IHR Interstate Hotels & Resorts,

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

SCHEDULE 14A

(Rule 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934

Filed by the Registrant þ

Filed by a Party other than the Registrant o

Check the appropriate box:

	þ		Preliminary Proxy Statement.
	o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)).
	o		Definitive Proxy Statement.
	o		Definitive Additional Materials.
	o		Soliciting material Pursuant to §240.14a-12.

Interstate Hotels & Resorts, Inc.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

o		No fee required.
þ		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: Common Stock, par value $0.01 per share, of Interstate Hotels & Resorts, Inc. (“Common Shares”); and Class A units in Interstate Operating Company, L.P. (“Common Units”)
	2)		Aggregate number of securities to which transaction applies: 33,380,558 Common Shares; and 56,826 Common Units (excluding Common Units held directly or indirectly by the Registrant)
	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): $2.25 per each Common Share and each Common Unit (excluding Common Units held directly or indirectly by the Registrant).
	4)		Proposed maximum aggregate value of transaction: $75,234,114.00
	5)		Total fee paid: $5,364.19

o

Fee paid previously with preliminary materials.

o

Check box if any part of the fee 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:
	2)		Form, Schedule or Registration Statement No.:
	3)		Filing Party:
	4)		Date Filed:

4501 N. Fairfax Drive, Suite 500

Arlington, Virginia 22203

(703) 387-3100

 

[ • ], 2010

 

Dear Stockholder:

 

You are cordially invited to attend a special meeting of stockholders of Interstate Hotels & Resorts, Inc., which will be held at our corporate offices, located at 4501 N. Fairfax Drive, Suite 500, Arlington, Virginia 22203, on [ • ],[ • ], at [ • ] Eastern Time.

 

At the special meeting, we will ask you to adopt the agreement and plan of merger, dated as of December 18, 2009, among Interstate Hotels & Resorts, Inc., which we refer to as “Interstate” or the “Company”, Interstate Operating Company, L.P., Hotel Acquisition Company, LLC, HAC Merger Sub, Inc. and HAC Merger Partnership, L.P., which we refer to as the “merger agreement,” and approve the merger of the Company with HAC Merger Sub, Inc. and the other transactions contemplated by the merger agreement. If the merger is completed, each holder of shares of the Company’s common stock will be entitled to receive $2.25 in cash, without interest, in exchange for each share held, as more fully described in the enclosed proxy statement.

 

After careful consideration, our board of directors has approved the merger, the merger agreement and the other transactions contemplated by the merger agreement and has declared the merger, the merger agreement and the other transactions contemplated by the merger agreement advisable and in the best interests of Interstate and our stockholders. As part of its deliberations, our board of directors has received an opinion from Barclays Capital Inc. that, as of December 18, 2009, the consideration to be offered to our stockholders in the merger was fair to our stockholders from a financial point of view. Our board of directors recommends that you vote “FOR” the adoption of the merger agreement and approval of the merger and the other transactions contemplated by the merger agreement.

 

The merger agreement must be adopted by the affirmative vote of holders of at least a majority of our outstanding shares of common stock that are entitled to vote at the special meeting.

 

The proxy statement accompanying this letter provides you with more specific information concerning the special meeting, the merger and the merger agreement and additional information about the parties involved. We urge you to read carefully the enclosed proxy statement, including the exhibits. You may also obtain more information about Interstate and Interstate Operating Company, L.P. from us or from documents we have filed with the Securities and Exchange Commission.

 

Your vote is very important regardless of the number of shares of the Company’s common stock you own. Whether or not you plan on attending the special meeting, we request that you cast your vote by either completing and returning the enclosed proxy card as promptly as possible or submitting your proxy or voting instructions by telephone or Internet. The enclosed proxy card contains instructions regarding voting. If you attend the special meeting, you may continue to have your shares voted as instructed in the proxy or you may withdraw your proxy at the special meeting and vote your shares in person. If you fail to vote by proxy or in person, or fail to instruct your broker on how to vote, it will

have the same effect as a vote against approval of the merger and the other transactions contemplated by the merger agreement.

 

Sincerely,

 

 

Thomas F. Hewitt

Chief Executive Officer and

Chairman of the Board

 

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

 

This proxy statement is dated [ • ] and is first being mailed, along with the attached proxy card, to our stockholders on or about [ • ].

4501 N. Fairfax Drive, Suite 500

Arlington, Virginia 22203

(703) 387-3100

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON [ • ], 2010

 

To our stockholders:

 

NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Interstate Hotels & Resorts, Inc., “Interstate” or the “Company,” will be held on [ • ], 2010, at [ • ] Eastern Time. The meeting will take place at our corporate offices, located at 4501 N. Fairfax Drive, Suite 500, Arlington, Virginia 22203, for the purpose of acting upon the following proposals:

 

1. To consider and vote upon a proposal to adopt the agreement and plan of merger, which we refer to as the “merger agreement”, dated as of December 18, 2009, by and among Hotel Acquisition Company, LLC, HAC Merger Sub, Inc., a wholly-owned subsidiary of Hotel Acquisition Company, LLC, HAC Merger Partnership, L.P., whose general partner is HAC Merger Sub, Inc., Interstate Operating Company, L.P. and the Company, and approve the merger of the Company with HAC Merger Sub, Inc., which we refer to as the “merger,” and the other transactions contemplated by the merger agreement. The merger agreement provides that, upon completion of the merger, each holder of shares of the Company’s common stock will be entitled to receive $2.25 in cash, without interest, in exchange for each share held;

 

2. To consider and vote upon a proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement; and

 

3. To consider and act upon any other matters that may properly be brought before the special meeting and at any adjournments or postponements thereof.

 

After careful consideration, our board of directors approved the merger, the merger agreement and the other transactions contemplated by the merger agreement and has declared the merger, the merger agreement and the other transactions contemplated by the merger agreement advisable and in the best interests of the Company and our stockholders. Our board of directors recommends that you vote “FOR” the adoption of the merger agreement and approval of the merger and the other transactions contemplated by the merger agreement and “FOR” the approval of any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

All holders of record of shares of the Company’s common stock as of the close of business on [ • ] are entitled to notice of and to vote at the special meeting or any postponements or adjournments of the special meeting.

 

The adoption of the merger agreement and approval of the merger and the other transactions contemplated by the merger agreement requires the affirmative vote of the holders of at least a majority of our outstanding shares of common stock. The proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of a majority of our shares of common stock present or represented by proxy at the special meeting and entitled to vote on the matter. Accordingly, regardless of the number of shares you own, your vote is important. Even if you plan on attending the meeting in person, we request that you cast your vote by either marking, signing, dating and promptly

returning the enclosed proxy card in the postage-paid envelope or submitting your proxy or voting instructions by telephone or Internet. If you fail to return your proxy card, the effect will be that your shares of the Company’s common stock will not be counted for purposes of determining whether a quorum is present and will have the same effect as a vote against adoption of the merger agreement and approval of the merger and the other transactions contemplated by the merger agreement, but will not affect the outcome of the vote regarding the proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Any proxy may be revoked at any time prior to its exercise by your delivery of a properly executed, later-dated proxy card, by your submitting your proxy or voting instructions by telephone or Internet at a later date than your previously submitted proxy or voting instructions, by your filing a written revocation of your proxy with our Secretary at our address set forth above or by your voting in person at the special meeting.

 

We encourage you to read this proxy statement carefully. If you have any questions or need assistance voting your shares, please call our proxy solicitor, MacKenzie Partners, Inc., toll-free at (800) 322-2885 or collect at (212) 929-5500. In addition, you may obtain information about us from certain documents that we have filed with the Securities and Exchange Commission and from our website at www.ihrco.com.

 

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND “FOR” THE APPROVAL OF ANY ADJOURNMENT OF THE SPECIAL MEETING, IF NECESSARY OR APPROPRIATE, TO SOLICIT ADDITIONAL PROXIES.

 

By Order of the Board of Directors

 

 

Christopher L. Bennett

Executive Vice President,

General Counsel and Secretary

 

[ • ], 2010

 

 

 

Table of Contents

 

 

 

The following questions and answers address briefly some questions you may have regarding the special meeting, the merger agreement and the mergers. These questions and answers may not address all questions that may be important to you as a stockholder of the Company. Please refer to the more detailed information contained elsewhere in this proxy statement, as well as the additional documents to which it refers or to which it incorporates by reference, including the merger agreement, a copy of which is attached to this proxy statement as Exhibit A-1 . In this proxy statement, we refer to Interstate Operating Company, L.P. as the “Operating Partnership,” Interstate Hotels & Resorts, Inc. as “we,” “us,” “our”, “Interstate”, or the “Company,” Hotel Acquisition Company, LLC as “HAC,” HAC Merger Sub, Inc. as “Merger Sub” and HAC Merger Partnership, L.P. as “Merger Partnership.” In addition, we refer to the merger of the Company and Merger Sub as the “merger,” and the merger of the Operating Partnership and Merger Partnership as the “partnership merger.” References to the “mergers” refer to both the merger and the partnership merger.

 

 

 

 

 

 

 

 

 

 

SUMMARY

 

The Parties to the Mergers (page [ • ])

 

The Special Meeting

 

The Mergers (page [ • ])

 

Recommendation of the Board of Directors (page [ • ])

	•	has approved the merger, the merger agreement and the other transactions contemplated by the merger agreement;
	•	has separately, on behalf of the Company as the general partner of the Operating Partnership, approved the merger agreement and the partnership merger;
	•	has declared the merger, the merger agreement and the other transactions contemplated by the merger agreement advisable and in the best interests of the Company and our stockholders; and
	•	recommends that you vote “FOR” the adoption of the merger agreement and approval of the merger and the other transactions contemplated by the merger agreement and “FOR” the approval of any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Opinion of Barclays Capital Inc. (page [ • ])

 

Amendments to Certain of Our Debt Instruments (page [ • ])

 

Material Modification to Our Tax Benefit Preservation Plan (page [ • ])

 

Financing (page [ • ])

 

Limited Guarantees (page [ • ])

 

Stock Options; Restricted Stock Awards (page [ • ])

	•	$2.25, multiplied by
	•	the aggregate number of shares of Interstate common stock subject to such restricted stock award immediately prior to the Company merger effective time.

 

Interests of the Company’s Directors and Executive Officers in the Mergers (page [ • ])

	•	the merger agreement provides that our directors and executive officers will have their vested and unvested restricted stock awards cancelled as of the Company merger effective time in return for a cash payment of $2.25 per share subject to each such restricted stock award, less applicable withholding taxes;
	•	Thomas F. Hewitt, our chief executive officer, will be entitled to severance and health benefits under his employment agreement if his employment is terminated without cause or he terminates his employment for good reason (other than a termination of employment by Mr. Hewitt within 12 months following the merger solely by reason of the merger itself as good reason, in which case he will only be entitled to health benefits) or his employment is terminated by the Company within two years following the merger. If Mr. Hewitt is assessed an excise tax under section 4999 of the Internal Revenue Code, in connection with accelerated termination payments for a change in control, the company will gross-up the termination payment equal to the amount of the assessed excise tax (subject to certain limitations); and
	•	each of Bruce A. Riggins, our chief financial officer, Leslie Ng, our chief investment officer, Samuel E. Knighton, our president of hotel operations, and Christopher L. Bennett, our executive vice president and general counsel, will be entitled to severance benefits and health benefits under their employment agreements if their employment is terminated without cause or they leave for good reason (as defined in the employment agreements) within 18 months after completion of the merger.

 

No Solicitation of Transactions (page [ • ])

 

Conditions to the Mergers (page [ • ])

	•	approval of the merger agreement by the requisite stockholder vote;
	•	the expiry of the waiting period applicable to the consummation of the mergers under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”), if applicable;
	•	no effective injunction, writ or preliminary restraining order or any order of any nature issued by a governmental entity of competent jurisdiction to the effect that the mergers may not be consummated, no proceeding or lawsuit pending by any governmental entity for the purpose of obtaining any such injunction, writ or preliminary restraining order and no written notice received from any governmental entity indicating an intent to restrain, prevent, materially impair or delay or restructure the transactions contemplated by the merger agreement;
	•	our and the Operating Partnership’s representations and warranties being true and correct in all respects without regard to any materiality or material adverse effect qualifications as of the closing as though made as of the closing (except for representations and warranties made as of a specified date, which must be true and correct in all respects as of that specified date), except where the failure of such representations and warranties to be true and correct in all respects would not, in the aggregate, have a material adverse effect. Certain of our and the Operating Partnership’s representations and warranties pertaining to authorization, enforceability, capitalization, voting, the opinion of the financial advisor,

		brokers and finders and our tax preservation plan must be true and correct in all material respects (except for representations and warranties made as of a specified date, which must be true and correct in all material respects as of that specified date). In addition, our and the Operating Partnership’s representations and warranties pertaining to the absence of a material adverse effect on us must be true and correct in all respects as of the closing;

	•	the performance, in all material respects, by us and the Operating Partnership of our obligations under the merger agreement;
	•	the receipt by HAC of a certificate signed by our chief executive officer or chief financial officer with respect to the truth and correctness of our and the Operating Partnership’s representations and warranties and the performance of our and the Operating Partnership’s obligations under the merger agreement;
	•	no lender or agent of the lenders under any of our existing financing documents having provided valid written notice to us of any material default under any such existing financing document that is not capable of being cured or for which no remaining cure period exists, and the amendments to the existing financings remaining in full force and effect;
	•	HAC’s, Merger Sub’s and Merger Partnership’s representations and warranties being true and correct in all respects without regard to any materiality qualifications as of the closing as though made as of the closing (except for representations and warranties made as of a specified date, which must be true and correct in all respects as of that specified date), except where the failure of their representations and warranties to be true and correct in all respects would not, in the aggregate, have a material adverse effect on HAC, Merger Sub or Merger Partnership;
	•	the performance, in all material respects, by HAC, Merger Sub and Merger Partnership of their obligations under the merger agreement; and
	•	the receipt by us of an officer’s certificate with respect to the truth and correctness of the representations and warranties of HAC, Merger Sub and Merger Partnership and the performance of their obligations under the merger agreement.

 

Termination of the Merger Agreement (page [ • ])

	•	by mutual written consent of HAC and us;
	•	by either HAC or us if:

	•	the closing has not occurred on or before June 30, 2010, so long as the failure to complete the mergers is not the result of the terminating party’s failure to comply with the terms of the merger agreement;
	•	the merger agreement has been submitted to our stockholders for adoption at a duly convened stockholders meeting (or adjournment or postponement thereof) and the requisite vote of our stockholders to approve the merger and the other transactions contemplated by the merger agreement upon a vote being taken at a duly convened stockholders meeting is not obtained upon a vote taken thereon;

	•	by HAC if:

	•	our board of directors withdraws, modifies or amends its recommendation with respect to the merger agreement or the mergers in any manner adverse to HAC solely in response to a material event,

		development, state of affairs or change in circumstances arising after the date of the merger agreement (other than in connection with a takeover proposal);

	•	(i) our board (or any authorized committee of the board) approves, endorses or recommends a takeover proposal, (ii) our board (or any authorized committee of the board) withdraws, modifies or amends its recommendation with respect to the merger agreement in any manner adverse to HAC in response to our receipt of a takeover proposal, (iii) our board fails to recommend against acceptance by our stockholders of a tender offer or exchange offer that is commenced prior to obtaining the requisite vote of our stockholders to approve the mergers, or (iv) we or our board (or any authorized committee of the board) publicly announces the intention to do any of the foregoing; or
	•	(i) we are in breach (or material breach in certain cases) of any of our covenants and agreements pertaining to solicitation and change of our board’s recommendation or (ii) we are in breach of any of our other representations, warranties, covenants or agreements in the merger agreement (and such breach has not been cured within 20 business days after receipt of written notice of such breach) such that the conditions pertaining to our representations and warranties and our obligations under the merger agreement would not be satisfied by June 30, 2010 (provided that HAC may only exercise this termination right if neither it nor Merger Sub nor Merger Partnership is then in material breach of its obligations under the merger agreement);

	•	by us if our board (or any authorized committee of the board) approves and authorizes us to enter into a definitive agreement to implement a superior proposal, so long as:

	•	the requisite stockholder vote has not yet been obtained;
	•	we are not in and have not been in breach of our obligations under the merger agreement with regard to soliciting acquisition proposals or changing our board’s recommendation in any material respect;
	•	our board (or any authorized committee of the board) has determined in good faith, after consulting with a nationally-recognized financial advisor, that such definitive agreement constitutes a superior proposal and has determined in good faith, after consultation with its outside legal counsel, that failure to take such actions would be reasonably likely to be inconsistent with its fiduciary obligations to our stockholders under applicable laws;
	•	we have provided written notice to HAC regarding our intention to enter into such definitive agreement;
	•	we have provided HAC with a five business day period, during which time we must negotiate in good faith with HAC to make adjustments to the terms and conditions of the merger agreement to enable the mergers and other transactions contemplated by the merger agreement to proceed and our board (or the authorized committee of the board) has determined in good faith, after the end of such five business day period, after considering the results of such negotiations and HAC’s revised proposals, if any, that the superior proposal continues to be a superior proposal; and
	•	we simultaneously pay to HAC the termination fee and certain of HAC’s expenses in accordance with the merger agreement; and

	•	by us if we are not in material breach of our obligations under the merger agreement and if any of HAC, Merger Sub or Merger Partnership is in breach of any of its representations, warranties, covenants or agreements in the merger agreement (and such breach has not been cured within 20 business days after receipt of notice of such breach) such that the conditions pertaining to its representations and warranties and its obligations under the merger agreement would not be satisfied by June 30, 2010.

