SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 'SS'240.14a-12
INTERSTATE HOTELS CORPORATION
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(Name of Registrant as Specified In Its Charter)
SHANER HOTEL GROUP LIMITED PARTNERSHIP
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the file is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date filed:
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Preliminary Copy, Subject to Completion, Dated April 23, 2002
SHANER HOTEL GROUP LIMITED PARTNERSHIP
1965 Waddle Road
State College, Pennsylvania 16803
April ___, 2002
Dear Interstate Stockholder:
As you know, Shaner Hotel Group Limited Partnership has made a tender offer at
$3 per share to acquire 2,465,322 shares of Class A Common Stock of Interstate
Hotels Corporation. If the tender offer is successful, Shaner will own 51% of
the issued and outstanding Class A Common Stock.
As the Chairman and CEO of Shaner Hotel Group Limited Partnership and a nominee
for director at this year's annual meeting of stockholders of Interstate Hotels
Corporation, I thought you may have some interest in my background. I started in
the hotel business at 29 years of age by acquiring a Sheraton Hotel. I learned
the hotel business through personally working at this property in all aspects of
hotel operations including sales and marketing, maintenance and food service.
Since that time, our company has owned or managed over 60 different hotels;
however, we have maintained our hands on family oriented approach to hotel
management and operations. Our company culture is built upon integrity and
respecting the interest of our owners and our employees. I believe that with
your support, I can institute our values at Interstate Hotels Corporation to
improve operating performance of Interstate and ultimately stockholder value. In
fact, Shaner has paid all scheduled distributions to all its partners without
exception from 1983 until the present time including excess distributions and I
hope to bring this positive financial management to Interstate.
In order to accomplish my goals, I am writing to you today seeking your support
on two initiatives that I am confident will add value to Interstate Hotels and
your investment. I am asking for your support by voting FOR on the two items on
the enclosed GOLD proxy.
[X] Electing the two Shaner nominees to the board of directors of
Interstate Hotels Corporation.
[X] Urging the Board to remove the "poison pill", which would allow Shaner
to move forward with a tender offer to acquire 2,465,322 shares of the
Class A Common Stock at $3.00 per share.
If you review the recent financial statements and other corporate filings of
Interstate Hotels Corporation, as I have, it becomes clear that current
management has performed at an unsatisfactory level. Examples of this
unsatisfactory performance are:
- OPERATIONS -
o Interstate stock has fallen from a high of $5.00 per share in June
1999 to a low of $1.25 in December 2001. Interstate Hotels Corporation
has reported net losses in excess of $23.5 million over the last three
years.
o Shaner Response--If our nominees are elected to the Board, we will
offer to bring significant new management fee income to a joint
venture between Interstate and Shaner by assigning the management
contracts on all Shaner hotels to the joint venture. Of course, any
business relationship will be an arms-length transaction and approved
by a disinterested Board. Our nominees would promote significant cost
savings which we believe will help to return Interstate to
profitability.
o Senior management of Interstate Hotels Corporation has received
compensation, which we estimate to be in excess of $12.0 million over
the last three years.
o Shaner Response--If our nominees are elected to the Board, they will
suggest a removal of senior management as it presently exists to be
replaced by Shaner senior executives which will result in a
significant yearly savings to Interstate.
o Interstate recorded a $3,026,000 loss less than one year after the
Worldgate investment, which investment appears to have benefited
interrelated parties and members of the Board of Interstate.
o Shaner Response--If we succeed in electing Shaner directors to the
Board, we will put forth a motion to the full board that, in the
future, Interstate funds shall not be invested in any private hotels
controlled by any members of the Board of Directors of Interstate.
o In over a year and a half, Interstate has failed to invest any of the
Lehman investor funds; however, Interstate has paid or accrued over
$3,500,000 in preferred dividends and interest expense while incurring
$2,100,000 in fees.
o Shaner Response--If we succeed in electing two Shaner directors to the
Board of Interstate, they will urge the full Board to commence
negotiations with the Lehman group in order to pay in full the debt
owed to the Lehman group and to redeem the preferred stock owned by
the Lehman group. This would result in an annual interest savings to
Interstate of approximately $2,600,000.
- CORPORATE GOVERNANCE -
o When the common stock was spun-off to Interstate stockholders management
adopted a number of anti takeover provisions including the "poison pill",
staggered board of directors, and executive golden parachutes. The Lehman
financing in 2000 introduced additional restrictions. The cumulative
effective of these proposals disenfranchises the common stockholders.
o Shaner Response - If we are successful in obtaining board representation we
will bring forth motions to:
o Redeem the poison pill;
o Replace the staggered election of the board of directors with annual
election of all directors making the board more responsive to shareholder
concerns;
o Require director attendance at or above the 75 percent level;
o Require the Audit, Compensation and Nominating Committees of the board to
be comprised of only Independent directors;
o Attempt to negotiate a reasonable settlement of the current executives'
golden parachutes.
o Eliminate the ability to reprice options as Interstate did in February
2001, when the exercise price of existing stock options was lowered to
$2.00 from $4.50.
As a substantial owner of Class A Common Stock, the interests of Shaner are
aligned with your interests. If the nominees of Shaner are elected to the board,
Shaner will strive to ensure that they act in the best interest of all
stockholders.
Your vote is essential. If you do not support the proposals of Shaner Hotel
Group Limited Partnership, we believe that Interstate will continue to perform
at an unsatisfactory level.
Even if you previously have submitted a proxy card furnished by Interstate, it
is not too late to change your vote by simply signing, dating and returning the
enclosed GOLD proxy card today. We request that all holders of Class A Common
Stock vote FOR the nominees designated by Shaner Hotel Group Limited Partnership
and that all holders of Common Stock vote FOR the resolution urging the board to
remove the poison pill.
Any questions you may have can be directed to N.S. Taylor & Associates, Inc., at
866-470-4500.
We urge you to support our efforts to protect your interest as common
stockholders in Interstate. Please sign, date and return the GOLD proxy card
today. I personally assure you that if I receive your support through a FOR vote
on our proxy solicitation you will receive my utmost efforts on your behalf to
improve stockholder value at Interstate.
Sincerely yours,
Lance T. Shaner
Chairman and CEO
Shaner Hotel Group Limited Partnership
Preliminary Copy, Subject to Completion, Dated April 23, 2002
PROXY STATEMENT
OF
SHANER HOTEL GROUP LIMITED PARTNERSHIP
2002 ANNUAL MEETING OF STOCKHOLDERS
OF INTERSTATE HOTELS CORPORATION
This Proxy Statement and the accompanying form of GOLD proxy card are
being furnished by Shaner Hotel Group Limited Partnership, a Delaware limited
partnership ("Shaner Hotel Group," "we" or "us"), to the owners of shares of
Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), and
the owner of the Class B Common Stock, par value $.01 per share (the "Class B
Common Stock" and together with the Class A Common Stock, the "Common Stock"),
of Interstate Hotels Corporation, a Maryland corporation ("Interstate" or the
"Company"), in connection with the solicitation by Shaner Hotel Group of proxies
from the stockholders to be voted at Interstate's 2002 Annual Meeting of
Stockholders, and at any adjournments, postponements or reschedulings thereof
(the "Annual Meeting"). Interstate has announced that the Annual Meeting will be
held at [_____ a.m.] local time on [June ___], 2002 at [_____]. Interstate has
fixed [April _____], 2002 as the date for the determination of stockholders of
record entitled to notice of and to vote at the Annual Meeting (the "Record
Date").
The date of this Proxy Statement is [May _____], 2002. This Proxy
Statement and the accompanying GOLD proxy card are first being sent or given to
Interstate's Common stockholders on or about May 3, 2002.
At the Annual Meeting, Interstate's Class A Common stockholders will be
asked to elect two members of Interstate's Board of Directors and its Class A
and Class B Common Stockholders will be asked to ratify the selection of
Interstate's independent public accountants. Shaner Hotel Group intends to make
the following two proposals, which are more fully described in this Proxy
Statement.
1. To elect the two Shaner Hotel Group Class A nominees for election as
Common Stock A-3 directors, as set forth below in this Proxy
Statement.
2. To recommend that Interstate's Board of Directors remove the
impediment to Shaner Hotel Group's tender offer for shares of Class
A Common Stock represented by Interstate's Shareholder Rights
Agreement.
Each of Shaner Hotel Group's stockholder proposals is described in greater
detail elsewhere in this Proxy Statement. Shaner Hotel Group is making no
recommendation concerning the ratification of the selection of independent
accountants. Interstate stockholders may use the enclosed GOLD proxy card to
vote on the ratification of the selection of Interstate's accountants, as well
as to vote on the two Shaner Hotel Group proposed resolutions described in this
Proxy Statement.
Shaner Hotel Group has approached Interstate twice with proposals to
negotiate a transaction, but has been rebuffed both times. The contacts and
course of dealing between Shaner Hotel Group and Interstate are described below
in the Section entitled "Background Information." Shaner Hotel Group remains
interested in pursuing discussions and negotiations with Interstate's Board of
Directors regarding a transaction. Shaner Hotel Group has commenced a cash
tender offer for 2,465,322 shares of Interstate's Class A Common Stock, on the
terms and subject to the conditions set forth in Shaner Hotel Group's Offer to
Purchase, dated April 20, 2002, and the related Letter of Transmittal. This
Proxy Statement is neither an offer to purchase those shares, nor a request for
the tender of them. Our offer is being made only by means of the Offer to
Purchase and the related of Letter of Transmittal, which you should have already
received. If you have not received the Offer to Purchase and the related Letter
of Transmittal, please contact our Solicitation Agent, N.S. Taylor & Associates,
Inc., as set forth below.
It is important that Interstate's stockholders vote their shares at the
Annual Meeting. Please read these materials regarding the Annual Meeting
carefully, and please make sure that you make your desires known by voting your
Interstate shares at the meeting. Based upon Interstate's Proxy Statement for
the Annual Meeting, as of the close of business on [April ____ ], 2002, there
were 5,487,885 shares of Class A Common Stock outstanding, 242,555 shares of
Class B Common Stock outstanding, and 725,000 shares of Series A Preferred Stock
outstanding.
A vote in favor of the Shaner Hotel Group proposals described in this
Proxy Statement will not obligate the Interstate Class A Common Stock
stockholders to tender their Interstate shares pursuant to the Offer to
Purchase. Each Interstate Class A Common stock stockholder of record as of the
Record Date will be entitled to vote at the Annual Meeting, even if the
stockholder has tendered Interstate Class A Common shares for purchase pursuant
to the Offer or has sold those shares after the Record Date.
Whether or not a Interstate stockholder plans to attend the Annual
Meeting, Shaner Hotel Group urges all Interstate stockholders to vote FOR both
of the Shaner Hotel Group proposals described in this Proxy Statement by signing
and returning the accompanying the GOLD proxy card in the enclosed, postage-paid
envelope. Unless revoked in the manner set forth below, GOLD proxies will be
voted at the Annual Meeting in accordance with the written instructions
specified in the proxy. In the absence of written instructions, GOLD proxies
will be voted FOR the two Shaner Hotel Group proposals described in this Proxy
Statement, and FOR the ratification of the selection of Interstate's independent
public accountants.
The proxies named in the accompanying GOLD proxy card will not have
discretionary authority to vote on any of the matters described in this Proxy
Statement. Shaner Hotel Group has no reason to believe that any proposals other
than those described in this Proxy Statement will come before Interstate's
stockholders at the Annual Meeting. If other proposals are introduced at the
Meeting, however, the proxies named in the accompanying GOLD proxy cards will
vote on any such other matters in their discretion. Shaner Hotel Group urges
Interstate's stockholders NOT to sign any proxy cards sent by Interstate
opposing either of the Shaner Hotel
ii
Group proposals described in this Proxy Statement, or which does not provide a
means to vote on the two Shaner Hotel Group proposals described in this
Statement.
You may already have received, or will soon receive, a proxy card from
Interstate. Please return only Shaner Hotel Group's GOLD proxy card and do not
return any Interstate proxy card under any circumstances. If you return both
proxy cards there is a danger that your shares will not be voted as you desire
because only the latest dated proxy card you submit counts.
THIS SOLICITATION IS BEING MADE BY THE SHANER HOTEL GROUP AND NOT ON
BEHALF OF THE BOARD OF DIRECTORS OF INTERSTATE.
If you have any questions regarding your proxy, or need assistance in
voting your shares of Common Stock, please call our Solicitation Agent:
N.S. TAYLOR & ASSOCIATES, INC.
15 North Street, 2nd Floor
Dover-Foxcroft, Maine 04426
Banks and Brokers Call Collect: 207.564.8700
All Others Call Toll-Free: 866.470.4500
[May ____ ], 2002
iii
TABLE OF CONTENTS
QUESTIONS AND ANSWERS ABOUT THIS PROXY SOLICITATION...............................................................1
BACKGROUND INFORMATION...........................................................................................12
SHANER HOTEL GROUP'S PROPOSALS...................................................................................13
VOTING PROCEDURES................................................................................................14
ELECTION OF SHANER HOTEL GROUP'S NOMINEES AS DIRECTORS...........................................................15
PROPOSAL TO RECOMMEND REMOVAL OF INTERSTATE'S POISON PILL........................................................32
PROPOSAL TO RATIFY APPOINTMENT OF INDEPENDENT ACCOUNTANTS........................................................35
SOLICITATION OF PROXIES..........................................................................................36
INFORMATION ABOUT INTERSTATE.....................................................................................37
INFORMATION ABOUT SHANER HOTEL GROUP.............................................................................39
BACKGROUND TO THIS PROXY SOLICITATION............................................................................42
MISCELLANEOUS ...................................................................................................48
OTHER INFORMATION................................................................................................49
SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF SHANER HOTEL GROUP AND SHANER OPERATING CORP....................51
SCHEDULE II CURRENT PORTFOLIO OWNED OR MANAGED BY SHANER HOTEL GROUP............................................53
SCHEDULE III INFORMATION CONCERNING PERSONS WHO MAY SOLICIT PROXIES..............................................54
SCHEDULE IV SHARES OF INTERSTATE'S COMMON STOCK OWNED BY SHANER HOTEL GROUP LIMITED PARTNERSHIP, ITS GENERAL
PARTNER, AND THEIR OFFICERS, DIRECTORS, EMPLOYEES, AND BY OTHERS WHO MAY SOLICIT PROXIES............55
SCHEDULE V BENEFICIAL OWNERSHIP OF INTERSTATE'S COMMON STOCK...................................................56
iv
QUESTIONS AND ANSWERS ABOUT THIS PROXY SOLICITATION
The following are some of the questions you as a stockholder of
Interstate, may have and our answers to those questions. Please read carefully
the remainder of this statement. The information in this section is only a
summary, is not complete, and may not contain all the information which may be
important to you. Questions or requests for assistance may be directed to N.S.
Taylor & Associates, Inc. at its address and telephone number listed in the last
question and answer in this section.
Who is soliciting my vote?
Shaner Hotel Group Limited Partnership, a Delaware limited partnership,
is soliciting the right to vote your shares. The General Partner of Shaner Hotel
Group is Shaner Operating Corp., a Delaware corporation. Shaner Hotel Group and
its affiliates beneficially own approximately 6.08% of the outstanding shares of
Class A Common Stock. Shaner Hotel Group has an outstanding tender offer to
purchase an additional 44.92% of the shares of Class A Common Stock. If
successfully completed, the tender offer would give Shaner Hotel Group and its
affiliates the beneficial ownership of approximately 51.0% of the Class A Common
Stock and approximately 48.4% of all Common Stock. For more information
concerning Shaner Hotel Group, Shaner Operating Corp., and their principals, see
pages 15 and 39 and Schedule I.
For what meeting are you soliciting my vote?
We are soliciting the right to vote your shares at the 2002 annual
meeting of stockholders of Interstate. Should you give us your proxy to vote
your shares at that meeting, we would vote shares of Class A Common Stock in
favor of our two nominees for election to Interstate's board of directors,
shares of all Common Stock in favor of our proposal to recommend that the board
of directors remove Interstate's "poison pill" as an impediment to the
completion of our tender offer, and shares of all Common Stock in our discretion
on any other matters which may come up for a vote at that meeting. (See page 13)
Why are you soliciting my votes?
We are soliciting the right to vote your shares in order to be able to
elect our two nominees as directors of Interstate and to pass a resolution
recommending to the board that it remove the "poison pill" as an impediment to
the completion of our tender offer. We are seeking to elect our two nominees to
the board in order to be able to exert influence on and control over the
management and affairs of Interstate. We want to remove the "poison pill"
impediment to the completion of our tender offer in order to increase our
investment in Interstate. We believe in the long-term value of Interstate, in
the business of owning and operating hotels and motels, and in the synergies and
operating efficiencies which may be obtained by a business relationship between
Interstate and us. (See pages 15 and 32)
What votes are required to adopt measures at the meeting?
The holders of a majority of the outstanding shares of Class A Common Stock,
Class B Common Stock and Series B Preferred Stock, considered together, and
present in person or by proxy, constitute a quorum for the transaction of
business at the meeting, provided that a majority of the outstanding Class A
Common shares are present for the election of the Class A Directors, and a
majority of the outstanding Class A and Class B Common shares, voting together
as a single class, are present for the adoption of our proposal relating to the
"poison pill," the ratification of the appointment of the independent
accountants, and for any other matter to be voted upon by the Common
Stockholders. If a quorum of stockholders is present at the meeting and the
holders of more than one-half of the Class A Common shares are present at the
meeting, in person or by proxy, the two Class A Common Stock directors shall be
elected by plurality vote of the Class A shares. If a quorum of stockholders is
present at the meeting and holders of more than one-half of the shares of Common
Stock are present at the meeting, in person or by proxy, the holders of a
majority of the Class A and Class B Common Stock, voting together as a single
class, present in person or by proxy, are required to adopt our proposal
relating to the "poison pill," ratify the appointment of the independent
accountants and to carry any other matter brought to a vote at the meeting to be
voted upon by the Common Stockholders. (See page 14)
What should I do now? How do I vote?
After you read and consider carefully the information contained in this
Proxy Statement, please fill out, sign, and date your GOLD proxy card and mail
your signed GOLD proxy card in the enclosed return envelope as soon as possible
so that your shares may be represented at the meeting. Failure to return your
GOLD proxy or vote in person at the meeting will have the same effect as a vote
against our nominees for director and our proposal for purposes of the vote
based on the shares outstanding. (See page 15)
If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
No. Your broker will not be able to vote your shares for our nominees
nor on our proposal to redeem the poison pill without your specific
instructions. You should fill out, sign, date, and return the GOLD proxy card
and otherwise follow the directions provided by your broker on how to instruct
your broker to vote your shares.
(See page 50)
Can I change my vote or revoke my proxy after I have mailed my signed proxy
card?
Yes, you can change your vote at any time before your proxy is voted at
the meeting. You can do this in one of three ways. First, you can send a written
notice stating that you would like to revoke your proxy. Second, you can
complete and submit a new proxy card. Third, you can attend the meeting and vote
in person. Simply attending the meeting, however, will not revoke your proxy;
you must vote at the meeting. If you have instructed a broker to vote your
shares, you must follow directions received from your broker to change your
vote. (See page 15)
2
How can I tender my shares into your offer?
If you would like to tender your shares into our offer, contact N.S.
Taylor & Associates, Inc. as set forth below for information on how to do so and
for copies of the required offer to purchase and letter of transmittal. Signing
and submitting a proxy card to us will not tender your shares. This Proxy
Statement is neither an offer to purchase your shares nor a request for the
tender of your shares. The offer is being made only by means of the offer to
purchase and the related letter of transmittal. (See page 12)
What are the conditions to your tender offer?
