Kahler Realty Corporation
20 Second Avenue Southwest P. O. Box 1028 Rochester, Minnesota 55903
NOTICE OF ANNUAL SHAREHOLDERS' MEETING
TO BE HELD APRIL 25, 1996
To the Shareholders of
Kahler Realty Corporation
The Annual Meeting of the Shareholders of Kahler Realty Corporation will be
held in the Centennial Room, Mezzanine Level, The Kahler Hotel, 20 SW
Second Avenue, Rochester, Minnesota 55902 on Thursday, April 25, 1996, at
9:45 a.m. for the following purposes:
1. To elect two (2) directors;
2. To vote on a proposal to designate KPMG Peat Marwick as auditors of
the Company for the current fiscal year;
3. To transact such other business as may properly come before the
meeting.
The Board of Directors has fixed the close of business on March 21,1996, as
the record date for determination of shareholders entitled to notice of and
to vote at the meeting.
The Company invites each shareholder to attend the meeting in person.
Parking in the Kahler Ramp is free, as long as space is available, to all
shareholders attending the meeting.
Regardless of the number of shares you hold, or whether or not you plan to
attend in person, your kindness in promptly signing, dating, and returning
the enclosed proxy in the envelope provided will be appreciated. The
giving of such proxy does not affect your right to vote in person in the
event you attend the meeting. Proxies may be revoked at any time.
Michael J. Quinn
Senior Vice President-Secretary
Dated: March 28,1996
<PAGE>
KAHLER REALTY CORPORATION
20 Second Avenue Southwest P. O. Box 1028 Rochester, Minnesota 55903
PROXY STATEMENT
ANNUAL SHAREHOLDERS' MEETING TO BE HELD April 25, 1996
The accompanying proxy is solicited by the Board of Directors of Kahler
Realty Corporation ("Kahler" or the "Company") in connection with the
Annual Meeting of the Shareholders of the Company to be held April 25,
1996, and any adjournment of the meeting. The costs of solicitation,
including the cost of preparing and mailing the Notice of Meeting and this
Proxy Statement, will be paid by the Company. Solicitation will be
primarily by mailing this Proxy Statement to all Shareholders entitled to
vote at the meeting. Proxies may be solicited by officers of the Company
personally, but without additional compensation. The Company will
reimburse brokers, banks and others holding shares in their names for
others for the cost of forwarding proxy material to and obtaining proxies
from their principals. This Proxy Statement is being mailed to
Shareholders on or about March 28, 1996.
Any shareholder executing a proxy retains the right to revoke it by notice
in writing to the Secretary of the Company at any time prior to its use. A
proxy may be revoked at any time prior to its exercise by giving written
notice of revocation to the Secretary of the Company or by filing a new
written appointment of a proxy with the Secretary of the Company. Unless
so revoked, all properly executed proxies will be voted in accordance with
the instructions indicated on such proxies. Shares voted as abstentions on
any matter (or a "withhold vote for" as to directors) will be counted as
shares that are present and entitled to vote for purposes of determining
the presence of a quorum at the meeting and as unvoted, although present
and entitled to vote, for purposes of determining the approval of each
matter as to which the shareholder has abstained. If a broker submits a
proxy which indicates that the broker does not have discretionary authority
as to certain shares to vote on one or more matters, those shares will be
counted as shares that are present and entitled to vote for purposes of
determining the presence of a quorum at the meeting, but will not be
considered as present and entitled to vote with respect to such matters.
All properly executed proxies received by the Board of Directors will be
voted for the election of the director nominees listed below, and for the
designation of auditors, unless otherwise specified. Shareholders are not
entitled to cumulate votes for the election of directors.
Only shareholders of record at the close of business on March 21, 1996, may
vote at the meeting or any adjournment. As of February 1, 1996, there were
issued and outstanding 4,301,323 shares of Common Stock of the Company, the
only class of securities of the Company entitled to vote at the meeting.
Each shareholder of record is entitled to one vote for each share
registered in his or her name on March 21, 1996.