 

Termination Fee and Expenses (page [ • ])

 

Material Federal Income Tax Consequences of the Merger (page [ • ])

 

Appraisal Rights (page [ • ])

 

Regulatory Approvals (page [ • ])

	•	the filing of the Company merger certificate and the partnership merger certificate with the Secretary of State of the State of Delaware;
	•	the filing with the SEC of (i) this proxy statement and (ii) any other filings and reports that may be required in connection with the merger agreement and the transactions contemplated by the merger agreement under the Exchange Act;
	•	compliance with the New York Stock Exchange (“NYSE”) rules and regulations; and
	•	compliance with any applicable state, federal or foreign laws governing the sale of liquor.

 

Litigation Related to the Mergers (page [ • ])

 

Market Price and Dividend Data (page [ • ])

 

Information both included and incorporated by reference in this proxy statement may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on various assumptions and describe our future plans, strategies, and expectations, are generally identified by our use of words such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations, including completing the mergers on the terms summarized in this proxy statement. All statements regarding our expected financial position, business and financing plans are forward-looking statements.

 

Except for historical information, matters discussed in this proxy statement are subject to known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

 

Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:

 

 

 

These risks and uncertainties, along with the risk factors discussed under “Item 1A. — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, should be considered in evaluating any forward-looking statements contained in this proxy statement. All forward-looking statements speak only as of the date of this proxy statement. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section.

 

This proxy statement is being furnished to our stockholders in connection with the solicitation of proxies by our board of directors for use at a special meeting to be held on [ • ], at [ • ] Eastern Time, at our corporate offices, located at 4501 N. Fairfax Drive, Suite 500, Arlington, Virginia 22203. The purpose of the special meeting is for you to consider and vote upon a proposal to adopt the merger agreement and approve the merger of the Company with Merger Sub, with Merger Sub surviving the merger, and the other transactions contemplated by the merger agreement, to consider and vote upon a proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies, and to consider and act upon any other matters that may properly be brought before the special meeting and at any adjournments or postponements thereof. Our stockholders must approve the proposal for the merger to occur. A copy of the merger agreement is attached as Exhibit A-1 to this proxy statement, which you are encouraged to read in its entirety.

 

The persons named in the accompanying proxy will also have discretionary authority to vote upon other business, if any, that properly comes before the special meeting and any adjournments or postponements of the special meeting, including any adjournments or postponements for the purpose of soliciting additional proxies to adopt the merger agreement and approve the merger and the other transactions contemplated by the merger agreement.

 

The holders of record of the Company’s common stock as of the close of business on the record date, which was [ • ], are entitled to receive notice of, and to vote at, the special meeting. On the record date, there were [ • ] shares of the Company’s common stock outstanding.

 

The holders of one-third of the shares of the Company’s common stock that were outstanding on the record date, represented in person or by proxy, will constitute a quorum for purposes of the special meeting. A quorum is necessary to hold the special meeting. Once a share is represented at the special meeting, it will be counted for the purpose of determining a quorum at the special meeting and any adjournment of the special meeting. However, if a new record date is set for the adjourned special meeting, then a new quorum will have to be established. Any shares of the Company’s common stock held by any of our subsidiaries are not considered to be outstanding for purposes of determining a quorum. Abstentions and properly executed broker non-votes will be counted as shares present for the purposes of determining the presence of a quorum. “Broker non-votes” result when the beneficial owners of shares of the Company’s common stock do not provide specific voting instructions to their brokers. Under the rules of the New York Stock Exchange, brokers are precluded from exercising their voting discretion with respect to the approval of non-routine matters, such as the merger.

 

Completion of the merger requires the adoption of the merger agreement and approval of the merger and the other transactions contemplated by the merger agreement by the affirmative vote of the holders of a majority of the outstanding shares of the Company’s common stock entitled to vote at the special meeting. The proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of a majority of the shares of the Company’s common stock present or represented by proxy at the special meeting and entitled to vote on the matter. Each share of the Company’s common stock that was outstanding on the record date entitles the holder to one vote at the special meeting. Because the required vote is based on the number of shares of the Company’s common stock outstanding rather than on the number of votes cast, failure to vote your shares of the Company’s common stock (including as a result of broker non-votes) and abstentions will have the same effect as voting against adoption of the merger agreement and approval of the merger and the other transactions contemplated by the merger agreement, but will not affect the outcome of the vote regarding the

proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies. Accordingly, in order for your shares of the Company’s common stock to be included in the vote, if you are a stockholder of record, you must either have your shares of the Company’s common stock voted by returning the enclosed proxy card or by submitting your proxy or voting instructions by telephone or Internet or voting in person at the special meeting.

 

Record holders may cause their shares of the Company’s common stock to be voted using one of the following methods:

 

 

Regardless of whether you plan to attend the special meeting, we request that you complete and return a proxy for your shares of the Company’s common stock as described above as promptly as possible.

 

If you hold your shares of the Company’s common stock through a bank, brokerage firm or nominee (i.e., in “street name”), you must provide voting instructions in accordance with the instructions on the voting instruction card that your bank, brokerage firm or nominee provides to you. You should instruct your bank, brokerage firm or nominee as to how to vote your shares of the Company’s common stock, following the directions contained in such voting instruction card. If you have not received such voting instructions or require further information regarding such voting instructions, contact your broker who can give you directions on how to vote your shares of the Company’s common stock.

 

In connection with the merger agreement, certain of our executive officers (who collectively beneficially hold approximately [5]% of the outstanding shares of our common stock as of the record date, and Coliseum Capital Management, LLC (together with certain of its affiliates), which beneficially holds approximately [11]% of the outstanding shares of our common stock as of the record date, have entered into voting agreements with HAC, dated as of December 18, 2009, pursuant to which the signatory stockholders agreed to vote their shares of our common stock in favor of the merger, the merger agreement and the transactions contemplated by the merger agreement. For more information, please see “The Merger Proposal — Voting Agreements” beginning on page [ • ].

 

If you submit a proxy, your shares of the Company’s common stock will be voted at the special meeting as you indicate on your proxy. If no instructions are indicated on your signed proxy card, your shares of the Company’s common stock will be voted “FOR” the adoption of the merger agreement and approval of the merger and the other transactions contemplated by the merger agreement and “FOR” the approval of any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

You may revoke your proxy at any time, but only before the proxy is voted at the special meeting, in any of three ways:

 

 

Any adjournment or postponement of the special meeting to solicit additional proxies will allow stockholders who have already sent in their proxies to revoke them at any time prior to their use.

Attendance at the special meeting will not, in itself, constitute revocation of a previously granted proxy. If you hold your shares of the Company’s common stock in street name, you may revoke or change a previously given proxy by following the instructions provided by the bank, brokerage firm, nominee or other party that is the registered owner of the shares of the Company’s common stock.

 

The Company will pay the costs of soliciting proxies for the special meeting. Our officers, directors and employees may solicit proxies by telephone and facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies. We will also request that individuals and entities holding shares of the Company’s common stock in their names, or in the names of their nominees, that are beneficially owned by others, send proxy materials to and obtain proxies from those beneficial owners, and, upon request, will reimburse those holders for their reasonable expenses in performing those services. We have retained MacKenzie Partners, Inc. to assist us in the solicitation of proxies, and will pay fees of approximately $9,500 plus reimbursement of out-of-pocket expenses. In addition, our arrangement with MacKenzie includes provisions obligating us to indemnify it for certain liabilities that could arise in connection with its solicitation of proxies on our behalf.

 

Although we do not expect to do so, if we have not received sufficient proxies to constitute a quorum or sufficient votes for adoption of the merger agreement and approval of the merger and the other transactions contemplated by the merger agreement at the special meeting of stockholders, the special meeting may be adjourned or postponed for the purpose of soliciting additional proxies. The proposal to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of a majority of the shares of the Company’s common stock present or represented by proxy at the special meeting and entitled to vote on the matter. Any signed proxies received by us that approve the proposal to adjourn the special meeting will be voted in favor of an adjournment in these circumstances. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow stockholders who have already sent in their proxies to revoke them at any time prior to their use.

 

We are a leading hotel real estate investor and hotel management company, incorporated in Delaware. We have two reportable operating segments: hotel ownership (through whole-ownership and joint ventures) and hotel management. We and our affiliates manage and/or have ownership interests in a total of 230 hospitality properties with more than 46,000 rooms in 37 states, the District of Columbia, Russia, India, Mexico, Belgium, Canada, Ireland and England. We have ownership interests in 56 of those properties, including six wholly owned assets. We also have contracts to manage 13 to be built hospitality properties with approximately 3,000 rooms which include our entry into new markets such as Costa Rica. Our principal executive offices are located at 4501 North Fairfax Drive, Suite 500, Arlington, VA 22203. The telephone number for our executive offices is (703) 387-3100.

 

The Operating Partnership is our subsidiary operating partnership and indirectly holds substantially all of our assets. We are the sole general partner of the Operating Partnership, and we own more than 99 percent of the Operating Partnership’s outstanding class A units. Certain independent third-parties hold the remaining class A units in the Operating Partnership. The partnership agreement gives the general partner full control over the business and affairs of the partnership. The principal executive offices of the Operating Partnership are located at 4501 North Fairfax Drive, Suite 500, Arlington, VA 22203. The telephone number for the Operating Partnership’s executive offices is (703) 387-3100.

 

HAC, formed as a Delaware limited liability company, is a joint venture owned, on a 50%-50% basis, by THI V Inca and Capital Gathering. To date, HAC has not conducted any activities other than those incident to its formation and the execution of the merger agreement. Upon completion of the mergers, the Company and the Operating Partnership will be wholly-owned subsidiaries of HAC. The principal executive offices of HAC are located at c/o Thayer Lodging Group, Inc., 1997 Annapolis Exchange Parkway, Suite 550, Annapolis, MD 21401 and its telephone number is (410) 268-0515.

 

THI V Inca is a subsidiary of Thayer. To date, THI V Inca has not conducted any activities other than those incident to its formation and the entry into the joint venture with Capital Gathering. Thayer Lodging, based in Annapolis, Maryland, is a privately held hotel investment company, managing funds with a current portfolio of 15 hotels aggregating more than 3,300 guest rooms. Formed in 1991, Thayer Lodging has sponsored five hotel investment funds for investors with hotels currently operating under the Marriott, Hilton, Hyatt and Wyndham brands.

 

Capital Gathering is a wholly-owned subsidiary of Jin Jiang. To date, Capital Gathering has not conducted any activities other than those incident to its formation and the entry into the joint venture with THI V Inca. Jin Jiang is one of the leading hotel operators and managers in the People’s Republic of China, which is principally engaged in star-rated hotel operation and management, budget hotel operation and franchising as well as restaurant operation. Jin Jiang operates or has under development in aggregate over 420 hotels including landmark hotels, luxury hotels, commercial hotels and Jin Jiang Inn budget hotels, providing over 75,000 rooms in aggregate.

 

Merger Sub is a Delaware corporation and a wholly-owned subsidiary of HAC. To date, Merger Sub has not conducted any activities other than those incident to its formation and the execution of the merger agreement. In the merger, Merger Sub will merge with and into the Company, with the Company being the surviving company. The principal executive offices of Merger Sub are located at c/o Thayer Lodging Group, Inc., 1997 Annapolis Exchange Parkway, Suite 550, Annapolis, MD 21401 and its telephone number is (410) 268-0515.

 

Merger Partnership is a Delaware limited partnership, whose general partner is Merger Sub. To date, Merger Partnership has not conducted any activities other than those incident to its formation and the execution of the merger agreement. In the partnership merger, Merger Partnership will be merged with and into the Operating Partnership, with the Operating Partnership as the surviving partnership. The principal executive offices of Merger Partnership are located at c/o Thayer Lodging Group, Inc., 1997 Annapolis Exchange Parkway, Suite 550, Annapolis, MD 21401 and its telephone number is (410) 268-0515.

 

Under the terms of the merger agreement, HAC will acquire us and our subsidiaries, including the Operating Partnership, through the merger of Merger Sub with and into us and the merger of Merger Partnership with and into the Operating Partnership. Under the merger agreement, Merger Sub will first merge with and into the Company, with the Company continuing as the surviving company. Immediately after the merger of the Company and Merger Sub, Merger Partnership will merge with and into the Operating Partnership, with the Operating Partnership continuing as the surviving partnership. We, as the general partner of the Operating Partnership, have already taken all actions necessary to approve the partnership merger and no further approvals of any of the partners of the Operating Partnership are required to complete the partnership merger. This proxy statement does not constitute a solicitation of consents in respect of the partnership merger.

 

As part of its ongoing analysis of our business and its strategic planning, our board of directors (which we sometimes will refer to as the “Board”) has periodically discussed and reviewed our strategic goals and alternatives, performance and prospects and considered various alternatives for enhancing stockholder value, including the possible sale of the Company. In 2007, several parties, including Thayer Lodging, contacted our management to express a potential interest in acquiring the Company.

 

On October 11, 2007, at a regularly-scheduled meeting, our Board considered the Company’s position, including its limited access to capital and the limited analyst coverage of our public company stock. The Board discussed our strategic alternatives and whether engaging in discussions with third parties regarding an acquisition of the Company was in the best interests of our stockholders. After significant discussion and deliberation, the Board directed our management to retain Lehman Brothers Inc., an investment bank later acquired by Barclays Capital Inc. in September 2008 (we will refer to Lehman Brothers Inc. and Barclays Capital Inc. collectively as “Barclays Capital”), and Paul, Weiss, Rifkind, Wharton & Garrison LLP (which we will refer to as “Paul, Weiss”), the Company’s outside counsel, to assist the Board with a strategic review process including the development of a current valuation of the Company and a process to further explore certain of the unsolicited offers, all in a private manner intended to reduce the chance of leaks or rumors that could disrupt our relationships with owners for whom we manage, or from whom we would like opportunities to manage, hotel properties.

 

During the week of October 15, 2007, Mr. Hewitt and Mr. Riggins communicated with six parties regarding their interest in a transaction with the Company. These included a real estate investing company, a business development company, a European real estate investment company, a private investment firm, a private equity firm and a real estate investment fund, which we will refer to as Party A, Party B, Party C, Party D, Party E and Party F, respectively. Each of those parties were notified that they would have an opportunity to review non-public information after signing an appropriate confidentiality agreement and that Barclays Capital would be contacting them to initiate the process.

 

During that week Mr. Hewitt also met with Mr. Bruce Wiles, the COO of Thayer Lodging. At that meeting, Mr. Wiles reiterated Thayer Lodging’s interest in a transaction and stated that Thayer Lodging had done significant valuation work based on the Company’s publicly available information and was interested in receiving additional due diligence to formulate an offer.

 

During the week of October 24, 2007, Mr. Hewitt and Mr. Riggins communicated with a private real estate investment company, which we will refer to as Party G, and separately with Mr. Wiles at Thayer Lodging, regarding their respective interest in a transaction with the Company. Party G and Thayer Lodging were notified that each would have an opportunity to review non-public information after signing an appropriate confidentiality agreement and that Barclays Capital would be contacting them to initiate the process to formulate a possible offer.

Mr. Hewitt also had a meeting that week with the chairman and chief executive officer of Party B at our office. The chairman and chief executive officer of Party B reiterated Party B’s interest in us and stated that he would need two weeks to coordinate with a partner and its adviser.

 

During that week, Mr. Hewitt had a lunch meeting with two representatives from Party A. The representatives reiterated Party A’s interest and Mr. Hewitt informed the representatives that we would be back in touch with Party A.

 

On November 7, 2007, Mr. Riggins had a telephone conversation with a representative from Party A and communicated that Barclays Capital would be contacting them to initiate a process and send a confidentiality agreement, the execution of which would allow them to view non-public information.

 

On November 27, 2007, Mr. Hewitt spoke with a representative of Party F, also one of our directors during 2000 through 2008, who stated that Party F would intend to start due diligence.

 

On November 29, 2007, Mr. Hewitt had a telephone conversation with the chairman and chief executive officer of Party B. Party B informed us that it had retained an investment bank as its financial advisor, which would assist with the transaction and provide debt financing and potentially equity financing. On November 30, 2007, Mr. Riggins had a telephone call with a representative of Party B’s advisor and referred Barclays Capital to this advisor. The advisor was granted access to our data site after executing a confidentiality agreement with us.

 

Following our engagement of Barclays Capital and communications with various parties as described above, seven parties (namely Party A, Party B, Party D, Party E, Party F, Party G and Thayer Lodging) signed confidentiality agreements and received confidential information from us. Party C refused to sign a confidentiality agreement. Six of the seven parties who signed confidentiality agreements performed due diligence and five submitted first round preliminary indications of interest with prices between $6.00 and $7.00 per share of our common stock (representing premiums of 54.6% to 80.4% over our closing share price on December 14, 2007). In addition, Party B did not appear to have performed any substantial due diligence review and submitted a preliminary indication of interest of $8.20 to $9.00 per share of our common stock.