The most important conditions to our offer are: (i) A minimum of
2,465,322 shares of Class A Common Stock being tendered; and (ii) the removal of
the "poison pill" by Interstate's board of directors. The offer is not
conditioned upon the receipt of financing by us. This is why the removal of the
"poison pill" as an impediment to our offer is important and why we need your
support. We have requested that Interstate's board of directors redeem the pill
or take other action to remove it as an impediment to our offer. We also need
your support and vote to have the stockholders recommend at the annual meeting
that the board of directors do so.
What is the "poison pill" and why is it important?
How does it work? The poison pill refers to Interstate's Shareholders
Rights Agreement adopted by the board of directors in 1999 and amended in 2000,
but never approved by Interstate stockholders. Under the agreement the board of
directors has issued to common stockholders one preferred stock purchase right
for each common share. If we were to complete our purchase under our tender
offer and nothing were done to redeem or change the preferred stock purchase
rights, each right would entitle its holder, other than us (and our affiliates
or associates) to purchase, for $33.00, preferred stock of Interstate having a
market value of $66.00. Alternatively, the board would be permitted to take
action that would result in the receipt by stockholders, other than us and our
affiliates and associates, of an equivalent amount of stock on a cashless
exercise basis. In some instances the board would also be permitted to exchange
one share of Class A Common Stock (or under a formula the equivalent of more
than one share of Class A Common Stock) in exchange for each right held by
stockholders other than us and our affiliates and associates.
What effect does it have? If we were to complete our purchase under our
tender offer while the rights remain in effect and unchanged, our ownership
interest in Interstate would be unacceptably diluted. As a result, we will not
proceed and complete the purchase contemplated by our offer, even if you wish to
accept the offer, unless the rights are redeemed or made inapplicable to us.
Interstate may maintain that this poison pill protects common stockholders by
encouraging suitors such as us to negotiate a stockholder-friendly transaction
with Interstate. However, in our case this is not true. We have offered several
times to discuss a transaction, but the board has rebuffed us each time.
3
How can you get around it? Interstate's board has the power to remove
the pill if it wishes. It can redeem the rights at a penny apiece or make the
pill not applicable to us. We have asked the board to remove the pill from our
path in order to be able to give you the benefits of our proposal. We also need
your support at the annual meeting to pass a stockholder resolution recommending
the board to do so. Please give us your proxy to vote your shares at the meeting
in favor of removal of the poison pill.
How and when was Interstate created?
Interstate was formed as a result of a series of events culminating in
the spin-off of Interstate's operations from Wyndham International, Inc.,
formerly known as Patriot American Hospitality, Inc. ("Wyndham"), on June 18,
1999. On that date, Wyndham transferred to Interstate, which was then a
newly-formed corporation, the third-party hotel management and leasing
businesses of a predecessor of Interstate, which had been merged with Wyndham in
1998, together with an equity interest in a hotel complex. Wyndham then spun-off
Interstate to Wyndham's public stockholders. (See page 19)
Was the "poison pill" ever approved by Interstate's Stockholders?
No. Prior to the creation and spin-off of Interstate from Wyndham, on
June 9, 1999, the then board of Interstate approved the adoption of the
Shareholders Rights Agreement. On July 8, 1999, following the spin-off, the
board declared a dividend distribution of one preferred stock purchase right for
each outstanding share of common stock of Interstate to stockholders of record
at that time. Thus, Interstate's stockholders never authorized or approved the
creation of the "poison pill." (See page 32)
Will the board of directors be required to remove the "poison pill" if you
obtain sufficient votes and your proposal is adopted?
Unfortunately, no. Our proposal is only a recommendation and its
adoption would only be a recommendation to the board. Members of the board,
however, have a fiduciary duty to all stockholders which supersedes their
individual member interests. A strong vote in favor of removal of the "pill"
should send a clear and persuasive message to the board that stockholders want
the "pill" removed. The "poison pill" is, in our opinion, a measure designed to
insulate and entrench members of the board and management. (See page 32)
If the board votes to remove the "poison pill" before the annual meeting, do you
still need our proxies to vote our shares?
Yes we do. Even if the board should redeem the pill, we still may not
be able to vote at the meeting the shares we obtain in the tender offer
depending upon the record date for stockholders entitled to vote at the meeting.
We therefore need the support of the holders of Class A Common Stock to elect
our two nominees to the board at the annual meeting. Please sign, date and mail
in your GOLD proxy card no matter what the board of directors does to the "pill"
before the meeting.
4
Can you describe the Lehman financing?
The "Lehman financing" involved the sale of two classes of securities
of Interstate. On October 20, 2000, Interstate issued 500,000 shares of its
Series B Convertible Preferred Stock for $5.0 million, and its 8.75%
Subordinated Convertible Preferred Notes for $25.0 million. The securities were
issued to CGLH Partners I L.P. and CGLH Partners II L.P., which are limited
partnerships affiliated with Lehman Brothers Holdings, Inc., New York City (the
"Lehman Investors"). The shares earn a preferred, annual dividend of 8.75% and
are convertible at any time into shares of Class A Common Stock at a conversion
rate of $4.00 per share. The Notes represent a debt of Interstate on which it
must pay an annual interest rate of 8.75% and are convertible into shares of
Class A Common Stock at $4.00 per share. The terms of the shares and the notes
limit the Lehman Investors from converting them into shares of Class A Common
Stock equal to more than 49.0% of Interstate's total common stock outstanding
after the conversion. The terms of these securities also give the Lehman
Investors five seats on the board of directors and the right to veto major
transactions of Interstate, including asset sales, mergers, and under certain
circumstances removal of the "poison pill." (See page 20)
At the time of the Lehman financing on October 20, 2000, Interstate
entered into amended and restated employment agreements with three members of
senior management. These new agreements provided for the issuance to these
officers of 225,000 additional shares of Series B Preferred Stock, with a value
to the recipients of $2.25 million, in exchange for the cancellation of their
then-existing employment agreements. The preferred shares were issued to them at
that time, but vest over a three-year period. If there is a change of control
(as defined in the employment agreements), the shares become vested immediately.
(See page 19)
The Lehman investment was substantial. Has it benefited Interstate?
After a very detailed review of Interstate's published financial
statements, it is our opinion that thus far Interstate has not received any
significant benefit from this expensive investment. (See page 22)
$30.0 million is a lot of money. What did Interstate have to pay to get this
money, how has it used the funds, and what has been the impact on common
stockholders?
Based upon our review of Interstate's published financial statements,
we believe that Interstate has expended a significant amount of its own money to
obtain this investment, paid a significant amount of money to the holders of the
investment, and lost a significant amount on an equity investment made with this
financing's proceeds. Aside from any management fee income earned from
Interstate's Worldgate investment, which is discussed below, the following
picture emerges as to Interstate's losses and their effect on common
stockholders. (See page 22)
5
Costs and Losses Suffered by Company
Lehman Equity Placement Fees..........................$2,100,000.00
Cancellation of Employment Contracts...................2,250,000.00
Dividends on Preferred Shares............................948,000.00
Interest on Notes......................................3,281,000.00
Loss on Worldgate Investment...........................3,900,000.00
Debt Placement Fee.....................................1,000,000.00
------------
$13,479,000.00
Benefits Received by Company
Estimated Interest Income on $25.0 million...........($1,000,000.00)
---------------
Net Cost to Company/Stockholders
Net Cost to Company (Estimated)......................$12,479,000.00
Net Cost Per Common Share (Estimated).........................$2.18
With regard to the items in this chart, please note that the employment
contract cancellation payments produced no benefit to Interstate because new
employment contracts containing substantially identical termination obligations
and annual compensation replaced the contracts which were cancelled as part of
this financing. Please also note that the loss of $2.18 per common share is in
addition to the fact that the shares of common stock are now junior to the new
shares of preferred stock. Notice that Interstate has paid over $6.0 million of
its own funds to obtain this investment and has the continuing obligation to pay
interest and dividends on the $30.0 million investment. Lastly, please factor in
the opportunity cost involved in that Interstate could have used these funds to
make other investments which would have had a positive return. The savings of
these costs and the alternative positive returns could have produced a positive
return to common stockholders.
What is the "Worldgate" investment and how does it relate to the Lehman
financing?
The Worldgate investment refers to Interstate's acquisition in October,
2000 of a 20% non-controlling equity interest in a limited partnership which
owns the Renaissance Worldgate Hotel in Kissimmee, Florida for $3.9 million. At
the time of the acquisition, Interstate received a fee agreement for the
management of the hotel. Management of Interstate has advised us that the
acquisition of this interest was approved several months before the Lehman
transaction was completed. (See page 21) We tie Interstate's Worldgate
investment and the Lehman transaction together for several reasons:
o the closings of the transactions occurred in the same month and must
have been negotiated at approximately the same time;
o the limited partnership owning the hotel, from which Interstate
purchased its equity interest, was controlled by affiliates of the
Lehman Investors;
6
o Interstate's funds used to purchase its interest in the hotel
partnership came from the proceeds of the sale a short time earlier of
Interstate's Series B Preferred Stock;
o shortly before Interstate's investment in the hotel, Lehman Brothers
Holding, Inc. refinanced the hotel with a $37.0 million loan which
Interstate then partially guaranteed.
Based on these facts, we are led to conclude that Lehman Brothers and
its affiliates, their investment in Interstate, Interstate's investment in the
Worldgate hotel partnership, and certain members of the board of directors of
Interstate, both before and after the Lehman transaction, are all inter-related.
Although related party transactions and potential conflicts of interest are not
necessarily prohibited, were they adequately and timely disclosed as required?
Before the closing of the Lehman financing, Common Stockholders were
asked to approve the financing in proxy materials distributed in September 2000.
There was no disclosure in those materials of (i) a possible acquisition by
Interstate of an equity interest in the Worldgate hotel, (ii) the ownership of
an interest in that hotel by affiliates of the Lehman Investors, (iii) the
relationships among Lehman, the purchasers of the notes and the preferred
shares, the individuals who were to become directors of Interstate, and the
entity owning the hotel, (iv) the anticipated use of part of the proceeds of the
preferred stock to make the investment in the hotel, and (v) Interstate's
partial guarantee of the Lehman extension of credit to the hotel. We believe
that the facts that the two transactions were tied together, that the parties
involved in the transaction themselves were so inter-related, and that there
were multiple potential conflicts of interest involved, were material to the
matters presented for stockholder approval and that they should have been
accurately and fully disclosed to stockholders for them to make an informed
decision. Limited disclosure of these matters later appeared in Interstate's
annual report on form 10-K for calendar year 2000 filed on March 31, 2001, and
in Interstate's Proxy Statement for its 2001 annual stockholders meeting
distributed on April 30, 2001, but those disclosures were long after the fact
and did not provide stockholders with the information they needed in the fall of
2000 to make an informed decision. (See page 21)
How has the Worldgate Hotel investment performed?
Not well. In fact, the investment has been a disaster. Interstate has
written off its entire $3.9 million investment in the Worldgate hold. Late in
2001 the hotel was unable to satisfy debt service obligations on its extensions
of credit and defaulted on its mortgage loans. At the end of 2001, Interstate's
accounts receivable owed from the hotel for reimbursable expense advances
amounted to $1.2 million. In February 2002, the ownership and financing of the
hotel were restructured because of its financial difficulties. At that time,
Interstate's equity interest was redeemed by the hotel in exchange for mutual
releases. At that same time, Interstate received a $0.9 million cash payment
towards the accounts receivable balance along with a promissory note for the
remaining accounts receivable balance. (See page 21)
7
In addition, the hotel management fee payable by the hotel to
Interstate went unpaid from July 2001 through February 2002. As part of the
February 2002 restructuring, that unpaid fee was forgiven and going forward from
that date the management fee was reduced to a below-market rate. It is unknown
if, as part of the February 2002 restructuring, any of the other related parties
had to surrender their equity interest in the hotel partnership. Thus, in the
space of only one and one-half years, Interstate has lost its entire investment
in the Worldgate hotel, has lost a good part of its past management fees, is
waiting on the reimbursement of past expense advances, and is earning a
below-market fee for managing the hotel currently. We question whether if, in
the fall of 2000, stockholders had known about the related party aspects and
potential conflicts of interest involved in this transaction, and the historical
and prospective performance of this hotel, they would have authorized this
equity investment.
Interstate's December 31, 2001 balance sheet indicates that it has over $39.0
million of available cash, which suggests that Interstate has substantial cash
to invest in the acquisition of additional hotel management contracts. Are there
any limitations?
As noted in the footnotes to the balance sheet, $25.0 million of that
cash is restricted to a joint venture with the Lehman Investors and not
available for other investments. The Lehman Investors must invest an additional
$20.0 million into the joint venture. Although Interstate would make the
majority investment in the joint venture, the general partner of the venture
would make all major decisions and that partner is controlled by the Lehman
interests. To date, the joint venture has not made any investments, Interstate
has not indicated when, if at all, any acquisitions may be made, and meanwhile
Interstate's $25.0 million sits idle, earning just interest. Shaner Hotel Group
believes that the failure of Interstate to segregate the $25.0 million of
restricted cash on the face of the balance sheet in its published reports is in
direct contravention of applicable rules of the Securities and Exchange
Commission. The rules require the "separate disclosure" of "cash items which are
restricted as to withdrawal or use." The requirement of separate disclosure has
uniformly been interpreted by the SEC to be more than more footnote disclosure.
Thus, we believe that the financial statements of Interstate are materially
misleading since they substantially mistake the relationship of current assets
to current liabilities. (See page 22)
Your description of the costs involved in the Lehman transaction indicates a
placement fee of $1.0 million. Was this associated with the Lehman financing in
October 2000?
Not directly. This fee relates to a $40.0 million senior secured credit
facility Interstate obtained in July 2001 through Lehman Brothers Holdings, Inc.
and other banks. As of March 18, 2002, there have been no draws on that line of
credit. Should Interstate decide to draw down on that line in order to fund a
future investment through the joint venture with the Lehman interests, a
conflict of interest would be present in that the lender to the venture and the
general partner making decisions for the venture are both related to Lehman.
(See page 20)
8
Has Interstate repriced its employee stock options and what does that mean?
In February 2001, Interstate repriced all its outstanding officer and
employee options to purchase shares of Class A Common Stock. At that time those
options were exercisable at a price per share of $4.50, which was well above the
market price. The repricing cut in half the number of shares covered by the
options and reduced the exercise price to $2.00 per share. The board indicated
that the repricing of the options would provide an incentive to current
employees and officers for their continued employment. The problem with this
action is that stock options are granted as an incentive to management to reach
goals and enhance stock performance. Moreover, it is an attempt by a company to
provide additional compensation to management despite its inability to perform.
In many corporate circles, the repricing of stock options is looked upon as
irresponsible corporate action. In our view, the fact that market prices were
substantially below the option exercise price at the time of the repricing, and
that Interstate did a repricing then, indicates that Interstate has not been
managed well and is run for the benefit of insiders.
Aside from the "poison pill," are there any other structural or contractual
barriers which help to entrench current management and which were not approved
by the stockholders?
Interstate's articles provide for the staggered election of Class A
Common Stock directors. This has the effect of discouraging possible
acquisitions of large blocks of Interstate's stock. In addition, Interstate has
put in place lucrative golden parachute contracts for its senior executives,
which have a similar dampening effect. Interstate may maintain that these
mechanisms protect common stockholders by encouraging suitors such as us to
negotiate a stockholder-friendly transaction with Interstate. But in our case
this is not true. We have offered several times to discuss a transaction, but
the board has rebuffed us each time.
With all of the problems you have described, why do you want to become involved
with this Company?
We believe that Interstate has a good core business and loyal
employees. For the last 18 months, the directors and management appear to have
been more interested in structuring transactions in which they and related
parties principally benefit to the detriment of Interstate and its stockholders.
We believe that Interstate's core business and loyal employees can be used in a
family-oriented approach to investments and business, which should produce
significantly higher revenues and lower operating expenses and which should
result in higher profits and hopefully a stronger common stock valuation.
What are your plans for Interstate?
Our current plans for Interstate are to complete our tender offer,
subject to the satisfaction or waiver of important conditions, to nominate and
to vote for two candidates for election to Interstate's board of directors at
this year's annual meeting of stockholders, and to exercise the rights of a
holders of Class A Common Stock. The board of directors currently consists of
eleven members, five of whom are elected by the holders of Class A Common Stock,
one by the holder of Class B Common Stock, and five by the holders of Series B
Preferred Stock. The terms of the Class A directors are staggered, with two
director seats up for election in 2002, one
9
in 2003, and two in 2004. (See page 38) We intend to nominate and to vote for
one director candidate at the annual stockholder meeting in 2003 and two
director candidates in 2004. We also intend to use our representation on the
board of directors to try to exert influence and control over the management and
affairs of Interstate. In addition, following the completion of our tender
offer, and in accordance with all applicable requirements and restrictions of
Interstate's articles of incorporation and bylaws, and of applicable law, we
will consider seeking to accomplish some or all of the following objectives in
cooperation with the appropriate persons or entities.
o Purchase a portion of the outstanding shares of Series B Preferred
Stock of Interstate and encourage Interstate to purchase back the
remaining portion of those shares.
o Encourage Interstate to retire any and all outstanding 8.75%
Subordinated Convertible Notes due 2007.
o Encourage Interstate to, and support an effort to, simplify and conform
the structure of the board of directors to reflect any and all changes
made to Interstate's capital structure.
o Encourage Interstate to enter into a business relationship with us,
which would involve the combination of both parties' management and
revenue from long-term management agreements, in order to achieve
operating synergies and efficiencies by combining the overhead
structures of both entities and eliminating duplication of effort. Any
business relationship between Shaner Hotel Group and Interstate would
be an arms-length transaction, negotiated carefully by each of these
separate entities which will each have able and independent counsel,
and approved by disinterested members of the board of directors of
Interstate. In proposing a combination of both entities' managements,
we would suggest that Lance T. Shaner serve as chief executive officer
of both companies and that J.B. Griffin would serve as chief financial
officer of both. In that case, we could urge Interstate to attempt to
negotiate a reasonable settlement of the employment agreements of the
present chief executive officer and chief financial officer. The
backgrounds, experience and qualifications of Mr. Shaner and Mr.
Griffin are set forth in Schedule I to this statement and on pages 15
and 40. The proposed combination of the long-term management agreements
of both companies would be based upon an independent appraisal of those
agreements by an appraiser mutually acceptable to both companies.
o We will encourage Interstate to investigate the following concerns and
issues and take any appropriate action based upon the results of that
investigation. We are concerned that, and believe that, in recent
years, Interstate may have made a questionable investment in the
Renaissance Worldgate Hotel in Kissimmee, Florida, may have misstated
current assets in its recent financial statements, and may have paid
executive compensation out of line with Interstate's financial
performance. (See pages 18-23)
10
Who can help answer my other questions?
You should contact our proxy solicitation agent with any questions you
may have.
N.S. TAYLOR & ASSOCIATES, INC.
