As
filed with the United States Securities and Exchange Commission on October 1,
2009
Registration
No. _________
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
S-3
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
MHI
Hospitality Corporation
(Exact
name of registrant as specified in its charter)
Maryland
(State
or other jurisdiction of
incorporation
or organization)
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20-1531029
(I.R.S.
Employer
Identification
No.)
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410
W. Francis Street
Williamsburg,
Virginia 23185
(757)
229-5648
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive offices)
Andrew
M. Sims
President
and CEO
410
W. Francis Street
Williamsburg,
Virginia 23185
(757)
229-5648
(Name,
address, including zip code, and telephone number, including area code, of agent
for service)
Copies
of all communications, including communications sent to agent for service,
should be sent to:
Thomas
J. Egan, Jr. Esq.
Baker
& McKenzie LLP
815
Connecticut Avenue, N.W.
Washington,
D.C. 20006
(202)
452-7000
Approximate date of commencement of
proposed sale to the public:
From time to time after the
effective date of this Registration Statement.
If the only securities being registered
on this Form are being offered pursuant to dividend or interest reinvestment
plans, please check the following box.
¨
If any of the securities being
registered on this Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act of 1933, other than securities
offered only in connection with dividend or interest reinvestment plans, check
the following box.
x
If this Form is filed to register
additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
If this Form is a post-effective
amendment filed pursuant to Rule 462(c) under the Securities Act, check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same
offering.
¨
If this Form is a registration
statement pursuant to General Instruction I.D. or a post-effective amendment
thereto that shall become effective upon filing with the Commission pursuant to
Rule 462(e) under the Securities Act, check the following
box.
¨
If this Form is a post-effective
amendment to a registration statement filed pursuant to General Instruction I.D.
filed to register additional securities or additional classes of securities
pursuant to Rule 413(b) under the Securities Act, check the following
box.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated
filer
¨
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Accelerated
filer
¨
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Non-accelerated
filer
¨
(Do
not check if a smaller
reporting
company)
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Smaller reporting company
x
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CALCULATION
OF REGISTRATION
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Title of Each Class of Securities to be Registered(1)
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Amount to be
Registered
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Proposed Maximum
Offering Price Per Share
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Proposed Maximum
Aggregate Offering Price
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Amount of
Registration
Fee(1)
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Non-transferable
Common Stock Subscription Rights
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(2)
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N/A
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N/A
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(3)
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Common
Stock, par value $0.01 per share
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_________
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______
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$
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7,000,000
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(4)
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$
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390.60
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(1)
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This
registration statement relates to: (a) non-transferable subscription
rights to purchase common stock of the Registrant, which subscription
rights are to be distributed to holders of the Registrant’s common stock;
and (b) the shares of common stock deliverable upon the exercise of
the non-transferable subscription rights pursuant to the rights
offering. This registration statement also covers any
additional shares of common stock of the Registrant that may become
issuable due to adjustments for changes resulting from stock dividends,
stock splits, recapitalizations, mergers, reorganizations, combinations or
exchanges or other similar events.
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(2)
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Evidencing
the subscription rights to subscribe for up to ________ shares of common
stock, par value $0.01 per share.
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(3)
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The
non-transferable subscription rights are being distributed without
consideration. Pursuant to Rule 457(g), no separate
registration fee is payable with respect to the subscription rights being
offered hereby since the subscription rights are being registered in the
same registration statement as the securities to be offered pursuant
thereto.
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(4)
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Represents
the gross proceeds from the assumed exercise of all non-transferable
subscription rights to be distributed. At no time will the
aggregate maximum offering price of all securities issued in any given
12-month period exceed the amount allowed for in General Instruction
I.B.6. of Form S-3.
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The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is
not an offer to sell these securities and it is not soliciting an offer to buy
these securities in any state where the offer or sale is not
permitted.
Subject
to Completion, dated October 1, 2009
PROSPECTUS
MHI
HOSPITALITY CORPORATION
Common
Stock
Subscription
Rights to Purchase up to
__________
Shares of Common Stock
We are
distributing at no charge to holders of our common stock non-transferable
subscription rights to purchase shares of our common stock. You will
receive one subscription right for each share of common stock held of record as
of 5:00 p.m., New York City time on October 12, 2009.
We are
distributing subscription rights exercisable for up to 6,964,263 shares of our
common stock, however, the total number of shares issuable upon exercise of the
rights is subject to reduction by us so that the aggregate market value of the
common stock issued pursuant to the rights offering does not exceed the
limitation applicable to our use of Form S-3, which we have determined to use
for purposes of registering our offering of the shares issuable upon exercise of
the rights. As of September 28, 2009, we may sell shares of common
stock with an aggregate market value of up to approximately $[5.4] million under
this prospectus pursuant to General Instruction I.B.6. of Form
S-3. We refer to this limitation as the Form S-3
Limitation.
Each
subscription right will entitle you to purchase one share of our common stock at
a subscription price equal to ______ per share, which we refer to as the basic
subscription privilege. If you fully exercise your basic subscription
privilege, you will also be entitled to purchase any shares not purchased by
other subscription rights holders pursuant to the over-subscription privilege
described in this prospectus. Your basic subscription privilege and
over-subscription privilege are subject to the Form S-3 Limitation and to
reduction by us to prevent any subscription rights holder from purchasing a
number of shares of our common stock that would cause such subscription rights
holder to own 9.9% or more of our common stock. To the extent you
properly exercise your basic subscription privilege and/or your
over-subscription privilege for an amount of shares that exceeds the number of
the unsubscribed shares available to you, any excess subscription payment
received by the subscription agent will be returned promptly, without interest
or penalty.
The
subscription rights may be exercised at any time during the subscription period,
which will commence on _________, 2009. The subscription rights will
expire if they are not exercised by 5:00 p.m., New York City time, on _______,
2009, unless we extend the rights offering period. We reserve the
right to extend the rights offering period at our sole
discretion. You should carefully consider whether to exercise your
subscription rights before the expiration of the rights offering
period. All exercises of subscription rights are
irrevocable. Our board of directors is making no recommendation
regarding your exercise of the subscription rights. The subscription
rights may not be sold, transferred or assigned to anyone else and will not be
listed for trading on the Nasdaq Global Market or any other stock exchange or
market or on the OTC Bulletin Board.
We may
cancel the rights offering at any time prior to its expiration for any
reason. If we cancel this offering all subscription payments received
by the subscription agent will be returned, without interest or penalty, as soon
as practicable.
The
shares of common stock are being offered directly by us without the services of
an underwriter or selling agent.
Shares of
our common stock are traded on the Nasdaq Global Market under the symbol
“MDH”. On September 28, 2009, the closing sale price for our common
stock was $2.43 per share. We urge you to obtain a current market
price for the shares of our common stock before making any determination with
respect to the exercise of your rights. The shares of common stock
issued in the rights offering we expect will also be listed on the Nasdaq Global
Market under the same symbol.
As of September 28, 2009, the aggregate
market value of our outstanding common stock held by non-affiliates was
approximately $16.2 million, based on 6,964,263 shares outstanding, of which
approximately 6,681,480 shares were held by non-affiliates, and on a price per
share of $2.43, the closing price of our common stock on September 28,
2009. Pursuant to General Instruction I.B.6 of Form S-3, in no event
will we sell our securities in a public primary offering on Form S-3 with a
value exceeding more than one-third of our market value in any 12-month period
so long as our market value remains below $75.0 million. As of the
date hereof, we have not offered or sold any securities pursuant to General
Instruction I.B.6 of Form S-3 during the prior 12 calendar month period that
ends on and includes the date hereof.
The
exercise of your subscription rights for shares of our common stock involves a
high degree of risk. You should carefully consider all of the
information set forth in this prospectus, including the section entitled “Risk
Factors” beginning on page 16 of this prospectus as well as all information
included or incorporated herein by reference in this prospectus in its entirety
before you decide whether to exercise your subscription rights. See
“Incorporation by Reference.”
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Per
Share
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$
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______
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$
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____
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(2)
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Total
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$
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______
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$
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_________
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(2)
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(1)
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Assumes
total estimated offering expenses of
$____________.
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(2)
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Assumes
that the rights offering is fully subscribed and that the maximum of
_______ shares are sold.
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Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The
date of this prospectus is
,
2009
TABLE
OF CONTENTS
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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1
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QUESTIONS
AND ANSWERS RELATING TO THE RIGHTS OFFERING
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2
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PROSPECTUS
SUMMARY
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8
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RISK
FACTORS
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16
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USE
OF PROCEEDS
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35
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PRICE
RANGE OF COMMON STOCK AND DIVIDEND POLICY
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35
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CAPITALIZATION
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37
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THE
RIGHTS OFFERING
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38
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DESCRIPTION
OF CAPITAL STOCK
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45
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CERTAIN
PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
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48
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CERTAIN
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
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52
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PLAN
OF DISTRIBUTION
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54
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LEGAL
MATTERS
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54
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EXPERTS
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54
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INCORPORATION
BY REFERENCE
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55
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WHERE
YOU CAN FIND MORE INFORMATION
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55
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You
should rely only on the information contained in or incorporated by reference
into this prospectus. We have not authorized anyone to provide you
with additional or different information from that contained in or incorporated
by reference into this prospectus. You should assume that the
information contained in this prospectus is accurate only as of the date on the
front cover of this prospectus and any information we have incorporated by
reference is accurate only as of the date of the document incorporated by
reference, regardless of the time of delivery of this prospectus or any exercise
of the subscription rights. Our business, financial condition,
results of operations and prospects may have changed since those
dates.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements contained in this prospectus constitute forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as
amended, or the Exchange Act. We intend such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Litigation Reform Act of
1995. The forward-looking statements involve 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.
Forward-looking
statements, which are based on certain assumptions and describe our current
strategies, expectations and future plans, 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,
but the absence of these words does not necessarily mean that a statement is not
forward-looking. You should read statements that contain these words
carefully because they discuss our plans, strategies, prospects and expectations
concerning our business, operating results, financial condition and other
similar matters. We believe that it is important to communicate our
future expectations to our investors. There will be events in the
future, however, that we are not able to predict accurately or
control. The factors listed under “Risk Factors” in this prospectus
and in any documents incorporated by reference into this prospectus as well as
any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking
statements. Such risks and uncertainties include, among other things,
risks and uncertainties related to:
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·
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National
and local economic and business conditions, including the current economic
downturn, that will affect occupancy rates at our hotels and the demand
for hotel products and services;
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·
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risks
associated with the hotel industry, including competition, increases in
wages, energy costs and other operating
costs;
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·
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the
availability and terms of financing and capital and the general volatility
of the securities markets, specifically, the impact of the current credit
crisis which has severely constrained the availability of debt
financing;
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·
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risks
associated with the level of our indebtedness and our ability to meet
covenants in our debt agreements;
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management
and performance of our hotels;
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·
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risks
associated with redevelopment and repositioning projects, including delays
and cost overruns;
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·
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supply
and demand for hotel rooms in our current and proposed market
areas;
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·
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our
ability to acquire additional properties and the risk that potential
acquisitions may not perform in accordance with
expectations;
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legislative/regulatory
changes, including changes to laws governing taxation of real estate
investment trusts; and
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other
factors, including those discussed in “Risk Factors” in this prospectus
and incorporated by reference into this
prospectus.
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These
risks and uncertainties should be considered in evaluating any forward-looking
statement contained in this prospectus or incorporated by reference herein. All
forward-looking statements speak only as of the date of this report or, in the
case of any document incorporated by reference, the date of that document. 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. We undertake no obligation to update or publicly release any revisions
to forward-looking statements to reflect events, circumstances or changes in
expectations after the date of this report. In addition, our past
results are not necessarily indicative of our future results.
QUESTIONS
AND ANSWERS RELATING TO THE RIGHTS OFFERING
The following are examples of what
we anticipate will be common questions about the rights offering. The answers
are based on selected information from this prospectus and the documents
incorporated by reference herein. The following questions and answers do not
contain all of the information that may be important to you and may not address
all of the questions that you may have about the rights offering. This
prospectus and the documents incorporated by reference herein contain more
detailed descriptions of the terms and conditions of the rights offering and
provide additional information about us and our business, including potential
risks related to the rights offering, our common stock, and our
business.
What
is being offered in this rights offering?
We are
distributing at no charge non-transferable subscription rights to holders of our
common stock. You will receive one subscription right for each share
of common stock you owned, as of 5:00 p.m., New York City time on October 12,
2009, the record date. The subscription rights will be evidenced by
subscription rights certificates. Each subscription right will
entitle you to purchase one share of our common stock at a subscription price
equal to ______ per share. You may exercise any number of your
subscription rights, or you may choose not to exercise any subscription
rights.
Your
basic subscription privilege and over-subscription privilege are subject to
reduction by us so that the aggregate market value of the common stock issued
pursuant to the rights offering does not exceed the limitation applicable to our
use of Form S-3.
Based on
an aggregate market value of outstanding common stock held by non-affiliates
equal to approximately $16.2 million as of September 28, 2009, we may not
currently sell shares of common stock with an aggregate market value of more
than approximately $[5.4] million under this prospectus pursuant to the Form S-3
Limitation. If rights in excess of the Form S-3 Limitation are
exercised, we will allocate the available shares of common stock pro rata among
the stockholders that exercises the basic subscription privilege or
over-subscription privilege, as the case may be, in proportion to the number of
shares of common stock owned by each such stockholder on the record date,
relative to the number of shares owned on the record date by all stockholders
exercising the basic subscription privilege or over-subscription privilege, as
the case may be.
Why
are we conducting the rights offering?
We are
conducting the rights offering in order to raise additional equity capital and
to improve and strengthen our financial position. A rights offering
provides the eligible stockholders the opportunity to participate in a capital
raise on a pro rata basis and, to the extent that they exercise the subscription
rights, minimize the dilution of their ownership interest in our
company. Assuming all the shares of common stock offered are
sold in the rights offering, we expect that the gross proceeds from the rights
offering will be approximately $___ million, or net proceeds equal to
approximately $_____. In authorizing the rights offering, our board
of directors evaluated our future need for additional liquidity and capital,
including for reducing or purchasing our indebtedness, and our need for
increased financial flexibility in order to enable us to achieve our business
plan and growth strategy. Our board of directors concluded that we
should take steps to raise additional capital including by means of this rights
offering. In connection with our board’s evaluation of our capital
needs and of this rights offering, our board of directors also
considered:
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·
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current
economic and financial market
conditions;
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·
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the
prospect of dilution of current stockholders’ ownership interests
resulting from any future efforts to raise capital from
non-stockholders;
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·
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the
size and timing of the rights
offering;
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·
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the
potential dilution to our current stockholders if they choose not to
participate in the offering;
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alternatives
available for raising equity
capital;
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historical
and current trading prices for our common
stock;
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the
fact that the rights offering could potentially increase the public float
for our common stock; and
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·
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the
fact that existing stockholders would have the opportunity to participate
on a pro rata basis and would also have an over-subscription
privilege.
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How
was the subscription price determined?
Our board
of directors determined the terms of the rights offering. In
determining the subscription price, our board of directors considered a number
of factors, including:
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·
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our
future needs for additional capital, liquidity and financial
flexibility;
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·
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current
economic and financial market
conditions;
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·
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alternatives
available for raising equity
capital;
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·
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the
size and timing of the rights offering and the price at which our
stockholders might be willing to participate in a rights offering offered
on a pro rata basis to all stockholders with an over-subscription
privilege; and
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·
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historical
and current trading prices for our common
stock.
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The
subscription price was established by our board of directors at a price of
______ per share. The subscription price is not necessarily related
to our book value, results of operations, cash flows, financial condition or net
worth or any other established criteria of value and may or may not be
considered the fair value of our common stock at the time the rights offering
was approved by our board of directors or during the rights offering
period. We cannot assure you that the trading price of our common
stock will not decline during or after the rights offering. We also
cannot assure you that you will be able to sell shares purchased in this
offering at a price equal to or greater than the subscription
price. We do not intend to change the subscription price in response
to changes in the trading price of our common stock prior to the closing of the
rights offering.
What
is the basic subscription privilege?
For each
right that you own, you will have a basic subscription privilege to buy from us
one share of our common stock at the subscription price, subject to the Form S-3
Limitation and the 9.9% ownership limitation, both of which are described
below. You may exercise your basic subscription privilege for some or
all of your subscription rights, or you may choose not to exercise any
subscription rights.
For
example, if you owned 100 shares of our common stock as of 5:00 p.m., New York
City time, on the record date, you would receive the same number of subscription
rights and would have the right to purchase 100 shares of common stock for
______ per share with your basic subscription privilege.
What
is the over-subscription privilege?
If you
exercise your basic subscription privilege in full, you, together with other
subscription rights holders that exercise their basic subscription privilege in
full, will also be entitled to an over-subscription privilege to purchase a
portion of any shares not purchased by other subscription rights holders
pursuant to their basic subscription privilege, subject to the Form S-3
Limitation and the 9.9% ownership limitation, both of which are described
below. The subscription price per share that applies to the
over-subscription privilege is the same subscription price per share that
applies to the basic subscription privilege.
What
are the limitations on the basic subscription privilege and the
over-subscription privilege?
Our ability to satisfy your exercise of
the basic subscription privilege and the over-subscription privilege will be
subject to the Form S-3 Limitation, which permits us to sell shares of common
stock with a maximum aggregate market value of $[5.4] million in the rights
offering.
We will be able to satisfy your
exercise of the over-subscription privilege only if other subscription rights
holders do not elect to purchase all of the shares offered under their basic
subscription privilege We will honor over-subscription requests in
full to the extent sufficient shares are available following the exercise of
rights under the basic subscription privilege.
If the basic subscription requests or
the over-subscription requests exceed the number of shares available, we will
allocate the available shares of common stock pro rata among the stockholders
that exercise such privilege in proportion to the number of shares of common
stock owned by each such stockholder on the record date, relative to the number
of shares owned on the record date by all stockholders exercising such basic
subscription privilege or over-subscription privilege, as the case may
be.
No fractional shares of common stock
will be issued. Any fractional rights resulting from the share
allocation process described in this prospectus will be eliminated by rounding
to the nearest whole number.
What
effect will our 9.9% ownership limitation have on a holder’s ability to exercise
a subscription right?
To help maintain our status as a real
estate investment trust (REIT), our charter restricts beneficial and
constructive ownership of common stock by any person or group of persons acting
collectively to 9.9% of our outstanding shares of common stock. See
“Description of Capital Stock – Restrictions on Ownership and
Transfer.”
If you only exercise your basic
subscription rights, your percentage ownership interest in us may not
increase. If you exercise your over-subscription rights, your
ownership percentage will increase. We do not intend to grant waivers from
our 9.9% limitation to any holder that exceeds the limit as a result of its
exercise of basic subscription rights and/or over-subscription rights. The 9.9%
limit for a person is computed based on the outstanding common stock, not
including any common stock issuable to that person upon conversion of units of
our operating partnership, MHI Hospitality, L.P., if any.
Any rights exercised by a holder and
any common stock subscribed for by that holder through the exercise of its basic
or over-subscription privilege that would cause it to go over the 9.9% ownership
limit will not be considered exercised or subscribed for by that holder. The
portion of the subscription price paid by a holder for rights that are not
considered exercised and for common stock not considered subscribed for will be
returned to that holder, without interest or penalty, as soon as practicable
after completion of this offering.
If a holder subscribes for and,
inadvertently or otherwise, is issued a number of shares of common stock that
causes that holder to go over the 9.9% ownership limit, the number of shares of
common stock in excess of the 9.9% ownership limit will not, in the hands of
that holder, have dividend, voting and other rights or be considered outstanding
for quorum, voting and other purposes. See “Description of Capital
Stock – Restrictions on Ownership and Transfer.”
Am
I required to exercise the rights I receive in the rights offering?
No. You
may exercise any number of your subscription rights, or you may choose not to
exercise any subscription rights. However, if you choose not to fully
exercise your basic subscription privilege and other subscription rights holders
fully exercise their basic subscription privilege, the percentage of our common
stock owned by other stockholders will increase, the relative percentage of our
common stock that you own will decrease, and your voting and other rights will
be diluted. In addition, if you do not exercise your basic
subscription privilege in full, you will not be entitled to participate in the
over-subscription privilege.
How
soon must I act to exercise my subscription rights?
If you received a rights certificate
and elect to exercise any or all of your subscription rights, the subscription
agent must receive your completed and signed rights certificate and payment
prior to the expiration of the rights offering, which is ________, 2009, at 5:00
p.m., New York time. If your shares of common stock are held in the name of a
custodian bank, broker, dealer or other nominee, your custodian bank, broker,
dealer or other nominee may establish a deadline prior to 5:00 p.m. New York
time, on _________, 2009 by which you must provide it with your instructions to
exercise your subscription rights and pay for your shares.
Although we will make reasonable
attempts to provide this prospectus to holders of subscription rights, the
rights offering and all subscription rights will expire at 5:00 p.m., New York
time on ______, 2009 (unless extended), whether or not we have been able to
locate each person entitled to subscription rights. Although we have the option
of extending the expiration of the rights offering, we currently do not intend
to do so.
May
I transfer my subscription rights?
No. You
may not sell, transfer or assign your subscription rights to anyone
else.
Are
we requiring a minimum subscription to complete the rights
offering?
There is
no minimum subscription requirement in the rights offering. However, our board
of directors reserves the right to cancel the rights offering for any reason,
including if our board of directors believes that there is insufficient
participation by our subscription rights holders. If the rights offering is
canceled, all subscription proceeds received by the subscription agent will be
returned, without interest or penalty.
Have
any stockholders indicated they will exercise their subscription
rights?
We have
no commitment from any stockholder participating in the rights
offering.
Are
there any other conditions to the completion of the rights
offering?
Yes. The
completion of the rights offering is subject to the conditions described under
“The Rights Offering—Conditions, Withdrawal and Termination.”
Can
the board of directors cancel, terminate, amend, or extend the rights
offering?
Yes. We
have the option to extend the rights offering, although we do not presently
intend to do so. We may cancel the rights offering at any time prior
to the expiration date for any reason. If the rights offering is
canceled, all subscription payments received by the subscription agent will be
returned, without interest or penalty, as soon as practicable to those persons
who subscribed for shares in the rights offering. Our board of
directors reserves the right to amend or modify the terms of the rights offering
at any time, for any reason. The terms of the rights offering cannot
be modified or amended after the expiration date of the rights
offering.
When
will I receive my subscription rights certificate?
As soon as practicable after the date
of this prospectus, the subscription agent will send a subscription rights
certificate to each registered holder of our common stock as of the close of
business on the record date, based on our stockholder registry maintained at the
transfer agent for our common stock. If you hold your shares of
common stock through a brokerage account, bank, or other nominee, you will not
receive an actual subscription rights certificate. Instead, as described in this
prospectus, you must instruct your broker, bank or nominee whether or not to
exercise rights on your behalf. If you wish to obtain a separate subscription
rights certificate, you should promptly contact your broker, bank or other
nominee and request a separate subscription rights certificate. It is not
necessary to have a physical subscription rights certificate to elect to
exercise your rights.
How
do I exercise my subscription rights?
If you
wish to participate in the rights offering, you must properly complete the
enclosed subscription rights certificate and deliver it, along with the full
subscription price (including any amounts in respect of your over-subscription
privilege), to the subscription agent before 5:00 p.m., New York City time, on
,
2009. If you use the mail, we recommend that you use insured,
registered mail, return receipt requested.
