% equity interest in the Provo Park Hotel. Accordingly,
the amounts shown represent 50.0% of the Base Rent and Percentage Rent
payable under the Percentage Lease with respect to the Provo Park Hotel.

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<PAGE>

Other than real estate and personal property taxes, casualty insurance
premiums, land rents for ground leases, debt service payments, the cost of
maintenance of any existing signs, any underground utilities and the structural
elements and an obligation to fund an amount equal to 5.5% of room revenue per
quarter on a cumulative basis for capital improvements and for replacement or
refurbishing of FF&E, which are obligations of Realty, the Percentage Leases
require KMC to pay all utility and other charges, and all other costs and
expenses incurred in the management, operation, maintenance and repair of the
Hotels. The Percentage Leases also provide for rent reductions and abatements
in the event of damage or destruction (but only to the extent of rent loss
insurance proceeds received by Realty) or a partial taking of any Hotel as
described under "--Damage to Hotels" and "--Condemnation of Hotels."

Capital and FF&E Reserves

Under the Percentage Leases, Realty is required to maintain any existing
signs, any underground utilities and the structural elements of the
improvements, including exterior walls (excluding plate glass) and the roof of
each Hotel. In addition, the Percentage Leases obligate Realty to reserve funds
for periodic capital improvements to the buildings and grounds of the Hotels
and for periodic replacement and refurbishment of FF&E in the Hotels, to be
expended by KMC and subject to the approval of Realty in an amount equal to
5.5% of room revenue for each fiscal quarter. This funding obligation is
cumulative and accrues quarterly. The obligation to reserve these funds ceases
upon termination of the Percentage Lease. Realty may reserve amounts in excess
of the obligated amounts, if necessary, to maintain the franchise licenses and
otherwise if Realty deems such expenditures to be in its best interest. KMC is
required, at its expense, to maintain the Hotels in good order and repair,
except for ordinary wear and tear, and to make nonstructural, foreseen and
unforeseen, ordinary and extraordinary repairs that may be necessary and
appropriate to keep the Hotels in good order and repair.

Maintenance and Modifications

KMC, at its expense, may make non-capital and capital additions,
modifications or improvements to the Hotels, provided that such action does not
significantly alter the character or purposes of the Hotels or significantly
detract from the value or operating efficiencies of the Hotels or significantly
impair the revenue-producing capability of the Hotels. All such additions,
modifications and improvements are subject to all the terms and provisions of
the Percentage Leases and will become the property of Realty upon termination
of the Percentage Leases. KMC owns all of the inventory, linens and other
nondepreciable personal property at the Hotels. Realty owns substantially all
of the remaining personal property at the Hotels, except in the case of the
Kahler Hotel, the Holiday Inn Downtown, the Olympia Park Hotel, the Boise Park
Suites Hotel, the Pocatello Park Quality Inn and the Green Oaks Inn and
Conference Center, where KMC owns all of the personal property associated with
the Hotel. Where KMC owns all such personal property, Realty has the option,
upon termination or expiration of the applicable Percentage Lease, to purchase
such personal property from KMC at a purchase price equal to the fair market
value of such personal property. KMC owns all of the personal property at these
six Hotels in order to satisfy certain requirements of the Code applicable to
REITs. See "Federal Income Tax Considerations--Requirements for Qualification--
Income Tests."

Insurance, Property Taxes and Ground Lease Payments

Realty is responsible for paying real estate and personal property taxes
(except for any such personal property taxes on property owned by KMC) and
casualty insurance premiums on the Hotels, and, in the case of three Hotels,
the ground rents payable under ground leases. KMC is required to pay or
reimburse Realty for all other insurance on the Hotels, including rent loss and
business interruption insurance, commercial general liability insurance
(including liquor law or "dram shop" liability), workers' compensation
insurance and other insurance appropriate and customary for properties similar
to the Hotels, and name Realty as an additional named insured.

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<PAGE>

Indemnification

Under each of the Percentage Leases, KMC has agreed to indemnify Realty
against, and hold Realty harmless from, all claims, liabilities, damages, costs
and expenses (including reasonable attorney's fees and expenses) incurred by
Realty with respect to: (i) any accident or injury to person or property on or
about the Hotels; (ii) any misuse by KMC or any of its agents of any Hotel;
(iii) any environmental liability resulting from conditions caused by or
resulting from any action or negligence of KMC; (iv) liability resulting from
the sale or consumption of alcoholic beverages at the Hotels; (v) any
negligence of KMC; (vi) taxes and assessments in respect of the Hotels (other
than real estate and personal property taxes on property which is not owned by
KMC and income taxes of Realty on income attributable to the Hotels); or (vii)
any breach of the Percentage Leases by KMC.

Assignment and Subleasing

KMC is not permitted to sublet the Hotels, other than to concessionaires and
hotel guests or in the normal course of business to a subtenant of any retail,
office or restaurant portion of the Hotel, or assign its interest under any of
the Percentage Leases, other than an assignment to an affiliate of KMC, without
the prior written consent of Realty. No assignment or subletting will release
KMC from any of its obligations under the Percentage Leases.

Damage to Hotels

In the event of damage to or destruction of any Hotel, KMC is obligated to
repair, rebuild or restore the Hotel. Realty is obligated to pay to KMC any
insurance proceeds received by Realty as a result of such damage or
destruction. Any excess costs of repair or restoration will be paid by KMC if
the insurance proceeds are unavailable or inadequate as a result of KMC's
failure to comply with its obligations to obtain and maintain insurance, or by
Realty if the insurance proceeds are unavailable or inadequate for reasons
unrelated to any such failure on KMC's part. If the insurance proceeds are
unavailable or inadequate, and Realty would be obligated to pay the costs of
repair or restoration, Realty instead may terminate the Percentage Lease. Any
unused insurance proceeds, whether following repair or restoration or upon
termination of the Percentage Lease, will be retained by Realty. Base Rent and
Percentage Rent under the Percentage Lease will be equitably abated during any
period required for repair or restoration of any damaged or destroyed Hotel,
but only to the extent that Realty receives proceeds of rent loss insurance
that KMC is required to maintain.

Condemnation of Hotels

In the event of a total condemnation of a Hotel, the relevant Percentage
Lease will terminate with respect to such Hotel as of the date of taking and,
except for certain limited rights of KMC, Realty will be entitled to the
condemnation award in accordance with the provisions of the Percentage Lease.
In the event of a partial taking that does not render the Hotel unsuitable for
KMC's use, KMC will be obligated to restore the untaken portion of the Hotel to
a complete architectural unit and Realty will be obligated to contribute to the
cost of such restoration that part of the condemnation award specified for
restoration.

Events of Default

Events of Default under the Percentage Leases include the following:

(i) the occurrence of an Event of Default under any other lease between
Realty or an affiliate of Realty and KMC or an affiliate of KMC;

(ii) the failure by KMC to pay rent (including Base Rent, Percentage Rent
and Additional Charges) when due and the continuation of such failure for a
period of ten days after receipt by KMC of notice thereof from Realty;

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<PAGE>

(iii) the failure by KMC to observe or perform any other term of a
Percentage Lease and the continuation of such failure for a period of 30
days after receipt by KMC of notice thereof from Realty,

unless such failure cannot be cured within such period and KMC commences
appropriate action to cure such failure within said 30 days and thereafter
diligently completes the curing thereof, provided that in no event will the
cure period extend beyond 90 days after such notice;

(iv) certain events of bankruptcy relating to KMC;

(v) if KMC voluntarily discontinues operations of a Hotel, except as a
result of damage, destruction or condemnation, and fails to recommence
operations within ten days after receipt by KMC of notice from Realty
directing KMC to do so; and

(vi) if the franchise agreement with respect to a Hotel is terminated or
not renewed by the franchisor as a result of any action or failure to act
by KMC or its agents.

If an Event of Default occurs and continues beyond any cure period, Realty
will have the option of terminating the Percentage Lease and any or all other
Percentage Leases by giving KMC written notice of such termination of the
Percentage Leases.

Expansion of Hotels

The Percentage Leases provide that Realty may give notice to KMC of any
proposed Hotel expansion and corresponding Percentage Lease amendment. Within
30 days KMC must elect to either (i) agree to the proposed amendments or (ii)
negotiate the proposed amendments with Realty in good faith. If after 80 days
KMC and Realty are unable to reach agreement, KMC will be deemed to have agreed
to the proposed amendment unless it gives notice to Realty within ten days of
its election to terminate the Percentage Lease. If the Percentage Lease is
terminated and Realty does not (i) commence the proposed expansion within six
months or (ii) complete the proposed expansion within two years, then Realty
must either pay to KMC an amount equal to the fair market value of the
leasehold estate or offer to lease to KMC one or more substitute hotels of
comparable value.

Termination of Percentage Leases on Disposition of the Hotels

In the event Realty enters into an agreement to sell or otherwise transfer a
Hotel, Realty will have the right to terminate the Percentage Lease with
respect to such Hotel if within six months of the termination Realty either (i)
pays KMC the fair market value of KMC's leasehold interest in the remaining
term of the Percentage Lease to be terminated, or (ii) offers to lease to KMC
one or more substitute Hotels on terms that would create a leasehold interest
in such Hotel with a fair market value equal to or exceeding the fair market
value of KMC's remaining leasehold interest under the Percentage Lease to be
terminated.

Subordination to Liens Created by Realty

In order to facilitate financing by Realty, the Percentage Leases will be
subordinate to liens created by Realty in connection with such financing,
including mortgages now or hereafter granted by Realty.

Limitation on Realty's Liability

Realty is not personally liable for its obligations under the Percentage
Leases, and KMC's recourse against Realty for a breach of such obligations is
limited to Realty's then interest and estate in the Hotel in question, and,
following entry of a final nonappealable judgment in KMC's favor against
Realty, a credit and offset against future rent.

Restrictions on Distributions

KMC covenants in each of the Percentage Leases that it will not pay any
dividends (other than dividends payable in KMC Common Stock) or make any other
distributions to its shareholders unless, when the dividend is declared, it has
cash and marketable securities with an aggregate fair market value equal to or
greater than 50.0% of the projected annual Rents due to Realty from KMC during
the 12 months following the declaration of the dividend under all percentage
leases then in effect between Realty and KMC.

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<PAGE>

THE LICENSE AGREEMENT

Realty and KMC have entered into a nonexclusive trademark license agreement
(the "License Agreement") pursuant to which certain trademarks of Realty are
licensed to KMC for its use in connection with the operation of the Hotels. The
License Agreement will become effective as of the Effective Date and will
remain in effect so long as any of the initial Percentage Leases are still in
effect, except that trademarks

unique to a specific Hotel will cease to be licensed to KMC if the Percentage
Lease for such Hotel is no longer in effect. Upon termination of the License
Agreement, KMC will cease to have any right to use the trademarks covered by
the License Agreement.

RIGHT OF FIRST REFUSAL AGREEMENT

Realty and KMC have entered into an agreement with respect to new hotel
opportunities (the "Right of First Refusal Agreement") pursuant to which Realty
has a right of first refusal to acquire any hotel or site suitable for the
development of a hotel controlled by KMC or any of its affiliates. This right
of first refusal provision requires KMC, before such hotel or site is sold to a
third party, to offer the property to Realty on the same terms and conditions
as the proposed sale to the third party. Realty also has a right of first
refusal with respect to two hotels on which KMC has a right of first refusal,
the Plaza One in Rock Island, Illinois and the Best Western Copper King Inn in
Butte, Montana. This right of first refusal gives Realty the ability to
exercise KMC's right of first refusal with respect to these hotels. In
addition, Realty has an option to purchase any hotel controlled by KMC,
beginning 18 months after the hotel is open, at fair market value as determined
by appraisers or other experts in real estate matters who are mutually agreed
upon by Realty and KMC. The Right of First Refusal Agreement also provides that
KMC has a right of first refusal to lease any hotel acquired by Realty. Before
Realty may lease a hotel to a third party, Realty must notify KMC and give KMC
the opportunity to lease the hotel on the same terms as the proposed lease to a
third party. Without the written consent of Realty, KMC will not manage, lease,
own or otherwise operate a hotel located within the trade area of a hotel owned
by Realty or on which Realty has a mortgage interest. KMC is obligated to
notify Realty before entering into any arrangement to manage, lease, own or
otherwise operate a hotel in order to allow Realty to determine whether the
proposed arrangement falls outside Realty's trade areas. The definition of the
trade area for each of Realty's hotels must be approved by a majority of the
independent directors of Realty. The Right of First Refusal Agreement will
remain in effect until the Rents paid by KMC to Realty for the previous twelve
months represent less than 50% of the total revenue of Realty during that
period.

OPTION AGREEMENT

Realty and KMC have entered into an agreement under which KMC grants to
Realty an option to purchase two hotels operated under Knights Inn franchises
located in Port Huron, Michigan and Racine, Wisconsin. These hotels will be
transferred to KMC by Historical Kahler as part of the Asset Transfers. The
option will become effective on the Effective Date (subject to closing of the
Offering), has a five year term and is exercisable at any time during its term.
The exercise price of the option is $4.9 million which the parties believe is
approximately 110% of the current aggregate fair market value of the
properties.

FRANCHISE AGREEMENTS

KMC expects to enter into non-exclusive license agreements with respect to
three of the Hotels and expects to enter into non-exclusive franchise
agreements with respect to three of the Hotels (hereinafter referred to as
"franchise licenses"). Of these six Hotels, two are Best Western Hotels (Ogden
Park, Utah and Twin Falls, Idaho), one is a Hilton Hotel (Salt Lake City,
Utah), one is a Holiday Inn (Rochester, Minnesota), one is a Sheraton Hotel
(Chandler, Arizona), and one is a Quality Inn (Pocatello, Idaho). Best
Western (R) is a registered trademark of Best Western Internationa l, Inc.
Hilton Hotels (R) is a registered trademark of Hilton Hotels Corporation.
Sheraton Hotel (R) is a registered trademark of the ITT Sheraton Corporation.
Holiday

Inn (R) is a registered trademark of Holiday Inns, Inc. Quality Inn (R) is a
registered trademark of Choice Hotels International, Inc.

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<PAGE>

The franchise licenses will generally specify certain management,
operational, recordkeeping, accounting, reporting and marketing standards and
procedures with which the franchisee must comply. The franchise licenses will
obligate the franchisee to comply with the franchisors' standards and
requirements with respect to training of operational personnel, safety,
maintaining specified insurance, the types of services and products ancillary
to guest room services that may be provided by the franchisee, display of
signage and the type, quality and age of furniture, fixtures and equipment
included in guest rooms, lobbies and other common areas. Realty is not aware of
any material defaults under the franchise licenses and the executive officers
of Realty believe that all of its franchise licenses are in good standing.

Each franchise license will give KMC the right during the term of the
agreement to operate the particular Hotel under the applicable tradename. The
Best Western franchise licenses will continue in full force and effect as long
as KMC is in possession of any property bearing the Best Western tradename or
any identification symbols in any manner. The Hilton franchise license will
expire in 2000. The Holiday Inns franchise license will expire in 2000. The
Sheraton franchise license will expire in 1997. The Choice Hotels franchise
license will expire in 2013. The franchise licenses will provide for
termination at the franchisor's option upon the occurrence of certain events,
including KMC's failure to pay royalties and fees or perform its other
covenants under the franchise license, bankruptcy, abandonment of the
franchise, commission of a felony, assignment of the franchise license without
the consent of the franchisor, or failure to comply with applicable law in the
operation of the relevant Hotel. KMC will be permitted to terminate the
franchise licenses under certain circumstances. KMC may terminate the Holiday
Inns franchise license at any time during the term of the franchise license
upon at least 12 months notice, which notice shall be accompanied by a lump sum
payment of certain specified fees. KMC may terminate the Sheraton franchise
license by giving at least six months notice accompanied by lump sum payment at
any time during the term of the franchise license, or at the end of each five
year period following the date of the franchise license, upon six months notice
to the franchisor. KMC may terminate the Choice Hotels franchise license upon
30 days notice if the franchisor shall be in default of any of its material
obligations under the license and the franchisor has failed to cure such
default after such 30 days notice from KMC, or upon three months notice on the
tenth or fifteenth anniversary of the franchise license, which notice shall be
accompanied by specified fees. None of the franchise licenses will renew
automatically.

KMC will be responsible for making all payments under the franchise licenses
to the franchisors. Under the Best Western franchise licenses with respect to
the Ogden Park Hotel and the Canyon Springs Park Hotel, KMC will pay franchise
fees of $0.58 and $0.59, respectively, per day per room at the respective Hotel
and reservation fees of $3.80 and $3.17, respectively, per room night confirmed
through the franchisor's reservation system, net of cancellations. Under the
Hilton Inns franchise license, KMC will pay a franchise fee of 5.0% of room
revenue. Under the Holiday Inns franchise license, KMC will pay a royalty fee
of 4.0% of room revenue, a marketing fee of 1.0% of room revenue, a reservation
contribution of 1.0% of room revenue, a Holidex fee of $3.50 per room and an
amount equal to any sales, gross receipts or similar tax imposed on franchisor.
Under the Sheraton franchise license, KMC will pay a franchise fee of 5.0% of
room sales. Under the Choice Hotels franchise license, KMC will pay a royalty
fee of 3.0% of room revenue, a marketing fee of 1.3% of the preceding month
room revenue plus a supplemental marketing fee of $0.28 per day times the
specified room count, a reservation fee of 1.0% of room revenue, and
reservation delivered charge of $1.00 per room night confirmed through the
franchisor's reservation system.

Realty anticipates that the franchisors will agree that, in the event of a
default by KMC under a franchise license with respect to a franchised Hotel, or
upon the termination or expiration of a Percentage Lease, the franchise for
that Hotel will be assigned to Realty or a designee of Realty acceptable to the
franchisor. In consideration of the franchisor's agreements to transfer the
franchises upon default, Realty will agree to guarantee KMC's obligation to
make franchise fee payments to the franchisors under the franchise licenses.

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<PAGE>

DIRECTORS AND EXECUTIVE OFFICERS OF REALTY

Realty will operate as a self-advised REIT. As such, Realty will employ a
sufficient number of employees to perform the services necessary to its
operations. Initially, Realty will have three executive officers, a chief
executive officer and a senior vice president and general counsel, who will
also be employees of KMC, and a senior vice president and chief financial
officer who will be employed solely by Realty. Realty intends to hire two new
employees; one to provide accounting and bookkeeping services, prepare
financial statements, evaluate potential leases and perform financial analyses
and other evaluations of new investment opportunities, and one employee whose
responsibilities will include acquisitions, corporate development and
management of investor relations. These new employees will not be employees of
KMC.

The three executive officers of Realty, who have a total of 49 years of
experience in the ownership, management and development of hotels and
conference centers, will consist of Harold W. Milner, President and Chief
Executive Officer (28 years of experience), Michael J. Quinn, Senior Vice
President, Secretary and General Counsel (nine years of experience), and Steven
R. Stenhaug, Senior Vice President, Chief Financial Officer, Treasurer (twelve
years of experience).

The Board of Directors of Realty consists of six members, four of whom are
independent directors. The Directors are elected for three year terms with
staggered expiration dates.

Certain information regarding the directors and executive officers of Realty
is set forth below.

<TABLE>
<CAPTION>
TERM
NAME AGE POSITION EXPIRES
---- --- -------- -------
<S> <C> <C> <C>
John H. Herrell................. 54 Chairman of Board 1997
Harold W. Milner................ 60 President, Chief Executive 1996
Officer and Director
Michael J. Quinn................ 47 Senior Vice President, Secretary
and General Counsel
Steven R. Stenhaug.............. 36 Senior Vice President, Chief
Financial Officer and Treasurer
A. Blaine Huntsman.............. 60 Director 1998
Donald L. Lucas................. 65 Director 1997
Donald C. McIlrath, M.D. ....... 66 Director 1996
Mark W. Sheffert................ 48 Director 1998
</TABLE>

John H. Herrell has been a Director of Realty since 1981 and Chairman of its
Board of Directors since 1993. Mr. Herrell has held various positions with the
Mayo Foundation since 1968, serving most recently as Vice President and Chief
Administrative Officer of the Mayo Foundation. He holds a Bachelor of Arts
degree from the University of Virginia and a Masters degree from the Harvard
Graduate School of Business Administration. He is a Director of Universal
Health Services, Inc.

Harold W. Milner has been President and Chief Executive Officer and a
Director of Realty since 1985. From 1967 to 1970, he was Assistant Treasurer
and then Treasurer of Marriott Corporation. From 1970 to 1975, he founded and
was the President and Chief Executive Officer of Hotel Investors Corporation
(predecessor of Starwood Lodging Trust). From 1975 to 1985, he was President
and Chief Executive Officer of Americana Hotels Corporation and its predecessor
corporation, Pick Hotels Corporation. From 1982 to 1985, he was also President,
Chairman and Chief Executive Officer of Americana Hotels and Realty
Corporation. He has a Bachelors degree in mechanical engineering from the
University of Utah and a Masters degree from the Harvard Graduate School of
Business Administration. He is a Director of Baron Asset Fund. See "The
Hotels--Legal Proceedings."

Michael J. Quinn has been Senior Vice President, Secretary and General
Counsel of Realty since 1993. From the time he joined Realty in 1989 until
assuming his present positions, Mr. Quinn served as Realty's

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<PAGE>

Vice President-Secretary and General Counsel. From 1988 to 1989, he was General
Counsel for PDQ Food Stores, Inc. From 1981 to 1989, he was Vice
President/General Counsel for Country Kitchen Restaurants, a subsidiary of
Carlson Companies. He holds a Bachelors degree in economics and history from
the University of Minnesota and a law degree from Stetson College of Law.

Steven R. Stenhaug has been Senior Vice President, Chief Financial Officer
and Treasurer of Realty since May 1994. Mr. Stenhaug served as Senior Vice
President-Treasurer from 1993 until May 1994 and as Treasurer and then Vice
President-Treasurer from 1985 to 1993. From 1981 until joining Realty in 1983,
he worked in public accounting with McGladrey & Pullen. He holds a Bachelors
degree in accounting from Luther College and is a Certified Public Accountant.
See "The Hotels--Legal Proceedings."

A. Blaine Huntsman has been a Director of Realty since 1994. From 1988 until
his retirement in 1995, Mr. Huntsman served as Chairman and Chief Executive
Officer of Olympus Capital Corporation, Salt Lake City, Utah, a bank holding
company. He is a Director of Geneva Steel Corporation and Zion Cooperative
Mercantile Institution. He holds a Bachelor of Arts degree from the University
of Utah and a Doctorate from the University of Pennsylvania (Wharton).

Donald L. Lucas has been a Director of Realty since 1984. Since 1967, Mr.
Lucas has been actively engaged in venture capital activities as a private
investor. Mr. Lucas holds a Bachelor of Arts degree in economics and a Master
of Business Administration degree from Stanford University. Mr. Lucas is also a
Director of Cadence Design Systems, Inc., Delphi Information Systems, Inc.,
ICOT Corporation, Macromedia, Inc., Oracle Systems Corporation, Quantum Health
Resources, Inc., Racotek, Inc., Tri-Care, Inc. and Tricord Systems, Inc.

Donald C. McIlrath, M.D. has been a Director of Realty since 1987. Until he
retired in 1993, he was a surgeon at the Mayo Clinic. Mr. McIlrath was a member
of the Board of Trustees of the Mayo Foundation from 1979 to 1986 and a member
of the Board of Governors of the Mayo Clinic from 1979 to 1987. From 1984 to
1986 Mr. McIlrath was a Director of Rochester Methodist Hospital. He holds a
Bachelor of Arts degree from the University of Kansas and a Doctor of Medicine
degree from University of Kansas School of Medicine.

Mark Sheffert has been a Director of Realty since 1991. Since January 1994,
Mr. Sheffert has been President of Manchester Financial Group, Inc., a private
investment and management consulting firm. From 1990 to 1993, Mr. Sheffert
served as a Managing Partner of Sheffert & Wein, Inc., a private investment
company. In connection with his employment with Sheffert & Wein, Mr. Sheffert
served as Chairman of the Board and Chief Executive Officer of National
Designwear, Inc. ("NDI"), which was one of the three companies acquired by
investor groups led by Sheffert & Wein. On January 31, 1992, NDI filed a
Chapter 11 petition under the federal bankruptcy code. On March 7, 1992, NDI
filed a Chapter 7 petition under the federal bankruptcy code and subsequently
was liquidated. From 1982 to 1990, he held various positions with First Bank
System and served as Executive Vice President from 1985 to 1989. He is a
Director of Combined Financial Group, Inc., Chairman and Director of Telident,
Inc., Director of CTS Computer Graphics, Inc., and Director of Triad Financial
Services, Inc. He holds a Bachelor of Arts Degree in business from the
University of Minnesota and a Masters of Science degree in management from
American College.

COMMITTEES OF THE BOARD OF DIRECTORS

Audit Committee

The Board of Directors has an Audit Committee which currently consists of
Messrs. Herrell, Lucas and Huntsman. The Audit Committee acts in a liaison
capacity between the Board of Directors and the independent auditors, making
recommendations as to selection of the auditors and their compensation. The
audit committee reviews with the auditors the scope of the annual audit,
matters of internal control and procedure and the adequacy thereof, the audit
results and reports and other general matters relating to the Realty's
accounts, records, controls and financial reporting. The Committee expects to
meet approximately three times each year.

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<PAGE>

Nominating and Compensation Committee

The Board of Directors has a Nominating and Compensation Committee which
consists of Messrs. Herrell, McIlrath and Sheffert. This committee reviews
annually the membership of the Board of Directors, evaluates directors'
performance and recommends to the Board candidates for membership. This
committee will also consider nominee recommendations from shareholders. In
addition, this committee recommends to the Board of Directors the salary of the
executive officers, reviews and recommends any incentive compensation plans,
and composition and levels of fringe benefits and retirement benefit programs.

Executive Committee

The Board of Directors has an Executive Committee which consists of Messrs.
Herrell, Lucas and Milner. This committee has authority to act on behalf of the
Board on all matters, except to alter membership of the Board of Directors, to
elect the president or chairman of the Board of Realty, to amend the articles
of incorporation or bylaws of Realty, to adopt an agreement of merger or
consolidation, to authorize the sale of any substantial part of Realty's
property or assets, to make a material acquisition of assets or to commit
Realty to any other financial obligation or debt where the proposed commitment
would be in excess of 5.0% of Realty's net worth, to recommend to shareholders
any action requiring their approval, to authorize the issuance of capital stock
or debt and to declare a dividend or authorize a material repurchase of any of
the outstanding stock of Realty.

COMPENSATION OF DIRECTORS

Realty compensates each of its non-employee directors at a rate of $12,000
per year for serving as a director. Non-employee directors also receive $750
for each meeting of the Board of Directors or committee thereof which the
director attends, except that only one such fee is paid for all meetings
occurring on the same day. In addition, each non-employee director serving on
the executive committee receives additional compensation of $3,000 per year.
The non-employee chairman of the Board of Directors receives additional
compensation of $15,000 per year. Non-employee chairmen of other Board
committees receive an additional $1,000 per year.

In addition to this cash compensation, Realty also awards non-employee
directors options to purchase Common Stock under the Kahler Realty Corporation
1994 Non-Employee Directors Stock Option Plan described under "--Stock Option
and Stock Retainer Plans."

Employee directors receive no additional compensation for serving on Realty's
Board of Directors beyond that which they receive in their capacity as
employees of Realty.

EXECUTIVE COMPENSATION

After the Spin Off, Realty will have three executive officers. Two of these
senior executives, Mr. Milner and Mr. Quinn, will be employed both by Realty
and KMC. Realty has agreed to pay 80% of the executives' base salary, while KMC
will pay the remaining 20%. The following table sets forth the aggregate annual
base salary that Realty and KMC intend to pay their Chief Executive Officer
during 1995. Realty does not anticipate that Realty and KMC will pay aggregate
cash compensation to any other shared executive officer at an annual base rate
in excess of $100,000 during 1995.

<TABLE>
<CAPTION>
BASE
NAME TITLE SALARY
---- ----- --------
<S> <C> <C>
Harold W. Milner.............. President and Chief Executive Officer $280,000
</TABLE>

During 1995, Mr. Milner will also receive bonus payments of $56,875 under
bonus plans for his performance in 1994.

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EMPLOYMENT AGREEMENT

Realty will enter into a three year employment agreement with Mr. Milner
which will become effective on the Effective Date, subject to the closing of
the Offering. Pursuant to the agreement, Mr. Milner will serve as Realty's
President and Chief Executive Officer and devote substantially all of his time
and attention to the operations of Realty, subject to his commitment to serve
as the President and Chief Executive Officer of KMC. Mr. Milner is expected to
spend approximately 20% of his working time on his duties for KMC. Realty and
KMC will pay 80% and 20%, respectively, of Mr. Milner's aggregate annual base
salary ($280,000 for 1995). Mr. Milner's annual base salary will be reviewed
and may be increased by Realty's Board of Directors at the end of each calendar
year. The agreement also provides that Mr. Milner will be eligible to receive,
at the sole discretion of the Board of Directors, a cash bonus each year from
Realty based on his performance during the previous year. Realty may terminate
the agreement for cause. If Mr. Milner's employment is terminated by Realty
without cause, or if his duties and responsibilities are substantially reduced
by Realty without his consent, then Mr. Milner will be entitled to (i) his
annual base salary through the end of the term of the agreement or for twelve
months, whichever is longer, (ii) any awarded but unpaid bonus, (iii) full
vesting of all outstanding stock options, and (iv) continuation of health and
life insurance benefits through the end of the term of the agreement or for
twelve months, whichever is longer. The agreement will preclude Mr. Milner,
unless his employment is terminated without cause, from competing with Realty
in the ownership, acquisition and development of hotel properties during the
term of the agreement and for one year after termination.

STOCK OPTION AND STOCK RETAINER PLANS

1994 Stock Option Plan

Realty's 1994 Stock Option Plan (the "1994 Option Plan") provides for the
grant of both incentive stock options intended to qualify for preferential tax
treatment under Section 422 of the Code, and nonqualified stock options that do
not qualify for such special tax treatment.

The exercise price of incentive stock options granted under the 1994 Option
Plan must equal or exceed the fair market value of the Common Stock at the time
of the grant. The exercise price for options granted under the 1994 Option Plan
which do not qualify as incentive stock options may not be less than 50% of the
fair market value of the Common Stock at the time of the grant. Only employees
of Realty or its subsidiaries are eligible for the grant of incentive stock
options. Nonqualified stock options may also be granted to consultants or
independent contractors providing valuable services to Realty. The 1994 Option
Plan is administered by the Board of Directors or a committee appointed by the
Board of Directors consisting of at least two directors, none of whom may be
officers or employees of Realty and all of whom must be disinterested persons
with respect to the 1994 Option Plan.

A total of 600,000 shares of Common Stock has been reserved for issuance
under the 1994 Option Plan. Options to purchase 89,500 shares of Common Stock
have been granted under the 1994 Option Plan as of the date hereof.

1994 Directors Plan

A total of 125,000 shares of Common Stock has been reserved for issuance
under the Kahler Realty Corporation 1994 Non-Employee Directors Stock Option
Plan (the "1994 Directors Plan"). The 1994 Directors Plan is administered by
the Board of Directors. Only non-employee directors are eligible to
participate. Eligible directors are automatically granted an option to purchase
12,200 shares of Common Stock on the date they first become a director, and an
option to purchase 4,000 shares on the day immediately following the last
regularly scheduled Board meeting each year, so long as the person continues to
serve as a director of Realty. The exercise price of an option granted under
the 1994 Directors Plan is the fair market value of the Common Stock on the
date the stock option is granted. Options extend for ten years and become fully
exercisable one year after the date of grant. Options to purchase 20,000 shares
of Common Stock have been granted under the 1994 Directors Plan as of the date
hereof.

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1994 Retainer Plan

The 1994 Retainer Stock Payment Plan For Non-Employee Directors (the "1994
Retainer Plan") provides non-employee directors the opportunity to elect to
receive payment of the annual fee, as well as any earned but unpaid committee
fees (the "Retainer"), in the form of shares of Common Stock. Under the terms
of the 1994 Retainer Plan each non-employee director who makes an election to
receive shares in lieu of cash payment of the Retainer will be issued after the
Annual Meeting of Shareholders an amount of shares equal to 100% of the
Retainer divided by the fair market value of the Common Stock as of that date.
The 1994 Retainer Plan is administered by the Board of Directors. Only non-
employee directors are eligible to participate in the 1994 Retainer Plan. A
total of 30,000 shares of Common Stock have been reserved for issuance under
the 1994 Retainer Plan, 5,478 of which have been issued as of the date hereof.

Effect of Spin Off on Outstanding Options

In addition to the options outstanding under the 1994 Option Plan and the
1994 Directors Plan, the officers and directors and certain employees of
Historical Kahler held outstanding options under several other Historical
Kahler option plans (the "Historical Kahler Plans") covering 300,825 shares of
Common Stock as of July 2, 1995. Individuals who exercise their outstanding
options prior to the Record Date of the Spin Off will be entitled to
participate in the Spin Off and receive one share of KMC Common Stock for every
ten shares of Common Stock owned as of the record date. Outstanding options
which are not exercised prior to the Record Date ("Pre-Spin Off Options") will
be split into two separately exercisable options: one to purchase shares of
Common Stock and one to purchase shares of KMC Common Stock (collectively, the
"Adjusted Options"). Adjusted Options denominated in Common Stock will be
exercisable for the same number of shares as the corresponding Pre-Spin Off
Options; Adjusted Options denominated in KMC Common Stock will be exercisable
for one-tenth of the number of shares acquirable upon exercise of the
corresponding Pre-Spin Off Options.

The per share exercise price of Pre-Spin Off Options in effect immediately
prior to the Spin Off will be allocated between the Adjusted Options on the
basis of the relative fair market values of the Common Stock and the KMC Common
Stock following the Spin Off. The other terms and conditions of the Adjusted
Options will be identical to those in effect for the Pre-Spin Off Options
immediately prior to the Spin Off. The vesting schedule of the Adjusted Options
will be the same as the Pre-Spin Off Options except that vesting will be
subject to continued employment by either KMC or Realty. The value of the
Adjusted Options is dependent upon the trading prices of Common Stock and KMC
Common Stock after the Spin Off. As a result, neither the value of the Adjusted
Options nor the amount of compensation expense, if any, to Realty as a result
of the split of Pre-Spin Off Options can be determined until after the Spin
Off.

Adjusted Options will be administered separately by Realty and KMC under the
terms of the plans under which such options were originally granted. Realty and
KMC have adopted the Historical Kahler Plans solely with respect to Adjusted
Options denominated in shares of their respective common stock. See "Certain
Relationships and Related Transactions--Distribution Agreement."

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

John H. Herrell, the Chairman of the Board of Realty, is also the Chairman of
the Board of KMC. Harold W. Milner serves as a director and President and Chief
Executive Officer of both Realty and KMC. In addition, Michael J. Quinn, Senior
Vice President, Secretary and General Counsel, serves in similar positions at
KMC.

Realty and KMC have entered into a number of agreements and transactions for
the purpose of effecting the Spin Off and defining their ongoing relationship
and the conduct of their respective businesses following the Spin Off. The
terms of these agreements and transactions were not the result of arm's-length
negotiations between independent parties. A majority of the independent
directors of each of Realty and KMC have approved these agreements and
transactions. These agreements may be modified and additional agreements,
arrangements and transactions may be entered into by Realty and KMC after
completion of the Spin Off.

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The following is a summary of the material features of certain agreements and
transactions between Realty and KMC. The summaries of each of the following
agreements are qualified in their entirety by reference to the full text of
such agreement, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.

THE PERCENTAGE LEASES

Realty has entered into the Percentage Leases, with terms of three, five and
seven years, relating to the leased Hotels. Pursuant to the terms of the
Percentage Leases, KMC is required to pay the greater of Base Rent or
Percentage Rent and the Additional Charges and is entitled to all profits from
the operation of the Hotels after payment of rent, operating and other
expenses. See "Certain Agreements--The Percentage Leases." The terms of the
Percentage Leases have been approved by a majority of the independent directors
of each of Realty and KMC. Realty anticipates that a similar Percentage Lease
will be executed with respect to each additional hotel acquired by Realty in
the future.

DISTRIBUTION AGREEMENT

Realty and KMC will enter into the Distribution Agreement, which provides for
(i) the Asset Transfers to occur prior to the Spin Off and the Offering, (ii)
the Spin Off, (iii) the division between Realty and KMC of certain liabilities
and (iv) certain other agreements governing the relationship between Realty and
KMC.

Subject to certain exceptions, the Distribution Agreement provides for
assumptions of liabilities and cross-indemnities designed to allocate,
effective as of the end of the last monthly fiscal period prior to the closing
of the Offering (the "Effective Date"), financial responsibility for the
liabilities arising out of or in connection with the KMC Business to KMC and
its subsidiaries, and financial responsibility for the liabilities arising out
of or in connection with the Realty business to Realty and its retained
subsidiaries. The specific dollar amount of liabilities allocated to each of
Realty and KMC pursuant to the terms of the Distribution Agreement will be
determined as of the Effective Date on a basis consistent with the
determination of the liabilities of Realty and KMC included in the Pro Forma
Condensed Consolidated Financial Data of Realty included elsewhere in this
Prospectus. Each of KMC and Realty will also agree to remain obligated with
regard to any liabilities relating to their respective businesses which were
not accrued as of the Effective Date but which were incurred before, or arise
with respect to facts, events or circumstances occurring before, such Effective
Date. KMC will assume any liabilities relating to the Spin Off.

As of the Effective Date, KMC will become the employer of all persons then
employed by Realty other than Mr. Stenhaug. Under the Distribution Agreement,
KMC will assume sponsorship and administration of Historical Kahler's pension
plan, 401(k) plan and group health benefit plan and liabilities arising under
these plans after the Effective Date. The liabilities assumed by KMC under the
Distribution Agreement include any employment-related liabilities accrued as of
the Effective Date, as well as liability for any action taken by Historical
Kahler with respect to Historical Kahler's pension plan, 401(k) plan and group
health benefit plan on or prior to the Effective Date and liabilities for
employment-related claims which were incurred before, or arise with respect to
facts, events or circumstances occurring before, such date.

The officers and directors and certain employees of Historical Kahler hold
options exercisable for shares of Common Stock granted under Realty's stock
option plans and the Historical Kahler Plans. The Distribution Agreement
provides that options which are not exercised prior to the Effective Date will
be split into two separately exercisable options: one to purchase shares of
Common Stock and one to purchase shares of KMC Common Stock. These options will
be administered separately by Realty and KMC under the terms of the Plans under
which such options were originally granted. Realty and KMC have adopted the
Historical Kahler Plans solely with respect to the options denominated in
shares of their respective common stock. All future stock option grants made by
Realty and KMC will be made under new stock option plans adopted by Realty and
KMC. See "Directors and Executive Officers of Realty--Stock Option and Stock
Retainer Plans."

After the Spin Off, Realty and KMC will not be able to participate in a
consolidated income tax return. The Distribution Agreement therefore contains
certain agreements clarifying responsibilities and procedures

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<PAGE>

for the filing of returns, the payment of taxes and the resolution of disputes
regarding taxes following the Spin Off. The Distribution Agreement provides
that Realty will be responsible for payment of income taxes attributable to the
operations of Realty and its subsidiaries for all taxable periods. The
Distribution Agreement further provides that Realty will be responsible for
payment of income taxes attributable to the operations of KMC and its
subsidiaries (other than its subsidiaries engaged in operating KMC's commercial
laundry and formal wear businesses) for taxable periods ending on or prior to
the Effective Date and the portion ending on the Effective Date of any taxable
period that includes (but does not end on) the Effective Date, and that KMC
will be responsible for payment of income taxes attributable to all of its
operations for the remaining portion of any such taxable period and for all
subsequent taxable periods and for payment of income taxes attributable to its
commercial laundry and formal wear subsidiaries for all taxable periods. The
Distribution Agreement also provides that Realty will be liable for the payment
of all income taxes that may be imposed on Realty as a result of the Spin Off
and any sales, use, transfer or excise taxes imposed on either party as a
result of the Asset Transfers or the Spin Off.

OTHER AGREEMENTS

In connection with the Spin Off, Realty and KMC have entered or will enter
into the License Agreement, the Right of First Refusal Agreement, the Option
Agreement and certain agreements with respect to the franchise licenses. See
"Certain Agreements."