 

Our Board met on December 14, 2007 to discuss the first round preliminary indications of interest from the various parties. At the meeting, representatives from Barclays Capital provided the Board with its valuation analysis on the Company and updated the Board on the status of discussions with the companies that had expressed interest earlier in the year to acquire us, which included, among other things, the background and financial viability of the companies expressing interest, the initial proposed acquisition price per share made by these companies and the potential for increase of those prices in a second “highest and best” round, as well as the other terms of the proposals (including the need for significantly more diligence and discussions with management) and other matters, such as the operating and strategic concerns of publicly announcing the strategic review process, the potential for Barclays Capital to locate additional logical buyers through a market canvassing and the stand-alone strategic alternatives for the Company. Based on the valuation analysis and the in-depth discussion regarding the companies expressing interest, as well as after further consultation with Barclays Capital and Paul, Weiss, the Board directed our management to continue the process in a second round. The Board also decided to allow the interested companies to have access to additional due diligence materials and to meet with our management to better understand the Company and set a date by which each interested company would need to provide a more specific and informed proposal to acquire the Company. The Board also directed Barclays Capital to perform a thorough search of all logical bidders so that additional parties that may have an interest in acquiring us could participate in the due diligence review of the Company. The Board also expressed a desire for Barclays Capital to be as selective and targeted as feasible in order to preserve the confidentiality of the process and avoid rumors and leaks that could adversely affect our relations with hotel owners.

 

On December 29, 2007, the president and chief executive officer of Party B made a telephone call to Mr. Hewitt to explain that Party B’s investment bank was incorrect in explaining that Party B was looking to syndicate equity. Instead, Party B indicated that it had a limited number of partners that Party B was looking to bring into a potential transaction with us.

On December 30, 2007, Mr. Hewitt had a telephone call with the founder and principal of a hospitality investment and advisory consulting firm, which we will refer to as Party H, who indicated that Party H was interested in a potential transaction with us by working with a private investment firm, which we will refer to as Party I. Barclays Capital subsequently contacted Party I, which was granted access to the data site after signing a confidentiality agreement.

 

All six parties which had submitted indications of interest in the first round of the process were invited to participate in the second round of the process. In addition, Barclays Capital invited four additional parties, including a hospitality management company, which we will refer to as Party J, a real estate investment trust, which we will refer to as Party K, a hotel management company, which we will refer to as Party L, and Party I into the process. In the second round of the process, our management and Barclays Capital provided information on an online data site and allowed interested parties to meet with our management to receive a presentation and ask diligence questions. In addition, they were each provided with a form of merger agreement prepared by Paul, Weiss and were asked to submit fully-funded and binding proposals to acquire us.

 

On February 8, 2008, three out of the ten parties invited to participate in the second round of the process, namely Party A, Party E and Thayer Lodging, submitted second round preliminary indications of interest. The proposed price was $4.60, $6.00 and $6.02 per share of our common stock from Party A, Thayer Lodging and Party E, respectively, which represented 11.9%, 46.0% and 46.5% premiums, respectively, to our closing share price on February 8, 2008. However, none of the parties which submitted second round indications of interest submitted fully-funded and binding proposals to acquire us, and we considered all of these preliminary indications to be highly conditional.

 

On February 20, 2008, representatives from Barclays Capital made a presentation to the Board, which included, among other topics, a discussion regarding the changes in the capital markets, a valuation analysis, the status of the process managed by Barclays Capital and the three proposals Barclays Capital had received regarding a potential acquisition of the Company. It was apparent that capital constraints were affecting all bids due to recent tightening in the capital markets. Serious reservations were expressed regarding the ability of the bidders to obtain the financing necessary to close on the transactions and some of the bidders had conditions requiring advance discussions with our hotel owners which we were concerned could be extremely damaging to our relations with those owners and to our business prospects. In general, the Board was concerned that despite the canvassing by Barclays Capital of potential interested acquirors none of the bids represented transactions that were probable of closing and the prices offered were not compelling enough to warrant the risk of the damage that could be done to us, including the risk of damaging relations with our hotel owners thereby risking the loss of existing management agreements, if we were to announce a transaction and fail to close. The Board determined, after consultation with Barclays Capital and Paul, Weiss, to discontinue the process at that time. While management was directed to focus on improving operating performance, our Board also encouraged management to continue to explore other opportunities for restoring stockholder value in the future, especially when the capital markets began to recover.

 

While we continued to execute on our strategic plan during 2008, our management had informal conversations from time to time with other industry participants regarding business combinations.

 

On April 17, 2008, Mr. Hewitt and Mr. Riggins had a lunch meeting with Mr. Wiles from Thayer Lodging, at which the parties discussed alternatives to an outright sale of the Company. Thayer Lodging presented a letter that outlined a preliminary interest in acquiring three hotels in our portfolio, including one of our largest hotels, for $157.5 million, coupled with an investment of $30 million in the Company by purchasing a convertible note issued by us to Thayer Lodging.

 

On May 12, 2008, Thayer Lodging sent a letter to our management expressing continued interest in us.

 

On May 30, 2008, Mr. Hewitt and Mr. Wiles had a meeting, at which Mr. Wiles expressed interest in continuing discussion with our management and made a request for updated projections of our financial conditions and corporate operations. On June 2, 2008, Mr. Hewitt and Mr. Riggins met with Mr. Wiles and discussed the potential for us to provide updated projections of our financial conditions and corporate

operations. However, no such updated projections or any other non-public information were given to Thayer Lodging at that time.

 

On June 18, 2008, Mr. Hewitt had a meeting with the founder and principal of Party H who made a presentation regarding alternatives to a transaction with us.

 

On June 27, 2008, Mr. Hewitt had a lunch meeting with Leland Pillsbury, the co-chairman and chief executive officer of Thayer Lodging, in Atlanta, GA.

 

On July 9, 2008, Party G requested to sign a new confidentiality agreement in order to receive updated non-public information about us. No new confidentiality agreement was executed.

 

On July 15, 2008, Thayer Lodging submitted to us a preliminary proposal to acquire us for $5.00 per share of our common stock, representing a 124.2% premium to the closing share price of our common stock on the same day. Thayer also requested a 45-day period of confirmatory due diligence on the Company and a 45-day exclusivity period for due diligence and negotiations. Also on July 15, 2008, Mr. Hewitt received an email from Party H summarizing certain highlights of a potential proposal for one of its private equity investor clients to recapitalize the Company and dispose of the hotel management business. Party H also indicated its interest in communicating with us on those highlights.

 

On July 21, 2008, our management had a telephone call with certain members of our Board to discuss the proposals from Thayer Lodging and Party H’s June 18 presentation. After due consideration, our management advised Thayer Lodging that management would not recommend their $5.00 per share proposal but encouraged them to improve their offer.

 

On August 26, 2008, Thayer Lodging re-submitted a preliminary proposal to acquire us for $5.75 per share of our common stock, which represented a premium of 133.7% to our closing share price on the same day.

 

On September 3, 2008, Mr. Hewitt had a telephone call with Mr. Wiles to discuss Thayer Lodging’s most recent letter regarding a potential transaction, and on September 15, 2008, Mr. Hewitt and Mr. Riggins met with Frederic Malek, the co-chairman of Thayer Lodging, Mr. Pillsbury and Mr. Wiles along with Thayer Lodging’s financial advisor, Merrill Lynch, Pierce, Fenner & Smith Incorporated, to discuss issues with their proposal, including their ability to obtain financing given the difficult credit market conditions at the time.

 

Beginning in September 2008, the lodging sector and the Company’s financial performance began to decline significantly in conjunction with the turmoil in the worldwide financial sector and the recession in the U.S.

 

On October 20, 2008, Mr. Hewitt met with Mr. Malek and Mr. Pillsbury. At the meeting, Thayer Lodging indicated to us that, due to the severe economic crisis and the deteriorating conditions of the capital markets, they would not be able to complete a transaction at $5.75 per share, but that they were still interested in pursuing a transaction with us. Our closing stock price on this date was $1.02.

 

On October 28, 2008, Thayer Lodging presented a revised letter with a proposal to, among other things, purchase three hotels in our portfolio, including one of our largest hotels, for $137.0 million, coupled with an investment of $40 million in the Company by Thayer Lodging through redeemable preferred stock (with a term of five years) with detachable warrants to be issued by us, which the Company decided not to pursue. On the same day, Mr. Hewitt had a lunch meeting with the president and chief executive officer of Party J, regarding a possible merger transaction with us.

 

On January 22, 2009, we announced significant reductions in our general and administrative expenses, including significant corporate personnel reductions.

 

On January 27, 2009, Mr. Hewitt and Mr. Riggins had a meeting with Mr. Malek, Mr. Pillsbury and Mr. Wiles from Thayer Lodging to discuss alternative transaction structures. Again on February 4, 2009, Mr. Riggins had a telephone conversation about potential alternative transaction structures. None of those discussions led to a concrete proposal from Thayer Lodging.

On February 16, 2009, we entered into a confidentiality agreement with Fairwood Capital, LLC, which we will refer to as “Fairwood,” in connection with its interest in a potential acquisition of some of the assets in our hotel ownership portfolio.

 

On March 12, 2009, our stock ceased trading on the NYSE and we received a delisting notice from the NYSE because we failed to maintain a minimum market capitalization of $15 million over a 30-day period under the NYSE listing requirements.

 

On March 15, 2009, Mr. Hewitt had a breakfast meeting with an individual investor, whom we will refer to as Party M, who expressed interest in a transaction with us and indicated that he would start buying shares of our common stock in the open market. No concrete proposal from this investor ever developed.

 

During April 2009, our management had a few initial conversations with various parties regarding various alternative strategies for the Company, none of which led to concrete discussions about a transaction with us.

 

On April 21, 2009, Mr. Hewitt had a telephone conversation with the chairman of a hospitality investment and management company, which we will refer to as Party N, in which Party N expressed its interest in a potential merger with us.

 

On April 22, 2009, James Dannhauser, one of our directors, had a meeting with Mr. Malek, Mr. Pillsbury and Mr. Wiles from Thayer Lodging in Greenwich, Connecticut. Thayer Lodging indicated that it now had a foreign investor who was very interested in a transaction to acquire us. On April 27, 2009, our management had a call to discuss the meeting with Thayer Lodging on April 22 and decided to continue our discussions with Thayer Lodging without disrupting the process of extending the maturity under our credit facility (as discussed below). On April 29, 2009, Mr. Hewitt and Mr. Riggins had a telephone call with Barclays Capital to discuss the inquiries that we had received from various parties. Barclays Capital was instructed to conduct further research on certain interested parties.

 

On May 8, 2009, Mr. Hewitt had a breakfast meeting with Mr. Wiles, who indicated that Thayer Lodging was seeking to close an agreement with a foreign investor by the end of the month and continued to have an interest in pursuing a transaction with us.

 

In May 2009, our management continued to meet with or have conversations with interested parties, none of which led to concrete discussions about a transaction with us.

 

In June 2009, Thayer Lodging indicated that they were now partnering with Jin Jiang in evaluating a potential transaction with us. On June 11, 2009, Mr. Wiles asked Mr. Hewitt to allow representatives from Jin Jiang to tour certain of our U.S. hotels, which our management provided. On June 25, 2009, our management had a meeting with representatives from Thayer Lodging and Jin Jiang, where a summary overview of certain basic publicly available information was provided to Thayer Lodging and Jin Jiang.

 

As our financial performance continued to decline, we faced the possibility of failing to satisfy certain debt covenants under our then existing credit facility. On July 10, 2009, we amended and restated the credit facility to extend its maturity date from March 2010 to March 2012 and converted the credit facility’s then outstanding balance of $161.2 million to a new term loan along with an $8.0 million revolving credit line. The amendment to our credit facility provided needed covenant flexibility, but significantly increased our cost of borrowing and required us to make specified permanent reductions in the principal amount borrowed or available for borrowing thereunder.

 

In July 2009, we were successful in appealing the NYSE delisting notice and our common stock resumed trading on the NYSE on July 29, 2009.

 

During July 2009, while we continued to execute our strategic plan, our management, after consultation with members of our Board, asked Barclays Capital to have confidential conversations, from time to time, with certain other industry participants to gauge their interest regarding a potential acquisition of the Company.

 

On July 6, 2009, we received an acquisition proposal from HAC, which offered to acquire us in an all-cash transaction for $2.00 per share of our common stock, representing a 189.9% premium to the closing share

price of our common stock on the same day. The July 6 proposal from HAC was conditioned on us reaching agreement with our senior lenders to waive their change of control rights, extend the maturity of the senior debt by 3 years and modify the interest rate in exchange for a permanent reduction of principal of $25 million to be funded by HAC. Following the receipt of the proposal, Mr. Hewitt met with Mr. Wiles to discuss the details in the proposal.

 

On July 7, 2009, Mr. Hewitt and Mr. Riggins had separate telephone calls with Barclays Capital and Mr. Dannhauser to discuss the July 6 proposal from HAC, including the feasibility of the modifications of our credit facility required by the proposal.

 

On July 9, 2009, Mr. Hewitt and Mr. Riggins had a telephone call with Mr. Wiles to discuss the July 6 proposal and expressed our management’s concern that the modifications of our credit facility required by the proposal were unlikely to be obtainable. Mr. Hewitt and Mr. Riggins requested that HAC provide us a revised proposal with acceptable modifications of our credit facility once we released our credit facility extension. Mr. Hewitt and Mr. Riggins also encouraged a short due diligence timeframe in any revised proposal.

 

On July 16, 2009, we received a revised acquisition proposal from HAC, which maintained the same offered price of $2.00 per share of our common stock, representing a 166.7% premium to the closing share price of our common stock on the same day, but contained a few revisions from the July 6 proposal: the July 16 proposal was conditioned on keeping our existing credit facility in place with a change of control waiver but without a requirement to change maturity or interest rates and $5.0 million of bank debt repayment funded by HAC. The proposal requested a 60-day period for HAC to complete its due diligence on the Company.

 

On July 27, 2009, Mr. Hewitt received an email communication from the chairman of Party N, as a follow-up to their April 21, 2009 telephone conversation, in which Party N proposed a transaction to acquire our hotel management segment in a cash and stock structure, which valued our management segment at approximately $40 to $48 million.

 

On July 28, 2009, Mr. Hewitt received a letter of interest from the founder and principal of Party O, an investment and development firm specializing in the hospitality and residential real estate sectors, which indicated Party O’s interest in the Company without specifying any terms.

 

On July 29, 2009, our Board met to discuss the offer made by HAC, the other indications of interest that had been received and our other strategic alternatives. Barclays Capital made a presentation to our Board to review the strategic alternatives. The Board’s discussion with Barclays Capital also included a discussion of the background and financial viability of the companies that had expressed interest and the terms and conditions of the expressions of interest. After consulting with Paul, Weiss and Barclays Capital, the Board directed Barclays Capital, working together with our management, to advise the companies that had made recent expressions of interest to provide additional concrete details and to inform HAC that it would need to substantially improve their offer. The Board also directed Barclays Capital to make inquiries of the participants from the 2008 process, to the extent any such participant could still reasonably be expected to submit a viable expression of interest given the recent market turmoil.

 

On July 30, 2009, Mr. Hewitt had a conversation with Mr. Wiles to discuss the July 16 acquisition proposal by HAC. Mr. Hewitt indicated that the terms in the last acquisition proposal needed significant improvement and we would need a revised offer letter with updated acceptable terms.

 

On August 5, 2009, we reduced our 2009 earnings guidance based on a projected decline of revenue per available room, which we refer to as RevPAR, of 19% for the fiscal year 2009, a decline consistent with that experienced by the hospitality industry generally.

 

On August 7, 2009, HAC submitted a revised acquisition proposal and increased their offer to $2.25 per share of our common stock, which represented a premium of 155.7% to our closing share price on the same day. The revised acquisition proposal also included substantive conditions, including that substantially all of our debt remain in place following a transaction, as well as a requirement for a “break-up” fee payable by us in certain circumstances to be specified a definitive transaction agreement. The revised acquisition proposal still also required a 60-day exclusive negotiation period between the parties and for an opportunity to conduct

further due diligence. HAC expressed to our management that it would only continue further discussions with us if we agreed to exclusive negotiations. Mr. Wiles also indicated a concern that Thayer Lodging may not be able to keep Jin Jiang interested in pursuing this opportunity absent a sign that the Board was willing to proceed very soon, as their newly formed fund was being viewed carefully in China and a successful announcement was needed in the near future. The revised HAC proposal was set to expire on August 19, 2009.

 

During July and August of 2009, as our Board had directed, Barclays Capital and our management had discussions with several parties that had previously expressed an interest, including with a representative for a Chinese strategic conglomerate that was partially owned by a Chinese state owned enterprise, which we will refer to as Party P, to gauge their potential interest in a potential acquisition of the Company. Some parties that were approached by Barclays Capital expressed doubt that our shares were worth any premium to their current public trading value and some indicated an interest in a recapitalization transaction where they could purchase positions senior to the holders of our common stock. Only the representative for Party P expressed interest in discussions regarding pursuing a premium offer for our stockholders and only with respect to a certain portion of our common stock. The interest of Party P, however, appeared extremely tentative with only a general range communicated by its representative.

 

On August 11, 2009, our Board met to consider the results of the process carried out by Barclays Capital and our management as well as the expression of interest from HAC and the representative for Party P. At that meeting our Board directed Barclays Capital, working with our management, to attempt to gauge the level of interest of Party P’s principals and impress upon them the need for a proposal with specific terms before the offer made by HAC was to expire.