If you
send a payment that is insufficient to purchase the number of shares you
requested, or if the number of shares you requested is not specified in the
forms, the payment received will be applied to exercise your subscription rights
to the fullest extent possible based on the amount of the payment received,
subject to the elimination of fractional rights. If your
aggregate subscription price payment is greater than the amount you would owe
for exercise of your basic subscription privilege in full, you will be deemed to
have exercised your over-subscription privilege to purchase the maximum number
of shares of our common stock that could be purchased with your
over-payment. If the payment exceeds the subscription price for the
full exercise of your subscription rights, or if you subscribe for more shares
than you are eligible to purchase pursuant to the basic privilege and/or
over-subscription privilege, then the excess will be returned to you as soon as
practicable. You will not receive interest on any payments refunded
to you under the rights offering.
What
should I do if I want to participate in the rights offering, but my shares of
common stock are held in the name of my broker, dealer, custodian bank or other
nominee?
If you
hold your shares of our common stock in the name of a broker, dealer, custodian
bank or other nominee, then your broker, dealer, custodian bank or other nominee
is the record holder of the shares of our common stock that you
own. The record holder must exercise the subscription rights on your
behalf for the shares of our common stock you wish to purchase.
If you
wish to purchase shares of our common stock through the rights offering, please
promptly contact your broker, dealer, custodian bank or other nominee as record
holder of your shares. We will ask your record holder to notify you of the
rights offering. However, if you are not contacted by your broker, dealer,
custodian bank or other nominee, you should promptly initiate contact with that
intermediary. Your broker, dealer, custodian bank or other nominee may establish
a deadline prior to the 5:00 p.m. New York time on _____, 2009, which we
established as the expiration date of the rights offering.
If
the rights offering is not completed, will my subscription payment be refunded
to me?
Yes. The
subscription agent will hold all funds it receives in a segregated bank account
until completion of the rights offering. If the rights offering is
not completed, the subscription agent will return, without interest or penalty,
as soon as practicable all subscription payments. If you own shares
of common stock in “street name,” it may take longer for you to receive payment
because the subscription agent will return payments through the record holder of
the shares.
What
form of payment is required to purchase our shares of common stock in the rights
offering?
As described in the instructions
accompanying the rights certificate, payments submitted to the subscription
agent in connection with the rights offering must be made in full, in United
States currency, in immediately available funds, by:
|
·
|
certified
bank check or bank draft payable to American Stock Transfer & Trust
Company, as subscription agent, f/b/o MHI Hospitality Corporation, drawn
upon a United States bank; or
|
|
·
|
wire
transfer of immediately available funds to the account maintained by the
subscription agent to: JP Morgan Chase, ABA # 021000021, Acct #
323-213251, Account name: American Stock Transfer & Trust, Reference:
MHI Hospitality Rights Offer.
|
You may
not remit personal checks of any type.
After
I exercise my subscription rights, can I change my mind?
No. All
exercises of subscription rights are irrevocable by the subscription rights
holders, even if you later learn information about us that you consider
unfavorable, or even in the event we extend the rights offering. You
should not exercise your subscription rights unless you are certain that you
wish to purchase the shares of common stock offered pursuant to this rights
offering. However, we may cancel, extend or otherwise amend the
rights offering at any time prior to the expiration date.
Does
exercising my subscription rights involve risk?
Yes. The
exercise of your subscription rights involves risks. Exercising your
subscription rights involves the purchase of shares of our common stock and
should be considered as carefully as you would consider other equity
investments. Among other things, you should carefully consider the
risks described under the heading “Risk Factors” in this prospectus and the
documents incorporated by reference into this prospectus.
Has
our board of directors made a recommendation to our stockholders regarding the
rights offering?
No. Our
board of directors is making no recommendations regarding your exercise of the
subscription rights. Stockholders who exercise subscription rights
risk investment loss on new money invested. We cannot assure you that
the trading price for our common stock will be above the subscription price at
the time of exercise or at the expiration of the rights offering period or that
anyone purchasing shares at the subscription price will be able to sell those
shares in the future at the same price or a higher price. You are
urged to make your own decision whether or not to exercise your subscription
rights based on your own assessment of our business and the rights
offering. See “Risk Factors” in this prospectus and the documents
incorporated by reference into this prospectus.
What
fees or charges apply if I exercise my subscription rights?
We are
not charging any fees or sales commissions to issue subscription rights to you
or to issue shares to you if you exercise your subscription
rights. If you exercise your subscription rights through a broker,
dealer, custodian bank or other record holder of your shares of common stock,
you are responsible for paying any fees that person may charge.
When
will I receive my new shares of common stock?
Stock
certificates will not be issued for shares of our common stock offered in the
offering. As soon as practicable after the expiration of the rights
offering period, the subscription agent will arrange for issuance to DTC on
behalf of each subscription rights holder of record that has validly exercised
its basic subscription privilege, the shares of common stock purchased pursuant
to the basic subscription privilege. Shares subscribed for pursuant
to the over-subscription privilege will be delivered to DTC on your behalf as
soon as practicable after the expiration date of the rights offering and
following the completion of any pro-rations as may be necessary in the event the
over-subscription requests exceed the number of shares not subscribed for
pursuant to the basic subscription privilege.
Will
the subscription rights be listed on a stock exchange or national
market?
The
subscription rights may not be sold, transferred or assigned to anyone else and
will not be listed on the Nasdaq Global Market or any other stock exchange or
market or on the OTC Bulletin Board. Our common stock will continue
to trade on the Nasdaq Global Market under the symbol “MDH”, and we expect the
shares of common stock to be issued in connection with the rights offering will
also be listed on the Nasdaq Global Market under the same symbol.
What
are the material U.S. federal income tax consequences of exercising my
subscription rights?
The
receipt and exercise of your subscription rights will generally not be taxable
under U.S. federal income tax laws. You should seek specific tax
advice from your personal tax advisor in light of your personal tax situation
and as to the applicability and effect of any tax laws. See “Certain
Material U.S. Federal Income Tax Considerations.”
What
happens if I choose not to exercise my subscription rights?
Subscription
rights holders who do not exercise their subscription rights will lose any value
that may be represented by the rights. If you do not exercise your
basic subscription privilege and the rights offering is completed, the number of
shares of our common stock you own will not change but, due to the fact that
shares will be purchased by other subscription rights holders in the rights
offering, your percentage ownership of our total outstanding common stock will
decrease. In addition, if you exercise your basic subscription
privilege in full but do not exercise your over-subscription privilege in full
and other subscription rights holders fully exercise their basic and
over-subscription privilege, the percentage of our common stock owned by those
other subscription rights holders will increase.
How
many shares of common stock will be outstanding after the rights
offering?
As of
September 28, 2009, there were 6,964,263 shares of our common stock
outstanding. We will issue up to ________ shares of common stock in
the rights offering, depending on the number of subscription rights that are
exercised. Based on the number of shares outstanding as of _________,
2009, if we issue all _________ shares of common stock available in this rights
offering, we would have __________ shares of common stock outstanding following
the completion of the rights offering.
How
much money will MHI receive from the rights offering?
The net
proceeds to us from the rights offering will depend on the number of
subscription rights that are exercised. If we issue all _________
shares available in the rights offering, the net proceeds to us, after deducting
estimated offering expenses, will be approximately $____ million. We
estimate that the expenses of the rights offering will be approximately $______
million. We will contribute the net proceeds to our operating
partnership in exchange for units in our operating partnership. Our
operating partnership intends to subsequently use the net proceeds received from
us for additional working capital, which may be used at our discretion to reduce
or purchase existing or future indebtedness, or for other general corporate
purposes. See “Use of Proceeds.”
To
whom should I send my forms and payment?
If you
received a rights certificate with this prospectus and wish to purchase shares
during the rights offering, you should send your properly completed and signed
rights certificate, any other subscription documents and payment by hand
delivery, first class mail or courier service to the subscription agent
at:
If
Delivering by Hand:
American
Stock Transfer & Trust Company
Attn:
Reorganization Department
59
Maiden Lane
New
York, New York 10038
|
|
By
Overnight Courier or By Mail:
American
Stock Transfer & Trust Company
Operations
Center
Attn:
Reorganization Department
6201
15th Avenue
Brooklyn,
New York 11219
|
You are
solely responsible for completing delivery to the subscription agent of your
subscription materials. The subscription materials are to be received by the
subscription agent on or prior to 5:00 p.m., New York time, on _______, 2009. We
urge you to allow sufficient time for delivery of your subscription materials to
the subscription agent.
Who
should I contact if I have more questions?
If you
have more questions about the rights offering or need additional copies of the
rights offering documents, please contact the information agent, The Altman
Group, at (866) 796-3419 or by email at
reorg@altmangroup.com
.
PROSPECTUS
SUMMARY
This
summary highlights the information contained elsewhere in or incorporated by
reference into this prospectus. This summary does not contain all of
the information that you should consider before deciding whether to exercise
your subscription rights. You should carefully read this entire
prospectus, including the information under the heading “Risk Factors” and all
information included or incorporated by reference into this prospectus, which
are described under the heading “Incorporation by Reference.” In this
prospectus, all references to the “Company,” “MHI” “we,” “us” and “our” refer to
MHI Hospitality Corporation, a Maryland corporation, and its subsidiaries and
predecessors, unless the context otherwise requires or where otherwise
indicated.
Company
Overview
We are a
self-advised REIT incorporated in Maryland in August 2004 to pursue
opportunities in the full-service, upper-upscale, upscale and mid-scale segments
of the hotel industry. We commenced operations in December 2004 when we
completed our initial public offering and thereafter consummated the acquisition
of six hotel properties, which we refer to as our initial
properties.
Our
wholly-owned hotel portfolio currently consists of nine full-service,
upper-upscale, upscale and mid-scale hotels with 2,110 rooms, which operate
under well-known brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn.
We also own a 25% indirect non-controlling interest in the 311 room Crowne Plaza
Hollywood Beach Resort through a joint venture with The Carlyle Group, which we
refer to as Carlyle, and we have a leasehold interest in a resort condominium
facility in Wrightsville Beach, North Carolina.
As of
September 30, 2009, we owned the following hotel properties:
Property
|
|
Number
of Rooms
|
|
Location
|
|
Date of Acquisition
|
Hilton
Philadelphia Airport
|
|
|
331
|
|
Philadelphia,
PA
|
|
December
21, 2004
|
Hilton
Savannah DeSoto
|
|
|
246
|
|
Savannah,
GA
|
|
December
21, 2004
|
Hilton
Wilmington Riverside
|
|
|
272
|
|
Wilmington,
NC
|
|
December
21, 2004
|
Sheraton
Louisville Riverside on Louisville
|
|
|
181
|
|
Jeffersonville,
IN
|
|
September
20, 2006
|
Crowne
Plaza Hampton Marina
|
|
|
172
|
|
Hampton,
VA
|
|
April
24, 2008
|
Crowne
Plaza Jacksonville
|
|
|
292
|
|
Jacksonville,
FL
|
|
July
22, 2005
|
Crowne
Plaza Tampa Westshore
|
|
|
222
|
|
Tampa,
FL
|
|
October
29, 2007
|
Holiday
Inn Brownstone
|
|
|
187
|
|
Raleigh,
NC
|
|
December
21, 2004
|
Holiday
Inn Laurel West
|
|
|
207
|
|
Laurel,
MD
|
|
December
21, 2004
|
Total
|
|
|
2,110
|
|
|
|
|
We
conduct substantially all our business through our operating partnership, MHI
Hospitality, L.P. We are the sole general partner of our operating partnership,
and we own an approximate 65.0% interest in our operating partnership, with the
remaining interest being held by the contributors of our initial properties as
limited partners.
To
qualify as a REIT, we cannot operate hotels. Therefore, our operating
partnership leases our hotel properties to MHI Hospitality TRS, LLC, our TRS
Lessee, which then engages a hotel management company to operate the hotels
under a management contract. Our TRS Lessee has engaged MHI Hotels Services, LLC
to manage our hotels. Our TRS Lessee, and its parent, MHI Hospitality TRS
Holding, Inc., which we refer to as MHI Holding, are consolidated into our
financial statements for accounting purposes. The earnings of MHI Hospitality
TRS Holding, Inc. are subject to taxation similar to other C
corporations.
We were
incorporated in Maryland in August 2004. Our principal executive offices are
located at 410 W. Francis Street, Williamsburg, VA 23185. Our telephone number
is (757) 229-5648. Our website is http://www.MHIHospitality.com.
The information contained on, or that
may be accessed through, our website is not part of, and is not incorporated
into, this prospectus.
8
Recent
Portfolio Changes
On
April 24, 2008, we completed the purchase of the 172-room Hampton Marina
Hotel in Hampton, Virginia for approximately $7.8 million, including transfer
costs. To facilitate the purchase, we assumed $5.75 million of existing
indebtedness, which bore a rate of 6.50% and was set to mature on July 1,
2016. The remainder of the purchase price as well as closing costs was funded
with borrowings on our credit facility. On June 30, 2008, we refinanced the
indebtedness drawing approximately $5.5 million on a three-year $9.0 million
mortgage loan from TowneBank with one 12-month extension. The loan requires
monthly payments of interest and bears a rate of the greater of 30-day LIBOR
plus 2.75% or 4.75%. The remainder of the proceeds, totaling approximately $3.5
million, funded a product improvement plan, or PIP, for the hotel in connection
with its Crowne Plaza licensing. In October 2008, the Company completed the
hotel’s conversion to the Crowne Plaza Hampton Marina.
On
May 1, 2008, we re-opened the Sheraton Louisville Riverside after
completing a $16.1 million renovation.
On
March 6, 2009, we re-opened the Crowne Plaza Tampa Westshore after
completing a $23.5 million renovation.
Summary
Financial Information
The
following is a summary of selected statement of operations and balance sheet
data for each of the periods indicated. The selected financial data presented
below for the years ended December 31, 2008 and December 31, 2007 are
derived from our audited consolidated financial statements and related
notes. The selected consolidated financial data presented below for the
six months ended June 30, 2009, and the summary balance sheet information
for June 30, 2009, compared with December 31, 2008 and 2007 are
derived from our unaudited consolidated financial statements and related
notes.
The
selected consolidated financial data presented below should be read in
conjunction with our consolidated financial statements and the notes to the
consolidated financial statements and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included in our Annual Report on
Form 10-K for the year ended December 31, 2008 and Quarterly Report on
Form 10-Q for the quarter ended June 30, 2009, which are incorporated
herein by reference.
|
|
Six Months Ended
June 30,
2009
|
|
|
Year Ended
December 31,
2008
|
|
|
Year Ended
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
$
|
36,031,709
|
|
|
$
|
70,762,732
|
|
|
$
|
69,814,379
|
|
Total
Operating Expenses excluding Depreciation and Amortization
|
|
|
(29,279,497
|
)
|
|
|
(58,810,002
|
)
|
|
|
(55,014,440
|
)
|
Depreciation
and Amortization
|
|
|
(3,996,058
|
)
|
|
|
(6,346,222
|
)
|
|
|
(5,050,234
|
)
|
Net
Operating Income
|
|
|
2,756,154
|
|
|
|
5,606,509
|
|
|
|
9,749,705
|
|
Interest
Income
|
|
|
27,828
|
|
|
|
72,547
|
|
|
|
132,715
|
|
Interest
Expense
|
|
|
(4,584,707
|
)
|
|
|
(6,811,460
|
)
|
|
|
(4,211,785
|
)
|
Other
Income (Expense) – Net
|
|
|
534,103
|
|
|
|
(1,263,305
|
)
|
|
|
(2,034,539
|
)
|
Income
Tax Benefit (Provision)
|
|
|
524,855
|
|
|
|
1,475,695
|
|
|
|
187,888
|
|
Net
Income (Loss)
|
|
|
(741,767
|
)
|
|
|
(920,014
|
)
|
|
|
3,823,984
|
|
Net
Income (Loss) Attributable to Non-Controlling Interest
|
|
|
259,137
|
|
|
|
322,127
|
|
|
|
(1,362,967
|
)
|
Net
Income (Loss) Attributable to the Company
|
|
$
|
(482,630
|
)
|
|
$
|
(597,887
|
)
|
|
$
|
2,461,017
|
|
9
|
|
Six Months Ended
June 30,
2009
|
|
|
Year Ended
December 31,
2008
|
|
|
Year Ended
December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Cash Flows
|
|
|
|
|
|
|
|
|
|
Cash
from (used in) Operations – net
|
|
$
|
(146,770
|
)
|
|
$
|
7,214,566
|
|
|
$
|
12,786,427
|
|
Cash
from (used in) Investing – net
|
|
|
(5,640,025
|
)
|
|
|
(51,931,701
|
)
|
|
|
(35,002,314
|
)
|
Cash
from (used in) Financing – net
|
|
|
10,667,130
|
|
|
|
42,447,582
|
|
|
|
24,759,096
|
|
Net
Increase (Decrease) in Cash and Cash Equivalents
|
|
$
|
4,880,335
|
|
|
$
|
(2,269,553
|
)
|
|
$
|
2,543,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
(1)
|
|
$
|
220,458,801
|
|
|
$
|
211,218,434
|
|
|
$
|
159,958,990
|
|
Total
Long-Term Debt including Current Portion
(1)
|
|
|
72,935,572
|
|
|
|
72,256,168
|
|
|
|
55,000,000
|
|
Total
Current and Long-Term Liabilities
(1)
|
|
|
167,560,899
|
|
|
|
157,442,238
|
|
|
|
100,083,094
|
|
Non-Controlling
Interest
(1)
|
|
|
17,127,258
|
|
|
|
17,461,147
|
|
|
|
19,689,453
|
|
Total
MHI Hospitality Corporation Stockholders’ Equity
(1)
|
|
|
35,770,644
|
|
|
|
36,315,049
|
|
|
|
40,186,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Number of Available Rooms
|
|
|
2,032
|
|
|
|
1,776
|
|
|
|
1,537
|
|
Total
Number of Available Room Nights
|
|
|
367,702
|
|
|
|
649,867
|
|
|
|
561,005
|
|
Occupancy
Percentage
(2)
|
|
|
60.7
|
%
|
|
|
61.9
|
%
|
|
|
69.8
|
%
|
Average
Daily Rate (ADR)
(2)
|
|
$
|
110.26
|
|
|
$
|
123.55
|
|
|
$
|
118.86
|
|
RevPAR
(2)
|
|
$
|
66.96
|
|
|
$
|
76.51
|
|
|
$
|
82.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
(3)
|
|
$
|
3,517,300
|
|
|
$
|
6,292,400
|
|
|
$
|
9,249,327
|
|
Earnings
Per Share (Basic and Diluted)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
0.36
|
|
(1)
|
As
of the period end.
|
(2)
|
Occupancy
Percent is calculated by dividing the total daily number of rooms sold by
the total daily number of rooms available. Average Daily Rate, ADR, is
calculated by dividing the total daily room revenue by the total daily
number of rooms sold. Revenue Per Available Room, RevPAR, is calculated by
dividing the total daily room revenue by the total daily number of rooms
available.
|
10
(3)
|
Funds
from Operations, FFO, is used by industry analysts and investors as a
supplemental operating performance measure of an equity REIT. FFO is
calculated in accordance with the definition that was adopted by the Board
of Governors of the National Association of Real Estate Investment Trusts,
NAREIT. FFO, as defined by NAREIT, represents net income or loss
determined in accordance with GAAP, excluding extraordinary items as
defined under GAAP and gains or losses from sales of previously
depreciated operating real estate assets, plus certain non- cash items
such as real estate asset depreciation and amortization, and after
adjustment for any minority interest from unconsolidated partnerships and
joint ventures. Historical cost accounting for real estate assets in
accordance with GAAP implicitly assumes that the value of real estate
assets diminishes predictably over time. Since real estate values instead
have historically risen or fallen with market conditions, many investors
and analysts have considered the presentation of operating results for
real estate companies that use historical cost accounting to be
insufficient by itself. Thus, NAREIT created FFO as a supplemental measure
of REIT operating performance that excludes historical cost depreciation,
among other items, from GAAP net income. Management believes that the use
of FFO, combined with the required GAAP presentations, has improved the
understanding of the operating results of REITs among the investing public
and made comparisons of REIT operating results more meaningful. Management
considers FFO to be a useful measure of adjusted net income (loss) for
reviewing comparative operating and financial performance because we
believe FFO is most directly comparable to net income (loss), which
remains the primary measure of performance, because by excluding gains or
losses related to sales of previously depreciated operating real estate
assets and excluding real estate asset depreciation and amortization, FFO
assists in comparing the operating performance of a company’s real estate
between periods or as compared to different companies. Although FFO is
intended to be a REIT industry standard, other companies may not calculate
FFO in the same manner as we do, and investors should not assume that FFO
as reported by us is comparable to FFO as reported by other REITs. Below
is a reconciliation of FFO to net income
(loss).
|
|
|
Six Months Ended
June 30,
2009
|
|
|
Year Ended
December 31,
2008
|
|
|
Year Ended
December 31,
2007
|
|
Reconciliation
of FFO
|
|
|
|
|
|
|
|
|
|
Net
Income (Loss) Attributable to the Company
|
|
$
|
(482,630
|
)
|
|
$
|
(597,887
|
)
|
|
$
|
2,461,017
|
|
Noncontrolling
Interest
|
|
|
(259,137
|
)
|
|
|
(322,127
|
)
|
|
|
1,362,967
|
|
Add
Depreciation and Amortization
|
|
|
3,996,058
|
|
|
|
6,346,222
|
|
|
|
5,050,234
|
|
Add
Equity in Depreciation on Joint Venture
|
|
|
271,879
|
|
|
|
545,659
|
|
|
|
135,445
|
|
Subtract
Gain/ Add Loss on Asset Disposal
|
|
|
(8,870
|
)
|
|
|
320,533
|
|
|
|
239,664
|
|
Funds
From Operations
|
|
$
|
3,517,300
|
|
|
$
|
6,292,400
|
|
|
$
|
9,249,327
|
|
FFO does
not represent cash generated from operating activities as determined by
accounting principles generally accepted in the United States of America, which
we refer to as GAAP, and should not be considered as an alternative to GAAP net
income, as an indication of our financial performance, or to cash flow from
operating activities as determined by GAAP, as a measure of liquidity. In
addition, FFO is not indicative of funds available to fund cash needs, including
the ability to make cash distributions.
11
SUMMARY
The
Rights Offering
The
following summary describes the principal terms of the rights offering, but is
not intended to be complete. See “The Rights Offering” for a more
detailed description of the terms and conditions of the rights
offering.
Securities
Offered
|
|
We
are distributing at no charge to holders of our common stock,
non-transferable subscription rights to purchase shares of our common
stock. You will receive one subscription right for each share of common
stock held of record, as of 5:00 p.m., New York City time on October 12,
2009.
|
|
|
|
Subscription
Price
|
|
The
subscription price per share of common stock shall be equal to
______.
|
|
|
|
Basic
Subscription Privilege
|
|
For
each right that you own, you will have a basic subscription privilege to
buy from us one share of our common stock at the subscription price,
subject to the Form S-3 Limitation and the 9.9% ownership limitation, both
of which are described below. You may exercise your basic subscription
privilege for some or all of your subscription rights, or you may choose
not to exercise your subscription rights.
|
|
|
|
Over-Subscription
Privilege
|
|
If
you exercise your basic subscription privilege in full, you will also have
an over-subscription privilege to purchase any shares that our other
subscription rights holders do not purchase under their basic subscription
privilege subject to the Form S-3 Limitation and the 9.9% ownership
limitation, both of which are described below. The subscription price for
shares purchased pursuant to the over-subscription privilege will be the
same as the subscription price for the basic subscription
privilege.