CERTAIN TRANSACTIONS WITH THE MAYO FOUNDATION

Historical Kahler regularly furnished laundry, hospitality and food services
to the Mayo Foundation and its affiliates at competitive prices. Mr. Herrell,
the Chairman of the Board of Directors of Historical Kahler, is an officer of
the Mayo Foundation. During 1994, sales of such services together with
management fees and rent amounted to $4.3 million or 3.9% of Historical
Kahler's revenue of owned operations. Sales of these services to the Mayo
Foundation amounted to $3.1 million and $4.1 million in 1992 and 1993,
respectively. See Note 10 of the Notes to Consolidated Financial Statements of
Historical Kahler.

Historical Kahler purchased, at competitive prices, steam, electricity, water
and related utility services from Franklin Heating Station ("Franklin"), a Mayo
Foundation affiliate, pursuant to a Utility Sale Agreement with Franklin. The
amount of purchased utility services during 1992 was $2.3 million, during 1993
was $1.9 million, and during 1994 was $1.9 million. See Note 10 to the
Consolidated Financial Statements of Historical Kahler. As a result of the Spin
Off, KMC has assumed the Utility Sales Agreement and will purchase from
Franklin all, or a portion, of the utility services for The Kahler Hotel, the
Kahler Plaza Hotel and the Clinic View Inn and Suites. The Utility Sales
Agreement has an indefinite term and may not be terminated unless, among other
things, the Franklin facilities are permanently retired, damaged or destroyed,
or the Franklin facilities are condemned or taken by eminent domain. The cost
of utility services is based on allocated cost of the utility services provided
by Franklin and the amount of usage.

It is anticipated that KMC will engage in transactions with the Mayo
Foundation that are similar to Historical Kahler's transactions with the Mayo
Foundation.

STOCK ACQUISITION

In October 1994, Milner Associates, a family partnership of which Mr. Harold
W. Milner is general partner, acquired 21,622 shares of Common Stock through
conversion of 8,000 shares of $2.25 Cumulative Convertible Exchangeable
Preferred Stock of Historical Kahler.

EXCHANGE AGREEMENT

At the request of the Underwriters and in order to facilitate the Offering
and Realty's conversion to REIT status, Realty, KMC, the Mayo Foundation and
the three executive officers of Realty have entered into an agreement intended
to eliminate the interest of Realty's executive officers in the equity of KMC
(the "Exchange Agreement"). Under the Exchange Agreement, the executive
officers of Realty will transfer all of

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the outstanding shares of KMC Common Stock held by them, either directly or
indirectly, to the Mayo Foundation in exchange for shares of Common Stock
having a value equal to the value of their KMC Common Stock. The executive
officers also agree (i) to exercise all of their Adjusted Options for KMC
Common Stock and dispose of the underlying shares (aggregating 6,600 shares)
prior to January 1, 1996, either by exchanging the shares for Common Stock
pursuant to the Exchange Agreement or by selling the shares in the open market,
and (ii) to request that the trustee of Historical Kahler's 401(k) plan dispose
of any shares of KMC Common Stock which are allocated to the officers' accounts
after the Spin Off. The executive officers also agree not to purchase or
otherwise own any shares of KMC Common Stock while employed by Realty, except
pursuant to the exercise of their Adjusted Options. Finally, Messrs. Milner,
Stenhaug and Quinn each agree to enter into a letter agreement with the
Underwriters pursuant to which he will agree not to sell any shares of Common
Stock for three years, six months and six months, respectively, after the
closing of the Offering. The Mayo Foundation will also agree to enter into a
similar letter agreement with the Underwriters pursuant to which (i) none of
the shares of Common Stock owned by the Mayo Foundation may be sold for one
year after the closing of the Offering, and (ii) one third of the shares of
Common Stock owned by the Mayo Foundation will become available for sale at the
commencement of each of the second, third and fourth years following the
closing of the Offering.

Realty and KMC have agreed to take certain other steps to induce the
executive officers to enter into the Exchange Agreement. Realty has agreed
that, within six months after the closing of the Offering, it will file and
have declared effective a registration statement on Form S-3 covering resales
by the executive officers of the shares of Common Stock received from the Mayo
Foundation in the exchange. Realty will be obligated to maintain the
effectiveness of that registration statement until the shares of Common Stock
are eligible for sale by the executive officers pursuant to Rule 144 under the
Securities Act of 1933, as amended. With respect to the exercise of the
Adjusted Options, the Exchange Agreement provides that (i) KMC will accelerate
the vesting of all of the Adjusted Options for KMC Common Stock held by the
executive officers of Realty, and (ii) Realty will award a cash bonus to each
of the executive officers approximately equal, on an after tax basis, to his
tax liability upon exercise of the Adjusted Options.

As a result of the Spin Off, the Mayo Foundation will hold 111,323 shares or
23.9% of the KMC Common Stock, and Messrs. Milner, Stenhaug and Quinn will hold
51,119 shares, 2,603 shares and 2,939 shares, respectively, of KMC Common Stock
(assuming the exercise of all options) or 12.0% of the KMC Common Stock on an
aggregate basis. Giving effect to the Exchange Agreement, Messrs. Milner,
Stenhaug and Quinn will have no equity interest in KMC and the Mayo Foundation
will hold up to 35.5% of the KMC Common Stock. The number of shares of Common
Stock to be transferred to the executive officers by the Mayo Foundation
pursuant to the Exchange Agreement will depend on the fair market value of the
KMC Common Stock after the Spin Off which cannot be determined at this time.
See "The Spin Off--Benefits of the Spin Off to Existing Shareholders of
Historical Kahler." Realty estimates that the shares of Common Stock to be
received by the executive officers of Realty pursuant to the Exchange Agreement
will represent less than 0.5% of the outstanding shares of Common Stock.

The Exchange Agreement will become effective upon the closing of the
Offering.

POLICIES AND OBJECTIVES WITH RESPECT TO CERTAIN ACTIVITIES

The following is a discussion of Realty's policies with respect to
investment, financing, conflicts of interest and certain other activities. The
policies with respect to these activities have been determined by the Board of
Directors of Realty and may be amended or revised from time to time at the
discretion of the Board of Directors without a vote of the shareholders of
Realty.

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INVESTMENT POLICIES

Equity Investments in Hotels

Realty will seek to increase Cash Available For Distribution and enhance
shareholder value by making opportunistic acquisitions of additional hotels. It
also intends to implement an internal growth strategy to increase revenues for
the Hotels, which may include the expansion and renovation of these Hotels. In
addition, if, in management's opinion, the investment opportunity justifies the
risk, Realty may selectively construct new hotels. One type of acquisition that
Realty will consider is hotels that have been in operation for several years
and have experienced stable ADRs and occupancy and operated profitably over the
previous two or three years. Realty may also consider acquiring hotels that
have low cash flows relative to expenses, but which represent potential turn-
around opportunities. Additionally, Realty will focus on acquiring hotels that
are in its existing markets or markets contiguous to those in which it
currently owns Hotels and which may service nearby large institutions. As part
of its internal growth strategy, Realty will seek to expand existing Hotels as
occupancy rates at specific Hotels warrant expansion and to renovate its Hotels
when it believes it can increase ADRs and hotel occupancy. Realty is obligated
under the Percentage Leases to fund periodic capital improvements to the Hotels
and the replacement and refurbishment of FF&E in an amount equal to 5.5% of
room revenues per quarter on a cumulative basis.

Hotels that Realty may acquire in the future may be subject to existing
mortgage financing or other indebtedness related to the acquired hotel. Realty
may participate with other entities in property ownership, through joint
ventures or other types of co-ownership. Realty has no current intention to
dispose of any Hotel, but may sell one or more Hotels, in whole or in part,
when it believes such action is in the best interests of shareholders.

Mortgage Investments in Hotels

While it will emphasize the acquisition of equity in hotels, Realty may
acquire mortgage notes secured by a hotel if such acquisition would be the most
advantageous way to obtain an interest in that hotel. Such mortgage notes may
be participating or convertible mortgage notes, which may enable Realty to
benefit from the cash flow or any appreciation in the value of the hotel.
Participating mortgage notes permit the holder to participate in increasing
revenues from the property and convertible mortgage notes enable the holder to
convert some or all of the mortgage notes to equity.

FINANCING

Realty may incur indebtedness to make additional investments in hotel
properties or to meet the distribution requirements imposed by the REIT
provisions of the Code, to the extent that cash flow from Realty's investments
and working capital is insufficient. Indebtedness incurred by Realty may be in
the form of purchase money obligations to the sellers of properties, bank
borrowings and publicly and privately placed debt instruments. Any of this
indebtedness may be unsecured or may be secured by mortgages or other interests
in the property owned by Realty. Such indebtedness may provide recourse to all
or any part of the property of Realty, or recourse may be limited to the
particular property to which the indebtedness relates. The proceeds from
borrowings by Realty may be used for the payment of distributions or dividends,
working capital, to refinance existing indebtedness or to finance acquisitions,
expansions, additions or renovations of hotel properties. See "Federal Income
Tax Considerations--Requirements for Qualification--Distribution Requirements."

To ensure that Realty has sufficient liquidity to conduct its operations,
including making investments in additional hotels and funding its anticipated
distribution obligations and financing costs, Realty is seeking to arrange the
Lines of Credit. The Lines of Credit may be secured by first mortgages on some
of the Hotels. See "Management's Discussion and Analysis of Pro Forma Financial
Data of Realty--Pro Forma Liquidity and Capital Resources."

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If the Board of Directors of Realty determines to raise additional equity
capital, the Board has the authority, without shareholder approval, to issue
additional shares of Common Stock, preferred stock or other capital stock of
Realty in any manner (and on such terms and for such consideration) as it deems
appropriate, including in exchange for property. Existing shareholders have no
preemptive right to purchase shares issued in any offering, and any such
offering may cause a dilution of a shareholder's investment in Realty.

CONFLICTS OF INTEREST POLICIES

Realty and KMC each has adopted policies and procedures to be followed by the
Board of Directors of each company to limit the involvement in matters
affecting both companies of the executive officers and directors who serve both
companies as well as to govern other conflicts. These procedures require
interested executive officers and directors to abstain from voting as directors
of either company, with respect to matters that present a material conflict of
interest and require a majority of the independent directors of each company to
approve any contract or transaction that presents a material conflict of
interest. See "The Spin Off." Whether or not a material conflict of interest
situation exists will be determined on a case-by-case basis depending on such
factors as the dollar value of the matter, the respective interests of the
shareholders of Realty and KMC and the likelihood that resolution of the matter
would have significant strategic, operational or financial implications for the
business of Realty or KMC. It is a principal responsibility of the independent
directors of each company to monitor such situations as well as any other
situation which presents a conflict of interest.

The ongoing relationships between Realty and KMC will create potential
conflict situations. Two executive officers, Harold W. Milner, the President
and Chief Executive Officer, and Michael J. Quinn, the Senior Vice President,
Secretary and General Counsel, will hold similar positions for each of Realty
and KMC. In addition, Mr. Milner and John H. Herrell, the Chairman of the
Board, will each be a director of both Realty and KMC. Realty anticipates that
additional employees may be hired to serve both Realty and KMC. Relationships
between Realty and KMC that may be subject to the conflict of interest policies
include the Percentage Leases, the Right of First Refusal Agreement, the
License Agreement, the Option Agreement, the Distribution Agreement, the
Exchange Agreement and the franchise licenses.

POLICIES WITH RESPECT TO OTHER ACTIVITIES

Realty currently does not intend to issue senior equity securities, invest in
the securities of other issuers for the purpose of exercising control over such
issuers, underwrite securities of other issuers or actively trade in loans or
other investments. Realty has authority to offer shares of its capital stock or
other securities and to repurchase or otherwise reacquire its shares or any
other securities and may engage in such activities in the future.

At all times, Realty intends to make investments in such a manner consistent
with the requirements of the Code for Realty to qualify as a REIT unless,
because of changing circumstances or changes in the Code (or in Treasury
Regulations), Realty's Board of Directors determines that it is no longer in
the best interests of Realty to qualify as a REIT. In addition, Realty intends
at all times to conduct its business and maintain substantially all its
investments in qualifying interest in real estate in order to maintain its
exempt status under the Investment Company Act of 1940.

WORKING CAPITAL RESERVES

Realty will maintain working capital reserves in amounts that the Board of
Directors determines to be adequate to meet normal contingencies in connection
with the operation of Realty's business and investments. See "--Financing." If
necessary, Realty may borrow under the Lines of Credit in order to fund a
portion of the Special Distribution. See "Distributions."

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THE SPIN OFF

Prior to the Offering, Historical Kahler will engage in the Spin Off. The
Spin Off will include the Asset Transfers and the distribution by dividend of
90.5% of KMC Common Stock to the shareholders of Historical Kahler as of the
Record Date. The Boards of Directors of Historical Kahler and KMC have
unanimously approved the Spin Off. The key elements of the Spin Off are as
follows:

. Asset Transfers. Historical Kahler will transfer to KMC all of its assets
and liabilities related to the KMC Business. Under the Code, at least
75.0% of a REIT's gross income for each taxable year must consist of
income derived from investments relating to real property or mortgages on
real property. In addition, a REIT may not operate or manage its hotels
and may not have its hotels operated on its behalf by a third party
pursuant to a management contract, unless that third party qualifies as
an "independent contractor from whom the [REIT] itself does not derive or
receive any income." As a first step toward satisfying these
requirements, Historical Kahler will complete the Asset Transfers. As a
result of the Asset Transfers, KMC will assume Historical Kahler's
outstanding hotel management contracts and retain the employees related
to Historical Kahler's hotel management operations. Historical Kahler
will also transfer to KMC equity interests in six hotels that are
operated under management contracts. To satisfy certain requirements
relating to REIT status, the Asset Transfers will also include transfers
to KMC of all of the personal property at The Kahler Hotel, the Holiday
Inn Downtown, the Olympia Park Hotel, the Pocatello Park Quality Inn, the
Boise Park Suites Hotel and the Green Oaks Inn and Conference Center. In
addition, KMC will own and operate certain other non-real estate related
assets owned by Historical Kahler. Following the Asset Transfers, Realty
will retain interests in the 15 Hotels, consisting of 100.0% equity
interests in 12 Hotels, 50.0% and 63.8% equity interests in two Hotels
and a mortgagee's interest in one Hotel through the Mortgage Note.

. Spin Off Dividend. The Board of Directors of Historical Kahler will
declare a dividend to its shareholders of record on the Record Date,
consisting of 90.5% of the issued and outstanding shares of KMC Common
Stock. The dividend will be payable only to existing shareholders of
Historical Kahler as of the Record Date. Realty expects to distribute the
dividend of KMC Common Stock within 60 days after the closing of the
Offering, and payment of the dividend is contingent on completion of the
Offering. After the Spin Off, Realty will own 9.5% of the outstanding KMC
Common Stock.

. Percentage Leases. As part of the Spin Off, Realty will also lease to KMC
pursuant to the Percentage Leases the 14 Hotels in which it has an
ownership interest. Realty will continue to hold the Mortgage Note on one
of the Hotels. KMC will manage that Hotel pursuant to a management
contract with the owner of the property.

. Realty and KMC. After the Spin Off, Realty and KMC will have the
following characteristics:

. Realty will be a publicly held corporation in the business of owning,
acquiring and developing hotels and will seek to qualify as a REIT for
federal income tax purposes and operate as a self-advised REIT
beginning in 1996. Realty will not seek to qualify as a REIT beginning
in 1996 unless it has completed the Offering and the Spin Off.

. KMC will be a publicly held corporation which will own equity interests
in certain hotels and will continue the other operations of Historical
Kahler that the federal tax laws generally preclude from being owned or
operated by a REIT, including the KMC Business.

The purpose of the Spin Off is to enable Realty to elect REIT status in 1996.
As a REIT, Realty will generally not pay federal income tax to the extent that
it distributes its income currently to shareholders in the form of quarterly
dividends. Election of REIT status will also facilitate Realty's ability to
access the public capital markets. As a result of the Offering, Realty's
financial leverage will be greatly reduced which will increase its ability to
capitalize on growth opportunities and provide it with increased debt capacity
to finance hotel acquisitions, expansions and renovations.

The Offering will reduce the percentage ownership interest of all of Realty's
shareholders below the Ownership Limitation.

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<PAGE>

BENEFITS OF THE SPIN OFF TO EXISTING SHAREHOLDERS OF HISTORICAL KAHLER

As a result of the Spin Off, the existing shareholders of Historical Kahler
will receive the following benefits. None of these benefits will accrue to
purchasers of shares of Common Stock in the Offering.

. The existing shareholders of Historical Kahler will receive increased
annual cash dividends as a result of the Spin Off and operation as a
REIT. Historical Kahler paid cash dividends of $.11 per share for the
twelve months ended July 2, 1995. For the quarter following completion
of the Offering, Realty expects to pay a dividend of $.32 per share,
which, on an annualized basis, would equal $1.28 per share.

. The existing shareholders of Historical Kahler will receive the
distribution of 421,103 shares of KMC Common Stock in the Spin Off. Of
these shares, 111,323 shares, or 23.9% of total shares outstanding, will
be received by the Mayo Foundation, 48,569 shares, or 10.4% of total
shares outstanding, will be received by Mr. Milner and his affiliates,
and 58,904 shares or 12.7% of total shares outstanding will be received
by all executive officers and directors of Realty. Pursuant to the
Exchange Agreement, the executive officers of Realty will acquire from
the Mayo Foundation additional shares of Common Stock in exchange for all
of the KMC Common Stock owned by them after the Spin Off. Realty's
executive officers will exercise all options to purchase KMC Common Stock
received by them in the Spin Off (aggregating 6,600 shares) and will
either exchange such shares for Common Stock pursuant to the Exchange
Agreement or sell the shares in the open market. The price at which the
KMC Common Stock will trade after the Spin Off cannot be predicted. There
is no public market for the KMC Common Stock and there can be no
assurance that a public market will develop or as to the prices at which
trading in the KMC Common Stock will occur after the Spin Off. Until the
KMC Common Stock is fully distributed and an orderly market develops, the
prices at which trading in such stock occurs may fluctuate significantly.
Accordingly, Realty is unable to place a value on the KMC Common Stock to
be received by the shareholders.

ADVANTAGES AND DISADVANTAGES OF THE SPIN OFF AND THE OFFERING

The Spin Off and the Offering will have various beneficial effects on the
operation of the Hotels and the business of Realty, including:

. Elimination of virtually all income tax upon the operations of the Hotels
upon achieving REIT status in 1996.

. Reduction of the debt service on the Hotels, resulting in a greater
amount of Cash Available For Distribution than would be available to
shareholders if debt service were not reduced.

. Strengthening of Realty's balance sheet, providing access to the Lines of
Credit and other financing alternatives to fund Realty's future
investments in hotels.

The Spin Off and the Offering may have certain disadvantages for purchasers
of Common Stock in the Offering and existing shareholders of Historical Kahler,
including:

. The Ownership Limitation and the restrictions on transfers of the Common
Stock will deter non- negotiated acquisitions of the Common Stock and
will perpetuate control by existing management, which may make investment
in the Common Stock less attractive to certain investors and could have
an adverse effect on the market value of the Common Stock.

. The terms of certain of the transactions included in and related to the
Spin Off were not established through arm's-length negotiations and,
accordingly, may not reflect fair market values or terms.

. Because certain officers and directors are officers and directors of both
Realty and KMC, there will be conflicts of interest with respect to their
obligations as officers and directors of either Realty or KMC or both.

. Upon the closing of the Offering, existing shareholders of Historical
Kahler will have their voting power reduced from 100.0% to 34.1%.

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<PAGE>

KAHLER MANAGEMENT CORPORATION

GENERAL

KMC, currently a wholly owned subsidiary of Historical Kahler, will continue
the KMC Business and will become a publicly held company as a result of the
Spin Off. See "The Spin Off." KMC manages and operates 22 hotels, including the
15 Hotels. Fourteen of the Hotels are leased from Realty pursuant to the
Percentage Leases. The University Park Hotel, in which Realty has a mortgage
interest only, will be operated by KMC pursuant to a management contract with
the Hotel owner. KMC performs all operational and management functions
necessary to operate the Hotels. These functions include all advertising,
marketing, maid and food service, reservations, accounting, laundry and
maintenance. Under the Percentage Leases, Realty is entitled to the greater of
Base Rent or Percentage Rent for each leased Hotel. KMC's ability to
effectively conduct its operations and to pay the Base Rent or Percentage Rent
under the Percentage Leases will depend on its ability to generate sufficient
cash flow from the operation of the Hotels. The obligations of KMC under the
Percentage Leases are unsecured. KMC is entitled to all revenue from the Hotels
after payment of Rent under the Percentage Leases and other operating expenses.
The Percentage Leases have a term of 30 years, subject to earlier termination
upon the occurrence of certain events. See "Certain Agreements--The Percentage
Leases."

KMC is not required to devote all of its time and effort to the Hotels.
Subject to the non-compete agreement set forth in the Right of First Refusal
Agreement, KMC may manage other hotels in addition to the Hotels. KMC manages
hotels in Morgantown, West Virginia, Rock Island, Illinois, Waverly, Iowa,
Hibbing, Minnesota, Butte, Montana, Port Huron, Michigan and Racine, Wisconsin
that are not affiliated with Realty. In addition, KMC owns an equity interest
in four of these seven hotels with which it has management contracts as well as
an equity interest in the University Park Hotel.

KMC's operating responsibilities with respect to the Hotels and under the
management contracts encompass all phases of lodging operations, including
hiring, training and supervising all of the managers and employees necessary
for the operation of the Hotels. KMC also provides computerized reservation
services, advertising and marketing and promotion services. KMC is responsible
for allocating funds for periodic maintenance and repairs of the buildings and
furnishings.

Each of the 22 hotels managed by KMC has a general manager who is responsible
for that hotel's operations. The general manager has a staff that manages the
various departments within the hotel. Each year the general managers prepare
detailed operating budgets and marketing plans. Hotel operations are monitored
throughout the year by comparing results to the budget and to the prior year's
performance. The general manager and the director of marketing for each hotel
are responsible for the sales effort of their hotel. The general manger is
compensated in part through a bonus equal to a percentage of the amount by
which the income of the hotel less operating expenses of the hotel exceeds the
annual budget for the hotel.

KMC has a centralized corporate staff that provides support to each general
manager and each hotel staff in the following areas: sales and marketing; human
relations and employee benefits; engineering and building maintenance;
accounting; and data processing.

KMC's senior vice president-marketing works with each hotel's sales staff in
setting marketing goals, developing marketing strategies and achieving
marketing goals. The general manager and the director of marketing for each
hotel are responsible for the sales effort of their hotel. Each hotel market is
divided into two general categories: individual travelers, who travel alone
with or without advance reservations, and group travelers, who stay at a hotel
as part of a business group, convention or tour group. Individual travelers are
attracted to a hotel as a result of the hotel's location, by advertising
directed at individual travelers, by maintaining toll-free numbers and
reservation systems, by providing special services when the traveler arrives at
the hotels and by promoting special sales programs and discounts. The hotels
attract group travelers as a result of the hotel's location, by providing
facilities and amenities to meet group needs and by offering special group
rates. Each hotel maintains a sales staff which calls on groups and travel
agents and works with them in selecting, planning and holding group functions.

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<PAGE>

KMC also owns and operates certain non-real estate assets owned by Historical
Kahler prior to the Spin Off, including Historical Kahler's commercial laundry
business and formal wear business. The commercial laundry business operates
laundry facilities in Rochester, Minnesota and Salt Lake City, Utah, providing
commercial and institutional laundry and dry cleaning services, as well as
linen and uniform rental services. The formal wear business is a wholesale and
retail distributor of men's formal wear, with distribution centers in
Rochester, Minnesota, Denver, Colorado, Kansas City, Kansas and Dallas, Texas
and 39 retail outlets throughout the Midwest and West.

Certain pro forma financial information for KMC is set forth under the Pro
Forma Condensed Consolidated Financial Data of KMC elsewhere in the Prospectus.
For the first six months of 1994, KMC has a pro forma loss of $726,000 as
compared to a pro forma loss of $342,000 in the first six months of 1995. For
the first six months of 1995, total lodging revenue increased $2.3 million or
4.7% to $51.2 million as compared to the first six months of 1994. Lodging
operating income increased from $1.8 million in the first six months of 1994 to
$2.0 million in the first six months of 1995. Laundry revenue declined $252,000
or 7.6% in 1995 as compared to 1994. KMC's laundry operating income improved
significantly in the first six months of 1995 to $588,000 as compared to
$89,000 in the first six months of 1994. These changes are attributable to
productivity improvements in the Rochester laundry and the closing of one
laundry in Salt Lake City. Productivity, which is measured in pounds per
operator hour, increased at the Rochester laundry in the first six months of
1995 to 90.1 from 62.3 in the first six months of 1994, a 44.6% increase.

For fiscal 1994, KMC had a pro forma net loss of $2.4 million as compared to
a $2.0 million loss for the twelve months ended July 2, 1995. Depreciation and
amortization accounted for approximately $3.3 million of each year's loss. At
July 2, 1995, KMC had pro forma total assets of $41.9 million and stockholders'
equity of $16.6 million. KMC's pro forma stockholders' equity is based on the
pro forma net book value of assets and liabilities distributed by Historical
Kahler to KMC in the Spin Off. The fair market value of KMC's common stock
following the Spin Off may differ substantially from the pro forma
stockholders' equity presented.

DIRECTORS, OFFICERS AND EMPLOYEES

The executive officers of KMC are the same persons who have been operating
the KMC Business of Historical Kahler. The four senior executive officers of
KMC have over 65 years of experience in the ownership, management and
development of hotels and conference centers and will include Harold W. Milner,
President and Chief Executive Officer (28 years of experience), Michael R.
Hinckley, Senior Vice President, Marketing (12 years of experience), Kevin L.
Molloy, Senior Vice President, Operations (21 years of experience), and Michael
J. Quinn, Senior Vice President, General Counsel (nine years of experience). In
addition, KMC has approximately 19 general hotel managers with an average of 20
years of experience operating and managing hotels and conference centers.

Certain information with respect to the directors and executive officers of
KMC is set forth below:

<TABLE>
<CAPTION>
TERM
NAME AGE POSITION EXPIRES
---- --- -------- -------
<S> <C> <C> <C>
John H.
Herrell 54 Chairman of Board 1996
Harold W.
Milner 60 President, Chief Executive Officer and Director 1997
Michael R.
Hinckley 59 Senior Vice President, Marketing
Kevin L.
Molloy 45 Senior Vice President, Operations
Michael J. 47 Senior Vice President, Secretary and
Quinn General Counsel
Thomas R.
Gintz 45 Vice President, Purchasing
Michael P.
Gehling 33 Vice President, Engineering
James E.
Hinrichs 56 Vice President, Accounting
James D.
Porrett 41 Vice President, Textile Care Services

Philip D.
Thorpe 61 Vice President, Real Estate
Paul R.
Tieskoetter 36 Controller and Treasurer
Simon W.
Workman 59 Vice President, Corporate Human Resources
Willis K.
Drake 71 Director 1998
Alan O.
Tuntland 53 Director 1998
</TABLE>

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<PAGE>

For biographical information with respect to Messrs. Herrell, Milner and
Quinn, see "Directors and Executive Officers of Realty."

Michael R. Hinckley has been Senior Vice President, Marketing and Operations
since 1987. From 1983 to 1987, he was Senior Vice President and Treasurer of
Americana Hotels Corporation. He has a Bachelor's degree from the University of
Utah and a Master's degree from the Harvard Graduate School of Business
Administration.

Kevin L. Molloy joined Historical Kahler in 1976. He has worked in various
management positions and since 1986 he has been Senior Vice President,
Operations. Mr. Molloy is a Certified Hotel Administrator and completed the
Management Apprenticeship Program, Shelbourne Hotel/International Airport
Hotel, Dublin, Ireland.

Thomas R. Gintz joined Historical Kahler in 1982. He has been Vice President,
Purchasing since 1992 and served as Purchasing Director prior to being
appointed a Vice President. He attended the University of Iowa, South Dakota
University and Iowa Central Community College.

Michael P. Gehling joined Historical Kahler in 1983. He has been Vice
President, Engineering since 1990 and served in various management positions in
engineering and construction prior to being appointed a Vice President. He
holds a Bachelor's degree in mechanical engineering from Iowa State University
and a Master's degree in business administration from Winona State University.

James E. Hinrichs joined Historical Kahler in 1962. He has been Vice
President, Accounting since 1985. He has a Bachelor's degree from Winona State
University.

James D. Porrett joined Historical Kahler in 1984. He has been Vice
President, Textile Care Services since 1993. From 1984 to 1994, he was General
Manager of the Rochester laundry facility and General Manager of the Salt Lake
City laundry facility. He has a Bachelor's degree from Millersville State
College.

Philip D. Thorpe joined Historical Kahler in 1987. He has been Vice
President, Real Estate since 1989 and was Director, Real Estate from 1987 to
1989. He holds a Bachelor's degree and a Master's degree from the University of
Utah and a Doctorate degree from Brigham Young University.

Paul R. Tieskoetter joined Historical Kahler in 1984. He has served as
Controller since 1985. He holds a Bachelor's degree from the University of
Northern Iowa and is a Certified Public Accountant.

Simon W. Workman joined Historical Kahler in 1992 as Vice President,
Corporate Human Resources. Prior to joining Kahler, he was Manager of
Headquarters Human Resources for Control Data Corporation from 1982 to 1992. He
holds a Bachelor of Arts degree from Calvin College.

Willis K. Drake has been a Director since 1994. From 1980 to 1994, he was a
Director of Kahler. He is the retired Chairman of the Board of Data Card
Corporation. He is a Director of Analysts International Corp., Innovex, Inc.,
Digi International, Inc. and Telident, Inc. He holds a Bachelor's degree from
Purdue University.

Alan O. Tuntland has been a Director of Management since 1994. Mr. Tuntland
has held various positions with Schmidt Printing, Inc. since 1976, serving most
recently as president and chairman of the board since 1994. Mr. Tuntland holds
a Bachelor of Science degree from South Dakota State University and Master of
Science degree from Purdue University.

As a result of the Spin Off, KMC has approximately 3,500 employees, which
represents substantially all of the former employees of Historical Kahler. This
staff includes a corporate staff of 45 individuals supporting senior management
and approximately 285 hotel management personnel. The hotel employees in
Rochester, Minnesota (approximately 496 employees) are represented by a labor
union. KMC believes its relationship with its employees is good.

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<PAGE>

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of Common Stock prior to and after the Offering by each
director of Realty, the Chief Executive Officer, each other person who owns
more than 5.0% of the Common Stock, and all directors and executive officers as
a group, in each case as of August 15, 1995. Except as otherwise indicated, the
persons listed have sole voting and investment power over such shares.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
OFFERING (1) OFFERING (1)
-------------------------- --------------------------
NUMBER PERCENT NUMBER PERCENT
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
John H. Herrell............ 31,398 * 31,398 *
A. Blaine Huntsman......... 31,843 * 31,843 *
Donald L. Lucas............ 32,090 * 32,090 *
Donald C. McIlrath, M.D.... 22,000 * 22,000 *
Harold W. Milner........... 485,686(2) 11.5% 485,686(3) 3.8%
Kahler Realty Corporation
20 Second Avenue Southwest
Rochester, Minnesota 55902
Milner Associates.......... 473,507 11.2% 473,507(3) 3.7%
Kahler Realty Corporation
20 Second Avenue Southwest
Rochester, Minnesota 55902
Mark Sheffert.............. 27,553 * 27,553 *
Mayo Foundation............ 1,113,234 26.4% 1,113,234 8.8%
Rochester, Minnesota
All directors and executive
officers as a group (8
persons).................. 665,070 15.5% 665,070(3) 5.2%
</TABLE>
--------

* Less than 1.0%

(1) Includes the following shares which could be acquired within 60 days upon
exercise of options: Mr. Herrell, 4,000 shares; Mr. Huntsman, 12,200
shares; Mr. Lucas, 4,000 shares; Dr. McIlrath, 12,000 shares; Mr. Milner,
9,000 shares; Mr. Sheffert, 24,200 shares; and all directors and executive
officers as a group, 76,026 shares. Also includes the following shares held
through Realty's 401(k) Plan, with respect to which the trustee of the
401(k) plan has the power to vote and the individual has the power to
dispose: Mr. Milner, 3,179 shares; and all directors and executive officers
as a group, 6,799 shares.

(2) Includes 473,507 shares of Common Stock that are owned by Milner
Associates, a family partnership, of which Mr. Milner is a general partner,
with power to vote and dispose of the shares.

(3) Does not include shares of Common Stock to be acquired by Messrs. Milner,
Stenhaug and Quinn pursuant to the Exchange Agreement. See "Certain
Relationships and Related Transactions--Exchange Agreement."

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

Under Realty's Articles of Incorporation, the total number of shares of all
classes of stock that Realty has authority to issue is 80 million, consisting
of 70 million shares of Common Stock, par value $.10 per share (the "Common
Stock"), and 10 million shares of Preferred Stock, par value $.10 per share
(the "Preferred Stock"). No shares of Preferred Stock are outstanding or will
be outstanding immediately after consummation of the Offering.

COMMON STOCK

General

Based on the number of shares of Common Stock outstanding at July 2, 1995,
Realty estimates that, after the Offering, there will be 12,772,118 shares of
Common Stock outstanding, assuming prior to the Offering (i) the issuance of
138,700 shares of Common Stock upon the exercise of vested stock options, and
(ii) the issuance of 2,387 shares of Common Stock pursuant to a deferred
incentive plan. All shares of Common Stock will be fully paid and
nonassessable, and the holders thereof will not have preemptive rights.

Voting Rights

The holders of Common Stock are entitled to one vote per share on all matters
voted on by shareholders, including elections of directors. Except as otherwise
required by law or provided in any resolution adopted by the Board of Directors
with respect to any series of Preferred Stock, the holders of such shares
exclusively possess all voting power. There is no cumulative voting in the
election of directors under Realty's Articles of Incorporation.

Dividends and Liquidation

Subject to any preferential rights of any outstanding series of Preferred
Stock, the holders of Common Stock are entitled to such dividends as may be
declared from time to time by the Board of Directors from funds available
therefor. Upon liquidation each common shareholder is entitled to receive a pro
rata share of the assets of Realty available for distribution to such holders.
See "Distributions."

Trading Market

The Common Stock is quoted on Nasdaq.

PREFERRED STOCK

The Board of Directors is authorized to provide for the issuance of shares of
Preferred Stock in one or more series, to establish the number of shares in
each series and to fix the designation, powers, preferences and rights of each
such series and the qualifications, limitations or restrictions thereof.
Because the Board of Directors has the power to establish the preferences and
rights of each class or series of Preferred Stock, the Board of Directors may
afford the holders of any series or class of Preferred Stock preferences,
powers and rights, voting or otherwise, senior to the rights of holder of
Common Stock. Realty has no present intention to issue shares of Preferred
Stock.

RESTRICTIONS ON TRANSFER

For Realty to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding stock. Specifically,
not more than 50.0% in value of Realty's outstanding stock may be owned,
directly or indirectly, by five or fewer individuals (as defined in the Code to
include certain entities) during the last half of a taxable year, and Realty
must be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months or during a proportionate part of a shorter
taxable

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<PAGE>

year. See "Federal Income Tax Considerations--Requirements for Qualification."
In addition, Realty must meet certain requirements regarding the nature of its
gross income in order to qualify as a REIT. One such requirement is that at
least 75.0% of its gross income for each year must consist of rents from real
property and income from certain other real property investments. The rents
received by Realty from KMC under the Percentage Leases will not qualify as
rents from real property, which likely would result in a loss of REIT status
for Realty, if any shareholder or group of shareholders acting together, own,
directly or constructively, 10.0% or more of the capital stock of KMC and 10.0%
or more of the capital stock of Realty. See "Federal Income Tax
Considerations--Requirements for Qualification--Income Tests." Because Realty's
Board of Directors believes it is essential for Realty to qualify as a REIT,
the Board of Directors has included in Realty's Articles of Incorporation a
provision limiting the transfer of shares of Realty's stock (the "Ownership
Limitation Provision").

The Ownership Limitation Provision provides that, subject to certain limited
exceptions specified in the Articles of Incorporation, no shareholder may own,
or be deemed to own by virtue of the attribution provisions of the Code, more
than 9.8% (in value or in number of shares, whichever is more restrictive) of
the outstanding capital stock (the "Ownership Limitation") of Realty and no
transfers are permitted that would result in the capital stock of Realty being
beneficially owned (within the meaning of the applicable provisions of the
Code) by fewer than 100 persons. If shares of stock in excess of the Ownership
Limitation are issued or transferred to any person, or if a transfer or
proposed transfer causes or would cause Realty to be beneficially owned by
fewer than 100 persons, such issuance or transfer shall be null and void and
the intended transferee will acquire no rights to the stock proposed to be
issued or transferred.

The attribution provisions of the Code are complex and may cause shares of
Common Stock owned directly or constructively by a group of related individuals
or entities to be constructively owned by one individual or entity. As a
result, the acquisition of less than 9.8% of the outstanding shares of Common
Stock (or the acquisition of an interest in an entity which owns shares of
Common Stock) by an individual or entity could cause that individual or entity
(or another individual or entity) to constructively own in excess of 9.8% of
the outstanding shares of Common Stock, and thereby subject these shares of
Common Stock to the Ownership Limitation.

The Board of Directors may, but in no event is required to, waive the
Ownership Limitation if evidence satisfactory to the Board of Directors is
presented that such ownership will not jeopardize Realty's status as a REIT. As
a condition of such waiver, the Board of Directors may, but is not required to,
require a ruling from the Internal Revenue Service on an opinion of counsel
satisfactory to it and an undertaking from the applicant with respect to
preserving the REIT status of Realty. The Board of Directors may revoke any
waiver of the Ownership Limitation at any time.

The Ownership Limitation Provision will not be automatically removed even if
the REIT provisions of the Code are changed so as to no longer contain any
ownership concentration limitation or if the ownership concentration limitation
is increased. Any change in the Ownership Limitation would require an amendment
to the Articles of Incorporation. Amendments to the Articles of Incorporation
require the affirmative vote of holders owning a majority of the outstanding
the Common Stock. In addition to preserving Realty's status as a REIT, the
Ownership Limitation may have the effect of precluding an acquisition of
control of Realty without the approval of the Board of Directors. All
certificates representing shares of the Common Stock will bear a legend
referring to the restrictions described above.

Any person who acquires, attempts to acquire or intends to acquire ownership
of shares of any class of stock of Realty in violation of the ownership
restrictions set forth in the Articles of Incorporation is required to
immediately give written notice to Realty of such event. Each shareholder shall
upon demand be required to disclose to Realty in writing such information as
Realty may request in order to determine the effect, if any, on Realty's status
as a REIT.

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<PAGE>

If the Board of Directors or its designee should at any time determine in
good faith that a transfer or other event has taken place in violation of the
Ownership Limitation of the Articles of Incorporation or that a person intends
to acquire, has attempted to acquire or may acquire the ownership of any shares
of the corporation in violation of such limitations, the Board of Directors or
its designee may take such action as it deems necessary or advisable to refuse
to give effect to or to prevent such transfer or other event, including
refusing to give effect to such transfer or other event on the stock record
books of Realty or instituting any appropriate proceedings to enjoin such
transfer or other event.

Each person who is an owner of outstanding shares of capital stock of Realty
shall, upon demand by Realty, disclose to Realty in writing such information
with respect to its ownership of capital stock as the Board of Directors of
Realty, or its designee, in its discretion deems necessary or appropriate to
ensure Realty's compliance with the REIT provisions of the Code. Whenever the
Board of Directors deems it reasonably necessary to protect the tax status of
Realty as a REIT, the Board of Directors may require a statement or affidavit
from each shareholder or proposed transferee of shares of capital stock setting
forth the number of shares of capital stock already owned by such person and
any related, associated or affiliated person specified by the Board of
Directors. If, in the opinion of the Board of Directors, any proposed transfer
may jeopardize the qualification of Realty as a REIT, the Board of Directors
shall have the right to refuse to permit such transfer.