 

Following the August 11 Board meeting, our management also invited Party P to meet with our management and Barclays Capital in person. The principals indicated that they would be willing to meet with us but not before August 19th when the HAC offer was to expire.

 

On August 18, 2009, Mr. Hewitt contacted Mr. Wiles of Thayer Lodging to request an extension of HAC’s proposal until August 21, 2009 when our Board was scheduled to meet again. That extension was granted by HAC.

 

We entered into a confidentiality agreement with Party P on August 20, 2009 and later that day Mr. Hewitt, Mr. Riggins and three other executives of the Company, Leslie Ng, Samuel E. Knighton and Christopher L. Bennett, and representatives of Barclays Capital met with the chairman and other representatives of Party P. At the meeting, Party P expressed a primary interest in acquiring certain of our assets. Following the meeting, Party P’s representative sent an email indicating that Party P had an interest in acquiring a minimum of 51% and a maximum of 75% fully diluted ownership of our shares of common stock at $1.50 per share.

 

On August 21, 2009, our Board met to consider our strategic alternatives including the expressions of interest from HAC as well as from Party P. In addition to the less attractive terms indicated by Party P, the Board expressed its concern that Party P was not as familiar with the Company as HAC and Party P would have substantially more due diligence to conduct. The Board also considered the risk of losing the HAC interest if it did not agree to the exclusive negotiations. Additionally, the Board discussed various recapitalization and refinancing options for the Company. After careful deliberation and analysis, the Board determined it was in the best interests of the Company and our stockholders to continue exploratory discussions with HAC and authorized the Company to agree to the exclusivity required by HAC in order to continue such discussions. The Board directed our management, working together with Barclays Capital and Paul, Weiss, to provide additional due diligence material to HAC upon its execution of a confidentiality agreement and directed Barclays Capital, working together with Paul, Weiss and our management, to engage with HAC and their advisors to ascertain further detail regarding the specific terms and conditions of its proposal and to return to the Board periodically for further direction and to report on the progress of the exploratory discussions and due diligence review process.

Later on August 21, 2009, Mr. Hewitt received a letter from the chairman and chief executive officer of Party Q, a real estate development and financial investment company as well as a beneficial holder of certain shares of our common stock. Party Q’s letter stated that it had not decided whether to make a bid for the Company and requested removing the standstill provisions from the form of confidentiality agreement that had been provided by the Company. The chairman and chief executive officer of Party Q also requested a meeting with our management. On August 24, 2009, Mr. Hewitt responded to Party Q insisting on the standstill provisions. Party Q did not execute the confidentiality agreement. We never received any follow-up proposal from Party Q.

 

Later on August 24, 2009, after consulting further with our Board members and their advisors regarding Party Q’s letter, we executed a confidentiality agreement with HAC that included an obligation for us to negotiate exclusively with HAC and not to solicit or encourage other competing proposals during the exclusivity period. Under the terms of the confidentiality agreement, the exclusivity period would end on October 9, 2009 and we were allowed to terminate the exclusivity agreement with HAC upon notice. Following the entry into the confidentiality agreement with us, HAC started its confirmatory due diligence on the Company, refreshing the work Thayer Lodging had begun in the 2008 process.

 

On September 24, 2009, Party P’s representative submitted a revised expression of interest, in which Party P proposed, subject to due diligence, to acquire a minimum 51% fully-diluted common equity position in the Company for a price of $2.00 per share of our common stock through a series of stock purchase and tender offer transactions. Because, among other things, we were in exclusive negotiations with HAC through October 9, 2009, we informed Party P that we were not in a position to respond at that time.

 

At the end of September 2009, HAC, through its legal counsel Hogan & Hartson LLP, submitted a draft merger agreement to the Company.

 

On October 5, 2009, HAC requested an extension of the exclusivity period for another 14 days and an extension of its due diligence period to run concurrently with the exclusivity period. On October 8, 2009, with the approval of the Board, the exclusivity period under our confidentiality agreement with HAC was extended until October 23, 2009.

 

On October 14, 2009, Party P, through its representative, contacted our management to request proceeding with its revised expression of interest in a possible acquisition of the Company or, alternatively, for us releasing Party P from the confidentiality agreement and its standstill obligations under the confidentiality agreement. Because, among other things, we were still in exclusive negotiations with HAC with the extended exclusivity period through October 23, 2009, we informed Party P again that we were not in a position to respond at that time and neither were we able to release Party P from its obligations under the confidentiality agreement.

 

On October 21, 2009, while we and HAC were still negotiating with our lenders to obtain the consents needed for a transaction and negotiating the terms of the merger agreement, HAC requested an extension of the exclusivity period until November 25, 2009 and an extension of its due diligence period to run concurrently with the exclusivity period. November 25th was the soonest that the parties expected the lender consent process to be completed.

 

On October 21, 2009, at a special meeting of the Board, the Board discussed the mark up of the then-current draft of the merger agreement and the status of certain debt amendments being sought by us in connection with the proposed transaction with HAC. Representatives of Paul, Weiss explained the Chinese legal process by which Chinese governmental bodies would need to grant various approvals to Jin Jiang before Jin Jiang could make any binding investment commitment to us. In light of these issues of Chinese law, the Paul, Weiss representatives led a discussion of the potential risks and benefits of using a reverse termination fee and of making approval by the Chinese governmental bodies a condition to closing. Management also led a discussion regarding the potential need for relief from our debt covenants beginning with the first quarter of 2010 as a result of our business performance, whether or not an agreement with HAC or another party could be achieved. The Board also considered the request by HAC for an extension to the exclusivity period in light of the lender approval process and the revised expression of interest from Party P. After consulting with

Barclays Capital and Paul, Weiss, our Board approved the extension of the exclusivity period with HAC until November 25, 2009.

 

On October 23, 2009, HAC sent a letter to us outlining major issues to be resolved in connection with the proposed transaction, including, among other things, the break-up fees, the consent from our lenders, governmental approvals and certain closing conditions. HAC indicated that it was unwilling to proceed with any payment of fees to our lenders to continue the debt amendment process unless the outlined issues in its letter were resolved.

 

On October 27, 2009, Party P, through its representative, made another revised expression of interest and indicated that it was interested in making an equity investment in us on terms that valued our stock at $2.25 per share, which expression of interest was affirmed by Party P’s representative in a separate communication on October 28, 2009. Because, among other things, we were still in exclusive negotiations with HAC through November 25, 2009, we responded that we were not in a position to respond to Party P’s communications at that time.

 

On November 2, 2009, the Board met to discuss Party P’s interest in a possible acquisition of us and Party P’s recently revised proposal. The Board discussed the economics of Party P’s proposal, Party P’s background, Party P’s approach in communicating with us, and the comparative lack of deal certainty surrounding Party P’s interest, given that it had not begun the due diligence process. The Board also discussed certain structural uncertainties inherent in any bid by Party P, including the potential need for Chinese governmental approvals of a second Chinese bidder and the uncertainty surrounding the governmental-approval process in China. In addition, the Board discussed the status of the debt amendment that was being sought in connection with the proposed transaction with HAC and the October 23, 2009 letter from HAC. The Board reviewed and discussed various issues outlined by HAC in its October 23, 2009 letter and, with the advice from Paul, Weiss, considered our positions on these issues, including the issues surrounding the timing of Jin Jiang’s obtaining the necessary Chinese governmental approvals for it to enter into any definitive agreement. After extensive discussion, our Board directed our management to continue to pursue the transaction with HAC and gave direction to our advisors in responding to the various open issues in the merger agreement, all in a manner designed to improve the certainty of execution.

 

On November 4, 2009, we further reduced our 2009 earnings guidance by approximately 10% based on a projected 20% decline in RevPAR for fiscal year 2009, which was consistent with the general downturn in the hospitality industry.

 

On November 4, 2009, the representative of Party P contacted Mr. Hewitt again regarding its October 27, 2009 proposal and indicated its continued interest in us. Because, among other things, we were still in exclusive negotiations with HAC through November 25, 2009, Mr. Hewitt responded that we were not in a position to respond at that time. On November 5, 2009, the representative of Party P contacted Mr. Hewitt again to confirm whether our Board had received and reviewed its October 27, 2009 proposal, which Mr. Hewitt confirmed on the same date.

 

On November 17, 2009, in recognition of the Company’s continuing need to sell assets of the Company in order to meet the paydown requirements under our amended and restated credit facility, signed on July 10, 2009, Interstate Baton Rouge, LLC, our wholly owned subsidiary, sold the Hilton Baton Rouge Hotel to an affiliate of Fairwood for $10.6 million. The net proceeds of this sale were used to pay down the term loan under our credit facility.

 

On November 23, 2009, HAC requested an extension of the exclusivity period until December 25, 2009 and an extension of its due diligence period to run concurrently with the exclusivity period.

 

On November 24, 2009, the Board met to discuss the status of the debt amendment being sought by us in connection with the proposed transaction with HAC and discussions with a mortgage lender regarding covenants under that mortgage that we were projected to not be able to satisfy within the first or second quarter of 2010. Assisted by Paul, Weiss, the Board also discussed remaining significant issues to be resolved in the draft merger agreement, including certain representations, warranties, covenants and the amounts and conditions of the termination fees and expenses payable by us and HAC under certain circumstances. After

due deliberation, the Board approved the extension of the exclusivity period with HAC until December 24, 2009, with such extension period to be granted to HAC in increments to be determined by our management.

 

On December 1, 2009, HAC funded the arranger fees due by us to our lead arranger thereby formally commencing the lender approval process.

 

On December 2, 2009, Party P, through its representative, confirmed its October 27, 2009 proposal and claimed that we were in material breach of the confidentiality agreement with Party P, which would excuse Party P’s performance thereunder including its standstill obligations. Party P indicated that it was taking the position that it would not be prevented from making a non-negotiated tender for all or a portion of the shares of our common stock, which, although it would still be at a premium to the market price of our common stock, would be less than $2.25 per share of our common stock that Party P had offered in its previous proposal. We did not respond to the communication or otherwise discourage any such offer.

 

From the end of September until December 18, 2009, as described above, outside legal advisors to the Company and HAC negotiated the draft merger agreement and all related documentation including the debt amendments on behalf of the parties. By December 1, 2009, HAC had agreed to proceed without a closing condition or reverse termination fee for Chinese governmental approvals as those were expected to be obtained in advance of signing the merger agreement.

 

On December 16, 2009, a regular meeting of our Board was held at our offices. In addition to a regular review of our performance budget and other operational and corporate matters, our Board considered the proposed merger agreement with HAC and the proposal from Party P. Representatives of Paul, Weiss and Barclays Capital, participated in the meeting. Our management also participated in the meeting as well. During the meeting, a representative of Paul, Weiss reviewed the directors’ legal obligations to Interstate and its stockholders in considering a business combination or a sale of the company. Mr. Hewitt, having distributed copies of the proposal letter from Party P, summarized the terms of the acquisition proposal received from Party P. He also summarized the proposal from HAC and the status of the negotiations with HAC. Representatives from Barclays Capital followed with a presentation on key transaction considerations and our efforts to seek potential partners with the resources to complete a strategic transaction with us and our responses to the various acquisition proposals. Barclays Capital’s presentation included an analysis of valuations of the Company based on various methodologies. Mr. Hewitt also briefly summarized for the Board Interstate’s stand-alone strategic plan, given industry trends and market conditions.

 

After the presentations, the Board discussed at length the merits of the two proposals as well as the merits and risks of the stand-alone strategic plan (including the limitations imposed by the provisions of the Company’s credit agreement and its difficulty in accessing capital to pursue growth prospects on a stand alone basis), in light of the lengthy process engaged in by the Company to seek potential strategic transaction partners. At the conclusion of this discussion, the Board opted to consider the details of the HAC proposal. Representatives from Paul, Weiss then summarized the terms of the then-current draft of the merger agreement and ancillary agreements, including conditions to closing, non-solicitation provisions, termination provisions, interim operating covenants, termination fees and expenses and the limited guarantees and equity commitments by Thayer and Jin Jiang entities. Mr. Hewitt concluded the presentations to the Board with management’s analysis of the proposed HAC transaction and with management’s recommendation that we proceed with the transaction. The Board then discussed at length the terms of the proposed transaction and its various positive and negative aspects and concluded that the Company should proceed towards finalizing the merger agreement with HAC.

 

On December 18, 2009, the Board convened a special meeting to further consider the HAC acquisition proposal. Once again, the entire Board participated in the meeting. Representatives of Paul, Weiss and Barclays Capital and various members of management also participated in the meeting. Mr. Hewitt provided an update on the status of the consents being sought to enter into an amendment to our credit facility and an amendment to our Columbia loan agreement in connection with the proposed merger with HAC. Paul, Weiss described the few changes that had been made to the agreement from the version reviewed with the Board in the previous days. Barclays Capital also updated its valuation materials to include the latest trading information. Mr. Riggins also reported on the status of the amendments to certain of our debt instruments and confirmed that the requisite consents of lenders had been obtained. Barclays Capital delivered its oral opinion

(subsequently confirmed in writing) that, as of such date, from a financial point of view, the consideration proposed to be paid to the stockholders of Interstate in the proposed merger was fair to our stockholders. Considerable discussion concerning the transaction then again ensued. After its deliberations, the Board, among other things, unanimously approved the merger, the merger agreement and the other transactions contemplated by the merger agreement, adopted certain Board resolutions and declared the merger advisable and in the best interest of the Company and its stockholders and resolved to recommend that our stockholders vote to approve the merger and the other transactions contemplated by the merger agreement. Separately, the Board, on behalf of the Company as the general partner of the Operating Partnership, approved the partnership merger. The Board also approved the formation of an advisory committee to expeditiously direct management with respect to any communication involving any takeover proposals and to advise and consult the Board with respect to our responses thereto. Certain of the factors considered by the Board are described in greater detail under the headings “The Company’s Reasons for the Mergers” and “Recommendation of the Board of Directors.”

 

Later that day, the Company, the Operating Partnership, HAC, Merger Sub and Merger Partnership executed the merger agreement. Before the market opened on December 18, 2009, we issued a press release announcing the execution of the merger agreement.

 

Subsequently, also on December 18, 2009, the representative of Party P contacted our management and indicated that Party P had reviewed the announcement that we and the Operating Partnership had entered into the merger agreement with HAC, Merger Sub and Merger Partnership and expressed its continued interest in our company. The representative also requested access to due diligence information for Party P. In a later separate communication on the same day, the representative of Party P asked our management to confirm that its interest qualified as an unsolicited bid under the no-shop provisions in the merger agreement, and that the “fiduciary-out” provisions would allow our management to provide access to Party P for due diligence.

 

On December 21, 2009, the representative of Party P contacted our management and stated that Party P would be interested in acquiring all shares of our common stock at a price of at least $2.50 per share. Party P also indicated that it would want the same lender consents and provide the same permanent principal reduction to our lenders under our existing credit facilities as was arranged in connection with the merger agreement with HAC and was willing to discuss an alternative structure that the Board could select to allow our stockholders to receive certain cash while retaining certain equity in the Company.

 

On December 22, 2009, an advisory committee of the Board evaluated the communications from Party P, with Paul, Weiss and Barclays Capital, and directed Barclays Capital to send a letter to Party P to clarify certain issues in its proposal, including whether Party P was prepared to make an actual offer and what would be the terms and conditions of such offer, as permitted by the merger agreement. On December 23, 2009, Barclays Capital sent such a letter to the representative of Party P.

 

On December 24, 2009, Party P sent a letter addressed to our Board proposing to acquire all of our outstanding common equity for a price of not less than $2.75 per share. The proposal indicated that Party P would want the same lender consents as were obtained in connection with the merger agreement with HAC. The proposal also described various alternative structures in which Party P could purchase control, but less than 100%, of our common stock at $2.75 per share. Party P also requested due diligence access.

 

Over that holiday weekend, our management scheduled meetings with the advisory committee and our Board for Monday, December 28, 2009 and consulted with our advisors regarding the proposal. Management began to make preparations for granting due diligence access and commencing discussions with Party P, in the event that our Board made the requisite determination under the merger agreement to allow such access and discussions. As required under the merger agreement, we also gave HAC prompt notice and copies of the communications with Party P. Over that weekend, HAC’s counsel advised Paul, Weiss that since Jin Jiang had already received the requisite Chinese governmental approvals to proceed with the proposed acquisition, no other party would be able to receive such Chinese governmental approvals (Jin Jiang had secured such approvals prior to HAC’s initial bid and again prior to the execution of the merger agreement and had previously provided copies of such approvals to Paul, Weiss). A senior official of China’s National

Development and Reform Commission subsequently confirmed to representatives of Paul, Weiss in Hong Kong and our local PRC counsel that Party P would not be receiving such approval.

 

On the morning of December 28, 2009, before our Board’s scheduled meeting to consider the proposal, Party P withdrew its proposal and stated that it would take no action to oppose or compete with the acquisition of the Company by HAC at the price of $2.25 per share. We have not received any further proposals from Party P.