If,
however, over-subscription requests exceed the number of shares of common
stock available for sale in the rights offering, we will allocate the
available shares of common stock pro rata among the stockholders that
exercise the over-subscription privilege in proportion to the number of
shares of common stock owned by each such stockholder on the record date,
relative to the number of shares owned on the record date by all
stockholders exercising the over-subscription privilege. If this pro rata
allocation results in any stockholder receiving a greater number of shares
of common stock than the stockholder subscribed for pursuant to the
exercise of the over-subscription privilege, then such stockholder will be
allocated only that number of shares for which the stockholder
oversubscribed, and the remaining shares of common stock will be allocated
among all other stockholders exercising the over-subscription privilege on
the same pro rata basis described above. The proration process will be
repeated until all shares of common stock have been allocated or all
over-subscription requests have been satisfied.
If
you are not allocated the full amount of shares for which you
over-subscribe, you will receive a refund of the subscription price,
without interest or penalty, that you delivered for those shares of our
common stock that are not allocated to you. The subscription agent will
mail such refunds as soon as practicable after the completion of the
offering.
No
fractional shares of common stock will be issued. Any fractional rights
resulting from the share allocation process specified above will be
rounded to the nearest number.
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|
|
|
Form
S-3 Limitation
|
|
Based
on an aggregate market value of outstanding common stock held by
non-affiliates equal to approximately $16.2 million as of September 28,
2009, we may not sell shares of common stock with an aggregate market
value of more than approximately $[5.4] million under this prospectus
pursuant to the Form S-3 Limitation. If the basic subscription requests or
the over-subscription requests exceed the number of shares available, we
will allocate the available shares of common stock pro rata among the
stockholders that exercise such privilege in proportion to the number of
shares of common stock owned by each such stockholder on the record date,
relative to the number of shares owned on the record date by all
stockholders exercising such basic subscription privilege or
over-subscription privilege, as the case may
be.
|
12
REIT
Ownership Limitation
|
|
To
help maintain our status as a real estate investment trust (REIT), our
charter restricts beneficial and constructive ownership of shares of
common stock by any person or group of persons acting collectively to 9.9%
of our outstanding common stock.
If
you only exercise your basic subscription rights, your percentage
ownership interest in us may not increase. If you exercise your
over-subscription rights, your ownership percentage will increase. We do
not intend to grant waivers from our 9.9% limitation to any holder that
exceeds the limit as a result of its exercise of basic subscription rights
and/or over-subscription rights.
In
order for us to qualify as a REIT under the Internal Revenue Code of 1986,
as amended, which we refer to as the Code, not more than 50% (by value) of
our outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to
include certain entities).
The
9.9% limit for a person is computed based on the outstanding shares of
common stock, and does not include any shares of common stock issuable to
that person upon conversion of limited partnership interests of our
operating partnership, MHI Hospitality, L.P., if any.
Any
rights exercised by a holder and any shares of common stock subscribed for
by that holder through the exercise of its over-subscription rights that
would cause it to go over the 9.9% ownership limit will not be considered
exercised or subscribed for by that holder. The portion of the
subscription price paid by a holder for rights that are not considered
exercised and for shares of common stock not considered subscribed for
will be returned to that holder, without interest or penalty, as soon as
practicable after completion of this offering.
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|
|
|
Record
Date
|
|
October
12, 2009
|
|
|
|
Expiration
Date
|
|
The
subscription rights will expire at 5:00 p.m., New York City time, on
__________, 2009, unless the expiration date is extended. We reserve the
right to extend the subscription rights period at our sole
discretion.
|
|
|
|
Procedure
for Exercising Subscription Rights
|
|
The
subscription rights may be exercised at any time during the subscription
period, which commences on __________ , 2009. To exercise your
subscription rights, you must take the following steps:
·
If you are a registered holder of our shares of common stock, you
may deliver payment and a properly completed rights certificate to the
subscription agent before 5:00 p.m., New York time on _______, 2009,
unless the expiration date is extended. You may deliver the documents and
payments by mail or commercial carrier. If regular mail is used for this
purpose, we recommend using registered mail, properly insured, with return
receipt requested.
·
If
you are a beneficial owner of shares that are registered in the name of a
broker, dealer, custodian bank or other nominee, or if you would rather an
institution conduct the transaction on your behalf, you should instruct
your broker, dealer, custodian bank or other nominee to exercise your
subscription rights on your behalf and deliver all documents and payments
before 5:00 p.m., New York time, on _______, 2009, unless the expiration
date is
extended.
|
13
Use
of Proceeds
|
|
The
net proceeds to us from the rights offering will depend on the number of
subscription rights that are exercised. If we issue all _________ shares
available in the rights offering, the net proceeds to us, after deducting
estimated offering expenses, will be approximately $___ million. We
estimate that the expenses of the rights offering will be approximately
$_____ million. We will contribute the net proceeds to our operating
partnership in exchange for units in our operating partnership. Our
operating partnership intends to subsequently use the net proceeds
received from us for additional working capital, which may be used for
reducing or purchasing our indebtedness, or for other general corporate
purposes. See “Use of Proceeds.”
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|
|
|
Non-Transferability
of Subscription Rights
|
|
The
subscription rights may not be sold, transferred or assigned to anyone
else and will not be listed for trading on the Nasdaq Global Market or any
other stock exchange or market or on the OTC Bulletin
Board.
|
|
|
|
No
Revocation
|
|
All
exercises of subscription rights are irrevocable, even if you later learn
information about us that you consider unfavorable, or even in the event
we extend the rights offering. You should not exercise your subscription
rights unless you are certain that you wish to purchase the shares of
common stock offered pursuant to this rights offering at a subscription
price of ______ per share.
|
|
|
|
Conditions
to the Rights Offering
|
|
The
completion of the rights offering is subject to the conditions described
under “The Rights Offering—Conditions, Withdrawal and
Termination.”
|
|
|
|
Extension;
Cancellation; Amendment
|
|
We
have the option to extend the rights offering and the period for
exercising your subscription rights, although we do not presently intend
to do so. We also reserve the right to cancel the rights offering at any
time prior to the expiration date for any reason. If the rights offering
is canceled, all subscription payments received by the subscription agent
will be returned, without interest or penalty, as soon as practicable to
those persons who subscribed for shares in the rights offering. We also
reserve the right to amend or modify the terms of the rights
offering.
|
|
|
|
No
Board Recommendation
|
|
Our
board of directors is making no recommendations regarding your exercise of
the subscription rights. You are urged to make your own decision whether
or not to exercise your subscription rights based on your own assessment
of our business and the rights offering. Please see the section of this
prospectus entitled “Risk Factors” for a discussion of some of the risks
involved in investing in our common stock.
|
|
|
|
Issuance
of Common Stock
|
|
If
you purchase shares of common stock through the rights offering, we will
issue those shares to DTC on your behalf as soon as practicable after the
completion of the rights offering. Stock certificates will not be issued
for shares of our common stock offered in the offering.
|
|
|
|
Listing
of Common Stock
|
|
Our
common stock trades on the Nasdaq Global Market under the symbol “MDH”,
and we expect the shares to be issued in connection with the rights
offering will also be listed on the Nasdaq Global Market under the same
symbol.
|
|
|
|
Certain
Material U.S. Federal Income Tax Considerations
|
|
The receipt and exercise of your subscription
rights will generally not be taxable under U.S. federal income tax laws.
You should seek specific tax advice from your personal tax advisor in
light of your personal tax situation and as to the applicability and
effect of any tax laws.
See “Certain Material U.S. Federal Income
Tax Considerations.”
|
|
|
|
Subscription
Agent
|
|
American
Stock Transfer & Trust Company
|
|
|
|
Information
Agent
|
|
The
Altman
Group
|
14
Shares
of Common Stock Outstanding Before the Rights Offering
|
|
As
of September 28, 2009, 6,964,263 shares of our common stock were
outstanding.
|
|
|
|
Shares
of Common Stock Outstanding After Completion of the Rights
Offering
|
|
We
will issue up to ________ shares of common stock in the rights offering,
depending on the number of subscription rights that are exercised. Based
on the number of shares of common stock outstanding as of September 28,
2009, if we issue all ________ shares of common stock available in this
rights offering, we would have ____________ shares of common stock
outstanding following the completion of the rights
offering.
|
|
|
|
Risk
Factors
|
|
Stockholders
considering making an investment by exercising subscription rights in the
rights offering should carefully read and consider the information set
forth in “Risk Factors” beginning on page 16 of this prospectus, together
with the other information contained in or incorporated by reference into
this prospectus, including the information discussed under the heading
“Risk Factors” in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission, or the SEC, on March 25, 2009, before making a
decision to invest in our common stock.
|
|
|
|
Fees
and Expenses
|
|
We
will pay the fees and expenses incurred by us related to the rights
offering.
|
15
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully read and consider the risks described below, together with the other
information contained in or incorporated by reference into this prospectus,
before making an investment. The risks described below are not the only risks we
face. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial may also materially and adversely affect our
business operations. If any of the following risks actually occurs, our
business, results of operations and financial condition could suffer. In that
case, the trading price of our common stock could decline, and you may lose all
or part of your investment. Some of the statements in this section of this
prospectus are forward-looking statements. For more information about
forward-looking statements, please see the section of this prospectus entitled
“Cautionary Note Regarding Forward-Looking Statements.”
Risks
Related to the Rights Offering
The
price of our common stock is volatile and may decline before or after the
subscription rights expire.
The
market price of our common stock is subject to wide fluctuations in response to
numerous factors, including factors that have little or nothing to do with us or
our performance, and these fluctuations could materially reduce our stock price.
These factors include, among other things, actual or anticipated variations in
our operating results and cash flow, the nature and content of our earnings
releases, and our competitors’ earnings releases, changes in financial estimates
by securities analysts, business conditions in our markets and the general state
of the securities markets and the market for similar stocks, the number of
shares of our common stock outstanding, changes in capital markets that affect
the perceived availability of capital to companies in our industry, governmental
legislation or regulation, as well as general economic and market conditions,
such as recessions. In addition, the stock market historically has experienced
significant price and volume fluctuations. These fluctuations are often
unrelated to the operating performance of particular companies. These broad
market fluctuations may cause declines in the market price of our common
stock.
If
you do not fully exercise your basic subscription privilege, your interest in us
will be diluted. In addition, if you do not exercise your basic
subscription privilege in full and the subscription price is less than the fair
value of our common stock, then you would experience an immediate dilution of
the aggregate fair value of your shares, which could be
substantial.
Up to
__________ shares of common stock are issuable in the rights
offering. If you do not choose to fully exercise your basic
subscription privilege, your proportionate voting interest will be reduced and
your percentage ownership interest in us will significantly
decrease. In addition, if you exercise your basic subscription
privilege in full but do not exercise your over-subscription privilege in full
and other subscription rights holders fully exercise their basic and
over-subscription privileges, the percentage of our common stock owned by those
other subscription rights holders will increase. For example, if you
own ______ shares of common stock before the rights offering, or approximately
___% of our common stock, and you do not exercise any of your basic or
over-subscription privileges while all other subscription rights holders
exercise their subscription privileges in full, then your percentage ownership
will be reduced to approximately __%. In addition, if you do not
exercise your basic subscription privilege in full and the subscription price is
less than the fair value of our common stock, you would experience immediate
dilution of the value of your shares relative to what your value would have been
had our common stock been issued at fair value. This dilution could
be substantial.
The
subscription price determined for the rights offering is not necessarily an
indication of the fair value of our common stock.
Our board
of directors determined the terms of the rights offering. In
determining the subscription price, our board of directors considered a number
of factors, including:
|
·
|
our
future needs for additional capital, liquidity and financial
flexibility;
|
|
·
|
current
economic and financial market
conditions;
|
|
·
|
alternatives
available for raising equity
capital;
|
|
·
|
the
size and timing of the rights offering and the price at which our
stockholders might be willing to participate in a rights offering offered
on a pro rata basis to all stockholders with an over-subscription
privilege; and
|
|
·
|
historical
and current trading prices for our common
stock.
|
The
subscription price was established by our board of directors at a price of
______ per share. The subscription price is not necessarily related
to our book value, results of operations, cash flows, financial condition or net
worth or any other established criteria of value and may or may not be
considered the fair value of our common stock at the time the rights offering
was approved by our board of directors or during the rights offering
period. On September 28, 2009, the closing sale price for our common
stock on the Nasdaq Global Market was $2.43 per share. We cannot
assure you that the trading price of our common stock will not decline during or
after the rights offering. We also cannot assure you that you will be
able to sell shares purchased in this offering at a price equal to or greater
than the subscription price. We do not intend to change the
subscription price in response to changes in the trading price of our common
stock prior to the closing of the rights offering.
Because
we do not have any formal commitments from any of our stockholders to
participate in the rights offering, the net proceeds we receive from the rights
offering may be lower than currently anticipated and we may require additional
capital.
We do not
have any formal commitments from any of our stockholders to participate in the
rights offering, and we cannot assure you that any of our stockholders will
exercise all or any part of their basic subscription privilege or their
over-subscription privilege. If our subscription rights holders
subscribe for fewer shares of our common stock than anticipated, the net
proceeds we receive from the rights offering could be significantly
reduced. If the rights offering is not fully subscribed and we do not
raise the desired amount of capital in this rights offering, we may need to
increase the amount of outside capital we seek to raise in the
future. We expect that even if all the rights are exercised and
the maximum number of shares are sold, we will seek to raise additional equity
financing to improve our capital position.
The
rights offering may cause the price of our common stock to decline.
The
subscription price of ______ per share is [lower/higher] than the average of the
closing sales prices of our common stock over the thirty trading day period
ended
,
2009. The announcement of the rights offering and its terms,
including the subscription price, together with the number of shares of common
stock we could issue if this offering is completed, may result in an immediate
decrease in the trading price of our common stock. This decrease may
continue after the completion of the rights offering. If that occurs,
your purchase of shares of our common stock in the rights offering may be at a
price greater than the prevailing trading price. Further, if a
substantial number of subscription rights are exercised and the holders of the
shares received upon exercise of those subscription rights choose to sell some
or all of those shares, the resulting sales could also depress the trading price
of our common stock.
We
may cancel the rights offering at any time prior to the expiration of the rights
offering period, and neither we nor the subscription agent will have any
obligation to you except to return your subscription payment.
We may at
our sole discretion cancel this rights offering at any time prior to the
expiration of the rights offering period. If we elect to cancel the
rights offering, neither we nor the subscription agent will have any obligation
with respect to the subscription rights except to return to you, without
interest or penalty, as soon as practicable any subscription
payments. In addition, we may suffer reputational harm if the rights
offering is canceled prior to the expiration date.
Because
you may not revoke or change your exercise of the subscription rights, you could
be committed to buying shares above the prevailing trading price at the time the
rights offering is completed.
Once you
exercise your subscription rights, you may not revoke or change the
exercise. The trading price of our common stock may decline before
the subscription rights expire. If you exercise your subscription
rights, and, afterwards, the trading price of our common stock decreases below
the ______ per share subscription price, you will have committed to buying
shares of our common stock at a price above the prevailing trading price and
could have an immediate unrealized loss. There can be no assurances
that the trading price of our common stock will equal or exceed the subscription
price at the time of exercise or at or after the expiration of the subscription
rights offering period.
Our
common stock is traded on the Nasdaq Global Market under the symbol, “MDH”, and
the closing sale price of our common stock on the Nasdaq Global Market on
September 28, 2009 was $2.43 per share.
You
may not be able to resell any shares of our common stock that you purchase
pursuant to the exercise of subscription rights immediately upon expiration of
the subscription rights offering period or be able to sell your shares at a
price equal to or greater than the subscription price.
If you
exercise subscription rights, you may not be able to resell the common stock
purchased by exercising your subscription rights until you, or your broker,
custodian bank or other nominee, if applicable, have received those
shares. Moreover, you will have no rights as a stockholder of the
shares you purchased in the rights offering until we issue the shares to
you. Although we will endeavor to issue the shares as soon as
practicable after completion of the rights offering, including after all
necessary calculations have been completed, there may be a delay between the
expiration date of the rights offering and the time that the shares are
issued. In addition, we cannot assure you that, following the
exercise of your subscription rights, you will be able to sell your common stock
at a price equal to or greater than the subscription price.
Because
we will have broad discretion over the use of the net proceeds from the rights
offering, you may not agree with how we use the proceeds.
We will
contribute the net proceeds to our operating partnership. Our
operating partnership intends to subsequently use the net proceeds received from
us for additional working capital, which may be used to reduce or purchase our
indebtedness, or for other general corporate purposes. However, we
may allocate the proceeds among these purposes in our discretion. In
addition, economic and financial market conditions may require us to allocate
portions of the net proceeds for other purposes. Accordingly, you
will be relying on the judgment of our management with regard to the use of
proceeds from the rights offering, and you will not have the opportunity, as
part of your investment decision, to assess whether the proceeds are being used
in a manner that you consider appropriate. See “Use of
Proceeds.”
If
you do not act promptly and follow the subscription instructions, your exercise
of subscription rights may be rejected.
Subscription
rights holders who desire to purchase shares in the rights offering must act
promptly to ensure that all required forms and payments are actually received by
the subscription agent prior to the expiration date of the rights
offering. If you are a beneficial owner of shares of our common
stock, but not a record holder, you must act promptly to ensure that your
broker, dealer, custodian bank or other nominee acts for you and that all
required forms and payments are actually received by the subscription agent
prior to the expiration of the rights offering period. We are not
responsible if your broker, dealer, custodian bank or nominee fails to ensure
that all required forms and payments are actually received by the subscription
agent prior to the expiration of the rights offering period. If you
fail to complete and sign the required subscription forms, send an incorrect
payment amount or otherwise fail to follow the subscription procedures that
apply to your exercise in the rights offering prior to the expiration of the
rights offering period, the subscription agent may, depending on the
circumstances, reject your subscription or accept it only to the extent of the
payment received. Neither we nor the subscription agent undertakes to
contact you concerning, or attempt to correct, an incomplete or incorrect
subscription form or payment. We have the sole discretion to
determine whether the exercise of your subscription rights properly and timely
follows the subscription procedures.
Because
the subscription rights are non-transferable, there is no market for the
subscription rights.
You may
not sell, transfer or assign your subscription rights to anyone else, and we do
not intend to list the subscription rights on the Nasdaq Global Market, any
other stock exchange or the OTC Bulletin Board. Because the
subscription rights are non-transferable, there is no market or other means for
you to directly realize any value associated with the subscription
rights. You must exercise the subscription rights and acquire shares
of our common stock to realize any value that may be embedded in the
subscription rights.
Risks
Related to Our Debt and Financing and the Current Economic Crisis
The
general economic slowdown has negatively affected the financial performance of
our hotels, which is the primary factor in determining their fair market value.
If the general economic slowdown continues and fails to turn around, we may have
difficulty complying with the covenants in our credit agreement.
Under the
terms of our credit facility, we must satisfy certain financial and
non-financial covenants. Our credit agreement limits the amount we
may borrow under the agreement to the lesser of $80.0 million or 100% of the
value of the collateral pool, as determined by the provisions of the agreement.
The financial covenants include tests of our overall leverage as well as tests
of our level of overall profitability. The credit agreement prescribes the
method for determining the values of our hotels for the purpose of computing the
leverage tests. With certain exceptions, the value of each hotel is directly
related to its financial performance. In February 2009, we executed an amendment
to the credit agreement that established new methodologies for valuing our
existing properties under renovation and obtained a waiver of any potential
defaults for 2008. As of December 31, 2008, after taking into account the
provisions of the third amendment to the credit agreement, and as of June 30,
2009, we were in compliance with all the required covenants.
Failure
to maintain sufficient levels of financial performance at our hotel properties
could cause the value of our collateral pool, as determined by the terms of the
agreement, to fall below the current level of borrowing under the credit
agreement and could require us to immediately repay a portion of the outstanding
indebtedness. Additionally, as our newly-opened properties convert to
having their respective collateral pool values determined by their financial
performance from their appraised value or accumulated cost basis, we may
experience significant deficiencies in the value of our collateral pool and be
required to immediately repay a portion of the outstanding
indebtedness. Failure to repay required portions of our indebtedness
would create a potential default under this credit facility. While we
may seek temporary or permanent relief through either an amendment or waiver,
there can be no assurance that the lenders would grant an amendment or waiver,
and any such amendment or waiver may include additional fees, increased interest
rates or other more stringent terms and conditions that are materially
disadvantageous to us.
Failure
to maintain sufficient levels of financial performance at our hotel properties
could cause us to fail any of the leverage or financial performance covenant
tests. Failure to satisfy these covenants and conditions would create a
potential default under this credit facility, in which case we could pursue an
amendment to our credit agreement or waiver. There can be no assurance that the
lenders would grant an amendment or waiver and, in light of current credit
market conditions, any such amendment or waiver may include additional fees,
increased interest rates or other more stringent terms and conditions that are
materially disadvantageous to us. In order to avoid a default due to
insufficiency of the collateral pool, we may have to repay a significant portion
of the outstanding indebtedness. In the event of a default, for
failure to satisfy any of the loan covenants or for failure to make timely
repayment necessitated by an insufficiency of the collateral pool, our lender
could require us to immediately repay all outstanding indebtedness under the
credit facility. In order to repay all or a significant portion of the
outstanding indebtedness, we would have to obtain financing from alternative
debt sources, private or public offerings of debt securities, or the issuance of
equity securities. There can be no assurance that such alternative
financing sources would be available to us at all or on terms that are
acceptable to us. If we are unable to refinance our debt on
acceptable terms, we may be forced to dispose of hotel properties on
disadvantageous terms. To the extent we cannot repay our outstanding debt, we
risk losing some or all of these properties to foreclosure and we could be
required to invoke insolvency proceedings including, but not limited to,
commencing a voluntary case under the U.S. Bankruptcy Code.
If
the general economic slowdown continues to negatively affect the financial
performance of our hotels, we may have difficulty refinancing existing
indebtedness when it matures.
The
amount of indebtedness lenders are willing to finance is generally limited to a
percentage of a property’s fair market value. Valuations of hotel properties can
be derived from various approaches, but a critical factor in the valuation is
the financial performance or potential financial performance of the hotel.
Should the current economic downturn continue to impact our hotels’ financial
performance, we may not be able to refinance the balances currently outstanding
on our properties’ mortgage loans and may be required to repay a portion of the
indebtedness upon refinance. If we do not have sufficient funds to repay that
portion of the indebtedness, it may be necessary to raise capital through
additional debt financing, private or public offerings of debt securities, or
additional equity financings. If, at the time of any refinancing, prevailing
interest rates or other factors result in higher interest rates on refinancing,
increases in interest expense would lower our cash flow, and, consequently, cash
available for distribution to our stockholders. If we are unable to refinance
our debt on acceptable terms, we may be forced to dispose of hotel properties on
disadvantageous terms, potentially resulting in losses and potentially reducing
cash flow from operating activities if the sale proceeds in excess of the amount
required to satisfy the indebtedness could not be reinvested in equally
profitable real property investments.
In
addition to refinancing mortgage indebtedness on individual properties, we may
be required to refinance our indebtedness under our credit facility, which
matures in May 2011. Should the properties that comprise the collateral pool for
the credit facility not achieve or maintain sufficient levels of financial
performance, we may not be able to obtain adequate secured debt financing.