Any transfer of shares that would prevent Realty from continuing to qualify
as a REIT under the Code will be void and of no force and effect to the fullest
extent permitted under applicable law and the intended transferee of such
shares will be deemed never to have had an interest in such shares. If, in the
opinion of the Board of Directors, (i) a transfer of shares would result in any
shareholder, or group of shareholders acting together, owning in excess of the
Ownership Limitation or (ii) a proposed transfer of shares may jeopardize the
qualification of Realty as a REIT under the Code, the Board of Directors may,
in its sole discretion, refuse to allow the shares to be transferred to the
proposed transferee. In addition, Realty or its designees may, in the
discretion of the Board of Directors, purchase any stock held of record by any
shareholder in excess of the Ownership Limitation, for a price equal to the
lesser of (i) the closing price of such excess stock on the date of notice of
redemption, (ii) the closing price of such excess stock on the date of
purchase, (iii) the maximum price allowed under the applicable provisions of
Minnesota law, or (iv) the price paid by the shareholder in the transaction
which gave rise to such excess stock (or if the shareholder did not give value
in such transaction, the closing price of such stock on the date of such
transaction).

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is Norwest Bank
Minnesota, N.A.

CERTAIN PROVISIONS OF MINNESOTA LAW AND REALTY'S ARTICLES OF INCORPORATION AND
BYLAWS

The following paragraphs describe certain provisions of Minnesota law and
Realty's Articles of Incorporation and Bylaws. The summary does not purport to
be complete and is subject to and qualified in its entirety by reference to
Realty's Articles of Incorporation and Bylaws, copies of which are exhibits to
the Registration Statement of which this Prospectus is a part, and to Minnesota
law.

Certain provisions of Realty's Articles of Incorporation and Bylaws described
in this section could make more difficult the acquisition of Realty by means of
a tender offer, a proxy contest or otherwise. These provisions are expected to
discourage certain types of coercive takeover practice and inadequate takeover
bids and to encourage persons seeking to acquire control of Realty to negotiate
first with the Board of Directors. Realty believes that the benefits of these
provisions outweigh the potential disadvantage of discouraging such proposals
because, among other things, negotiation of such proposals might result in an
improvement of their terms. See also "Description of Capital Stock--
Restrictions on Transfer."

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<PAGE>

STAGGERED BOARD OF DIRECTORS

Realty's Articles of Incorporation provide that the Board of Directors will
be divided into three classes of directors, each class constituting
approximately one third of the total number of directors and serving staggered
three-year terms. The classification of directors will have the effect of
making it more difficult for shareholders to change the composition of the
Board of Directors. Realty believes, however, that the longer time required to
elect a majority of a classified Board of Directors will help to ensure
continuity and stability of Realty's management and policies.

The classification provisions could also have the effect of discouraging a
third party from accumulating large blocks of Realty's stock or attempting to
obtain control of Realty, even though such an attempt might be beneficial to
Realty and its shareholders. Accordingly, shareholders could be deprived of
certain opportunities to sell their shares of Common Stock at a higher market
price than might otherwise be the case.

NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES

The number of directors on Realty's initial Board will consist of six
persons, subject to increase or decrease by the affirmative vote of a majority
of the members of the Board of Directors or the shareholders. The shareholders
shall be entitled to vote on the election or removal of directors, with each
share entitled to one vote. Any vacancies on the Board will be filled by the
affirmative vote of a majority of the remaining directors. Accordingly, the
Board of Directors could temporarily prevent any shareholder from enlarging the
Board of Directors and filling the new directorships with such shareholder's
own nominees. Any director so elected shall hold office until his or her
successor is elected by the shareholders.

A director may be removed with or without cause by the vote of a majority of
the shareholders. The term "cause" is not defined in Realty's Articles of
Incorporation.

PREFERRED STOCK

Realty's Articles of Incorporation authorize the Board of Directors to issue
up to 10 million shares of preferred stock and to establish the preferences and
rights of any shares issued. See "Description of Capital Stock--Preferred
Stock." Although Realty has no current intention to issue shares of preferred
stock in the foreseeable future, the issuance of preferred stock could have the
effect of delaying or preventing a change in control of Realty even if a change
in control were in the shareholder's interest. No shares of preferred stock
will be issued or outstanding as of the close of the Offering.

LIMITATION OF LIABILITY

The Articles of Incorporation provide that to the maximum extent permitted by
Minnesota law, as in effect from time to time, no director or officer of Realty
shall be liable to Realty or its shareholders for monetary damages.

INDEMNIFICATION

Under Realty's Bylaws, Realty is required to indemnify its officers and
directors for such expenses and liabilities, in such manner, under such
circumstances, and to such extent, as required or permitted by Minnesota law.

Under Minnesota law, a corporation shall, unless prohibited or limited by its
articles of incorporation or bylaws, indemnify its current and former officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, penalties, fines and amounts paid in settlement and which were
incurred in

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connection with actions, suits or proceedings in which such persons are parties
by reason of the fact that they are or were an officer, director, employee or
agent of the corporation, if they: (i) have not been indemnified by another
organization; (ii) acted in good faith; (iii) received no improper personal
benefit; (iv) in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and (v) reasonably believed that the conduct
was in the best interests of the corporation. Minnesota corporate law also
provides that a corporation may purchase and maintain insurance on behalf of
its officers, directors, employees and agents against any liability which may
be asserted against, or incurred by, such persons in their capacities as
officers, directors, employees and agents of the corporation, whether or not
the corporation would have been required to indemnify the person against the
liability under the provisions of such section.

Any indemnification by Realty pursuant to the provisions of the Articles of
Incorporation described above shall be paid out of the assets of Realty and
shall not be recoverable from the shareholders. To the extent that the
foregoing indemnification provisions purport to include indemnification for
liabilities arising under the Securities Act of 1933, as amended, in the
opinion of the Commission such indemnification is contrary to public policy
and, therefore, unenforceable.

Realty will seek to obtain insurance on behalf of its directors and executive
officers against liabilities which may be asserted against or incurred by these
persons in their capacities as directors and executive officers of Realty. The
scope of the coverage of this insurance, if any, has yet to be determined.

AMENDMENT

The Articles of Incorporation may be amended by the affirmative vote of the
holders of a majority of the outstanding shares of the Common Stock, with the
shareholders voting as a class with one vote per share. Subject to certain
limitations, Realty's Bylaws may be amended by the Board of Directors or by
vote of the holders of a majority of the outstanding shares of the Common
Stock.

MINNESOTA ANTI-TAKEOVER STATUTES

Realty will be governed by the provisions of Sections 302A.671 and 302A.673
of the MBCA. Section 302A.671 of the MBCA provides that the shares of a
corporation acquired in a "control share acquisition" have no voting rights
unless they are approved in a prescribed manner. A "control share acquisition"
is generally defined as an acquisition of beneficial ownership of voting stock
of the corporation that would, when added to all other shares beneficially
owned by the acquiring person, entitle the acquiring person to have voting
power of 20.0% or more in the election of directors. Section 302A.673 of the
MBCA prohibits a publicly-held Minnesota corporation from engaging in a
"business combination" with an "interested shareholder" for a period of four
years after the date of the transaction in which the person became an
interested shareholder, unless the business combination is approved in a
prescribed manner. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
shareholder. Subject to certain exceptions, an "interested shareholder" is a
person who, together with affiliates, beneficially owns, or within four years
did own, 10.0% or more of the corporation's outstanding voting stock.

In the event of certain tender offers for stock of Realty, Section 302A.675
of the MBCA precludes the tender offeror from acquiring additional shares of
stock (including acquisitions pursuant to mergers, consolidations or statutory
share exchanges) within two years following the completion of such offer unless
the selling shareholders are given the opportunity to sell the shares on terms
that are substantially equivalent to those contained in the earlier tender
offer. This section does not apply if a committee of the board of directors
consisting of disinterested directors (excluding present and former officers of
the corporation) approves the subsequent acquisition before shares are acquired
pursuant to the earlier tender offer.

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FEDERAL INCOME TAX CONSIDERATIONS

The following is a summary of material federal income tax considerations
regarding the Spin Off and Realty's election to be taxed as a REIT. Dorsey &
Whitney P.L.L.P., which has acted as counsel to Realty, has reviewed this
summary and is of the opinion that, insofar as the summary constitutes
statements of law or legal conclusions as to the likely outcome of material
issues under the federal income tax laws, it provides an accurate summary of
such law or conclusions. The summary does not purport to deal with all aspects
of taxation that may be relevant to particular shareholders in light of their
personal investment or tax circumstances, or to certain types of shareholders
(including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations, and persons who are not
citizens or residents of the United States) subject to special treatment under
the federal income tax laws.

EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF THE
COMMON STOCK.

TAX CONSEQUENCES OF THE SPIN OFF TO REALTY

For federal income tax purposes, the Asset Transfers will generally be non-
taxable to Realty to the extent that Realty receives only stock of KMC in
exchange for the assets that it transfers to KMC. Realty may, however,
recognize taxable gain to the extent that it receives property other than KMC
stock ("boot") as part of the Asset Transfers. In connection with the Asset
Transfers, Realty will be entering into certain contractual arrangements with
KMC and acquiring certain rights with respect to certain properties of KMC.
Management of Realty believes that the rights it will acquire under these
contractual arrangements do not have a significant value. Management of Realty
therefore does not believe that Realty will receive any taxable boot in
connection with the Asset Transfers.

For federal income tax purposes, the Spin Off dividend will result in the
recognition of gain by Realty equal to the excess (if any) of the fair market
value of the KMC Common Stock distributed in the Spin Off over the adjusted tax
basis of such stock. Management of Realty believes that the fair market value
of the KMC Common Stock to be distributed will not exceed its adjusted tax
basis, and expects that the trading price of the KMC Common Stock after the
date of the distribution of the KMC Common Stock will support this conclusion.
If, however, the fair market value of the KMC Common Stock exceeded its
adjusted stock basis, Realty would recognize gain and incur tax liability as a
result of the Spin Off.

TAXATION OF REALTY

Realty plans to make an election to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
1996. Realty believes that, commencing with such taxable year, it will be
organized and will operate in such a manner as to qualify for taxation as a
REIT under the Code, and Realty intends to continue to operate in such a
manner, but no assurance can be given that Realty will operate in a manner so
as to qualify or remain qualified as a REIT.

The sections of the Code relating to qualification and operation as a REIT
are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. The discussion is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder ("Treasury Regulations"), and administrative and judicial
interpretations thereof, all of which are subject to change prospectively or
retrospectively. Dorsey & Whitney P.L.L.P. has acted as counsel to Realty in
connection with the Spin Off, the Offering and Realty's election to be taxed as
a REIT.

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In the opinion of Dorsey & Whitney P.L.L.P., commencing with Realty's taxable
year ending December 31, 1996, and assuming that the elections and other
procedural steps described in this discussion of "Federal Income Tax
Considerations" are completed by Realty in a timely fashion, Realty will be
organized in conformity with the requirements for qualification as a REIT, and
its proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. Shareholders should be
aware, however, that opinions of counsel are not binding upon the Service or
any court. It must be emphasized that Dorsey & Whitney P.L.L.P.'s opinion is
based on various assumptions and is conditioned upon certain representations
made by Realty as to factual matters, including representations regarding the
nature of Realty's properties and the future conduct of its business. In
particular, Dorsey & Whitney P.L.L.P.'s opinion is based on representations
made by Realty to the effect that the Percentage Leases will be on commercially
reasonable terms and that any other transactions entered into between Realty
and KMC will be consistent with the results that would have been realized if
unrelated parties had engaged in comparable transactions and will be on
commercially reasonable terms. Certain factual assumptions and representations
are described below in this discussion of "Federal Income Tax Considerations"
and are set out in the federal income tax opinion of Dorsey & Whitney P.L.L.P.
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Moreover, qualification and taxation as a REIT depends
upon Realty's ability to meet on a continuing basis, through actual annual
operating results, distribution levels and stock ownership, the various
qualification tests imposed under the Code discussed below. Accordingly, no
assurance can be given that the actual results of Realty's operation for any
particular taxable year will satisfy such requirements. For a discussion of the
tax consequences of failure to qualify as a REIT, see "--Failure to Qualify."

If Realty qualifies for taxation as a REIT, it generally will not be subject
to federal corporate income taxes on its net income that is distributed
currently to the shareholders. However, Realty will be subject to federal
income tax in the following circumstances. First, Realty will be taxed at
regular corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, Realty
may be subject to the "alternative minimum tax" on its items of tax preference.
Third, if Realty has (i) net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if Realty has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property (other than
foreclosure property) held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100.0% tax. Fifth, if
Realty should fail to satisfy the 75.0% gross income test or the 95.0% gross
income test (as discussed below), and has nonetheless maintained its
qualification as a REIT because it has met certain other requirements, it will
be subject to a 100.0% tax on the net income attributable to the greater of the
amount by which Realty fails the 75.0% or 95.0% gross income test. Sixth, if
Realty should fail to distribute during each calendar year at least the sum of
(i) 85.0% of its REIT ordinary income for such year, (ii) 95.0% of its REIT
capital gain net income for such year, and (iii) any undistributed taxable
income from prior periods, Realty would be subject to a 4.0% excise tax on the
excess of such required distribution over the amounts actually distributed.
(For this purpose, any retained income or net capital gain on which the
corporate income tax has been imposed will be deemed distributed.) Seventh,
with respect to any asset that Realty held immediately before the first day of
the first taxable year during which its REIT election is in effect, if Realty
recognizes gain on the disposition of such an asset during the ten year period
beginning on the first day of the first taxable year during which Realty REIT
election is in effect, then (pursuant to an election Realty intends to make for
federal tax purposes) to the extent of such asset's "built-in gain" (i.e., the
excess of the fair market value of such asset on the first day of Realty's
first year as a qualified REIT over the adjusted basis in such asset at such
time), such gain will be subject to tax at the highest regular corporate rate
applicable (as provided in Treasury Regulations that have not yet been
promulgated). With respect to the tax on net built-in gain, Realty has no
present intention to dispose of any of the Hotels during the ten year period
beginning with its election to be taxed as a REIT. The risk of a substantial
amount of corporate-level tax on the net built-in gain attributable to a Hotel
if disposed of during the ten year period might inhibit Realty's ability to
sell a Hotel even though market conditions or the Hotel's performance might
otherwise indicate that its sale would be in the best economic interests of
Realty.

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REQUIREMENTS FOR QUALIFICATION

The Code defines a REIT as a corporation, trust or association: (i) that is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) that would be taxable as a domestic corporation, but
for Sections 856 through 860 of the Code; (iv) that is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi) not
more than 50% in value of the outstanding stock of which is owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of each taxable year (the "5/50 Rule");
(vii) that makes an election to be a REIT (or has made such election for a
previous taxable year that is still in effect) and satisfies all relevant
filing and other administrative requirements established by the Service that
must be met in order to elect and to maintain REIT status; (viii) that uses a
calendar year for federal income tax purposes and complies with the
recordkeeping requirements of the Code and Treasury Regulations promulgated
thereunder; and (ix) that meets certain other tests, described below, regarding
the nature of its income and assets. Furthermore, to be taxed as a REIT, a
corporation such as Realty must, as of the close of each taxable year, have no
earnings and profits accumulated in any year when it did not have in place a
valid election to be taxed as a REIT. The Code provides that conditions (i) to
(iv), inclusive, must be met during the entire taxable year and that condition
(v) must be met during at least 335 days of a taxable year of 12 months, or
during a proportionate part of a taxable year of less than 12 months.
Conditions (v) and (vi) will not apply until after the first taxable year for
which Realty makes an election to be taxed as a REIT. Realty has issued Common
Stock in sufficient proportions to allow it to satisfy requirements (v) and
(vi). In addition, Realty has provided for restrictions regarding transfer of
Common Stock that are intended to assist Realty in continuing to satisfy the
share ownership requirements described in (v) and (vi) above. Such transfer
restrictions are described in "Description of Capital Stock--Restrictions on
Transfer."

For purposes of determining stock ownership under the 5/50 Rule, a pension
trust generally is considered an individual. However, for taxable years
beginning on or after January 1, 1994, beneficiaries of certain pension trusts
are treated as holding shares of a REIT in proportion to their actuarial
interests in the pension trust for purposes of the 5/50 Rule.

Realty currently holds certain of its hotel properties through first- or
second-tier wholly owned subsidiaries. Code Section 856(i) provides that a
corporation that is a "qualified REIT subsidiary" shall not be treated as a
separate corporation, and all assets, liabilities and items of income,
deduction and credit of a "qualified REIT subsidiary" shall be treated as
assets, liabilities and items of income, deduction and credit of the REIT. A
"qualified REIT subsidiary" is a subsidiary 100.0% of whose stock has at all
times been held by the REIT. The stock of all of Realty's subsidiaries has at
all times been held by Historical Kahler or Realty. The Service has privately
ruled that, in the case where a corporation has acquired wholly owned
subsidiaries in a tax-free reorganization, those subsidiaries will be treated
as "qualified REIT subsidiaries." The Service has also privately ruled that
subsidiaries all of whose stock has been held at all times by a corporation
that subsequently elects to be taxed as a REIT will be treated as "qualified
REIT subsidiaries." In so ruling, the Service has relied on the legislative
history to the Tax Reform Act of 1986, which indicates that Congress recognized
that, for purposes of limiting liability, real estate properties are often held
in separate corporations. Congress recognized that REITs would be effectively
prevented from achieving this goal unless the separate existence of their
wholly owned subsidiaries was ignored. Based on this legislative intent, the
Service has further recognized that, if pre-existing subsidiaries could not be
treated as "qualified REIT subsidiaries," a corporation seeking to qualify as a
REIT would have to liquidate its subsidiaries before electing REIT status. The
Service believed that such a requirement would be contrary to the legislative
purpose underlying the "qualified REIT subsidiaries" provisions. Similarly,
NAREIT has recently proposed legislation that would treat any wholly owned
subsidiary of a REIT as a "qualified REIT subsidiary," regardless of how the
REIT acquired the stock of the subsidiary.

Realty does not intend to seek a ruling from the Service concerning this
matter. The private rulings issued to other taxpayers may not be relied upon or
cited as precedent, and there is no published authority

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that addresses Realty's specific situation. Nevertheless, based upon its
interpretation of existing law, including the legislative history and the
private rulings discussed above, it is the opinion of Dorsey & Whitney P.L.L.P.
that all of the subsidiaries 100.0% of whose stock is held (directly or
indirectly) by Realty will be "qualified REIT subsidiaries." Thus, in applying
the requirements described herein, Realty's "qualified REIT subsidiaries" will
be ignored, and all assets, liabilities and items of income, deduction and
credit of such subsidiaries will be treated as assets, liabilities and items of
income, deduction and credit of Realty.

Realty also holds certain of its hotels through partnerships in which it (or
a wholly owned subsidiary) has a partnership interest. In the case of a REIT
that is a partner in a partnership, Treasury Regulations provide that the REIT
will be deemed to own its proportionate share of the assets of the partnership
and will be deemed to be entitled to the gross income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership will retain the same character in the hands of the
REIT for purposes of Section 856 of the Code, including satisfying the gross
income and asset tests, described below. Thus, Realty's proportionate share of
the assets, liabilities and items of income of the partnership in which it
holds partnership interests will be treated as assets and gross income of
Realty for purposes of applying the requirements described herein. If the
Service successfully challenged the tax status of any partnership in which
Realty holds an interest, the affected partnership might be taxable as a
corporation. In that event, the character of the income Realty receives through
the partnership and the character of the asset consisting of Realty's ownership
of its partnership interest would change for purposes of the REIT income and
assets tests. Such a change might cause Realty to fail to qualify as a REIT.
Also, the imposition of a corporate tax on such a partnership would reduce the
funds available to Realty.

Income Tests

In order to maintain its qualification as a REIT, Realty must satisfy
annually three requirements relating to its gross income. First, at least 75.0%
of Realty's gross income (excluding gross income from prohibited transactions)
for each taxable year must consist of defined types of income derived directly
or indirectly from investments relating to real property or mortgages on real
property (including "rents from real property" and, in certain circumstances,
interest) or temporary investment income. Second, at least 95.0% of Realty's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property or mortgages, and from
dividends, other types of interest and gain from the sale or disposition of
stock or securities, or from any combination of the foregoing. Third, not more
than 30% of Realty's gross income (including gross income from prohibited
transactions) for each taxable year may be gain from the sale or other
disposition of (i) stock or securities held for less than one year, (ii) dealer
property that is not foreclosure property and (iii) certain real property held
for fewer than four years (apart from involuntary conversions and sales of
foreclosure property). The specific application of these tests to Realty is
discussed below.

Rents received by Realty will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if Realty, or an owner of 10.0% or more of Realty, directly
or constructively owns 10.0% or more of such tenant (a "Related Party Tenant").
Third, if rent attributable to personal property, leased in connection with a
lease of real property, is greater than 15.0% of the total rent received under
the lease, then the portion of rent attributable to such personal property will
not qualify as "rents from real property." Finally, for rents received to
qualify as "rents from real property," Realty generally must not operate or
manage the property or furnish or render services to the tenants of such
property, other than through an "independent contractor" from whom Realty
derives no revenue. The "independent contractor" requirement, however, does not
apply to the extent the services provided by Realty are "usually or customarily
rendered" in connection with the rental of space for occupancy only and are not
otherwise considered "rendered to the occupant."

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Pursuant to the Percentage Leases, KMC will lease from Realty the land,
buildings, improvements, furnishings and equipment comprising the Hotels for a
three-year period, except that, in the case of The Kahler Hotel, the Holiday
Inn Downtown, the Olympia Park Hotel, the Boise Park Suites Hotel, the
Pocatello Park Quality Inn and the Green Oaks Inn and Conference Center, Realty
is transferring the personal property associated with the hotels to KMC as part
of the Asset Transfers, and consequently this personal property will not be
leased under the Percentage Leases. See "Certain Agreements--The Percentage
Leases." The Percentage Leases provide that KMC will be obligated to pay to
Realty (i) the greater of a fixed rent (the "Base Rent") or a percentage rent
(the "Percentage Rent") (collectively, the "Rents") and (ii) certain other
amounts, including interest accrued on any late payments or charges (the
"Additional Charges"). The Percentage Rent is calculated by multiplying fixed
percentages by the gross room revenues and gross food and beverage revenues for
each of the Hotels in excess of certain levels. The Base Rent accrues and is
required to be paid monthly. Although Percentage Rent is due quarterly KMC will
not be in default for non-payment of Percentage Rent due in any calendar year
if KMC pays, within 90 days of the end of the calendar year, the excess of
Percentage Rent due and unpaid over the Base Rent with respect to such year.

In order for the Base Rent, the Percentage Rent, and the Additional Charges
to constitute "rents from real property," the Percentage Leases must be
respected as true leases for federal income tax purposes and not treated as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the Percentage Leases are true leases depends on an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following: (i) the intent of the parties; (ii) the form of the agreement; (iii)
the degree of control over the property that is retained by the property owner
(e.g., whether the lessee has substantial control over the operation of the
property or whether the lessee was required simply to use its best efforts to
perform its obligations under the agreement); and (iv) the extent to which the
property owner retains the risk of loss with respect to the property (e.g.,
whether the lessee bears the risk of increases in operating expenses or the
risk of damage to the property).

In addition, Code Section 7701(e) provides that a contract that purports to
be a service contract (or a partnership agreement) is treated instead as a
lease of property if the contract is properly treated as such, taking into
account all relevant factors, including whether or not: (i) the service
recipient is in physical possession of the property; (ii) the service recipient
controls the property; (iii) the service recipient has a significant economic
or possessory interest in the property (e.g., the property's use is likely to
be dedicated to the service recipient for a substantial portion of the useful
life of the property, the recipient shares the risk that the property will
decline in value, the recipient shares in any appreciation in the value of the
property, the recipient shares in savings in the property's operating costs, or
the recipient bears the risk of damage to or loss of the property); (iv) the
service provider does not bear any risk of substantially diminished receipts or
substantially increased expenditures if there is nonperformance under the
contract; (v) the service provider does not use the property concurrently to
provide significant services to entities unrelated to the service recipient;
and (vi) the total contract price does not substantially exceed the rental
value of the property for the contract period. Since the determination whether
a service contract should be treated as a lease is inherently factual, the
presence or absence of any single factor may not be dispositive in every case.

Dorsey & Whitney P.L.L.P. is of the opinion that the Percentage Leases will
be treated as true leases for federal income tax purposes. Such opinion is
based, in part, on the following facts and representations: (i) Realty and KMC
intend for their relationship to be that of a lessor and lessee and such
relationship will be documented by lease agreements; (ii) KMC will have the
right to exclusive possession and use and quiet enjoyment of the Hotels during
the term of the Percentage Leases; (iii) KMC will bear the cost of, and be
responsible for, day-to-day maintenance and repair of the Hotels, other than
the cost of maintaining underground utilities and structural elements, and will
dictate how the Hotels are operated, maintained and improved; (iv) KMC will
bear all of the costs and expenses of operating the Hotels (including the cost
of any inventory used in their operation) during the term of the Percentage
Leases (other than real and personal property taxes, and the cost of
replacement or refurbishment of furniture, fixtures and equipment, to the

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extent such costs do not exceed the allowance for such costs provided by Realty
under each Percentage Lease); (v) KMC will benefit from any savings in the
costs of operating the Hotels during the term of the Percentage Leases; (vi)
KMC will indemnify Realty against all liabilities imposed on Realty during the
term of the Percentage Leases by reason of (A) injury to persons or damage to
property occurring at the Hotels or (B) KMC's use, management, maintenance or
repair of the Hotels; (vii) KMC is obligated to pay substantial fixed rent for
the period of use of the Hotels; and (viii) KMC stands to generate substantial
profits or incur substantial losses depending on how successfully it operates
the Hotels.

Shareholders should be aware that there are no controlling Treasury
Regulations, published rulings, or judicial decisions involving leases with
terms substantially the same as the Percentage Leases that discuss whether such
leases constitute true leases for federal income tax purposes. Therefore, the
opinion of Dorsey & Whitney P.L.L.P. with respect to the relationship between
Realty and KMC is based upon all of the facts and circumstances and upon
rulings and judicial decisions involving situations that are considered to be
analogous. Opinions of counsel are not binding upon the Service or any court,
and there can be no complete assurance that the Service will not assert
successfully a contrary position. If the Percentage Leases were recharacterized
as service contracts or partnership agreements, rather than true leases, part
or all of the payments that Realty receives from KMC might not be considered
rent or might not otherwise satisfy the various requirements for qualification
as "rents from real property." In that case, Realty likely would not be able to
satisfy either the 75.0% or 95.0% gross income tests and, as a result, would
lose its REIT status.

In order for the Rents to constitute "rents from real property," several
other requirements also must be satisfied. One requirement is that the Rents
attributable to personal property leased in connection with the lease of the
real property comprising an Hotel must not be greater than 15.0% of the Rents
received under the Percentage Lease. The Rents attributable to the personal
property in an Hotel is the amount that bears the same ratio to total rent for
the taxable year as the average of the adjusted bases of the personal property
in the Hotel at the beginning and at the end of the taxable year bears to the
average of the aggregate adjusted bases of both the real and personal property
comprising the Hotel at the beginning and at the end of such taxable year (the
"Adjusted Basis Ratio"). With respect to each Hotel except for The Kahler
Hotel, the Holiday Inn Downtown, the Olympia Park Hotel, the Boise Park Suites
Hotel, the Pocatello Park Quality Inn and the Green Oaks Inn and Conference
Center, it is expected that the initial adjusted basis of the personal property
in such hotel will be less than 15.0% of the initial adjusted basis of both the
real and the personal property comprising such hotel. In the case of The Kahler
Hotel, the Holiday Inn Downtown, the Olympia Park Hotel, the Boise Park Suites
Hotel, the Pocatello Park Quality Inn and the Green Oaks Inn and Conference
Center, all of the personal property at such hotels will be owned by KMC. See
"Certain Agreements--The Percentage Leases." Further, in no event will Realty
acquire additional personal property for a Hotel to the extent that such
acquisition would cause the Adjusted Basis Ratio for that hotel to exceed
15.0%. There can be no assurance, however, that the Service would not assert
that the personal property acquired by Realty had a value in excess of the
appraised value, or that a court would not uphold such assertion. If such a
challenge were successfully asserted, Realty could fail the 15.0% Adjusted
Basis Ratio as to one or more of the Percentage Leases, which in turn
potentially could cause it to fail to satisfy the 75.0% or 95.0% gross income
test and thus lose its REIT status.

A second requirement for qualification of the Rents as "rents from real
property" is that the Percentage Rent must not be based in whole or in part on
the income or profits of any person. The Percentage Rent, however, will qualify
as "rents from real property" if it is based on percentages of receipts or
sales and the percentages (i) are fixed at the time the Percentage Leases are
entered into, (ii) are not renegotiated during the term of the Percentage
Leases, or as the Percentage Leases may be extended, in a manner that has the
effect of basing Percentage Rent on income or profits, and (iii) conform with
normal business practice. More generally, the Percentage Rent will not qualify
as "rents from real property" if, considering the Percentage Leases and all the
surrounding circumstances, the arrangement does not conform with normal
business practice but is in reality used as a means of basing the Percentage
Rent on income or profits. Since the Percentage Rent is based on fixed
percentages of the gross revenues from the Hotels that are established in

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the Percentage Leases, and Realty has represented that the percentages (i) will
not be renegotiated during the term of the Percentage Leases, or as the
Percentage Leases may be extended, in a manner that has the effect of basing
the Percentage Rent on income or profits and (ii) conform with normal business
practice, the Percentage Rent should not be considered based in whole or in
part on the income or profits of any person. Furthermore, Realty has
represented that, with respect to other hotel properties that it acquires in
the future, it will not charge rent for any property that is based in whole or
in part on the income or profits of any person (except by reason of being based
on a fixed percentage of gross revenues, as described above).

A third requirement for qualification of the Rents as "rents from real
property" is that Realty must not own, directly or constructively, 10.0% or
more of KMC. The constructive ownership rules generally provide that, if 10.0%
or more in value of the stock of Realty is owned, directly or indirectly, by or
for any person, Realty is considered as owning the stock owned, directly or
indirectly, by or for such person. Realty initially will own 9.5% of the common
stock of KMC. Realty does not intend to increase its direct or constructive
ownership in KMC to 10.0% or more. Furthermore, Realty has represented that it
will enforce the Ownership Limitations contained in the Articles to prevent any
person from owning 10.0% or more of Realty. Realty has also represented that,
so long as Realty seeks to maintain its eligibility to be taxed as a REIT, with
respect to other hotel properties that Realty acquires in the future, it will
not rent any property to a Related Party Tenant.

A fourth requirement for qualification of the Rents as "rents from real
property" is that Realty cannot furnish or render non-customary services to the
tenants of the Hotels, or manage or operate the Hotels, other than through an
independent contractor from whom Realty itself does not derive or receive any
income. Provided that the Percentage Leases are respected as true leases,
Realty should satisfy this requirement because Realty is not performing any
services other than customary ones for KMC. Furthermore, Realty has represented
that, with respect to other hotel properties that it acquires in the future, it
will not perform noncustomary services with respect to the tenant of the
property. As described above, however, if the Percentage Leases were
recharacterized as service contracts or partnership agreements, the Rents
likely would be disqualified as "rents from real property" because Realty would
be considered to furnish or render services to the occupants of the Hotels and
to manage or operate the Hotels other than through an independent contractor
from whom Realty derives or receives no income.

If the Rents do not qualify as "rents from real property" because the rents
attributable to personal property exceed 15.0% of the total Rents for a taxable
year, the portion of the Rents that is attributable to personal property will
not be qualifying income for purposes of either the 75.0% or 95.0% gross income
tests. Thus, if the Rents attributable to personal property, plus any other
nonqualifying income, during a taxable year exceed 5.0% of Realty's gross
income during the year, Realty will lose its REIT status. If, however, the
Rents do not qualify as "rents from real property" because (i) the Percentage
Rent is considered based on income or profits of KMC, (ii) Realty owns,
directly or constructively, 10.0% or more of KMC, or (iii) Realty furnishes
noncustomary services to the tenants of the Hotels, or manages or operates the
Hotels, other than through a qualifying independent contractor, none of the
Rents would qualify as "rents from real property." In that case, Realty likely
would lose its REIT status because it would be unable to satisfy either the
75.0% or 95.0% gross income tests.

In addition to the Rents, KMC is required to pay to Realty the Additional
Charges. To the extent that the Additional Charges represent either (i)
reimbursements of amounts that KMC is obligated to pay to third parties or (ii)
penalties for nonpayment or late payment of such amounts, the Additional
Charges should qualify as "rents from real property." To the extent, however,
that the Additional Charges represent interest that is accrued on the late
payment of the Rents or the Additional Charges, the Additional Charges should
not qualify as "rents from real property," but instead should be treated as
interest that qualifies for the 95.0% gross income test.

Based on the foregoing, Dorsey & Whitney P.L.L.P. is of the opinion that the
Rents and the Additional Charges will qualify as "rents from real property" for
purposes of the 75.0% and 95.0% gross income tests,

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except to the extent that the Additional Charges represent interest that is
accrued on the late payment of the Rents or the Additional Charges (which will
be qualifying gross income for the 95.0% test but not the 75.0% test). As
described above, the opinion of Dorsey & Whitney P.L.L.P. is based upon an
analysis of all the facts and circumstances and upon rulings and judicial
decisions involving situations that are considered to be analogous, as well as
representations by Realty and assumptions that are described above and set out
in the federal income tax opinion of Dorsey & Whitney P.L.L.P., which is filed
as an exhibit to the Registration Statement of which this Prospectus is a part.
Opinions of counsel are not binding upon the Service or a court. Accordingly,
there can be no complete assurance that the Service will not successfully
assert a contrary position and, therefore, prevent Realty from qualifying as a
REIT.

In order for the interest Realty receives pursuant to the Mortgage Note with
respect to the University Park Hotel to be treated as "interest" for purposes
of the 95.0% gross income test and as "interest on obligations secured by real
property" for purposes of the 75.0% gross income test, the Mortgage Note must
be treated as debt for federal income tax purposes. In general, for federal
income tax purposes, the determination of whether an instrument such as the
Mortgage Note will be treated as debt for federal income tax purposes, or
instead will be treated as an equity interest, depends on all the facts and
circumstances in each case. In any such determination, several factors must be
considered, and debt characterization may be indicated by, among other things,
the intention of the parties to create a debt, the creation of a formal debt
instrument, the provision of a fixed maturity date, the safety of the principal
amount, the debt to equity ratio of the issuer, the nature of the assets
serving as security for the obligation and the extent of equity features.

The REIT provisions of the Code contain certain special rules regarding the
treatment of certain payments otherwise qualifying as interest. Generally,
under Code Section 856(f), for purposes of the 75.0% and 95.0% income tests,
"interest" does not include any amount the determination of which depends in
whole or in part on the income or profits of any person. An exception to this
rule provides, however, that an amount will not be excluded as "interest"
solely because it is based on a fixed percentage of receipts or sales. Another
special rule provides that, if a REIT has a "shared appreciation" interest in
property, that is, a right to receive a specified portion of the gain realized
on the sale or exchange of property that secures an obligation held by the
REIT, any income received pursuant to such a right, although it will not be
considered to be interest, will be treated as gain recognized on the sale of
the secured property, and therefore (assuming the secured property constitutes
real property) will be qualifying income for both the 75.0% and 95.0% tests.

With respect to the Mortgage Note, the issuer and Realty have evidenced their
intention to create a debt, and the note is in form a debt instrument that
includes an unconditional promise to pay a sum certain, together with interest
on the unpaid balance thereof, by a fixed maturity date. In addition, the
interest rates payable with respect to the principal of the Mortgage Note
appears to be consistent with the characterization of such note as a debt
instrument.

In connection with the Mortgage Note, Historical Kahler acquired and holds an
option, exercisable after September 30, 1998, to convert its interest in the
note into a 60.0% equity interest in the limited partnership that owns the
Hotel. Realty is under no obligation to exercise the option, and does not
intend to do so unless such exercise is in the best interests of Realty at the
time of the exercise. Furthermore, the option (unless exercised earlier) lapses
upon repayment of the principal amount due under the note. The existence of
this option has caused Realty to be treated as holding an equity interest in
the partnership for financial accounting purposes. However, the federal tax
standard for determining whether the note constitutes debt or equity differs
from the financial accounting standard, and Realty has consistently treated the
note as debt for income tax purposes.

There are no regulations, published rulings or judicial decisions involving
the characterization for federal tax purposes of interests with exactly the
same terms as the Mortgage Note. While the issue is not free from doubt,
particularly in view of the equity features of the Mortgage Note as described
and the inherently factual nature of debt versus equity determinations, in the
opinion of Dorsey & Whitney P.L.L.P. the Mortgage Note

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will be respected as debt for federal tax purposes and amounts received by
Realty under the Mortgage Note will be qualifying income for purposes of both
the 75.0% and the 95.0% gross income tests.

With respect to the Ogden Park Hotel, Realty will hold a 63.8% general
partnership in Ogden Park Associates, a Utah limited partnership
("Associates"), the entity owning the hotel, and will also hold a $3.2 million
mortgage note issued by Associates and secured by the hotel. Pursuant to an
option agreement executed at the time the mortgage note was made, Realty,
through its wholly owned subsidiary, Ogden Park Hotel Corporation, Inc., has
the option to convert the mortgage note into a 60.0% equity interest in a new
joint venture to which Associates would transfer all of its interest in the
hotel in exchange for a partnership interest. The mortgage note with respect to
the Ogden Park Hotel contains both a "shared appreciation" provision on the
sale of the Hotel and a provision for a conversion of the fixed interest rate
on the note, at the option of the holder of the note, into an interest rate
based on the "cash flow" realized from the operation of the Hotel. With respect
to the "shared appreciation" provision of the note, under the special rule
described above, any gain realized by Realty pursuant to this provision will
constitute qualifying income for both of the REIT income tests. With respect to
the feature allowing conversion to a "cash flow" interest rate, management of
Realty has indicated that, so long as its REIT election remains in effect, it
will not exercise this conversion right.

Because Realty owns a majority interest in Associates, for financial
accounting purposes Associates will be treated as a consolidated entity, the
mortgage note will be ignored, and any income Realty receives from Associates
will be treated as attributable to its equity interest. For federal tax
purposes, however, and specifically for purposes of meeting the REIT
qualification income and asset tests, Dorsey & Whitney P.L.L.P. believes that
the mortgage note will be treated as evidencing debt between Realty and
Associates, and that Realty will be treated as receiving interest income to the
extent it receives payments with respect to the note and income with respect to
its partnership interest to the extent of its proportionate interest in the
gross income of the partnership. With respect to the interest income, such
income will qualify as interest income for purposes of the 95.0% income test
and as "interest on obligations secured by mortgages on real property" for
purposes of the 75.0% income test. With respect to income attributable to
Realty's partnership interest, such income will have the same character in the
hands of Realty as in the hands of the partnership owning the Hotel. Because
the gross income of the partnership derived from the Percentage Lease with
respect to the Hotel is expected to qualify as "rent from real property,"
Realty's proportionate share of this income will qualify as "rent from real
property" for purposes of both the 75.0% and 95.0% income tests.

It is possible nonetheless that certain features of the mortgage note that
Realty will hold with respect to the Ogden Park Hotel (including the option to
convert the note into an equity interest and the right to convert the interest
rate to a rate based on cash flow) might cause the payments that Realty
receives under the note to be recharacterized as payments attributable to
additional equity in the partnership that owns the Hotel, as "guaranteed
payments" under Code Section 707(c) to which Realty is entitled for Associate's
use of its capital, or as a combination of the two. In this event, the payments
Realty receives under the note would be treated either as part of its
distributive share as a partner or as interest income for the use of its
capital. Under either of these characterizations, the income received by Realty
would be qualifying income for purposes of both the 75.0% and 95.0% income
tests.

If Realty fails to satisfy one or both of the 75.0% or 95.0% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. Those relief
provisions will generally be available if (i) Realty's failure to meet such
tests is due to reasonable cause and not due to willful neglect, (ii) Realty
attaches a schedule of the sources of its income to its return and (iii) any
incorrect information on the schedule was not due to fraud with intent to evade
tax. It is not possible, however, to state whether in all circumstances Realty
would be entitled to the benefit of those relief provisions. As discussed above
in "--Taxation of Realty," even if those relief provisions apply, a tax would
be imposed with respect to the net income attributable to the excess of 75.0%
or 95.0% of Realty's gross income over its qualifying income in the relevant
category, whichever is greater. No such relief is available for violations of
the 30.0% income test.