 

In reaching its decision to approve the merger, the merger agreement and the other transactions contemplated by the merger agreement and to recommend adoption of the merger agreement and approval of the merger and other transactions contemplated by the merger agreement to our stockholders, our Board consulted with our management, as well as our outside legal and financial advisors, and considered a number of factors, including the following material factors which our Board viewed as supporting its decision to approve the merger, the merger agreement and the other transactions contemplated by the merger agreement and to recommend adoption of the merger agreement and approval of the merger and the other transactions contemplated by the merger agreement to our stockholders:

 

 

 

Our Board also considered the following potentially negative factors in its deliberations concerning the merger agreement, the merger and the other transactions contemplated by the merger agreement:

 

 

The foregoing discussion of the factors considered by the Board is not intended to be exhaustive, but rather includes the material factors considered by the Board. In reaching its decision to approve the mergers, the merger agreement and the other transactions contemplated by the merger agreement, the Board did not quantify or assign any relative weights to the factors considered and individual directors may have given different weights to different factors. In the event the mergers are not completed for any reason, we expect to

continue to pursue our strategic plan with the intention of delivering further improvement in our financial results and enhanced stockholder value.

 

After careful consideration, our Board, by unanimous vote, has approved the merger, the merger agreement and the other transactions contemplated by the merger agreement and has declared the merger, the merger agreement and the other transactions contemplated by the merger agreement advisable and in the best interests of the Company and our stockholders. Our Board recommends that you vote “FOR” the adoption of the merger agreement and approval of the merger and the other transactions contemplated by the merger agreement and “FOR” the approval of any adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

As set forth in the engagement letter, dated October 2, 2009, the Company formally retained Barclays Capital Inc., which we have referred to as “Barclays Capital,” to act as its financial advisor with respect to pursuing strategic alternatives for the Company, including with respect to the mergers. On December 18, 2009, Barclays Capital rendered its oral fairness opinion, subsequently confirmed in writing, to the Board that as of such date and, based upon and subject to the qualifications, limitations and assumptions stated in the opinion, the consideration to be received by the stockholders of Interstate is fair, from a financial point of view, to such stockholders.

 

The full text of Barclays Capital’s written opinion, dated as of December 18, 2009, is attached as Exhibit B to this Proxy Statement. Barclays Capital’s written opinion sets forth, among other things, the assumptions made, procedures followed, factors considered and limitations upon the review undertaken by Barclays Capital in rendering its opinion. You are encouraged to read the opinion carefully in its entirety. The following is a summary of Barclays Capital’s opinion and the methodology that Barclays Capital used to render its opinion. This summary is qualified in its entirety by reference to the full text of the opinion.

 

Barclays Capital’s opinion, the issuance of which was approved by Barclays Capital’s Fairness Opinion Committee, is addressed to the Board of Interstate, addresses only the fairness, from a financial point of view, of the consideration to be offered to the stockholders of Interstate and does not constitute a recommendation to any stockholder of Interstate as to how such stockholder should vote with respect to the proposed transaction or any other matter. The terms of the proposed transaction were determined through arm’s-length negotiations between Interstate and HAC and were unanimously approved by Interstate’s Board. Barclays Capital did not recommend any specific form of consideration to Interstate or that any specific form of consideration constituted the only appropriate consideration for the proposed transaction. Barclays Capital was not requested to address, and its opinion does not in any manner address, Interstate’s underlying business decision to proceed with or effect the proposed transaction. In addition, Barclays Capital expressed no opinion on, and it does not in any manner address, the fairness of the amount or the nature of any compensation to any officers, directors or employees of any parties to the proposed transaction, or any class of such persons, relative to the consideration to be offered to the stockholders of Interstate in the proposed transaction. No limitations were imposed by Interstate’s Board upon Barclays Capital with respect to the investigations made or procedures followed by it in rendering its opinion.

 

In arriving at its opinion, Barclays Capital, among other things:

 

 

 

In arriving at its opinion, Barclays Capital assumed and relied upon the accuracy and completeness of the financial and other information used by Barclays Capital without any independent verification of such information. Barclays Capital also relied upon the assurances of management of Interstate that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the financial projections of Interstate, upon advice of Interstate, Barclays Capital assumed that such projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Interstate as to Interstate’s future financial performance and that Interstate would perform substantially in accordance with such projections. In arriving at its opinion, Barclays Capital assumed no responsibility for and expressed no view as to any such projections or estimates or the assumptions on which they were based. In arriving at its opinion, Barclays Capital did not conduct a physical inspection of the properties and facilities of Interstate and did not make or obtain any evaluations or appraisals of the assets or liabilities of Interstate. Barclays Capital’s opinion was necessarily based upon market, economic and other conditions as they existed on, and could be evaluated as of, December 18, 2009. Barclays Capital assumed no responsibility for updating or revising its opinion based on events or circumstances that may have occurred after December 18, 2009. Furthermore, Barclays Capital has assumed that the capital commitments referred to in the Commitment Letters shall have been effected prior to, or contemporaneously with, the execution of the Agreement.

 

In connection with rendering its opinion, Barclays Capital performed certain financial, comparative and other analyses as summarized below. In arriving at its opinion, Barclays Capital did not ascribe a specific range of values to the shares of Interstate common stock but rather made its determination as to fairness, from a financial point of view, to Interstate’s stockholders of the consideration to be offered to such stockholders in the proposed transaction on the basis of various financial and comparative analyses. The preparation of a fairness opinion is a complex process and involves various determinations as to the most appropriate and

relevant methods of financial and comparative analyses and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to summary description.

 

In arriving at its opinion, Barclays Capital did not attribute any particular weight to any single analysis or factor considered by it but rather made qualitative judgments as to the significance and relevance of each analysis and factor relative to all other analyses and factors performed and considered by it and in the context of the circumstances of the particular transaction. Accordingly, Barclays Capital believes that its analyses must be considered as a whole, as considering any portion of such analyses and factors, without considering all analyses and factors as a whole, could create a misleading or incomplete view of the process underlying its opinion.

 

The following is a summary of the material financial analyses used by Barclays Capital in preparing its opinion to Interstate’s Board. Certain financial analyses summarized below include information presented in tabular format. In order to fully understand the financial analyses used by Barclays Capital, the tables must be read together with the text of each summary, as the tables alone do not constitute a complete description of the financial analyses. In performing its analyses, Barclays Capital made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Interstate or any other parties to the proposed transaction. None of Interstate, HAC, Barclays Capital or any other person assumes responsibility if future results are materially different from those discussed. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below. In addition, analyses relating to the value of the businesses do not purport to be appraisals or reflect the prices at which the businesses may actually be sold.

 

Historical Share Price Analysis

 

Barclays Capital reviewed publicly available historical trading prices and volumes for Interstate’s common shares for the 12-month period between December 17, 2008 and December 17, 2009. In addition, Barclays Capital compared the $2.25 per share of Interstate’s common shares to be received by holders of common shares pursuant to the merger agreement to the average closing trading prices of Interstate’s common shares during the 10-day, 30-day, 60-day, 90-day, and 180-day periods ending December 17, 2009, as well as the high and low closing share trading prices during the 52 week period ending December 17, 2009. The $2.25 per share offer price represents a premium to such historical trading prices of Interstate’s common share trading prices as follows:

 

 

Selected Comparable Company Analysis

 

In order to assess how the public market values shares of similar publicly traded companies, Barclays Capital reviewed and compared specific financial and operating data relating to Interstate with selected

companies that Barclays Capital, based on its experience in the lodging industry, deemed comparable to Interstate. The selected comparable companies were:

 

 

As part of its selected comparable company analysis, Barclays Capital calculated and analyzed each company’s enterprise value to estimated 2010 EBITDA. In its analysis, and upon advice of Interstate’s management, Barclays Capital utilized an Interstate EBITDA (which is generally earnings before interest, taxes, depreciation and amortization) projection which excluded any contribution from one wholly owned asset and five joint venture assets which were estimated to have negative equity value and excluded any contribution from non-recurring management contract termination fees and subtracted any debt associated with these assets and the estimated after tax present value of Interstate’s projected management contract termination fees from Interstate’s net debt. The enterprise value of each company was obtained by adding its short and long-term debt to the sum of the market value of its common equity (including common stock and partnership units), the value of any preferred stock (at liquidation value) and the book value of any minority interest, and subtracting its cash and cash equivalents. All of these calculations were performed, and based on publicly available financial data, publicly available research data and closing prices, as of December 17, 2009, the last trading date prior to the delivery of Barclays Capital’s opinion.

 

Barclays Capital selected the comparable companies listed above because their businesses and operating profiles are reasonably similar to that of Interstate. However, because of the inherent differences between the business, operations and prospects of Interstate and those of the selected comparable companies, Barclays Capital believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the selected comparable company analysis. Accordingly, Barclays Capital also made qualitative judgments concerning differences between the business, financial and operating characteristics and prospects of Interstate and the selected comparable companies that could affect the public trading values of each in order to provide a context in which to consider the results of the quantitative analysis. These qualitative judgments related primarily to the differing sizes, growth prospects, profitability levels and degree of operational risk between Interstate and the companies included in the selected company analysis. Based upon these judgments, Barclays Capital calculated a range consisting of the high, mean, median and low of the 2010 EBITDA multiples for the selected comparable companies and applied the range of multiples to Interstate management’s estimate of 2010 EBITDA. The following summarizes the result of these calculations:

 

 

Barclays Capital noted that on the basis of the selected comparable company analysis, the transaction consideration of $2.25 per share was within the range of implied values per share calculated using management’s projections.

Selected Precedent Transaction Analysis

 

Barclays Capital reviewed and compared the purchase prices and forward EBITDA multiples paid in selected other transactions that Barclays Capital, based on its experience with merger and acquisition transactions, deemed relevant. In its analysis, and upon advice of Interstate’s management, Barclays Capital utilized an Interstate EBITDA projection which excluded any contribution from one wholly owned asset and five joint venture assets which were estimated to have negative equity value and excluded any contribution from non-recurring management contract termination fees and subtracted any debt associated with these assets and the estimated after tax present value of Interstate’s projected management contract termination fees from Interstate’s net debt. Barclays Capital chose such transactions based on, among other things, the similarity of the applicable target companies in the transactions to Interstate with respect to the asset types, margins and other characteristics of their businesses. The table below highlights the transactions analyzed:

 

 

The reasons for and the circumstances surrounding each of the selected precedent transactions analyzed were diverse and there are inherent differences in the business, operations, financial conditions and prospects of Interstate and the companies included in the selected precedent transaction analysis. Accordingly, Barclays Capital believed that a purely quantitative selected precedent transaction analysis would not be particularly meaningful in the context of considering the proposed transaction. Barclays Capital therefore made qualitative judgments concerning differences between the characteristics of the selected precedent transactions and the proposed transaction which would affect the acquisition values of the selected target companies and Interstate. Based upon these judgments, Barclays Capital calculated a range consisting of the high, mean, median and low forward EBITDA multiples for the comparable transactions and applied the range of multiples to management’s estimate of 2010 EBITDA. Based upon transaction multiples, Barclays Capital calculated the following range of implied share prices:

 

 

Barclays Capital noted that on the basis of the selected precedent transaction analysis, the transaction consideration of $2.25 per share was above the range of implied values per share calculated using management projections.

Transaction Premium Analysis

 

In order to assess the premium offered to the stockholders of Interstate in the proposed transaction relative to the premiums offered to stockholders in other transactions, Barclays Capital reviewed the premiums paid in the REIT sector for transactions valued over $200 million over the period January 2006 to December 8, 2009. For each transaction, Barclays Capital calculated the premium per share paid by the acquirer by comparing the announced transaction value per share to the target company’s historical average share price 30 calendar days prior to announcement. The results of this transaction premium analysis are summarized below:

 

 

The reasons for and the circumstances surrounding each of the transactions analyzed in the transaction premium analysis were diverse and there are inherent differences in the business, operations, financial conditions and prospects of Interstate and the companies included in the transaction premium analysis. Accordingly, Barclays Capital believed that a purely quantitative transaction premium analysis would not be particularly meaningful in the context of considering the proposed transaction. Barclays Capital therefore made qualitative judgments concerning the differences between the characteristics of the selected transactions and the proposed transaction which would affect the acquisition values of the target companies and Interstate. Based upon these judgments, Barclays Capital selected the high, mean, median and low of the premiums listed above to 30 days prior to announcement to the closing price of Interstate common stock on December 17,

2009 to calculate a range of implied prices per share of Interstate. The following summarizes the result of these calculations:

 

 

Barclays Capital noted that on the basis of the transaction premium analysis for all REIT transactions greater then $200 million, since January 2006, the transaction consideration of $2.25 per share was within the range of implied values per share calculated using the closing price of Interstate common stock on December 17, 2009.

 

In addition, due to a lack of recent transaction activity within the REIT sector, Barclays Capital also assessed the premium offered to the stockholders of Interstate in the proposed transaction relative to the premiums offered to stockholders in all public cash transactions between $200 million and $2 billion from July 1, 2009 to December 8, 2009. For each transaction, Barclays Capital calculated the premium per share paid by the acquirer by comparing the announced transaction value per share to the target company’s historical share price 30 calendar days prior to announcement. The results of this transaction premium analysis are summarized below:

 

 

The reasons for and the circumstances surrounding each of the transactions analyzed in the transaction premium analysis were diverse and there are inherent differences in the business, operations, financial conditions and prospects of Interstate and the companies included in the transaction premium analysis. Accordingly, Barclays Capital believed that a purely quantitative transaction premium analysis would not be particularly meaningful in the context of considering the proposed transaction. Barclays Capital therefore made qualitative judgments concerning the differences between the characteristics of the selected transactions and the proposed transaction which would affect the acquisition values of the target companies and Interstate. Based upon these judgments, Barclays Capital selected the high, mean, median and low of the all cash transaction premiums above to 30 days prior to announcement to the closing price of Interstate common stock

on December 17, 2009 to calculate a range of implied prices per share of Interstate. The following summarizes the result of these calculations:

 

 

Barclays Capital noted that on the basis of the transaction premium analysis for all cash transactions between $200 million and $2 billion from July 1, 2009 to December 8, 2009, the transaction consideration of $2.25 per share was within the range of implied values per share calculated using the closing price of Interstate common stock on December 17, 2009.

 

Discounted Cash Flow Analysis

 

In order to estimate the present value of Interstate common stock, Barclays Capital performed a discounted cash flow analysis of Interstate. A discounted cash flow analysis is a traditional valuation methodology used to derive a valuation of an asset by calculating the “present value” of estimated future cash flows of the asset. “Present value” refers to the current value of future cash flows or amounts and is obtained by discounting those future cash flows or amounts by a discount rate that takes into account macroeconomic assumptions and estimates of risk, the opportunity cost of capital, expected returns and other appropriate factors.

 

To calculate the estimated enterprise value of Interstate using the discounted cash flow method, Barclays Capital added (i) Interstate’s projected after-tax unlevered free cash flows for the period October 1, 2009 through December 31, 2013, based on management projections to (ii) the “terminal value” of Interstate as of December 31, 2013, and discounted such amount to its present value using a range of selected discount rates. The after-tax unlevered free cash flows were calculated by taking the tax-affected earnings before interest, tax expense and amortization (excluding amortization of purchased intangibles) and subtracting capital expenditures and adjusting for changes in working capital. The residual value of Interstate at the end of the forecast period, or “terminal value,” was estimated by selecting a range of terminal value multiples based on forward EBITDA of 10.0x to 11.0x, which was derived by analyzing the historical long-term average multiple range of selected comparable companies and applying such range to the management projections. The range of after-tax discount rates of 12.5% to 13.5% was selected based on an analysis of the weighted average cost of capital of Interstate. In its analysis, and upon advice of Interstate’s management, Barclays Capital utilized Interstate EBITDA projections which excluded any contribution from one wholly owned asset starting in 2013 when it was assumed the asset would be relinquished to its lender and five joint venture assets which were estimated to have negative equity value and subtracted any debt associated with these assets from Interstate’s net debt. Barclays Capital then calculated a range of implied prices per share of Interstate by subtracting the estimated current net debt balance from the estimated enterprise value using the discounted cash flow method and dividing such amount by the fully diluted number of shares of Interstate common stock. The following summarizes the result of these calculations:

 

 

Barclays Capital noted that on the basis of the discounted cash flow analysis, the transaction consideration of $2.25 per share was within the range of implied values per share calculated using management projections.

Sum of the Parts Valuation Analysis

 

Barclays Capital conducted a sum of the parts valuation analysis to calculate the enterprise value of each primary segment of Interstate’s business (such as its wholly owned hotels, joint venture hotels and hotel management) on a stand-alone basis, using a multiples methodology and certain financial forecasts provided by Interstate’s management. For the portfolio of owned hotels, Barclays Capital assumed a multiple range of 13.5x — 14.5x management’s estimated 2010 EBITDA. For Interstate’s hotel management business, Barclays Capital assumed a range of 6.0x — 7.0x of management’s estimated 2010 EBITDA. For Interstate’s hotel assets held within unconsolidated joint ventures, Barclays Capital assumed a range of 12.5x — 13.5x management’s estimated 2010 EBITDA. For one recently formed joint venture where Interstate’s management projected no EBITDA in 2010, Barclays Capital assumed a value equal to the book value of Interstate’s original investment in this joint venture. Barclays Capital took the aggregate value of the combined operations, netted their value against Interstate’s estimated current net debt balance and divided such amount by the fully diluted number of shares of Interstate common stock to imply a per share value for Interstate’s shares. In its analysis, and upon advice of Interstate’s management, Barclays Capital utilized an Interstate EBITDA projection which excluded any contribution from one wholly owned asset and five joint venture assets which were estimated to have negative equity value and excluded any contribution from non-recurring management contract termination fees and subtracted any debt associated with these assets and the estimated after tax present value of Interstate’s projected management contract termination fees from Interstate’s net debt.