Similar to the risk of refinancing mortgage indebtedness on individual
properties, if we do not have sufficient funds to repay the indebtedness, we may
have to raise additional capital, which may be subject to disadvantageous terms
and higher rates of interest that would lower our cash flow; or we may have to
dispose of hotel properties on disadvantageous terms.
Due
to conditions beyond our control, we may not be able to obtain corporate
financing in the future, and the terms of any future financings may limit our
ability to manage our business. Difficulties in obtaining financing on favorable
terms would have a negative effect on our ability to maintain our current
operations and execute our business strategy.
In
addition to capital available under our credit facility and any proceeds from
this offering, we anticipate that we will seek additional capital in the future,
including financing necessary to refinance or replace existing long-term debt
and to fund capital expenditures. Based on current market conditions,
the availability of financing is, and may continue to be, limited. There can be
no assurance that we will be able to obtain future financings, if needed, on
acceptable terms, if at all. We have no significant debt maturing in 2009. In
July 2010, our mortgage on the Crowne Plaza Jacksonville Riverfront matures, but
may be extended to July 2011. In May 2011, our $80.0 million credit
facility matures followed by the mortgage on the Crowne Plaza Hampton Marina in
June 2011, which may be extended to June 2012.
If we are
unable to obtain alternative or additional financing arrangements in the future,
or if we cannot obtain financing on acceptable terms, we may not be able to
execute our business strategies. Moreover, the terms of any additional financing
may restrict our financial flexibility, including the debt we may incur in the
future, or may restrict our ability to manage our business as we had
intended.
We
have incurred a significant amount of debt and have increased our overall
leverage. While we have managed a significant debt level since our inception, we
do not have extensive experience managing significant debt loads. If we are
unable to manage our debt successfully, we may be required to liquidate our
properties, we may jeopardize our tax status as a REIT and we may have
significant restrictions on our ability to make distributions to our
stockholders.
At
September 30, 2009, we had total loans, mortgage and secured indebtedness of
approximately $160.2 million, which we estimate was between 60.0% and 65.0% of
the fair market value of our assets, and which is in excess of our targeted debt
levels of 45.0% to 55.0% of total assets. We, and our subsidiaries,
may be able to incur substantial additional debt, including secured debt, in the
future. Our existing indebtedness, as well as the incurrence of any
additional debt, subjects us to many risks, including the risks
that:
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Our
cash flow from operations will be insufficient to make required payments
of principal and interest;
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Our
debt may increase our vulnerability to adverse conditions in local
markets, the lodging industry or the general
economy;
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We
may be required to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing cash available for
distribution to our stockholders, cash available for operations and
capital expenditures, and cash available for future business opportunities
or other purposes;
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Our
debt service obligations on floating rate debt will increase as interest
rates rise;
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The
terms of any refinancing will not be as favorable as the terms of the debt
being refinanced; and
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The
use of leverage could adversely affect our ability to make distributions
to our stockholders and the market price of our common
stock.
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Our
various debt agreements provide that we must satisfy certain financial and
non-financial covenants. As of December 31, 2008, after taking into account
the provision of the third amendment to our credit agreement, and as of June 30,
2009, we were in compliance with all the required covenants. Maintaining
continued compliance with our debt covenants is dependent on the operating
performance of our hotels, which is directly affected by the current economic
environment in which they operate. Failure to satisfy these covenants would
create a default under one or more loan agreements and one or more lenders could
require us to immediately repay all or a portion of our indebtedness before
maturity.
If we do
not have sufficient funds to make any required payments on our debt, it may be
necessary to refinance this debt through additional debt financing, private or
public offerings of debt securities or additional equity financings. If, at the
time of any refinancing, prevailing interest rates or other factors result in
higher interest rates on refinancing, increases in interest expense would lower
our cash flow, and, consequently, cash available for distribution to our
stockholders. If we are unable to refinance our debt on acceptable terms, we may
be forced to dispose of hotel properties on disadvantageous terms, potentially
resulting in losses that reduce future cash flows from operating activities. We
may place mortgages on our hotel properties to secure our credit facility or
other debt.
To the
extent we cannot meet our debt service obligations, we risk losing some or all
of those properties to foreclosure and we could be required to invoke insolvency
proceedings including, but not limited to, commencing a voluntary case under the
U.S. Bankruptcy Code. Also, covenants applicable to our debt
could impair our planned strategies.
Our
liquidity, including access to capital markets and financing, could be
constrained by limitations in the overall credit markets, our credit worthiness,
and our ability to comply with financial covenants in our debt
instruments.
Our
ability to borrow under new financial arrangements or additional amounts under
our existing financial arrangements depends on our compliance with covenants in
the related agreements, and on our performance against covenants in our
revolving credit facility that require compliance with certain financial ratios
as of the end of each fiscal quarter. Among other restrictions, our credit
facility limits the amount of leverage we are allowed to undertake. To the
extent that we are unable to maintain compliance with this and other
requirements or to perform against the financial performance covenants, due to
one or more of the various risk factors discussed herein or otherwise, our
ability to borrow, and our liquidity, would be adversely impacted.
The
scarcity of equity and debt capital has frozen the market for buying and selling
hotels.
Currently,
buyers of hotels are finding it extremely difficult to source capital for hotel
acquisitions. Even if they are able to obtain debt, lenders are lending lesser
amounts and are requiring more restrictive terms and conditions. At the same
time, private equity sources have materially reduced their commitments and the
stock prices of public companies, including ours, have significantly declined
making it more difficult to sell stock without diluting existing stockholders.
As a result of the difficulties in the equity and debt markets, buyers are
having less ability to pay the purchase prices that sellers are seeking. This
has resulted in a sizable gap between the prices sellers ask for hotels and the
prices buyers are able to pay for hotels.
We
believe the stress in the capital markets would make it very difficult for us to
sell any of our hotels at attractive prices if we were forced by economic
circumstances to sell at any time in the near future.
Our
borrowing costs are sensitive to fluctuations in interest rates.
Higher
interest rates could increase debt service requirements on our floating rate
debt, including any borrowings under our credit facility, which permits us to
borrow up to $80.0 million. Borrowings under our credit facility have borne
interest at floating interest rates of 30-day LIBOR plus 1.625% to 2.125%,
depending on our leverage ratio, and as of February 18, 2009, they bear
interest at floating rates of 30-day LIBOR plus 2.75% to 3.25%, depending on our
leverage ratio. We currently have an interest-rate swap agreement that fixes the
amount of interest on $30.0 million of indebtedness which expires in April 2010.
We expect to enter into another interest-rate swap or interest-rate cap
agreement covering the remaining term of the agreement for up to $40.0 million
of indebtedness. To the extent that the total amount borrowed on the credit
facility is less than the notional amount of the interest-rate swap, we are
exposed to falling interest rates on the difference between the amount borrowed
and the notional amount of the interest rate swap. To the extent that the total
amount borrowed on the credit facility is more than the notional amount of the
swap, we are exposed to rising interest rates on the amount borrowed in excess
of the notional amount of the swap. Any additional hedging transactions into
which we enter would have to be structured so as to not jeopardize our status as
a REIT. Adverse economic conditions could also cause the terms on
which we borrow to be unfavorable.
Our shares may be
delisted from the NASDAQ Global Market if the closing price for our shares is
not maintained at $1.00 per share or higher.
NASDAQ
imposes, among other requirements, listing maintenance standards as well as
minimum bid and public float requirements. The price of our shares must trade at
or above $1.00 to comply with NASDAQ’s minimum bid requirement for continued
listing on the NASDAQ Global Market. In recent months, our shares have traded at
below $1.00 at closing for a period of time.
If the
closing price of our shares fails to meet NASDAQ’s minimum bid price requirement
for 30 consecutive days, or if we otherwise fail to meet all other applicable
requirements of the NASDAQ Global Market, NASDAQ may make a determination to
delist our shares of common stock. Any such delisting could have adverse affects
by, among other things:
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Reducing
the trading liquidity and market price of our common
stock;
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Reducing
the number of investors willing to hold or acquire our common stock,
thereby restricting our ability to obtain equity
financing;
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Causing
an event of default under certain of our debt agreements, which could
serve to accelerate the indebtedness;
and
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Reducing
our ability to retain, attract and motivate directors, officers and
employees.
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Risks
Related to Our Business and Properties
If
the general economic slowdown continues and fails to turn around, our operating
performance and financial results may be harmed by further declines in
occupancy, average daily room rates and/or other operating
revenues.
The
performance of the lodging industry and the general economy have traditionally
been closely linked. In an economic downturn, business and leisure travelers may
seek to reduce costs by limiting travel and/or reducing costs on their trips.
Our hotels, which are all full-service hotels, may be more susceptible to a
decrease in revenue, as compared to hotels in other categories that have lower
room rates. A decrease in demand for hotel stays and hotel services will
negatively affect our operating revenues, which will lower our cash flow and may
affect our ability to make distributions to stockholders and to maintain
compliance with our loan obligations. We incurred a net loss of $0.6 million for
our 2008 fiscal year and $0.5 million for our six month period ended June 30,
2009. A prolonged economic downturn may produce continued losses. A
continued weakening economy may adversely and materially affect our industry,
business and results of operations and we cannot predict how severe and
prolonged the continued downturn might be. Moreover, reduced revenues as a
result of the weakening economy may also reduce our working capital and impact
our long-term business strategy.
We
are subject to risks of increased hotel operating expenses and decreased hotel
revenues.
Our
leases with our TRS Lessee provide for the payment of rent based in part on
gross revenues from our hotels. Our TRS Lessee is subject to hotel operating
risks including decreased hotel revenues and increased hotel operating expenses,
including but not limited to the following:
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wage
and benefit costs;
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repair
and maintenance expenses;
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other
operating expenses.
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Any
increases in these operating expenses can have a significant adverse impact on
the TRS Lessee’s ability to pay rent and other operating expenses and,
consequently, our earnings and cash flow.
In
keeping with our investment strategy, we may acquire, renovate, and/or re-brand
hotels in new or existing geographic markets as part of our repositioning
strategy. Unanticipated expenses and insufficient demand for newly repositioned
hotels could adversely affect our financial performance and our ability to
comply with covenants in our credit agreement and to make distributions to our
stockholders.
In May
2008, we opened the Sheraton Louisville Riverside following an extensive
18-month renovation of the hotel. In addition, in April 2008 we acquired the
Hampton Marina Hotel in Hampton, Virginia and subsequently renovated the
property as a part of its re-branding as the Crowne Plaza Hampton Marina. In
March 2009, we opened the Crowne Plaza Tampa Westshore following a 16-month
renovation of the hotel. As part of our business plan, we may continue to
develop or acquire hotels in geographic areas in which our management may have
little or no operating experience. Additionally, those properties may also be
renovated and re-branded as part of a repositioning strategy. Potential
customers may not be familiar with our newly renovated hotel or be aware of the
brand change. As a result, we may have to incur costs relating to the opening,
operation and promotion of those new hotel properties that are substantially
greater than those incurred in other areas. These hotels may attract fewer
customers than expected and we may choose to increase spending on advertising
and marketing to promote the hotel and increase customer demand. Unanticipated
expenses and insufficient demand at new hotel properties, therefore, could
adversely affect our financial performance and our ability to comply with
covenants in our credit agreement and to make distributions to our
stockholders.
We
do not have the authority to require any hotel to be operated in a particular
manner or to govern any particular aspect of the daily operations of any hotel
and as a result, our returns are dependent on the management of our hotels by
MHI Hotels Services.
Under the
terms of our management agreement with MHI Hotels Services and the REIT
qualification rules, our ability to participate in operating decisions regarding
the hotels is limited. We will depend on MHI Hotels Services to operate our
hotels as provided in the management agreement. We do not have the authority to
require any hotel to be operated in a particular manner or to govern any
particular aspect of the daily operations of any hotel (for instance, setting
room rates). Thus, even if we believe our hotels are being operated
inefficiently or in a manner that does not result in satisfactory occupancy
rates, revenue per available room, which we refer to as RevPAR, and average
daily rates, which we refer to as ADR, we may not be able to force MHI Hotels
Services to change its method of operation of our hotels. Additionally, in the
event that we need to replace MHI Hotels Services or any other management
companies in the future, we may be required by the terms of the management
agreement to pay substantial termination fees and may experience significant
disruptions at the affected hotels.
Our
ability to make distributions to our stockholders is subject to fluctuations in
our financial performance, operating results and capital improvements
requirements.
As a
REIT, we are required to distribute at least 90% of our REIT taxable income,
excluding net capital gains, each year to our stockholders. However, several
factors may make us unable to declare or pay distributions to our stockholders
including poor operating results and financial performance or unanticipated
capital improvements to our hotels, including capital improvements which may be
required by our franchisors.
We lease
all of our hotels to our TRS Lessee. The TRS Lessee is subject to hotel
operating risks, including risks of sustaining operating losses after payment of
hotel operating expenses, including management fees. Among the factors which
could cause our TRS Lessee to fail to make required rent payments are reduced
net operating profits or operating losses, increased debt service requirements
and capital expenditures at our hotels, including capital expenditures required
by the franchisors of our hotels. Among the factors that could reduce the net
operating profits of our TRS Lessee are decreases in hotel revenues and
increases in hotel operating expenses. Hotel revenue can decrease for a number
of reasons, including increased competition from a new supply of hotel rooms and
decreased demand for hotel rooms. These factors can reduce both occupancy and
room rates at our hotels.
Additionally,
our ability to make distributions is constrained by the terms of the third
amendment to our revolving credit facility. While it permits the minimum
distributions that allow us to maintain our status as a REIT, it provides
conditions that must be met before additional distributions can be made. These
conditions include certain liquidity requirements including (a) that we
maintain at least $10.0 million of liquidity, which is measured by the sum of
our unrestricted cash and cash equivalents plus unused and available borrowing
capacity on the revolving credit facility up to a limit of $5.0 million and
(b) a debt yield, which requires that we then have a ratio of EBITDA to
total liabilities of no less than 0.10.
The
timing and amount of distributions are in the sole discretion of our board of
directors, which will consider, among other factors, our financial performance,
debt service obligations, debt covenants, and capital expenditure requirements.
We cannot assure you that we will continue to generate sufficient cash to fund
distributions.
Geographic
concentration of our initial hotels will make our business vulnerable to
economic downturns in the Mid-Atlantic, Midwest and Southeastern United
States.
Our
hotels are located in the Mid-Atlantic, Midwest and Southeastern United States.
Economic conditions in the Mid-Atlantic, Midwest and Southeastern United States
will significantly affect our revenues and the value of our hotels. Business
layoffs or downsizing, industry slowdowns, changing demographics and other
similar factors may adversely affect the economic climate in these areas. Any
resulting oversupply or reduced demand for hotels in the Mid-Atlantic, Midwest
or Southeastern United States and our markets in particular would therefore have
a disproportionate negative impact on our revenues and limit our ability to make
distributions to stockholders.
Our
net income would be adversely affected if our leases for the resort property are
terminated or if the sub-lessees have insufficient net income to pay
rent.
We own two leasehold interests in the
Shell Island Resort, a 160-unit condominium resort property in Wrightsville
Beach, North Carolina, which were purchased for $3.5 million with the proceeds
of the initial public offering. Our operating partnership entered into sublease
arrangements to sublease our entire leasehold interests in the property at Shell
Island to affiliates of our management company.
If the Shell Island Resort property
leases are terminated, our sublease agreements for the resort property will also
be terminated. The property leases may be terminated by the resort property’s
homeowners’ association if MHI Hotels, LLC or MHI Hotels Two, Inc., two of our
affiliates, breach certain provisions under the leases. The homeowners’
association may also terminate the leases if MHI Hotels Services serves as
central rental agent for less than 80 of the 160 rental units at the resort.
Upon termination of these subleases, MHI Hotels, LLC and MHI Hotels Two, Inc.
may be unable to meet their payment obligations, and we would no longer receive
the fixed annual amount of $640,000, less our lease payments of approximately
$168,000 to the resort property’s homeowners’ association. In addition, the
ability of MHI Hotels, LLC and MHI Hotels Two, Inc. to make rent payments may be
dependent upon generating revenues from the operation of the resort properties.
Although MHI Hotels Services has agreed to make capital contributions to MHI
Hotels, LLC and MHI Hotels Two, Inc. in an amount sufficient to cure their
defaults under the sublease agreements, MHI Hotels Services has nominal assets,
and is dependent on management fee income. In such event, our net
income could be adversely affected, and we may be required to write off our
investment in the Shell Island Resort property leases.
Risks
Related to Conflicts of Interest of Our Officers and Directors
Conflicts
of interest could result in our executive officers and certain of our directors
acting in a manner other than in our stockholders’ best interest.
Conflicts
of interest relating to MHI Hotels Services, the entity that manages the
properties, and the terms of its management agreement may lead to management
decisions that are not in the stockholders’ best interest.
Conflicts
of interest relating to MHI Hotels Services may lead to management decisions
that are not in the stockholders’ best interest. MHI Hotels Services is owned
and controlled by members of the Sims family, including Andrew Sims, our
chairman, president and chief executive officer, Kim Sims and Christopher Sims,
who serve on our board of directors, William Zaiser, our executive vice
president and chief financial officer, and Steven Smith who is the Executive
Vice President of MHI Hotels Services. MHI Hotels Services manages our hotel
properties. In addition, unless a majority of independent directors concludes
otherwise, MHI Hotels Services has a right of first offer to manage hotels we
acquire in the future, subject to certain exceptions, and receives substantial
management fees based on the revenues and operating profit of our hotels. Our
management agreement with MHI Hotels Services, including the financial terms
thereof, was not negotiated on an arm’s-length basis and may be less favorable
to us than we could have obtained from third parties.
Our
management agreement establishes the terms of MHI Hotels Services’ management of
our hotels. Under certain circumstances, if we terminate our management
agreement as to one of the hotels, we will be required to pay MHI Hotels
Services a termination fee. If we were to terminate the management agreement
with respect to all our hotels in connection with a sale of those hotels
effective December 31, 2009, the aggregate termination fee would be
approximately $8.8 million. As majority owners of MHI Hotels
Services, which would receive any management and management termination fees
payable by us under the management agreement, Andrew Sims, William Zaiser, Kim
Sims and Christopher Sims may influence our decisions to sell a hotel or acquire
or develop a hotel when it is not in the best interests of our stockholders to
do so. In addition, Andrew Sims and William Zaiser will have conflicts of
interest with respect to decisions to enforce provisions of the management
agreement, including any termination thereof.
There
can be no assurance that provisions in our bylaws will always be successful in
mitigating conflicts of interest.
Under our
bylaws, a committee consisting of only independent directors must approve any
transaction between us and MHI Hotels Services or its affiliates or any
interested director. However, there can be no assurance that these policies
always will be successful in mitigating such conflicts, and decisions could be
made that might not fully reflect the interests of all of our
stockholders.
Certain
of our officers and directors hold units in our operating partnership and may
seek to avoid adverse tax consequences, which could result from transactions
that would otherwise benefit our stockholders.
Holders
of units, including members of our management team, may suffer adverse tax
consequences upon our sale or refinancing of certain properties. Therefore,
holders of units, including Andrew Sims, William Zaiser, Kim Sims, Christopher
Sims, and Edward Stein may have different objectives than holders of our common
stock regarding the appropriate pricing and timing of a property’s sale, or the
timing and amount of a property’s refinancing. These individuals,
together with their affiliates owned as of September 30, 2009, in the aggregate,
approximately 21.54%
of the outstanding units
in our operating partnership. These officers and directors may
influence us not to sell or refinance certain properties, even if such sale or
refinancing might be financially advantageous to our stockholders, or they may
influence us to enter into tax-deferred exchanges with the proceeds of such
sales when such a reinvestment might not otherwise be in our best
interest.
Contractual
obligations require us to nominate affiliates of the Sims family as two of our
directors.
Pursuant
to a strategic alliance agreement we entered into in December 2004, MHI Hotels
Services has a contractual right to nominate one person for election as a
director, to our Company’s Board of Directors, and, pursuant to his employment
agreement with us, Andrew Sims has the right to be nominated as a director.
These provisions in effect provide the Sims family and their affiliates the
right to nominate two of our directors. As discussed herein, such persons have
conflicts of interest with our company.
Our
tax indemnification obligations, which were not the result of arm’s-length
negotiations and which apply in the event that we sell certain properties, could
subject us to liability, which we currently estimate to be approximately $46.0
million, and limit our operating flexibility and reduce our returns on our
investments.
If we
dispose of certain of our initial hotels, we would be obligated to indemnify the
original contributors (including their permitted transferees and persons who are
taxable on the income of a contributor or permitted transferee) against certain
tax consequences of the sale pursuant to the tax indemnity agreements, the terms
of which were not the result of arm’s-length negotiations. These original
contributors include Andrew Sims, our chairman, president and chief executive
officer, William Zaiser, our executive vice president and chief financial
officer, and Kim and Christopher Sims, two of our directors. We have agreed to
pay a certain amount of the contributor’s tax liability with respect to gain
allocated to the contributor under Section 704(c) of the Code if we dispose
of a property contributed by the contributor in a taxable transaction during a
“protected period,” which continues until the earlier of:
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10
years after the contribution of such property;
or
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the
date on which the contributor no longer owns, in the aggregate, at least
25.0% of the units we issued to the contributor at the time of its
contribution of property to our operating
partnership.
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This tax
indemnity will be equal to a certain amount of the federal and state income tax
liability the contributor incurs with respect to the gain allocated to the
contributor upon such sale based on a sliding scale percentage. Specifically, we
will indemnify the contributors for 100% of their tax liability during the first
five years after contribution, 50.0% during the sixth year, 40.0% during the
seventh year, 30.0% during the eighth year, 20.0% during the ninth year and
10.0% during the tenth year. The terms of the tax indemnity agreements also
require us to gross up the tax indemnity payment for the amount of income taxes
due as a result of the tax indemnity payment. While the tax indemnities do not
contractually limit our ability to conduct our business in the way we desire, we
are less likely to sell any of the contributed properties in a taxable
transaction during the protected period because of the significant tax liability
we would have to the contributors. Instead, we would likely hold the property
for the entire protected period, or at least the first five years, or seek to
transfer the property in a tax-deferred like-kind exchange.
As nearly
five years have elapsed since the properties were contributed, if we were to
sell, during the next year in a taxable transaction, the five initial hotels
that were contributed to us in our initial public offering in exchange for units
immediately after the closing of our initial public offering, substituting our
property in Jeffersonville, Indiana for the property in Williamsburg, Virginia,
our estimated total tax indemnification obligation to our indemnified
contributors, including the gross-up payment, would be approximately $46.0
million, decreasing to approximately $23.0 million in 2010 and further
decreasing until the end of 2014 at which time the indemnification agreement
expires.
Our
agreements with MHI Hotels Services and its affiliates, including the
contribution agreements, management agreement, strategic alliance agreement,
subleases, partnership agreement of our operating partnership and employment
agreements, were not negotiated on an arms’ length basis and may be less
favorable to us than we could have obtained from third parties.
In
connection with our initial public offering, we entered into various agreements
with MHI Hotels Services and its affiliates, including contribution agreements,
a management agreement, a strategic alliance agreement, subleases, the
partnership agreement of our operating partnership and employment agreements.
The terms of each of these agreements were determined by our management team,
who had conflicts of interest as described above and ownership interests in MHI
Hotels Services and its affiliates. The terms of each of these agreements may be
less favorable to us than we could have obtained from third
parties.