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Asset Tests

Realty, at the close of each quarter of its taxable year, also must satisfy
two tests relating to the nature of its assets. First, at least 75.0% of the
value of Realty's total assets must be represented by cash or cash items
(including certain receivables), government securities, "real estate assets"
or, in cases where Realty raises new capital through stock or long term (at
least five year) debt offerings, temporary investments in stock or debt
instruments during the one year period following Realty's receipt of such
capital. The term "real estate assets" includes interests in real property,
interests in mortgages on real property to the extent the mortgage balance does
not exceed the value of the associated real property and shares of other REITs.
For purposes of the 75.0% asset requirement, the term "interest in real
property" includes an interest in land and improvements thereon, such as
buildings or other inherently permanent structures (including items that are
structural components of such buildings or structures), a leasehold in real
property, and an option to acquire real property (or a leasehold in real
property). Second, of the investments not included in the 75.0% asset class,
the value of any one issuer's securities owned by Realty may not exceed 5.0% of
the value of Realty's total assets and Realty may not own more than 10.0% of
any one issuer's outstanding voting securities (except for the stock of a
"qualified REIT subsidiary").

As described above, Realty will own 9.5% of KMC Common Stock. Stock of KMC
will not qualify as a real estate asset held by Realty and therefore will be
subject to the 5.0% and 10.0% tests described in the preceding paragraph.
Realty will not own more than 10.0% of the voting securities of KMC. In
addition, Realty and its senior management believe that the value of KMC stock
held by Realty will exceed, at the time of the Spin Off, 5.0% of the total
value of Realty's assets. There can be no assurance, however, that the Service
might not contend that the value of the securities of KMC held by Realty
exceeds the 5.0% value limitation. Dorsey & Whitney P.L.L.P., in rendering its
opinion as to the qualification of Realty as a REIT, is relying on the
conclusions of Realty and its senior management as to the value of the
securities of KMC.

The 5.0% requirement must also be met at the end of any quarter during which
Realty acquires securities or other property. Although Realty plans to take
steps to ensure that it satisfies the 5.0% value test for any quarter with
respect to which retesting is to occur, there can be no assurance that such
steps will always be successful or will not require a reduction in Realty's
ownership interest in KMC.

Realty has represented that, as of the last day of each quarter (i) at least
75.0% of the value of its total assets will be represented by real estate
assets, cash and cash items (including receivables) and government securities;
and (ii) it will not own any securities that do not satisfy the 75.0% asset
requirement (except for (a) the stock of subsidiaries with respect to which it
has held 100.0% of the stock at all times during the subsidiary's existence and
(b) the KMC Common Stock described above). In addition, Realty has represented
that it will not acquire or dispose of assets in the future in a way that would
cause it to violate either asset requirement. Based on the foregoing, Dorsey &
Whitney P.L.L.P. is of the opinion that Realty will satisfy both asset
requirements for REIT status.

If Realty should fail inadvertently to satisfy the asset requirements at the
end of a calendar quarter, such a failure would not cause it to lose its REIT
status if (i) it satisfied all of the asset tests at the close of the preceding
calendar quarter and (ii) the discrepancy between the value of Realty's assets
and the standards imposed by the asset requirements either did not exist
immediately after the acquisition of any particular asset or was not wholly or
partly caused by such an acquisition (i.e., the discrepancy arose from changes
in the market values of its assets). If the condition described in clause (ii)
of the preceding sentence were not satisfied, Realty still could avoid
disqualification by eliminating any discrepancy within 30 days after the close
of the calendar quarter in which it arose.

Special Distribution Requirement

Realty plans to elect to be taxed as a REIT by filing such an election with
its federal income tax return for its 1996 tax year. The Code provides that, in
the case of an entity such as Realty, which was not taxed as a REIT for all of
its taxable years beginning after February 28, 1986, the entity is eligible to
be taxed as a

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REIT for a tax year only if, as of the close of such year, it has distributed
all earnings and profits accumulated from any non-REIT year. Under the Code, in
order to distribute all earnings and profits accumulated as of the end of a
prior taxable year, it is necessary to distribute all earnings and profits
generated in the current taxable year. Thus Realty will be required to make
distributions prior to December 31, 1996, in an amount equal to its earnings
and profits accumulated as of December 31, 1996. Realty's planned distributions
include cash dividends and the distribution to shareholders of 90.5% of the
stock of KMC. See "Distributions." Although calculations of earnings and
profits are complex and divergences of opinion may exist with respect to the
amount of accumulated earnings and profits, Realty believes that its planned
distributions will be sufficient to meet the special distribution requirements
of the Code in a timely fashion.

Distribution Requirements

In order to qualify as a REIT, Realty is required to distribute dividends
(other than capital gain dividends) to its shareholders in an amount at least
equal to (i) the sum of (A) 95.0% of its "REIT taxable income" (computed
without regard to the dividends paid deduction and its net capital gain) and
(B) 95.0% of the net income (after tax), if any, from foreclosure property,
minus (ii) the sum of certain items of noncash income. Such distributions must
be paid in the taxable year to which they relate, or in January of the
following year, if the dividend was declared in October, November or December
of the taxable year to which the distribution relates, or in the following
taxable year if declared before Realty timely files its tax return for such
year and if paid on or before the first regular dividend payment after such
declaration. To the extent that Realty does not distribute all of its net
capital gain or distributes at least 95.0%, but less than 100.0%, of its "REIT
taxable income," as adjusted, it will be subject to tax on the undistributed
amounts at regular ordinary income and capital gains corporate tax rates.
Furthermore, if Realty should fail to distribute during each calendar year at
least the sum of (i) 85.0% of its REIT ordinary income for such year, (ii)
95.0% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, Realty would be subject to a
4.0% nondeductible excise tax on the excess of such required distribution over
the amounts actually distributed. (For this purpose, undistributed income on
which the corporate income tax has been imposed is considered to be
distributed.) Realty intends to make timely distributions sufficient to satisfy
all annual distribution requirements.

It is possible that, from time to time, Realty may experience timing
differences between (i) the actual receipt of income and actual payment of
deductible expenses and (ii) the inclusion of that income and deduction of such
expenses in arriving at its REIT taxable income. For example, under the
Percentage Leases, KMC may defer payment of the excess of the Percentage Rent
over the Base Rent for a period of up to 90 days after the end of the calendar
year in which such payment was due. In that case, Realty still would be
required to recognize as income the excess of the Percentage Rent over the Base
Rent in the calendar quarter to which it relates. Further, it is possible that,
from time to time, Realty may recognize a net capital gain attributable to the
sale of depreciated property that exceeds the cash it receives in connection
with that sale. Therefore, Realty may have less cash available for distribution
than is necessary to meet its annual 95.0% distribution requirement or to avoid
corporate income tax or the excise tax imposed on certain undistributed income.
In such a situation, Realty may find it necessary to arrange for short-term (or
possibly long-term) borrowings or to raise funds through the issuance of
additional shares of common or preferred stock.

Under certain circumstances, Realty may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to its
shareholders in a later year, which may be included in Realty's deduction for
dividends paid for the earlier year. Although Realty may be able to avoid being
taxed on amounts distributed as deficiency dividends, it will be required to
pay to the Service interest based upon the amount of any deduction taken for
deficiency dividends.

Pursuant to applicable Treasury Regulations, in order to be able to elect to
be taxed as a REIT, Realty must maintain certain records and request on an
annual basis certain information from its shareholders designed to disclose the
actual ownership of its outstanding stock. Realty intends to comply with such
requirements.

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FAILURE TO QUALIFY

If Realty fails to qualify for taxation as a REIT in any taxable year, and
the relief provisions do not apply, Realty will be subject to tax (including
any applicable alternative minimum tax) on its taxable income at regular
corporate rates. Distributions to the shareholders in any year in which Realty
fails to qualify will not be deductible by Realty nor will they be required to
be made. In such event, all distributions to shareholders will be taxable as
ordinary income to the extent of current and accumulated earnings and profits,
and, subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, Realty also will be disqualified from taxation
as a REIT for the four taxable years following the year during which Realty
ceased to qualify as a REIT. It is not possible to state whether in all
circumstances Realty would be entitled to such statutory relief.

TAXATION OF TAXABLE SHAREHOLDERS

As long as Realty qualifies as a REIT, distributions made to Realty's taxable
shareholders out of current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taken into account by such
shareholders as ordinary income and will not be eligible for the dividends
received deduction generally available to corporations. Distributions that are
designated as capital gain dividends will be taxed as long-term capital gains
(to the extent they do not exceed Realty's actual net capital gain for the
taxable year) without regard to the period for which the shareholder has held
his Common Stock. Distributions in excess of current and accumulated earnings
and profits will not be taxable to a shareholder to the extent that they do not
exceed the adjusted basis of the shareholders Common Stock, but will reduce the
adjusted basis of such stock. To the extent that distributions in excess of
current and accumulated earnings and profits exceed the adjusted basis of a
shareholders Common Stock, such distributions will be included in income as
long-term capital gain (or short-term capital gain if the Common Stock has been
held for one year or less), assuming the Common Stock is a capital asset in the
hands of the shareholder. In addition, any distribution declared by Realty in
October, November or December of any year and payable to a shareholder of
record on a specified date in any such month shall be treated as paid by Realty
and received by the shareholder on December 31 of such year, provided that the
distribution is actually paid by Realty during January of the following
calendar year. Realty will notify shareholders after the close of Realty's
taxable year as to the portions of the distributions attributable to that year
that constitute ordinary income, return of capital, and capital gain.

In general, any gain or loss realized upon a taxable disposition of the
Common Stock by a shareholder who is not a dealer in securities will be treated
as long-term capital gain or loss if the Common Stock has been held for more
than one year and otherwise as short-term capital gain or loss. However, any
loss upon a sale or exchange of Common Stock by a shareholder who has held such
stock for six months or less (after applying certain holding period rules),
will be treated as a long-term capital loss to the extent of distributions from
Realty required to be treated by such shareholder a long-term capital gain. All
or a portion of any loss realized upon a taxable disposition of the Common
Stock may be disallowed if other shares of the Common Stock are purchased
within 30 days or after the disposition.

INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING

Realty will report to its shareholders and the Service the amount of
distributions paid during each calendar year, and the amount of tax withheld,
if any. Under the backup withholding rules, a shareholder may be subject to
backup withholding at the rate of 31.0% with respect to distributions paid
unless such holder (i) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or (ii) provides a
taxpayer identification number, certifies that it is exempt from backup
withholding and otherwise complies with the applicable requirements of the
backup withholding rules. A shareholder who does not provide Realty with his
correct taxpayer identification number also may be subject to penalties imposed
by the Service. Any amount paid as backup withholding will be creditable
against the shareholder's

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income tax liability. In addition, Realty may be required to withhold a portion
of capital gain distributions to any shareholders who fail to certify their
nonforeign status to Realty.

TAXATION OF TAX-EXEMPT SHAREHOLDERS

Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts ("Exempt Organizations"), are
generally exempt from federal income taxation, but are subject to taxation on
their unrelated business taxable income ("UBTI"). While many investments in
real estate generate UBTI, the Service has publicly ruled that dividend
distributions by a REIT to an exempt employee pension trust do not constitute
UBTI, provided that the shares of the REIT are not otherwise used in an
unrelated trade or business of the exempt employee pension trust. Based on that
ruling and on the intention of Realty to invest its assets in a manner that
will avoid the recognition of UBTI by Realty, amounts distributed by Realty to
Exempt Organizations generally should not constitute UBTI. However, if an
Exempt Organization finances its acquisition of the Common Stock with debt, a
portion of its income from Realty will constitute UBTI pursuant to the "debt-
financed property" rules. Furthermore, social clubs, voluntary employee benefit
associations, supplemental unemployment benefit trusts and qualified group
legal services plans that are exempt from taxation under paragraphs (7), (9),
(17) and (20), respectively, of Code Section 501(c) are subject to different
UBTI rules, which generally will require them to characterize distributions
from Realty as UBTI. In addition, Congress recently enacted certain changes to
the Code that may cause a portion of the distributions by Realty to
shareholders that are tax-exempt pension trusts to be treated as UBTI under
certain circumstances.

OTHER TAX CONSEQUENCES

Realty and its shareholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of Realty and
its shareholders may not conform to the federal income tax consequences
discussed above. CONSEQUENTLY, PROSPECTIVE SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISORS REGARDING THE EFFECT OF STATE AND LOCAL TAX LAWS ON AN
INVESTMENT IN REALTY. Furthermore, the above discussion of the federal tax
consequences of an investment in Realty relate only to United States
shareholders. Special rules apply to foreign shareholders and such shareholders
are urged to consult their own tax advisor concerning the federal tax
consequences of that investment in Realty.

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<PAGE>

UNDERWRITING

Subject to the terms and conditions of an Underwriting Agreement, Realty will
agree to sell to each of the Underwriters named below (the "Underwriters"), for
whom Salomon Brothers Inc and Dillon, Read & Co. Inc. are acting as
representatives (the "Representatives"), and each such Underwriter will
severally agree to purchase from Realty, the respective number of shares of
Common Stock set forth opposite its name:

<TABLE>
<CAPTION>
UNDERWRITER SHARES
----------- -----------
<S> <C>
Salomon Brothers Inc..........................................
Dillon, Read & Co. Inc........................................
-----------
Total.....................................................
===========
</TABLE>

The Underwriters will be severally committed to take and pay for all of the
shares of Common Stock offered hereby, if any are taken. Realty has been
advised by the Representatives that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession of $ per share. The Underwriters may allow, and such
dealers may re-allow, a discount not in excess of $ per share to other
brokers and dealers. The initial public offering price, concession and discount
to dealers may be changed by the Underwriters after the shares of Common Stock
are released for sale to the public. The Representatives have informed Realty
that the Underwriters do not intend to confirm sales to any account over which
they exercise discretionary authority.

Realty will grant to the Underwriters an option, exercisable for 30 days from
the date of this Prospectus, to purchase up to 1,263,000 additional shares of
Common Stock at the initial public offering price, less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriters may
exercise the option only for the purpose of covering over-allotments, if any,
made in connection with the distribution of shares of Common Stock offered
hereby to the public.

Realty will agree to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act.

Subject to certain exceptions, Realty will agree with the Underwriters not to
offer, sell, contract to sell or otherwise dispose of any shares of Common
Stock or any securities or interests convertible into or exercisable or
exchangeable for shares of Common Stock, or to register for sale under the
Securities Act any shares of Common Stock or any securities or interests
convertible into or exercisable or exchangeable for shares of Common Stock,
except for the shares of Common Stock offered hereby, for a period of one year
after the closing of the Offering without the prior written consent of Salomon
Brothers Inc (the "Lead Representative").

106
<PAGE>

Mr. Milner will agree with the Underwriters not to offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock or any securities or
interests convertible into or exercisable or exchangeable for shares of Common
Stock, directly or indirectly through any affiliate, for a period of three
years after the closing of the offering without the prior written consent of
the Lead Representative. The Mayo Foundation will agree with the Underwriters
not to offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities or interests convertible into or exercisable or
exchangeable for shares of Common Stock, directly or indirectly through any
affiliate, for a period of one year from the closing of the Offering without
the prior written consent of the Lead Representative. Thereafter, one-third of
the shares of Common Stock owned by the Mayo Foundation will become available
for sale at the commencement of each of the second, third and fourth years
following the closing of the Offering. Messrs. Quinn and Stenhaug will agree to
similar restrictions for a period of 180 days at the closing of the offering.
The agreements of Messrs. Milner, Quinn and Stenhaug are subject to their
continued employment by Realty.

The Common Stock is quoted on Nasdaq under the symbol "KHLR." In connection
with the offering, certain Underwriters or their affiliates may engage in
passive market making transactions in the Common Stock on Nasdaq in accordance
with Rule 10b-6A under the Exchange Act during the two business day period
before the commencement of sales in this offering. Passive market making
consists of, among other things, displaying bids on Nasdaq limited by the bid
prices of independent market makers and purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified period and
all possible market making activity must be discontinued when such limit is
reached. Passive market making may stabilize the market price of the Common
Stock at a level above that which might otherwise prevail and, if commenced,
may be discontinued at any time.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed upon
by Dorsey & Whitney P.L.L.P. of Minneapolis, Minnesota. In addition, the
description of federal income tax consequences contained in this Prospectus
under the caption "Federal Income Tax Considerations" is based on the opinion
of Dorsey & Whitney P.L.L.P. Certain legal matters will be passed upon for the
Underwriters by Gibson, Dunn & Crutcher, New York, New York.

CHANGE IN AUDITORS

On October 25, 1993, Kahler Corporation retained KPMG Peat Marwick LLP as its
independent auditors for 1993, thereby replacing Deloitte & Touche LLP as
Kahler Corporation's independent auditors. Kahler Corporation and Deloitte &
Touche LLP did not have any disagreements on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure during Kahler Corporation's fiscal year 1992 or during any subsequent
interim period.

EXPERTS

The consolidated financial statements and consolidated financial statement
schedules of Kahler Realty Corporation and Subsidiaries as of January 1, 1995
and January 2, 1994 and for the years then ended have been included herein, and
in the Registration Statement in reliance upon the reports of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.

The consolidated financial statements of operations, stockholders' equity and
cash flows for the year ended January 3, 1993 of Kahler Realty Corporation
(formerly Kahler Corporation) and Subsidiaries included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein and elsewhere in the Registration Statement and have
been so included in reliance upon the report of said firm given upon their
authority as experts in accounting and auditing.

107
<PAGE>

AVAILABLE INFORMATION

Realty is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by Realty can be inspected and copied at
the offices of the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York 10048; and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Realty
intends to furnish its shareholders with annual reports containing audited
financial statements certified by an independent public accounting firm.

Realty has filed a Registration Statement on Form S-11 with the Commission
with respect to the Common Stock to be issued in the Offering. This Prospectus
does not contain all the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. The Registration Statement and any amendments thereto,
including exhibits filed as a part thereof, are available at the Commission for
inspection and copying as set forth above.

CERTAIN DEFINITIONS

"1994 Directors Plan" means the Kahler Realty Corporation 1994 Non-Employee
Directors Stock Option Plan.

"1994 Option Plan" means the Kahler Realty Corporation's 1994 Stock Option
Plan, as amended.

"1994 Retainer Plan" means the Kahler Realty Corporation 1994 Retainer Stock
Payment Plan for Non-employee Directors.

"ACM" means asbestos containing material.

"ADA" means the Americans with Disabilities Act of 1990, as amended.

"Additional Charges" means certain amounts in addition to Base Rent and
Percentage Rent, including interest accrued on any late payments or charges,
due to Realty from KMC under the Percentage Leases.

"Adjusted Basis Ratio" means the ratio of the average of the adjusted bases
of the personal property in a hotel at the beginning and at the end of a
taxable year to the average of the aggregate adjusted bases of both the real
and personal property comprising the hotel at the beginning and at the end of
such taxable year.

"Adjusted Options" means the two separately exercisable options into which
the Pre-Spin Off Options will be split as of the Record Date.

"ADR" means average daily room rate per occupied room.

"Articles of Incorporation" mean the Kahler Realty Corporation Articles of
Incorporation, as amended.

"Asset Transfers" means a series of asset transfers and related transactions
which will be engaged in by Historical Kahler as part of the Spin Off to
separate certain of its hotel interests from its hotel management operations.

"Associates" means Ogden Hotel Associates, a Utah limited partnership, which
owns the Ogden Park Hotel.

"Base Rent" means the fixed rent due to Realty from KMC under the Percentage
Leases.

108
<PAGE>

"Best Western" means Best Western International Inc.

"Cash Available For Distribution" means net income (computed in accordance
with GAAP) excluding gains (or losses) from debt restructuring and sales of
property, and real estate related depreciation and amortization (excluding
amortization of financing costs) and after adjustments for unconsolidated
partnerships and joint ventures, and less adjustments for capital expenditures
(including expenditures for furniture, fixtures and equipment) and principal
payments on debt.

"Choice Hotels" means Choice Hotels International, Inc.

"Code" means the Internal Revenue Code of 1986, as amended.

"Commission" means the Securities and Exchange Commission.

"Common Stock" means the common stock, $.10 par value, of Realty.

"CPI" means the Consumer Price Index, All Urban Consumers, U.S. City Average,
All Items, Standard Reference Base 1982-1984=100, as released by the U.S.
Department of Labor, Bureau of Labor Statistics.

"Distribution Agreement" means the agreement between Realty and KMC which
provides for the Asset Transfers, the Spin Off, the division between Realty and
KMC of certain liabilities and certain other agreements governing the
relationship between Realty and KMC following the date of the Spin Off.

"EBITDA" means income (loss) from operations before income taxes, excluding
gains or losses on sale of assets, non-cash writedowns of real estate property,
interest expense, depreciation and amortization.

"Effective Date" means the effective date of the Distribution Agreement,
which will be the end of the last monthly fiscal period prior to the closing of
the Offering.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Exchange Agreement" means the agreement among Realty, KMC, the Mayo
Foundation and the executive officers of Realty which provides for the transfer
of the executive officers' shares of KMC Common Stock to the Mayo Foundation in
exchange for shares of Common Stock.

"Exempt Organizations" means tax-exempt entities, including qualified
employee pension and profit sharing trusts and individual retirement accounts.

"FF&E" means furniture, fixtures and equipment.

"Franklin" means the Franklin Heating Station, a Mayo Foundation affiliate
which provides steam, electricity, water and related utility services to
Historical Kahler.

"Funds From Operations" means, in accordance with the resolution adopted by
the Board of Governors of NAREIT, net income (loss) (computed in accordance
with generally accepted accounting principles), excluding gains (or losses)
from debt restructuring or sales of property, and real estate related
depreciation and amortization (excluding amortization of financing costs), and
after adjustments for unconsolidated partnerships and joint ventures.

"Hilton" means Hilton Hotels Corporation.

"Historical Kahler" means Kahler Realty Corporation without giving effect to
the Spin Off.

"Historical Kahler Plans" means the option plans in effect at Historical
Kahler prior to the adoption of the 1994 Option Plan and the 1994 Directors
Plan.

109
<PAGE>

"Holiday Inns" means Holiday Inns, Inc.

"Hotels" means the 15 hotels included in the table under the heading "The
Hotels."

"House Profit" means total revenues less operating costs and expenses before
real estate taxes and insurance, ground rent, interest, income taxes,
depreciation and amortization and allocation of corporate expenses.

"KMC" means Kahler Management Corporation, a wholly owned subsidiary of
Historical Kahler, 90.5% of the Common Stock of which is being distributed to
the existing shareholders of Historical Kahler in the Spin Off.

"KMC Business" means the businesses to be engaged in by KMC after the Spin
Off which will include the ownership of minority interests in certain hotels
and the continuation of the other operations of Historical Kahler that the
federal tax laws generally preclude from being owned or operated by a REIT,
including Historical Kahler's hotel management operations and non-real estate
related businesses.

"KMC Common Stock" means the common stock, $.10 par value, of KMC.

"Knights Inn" is a registered trademark of Cardinal Lodging Group, Inc.

"License Agreement" means the non-exclusive trademark license agreement
entered into by Realty and KMC. See "Certain Agreements--The License
Agreement."

"Lines of Credit" means the lines of credit currently being negotiated by
Realty in an aggregate principal amount of $50.0 million.

"MBCA" means the Minnesota Business Corporation Act, as amended.

"Mortgage Note" means the mortgage note held by Realty and relating to the
University Park Hotel. See "The Hotels--Full Service Hotels--University Park
Hotel-Salt Lake City, Utah."

"NAREIT" means the National Association of Real Estate Investment Trusts.

"Nasdaq" means the Nasdaq National Market.

"Offering" means the public offering of Common Stock to which this Prospectus
relates.

"Option Agreement" means the agreement between Realty and KMC which grants
Realty a five-year option to purchase two Knights Inn hotels owned by KMC.

"Ownership Limitation" means the limitation contained in the Articles of
Incorporation which provides that, subject to certain limited exceptions, no
shareholder may own, or be deemed to own by virtue of the attribution
provisions of the Code, more than 9.8% (in value or in number of shares,
whichever is more restrictive) of the outstanding capital stock of Realty.

"Ownership Limitation Provision" means the provision in the Articles of
Incorporation which limits the transfer of shares of Common Stock.

"Park Hotels" means Park Hotels, L.C., a Utah limited liability company,
which holds a 50-year ground lease with the City of Provo, Utah, with respect
to the Provo Park Hotel.

"Percentage Leases" means the leases pursuant to which KMC will lease 14 of
the Hotels from Realty after the Offering.

"Percentage Rent" means the percentage rent due to Realty from KMC under the
Percentage Leases.

110
<PAGE>

"Preferred Stock" means the 10 million shares of Preferred Stock, par value
$.10 per share, authorized for issuance under the Articles of Incorporation.

"Pre-Spin Off Options" means outstanding options for Common Stock which are
not exercised prior to the Record Date of the Spin Off.

"Prospectus" means this Prospectus filed as part of the Registration
Statement.

"Realty" means Kahler Realty Corporation giving effect to the Spin Off.

"Record Date" means the date as of which the shareholders of record of
Historical Kahler to receive the Spin Off dividend will be determined.

"REIT" means real estate investment trust.

"Rents" means the Base Rent and Percentage Rent, collectively.

"Residence Inn by Marriott" is a registered trademark of Residence by
Marriott, Inc.

"Retainer" means the annual fee paid to non-employee directors, as well as
any earned but unpaid committee fees.

"REVPAR" means the average daily room revenue per available room, which is
calculated by multiplying occupancy times ADR.

"Right of First Refusal Agreement" means the agreement entered into by Realty
and KMC with respect to new hotel opportunities. See "Certain Agreements--Right
of First Refusal Agreement."

"Service" means the Internal Revenue Service.

"Sheraton" means ITT Sheraton Corporation.

"Special Distribution" means the additional funds which Realty may distribute
to its shareholders to ensure the elimination of all earnings and profits by
the end of 1996. See "Distributions."

"Spin Off" means a series of transactions which Historical Kahler will engage
in to facilitate its conversion into a REIT. The Spin Off will include (i) the
Asset Transfers and (ii) the distribution by dividend of 90.5% of the KMC
Common Stock to the existing shareholders of Historical Kahler.

"Treasury Regulations" means the applicable Code provisions, rules and
regulations promulgated thereunder.

"UBTI" means unrelated business taxable income.

"UIA" means the University Inn Associates, a Utah limited partnership, which
owns the University Park Hotel.

"West One" means the West One Bank, Boise, Idaho.

111
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
I. KAHLER REALTY CORPORATION (REALTY):
Pro Forma Condensed Consolidated Balance Sheet as of July 2, 1995
(Unaudited)............................................................ F-3
Pro Forma Condensed Consolidated Statement of Operations for the year
ended January 1, 1995 (Unaudited)...................................... F-8
Pro Forma Condensed Consolidated Statement of Operations for the 12
months ended July 2, 1995 (Unaudited).................................. F-13
Pro Forma Condensed Consolidated Statement of Operations for the first
six months ended July 2, 1995 (Unaudited).............................. F-18
II. KAHLER MANAGEMENT CORPORATION (KMC):
Pro Forma Condensed Consolidated Balance Sheet as of July 2, 1995
(Unaudited)............................................................ F-24
Pro Forma Condensed Consolidated Statement of Operations for the year
ended January 1, 1995 (Unaudited)...................................... F-27
Pro Forma Condensed Consolidated Statement of Operations for the 12
months ended July 2, 1995 (Unaudited).................................. F-31
Pro Forma Condensed Consolidated Statement of Operations for the first
six months ended
July 2, 1995 (Unaudited)............................................... F-35
III. KAHLER REALTY CORPORATION (HISTORICAL KAHLER):
Independent Auditors' Reports........................................... F-40
Consolidated Balance Sheets as of January 2, 1994 and January 1, 1995
and July 2, 1995 (Unaudited)........................................... F-42
Consolidated Statements of Operations for the years ended January 3,
1993, January 2, 1994 and January 1, 1995 and the first six months
ended July 3, 1994 and July 2, 1995 (Unaudited)........................ F-44
Consolidated Statements of Cash Flows for the years ended January 3,
1993, January 2, 1994 and January 1, 1995 and the first six months
ended July 3, 1994 and July 2, 1995 (Unaudited)........................ F-45
Consolidated Statements of Stockholders' Equity for the years ended
January 3, 1993, January 2, 1994 and January 1, 1995 and the first six
months ended July 2, 1995 (Unaudited).................................. F-46
Notes to Consolidated Financial Statements.............................. F-47
</TABLE>

F-1
<PAGE>

I. KAHLER REALTY CORPORATION (REALTY)

F-2
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

JULY 2, 1995
(UNAUDITED)

The unaudited Pro Forma Condensed Consolidated Balance Sheet of Realty is
presented as if (i) the Spin Off had occurred on July 2, 1995 and (ii) the
Offering and the application of the net proceeds therefrom to repay certain
outstanding indebtedness and the acquisition of the Canyon Springs Park Hotel
occurred on July 2, 1995. This unaudited Pro Forma Condensed Consolidated
Balance Sheet should be read in conjunction with the Consolidated Financial
Statements of Historical Kahler and its subsidiaries and the notes thereto
included elsewhere in this Prospectus. In management's opinion, all adjustments
considered necessary to reflect the effects of the Spin Off and the application
of the net proceeds of the Offering have been made. Reference is made to "The
Spin Off."

This unaudited Pro Forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been at
July 2, 1995, nor does it purport to represent the future financial position of
Realty. Capitalized terms not defined herein are used as defined elsewhere in
this Prospectus of which these unaudited financial statements are a part.

F-3
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

JULY 2, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ASSETS PRO FORMA PRO FORMA
HISTORICAL TO BE HISTORICAL PRO FORMA CONDENSED
KAHLER OWNED BY KAHLER ADJUSTMENTS CONSOLIDATED
ASSETS (A) KMC (D) (E) REALTY
------ ---------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS
Cash................... $ 1,324 $ (845) $ 479 $ 2,157 $ 2,636
Receivables:
Trade, less allowance
for doubtful
accounts............ 6,173 (5,543) 630 -- 630
Notes receivable--
current............. 150 (150) -- -- --
Inventory.............. 2,557 (2,445) 112 -- 112
Prepaid expenses....... 446 (445) 1 -- 1
-------- -------- -------- -------- --------
Total current
assets............ 10,650 (9,428) 1,222 2,157 3,379
-------- -------- -------- -------- --------
OTHER ASSETS
Notes receivable....... 1,393 (1,393) -- -- --
Investment in
affiliates............ 3,425 (606) 4,689 -- 4,689
1,870 (B)
Debt service reserve
fund.................. 750 -- 750 (750) --
Intangibles............ 736 (671) 65 -- 65
Other.................. 2,069 (102) 1,967 (1,505) 462
-------- -------- -------- -------- --------
Total other assets. 8,373 (902) 7,471 (2,255) 5,216
-------- -------- -------- -------- --------
PROPERTY AND EQUIPMENT
Land and improvements.. 16,349 (1,475) 14,874 250 15,124
Buildings.............. 136,967 (12,334) 124,633 4,850 129,483
Equipment.............. 49,043 (25,632) 23,411 650 24,061
Formal wear............ 5,763 (5,763) -- -- --
-------- -------- -------- -------- --------
Total.............. 208,122 (45,204) 162,918 5,750 168,668
Less accumulated
depreciation...... 58,521 (15,537) 42,984 -- 42,984
-------- -------- -------- -------- --------
Total property and
equipment......... 149,601 (29,667) 119,934 5,750 125,684
-------- -------- -------- -------- --------
TOTAL ASSETS....... $168,624 $(39,997) $128,627 $ 5,652 $134,279
======== ======== ======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------ --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable....... $ 7,727 $ (6,558) $ 1,169 $ (140) $ 1,029
Accrued liabilities.... 6,615 (3,464) 3,151 -- 3,151
Notes payable.......... 4,100 -- 4,100 (4,100) --
Current portion of
long-term debt........ 2,912 (794) 2,118 (1,659) 459
Current portion of
subordinated debt..... 500 -- 500 (500) --
-------- -------- -------- -------- --------
Total current
liabilities....... 21,854 (10,816) 11,038 (6,399) 4,639
-------- -------- -------- -------- --------
LONG-TERM DEBT.......... 120,565 (13,326) 107,239 (90,063) 17,176
-------- -------- -------- -------- --------
SUBORDINATED DEBT TO
AFFILIATE.............. 1,000 -- 1,000 (1,000) --
-------- -------- -------- -------- --------
OTHER DEFERRED
LIABILITIES
Deferred revenue....... 134 (71) 63 -- 63
Other.................. 1,392 (1,077) 315 -- 315
-------- -------- -------- -------- --------
Total other
deferred
liabilities....... 1,526 (1,148) 378 -- 378
-------- -------- -------- -------- --------
STOCKHOLDERS' EQUITY
Common stock........... 421 -- 421 842 1,263
Additional paid-in --
capital............... 13,250 13,250 107,536 120,786
Retained earnings...... 10,008 (16,577) (4,699) (5,264) (9,963)
1,870 (B)
-------- -------- -------- -------- --------
Total stockholders'
equity............ 23,679 (14,707) 8,972 103,114 112,086
-------- -------- -------- -------- --------
TOTAL LIABILITIES
AND STOCKHOLDERS'
EQUITY............ $168,624 $(39,997)(C) $128,627 $ 5,652 $134,279
======== ======== ======== ======== ========
</TABLE>

F-4
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET

JULY 2, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)

(A) The "Historical Kahler" column represents the historical consolidated
balance sheet of Kahler Realty Corporation as of July 2, 1995, without
giving effect to the Spin Off.

(B) The following adjustments are a result of reclassification of certain
assets and liabilities of Historical Kahler as a result of the Spin Off:

<TABLE>
<CAPTION>
INVESTMENT RETAINED
IN AFFILIATES EARNINGS
------------- --------
<S> <C> <C>
Establish KMC's
investment in
University Park Hotel.. $ 295 $ 295
Establish Realty's
investment in KMC...... 1,575 1,575
------ ------
$1,870 $1,870
====== ======
</TABLE>

Realty's interest in KMC has been established at 9.5% of the pro forma net
book value of the assets and liabilities distributed by Historical Kahler
to KMC in the Spin Off. The fair market value of Realty's interest in KMC
following the Spin Off may differ substantially from the amount presented
above.

(C) The total of the column headed "Assets to be Owned by KMC" differs from the
total presented in the KMC Pro Forma Condensed Consolidated Balance Sheet
as follows:

<TABLE>
<S> <C>
Assets to be owned by KMC in the Realty Pro Forma Condensed
Consolidated Balance Sheet........................................ $39,997
Establish KMC's investment in University Park Hotel................ 295
Realty's investment in KMC......................................... 1,575
-------
$41,867
=======
</TABLE>

(D) The "Pro Forma Historical Kahler" column represents the historical basis of
the assets and liabilities of Realty upon the completion of the Spin Off.

F-5
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET--(CONTINUED)

JULY 2, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS)

(E) Detail for each of the pro forma adjustments is presented in the following
table:
<TABLE>
<CAPTION>
ACQUIRE
CANYON WRITE-OFF WRITE-OFF
SPRINGS REPAYMENT PENALTIES OF DEFERRED OF PREPAID TOTAL
OFFERING PARK OFFERING OF ON DEBT FINANCING INCOME PRO FORMA
PROCEEDS HOTEL(1) COSTS DEBT(3) REPAYMENT COSTS TAXES ADJUSTMENTS
-------- -------- -------- --------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Cash.................... $117,880 $(5,750) $(9,502) $(95,897) $(4,574) $ -- $ -- $ 2,157
Debt service reserve
fund................... -- -- -- (750)(2) -- -- -- (750)
Other................... -- -- (140) -- -- (852) (513) (1,505)
Property and equipment.. -- 5,750 -- -- -- -- -- 5,750
-------- ------- ------- -------- ------- ----- ----- --------
$117,880 $ -- $(9,642) $(96,647) $(4,574) $(852) $(513) $ 5,652
======== ======= ======= ======== ======= ===== ===== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable........ $ -- $ -- $ (140) $ -- $ -- $ -- $ -- $ (140)
Notes payable........... -- -- -- (4,100) -- -- -- (4,100)
Current portion of long-
term debt.............. -- -- -- (1,659) -- -- -- (1,659)
Current portion of
subordinated debt...... -- -- -- (500) -- -- -- (500)
Long-term debt.......... -- -- -- (90,063) -- -- -- (90,063)
Subordinated debt to
affiliate.............. -- -- -- (1,000) -- -- -- (1,000)
Common Stock............ 842 -- -- -- -- -- -- 842
Additional paid-in
capital................ 117,038 -- (9,502) -- -- -- -- 107,536
Retained earnings....... -- -- -- 675 (4,574) (852) (513) (5,264)
-------- ------- ------- -------- ------- ----- ----- --------
$117,880 $ -- $(9,642) $(96,647) $(4,574) $(852) $(513) $ 5,652
======== ======= ======= ======== ======= ===== ===== ========
</TABLE>
--------

(1) On August 1, 1995, Historical Kahler acquired the Canyon Springs Park
Hotel in Twin Falls, Idaho for $5.8 million. The acquisition was
financed with a first mortgage of $3.8 million, a note payable to
seller of $400,000 and $1.6 million from available cash and lines of
credit. Due to the date of acquisition, this debt is not reflected in
the table below.

(2) Release of $750 in debt service reserve funds held in escrow.

(3) The pro forma adjustments in the "Repayment of Debt" column reflect the
anticipated repayment of certain outstanding debt with proceeds of the
Offering. The following table represents the debt being repaid:

<TABLE>
<CAPTION>
PROPERTY PLEDGED INTEREST PRINCIPAL
AS COLLATERAL RATE BALANCE
---------------- -------- ---------
<S> <C> <C>
Kahler Plaza Hotel...................... 10% + 2% room revenue $15,377
Clinic View Inn......................... 9.75% + 2% room revenue 14,580
Sheraton San Marcos Golf Resort and
Conference Center...................... 7.5% + added interest 12,700
The Kahler Hotel........................ Prime + 1% 12,203
Salt Lake Hilton Hotel.................. Prime + 0.5% 11,785
Ogden Park Hotel........................ Prime + 0.5% 5,190
Lakeview Conference Center and Resort... Prime + 1.125% 4,549
Olympia Park Hotel...................... Prime + 2% 3,853
Boise Park Suites Hotel................. Prime + 1% 4,058
Pocatello Park Quality Inn.............. Prime + 1.5% 3,614
The Kahler Hotel........................ 12% 2,855
Lakeview Conference Center and Resort,
Knights Inns........................... Prime 648
Lines of Credit......................... Prime + 1% 4,100
Miscellaneous........................... Various 310
Subordinated Debt....................... Prime + 1% 1,500
-------
Total....................................................... 97,322
Less debt service reserve fund.............................. (750)
Less discounts.............................................. (675)
-------
$95,897
=======
</TABLE>

F-6
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED

BALANCE SHEET--(CONTINUED)

JULY 2, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS)
(E) Continued

Actual amounts to be repaid and related prepayment penalties may differ
from the amounts set forth above due to the timing of payments. In
addition, Realty is considering reissuing the $12.7 million of tax-exempt
revenue bonds secured by the Sheraton San Marcos Golf Resort and Conference
Center if it is able to do so on terms more favorable to Realty than the
anticipated terms of the Lines of Credit. Realty anticipates that the bonds
would be credit enhanced and would bear interest at a variable rate
determined monthly. Realty anticipates that the combined credit enhancement
and interest costs of the bonds would be comparable to the interest Realty
would earn from reinvesting the bonds proceeds pending use thereof.

(F) In order to complete the conversion of Historical Kahler to a REIT,
accumulated earnings and profits through the end of 1995, as determined for
federal income tax purposes, must be distributed to its shareholders by the
end of 1996. Realty intends to satisfy this requirement in part through the
Spin Off. It is anticipated that any remaining accumulated earnings and
profits will be distributed to the holders of Common Stock prior to
December 31, 1996 with funds generated from operations and lines of credit.
Realty does not anticipate using offering proceeds to fund this earnings
and profits distribution and has not presented a pro forma adjustment for
this activity.