 

The sum of the parts valuation analysis indicated a range of equity values of Interstate of between $0.71 and $1.28 per share. Barclays Capital noted that on the basis of the sum of the parts valuation analysis, the transaction consideration of $2.25 per share was above the range of implied values per share calculated using management projections.

 

General

 

Barclays Capital is an internationally recognized investment banking firm and, as part of its investment banking activities, is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, investments for passive and control purposes, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. Interstate’s Board selected Barclays Capital because of its familiarity with Interstate and its qualifications, reputation and experience in the valuation of businesses and securities in connection with mergers and acquisitions generally, as well as substantial experience in transactions comparable to the proposed transaction.

 

Barclays Capital is acting as financial advisor to Interstate in connection with the proposed transaction. As compensation for its services in connection with the proposed transaction, Interstate agreed to pay Barclays Capital an opinion fee equal to $750,000, which was payable in cash upon the earlier of the delivery of the opinion or the time when Barclays Capital informs the Company that it is prepared to deliver the opinion. Interstate also agreed to pay Barclays Capital a fee equal to the greater of (i) 4.65% of the merger consideration and (ii) $2,750,000 payable upon the consummation of the transaction, against which the opinion fee would be credited. In the event that a transaction is not consummated and the Company is paid a termination fee, the Company has agreed to pay Barclays Capital a fee equal to the lesser of (i) 15% of such fee and (less the costs and expenses incurred in obtaining such fee) and (ii) the amount that would otherwise have been payable to Barclays Capital if a transaction had been consummated, against which the opinion fee would be credited. In addition, Interstate has agreed to reimburse Barclays Capital for expenses incurred in connection with the proposed transaction and to indemnify Barclays Capital for certain liabilities that may arise out of its engagement by Interstate and the rendering of Barclays Capital’s opinion. Barclays Capital has performed various investment banking and financial services for Interstate in the past, and expects to perform such services in the future, and has received, and expects to receive, customary fees for such services, however, in the past two years, Barclays Capital has not provided any services to the Interstate for which fees were received.

Barclays Capital and its affiliates engage in a wide range of businesses from investment and commercial banking, lending, asset management and other financial and non-financial services. In the ordinary course of its business, Barclays Capital and affiliates may actively trade and effective transactions in the equity, debt and/or other securities (and any derivatives thereof) and financial instruments (including loans and other obligations) of Interstate for its own account and for the accounts of its customers and, accordingly, may at any time hold long or short positions and investments in such securities and financial instruments.

 

On December 18, 2009, we and the Operating Partnership entered into an amendment (which we will refer to as the “credit agreement amendment”) to our first amended and restated senior secured credit agreement, dated as of July 10, 2009 (which we will refer to, as amended, as the “credit facility”), among the Operating Partnership, as borrower, Bank of America, N.A., as administrative agent, Banc of America Securities LLC, as sole lead arranger and sole book runner and various lenders thereunder (which we will refer to, collectively, as the “lenders”), pursuant to which the lenders have agreed (i) to consent to the mergers, (ii) to waive compliance by the Operating Partnership with a covenant in the credit agreement (which we will refer to as the “EBITDA covenant”) requiring a minimum level of EBITDA from our hotel management business for the fourth quarter of 2009, and (iii) effective upon the mergers, (a) to waive compliance with the EBITDA covenant for calendar year 2010 and reduce such covenant thereafter, (b) to reduce the debt service coverage ratio that we are required to maintain under the credit agreement and (c) to modify certain other non-financial covenants in the credit facility.

 

In consideration of the lenders entering into the credit agreement amendment, the Operating Partnership has agreed to make a principal payment of $20 million upon closing of the mergers (which we will refer to as the “principal reduction”) to be applied against the term loan under the credit facility, and HAC has agreed to contribute at least $12 million to the Operating Partnership within one year of the closing of the mergers to be used for new investment, capital expenditures and working capital. Under the credit agreement amendment, we will pay a fee to consenting lenders equal to .25% of the loan balance as of the date of the credit agreement amendment (which we will refer to as the “MBE amendment fee”) and a total fee to consenting lenders of up to 1% of the loan balance as of the closing of the mergers (crediting the MBE amendment fee against the total fee). Under the merger agreement, HAC has agreed to fund the foregoing payments due at closing for and on behalf of the Operating Partnership.

 

In addition, on December 18, 2009, Interstate Columbia SPE, LLC, our wholly-owned subsidiary (which we will refer to as the “Columbia subsidiary”), entered into an amendment (the “Columbia loan amendment”) to the loan agreement, dated as of May 1, 2008 (which we will refer to as the “Columbia loan agreement”), between the Columbia subsidiary and Calyon New York Branch and various other lenders (which we will refer to, collectively, as the “Columbia lenders”), the indebtedness under which is secured by our Columbia Sheraton Hotel. Pursuant to the Columbia loan amendment, the Columbia lenders have agreed (i) to consent to the mergers, (ii) to waive, for the fourth quarter of 2009, the Columbia subsidiary’s compliance with a covenant in the Columbia loan agreement (which we will refer to as the “DSCR covenant”) requiring a minimum level of debt service coverage from the operations of the Columbia subsidiary’s property and (c) effective upon the closing of the mergers, to waive the DSCR covenant for 2010 and modify it thereafter.

 

In consideration of the Columbia lenders entering into the Columbia loan amendment, the Columbia subsidiary has agreed to (i) make a principal prepayment of $5 million upon closing of the mergers, to be applied to permanently reduce the principal amount under the Columbia loan agreement and (ii) increase the interest rate payable thereunder by 150 basis points. The Columbia amendment requires the Columbia subsidiary to pay to the Columbia lenders a fee of $50,000 upon signing of the Columbia amendment and an additional fee of $50,000 upon the closing of the mergers. Under the merger agreement, HAC has agreed to fund the foregoing payments due at closing for and on behalf of the Columbia subsidiary.

 

On December 18, 2009, we entered into the first amendment (which we will refer to as the “first amendment”) to the tax benefit preservation plan with Computershare Trust Company, N.A., as rights agent, dated as of September 24, 2009 (which we will refer to as the “plan”). The first amendment was entered into in order to ensure that the execution of the merger agreement and the performance and consummation of the transactions contemplated by the merger agreement do not trigger the distribution and/or exercise of the rights or any adverse event under the plan. The first amendment provides, among other things, (i) that none of the purchaser parties or any of their respective affiliates or associates shall be deemed an acquiring person (as defined in the plan) as a result of, among other things, the approval, execution or delivery of the merger agreement, any amendments thereto, the merger or the other transactions contemplated by the merger agreement, (ii) that no stock acquisition date (as defined in the plan) or distribution date (as defined in the plan) will occur or be deemed to occur as a result of, among other things, the approval, execution or delivery of the merger agreement, any amendments thereto, the merger or the other transactions contemplated by the merger agreement and (iii) for an exception from certain other requirements under the plan for the execution and delivery of the merger agreement, any amendments thereto, the merger or the other transactions contemplated by the merger agreement.

 

In connection with the merger agreement, Capital Gathering has contributed $38 million to HAC and has agreed to contribute an additional $12.5 million to HAC prior to the closing of the mergers under an equity commitment letter between Capital Gathering and HAC, dated as of December 18, 2009, which expressly provides for the Company to be a third party beneficiary thereof. In addition, THI V Inca is committed to contribute $50.5 million to HAC prior to the closing of the mergers under an equity commitment letter between THI V Inca and HAC, dated as of December 18, 2009, which expressly provides for the Company to be a third party beneficiary thereof. There are no conditions precedent or other contingencies related to the funding of the full amount under the equity commitment letters other than the terms and conditions thereof. The equity commitment letters will terminate automatically and immediately upon the termination of the merger agreement.

 

The merger agreement does not contain a financing condition or a “market MAC” condition. Under the terms of the merger agreement, HAC has agreed that its obligation to consummate the transactions contemplated by the merger agreement is not conditioned upon the availability or consummation of any financing requirements of HAC. HAC has also agreed to cause Merger Sub, Merger Partnership and their respective affiliates to at all times comply with all of the terms and conditions set forth in the equity commitment letters and will take all commercially reasonable actions necessary under the merger agreement to cause the proceeds of the financing to be available on the closing date.

 

In connection with the merger agreement, each of Thayer and Jin Jiang has executed a limited guarantee dated as of December 18, 2009, in favor of us and the Operating Partnership, and has agreed absolutely, unconditionally and irrevocably to guarantee the due and punctual performance and discharge of all of the payment obligations of HAC Merger Sub and Merger Partnership under the merger agreement, up to a maximum amount of $50.5 million and $12.5 million, respectively.

 

In the event of any breach of the merger agreement by any of HAC, Merger Sub or Merger Partnership, HAC agrees that the damages of the Company, if any, will not be limited to reimbursement of expenses or out-of-pocket costs, and may include to the extent proven, the benefit of the bargain lost by the holders of partnership interests in the Operating Partnership and the Company’s stockholders (taking into consideration relevant matters, including other combination opportunities and the time value of money). The parties have also agreed that our aggregate damages will not be deemed to exceed $75,265,164 if the merger agreement is terminated by us in accordance with the terms of the merger agreement due to any breach of HAC, Merger Sub or Merger Partnership of any of its representations, warranties, covenants or agreements in the merger

agreement (and such breach has not been cured within 20 business days after receipt of written notice of such breach) such that the conditions pertaining to its representations and warranties and its obligations under the merger agreement would not be satisfied by June 30, 2010.

 

Under the merger agreement, we will have the right (without prejudice to our rights under the limited guarantees) to, at our election, (i) cause HAC, Merger Sub and Merger Partnership to cause the mergers and the transactions contemplated by the merger agreement to be consummated on the terms and subject to the conditions set forth in the merger agreement and (ii) cause HAC, Merger Sub and Merger Partnership to fully enforce the terms of the equity commitment letters against the parties thereto in accordance with the terms thereof.

 

Company Stock Options and Restricted Stock Awards

 

As of the record date, there were approximately 205,500 shares of the Company’s common stock subject to stock options granted to our executive officers and directors, none of which had an exercise price less than $2.25 per share, and approximately 1,348,941 shares of the Company’s common stock subject to restricted stock awards granted to our executive officers and directors under our stock award plans.

 

Under the terms of the merger agreement, each stock option to purchase shares of the Company’s common stock that remains outstanding immediately prior to the Company merger effective time, whether vested or unvested, will be cancelled and, because none of the outstanding stock options has an exercise price of less than $2.25 per share, no payments will be made in respect thereof.

 

Under the terms of the merger agreement, each restricted stock award outstanding immediately prior to the Company merger effective time, whether vested or unvested, will be cancelled and converted into the right to receive immediately prior to the Company merger effective time a cash payment, less applicable withholding taxes, equal to the product of:

 

 

The following table summarizes the shares held by each of our executive officers and directors in respect of vested and unvested restricted stock awards previously granted under one of our stock award plans, in each case, as of December 31, 2009, and the resulting consideration, prior to any reduction for applicable tax withholdings, that each of them will receive under the merger agreement in connection with the cancellation of these restricted stock awards. Shares previously granted to an executive pursuant to a restricted stock award that have vested and are now not subject to any award restrictions are included in this table.

 

 

Employment Agreements

 

The merger will represent a “change of control” under the Company’s equity award plans as well as the employment agreements between the Company and certain of its executive officers. Various change of control payments could be triggered as a result of the mergers.

 

If Mr. Hewitt terminates his employment for good reason (other than by reason of the merger itself) or his employment is terminated without cause by the Company within two years following the merger, he would receive a lump sum equal to two (2) times the product of the sum of his current annual base salary and an amount equivalent to that of Mr. Hewitt’s bonus for the preceding year. In addition, and if Mr. Hewitt terminates his employment solely by reason of the merger within 12 months following the merger, we would reimburse Mr. Hewitt for the cost of COBRA coverage, equivalent to coverage during his term of employment, until the earlier of 18 months after the date of termination, or until Mr. Hewitt receives benefits from another employer.

 

For Mr. Hewitt, “good reason” means the occurrence of any of the following without the prior written consent of the executive:

 

 

 

Should Mr. Hewitt be assessed an excise tax under section 4999 of the Internal Revenue Code, in connection with accelerated termination payments for a change in control, the Company will gross-up the termination payment equal to the amount of the assessed excise tax (subject to certain limitations).

 

If any of Messrs. Riggins, Ng, Knighton or Bennett is terminated without cause within 18 months following the merger or the executive terminates his employment for good reason within 18 months following the merger, he would receive a lump sum equal to two (2) times the product of the sum of his current annual base salary and an amount equivalent to that of the executive’s bonus for the preceding year. In addition, we would reimburse the executive for the cost of COBRA coverage, equivalent to coverage during his term of employment, until the earlier of 18 months after the date of termination, or until the executive receives benefits from another employer.

 

“Good reason” for Messrs. Riggins, Ng, Knighton, and Bennett means the occurrence of any of the following without the prior written consent of the executive:

 

 

If payments made pursuant to a change in control are considered “parachute payments” under Section 280G of the Internal Revenue Code of 1986, then the sum of such parachute payments plus any other payments made by the Company to the executive (other than Mr. Hewitt) which are considered parachute payments shall be limited to the greatest amount which may be paid to the executive under Section 280G without causing any loss of deduction to the Company under such section; but only if, by reason of such reduction, the net after-tax benefit to the executive shall exceed the net after-tax benefit if such reduction were not made.

If our executives are terminated following the change in control on [ • ], we would make the following payments and provide the listed benefits:

 

 

The merger agreement provides that HAC, the surviving company and the surviving partnership will cause all existing rights to indemnification, advancement of expenses and exculpation in favor of our or our subsidiaries’ present or former directors or officers as provided in our or our subsidiaries’ charters, bylaws and other similar organizational documents or applicable contracts, as in effect on December 18, 2009, to survive the merger and to continue in full force and effect for a period of at least six years after the Company merger effective time.

 

HAC has agreed to indemnify, to the fullest extent permitted by applicable laws, our and our subsidiaries’ present and former directors and officers with respect to all acts and omissions arising out of or relating to their services as our or our subsidiaries’ directors or officers occurring prior to the Company merger effective time and, subject to certain conditions, shall pay related reasonable legal fees, costs and expenses incurred by them.

 

The merger agreement requires that HAC, the surviving company and the surviving partnership either:

 

 

The obligations described above regarding directors’ and officers’ indemnification and insurance must be assumed by any successor entity to HAC, the surviving company or the surviving partnership as a result of any consolidation, merger or transfer of all or substantially all of its properties and assets.

 

In the course of discussions between us and HAC, we provided HAC with selected, non-public financial projections prepared by our management for the five fiscal years ending December 31, 2009 through 2013. These projections were prepared without regard to the proposed mergers or the debt amendments or any fees or expenses relating thereto. We do not as a matter of course make public any projections as to future financial performance or earnings with respect to periods after our then-current fiscal year, and the projections set forth below are included in this proxy statement only because this information was provided to our Board, Barclays Capital and HAC in connection with their evaluations of a potential transaction.

The projections set forth below were not prepared with a view to public disclosure or compliance with published guidelines of the SEC, any state securities commission or the American Institute of Certified Public Accountants regarding preparation and presentation of prospective financial information. Our internal financial forecasts, upon which the projections were based, are subjective in many respects. The projections reflect numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, all of which are difficult to predict and beyond our control. The projections also reflect numerous estimates and assumptions related to our business (including with respect to the growth and viability of certain segments of our business) that are inherently subject to significant economic, political and competitive uncertainties, all of which are difficult to predict and many of which are beyond our control. There can be no assurance that the assumptions made in preparing the projections set forth below will prove accurate, and actual results may be materially greater or less than those contained in the projections set forth below. In addition, the projections have not been revised to reflect events that have occurred subsequent to their preparation, and thus, reliance should not be placed on these projections.

 

The inclusion of the projections in this proxy statement should not be regarded as an indication that the Company, the Operating Partnership, HAC, Barclays Capital or their respective officers, directors and other affiliates consider such information to be an accurate prediction of future events or necessarily achievable. None of the Company, the Operating Partnership, Barclays Capital, HAC or their respective officers, directors and other affiliates has made any representations regarding such projected financial information. In light of the uncertainties inherent in forward-looking information of any kind, we caution you against reliance on such information. Neither the Company nor the Operating Partnership nor their respective officers, directors or other affiliates intend to update or revise the projections to reflect the circumstances existing after the date when prepared or to reflect circumstances existing after the date when prepared or to reflect the occurrence of future events, except to the extent required by law. These projections constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. See “ Cautionary Statement Regarding Forward-Looking Statements ” beginning on page [ • ]. Please also see “Item 1A. — Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

Interstate Hotels & Resorts, Inc. Financial Projections Summary

 

 

Non-GAAP Financial Measures

 

Included in the above forecasts and reconciliations below are certain financial measures that are different from measures calculated and presented in accordance with generally accepted accounting principles in the United States of America (or GAAP).