We
may realize reduced revenue because our management company may experience
conflicts of interest in connection with the management of the resort
property.
MHI
Hotels Services may experience conflicts of interest in connection with the
management of our resort property and one of our initial hotel properties, which
are located less than one mile from each other, and its continued management of
an additional resort property not owned by us and located nearby in the same
geographic market. The fees MHI Hotels Services earns for managing our
properties are largely fixed under our management agreement with MHI Hotels
Services and may be less than the fees it earns for managing the resort property
that we do not own or lease. Because MHI Hotels Services handles the
reservations for all of these properties, MHI Hotels Services may have a greater
financial incentive to direct guests to the resort property that we do not own
or lease.
Risks
Related to the Hotel Industry
Our
ability to comply with our credit terms, our ability to make distributions to
our stockholders and the value of our hotels in general, may be affected by
factors in the lodging industry.
Operating
Risks
Our hotel
properties are subject to various operating risks common to the lodging
industry, many of which are beyond our control, including the following:
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competition
from other hotel properties in our
markets;
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over-building
of hotels in our markets, which adversely affects occupancy and revenues
at our hotels;
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dependence
on business and commercial travelers and
tourism;
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increases
in energy costs and other expenses affecting travel, which may affect
travel patterns and reduce the number of business and commercial travelers
and tourists;
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increases
in operating costs due to inflation and other factors that may not be
offset by increased room rates;
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changes
in interest rates and in the availability, cost and terms of debt
financing;
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changes
in governmental laws and regulations, fiscal policies and zoning
ordinances and the related costs of compliance with laws and regulations,
fiscal policies and ordinances;
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adverse
effects of international, national, regional and local economic and market
conditions;
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adverse
effects of a downturn in the lodging industry;
and
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risks
generally associated with the ownership of hotel properties and real
estate, as we discuss in detail
below.
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These
factors could reduce the net income of our TRS Lessee, which in turn could
adversely affect the value of our hotels and our ability to comply with our loan
agreements and to make distributions to our stockholders.
Competition
for Acquisitions
We may
compete for investment opportunities with entities that may have substantially
greater financial resources than we do. These entities generally may be able to
accept more risk than we choose to prudently manage. This competition may
generally limit the number of suitable investment opportunities offered to us.
This competition may also increase the bargaining power of property owners
seeking to sell to us, making it more difficult for us to acquire new properties
on attractive terms.
Seasonality
of Hotel Business
The hotel
industry is seasonal in nature. This seasonality can be expected to cause
quarterly fluctuations in our revenues. Our quarterly earnings may be adversely
affected by factors outside our control, including weather conditions and poor
economic factors. As a result, we may have to enter into short-term borrowings
in certain quarters in order to offset these fluctuations in revenues and to
make distributions to our stockholders.
Investment
Concentration in Particular Segments of Single Industry
Our
entire business is lodging-related. Therefore, a downturn in the lodging
industry, in general, and the segments in which we operate, in particular, will
have a material adverse effect on the value of our hotels, our financial
condition and the extent to which cash may be available for distribution to our
stockholders.
Capital
Expenditures
Our hotel
properties have an ongoing need for renovations and other capital improvements,
including replacements, from time to time, of furniture, fixtures and equipment.
The franchisors of our hotels also require us to make periodic capital
improvements as a condition of keeping the franchise licenses. In addition, our
lenders require that we set aside annual amounts for capital improvements to our
hotel properties. We expect the average lenders’ capital improvements reserve
requirement for all of our hotels will be approximately 4.0% of gross sales.
Based upon our hotels’ gross revenue in fiscal year 2008, the average lender’s
capital improvements reserve contribution requirement for all of our hotels
would have been approximately $2,830,500 based on an average 4.0% capital
improvement reserves. For the year ended December 31, 2008 and for the
six-month period ended June 30, 2009, we spent approximately $44.4 million and
approximately $8.5 million, respectively, on capital improvements to our
hotels. Capital improvements and renovation projects may give rise to
the following risks:
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possible
environmental problems;
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construction
cost overruns and delays;
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a
possible shortage of available cash to fund capital improvements and the
related possibility that financing for these capital improvements may not
be available to us on affordable terms;
and
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uncertainties
as to market demand or a loss of market demand after capital improvements
have begun.
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The costs
of all these capital improvements as well as future capital improvements could
adversely affect our financial condition and amounts available for distribution
to our stockholders.
Operating
our hotels under franchise agreements could increase our operating costs and
lower our net income.
Our
hotels operate under franchise agreements, which subject us to risks in the
event of negative publicity related to one of our franchisors.
The
maintenance of the franchise licenses for our hotels is subject to our
franchisors’ operating standards and other terms and conditions. Our franchisors
periodically inspect our hotels to ensure that we, our lessee and our management
company follow their standards. Failure by us, our TRS Lessee or our management
company to maintain these standards or other terms and conditions could result
in a franchise license being canceled. If a franchise license terminates due to
our failure to make required improvements or to otherwise comply with its terms,
we may also be liable to the franchisor for a termination payment, which varies
by franchisor and by hotel. As a condition of continuing a franchise license, a
franchisor could also possibly require us to make capital expenditures, even if
we do not believe the capital improvements are necessary or desirable or will
result in an acceptable return on our investment. Nonetheless, we may risk
losing a franchise license if we do not make franchisor-required capital
expenditures.
If a
franchisor terminates the franchise license, we may try either to obtain a
suitable replacement franchise license, or to operate the hotel without a
franchise license. The loss of a franchise license could significantly decrease
the revenues at the hotel and reduce the underlying value of the hotel because
of the loss of associated name recognition, marketing support and centralized
reservation systems provided by the franchisor. A loss of a franchise license
for one or more hotels could materially and adversely affect our revenues. This
loss of revenues could, therefore, also adversely affect our financial condition
and results of operations, our ability to comply with our loan covenants and
reduce our cash available for distribution to stockholders.
Hotel
re-development is subject to timing, budgeting and other risks that would
increase our operating costs and limit our ability to make distributions to
stockholders.
We intend
to acquire hotel properties from time to time as suitable opportunities arise,
taking into consideration general economic conditions and seek to re-develop or
reposition these hotels. Redevelopment of hotel properties involve a number of
risks, including risks associated with:
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construction
delays or cost overruns that may increase project
costs;
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receipt
of zoning, occupancy and other required governmental permits and
authorizations;
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development
costs incurred for projects that are not pursued to
completion;
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acts
of God such as earthquakes, hurricanes, floods or fires that could
adversely impact a project;
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governmental
restrictions on the nature or size of a
project.
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We cannot
assure you that any re-development project will be completed on time or within
budget. Our inability to complete a project on time or within budget would
increase our operating costs and reduce our net income.
The
hotel business is capital intensive, and our inability to obtain financing could
limit our growth.
Our hotel
properties will require periodic capital expenditures and renovation to remain
competitive. Acquisitions or development of additional hotel properties will
require significant capital expenditures. The lenders on debt secured by three
of our properties require us to set aside varying amounts each year for capital
improvements at our hotels. We may not be able to fund capital improvements or
acquisitions solely from cash provided from our operating activities because we
must distribute at least 90% of our REIT taxable income, excluding net capital
gains, each year to maintain our REIT tax status. As a result, our
ability to fund capital expenditures, acquisitions or hotel development through
retained earnings is very limited. Consequently, we rely upon the availability
of debt or equity capital to fund our investments and capital improvements, but
due to the current recession and disruption of capital markets, these sources of
funds are currently either unavailable to us or not available on reasonable
terms and conditions. Our ability to grow through acquisitions or development of
hotels will be limited if we cannot obtain satisfactory debt or equity financing
which will depend on market conditions. Neither our charter nor our bylaws
limits the amount of debt that we can incur. However, we cannot assure you that
we will be able to obtain additional equity or debt financing or that we will be
able to obtain such financing on favorable terms.
Dramatic
global events such as the terrorist attacks of September 11, 2001 and the
substantial run-up of oil prices in 2008 adversely affected the hotel
industry generally, and these adverse effects may recur.
Before
September 11, 2001, hotel owners and operators had begun experiencing declining
RevPAR, as a result of the slowing U.S. economy. The terrorist attacks of
September 11, 2001 and the after-effects (including the prospects for more
terror attacks in the United States and abroad), combined with economic trends
and the U.S.-led military action in Afghanistan and Iraq, substantially reduced
business and leisure travel and lodging industry RevPAR generally.
After
significant increases in RevPAR in 2005 and 2006, hotel owners and operators
experienced a slowing in RevPAR growth during 2007. The substantial rise in oil
and gasoline prices in 2007 and 2008 exacerbated the problems facing a stalling
U.S. economy hampered by a slump in housing and a pending mortgage crisis
causing hotel owners and operators in many markets to experience significant
declines in occupancy, ADR, and RevPAR.
We cannot
predict the extent to which global or national events will directly or
indirectly impact the value of our common stock, the lodging industry or our
operating results in the future. Declining RevPAR at our hotels would reduce our
net income and restrict our ability to fund capital improvements at our hotels
and our ability to make distributions to stockholders necessary to maintain our
status as a REIT. Additional terrorist attacks, acts of war or similar events
could have further material adverse effects on the markets on which shares of
our common stock trade, the lodging industry at large and our operations in
particular.
Uninsured
and underinsured losses could adversely affect our operating results and our
ability to make distributions to our stockholders.
We intend
to maintain comprehensive insurance on each of our hotel properties, including
liability, fire and extended coverage, of the type and amount we believe are
customarily obtained for or by hotel owners. There are no assurances that
current coverage will continue to be available at reasonable rates. Various
types of catastrophic losses, like earthquakes and floods, such as Hurricane
Katrina in New Orleans in August 2005, losses from foreign terrorist activities
such as those on September 11, 2001 or losses from domestic terrorist activities
such as the Oklahoma City bombing on April 19, 1995, may not be insurable
or may not be economically insurable. We do not expect to obtain
terrorism insurance on our hotel properties because it is costly. Lenders may
require such insurance and our failure to obtain such insurance could constitute
a default under loan agreements.
Depending on our access
to capital, liquidity and the value of the properties securing the affected loan
in relation to the balance of the loan, a default could reduce our net income
and limit our ability to obtain future financing.
In the
event of a substantial loss, our insurance coverage may not be sufficient to
cover the full current market value or replacement cost of our lost investment.
Should an uninsured loss or a loss in excess of insured limits occur, we could
lose all or a portion of the capital we have invested in a hotel, as well as the
anticipated future revenue from the hotel. In that event, we might nevertheless
remain obligated for any mortgage debt or other financial obligations related to
the property. Inflation, changes in building codes and ordinances, environmental
considerations and other factors might also keep us from using insurance
proceeds to replace or renovate a hotel after it has been damaged or destroyed.
Under those circumstances, the insurance proceeds we receive might be inadequate
to restore our economic position on the damaged or destroyed
property.
Noncompliance
with governmental regulations could adversely affect our operating
results.
Environmental
Matters
Our
hotels may be subject to environmental liabilities. An owner of real property
can face liability for environmental contamination created by the presence or
discharge of hazardous substances on the property. We may face liability
regardless of:
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our
knowledge of the contamination;
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the
timing of the contamination;
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the
cause of the contamination; or
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the
party responsible for the contamination of the
property.
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There may
be unknown environmental problems associated with our properties. If
environmental contamination exists on our properties, we could become subject to
strict, joint and several liability for the contamination by virtue of our
ownership interest.
The
presence of hazardous substances on a property may adversely affect our ability
to sell the property and we may incur substantial remediation costs. The
discovery of environmental liabilities attached to our properties could have a
material adverse effect on our results of operations and financial condition and
our ability to comply with our covenants and to pay distributions to
stockholders.
Americans
with Disabilities Act and Other Changes in Governmental Rules and
Regulations
Under the
Americans with Disabilities Act of 1990, or the ADA, all public accommodations
must meet various federal requirements related to access and use by disabled
persons. Compliance with the ADA’s requirements could require removal of access
barriers, and non-compliance could result in the U.S. government imposing fines
or in private litigants winning damages. If we are required to make substantial
modifications to our hotels, whether to comply with the ADA or other changes in
governmental rules and regulations, our financial condition, results of
operations and ability to comply with our loan covenants and to make
distributions to our stockholders could be adversely affected.
General
Risks Related to the Real Estate Industry
Illiquidity
of real estate investments could significantly impede our ability to respond to
adverse changes in the performance of our properties and harm our financial
condition.
Because
real estate investments are relatively illiquid, our ability to promptly sell
one or more hotel properties or mortgage loans in our portfolio in response to
changing economic, financial and investment conditions is limited.
The real
estate market is affected by many factors that are beyond our control,
including:
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adverse
changes in international, national, regional and local economic and market
conditions;
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changes
in interest rates and in the cost and terms of debt
financing;
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absence
of liquidity in credit markets which limits the availability and amount of
debt financing;
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changes
in governmental laws and regulations, fiscal policies and zoning
ordinances and the related costs of compliance with laws and regulations,
fiscal policies and ordinances;
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the
ongoing need for capital improvements, particularly in older
structures;
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changes
in operating expenses; and
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civil
unrest, acts of God, including earthquakes, floods and other natural
disasters such as Hurricane Katrina in New Orleans in August 2005, which
may result in uninsured losses, and acts of war or terrorism, including
the consequences of the terrorist acts, such as those that occurred on
September 11, 2001.
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We may
decide to sell our hotels in the future. We cannot predict whether we will be
able to sell any hotel property for the price or on the terms set by us, or
whether any price or other terms offered by a prospective purchaser would be
acceptable to us. We also cannot predict the length of time needed to find a
willing purchaser and to close the sale of a hotel property.
We may be
required to expend funds to correct defects or to make improvements before a
hotel property can be sold. We cannot assure you that we will have funds
available to correct those defects or to make those improvements. In acquiring a
hotel property, we may agree to lock-out provisions that materially restrict us
from selling that property for a period of time or impose other restrictions,
such as a limitation on the amount of debt that can be placed or repaid on that
property. These factors and any others that would impede our ability to respond
to adverse changes in the performance of our properties could have a material
adverse effect on our operating results and financial condition, as well as our
ability to comply with our loan covenants and to pay distributions to
stockholders.
Future
acquisitions may not yield the returns expected, may result in disruptions to
our business, may strain management resources and may result in stockholder
dilution.
Our
business strategy may not ultimately be successful and may not provide positive
returns on our investments. Acquisitions may cause disruptions in our operations
and divert management’s attention away from day-to-day operations. The issuance
of equity securities in connection with any acquisition could be substantially
dilutive to our stockholders.
Our
hotels may contain or develop harmful mold, which could lead to liability for
adverse health effects and costs of remediating the problem.
When
excessive moisture accumulates in buildings or on building materials, mold
growth may occur, particularly if the moisture problem remains undiscovered or
is not addressed over a period of time. Some molds may produce airborne toxins
or irritants. Concern about indoor exposure to mold has been increasing, as
exposure to mold may cause a variety of adverse health effects and symptoms,
including allergic or other reactions. As a result, the presence of significant
mold at any of our properties could require us to undertake a costly remediation
program to contain or remove the mold from the affected property, which would
reduce our cash available for distribution. In addition, the presence of
significant mold could expose us to liability from our guests, employees or our
management company and others if property damage or health concerns arise and
could harm our reputation.
Risks
Related to Our Organization and Structure
Our
failure to qualify as a REIT under the federal tax laws will result in
substantial tax liability, which would reduce the amount of cash available for
distribution to our stockholders.
The
federal income tax laws governing REITs are complex.
We intend
to operate in a manner that will maintain our qualification as a REIT under the
federal income tax laws. The REIT qualification requirements are extremely
complex, however, and interpretations of the federal income tax laws governing
qualification as a REIT are limited. We have not applied for or obtained a
ruling from the Internal Revenue Service that we qualify as a REIT. Accordingly,
we cannot be certain that we will be successful in operating so we continue to
qualify as a REIT. At any time, new laws, interpretations or court decisions may
change the federal tax laws or the federal income tax consequences of our
qualification as a REIT.
Failure
to make distributions could subject us to tax.
In order
to maintain our qualification as a REIT, each year we must pay out to our
stockholders in distributions at least 90% of our REIT taxable income, excluding
net capital gain. To the extent that we satisfy this distribution minimum, but
distribute less than 100% of our taxable income, we will be subject to federal
corporate income tax on our undistributed taxable income. In addition, we will
be subject to a 4.0% nondeductible excise tax if the actual amount that we pay
out to our stockholders in a calendar year is less than the minimum amount
specified under federal tax laws. Our only source of funds to make these
distributions comes from rent and dividends we receive from our TRS Lessee,
which in turn receives revenues from hotel operations. Accordingly, we may be
required to borrow money or sell assets to make distributions sufficient to
enable us to pay out enough of our taxable income to satisfy the distribution
requirement and to avoid corporate income tax and the 4.0% nondeductible excise
tax in a particular year.
Failure
to qualify as a REIT would subject us to federal income tax.
If we
fail to remain qualified as a REIT in any taxable year (including, but not
limited to, a failure resulting from not making the minimum required
distribution), and if the relief provisions were not to apply, we will be
subject to federal income tax on our taxable income. If we fail to qualify as a
REIT, we would not be required to make any distributions. In addition, any
distributions that we do make will not be deductible by us. This would
substantially reduce our earnings, our cash available to pay distributions, and
the value of our common stock.
The
resulting tax liability might cause us to borrow funds, liquidate some of our
investments, or take other steps that could negatively affect our operating
results in order to pay any such tax. Moreover, if our REIT status is terminated
because of our failure to meet a technical REIT requirement and the relief
provisions did not excuse our failure to qualify as a REIT, or if we voluntarily
revoke our election, we generally would be disqualified from re-electing
treatment as a REIT until the fifth taxable year after the year in which we
failed to qualify as a REIT.
Failure
to qualify as a REIT may cause us to reduce or eliminate distributions to our
stockholders, and we may face increased difficulty in raising capital or
obtaining financing.
If we
fail to remain qualified as a REIT, we may have to reduce or eliminate any
distributions to our stockholders in order to satisfy our income tax
liabilities. Any distributions that we do make to our stockholders would be
treated as taxable dividends to the extent of our current and accumulated
earnings and profits. This may result in negative investor and market perception
regarding the market value of our common stock, and the value of your shares of
our common stock may be reduced. In addition, we may face increased difficulty
in raising capital or obtaining financing if we fail to qualify or remain
qualified as a REIT because of the resulting tax liability and potential
reduction of our market valuation.
MHI
Holding and our TRS Lessee increase our overall tax liability.
MHI
Holding and our TRS Lessee are subject to federal and state income tax on their
taxable income, which will consist of the revenues from the hotels leased by our
TRS Lessee, net of the operating expenses for such hotels and rent payments to
us. Accordingly, although our ownership of our TRS Lessee will allow us to
participate in the operating income from our hotels in addition to receiving
rent, that operating income will be fully subject to income tax. The after-tax
net income of our TRS Lessee is available for distribution to
us.
We will
incur a 100% excise tax on transactions with MHI Holding and our TRS Lessee that
are not conducted on an arm’s-length basis. For example, to the extent that the
rent paid by our TRS Lessee to us exceeds an arm’s-length rental amount, such
amount potentially will be subject to this excise tax. We intend that all
transactions between us and MHI Holding and our TRS Lessee will be conducted on
an arm’s-length basis and, therefore, that the rent paid by our TRS Lessee to us
will not be subject to this excise tax.
Even
if we remain qualified as a REIT, we may face other tax liabilities that reduce
our cash flow.
Even if
we remain qualified for taxation as a REIT, we may be subject to certain
federal, state and local taxes on our income and assets. For
example:
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We
will be required to pay tax on undistributed REIT taxable
income.
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We
may be required to pay “alternative minimum tax” on our items of tax
preference.
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If
we have net income from the disposition of foreclosure property held
primarily for sale to customers in the ordinary course of business or
other non-qualifying income from foreclosure property, we must pay tax on
that income at the highest corporate
rate.
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If
we sell a property in a “prohibited transaction,” our gain from the sale
would be subject to a 100% penalty tax. A “prohibited transaction” would
be a sale of property, other than a foreclosure property, held primarily
for sale to customers in the ordinary course of
business.
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MHI
Holding is a fully taxable corporation and is required to pay federal and
state taxes on its income, which will consist of the revenues from the
hotels leased from our operating partnership, net of the operating
expenses for such hotels and rent payments to
us.
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Our
ability to effect a merger or other business combination transaction may be
restricted by our operating partnership agreement.
Conflicts
of interest relating to a merger or other business combination transactions
involving our change of control may occur between us and Andrew Sims, our
chairman, president and chief executive officer, William Zaiser, our executive
vice president and chief financial officer and Kim Sims, Christopher Sims, and
Edward Stein, three of our directors. Our operating partnership’s agreement of
limited partnership provides that the holders of 66.7% of the outstanding
limited partnership interests in our operating partnership (including our
limited partnership interest in our operating partnership) must approve such a
merger or other business combination transaction, unless the holders of 50.0% or
more of the outstanding limited partnership interests (excluding our limited
partnership interest) approves such a merger or other business combination
transaction. As of September 30, 2009, Andrew Sims, William Zaiser,
Kim Sims, Christopher Sims and Edward Stein beneficially own approximately
21.54% of our outstanding limited partnership interests, and we own
approximately 65.0%.
If we issue all
_________ shares available in the rights offering, we will contribute an
estimated ___ in net proceeds to our operating partnership in exchange for
______ units in our operating partnership, resulting in the Company owning
approximately ___% of the operating partnership. If all of the rights
are exercised , we will own approximately 72.5% of the outstanding limited
partnership interests. Although our stockholders must approve a
merger or other business combination transaction under applicable Maryland law,
under our operating partnership agreement, limited partners, including certain
of our officers and directors, must approve certain business combination
transactions involving us. These approval rights of limited partners may lead to
conflicts of interest, which could result in decisions that do not fully reflect
our best interests or the best interests of our stockholders.
In
addition, in the event of a change of control of our company, the limited
partners will have the right, for a period of 30 days following the change of
control event, to cause the operating partnership to redeem all of the units
held by the limited partners for a cash amount equal to the cash redemption
amount otherwise payable upon redemption pursuant to the partnership agreement.
This cash redemption right may make it more unlikely or difficult for a third
party to propose or consummate a change of control transaction, even if such
transaction were in the best interests of our stockholders.
Complying
with REIT requirements may cause us to forego attractive opportunities that
could otherwise generate strong risk-adjusted returns and instead pursue less
attractive opportunities, or none at all.
To
qualify as a REIT for federal income tax purposes, we must continually satisfy
tests concerning, among other things, the sources of our income, the nature and
diversification of our assets, the amounts we distribute to our stockholders and
the ownership of our stock. Thus, compliance with the REIT requirements may
hinder our ability to operate solely on the basis of generating strong
risk-adjusted returns on invested capital for our stockholders.
Complying
with REIT requirements may force us to liquidate otherwise attractive
investments, which could result in an overall loss on our
investments.