F-7
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JANUARY 1, 1995

(UNAUDITED)

The unaudited Pro Forma Condensed Consolidated Statement of Operations of
Realty is presented as if (i) the Spin Off had occurred on January 3, 1994,
(ii) Realty qualified as a REIT for the period presented, (iii) the Offering
and the application of the net proceeds therefrom to repay certain outstanding
indebtedness had occurred on January 3, 1994, (iv) the acquisition of certain
properties acquired subsequent to January 3, 1994, including the Canyon Springs
Park Hotel, had occurred on January 3, 1994 and (v) the Percentage Leases were
executed and in effect as of the beginning of the period presented. This
unaudited Pro Forma Condensed Consolidated Statement of Operations should be
read in conjunction with the Consolidated Financial Statements of Historical
Kahler and its subsidiaries and the notes thereto included elsewhere in this
Prospectus. In management's opinion, all adjustments considered necessary to
reflect the effects of the Spin Off, the application of the net proceeds of the
Offering and the Percentage Leases have been made. Reference is made to "The
Spin Off" and "Certain Agreements--The Percentage Leases."

This unaudited Pro Forma Condensed Consolidated Statement of Operations is
not necessarily indicative of what the actual results of operations would have
been for the year ended January 1, 1995, assuming the Spin Off and the related
debt repayments, the acquisition of certain properties and the execution of the
Percentage Leases had been consummated at the beginning of the period
presented, nor does it purport to represent the future operations of Realty.
Capitalized terms not defined herein are used as defined elsewhere in this
Prospectus of which these unaudited financial statements are a part.

F-8
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JANUARY 1, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
OPERATIONS ACQUISITION
OPERATIONS TO BE OF PROPERTIES OF CANYON PRO FORMA
TRANSFERRED TO PRIOR TO SPRINGS CONDENSED
HISTORICAL KMC ACQUISITION PARK HOTEL PRO FORMA CONSOLIDATED
KAHLER (A) (B) (C) (D) ADJUSTMENTS REALTY
---------- ---------------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
LODGING SEGMENT
Percentage leases....... $ -- $ -- $ 261 $976 $23,117 (E) $24,354
Lodging revenue......... (a) 93,243 (86,135) -- -- -- 7,108 (L)
Interest income......... (b) 773 (137) (524) -- (102)(F) 10
Equity income of
affiliates............. (c) 193 314 -- -- -- 507
------- -------- ----- ---- ------- -------
Total Lodging revenue... 94,209 (85,958) (263) 976 23,015 31,979
Lodging expenses:
Hotels................. 65,385 (61,848) 217 56 -- 3,810
University Park Hotel.. 5,412 -- -- -- 458 (G) 5,870 (L)
------- -------- ----- ---- ------- -------
(d) 70,797 (61,848) 217 56 458 9,680
------- -------- ----- ---- ------- -------
Lodging income before
interest, depreciation,
and corporate expenses. 23,412 (24,110) (480) 920 22,557 22,299
------- -------- ----- ---- ------- -------
LAUNDRY SEGMENT
Laundry revenue......... (e) 6,304 (6,304) -- -- -- --
Laundry expenses........ (f) 5,957 (5,957) -- -- -- --
------- -------- ----- ---- ------- -------
Laundry income before
interest, depreciation,
and corporate expenses. 347 (347) -- -- -- --
------- -------- ----- ---- ------- -------
FORMAL WEAR SEGMENT
Formal Wear revenue..... (g) 8,924 (8,924) -- -- -- --
Formal Wear expenses.... (h) 6,975 (6,975) -- -- -- --
------- -------- ----- ---- ------- -------
Formal Wear income
before interest,
depreciation, and
corporate expenses..... 1,949 (1,949) -- -- -- --
------- -------- ----- ---- ------- -------
Other income before
interest, depreciation,
and corporate expenses. (i) 111 (86) -- -- -- 25
------- -------- ----- ---- ------- -------
Total income before
corporate expense,
interest, and
depreciation........... 25,819 (26,492) (480) 920 22,557 22,324
Corporate expenses...... (j) (3,257) 2,782 -- -- (350)(H) (825)
Interest expense........ (k) (11,207) 1,290 -- -- 8,964 (I) (953)
Depreciation and
amortization........... (l) (8,477) 3,193 (150) (204) 140 (J) (5,498)
Non-recurring charges... (m) (1,811) -- -- -- 1,811 (K) --
Gain (Loss) on sale of
assets................. (n) 20 5 -- -- (25) --
------- -------- ----- ---- ------- -------
INCOME (LOSS) FROM
OPERATIONS BEFORE
INCOME TAXES........... $ 1,087 $(19,222) $(630) $716 $33,097 $15,048
======= ======== ===== ==== ======= =======
Primary and fully
diluted income per
common share before
extraordinary item..... $ 1.18 (M)
=======
</TABLE>

F-9
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JANUARY 1, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(A) The "Historical Kahler" column represents the historical consolidated
statement of operations of Kahler Realty Corporation for the year ended
January 1, 1995, without giving effect to the Spin Off, reformatted by
segment as follows:

<TABLE>
<CAPTION>
CONSOLIDATED
STATEMENT OF OPERATIONS
OF HISTORICAL KAHLER
-----------------------
<S> <C>
REVENUE OF OWNED OPERATIONS
Lodging--rooms................................. $ 54,108
--food and beverage......................... 29,339
--other..................................... 9,796
--------
93,243 (a)
Formal wear, laundry & other
--laundry................................... 6,304 (e)
--formal wear............................... 8,924 (g)
--other..................................... 666 (i)
--------
15,894
--------
Interest income................................ 773 (b)
--------
Total revenue of owned operations............ 109,910
--------
OPERATING COSTS AND EXPENSES
Lodging--rooms................................. 13,523
--food and beverage......................... 23,221
--other..................................... 34,053
--------
70,797 (d)
--------
Formal wear, laundry & other
--laundry................................... 5,957 (f)
--formal wear............................... 6,975 (h)
--other..................................... 555 (i)
--------
13,487
--------
Corporate expenses............................. 3,257 (j)
Depreciation and amortization.................. 8,477 (l)
Non-recurring charges.......................... 1,811 (m)
--------
Total operating costs and expenses........... 97,829
--------
GROSS OPERATING PROFIT........................... 12,081
Interest expense............................... (11,207)(k)
Equity earnings of affiliates.................. 193 (c)
Gain on sale of assets......................... 20 (n)
--------
INCOME FROM OPERATIONS BEFORE INCOME TAXES....... $ 1,087
========
</TABLE>
--------

References (a)-(n) refer to the reformatted totals by segment in the
accompanying Pro Forma Condensed Consolidated Statement of Operations of
Realty.

F-10
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF OPERATIONS--(CONTINUED)

FOR THE YEAR ENDED JANUARY 1, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(B) This column represents the operations of Historical Kahler which will be
transferred to KMC upon completion of the Spin Off, including revenues and
certain expenses related to Hotels that are to be leased to KMC.

(C) These adjustments relate to the Green Oaks Inn and Conference Center and
Pocatello Park Quality Inn, which were acquired subsequent to January 2,
1994, to include percentage lease income for Pocatello and certain expenses
related to both for the period of time from January 3, 1994 through their
respective dates of acquisition.

(D) This column reflects the estimated Percentage Lease income and certain
expenses of the Canyon Springs Park Hotel as though it was owned by Realty
as of January 3, 1994. The Canyon Springs Park Hotel was acquired on August
1, 1995.

(E) This adjustment represents estimated lease payments calculated on a pro
forma basis using the provisions contemplated in the Percentage Leases and
historical revenues of the Hotels which will be leased to KMC pursuant to
Percentage Leases.

The following table reflects the revenues associated with the Hotels for
which Percentage Leases will be entered into. The information reflects
revenues for each of the last three fiscal years or commencing from the
date of acquisition in the case of any Hotel acquired by Historical Kahler
during the last three fiscal years. Of the 14 leased Hotels, Boise Park
Suites Hotel was acquired in January 1992, Olympia Park Hotel in October
1992, and Pocatello Park Quality Inn in March 1994. The Canyon Springs Park
Hotel was acquired on August 1, 1995 and is not included in the table
below.

<TABLE>
<CAPTION>
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Room revenue..................................... $42,799 $43,923 $51,114
Food & beverage revenue.......................... 24,888 25,114 28,601
Percentage Lease revenue......................... 19,187 19,897 23,117
</TABLE>

(F) The pro forma adjustment reflects the reduction of interest income
associated with the termination of a guarantee agreement related to the
Salt Lake Hilton Hotel and the release of a debt service reserve fund
related to debt on the Sheraton San Marcos Golf Resort and Conference
Center.

(G) This pro forma adjustment represents management fees and certain other
expenses to be paid by Realty in connection with the University Park Hotel
and the related management contract with KMC. This adjustment also reflects
KMC's share of equity distributions in University Park Hotel.

(H) This pro forma adjustment represents additional estimated general and
administrative expenses expected to be incurred by Realty following the
completion of the Spin Off.

(I) This pro forma adjustment represents a reduction in interest expense
resulting from the repayment of certain outstanding debt with proceeds of
the Offering.

During the fiscal period subsequent to the consummation of the Offering,
Realty expects to recognize net extraordinary charges of approximately
$3,899 ($4,574 in prepayment penalties offset by principal
reduction/discounts of $675) associated with the repayment of certain
outstanding debt which has not been included in the Pro Forma Condensed
Consolidated Statement of Operations of Realty.

(J) This pro forma adjustment represents a reduction in amortization of
deferred financing costs as a result of the write-off of certain deferred
financing costs associated with outstanding debt to be repaid with proceeds
of the Offering.

F-11
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF OPERATIONS--(CONTINUED)

FOR THE YEAR ENDED JANUARY 1, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(K) This adjustment eliminates the effects of non-recurring charges recorded by
Historical Kahler related to expenses incurred in connection with a planned
secondary offering and conversion to a REIT during fiscal year 1994.

(L) Represents lodging revenues and expenses of the University Park Hotel. In
1990, Historical Kahler entered into a transaction in which title to the
Hotel was transferred to an investor in exchange for a Mortgage Note with a
conversion option. Certain provisions in the sales agreement prevented the
transaction from meeting the criteria for a sale as defined by Statement of
Financial Accounting Standards No. 66 and therefore Realty will continue to
consolidate the operations of the Hotel in its financial statements.

(M) Pro forma primary and fully diluted net income per share before
extraordinary item assumes the conversion of all outstanding exercisable
options to purchase shares of Common Stock as of the date of the Offering
and is based upon 12,772,118 shares of Common Stock outstanding during the
period.

F-12
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS

FOR THE 12 MONTHS ENDED JULY 2, 1995
(UNAUDITED)

The unaudited Pro Forma Condensed Consolidated Statement of Operations of
Realty is presented as if (i) the Spin Off had occurred on July 4, 1994, (ii)
Realty qualified as a REIT for the period presented, (iii) the Offering and the
application of the net proceeds therefrom to repay certain outstanding
indebtedness had occurred on July 4, 1994, (iv) the acquisition of certain
properties acquired subsequent to July 4, 1994, including the Canyon Springs
Park Hotel, had occurred on July 4, 1994 and (v) the Percentage Leases were
executed and in effect as of the beginning of the period presented. This
unaudited Pro Forma Condensed Consolidated Statement of Operations should be
read in conjunction with the Consolidated Financial Statements of Historical
Kahler and its subsidiaries and the notes thereto included elsewhere in this
Prospectus. In management's opinion, all adjustments considered necessary to
reflect the effects of the Spin Off, the application of the net proceeds of the
Offering and the Percentage Leases have been made. Reference is made to "The
Spin Off" and "Certain Agreements--The Percentage Leases."

This unaudited Pro Forma Condensed Consolidated Statement of Operations is
not necessarily indicative of what the actual results of operations would have
been for the 12 months ended July 2, 1995, assuming the Spin Off and the
related debt repayments, the acquisition of certain properties and the
execution of the Percentage Leases had been consummated at the beginning of the
period presented, nor does it purport to represent the future operations of
Realty. Capitalized terms not defined herein are used as defined elsewhere in
this Prospectus of which these unaudited financial statements are a part.

F-13
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE 12 MONTHS ENDED JULY 2, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
OPERATIONS ACQUISITION
OPERATIONS TO BE OF PROPERTIES OF CANYON PRO FORMA
HISTORICAL TRANSFERRED TO PRIOR TO SPRINGS PARK CONDENSED
KAHLER KMC ACQUISITION HOTEL PRO FORMA CONSOLIDATED
(A) (B) (C) (D) ADJUSTMENTS REALTY
---------- ---------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
LODGING SEGMENT
Percentage leases....... $ -- $ -- $ -- $1,029 $24,088 (E) $25,117
Lodging revenue......... (a) 98,902 (91,587) -- -- -- 7,315 (L)
Interest income......... (b) 714 (144) (345) -- (215)(F) 10
Equity income of
affiliates............. (c) 386 188 -- -- -- 574
-------- -------- ----- ------ ------- -------
Total Lodging revenue... 100,002 (91,543) (345) 1,029 23,873 33,016
Lodging expenses:
Hotels................. 69,315 (65,594) 95 57 -- 3,873
University Park Hotel.. 5,545 -- -- -- 433 (G) 5,978 (L)
-------- -------- ----- ------ ------- -------
(d) 74,860 (65,594) 95 57 433 9,851
-------- -------- ----- ------ ------- -------
Lodging income before
interest, depreciation,
and corporate expenses. 25,142 (25,949) (440) 972 23,440 23,165
-------- -------- ----- ------ ------- -------
LAUNDRY SEGMENT
Laundry revenue......... (e) 6,052 (6,052) -- -- -- --
Laundry expenses........ (f) 5,206 (5,206) -- -- -- --
-------- -------- ----- ------ ------- -------
Laundry income before
interest, depreciation,
and corporate expenses. 846 (846) -- -- -- --
-------- -------- ----- ------ ------- -------
FORMAL WEAR SEGMENT
Formal Wear revenue..... (g) 9,117 (9,117) -- -- -- --
Formal Wear expenses.... (h) 7,207 (7,207) -- -- -- --
-------- -------- ----- ------ ------- -------
Formal Wear income
before interest,
depreciation, and
corporate expenses..... 1,910 (1,910) -- -- -- --
-------- -------- ----- ------ ------- -------
Other income before
interest, depreciation,
and corporate expenses. (i) 98 (73) -- -- -- 25
-------- -------- ----- ------ ------- -------
Total income before
corporate expense,
interest, and
depreciation........... 27,996 (28,778) (440) 972 23,440 23,190
Corporate expenses...... (j) (3,477) 3,002 -- -- (350)(H) (825)
Interest expense........ (k) (12,019) 1,335 -- -- 9,571 (I) (1,113)
Depreciation and
amortization........... (l) (8,617) 3,244 (58) (204) 123 (J) (5,512)
Non-recurring charges... (m) (1,811) -- -- -- 1,811 (K) --
Gain (Loss) on sale of
assets................. (n) (22) 41 -- -- (19) --
-------- -------- ----- ------ ------- -------
INCOME (LOSS) FROM
OPERATIONS BEFORE
INCOME TAXES........... $ 2,050 $(21,156) $(498) $ 768 $34,576 $15,740
======== ======== ===== ====== ======= =======
Primary and fully
diluted income per
common share before
extraordinary item..... $ 1.23 (M)
=======
</TABLE>

F-14
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE 12 MONTHS ENDED JULY 2, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(A) The "Historical Kahler" column represents the historical consolidated
statement of operations of Kahler Realty Corporation for the 12 months
ended July 2, 1995, without giving effect to the Spin Off, reformatted by
segment as follows:

<TABLE>
<CAPTION>
CONSOLIDATED
STATEMENT OF OPERATIONS
OF HISTORICAL KAHLER
-----------------------
<S> <C>
REVENUE OF OWNED OPERATIONS
Lodging--rooms................................ $ 57,515
--food and beverage........................... 30,919
--other....................................... 10,468
--------
98,902 (a)
Formal wear, laundry & other
--laundry..................................... 6,052 (e)
--formal wear................................. 9,117 (g)
--other....................................... 646 (i)
--------
15,815
--------
Interest income............................... 714 (b)
--------
Total revenue of owned operations........... 115,431
--------
OPERATING COSTS AND EXPENSES
Lodging--rooms................................ 14,318
--food and beverage........................... 24,441
--other....................................... 36,101
--------
74,860 (d)
--------
Formal wear, laundry & other
--laundry..................................... 5,206 (f)
--formal wear................................. 7,207 (h)
--other....................................... 548 (i)
--------
12,961
--------
Corporate expenses............................ 3,477 (j)
Depreciation and amortization................. 8,617 (l)
Non-recurring charges......................... 1,811 (m)
--------
Total operating costs and expenses.......... 101,726
--------
GROSS OPERATING PROFIT.......................... 13,705
Interest expense.............................. (12,019)(k)
Equity earnings of affiliates................. 386 (c)
Gain on sale of assets........................ (22) (n)
--------
INCOME FROM OPERATIONS BEFORE INCOME TAXES...... $ 2,050
========
</TABLE>
--------

References (a) - (n) refer to the reformatted totals by segment in the
accompanying Pro Forma Condensed Consolidated Statement of Operations of
Realty.

F-15
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS--(CONTINUED)

FOR THE 12 MONTHS ENDED JULY 2, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(C) This adjustment relates to the Green Oaks Inn and Conference Center, which
was acquired subsequent to July 3, 1994, to include certain expenses for
the period of time from July 4, 1994 through the date of acquisition in
December 1994.

(D) This column reflects the estimated Percentage Lease income and certain
expenses of the Canyon Springs Park Hotel as though it was owned by Realty
as of July 4, 1994. The Canyon Springs Park Hotel was acquired, on August
1, 1995.

Revenues of the leased Hotels for the 12 months ended July 2, 1995 are
presented below. The Canyon Springs Park Hotel was acquired on August 1,
1995 and is not included in the information presented.

<TABLE>
<S> <C>
Room revenue................. $52,632
Food and beverage revenue.... 29,310
Percentage Lease revenue..... 24,088
</TABLE>

(F) The pro forma adjustment reflects the reduction of interest income
associated with the termination of a guarantee agreement related to the
Salt Lake Hilton Hotel and release of a debt service reserve fund related
to debt on the Sheraton San Marcos Golf Resort and Conference Center.

(H) This pro forma adjustment represents additional estimated general and
administrative expenses expected to be incurred by Realty following the
completion of the Spin Off.

(I) This pro forma adjustment represents a reduction in interest expense
resulting from the repayment of certain outstanding debt with proceeds of
the Offering.

During the fiscal period subsequent to the consummation of the Offering,
Realty expects to recognize net extraordinary charges of approximately
$3,899 ($4,574 in prepayment penalties offset by principal
reductions/discounts of $675) associated with the repayment of certain
outstanding debt which has not been included in the Pro Forma Condensed
Consolidated Statement of Operations of Realty.

F-16
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS--(CONTINUED)

FOR THE 12 MONTHS ENDED JULY 2, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(M) Pro forma primary and fully diluted net income per share before
extraordinary item assumes the conversion of all outstanding exercisable
options to purchase shares of Common Stock as of the date of the offering,
and is based upon 12,772,118 shares of Common Stock outstanding during the
period.

F-17
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE FIRST SIX MONTHS ENDED JULY 2, 1995
(UNAUDITED)

The unaudited Pro Forma Condensed Consolidated Statement of Operations of
Realty is presented as if (i) the Spin Off had occurred on January 2, 1995,
(ii) Realty qualified as a REIT for the period presented, (iii) the Offering
and the application of the net proceeds therefrom to repay certain outstanding
indebtedness had occurred on January 2, 1995, (iv) the acquisition of the
Canyon Springs Park Hotel had occurred on January 2, 1995 and (v) the
Percentage Leases were executed and in effect as of the beginning of the period
presented. This unaudited Pro Forma Condensed Consolidated Statement of
Operations should be read in conjunction with the Consolidated Financial
Statements of Historical Kahler and its subsidiaries and the notes thereto
included elsewhere in this Prospectus. In management's opinion, all adjustments
considered necessary to reflect the effects of the Spin Off, the application of
the net proceeds of the Offering and the Percentage Leases have been made.
Reference is made to "The Spin Off" and "Certain Agreements--The Percentage
Leases."

This unaudited Pro Forma Condensed Consolidated Statement of Operations is
not necessarily indicative of what the actual results of operations would have
been for the six months ended July 2, 1995, assuming the Spin Off and the
related debt repayments, the acquisition of the Canyon Springs Park Hotel and
the execution of the Percentage Leases had been consummated at the beginning of
the period presented, nor does it purport to represent the future operations of
Realty. Capitalized terms not defined herein are used as defined elsewhere in
this Prospectus of which these unaudited financial statements are a part.

F-18
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF OPERATIONS

FOR THE FIRST SIX MONTHS ENDED JULY 2, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
OPERATIONS TO BE ACQUISITION OF PRO FORMA
TRANSFERRED TO CANYON SPRINGS CONDENSED
HISTORICAL KMC PARK HOTEL PRO FORMA CONSOLIDATED
KAHLER (A) (B) (C) ADJUSTMENTS REALTY
---------- ---------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
LODGING SEGMENT
Percentage leases....... $ -- $ -- $513 $13,002 (D) $13,515
Lodging revenue......... (a) 53,277 (49,391) -- -- 3,886 (J)
Interest income......... (b) 224 (67) -- (155)(E) 2
Equity Income of 291 24 -- 315
affiliates............. (c) ------- -------- ---- ------- -------
Total lodging revenue... 53,792 (49,434) 513 12,847 17,718
Lodging expenses:
Hotels................. 36,632 (34,657) 30 -- 2,005
University Park Hotel.. 2,884 -- -- 296 (F) 3,180 (J)
------- -------- ---- ------- -------
(d) 39,516 (34,657) 30 296 5,185
------- -------- ---- ------- -------
Lodging income before
interest, depreciation, 14,276 (14,777) 483 12,551 12,533
and corporate expenses. ------- -------- ---- ------- -------
LAUNDRY SEGMENT
Laundry revenue......... (e) 3,057 (3,057) -- -- --
Laundry expenses........ (f) 2,469 (2,469) -- -- --
------- -------- ---- ------- -------
Laundry income before
interest, depreciation, 588 (588) -- -- --
and corporate expense.. ------- -------- ---- ------- -------
FORMAL WEAR SEGMENT
Formal wear revenue..... (g) 5,002 (5,002) -- --
Formal Wear expenses.... (h) 3,936 (3,936) -- -- --
------- -------- ---- ------- -------
Formal Wear income
before interest,
depreciation, and 1,066 (1,066) -- -- --
corporate expenses..... ------- -------- ---- ------- -------
Other income before
interest, depreciation, 43 (30) -- -- 13
and corporate expenses. (i) ------- -------- ---- ------- -------
Total income before
corporate expense,
interest, and
depreciation........... 15,973 (16,461) 483 12,551 12,546
Corporate expenses...... (j) (1,914) 1,676 -- (174)(G) (412)
Interest expense........ (k) (6,060) 672 -- 4,801 (H) (587)
Depreciation and
amortization........... (l) (4,438) 1,709 (102) 56 (I) (2,775)
Gain (Loss) on sale of (31) 32 -- (1) --
assets................. (m) ------- -------- ---- ------- -------
INCOME (LOSS) FROM
OPERATIONS BEFORE $ 3,530 $(12,372) $381 $17,233 $ 8,772
INCOME TAXES........... ======= ======== ==== ======= =======
Primary and fully
diluted income per
common share before $ .69(K)
extraordinary item..... =======
</TABLE>

F-19
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS

FOR THE FIRST SIX MONTHS ENDED JULY 2, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(A) The "Historical Kahler" column represents the historical consolidated
statement of operations of Kahler Realty Corporation for the first six
months ended July 2, 1995, without giving effect to the Spin Off,
reformatted by segment as follows:

<TABLE>
<CAPTION>
CONSOLIDATED
STATEMENT OF OPERATIONS
OF HISTORICAL KAHLER
-----------------------
<S> <C>
REVENUE OF OWNED OPERATIONS
Lodging--rooms.................................. $31,308
--food and beverage............................. 16,081
--other......................................... 5,888
-------
53,277 (a)
Formal wear, laundry & other
--laundry....................................... 3,057 (e)
--formal wear................................... 5,002 (g)
--other......................................... 306 (i)
-------
8,365
-------
Interest income................................. 224 (b)
-------
Total revenue of owned operations............. 61,866
-------
OPERATING COSTS AND EXPENSES
Lodging--rooms.................................. 7,588
--food and beverage............................. 12,762
--other......................................... 19,166
-------
39,516 (d)
-------
Formal wear, laundry & other
--laundry....................................... 2,469 (f)
--formal wear................................... 3,936 (h)
--other......................................... 263 (i)
-------
6,668
-------
Corporate expenses.............................. 1,914 (j)
Depreciation and amortization................... 4,438 (l)
-------
Total operating costs and expenses............ 52,536
-------
GROSS OPERATING PROFIT............................ 9,330
Interest expense................................ (6,060)(k)
Equity earnings of affiliates................... 291 (c)
Gain on sale of assets.......................... (31)(m)
-------
INCOME FROM OPERATIONS BEFORE INCOME TAXES........ $ 3,530
=======
</TABLE>
--------

References (a)-(m) refer to the reformatted totals by segment in the
accompanying Pro Forma Condensed Consolidated Statement of Operations of
Realty.

F-20
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS--(CONTINUED)

FOR THE FIRST SIX MONTHS ENDED JULY 2, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(C) This column reflects the estimated Percentage Lease income and certain
expenses of the Canyon Springs Park Hotel as though it was owned by Realty
as of January 2, 1995. The Canyon Springs Park Hotel was acquired on August
1, 1995.

(D) This adjustment represents additional estimated lease payments calculated
on a pro forma basis using the provisions contemplated in the Percentage
Leases and historical revenues of the Hotels which will be leased to KMC
pursuant to Percentage Leases.

Revenues of the leased Hotels for the six months ended July 2, 1995 are
presented below. The Canyon Springs Park Hotel was acquired on August 1,
1995 and is not included in the information presented.

<TABLE>
<S> <C>
Room revenue..................... $27,854
Food and beverage revenue........ 14,828
Percentage lease revenue......... 13,002
</TABLE>

(E) The pro forma adjustment reflects the reduction of interest income
associated with the termination of a guarantee agreement related to the
Salt Lake Hilton Hotel and release of a debt service reserve fund related
to debt on the Sheraton San Marcos Golf Resort and Conference Center.

(F) This pro forma adjustment represents management fees and certain other
expenses to be paid by Realty in connection with the University Park Hotel
and the related management contract with KMC. This adjustment also reflects
KMC's share of equity distributions in University Park Hotel.

(G) This pro forma adjustment represents estimated general and administrative
expenses expected to be incurred by Realty following the completion of the
Spin Off.

(H) This pro forma adjustment represents a reduction in interest expense
resulting from the repayment of certain outstanding debt with proceeds of
the Offering.

During the fiscal period subsequent to the consummation of the Offering,
Realty expects to recognize net extraordinary charges of approximately
$3,899 ($4,574 in prepayment penalties offset by principal
reductions/discounts of $675) associated with the repayment of certain
outstanding debt which has not been included in the Pro Forma Condensed
Consolidated Statement of Operations of Realty.

(I) This pro forma adjustment represents a reduction in amortization of
deferred financing costs as a result of the write-off of certain deferred
financing costs associated with outstanding debt to be repaid with proceeds
of the Offering.

(J) Represents lodging revenues and expenses of the University Park Hotel. In
1990, Historical Kahler entered into a transaction in which title to the
Hotel was transferred to an investor in exchange for a Mortgage Note with a
conversion option. Certain provisions in the sales agreement prevented the
transaction from meeting the criteria for a sale as defined by Statement of
Financial Accounting Standards No. 66 and therefore Realty will continue to
consolidate the operations of the Hotel in its financial statements.

F-21
<PAGE>

KAHLER REALTY CORPORATION (REALTY)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS--(CONTINUED)

FOR THE FIRST SIX MONTHS ENDED JULY 2, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(K) Pro forma primary and fully diluted net income per share before
extraordinary item assumes the conversion of all outstanding exercisable
options to purchase shares of Common Stock as of the date of the offering,
and is based upon 12,772,118 shares of Common Stock outstanding during the
period.

F-22
<PAGE>

II. KAHLER MANAGEMENT CORPORATION (KMC)

F-23
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

PRO FORMA CONDENSED CONSOLIDATED

BALANCE SHEET

JULY 2, 1995

(UNAUDITED)

The unaudited Pro Forma Condensed Consolidated Balance Sheet of KMC is
presented as if (i) the Spin Off had occurred on July 2, 1995, (ii) the
Offering and the application of the net proceeds therefrom to repay certain
outstanding indebtedness had occurred on July 2, 1995, and (iii) KMC's equity
investment in the Copper King Inn, Butte, Montana ("Butte Hotel") had occurred
on July 2, 1995. This unaudited Pro Forma Condensed Consolidated Balance Sheet
should be read in conjunction with the Consolidated Financial Statements of
Historical Kahler and its subsidiaries and the notes thereto included elsewhere
in this Prospectus. In management's opinion, all adjustments considered
necessary to reflect the effects of the Spin Off and the application of the net
proceeds of the Offering have been made. Reference is made to "The Spin Off."

This unaudited Pro Forma Condensed Consolidated Balance Sheet is not
necessarily indicative of what the actual financial position would have been at
July 2, 1995, nor does it purport to represent the future financial position of
KMC. Capitalized terms not defined herein are used as defined elsewhere in this
Prospectus of which these unaudited financial statements are a part.

Prior to the Offering, the Board of Directors of Historical Kahler will
declare the Spin Off dividend to shareholders of Historical Kahler of record on
the Record Date, consisting of 90.5% of the issued and outstanding shares of
KMC Common Stock, payable in a ratio of one share of KMC Common Stock for every
ten shares of Common Stock. The dividend will be payable only to existing
shareholders of Historical Kahler as of the Record Date. PURCHASERS IN THE
OFFERING WILL NOT RECEIVE ANY SHARES OF KMC COMMON STOCK IN THE SPIN OFF.

The Pro Forma Condensed Consolidated Financial Data of KMC has been included
in this Prospectus because Realty will derive substantially all of its income
from the Hotels in the form of Base Rent, Percentage Rent and Additional
Charges received pursuant to the Percentage Leases entered into with KMC. See
"Risk Factors--Realty's Dependence on KMC."

F-24
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

JULY 2, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL
ASSETS CONDENSED INVESTMENT PRO FORMA
HISTORICAL TO BE CONSOLIDATED IN BUTTE CONDENSED
KAHLER OWNED KMC HOTEL CONSOLIDATED
ASSETS (A) BY REALTY (B) (C) KMC
------ ---------- --------- ------------ ---------- ------------
CURRENT ASSETS
<S> <C> <C> <C> <C> <C>
Cash...................... $ 1,324 $ (479) $ 845 $(600) $ 245
Receivables:..............
Trade, less allowance for
doubtful accounts....... 6,173 (630) 5,543 -- 5,543
Notes receivable--current. 150 -- 150 -- 150
Inventories............... 2,557 (112) 2,445 -- 2,445
Prepaid expenses.......... 446 (1) 445 -- 445
-------- --------- ------- ----- -------
Total current assets... 10,650 (1,222) 9,428 (600) 8,828
-------- --------- ------- ----- -------
OTHER ASSETS
Notes receivables......... 1,393 -- 1,393 -- 1,393
Investment in affiliates.. 3,425 (2,819) 606 600 1,206
Debt service reserve fund. 750 (750) -- -- --
Intangibles............... 736 (65) 671 -- 671
Other..................... 2,069 (1,967) 102 -- 102
-------- --------- ------- ----- -------
Total other assets..... 8,373 (5,601) 2,772 600 3,372
-------- --------- ------- ----- -------
PROPERTY AND EQUIPMENT
Land and improvements..... 16,349 (14,874) 1,475 -- 1,475
Buildings................. 136,967 (124,633) 12,334 -- 12,334
Equipment................. 49,043 (23,411) 25,632 -- 25,632
Formal wear apparel....... 5,763 -- 5,763 -- 5,763
-------- --------- ------- ----- -------
Total.................... 208,122 (162,918) 45,204 -- 45,204
Less accumulated 58,521 (42,984) 15,537 -- 15,537
depreciation............ -------- --------- ------- ----- -------
Total property and 149,601 (119,934) 29,667 -- 29,667
equipment............... -------- --------- ------- ----- -------
TOTAL ASSETS........... $168,624 $(126,757) $41,867 $ -- $41,867
======== ========= ======= ===== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
-----------------------------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable.......... $ 7,727 $ (1,169) $ 6,558 $ -- $ 6,558
Accrued liabilities....... 6,615 (3,151) 3,464 -- 3,464
Notes payable............. 4,100 (4,100) -- -- --
Current portion of long-
term debt................ 2,912 (2,118) 794 -- 794
Current portion of 500 (500) -- -- --
subordinated debt........ -------- --------- ------- ----- -------
Total current 21,854 (11,038) 10,816 -- 10,816
liabilities........... -------- --------- ------- ----- -------
LONG-TERM DEBT.............. 120,565 (107,239) 13,326 -- 13,326
-------- --------- ------- ----- -------
SUBORDINATED DEBT TO 1,000 (1,000) -- -- --
AFFILIATE.................. -------- --------- ------- ----- -------
OTHER DEFERRED LIABILITIES
Deferred revenue.......... 134 (63) 71 -- 71
Other..................... 1,392 (315) 1,077 -- 1,077
-------- --------- ------- ----- -------
Total other deferred 1,526 (378) 1,148 -- 1,148
liabilities.............. -------- --------- ------- ----- -------
STOCKHOLDERS' EQUITY
Common stock.............. 421 (421) 43 -- 43
43 (D)
Additional paid-in
capital.................. 13,250 (13,250) 16,534 -- --
Retained earnings......... 10,008 6,569 -- -- 16,534
(43)(D)
-------- --------- ------- ----- -------
Total stockholders' equity.. 23,679 (7,102) 16,577 -- 16,577
-------- --------- ------- ----- -------
TOTAL LIABILITIES AND $168,624 $(126,757) $41,867 $ -- $41,867
STOCKHOLDERS' EQUITY....... ======== ========= ======= ===== =======
</TABLE>

F-25
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET

JULY 2, 1995
(UNAUDITED)

(A) The "Historical Kahler" column represents the historical consolidated
balance sheet of Kahler Realty Corporation as of July 2, 1995, without
giving effect to the Spin Off.

(B) The "Pro Forma Historical Condensed Consolidated KMC" column represents the
assets and liabilities which will be held by KMC upon completion of the
Spin Off.

Totals for this column can be reconciled to the column headed "Assets to be
Owned by KMC" presented in the Realty Pro Forma Condensed Consolidated
Balance Sheet as follows:

<TABLE>
<S> <C>
Realty pro forma totals........................................... $39,997
Adjustments:
Equity interest in University Park Hotel reflected as an asset
by KMC......................................................... 295
Investment in KMC reflected as an asset by Realty............... 1,575
-------
$41,867
=======
</TABLE>

(C) Represents KMC's planned equity investment in the Butte Hotel. Historical
Kahler has an agreement to acquire an equity interest of approximately 30%
in the Butte Hotel as well as a management agreement with respect to this
hotel.

(D) Represents the par value of KMC Common Stock expected to be issued in
connection with the Spin Off.

F-26
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JANUARY 1, 1995
(UNAUDITED)

The unaudited Pro Forma Condensed Consolidated Statement of Operations of KMC
is presented as if (i) the Spin Off had occurred on January 3, 1994, (ii) the
Offering and the application of the net proceeds therefrom to repay certain
outstanding indebtedness had occurred on January 3, 1994, (iii) the acquisition
of certain properties acquired subsequent to January 3, 1994, including the
Canyon Springs Park Hotel and Butte Hotel, had occurred on January 3, 1994, and
(iv) the Percentage Leases were executed and in effect as of the beginning of
the period presented. This unaudited Pro Forma Condensed Consolidated Statement
of Operations should be read in conjunction with the Consolidated Financial
Statements of Historical Kahler and its subsidiaries and the notes thereto
included elsewhere in this Prospectus. In management's opinion, all adjustments
considered necessary to reflect the effects of the Spin Off and the application
of the net proceeds of the Offering and the Percentage Leases have been made.
Reference is made to "The Spin Off" and "Certain Agreements--The Percentage
Leases."

This unaudited Pro Forma Condensed Statement of Operations is not necessarily
indicative of what the actual results of operations would have been for the
year ended January 1, 1995, assuming the Spin Off and the related debt
repayments, the acquisition of certain properties and management contracts and
the execution of the Percentage Leases had been consummated at the beginning of
the period presented, nor does it purport to represent the future operations of
KMC. Capitalized terms not defined herein are used as defined elsewhere in this
Prospectus of which these unaudited financial statements are a part.

F-27
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JANUARY 1, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
OPERATIONS ACQUISITION OF
PRO FORMA OF PROPERTIES CANYON SPRINGS PRO FORMA
HISTORICAL OPERATIONS TO BE HISTORICAL PRIOR TO PARK AND BUTTE CONDENSED
KAHLER RETAINED BY KMC ACQUISITION HOTELS PRO FORMA CONSOLIDATED
(A) REALTY (B) (C) (D) ADJUSTMENTS KMC
---------- ---------------- ---------- ------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LODGING SEGMENT
Lodging--rooms......... (a) $54,108 $(3,993) $50,115 $3,514 $1,646 $ -- $55,275
--food & beverage... (b) 29,339 (2,732) 26,607 2,031 1,231 -- 29,869
--other............. (c) 9,796 (383) 9,413 267 138 303 (E) 10,121
Interest income........ (d) 773 (636) 137 -- -- -- 137
Equity income (loss) of
affiliates............ (e) 193 (507) (314) -- (152) 188 (F) (278)
------- ------- ------- ------ ------ -------- -------
Total Lodging revenue.. 94,209 (8,251) 85,958 5,812 2,863 491 95,124
Percentage lease
expense............... -- -- -- 261 976 23,117 (G) 24,354
Lodging expenses....... (f) 70,797 (8,949) 61,848 4,429 1,901 -- 68,178
------- ------- ------- ------ ------ -------- -------
Lodging income before
interest,
depreciation, and
corporate expenses.... 23,412 698 24,110 1,122 (14) (22,626) 2,592
------- ------- ------- ------ ------ -------- -------
LAUNDRY SEGMENT
Laundry revenue........ (g) 6,304 -- 6,304 -- -- -- 6,304
Laundry expenses....... (h) 5,957 -- 5,957 -- -- -- 5,957
------- ------- ------- ------ ------ -------- -------
Laundry income before
interest,
depreciation, and
corporate expenses.... 347 -- 347 -- -- -- 347
------- ------- ------- ------ ------ -------- -------
FORMAL WEAR SEGMENT
Formal Wear revenue.... (i) 8,924 -- 8,924 -- -- -- 8,924
Formal Wear expenses... (j) 6,975 -- 6,975 -- -- -- 6,975
------- ------- ------- ------ ------ -------- -------
Formal Wear income
before interest,
depreciation, and
corporate expenses.... 1,949 -- 1,949 -- -- -- 1,949
------- ------- ------- ------ ------ -------- -------
Other income before
interest,
depreciation, and
corporate expenses.... (k) 111 (25) 86 -- -- -- 86
------- ------- ------- ------ ------ -------- -------
Total income before
corporate expense,
interest, and
depreciation.......... 25,819 673 26,492 1,122 (14) (22,626) 4,974
Corporate expenses..... (l) (3,257) 475 (H) (2,782) -- -- -- (2,782)
Interest expense....... (m) (11,207) 9,917 (1,290) (4) -- -- (1,294)
Depreciation and
amortization.......... (n) (8,477) 5,284 (3,193) (112) -- -- (3,305)
Non-recurring charges.. (o) (1,811) 1,811 -- -- -- -- --
Gain (Loss) on sale of
assets................ (p) 20 (25) (5) -- -- 5 --
------- ------- ------- ------ ------ -------- -------
INCOME (LOSS) FROM
OPERATIONS BEFORE
INCOME TAXES.......... $ 1,087 $18,135 $19,222 $1,006 $ (14) (22,621) (2,407)
======= ======= ======= ====== ======
Provision for income
tax................... -- (I) --
-------- -------
NET LOSS............... $(22,621) $(2,407)
======== =======
Primary and fully
diluted income per
common share before
extraordinary item.... $ (5.02)(J)
=======
</TABLE>

F-28
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JANUARY 1, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
CONSOLIDATED
STATEMENT OF OPERATIONS
OF HISTORICAL KAHLER
-----------------------
<S> <C>
REVENUE OF OWNED OPERATIONS
Lodging--rooms.................................. $ 54,108 (a)
--food and beverage............................... 29,339 (b)
--other........................................... 9,796 (c)
Formal wear, laundry & other
--laundry......................................... 6,304 (g)
--formal wear..................................... 8,924 (i)
--other........................................... 666 (k)
--------
15,894
--------
Interest income................................. 773 (d)
--------
Total revenue of owned operations............. 109,910
--------
OPERATING COSTS AND EXPENSES
Lodging--rooms 13,523
--food and beverage............................... 23,221
--other........................................... 34,053
--------
70,797 (f)
--------
Formal wear, laundry & other
--laundry......................................... 5,957 (h)
--formal wear..................................... 6,975 (j)
--other........................................... 555 (k)
--------
13,487
--------
Corporate expenses.............................. 3,257 (l)
Depreciation and amortization................... 8,477 (n)
Non-recurring charges........................... 1,811 (o)
--------
Total operating costs and expenses............ 97,829
--------
GROSS OPERATING PROFIT............................ 12,081
Interest expense................................ (11,207)(m)
Equity earnings of affiliates................... 193 (e)
Gain on sale of assets.......................... 20 (p)
--------
INCOME FROM OPERATIONS BEFORE INCOME TAXES........ $ 1,087
========
</TABLE>
--------

References (a)-(p) refer to the reformatted totals by segment in the
accompanying Pro Forma Condensed Consolidated Statement of Operations of KMC.

F-29
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS--(CONTINUED)

FOR THE YEAR ENDED JANUARY 1, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(B) The "Pro Forma Historical KMC" column represents the operations of
Historical Kahler which will be transferred to KMC upon completion of the
Spin Off, including revenues and certain operating expenses related to
Hotels that are to be leased to and operated by KMC.

(C) These adjustments relate to operations of the Green Oaks Inn and Conference
Center and Pocatello Park Quality Inn and income on the Red Fox Inn
management contract, which were acquired subsequent to January 2, 1994, to
include operations and management fee income related to these properties
and Percentage Lease payments for Pocatello Park for the period of time
from January 3, 1994 through their respective dates of acquisition.

(D) This column reflects the historical revenues and certain operating expenses
(including estimated Percentage Lease payments) of the Canyon Springs Park
Hotel, which was acquired by Realty on August 1, 1995. Also included is
management fee income and equity losses for the Butte Hotel, which is under
contract to be acquired by Historical Kahler.

(E) This pro forma adjustment represents management fees to be paid to KMC by
Realty pursuant to the University Park Hotel management agreement.

(F) This pro forma adjustment represents KMC's share of equity earnings (loss)
in the University Park Hotel and the Plaza One Hotel.

(G) This adjustment represents estimated lease payments calculated on a pro
forma basis using the provisions contemplated in the Percentage Leases and
historical revenues of the Hotels which will be leased to KMC pursuant to
Percentage Leases.

The following table reflects the revenues associated with the Hotels for
which Percentage Leases will be entered into. The information reflects
revenues for each of the last three fiscal years or commencing from the
date of acquisition in the case of any Hotel acquired by Historical Kahler
during the last three fiscal years. Of the leased Hotels, Boise Park Suites
Hotel was acquired in January 1992, and the Olympia Park Hotel in October
1992, and the Pocatello Park Quality Inn in March 1994. The Canyon Springs
Park Hotel, which was acquired on August 1, 1995, is not included in the
table below.

<TABLE>
<CAPTION>
1992 1993 1994
------- ------- -------
<S> <C> <C> <C>
Room revenue..................................... $42,799 $43,923 $51,114
Food & beverage revenue.......................... 24,888 25,114 28,601
Percentage leases................................ 19,187 19,897 23,117
</TABLE>

(H) This adjustment represents the transfer of corporate expenses that will be
the responsibility of Realty.

(I) There is no adjustment for estimated federal and state taxes for there is
no expected benefit to be obtained from the operating loss.

(J) Pro forma primary and fully diluted net loss per share before extraordinary
item assumes the conversion of all outstanding exercisable options as of
the date of the offering and is based upon 479,177 shares of KMC Common
Stock outstanding during the period.

F-30
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS

FOR THE 12 MONTHS ENDED JULY 2, 1995
(UNAUDITED)

The unaudited Pro Forma Condensed Consolidated Statement of Operations of KMC
is presented as if (i) the Spin Off had occurred on July 4, 1994, (ii) the
Offering and the application of the net proceeds therefrom to repay certain
outstanding indebtedness had occurred on July 4, 1994, (iii) the acquisition of
certain properties acquired subsequent to July 4, 1994, including the Canyon
Springs Park Hotel and Butte Hotel, had occurred on July 4, 1994, and (iv) the
Percentage Leases were executed and in effect as of the beginning of the period
presented. This unaudited Pro Forma Condensed Consolidated Statement of
Operations should be read in conjunction with the Consolidated Financial
Statements of Historical Kahler and its subsidiaries and the notes thereto
included elsewhere in this Prospectus. In management's opinion, all adjustments
considered necessary to reflect the effects of the Spin Off and the application
of the net proceeds of the Offering and the Percentage Leases have been made.
Reference is made to "The Spin Off" and "Certain Agreements--The Percentage
Leases."

This unaudited Pro Forma Condensed Statement of Operations is not necessarily
indicative of what the actual results of operations would have been for the 12
months ended July 2, 1995, assuming the Spin Off and the related debt
repayments, the acquisition of certain properties and management contracts and
the execution of the Percentage Leases had been consummated at the beginning of
the period presented, nor does it purport to represent the future operations of
KMC. Capitalized terms not defined herein are used as defined elsewhere in this
Prospectus of which these unaudited financial statements are a part.

F-31
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE 12 MONTHS ENDED JULY 2, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
OPERATIONS ACQUISITION OF
PRO FORMA OF PROPERTIES CANYON SPRINGS PRO FORMA
HISTORICAL OPERATIONS TO BE HISTORICAL PRIOR TO PARK AND BUTTE CONDENSED
KAHLER RETAINED BY KMC ACQUISITION HOTELS PRO FORMA CONSOLIDATED
(A) REALTY (B) (C) (D) ADJUSTMENTS KMC
---------- ---------------- ---------- ------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LODGING SEGMENT
Lodging--rooms........ (a) $57,515 $(4,132) $53,383 $1,570 $1,720 $ -- $56,673
--food & beverage... (b) 30,919 (2,794) 28,125 851 1,296 -- 30,272
--other............. (c) 10,468 (389) 10,079 129 144 289 (E) 10,641
Interest income....... (d) 714 (570) 144 -- -- -- 144
Equity income (loss)
of affiliates........ (e) 386 (574) (188) -- (201) 97 (F) (292)
------- ------- ------- ------ ------ -------- -------
Total Lodging revenue. 100,002 (8,459) 91,543 2,550 2,959 386 97,438
Percentage leases..... -- -- -- -- 1,029 24,088 (G) 25,117
Lodging expenses...... (f) 74,860 (9,266) 65,594 1,946 2,002 -- 69,542
------- ------- ------- ------ ------ -------- -------
Lodging income before
interest,
depreciation, and
corporate expenses... 25,142 807 25,949 604 (72) (23,702) 2,779
------- ------- ------- ------ ------ -------- -------
LAUNDRY SEGMENT
Laundry revenue....... (g) 6,052 -- 6,052 -- -- -- 6,052
Laundry expenses...... (h) 5,206 -- 5,206 -- -- -- 5,206
------- ------- ------- ------ ------ -------- -------
Laundry income before
interest,
depreciation, and
corporate expenses... 846 -- 846 -- -- -- 846
------- ------- ------- ------ ------ -------- -------
FORMAL WEAR SEGMENT
Formal Wear revenue... (i) 9,117 -- 9,117 -- -- -- 9,117
Formal Wear expenses.. (j) 7,207 -- 7,207 -- -- -- 7,207
------- ------- ------- ------ ------ -------- -------
Formal Wear income
before interest,
depreciation, and
corporate expenses... 1,910 -- 1,910 -- -- -- 1,910
------- ------- ------- ------ ------ -------- -------
Other income before
interest,
depreciation, and
corporate expenses... (k) 98 (25) 73 -- -- -- 73
------- ------- ------- ------ ------ -------- -------
Total income before
corporate expense,
interest, and
depreciation......... 27,996 782 28,778 604 (72) (23,702) 5,608
Corporate expenses.... (l) (3,477) 475 (H) (3,002) -- -- -- (3,002)
Interest expense...... (m) (12,019) 10,684 (1,335) (2) -- -- (1,337)
Depreciation and
amortization......... (n) (8,617) 5,373 (3,244) (48) -- -- (3,292)
Non-recurring......... (o) (1,811) 1,811 -- -- -- -- --
Gain (Loss) on sale of
assets............... (p) (22) (19) (41) -- -- 41 --
------- ------- ------- ------ ------ -------- -------
INCOME (LOSS) FROM
OPERATIONS BEFORE
INCOME TAXES......... $ 2,050 $19,106 $21,156 $ 554 $ (72) (23,661) (2,023)
======= ======= ======= ====== ======
Provision for income
tax.................. -- (I) --
-------- -------
NET LOSS.............. $(23,661) $(2,023)
======== =======
Primary and fully
diluted income per
common share before
extraordinary item... $ (4.22)(J)
=======
</TABLE>

F-32
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS

FOR THE 12 MONTHS ENDED JULY 2, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
CONSOLIDATED
STATEMENT OF OPERATIONS
OF HISTORICAL KAHLER
-----------------------
<S> <C>
REVENUE OF OWNED OPERATIONS
Lodging--rooms.................................. $57,515 (a)
--food and beverage............................. 30,919 (b)
--other......................................... 10,468 (c)
Formal wear, laundry & other
--laundry....................................... 6,052 (g)
--formal wear................................... 9,117 (i)
--other......................................... 646 (k)
-------
15,815
-------
Interest income................................. 714 (d)
-------
Total revenue of owned operations............. 115,431
-------
OPERATING COSTS AND EXPENSES
Lodging--rooms.................................. 14,318
--food and beverage............................. 24,441
--other......................................... 36,101
-------
74,860 (f)
-------
Formal wear, laundry & other
--laundry....................................... 5,206 (h)
--formal wear................................... 7,207 (j)
--other......................................... 548 (k)
-------
12,961
-------
Corporate expenses.............................. 3,477 (l)
Depreciation and amortization................... 8,617 (n)
Non-recurring charges........................... 1,811 (o)
-------
Total operating costs and expenses............ 101,726
-------
GROSS OPERATING PROFIT............................ 13,705
Interest expense (12,019)(m)
Equity earnings of affiliates................... 386 (e)
Gain on sale of assets.......................... (22)(p)
-------
INCOME FROM OPERATIONS BEFORE INCOME TAXES........ $ 2,050
=======
</TABLE>
--------

References (a)-(p) refer to the reformatted totals by segment in the
accompanying Pro Forma Condensed Consolidated Statement of Operations of KMC.

F-33
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF OPERATIONS--(CONTINUED)

FOR THE 12 MONTHS ENDED JULY 2, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(C) These adjustments relate to the operations of the Green Oaks Inn and
Conference Center and income on the Red Fox Inn management contract, which
were acquired subsequent to July 3, 1994, to include operations and
management fee income related to these properties for the period of time
from July 4, 1994 through their respective dates of acquisition.

(D) This column reflects the historical revenues and certain operating expenses
(including estimated Percentage Lease payments) of the Canyon Springs Park
Hotel, which was acquired on August 1, 1995. Also included is management
fee income and equity losses for the Butte Hotel, which is under contract
to be acquired by Historical Kahler.

(E) This pro forma adjustment represents management fees to be paid to KMC by
Realty pursuant to the University Park Hotel management agreement.

(F) This pro forma adjustment represents KMC's share of equity earnings (loss)
in the University Park Hotel and the Plaza One Hotel.

Revenues of the leased Hotels for the 12 months ended July 2, 1995 are
presented below. The Canyon Springs Park Hotel was acquired on August 1,
1995 and is not included in the information presented.

<TABLE>
<S> <C>
Room revenue..................... $52,632
Food and beverage revenue........ 29,310
Percentage leases................ 24,088
</TABLE>

(H) This adjustment represents the transfer of corporate expenses that will be
the responsibility of Realty.

(I) There is no adjustment for estimated federal and state taxes for there is
no expected benefit to be obtained from the operating loss.

(J) Pro forma net loss per share before extraordinary item assumes the
conversion of all outstanding exercisable options as of the date of the
offering and is based upon 479,177 shares of KMC Common Stock outstanding
during the period.

F-34
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF OPERATIONS

FOR THE FIRST SIX MONTHS ENDED JULY 2, 1995

(UNAUDITED)

The unaudited Pro Forma Condensed Consolidated Statement of Operations of KMC
is presented as if (i) the Spin Off had occurred on January 2, 1995, (ii) the
Offering and the application of the net proceeds therefrom to repay certain
outstanding indebtedness had occurred on January 2, 1995, (iii) the acquisition
of the Canyon Springs Park Hotel and Butte Hotel had occurred on January 2,
1995, and (iv) the Percentage Leases were executed and in effect as of the
beginning of the period presented. This unaudited Pro Forma Condensed
Consolidated Statement of Operations should be read in conjunction with the
Consolidated Financial Statements of Historical Kahler and its subsidiaries and
the notes thereto included elsewhere in this Prospectus. In management's
opinion, all adjustments considered necessary to reflect the effects of the
Spin Off and the application of the net proceeds of the Offering and the
Percentage Leases have been made. Reference is made to "The Spin Off" and
"Certain Agreements--The Percentage Leases."

This unaudited Pro Forma Condensed Statement of Operations is not necessarily
indicative of what the actual results of operations would have been for the six
months ended July 2, 1995, assuming the Spin Off and the related debt
repayments, the acquisition of certain properties and management contracts and
the execution of the Percentage Leases had been consummated at the beginning of
the period presented, nor does it purport to represent the future operations of
KMC. Capitalized terms not defined herein are used as defined elsewhere in this
Prospectus of which these unaudited financial statements are a part.

F-35
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE FIRST SIX MONTHS ENDED JULY 2, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
ACQUISITION
OF CANYON
SPRINGS
PRO FORMA PARK AND PRO FORMA
HISTORICAL OPERATIONS TO BE HISTORICAL BUTTE CONDENSED
KAHLER RETAINED BY KMC HOTELS PRO FORMA CONSOLIDATED
(A) REALTY (B) (C) ADJUSTMENTS KMC
---------- ---------------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
LODGING SEGMENT
Lodging--rooms.......... (a) $31,308 $(2,243) $29,065 $ 860 $ -- $29,925
--food & beverage.... (b) 16,081 (1,447) 14,634 635 -- 15,269
--other.............. (c) 5,888 (196) 5,692 76 194 (D) 5,962
Interest income......... (d) 224 (157) 67 -- -- 67
Equity income (loss) of
affiliates............. (e) 291 (315) (24) (44) 25 (E) (43)
------- ------- ------- ----- -------- -------
Total Lodging revenue... 53,792 (4,358) 49,434 1,527 219 51,180
Percentage lease
expense................ -- -- -- 513 13,002 (F) 13,515
Lodging expenses........ (f) 39,516 (4,859) 34,657 977 -- 35,634
------- ------- ------- ----- -------- -------
Lodging income before
interest, depreciation,
and corporate expenses. 14,276 501 14,777 37 (12,783) 2,031
------- ------- ------- ----- -------- -------
LAUNDRY SEGMENT
Laundry revenue......... (g) 3,057 -- 3,057 -- -- 3,057
Laundry expenses........ (h) 2,469 -- 2,469 -- -- 2,469
------- ------- ------- ----- -------- -------
Laundry income before
interest, depreciation,
and corporate expenses. 588 -- 588 -- -- 588
------- ------- ------- ----- -------- -------
FORMAL WEAR SEGMENT
Formal Wear revenue..... (i) 5,002 -- 5,002 -- -- 5,002
Formal Wear expenses.... (j) 3,936 -- 3,936 -- -- 3,936
------- ------- ------- ----- -------- -------
Formal Wear income
before interest,
depreciation, and
corporate expenses..... 1,066 -- 1,066 -- -- 1,066
------- ------- ------- ----- -------- -------
Other income before
interest, depreciation,
and corporate expenses. (k) 43 (13) 30 -- -- 30
------- ------- ------- ----- -------- -------
Total income before
corporate expense,
interest, and
depreciation........... 15,973 488 16,461 37 (12,783) 3,715
Corporate expenses...... (l) (1,914) 238 (G) (1,676) -- -- (1,676)
Interest expense........ (m) (6,060) 5,388 (672) -- -- (672)
Depreciation and
amortization........... (n) (4,438) 2,729 (1,709) -- -- (1,709)
Gain (Loss) on sale of
assets................. (p) (31) (1) (32) -- 32 --
------- ------- ------- ----- -------- -------
INCOME (LOSS) FROM
OPERATIONS BEFORE
INCOME TAXES........... $ 3,530 $ 8,842 $12,372 $ 37 (12,751) (342)
======= ======= ======= =====
Provision for income
tax.................... -- (H) --
-------- -------
NET LOSS................ $(12,751) $ (342)
======== =======
Primary and fully
diluted income per
common share before
extraordinary item..... $ (.71)(I)
=======
</TABLE>

F-36
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED

STATEMENT OF OPERATIONS

FOR THE FIRST SIX MONTHS ENDED JULY 2, 1995

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(A) The "Historical Kahler" column represents the historical consolidated
statement of operations of Kahler Realty Corporation for the first three
months ended July 2, 1995, without giving effect to the Spin Off,
reformatted by segment as follows:

<TABLE>
<CAPTION>
CONSOLIDATED
STATEMENT OF OPERATIONS
OF HISTORICAL KAHLER
-----------------------
<S> <C>
REVENUE OF OWNED OPERATIONS
Lodging--rooms.................................. $31,308 (a)
--food and beverage............................. 16,081 (b)
--other......................................... 5,888 (c)
Formal wear, laundry & other
--laundry....................................... 3,057 (g)
--formal wear................................... 5,002 (i)
--other......................................... 306 (k)
-------
8,365
-------
Interest income................................. 224 (d)
-------
Total revenue of owned operations............. 61,866
-------
OPERATING COSTS AND EXPENSES
Lodging--rooms.................................. 7,588
--food and beverage............................. 12,762
--other......................................... 19,166
-------
39,516 (f)
-------
Formal wear, laundry & other
--laundry....................................... 2,469 (h)
--formal wear................................... 3,936 (j)
--other......................................... 263 (k)
-------
6,668
-------
Corporate expenses.............................. 1,914 (l)
Depreciation and amortization................... 4,438 (n)
-------
Total operating costs and expenses............ 52,536
-------
GROSS OPERATING PROFIT............................ 9,330
Interest expense................................ (6,060)(m)
Equity earnings of affiliates................... 291 (e)
Gain on sale of assets.......................... (31)(p)
-------
INCOME FROM OPERATIONS BEFORE INCOME TAXES........ $ 3,530
=======
</TABLE>
--------

References (a)-(p) refer to the reformatted totals by segment in the
accompanying Pro Forma Condensed Consolidated Statement of Operations of KMC.

F-37
<PAGE>

KAHLER MANAGEMENT CORPORATION (KMC)

NOTES TO PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS--(CONTINUED)

FOR THE FIRST SIX MONTHS ENDED JULY 2, 1995
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

(C) This column reflects the historical revenues and certain operating expenses
(including estimated Percentage Lease payments) of the Canyon Springs Park
Hotel which was acquired by Realty on August 1, 1995. Also included is
management fee income and equity losses for the Butte Hotel, which is under
contract to be acquired by Historical Kahler.

(D) This pro forma adjustment represents management fees to be paid to KMC by
Realty pursuant to the University Park Hotel management agreement.

(E) This pro forma adjustment represents KMC's share of equity earnings (loss)
in the University Park Hotel and the Plaza One Hotel.

(F) This adjustment represents estimated lease payments calculated on a pro
forma basis using the provisions contemplated in the Percentage Leases and
historical revenues of the Hotels which will be leased to KMC pursuant to
Percentage Leases.

Revenues of the leased Hotels for the six months ended July 2, 1995 are
presented below. The Canyon Springs Park Hotel, which was acquired on
August 1, 1995 is not included in the information presented.

<TABLE>
<S> <C>
Room revenue..................... $27,854
Food and beverage revenue........ 14,828
Percentage lease revenue......... 13,002
</TABLE>

(G) This adjustment represents the transfer of corporate expenses that will be
the responsibility of Realty.

(H) There is no adjustment for estimated federal and state taxes for there is
no expected benefit to be obtained from the first six months' operating
loss.

(I) Pro forma loss per share before extraordinary item assumes the conversion
of all outstanding exercisable options as of the date of the offering and
is based upon 479,177 shares of KMC Common Stock outstanding during the
period.

F-38
<PAGE>

III. KAHLER REALTY CORPORATION (HISTORICAL KAHLER)

F-39
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders

Kahler Realty Corporation and Subsidiaries:

We have audited the accompanying consolidated balance sheet of Kahler Realty
Corporation and Subsidiaries as of January 1, 1995 and January 2, 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years then ended. 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. The consolidated
financial statements of Kahler Realty Corporation and Subsidiaries as of and
for the year ended January 3, 1993 were audited by other auditors whose report
thereon dated February 19, 1993, (except for Note 13 as to which the date was
November 12, 1993) expressed an unqualified opinion, including explanatory
paragraphs, on those consolidated statements.

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 January 1, 1995 and January 2, 1994,
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

Chicago, Illinois

February 17, 1995

F-40
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Stockholders and Directors

Kahler Realty Corporation:

We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows for the year ended January 3, 1993 of
Kahler Realty Corporation (formerly Kahler Corporation) and Subsidiaries (the
Company). These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, such consolidated statements of operations, stockholders'
equity, and cash flows present fairly, in all material respects, the results of
operations and cash flows of Kahler Realty Corporation and Subsidiaries for the
year ended January 3, 1993 in conformity with generally accepted accounting
principles.

Deloitte & Touche LLP

Minneapolis, Minnesota

February 19, 1993

(Except for Note 13, as to which the date is November 12, 1993)

F-41
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
JANUARY JANUARY JULY 2,
2, 1994 1, 1995 1995
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash........................................... $ 984 $ 1,110 $ 1,324
Receivables:
Trade, less allowance for doubtful accounts
of $214, $252, and $239, respectively (Note
10)......................................... 4,371 5,333 6,173
Current portion of notes receivable.......... 300 150 150
Inventories.................................... 2,354 2,498 2,557
Prepaid expenses............................... 233 265 446
-------- -------- --------
Total current assets......................... 8,242 9,356 10,650
-------- -------- --------
OTHER ASSETS
Notes receivable, primarily from affiliates
(Note 2)...................................... 4,828 1,423 1,393
Investment in and advances to affiliates (Note
4)............................................ 3,460 3,279 3,425
Debt service reserve fund...................... 750 750 750
Intangibles (Note 1)........................... 518 791 736
Other.......................................... 1,865 1,823 2,069
-------- -------- --------
Total other assets........................... 11,421 8,066 8,373
-------- -------- --------
PROPERTY AND EQUIPMENT
Land and improvements.......................... 15,225 16,349 16,349
Buildings...................................... 130,240 136,967 136,967
Equipment...................................... 46,312 46,977 48,232
Formal wear apparel............................ 5,096 4,735 5,763
-------- -------- --------
Total...................................... 196,873 205,028 207,311
Less accumulated depreciation.............. 54,130 54,281 58,521
-------- -------- --------
142,743 150,747 148,790
Construction in progress................... -- -- 811
-------- -------- --------
Total property and equipment............... 142,743 150,747 149,601
-------- -------- --------
TOTAL ASSETS............................... $162,406 $168,169 $168,624
======== ======== ========
</TABLE>

See Notes to Consolidated Financial Statements

F-42
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1, JULY 2,
1994 1995 1995
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Note 10)................. $ 7,066 $ 8,559 $ 7,727
Accrued liabilities:
Payroll and payroll related liabilities.. 2,543 2,473 3,092
Real estate taxes........................ 2,011 1,996 2,214
Other taxes.............................. 736 806 1,309
Notes payable (Note 5)..................... 2,450 5,300 4,100
Current portion of long-term debt.......... 3,212 2,767 2,912
Current portion of subordinated debt due to
affiliate................................. -- 500 500
-------- -------- --------
Total current liabilities.............. 18,018 22,401 21,854
-------- -------- --------
LONG-TERM DEBT (Note 5)
Obligations of Kahler Realty Corporation... 93,727 94,942 94,300
Obligations of Subsidiaries--Nonrecourse to
Kahler Realty Corporation................. 27,046 26,517 26,265
-------- -------- --------
Total long-term debt................... 120,773 121,459 120,565
-------- -------- --------
OTHER DEFERRED LIABILITIES
Deferred revenue........................... 714 137 134
Other...................................... 1,268 1,401 1,392
-------- -------- --------
Total other deferred liabilities....... 1,982 1,538 1,526
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (Note 8)
SUBORDINATED DEBT DUE TO AFFILIATE (Note 7).. 2,000 1,500 1,000
-------- -------- --------
REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note
6).......................................... 3,267 -- --
-------- -------- --------
Authorized--10,000,000 shares, Issued and
outstanding 141,828 shares, Redemption
amount $3,546, January 2, 1994............
STOCKHOLDERS' EQUITY (Note 7)................
Common stock, par value $.10...............
Authorized--70,000,000 shares; Issued and
outstanding--3,425,798, 4,167,598 and
4,211,031, respectively................. 343 417 421
Additional paid-in capital................. 8,450 13,030 13,250
Retained earnings.......................... 7,800 7,991 10,175
Minimum pension liability adjustment (Note
9)........................................ (227) (167) (167)
-------- -------- --------
Total stockholders' equity............. 16,366 21,271 23,679
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................ $162,406 $168,169 $168,624
======== ======== ========
</TABLE>

See Notes to Consolidated Financial Statements

F-43
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

CONSOLIDATED STATEMENTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
SIX MONTHS
FOR YEARS ENDED ENDED
-------------------------------- ----------------
JULY JULY
JANUARY 3, JANUARY 2, JANUARY 1, 3, 2,
1993 1994 1995 1994 1995
---------- ---------- ---------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Revenue of owned
operations............... $ 74,014 $ 96,979 $109,910 $56,345 $61,866
Other properties managed
and/or partially owned... 29,237 17,910 17,490 8,576 8,362
-------- -------- -------- ------- -------
Total revenues.......... $103,251 $114,889 $127,400 $64,921 $70,228
======== ======== ======== ======= =======
REVENUE OF OWNED OPERATIONS
Lodging--rooms............ $ 33,314 $ 46,026 $ 54,108 $27,901 $31,308
--food and beverage....... 17,374 25,185 29,339 14,501 16,081
--other................... 7,720 9,294 9,796 5,216 5,888
Formal wear, laundry &
other.................... 14,182 15,277 15,894 8,444 8,365
Interest income........... 1,424 1,197 773 283 224
-------- -------- -------- ------- -------
Total revenue of owned
operations............. 74,014 96,979 109,910 56,345 61,866
-------- -------- -------- ------- -------
OPERATING COSTS AND EXPENSES
Lodging--rooms............ 8,272 11,388 13,523 6,793 7,588
--food and beverage....... 14,445 19,801 23,221 11,542 12,762
--other................... 22,336 29,785 34,053 17,118 19,166
Formal wear, laundry &
other.................... 12,092 12,621 13,487 7,194 6,668
Corporate expenses........ 3,225 3,272 3,257 1,694 1,914
Depreciation and
amortization (Note 10)... 6,492 7,904 8,477 4,298 4,438
Non-recurring charges
(Note 10)................ 2,758 -- 1,811 -- --
-------- -------- -------- ------- -------
Total operating costs
and expenses........... 69,620 84,771 97,829 48,639 52,536
-------- -------- -------- ------- -------
GROSS OPERATING PROFIT...... 4,394 12,208 12,081 7,706 9,330
Interest expense.......... (7,303) (9,362) (11,207) (5,248) (6,060)
Equity earnings (loss) of
affiliates............... (688) 27 193 98 291
Gain (Loss) on sale of
assets................... (693) 6 20 11 (31)
-------- -------- -------- ------- -------
INCOME (LOSS) FROM
OPERATIONS BEFORE INCOME
TAXES...................... (4,290) 2,879 1,087 2,567 3,530
Provision (Credit) for
income taxes............. (300) 875 323 770 1,094
-------- -------- -------- ------- -------
Income (Loss) before
extraordinary item and
change in accounting
principle................ (3,990) 2,004 764 1,797 2,436
Extraordinary item net of
income taxes (Note 10)... 2,517 -- -- -- --
Cumulative effect of
change in accounting for
nonpension postretirement
benefits (Note 9)........ (250) -- -- -- --
-------- -------- -------- ------- -------
NET INCOME (LOSS)........... $ (1,723) $ 2,004 $ 764 $ 1,797 $ 2,436
======== ======== ======== ======= =======
PER COMMON SHARE DATA
Primary income (loss) per
common share............... $ (.59) $ .49 $ .14 $ .43 $ .57
======== ======== ======== ======= =======
Fully diluted income (loss)
per common share........... $ ( .59) $ .46 $ .14 $ .43 $ .57
======== ======== ======== ======= =======
</TABLE>

See Notes to Consolidated Financial Statements

F-44
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS
FOR YEARS ENDED ENDED
-------------------------------- ----------------
JANUARY 3, JANUARY 2, JANUARY 1, JULY 3, JULY 2,
1993 1994 1995 1994 1995
---------- ---------- ---------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net income (loss)......... $(1,723) $ 2,004 $ 764 $ 1,797 $ 2,436
Adjustments to reconcile
net income (loss) to net
cash provided by
operating activities:
Depreciation and
amortization........... 6,492 7,904 8,477 4,298 4,438
Common stock issued
under employee benefit
plans.................. 263 130 6 3 105
Equity in (earnings)
loss of affiliates..... 688 (27) (193) (98) (291)
(Gain) Loss on sale of
assets................. 693 (6) (20) (11) (31)
Writedown of hotel
property............... 1,200 -- -- -- --
Gain on debt
extinguishment......... (2,795) -- -- -- --
Change in current assets
and current liabilities:
Receivables............. (490) (533) (962) (1,034) (840)
Inventories............. (100) (115) (144) (92) (59)
Prepaid expenses........ 123 57 (32) (271) (181)
Accounts payable........ 809 74 1,493 (304) (832)
Accrued liabilities..... (733) 929 (15) 1,304 1,340
------- -------- -------- ------- -------
Net cash provided by
operating activities. 4,427 10,417 9,374 5,592 6,085
------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payments for property and
equipment................ (11,583) (12,190) (13,523) (8,682) (3,163)
Proceeds from sale of
property and equipment... 19 146 125 14 35
Payments received on notes
receivable............... 2,418 614 250 105 30
Additions to notes
receivable............... (465) -- -- -- --
Investment in and advances
to affiliates............ (430) (3,365) -- -- (42)
Payments received from
affiliates............... 918 330 374 187 187
Payments for intangible
assets................... (272) (15) (374) (37) (2)
Increase in other assets.. (402) (205) (108) (1,037) (322)
------- -------- -------- ------- -------
Net cash used in
investment
activities........... (9,797) (14,685) (13,256) (9,450) (3,277)
------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Dividends paid to
preferred shareholders... (319) (319) (224) (159) --
Dividends paid to common
shareholders............. -- (205) (349) (142) (252)
Proceeds from issuance of
common stock............. 65 119 1,352 420 119
Purchase of common stock.. -- (62) -- -- --
Proceeds from issuance of
subordinated debt........ 2,000 -- -- -- --
Proceeds from new long-
term debt and notes
payable.................. 13,178 11,864 3,833 3,700 227
Principal payments on
long-term debt........... (9,210) (3,087) (3,592) (1,159) (976)
Principal payments on
subordinated debt........ -- -- -- -- (500)
Net borrowings (payments)
under line-of-credit
agreements and short-term
notes payable............ (150) (3,500) 2,850 1,700 (1,200)
Unrecognized gain(loss) on
defined benefit pension
plan..................... (5) (168) 60 -- --
Increase (Decrease) in
other liabilities........ 416 (193) 78 (174) (12)
------- -------- -------- ------- -------
Net cash provided by
financing activities. 5,975 4,449 4,008 4,186 (2,594)
------- -------- -------- ------- -------
INCREASE IN CASH............ 605 181 126 328 214
CASH AT BEGINNING OF THE
PERIOD..................... 198 803 984 984 1,110
------- -------- -------- ------- -------
CASH AT END OF THE PERIOD... $ 803 $ 984 $ 1,110 $ 1,312 $ 1,324
======= ======== ======== ======= =======
</TABLE>

See Notes to Consolidated Financial Statements

F-45
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995

AND SIX MONTHS ENDED JULY 2, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
COMMON STOCK MINIMUM
----------------- ADDITIONAL PENSION
NUMBER PAID-IN RETAINED LIABILITY
OF SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
--------- ------ ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 29,
1991................... 3,278,226 $328 $ 7,950 $ 8,362 $ (54) $16,586
Net Loss.............. (1,723) (1,723)
Dividends paid to
preferred
shareholders......... (319) (319)
Unrecognized loss on
defined benefit
pension plan......... (5) (5)
Common stock issued... 82,876 8 320 328
--------- ---- ------- ------- ----- -------
BALANCE, January 3,
1993................... 3,361,102 336 8,270 6,320 (59) 14,867
Net Income............ 2,004 2,004
Dividends paid to
preferred
shareholders......... (319) (319)
Dividends paid to
common shareholders
($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)
--------- ---- ------- ------- ----- -------
BALANCE, January 2,
1994................... 3,425,798 343 8,450 7,800 (227) 16,366
Net income............ 764 764
Dividends paid to
preferred
shareholders......... (224) (224)
Dividends paid to
common shareholders
($0.09 per share).... (349) (349)
Unrecognized gain on
defined benefit
pension plan......... 60 60
Common stock issued
(Note 6)............. 741,800 74 4,580 4,654
--------- ---- ------- ------- ----- -------
BALANCE, January 1,
1995................... 4,167,598 417 13,030 7,991 (167) 21,271
Net income............ 2,436 2,436
Dividends paid to
common shareholders
($0.06 per share).... (252) (252)
Common stock issued... 43,433 4 220 224
--------- ---- ------- ------- ----- -------
BALANCE, July 2, 1995
(unaudited)............ 4,211,031 $421 $13,250 $10,175 $(167) $23,679
========= ==== ======= ======= ===== =======
</TABLE>

See Notes to Consolidated Financial Statements

F-46
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995

(UNAUDITED AS TO INTERIM PERIODS)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Description of business

Kahler Realty Corporation was incorporated under the Minnesota Business
Corporation Act on May 18, 1994, as a wholly owned subsidiary of Kahler
Corporation. On October 11, 1994, Kahler Corporation was merged into Kahler
Realty Corporation, and each outstanding share of Kahler Corporation common
stock was converted into one share of Kahler Realty Corporation common stock.
Kahler Realty Corporation has continued Kahler Corporation's business
activities which principally consist of the operation and management of hotel
properties. Kahler Realty Corporation also operates commercial laundries in
Rochester and Salt Lake City which provide services to its hotels as well as
outside accounts. Kahler Realty Corporation's other business activities include
operating a wholesale and retail formal wear business. Kahler Realty
Corporation and Kahler Corporation are collectively referred to as Historical
Kahler in the accompanying consolidated financial statements and notes thereto.

Principles of consolidation

The consolidated financial statements include the accounts of Historical
Kahler and its wholly-owned subsidiaries. Investments of 50% or less in owned
affiliates in which Historical Kahler possesses significant influence are
accounted for under the equity method. In 1990, Historical Kahler entered into
a transaction in which it transferred title of the University Park Hotel to an
investor in exchange for a $4,620, 9% mortgage note with an option to convert
the note into a 60% equity interest in the hotel in 1998. Historical Kahler
consolidates the assets and liabilities of the hotel which were approximately
$11,066 and $9,550 at January 2, 1994, $10,714 and $9,463 at January 1, 1995,
and $10,537 and $9,307 at July 2, 1995, respectively. All material intercompany
transactions and balances have been eliminated.

Reclassifications

The consolidated financial statements for prior years reflect certain
reclassifications to conform with classifications adopted in 1994. These
reclassifications have no effect on net income (loss) or stockholders' equity
as previously reported.

Revenues

Revenues of Historical Kahler are classified into two components. Historical
Kahler uses this presentation to show the total scope of Historical Kahler's
operations. The components of revenue are:

. Revenue of owned operations include revenues from lodging properties in
which Historical Kahler 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 Historical Kahler and the
properties managed for others. Under generally accepted accounting
principles, this revenue is not included in revenue of owned operations
and Historical Kahler's interest in partially-owned properties is
reflected in the Consolidated Statements of Operations as equity in
earnings (loss) of affiliates.

Cash and cash equivalents

Historical Kahler considers all highly liquid investments with a maturity of
three months or less at the time of purchase to be cash equivalents.

F-47
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Inventories

Inventories are stated primarily at the lower of average cost or market.

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 $6,230, $7,588 and
$8,197 for the years 1992, 1993, and 1994, respectively, and $4,154 and $4,305
for the first six months of 1994 and 1995, respectively. Capitalized interest
of $461 has been included in property and equipment for the year ended January
2, 1994. The estimated useful lives are:

<TABLE>
<S> <C>
Land improvements......... 5 to 25 years
Buildings................. 20 to 50 years
Equipment................. 5 to 20 years
Formal wear apparel....... 4 years
</TABLE>

Deferred debt expense

Deferred debt expense of $1,458, $1,309 and $1,408 at January 2, 1994,
January 1, 1995, and July 2, 1995, respectively, which is net of accumulated
amortization, is included in other assets and amortized over the life of the
respective loans.

Income taxes

Historical Kahler accounts for income taxes in accordance with the Statement
of Financial Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes",
which, among other things, requires an asset and liability approach in
accounting for deferred income taxes. (See Note 11)

Intangibles

Intangibles represent the pre-opening costs, organization costs, franchise
rights and an intangible pension asset relating to Historical Kahler's defined
benefit plan. Pre-opening costs include costs 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:

<TABLE>
<CAPTION>
JULY 2,
1993 1994 1995 EXPECTED LIFE
---- ---- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Pre-opening costs........................... $163 $163 $163 3 years
Organization costs.......................... 171 132 134 5 years
Franchise rights............................ 109 139 114 8 to 20 years
---- ---- ---- -------------
443 434 411
Accumulated amortization.................... 180 210 242
---- ---- ----
263 224 169
Intangible pension asset.................... 255 567 567
---- ---- ----
$518 $791 $736
==== ==== ====
</TABLE>

F-48
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Income (Loss) per common share

For 1993, 1994 and the first six months of 1994 and 1995, 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 warrant) aggregating 3,525,000, 3,956,000,
3,785,000 and 4,306,000, respectively.

For 1992, loss per share is computed on a primary share basis using only the
weighted average number of outstanding common shares aggregating 3,341,000.
Common stock equivalents have been excluded since the effect was antidilutive.

Income per share is computed on a fully diluted basis using the weighted
average number of outstanding common shares plus stock equivalents aggregating
3,743,000 for 1993. In 1992, 1994 and the first six months of 1994 and 1995 the
effect is the same as on a primary share basis.

Fiscal year

Historical Kahler's fiscal year ends on the Sunday closest to December 31.

Unaudited First Six Months Statements

The consolidated financial statements and related disclosures as of July 2,
1995 and for the six months ended July 3, 1994 and July 2, 1995 are unaudited;
however, in the opinion of management, all adjustments (consisting solely of
normal recurring adjustments) necessary for a fair presentation of the
consolidated financial statements for these periods have been included. The
results for the six months ended July 2, 1995 are not necessarily indicative of
the results to be obtained for the full fiscal year.

NOTE 2. NOTES RECEIVABLE

Notes receivable, primarily from affiliates, consist of contracts for deeds,
a first mortgage and a second mortgage, bearing interest at rates ranging from
8% to 10%.

Total maturities for notes receivable for the five years following January 1,
1995, are approximately $150, $554, $94, $258 , and $31, respectively.

NOTE 3. ACQUISITIONS

In March 1994, Historical Kahler acquired the Pocatello Park Quality Inn, a
152 room hotel property in Pocatello, Idaho for $5,224. This purchase was
financed with new long-term debt of $3,700. Historical Kahler's lines of credit
and internally generated funds were utilized to finance the balance of the
purchase price. In December 1994, Historical Kahler 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 Historical Kahler held a mortgage receivable of $2,783 net of
deferred revenue of $522. Historical Kahler 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 capital

F-49
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

lease. This transaction had the following impact on Historical Kahler's 1994
Consolidated Balance Sheet at the time of acquisition:

<TABLE>
<S> <C>
Current liabilities............... $ 320
Long term debt.................... 16
Deferred revenue.................. (522)
-----
$(186)
=====
</TABLE>
<TABLE>
<S> <C>
Current assets, excludes change
in current portion of notes
receivable...................... $ (300)
Current portion of notes
receivable...................... (165)
Notes receivable long term....... (3,140)
Property & equipment............. 3,419
-------
$ (186)
=======
</TABLE>

In May 1993, Historical Kahler acquired its partner's 50% interest in the
Salt Lake Hilton Hotel for $100 and the assumption of a first mortgage and a
capital lease for $12,098. Historical Kahler has accounted for this transaction
as a purchase and beginning the second quarter of 1993 consolidated all
financial information. Prior to this, Historical Kahler included 50% of the
hotel's income and loss as equity in earnings and loss from affiliates on
Historical Kahler's Consolidated Statements of Operations.

Historical Kahler acquired a 63.75% interest in the Ogden Park Hotel during
the third quarter of 1993 which it has managed since September 1989. At the
time of the acquisition Historical Kahler held a note receivable of
approximately $3,501, which is net of a reserve of $632 established in 1991.
Historical Kahler purchased this interest by assuming a $9,400 tax-exempt bond
less a cash payment from previous owners of $100. In addition, the note
receivable gives Historical Kahler the option to acquire an additional 21.75%
interest in the joint venture. Historical Kahler has accounted for the
transaction as a purchase and consolidated the activities of this joint
venture. No minority interest has been reflected due to the remote likelihood
of Historical Kahler's partners receiving any future economic benefits.

The 1993 transactions had the following impact on Historical Kahler's
Consolidated Balance Sheet at the time of the acquisition:

<TABLE>
<S> <C>
Current assets.................. $ 1,161
Note receivable................. (3,501)
Investments in and advances to
affiliates..................... (2,620)
Intangibles..................... (59)
Other assets.................... 45
Property and equipment.......... 28,079
-------
$23,105
=======
</TABLE>
<TABLE>
<S> <C>
Current liabilities......... $ 1,458
Long term debt.............. 21,498
Other deferred liabilities.. 149
-------
$23,105
=======
</TABLE>

Also in the third quarter of 1993, Historical Kahler acquired a 26.6%
interest in a corporation which owns the Plaza One Hotel in Rock Island,
Illinois for $250 and a 50% interest in a joint venture which owns the Provo
Park Hotel in Provo, Utah for $3,115. Both transactions were accounted for as
purchases and are accounted for under the equity method of accounting (Note 4).
Historical Kahler has management contracts for both properties.

The pro forma results listed below are unaudited and reflect the impact of
the purchase price accounting adjustments on Historical Kahler's Consolidated
Statement of Operations assuming the acquisitions occurred at the beginning of
each period presented.

F-50
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
----------------- ENDED JULY
1993 1994 2, 1995
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Revenue of owned operations...................... $111,607 $115,155 $61,866
Income before extraordinary item and change in
accounting principle............................ 2,494 895 2,436
Net income....................................... 2,494 895 2,436
Income per common share:
Primary........................................ .63 .17 .57
Fully diluted.................................. .59 .17 .57
</TABLE>

NOTE 4. INVESTMENT IN AND ADVANCES TO AFFILIATES

<TABLE>
<CAPTION>
OWNERSHIP JANUARY 2, JANUARY 1, JULY 2,
INTERESTS 1994 1995 1995
--------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Equity investments
Provo Park Hotel, Provo,
UT..................... 50.0% $3,087 $3,165 $3,308
Kahler Park Hotel,
Hibbing, MN............ 25.0% 205 114 117
Plaza One Hotel, Rock
Island, IL............. 26.6% 168 -- --
------ ------ ------
$3,460 $3,279 $3,425
====== ====== ======
</TABLE>

Investment in and advances to affiliates represent Historical Kahler's
proportionate share of the affiliates' assets and liabilities as adjusted to
reflect the effect of any basis differences. Historical Kahler or its
subsidiaries typically serve as a general partner or limited partner of the
partnership and operate the hotels under long-term management contracts.

Historical Kahler's income from affiliates before taxes is as follows:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
---------------------- ---------------
(UNAUDITED)
JAN.
3, JAN. 2, JAN. 1, JULY 3, JULY 2,
1993 1994 1995 1994 1995
----- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Management fees.......................... $ 408 $268 $381 $162 $187
Equity in net earnings (losses).......... (688) 27 193 98 291
----- ---- ---- ---- ----
$(280) $295 $574 $260 $478
===== ==== ==== ==== ====
</TABLE>

Combined summarized balance sheet information for affiliates is as follows:

<TABLE>
<CAPTION>
JAN. JAN.
2, 1, JULY 2,
1994 1995 1995
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets........................................ $ 808 $ 654 $ 742
Noncurrent assets..................................... 15,810 15,629 15,405
Current liabilities................................... 1,073 1,595 1,433
Long-term debt, principally mortgages................. 9,162 9,162 9,211
Other long-term liabilities........................... 1,295 1,273 1,293
Owners' equity........................................ 5,088 4,253 4,210
</TABLE>

F-51
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Combined summarized operating results reported by these affiliates are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
------------------------ --------------
JAN. JULY JULY
JAN. 3, 2, JAN. 1, 3, 2,
1993 1994 1995 1994 1995
------- ------ ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.............................. $17,711 $8,056 $11,099 $5,418 $6,266
Net losses............................ (1,046) (236) (87) (470) (42)
</TABLE>

NOTE 5. FINANCING

Notes payable consists of $4,300 on January 1, 1995 and $4,100 on July 2,
1995, drawn on various lines of credit with a maximum available of $5,000. In
addition, a short-term note payable of $1,000 was outstanding at January 1,
1995. The lines of credit each carry an interest rate of prime plus 1%, the
note payable carries an interest rate of 8.75% and are secured by property and
equipment, inventory and accounts receivable. The Company anticipates the
extension of all its lines of credit. Prime rate at January 2, 1994, January 1,
1995 and July 2, 1995 was 6.0%, 8.5% and 9.0%, respectively.

Outstanding long-term debt, which is secured by substantially all property
and equipment is summarized as follows:

OBLIGATIONS OF HISTORICAL KAHLER

Mortgages
<TABLE>
<CAPTION>
SECURITY/SECURED JANUARY 2, JANUARY 1, JULY 2,
PROPERTY INTEREST RATE MATURITY 1994 1995 1995
---------------- ------------- -------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Kahler 10.0% plus 2.0%
Plaza of room sales
Hotel November 1997 $15,595 $15,455 $15,377
Clinic View 9.75% plus 2.0%
Inn and of room sales
Suites May 2000 14,766 14,654 14,580
Sheraton 7.5% plus added
San Marcos interest (1)
Golf
Resort and
Conference
Center December 2000 13,600 12,700 12,700
The Kahler Prime plus 1.0%
Hotel December 2003 12,754 12,421 12,203
Textile 9.875%
Care June 2013 9,907 9,729 9,615
Salt Lake Prime plus 0.5%
Hilton
Hotel June 2003 6,954 6,850 6,785
Ogden Park Prime plus 0.5%
Hotel Cap rate of 12.0% August 1999 5,430 5,266 5,190
Lakeview Prime plus 1.125%
Conference
Center and
Resort September 1996 5,011 4,645 4,549
Olympia Prime plus 2.0%
Park Hotel August 2013 3,973 3,897 3,853
Boise Park Prime plus 1.0%
Suites
Hotel March 1997 3,882 3,851 4,058
Pocatello Prime plus 1.5%
Park
Quality
Inn April 2014 -- 3,651 3,614
The Kahler 12.0%
Hotel December 2003 2,928 2,885 2,855
Lakeview Prime rate
Conference
Center and
Resort,
Knights
Inns June 2004 710 667 648
Sheraton Prime plus 1.0%
San Marcos
Golf
Resort and
Conference
Center July 1997 7 -- --
Notes Prime to 11.0% Various dates through
payable September 1997 638 290 440
Capitalized 12.2% to 12.93%
leases May 1997 33 46 44
------- ------- -------
Total 96,188 97,007 96,511
Less
current
maturities 2,461 2,065 2,211
------- ------- -------
93,727 94,942 94,300
------- ------- -------
</TABLE>

--------

(1)Added interest is defined as approximately 67% of Excess Cash Flow as
defined. Also see Note 8.

F-52
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

OBLIGATIONS OF SUBSIDIARIES--NONRECOURSE TO HISTORICAL KAHLER

Mortgages

<TABLE>
<CAPTION>
SECURITY/SECURED JANUARY 2, JANUARY 1, JULY 2,
PROPERTY INTEREST RATE MATURITY 1994 1995 1995
---------------- ------------- -------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Salt Lake Prime plus 0.5%
Hilton June 2003 5,000 5,000 5,000
Knights Inns Prime rate June 2009 4,201 4,073 4,045
University Tax-exempt variable
Park Hotel rate, 4.7% to 5.9% December 2015 9,055 8,935 8,935
Ogden Park Tax-exempt variable
Hotel rate, 4.55% to 5.2% September 2013 9,200 8,900 8,700
Special 7.5% to 12.0%
assessments December 1997 200 158 156
Capitalized 0.0% to 14.3% August 1994 to
leases June 1998 141 153 130
-------- -------- --------
Total 27,797 27,219 26,966
Less current
maturities 751 702 701
-------- -------- --------
27,046 26,517 26,265
-------- -------- --------
Total
outstanding 123,985 124,226 123,477
Less current
maturities 3,212 2,767 2,912
-------- -------- --------
$120,773 $121,459 $120,565
======== ======== ========
</TABLE>

Total maturities of long-term debt excluding capital lease obligations, in
each of the five years subsequent to January 1, 1995 are approximately $2,700,
$6,827, $21,349, $2,724, and $7,146, respectively.

Historical Kahler has arranged for the issuance of letters of credit
aggregating $1,475 (increased to $2,000 subsequent to year end) as additional
collateral for certain of the nonrecourse obligations listed above.

Under certain financial debt covenants, Historical Kahler is required to
maintain certain levels of net worth, debt to equity and cash flow ratios.
Waivers of certain covenants have been obtained for fiscal 1995 and 1994.

The laundry facility in Rochester, Minnesota was financed with a $10,000
loan. In the event of default by Historical Kahler on this loan the lender can
require Historical Kahler's largest shareholder to purchase the loan at its
outstanding balance.

NOTE 6. REDEEMABLE CONVERTIBLE PREFERRED STOCK

On December 28, 1989, Historical Kahler issued 141,828 shares of $2.25
Cumulative Convertible Exchangeable Preferred Stock with a stated value of
$25.00 per share. Preferred stock dividends are payable quarterly at an annual
rate of $2.25 per preferred share. The preferred stock carries a liquidation
preference of $25.00 per share plus accumulated and unpaid dividends. The
preferred stock is convertible into common stock at any time at a rate
equivalent to a conversion price of $9.25. On September 21, 1994 Historical
Kahler sent a letter notifying the Preferred Shareholders of its intent to
redeem all outstanding shares of preferred stock outstanding as of October 7,
1994. All remaining Preferred Shareholders elected to convert their outstanding
preferred shares to common stock in 1994.

F-53
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Preferred stock for 1993 is net of unamortized offering costs of $279 which
were being amortized over a ten-year period. Upon conversion in 1994, preferred
stock of $3,296 net of $250 in unamortized offering costs was reclassified to
common stock and additional paid-in capital.

NOTE 7. STOCKHOLDERS' EQUITY

Preferred stock

Historical Kahler has authorized 10,000,000 shares of Preferred Stock, par
value $.10 per share. No shares were outstanding as of January 1 and July 2,
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
options, employee retirement and stock purchase plans.

Dividends

The Board of Directors of Historical Kahler authorized a stock split effected
in the form of a 2-for-1 stock dividend on April 30, 1993 which was paid on
June 1, 1993 to shareholders of record on May 15, 1993. All common share and
per share amounts in the consolidated financial statements and notes thereto
have been restated to give retroactive effect to the stock dividend. In
addition, $168, representing the par value of the new shares issued, was
transferred from retained earnings to common stock.

Stock option plan

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 and options not qualifying as incentive stock options may be
granted to non-employees providing valuable services to Historical Kahler at
not less than 50% of the fair market value. None of these shares have been
granted at less than market value. Total number of shares authorized under
these plans are 616,425. Key employee options expire five years after date of
grant and are exercisable 25% per year commencing one year after the date of
grant. Non-employee director options expire in ten years after date of grant
and are exercisable after one year. Activity under the plans is summarized
below:

<TABLE>
<CAPTION>
OPTION
NUMBER PRICE
OF SHARES PER SHARE
--------- -----------
<S> <C> <C>
Balance, December 29, 1991........................ 354,526 $3.50-10.00
Granted......................................... 144,000 3.00- 4.13
Canceled........................................ (61,926) 3.50-10.00
-------- -----------
Balance, January 3, 1993.......................... 436,600 3.00- 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
======== ===========
</TABLE>

F-54
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

On January 7, 1993, Historical Kahler's Board of Directors approved the
repricing of all granted employee stock options that had an exercise price of
$5 per share or higher to a market price as of that date which was $2.88 per
share. At January 1, 1995, options for 154,100 were exercisable and 198,500
shares were available for granting of additional options.

Issuance of common stock warrant

In January 1992, Historical Kahler issued a $2,000 subordinated note to
Historical Kahler's largest shareholder. The subordinated note requires annual
principal payments of $500 per year beginning January 21, 1995, matures on
January 21, 1998 and carries an interest rate of prime plus 1%. The January
1995 payment was made as scheduled. Historical Kahler has the right to repay
the note in cash or with common stock equal to 120% of the subordinated note at
any time. In addition, Historical Kahler issued a warrant for 150,000 shares of
common stock at an exercise price of $3.25. The warrant was exercised in 1994.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Historical Kahler is in the discovery stage of litigation with a
telecommunications company relating to disputed unremitted telephone revenue
and fees at ten of Historical Kahler's hotels. Historical Kahler has denied all
claims and has made counter claims relating to breach of contract and intends
to pursue all available alternatives. The outcome of this dispute is uncertain;
accordingly no adjustments have been made to the accompanying consolidated
financial statements.

In December 1994 Historical Kahler received notice of default relating to
bond indebtedness on one of its wholly owned properties. A group of bondholders
have claimed Historical Kahler incorrectly calculated added interest for this
hotel for the year 1993 in the amount of approximately $267. Historical Kahler
denies the claim. If the bondholders were found judicially correct, Historical
Kahler would owe this amount for 1993 and an additional $618 for 1994.

Additionally, Historical Kahler is involved in various litigation in the
normal course of business. Historical Kahler does not expect the outcome of the
matters described above to have a material adverse effect on Historical
Kahler's consolidated financial statements.

Operating leases

Historical Kahler leases warehouse and retail store facilities for its formal
wear operations and land for two 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 $1,288, $1,474 and
$1,550 which includes contingent rentals of $359, $410 and $486 for 1992, 1993
and 1994, respectively.

Future minimum lease payments under operating leases total $5,175 with annual
payments of $958, $602, $369, $233 and $175 due in each of the next five years,
respectively.

Capital leases

Historical Kahler leases furniture and equipment under capital leases. Future
minimum lease payments under these capital leases total $272 with annual
payments of $101, $100, $54, $17 and $ -0- due in each of the next five years,
respectively. Of the $272 of total minimum lease payments, $73 represents
interest.

F-55
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following is an analysis of property under capital leases:

<TABLE>
<CAPTION>
1993 1994
----- -----
<S> <C> <C>
Equipment................................................... $ 782 $ 465
Less accumulated amortization............................... (232) (164)
----- -----
$ 550 $ 301
===== =====
</TABLE>

Annual amortization of leased equipment is classified with depreciation
expense.

Other

In 1994, Historical Kahler purchased land to expand the Boise Park Suites
Hotel. Historical Kahler has a loan commitment to fund substantially all of the
expansion costs.

NOTE 9. RETIREMENT PLANS

Historical Kahler has defined benefit and contribution plans covering
substantially all employees. Pension contributions and expenses for the defined
benefit plan are determined based on the actuarial cost of current service and
amortization of prior service costs over a 20-year period. The funding of the
defined contribution plan is determined by the Board of Directors.

Total pension expense for both plans was $393, $336, and $215 for 1992, 1993
and 1994, respectively.

Net periodic pension cost for the defined benefit plan included the following
components:

<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
<S> <C> <C> <C>
Service costs-benefits earned during the period............... $ 68 $ 68 $ 80
Interest cost on projected benefit obligation................. 163 171 179
Return on assets-actual....................................... (93) (95) 8
Net amortization and deferral................................. 9 5 (102)
---- ---- ----
Net periodic pension cost..................................... $147 $149 $165
==== ==== ====
</TABLE>

The following table sets forth the Plan's funded status at January 2, 1994
and January 1, 1995:

<TABLE>
<CAPTION>
1993 1994
------ ------
<S> <C> <C>
Actuarial present value of vested benefit obligation..... $2,278 $2,503
------ ------
Accumulated benefit obligation........................... $2,342 $2,564
------ ------
Projected benefit obligation............................. $2,342 $2,564
Fair market value of plan assets*........................ 1,536 1,498
------ ------
Unfunded projected benefit obligation.................... 806 1,066
Unrecognized net liability at date of initial
application............................................. (46) (40)
Unrecognized prior service cost.......................... (209) (527)
Unrecognized net loss.................................... (227) (167)
Adjustment to recognize minimum liability................ 482 734
------ ------
Pension liability........................................ $ 806 $1,066
====== ======
</TABLE>
--------

* Plan assets consist primarily of equity and fixed income securities.

F-56
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Historical Kahler 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
January 1, 1995 the additional liability exceeded the unrecognized prior
service cost and the unrecognized transition liability by $167. 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 7.5% and 8.5% in 1993 and 1994,
respectively. The expected long-term rate of return on assets was 8%.

Historical Kahler provides postretirement benefits to a limited number of
retired employees relating to service provided prior to 1992. In 1992,
Historical Kahler adopted SFAS No. 106--Employer's Accounting for
Postretirement Benefits Other Than Pensions and recorded a cumulative charge of
$250 in 1992. This liability decreased by $25 and $25 in 1993 and 1994,
respectively.

NOTE 10. SEGMENTS

Historical Kahler'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. Historical Kahler's
other business activities include a wholesale and retail formal wear business
and institutional laundries. Intersegment transactions including laundry
revenues of $1,445, $1,437, and $1,857 in 1992, 1993, and 1994, respectively,
have been eliminated from the table below. Operating income (loss) 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 $28,079 in 1993 and
$2,783 in 1994. General corporate assets consist primarily of cash, notes and
other investments.

F-57
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following tables summarize Historical Kahler's segment information:

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
---------------------------- ------------------
(UNAUDITED)
JAN. 3, JAN. 2, JAN. 1, JULY 3, JULY 2,
1993 1994 1995 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUE OF OWNED OPERATIONS
Lodging.................... $ 58,408 $ 80,505 $ 93,243 $ 47,618 $ 53,277
Laundry.................... 4,694 6,200 6,304 3,309 3,057
Formal Wear................ 9,112 8,467 8,924 4,809 5,002
Other...................... 376 610 666 326 306
Interest income............ 1,424 1,197 773 283 224
-------- -------- -------- -------- --------
$ 74,014 $ 96,979 $109,910 $ 56,345 $ 61,866
======== ======== ======== ======== ========
OPERATING INCOME (LOSS)
Lodging.................... $ 8,976 $ 13,794 $ 16,304 $ 9,054 $ 10,504
Laundry.................... 601 331 (389) (269) 193
Formal Wear................ (193) 323 539 351 374
Other...................... (314) (65) 11 26 (3)
Non-recurring charges...... (2,758) -- (1,811) -- --
Corporate expense.......... (3,342) (3,372) (3,346) (1,739) (1,962)
Interest income............ 1,424 1,197 773 283 224
-------- -------- -------- -------- --------
Gross operating profit....... 4,394 12,208 12,081 7,706 9,330
Interest expense............. (7,303) (9,362) (11,207) (5,248) (6,060)
Equity earnings (loss) of
affiliates.................. (688) 27 193 98 291
Gain (Loss) on sale of
assets...................... (693) 6 20 11 (31)
-------- -------- -------- -------- --------
Income (Loss) from operations
before income taxes and
extraordinary items......... $ (4,290) $ 2,879 $ 1,087 $ 2,567 $ 3,530
======== ======== ======== ======== ========
IDENTIFIABLE ASSETS
Lodging.................... $108,912 $132,495 $141,423 $136,978 $140,708
Laundry.................... 5,922 14,819 14,703 15,262 14,496
Formal Wear................ 4,681 3,909 4,024 5,108 4,798
Other...................... 2,033 1,616 1,634 1,584 1,616
Corporate.................. 10,844 9,567 6,385 10,482 7,006
-------- -------- -------- -------- --------
$132,392 $162,406 $168,169 $169,414 $168,624
======== ======== ======== ======== ========
CAPITAL EXPENDITURES
Lodging.................... $ 7,127 $ 30,073 $ 13,859 $ 6,735 $ 1,818
Laundry.................... 2,853 9,368 846 542 90
Formal Wear................ 1,499 789 1,464 1,381 1,175
Other...................... 85 1 74 -- 27
Corporate.................. 19 38 63 24 53
-------- -------- -------- -------- --------
$ 11,583 $ 40,269 $ 16,306 $ 8,682 $ 3,163
======== ======== ======== ======== ========
DEPRECIATION AND AMORTIZATION
Lodging.................... $ 4,379 $ 5,737 $ 6,142 $ 3,111 $ 3,257
Laundry.................... 276 462 736 358 395
Formal Wear................ 1,617 1,547 1,411 754 692
Other...................... 103 58 99 30 46
Corporate.................. 117 100 89 45 48
-------- -------- -------- -------- --------
$ 6,492 $ 7,904 $ 8,477 $ 4,298 $ 4,438
======== ======== ======== ======== ========
</TABLE>

F-58
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

During the fourth quarter of 1994, Historical Kahler recorded non-recurring
charges of $1,811 related to expenses incurred in connection with a planned
secondary offering and conversion of Historical Kahler into a real estate
investment trust which was not completed as a result of market conditions.

Non-recurring charges of $2,758 in 1992 represents a $1,558 charge comprised
of settlement fees and legal fees related to the settlement of a lawsuit with
Historical Kahler's partner at the Sheraton San Marcos. The remaining $1,200 is
a writedown of the carrying value of a hotel. Simultaneous with the writedown,
Historical Kahler recorded an extraordinary gain of $2,517, net of income tax
of $278, as a result of extinguishment of debt pertaining to this hotel.

The loss on sale of assets in 1992 of $693 includes a loss of $397 on the
Wisconsin Dells hotel, a $400 writedown of assets and reserve for demolition of
a laundry in Rochester due to Historical Kahler's building of a new laundry,
and a gain of $104 on the sale of customer contracts related to the closing of
formal wear operations in San Jose.

Historical Kahler regularly furnishes laundry, hospitality and food services
to Historical Kahler's largest shareholder, the Mayo Foundation and its
affiliates (Mayo) at competitive prices. Historical Kahler purchases, at
competitive prices, steam, electricity, water and related utility services from
a Mayo affiliate. These activities are summarized below.

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
----------------------- ---------------
(UNAUDITED)
JAN. 3, JAN. 2, JAN. 1, JULY 3, JULY 2,
1993 1994 1995 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue
Laundry sales......................... $2,108 $2,885 $3,333 $1,667 $1,768
Food services......................... 1,026 1,173 951 475 494
Operating costs and expenses
Utilities............................. $2,322 $1,946 $1,870 $ 864 $ 612
Interest.............................. 138 140 162 73 80
</TABLE>

The consolidated balance sheet includes receivables and payables to Mayo
summarized as follows:

<TABLE>
<CAPTION>
JANUARY 2, JANUARY 1, JULY 2,
1994 1995 1995
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Receivables................................... $409 $424 $554
Payables (including accrued interest)......... 213 209 230
</TABLE>

In addition Historical Kahler has issued a $2,000 subordinated note to Mayo
which is further described in Note 7 of the Notes to Consolidated Financial
Statements.

Approximately $3.7 million in long-term debt secured by the Pocatello Park
Quality Inn has been provided by a lending institution affiliated with a
director of Historical Kahler.

F-59
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE 11. PROVISION FOR INCOME TAXES

Provision for income taxes consists of the following:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
-------------------------- ---------------
(UNAUDITED)
JAN. 3, JAN. 2, JAN. 1, JULY 3, JULY 2,
1993 1994 1995 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Federal tax, paid or (refundable).... $(13) $671 $350 $592 $ 847
State tax, currently paid or payable. 18 204 93 178 247
Net deferred credits (prepaid
charges)............................ (27) -- (120) -- --
---- ---- ---- ---- ------
Tax provision (credit)............... (22)(1) 875 323 770 1,094
Tax benefit from NOL carryforwards... -- -- -- -- --
---- ---- ---- ---- ------
Tax provision (credit) net of tax
benefit classified as extraordinary. $(22) $875 $323 $770 $1,094
==== ==== ==== ==== ======
</TABLE>
--------

(1) In 1992 a tax charge of $278 allocated to the extraordinary gain resulted
in the tax provision on the Consolidated Statements of Operations being a
$300 credit.

The effective tax rate is calculated using the provision for income taxes
including the tax benefits or charges in extraordinary items. The difference
between the U.S. Federal Statutory rate and the effective tax rate are as
follows:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
------------------------ ---------------
(UNAUDITED)
JAN. 3, JAN. 2, JAN. 1, JULY 3, JULY 2,
1993 1994 1995 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Statutory tax rate.................... (34.0)% 34.0% 34.0% 34.0% 34.0%
Effect of graduated federal rates..... 30.4 -- -- -- --
Change in the beginning of year
valuation allowance.................. -- (10.2) (15.0) (10.0) (9.0)
Other permanent differences........... 1.3 1.0 5.4 -- --
State taxes, before valuation
allowance and net of federal income
tax.................................. 1.1 5.6 5.3 6.0 6.0
----- ----- ----- ----- ----
Effective tax rate.................... (1.2)% 30.4% 29.7% 30.0% 31.0%
===== ===== ===== ===== ====
</TABLE>

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.

F-60
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Temporary differences comprising the net prepaid taxes included in other
assets on the Consolidated Balance Sheet at January 2, 1994 and January 1, 1995
is as follows:

<TABLE>
<CAPTION>
1993
--------------------------
TEMPORARY DIFFERENCES ASSETS LIABILITIES TOTAL
--------------------- ------ ----------- ------
<S> <C> <C> <C>
Allowance for doubtful accounts..................... $ 72 $ -- $ 72
Accrued employee benefits........................... 303 -- 303
Other............................................... 40 (64) (24)
------ ------- ------
Current........................................... 415 (64) 351
------ ------- ------
Depreciation and amortization....................... 497 (1,771) (1,274)
Deferred revenues................................... 2,241 (105) 2,136
Installment gains................................... -- (468) (468)
Property valuation allowances....................... 340 (110) 230
Joint ventures...................................... 256 (209) 47
Accrued employee benefits........................... 269 -- 269
------ ------- ------
Noncurrent........................................ 3,603 (2,663) 940
------ ------- ------
<CAPTION>
OTHER COMPONENTS
----------------
<S> <C> <C> <C>
Alternative minimum tax credits..................... 783 -- 783
General business credits............................ 576 -- 576
Valuation allowance................................. (2,257) -- (2,257)
------ ------- ------
(898) -- (898)
------ ------- ------
Net prepaid tax asset............................. $3,120 $(2,727) $ 393
====== ======= ======
<CAPTION>
1994
--------------------------
TEMPORARY DIFFERENCES ASSETS LIABILITIES TOTAL
--------------------- ------ ----------- ------
<S> <C> <C> <C>
Allowance for doubtful accounts..................... $ 75 $ -- $ 75
Accrued employee benefits........................... 360 -- 360
Other............................................... 13 (129) (116)
------ ------- ------
Current........................................... 448 (129) 319
------ ------- ------
Depreciation and amortization....................... 556 (1,605) (1,049)
Deferred revenues................................... 1,596 (108) 1,488
Installment gains................................... 8 (427) (419)
Property valuation allowances....................... 274 (90) 184
Joint ventures...................................... 589 (81) 508
Accrued employee benefits........................... 264 -- 264
------ ------- ------
Noncurrent........................................ 3,287 (2,311) 976
------ ------- ------
<CAPTION>
OTHER COMPONENTS
----------------
<S> <C> <C> <C>
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............................. $2,953 $(2,440) $ 513
====== ======= ======
</TABLE>

F-61
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Historical Kahler 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. Also,
these credits could generate a refund by carrying back net operating losses if
Historical Kahler incurred such losses in the future.

The total valuation allowance at the end of 1994 was $2,655. The net change
in the total valuation allowance for the years ended 1993 and 1994 was an
increase of $300 and $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, Historical
Kahler will need to generate future regular tax. Taxable income (loss) for the
years ended 1993 and 1994 was approximately $3,402 and $(547), respectively.
Based upon the levels of historical taxable income, projections for future
taxable income and the ability to carry back future net operating losses,
management believes it is more likely than not Historical Kahler will realize
the benefits of the net prepaid tax asset, net of the existing valuation
allowance at January 1, 1995.

NOTE 12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH
FINANCING AND INVESTING ACTIVITIES

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
------------------------- --------------
(UNAUDITED)
JULY JULY
JAN. 3, JAN. 2, JAN. 1, 3, 2,
1993 1994 1995 1994 1995
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Interest paid, net of amounts
capitalized........................ $ 7,447 $ 9,307 $10,968 $5,752 $6,397
Interest received................... (1,398) (1,026) (753) (277) (155)
Income taxes paid................... 306 889 520 302 409
</TABLE>

Historical Kahler acquired certain hotel interests in 1993 and 1994 as
described in Note 3.

NOTE 13. SEC PROCEEDING AND RESTATEMENT

From its opening in early 1988 through December 1989, Historical Kahler
deferred $784 of the operating losses of a property that was being held for
sale. These losses primarily occurred in 1988. Depreciation and amortization of
$754 and $774 for fiscal 1988 and 1989, respectively, would also have been
incurred had the property not been held for sale. Effective January 1, 1990,
Historical Kahler transferred the property to property and equipment categories
and included the results of operations of the property in its consolidated
statement of operations. In 1988 and 1989, Historical Kahler's independent
auditors issued an unqualified opinion on Historical Kahler's financial
statements.

In 1989, in connection with a registration statement filed earlier in 1989 by
Historical Kahler with the Securities and Exchange Commission (SEC), the SEC
initiated an informal inquiry and requested additional information, which
Historical Kahler provided, concerning Historical Kahler's accounting for
property it was holding for sale and its investment in the Sheraton San Marcos
Golf and Conference Center.

The Securities and Exchange Commission instituted an administrative
proceeding pursuant to Section 21C(a) of the Securities Exchange Act of 1934 on
June 24, 1993 against Historical Kahler, the President and CEO of Historical
Kahler and the Senior Vice President--Treasurer of Historical Kahler.

F-62
<PAGE>

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)

YEARS ENDED JANUARY 3, 1993, JANUARY 2, 1994 AND JANUARY 1, 1995 AND

FIRST SIX MONTHS ENDED JULY 3, 1994 AND JULY 2, 1995
(UNAUDITED AS TO INTERIM PERIODS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The matter concerned allegedly improper accounting and disclosure practices
employed by Historical Kahler during fiscal years 1988 through 1990, resulting
in violations of Sections 13(a) and 13(b)(2)(A) of the Exchange Act and Rules
12b-20 and 13a-13 thereunder.

Historical Kahler, the President and CEO and the Senior Vice President--
Treasurer, without admitting any wrongdoing, have agreed to permanently cease
and desist from causing any violation and any future violation of these
sections of the Exchange Act and Rules.

Pursuant to this SEC administrative proceeding, Historical Kahler has
restated its financial statements to reflect as an operating property the
property previously recorded as held for sale in 1988 and 1989. As a result,
Historical Kahler recognized previously deferred operating losses and recorded
depreciation and amortization expense with respect to this property during such
period. As a result of this restatement, the carrying value of property and
equipment, intangibles and other assets carried through to years 1990, 1991 and
1992 was decreased causing reductions in depreciation and amortization for
these years and related changes to the provision for income taxes. The effects
of the restatements are summarized as follows for 1992. The income (loss) per
common share and the retained earnings have been adjusted to give effect to the
2 for 1 stock dividend which is discussed in Note 7.

Consolidated Statement of Operations:

<TABLE>
<CAPTION>
1992 1992--AS
AS RESTATED PREVIOUSLY REPORTED
----------- -------------------
<S> <C> <C>
Revenue of owned operations.............. $74,014 $74,014
Income (Loss) from operations before
income taxes............................ (4,290) (4,335)
Net income (loss)........................ (1,723) (1,690)
Income (Loss) per common share........... (.59) (.58)
</TABLE>

NOTE 14. SUBSEQUENT EVENTS (UNAUDITED)

(a) Restructuring of Historical Kahler

Historical Kahler intends to engage in a series of transactions to
recapitalize its operations and restructure its assets in the form of a real
estate investment trust (REIT) and a hotel management company in the third
quarter of 1995. These transactions will include (i) the transfer of Historical
Kahler's hotel management, commercial laundry and formal wear business
operations and related net assets to Kahler Management Corporation (KMC), a
wholly owned subsidiary, (ii) the distribution of 90.5% of KMC's common stock
to existing shareholders of Historical Kahler and (iii) a public offering of
shares in Kahler Realty Corporation, which will continue Historical Kahler's
ownership and development business.

(b) Purchase Option on Hotel

In June 1995, Historical Kahler acquired an option to purchase a 112 room
hotel in Twin Falls, Idaho for $5.8 million. On August 1, 1995, Historical
Kahler exercised this option and financed the purchase with a first mortgage of
$3.8 million, a note payable to seller of $400 and $1.6 million from available
cash and lines of credit.

In April 1995, construction of a 108 room expansion of the Boise Park Suites
Hotel began. Substantially all of the remaining construction costs will be paid
for with a $4.9 million construction and permanent loan.

F-63
<PAGE>

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN, AND IF
GIVEN OR MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY REALTY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO PURCHASE ANY SECU-
RITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER IS UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION PROVIDED HEREIN IS CORRECT AT ANY TIME
SUBSEQUENT TO ITS DATE.
-----------------

TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 18
Realty.................................................................... 26
Use of Proceeds........................................................... 28
Price Range of Common Stock............................................... 29
Distributions............................................................. 29
Pro Forma Capitalization.................................................. 32
Selected Consolidated Financial and Operating Data of Historical Kahler... 32
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Historical Kahler.......................................... 35
Selected Consolidated Pro Forma Financial and Operating Data of Realty.... 40
Management's Discussion and Analysis of Pro Forma Financial Data of
Realty................................................................... 42
Growth Strategies......................................................... 44
Business and Operating Strategies......................................... 49
The Hotel Industry........................................................ 50
The Hotels................................................................ 52
Certain Agreements........................................................ 65
Directors and Executive Officers of Realty................................ 72
Certain Relationships and Related Transactions............................ 76
Policies and Objectives with Respect to Certain Activities................ 79
The Spin Off.............................................................. 82
Kahler Management Corporation............................................. 84
Principal Shareholders.................................................... 87
Description of Capital Stock.............................................. 88
Certain Provisions of Minnesota Law and Realty's Articles of Incorporation
and Bylaws............................................................... 90
Federal Income Tax Considerations......................................... 93
Underwriting.............................................................. 106
Legal Matters............................................................. 107
Change in Auditors........................................................ 107
Experts................................................................... 107
Available Information..................................................... 108
Certain Definitions....................................................... 108
Index to Financial Statements............................................. F-1
</TABLE>

8,420,000 SHARES

KAHLER REALTY

CORPORATION

COMMON STOCK

($.10 PAR VALUE)

LOGO

SALOMON BROTHERS INC

DILLON, READ & CO. INC.

PROSPECTUS

DATED , 1995
<PAGE>

Graphics Appendix
-----------------

Inside Front Cover Page:
------------------------

Drawing showing the location of Realty's Hotels. Using a drawing of the United
States, blue shading indicates those states in which hotels owned by Realty are
located (Idaho, Utah, Arizona, Texas, Minnesota and West Virginia), and yellow
shading indicates those states in which hotels that Realty has an option or
right of first refusal to acquire are located (Montana, Illinois, Wisconsin and
Michigan).

Gatefold, Page 1:
-----------------

Drawing of the outlines of Idaho, Utah and Arizona, including locations of
cities with Realty's Hotels (Boise, Pocatello and Twin Falls, Idaho; Ogden, Park
City, Salt Lake City (2) and Provo, Utah; and Chandler (Greater Phoenix),
Arizona.

Photograph of Ogden Park Hotel, Ogden, Utah.

Photograph of University Park Hotel, Salt Lake City, Utah.

Photograph of Salt Lake Hilton Hotel, Salt Lake City, Utah.

Photograph of Boise Park Suites Hotel, Boise, Idaho.

Photograph of Olympia Park Hotel, Park City, Utah.

Photograph of Sheraton San Marcos Golf Resort and Conference Center, Chandler
(Greater Phoenix), Arizona.

Gatefold, Page 2:
-----------------

Drawing of the outline of Minnesota, including Rochester.

Detailed sketch of three city blocks in Rochester, Minnesota, highlighting three
of Realty's Hotels (Kahler Plaza Hotel, The Kahler Hotel and Clinic View Inn and
Suites) and the surrounding Mayo Clinic buildings.

Photograph of Kahler Plaza Hotel.

Photograph of Clinic View Inn & Suites.

Photograph of The Kahler Hotel.
<PAGE>

Graphics Appendix (continued
-----------------

Page 5
------

Diagram showing the structure and ownership of Realty and KMC after the Spin
Off and the Offering. Using a combination of boxes and lines, the diagram
illustrates the ownership of Realty by New Realty Shareholders (65.9%) and
Existing Shareholders of Historical Kahler (34.1%), the ownership of KMC by
Realty (9.5%) and Existing Shareholders of Historical Kahler (90.5%), the
ownership by Realty of one Mortgage with Equity Features [Note (1)] and 14 Owned
Hotels [Note (2)], and the corresponding Management Agreement and Percentage
Leases with KMC.

Inside Back Cover Page
----------------------

Photograph of Green Oaks Inn and Conference Center, Fort Worth, Texas.

Photograph of Lakeview Resort and Conference Center, Morgantown, West Virginia.

Photograph of Pocatello Park Quality Inn, Pocatello, Idaho.

Photograph of banquet setting at Sheraton San Marcos Golf Resort and Conference
Center, Chandler (Greater Phoenix), Arizona.

Drawing of typical suite that Realty has constructed at Boise Park Suites Hotel,
Boise, Idaho and Clinic View Inn & Suites, Rochester, Minnesota, specifically
noting the following: extra large vanity, wall-sized mirror, 25" remote control
TV (swivels between bedroom and living room), spacious work table, desk phone
(long cord) with modem, wet bar, dishes and utensils, coffee maker, microwave
oven, mini-refrigerator/freezer, multiple door locks, AM/FM alarm clock radio,
bedroom phone and choice of king-size or standard double bed.
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the estimated expenses (other than the
underwriting discount) payable by Realty and to be incurred in connection with
the offering described in the Registration Statement:

<TABLE>
<S> <C>
SEC registration fees............................................ $ 6,310
NASD fees........................................................ 1,830
NASDAQ National Market Listing Fee............................... *
Printing and mailing............................................. *
Printing of stock certificates................................... *
Blue Sky fees and expenses....................................... *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Miscellaneous.................................................... *
----------
Total.......................................................... $ *
==========
</TABLE>
--------

*To be provided by amendment.

In addition to the estimated expenses payable by Realty as disclosed above,
Realty previously incurred and has paid an aggregate of $1.8 million in
expenses in connection with the offering described in the Registration
Statement before the offering was postponed due to market conditions in October
1994.

ITEM 31. SALES TO SPECIAL PARTIES.

In the last six months, Realty has issued no securities except shares of
Common Stock acquired by directors or employees pursuant to Realty's stock
option plans, employee stock purchase plan or retainer stock payment plan.
Options under Realty's stock option plans have been granted at cash exercise
prices equal to the market value of the Common Stock on the date of grant.
Purchases under Realty's employee stock purchase plan are at a cash price
payable through payroll deductions equal to the lesser of 85.0% of the fair
market value of the Common Stock on the first day of the purchase period and
85.0% of fair market value on the last day of the purchase period. Shares are
issued to non-employee directors of Realty under the retainer stock payment
plan in lieu of cash retainer payments, and such shares are valued for such
purpose at market value on the date of the Registrant's annual meeting of
shareholders or on such other regular date as the Board of Directors may
establish.

ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.

In connection with the organization and initial capitalization of Realty, 100
shares of its Common Stock were issued to Kahler Corporation, a publicly held
Delaware corporation, in May 1994 in consideration for a cash payment of
$1,000. Realty relied on the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, for transactions not involving
a public offering.

ITEM 33. INDEMNIFICATION OF OFFICERS AND DIRECTORS

The Bylaws of Realty require Realty to indemnify its officers and directors
for such expenses and liabilities in such manner, under such circumstances and
to such extent, as required or permitted by Minnesota law. Subject to any
limitations contained in the Bylaws or Articles of Incorporation of Realty,
Section 302A.521 of the Minnesota Statutes requires Realty to indemnify a
person made or threatened to be made a party to a proceeding by reason of the
former or present official capacity of the person with respect to Realty,
against judgments, penalties, fines, including reasonable expenses, if such
person (1) has not been

II-1
<PAGE>

indemnified by another organization or employee benefit plan for the same
judgments, penalties, fines, including without limitations, excise taxes
assessed against the person with respect to an employee benefit plan,
settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by the person in connection with the proceeding with
respect to the same acts or omissions; (2) acted in good faith; (3) received no
improper personal benefit, and statutory procedure has been followed in the
case of any conflict of interest by a director; (4) in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and
(5) in the case of acts or omissions occurring in the person's performance in
the official capacity of director or, for a person not a director, in the
official capacity of officer, committee member, employee or agent, reasonably
believed that the conduct was in the best interests of Realty, or, in the case
of performance by a director, officer, employee or agent of Realty as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, reasonably believed that the conduct was not opposed
to be the best interests of Realty. In addition, Section 302A.521, subd. 3,
requires payment by Realty, upon written request, of reasonable expenses in
advance of final disposition in certain instances, upon receipt of a written
undertaking by the person to repay all amounts so paid if it is ultimately
determined that the person is not entitled to indemnification, unless otherwise
limited by the Articles of Incorporation or Bylaws of Realty. A decision as to
required indemnification is made by a disinterested majority of the Board of
Directors present at a meeting at which a disinterested quorum is present, or
by a designated committee of the Board, by special legal counsel, by the
shareholders, or by a court.

Realty's Articles of Incorporation provide that a director is not liable to
Realty or its shareholders for monetary damages for a breach of fiduciary duty
as a director, except for liability (i) for any breach of the directors duty of
loyalty to Realty or its shareholders; (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the
law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv)
for any transaction from which the director derived an improper personal
benefit; or (v) for any act or omission occurring prior to the date such
indemnification provision became effective.

Realty intends to enter into agreements to indemnify its directors in
addition to the indemnification provided for in the Bylaws. These agreements
will, among other things, indemnify Realty's directors and certain of its
officers to the full extent permitted by the Minnesota Statutes for any claims,
liabilities, damages, judgments, penalties, fines, settlement, disbursements or
expenses (including attorneys' fees) included by such person in any action or
proceeding, including any action by or in the right of the Company, on account
of services as a director of the Company.

Pursuant to the Underwriting Agreement filed as Exhibit 1 hereto, the
Underwriters will agree to indemnify Realty, its directors and officers and
persons who control Realty within the meaning of the Securities Act of 1933, as
amended, against certain liabilities and under certain conditions.

ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.

None.

ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.

(a) INDEX TO FINANCIAL STATEMENTS INCLUDED IN THE PROSPECTUS

See page F-1

INDEX TO FINANCIAL STATEMENT SCHEDULES NOT INCLUDED IN PROSPECTUS

Independent Auditors' Reports on Schedules

Schedule II--Valuation and Qualifying Accounts

All schedules other than that indicated have been omitted as the
required information in either is not applicable or is presented in the
financial statements or related notes thereto.

II-2
<PAGE>

(b) EXHIBITS--The following list assumes that the Spin Off, which is
contingent upon the Offering, has already occurred.

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1 Form of Underwriting Agreement**
2 Agreement and Plan of Merger by and among Kahler Corporation and
Kahler Realty Corporation*
3.1 Amended and Restated Articles of Incorporation of Kahler Realty
Corporation
3.2 Bylaws of Kahler Realty Corporation*
4.1 Specimen Common Stock Certificate*
4.2 Guaranty Agreement dated May 1, 1986 between The Kahler Corporation,
Guarantor and United Bank of Arizona, Trustee with respect to
$14,000,000 Industrial Development Revenue Bonds (SMP II) Series
1985 (incorporated herein by reference to Exhibit 4(a) to the
Annual Report of Kahler Corporation on Form 10-K for the year ended
January 3, 1993).
4.3 Guaranty Loan Agreement dated April 23, 1990 between The Kahler
Corporation and Northwestern Mutual Life Insurance Company in the
principal amount of $15,000,000 (incorporated herein by reference
to Exhibit 4(b) to the Annual Report of Kahler Corporation on Form
10-K for the year ended December 30, 1990).
4.4 Guaranty Loan Agreement dated June 30, 1987 between Kahler
Corporation and Northwestern Mutual Life Insurance Company in the
original principal amount of $17,000,000 (incorporated herein by
reference to Exhibit 4(c) to the Annual Report of Kahler
Corporation on Form 10-K for the year ended January 3, 1993).
5 Opinion of Dorsey & Whitney P.L.L.P. regarding the validity of
Kahler Realty Corporation Common Stock to be issued in the
Offering.**
8 Opinion of Dorsey & Whitney P.L.L.P. regarding certain tax
matters.**
10.1 Form of Indemnity Agreement between Kahler Corporation and each
director of Kahler Corporation (incorporated herein by reference to
Exhibit 10(a) to the Annual Report of Kahler Corporation on Form
10-K for the year ended January 3, 1993).
10.2 Form of Kahler Corporation Amended and Restated 1987 Stock Option
Plan.*
10.3 Form of Kahler Corporation Amended and Restated 1982 Incentive Stock
Option Plan.*
10.4 Form of Kahler Corporation Amended and Restated Stock Option Plan
for Non-Employee Directors.*
10.5 Third Amended and Restated Agreement and Certificate of Limited
Partnership for SMP II, Limited Partnership dated September 10,
1986 (incorporated herein by reference to Exhibit 10(h) to the
Annual Report of Kahler Corporation on Form 10-K for the year ended
January 3, 1993).
10.6 Form of Exchange Agreement.***
10.7 Form of Utility Sale Agreement, dated as of October 31, 1986,
between The Kahler Corporation and Franklin Heating Station, a
Minnesota general partnership composed of Mayo Foundation and
Rochester Methodist Hospital.*
</TABLE>

--------

*Previously filed.

**Previously filed; new form reflecting changes in the transaction to be
filed by amendment.

***To be filed by amendment.

II-3
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.8 Laundry Service Agreement, dated September 1, 1992 between Textile
Care Services and Mayo Foundation (incorporated herein by reference
to Exhibit 10(m) to the Annual Report of Kahler Corporation on Form
10-K for the year ended January 3, 1993).
10.9 Form of Distribution Agreement among Kahler Corporation, Kahler
Realty Corporation and Kahler Management Corporation.**
10.10 Form of Percentage Lease.**
10.11 Form of Trademark License Agreement between Kahler Realty
Corporation and Kahler Management Corporation.**
10.12 Form of Right of First Refusal Agreement between Kahler Realty
Corporation and Kahler Management Corporation.**
10.13 Form of Option Agreement for Interest in Two Knights Inn Hotels
between Kahler Realty Corporation and Kahler Management
Corporation.***
10.14 Form of Employment Agreement between Kahler Realty Corporation and
Harold W. Milner.***
10.15 Form of Kahler Realty Corporation 1994 Stock Option Plan.*
10.16 Form of Kahler Realty Corporation 1994 Non-Employee Directors Stock
Option Plan.*
10.17 Form of Kahler Realty Corporation 1994 Retainer Stock Payment Plan
for Non-Employee Directors.*
10.18 Form of Indemnity Agreement between Kahler Realty Corporation and
its directors and officers.*
10.19 Replacement Promissory Note dated August 31, 1989 in the original
principal amount of $3,200,000 issued by Ogden Hotel Associates to
Kahler Corporation.*
10.20 Deed of Trust and Security Agreement dated August 31, 1989 between
Ogden Hotel Associates and Landmark Title Company in favor of
Kahler Corporation.*
10.21 Option Agreement dated August 31, 1989 among Ogden Hotel Associates,
Pearson Enterprises Management Company, BG Hotel Properties, Inc.
and Ogden Park Hotel Corporation, Inc.*
10.22 [Deleted]
10.23 [Deleted]
10.24 Promissory Note dated September 26, 1990 in the original principal
amount of $4,620,000 issued by University Inn Associates to Kahler
Corporation.*
10.25 Leasehold Deed of Trust, Assignment of Rents and Security Agreement
dated September 26, 1990 between University Inn Associates and
Landmark Title Company in favor of Kahler Corporation.*
10.26 [Deleted]
10.27 [Deleted]
</TABLE>
--------

*Previously filed.

**Previously filed; new form reflecting changes in the transaction to be
filed by amendment.

***To be filed by amendment.

II-4
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.28 [Deleted]
10.29 [Deleted]
10.30 Amendment to Kahler Realty Corporation 1994 Stock Option Plan***
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of Realty**
23.1 Consents of Dorsey & Whitney (to be included in
Exhibits 5 and 8)**
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Deloitte & Touche LLP (included in Item 35(a) of this Registration
Statement)
24 Powers of
Attorney*
27 Financial Data
Schedule
</TABLE>
--------
*Previously filed.

**Previously filed; new form reflecting changes in the transaction to be
filed by amendment.

***To be filed by amendment.

Pursuant to paragraph b(4)(iii) of Item 601 of Regulation S-K, copies of
instruments defining the rights of holders of certain long-term debt of Realty
are not filed and, in lieu thereof, Realty agrees to furnish a copy thereof to
the Securities and Exchange Commission upon request.

ITEM 36. UNDERTAKINGS.

(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

(b) The undersigned registrant hereby undertakes that:

(i) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-5
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-11 AND HAS DULY CAUSED THIS AMENDMENT TO
REGISTRATION STATEMENT ON FORM S-11 TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF MINNEAPOLIS, STATE OF
MINNESOTA, ON SEPTEMBER 1, 1995.

Kahler Realty Corporation

/s/ Michael J. Quinn
By __________________________________
MICHAEL J. QUINN,SENIOR VICE
PRESIDENT, SECRETARY AND GENERAL
COUNSEL

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
REGISTRATION STATEMENT ON FORM S-11 HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES INDICATED ON SEPTEMBER 1, 1995:

SIGNATURES TITLE

* President, Chief
------------------------------------- Executive Officer
HAROLD W. MILNER and Director
(principal
executive officer)

* Senior Vice
------------------------------------- President, Chief
STEVEN R. STENHAUG Financial Officer
and Treasurer
(principal
financial and
accounting officer)

* Chairman of the
------------------------------------- Board and Director
JOHN H. HERRELL

* Director
-------------------------------------
A. BLAINE HUNTSMAN

* Director
-------------------------------------
DONALD L. LUCAS

* Director
-------------------------------------
DONALD C. MCILRATH, M.D.

* Director
-------------------------------------

MARK W. SHEFFERT
/s/ Michael J. Quinn
*By _________________________________
MICHAEL J. QUINNATTORNEY-IN-FACT

II-6
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders

Kahler Realty Corporation and Subsidiaries:

Under date of February 17, 1995, we reported on the consolidated balance
sheets of Kahler Realty Corporation and Subsidiaries as of January 1, 1995 and
January 2, 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended, as contained in
the Prospectus. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule in the Registration Statement. 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, such schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

KPMG Peat Marwick LLP

Chicago, Illinois

February 17, 1995
<PAGE>

INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE

To the Stockholders and Directors

Kahler Realty Corporation:

We consent to the use in this Amendment No. 4 to Registration Statement No.
33-82994 of Kahler Realty Corporation on Form S-11 of our report dated February
19, 1993 (November 12, 1993 as to Note 13) appearing in the Prospectus, which
is a part of this Registration Statement. We also consent to the reference to
us under the heading "EXPERTS" in such Prospectus.

Our audit of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Kahler Realty
Corporation, listed in Item 35(a). for the year ended January 3, 1993. This
financial statement schedule is the responsibility of the Corporation's
management. Our responsibility is to express an opinion based on our audit. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, present fairly in all material
respects the information set forth therein.

Deloitte & Touche LLP

Minneapolis, Minnesota

August 29, 1995
<PAGE>

SCHEDULE II

KAHLER REALTY CORPORATION AND SUBSIDIARIES (HISTORICAL KAHLER)

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
FOR FISCAL YEARS 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE ADDITIONS BALANCE
BEGINNING CHARGES TO END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS(A) YEAR
----------- --------- ---------- ------------- -------
<S> <C> <C> <C> <C>
1994
Allowance for doubtful accounts.... $214 $235 $197 $252
==== ==== ==== ====
1993
Allowance for doubtful accounts.... $199 $183 $168 $214
==== ==== ==== ====
1992
Allowance for doubtful accounts.... $174 $217 $192 $199
==== ==== ==== ====
</TABLE>
--------
(A) "Deductions" consist of accounts written off net of recoveries.
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. NO.
----------- ----
<C> <S> <C>
1 Form of Underwriting Agreement**
2 Agreement and Plan of Merger by and among Kahler
Corporation and Kahler Realty Corporation*
3.1 Amended and Restated Articles of Incorporation of Kahler
Realty Corporation
3.2 Bylaws of Kahler Realty Corporation*
4.1 Specimen Common Stock Certificate*
4.2 Guaranty Agreement dated May 1, 1986 between The Kahler
Corporation, Guarantor and United Bank of Arizona, Trustee
with respect to $14,000,000 Industrial Development Revenue
Bonds (SMP II) Series 1985 (incorporated herein by
reference to Exhibit 4(a) to the Annual Report of Kahler
Corporation on Form 10-K for the year ended January 3,
1993).
4.3 Guaranty Loan Agreement dated April 23, 1990 between The
Kahler Corporation and Northwestern Mutual Life Insurance
Company in the principal amount of $15,000,000
(incorporated herein by reference to Exhibit 4(b) to the
Annual Report of Kahler Corporation on Form 10-K for the
year ended December 30, 1990).
4.4 Guaranty Loan Agreement dated June 30, 1987 between Kahler
Corporation and Northwestern Mutual Life Insurance Company
in the original principal amount of $17,000,000
(incorporated herein by reference to Exhibit 4(c) to the
Annual Report of Kahler Corporation on Form 10-K for the
year ended January 3, 1993).
5 Opinion of Dorsey & Whitney P.L.L.P. regarding the validity
of Kahler Realty Corporation Common Stock to be issued in
the Offering.**
8 Opinion of Dorsey & Whitney P.L.L.P. regarding certain tax
matters.**
10.1 Form of Indemnity Agreement between Kahler Corporation and
each director of Kahler Corporation (incorporated herein by
reference to Exhibit 10(a) to the Annual Report of Kahler
Corporation on Form 10-K for the year ended January 3,
1993).
10.2 Form of Kahler Corporation Amended and Restated 1987 Stock
Option Plan.*
10.3 Form of Kahler Corporation Amended and Restated 1982
Incentive Stock Option Plan.*
10.4 Form of Kahler Corporation Amended and Restated Stock
Option Plan for Non-Employee Directors.*
10.5 Third Amended and Restated Agreement and Certificate of
Limited Partnership for SMP II, Limited Partnership dated
September 10, 1986 (incorporated herein by reference to
Exhibit 10(h) to the Annual Report of Kahler Corporation on
Form 10-K for the year ended January 3, 1993).
10.6 Form of Exchange Agreement.***
10.7 Form of Utility Sale Agreement, dated as of October 31,
1986, between The Kahler Corporation and Franklin Heating
Station, a Minnesota general partnership composed of Mayo
Foundation and Rochester Methodist Hospital.*
10.8 Laundry Service Agreement, dated September 1, 1992 between
Textile Care Services and Mayo Foundation (incorporated
herein by reference to Exhibit 10(m) to the Annual Report
of Kahler Corporation on Form 10-K for the year ended
January 3, 1993).
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. NO.
----------- ----
<C> <S> <C>
10.9 Form of Distribution Agreement among Kahler Corporation,
Kahler Realty Corporation and Kahler Management
Corporation.**
10.10 Form of Percentage Lease.**
10.11 Form of Trademark License Agreement between Kahler Realty
Corporation and Kahler Management Corporation.**
10.12 Form of Right of First Refusal Agreement between Kahler
Realty Corporation and Kahler Management Corporation.**
10.13 Form of Option Agreement for Interest in Two Knights Inn
Hotels between Kahler Realty Corporation and Kahler
Management Corporation.***
10.14 Form of Employment Agreement between Kahler Realty
Corporation and Harold W. Milner.***
10.15 Form of Kahler Realty Corporation 1994 Stock Option Plan.*
10.16 Form of Kahler Realty Corporation 1994 Non-Employee
Directors Stock Option Plan.*
10.17 Form of Kahler Realty Corporation 1994 Retainer Stock
Payment Plan for Non-Employee Directors.*
10.18 Form of Indemnity Agreement between Kahler Realty
Corporation and its directors and officers.*
10.19 Replacement Promissory Note dated August 31, 1989 in the
original principal amount of $3,200,000 issued by Ogden
Hotel Associates to Kahler Corporation.*
10.20 Deed of Trust and Security Agreement dated August 31, 1989
between Ogden Hotel Associates and Landmark Title Company
in favor of Kahler Corporation.*
10.21 Option Agreement dated August 31, 1989 among Ogden Hotel
Associates, Pearson Enterprises Management Company, BG
Hotel Properties, Inc. and Ogden Park Hotel Corporation,
Inc.*
10.22 [Deleted]
10.23 [Deleted]
10.24 Promissory Note dated September 26, 1990 in the original
principal amount of $4,620,000 issued by University Inn
Associates to Kahler Corporation.*
10.25 Leasehold Deed of Trust, Assignment of Rents and Security
Agreement dated September 26, 1990 between University Inn
Associates and Landmark Title Company in favor of Kahler
Corporation.*
10.26 [Deleted]
10.27 [Deleted]
10.29 [Deleted]
10.30 Amendment to Kahler Realty Corporation 1994 Stock Option
Plan***
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of Realty**
23.1 Consents of Dorsey & Whitney (to be included in Exhibits 5
and 8)**
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. NO.
----------- ----
<C> <S> <C>
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Deloitte & Touche LLP (included in Item 35(a) of
this Registration Statement)
24 Powers of Attorney*
27 Financial Data Schedule
</TABLE>
--------
*Previously filed.

**Previously filed; new form reflecting changes in the transaction to be
filed by amendment.

***To be filed by amendment.

<PAGE>

Exhibit 3.1

AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
KAHLER REALTY CORPORATION

To form a Minnesota business corporation under and pursuant to the
Minnesota Business Corporation Act, the following articles of incorporation are
adopted:

ARTICLE 1. NAME

The name of the corporation is Kahler Realty Corporation.

ARTICLE 2. REGISTERED OFFICE

The address of the registered office of the corporation is 20 Second
Avenue Southwest, Rochester, Minnesota 55904.

ARTICLE 3. PURPOSE

The corporation may engage in any lawful act or activity for which
corporations may be formed under the Minnesota Business Corporation Act.

ARTICLE 4. AUTHORIZED SHARES

4.1 Authorized Capital Stock. The total number of shares of Capital Stock
("Capital Stock") that the corporation is authorized to issue shall be
80,000,000 shares, consisting of 70,000,000 shares of common stock, par value
$0.10 per share ("Common Stock") and 10,000,000 shares of preferred stock, par
value $0.10 per share ("Preferred Stock").

4.2 Common Stock. All shares of Common Stock shall be voting shares and
shall be entitled to one vote per share. Subject to any preferential rights of
holders of Preferred Stock, holders of Common Stock shall be entitled to receive
their ratable shares of such dividends or other distributions as may be declared
by the Board of Directors from time to time and of any distribution of the
assets of the corporation upon its liquidation, dissolution or winding up,
whether voluntary or involuntary.
<PAGE>

4.3 Preferred Stock. The Board of Directors of the corporation is hereby
authorized to provide, by resolution or resolutions adopted by such Board, for
the issuance of Preferred Stock from time to time in one or more classes and/or
series, to establish the designation and number of shares of each such class or
series and to fix the relative rights and preferences of the shares of each such
class or series, all to the full extent permitted by the Minnesota Business
Corporation Act, as now enacted or hereinafter amended.

ARTICLE 5. RESTRICTIONS ON OWNERSHIP AND TRANSFER TO PRESERVE TAX BENEFIT;
REDEMPTION OF EXCESS STOCK

5.1 Definitions. For the purposes of this Article 5, the following terms
shall have the following meanings:

"Beneficial Ownership" shall mean ownership of Capital Stock by a
Person who is or would be treated as an owner of such Capital Stock
either directly or through the application of Section 544 of the Code,
as modified by Section 856(h) of the Code. The terms "Beneficial
Owner," "Beneficially Owns" and "Beneficially Owned" shall have the
correlative meanings.

"Closing Price" with respect to any Capital Stock shall mean, for
any day, the last reported sale price of such Stock regular way or, in
case no sale takes place on such day, the average of the closing bid
and asked prices regular way on such day, in either case as reported
on the New York Stock Exchange Composite Tape, or, if such Stock is
not listed or admitted to trading on such Exchange, on the principal
national securities exchange on which such Stock is listed or admitted
to trading, or, if such Stock is not listed or admitted to trading on
any national securities exchange, on the Nasdaq National Market, or,
if such Stock is not admitted for quotation on the Nasdaq National
Market, the average of the high bid and low asked prices on such day
as recorded by the National Association of Securities Dealers, Inc.
through Nasdaq, or, if the National Association of Securities Dealers,
Inc. through Nasdaq shall not have reported any bid and asked prices
for such Stock on such day, the average of the bid and asked prices
for such day as furnished by any New York Stock Exchange member firm
selected from time to time by the corporation for such purpose, or, if
no such bid and asked prices can be obtained from any such firm, the
fair market value of one share of such Stock on such day as determined
in good faith by the Board of Directors of the corporation.

"Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.

-2-
<PAGE>

"Constructive Ownership" shall mean ownership of Capital Stock by
a Person who is or would be treated as an owner of such Capital Stock
through the application of Section 318 of the Code, as modified by
Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Owns" and "Constructively Owned" shall have the
correlative meanings.

"Merger Date" shall mean the effective date of any merger between
the corporation and Kahler Corporation, a Delaware corporation.

"Ownership" shall mean ownership, Beneficial Ownership or
Constructive Ownership of Capital Stock by a Person. The terms Owner,
Owns and Owned shall have correlative meanings.

"Ownership Limit" shall mean not more than 9.8% (in value or in
number of shares, whichever is more restrictive) of the outstanding
Capital Stock.

"Person" shall mean an individual, corporation, partnership,
estate, trust (including a trust qualified under Section 401(a) or
501(c)(17) of the Code), a portion of a trust permanently set aside
for or to be used exclusively for the purposes described in Section
642(c) of the Code, association, private foundation within the meaning
of Section 509(a) of the Code, joint stock company or other entity.

"REIT" shall mean a Real Estate Investment Trust under Section
856 of the Code.

"REIT Provisions" shall mean (i) all provisions of the Code
relating to REITs and all regulations, rulings and cases promulgated
or decided thereunder and (ii) the requirements of any taxing
authority or governmental agency relating to REITs.

"Transfer" shall mean any sale, transfer, gift, assignment,
hypothecation, pledge, devise or other disposition of Capital Stock,
including, without limitation, the (i) granting of any warrant, option
or similar right exercisable for such Capital Stock, (ii) entering
into of any agreement for the sale, transfer, gift, assignment,
hypothecation, pledge, devise or other disposition of Capital Stock or
any instrument or security described in clauses (i) or (iii) hereof or
(iii) the sale, transfer, gift, assignment, hypothecation, pledge,
devise or other disposition of any securities convertible into or
exchangeable for Capital Stock (or any warrants, options, or similar
rights to acquire any such exchangeable or convertible securities),
whether voluntary or involuntary, whether of record, by operation of
law or otherwise, and

-3-
<PAGE>

including, but not limited to, transfers of interests in other Persons
that result in changes in the Ownership of Capital Stock. The terms
"Transferor" and "Transferee" shall have correlative meanings.

5.2 Restriction on Ownership and Transfer.

(a) Except as provided in Section 5.7, from and after the Merger Date, no
Person shall directly or indirectly Own Capital Stock in excess of the Ownership
Limit.

(b) Except as provided in Section 5.7, from and after the Merger Date, any
Transfer (whether or not such Transfer is the result of a transaction entered
into or through the Nasdaq National Market or any exchange upon which the
Capital Stock may be traded) that, if effective, would result in any Person
directly or indirectly Owning Capital Stock in excess of the Ownership Limit
shall be void and of no force or effect as to the Transfer of that number of
shares of Capital Stock that would be otherwise Owned by such Person in excess
of the Ownership Limit, and the purported transfer of such shares will not be
reflected on the corporation's stock record books.

(c) From and after the Merger Date, any Transfer (whether or not such
Transfer is the result of a transaction entered into or through the Nasdaq
National Market or any exchange upon which the Capital Stock may be traded)
that, if effective, would result in the Capital Stock being beneficially owned
(within the meaning of Section 856(a)(5) of the Code and determined as provided
in Treasury Regulation (S) 1.856-1(d)(2) promulgated thereunder) by less than
100 persons (as such term is used in Section 856(a)(5) of the Code) shall be
void and of no force or effect as to the Transfer of that number of shares of
Capital Stock that would otherwise cause such 100 person minimum beneficial
ownership requirement to be violated.

(d) From and after the Merger Date, any Transfer (whether or not such
Transfer is the result of a transaction entered into or through the Nasdaq
National Market or any exchange upon which the Capital Stock may be traded) or
other event that, if effective, would result in the corporation being "closely
held" within the meaning of Section 856(h) of the Code or which would otherwise
result in the corporation failing to qualify as a REIT (including, but not
limited to, a Transfer or other event that would result in the corporation
directly or indirectly Constructively Owning an interest in a tenant that
exceeds the limits described in Section 856(d)(2)(B) of the Code), shall be void
and of no force or effect as to the Transfer of that number of shares of Capital
Stock or other event that would otherwise cause the corporation to be "closely
held" within the meaning of Section 856(h) of the Code or which would otherwise
result in the corporation failing to qualify as a REIT, and any purported
Transfer of shares that would cause the same will not be reflected on the
corporation's stock record books.

-4-
<PAGE>

5.3 Remedies. If the Board of Directors, or its designee, should at any
time determine in good faith that a Transfer or other event has taken place in
violation of Section 5.2 or that a Person intends to acquire, has attempted to
acquire or may acquire the Ownership of any shares of the corporation in
violation of Section 5.2, the Board of Directors, or its designee, may take such
action as it deems necessary or advisable to refuse to give effect to or to
prevent such Transfer or other event, including, but not limited to, refusing to
give effect to such Transfer or other event on the stock record books of the
corporation or instituting any appropriate proceedings to enjoin such Transfer
or other event. Nothing contained in this Article 5 (but subject to Section
5.11) shall limit the authority of the Board of Directors to take such other
action as it deems necessary or advisable to protect the corporation and the
interests of its stockholders by preservation of the corporation's status as a
REIT.

5.4 Notice of Restricted Transfer. Any Person who acquires, attempts to
acquire or intends to acquire the Ownership of Capital Stock in violation of
Section 5.2 shall immediately give written notice to the corporation of such
event and shall provide to the corporation such other information as the
corporation may request in order to determine the effect, if any, of such event
on the corporation's status as a REIT.

5.5 Owners Required To Provide Information. From and after the Merger
Date, each Person who is an Owner of outstanding shares of Capital Stock shall,
upon demand by the corporation, disclose to the corporation in writing such
information with respect to its Ownership of Capital Stock as the Board of
Directors, or its designee, in its discretion deems necessary or appropriate to
ensure the corporation's compliance with the REIT Provisions. Whenever the
Board of Directors deems it reasonably necessary to protect the tax status of
the corporation as a REIT under the REIT Provisions, the Board of Directors may
require a statement or affidavit from each stockholder or proposed Transferee of
shares of Capital Stock setting forth the number of shares of Capital Stock
already Owned by such Person and any related, associated or affiliated Person
specified by the Board of Directors. If, in the opinion of the Board of
Directors, any proposed Transfer may jeopardize the qualification of the
corporation as a REIT, the Board of Directors shall have the right, but not the
duty, to refuse to permit such Transfer. All contracts, agreements or other
instruments that provide for the Transfer of shares of Capital Stock shall be
subject to this Section 5.5.

5.6 Ambiguity. In the case of an ambiguity in the application of any of
the provisions of this Article 5, including, but not limited to, any definition
contained in Section 5.1, the Board of Directors shall have the power to
determine the appropriate application of the provisions of this Article 5 with
respect to any

-5-
<PAGE>

situation based on the facts known to it (subject, however, to the provisions of
Section 5.11).

5.7 Exceptions. (a) Subject to Sections 5.2(c), 5.2(d) and 5.7(c), the
Board of Directors may, in its sole and absolute discretion, exempt a Person
(including an underwriter in a public offering of shares of Capital Stock of the
corporation or any Person in any transaction involving the issuance of Capital
Stock by the corporation) from the Ownership Limit if the Board of Directors
obtains such representations, agreements and undertakings from such Person as
the Board of Directors, in its sole and absolute discretion, determines are
necessary to ensure that the qualification of the corporation as a REIT will
not be jeopardized thereby.

(b) Prior to granting any exception pursuant to Section 5.7(a), the Board
of Directors may, in its sole discretion, require a ruling from the Internal
Revenue Service or an opinion of counsel, in either case in form and substance
satisfactory to the Board of Directors, if it deems the same necessary or
advisable in order to determine or ensure the corporation's status as a REIT;
provided, however, that obtaining a favorable ruling or opinion shall not be
required for the Board of Directors to grant an exception hereunder.

(c) The Board of Directors may, in its sole and absolute discretion, at any
time revoke any exception granted pursuant to Section 5.7(a), and upon such
revocation, the provisions of this Article 5 shall immediately become applicable
to the Person to whom the exemption was granted and all Capital Stock of the
corporation Owned or proposed to be Owned by such Person. A decision to exempt
or refuse to exempt from the Ownership Limit the Ownership of shares of Capital
Stock or to revoke an exemption previously granted may be based on any reason
whatsoever, including, but not limited to, the preservation of the corporation's
qualification as a REIT.

5.8 Legend. Each certificate for Capital Stock of the corporation shall
bear the following legend:

"The shares of Capital Stock represented by this certificate are subject to
restrictions on ownership and transfer for the purpose of the issuer's
qualification for and maintenance of its status as a Real Estate Investment
Trust under the Internal Revenue Code of 1986, as amended. No Person may Own
Capital Stock of the issuer in excess of 9.8% (in value or in number of shares,
whichever is more restrictive) of the outstanding Capital Stock of the issuer,
with certain further restrictions and exceptions set forth in the issuer's
Articles of Incorporation. Any Person who attempts to Own Capital Stock in
excess of the above limitations must immediately notify the issuer. TRANSFERS
IN VIOLATION OF THE RESTRICTIONS DESCRIBED ABOVE MAY BE VOID AND OF NO FORCE OR
EFFECT.

-6-
<PAGE>

In addition, upon the occurrence of certain events, if the restrictions on
Ownership are violated, the Capital Stock represented hereby may be purchased
by the issuer or its designee. The issuer will furnish to the holder hereof
upon request and without charge a complete written statement of the terms and
conditions of such repurchase right. Requests for such a statement should be
directed to the issuer's registered office in Minnesota. All capitalized terms
in this legend have the meanings given them in the issuer's Articles of
Incorporation. "

5.9 Separability. If any provision of this Article 5 or any application
of any such provision is determined to be invalid by any federal or state court
having jurisdiction, the validity of the remaining provisions of this Article 5
shall not be affected and other applications of such provisions shall be
affected only to the extent necessary to comply with the determination of such
court.

5.10 Corporation's Purchase Right. Any shares of Capital Stock ("Excess
Stock") held of record by any shareholder in excess of the Ownership Limitation
shall be deemed to have been offered for sale to the corporation, or its
designee, at a price per share equal to the lesser of (i) the price per share
paid by the shareholder in the transaction that created such Excess Stock (or,
if the shareholder did not give value for the Excess Stock, the Closing Price of
the class of Capital Stock constituting such Excess Stock on the date of the
Transfer or other event that gave rise to the Excess Stock), (ii) the Closing
Price of the class of Capital Stock constituting such Excess Stock on the date
the corporation, or its designee, gives notice of acceptance of such offer,
(iii) the Closing Price of the class of Capital Stock constituting such Excess
Stock on the date the corporation, or its designee, purchases such Excess Stock
and (iv) the maximum price allowed under the applicable provisions of Minnesota
law. Any decision by the corporation to purchase shares of Excess Stock or to
designate a person to purchase such stock, shall be made by the Board of
Directors of the corporation in its sole and absolute discretion.

5.11 Settlement. Nothing in this Article 5 shall preclude the settlement
of any transaction entered into through the Nasdaq National Market or any
exchange upon which the Capital Stock of the corporation may be traded.

ARTICLE 6. NO CUMULATIVE VOTING

Unless otherwise provided in the resolutions of the Board of Directors
establishing a class or series of Preferred Stock, there shall be no cumulative
voting by shareholders of the corporation.

-7-
<PAGE>

ARTICLE 7. NO PREEMPTIVE RIGHTS

Unless otherwise provided in the resolutions of the Board of Directors
establishing a class or series of Preferred Stock the shareholders of the
corporation shall not have any preemptive rights to subscribe for or acquire
securities or rights to purchase securities of any class, kind, or series of the
corporation.

ARTICLE 8. BOARD OF DIRECTORS

The affairs of the corporation shall be conducted by a Board of
Directors. The directors shall be divided into three classes: Class I; Class
II and Class III; each such class, as nearly as possible, to have the same
number of directors. The term of office of the initial Class I directors shall
expire at the annual shareholders meeting in 1995, the term of office of the
initial Class II directors shall expire at the annual shareholders meeting in
1996, and the term of office of the initial Class III directors shall expire at
the annual shareholders meeting in 1997. At each annual election of directors
by the shareholders, the directors chosen to succeed those whose terms have then
expired shall be identified as being of the same class as the directors they
succeed and shall be elected by the shareholders for a term expiring at the
third succeeding annual election of directors. In all cases, directors shall
hold office until their respective successors are elected by the shareholders
and have qualified.

ARTICLE 9. WRITTEN ACTION BY DIRECTORS

An action required or permitted to be taken at a meeting of the board
of directors of the corporation may be taken by a written action signed, or
counterparts of a written action signed in the aggregate, by all of the
directors unless the action need not be approved by the shareholders of the
corporation, in which case the action may be taken by a written action signed in
the aggregate, by the number of directors that would be required to take the
same action at a meeting of the board of directors of the corporation at which
all of the directors were present.

ARTICLE 10. DIRECTOR LIABILITY

A director of this corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under sections 302A.559 or 80A.23 of the Minnesota
Statutes; or (iv) for any transaction from which the director derived an
improper personal benefit.

If the Minnesota Business Corporation Act is hereafter amended to
authorize any further limitation of the liability of a director, then the
liability of a

-8-
<PAGE>

director of the corporation shall be eliminated or limited to the fullest extent
permitted by the Minnesota Business Corporation Act, as amended.

Any repeal or modification of the foregoing provisions of this Article
10 by the shareholders of the corporation shall not adversely affect any right
or protection of a director of the corporation existing at the time of such
repeal or modification.

ARTICLE 11. LIMITATION ON INDEBTEDNESS

From and after the fifteenth day following receipt by the corporation
of the proceeds of the first Public Offering after the effective date of these
Amended and Restated Articles of Incorporation, the corporation shall not incur
or at any time suffer to exist aggregate Consolidated Indebtedness outstanding
at any time in excess of 40% of the aggregate Consolidated Hotel Investment of
the corporation after giving effect to the use of proceeds from any Consolidated
Indebtedness. "Consolidated Indebtedness" shall mean (a) obligations for
borrowed money, (b) obligations representing the deferred purchase price of
property (other than accounts payable incurred in the ordinary course of
business), and (c) obligations which are evidenced by notes, acceptances or
other instruments. "Consolidated Hotel Investment" shall mean the total amount
invested in hotel properties at cost and before accumulated depreciation.
Consolidated Indebtedness and Consolidated Hotel Investment shall be determined
on a consolidated basis in accordance with generally accepted accounting
principles in effect at any date of determination. "Public Offering" shall mean
the sale by the corporation of shares of Common Stock in an offering registered
on Form S-11 under the Securities Act of 1933, as amended.

-9-
<PAGE>

ARTICLES OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
KAHLER REALTYCORPORATION

The undersigned, Harold W. Milner, President and Chief Executive
Officer of Kahler Realty Corporation, a Minnesota Corporation (the
"Corporation"), hereby certifies that the following resolution was duly adopted
by the shareholders and the board of directors of the Corporation pursuant to
Chapter 302A of the Minnesota Business Corporation Act at duly convened board of
directors and shareholder meetings on April 27, 1995, and that such resolution
has not been subsequently modified or rescinded:

RESOLVED, that the Articles of Incorporation of the Corporation are
hereby amended to delete Article 11 of such Articles of Incorporation in its
entirety.

IN WITNESS WHEREOF, the undersigned President and Chief Executive
Officer of the Corporation, being duly authorized on behalf of the Corporation,
has executed this document as of June 27, 1995.

/s/ Harold W. Milner
------------------------------------
Harold W. Milner
President and Chief Executive Officer

-10-

<PAGE>

EXHIBIT 11

KAHLER REALTY CORPORATION AND SUBSIDIARIES

STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR FISCAL YEAR ENDED JANUARY 1, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FULLY
PRIMARY DILUTED
EPS EPS
--------- ---------
<S> <C> <C>
Weighted average number of common shares outstanding....... 3,707,299 3,707,299
Common Stock equivalents due to assumed exercise of
options................................................... 248,392 277,540
--------- ---------
Total Shares........................................... 3,955,691 3,984,839
Net Income................................................. $ 764 $ 764
Less: Preferred Stock dividend net of offering cost
amortization............................................ 195 195
--------- ---------
$ 569 $ 569
========= =========
Income Per Share........................................... $ .14 $ .14
========= =========
</TABLE>

<PAGE>

EXHIBIT 23.2

CONSENT OF KPMG PEAT MARWICK LLP

The Board of Directors and Stockholders
Kahler Realty Corporation and Subsidiaries:

We consent to the use of our reports included herein and to the reference to
our firm under the heading "EXPERTS".

KPMG Peat Marwick LLP

Chicago, Illinois

August 31, 1995

<PAGE>

<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Form S-11 Registration Statement and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-02-1995
<PERIOD-END> JUL-02-1995
<CASH> 1324
<SECURITIES> 0
<RECEIVABLES> 6173
<ALLOWANCES> 239
<INVENTORY> 2557
<CURRENT-ASSETS> 10650
<PP&E> 207311
<DEPRECIATION> 58521
<TOTAL-ASSETS> 168624
<CURRENT-LIABILITIES> 21854
<BONDS> 0
<COMMON> 421
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 168624
<SALES> 61866
<TOTAL-REVENUES> 61866
<CGS> 0
<TOTAL-COSTS> 52536
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</TABLE>