 

Adjusted Recurring EBITDA

 

Adjusted Recurring EBITDA is a financial measure that is not prepared in accordance with GAAP. However, we have provided a reconciliation of Adjusted Recurring EBITDA to the most directly comparable GAAP financial measure, which is net income (loss), in the table below. We define Adjusted Recurring EBITDA as net income (loss), adjusted by excluding interest, taxes, depreciation and amortization, which we refer to as EBITDA, further adjusted by excluding restructuring and severance expenses, asset impairments and write-offs, gains and losses on asset dispositions for both consolidated and unconsolidated investments, and other non-cash charges, which we refer to as Adjusted EBITDA, further adjusted for certain items,

including contract termination fees, operations related to assets sold, a consolidated hotel which management estimates has negative equity value and unconsolidated entities where management estimates there is negative equity value. Adjusted Recurring EBITDA is not a substitute for net income (loss) as determined in accordance with GAAP. A significant portion of our non-current assets consists of intangible assets, related to some of our management contracts, and long lived assets, which includes the cost of our owned hotels. Intangible assets, excluding goodwill, are amortized over their expected term. Property and equipment is depreciated over its useful life. We also exclude depreciation and amortization and interest expense from our unconsolidated entities. Therefore, we have excluded such items from our calculation of EBITDA. In addition, we have excluded various restructuring costs, asset impairment costs and other similar items from our calculation of Adjusted EBITDA because impairment costs are non-cash charges, and the exclusion of the other items we consider non-recurring, such as restructuring costs, start-up costs and other expenses enhances comparability between periods. We exclude contract termination fees, EBITDA from assets sold and EBITDA from assets with estimated negative equity value to arrive at Adjusted Recurring EBITDA in order to provide a view of our ongoing future performance that is reflective of the EBITDA that we project would be generated from assets we expect to own on an ongoing basis. We believe Adjusted Recurring EBITDA may provide useful information to investors and other interested parties regarding our ongoing operating performance and our capacity to incur and service debt, fund capital expenditures and expand our business based on the assets we expect to own on an ongoing basis.

 

 

Adjusted Net Income (Loss) and Adjusted Earnings Per Share

 

Adjusted Net Income (Loss) and Adjusted Earnings Per Share are financial measures that are not prepared in accordance with GAAP. However, we have provided a reconciliation of these items to the most directly

comparable GAAP financial measure, which is net income (loss), in the table below. We define Adjusted Net Income (Loss) and Adjusted Earnings Per Share as net income (loss) and diluted earnings per share, without the effects of the expenses, transactions and special charges described earlier, but these are not a substitute for net income (loss) and earnings per share as determined in accordance with GAAP. We believe that Adjusted Net Income (Loss) and Adjusted Earnings Per Share may be useful performance measures because including these expenses, transactions and special charges may either mask or exaggerate trends in our ongoing operating performance. Furthermore, performance measures that include these charges may not be indicative of the continuing performance of our underlying business. Therefore, we present Adjusted Net Income (Loss) and Adjusted Earnings Per Share because they may help investors and other interested parties to compare our performance before the effect of various items that do not directly affect our ongoing operating performance.

 

 

Free Cash Flow Before Debt Issuance/Repayment and Asset Sales

 

Free Cash Flow Before Debt Issuance/Repayment and Asset Sales (“Free Cash Flow”) is a financial measure that is not prepared in accordance with GAAP. However, we have provided a reconciliation of Free Cash Flow to the most directly comparable GAAP financial measure, which is net income (loss), in the table below. We define Free Cash Flow as cash flow from operating activities (which is generally equivalent to Adjusted EBITDA excluding unconsolidated entities), adjusted for cash paid for interest and taxes, capital expenditures, investments, refinancing fees and other non-recurring items or special charges, but Free Cash Flow is not a substitute for net income (loss) as determined in accordance with GAAP. We believe Free Cash Flow may provide useful information to investors and other interested parties regarding our financial condition because Free Cash Flow may be useful for evaluating our ability to generate funds for purposes such as repaying long-term debt or expanding our business through debt or equity investments.

 

 

If the merger is completed, the Company’s common stock will no longer be traded on the New York Stock Exchange, and the Company’s common stock will be deregistered under the Exchange Act. As a result, we will cease to be subject to the reporting obligations under the Exchange Act.

 

Holders of Shares of the Company’s Common Stock

 

At the Company merger effective time, each share of the Company’s common stock issued and outstanding immediately prior to the Company merger effective time will be converted into the right to receive $2.25 in cash, without interest, less any required withholding taxes, other than the Company’s common stock:

 

 

In addition, at the Company merger effective time, each share of Merger Sub’s common stock issued and outstanding immediately prior to the Company merger effective time will be converted into one fully paid and non-assessable share of common stock, par value $0.01 per share, of the surviving company.

 

Holders of the Units in the Operating Partnership

 

At the partnership merger effective time, each class A unit of the Operating Partnership issued and outstanding immediately prior to the partnership merger effective time will automatically be converted into the right to receive an amount in cash, without interest, equal to $2.25 per each share of the Company’s common

stock on an as-converted basis, less any required withholding taxes, other than class A units in the Operating Partnership:

 

 

In addition, at the partnership merger effective time, the general partner interests of the Operating Partnership shall remain outstanding as general partner interests in the surviving partnership and each partnership interest in Merger Partnership issued and outstanding and owned, directly or indirectly, by us and HAC immediately prior to the partnership merger effective time will be converted into a limited partnership interest in the surviving partnership, such that, giving effect to the other provisions of the merger agreement, upon the partnership merger effective time, HAC will hold a 0.99% limited partnership interest in the surviving partnership and the Company will hold a 1% general partnership interest and a 98.01% limited partnership interest in the surviving partnership.

 

Holders of the Company’s Stock Options and Restricted Stock Awards

 

Each stock option to purchase shares of the Company’s common stock outstanding immediately prior to the Company merger effective time, whether or not exercisable or vested, will be cancelled and no further payment will be made in respect thereof.

 

Each restricted stock award outstanding immediately prior to the Company merger effective time, whether or not vested, will be converted into the right to receive an amount in cash, without interest and less applicable withholding taxes, equal to the product of:

 

 

The amount of cash payable with respect to restricted stock awards will be reduced by the amount of any applicable taxes required to be withheld. All stock options and restricted stock awards will be cancelled and all of the Company’s stock award plans will terminate at the Company merger effective time.

 

Anti-Dilution Adjustment to the Merger Consideration

 

The merger consideration will be equitably adjusted if we change the number of shares of common stock or class A units in the Operating Partnership or other securities convertible or exchangeable into or exercisable for shares of common stock or class A units in the Operating Partnership issued and outstanding prior to the Company merger effective time or partnership merger effective time, as applicable, as a result of a reclassification, stock split (including a reverse stock split), stock dividend, recapitalization, merger, issuer tender or exchange offer, or other similar transaction.

 

No Further Ownership Rights

 

After the Company merger effective time and the partnership merger effective time, as the case may be, each of our outstanding stock certificates and each class A unit in the Operating Partnership not held directly or indirectly by us or HAC will represent only the right to receive the merger consideration until surrendered or exchanged in accordance with the merger agreement. The merger consideration paid upon surrender of each stock certificate or class A unit in the Operating Partnership will be paid in full satisfaction of all rights pertaining to the shares of the Company’s common stock represented by that certificate or to that class A unit in the Operating Partnership, as the case may be.

 

On December 18, 2009, Coliseum Capital Management, LLC (together with certain of its affiliates), which collectively beneficially hold approximately [11]% of the Company’s common stock as of the record date, and Thomas F. Hewitt, Leslie Ng, Bruce A. Riggins, Christopher L. Bennett and Samuel E. Knighton, each an officer of the Company, who collectively beneficially hold approximately [5]% of the outstanding shares of our common stock as of the record date (who we refer to collectively, with Coliseum Capital Management, LLC and certain of its affiliates, as the “voting stockholders”), have each entered into a voting agreement with HAC. The terms of the voting agreements are substantially identical.

 

Pursuant to the voting agreements, the voting stockholders have agreed, among other things, to vote their shares of our common stock:

 

 

In addition, each of the voting stockholders has agreed not to transfer or encumber any of his, her or its shares of our common stock that are subject to each of the voting agreements. Each of the voting stockholders has also agreed not to take any action that would in any way restrict, limit or interfere with the performance of such voting stockholder’s obligation under the voting agreements.

 

Each voting agreement will terminate on the earlier of (i) the date the merger agreement is terminated in accordance with its terms, (ii) the delivery of written notice of termination, by the voting stockholder who is a party to such voting agreement, following any amendment to the merger agreement effected without the prior written consent of such voting stockholder which would reduce or change the form of the merger consideration and (iii) the date of the closing of the merger.

 

Under Section 262 of the DGCL, any holder of the Company’s common stock who does not wish to accept the merger consideration may elect to exercise appraisal rights. Even if the merger is approved and adopted by the holders of the requisite number of shares of the Company’s common stock, you are entitled to exercise appraisal rights and obtain, in lieu of the merger consideration, payment of the “fair value” for your shares of the Company’s common stock as determined by the Delaware Court of Chancery, which we refer to as the “Delaware Court”, exclusive of any element of value arising from the expectation or accomplishment of the merger, together with interest, if any, as determined by the Delaware Court. The holders of the Company’s common stock who elect to exercise appraisal rights must comply with the provisions of Section 262 of the DGCL in order to perfect their rights. Failure to precisely follow any of the statutory procedures set forth in Section 262 of the DGCL may result in a termination or waiver of appraisal rights. The Company will require strict compliance with the statutory procedures.

 

The following is intended as a brief summary of the material provisions of the Delaware statutory procedures required to be followed by a holder of the Company’s common stock in order to demand and perfect appraisal rights. This summary, however, is not a complete statement of all applicable requirements and is qualified in its entirety by reference to Section 262 of the DGCL, the full text of which appears in Exhibit C to this proxy statement. All references in this summary to a “stockholder” are to the record holder of shares of the Company’s common stock as of the record date unless otherwise indicated.

Under Section 262 of the DGCL, when a merger is submitted for approval at a meeting of stockholders for whom appraisal rights are available, as in the case of the merger agreement, the corporation, not less than 20 days prior to the meeting, must notify each of its stockholders for whom appraisal rights are available that appraisal rights are available and include in the notice a copy of Section 262 of the DGCL. This proxy statement constitutes such notice, and the applicable statutory provisions are attached to this proxy statement as Exhibit C.

 

In order to exercise your appraisal rights effectively, you must satisfy each of the following primary requirements:

 

 

If you fail strictly to comply with any of the above conditions or otherwise fail strictly to comply with the requirements of Section 262 of the DGCL, you will be entitled to receive the merger consideration but you will have no appraisal rights with respect to your shares of the Company’s common stock. You will receive no further notices from the Company regarding your appraisal rights. Neither voting (in person or by proxy) against, abstaining from voting on or failing to vote on the proposal to adopt the merger agreement and approve the merger will constitute a written demand for appraisal within the meaning of Section 262 of the DGCL. The written demand for appraisal must be in addition to and separate from any proxy or vote.

 

The address for purposes of making an appraisal demand is:

 

Interstate Hotels & Resorts, Inc.
4501 N. Fairfax Drive, Suite 500
Arlington, Virginia 22203
Attention: General Counsel

 

Only a holder of record of shares of the Company’s common stock, or a person duly authorized and explicitly purporting to act on his or her behalf, is entitled to assert an appraisal right for the shares of the Company’s common stock registered in his or her name. Beneficial owners who are not record holders and who wish to exercise appraisal rights are advised to consult with the appropriate record holders promptly as to the timely exercise of appraisal rights. A record holder, such as a broker, who holds shares of the Company’s common stock as a nominee for others, may exercise appraisal rights with respect to shares of the Company’s common stock held for one or more beneficial owners, while not exercising such rights for other beneficial owners. In such a case, the written demand should set forth the number of shares of the Company’s common stock as to which the demand is made. Where no shares of the Company’s common stock are expressly mentioned, the demand will be presumed to cover all shares of the Company’s common stock held in the name of such record holder.

A demand for the appraisal of shares of the Company’s common stock owned of record by two or more joint holders must identify and be signed by all of the holders. A demand for appraisal signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity must so identify the persons signing the demand.

 

An appraisal demand may be withdrawn by a former stockholder, who has not commenced an appraisal proceeding or joined that proceeding as a named party, within 60 days after the Company merger effective time, or thereafter only with the Company’s approval. Upon withdrawal of an appraisal demand within the required period, the former stockholder will be entitled to receive the merger consideration referred to above, without interest.

 

If the Company consummates the merger, it will give written notice of the Company merger effective time within 10 days after the Company merger effective time to each of the Company’s former stockholders who did not vote in favor of the merger agreement and who made a written demand for appraisal in accordance with Section 262 of the DGCL. Within 120 days after the Company merger effective time, but not later, either the surviving company or any dissenting stockholder who has complied with the requirements of Section 262 of the DGCL may file a petition in the Delaware Court demanding a determination of the fair value of the shares of the Company’s common stock held by all stockholders entitled to appraisal. A person who is the beneficial owner of shares of the Company’s common stock held either in a voting trust or by a nominee on behalf of such person may, in such person’s own name, file the petition described in the previous sentence. Upon the filing of the petition by a stockholder, service of a copy of such petition shall be made upon the surviving company. The surviving company has no obligation to file such a petition in the event there are stockholders who have demanded appraisal of their shares. Accordingly, the failure of a stockholder to file such a petition within the period specified could nullify the stockholder’s previously written demand for appraisal. There is no present intent on the part of the surviving company to file an appraisal petition and stockholders seeking to exercise appraisal rights should not assume that the surviving company will file such a petition or that the surviving company will initiate any negotiations with respect to the fair value of such shares. Accordingly, stockholders who desire to have their shares of the Company’s common stock appraised should initiate any petitions necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262 of the DGCL.

 

Within 120 days after the Company merger effective time, any stockholder who has complied with the provisions of Section 262 of the DGCL up to that point may receive from the surviving company, upon written request, a statement setting forth the aggregate number of shares of the Company’s common stock not voted in favor of the merger agreement and with respect to which the Company has received demands for appraisal, and the aggregate number of holders of those shares of the Company’s common stock. A person who is the beneficial owner of shares of the Company’s common stock held either in a voting trust or by a nominee on behalf of such person may, in such person’s own name, request the statement described in the previous sentence. The surviving company must mail this statement to the stockholder within 10 days of receipt of the request or within 10 days after expiration of the period for delivery of demands for appraisals under Section 262 of the DGCL, whichever is later.

 

If a petition for appraisal is duly filed by a stockholder and a copy of the petition is delivered to the surviving company, the surviving company will then be obligated, within 20 days after receiving service of a copy of the petition, to provide the Delaware Court with a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares and with whom agreements as to the value of their shares have not been reached by the surviving company.

 

If a hearing on the petition is held, following notice to the stockholders who have demanded appraisal of their shares, the Delaware Court is empowered to determine which dissenting stockholders are entitled to an appraisal of their shares of the Company’s common stock. The Delaware Court may require dissenting stockholders who hold stock represented by certificates to submit their certificates representing shares of the Company’s common stock for notation thereon of the pendency of the appraisal proceedings, and the Delaware Court is empowered to dismiss the proceedings as to any dissenting stockholder who does not comply with

this request. Accordingly, dissenting stockholders are cautioned to retain their stock certificates, pending resolution of the appraisal proceedings.

 

After determination of the dissenting stockholders entitled to an appraisal, the Delaware Court will appraise the shares of the Company’s common stock held by such dissenting stockholders at their fair value as of the Company merger effective time, exclusive of any element of value arising from the expectation or accomplishment of the merger, together with interest, if any. Unless the Delaware Court in its discretion determines otherwise for good cause shown, interest from the effective date of the merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment. When the fair value is determined, the Delaware Court will direct the payment by the surviving company of such value, with interest thereon if the Delaware Court so determines, to the dissenting stockholders entitled to receive the same, upon surrender to the surviving company by such dissenting stockholders of the certificates representing such shares of the Company’s common stock.

 

In determining fair value, the Delaware Court will take into account all relevant factors. The Delaware Supreme Court has stated that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered, and that “fair price obviously requires consideration of all relevant factors involving the value of a company.”

 

Stockholders should be aware that the fair value of their shares of the Company’s common stock as determined under Section 262 of the DGCL could be greater than, the same as or less than the merger consideration.

 

The Delaware Courts may also, on application, (1) assess costs among the parties as the Delaware Courts deem equitable and (2) order all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney’s fees and fees and expenses of experts, to be charged pro rata against the value of all shares of the Company’s common stock entitled to appraisal. Determinations by the Delaware Courts are subject to appellate review by the Delaware Supreme Court.

 

No appraisal proceedings in the Delaware Courts will be dismissed as to any dissenting stockholder without the approval of the Delaware Court, and this approval may be conditioned upon terms which the Delaware Court deems just; provided, however, that any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party will maintain the right to withdraw such stockholder’s demand for appraisal and to accept the cash that such holder would have received pursuant to the merger agreement within 60 days after the Company merger effective time.

 

From and after the Company merger effective time, former holders of shares of the Company’s common stock are not entitled to vote their shares of the Company’s common stock for any purpose and are not entitled to receive payment of dividends or other distributions on the shares of the Company’s common stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the Company merger effective time).

 

A stockholder who wishes to exercise appraisal rights should carefully review the foregoing description and the applicable provisions of Section 262 of the DGCL which is set forth in its entirety in Exhibit C to this proxy statement and is incorporated herein by reference. Any stockholder considering demanding appraisal is advised to consult legal counsel because the failure strictly to comply with the procedures required by Section 262 of the DGCL could result in the loss of appraisal rights.