15 North Street, 2nd Floor
Dover-Foxcroft, Maine 04426
Banks and Brokers Call Collect: 207.564.8700
All Others Call Toll-Free: 866.470.4500
11
BACKGROUND INFORMATION
In December, 2001, Shaner Hotel Group acquired 320,000 shares of Class
A Common Stock of Interstate. The total number of shares of that class owned by
Shaner Hotel Group and its affiliates is 333,500. In its Schedule 13D filing
filed on January 9, 2002, Shaner Hotel Group stated that it was considering
making a proposal which might include an acquisition, merger, or a joint venture
between Shaner Hotel Group and Interstate to manage, operate, or own hotel and
motel properties. On January 14, 2002, Shaner Hotel Group sent to Interstate a
letter setting forth a proposal to combine the operations of Interstate and
Shaner Hotel Group. In a letter on February 14, 2002, Interstate told Shaner
Hotel Group that its board of directors had concluded that Shaner Hotel Group's
proposal did not present an opportunity which was in the best interest of
Interstate's public stockholders. That letter also stated that the proposal was
contingent upon its acceptance by the holders of Interstate's Series B Preferred
Stock and its 8.75% Subordinated Convertible Notes, and that those holders had
advised the board of directors that they did not wish to dispose of their
securities on the terms set forth in the proposal. On February 18, 2002, Shaner
Hotel Group sent to Interstate a letter expanding upon its earlier proposal. On
March 5, 2002, Shaner Hotel Group sent to Interstate a further revised proposal.
In an exchange of correspondence following that letter, Interstate rebuffed
Shaner Hotel Group's revised proposal.
Shaner Hotel Group's Tender Offer
On April 11, 2002, Shaner Hotel Group commenced a cash tender offer to
purchase 2,465,322 shares of Class A Common Stock of Interstate. The following
terms of the offer are set forth in the Offer to Purchase dated April 20, 2002.
The offer will expire on Friday, May 31, 2002, or such other date as to which
the offer may be extended. The shares of Class A Common Stock sought pursuant to
the offer represent 44.92% of the total number of shares of Class A Common Stock
issued and outstanding as of April 20, 2002. Shaner Hotel Group and its
affiliates currently beneficially own an aggregate of 333,500 shares of Class A
Common Stock, or approximately 6.08% of the total of the 5,487,885 shares of
Class A Common Stock issued and outstanding as of April 20, 2002. If the offer
is successful and Shaner Hotel Group acquires all of the shares sought, it and
its affiliates will beneficially own approximately 51% of the issued and
outstanding shares of Class A Common Stock.
As stated in the Offer to Purchase, the offer is conditioned on, among
other things: (i) a minimum of 2,465,322 shares of Class A Common Stock being
tendered; and (ii) the preferred stock purchase rights issued under Interstate's
Shareholders Rights Agreement having been redeemed by the board of directors, or
Shaner Hotel Group being satisfied, in its reasonable judgment that the
preferred stock purchase rights are invalid or otherwise inapplicable to the
offer. If as of the expiration date, more than 2,465,322 shares of Class A
Common Stock are validly tendered and not withdrawn, Shaner Hotel Group will
only accept for purchase on a pro rata basis 2,465,322 shares. A stockholder may
tender any or all shares owned by such stockholder.
12
The Offer to Purchase states that the purpose of the tender offer is to
increase, through the purchase of shares, Shaner Hotel Group's investment in
Interstate because it believes in the long-term value of Interstate, in the
business of owning and operating hotels and motels, and in the synergies and
operating efficiencies which may be obtained by a business relationship between
Interstate and Shaner Hotel Group. The Offer goes on to state that the tender
offer, at a significant premium to the market price of Interstate's stock at the
time that the tender offer was announced, demonstrates Shaner Hotel Group's
commitment to Interstate. The additional investment will increase Shaner Hotel
Group's incentive to see that the shares perform well. The tender offer will
give the stockholders an opportunity to sell some of their shares at a price
substantially in excess of the current market price and still retain a
significant interest in the future growth of Interstate.
This Proxy Statement is neither an offer to purchase shares in
connection with the tender offer of Shaner Hotel Group, nor a request for the
tender of shares. Shaner Hotel Group's tender offer is being made only by means
of the Offer to Purchase dated April 20, 2002, and the related Letter of
Transmittal, which you should have already received. If you have not already
received the Offer to Purchase and the related Letter of Transmittal, please
contact Shaner Hotel Group's Solicitation Agent, N.S. Taylor & Associates, Inc.,
as set forth at the beginning of this Proxy Statement.
SHANER HOTEL GROUP'S PROPOSALS
For the reasons discussed below in this Proxy Statement, Shaner Hotel
Group intends to present the following two proposals to Interstate's
stockholders at the Annual Meeting:
1. To elect the two Shaner Hotel Group Class A nominees for election as
Common Stock A-3 directors, as set forth below in this Proxy Statement.
2. To recommend that Interstate's Board of Directors remove the impediment
to Shaner Hotel Group's tender offer for shares of Class A Common Stock
represented by Interstate's Shareholder Rights Agreement.
The complete text of the second resolution above relating to Interstate's Rights
Agreement is as follows:
BE IT RESOLVED, that the holders of the Common Stock of Interstate urge
the Board of Directors to take one of the following actions and to
recommend to the Lehman Investors (as defined below) that such Lehman
Investors (as defined below) authorize the Board to take one of the
following actions: (i) redeem the stockholder rights issued pursuant to the
Shareholders Rights Agreement of Interstate; or (ii) amend the Shareholders
Rights Agreement to exclude Shaner Hotel Group and its affiliates as an
acquiring party. If the Board takes action (i), the holders of Common Stock
also ask the Board of Directors not to reissue or extend these rights, or
create a new rights plan unless such action by the Board is approved by an
affirmative vote of a majority of the outstanding shares at a meeting of
the stockholders held as soon as is practicable.
13
VOTING PROCEDURES
The information contained in the following four paragraphs is based on
a publicly-available copy of Interstate's Proxy Statement dated [April ___],
2002, and filed with the Securities and Exchange Commission, together with
Interstate's Bylaws (the "Bylaws").
The holders of record of shares of Class A Common Stock, Class B Common
Stock and Series B Convertible Preferred Stock, par value of $.01 per share (the
"Series B Preferred Stock"), of Interstate at the close of business on [April
___], 2002 ("the Record Date"), are entitled to receive notice of, and to vote
such shares at, the Annual Meeting. As of the Record Date, there were
[_____________] shares of Class A Common Stock outstanding, 242,555 shares of
Class B Common Stock outstanding and 725,000 shares of Series B Preferred Stock
outstanding. Holders of such class of shares as of the Record Date are entitled
to one vote per share on each matter to be considered by such holders' class of
shares at the Annual Meeting.
The holders of a majority of the issued and outstanding shares of Class
A Common Stock, Class B Common Stock and Series B Preferred Stock as of the
Record Date, considered together, present in person or represented by proxy,
will constitute a quorum for the transaction of business at the Annual Meeting,
provided that a majority of the outstanding Class A Common Stock is required for
the election of the Class A-3 Directors, a majority of the outstanding Class B
Common Stock is required for the election of the Class B Director, a majority of
the outstanding Series B Preferred Stock is required for the election of the
Series B Preferred Directors and a majority of the outstanding Class A and Class
B Common Stock, voting together as a single class, is required for the
ratification of the appointment of the independent accountants. Abstentions and
broker non-votes will be included in determining the number of shares present or
represented at the Annual Meeting for purposes of determining whether a quorum
exists. If a quorum is present: (1) the holders of the Class A Common Stock are
entitled to elect two Class A-3 Directors, with the election of directors being
determined by plurality vote, (2) the holders of the Class B Common Stock are
entitled to elect one member of the Board, with the election of the director
being determined by plurality vote, (3) the holders of the Series B Preferred
Stock are entitled to elect five members of the Board, with the election of
directors being determined by plurality vote and (4) the affirmative vote of a
majority of the Class A and Class B Common Stock, voting together as a single
class, present in person or represented by proxy and entitled to vote is
required to ratify the appointment of the independent accountants and any other
matter brought to a vote at the Annual Meeting. Abstentions and broker non-votes
with respect to any matter brought to a vote at the Annual Meeting will be
treated as shares not voted and, accordingly, will have no effect on the
election of directors but will have the effect of a vote against the
ratification of the appointment of the independent accountants. If the persons
present or represented by proxy at the Annual Meeting constitute the holders of
less than a majority of the outstanding shares of Class A Common Stock, Class B
Common Stock or Series B Preferred Stock as of the Record Date, the Annual
Meeting may be adjourned to a later date to obtain a quorum.
14
If the enclosed form of GOLD proxy card is executed and returned, it
may nevertheless be revoked by the person giving it any time before the vote at
the Annual Meeting either by filing with the Secretary of Interstate a written
notice of revocation or a proxy card bearing a later date than the most recently
submitted proxy card or by attending the Annual Meeting and voting in person.
The execution of a proxy card will not affect a stockholder's right to attend
the Annual Meeting and vote in person, but attendance at the Annual Meeting will
not, by itself, revoke a proxy.
Interstate's stockholders do not have dissenters' or appraisal rights
under Title 3, Subtitle 2 of the Maryland General Corporation Law or pursuant to
Interstate's charter with respect to the items set forth in this Proxy
Statement.
IF YOU, AS A HOLDER OF CLASS A COMMON STOCK, WISH TO VOTE FOR THE
SHANER HOTEL GROUP CLASS A NOMINEES AND/OR YOU, AS A HOLDER OF COMMON STOCK,
WISH TO VOTE FOR THE PROPOSAL TO RECOMMEND REMOVAL OF INTERSTATE'S POISON PILL,
YOU MUST SUBMIT THE ENCLOSED GOLD PROXY CARD AND SHOULD NOT SUBMIT INTERSTATE'S
PROXY CARD.
According to Interstate's Proxy Statement for the Annual Meeting, at
the Annual Meeting Interstate's stockholders will also be asked to ratify the
selection of Interstate's independent public accountants to audit its books,
records, and accounts for the year ending December 31, 2002. Shaner Hotel Group
is not making any recommendation on this matter. Interstate's stockholders may
use the GOLD proxy card accompanying this Proxy Statement to vote on the
ratification of Interstate's selection of independent public accountants.
Unless contrary instructions are indicated on the enclosed GOLD proxy
card, all shares of Common Stock represented by valid GOLD proxy cards received
pursuant to this solicitation (which have not been revoked as described above)
will be voted FOR the election of the Shaner Hotel Group Class A Nominees, FOR
the Proposal to recommend removal of Interstate's poison pill, FOR the
ratification of the appointment of the independent accountants, as applicable
and, at the discretion of the proxy holder(s), on such other business as may
properly come before the Annual Meeting.
ELECTION OF SHANER HOTEL GROUP'S NOMINEES AS DIRECTORS
Shaner Hotel Group Class A Nominees
At the Annual Meeting, and for the reasons set forth below, Shaner
Hotel Group will nominate the following two Shaner Hotel Group Class A nominees
for election as Common Stock A-3 Directors. The information below concerning age
and principal occupation of the Shaner Hotel Group Class A Nominees has been
furnished by the respective nominees. Except as described in this Proxy
Statement, neither of the Shaner Hotel Group Class A Nominees beneficially owns
any Common Stock.
15
Name Age Principal Occupation
---- --- --------------------
Lance T. Shaner 48 Mr. Shaner has been Chairman of the Board and
Vice President of the General Partner of Shaner
hotel Group, and Chairman and CEO of Shaner
Hotel Group, since 1995. Mr. Shaner has served
as the Chairman of the Board of Shaner Energy,
Inc. for the past five years. Shaner Energy,
Inc. is a gasoline and home heating distributing
company selling both products at wholesale and
retail in the Huntingdon, Clearfield, and Port
Royal, Pennsylvania areas. For the last five
years, Lance T. Shaner and Frederick J. Shaner
have been principal officers, directors and
stockholders of Shaner Cable, Inc. an owner of
several cable television systems in the southern
tier of New York. Lance T. Shaner and Frederick
J. Shaner have been the principal officers,
directors and stockholders of Shaner Development
Corporation, the owner of several residential
properties in the southern tier of New York.
Lance T. Shaner is the principal officer,
stockholder, and director of several affiliate
corporations that are general partners and/or
managing partners in Jelms Hotel Company Limited
Partnership, Lance Shaner Hotel Limited
Partnership and Shaner Family Partners, LLC that
owns various interests in hotel properties. The
interest in these entities started on or about
September 1, 1997.
Since founding Shaner Hotel Group LP in 1995,
Mr. Shaner has led and guided the company with
his announced philosophy of having a clear
vision for the future, maintaining integrity in
all relationships, providing value to its
customers and offering opportunity to employees
and associates. Prior to founding Shaner Hotel
Group in 1995, Mr. Shaner held ownership
interests and was the CEO in numerous hotel
companies and partnerships involving 35 hotels
since 1983.
Mr. Shaner serves as Chairman and CEO of Shaner
Hotel Group. Under his leadership, Shaner Hotel
Group and its predecessors have completed over
$500,000,000 in financings and other
transactions and grown to be a highly-respected,
fully integrated hotel company.
Mr. Shaner has served on the full service owners
committee for Bass Hotels and presently serves
on Marriott International's full service hotel
owner's committee. He presently serves as an
honorary professor at the Penn State Hotel
School in State College, Pennsylvania and is on
the advisory Board at the University of Delaware
Hotel School in Newark, Delaware.
In Mr. Shaner's extensive business career, he
has worked in finance and venture capital
specializing in contract negotiations,
acquisitions and increasing investor value
through improving operating results of companies
which he oversees.
16
Name Age Principal Occupation
---- --- --------------------
Lance T. Shaner, Continued
Additional examples of Mr. Shaner's experience
include the following:
o Negotiated a $300,000,000 asset
acquisition and equity investment
partnership by one of the leading pension
funds in the United States in real
estate.
o The funding and development of a regional
cable television company in Western New
York and Northern Pennsylvania that was
sold for a substantial profit in 1988.
o Co-founded an oil and gas production
company with operations in Texas and
Oklahoma in 1996 with significant success
in exploration and development of oil and
gas properties in those states.
o Developer of the award winning
Williamsburg Square mixed use $30,000,000
project in State College, Pennsylvania.
The Williamsburg Square Development is a
colonial themed development with Class A
buildings consisting of two hotels,
restaurants, Class A office space and the
final Marriott Springhill Suites hotel to
be completed in 2003.
o Has assisted in the reorganization and
recapitalization of companies through
analysis and review of operating results
and leading innovative change to
streamline operations, to increase
profitability and value.
o Led as co-chairman a successful capital
campaign in State College, Pennsylvania
which resulted in more than doubling the
existing size of the YMCA and has led
fund raising efforts to provide monies
necessary to pay dues for under
privileged children to allow their
participation in Y programs.
o Has served in various capacities to
assist low-income families in acquiring
affordable housing and has won the Golden
Hammer Award from Habitat for Humanity
for past service.
o Awarded Entrepreneur of the Year in
Central Pennsylvania in 2002.
17
Name Age Principal Occupation
---- --- --------------------
Leo A. Keevican, Jr. 52 Mr. Keevican is Managing Director and a
Shareholder of DKW Law Group, PC, a law firm
located in Pittsburgh, Pennsylvania. He has been
a shareholder at DKW since 1988. Mr. Keevican has
served as the Secretary and General Counsel of
Freedom Forge Corporation and as a Director of
American Alloys, Inc. He is a member of the Board
of Directors of the United Way of Allegheny
County, Shadyside Hospital Foundation and the
West Penn Chapter of the March of Dimes.
Each of the Shaner Hotel Group Class A Nominees has agreed to be named
in this Proxy Statement and to serve as a director of Interstate, if elected. We
do not expect that either of the Shaner Hotel Group Class A Nominees will be
unable to stand for election or serve as a director, but if any vacancy in the
slate of the Shaner Hotel Group Class A Nominees occurs for any reason
(including if Interstate makes or announces any changes to the Bylaws or takes
or announces any other action that has, or if consummated would have, the effect
of disqualifying any or all of the Shaner Hotel Group Class A Nominees or
resulting in a decrease in the number of Class A-3 Directors), the shares
represented by GOLD proxy cards received from the holders of Class A Common
Stock by Shaner Hotel Group and not properly revoked will be voted for the
substitute candidate nominated by Shaner Hotel Group in compliance with the
rules of the SEC and any other applicable law and, if applicable, the Bylaws.
Reasons for Our Nominations
For the following reasons, and based upon a thorough investigation of
the matters described below, we believe that it is reasonable to conclude that,
since Interstate's founding nearly three years ago: (1) Interstate and its
common stock have performed poorly; (2) its principal executive officers have
also performed poorly and been overcompensated; (3) it has made significant
investments which have been unsuccessful and unwise, which reflect poor
judgment, and which further suggest that high compensation paid to senior
management has been out of line with performance; (4) related party transactions
involving potential conflicts of interest have not been adequately disclosed to
and approved by Interstate's stockholders; and (5) because of the inappropriate
application of accounting principles, Interstate has misstated its financial
statements in a way which has been highly misleading to stockholders and
potential investors. We would ask our nominees for election as directors that,
if elected, they use their best efforts as members of the board of directors to
improve company and management performance, to seek an investigation of possible
improper dealings and the taking of any and all appropriate action based upon
that investigation, and to seek the correction or restatement of any misleading
financial statements.
In effect, we would ask our nominees, if elected, to pull back the
drapes and lift up the blinds to let the clear light of day shine in on the
management and affairs of Interstate, and to open up the windows and let fresh
air and new ideas circulate within the Company.
18
Financial and Stock Performance. Interstate was formed as a result of a
series of events culminating in the spin-off of Interstate's operations from
Wyndham International, Inc., a public company, on June 18, 1999. On that date,
Wyndham transferred to Interstate, which was then a newly-formed corporation,
certain third-party hotel management and leasing businesses and an equity
interest in a hotel complex. Wyndham then spun-off Interstate to Wyndham's
public stockholders.
In the nearly three years since its creation, Interstate has never had
a profitable quarter and has never paid a dividend to its common stockholders.
During that time its common stock has fallen from a high of $5.00 per share in
June 1999 to $2.16 per share on the day before we first announced the beginning
of our tender offer. This record suggests to us that Interstate has not been
well-managed.
Executive Compensation. In 2001, Thomas F. Hewitt, Interstate's
Chairman and Chief Executive Officer, earned total compensation of over $1.0
million (with salary and bonus of $890,000) despite the fact that Interstate
lost over $7.3 million in 2001. During 2001, J. William Richardson, Interstate's
Chief Financial Officer, earned over $800,000 (with salary and bonus of
approximately $600,000). In 2000, when Interstate lost over $8.9 million, Mr.
Hewitt and Mr. Richardson received total compensation in excess of $1.5 million
and $1.4 million, respectively.
In connection with the Lehman financing described below, Mr. Hewitt,
Mr. Richardson and one other senior executive were awarded 225,000 shares of
Series B Preferred Stock with a value of $2,250,000. This preferred stock award
was done in connection with the cancellation of existing employment agreements
and the entering into of new agreements. In our view, there does not appear to
be any new or additional consideration given by these executives to justify such
high additional compensation, nor does the additional compensation appear to be
justified by past performance. As indicated below in the description of the
Lehman financing, significant benefits were provided by Interstate to the Lehman
interests as part of that financing. The senior executives received a huge stock
bonus at the same time, which appears unjustified in terms of past performance
or future commitments. We question if there was some quid pro quo between the
Lehman investors and the new directors elected by the Series B Preferred Stock,
on the one hand, and senior management of Interstate, on the other hand.
Generally, these preferred shares vest over a three-year period.
(However, they vest immediately if there is a change of control, as defined in
the senior executive employment agreements). Inasmuch as the preferred stock
award is only recognized as income as it vests, a significant portion of the
value of the preferred stock award was not included in the 2000 compensation
levels. In connection with the Lehman transaction, Mr. Hewitt and Mr. Richardson
did agree to cancel certain options with an exercise price of $4.50 per share.
Please see Interstate's Proxy Statement dated [April ____], 2001 and
Interstate's annual report on Form 10-K/A for the fiscal year ended December 31,
2001 filed on April 19, 2002 for a detailed discussion of executive compensation
issues.
19
We believe that senior executive compensation at the levels described
above is unreasonable and excessive in relation to Interstate's financial and
stock performance in recent years. We also believe it is out of line with
compensation paid by other companies in the hotel industry. In fact, a study
performed by Graef Crystal, a hotel industry expert, shows that in 2000, Mr.
Hewitt received a performance ranking of 5 out of a highest possible 100 and was
overpaid by 56%. This amount is determined through regression analysis, a
statistical method which shows the relationship between pay and such factors as
company size and stock performance.
Lehman Financing and Worldgate Investment. On October 20, 2000,
Interstate issued 500,000 shares of its Series B Convertible Preferred Stock for
$5.0 million, and its 8.75% Subordinated Convertible Preferred Notes for $25.0
million. The securities were issued to two limited partnerships affiliated with
Lehman Brothers Holdings, Inc., New York City (the "Lehman investors"). The
holders of the Series B Preferred Stock and the Convertible Notes appoint five
members to Interstate's eleven-member board of directors. We refer to this
transaction as the "Lehman financing." The Lehman financing was described in
Interstate's proxy materials dated September 15, 2000 and approved at a special
stockholder meeting on October 16, 2000.
At the time of the Lehman financing, on October 20, 2000, Interstate
entered into amended and restated employment agreements with the three most
senior members of management. These new agreements provided for the issuance to
these officers of 225,000 additional shares of Series B Preferred Stock, with a
value to the recipients of $2.25 million, in exchange for the cancellation and
replacement of their then-existing employment agreements. The shares were
delivered at the time but vest over a three-year period. As indicated above, we
believe that the issuance of these shares to senior management in exchange for a
continuation of their employment amounts to excessive compensation to them based
upon their performance and the performance of Interstate. We also question if
there was a quit pro quo involved in this transaction between the Lehman
investors and senior management. Because we believe that the award of these
shares of stock to these executives was not supported by adequate consideration,
we believe that these awards amount to a redistribution of the equity of the
company from common stockholders to these executives in the amount of $2.25
million and that the redistributed equity, as preferred stock, has a preference
over the equity of the common stockholders.
In connection with the Lehman financing, Interstate obtained from
Lehman Brothers, Inc. a $40.0 million, short-term senior secured revolving
credit facility. Interstate paid Lehman a debt placement fee at that time of
$1.0 million. Interstate has never used the facility.
20
In October 2000 Interstate acquired, for $3.9 million, a 20%
non-controlling equity interest in a limited partnership which owns the
Renaissance Worldgate Hotel in Kissimmee, Florida. We refer to this as the
"Worldgate investment." As part of the equity investment, Interstate received a
fee agreement for the management of the hotel. We tie Interstate's Worldgate
investment and the Lehman financing together for several reasons. First, the
closings of the transactions occurred about the same time and appear to have
been negotiated over the same time period. Second, the majority owners of the
hotel were affiliated with the Lehman investors and, in connection with the
Lehman financing, obtained representation on Interstate's board of directors.
Third, Interstate's monies used to purchase its equity interest appear to have
come from the proceeds of the sale of Interstate's Series B Preferred Stock.
Fourth, shortly before Interstate's investment in the hotel, Lehman Brothers
Holdings, Inc. refinanced the hotel with a $37.0 million loan which Interstate
then partially guaranteed. Based upon these facts, we believe that Lehman
Brothers and its affiliates, their investment in Interstate, Interstate's
investment in the Worldgate Hotel partnership, and certain members of the board
of directors of Interstate, are all related.
Before the closing of the Lehman financing, stockholders were asked to
approve the financing in proxy materials dated September 15, 2000. There was no
disclosure in those materials of (i) a possible acquisition by Interstate of an
equity interest in the Worldgate Hotel, (ii) the ownership of an interest in
that hotel by affiliates of the Lehman investors, (iii) the relationships among
Lehman, the purchasers of the notes and the preferred shares, the individuals
who were to become directors of Interstate, and the entity owning the hotel,
(iv) the anticipated use of part of the proceeds of the preferred stock to make
the investment in the hotel, and (v) Interstate's partial guarantee of the
Lehman extension of credit to the hotel. We believe that the facts that the two
transactions were tied together, that the parties involved in the transactions
themselves were so interrelated, and that there were multiple potential
conflicts of interest involved, were material to the matters presented for
stockholder approval and that they should have been accurately and fully
disclosed to stockholders for them to make an informed decision.
The Worldgate investment has performed very poorly for Interstate.
Interstate has already written off its entire investment. Late in 2001, the
hotel was unable to satisfy debt service obligations on its extensions of credit
and defaulted on its mortgage loans. At the end of 2001, Interstate's accounts
receivable owed from the hotel for reimbursable expense advances amounted to
$1.2 million. In February 2002, as part of a restructuring of the ownership and
financing of the hotel because of its financial difficulties, Interstate's
equity interest was bought by the hotel in exchange for mutual releases,
Interstate received a $0.9 million cash payment toward its accounts receivable
balance and a promissory note for the remaining amount. Please see Interstate's
Form 10-K filed with the SEC on April 1, 2002 for a discussion of the Worldgate
restructuring. In addition, the hotel management fee payable by the hotel to
Interstate went unpaid from July 2001 through February 2002. As part of the
February 2002 restructuring, that unpaid fee was forgiven. Going forward from
that date the management fee was reduced to a below-market rate. Thus, in the
space of only one and one-half years, Interstate lost its entire investment in
the Worldgate hotel, lost a good part of its past management fees, is waiting on
the reimbursement of past expense advances, and is now earning a below-market
fee for managing the hotel.
21
The Lehman financing has not worked out very well for Interstate
either. After a thorough review of Interstate's published financial statements,
it is our opinion that thus far Interstate has not received any significant
benefit from this expensive transaction. Based upon our review of those
statements, we believe that Interstate has expended a significant amount of its
own money to obtain this investment, paid a significant amount of money to the
holders of the investment, and lost a significant amount on the Worldgate
investment made with part of the proceeds of this financing. According to our
calculations, the costs to and losses suffered by Interstate as a result of the
Lehman financing and the related Worldgate investment total over $13.0 million.
The $25.0 million proceeds of the notes has never been used for its intended
purpose of investment in hotel properties as and is presently sitting idle. The
$40.0 million revolving credit facility has never been used either and is also
sitting idle. The benefits received by Interstate, which are principally the
estimated income on the $25.0 million proceeds of the notes, is approximately
$1.0 million. The net costs and loss to Interstate and its stockholders is
therefore over $12.0 million, which equates to over $2.00 per common share.
For these reasons, we believe it is reasonable to conclude that the
Lehman financing and the Worldgate investment were unsuccessful and unwise
investments, which reflect poor business judgment and suggest that the high
compensation paid to management was out of line with performance. We also
believe that it is reasonable to conclude that there were related party
transactions involving potential conflicts of interest which should have been
adequately disclosed to and approved by stockholders.
Financial Statements. Finally, with respect to financial statement
matters, Interstate's 2000 and 2001 annual financial statements and interim
quarterly reports have shown the $25.0 million proceeds of the Lehman
convertible note financing as a current asset. These proceeds represent a large
part of the $39.0 million in cash shown in the 2001 balance sheet. We believe
that this treatment is not only inappropriate under current accounting
principles promulgated by the Commission, but that it is also highly misleading
to stockholders and potential investors. The $25.0 million proceeds are required
to be invested by Interstate in a newly-formed joint venture for the acquisition
of hotel properties. The managing general partner of that joint venture is an
entity related to the Lehman interests and not controlled by Interstate. Without
the consent of that managing general partner, none of these proceeds are
available for Interstate's use. When and if these funds become available for
use, they are restricted to investment in the joint venture. Because Interstate
must hold these funds for this investment, we believe that the inclusion of them
in Interstate's financial statements as a current asset grossly overstates its
working capital, which is a significant measure of a company's value. Inclusion
in the financial statements as a current asset is also in direct violation of
the Commission's accounting rules.
Under Regulation S-X, Rule 5.02.1, a registrant is required to
separately disclose and segregate on the face of its balance sheet any cash
which is restricted as to use under contracts entered into with others. While
Interstate has disclosed this commitment in its 2000 and 2001 financial
statement footnotes, it has not segregated the $25.0 million on the face of the
balance sheet as required by that rule. In addition, because these funds are
committed to be invested in a joint venture which will acquire hotels, which are
long-term assets, we believe that this amount should be classified as long-term
restricted cash, not short-term. As a result, we believe that
22
Interstate has overstated cash and cash equivalents, and working capital, by
$25.0 million in its 2000 and 2001 financial statements.
We have twice reviewed this situation with our own independent
auditors. They have advised us that they are convinced that the failure to
segregate the $25.0 million of restricted cash on the face of the balance sheet
is in direct contravention of Regulation S-X, Rule 5.02.1. They have advised us
that while this Rule requires a registrant to describe in footnotes "the
provisions of any restrictions," it also requires on the face of the balance
sheet "separate disclosure" of "cash items which are restricted as to withdrawal
or use." They have informed us that this requirement of separate disclosure is
uniformly interpreted to mean more than footnote disclosure.
In a letter to the board of directors of Interstate on March 21, 2002,
Shaner Hotel Group raised the issues described above relating to the possibility
of misleading financial statements and with regard to the Worldgate investment.
That letter is set forth below in its entirety.
SHANER HOTEL GROUP LIMITED PARTNERSHIP
1965 WADDLE ROAD
STATE COLLEGE, PENNSYLVANIA 16803
March 21, 2002
Board Member Interstate Hotel Corporation
Mr. Thomas F. Hewitt
Interstate Hotels Corp.
680 Anderson Drive
Foster Plaza Ten
Pittsburgh, PA 15220
Dear Tom:
Re: Financial Disclosure Concerns
In the course of responding to the letter I received from
Thomas F. Hewitt, CEO of Interstate Hotels Corporation (the "Company")
on March 13, 2002, I have become aware of an issue which I believe
requires the immediate attention of the Audit Committee and of the full
Board of Directors. For the reasons set forth below, and based upon the
information my advisors have been able to uncover from a review of the
documents on file at the Securities and Exchange Commission, I believe
that the financial statements of the Company included with its annual
report for the year 2000 and with its quarterly reports since that date
are materially misleading.
23
Letter to Board of Directors
March 21, 2002
Continued
In Mr. Hewitt's letter he refers to the Company's "available
cash resources." As you know, Interstate's 2000 annual financial
statements and its quarterly reports since that date have shown the
$25,000,000 proceeds of the 2000 subordinated convertible note
financing as current assets. I believe that that is not only
inappropriate under current accounting rules promulgated by the
Securities and Exchange Commission, but it is also highly misleading to
present shareholders and to potential investors who may be considering
acquiring Interstate shares.
The Form 8-K filed by the Company on September 6, 2000 with
respect to the issuance of the $25,000,000 of subordinated convertible
notes states that "$25,000,000 of the proceeds raised by the sale of
the Notes and the Preferred Stock will be invested by the Company
in a newly formed joint venture . . . for acquisition of hotel
properties . . . ." The Managing General Partner of that joint venture,
CGLH-IHC Fund I, LP, is CGLH, GP, an entity not controlled by the
Company. The overall management and control of the business and affairs
of the joint venture is vested in the Managing General Partner. I will
not burden this letter with a recitation of the remaining provisions of
the joint venture agreement.
Suffice it to say that without the consent of the Managing
General Partner, none of the cash which is required to be invested into
the joint venture is available for use by the Company.
Even if the Company has not yet fulfilled its obligation to
contribute funds to the joint venture, the $25,000,000 remains
restricted cash under any reasonable definition of that term. Pursuant
to Section 5.5 of the Securities Purchase Agreement dated as of August
31, 2000 among Interstate Hotels Corporation and the Subordinated Note
purchasers (CGLH Partners I, LP and CGLH Partners II, LP), the Company
is required to maintain "sufficient liquidity so that $25,000,000 of
the Purchase Price shall be available to meet the Company's obligations
to contribute capital to [the joint venture] . . . ." Thus, the Company
is under a clear obligation to hold the funds and their inclusion in
the financial statements as a current asset grossly overstates working
capital, a significant measurement of a company's value, and is in
direct violation of applicable SEC requirements. Under SEC Regulation
S-X.T Rule 5-02.1, registrants are required to separately disclose on
the face of the balance sheet any cash that is restricted as to usage
under contracts entered into with others. While Interstate has
disclosed this commitment in the 2000 and 2001 financial statement
footnotes, you have not segregated the $25,000,000 on the face of the
balance sheet as required by the SEC regulations. In addition, as you
have committed these funds to be invested in a joint venture that will
acquire hotels, I believe that this cash should be classified as long
term restricted cash because you have committed this amount to acquire
a
24
Letter to Board of Directors
March 21, 2002
Continued
long-lived asset that will not be included in current assets. As a
result, I believe that you have overstated your cash and cash
equivalents and working capital by $25,000,000 in your 2000 and 2001
financial statements.
The failure to note that the cash on the balance sheet of the
Company is restricted is a serious problem. The purported justification
for the subordinated convertible notes and preferred stock financing
which was completed in 2000 was to provide a source of capital to the
Company to acquire hotel properties which could generate substantial
additional management fees for the Company. Surprisingly, not one penny
of the proceeds of the subordinated convertible notes financing has
been expended by the Company for this purpose. I can only conclude that
the failure to expend any of these funds is a function of the fact that
the note purchasers have used their contractual rights to prevent the
Company from moving forward in respect to its plans to acquire new
properties. Thus, the restrictions are not only real, they are
currently affecting the Company in adverse ways, including payment of
interest and preferred dividends with minimal offsetting revenues.
I would be remiss in a discussion of this issue if I did not
mention the most recent experience of the Company in expending funds to
acquire management contracts. The quarterly report from Interstate
Hotels for the third quarter of 2001 indicates that the Company was
forced to write-off over $3,000,000 with respect to its 20%
non-controlling interest in the Renaissance Worldgate Hotel in
Kissimmee, Florida. I believe that this represents the remaining
balance of the $3,900,000 equity investment that the Company had made
in November of 2000. Of particular concern, to me as a shareholder, is
that the footnote announcing the write-off states: "The majority owners
and the principal lender for the hotel have representation on the
Company's board of directors and are affiliated with the holders of the
Subordinated Convertible Notes and the Series B convertible stock."
Thus, approximately one month after the 2000 financing, the Company
made a substantial investment with affiliates of the subordinated
convertible note and preferred stock purchasers which had to be
written-off in its entirety within nine months. It appears that the
Company has engaged in a transaction in which it made an investment
which benefited the holders of the notes and preferred stock at the
cost of a $3,000,000+ impairment of the Company's common stock equity.
I am interested to know if this investment was approved in advance by a
majority of the disinterested Board members.
25
Letter to Board of Directors
March 21, 2002
Continued
In addition to the loss of its entire investment in the
Worldgate property, the Company is owed approximately $1,000,000 in
unsecured accounts receivables. The Company's September 30, 2001 8-K
filing noted that these accounts receivable have not been written-off.
It further noted that the "Company's management anticipates the
possibility of a foreclosure . . . and does not expect the hotel to
recover." Since the Worldgate accounts receivable is unsecured, and
there is an impending foreclosure, it appears that the collectibility
of this asset is in serious doubt. I believe this must be addressed in
calculation of 2001 net income.
The timing of the Worldgate transaction also raises the
question as to whether the Company made adequate disclosure in its
proxy filings to approve the issuance of the preferred stock and the
convertible debt. It appears unlikely that the November 2000 investment
in Worldgate was not anticipated on October 20, 2000. I believe that
the proxy statement should have included at least some information
about the Worldgate investment and the related party affiliation.
Certainly, the Board of Directors of the Company owes its
shareholders an explanation with respect to the Worldgate investment
and a fair presentation of its financial statements. In particular, if,
as I fear, a large portion of the Company's "available cash" is
required to be held for ultimate contribution to a partnership over
which the Company will have no effective control, it is imperative that
the Company's annual financial statement for the year 2001 properly
reflect that amount as restricted cash. The shareholders of the Company
have a right to know the current financial position of the Company and
should not be required to sift through footnotes to determine the
correct amount of cash available to management. Unless the Company or
its auditors explain the issues raised in this letter by the close of
business on March 25, 2002, I will, at the very least, communicate with
the other shareholders of the Company in an effort to give them a more
complete and accurate picture of the Company's financial position.
Very truly yours,
Lance T. Shaner,
Chairman and CEO
cc: PricewaterhouseCoopers
26
In a subsequent letter to Mr. Hewitt on April 10, 2002, Shaner Hotel Group
reiterated its position that the failure of Interstate to segregate the $25.0
million of restricted cash on the face of its balance sheet directly contravened
Securities and Exchange Commission rules and raised additional issues regarding
the Worldgate investment. That April 10, 2002, letter also outlined the costs
and expenses of the Lehman financing and the Worldgate investment, and is set
forth below in its entirety.
SHANER HOTEL GROUP LIMITED PARTNERSHIP
1965 WADDLE ROAD
STATE COLLEGE, PENNSYLVANIA 16803
April 10, 2002
Thomas F. Hewitt, CEO
Interstate Hotels Corporation
680 Andersen Drive
Foster Plaza 10
Pittsburgh, Pennsylvania 15220
Dear Mr. Hewitt:
I am in receipt of your letter dated April 3, 2002 addressing
the issues we have raised concerning Interstate Hotels Corporation's
financial disclosure. I was surprised to learn that the Worldgate
investment had been approved by the Board prior to the October 2000
Financing. This was a significant transaction with a potential related
party and it should have been disclosed in the proxy filing dated
September 15, 2000 and more importantly in the Form 13d filed by Lehman
affiliates on September 11, 2000, since the Worldgate transaction was
pending at the date of the filings. We have not found any reference to
the transaction in either filing. In addition, it would be naive to
believe that the Worldgate investment and the October 2000 Financing
were unrelated.
As a consequence of the completion of the October 2000
Financing, the Investor Group obtained the right to elect five members
on the Board of Directors. The existence of the obvious conflict of
interest between the Investor Group and Interstate as a consequence of
the "pending" acquisition of the Worldgate partnership interest should
have been disclosed in connection with the proxy filing.
The restructuring of the Worldgate investment in February of
this year raises additional disclosure/conflict of interest questions:
(1) Did the remaining partners surrender any or all of
their interest in the partnership as part of the debt
restructure or was Interstate the only partner to
lose its entire investment in Worldgate?
27
Letter to Mr. Thomas F. Hewitt, CEO
April 10, 2002
Continued
(2) What was the nature and extent of the Interstate
obligations which were released in exchange for a
surrender of Interstate's $3,900,000 investment in
Worldgate?
(3) Why were these obligations not included as a
contingent liability footnote in Interstate's prior
period financial statements?
We cannot understand the conclusionary assertion in your
letter that: "IHC does not believe that any further action need be
taken with regard to the disclosure of the Worldgate transaction."
Timely disclosure of related party transactions is an important aspect
of corporate governance. The vote in favor of the October 2000
Financing was not an overwhelming majority of the outstanding shares
and disclosure of the Worldgate transaction and the conflicts it
presented may have resulted in a number of shares changing their vote
or withholding the vote. Yet there was absolutely no disclosure of any
kind included in the proxy solicitation materials of these significant
and material conflicts of interest.
We submit that in light of your failure to disclose the
Worldgate transaction to shareholders in soliciting their consent to
the October 2000 Financing, the company is compelled to fully and
fairly address the concerns raised in our letter. Your efforts to
separate the Worldgate investment from the October 2000 Financing are
not persuasive. The purchaser of the Subordinated Notes in the October
2000 Financing is an affiliate of the lender for the Worldgate hotel
and the affiliate benefited from the transaction as a consequence of an
Interstate guaranty of some portion of the Worldgate loan. An affiliate
of the purchasers of the preferred stock issued in connection with the
October 2000 Financing apparently owned and controlled the partnership
that owns the Worldgate hotel. Virtually all of the money they
"invested" in Interstate (after payment of fees) in the October 2000
Financing ended up back in their "pockets" as a consequence of the
equity investment in Worldgate. That equity "investment" had become
worthless shortly after it was made, thus raising questions about the
wisdom of the investment or the bona fide nature of the transaction.
Since the proceeds of the Subordinated Notes are not available
for use by Interstate without consent of the Investor Group, we fail to
see what benefit Interstate received from the October 2000 Financing,
other than raising the funds for the Worldgate investment. Even a
cursory review of the effects of the October 2000 Financing, when
considered in light of the Worldgate investment, leads to the
inescapable conclusion that the financing has materially and adversely
affected the common shareholders of the company. If one ignores the
"management fees" obtained by Interstate, the following picture emerges
as to the
28
Letter to Mr. Thomas F. Hewitt, CEO
April 10, 2002
Continued
effect on common shareholders from the combination of the Worldgate
transaction and the October 2000 Financing:
Cash Costs Borne by Interstate
Lehman Equity Placement Expenses(1) $2,100,000
Cancellation of Employment Contracts 2,250,000(2)
Dividends Paid/Accrued 948,280
Interest Paid/Accrued 3,281,250
Lost Worldgate Investment 3,900,000
Debt Placement Fee(3) 1,000,000
-----------
$13,479,530
Benefits Received by Interstate
Estimated Interest Income ($1,000,000)
-----------
Net Costs $12,479,530
Per Common Share $2.18/Share(4)
---------------------
(1) Per financial statements net cost being amortized over seven years.
(2) These employment contract cancellation payments produced no net
benefit to the Company since new contracts containing identical
termination obligations and annual compensation were executed in
connection with the October 2000 Financing.
(3) Does not include standby fees which are due on unfunded amounts.
(4) The $2.18/common share loss ignores the fact that the common stock
is now junior to $5 million in new preferred.
The foregoing analysis ignores the management fee income
earned from the Worldgate hotel. However, that fee income certainly
does not alter the conclusion. The April 2002 10K filed by Interstate
states the following in describing the February 2002 Worldgate
"restructuring":
As part of this restructuring, the Company's 20%
non-controlling equity interest was redeemed in exchange for
mutual releases with respect to the obligations of the hotel.
In addition, the hotel owner and the Company amended the
management agreement for the hotel, pursuant to which, among
other things, the Company waived its management fees for the
period from July 2, 2001 through
29
Letter to Mr. Thomas F. Hewitt, CEO
April 10, 2002
Continued
February 21, 2002 and agreed to reduce its base management
fee for periods following February 21, 2001. (emphasis
supplied)
Thus, the company entered into a transaction in late 2000
pursuant to which it received the right to manage the Worldgate
property in exchange for a $3.9 million investment. By the summer of
2001, the investment had been written off in its entirety and
$1,200,000 of the management fees remained unpaid. In February of this
year, Interstate, in exchange for waiving nearly eight months of fees
and agreeing to reduce its future fee to a below-market level received
only a partial payment of the accrued fees, with the balance payable by
the issuance of a promissory note, the collection of which remains in
doubt given the financial circumstances of Worldgate. Most likely, the
cost of performing management services under Interstate's agreement
with the Worldgate have exceeded the revenues it has received, thus
increasing, not reducing, the loss to the common shareholders. The
Board may have concluded that no "further action need be taken" with
regard to disclosure of the Worldgate transaction; however, we
disagree.
Finally, with regard to the refusal to segregate restricted
cash on your balance sheet we have once again contacted our auditors.
They remain convinced that the failure to segregate the $25,000,000 of
restricted cash on the face of balance sheet is in direct contravention
of SEC Reg. S-X, Rule 5.02.1. While that rule requires registrants to
describe in footnotes "the provisions of any restrictions," it requires
"separate disclosure" of "cash items which are restricted as to
withdrawal or use." The requirement of separate disclosure has
uniformly been interpreted by the SEC to be more than mere footnote
disclosure. Accordingly, we continue to believe that your financial
statements are materially misleading, since they substantially misstate
the relationship of current assets to current liabilities.
Your financial statements should be restated and your
shareholders should be given all of the facts of the Worldgate
investment and October 2000 Financing so that they may adequately
assess our tender offer for their shares.
Sincerely,
SHANER HOTEL GROUP
Lance T. Shaner
Chairman and CEO
cc: Board of Directors
* * * * *
30
Future Plans for Interstate. In addition to investigating and
redressing the grievances outlined above, Shaner Hotel Group will encourage its
nominees for election as directors, if elected, to use their membership on the
board of directors to seek to accomplish some or all of the following objectives
in cooperation with the appropriate persons or entities, and in accordance with
all applicable requirements and restrictions of Interstate's articles of
incorporation and bylaws, and of applicable law:
o Discuss with the holders of the shares of Series B Preferred Stock
of Interstate a purchase of a portion of those outstanding shares
and encourage Interstate to purchase back the remaining portion of
those shares.
o Encourage Interstate to retire any and all outstanding 8.75%
Subordinated Convertible Notes due 2007.
o Encourage Interstate to simplify and conform the structure of the
board of directors to reflect any and all changes made to
Interstate's capital structure.
o Encourage Interstate to enter into a business relationship with
Shaner Hotel Group, which would involve the combination of both
parties' management and revenue from long-term management
agreements, and the achievement of operating synergies and
efficiencies by combining the overhead structures of both entities
and eliminating duplication of effort. Any business relationship
between Shaner Hotel Group and Interstate would be an arms-length
transaction, negotiated carefully by each of these separate entities
which will each have able and independent counsel, and approved by
disinterested members of the board of directors of Interstate. In
proposing a combination of both entities' managements, we would
suggest that Lance T. Shaner serve as chief executive officer of
both companies and that J.B. Griffin would serve as chief financial
officer of both. In that case, we would urge Interstate to attempt
to negotiate a reasonable settlement of the employment agreement of
the present chief executive officer and the chief financial officer
of Interstate. The backgrounds, experience and qualifications of Mr.
Shaner and Mr. Griffin are set forth in Schedule I to this Statement
and on pages 15 and 40. The proposed combination of the long-term
management agreements of both companies would be based upon an
independent appraisal of those agreements by an appraiser mutually
acceptable to both companies.
- --------------------------------------------------------------------------------
SHANER HOTEL GROUP RECOMMENDS THAT HOLDERS OF SHARES OF CLASS A COMMON STOCK
VOTE IN FAVOR OF THE SHANER HOTEL GROUP CLASS A NOMINEES FOR CLASS A-3 DIRECTORS
AND NOT VOTE IN FAVOR OF ANY OF INTERSTATE'S NOMINEES FOR CLASS A-3 DIRECTORS.
- --------------------------------------------------------------------------------
31
PROPOSAL TO RECOMMEND REMOVAL OF INTERSTATE'S POISON PILL
We strongly believe that Interstate's financial performance is closely
linked to its corporate governance policies and procedures, and the level of
management accountability they impose. Interstate's Shareholders Rights
Agreement, which is summarized below and which is commonly known as a "poison
pill," is a powerful anti-takeover device. This Agreement effectively prevents a
change in control of Interstate without the approval of the board of directors,
despite a level of performance which may adversely affect stockholder value.
Shaner Hotel Group has provided the board of directors of Interstate
with several proposals pursuant to which Shaner Hotel Group would increase its
equity stake in Interstate. Unless and until the poison pill is removed, Shaner
Hotel Group proceeding with a tender offer for additional shares of Interstate's
Class A Common Stock is prohibitively expensive. Interstate has rebuffed Shaner
Hotel Group's proposals each time. Interstate has issued two press releases
stating that it has authorized a special committee of its independent directors
to review and evaluate the terms and conditions of Shaner Hotel Group's tender
offer, and that the special committee and the full board would make a
recommendation to stockholders about that tender offer by April 24, 2002. Shaner
Hotel Group has requested that it be able to meet with and make a presentation
to the members of that special board committee and indicated that Mr. Shaner
would be willing to meet with the members of that committee whenever and
wherever it would be convenient for them. Interstate has thus far turned a deaf
ear to Shaner Hotel Group's and Mr. Shaner's requests.
Interstate's poison pill, which was never approved by Interstate's
stockholders, inhibits a potential bidder of Interstate stock, such as Shaner
Hotel Group, from acquiring 10% or more of the outstanding common stock of
Interstate. Triggering the poison pill has the effect of substantially injuring
the bidder by allowing Interstate's board to unilaterally cut by 50% the value
of stockholdings acquired by such a person. Such a situation, we believe,
precludes stockholders of Interstate from exercising their ownership rights in
response to offers from potential bidders.
The poison pill is intended to force potential investors to negotiate
acquisitions with management, instead of making their offer directly to
stockholders. This argument that directors, including Interstate's directors,
need a poison pill in order to negotiate a better offer from potential bidders
or prevent so-called "abusive takeover practices" is unpersuasive. In the past
several years, proposals to redeem or allow stockholder votes on poison pills
have received majority support at numerous U.S. publicly-traded companies. In
our case, we have offered several times to discuss a transaction with
Interstate, but its board of directors has rebuffed us each time. We have also
requested a meeting with the special committee of the board for them to evaluate
our tender offer in order to present our case to that committee and the board,
but they have turned deaf ear to our request. We strongly believe that it is the
stockholders, who are the owners of Interstate, not the directors and managers,
who merely act as agents for the owners, who should have the right to decide
what is or is not a fair price for their shareholdings.
32
Poison pills can pose such an obstacle to takeovers that management
becomes entrenched. We believe that the entrenchment of management, and the lack
of accountability that results, can adversely affect stockholder value. While it
is impossible to assess the degree to which the poison pill may inhibit
performance, it is indisputable that a poison pill effectively deters attempts
by stockholders to remove the current board and its management team for
nonperformance.
Redemption of Interstate's pill would allow stockholders to consider
all tender offers, not just those endorsed by incumbent management. Amending the
Shareholders Rights Agreement to exclude Shaner Hotel Group and its affiliates
as an acquiring party would enable Shaner Hotel Group to proceed with a tender
offer for additional shares of Interstate's Class A Common Stock. Notably, the
articles of incorporation of Interstate provide that Interstate through its
board shall not redeem the pill or otherwise render the poison pill inapplicable
to any person without obtaining the approval of the holders of the Series B
Preferred Stock and Interstate's 8.75% Convertible Subordinated Notes (the
"Lehman Investors").
In light of the foregoing, we are asking you, as holders of all of the
Common Stock, to recommend to Interstate's board of directors that it remove
Interstate's poison pill as an impediment to the completion of our tender offer
by approving the following Proposal at the Annual Meeting:
BE IT RESOLVED, that the holders of the Common Stock of
Interstate urge the Board of Directors to take one of the following
actions and to recommend to the Lehman Investors that such Lehman
Investors authorize the Board to take one of the following actions: (i)
redeem the shareholder rights issued pursuant to the Shareholders
Rights Agreement of Interstate; or (ii) amend the Shareholders Rights
Agreement to exclude Shaner Hotel Group and its affiliates as an
acquiring party. If the Board takes action (i), the holders of Common
Stock also ask the Board of Directors not to reissue or extend these
rights, or create a new rights plan unless such action by the Board is
approved by an affirmative vote of a majority of the outstanding shares
at a meeting of the stockholders held as soon as is practicable.
The following summary of certain provisions of the Shareholder Rights
Agreement relating to the preferred stock purchase rights (the "Rights") (as
amended, the "Rights Agreement") is based upon the Company's Form 8-A regarding
the Rights filed with the SEC on July 23, 1999, as amended a Form 8-A/A filed
with the SEC on September 6, 2000, and is not intended to be complete and is
qualified in its entirety by reference to those filings and the full Agreement,
which is attached as an exhibit to those filings. A copy of the filings and the
Agreement may be obtained for free at the SEC's website at www.sec.gov.
On June 9, 1999, the board of the Company approved the
adoption of the Rights Agreement. Pursuant to its terms, the board
declared a dividend distribution of one Right for each outstanding
share of Common Stock of the Company (including Class A and Class B
Common Stock) to stockholders of record as of the close of business on
July 8, 1999. In addition, one Right
33
automatically attaches to each share of Common Stock issued between
the Record Date and the Distribution Date (as hereinafter defined).
Each Right initially entitles the registered holder thereof to
purchase from the Company a unit consisting of one one-thousandth of a
share (a "Unit") of Series A Junior Participating Cumulative Preferred
Stock, par value $0.01 per share (the "Preferred Stock"), at a cash
exercise price of $33.00 per Unit (the "Exercise Price"), subject to
adjustment.
The Rights have not been exercisable and are attached to and
have traded with the outstanding shares of Common Stock. The Rights
will separate from the Common Stock and will become exercisable upon
the earlier of (i) the close of business on the tenth calendar day
following the first public announcement that a person or group of
affiliated or associated persons has acquired beneficial ownership of
10% or more of the outstanding shares of Common Stock (an "Acquiring
Person") (the date of said announcement being the "Stock Acquisition
Date"), or (ii) the close of business on the tenth business day (or
such later calendar day as the Board of Directors may determine)
following the commencement of a tender offer or exchange offer that
could result upon its consummation in a person or group becoming the
beneficial owner of 10% or more of the outstanding shares of Common
Stock (the earlier of such dates being the "Distribution Date").
The Rights are not exercisable until the Distribution Date and
will expire at the close of business on July 7, 2009, unless previously
redeemed or exchanged by the Company as described below. As soon as
practicable after the Distribution Date, Right Certificates are to be
mailed to holders of record of Common Stock as of the close of business
on the Distribution Date.
Based upon publicly available information, Shaner Hotel Group
believes that, as of the date of this Proxy Statement, the Rights were
not exercisable, Rights Certificates have not been issued, and the
Rights are evidenced by the Common Stock Certificates. Shaner Hotel
Group believes that, as a result of the commencement of Shaner Hotel
Group's tender offer on April 20, 2002, the Distribution Date would
have occurred as early as April 25, 2002, unless prior to such date the
Company's board redeemed the Rights or took action to delay the
Distribution Date. On April 16, 2002, the Company issued a press
release which announced that the board of directors had taken action to
defer the Distribution Date until further action by the board.
In the event that a Stock Acquisition Date occurs, each holder
of a Right (other than an Acquiring Person, whose Rights become null
and void) is thereafter to have the right to receive upon exercise that
number of Units of Preferred Stock of the Company having a market value
of two times the exercise price of the Right (such right being referred
to as the "Subscription Right"). Alternatively, the board is permitted
to take action that will result in the receipt by stockholders other
than the Acquiring Person of an equivalent amount of stock on a
cashless
34
exercise basis. In some instances, the board is also permitted to
exchange one share of Class A Common Stock (or under a formula the
equivalent of more than one share of Class A Common Stock) in exchange
for each Right held by stockholders other than the Acquiring Person.
In any case, the existence of the Rights would greatly diminish the
value of Shares acquired pursuant to the Offer if the purchase were to
be completed.
The Rights may be redeemed in whole, but not in part, at a
price of $0.01 per Right (payable in cash, Class A Common Stock or
other consideration deemed appropriate by the Board of Directors) by
the Board of Directors until the time at which any person becomes an
Acquiring Person. In addition, the Rights Agreement may be amended by
the Board of Directors to materially change its terms only until the
time at which any person becomes an Acquiring Person.
The amended articles of incorporation of the Company provide
that the Company through its board shall not redeem the Rights or
otherwise render the rights plan inapplicable to any person without
obtaining the approval of the holders of the Company's Series B
Cumulative Preferred Stock and of the Company's 8.75% Convertible
Subordinated Notes. This approval is not required, however, in
connection with a transaction approved by unanimous vote of the board
members present and voting thereon (in all events including a majority
of those elected by the holders of the Company's Series B Cumulative
Preferred Stock) or if the board determines that the redemption, or
other action to render the rights plan inapplicable, is required by law
or the requirements of a national securities exchange.
- -------------------------------------------------------------------------------
SHANER HOTEL GROUP RECOMMENDS THAT HOLDERS OF SHARES OF ALL OF THE COMMON STOCK
VOTE IN FAVOR OF THE PROPOSAL TO RECOMMEND THE REMOVAL OF THE POISON PILL
- -------------------------------------------------------------------------------
PROPOSAL TO RATIFY APPOINTMENT OF INDEPENDENT ACCOUNTANTS
According to Interstate's Proxy Statement for the Annual Meeting, the
board of directors of Interstate, upon the recommendation of its Audit
Committee, has appointed the firm of Pricewaterhouse Coopers LLP as independent
accountants to audit the books, records, and accounts of the Company for the
fiscal year ended December 31, 2002, subject to ratification of that appointment
by Interstate's stockholders.
The affirmative vote of the holders of a majority of Interstate's Class
A and Class B Common stock, voting together as a single class, represented and
entitled to vote at the Annual Meeting, will be required to ratify the
appointment of Pricewaterhouse Coopers LLP as the Company's independent
accountants for fiscal year 2002.
35
According to Interstate, in addition to the engagement to audit the
Company's annual financial statements and to review the financial statements
included in its quarterly reports on Form 10-Q, Pricewaterhouse Coopers LLP was
also engaged to perform certain other services during 2001. According to
Interstate's public filings, the aggregate fees billed by Pricewaterhouse
Coopers LLP for the services for the fiscal year ended December 31, 2001 were:
Audit Fees...........................................$[___.00] Million
Financial Information Systems
Design and Implementation Fees.......................$[___.00] Million
All other fees.......................................$[___.00] Million
As indicated under "Voting Procedures" above, votes on the ratification
of Pricewaterhouse Coopers LLP which are marked "abstain" and broker non-votes
(for example, when a broker does not have authority to vote on a specific issue)
will not be counted as votes cast and will have no effect on the result of the
vote for ratification of the independent accountants. Additional information
regarding this proposal is available in Interstate's Proxy Statement for the
Annual Meeting.
Shaner Hotel Group makes no recommendation regarding the ratification
of the appointment of Interstate's independent accountants. In the absence of
written instructions, GOLD proxy cards will be voted FOR this proposal.
SOLICITATION OF PROXIES
Proxies may be solicited by mail, telephone, facsimile, and in person.
Solicitations may be made by certain officers of Shaner Hotel Group and its
general partner, none of whom will receive additional compensation for such
solicitations. Shaner Hotel Group has requested banks, brokerage houses, and
other custodians, nominees, and fiduciaries to forward all of its solicitation
materials to the beneficial owners of the Interstate shares they hold of record.
Shaner Hotel Group will reimburse these recordholders for customary clerical and
mailing expenses incurred by them in forwarding their materials to their
customers.
Shaner Hotel Group has retained N.S. Taylor & Associates, Inc.,
Dover-Foxcroft, Maine ("Solicitation Agent") for solicitation and advisory
services in connection with this proxy solicitation. The Solicitation Agent will
be paid an aggregate fee of approximately $[_____] for acting (i) as proxy
solicitor in connection with this Proxy Statement, and (ii) as Information Agent
in connection with Shaner Hotel Group's tender offer. The Solicitation Agent may
also receive additional reasonable and customary compensation for providing
additional advisory services in connection with this proxy solicitation and any
other proxy solicitations contemplated by this Proxy Statement. Shaner Hotel
Group has also agreed to reimburse the Solicitation Agent for its reasonable
out-of-expenses and to indemnify the Solicitation Agent against certain
liabilities and expenses, including liabilities and expenses under the United
States federal securities laws. The Solicitation Agent will solicit proxies from
individuals, brokers, banks, bank nominees, and other institutional holders.
36
Shaner Hotel Group has retained Jack Horner Communications, Inc.,
Pittsburgh, Pennsylvania, as its public relations advisor in connection with
this proxy solicitation. Jack Horner Communications will be paid reasonable and
customary compensation for its services, and Shaner Hotel Group has agreed to
reimburse Jack Horner Communications for any out-of-pocket expenses incurred in
connection with those services.
The entire expense of this proxy solicitation is being borne by Shaner
Hotel Group. Shaner Hotel Group will not seek reimbursement for such expenses
from Interstate. Costs incidental to these proxies include expenditures for
printing, postage, legal and related expenses and are expected to be $[_____].
Total costs incurred to date in furtherance of or in connection with the
solicitation of proxies described in this Proxy Statement are approximately
$[_____].
If Shaner Hotel Group should ultimately elect to amend or supplement
the terms of any of the stockholder proposals described in this Proxy Statement,
or present additional proposals prior to the Annual Meeting, Shaner Hotel Group
will distribute information regarding such changes or additions to Interstate
stockholders in compliance with applicable law and, in appropriate
circumstances, will provide Interstate stockholders with a reasonable
opportunity to revoke any stockholder proxies previously given prior to the
Annual Meeting.
INFORMATION ABOUT INTERSTATE
The information about Interstate contained in this Proxy Statement,
including financial information, for the most part has been taken from or based
upon publicly available documents and records on file with the SEC and other
public sources. Shaner Hotel Group does not assume any responsibility for the
accuracy or completeness of the information concerning Interstate contained in
such documents and records or for any failure by Interstate to disclose events
which may have occurred or may affect the significance or accuracy of any such
information but which are unknown to Shaner Hotel Group.
Interstate is a Maryland corporation whose principal place of business
is Foster Plaza Ten, 680 Andersen Drive, Pittsburgh, Pennsylvania 15220 and its
telephone number is 412.937.0600.
As of December 31, 2001, Interstate managed, leased or performed
related services for 134 hotels with a total of 28,316 rooms in 37 states in the
United States, as well as Canada and Russia. Interstate operates its hotels
under two separate operating segments - Interstate, which primarily operates
luxury and upscale hotels, and Crossroads, which primarily operates mid-scale,
upper economy and budget hotels. Interstate competes for third-party hotel
management agreements with international, national, regional and local hotel
management and franchise companies. Interstate competes with these companies on
factors such as relationships with hotel owners and investors, access to
capital, financial performance, contract terms, name recognition, marketing
support and the willingness to provide funds in connection with new management
arrangements.
37
The following chart summarizes the capital structure of Interstate.
Outstanding Conversion Priced
Shares/ Holders Publicly into Class A
Class of Stock Amount (approx.) Traded Board Seats Common Stock
- -------------- ------ ------- ------ ----------- ------------
Common Stock
Class A 5,487,885 1,938 Nasdaq five(1) N/A
Class B 242,555 one No one See Note 2
Preferred Stock
Series A -0- -0- N/A none N/A(3)
Series B 725,000 five No five $4.00(4) per share
Subordinated
Convertible Notes $25,000,000 one No N/A See notes 4 and 5
(1) The terms of the five Class A Common Stock directors are staggered. Two
directors stand for election in 2002, one in 2003, and two in 2004. The
board seats presently held by Phillip H. McNeill and Thomas F. Hewitt,
Chairman of the Board and Chief Executive Officer of Interstate, are up
for election in 2002.
(2) Each share of Class B Common Stock is convertible into one share of Class
A Common Stock.
(3) At the option of the board outstanding shares of Series A Preferred Stock
are exchangeable into shares of Class A Common Stock. See Section 14,
"Certain Conditions to this Offer," in Shaner Hotel Group's "The Tender
Offer."
(4) Outstanding shares of Series B Preferred Stock and outstanding
Subordinated Convertible Notes are convertible into a maximum of 49% of
the outstanding shares of Class A Common Stock following conversion.
(5) The Subordinated Convertible Notes are convertible into shares of Class A
Common Stock at a conversion rate of $4.00 per share.
Based upon recent trading prices of shares of Class A Common Stock, and assuming
that those prices remain approximately the same in the near future, it appears
unlikely that shares of Series B Preferred Stock, or the Convertible Notes, will
be converted into shares of Class A Common Stock, because those trading prices
are substantially below the above conversion prices. The holders of Class A
Common Stock are entitled to elect a maximum of five of the eleven members of
Interstate's board of directors. Shaner Hotel Group is entitled to vote its
shares for two Class A Common Stock directors in 2002, one in 2003, and two in
2004.
38
AVAILABLE INFORMATION. Interstate is subject to the information and
reporting requirements of the Exchange Act and is required to file reports and
other information with the SEC relating to its business, financial condition and
other matters. Information, as of particular dates, concerning Interstate's
directors and officers, their remuneration, stock options granted to them, the
principal holders of the Shares, any material interests of such persons in
transactions with Interstate and other matters is required to be disclosed in
proxy statements distributed to Interstate's stockholders and filed with the
SEC. These reports, proxy statements and other information should be available
for inspection at the public reference facilities of the SEC located in
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and also should
be available for inspection and copying at prescribed rates at the following
regional offices of the SEC: Woolworth Building, 223 Broadway, New York, New
York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of this material may also be obtained by mail, upon payment of the SEC's
customary fees, from the SEC's principal office at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The SEC also maintains an Internet web site at
www.sec.gov that contains reports, proxy statements and other information.
Interstate's shares of Class A Common Stock are listed on the Nasdaq, and
reports, proxy statements and other information concerning Interstate should
also be available for inspection and at the offices of the Nasdaq, One Liberty
Plaza, New York, New York 10006.
INFORMATION ABOUT SHANER HOTEL GROUP
Shaner Hotel Group is a Delaware limited partnership formed on August
30, 1995. The main business of Shaner Hotel Group is management and ownership of
hotels and motels, and was started by Shaner Hotel Group's principals in 1983.
Shaner Hotel Group has its principal place of business at 1965 Waddle Road,
State College, Pennsylvania 16803 and its telephone number is 814.234.4460. As
of the date of this Proxy Statement, Shaner Hotel Group is the beneficial owner
of 333,500 shares of Class A Common Stock, which constitute approximately 6.08%
of the shares of Class A Common Stock outstanding as of the date of this Proxy
Statement.
The general partner of Shaner Hotel Group is Shaner Operating Corp., a
Delaware corporation (the "General Partner"). The principal business of the
General Partner is acting as the general partner of Shaner Hotel Group. The
General Partner has its principal place of business at 1965 Waddle Road, State
College, Pennsylvania 16803 and its telephone number is 814.234.4460. For
certain information concerning the directors and executive officers of the
General Partner and Shaner Hotel Group, see their biographies set forth below
and Schedule I to this Proxy Statement.
Shaner Hotel Group is a privately-held, fully integrated hotel company
which specializes in the acquisition, refurbishment, repositioning, development
and long-term ownership of full-service hotels. Shaner Hotel Group also has
extensive limited-service and extended-stay experience.
39
Shaner Hotel Group and its affiliates own 22 hotels in 15 states as
listed on Schedule II to Shaner Hotel Group's tender offer. These hotels
represent ten different hotel brands, including, Comfort Inn, Hampton Inns,
Residence Inn, Holiday Inn, Holiday Inn Express, Holiday Inn Sunspree, Marriott,
Newport Hotel, Radisson, and Savery Hotel. Shaner Hotel Group also manages or
has agreed to manage hotels representing the following brands: Marriott,
Radisson, Renaissance, Residence Inn by Marriott, Comfort Inn, Hampton Inn and
Suites, Fairfield Inn by Marriott, and Springhill Suites by Marriott. As part of
Shaner Hotel Group's full-service management of hotels, it provides complete
in-house services: Operations, sales, marketing, and revenue management;
financial and tax reporting and payroll; human resources; in-house legal
counsel; development; franchise relationships; renovation, construction, design
and purchasing; information systems, equity capital for investment; and
conference and convention center management.
The backgrounds and relevant hotel and motel experience of the four
principal executive officers of Shaner Hotel Group and its general partner are
described below. Please refer to Schedule I attached to Shaner Hotel Group's
tender offer for a description of their employment history for the past five
years.
Lance T. Shaner serves as Chairman and CEO of Shaner Hotel Group. His
biography is set forth under the caption "Election of Shaner Hotel
Group's Nominees as Directors."
Frederick T. Shaner is president and chief operating officer,
responsible for all daily operations of Shaner Hotel Group, with
oversight on various other divisions, including marketing, personnel,
purchasing and guest services. He attended the Rochester Institute of
Technology and Alfred University, majoring in business administration.
Under his direction, Interstate has earned a variety of top hospitality
awards, including the Marriott Silver Quest for Quality Award, Holiday
Inn Newcomer and Torchbearer Awards, YMCA, and the Choice Gold Award.
He serves as a guest lecturer for the Pennsylvania State University
School of Hotel, Restaurant and Recreation Management, is a member of
the Penn State University President's Club and Founder's Club and is
active in various civic and educational organizations. He and his wife,
Mimi, have two children, Meghan and Alyn.
J. B. Griffin, chief financial officer, joined Shaner Hotel Group in
1995 as vice president of finance and was promoted to his present post
in October 1997. He has responsibility for overseeing Interstate's
financial operations, including accounting, risk management, investor
relations, financial performance of all hotels and due diligence
analysis for potential hotel acquisitions by Interstate. Prior to
joining Shaner Hotel Group, Mr. Griffin had his own financial
consulting firm for five years, providing financial operations support
for both individual hotel owner/operators and several hotel companies.
He previously managed several properties including Embassy Suites,
Holiday Inn, Residence Inn and Independent properties. Since joining
Shaner Hotel Group, Mr. Griffin has been actively involved, as vice
president of finance or chief financial officer, in the
40
acquisition of at least 25 hotels, debt financings in excess of $300
million and the formation of a $300 million joint venture. He is a
1983 graduate of Niagara University, Niagara Falls, N.Y., with a
degree in hotel administration. He and his wife, Mary Pat, have five
children.
Peter Hulburt, vice president and corporate counsel, joined Shaner
Hotel Group in his current position in June 1993. For the 17 years
prior to joining Shaner Hotel Group, Mr. Hulburt had been with the
Cuba, N.Y., law firm of Williams, Hulburt & Brown, as a partner since
1976 and as the major partner since 1984. While with the law firm, he
also served as outside legal counsel to Lance and Fred Shaner for 17
years, including their early entrepreneurial days prior to the
formation of Shaner Hotel Group. Mr. Hulburt's responsibilities include
relations with all outside counsel, overseeing the legal aspects of all
new acquisitions and advising all company departments on legal matters.
Mr. Hulburt has been actively involved, as general counsel, in the
acquisition of at least 25 hotels, debt financings in excess of $300
million and the formation of a $300 million joint venture. He received
his B.S. degree from the State University of New York at Buffalo and
his jurisprudence doctorate from Albany (N.Y.) Law School in 1973. The
Buffalo native and his wife, Kathleen, a high school guidance
counselor, have three sons.
Except as set forth in this Proxy Statement, including the Schedules
hereto, neither Shaner Hotel Group, the General Partner nor, to the best
knowledge of Shaner Hotel Group or the General Partner, any of the persons
listed above and in Schedule I hereto: (i) has had any contract, arrangement,
understanding or relationship with any other person with respect to any
securities of Interstate, including, without limitation, any contract,
arrangement, understanding or relationship concerning the transfer of the voting
of any securities of Interstate, joint ventures, loan or option arrangements,
puts or calls, guaranties of loans, guaranties against loss or the giving or
withholding of proxies; or (ii) has had any transactions with Interstate, or any
of its executive officers, trustees or affiliates that would require reporting
under the rules of the Commission. Except as set forth in this Proxy Statement,
including the Schedules hereto, there have been no contacts, negotiations or
transactions between Shaner Hotel Group, the General Partner nor, to the best
knowledge of Shaner Hotel Group or the General Partner, any of the persons
listed in Schedule I hereto, on the one hand, and Interstate or its directors,
executive officers, or affiliates, on the other hand, concerning a merger,
consolidation or acquisition, tender offer or other acquisition of securities,
election of directors, or a sale or other transfer of a material amount of
assets that would require reporting under the rules of the Commission. Except as
set forth in this Proxy Statement, there have been no transactions in the shares
of Class A Common Stock that were effected during the sixty days prior to the
date of this Proxy Statement by Shaner Hotel Group or any of its affiliates.
41
BACKGROUND TO THIS PROXY SOLICITATION
The following is a chronological summary of the contacts and
discussions between Shaner Hotel Group and Interstate.
On October 3, 2000, Lance T. Shaner, the Chairman and Chief Executive
Officer of Shaner Hotel Group, sent a letter to Mr. Thomas F. Hewitt, CEO and
Chairman of the Board of Interstate. In that letter, Shaner Hotel Group proposed
an acquisition of all of the Common Stock of Interstate at a price of $4.125 per
share and Mr. Shaner requested an opportunity to meet with Mr. Hewitt or his
representatives. The proposal was subject to due diligence. The letter noted
that the offer was a joint offer of Shaner Hotel Group and Bruce S. Brickman &
Associates, Inc.
On October 5, 2000, the Board of Directors of Interstate determined
that pursuing the proposal of Shaner Hotel Group was not in the best interests
of stockholders. The Board reaffirmed its recommendation that stockholders
approve the previously announced investment by the Lehman Investors led by
Lehman Brothers (the "Lehman Investor").
Mr. Shaner sent a letter to Mr. J. William Richardson, the Vice
Chairman of Interstate, on October 6, 2000, clarifying the proposal and
requesting an opportunity to meet with Interstate management.
On October 8, 2000, the Board of Directors announced that it had
determined that the proposal was not reasonably likely to be completed and that
the previously announced transaction with the Lehman Investors was financially
superior to the transaction proposed by Shaner Hotel Group.
On October 11, 2000, Mr. Shaner sent a letter further clarifying the
position of Shaner Hotel Group.
On October 20, 2000, Interstate issued 8.75% Subordinated Convertible
Notes (the "Notes") for $25.0 million and 500,000 shares of its Series B
Convertible Preferred Stock, par value $.01 per share (the "Preferred Stock")
for $5.0 million. These securities were issued to CGLH Partners I LP and CGLH
Partners II LP, which were entities affiliated with Lehman Brothers Holdings
Inc.
From October of 2000 until December of 2001, Shaner Hotel Group
continued to closely monitor the performance of Interstate. Shaner Hotel Group
noted that Interstate did not appear to be using the funds from the Lehman
Investors investment in order to acquire new properties or contracts.
In December of 2001, Shaner Hotel Group acquired 320,000 shares of the
Class A Common Stock of Interstate. In its Schedule 13D filing (filed on January
9, 2002), Shaner Hotel Group stated that it is considering making a proposal
which might include an acquisition, merger or a joint venture between Shaner
Hotel Group and Interstate to manage, operate or own hotel and motel properties.
42
On January 14, 2002, Mr. Shaner sent to Mr. Hewitt a letter setting
forth a proposal to combine the operations of Interstate and Shaner Hotel Group.
The proposal provided for the acquisition of additional shares of Common Stock
of Interstate by Shaner Hotel Group, the repayment of the Notes, the purchase of
a portion of the Preferred Stock and the redemption of all remaining Preferred
Stock and the combination of certain operations.
In a letter dated January 21, 2002, Mr. Hewitt stated that Mr. Shaner's
letter has been distributed to its Board of Directors and Interstate's
independent advisors. Subsequent to the receipt of this letter, Mr. Shaner
attempted to contact Mr. Hewitt by telephone. On or about January 27, 2002, Mr.
Hewitt left Mr. Shaner a voice-mail indicating that the Board would consider the
proposal of Shaner Hotel Group at its next meeting, scheduled for February 11,
2002. In a letter dated January 28, 2002, Mr. Shaner requested an opportunity to
meet with Mr. Hewitt as well as an opportunity to make a presentation to the
independent directors of Interstate prior to the February 11th Board meeting.
Also on January 28, 2002, Mr. Shaner sent a letter to each of the independent
directors of Interstate requesting an appointment to meet and an opportunity to
make a presentation.
During the period prior to the February 11th Board meeting, Mr. Shaner
made calls to each of the independent directors as well as to several of the
directors elected by the Lehman Investors (the "Lehman Investor Directors"). Mr.
Shaner was unable to obtain a meeting with any of the independent directors or
the Lehman Investor Directors but did have several phone conversations in which
he explained the proposal.
In an e-mail to Mr. Shaner sent on Tuesday, January 29, 2002, Mr.
Hewitt suggested that he and Mr. Shaner meet on February 6, 2002. Mr. Shaner
accepted the offer to meet and on February 6, 2002, a meeting was held at
Interstate's offices. Attending on behalf of Shaner Hotel Group were: Mr.
Shaner, J.B. Griffin (the CFO of Shaner Hotel Group) and Michael McNulty (a
financial consultant). Mr. Hewitt and Mr. Richardson represented Interstate. At
the meeting on February 6, 2002, the Shaner Hotel Group representatives
explained the proposal.
In a letter dated February 14, 2002, from Mr. Hewitt to Mr. Shaner, Mr.
Hewitt wrote that the Board of Directors has concluded that the proposal does
not present an opportunity which is in the best interests of Interstate's public
stockholders. The letter also stated that the proposal is contingent upon its
acceptance by the Lehman Investors and that the Lehman Investors has advised the
Board of Directors that it does not wish to dispose of its securities on the
terms set forth in the proposal.
On February 18, 2002, the Shaner Hotel Group sent to the Board of
Directors of Interstate a Letter Agreement formalizing and expanding upon its
proposal. The proposal provided for the purchase of up to 680,000 shares of
Class A Common Stock and fifteen percent of the Class B Common Stock at a price
of $2.70 per share. It also provided for the purchase, redemption or repayment
of the securities owned by the Lehman Investors and for the combination of
certain operations between Interstate and Shaner Hotel Group. The proposal
stated that it would remain open only until February 25, 2002.
43
On February 18, 2002, Shaner Hotel Group issued a press release. The
press release stated that Interstate has received a new proposal from Shaner
Hotel Group. The press release noted that the previous proposal of Shaner Hotel
Group had been rejected. In the press release, Mr. Shaner observed that
Interstate has not posted a winning quarter for several years. Mr. Shaner
asserted that, as one of Interstate's largest stockholders, Shaner Hotel Group
is intensely concerned about stockholder value.
On February 19, 2002, Mr. Shaner sent an e-mail to Mr. Hewitt
requesting a meeting. Mr. Hewitt called Mr. Shaner on February 21, 2002. During
the call on February 21, 2002, Mr. Hewitt stated that Mr. Shaner will need to
reach an agreement with the Lehman Investors. Mr. Shaner asked Mr. Hewitt if Mr.
Hewitt would object to Mr. Shaner speaking directly to the Lehman Investors. Mr.
Hewitt stated that he had no objection. Mr. Shaner sent Mr. Hewitt a letter on
February 21, 2002, confirming the call and thanking Mr. Hewitt for the comment
that Mr. Hewitt did not object to Mr. Shaner speaking directly to the Lehman
Investors. Mr. Shaner also wrote that he looked forward to hearing from Mr.
Hewitt so that a dinner could be scheduled.
Mr. Shaner had a conversation with a representative of the Lehman
Investors, Mahmood Khimji, on February 25, 2002. Mr. Khimji stated that, to be
successful, a proposal would need to gain favor with the Lehman Investors as
well as the board and management. Mr. Khimji indicated that the Lehman Investors
would be willing to discuss proposals but that the Lehman Investors would not
accept the proposal set forth in the Letter Agreement dated February 18, 2002.
On March 5, 2002, Shaner Hotel Group sent a revised proposal to
Interstate. The revised proposal provided that Shaner Hotel Group would tender
for 1,650,000 shares of the Class A Common Stock of Interstate at a price of
$3.00 per share. It also increased the consideration to be paid to the Lehman
Investors by $2.3 million. The proposal stated that it would remain open only
until March 13, 2002.
On March 7, 2002, Mr. Hewitt sent Mr. Shaner an e-mail stating that the
Board was considering the proposal. Mr. Hewitt stated that Interstate may not be
able to respond by March 13, 2002.
On March 11, 2002, Mr. Shaner wrote to Mr. Hewitt and asked to be
advised of when Interstate could respond to the March 5th proposal. Once again,
Mr. Shaner requested a meeting. In addition, Mr. Shaner requested a copy of the
stockholder list of all current stockholders of Interstate including mailing
addresses.
On March 11, 2002, Mr. Khimji returned a call from Mr. Shaner. Mr.
Shaner requested a meeting in the near future between Shaner Hotel Group and the
Lehman Investors representatives. Mr. Khimji emphasized that he would contact
the Lehman Investors and relay the request but stated that if Mr. Shaner did not
hear from Mr. Khimji in twenty-four hours, then Mr. Shaner should assume that
the Lehman Investors is not interested in meeting. Mr. Shaner asked why the
Lehman Investors showed so little interest in meeting. Mr. Khimji stated that
the Lehman Investors had its reasons. Mr. Shaner indicated that it was clear to
him that Interstate
44
was negotiating a merger or sale of Interstate with a third person. Based upon
this conversation, Mr. Shaner concluded that negotiations with the Lehman
Investors had reached an impasse.
On March 12, 2002, Shaner Hotel Group released a press release. In the
press release Shaner Hotel Group announced that it had made an all-cash offer
for a controlling stake in Interstate the prior week. In addition, the press
release announced that Mr. Hewitt received a request for the stockholder list
from Shaner Hotel Group. The press release described the offer sent to
Interstate's Board on March 5, 2002. Mr. Shaner stated that "We are sincere and
highly committed to our vision for improving Interstate's performance. We want
to implement our strategy while Interstate is still in a viable position. The
time for Shaner and Interstate to join forces is right now."
On March 13, 2002, Mr. Hewitt sent Mr. Shaner a letter responding to
Mr. Shaner's letter of March 11, 2002. Mr. Hewitt asserted that the proposal of
Shaner Hotel Group would consume approximately $30,000,000 of Interstate's
available cash resources. Further, Mr. Hewitt stated that the Board needs to
obtain additional information in order to adequately review the proposal. Mr.
Hewitt requested details of the financing arrangement of Shaner Hotel Group and
details regarding the plans of Shaner Hotel Group regarding changes to the
equity structure, management and business organization of Interstate following
the tender offer and the redemptions. In addition, Mr. Hewitt inquired about the
basis for the belief of Shaner Hotel Group that the Lehman Investors would
consent to the transaction. Finally, Mr. Hewitt stated that Interstate is not
prepared to provide a list of stockholders.
Mr. Shaner sent a response on March 20, 2002. Mr. Shaner stated that he
was disappointed that Mr. Hewitt canceled their lunch scheduled for March 13,
2002. Mr. Shaner proposed that he and Mr. Hewitt continue a dialogue. In this
letter, Mr. Shaner observed that $25,000,000 of cash on Interstate's balance
sheet is in fact restricted. Mr. Shaner said that Shaner Hotel Group believes
that Interstate's failure to use this cash is either one example of
mismanagement or an indication that the Lehman Investors is using its
contractual rights to prevent Interstate from using the cash. Mr. Shaner assured
Mr. Hewitt that the Shaner Hotel Group has sufficient financing and stated that
the restructuring contemplated in the proposal is the same as the restructuring
set forth in prior proposals. Mr. Shaner stated that Shaner Hotel Group has been
disappointed with the unwillingness of the Lehman Investors to discuss a
transaction with Shaner Hotel Group. Mr. Shaner reiterated the request for a
stockholder list. Mr. Shaner also insisted that Shaner Hotel Group be given a
level playing field with any other proposal. Mr. Shaner asserted that any
transaction negotiated with a third party should exclude a subsequent
transaction break-up fee if a transaction with the Shaner Hotel Group is
completed. Mr. Shaner stated that he is willing to discuss the interest of
Shaner Hotel Group at any time.
In a letter to the Board of Directors of Interstate sent on March 21,
2002, Mr. Shaner addressed two issues. First he stated that he believes that the
financial statements of Interstate set forth in its public filings are
misleading. Mr. Hewitt's letter of March 13, 2002, referred to available cash
resources. Interstate's quarterly reports have shown the $25,000,000 proceeds of
the Lehman Investors' Notes as current assets. However, such funds may only be
invested with the consent of the Managing General Partner of the joint venture
between Interstate and certain members of the Lehman Investors. Mr. Shaner
maintained that the cash should have been shown
45
as restricted on the balance sheet. Mr. Shaner also raised issues with respect
to the Worldgate investment. Mr. Shaner noted that approximately one month after
the Lehman Investors financing, Interstate made a $3,900,000 equity investment
with affiliates of the Lehman Investors, which investment had to be written off
in its entirety within nine months. Mr. Shaner stated that the timing of the
Worldgate transaction raises the question as to whether Interstate made adequate
disclosure in its proxy filings to approve the issuance of the Lehman Investors
financing. Mr. Shaner concluded that, unless Interstate or its auditors explain
the issues by March 25, 2002, he will communicate with the other stockholders of
Interstate in an effort to give them a more complete and accurate picture of
Interstate's financial position.
In a letter dated March 21, 2002 to Mr. Khimji, Mr. Shaner raised
issues regarding the ownership interest of affiliates of Mr. Khimji. Mr. Shaner
asked Mr. Khimji to explain why a company with which Mr. Khimji was affiliated
and which apparently disposed of a significant ownership stake did not file a
Schedule 13D.
On March 25, 2002, Mr. Hewitt responded to Shaner Hotel Group's letters
of March 20 and 21, 2002. Mr. Hewitt stated that Interstate's management and
Board were considering matters discussed in those letters and would respond
following the appropriate review.
In accordance with the Bylaws of Interstate, on March 25, 2002, Shaner
Hotel Group sent to Timothy Q. Hudak, Secretary of Interstate, written notice of
proposals to be considered at the annual meeting. The proposals relate to
redemption of the Rights created by Interstate's Shareholders Rights Agreement
or the amendment of the Shareholders Rights Agreement to remove the impediments
to the consummation of Shaner Hotel Group's tender offer. In that letter and in
a follow-up letter on March 28, 2002, Shaner Hotel Group also nominated Lance T.
Shaner and Leo A. Keevican, Jr. for election as Class A Directors at
Interstate's next annual meeting.
On March 27, 2002, Shaner Hotel Group issued a press release announcing
that it would be initiating the Offer shortly.
On April 2, 2002, Shaner Hotel Group sent a letter to the Board of
Directors of Interstate which contained two requests relating to its Offer.
First, Shaner Hotel Group asked the Board to act immediately to redeem the
Rights issued under its Shareholders Rights Agreement or take such action as is
necessary so that the Rights are invalid or otherwise inapplicable to its Offer.
Second, Shaner Hotel Group requested that the Board schedule the 2002 annual
meeting of Stockholders, and set the record date for stockholders entitled to
notice of and to vote at that meeting, so as to enable Shaner Hotel Group to
complete the Offer and vote the Shares purchased in it at that meeting and at
any other special stockholder meeting.
On April 3, 2002, Shaner Hotel Group filed with the Securities and
Exchange Commission its Schedule TO-T relating to the Offer and incorporating
the Offer, the Letter of Transmittal, and other related documents.
On April 3, 2002, Shaner Hotel Group issued a press release announcing
that it was beginning the Offer.
46
On April 3, 2002, Shaner Hotel Group sent to Timothy Q. Hudak,
Secretary of Interstate, a written request in connection with the Offer to
notify Shaner Hotel Group of Interstate's election either to mail the Offer and
related offering materials to holders of record of Class A Common Stock, or to
provide Shaner Hotel Group with a stockholder mailing list to enable it to mail
the materials itself. On April 4, 2002, counsel for Interstate responded to that
request by declining to comply with it and suggesting that the request be
renewed.
On April 3, 2002, Mr. Hewitt sent a letter to Mr. Shaner responding to
Mr. Shaner's letter to the Board of Interstate sent on March 21, 2002. Mr.
Hewitt asserted that Interstate believed that its treatment of the $25,000,000
as cash on the balance sheet is entirely appropriate. Mr. Hewitt also addressed
the Worldgate investment. He noted that the Worldgate investment was approved
unanimously by Interstate's Board several months prior to the investment by the
Lehman Investors. Finally, Mr. Hewitt acknowledged receipt of the stockholder
proposals provided by the Shaner Hotel Group on March 25 and March 28, 2002.
On April 3, 2002, Interstate issued a press release stating that
Interstate had authorized a special committee of its independent directors to
review and evaluate the terms and conditions of the Offer of Shaner Hotel Group,
and that the special committee and the full Board would make a recommendation to
stockholders no later than Tuesday, April 16, 2002, about the Offer.
In a letter sent to Mr. Hewitt on April 10, 2002, Shaner Hotel Group
reiterated its position that the failure of Interstate to segregate the
$25,000,000 of restricted cash on the face of the balance sheet is in direct
contravention of SEC rules. In the letter, Mr. Shaner raised additional issues
regarding the Worldgate investment. Mr. Shaner maintained that if the Worldgate
investment was approved prior to the Lehman Investors financing, the investment
should have been disclosed in the proxy solicitation materials sent to the
stockholders of Interstate seeking their approval of the financing with the
Lehman Investors, and that no such disclosure was made in those materials.
On April 10, 2002, Shaner Hotel Group sent a letter to Mr. Joseph J.
Flannery, a director of Interstate and a Vice President of Lehman Brothers in
New York City, emphasizing that Lehman Brothers must not serve as a financial
advisor to the special committee of Interstate's board of directors formed to
evaluate Shaner Hotel Group's tender offer.
On April 11, 2002, Shaner Hotel Group filed with the Securities and
Exchange Commission its Schedule TO-T/A relating to the Offer and incorporating
an updated Offer to Purchase, and published a summary advertisement in The New
York Times announcing the Offer, its terms, and how to obtain more information
about and copies of the Offer.
On April 11, 2002, Shaner Hotel Group sent to Timothy Q. Hudak, Senior
Vice President, General Counsel and Secretary of Interstate, a written request
that Interstate notify Shaner Hotel Group of its election either to mail the
Offer and related materials to stockholders of record or to provide Shaner Hotel
Group with a stockholder mailing list.
47
On April 11, 2002, Interstate issued a press release stating that its
board of directors would respond by April 24, 2002 to Shaner Hotel Group's
tender offer. The release stated that by that date the board would recommend to
stockholders acceptance or rejection of the Offer, express no opinion or remain
neutral on the Offer, or state that it is unable to take a position with respect
to the Offer.
On April 12, 2002, Timothy Q. Hudak, Senior Vice President, General
Counsel and Secretary of Interstate, in response to Interstate's April 11, 2002
letter to him, indicated in a letter to counsel for Shaner Hotel Group that
Interstate had elected to mail Shaner Hotel Group's tender offer materials to
stockholders.
On April 12, 2002, in a letter to Mr. Hewitt, Mr. Shaner requested that
he be able to meet with and make a presentation to the members of the special
board committee of independent directors formed to evaluate the Offer. Mr.
Shaner indicated in the letter that he would be willing to meet with the members
of the committee whenever and wherever would be convenient for them.
On April 16, 2002, Interstate issued a press release stating that its
special committee of independent directors authorized to review and evaluate the
terms and conditions of Shaner Hotel Group's tender offer, had engaged Merrill
Lynch to act as its financial advisor with the review and evaluation of the
Offer. The press release also announced that the board of directors had taken
action to defer the Distribution Date under Interstate's Rights Agreement until
further action by the board.
On April 23, 2002, Shaner Hotel Group issued a press release stating
that it had extended the expiration date of its tender offer from May 10, 2002,
to May 31, 2002, and that same day began mailing its tender offer materials to
holders of Interstate's Class A Common Stock.
On April 24, 2002, Shaner Hotel Group filed with the Securities and
Exchange Commission a preliminary proxy statement for Interstate's 2002 annual
meeting of shareholders.
MISCELLANEOUS
Other Matters
Shaner Hotel Group knows of no business to be presented for
consideration at the Annual Meeting other than that described in this Proxy
Statement. If any other matters properly come before the Annual Meeting,
however, the GOLD proxies in the form accompanying this Proxy Statement will be
voted according to the discretion of the named proxies.
Stockholder Proposals for the 2003 Annual Meeting
The information in the following two paragraphs is taken from
Interstate' Proxy Statement for the 2002 Annual Meeting.
48
[In addition to otherwise satisfying the eligibility requirements of
SEC Rule 14a-8, any proposal of a stockholder intended to be presented at
Interstate's 2003 annual meeting of stockholders must be received in writing by
the Secretary of Interstate by January 1, 2003 for inclusion in Interstate's
proxy, notice of meeting and Proxy Statement relating to the 2003 annual
meeting. The Securities and Exchange Commission amended Rule 14a-4 under the
Exchange Act to provide that a proxy may confer discretionary authority to vote
on a proposal for an annual meeting of stockholders if the proponent fails to
notify Interstate at least 45 days prior to the anniversary of the month and day
of mailing the prior year's Proxy Statement. For purposes of Interstate's 2003
annual meeting of stockholders, management may use its discretionary voting
authority to vote on any proposal with respect to which Interstate receives
notice after January 1, 2003, even if such proposal is not discussed in the
Proxy Statement for the 2003 annual meeting of stockholders.]
[In addition, Interstate's bylaws currently provide that in order for a
stockholder to nominate a candidate for election as a director at an annual
meeting of stockholders or propose business for consideration at an annual
meeting, written notice (including certain specified information) generally must
be delivered to the Secretary of Interstate, at its principal executive offices,
not later than the close of business of the 75th day and not earlier than the
close of business of the 120th day prior to the first anniversary of the
preceding year's annual meeting. Accordingly, under the current bylaws, a
stockholder nomination or proposal intended to be considered at the 2003 annual
meeting must be received by the Secretary after the close of business on
February [_____], 2003, and prior to the close of business on April [_____],
2003. The Secretary of Interstate will provide a copy of the bylaws upon written
request and without charge. Interstate's bylaws further require that the notice
by the stockholder set forth certain information concerning the stockholder and
the stockholder's nominees, including their names and addresses, a
representation that the stockholder is entitled to vote at the annual meeting
and intends to appear in person or by proxy at the annual meeting to nominate
the person or persons specified in the notice, the class and number of shares of
Interstate's stock owned beneficially and of record by the stockholder, a
description of all arrangements or understandings between the stockholder and
each nominee, such other information regarding each nominee as would be required
to be included in a proxy statement soliciting proxies for the election of the
nominees of such stockholder and the consent of each nominee to serve as a
director of Interstate if so elected. The chairman of the meeting may refuse to
acknowledge the nomination of any person not made in compliance with these
requirements.]
OTHER INFORMATION
Certain executive officers of Shaner Hotel Group and its general
partner who may assist the Solicitation Agent in soliciting proxies are listed
in the attached Schedule III. Schedule IV sets forth certain information
regarding the shares of Interstate's Common stock owned by Shaner Hotel Group,
its general partner, and their directors, executive officers, and employees, and
others, who may solicit proxies. Schedule V sets forth certain publicly
available information regarding Interstate's Common stock held by Interstate's
principal stockholders and its management.
49
This Proxy Statement is neither a request for the tender of any shares
of Interstate's Class A Common Stock nor an offer to purchase any of them.
Shaner Hotel Group's tender offer is being made only by means of the Offer to
Purchase and the related Letter of Transmittal, as filed with the Securities and
Exchange Commission.
Important
o Your proxy is important no matter how many shares you own. Be sure
to vote on the GOLD proxy card. Shaner Hotel Group urges you NOT to
sign any [_____] proxy card sent to you by Interstate.
o If you have already submitted a proxy card to Interstate you may
change your vote to a vote FOR Shaner Hotel Group' proposals and
against Interstate's slate of directors by signing, dating, and
returning the GOLD proxy card. The GOLD proxy card must be dated
after any proxy card you may have sent to Interstate. Only your last
dated proxy card will count at the Annual Meeting.
o If any of your shares are held in the name of a bank, broker, or
other nominee holder, please advise each such nominee holder to vote
FOR Shaner Hotel Group's proposals described above by submitting a
GOLD proxy card.
o If you hold your shares in more than one type of account or in
different names, you may receive more than one GOLD proxy card. We
encourage you to vote each GOLD proxy card you receive.
If you have any questions or need assistance in voting your shares,
please contact our Solicitation Agent at the following telephone numbers.
N.S. Taylor & Associates, Inc.
Banks and Brokers Call Collect: 207.564.8700
All Others Call Toll-Free: 866.470.4500
Please indicate support for Shaner Hotel Group's proposed resolutions
described in this Proxy Statement by completing, signing, and dating the
enclosed GOLD proxy card and promptly returning it in the enclosed envelope to:
Shaner Hotel Group Limited Partnership
c/o N.S. Taylor & Associates, Inc.
15 North Street, 2nd Floor
Dover-Foxcroft, Maine 04426
No postage is necessary if the envelope is mailed in the United States.
SHANER HOTEL GROUP LIMITED PARTNERSHIP
[May _____ ], 2002
50
SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS OF SHANER HOTEL GROUP AND
SHANER OPERATING CORP.
Set forth below are the name, business address and present principal
occupation or employment, and material occupations, positions, offices or
employment for the past five years of each executive officer of the Shaner Hotel
Group and of its General Partner, Shaner Operating Corp., a Delaware corporation
(the "General Partner"). Please also see the biographical descriptions for these
officers on page 40 of this Proxy Statement. The business address of each
officer is 1965 Waddle Road, State College, Pennsylvania 16803, and telephone
number of each officer is 814.234.4460. Each such person is a United States
citizen.
Name Position
---- --------
Lance T. Shaner Chairman of the Board and Vice President of the General Partner and Chairman
and CEO of Shaner Hotel Group
Frederick J. Shaner President of the General Partner and of Shaner Hotel Group
Peter K. Hulburt Vice President-Legal and Secretary of the General Partner and of Shaner Hotel
Group
J. B. Griffin Vice President-Finance and Treasurer of the General Partner and of Shaner
Hotel Group
The shareholders of the General Partner ("GP Shareholders"), and the
members of its board of directors ("Directors"), are Lance T. Shaner and
Frederick J. Shaner, who are brothers. Lance T. Shaner serves as Chairman of the
Board and Vice President of the General Partner and as Chairman and CEO of
Shaner Hotel Group. Frederick J. Shaner serves as President of the General
Partner and of Shaner Hotel Group. Peter K. Hulburt is Vice President-Legal and
Secretary of the General Partner and of Shaner Hotel Group. J.B. Griffin serves
as Vice President-Finance and Treasurer of the General Partner and of Shaner
Hotel Group. These four executive officers of the General Partner are referred
to as the "Officers" in the Offer to Purchase.
Lance T. Shaner has been Chairman of the Board and Vice President of
the General Partner, and Chairman and CEO of Shaner Hotel Group, since 1995. Mr.
Shaner has served as the Chairman of the Board of Shaner Energy, Inc. for the
past five years. Shaner Energy, Inc. is a gasoline and home heating distributing
company selling both products at wholesale and retail in the Huntingdon,
Clearfield, and Port Royal, Pennsylvania area. For the last five years, Lance T.
Shaner and Frederick J. Shaner have been principal officers, directors and
stockholders of Shaner Cable, Inc. an owner of several cable television systems
in the southern tier of New York. Lance T. Shaner and Frederick J. Shaner have
been the principal officers, directors and shareholders of Shaner Development
Corporation, the owner of several residential properties in the southern tier of
New York. Lance T. Shaner is the principal officer, stockholder, and director of
several affiliate corporations that are general partners and/or managing
partners in Jelms Hotel
51
Company Limited Partnership, Lance Shaner Hotel Limited Partnership and Shaner
Family Partners, LP that owns various interests in hotel properties. The
interest in these entities started on or about September 1, 1997.
Frederick J. Shaner has been President of the General Partner and of
Shaner Hotel Group since 1995. Mr. Shaner is a thirty percent shareholder of the
General Partner. For the last five years, Lance T. Shaner and Frederick J.
Shaner have been principal officers, directors and stockholders of Shaner Cable,
Inc. an owner of several cable television systems in the southern tier of New
York. Lance T. Shaner and Frederick J. Shaner have been the principal officers,
directors and shareholders of Shaner Development Corporation, the owner of
several residential properties in the southern tier of New York.
Peter K. Hulburt has been the Vice President-Legal of the General
Partner since January 1, 1995 and Secretary of the General Partner since August
6, 1998. He has also served as the Vice President-Legal since January 1, 1995
and Secretary of Shaner Hotel Group since August 6, 1998.
J.B. Griffin has been Vice President Finance of the General Partner
since October 10, 1997 and Treasurer of the General Partner since August 6,
1998. He has also served as Vice President Finance of Shaner Hotel Group since
October 10, 1997 and Treasurer of Shaner Hotel Group since August 6, 1998.
None of Shaner Hotel Group, the General Partner, the GP Shareholders,
the Directors, or the Officers has, during the last five years (i) been
convicted in a criminal proceeding (excluding traffic violations or similar
misdemeanors), or (ii) been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction as a result of which such person
was or is subject to a judgment, decree, or final order enjoining future
violations of, or prohibiting or mandating activities subject to, federal or
state securities laws or finding a violation with respect to such laws.
52
SCHEDULE II
CURRENT PORTFOLIO OWNED OR MANAGED BY
SHANER HOTEL GROUP
NAME LOCATION
---- --------
1. Holiday Inn August, Georgia
2. Holiday Inn Birmingham, Alabama
3. Comfort Inn Cromwell, Connecticut
4. Radisson Cromwell, Connecticut
5. Savery Hotel Des Moines, Iowa
6. Marriott at the Civic Center Durham, North Carolina
7. Residence Inn Edina, Minnesota
8. Holiday Inn Sunspree Resort Jacksonville Beach, Florida
9. Newport Harbor Hotel & Marina Newport, Rhode Island
10. Holiday Inn Statesville, North Carolina
11. Holiday Inn Express & Suites Statesville, North Carolina
12. Holiday Inn Express Charleston, West Virginia
13. Holiday Inn Convention Center Alexandria, Louisiana
14. Marriott Chattanooga, Tennessee
15. Radisson Paramus, New Jersey
16. Holiday Inn Shreveport, Louisiana
17. Holiday Inn Express State College, Pennsylvania
18. Hampton Inn & Suites State College, Pennsylvania
19. Hampton Inn Andover, Massachusetts
20. Holiday Inn Muscatine, Iowa
21. Marriott City Center Pittsburgh, Pennsylvania
22. Holiday Inn & Suites Dayton, Ohio
HOTELS EXPECTED TO BE OPEN WITHIN THE NEXT 12 MONTHS
1. Spring Hill Suites State College, Pennsylvania
2. Fairfield Inn Jacksonville Beach, Florida
3. Marriott Courtyard Newark, Delaware
53
SCHEDULE III
INFORMATION CONCERNING PERSONS WHO MAY SOLICIT PROXIES
Set forth below are the names of each executive officer, director,
employee, and other representatives of Shaner Hotel Group Limited Partnership or
of its general partner who may assist N.S. Taylor & Associates, Inc., the
Solicitation Agent, in soliciting proxies from Interstate's stockholders. None
of the officers, directors, or employees of Shaner Hotel Group Limited
Partnership or of its general partner, will receive compensation for soliciting
proxies other than their ordinary compensation as an officer, director, or
employee, as the case may be.
Lance T. Shaner
Chairman & CEO
Shaner Hotel Group Limited Partnership
1965 Waddle Road
State College, Pennsylvania 16803
J.B. Griffin
Vice President-Finance & Treasurer
Shaner Hotel Group Limited Partnership
1965 Waddle Road
State College, Pennsylvania 16803
Leo A. Keevican, Jr.
Managing Director & Shareholder
DKW Law Group, PC
58th Floor, USX Tower
600 Grant Street
Pittsburgh, Pennsylvania 15219
54
SCHEDULE IV
SHARES OF INTERSTATE'S COMMON STOCK OWNED BY SHANER HOTEL GROUP LIMITED
PARTNERSHIP, ITS GENERAL PARTNER, AND THEIR OFFICERS, DIRECTORS, AND EMPLOYEES,
AND BY OTHERS WHO MAY SOLICIT PROXIES
Beneficial Owner Shares of Class A Common Stock
---------------- ------------------------------
Shaner Hotel Group Limited Partnership 333,500
Of the 333,500 shares of Interstate's Class A Common Stock beneficially owned by
Shaner Hotel Group Limited Partnership as set forth above, 227,500 shares are
owned by Shaner Hotel Group Limited Partnership itself and 6,000 shares are
owned by Lance T. Shaner. Mr. Shaner is a 70% shareholder of Shaner Operating
Corp., a Delaware corporation, the General Partner of Shaner Hotel Group Limited
Partnership. Mr. Shaner is a Director and Chairman of the Board and Vice
President of the General Partner, and Chairman and CEO of Shaner Hotel Group
Limited Partnership.
55
SCHEDULE V
BENEFICIAL OWNERSHIP OF INTERSTATE'S COMMON STOCK
The following table sets forth certain information regarding the
beneficial ownership of Class A Common Stock as of April 16, 2002 by (1) each
person known by the Company to own beneficially more than 5% of the Class A
Common Stock, (2) each director and Named Executive Officer of the Company, and
(3) all directors and executive officers of the Company as a group. Such
information is derived from Interstate's Amended Annual Report on Form 10K/A for
the fiscal year ended December 31, 2001, filed with the Securities and Exchange
Commission on April 19, 2002. The figures in the following table are based on
5,487,885 shares of Class A Common Stock outstanding as of April 16, 2002 and,
where required by the applicable rules governing the presentation of the
information contained in this table, assume the conversion of the Notes and/or
shares of the Preferred Stock beneficially owned by such person into shares of
Class A Common Stock. Unless indicated otherwise, the address for each of the
persons named in the table is c/o Interstate Hotels Corporation, Foster Plaza
Ten, 680 Andersen Drive, Pittsburgh, Pennsylvania 15220. For purposes of the
table, a person or group of persons is deemed to have "beneficial ownership" of
any shares as of a given date which such person has the right to acquire within
60 days after such date.
Name Number of Class A Percentage of Class A
Shares Owned Shares Owned
Thomas F. Hewitt(1)...........................................441,434.................................7.7%
J. William Richardson(2)......................................341,776.................................6.0%
Kevin P. Kilkeary(3)..........................................170,166.................................3.0%
Henry L. Ciaffone............................................. --................................. --
Charles R. Tomb............................................ 123................................. *
Karim J. Alibhai(4).........................................5,359,183................................49.5%
Joseph J. Flannery..............................................7,000....................................*
Benjamin D. Holloway............................................4,000....................................*
Stephen P. Joyce...................................................--...................................--
Alan J. Kanders(5)..............................................9,000....................................*
Mahmood J. Khimji..................................................--...................................--
Phillip H. McNeill, Sr.........................................36,230....................................*
John J. Russell, Jr................................................--...................................--
Sherwood M. Weiser(6).......................................5,351,825................................49.5%
Odessa Limited(7).............................................607,000................................11.1%
Gary M. Goldberg and affiliates(8)............................310,033.................................5.6%
Shaner Hotel Group Limited Partnership(9).....................333,500.................................6.1%
The PNC Financial Services Group, Inc.(10)....................455,942.................................8.3%
Raffles Associates, L.P.(11)..................................288,855.................................5.3%
CGLH Partners I LP and CGLH Partners II LP
as a group(12).......................................5,329,183................................49.3%
All directors and executive officers
as a group (16 persons)(13)..........................6,392,688................................56.2%
* Less than 1%
56
(1) Includes 250,000 shares issuable upon the conversion of their
shares of the Preferred Stock into shares of Class A Common Stock.
(2) Includes 43 shares held by Mr. Richardson's daughter and 187,500
shares issuable upon the conversion of their shares of the Preferred Stock into
shares of Class A Common Stock.
(3) Includes 125,000 shares issuable upon the conversion of their
shares of the Preferred Stock into shares of Class A Common Stock.
(4) Includes 5,329,183 shares issuable upon the conversion of the Notes
and/or shares of the Preferred Stock into shares of Class A Common Stock
(adjusted to reflect 5,487,885 shares of Class A Common Stock outstanding as of
April 16, 2002) held indirectly through Mr. Alibhai's indirect interests in CGLH
Partners I LP and CGLH Partners II LP. See Note (12) below.
(5) Includes 2,000 shares held in trust for the benefit of Mr. Kanders'
daughter.
(6) Includes 5,329,183 shares issuable upon the conversion of the Notes
and/or shares of the Preferred Stock into shares of Class A Common Stock
(adjusted to reflect 5,487,885 shares of Class A Common Stock outstanding as of
April 16, 2002) held indirectly through Mr. Weiser's indirect interests in CGLH
Partners I LP and CGLH Partners II LP. See Note (12) below.
(7) As reported in a Schedule 13D filed with the SEC on October 5,
2000. The address of Odessa Limited is International House, Victoria Road,
Douglas, Isle of Man, British Isles.
(8) As reported in an amended Schedule 13D filed with the SEC on
October 5, 2000. Represents shares held in managed discretionary and
non-discretionary accounts for clients advised by Gary M. Goldberg & Co., Inc.,
VIP 100, L.P. and/or Gary Goldberg VIP 100, Inc. Gary M. Goldberg is a
controlling person of all of these entities and, as such, is deemed to be the
beneficial owner of any shares of the Company's Class A Common Stock of which
these entities may be deemed to beneficially own. This information is based
solely upon the contents of joint filings made by Mr. Goldberg and his
affiliates pursuant to Section 13 of the Securities Exchange Act of 1934. The
address of the Gary M. Goldberg group is c/o Gary M. Goldberg, Montebello Park,
75 Montebello Road, Suffern, New York 10901.
(9) As reported in a Schedule TO-T/A filed with the SEC on April 11,
2002. The address of Shaner Hotel Group Limited Partnership is 1965 Waddle Road,
State College, Pennsylvania 16803.
(10) As reported in a Schedule 13G filed with the SEC on February 12,
2002. Represents shares held by affiliates of The PNC Financial Services Group,
Inc., whose addresses are as follows: (a) The PNC Financial Services Group,
Inc., One PNC Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707; (b)
PNC Bancorp, Inc., 222 Delaware Avenue,
57
Wilmington, Delaware 19899; and (c) PNC Bank, National Association, One PNC
Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania 15222-2707.
(11) As reported in a Schedule 13G filed with the SEC on February 13,
2002. The address of Raffles Associates, L.P., is 450 Seventh Avenue, Suite 509,
New York, New York 10123.
(12) As reported in an amended Schedule 13D filed with the SEC on
November 6, 2000, adjusting the percentage to reflect 5,487,885 shares of Class
A Common Stock outstanding as of April 16, 2002, the following entities
beneficially own the Company's Class A Common Stock that the Investor has the
right to acquire pursuant to the terms of the Preferred Stock and the Notes held
by the Investor: (i) CGLH Partners I LP (sole voting power over 1,250,000
shares); (ii) CGLH Partners II LP (sole voting power over 5,329,183 shares);
(iii) LB Interstate GP LLC; (iv) LB Interstate LP LLC; (v) PAMI LLC; (vi)
Property Asset Management Inc.; (vii) Lehman ALI Inc.; (viii) Lehman Brothers
Holdings Inc.; (ix) MK/CG GP LLC; (x) MK/CG LP LLC; (xi) CG Interstate
Associates LLC; (xii) Continental Gencom Holdings, LLC; (xiii) KFP Interstate,
LLC; (xiv) Grosvenor, LLC; (xv) KFP Holdings, Ltd.; (xvi) Quadrangle Trust
Company (BVI) Limited; (xvii) Sherwood M. Weiser (sole voting power over 22,642
shares); (xviii) Donald E. Lefton (sole voting power over 21,390 shares); (xix)
Karim J. Alibhai (sole voting power over 30,000 shares). Each of the foregoing
entities (other than CGLH Partners I LP and CGLH Partners II LP) have shared
voting power over 5,329,183 shares of the Company's Class A Common Stock. CGLH
Partners I LP and CGLH Partners II LP have sole voting power over the shares
listed in clauses (i) and (ii) above, but do not have any shared voting power
over any other shares. The terms of the Preferred Stock and the Notes prohibit
any single holder and its affiliates or any group of which any of them is a
member from converting into more than 49% of the Company's common stock. If this
restriction were not applicable, the Preferred Stock and the Notes held by the
foregoing entities initially would be convertible into an aggregate of 7,500,000
shares of Class A Common Stock or approximately 57% of the Company's total
outstanding common stock as of April 16, 2002. For more information, see the
amended Schedule 13D, filed with the SEC on November 6, 2000. The address of
CGLH Partners I LP and CGLH Partners II LP is c/o Lehman Brothers Holdings Inc.,
1285 Avenue of the Americas, 13th Floor, New York, New York 10019.
(13) Includes 5,329,183 shares (adjusted to reflect 5,487,885 shares of
Class A Common Stock outstanding as of April 16, 2002) held indirectly through
Mr. Alibhai's and Mr. Weiser's indirect interests in CGLH Partners I LP and CGLH
Partners II LP, 250,000 shares held directly by Mr. Hewitt, 187,500 shares held
directly by Mr. Richardson and 125,000 shares held directly by Mr. Kilkeary (all
of such shares issuable upon the conversion of the Notes and/or shares of the
Preferred Stock into shares of Class A Common Stock).
All of the 242,555 outstanding shares of Class B Common Stock of the
Company are beneficially owned by Marriott Hotel Services, Inc. The address of
Marriott Hotel Services, Inc. is One Marriott Drive, Washington, D.C. 20058.
58
The information concerning Interstate's beneficial ownership of Common
Stock set forth in this Schedule V has been taken from Interstate's Amended
Annual Report on Form 10-K/A for the fiscal year ended December 31, 2001 filed
with the Securities and Exchange Commission on April 19, 2002. Shaner Hotel
Group disclaims any responsibility for the accuracy or completeness of the
information contained in that document, or for the failure by Interstate or any
third party to disclose events that may have occurred and may affect the
significance or accuracy of any information, but which are unknown to Shaner
Hotel Group.
59
Appendix 1
Preliminary Copy, Subject to Completion,
Dated April 23, 2002
IN OPPOSITION TO THE BOARD OF DIRECTORS OF
INTERSTATE HOTELS CORPORATION
PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS: _______________, 2002
THIS PROXY IS SOLICITED ON BEHALF OF SHANER HOTEL GROUP
LIMITED PARTNERSHIP
The undersigned hereby appoints Lance T. Shaner, Leo A.
Keevican, Jr., and J.B. Griffin, and each of them, as proxies, each with the
power to appoint his substitute, to vote all of the shares of capital stock of
Interstate Hotels Corporation, a Maryland corporation (the "Company"), held of
record by the undersigned on the record date, at the annual meeting of
shareholders of the Company to be held on ______, 2002, at _______ a.m. Eastern
Daylight Savings Time, and any postponement or any adjournment thereof, as
directed and, in their or his discretion, on all other matters which may
properly come before the meeting.
The votes represented by this Proxy will be voted as marked by you. IF NO
DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE ELECTION OF BOTH NOMINEES
FOR DIRECTOR AND FOR THE PROPOSALS SHOWN BELOW. Any Proxy which is not properly
executed shall be ineffective. Please mark each space with an "x".
Section A. To be voted upon by all holders of Common Stock of the Company
1. BE IT RESOLVED, that the holders of the Common Stock of Interstate
urge the Board of Directors to take one of the following actions and to
recommend to the Lehman Investors that such Lehman Investors authorize the Board
to take one of the following actions: (i) redeem the shareholder rights issued
pursuant to the Shareholders Rights Agreement of Interstate; or (ii) amend the
Shareholders Rights Agreement to exclude Shaner Hotel Group and its affiliates
as an acquiring party. If the Board takes action (i), the holders of Common
Stock also ask the Board of Directors not to reissue or extend these rights, or
create a new rights plan unless such action by the Board is approved by an
affirmative vote of a majority of the outstanding shares at a meeting of the
stockholders held as soon as is practicable.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. Proposal to Ratify Appointment of PricewaterhouseCoopers LLP as Independent
Accountants for 2002.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
Section B. To be voted upon by all holders of Class A Common Stock
ELECTION OF THE FOLLOWING INDIVIDUALS TO SERVE AS CLASS
A-3 DIRECTORS UNTIL THE ANNUAL MEETING OF THE COMPANY IN 2005
LANCE T. SHANER FOR [ ] WITHHOLD AUTHORITY [ ]
LEO A. KEEVICAN, JR. FOR [ ] WITHHOLD AUTHORITY [ ]
In their discretion, the proxies named above are authorized to vote
upon such other matters as may properly come before the Annual Meeting and any
adjournment or postponement thereof.
All previous proxies given by the undersigned to vote at the Annual
Meeting or at any adjournment or postponement thereof (and any discretionary
voting authority purportedly granted by such proxies) are hereby revoked.
Dated: ________________, 2002
_____________________________________________
(Signature)
_____________________________________________
(Name/Title)
_____________________________________________
(Signature, if jointly held)
_____________________________________________
(Name/Title)
Please sign your name exactly as you print it on the line immediately below the
signature line. If shares are held by joint tenants or otherwise jointly held,
both parties should sign. If you are signing as an attorney, executor,
administrator, trustee or guardian, please specify your title. If the holder is
a corporation, please sign in the full corporate name by the President or other
authorized officer. If the holder is a partnership, please sign in the
partnership name by an appropriate authorized person.
Please complete, sign, date and promptly mail your proxy in the enclosed postage
paid envelope to:
N.S. TAYLOR & ASSOCIATES, INC.
15 North Street, 2nd Floor
Dover-Foxcroft, Maine 04426
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as..................................'SS'