<PAGE>
BENEFICIAL OWNERSHIP OF SHARES
Directors and Executive Officers. The following information is furnished
as of February 1, 1996, to indicate beneficial ownership of the Common
Stock of Kahler by each director, nominee and certain executive officers,
individually, and all directors and executive officers of Kahler as a
group. Except as otherwise indicated, the persons listed have sole voting
and investment power over such shares.
Number of Shares
Beneficially Percent
Beneficial Owner Owned (1) (2) Outstanding Shares
Harold W. Milner 493,657 11.5%
A. Blaine Huntsman 34,468 *
John H. Herrell 35,398 *
Michael R. Hinckley 26,600 *
Donald L. Lucas 40,215 *
Donald C. McIlrath, M. D. 26,000 *
Kevin L. Molloy 22,078 *
Mark W. Sheffert 31,678 *
Steven R. Stenhaug 18,807 *
All directors and executive
officers as a group (17 persons) 825,183 18.7%
* Less than 1%
(1) Includes shares held by wives or minor children.
(2) Includes the following shares which could be acquired within 60 days
upon exercise of options: Mr. Milner, 1,250 shares; Mr. Huntsman, 4,000
shares; Mr. Herrell, 8,000 shares; Mr. Hinckley, -0- shares; Mr. Lucas,
8,000 shares; Dr. McIlrath, 12,000 shares; Mr. Molloy, 9,100 shares; Mr.
Sheffert, 28,200 shares; Mr. Stenhaug, 11,625 shares and all directors and
executive officers as a group, 108,750 shares.
The share ownership shown above for Mr. Herrell, who is an officer,
director or employee of the Mayo Foundation or its affiliates, does not
include shares owned by Mayo Foundation, although Mr. Herrell may be deemed
to share voting power with respect to the shares owned by the Mayo
Foundation.
Principal Shareholders. The following information indicates the identity
of each person or group known to the Company to own beneficially more than
5% of the outstanding Common Stock of the Company. Except as otherwise
indicated, the information is as of February 1, 1996, and the holders have
sole voting and investment power over such shares.
<PAGE>
Number of Shares Percent of
Beneficially Outstanding
Beneficial Owner Owned Shares
Mayo Foundation 1,113,234 25.9%
Rochester, Minnesota
Harold W. Milner 493,657 (1) 11.5%
(1) 492,407 of these shares are held by Milner Associates, a family
partnership of which Mr. Milner is a general partner. As general partner,
Mr. Milner has power both to vote and dispose of the 492,407 shares. In
addition, includes 1,250 shares Mr. Milner may acquire upon exercise of
options exercisable within 60 days.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Kahler's directors and executive officers and all persons who beneficially
own more than ten percent of the outstanding shares of Kahler's Common
Stock to file with the Securities and Exchange Commission initial reports
of ownership and reports of changes in ownership of such Common Stock.
Directors, officers and greater than ten percent beneficial owners are
also required to furnish Kahler with copies of all Section 16(a) forms they
file. To Kahler's knowledge, based upon a review of the copies of such
reports furnished to Kahler and written representations during the fiscal
year ended December 31,1995, all filing requirements were complied with
except James D. Porrett, a vice president, who failed to timely file one
Form 4, Statement of Changes of Beneficial Ownership of Securities to
report one sales transaction in May, 1995 of 2,000 shares of the Company
Stock.
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes with each class being
elected for a three-year term. The number of members to serve as directors
during 1996 has been set at six. Directors are to be elected at the Annual
Meeting. The Board of Directors has nominated Messrs. Harold W. Milner and
Donald C. McIlrath, M.D. for three-year terms expiring in 1998. Mr. Milner
and Dr. McIlrath were previously elected by the Shareholders.
Unless otherwise instructed, the persons named in the accompanying proxy
will vote for the election of the above-described nominees. The Board of
Directors is informed that the nominees are willing to serve as a director;
however, if any of the nominees should decline or shall become unable to
serve as a director for any reason, the proxy may be voted for such other
person as the proxies shall, in their discretion, determine. Each share of
Common Stock is entitled to one vote for each director position to be
filled by the Shareholders at the Annual Meeting. Election of directors
requires the affirmative vote of a majority of the shares of Common Stock
present and entitled to vote at the Annual Meeting.
The following table sets forth information, as of February 1, 1996,
including principal occupations during the last five years, as to the
nominees for election and as to the other four directors of the Company
whose terms of office will continue after the Annual Meeting:
<PAGE>
Name, Position or Principal Director
Occupation, and Directorships Age Since
Nominees for election as Director
for a term expiring in 1999:
Harold W. Milner (e) 61 1985
President & CEO
Other Directorship:
Baron Asset Fund
Donald C. McIlrath, M.D.(a) 66 1987
Surgeon, Mayo Clinic, Retired
Directors whose terms expire in 1998
A. Blaine Huntsman (n) 60 1994
Private Investor
Other Directorships:
Geneva Steel Corporation
Zions Cooperative Mercantile Institution
Mark W. Sheffert (n) 48 1991
Managing Partner, Manchester Financial
Oct. 1990 to Jan. 1994
Managing Partner, Sheffert & Wein, Inc.
Sept. 1982 to Oct. 1990
Executive Vice President, First Bank System, Inc.
Other Directorships:
Telident, Inc.
Directors whose terms expire in 1997
John H. Herrell, Chairman of the 55 1981
Board of Company (a) (e) (n)
Vice President and Chief Administrative
Officer, Mayo Medical Center
Other Directorship:
Universal Health Services, Inc.
Donald L. Lucas (a) (e) 65 1984
Venture Capitalist
Other Directorships:
Cadence Design Systems, Inc.
Delphi Information Systems, Inc.
ICOT Corporation
Macromedia, Inc.
Oracle Systems Corporation
Quantum Health Resources, Inc.
Racotek, Inc.
Tri-Care, Inc.
Tricord Systems, Inc.
(a) Member of audit committee
(e) Member of executive committee
(n) Member of nominating and compensation committee
<PAGE>
In June 1993, Kahler, its President and Chief Executive Officer and its
Senior Vice President-Treasurer entered into an order and consent decree
with the Securities and Exchange Commission concerning allegedly improper
accounting and disclosure practices employed by Kahler during fiscal years
1988 through 1990. Under the terms of the decree, Kahler, the President
and CEO, and the Senior Vice President-Treasurer, without admitting any
wrong doing, have agreed to permanently cease and desist from causing any
violation and any future violation of certain sections of the Exchange Act
and the Rules thereunder governing the Company's disclosure and accounting
practices.
MEETINGS OF THE BOARD AND CERTAIN COMMITTEES
During 1995, the Board of Directors held a total of four meetings. All of
the directors attended 100% of the combined total number of Board meetings
and meetings of Board Committees on which they served.
The Board of Directors of the Company has a standing audit committee,
nominating and compensation committee and executive committee which have
current memberships as indicated in the foregoing table. Except for the
executive committee, these committees usually act in an advisory capacity
to the Board on matters within their jurisdiction.
The audit committee acts in a liaison capacity between the Board of
Directors and the independent auditors, making recommendations as to the
election of the auditors and their compensation, reviewing 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 Company's accounts, records,
controls, and financial reporting. There were two meetings of the
committee held during 1995.
The nominating and compensation committee reviews annually the membership
of the Board, evaluates directors' performance and recommends to the Board
candidates for membership. This committee will also consider nominee
recommendations by shareholders. Such recommendations should be submitted
to the chairman of the committee with appropriate biographical data.
This committee also 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
benefits programs. See "Executive Compensation - Compensation Committee
Report on Executive Compensation". There was one meeting of this committee
during 1995.
EXECUTIVE COMPENSATION
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
OVERVIEW
The Nominating and Compensation Committee of the Board of Directors (the
"Committee") is responsible for developing and making recommendations to
the Board with respect to the Company's executive compensation policies.
Further, the Committee makes annual recommendations to the Board concerning
the compensation to be paid to the Chief Executive Officer and the other
executive officers of the Company.
In addition, the Committee administers all aspects of the Company's
executive compensation program, including all of the Company's employee
benefit plans. The Company currently maintains a variety of employee
benefit plans in which its executive officers may participate including the
1994 Stock Option Plan, Employee Stock Purchase Plan, Employees' Retirement
and Savings Plan and the KahlerShare 401(k) Plan. The Committee is
composed entirely of independent outside directors of the Company.
EXECUTIVE COMPENSATION PROGRAM
The components of the Company's executive compensation program which are
subject to the discretion of the Committee on an individual basis include
(a) base salaries, (b) performance-based bonuses, (c) stock options, and
(d) miscellaneous other fringe benefits. The mix of base salary, bonuses
and other benefits reflects the Company's goals of (i) attracting and
retaining highly qualified and motivated managers, (ii) recognizing and
rewarding outstanding performance, and (iii) developing a strong and
diverse management team.
In order to make its recommendation to the Board concerning executive
compensation, the Committee annually reviews and evaluates the Company's
corporate performance as compared with companies within its own industry.
Based on this review, and in accordance with the Company's policy with
respect to the base salaries of its executive officers, the Committee
recommends to the Board salaries for each of its executive officers which
the Committee believes are comparable to similar sized companies in the
hotel industry and for the Company's headquarters location.
For executives, including the Chief Executive Officer and Messrs. Molloy
and Hinckley, bonuses are normally awarded if the Company achieves or
exceeds certain corporate performance objectives. However, the Committee
reserves the option to recommend to the Board the payment of bonuses to
executives even if planned corporate performance objectives have not been
achieved, but there have been substantial increases over the previous year.
The size of the fund available for bonuses to the executives other than the
Chief Executive Officer and Messrs. Molloy and Hinckley is based on the
degree to which such performance objectives are met. Once the size of the
bonus fund has been determined, the Committee allocates the fund among
these executives with each individual receiving that portion of the fund
which equals the ratio between the base salary and the sum of the base
salaries of all of the executives.
With respect to fiscal year 1995, the Committee established separate bonus
programs for Messrs. Milner, Molloy and Hinckley in lieu of the Company's
bonus program for the other executive officers. The corporate performance
objectives used in determining the size of the bonus program for executive
officers other than Messrs. Molloy and Hinckley were based upon the
performance of the properties exceeding goals set by the Compensation
Committee. The bonus program for Messrs. Molloy and Hinckley was based
upon the performance of properties which they respectively oversee as
compared to goals set by the Compensation Committee. The 1995 bonus pay
for the executive officers (other than Messrs. Milner, Molloy and Hinckley)
was $105,413. Each of these executive officers was awarded a bonus of
approximately 17.6% of their annual base salary.
<PAGE>
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Using the process described above, the base salary of the Chief Executive
Officer is set by the Committee, subject to Board approval. The Committee
also recommended that Mr. Milner be awarded a bonus for 1995 based on the
Company's achievement of the Committee's targets for earnings per share and
funds flow from operations. The size of Mr. Milner's bonus was $96,500,
and will be paid in 1996.
Mark W. Sheffert
John H. Herrell
A. Blaine Huntsman
Members of the Committee for 1995
EMPLOYMENT AGREEMENT
The Company has entered into an agreement with each of Messrs. Milner,
Molloy, Hinckley and Stenhaug under which he will receive a lump sum
payment equal to his highest one year base salary plus his highest bonus or
50% of his highest base salary; whichever is greater, during the past three
years, if there is a greater than 30% change in ownership of the Company
and his employment is either terminated or changed substantially.
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and noncash compensation for each
of the last three fiscal years awarded to or earned by the Chief Executive
Officer of the Company and the executive officers of the Company whose
salary and bonus earned in 1995 exceeded $100,000.
Long-Term
Annual Compensation
Name and Compensation Awards All Other
Principal Position Year Salary Bonus Options Compensation(1)
Harold W. Milner 1995 $281,357 $ 96,500 9,000 $2,058
Chief Executive 1994 $270,001 $ 56,875 4,000 $ 465
Officer & President 1993 $256,473 $ 22,433 8,000 $3,311
Kevin L. Molloy 1995 $156,558 $138,600 4,600 $2,058
Senior Vice 1994 $146,501 $ - 4,000 $ 465
President-Operations 1993 $137,390 $ 49,875 4,200 $1,929
Michael R. Hinckley 1995 $139,013 $ 28,575 4,600 $1,940
Senior Vice 1994 $129,164 $ - 3,800 $ 465
President-Marketing 1993 $126,125 $101,025 3,800 $1,791
Steven R. Stenhaug 1995 $ 95,400 $ 16,754 4,500 $1,387
Senior Vice 1994 $ 90,000 $ 4,600 4,000 $ 298
President-Treasure 1993 $ 77,112 $ 6,818 3,750 $1,089
(1) Amounts represent discretionary contributions by Kahler to each
officer's account in Kahler's 401(k) plan.
<PAGE>
STOCK OPTIONS
The following tables summarize stock option grants and exercises during
1995 to or by the Chief Executive Officer or one of the executive officers
named in the Summary Compensation Table above, and the values of the
options held by such persons at the end of 1995.
Stock Option Grants in 1995
Percentage Potential
of Total Realizable value
Options at Assumed Annual
Number of Granted to Rates of Stock
Securities Employees Exercise Expi- Price Appreciation
Underlying in Fiscal or Base ration for Option Term
Name Granted(a) 1995 Price Date 5% 10%
Mr. Milner 5,000 4.0% $ 7.875 2/00 $10,875 $24,025
4,000 3.2% $12.875 10/00 $14,220 $31,460
Mr. Molloy 4,600 3.7% $12.875 10/00 $16,353 $36,179
Mr. Hinckley 4,600 3.7% $12.875 10/00 $16,353 $36,179
Mr. Stenhaug 4,500 3.6% $12.875 10/00 $15,998 $35,393
(a) Options are for a term of 5 years and employees may exercise 25% of
the options granted at the end of the first year and an additional 25% each
year thereafter.
Stock Option Exercises in 1995 and Value at End of 1995
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
Shares End of 1995 End of 1995
Acquired Value (Exercisable/ (Exercisable/
Name On ExerciseRealized(1)Unexercisable) Unexercisable)(1)
Mr. Milner 20,000 $153,300 -0- /19,500 -0- /70,875
Mr. Molloy - $ -0- 9,100/11,200 62,200/23,700
Mr. Hinckley 7,850 $ 36,956 -0- /10,600 -0- /20,512
Mr. Stenhaug 2,000 $ 10,500 11,625/10,625 84,937/20,438
(1) Market Value of underlying securities at exercise or year-end, minus
the exercise or base price
COMPENSATION OF DIRECTORS
The Company pays non-employee directors $12,000 per year, and an additional
$750 for each Board meeting attended. Non-employee committee chairmen
receive an additional $1,000 per year. The non-employee executive committee
members receive an additional $3,000 per year. The non-employee Chairman
of the Board receives additional compensation of $15,000 per year.
<PAGE>
A non-employee director may elect to have up to 100% of the annual retainer
fee and meeting fees paid in Common Stock of Kahler rather than cash. For
valuation purposes, Kahler uses the fair market value of the stock as of
the date of the annual meeting of stockholders or on such other regular
date as may be established by the Board of Directors. During fiscal year
1995, an aggregate of 5,853 shares were issued to three directors who
elected this alternative.
Kahler also awards each director options of 12,200 shares of Common Stock
at the time of the director's initial election and grants each director an
option for 4,000 shares of Common Stock on the date immediately following
the last regularly scheduled Board meeting of each year. The exercise
price of each option is the fair market value of the Common Stock as of the
date of grant. Each option extends for ten years and is fully exercisable
one year after the date of grant. Accordingly, each of the directors
received an option for 4,000 shares with an exercise price of $12.875 on
October 30, 1995.
Employee directors will receive no additional compensation for serving on
the Company's Board of Directors, beyond that which they receive in their
capacity as employees of the Company.
Comparison of Five Year Cumulative Total Return Among Kahler Realty
Corporation, the NASDAQ Stock Market and NASDAQ Non-Financial Stocks
Year ended 1990 1991 1992 1993 1994 1995
Kahler Realty Corp $100.00 $112.50 $ 71.88 $169.75 $224.88 $306.25
NASDAQ US $100.00 $160.56 $186.87 $214.51 $209.69 $296.30
NASDAQ Non-Fin $100.00 $160.98 $176.09 $203.32 $194.86 $267.92
DESIGNATION OF AUDITORS
The Board of Directors, upon recommendation of the audit committee of the
Board, proposes that the firm of KPMG Peat Marwick LLP be retained as
independent auditors for the Company for the 1996 fiscal year.
Representatives of KPMG Peat Marwick LLP are scheduled to be present at the
meeting, will have the opportunity to make a statement if they desire to do
so, and will be able to respond to appropriate questions by any of the
Shareholders.
Unless instructed to vote against or abstain, the proxies will vote FOR the
retention of KPMG Peat Marwick LLP as auditors.
TRANSACTIONS WITH MANAGEMENT AND PRINCIPAL SHAREHOLDERS
In February 1989, the Company entered into a Cross Option Agreement with
Mayo Foundation. The Company granted the Foundation a right of first
refusal if the Company desires to sell (defined to exclude the granting of
mortgages and other financing arrangements) any of the Company's Rochester
hotels (which include The Kahler Hotel, the Kahler Plaza Hotel, the Clinic
View Inn and the Holiday Inn Hotel) or to lease a substantial portion of
the land or square footage of the hotels or to subcontract the management
of any of the hotels for more than one year.
<PAGE>
The Mayo Foundation granted the Company a right of first refusal if the
Foundation seeks to sell all or any portion of the Common Shares of the
Company owned (now or in the future) by the Foundation. Each right of
first refusal requires the Company or the Foundation, as the case may be,
to give written notice to the other of any desire to sell an asset subject
to the Cross Option Agreement, and allows the other party 120 days in which
to exercise the option and agree to match the terms of the offer to which
the option applies. The options expire in 1999 and are subject to various
other terms and conditions.
In January 1992, Mayo Foundation purchased a $2 million Subordinated Note
of the Company. The Subordinated Note is due in April 1998 and carries an
interest rate of prime plus 1%. In connection with the issuance of the
Subordinated Note, the Company issued to Mayo Foundation a warrant for
150,000 shares of Common Stock at a price of $3.25 per share. The warrant
was exercised in October 1994. The terms of this transaction were
negotiated on behalf of the Company by a committee of the Board of
Directors consisting of persons who were not affiliated with Mayo
Foundation. The Company believes that the terms of this transaction are at
least as favorable to it as the terms available from unaffiliated parties.
During 1995, the Company paid $162,527 in interest on the Subordinated
Note.
Mr. Herrell, director of the Company, was an officer of the Mayo Foundation
during 1995 and Dr. McIlrath, director of the Company, was a retired
employee of the Mayo Foundation during 1995.
SHAREHOLDER PROPOSALS FOR THE NEXT ANNUAL MEETING
Any proposal by a shareholder to be presented to the shareholders at the next
Annual Meeting must be received by the Company at its principal executive office
not later than December 1, 1996.
OTHER BUSINESS
As of this date, the Board of Directors is not aware that any matters are to be
presented for action at this meeting other than those set forth herein. If any
other matters are brought before the meeting, the proxies will vote all proxies
on such matters in accordance with their judgment of the best interest of the
Company.
By order of the Board of Directors
Michael J. Quinn
Michael J. Quinn
Senior Vice President-Secretary
Dated: March 28, 1996