 

The following is a discussion of the material United States federal income tax consequences of the merger to holders of the Company’s common stock whose shares are surrendered in the merger in exchange for the right to receive the merger consideration. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), applicable current and proposed U.S. Department of

Treasury regulations, judicial authority, and administrative rulings and practice, all as presently in effect. Future legislative, judicial or administrative changes or interpretations, which may or may not be retroactive, may adversely affect the accuracy of the statements and conclusions set forth below. There can be no assurance that the Internal Revenue Service (the “IRS”) will not challenge one or more of the tax considerations described herein, and no ruling has been sought from the IRS as to the United States federal income tax consequences of the merger.

 

This summary assumes that the Company’s common stock is held as a capital asset within the meaning of Section 1221 of the Code and does not address all aspects of taxation that may be relevant to particular holders in light of their personal investment or tax circumstances or to persons that are subject to special tax rules and does not address the tax consequences of the merger to holders of stock options or restricted stock unit awards. In addition, this summary does not address the tax treatment of special classes of holders of the Company’s common stock, including, for example:

 

 

This summary also does not discuss any state, local, foreign or other tax considerations.

 

If any entity that is treated as a partnership for United States federal tax purposes holds shares of the Company’s common stock, the tax treatment of its partners or members generally will depend upon the status of the partner or member and the activities of the entity. If you are a partner of a partnership or a member of a limited liability company or other entity classified as a partnership for United States federal tax purposes and that entity is holding the Company’s common stock, you should consult your tax advisor.

 

For purposes of this section, a “U.S. holder” means a beneficial owner of shares of the Company’s common stock that is for United States federal income tax purposes one of the following:

 

 

 

As used in this section, a “non-U.S. holder” means a beneficial owner of shares of the Company’s common stock that is an individual, corporation, estate or trust that is not described in the bullets above.

 

Consequences of the Merger to U.S. Holders

 

General .   The receipt of cash by U.S. holders in exchange for their shares of the Company’s common stock pursuant to the merger will be a taxable transaction for United States federal income tax purposes (and also may be a taxable transaction under applicable state, local and foreign income and other tax laws). In general, a U.S. holder of the Company’s common stock will recognize gain or loss for United States federal income tax purposes equal to the difference between:

 

 

Gain or loss will be calculated separately for each block of shares, with a block consisting of shares acquired at the same cost in a single transaction. Assuming that the shares constitute capital assets in the hands of the U.S. holder, this gain or loss will be capital gain or loss and will be long-term capital gain or loss if at the time of the merger the shares have been held for more than one year. Gain or loss, if any, realized by a U.S. holder in connection with the merger generally will be treated as having a U.S. source. An individual U.S. holder will be subject to tax on net capital gain at a maximum federal income tax rate of 15%. The deductibility of a capital loss recognized in the exchange is subject to significant limitations under the Code.

 

Consequences of the Merger to Non-U.S. Holders

 

General .   The United States federal income tax consequences of the merger to a non-U.S. holder will depend on various factors. A non-U.S. holder generally will not be subject to United States federal income tax on the gain, if any, recognized on the exchange of its shares of the Company’s common stock for cash pursuant to the merger, unless:

 

 

If gain on the exchange of the Company’s common stock for cash is subject to tax under the first, or second bullet point immediately above, a non-U.S. holder would be subject to the same treatment as a U.S. holder with respect to the gain, as described above. In addition, a non-U.S. holder described in the preceding sentence that is a foreign corporation also may be subject to the branch profits tax of 30% absent any reduction or exemption under an applicable income tax treaty. Finally, an individual non-U.S. holder described in the third bullet point immediately above will be subject to a flat 30% tax on the gain, which may be offset by United States source capital losses. In addition, the non-U.S. holder may be subject to applicable alternative minimum taxes.

United States Real Property Interest .   Company common stock will not be treated as a United States real property interest with respect to a non-U.S. holder if such class of shares is regularly traded on an established securities market within the meaning of applicable U.S. Treasury Regulations and the non-U.S. holder did not actually, or constructively under specified Code attribution rules, own more than 5% of that class at any time during the shorter of the five-year period preceding the disposition or the holder’s holding period. Because our shares are regularly traded on the New York Stock Exchange, our shares will not be treated as a United States real property interest, except with respect to a non-U.S. holder meeting the more than 5% ownership requirement. If a non-U.S. holder’s Company common stock constitutes a “United States real property interest” under FIRPTA, such holder will be required to file a United States federal income tax return and will be subject to United States federal income tax on the gain recognized in the merger on a net basis in the same manner as a U.S. holder. A non-U.S. holder’s Company common stock will not constitute a U.S. real property interest if the Company is not and has not been a “United States real property holding corporation” for United States federal income tax purposes. However, we believe we are a “United States real property holding corporation” for United States federal income tax purposes. Non-U.S. holders are urged to consult their tax advisors with respect to the treatment of their shares as a United States real property interest pursuant to these rules.

 

Information Reporting and Backup Withholding

 

Backup withholding, presently at a rate of 28%, and information reporting may apply to the cash received pursuant to the exchange of the Company’s common stock in the merger. Backup withholding will not apply, however, to a holder who

 

 

Backup withholding is not an additional tax and any amount withheld under these rules may be credited against the holder’s United States federal income tax liability and may entitle the holder to a refund if required information is timely furnished to the IRS.

 

THE FOREGOING DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OF THE POTENTIAL TAX CONSIDERATIONS RELATING TO THE MERGER AND IS NOT TAX ADVICE. THEREFORE, HOLDERS OF THE COMPANY’S COMMON STOCK ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF UNITED STATES FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS IN THEIR PARTICULAR CIRCUMSTANCES.

 

We believe that no consent, approval or other authorization of, or filing with or notification to, any international, national, federal, state, provincial or local governmental, regulatory or administrative authority, agency, commission, court, tribunal, arbitral body or self-regulated entity, whether domestic or foreign, is required to be obtained by us, the Operating Partnership, HAC, Merger Sub or Merger Partnership in connection with the mergers, other than:

 

 

 

The parties to the merger agreement have agreed that the failure to obtain approvals, consents or authorizations in respect of or related to any applicable state, federal or foreign laws governing the sale of liquor will not be a condition to the closing or be deemed to have, result in, or cause a material adverse effect on us.

 

The summary of the material terms of the merger agreement below and elsewhere in this proxy statement is qualified in its entirety by reference to the merger agreement, a copy of which is attached to this proxy statement as Exhibit A-1 and which we incorporate by reference into this document. This summary may not contain all of the information about the merger agreement that is important to you.

 

The merger agreement has been included to provide you with information regarding its terms, and we recommend that you read carefully the merger agreement in its entirety. Except for its status as a contractual document that establishes and governs the legal relations among the parties thereto with respect to the mergers, we do not intend for its text to be a source of factual, business or operational information about us. The merger agreement contains representations, warranties and covenants that are qualified and limited, including by information in the schedules referenced in the merger agreement that the parties delivered in connection with the execution of the merger agreement. Representations and warranties may be used as a tool to allocate risks between the respective parties to the merger agreement, including where the parties do not have complete knowledge of all facts, instead of establishing such matters as facts. Furthermore, the representations and warranties may be subject to different standards of materiality applicable to the contracting parties, which may differ from what may be viewed as material to stockholders. These representations may or may not have been accurate as of any specific date and do not purport to be accurate as of the date of this proxy statement. Moreover, information concerning the subject matter of the representations and warranties may have changed since the date of the merger agreement and subsequent developments or new information qualifying a representation or warranty may have been included in this proxy statement. Except for the parties themselves, under the terms of the merger agreement only certain other specifically identified persons are third party beneficiaries of the merger agreement who may enforce it and rely on its terms. As stockholders, you are not third party beneficiaries of the merger agreement and therefore may not directly enforce or rely upon its terms and conditions and you should not rely on its representations, warranties or covenants as characterizations of the actual state of facts or condition of the Company or any of its affiliates.

 

The Company Merger

 

At the Company merger effective time, Merger Sub will merge with and into the Company, Merger Sub’s separate corporate existence will cease, and the Company will survive the merger. All of our and Merger Sub’s properties, assets, rights, privileges, immunities, powers and purposes, and all of our and Merger Sub’s liabilities, will become those of the surviving company. Following the completion of the merger, the Company’s common stock will be delisted from the New York Stock Exchange and deregistered under the Exchange Act and will no longer be publicly traded.

 

The Partnership Merger

 

At the partnership merger effective time, Merger Partnership will merge with and into the Operating Partnership and the Operating Partnership will survive the partnership merger and continue to exist. After such partnership merger, each class A unit held by any limited partner of the Operating Partnership (other than any interest held by us or any of our wholly-owned subsidiaries or by HAC or HAC’s wholly-owned subsidiaries) will be converted into the right to receive an amount without interest equal to the OP unit merger consideration, and the Company will remain the sole general partner of the surviving operating partnership. All of the Operating Partnership’s and Merger Partnership’s property, whether real, personal or mixed, and all of the Operating Partnership’s and Merger Partnership’s liabilities, will become those of the surviving partnership.

 

The merger of the Company and Merger Sub will become effective at (1) the time when the certificate of merger has been duly filed with the Secretary of State of the State of Delaware under applicable law or (2) a

later date or time (not later than 30 days after acceptance for record) as HAC and the Company agree to prior to the closing.

 

The merger of the Operating Partnership and Merger Partnership will become effective at (1) the time when the Certificate of Merger has been filed with the Secretary of State of the State of Delaware under applicable law or (2) a later date or time (no later than 30 days after acceptance for record) as HAC and the Company agree to prior to the closing by the parties in such filing.

 

It is the intention of the parties that the merger of the Operating Partnership and Merger Partnership shall become effective immediately after the merger of the Company and Merger Sub. The closing of the mergers will occur on (1) the fifth business day after the day on which the last of the conditions set forth in the merger agreement is satisfied or waived (other than those conditions which by their terms are required to be satisfied or waived at the closing) or (2) any other date as the parties may agree in writing.

 

The certificate of incorporation and the bylaws of the Company, each as set forth in an exhibit to the merger agreement, will be the certificate of incorporation and the bylaws of the surviving company until later amended.

 

The certificate of limited partnership and the limited partnership agreement of the Operating Partnership, each as in effect immediately prior to the partnership merger effective time, will be the certificate of limited partnership and the limited partnership agreement of the surviving partnership until later amended.

 

The directors and officers of Merger Sub immediately prior to the Company merger effective time will become the directors and officers of the surviving company until their successors are duly elected and qualified or until their earlier death, resignation or removal in accordance with organizational documents and applicable law.

 

The surviving company will be the sole general partner of the surviving partnership and the officers of Merger Partnership immediately prior to the partnership merger effective time will become the officers of the surviving partnership.

 

Common Stock of the Company

 

At the Company merger effective time, each share of the Company’s common stock issued and outstanding immediately prior to the Company merger effective time will be converted into the right to receive $2.25 in cash, without interest, less any required withholding taxes, other than the Company’s common stock:

 

 

In addition, at the Company merger effective time, each share of Merger Sub’s common stock issued and outstanding immediately prior to the Company merger effective time will be converted into one fully paid and non-assessable share of common stock, par value $0.01 per share, of the surviving company.

 

Partnership Units

 

At the partnership merger effective time, each class A unit in the Operating Partnership issued and outstanding immediately prior to the partnership merger effective time will automatically be converted into the

right to receive an amount in cash, without interest, equal to $2.25 per unit, less any required withholding taxes, other than the class A units in the Operating Partnership:

 

 

In addition, at the partnership merger effective time, the general partner interests of the Operating Partnership shall remain outstanding as general partner interests in the surviving partnership and each partnership interest in Merger Partnership issued and outstanding immediately prior to the partnership merger effective time will be converted into a limited partnership interest in the surviving partnership, such that, giving effect to the other provisions of the merger agreement, upon the partnership merger effective time, HAC will hold a 0.99% limited partnership interest in the surviving partnership and the Company will hold a 1% general partnership interest and a 98.01% limited partnership interest in the surviving partnership.

 

Stock Options and Unit Awards

 

Each stock option to purchase shares of the Company’s common stock outstanding immediately prior to the Company merger effective time, whether or not exercisable or vested, will be cancelled and no further payment will be made in respect thereof.

 

Each restricted stock award outstanding immediately prior to the Company merger effective time, whether or not vested, will be converted into the right to receive an amount in cash, without interest and less applicable withholding taxes, equal to the product of:

 

 

The amount of cash payable with respect to restricted stock awards will be reduced by the amount of any applicable taxes required to be withheld. All stock options and restricted stock awards will be cancelled and all of the Company’s stock award plans will terminate at the Company merger effective time.

 

Anti-Dilution Adjustment to the Merger Consideration

 

The merger consideration will be equitably adjusted if we change the number of shares of common stock or class A units in the Operating Partnership or other securities convertible or exchangeable into, or exercisable for, shares of common stock or class A units in the Operating Partnership issued and outstanding prior to the Company merger effective time or partnership merger effective time, as applicable, as a result of a reclassification, stock split (including a reverse stock split), stock dividend, recapitalization, merger, issuer tender or exchange offer, or other similar transaction.

 

No Further Ownership Rights

 

After the Company merger effective time and the partnership merger effective time, as the case may be, each of our outstanding stock certificates and each class A unit in the Operating Partnership, other than in respect of shares of stock or class A units owned, directly or indirectly, by us and HAC, will represent only the right to receive the merger consideration until surrendered or exchanged in accordance with the merger agreement. The merger consideration paid upon surrender of each stock certificate or class A unit in the Operating Partnership will be paid in full satisfaction of all rights pertaining to the shares of the Company’s common stock represented by that certificate or to that class A unit, as the case may be.

 

On the closing date, HAC will provide an amount of cash sufficient to pay the aggregate merger consideration to holders of shares of the Company’s common stock and holders of class A units in the Operating Partnership (other holders of excluded units as described above) in the Operating Partnership to a paying agent reasonably acceptable to us. Promptly after the Company merger effective time, the paying agent will mail a letter of transmittal and instructions to you. The letter of transmittal and instructions will tell you how to surrender your stock certificates in exchange for the merger consideration for common stock. Separate materials will be sent to the limited partners of the Operating Partnership providing instructions on how to surrender their class A units in the Operating Partnership in exchange for the merger consideration for limited partner interests.

 

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

 

You will not be entitled to receive the merger consideration until you surrender your stock certificate or certificates to the paying agent, together with a duly completed and executed letter of transmittal and any other documents as the paying agent may reasonably require. The merger consideration may be paid to a person other than the person in whose name the corresponding certificate is registered if the certificate is accompanied by all documents reasonably required to evidence and effect the transfer. In addition, the person requesting payment must either pay any applicable stock transfer taxes or establish to the reasonable satisfaction of HAC and the paying agent that such stock transfer taxes have been paid or are not applicable.

 

No interest will be paid or will accrue on the cash payable upon surrender of the certificates. Each of the paying agent, the surviving company and HAC will be entitled to deduct and withhold any applicable taxes from the merger consideration.

 

At the Company merger effective time and the partnership merger effective time, respectively, our share transfer books and the transfer books of the Operating Partnership will be closed, and there will be no further registration of transfers of outstanding shares of common stock or limited partner interests in the Operating Partnership, respectively.

 

None of the paying agent, HAC, the surviving company or the surviving partnership will be liable to any holder of stock certificates or limited partner interests for any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. Any portion of the merger consideration deposited with the paying agent that remains undistributed to the holders of certificates evidencing shares of the Company’s common stock and holders of limited partner interests of the Operating Partnership for 180 days after the Company merger effective time will be delivered, upon demand, to HAC. Holders of shares of the Company’s common stock or limited partner interests in the Operating Partnership who have not surrendered their shares or units within 180 days after the Company merger effective time may only look to HAC for the payment of the applicable merger consideration.

 

If you have lost a certificate, or if it has been stolen or destroyed, then before you are entitled to receive the merger consideration, you will be required to make an affidavit of that fact and to execute and deliver an indemnity agreement reasonably required by HAC or the paying agent as indemnity against any claim that may be made against HAC, the surviving company or the paying agent on account of the alleged loss, theft or destruction of such certificate.

 

If any holder of shares of the Company’s common stock outstanding immediately prior to the Company merger effective time (1) has not voted in favor of the merger or consented to it in writing and (2) has demanded the appraisal of the shares in accordance with, and has complied in all respects with, Section 262 of the DGCL, then such shares will be deemed to be dissenting shares and will not be converted into the right to receive the common stock merger consideration. At the Company merger effective time, (1) all dissenting shares will be cancelled and cease to exist and (2) the holder or holders of dissenting shares will be entitled only to such rights as may be granted to them under Section 262 of the DGCL. If any holder of dissenting

shares effectively withdraws or loses such appraisal rights (through failure to perfect such appraisal rights or otherwise), then that holder’s shares (1) will no longer be deemed to be dissenting shares and (2) will be treated as if they had been converted automatically at the Company merger effective time into the right to receive the common stock merger consideration upon surrender of the certificate formerly representing such shares in accordance with the merger agreement.

 

The Company and the Operating Partnership each make customary representations and warranties in the merger agreement that are subject, in some cases, to specified exceptions and qualifications contained in the merger agreement or in the disclosure letter delivered in connection therewith. These representations and warranties relate to, among other things: