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OTK Associates to Nominate Directors to Morgans Hotel Board

  OTK Associates to Nominate Directors to Morgans Hotel Board

Business Wire

NEW YORK -- March 18, 2013

OTK Associates LLC, the largest shareholder of Morgans Hotel Group Co.
(Nasdaq: MHGC) with 13.9% of the outstanding common stock of the company,
today disclosed that it intends to nominate a slate of seven candidates to the
company’s board of directors and notified the company of its intent in a
letter on March 15, 2013. Morgans' 2013 Annual Meeting of Shareholders is
scheduled to be held on May 15, 2013.

OTK Associates also disclosed a letter to MHGC shareholders outlining why it
believes a reconfiguration of the Board is urgently needed. The full text of
the letter follows:

March 18, 2013

Dear Fellow Stockholders,

We are writing to inform you that on Friday, March 15, OTK Associates, LLC
delivered notice to Morgans Hotel Group of its intent to nominate seven
qualified candidates to the company’s board of directors at the upcoming
annual meeting of stockholders on May 15, 2013.

As the company's largest stockholder, with a 13.9% ownership stake or
4,500,000 common shares of Morgans, we are seeking your support to elect
directors that have the skills and experience necessary to either grow the
business and return the company to profitability or to appropriately evaluate
and pursue strategic alternatives in a disinterested fashion. We are
nominating a slate of directors that brings significant lodging industry
expertise, capital markets experience and superior hotel operating acumen. We
strongly believe that a reconfigured board is a prerequisite for improving the
company's financial performance and competitive position, and for harvesting
additional value from its existing asset base.

OTK is a partnership between families that have a demonstrated track record of
creating value in the real estate and lodging industries. OTK acquired its
position in Morgans more than five years ago and has not sold any shares since
that time. During this period, OTK has observed as various management teams
and board members squandered resources and failed to capitalize on the
extraordinary brand value of the company. OTK believes that new leadership is
urgently needed to protect the interests of common stockholders and maximize
stockholder value going forward, and we believe the majority of Morgans'
common stockholders will agree.

Need for Alignment of Interests:

  *As the company’s largest stockholder, our interests are best aligned with
    those of the entire stockholder base.
  *The current board has significant representation from individuals directly
    and indirectly affiliated with the company’s largest holder of convertible
    debt securities and preferred shares. The next board will have to
    anticipate and plan for the maturity of the convertible debt and the
    accelerated accrual of dividends on the preferred securities. Stockholders
    should be represented by a board whose interests are aligned first and
    foremost with its fiduciary duties to common stockholders, while cognizant
    of the company's contractual obligations to creditors.
  *The board has engaged in a number of self-serving transactions and
    questionable employment decisions during its tenure. In March 2011, the
    board appointed a new chief executive officer who had never previously
    served in a public company operating role nor worked in the hotel and
    lodging sectors. The CEO has however served as a paid employee for
    Morgans' largest holder of convertible debt securities and preferred
    shares from 2008 to 2011.
  *Additionally, directors have received various extraordinary payments and
    bonuses in addition to their base compensation for activities associated
    with ordinary board responsibilities.

Restoring Financial Performance:

  *Morgans was adversely affected by the recession, but unlike most other
    hotel companies, it has not recovered. Over the past five years, Morgans
    shares have decreased by approximately 68% representing approximately $325
    million in value destruction. During that time S&P 500 Hotels, Restaurants
    & Leisure Index, Morgans' self-selected reference index, has increased by
    69%. Morgans' five-year stock performance is in the bottom 20% of
    companies in the Nasdaq composite index.
  *Systemwide comparable RevPAR for the full year 2012 was approximately 5%
    below the level reported as of December 31, 2008, while total company
    revenue is down almost 37% over the same period. Adjusted EBITDA margin,
    based on adjusted EBITDA as reported by the company, has fallen 59.0% from
    29.5% to 12.1% over that time.
  *Between 2008 and 2012, the company reported cumulative net losses of
    approximately $384 million, or just over 2.4x today’s remaining equity
    market cap. Over $144 million of those losses were recognized during 2011
    and 2012 under the stewardship of current management.

Opportunity to Improve Management and Board Oversight:

  *Over the past several years the board has allowed management to pursue a
    litany of transactions that have destroyed significant equity capital and
    collectively generated negative returns to stockholders. These include
    deals that have resulted in terminated management contracts, accounting
    impairments, foreclosures and restructurings.
  *Poorly timed and ill executed capital markets transactions have limited
    the company’s financial and strategic flexibility.
  *Morgans' overhead expense is disproportionate to its asset base and market
    capitalization. The combined total of executive compensation for named
    executive officers in 2011, the most recent year for which such
    information is available, was $20.4 million, or 68% of the company’s 2011
    reported adjusted EBITDA.
  *Total SG&A expenses plus stock based compensation for 2011 and 2012
    combined totaled over $94 million, or approximately 60% of today’s equity
    market capitalization and 1.8x the company's reported adjusted EBITDA for
    those two years combined. The new board would take swift action to right
    size the expense structure and improve operating cash flow.
  *The proposed slate includes members with deep industry relationships and
    the ability to draw talent, establish a more efficient management
    structure and forge relationships with world-class partners.

The decision to nominate a new slate of board members has not been taken
lightly. After five years of observation, OTK views it impossible, based on
the company's performance over time, to effect sweeping and necessary change
without replacing substantially all of the current board. The slate we are
proposing has been constructed to refocus the company on its core business,
extend its collection of world recognized brands and to right-size its
operating cost structure. Members of this slate possess the specific industry
experience, financial sophistication and operating relationships to assist the
company moving forward.

Morgans Hotel Group has been a leading name in luxury boutique hotels, and can
be again with proper oversight and leadership. We ask for your support in
electing directors committed to stabilizing the company and maximizing its
value.

If you have questions, we urge you to call our proxy solicitors, Okapi
Partners LLC, toll-free at (877) 869-0171. You may also email questions to
info@okapipartners.com

Sincerely,

/s/ OTK Associates, LLC

OTK Associates, LLC

IMPORTANT INFORMATION

STOCKHOLDERS ARE ADVISED TO READ THE PROXY STATEMENT AND OTHER DOCUMENTS
RELATED TO SOLICITATION OF PROXIES BY OTK ASSOCIATES, LLC AND ITS AFFILIATES
FROM THE STOCKHOLDERS OF MORGANS HOTEL GROUP CO. FOR USE AT THE 2013 ANNUAL
MEETING OF MORGANS HOTEL GROUP CO. WHEN THEY ARE AVAILABLE BECAUSE THEY WILL
CONTAIN IMPORTANT INFORMATION. WHEN COMPLETED, SUCH MATERIALS WILL, ALONG WITH
OTHER RELEVANT DOCUMENTS, BE AVAILABLE AT NO CHARGE AT THE SECURITIES AND
EXCHANGE COMMISSION'S WEBSITE AT HTTP://WWW.SEC.GOV OR BY CONTACTING THE
PARTICIPANTS' PROXY SOLICITOR, OKAPI PARTNERS, TOLL FREE AT (877) 869-0171, OR
BY EMAIL TO INFO@OKAPIPARTNERS.COM.

INFORMATION RELATING TO THE POTENTIAL PARTICIPANTS IN A POTENTIAL PROXY
SOLICITATION IS CONTAINED IN EXHIBIT 2 TO THE SCHEDULE 14A FILED PURSUANT TO
RULE 14A-12 FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BY OTK
ASSOCIATES, LLC ON MARCH 15, 2013, AS IT MAY BE AMENDED FROM TIME TO TIME. THE
SCHEDULE 14A AND ANY AMENDMENTS ARE AVAILABLE AT NO CHARGE ON THE SECURITIES
AND EXCHANGE COMMISSION’S WEBSITE AT HTTP://WWW.SEC.GOV.

Contact:

Investor Contacts:
Okapi Partners LLC
Bruce Goldfarb/Patrick McHugh/Charles Garske, 212-297-0720
or
Media Contacts:
Sard Verbinnen & Co
Dan Gagnier/Nathaniel Garnick, 212-687-8080
 
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