To
maintain qualification as a REIT, we must ensure that at the end of each
calendar quarter at least 75.0% of the value of our assets consists of cash,
cash items, government securities and qualified REIT real estate assets. The
remainder of our investment in securities (other than government securities,
qualified real estate assets and securities of one or more taxable REIT
subsidiaries) generally cannot include more than 10.0% of the outstanding voting
securities of any one issuer or more than 10.0% of the total value of the
outstanding securities of any one issuer. In addition, in general, no more than
5.0% of the value of our assets (other than government securities, qualified
real estate assets and securities of one or more taxable REIT subsidiaries) can
consist of the securities of any one issuer, and no more than 25.0% of the value
of our total assets can be represented by securities of one or more taxable REIT
subsidiaries. If we fail to comply with these requirements at the end of any
calendar quarter, we must correct such failure within 30 days after the end of
the calendar quarter to avoid losing our REIT status and suffering adverse tax
consequences. If we fail to comply with these requirements at the end of any
calendar quarter, and the failure exceeds a de minimis threshold, we may be able
to preserve our REIT status if the failure was due to reasonable cause and not
to willful neglect. In this case, we will be required to dispose of the assets
causing the failure within six months after the last day of the quarter in which
the failure occurred, and we will be required to pay an additional tax of the
greater of $50,000 or the product of the highest applicable tax rate multiplied
by the net income generated on those assets. As a result, we may be required to
liquidate otherwise attractive investments.
Taxation
of dividend income could make our common stock less attractive to investors and
reduce the market price of our common stock.
The
federal income tax laws governing REITs, or the administrative interpretations
of those laws, may be amended at any time. Any new laws or interpretations may
take effect retroactively and could adversely affect us or could adversely
affect you as a stockholder. Under current law, “qualified dividends,” which
include dividends from domestic C corporations that are received before 2011 and
paid to noncorporate stockholders are subject to a reduced rate of tax of 15.0%.
Because REITs generally do not pay corporate-level taxes as a result of the
dividends paid deduction to which they are entitled, dividends from REITs
generally are not treated as qualified dividends and thus do not qualify for the
15.0% reduced tax rate. If the federal income tax laws extended the
applicability of the 15.0% tax rate on qualified dividends to taxable years
beginning after December 31, 2010, noncorporate investors could view an
investment in non-REIT corporations as more attractive than an investment in
REITs because the dividends they would receive from non-REIT corporations would
be subject to lower tax rates.
Provisions
of our charter may limit the ability of a third party to acquire control of our
company.
Aggregate
Share and Common Share Ownership Limits
Our
charter provides that no person may directly or indirectly own more than 9.9% of
the value of our outstanding shares of stock or more than 9.9% of the number of
our outstanding shares of common stock. These ownership limitations may prevent
an acquisition of control of our company by a third party without our board of
directors’ approval, even if our stockholders believe the change of control is
in their interest. Our board of directors has discretion to waive that ownership
limit if the board receives evidence that ownership in excess of the limit will
not jeopardize our REIT status.
Authority
to Issue Stock
Our
amended and restated charter authorizes our board of directors to issue up to
49,000,000 shares of common stock and up to 1,000,000 shares of preferred stock,
to classify or reclassify any unissued shares of common stock or preferred stock
and to set the preferences, rights and other terms of the classified or
reclassified shares. Issuances of additional shares of stock may have the effect
of delaying or preventing a change in control of our company, including
transactions at a premium over the market price of our stock, even if
stockholders believe that a change of control is in their interest. We will be
able to issue additional shares of stock or preferred stock without stockholder
approval, unless stockholder approval is required by applicable law or the rules
of any stock exchange or automated quotation system on which our securities may
be listed or traded.
Provisions
of Maryland law may limit the ability of a third party to acquire control of our
company.
Certain
provisions of the Maryland General Corporation Law, or the MGCL, may have the
effect of inhibiting a third party from making a proposal to acquire us or of
impeding a change of control under circumstances that otherwise could provide
the holders of shares of our common stock with the opportunity to realize a
premium over the then-prevailing market price of such shares,
including:
|
·
|
“business
combination” provisions that, subject to limitations, prohibit certain
business combinations between us and an “interested stockholder” (defined
generally as any person who beneficially owns 10.0% or more of the voting
power of our shares or an affiliate thereof) for five years after the most
recent date on which the stockholder becomes an interested stockholder,
and thereafter imposes special appraisal rights and special stockholder
voting requirements on these combinations;
and
|
|
·
|
“control
share” provisions that provide that “control shares” of our company
(defined as shares which, when aggregated with other shares controlled by
the stockholder, entitle the stockholder to exercise one of three
increasing ranges of voting power in electing directors) acquired in a
“control share acquisition” (defined as the direct or indirect acquisition
of ownership or control of “control shares”) have no voting rights except
to the extent approved by our stockholders by the affirmative vote of at
least two-thirds of all the votes entitled to be cast on the matter,
excluding all interested shares.
|
We have
opted out of these provisions of the MGCL, in the case of the business
combination provisions of the MGCL by resolution of our board of directors, and
in the case of the control share provisions of the MGCL pursuant to a provision
in our bylaws. However, our board of directors may by resolution elect to opt in
to the business combination provisions of the MGCL and we may, by amendment to
our bylaws, opt in to the control share provisions of the MGCL in the
future. Our board of directors has the exclusive power to amend our
bylaws.
Additionally,
Title 8, Subtitle 3 of the MGCL permits our board of directors, without
stockholder approval and regardless of what is currently provided in our charter
or bylaws, to implement takeover defenses, some of which (for example, a
classified board) we do not yet have. These provisions may have the effect of
inhibiting a third party from making an acquisition proposal for our company or
of delaying, deferring or preventing a change in control of our company under
the circumstances that otherwise could provide the holders of our common stock
with the opportunity to realize a premium over the then current market price.
Provisions
in our executive officers’ employment agreements and the strategic alliance
agreement may make a change of control of our company more costly or
difficult.
Our
employment agreements with Mr. Andrew Sims, our chief executive officer,
and Mr. William Zaiser, our chief financial officer, contain provisions
providing for substantial payments to these officers in the event of a change of
control of our company. Specifically, if we terminate these executive’s
employment without cause or the executive resigns with good reason, which
includes a failure to nominate Mr. Sims to our board of directors or his
involuntary removal from our board of directors, unless for cause or by vote of
the stockholders, or if there is a change of control, each of these executives
is entitled to the following:
|
·
|
any
accrued but unpaid salary and
bonuses;
|
|
·
|
vesting
of any previously issued stock options and restricted
stock;
|
|
·
|
payment
of the executive’s life, health and disability insurance coverage for a
period of five years following
termination;
|
|
·
|
any
unreimbursed expenses; and
|
|
·
|
a
severance payment equal to five times the executive’s combined salary base
and actual bonus compensation for the preceding fiscal
year.
|
In the
event that the employment of Mr. David Folsom, our chief operating officer,
is terminated without cause or he resigns for good reason, Mr. Folsom is
entitled to receive the sum of the following amounts:
|
·
|
any
accrued but unpaid salary and
bonuses;
|
|
·
|
issuance
and vesting of any previously granted stock options or restricted stock
(including unissued shares conditioned upon and in consideration of
Mr. Folsom’s employment through dates set forth in the employment
agreement);
|
|
·
|
payment
of life, health and disability insurance coverage for a period of three
years following termination;
|
|
·
|
any
unreimbursed expenses; and
|
|
·
|
and
a severance payment equal to three times of the executive’s combined
salary and actual bonus compensation for the preceding fiscal
year.
|
In
addition, these executives will receive additional payments to compensate them
for a non-deductible excise tax imposed on them under Section 4999 of the
Code by reason of receipt of excess parachute payments. We will not
be able to deduct any of the above amounts paid to the executives.
These
provisions may make a change of control of our company, even if it is in the
best interests of our stockholders, more costly and difficult and may reduce the
amounts our stockholders would receive in a change of control
transaction.
Our
ownership limitations may restrict or prevent you from engaging in certain
transfers of our common stock.
In order
to maintain our REIT qualification, we cannot be closely held (i.e., no more
than 50.0% in value of our outstanding stock may be owned, directly or
indirectly, by or for not more than five individuals during the last half of any
taxable year (other than the first year for which a REIT election is made)). To
preserve our REIT qualification, our charter contains a 9.9% aggregate share
ownership limit and a 9.9% common share ownership limit. Generally, any shares
of our stock owned by affiliated persons will be added together for purposes of
the aggregate share ownership limit, and any shares of common stock owned by
affiliated owners will be added together for purposes of the common share
ownership limit.
If anyone
transfers shares in a way that would violate the aggregate share ownership limit
or the common share ownership limit, or prevent us from continuing to qualify as
a REIT under the federal income tax laws, those shares instead will be
transferred to a trust for the benefit of a charitable beneficiary and will be
either redeemed by us or sold to a person whose ownership of the shares will not
violate the aggregate share ownership limit or the common share ownership limit.
If this transfer to a trust fails to prevent such a violation or fails to
preserve our continued qualification as a REIT, then we will consider the
initial intended transfer to be null and void from the outset. The intended
transferee of those shares will be deemed never to have owned the shares. Anyone
who acquires shares in violation of the aggregate share ownership limit, the
common share ownership limit or the other restrictions on transfer in our
charter bears the risk of suffering a financial loss when the shares are
redeemed or sold if the market price of our stock falls between the date of
purchase and the date of redemption or sale.
The
board of directors’ revocation of our REIT status without stockholder approval
may decrease our stockholders’ total return.
Our
charter provides that our board of directors may revoke or otherwise terminate
our REIT election, without the approval of our stockholders, if it determines
that it is no longer in our best interest to continue to qualify as a REIT. If
we cease to be a REIT, we would become subject to federal income tax on our
taxable income and would no longer be required to distribute most of our taxable
income to our stockholders, which may have adverse consequences on our total
return to our stockholders.
The
ability of our board of directors to change our major corporate policies may not
be in your interest.
Our board
of directors determines our major corporate policies, including our acquisition,
financing, growth, operations and distribution policies. Our board may amend or
revise these and other policies from time to time without the vote or consent of
our stockholders.
We
do not have the ability to control the sale of any hotel properties acquired
through our joint venture program with The Carlyle Group.
Pursuant
to the terms of the program agreement with Carlyle, we will retain a minority
interest of 10.0% to 25.0% in each investment. Carlyle controls all major
decisions relating to each investment, including, but not limited to, the sale
of individual investment properties. Carlyle will determine the timing and terms
and conditions of sale of each investment property. Specifically, we will not be
able to control the timing and terms and conditions of sale of our interest in
the Crowne Plaza Hollywood Beach Resort.
Joint
venture investments could be adversely affected by our lack of sole
decision-making authority, our reliance on a joint venture partners’ financial
condition and disputes between our joint venture partners and us.
In August
2007, we purchased a 25.0% indirect, non-controlling interest in the Crowne
Plaza Hollywood Beach Resort through a joint venture with Carlyle. Carlyle owns
a 75.0% controlling interest in the joint venture and is in a position to
exercise sole decision-making authority regarding the property including, but
not limited to, the method and timing of disposition of the
property.
We may
co-invest in the future with Carlyle or other third parties through
partnerships, joint ventures or other entities, acquiring non-controlling
interests in or sharing responsibility for managing the affairs of a property,
partnership, joint venture or other entity. In such event, we would not be in a
position to exercise sole decision-making authority regarding the property,
partnership, joint venture or other entity. Investments in partnerships, joint
ventures, or other entities may, under certain circumstances, involve risks not
present were a third party not involved, including the possibility that partners
or joint venture partners might become bankrupt or fail to fund their share of
required capital contributions. Partners or joint venture partners may have
economic or other business interests or goals, which are inconsistent with our
business interests or goals, and may be in a position to take actions contrary
to our policies or objectives. Such investments may also have the potential risk
of impasses on decisions, such as a sale, because neither we, nor the partner or
joint venture partner, would have full control over the partnership or joint
venture. Disputes between us and partners or joint venture partners may result
in litigation or arbitration that would increase our expenses and prevent our
officers and/or directors from focusing their time and effort on our business.
Consequently, actions by, or disputes with, partners or joint venture partners
might result in subjecting properties owned by the partnership or joint venture
to additional risk. We may also, in certain circumstances, be liable for the
actions of our third-party partners or joint venture partners. For example, we
may be required to guarantee indebtedness incurred by a partnership, joint
venture or other entity for the purchase or renovation of a hotel property. Such
a guarantee may be on a joint and several basis with our partner or joint
venture partner in which case we may be liable in the event such party defaults
on its guaranty obligation.
We
agreed to provide to certain of the contributors of our initial properties
opportunities to guarantee liabilities of our operating partnership which may
limit our ability to make similar opportunities available to owners of
properties that we would like to purchase. This limitation may adversely affect
our ability to acquire properties in the future.
Under
certain of the tax indemnification agreements, we agreed to use commercially
reasonable efforts during the protected period to make available to certain
contributors opportunities to guarantee liabilities of our operating
partnership. By guaranteeing liabilities of the operating partnership, the
contributors will be entitled to defer recognition of gain in connection with
the contribution of certain hotels. As a consequence of the allocation of debt
to them for tax purposes by virtue of guaranteeing the liabilities of the
operating partnership, contributors will not be deemed to have received a
distribution under the applicable provisions of the Code. In the case of our tax
indemnification obligation, the protected period continues until the earlier
of:
|
·
|
10
years after the contribution of such property;
or
|
|
·
|
the
date on which the contributor no longer owns, in the aggregate, at least
25.0% of the units we issued to the contributor at the time of its
contribution of property to our operating
partnership.
|
The
obligation to make guarantee opportunities available to the contributors could
adversely affect our ability to acquire additional properties in the future by
reducing the amount of debt that could be guaranteed by other, future
contributors.
Our
success depends on key personnel whose continued service is not
guaranteed.
We depend
on the efforts and expertise of our chairman, president and chief executive
officer, Andrew Sims; our executive vice president and chief operating officer,
David Folsom; and our executive vice president and chief financial officer,
William Zaiser, to manage our day-to-day operations and strategic business
direction. The loss of any of their services could have an adverse effect on our
operations
.
USE
OF PROCEEDS
The net
proceeds to us from the rights offering will depend on the number of
subscription rights that are exercised. If we issue all ________
shares available in the rights offering, we estimate that the net proceeds to us
from the sale of our common stock offered in the rights offering, after
deducting estimated offering expenses, will be approximately $___
million. We estimate that the expenses of the rights offering will be
approximately $______ million.
We will
contribute the net proceeds to our operating partnership. Our
operating partnership intends to subsequently use the net proceeds received from
us for additional working capital, which may be used to reduce or purchase our
indebtedness, or for other general corporate purposes.
Until we
use the net proceeds, we will invest them temporarily in liquid short-term
securities.
PRICE
RANGE OF COMMON STOCK AND DIVIDEND POLICY
Prior to
March 11, 2008, our common stock traded on the American Stock Exchange
under the symbol “MDH”. On March 11, 2008, we terminated our listing on the
American Stock Exchange and listed our common stock on the NASDAQ
®
Stock
Market
also under
the symbol “MDH”. The following table sets forth, for the indicated period, the
high and low sales prices for the common stock, as reported on NASDAQ, and,
prior to March 11, 2008, as reported on AMEX:
|
|
Price
Range
|
|
|
|
High
|
|
|
Low
|
|
Fiscal
Year 2009
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
1.38
|
|
|
$
|
1.13
|
|
Second
Quarter
|
|
$
|
1.47
|
|
|
$
|
1.39
|
|
Third
Quarter (through September 28, 2009)
|
|
$
|
3.50
|
|
|
$
|
1.17
|
|
Year
Ended December 31, 2008
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
9.97
|
|
|
$
|
5.71
|
|
Second
Quarter
|
|
$
|
6.80
|
|
|
$
|
5.00
|
|
Third
Quarter
|
|
$
|
7.25
|
|
|
$
|
3.79
|
|
Fourth
Quarter
|
|
$
|
5.45
|
|
|
$
|
1.03
|
|
Year
Ended December 31, 2007 (AMEX)
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
10.39
|
|
|
$
|
9.55
|
|
Second
Quarter
|
|
$
|
10.90
|
|
|
$
|
9.98
|
|
Third
Quarter
|
|
$
|
11.00
|
|
|
$
|
9.70
|
|
Fourth
Quarter
|
|
$
|
10.20
|
|
|
$
|
7.15
|
|
The
closing price of our common stock on the NASDAQ
®
Stock
Market on September 28, 2009 was $2.43 per share.
Stockholder
Information
As of September 21, 2009, there were 84
holders of record of our common stock.
In order
to comply with certain requirements related to our qualification as a REIT, our
charter, subject to certain exceptions, limits the number of shares of common
stock that may be owned by any single person or affiliated group to 9.9% of the
outstanding shares of common stock.
Dividend
and Distribution Information
We
elected to be taxed as a REIT commencing with our taxable year ending
December 31, 2004. To maintain qualification as a REIT, we are required to
make annual distributions to our stockholders of at least 90% of our REIT
taxable income, excluding net capital gain, which does not necessarily equal net
income as calculated in accordance with generally accepted accounting
principles. Our ability to pay distributions to our stockholders will depend, in
part, upon our receipt of distributions from our operating partnership which may
depend upon receipt of lease payments with respect to our properties from our
TRS Lessee, and in turn, upon the management of our properties by our hotel
manager. Distributions to our stockholders will generally be taxable to our
stockholders as ordinary income; however, because a portion of our investments
will be equity ownership interests in hotels, which will result in depreciation
and non-cash charges against our income, a portion of our distributions may
constitute a tax-free return of capital. To the extent not inconsistent with
maintaining our REIT status, our TRS Lessee may retain any after-tax
earnings.
The
following table sets forth our dividend payments for fiscal year 2007 to
present.
Dividend
Payments
|
|
Date Declared
|
|
For the Quarter Ended
|
|
Date Paid
|
|
Amount per Share
|
|
April
2009
|
|
March
31, 2009
|
|
June
30, 2009
|
|
$
|
0.01
|
|
January
2009
|
|
December
31, 2008
|
|
March
30, 2009
|
|
$
|
0.01
|
|
July
2008
|
|
September
30, 2008
|
|
October
11, 2008
|
|
$
|
0.17
|
|
April
2008
|
|
June
30, 2008
|
|
July
11, 2008
|
|
$
|
0.17
|
|
January
2008
|
|
March
31, 2008
|
|
April
11, 2008
|
|
$
|
0.17
|
|
October
2007
|
|
December
31, 2007
|
|
January
11, 2008
|
|
$
|
0.17
|
|
July
2007
|
|
September
30, 2007
|
|
October
11. 2007
|
|
$
|
0.17
|
|
April
2007
|
|
June
30, 2007
|
|
July
11, 2007
|
|
$
|
0.17
|
|
January
2007
|
|
March
31, 2007
|
|
April
11, 2007
|
|
$
|
0.17
|
|
In
December 2008, in the interest of capital preservation within the current
economic environment, and based on the expectation that the U.S. economy, and in
particular the lodging industry, will continue to face declining operating
trends through 2009, we amended our dividend policy. We subsequently entered
into a third amendment to our revolving credit facility which imposes additional
restrictions on the timing of the payment and the amount of cash dividends but
permits us to pay by the end of our fiscal year that amount of cash dividends
necessary to maintain REIT status, providing certain conditions are met before
additional distributions can be made. This may result in a reduction in the
level of dividend payouts compared to the level of dividend payments we have
made in recent years.
The
amount of future distributions will be based upon quarterly operating results,
general economic conditions, requirements for capital improvements, the
availability of debt and equity capital, the Code’s annual distribution
requirements, and other factors which our board of directors deems relevant. The
amount, timing and frequency of distributions will be authorized by our board of
directors and declared by us based upon a variety of factors deemed relevant by
our directors, and no assurance can be given that our distribution policy will
not change in the future.
CAPITALIZATION
The
following table shows our capitalization as of June 30, 2009 on a historical
basis. The table also includes our capitalization on a pro forma
basis reflecting a fully subscribed rights offering. The rights
offering is capped by the Form S-3 Limitation at one-third of our total market
value. For the purposes of this pro forma we are assuming a stock
price of $___ on ________ and a total market capitalization of
$________. The following information should be read in conjunction
with our consolidated financial statements and the notes thereto incorporated by
reference in this prospectus.
|
|
Historical
|
|
|
Rights
|
|
|
Pro
Forma
|
|
|
Pro
Forma
|
|
|
|
as
reported
|
|
|
Offering
(1)
|
|
|
Adjustments
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Loans Payable
|
|
$
|
72,935,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line
of Credit
|
|
|
79,487,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
Payable
|
|
|
4,665,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares, $.01 par 49,000,000 authorized
6,964,263 shares outstanding
as of 6/30/2009
|
|
|
69,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in Capital
|
|
|
48,664,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
distributions in excess of retained earnings
|
|
|
(12,963,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
MHI Hospitality Corporation Stockholders’ Equity
|
|
|
35,770,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
Interest
|
|
|
17,127,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Equity
|
|
|
52,897,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capitalization
|
|
$
|
209,987,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Based
upon ___ common shares issued pursuant to this rights offering at a subscription
price of $____ less approximately $_____ per share in related
expenses.
(2)
Adjustment to non-controlling interest.
THE
RIGHTS OFFERING
The
following describes the rights offering in general and assumes, unless
specifically provided otherwise, that you are a record holder of our common
stock on the record date. If you hold your shares in a brokerage
account or through a dealer or other nominee, please also refer to “—Notice To
Brokers and Nominees” below.
Before
deciding whether to exercise your subscription rights, you should carefully read
this prospectus, including the information set forth under the heading “Risk
Factors” and the information that is incorporated by reference into this
prospectus, including the information set forth under the heading “Risk Factors”
in our Annual Report on Form 10-K filed with the SEC on March 25,
2009.
The
Subscription Rights
We are
distributing to holders of our common stock as of 5:00 p.m., New York City time,
on October 12, 2009, which is the record date for this rights offering, at no
charge, non-transferable subscription rights to purchase shares of our common
stock. You will receive one subscription right for each share of
common stock you owned as of 5:00 p.m., New York City time, on the record
date. The subscription rights will be evidenced by subscription
rights certificates. Subscription rights may be exercised at any time
during the subscription period, which commences on ________, 2009, through the
expiration date for the rights offering, which is 5:00 p.m., New York City
time, on __________, 2009. You are not required to exercise any of
your subscription rights.
Any fractional rights resulting from
the allocation process specified below will be rounded to the nearest whole
number.
Basic
Subscription Privilege
Each
subscription right will entitle you to purchase one share of our common stock at
a subscription price of _____ per share, subject to the Form S-3 Limitation and
the 9.9% ownership limitation, both of which are described below. You
may exercise any number of your subscription rights, or you may choose not to
exercise any subscription rights.
Over-Subscription
Privilege
If you
exercise your basic subscription privilege in full, you will also have an
over-subscription privilege to purchase any shares that our other subscription
rights holders do not purchase pursuant to their basic subscription privilege,
subject to the Form S-3 Limitation and the 9.9% ownership limitation, both of
which are described below. The subscription price for shares
purchased pursuant to the over-subscription privilege will be the same as the
subscription price for the basic subscription privilege.
You may
exercise your over-subscription privilege only if you exercise your basic
subscription privilege in full. To determine if you have fully
exercised your basic subscription privilege, we will consider only the basic
subscription privilege held by you in the same capacity. For example,
if you are granted subscription rights for shares of our common stock that you
own individually and shares of our common stock that you own jointly with your
spouse, you may exercise your over-subscription privilege with respect to the
subscription rights you own individually, as long as you fully exercise your
basic subscription privilege with respect to your individually owned
subscription rights. You will not, however, be able to exercise the
over-subscription privilege you own collectively with your spouse unless the
basic subscription privilege collectively owned by you and your spouse is fully
exercised. You do not have to subscribe for any shares under the
basic subscription privilege owned jointly with your spouse to exercise your
individual over-subscription privilege.
When you
complete the portion of your subscription rights certificate to exercise your
over-subscription privilege, you will be representing and certifying that you
have fully exercised your basic subscription privilege as to shares of our
common stock that you hold in that capacity. You must exercise your
over-subscription privilege at the same time you exercise your basic
subscription privilege in full.
If,
however, over-subscription requests exceed the number of shares of common stock
available, we will allocate the available shares of common stock pro rata among
each stockholder exercising the over-subscription privilege in proportion to the
number of shares of common stock owned by such stockholder on the record date,
relative to the number of shares owned on the record date by all stockholders
exercising the oversubscription privilege. If this pro rata allocation results
in any stockholder receiving a greater number of shares of common stock than the
stockholder subscribed for pursuant to the exercise of the over-subscription
privilege, then such stockholder will be allocated only that number of shares
for which the stockholder oversubscribed, and the remaining shares of common
stock will be allocated among all other stockholders exercising the
over-subscription privilege on the same pro rata basis described above. The
proration process will be repeated until all shares of common stock have been
allocated or all over-subscription requests have been
satisfied.
If you
are not allocated the full amount of shares for which you over-subscribe, you
will receive a refund of the subscription price, without interest or penalty,
that you delivered for those shares of our common stock that are not allocated
to you. The subscription agent will mail such refunds as soon as
practicable after the completion of the offering.
Form
S-3 Limitation on Subscription
Based on an aggregate market value of
outstanding common stock held by non-affiliates equal to approximately $16.2
million as of September 28, 2009, we may not sell shares of common stock with an
aggregate market value of more than approximately $[5.4] million under this
prospectus pursuant to the Form S-3 Limitation. If the basic
subscription requests or the over-subscription requests exceed the number of
shares available, we will allocate the available shares of common stock pro rata
among the stockholders that exercise such privilege in proportion to the number
of shares of common stock owned by each such stockholder on the record date,
relative to the number of shares owned on the record date by all stockholders
exercising such basic subscription privilege or over-subscription privilege, as
the case may be.
REIT Limitation
on Subscription
To help
maintain our status as a real estate investment trust (REIT), our charter
restricts beneficial and constructive ownership of shares of common stock by any
person or group of persons acting collectively to 9.9% of our outstanding shares
of common stock. See “Description of Capital Stock –
Restrictions on Ownership and Transfer.”
If you
only exercise your basic subscription rights, your percentage ownership interest
in us may not increase. If you exercise your over-subscription
rights, your ownership percentage will increase. We do not intend to
grant waivers from our 9.9% limitation to any holder that exceeds the limit as a
result of its exercise of basic subscription rights and/or over-subscription
rights. In order for us to qualify as a REIT under the Code, not more than 50%
(by value) of our outstanding shares of capital stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities).
The 9.9% limit for a person is computed
based on the outstanding shares of common stock.
Any
rights exercised by a holder and any shares of common stock subscribed for by
that holder through the exercise of its over-subscription rights that would
cause it to go over the 9.9% ownership limit will not be considered exercised or
subscribed for by that holder. The portion of the subscription price paid by a
holder for rights that are not considered exercised and for shares of common
stock not considered subscribed for will be returned to that holder, without
interest or penalty, as soon as practicable after completion of this
offering.
If a
holder subscribes for and, inadvertently or otherwise, is issued a number of
shares of common stock that causes that holder to go over the 9.9% ownership
limit, the number of shares of common stock in excess of the 9.9% ownership
limit will not, in the hands of that holder, have dividend, voting and other
rights or be considered outstanding for quorum, voting and other
purposes.
Subscription
Price
Our board
of directors determined the terms of the rights offering. In
determining the subscription price, our board of directors considered a number
of factors, including:
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our
future needs for additional capital, liquidity and financial
flexibility;
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current
economic and financial market
conditions;
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alternatives
available for raising equity
capital;
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the
size and timing of the rights offering and the price at which our
stockholders might be willing to participate in a rights offering offered
on a pro rata basis to all stockholders with an over-subscription
privilege; and
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historical
and current trading prices for our common
stock.
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The
subscription price was established by our board of directors at a price of
______ per share. The subscription price is not necessarily related
to our book value, results of operations, cash flows, financial condition or net
worth or any other established criteria of value and may or may not be
considered the fair value of our common stock at the time the rights offering
was approved by our board of directors or during the rights offering
period. We cannot assure you that the trading price of our common
stock will not decline during or after the rights offering.
We also
cannot assure you that you will be able to sell shares of common stock purchased
during the rights offering at a price equal to or greater than the subscription
price. We urge you to obtain a current quote for our common stock
before exercising your subscription rights. We do not intend to
change the subscription price in response to changes in the trading price of our
common stock prior to the closing of the rights offering.
Expiration Time and Date;
Amendments
The
subscription rights will expire at 5:00 p.m., New York City time, on
,
2009, unless we extend it. We reserve the right to extend the
subscription period at our sole discretion, although we do not presently intend
to do so. We will notify you of any extension of the expiration date
by issuing a press release announcing such extension no later than 9:00 a.m.,
New York time, on the next business day after the most recently announced
expiration of the rights offering. You must properly complete the
enclosed subscription rights certificate and deliver it, along with the full
subscription price (including any amounts in respect of your over-subscription
privilege), to the subscription agent prior to 5:00 p.m., New York City time, on
,
2009, unless the expiration date is extended. After the expiration of
the rights offering period, all unexercised subscription rights will be null and
void. We will not be obligated to honor any purported exercise of
subscription rights which the subscription agent receives after the expiration
of the offering, regardless of when you sent the documents regarding that
exercise. Shares purchased in the rights offering will be issued to DTC on your
behalf and any subscription payments for shares not allocated or validly
purchased will be returned, without interest or penalty, as soon as practicable
following the expiration date of the rights offering.
We
reserve the right, at our sole discretion, to amend or modify the terms of the
rights offering. The terms of the rights offering cannot be modified
or amended after the expiration date of the rights offering.
Reasons
for the Rights Offering
We are
conducting the rights offering in order to raise additional equity capital and
to improve and strengthen our financial position. In authorizing the
rights offering, our board of directors evaluated our future need for additional
liquidity and capital, including for reducing or purchasing our indebtedness,
and our need for increased financial flexibility in order to enable us to
achieve our business plan and growth strategy. Our board of directors concluded
that we should take steps to raise additional capital including by means of this
rights offering. In connection with our board’s evaluation of our
capital needs and of this rights offering, our board of directors also
considered:
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current
economic and financial market
conditions;
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the
prospect of dilution of current stockholders’ ownership interests
resulting from any future efforts to raise capital from
non-stockholders;;
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the
size and timing of the rights
offering;
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the
potential dilution to our current stockholders if they choose not to
participate in the offering;
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alternatives
available for raising equity
capital;
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historical
and current trading prices for our common
stock;
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the
fact that the rights offering could potentially increase the public float
for our common stock; and
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the
fact that existing stockholders would have the opportunity to participate
on a pro rata basis and would also have an over-subscription
privilege.
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The net
proceeds to us from the rights offering will depend on the number of
subscription rights that are exercised. If we issue all
_________ shares available in the rights offering, the net proceeds
to us, after deducting estimated offering expenses, will be approximately $___
million. We estimate that the expenses of the rights offering will be
approximately $______ million. We expect that even if all the rights
are exercised and the maximum number of shares are sold, we will seek to raise
additional equity financing to improve our capital position.
We will
contribute the net proceeds to our operating partnership. Our
operating partnership intends to subsequently use the net proceeds received from
us for additional working capital, to reduce or purchase our indebtedness, or
for other general corporate purposes.
Although
we believe that the rights offering will strengthen our financial condition, our
board of directors is not making any recommendation as to whether you should
exercise your subscription rights.
Effect
of Rights Offering on Existing Stockholders
The
ownership interests and voting interests of the existing stockholders that do
not fully exercise their subscription rights will be diluted.
Method
of Exercising Subscription Rights
The
exercise of subscription rights is irrevocable, even in the event we extend the
rights offering, and may not be canceled or modified. You may exercise your
subscription rights as follows:
Subscription
by Registered Holders
If you
hold certificates evidencing your shares of our common stock, the number of
rights you may exercise pursuant to the basic subscription privilege will be
indicated on the rights certificate delivered to you. You may exercise your
subscription rights by properly completing and executing the rights certificate
and forwarding it, together with your full subscription payment, to the
subscription agent at the address set forth below under “— Subscription Agent,”
prior to the expiration of the rights offering.
Subscription
by Beneficial Owners
If you
are a beneficial owner of shares of our common stock that are registered in the
name of a broker, dealer, custodian bank or other nominee, you will not receive
a rights certificate. Instead, one subscription right will be issued to the
nominee record holder for each share of our common stock that you own at the
record date. If you are not contacted by your broker, dealer, custodian bank or
other nominee, you should promptly contact your broker, dealer, custodian bank
or other nominee in order to subscribe for shares of our common stock in the
rights offering.
If your
shares of our common stock are held in the name of a broker, dealer, custodian
bank or other nominee, your nominee may exercise the subscription rights on your
behalf in accordance with your instructions. Your nominee may establish a
deadline that may be before the 5:00 p.m., New York time, ________, 2009
expiration date we have established for the rights offering.
Payment
Method
As
described in the instructions accompanying the rights certificate, payments
submitted to the subscription agent in connection with the rights offering must
be made in full, in United States currency, in immediately available funds,
by:
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certified
bank check or bank draft payable to American Stock Transfer & Trust
Company, as subscription agent, f/b/o MHI Hospitality Corporation., drawn
upon a United States bank; or
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wire
transfer of immediately available funds to the account maintained by the
subscription agent to: JP Morgan Chase, ABA # 021000021, Acct #
323-213251, Account name: American Stock Transfer & Trust, Reference:
MHI Hospitality Rights Offer.
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Personal
checks are not accepted. Payment received after the expiration of the
rights offering may not be honored, in which case the subscription agent will
return your payment to you promptly, without interest or penalty.
You
should read and follow the delivery and payment instructions accompanying the
rights certificate. DO NOT SEND RIGHTS CERTIFICATES OR PAYMENTS DIRECTLY TO MHI.
We will not consider your subscription received until the subscription agent has
received delivery of a properly completed and duly executed rights certificate
and other subscription documents and payment of the full subscription amount.
The risk of delivery of all documents and payments is borne by you or your
nominee, not by the subscription agent or us.
The
method of delivery of rights certificates and payment of the subscription amount
to the subscription agent will be at the risk of the holders of subscription
rights. If sent by mail, we recommend that you send subscription materials and
payments by overnight courier or by registered mail, properly insured, with
return receipt requested, and that a sufficient number of days be allowed to
ensure delivery to the subscription agent and clearance of payment prior to the
expiration of the rights offering.
Missing
or Incomplete Subscription Information
If you do
not indicate the number of subscription rights being exercised, or the
subscription agent does not receive the full subscription payment for the number
of subscription rights that you indicate are being exercised, then you will be
deemed to have exercised your subscription rights with respect to the maximum
number of subscription rights that may be exercised with the aggregate
subscription price payment you delivered to the subscription
agent. If your aggregate subscription price payment is greater than
the amount you would owe for exercise of your basic subscription privilege in
full, you will be deemed to have exercised your over-subscription privilege to
purchase the maximum number of shares of our common stock that could be
purchased with your over-payment. If the subscription agent does not
apply your full subscription price payment to your purchase of shares of our
common stock, any excess subscription payment received by the subscription agent
will be returned, without interest or penalty, as soon as practicable after the
expiration date of the rights offering.
Conditions, Withdrawal and
Termination
We
reserve the right to withdraw the rights offering prior to the expiration of the
rights offer for any reason. We may terminate the rights offering, in whole or
in part, if at any time before completion of the rights offering there is any
judgment, order, decree, injunction, statute, law or regulation entered,
enacted, amended or held to be applicable to the rights offering that in the
sole judgment of our board of directors would or might make the rights offering
or its completion, whether in whole or in part, illegal or otherwise restrict or
prohibit completion of the rights offering. We may waive any of these conditions
and choose to proceed with the rights offering even if one or more of these
events occur. If we terminate the rights offering, in whole or in part, prior to
completion, all affected subscription rights will expire without value, and all
excess subscription payments received by the subscription agent will be returned
promptly, without interest or penalty. If we cancel the rights offering, we will
issue a press release notifying stockholders of the cancellation, and all
subscription payments received by the subscription agent will be returned
promptly, without interest or penalty.
Subscription
Agent
American
Stock Transfer & Trust Company is acting as the subscription agent for the
rights offering under an agreement with us. The address to which
subscription documents, rights certificates and subscription payments other than
wire transfers, should be mailed or delivered is:
If
Delivering by Hand:
American
Stock Transfer & Trust Company
Attn:
Reorganization Department
59
Maiden Lane
New
York, New York 10038
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By
Overnight Courier or By Mail:
American
Stock Transfer & Trust Company
Operations
Center
Attn:
Reorganization Department
6201
15
th
Avenue
Brooklyn,
New York 11219
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We will
pay the fees and expenses of American Stock Transfer & Trust
Company. We will also agree to indemnify American Stock Transfer
& Trust Company against certain liabilities in connection with the rights
offering.
You are
solely responsible for completing delivery to the subscription agent of your
subscription materials. The subscription materials are to be received
by the subscription agent on or prior to 5:00 p.m., New York time, on
__________, 2009. We urge you to allow sufficient time for delivery
of your subscription materials to the subscription agent. If you
deliver subscription documents or subscription rights certificates in a manner
different than that described in this prospectus, then we may not honor the
exercise of your subscription privilege.
Information
Agent
We have appointed The Altman Group as
information agent for the rights offering. Any questions regarding
the MHI Hospitality Corporation rights offering or requests for additional
copies of documents may be directed to The Altman Group at (866) 796-3419
(toll free) Monday through Friday (except bank holidays), between 10:00 a.m. and
4:00 p.m., New York time or by email at
reorg@altmangroup.com
.
Fees
and Expenses
We will
pay all fees charged by the subscription agent and the information
agent. You are responsible for paying any other commissions, fees,
taxes or other expenses incurred in connection with the exercise of the
subscription rights. Neither the subscription agent nor we will pay
such expenses.
Fractional
Shares of Common Stock
We will
not issue fractional shares of common stock. Any fractional rights
resulting from the share allocation process specified below will be rounded to
the nearest whole number.
Notice
To Brokers and Nominees
If you
are a broker, dealer, custodian bank or other nominee holder that holds shares
of our common stock for the account of others on the record date, you should
notify the beneficial owners of the shares for whom you are the nominee of the
rights offering as soon as possible to learn their intentions with respect to
exercising their subscription rights. You should obtain instructions from the
beneficial owner, as set forth in the instructions we have provided to you for
your distribution to beneficial owners. If the beneficial owner so instructs,
you should submit information and payment for shares. We expect that the
exercise of subscription rights on behalf of beneficial owners may be made
through the facilities of DTC. You may exercise individual or aggregate
beneficial owner subscription rights by instructing DTC to transfer subscription
rights from your account to the account of the subscription agent, together with
certification as to the aggregate number of subscription rights exercised and
the number of shares of common stock subscribed for under the basic subscription
privilege and the over-subscription privilege, if any, and your full
subscription payment.
Beneficial
Owners
If you do
not hold certificates for shares of our common stock, you are a beneficial owner
of our shares of our common stock. Instead of receiving a rights certificate,
you will receive your subscription rights through a broker, dealer, custodian
bank or other nominee. We will ask your broker, dealer, custodian bank or other
nominee to notify you of the rights offering.
You
should contact your broker, dealer, custodian bank or other nominee if you do
not receive information regarding the rights offering, but believe you are
entitled to subscription rights. We are not responsible if you do not receive
notice by your broker, dealer, custodian bank or other nominee or if you do not
receive notice in time to respond to your nominee by the deadline established by
the nominee, which may be prior to 5:00 p.m. NewYork time, on _____,
2009.
If you
wish to exercise your subscription rights, you will need to have your broker,
dealer, custodian bank or other nominee act for you. If you hold certificates
for shares of our common stock and received a rights certificate, but would
prefer to have your broker, dealer, custodian bank or other nominee act for you,
you should contact your nominee and request it to effect the transaction for
you.
Questions
About Exercising Subscription Rights
If you
have any questions or require assistance regarding the method of exercising your
subscription rights or requests for additional copies of this document, or the
Instructions as to the Use of MHI Subscription Rights Certificates, you should
contact the information agent, The Altman Group, at (866) 796-3419 or by
email at
reorg@altmangroup.com
.
Non-Transferability
of Subscription Rights
The
subscription rights granted to you are non-transferable and, therefore, you may
not sell, transfer or assign your subscription rights to anyone
else. The subscription rights will not be listed for trading on the
Nasdaq Global Market or any other stock exchange or market or on the OTC
Bulletin Board. We expect that the shares of common stock issuable
upon exercise of the subscription rights will be listed on the Nasdaq Global
Market under the ticker symbol “MDH”.
Validity
of Subscriptions
We will
resolve all questions regarding the validity and form of the exercise of your
subscription privileges, including time of receipt and eligibility to
participate in the rights offering. Our determination will be final
and binding. Once made, subscriptions and directions are irrevocable,
even in the event we extend the rights offering, and we will not accept any
alternative, conditional or contingent subscriptions or
directions. We reserve the absolute right to reject any subscriptions
or directions not properly submitted or the acceptance of which would be
unlawful. You must resolve any irregularities in connection with your
subscriptions before the subscription period expires, unless waived by us at our
sole discretion. Neither the subscription agent nor we shall be under
any duty to notify you or your representative of defects in your
subscriptions. A subscription will be considered accepted, subject to
our right to cancel the rights offering, only when a properly completed and duly
executed subscription rights certificate and any other required documents and
payment of the full subscription amount have been received by the subscription
agent. Our interpretations of the terms and conditions of the rights
offering will be final and binding.
Escrow
Arrangements; Return of Funds
The
subscription agent will hold funds received in payment for shares of the common
stock in a segregated account pending completion of the rights
offering. The subscription agent will hold this money in escrow until
the rights offering is completed or is withdrawn and canceled. If the
rights offering is canceled for any reason, all subscription payments received
by the subscription agent will be returned promptly, without interest or
penalty.
Certificates
for Shares of Common Stock
Stock
certificates will not be issued for shares of our common stock offered in the
offering. As soon as practicable after the expiration of the rights
offering period, the subscription agent will arrange for issuance to the
Depository Trust Company, New York, New York, known as DTC, on behalf of each
subscription rights holder of record that has validly exercised its basic
subscription privilege, the shares of common stock purchased pursuant to the
basic subscription privilege. Shares subscribed for pursuant to the
over-subscription privilege will be delivered to DTC on your behalf as soon as
practicable after the expiration date of the rights offering and following the
completion of any pro-rations as may be necessary in the event the
over-subscription requests exceed the number of shares available pursuant to the
offering and not subscribed for pursuant to the basic subscription
privilege.
Rights
of Subscribers
You will
have no rights as a stockholder of our common stock until your account, or your
account at your broker, custodian bank or other nominee is credited with the
shares of our common stock purchased in the rights offering. You will
have no right to revoke your subscriptions after you deliver your completed
subscription rights certificate, payment and any other required documents to the
subscription agent.
No
Revocation or Change
Once you
submit the form of subscription rights certificate to exercise any subscription
rights, you are not allowed to revoke or change the exercise or request a refund
of monies paid. All exercises of subscription rights are irrevocable,
even if you learn information about us that you consider to be unfavorable, or
even in the event we extend the rights offering. You should not
exercise your subscription rights unless you are certain that you wish to
purchase the shares of common stock offered pursuant to this rights
offering.
Regulatory
Limitation
We will
not be required to issue to you shares of our common stock pursuant to the
rights offering if, in our opinion, you are required to obtain prior clearance
or approval from any state or federal regulatory authorities to own or control
the shares and if, at the time the rights offering expires, you have not
obtained this clearance or approval.
U.S.
Federal Income Tax Treatment of Subscription Rights Distribution
Based upon discussions with our advisors, we believe
that our distribution of the subscription rights to our stockholders and our
stockholders’ exercise of these subscription rights to purchase shares of common
stock should generally not be taxable.
YOU ARE URGED TO
CONSULT WITH YOUR OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR FEDERAL, STATE,
LOCAL AND FOREIGN TAX CONSEQUENCES OF THE RECEIPT OF SUBSCRIPTION RIGHTS IN THIS
OFFERING AND THE OWNERSHIP, EXERCISE AND DISPOSITION OF THE SUBSCRIPTION RIGHTS
APPLICABLE TO YOUR OWN PARTICULAR TAX SITUATION.
No
Recommendation to Subscription Rights Holders
Our board
of directors is making no recommendations regarding your exercise of the
subscription rights. You are urged to make your own decision whether
or not to exercise your subscription rights based on your own assessment of our
business and the rights offering. See “Risk Factors” in this
prospectus and in any document incorporated by reference into this
prospectus.
Listing
The
subscription rights may not be sold, transferred or assigned to anyone else and
will not be listed on the Nasdaq Global Market or any other stock exchange or
market or on the OTC Bulletin Board. The shares of common stock
issuable upon exercise of the subscription rights will be listed on the Nasdaq
Global Market under the symbol “MDH” and we intend to apply for listing of the
shares of common stock issued in the rights offering.
Shares
of Common Stock Outstanding After the Rights Offering
Based on
6,964,263 shares of our common stock outstanding as of September 28, 2009, and
assuming all shares available in the rights offering are sold, __________ shares
of our common stock will be outstanding upon completion of the rights offering,
representing an increase in the number of outstanding shares of our common stock
of approximately ______%. As a result of the rights offering, the
ownership interests and voting interests of the existing stockholders that do
not fully exercise their subscription rights will be diluted.
Other
Matters
We are
not making the rights offering in any state or other jurisdiction in which it is
unlawful to do so, nor are we distributing or accepting any offers to purchase
any shares of our common stock from subscription rights holders who are
residents of those states or other jurisdictions or who are otherwise prohibited
by federal or state laws or regulations from accepting or exercising the
subscription rights. We may delay the commencement of the rights
offering in those states or other jurisdictions, or change the terms of the
rights offering, in whole or in part, in order to comply with the securities
laws or other legal requirements of those states or other
jurisdictions. Subject to state securities laws and regulations, we
also have the discretion to delay allocation and distribution of any shares you
may elect to purchase by exercise of your subscription privileges in order to
comply with state securities laws. We may decline to make
modifications to the terms of the rights offering requested by those states or
other jurisdictions, in which case, if you are a resident in those states or
jurisdictions or if you are otherwise prohibited by federal or state laws or
regulations from accepting or exercising the subscription rights you will not be
eligible to participate in the rights offering. However, we are not
currently aware of any states or jurisdictions that would preclude participation
in the rights offering.
DESCRIPTION
OF CAPITAL STOCK
The
following summary of the terms of our common stock does not purport to be
complete and is subject to and qualified in its entirety by reference to our
charter and bylaws. We have filed our charter and bylaws as exhibits to the
registration statement of which this prospectus is a part. See “Where
You Can Find More Information.”
General
Our
amended and restated charter provides that we may issue up to 49,000,000 shares
of common stock, $0.01 par value per share, and 1,000,000 shares of preferred
stock, $0.01 par value per share. As of the date of this prospectus, we have
6,964,263 shares of common stock issued and outstanding. As permitted by the
Maryland General Corporation Law, our charter contains a provision permitting
our board of directors, without any action by our stockholders, to amend the
charter to increase or decrease the aggregate number of shares of stock or the
number of shares of stock of any class or series that we have authority to
issue.
Voting
Rights of Common Stock
Subject
to the provisions of our charter regarding the restrictions on the transfer and
ownership of shares of common stock, each outstanding share of common stock
entitles the holder to one vote on all matters submitted to a vote of
stockholders, including the election of directors, and, except as may be
provided with respect to any other subsequently issued class or series of common
stock, the holders of such common stock possess the exclusive voting power.
There is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding common stock, voting as a single class,
can elect all of the directors and the holders of the remaining stock are not
able to elect any directors.
Distributions,
Liquidation and Other Rights
All
common stock offered by this prospectus will be duly authorized, fully paid and
nonassessable. Holders of our common stock are entitled to receive distributions
when authorized by our board of directors and declared by us out of assets
legally available for the payment of distributions. They also are entitled to
share ratably in our assets legally available for distribution to our
stockholders in the event of our liquidation, dissolution or winding up, after
payment of or adequate provision for all of our known debts and liabilities.
These rights are subject to the preferential rights of any other class or series
of our stock and to the provisions of our charter regarding restrictions on
transfer of our stock.
Other
than the subscription rights offered in this offering, holders of our common
stock have no preference, conversion, exchange, sinking fund, redemption or
appraisal rights and have no preemptive rights to subscribe for any of our
securities. Subject to the restrictions on transfer of stock contained in our
charter, all common stock will have equal distribution, liquidation and other
rights.
Power
to Reclassify Stock
Our
charter authorizes our board of directors to classify any unissued preferred
stock and to reclassify any previously classified but unissued common stock and
preferred stock of any series from time to time in one or more classes or
series, as authorized by the board of directors. Prior to issuance of stock of
each class or series, the board of directors is required by the MGCL and our
charter to set for each such class or series, subject to the provisions of our
charter regarding the restriction on transfer of common stock, the terms,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications and terms or
conditions of redemption for each such class or series. Thus, our board of
directors could authorize the issuance of preferred stock with priority over the
common stock with respect to distributions and rights upon liquidation and with
other terms and conditions which could have the effect of delaying, deferring or
preventing a transaction or a change in control of our company that might
involve a premium price for holders of common stock or otherwise might be in
their best interest. As of the date hereof, no shares of preferred stock are
outstanding and we have no current plans to issue any preferred
stock.
Power
to Issue Additional Common Stock and Preferred Stock
We
believe that the power to issue additional common stock or preferred stock and
to classify or reclassify unissued common stock or preferred stock and
thereafter to issue the classified or reclassified stock provides us with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other needs which might arise. These actions can be taken without
stockholder approval, unless stockholder approval is required by applicable law
or the rules of any stock exchange or automated quotation system on which our
securities may be listed or traded. Although we have no current intention of
doing so, we could issue a class or series of stock that could delay, defer or
prevent a transaction or a change in control that might involve a premium price
for holders of common stock or otherwise be in their best
interest.
Restrictions
on Ownership and Transfer
For us to
qualify as a REIT under the Code, our shares of stock must be beneficially owned
by 100 or more persons during at least 335 days of a taxable year of 12 months
(other than the first year for which an election to be a REIT has been made) or
during a proportionate part of a shorter taxable year. Also, not more than 50%
of the value of the outstanding shares of stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) during the last half of a taxable year (other than the first
year for which an election to be a REIT has been made). In addition, we cannot
receive significant amounts of rents from tenants that are related to us,
directly or constructively, through ownership.
Because
our board of directors believes it is essential at present for us to qualify as
a REIT, the charter, subject to certain exceptions, contains restrictions on the
number of our shares of stock that a person may own. Our charter provides that
no person may own, or be deemed to own by virtue of the attribution provisions
of the Code, more than 9.9% (the “Aggregate Stock Ownership Limit”) in value of
our outstanding shares of stock. In addition, the charter prohibits any person
from acquiring or holding, directly or indirectly, shares of common stock in
excess of 9.9% of the number of our outstanding shares of common stock (the
“Common Stock Ownership Limit”).
Our
charter prohibits (a) any person from beneficially or constructively owning
our shares of stock that would result in us being “closely held” under
Section 856(h) of the Code, (b) any person from transferring our
shares of stock if such transfer would result in our shares of stock being owned
by fewer than 100 persons, (c) any transfer that would cause us to own,
directly or indirectly, 10% or more of the ownership interests in a tenant of
our company (or a tenant of any entity owned or controlled by us) other than a
taxable REIT subsidiary if the requirements of Section 856(d)(8)(B) of the
Code are satisfied and (d) any transfer that would cause any of our hotel
management companies to fail to qualify as an “eligible independent contractor”
within the meaning of Section 856(d)(9) of the Code. Any person who
acquires or attempts or intends to acquire beneficial or constructive ownership
of our shares of stock that will or may violate any of the foregoing
restrictions on transferability and ownership, or any person who would have
owned our shares of stock that resulted in a transfer of shares to the
Charitable Trust (as defined below), is required to give written notice
immediately to us, or in the case of a proposed or attempted transaction, to
give at least 15 days’ prior written notice, and provide us with such other
information as we may request in order to determine the effect of such transfer
on our status as a REIT. The foregoing restrictions on transferability and
ownership will not apply if our board of directors determines that it is no
longer in our best interests to attempt to qualify, or to continue to qualify,
as a REIT.
Furthermore,
our board of directors, in its sole discretion, may exempt a proposed transferee
from the Aggregate Stock Ownership Limit, the Common Stock Ownership Limit
and/or any of the restrictions described in the first sentence of the paragraph
directly above (an “Excepted Holder”). However, the board of directors may not
grant such an exemption to any person if such exemption would result in our
failing to qualify as a REIT. Our board of directors may require a ruling from
the Internal Revenue Service or an opinion of counsel, in either case in form
and substance satisfactory to the board of directors, in its sole discretion, in
order to determine or ensure our status as a REIT.
If any
transfer of our shares of stock occurs which, if effective, would result in any
person beneficially or constructively owning shares of stock in excess or in
violation of the above transfer or ownership limitations (a “Prohibited Owner”),
then that number of shares of stock the beneficial or constructive ownership of
which otherwise would cause such person to violate such limitations (rounded to
the nearest whole share) shall be automatically transferred to a trust (the
“Charitable Trust”) for the exclusive benefit of one or more charitable
beneficiaries (the “Charitable Beneficiary”), and the Prohibited Owner shall not
acquire any rights in such shares. Such automatic transfer shall be deemed to be
effective as of the close of business on the Business Day (as defined in the
charter) prior to the date of such violative transfer. If any automatic transfer
to the Charitable Trust is not effective, then the initial transfer of stock
will be void ab initio to the extent necessary to prevent a violation of the
above transfer or ownership limitations. Shares of stock held in the Charitable
Trust shall be issued and outstanding shares of stock. The Prohibited Owner
shall not benefit economically from ownership of any shares of stock held in the
Charitable Trust, shall have no rights to dividends or other distributions and
shall not possess any rights to vote or other rights attributable to the shares
of stock held in the Charitable Trust. The trustee of the Charitable Trust (the
“Trustee”) shall have all voting rights and rights to dividends or other
distributions with respect to shares of stock held in the Charitable Trust,
which rights shall be exercised for the exclusive benefit of the Charitable
Beneficiary. Any dividend or other distribution paid prior to our discovery that
shares of stock have been transferred to the Trustee shall be paid by the
recipient of such dividend or distribution to the Trustee upon demand, and any
dividend or other distribution authorized but unpaid shall be paid when due to
the Trustee. Any dividend or distribution so paid to the Trustee shall be held
in trust for the Charitable Beneficiary. The Prohibited Owner shall have no
voting rights with respect to shares of stock held in the Charitable Trust and,
subject to Maryland law, effective as of the date that such shares of stock have
been transferred to the Trustee, the Trustee shall have the authority (at the
Trustee’s sole discretion) (i) to rescind as void any vote cast by a
Prohibited Owner prior to our discovery that such shares have been transferred
to the Trustee and (ii) to recast such vote in accordance with the desires
of the Trustee acting for the benefit of the Charitable Beneficiary. However, if
we have already taken irreversible corporate action, then the Trustee shall not
have the authority to rescind and recast such vote.
Within 20
days of receiving notice from us that shares of stock have been transferred to
the Charitable Trust, the Trustee shall sell the shares of stock held in the
Charitable Trust to a person, designated by the Trustee, whose ownership of the
shares will not violate the ownership limitations set forth in the charter. Upon
such sale, the interest of the Charitable Beneficiary in the shares sold shall
terminate and the Trustee shall distribute the net proceeds of the sale to the
Prohibited Owner and to the Charitable Beneficiary as follows: The Prohibited
Owner shall receive the lesser of (i) the price paid by the Prohibited
Owner for the shares or, if the Prohibited Owner did not give value for the
shares in connection with the event causing the shares to be held in the
Charitable Trust (
e.g.
,
in the case of a gift, devise or other such transaction), the Market Price (as
defined in the charter) of such shares on the day of the event causing the
shares to be held in the Charitable Trust and (ii) the price per share
received by the Trustee from the sale or other disposition of the shares held in
the Charitable Trust. Any net sale proceeds in excess of the amount payable to
the Prohibited Owner shall be paid immediately to the Charitable Beneficiary.
If, prior to our discovery that shares of stock have been transferred to the
Charitable Trust, such shares are sold by a Prohibited Owner, then (i) such
shares shall be deemed to have been sold on behalf of the Charitable Trust and
(ii) to the extent that the Prohibited Owner received an amount for such
shares that exceeds the amount that such Prohibited Owner was entitled to
receive pursuant to the aforementioned requirement, such excess shall be paid to
the Trustee upon demand.
In
addition, shares of stock held in the Charitable Trust shall be deemed to have
been offered for sale to us, or our designee, at a price per share equal to the
lesser of (i) the price per share in the transaction that resulted in such
transfer to the Charitable Trust (or, in the case of a devise or gift, the
Market Price at the time of such devise or gift) and (ii) the market price
on the date we, or our designee, accepts such offer. We shall have the right to
accept such offer until the Trustee has sold the shares of stock held in the
Charitable Trust. Upon such a sale to us, the interest of the Charitable
Beneficiary in the shares sold shall terminate and the Trustee shall distribute
the net proceeds of the sale to the Prohibited Owner and any dividends or other
distributions held by the Trustee shall be paid to the Charitable
Beneficiary.
All
certificates representing our shares of stock will bear a legend referring to
the restrictions described above.
Every
owner of more than 5% (or such lower percentages as required by the Code or the
Treasury Regulations promulgated thereunder) of all classes or series of our
shares of stock, including common stock, within 30 days after the end of each
taxable year, is required to give written notice to us stating the name and
address of such owner, the number of shares of each class and series of shares
of stock which the owner beneficially owns and a description of the manner in
which such shares are held. Each such owner shall provide to us such additional
information as we may request in order to determine the effect, if any, of such
beneficial ownership on our status as a REIT and to ensure compliance with the
Aggregate Stock Ownership Limit and the Common Stock Ownership Limit. In
addition, each stockholder shall upon demand be required to provide to us such
information as we may request, in good faith, in order to determine our status
as a REIT and to comply with the requirements of any taxing authority or
governmental authority or to determine such compliance and to ensure compliance
with the Aggregate Stock Ownership Limit and the Common Stock Ownership
Limit.
These
ownership limitations could delay, defer or prevent a transaction or a change in
control that might involve a premium price for the common stock or otherwise be
in the best interest of our stockholders.
CERTAIN
PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
The
following description of certain provisions of Maryland law and of our charter
and bylaws is only a summary. For a complete description, we refer you to
Maryland law, our charter and our bylaws. We have filed our charter and bylaws
as exhibits to the registration statement of which this prospectus is a part.
See “Where You Can Find More Information.”
Our
Board of Directors
Our
bylaws provide that the number of our directors may be established by our board
of directors. We currently have seven directors. The board of directors may
increase or decrease the number of directors by a vote of a majority of the
members of our board of directors, provided that the number of directors shall
never be less than the minimum number required by Maryland law and that the
tenure of office of a director shall not be affected by any decrease in the
number of directors. Except as may be provided by the board of directors in
setting the terms of any class or series of preferred stock, any vacancy may be
filled only by a majority of the remaining directors, even if the remaining
directors do not constitute a quorum, or, if no directors remain, by our
stockholders. Any director elected to fill a vacancy shall serve for the
remainder of the full term in which the vacancy occurred and until a successor
is elected and qualifies.
At each
annual meeting of stockholders, the holders of the common stock may vote to
elect all of the directors on the board of directors. Holders of common stock
have no right to cumulative voting in the election of directors. Consequently,
at each annual meeting of stockholders, the holders of a majority of the
outstanding shares of common stock are able to elect all of the
directors.
Removal
of Directors
Our
charter provides that a director may be removed, with or without cause, upon the
affirmative vote of at least two-thirds of the votes entitled to be cast in the
election of directors. Absent removal of all of our directors, this provision,
when coupled with the exclusive power of our board of directors to fill vacant
directorships, precludes stockholders from removing incumbent directors, except
upon a substantial affirmative vote, and filling the vacancies created by such
removal with their own nominees.
Business
Combinations
Maryland
law prohibits “business combinations” between us and an interested stockholder
or an affiliate of an interested stockholder for five years after the most
recent date on which the interested stockholder becomes an interested
stockholder. These business combinations include a merger, consolidation, share
exchange or, in circumstances specified in the statute, an asset transfer or
issuance or reclassification of equity securities. Maryland law defines an
interested stockholder as:
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any
person who beneficially owns 10% or more of the voting power of our stock;
or
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an
affiliate or associate of ours who, at any time within the two-year period
prior to the date in question, was the beneficial owner of 10% or more of
the voting power of our then outstanding voting
stock.
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A person
is not an interested stockholder if our board of directors approved in advance
the transaction by which the person otherwise would have become an interested
stockholder. However, in approving a transaction, our board of directors may
provide that its approval is subject to compliance, at or after the time of
approval, with any terms and conditions determined by our board of
directors.
After the
five-year prohibition, any business combination between us and an interested
stockholder generally must be recommended by our board of directors and approved
by the affirmative vote of at least:
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80%
of the votes entitled to be cast by holders of our then outstanding shares
of voting stock; and
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two-thirds
of the votes entitled to be cast by holders of our voting stock other than
stock held by the interested stockholder with whom or with whose affiliate
the business combination is to be effected or stock held by an affiliate
or associate of the interested
stockholder.
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These
super-majority vote requirements do not apply if our common stockholders receive
a minimum price, as defined under Maryland law, for their stock in the form of
cash or other consideration in the same form as previously paid by the
interested stockholder for its stock.
The
statute permits various exemptions from its provisions, including business
combinations that are exempted by the board of directors before the time that
the interested stockholder becomes an interested stockholder. We have opted out
of the business combination provisions of the MGCL by resolution of our board of
directors. However, our board of directors may, by resolution and without
stockholders approval, opt into the business combination statute in the
future.
Should
our board opt in to the business combination statute, it may discourage others
from trying to acquire control of us and increase the difficulty of consummating
any transaction.
Control
Share Acquisitions
Maryland
law provides that “control shares” of a Maryland corporation acquired in a
“control share acquisition” have no voting rights unless approved by a vote of
two-thirds of the votes entitled to be cast on the matter. Shares owned by the
acquiror, or by officers or by directors who are our employees are excluded from
shares entitled to vote on the matter. “Control shares” are voting shares which,
if aggregated with all other shares previously acquired by the acquiring person,
or in respect of which the acquiring person is able to exercise or direct the
exercise of voting power (except solely by virtue of a revocable proxy), would
entitle the acquiring person to exercise voting power in electing directors
within one of the following ranges of voting power:
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one-tenth
or more but less than one-third;
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one-third
or more but less than a majority;
or
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a
majority or more of all voting
power.
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Control
shares do not include shares the acquiring person is then entitled to vote as a
result of having previously obtained stockholder approval. A “control share
acquisition” means the acquisition of control shares, subject to certain
exceptions.
A person
who has made or proposes to make a control share acquisition may compel our
board of directors to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the shares. The right to
compel the calling of a special meeting is subject to the satisfaction of
certain conditions, including an undertaking to pay the expenses of the meeting.
If no request for a meeting is made, we may present the question at any
stockholders’ meeting.
If voting
rights are not approved at the stockholders’ meeting or if the acquiring person
does not deliver the acquiring person statement required by Maryland law, then,
subject to certain conditions and limitations, we may redeem any or all of the
control shares, except those for which voting rights have previously been
approved, for fair value. Fair value is determined without regard to the absence
of voting rights for the control shares and as of the date of the last control
share acquisition or of any meeting of stockholders at which the voting rights
of the shares were considered and not approved. If voting rights for control
shares are approved at a stockholders’ meeting and the acquiror may then vote a
majority of the shares entitled to vote, then all other stockholders may
exercise appraisal rights. The fair value of the shares for purposes of these
appraisal rights may not be less than the highest price per share paid by the
acquiror in the control share acquisition. The control share acquisition statute
does not apply to shares acquired in a merger, consolidation or share exchange
if we are a party to the transaction, nor does it apply to acquisitions approved
or exempted by our charter or bylaws.
Our
bylaws contain a provision exempting from the control share acquisition statute
any and all acquisitions by any person of our shares of stock. Our board of
directors may amend our bylaws, without stockholder approval, so as to implement
the control share acquisition statute in the future.
Maryland
Unsolicited Takeovers Act
Subtitle
8 of Title 3 of the Maryland General Corporation Law permits a Maryland
corporation with a class of equity securities registered under the Securities
Exchange Act of 1934, as amended, and at least three independent directors to
elect to be subject, by provision in its charter or bylaws or a resolution of
its board of directors and notwithstanding any contrary provision in the charter
or bylaws, to any or all of five provisions:
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a
two-thirds vote requirement for removing a
director;
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a
requirement that the number of directors be fixed only by vote of the
directors;
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a
requirement that a vacancy on the board be filled only by the remaining
directors and for the remainder of the full term of the class of directors
in which the vacancy occurred; and
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a
majority requirement for the calling of a special meeting of
stockholders.
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Pursuant
to Subtitle 8, we have elected to provide that vacancies on the board be filled
only by the remaining directors and for the remainder of the full term of the
directorship in which the vacancy occurred. Through provisions in our charter
and bylaws unrelated to Subtitle 8, we already (a) require a two-thirds vote for
the removal of any director from the board, (b) vest in the board the exclusive
power to fix the number of directorships and (c) require, unless called by our
chairman of our board of directors, our president and chief executive officer or
our board of directors, the request of the holders of a majority of outstanding
shares to call for a special meeting.
Merger;
Amendment of Charter
Under the
Maryland General Corporation Law, a Maryland corporation generally cannot
dissolve, amend its charter or merge with another entity unless approved by the
affirmative vote of stockholders holding at least two-thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all the votes entitled to be cast on the matter) is set forth in the
corporation’s charter. Our charter provides for approval by the holders of a
majority of all the votes entitled to be cast on the matter for the matters
described in this paragraph, except for amendments to various provisions of the
charter, including the provisions relating to removal of directors, that require
the affirmative vote of the holders of two-thirds of the votes entitled to be
cast on the matter. As permitted by the Maryland General Corporation Law, our
charter contains a provision permitting our directors, without any action by our
stockholders, to amend the charter to increase or decrease the aggregate number
of shares of stock or the number of shares of stock of any class or series that
we have authority to issue.
Limitation
of Liability and Indemnification
Our
charter limits the liability of our directors and officers for money damages to
the maximum extent permitted by Maryland law.
Our
charter authorizes us to obligate ourselves and our bylaws require us, to the
maximum extent permitted by Maryland law, to indemnify, and to pay or reimburse
reasonable expenses to, any of our present or former directors or officers or
any individual who, while a director or officer and at our request, serves or
has served another entity, employee benefit plan or any other enterprise as a
trustee, director, officer, partner or otherwise. The indemnification covers any
claim or liability against the person by reason of his or her status as a
present or former director or officer.
Maryland
law permits us to indemnify our present and former directors and officers
against liabilities and reasonable expenses actually incurred by them in any
proceeding unless it is established that:
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the
act or omission of the director or officer was material to the matter
giving rise to the proceeding; and
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was committed in bad
faith; or
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was the result of
active and deliberate dishonesty;
or
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the
director or officer actually received an improper personal benefit in
money, property or services; or
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in
a criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was
unlawful.
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However,
Maryland law prohibits us from indemnifying our present and former directors and
officers for an adverse judgment in a derivative action. Maryland law requires
us, as a condition to advancing expenses in certain circumstances, to
obtain:
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a
written affirmation by the director or officer of his or her good faith
belief that he or she has met the standard of conduct necessary for
indemnification; and
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a
written undertaking by or on behalf of the director or officer to repay
the amount reimbursed if the standard of conduct is not
met.
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We have
entered into indemnification agreements with our directors and executive
officers that provide for indemnification of such persons to the fullest extent
permitted under Maryland law.
The
partnership agreement of our operating partnership provides for indemnification
of officers, directors and employees of our operating partnership, as well as
our indemnification, along with our employees, officers and
directors.
Insofar
as the foregoing provisions permit indemnification of directors, officers or
persons controlling us for liability arising under the Securities Act, we have
been informed that, in the opinion of the SEC, this indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
REIT
Status
Our
charter provides that our board of directors may revoke or otherwise terminate
our REIT election, without the approval of our stockholders, if it determines
that it is no longer in our best interest to continue to qualify as a
REIT.
Dissolution
Pursuant
to our charter, and subject to the provisions of any of our classes or series of
shares of stock then outstanding and the approval by a majority of the entire
board of directors, our stockholders, at any meeting thereof, by the affirmative
vote of a majority of all of the votes entitled to be cast on the matter, may
approve a plan of liquidation and dissolution.
Advance
Notice of Director Nominations and New Business
Our
bylaws provide that, with respect to an annual meeting of stockholders,
nominations of individuals for election to our board of directors and the
proposal of business to be considered by stockholders at the annual meeting may
be made only:
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pursuant
to our notice of the meeting;
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by
or at the direction of our board of directors;
or
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by
a stockholder who was a stockholder of record both at the time of the
provision of notice and at the time of the meeting who is entitled to vote
at the meeting and has complied with the advance notice procedures set
forth in our bylaws.
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With
respect to special meetings of stockholders, only the business specified in our
notice of meeting may be brought before the meeting of stockholders and
nominations of individuals for election to our board of directors may be made
only:
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pursuant
to our notice of the meeting;
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by
or at the direction of our board of directors;
or
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provided
that our board of directors has determined that directors shall be elected
at such meeting, by a stockholder who was a stockholder of record both at
the time of the provision of notice and at the time of the meeting who is
entitled to vote at the meeting and has complied with the advance notice
provisions set forth in our bylaws.
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Possible Anti-Takeover Effect of
Certain Provisions of Maryland Law and of our Charter and
Bylaws
Our board
may rescind the resolution opting out of the business combination statute or
repeal the bylaw opting-out of the control share acquisition statute without
stockholder approval. If the business combination provisions or control share
provisions become applicable to our company, those provisions, in addition to
the provisions in our charter regarding removal of directors and the
restrictions on the transfer of shares of stock and the advance notice
provisions of our bylaws could have the effect of delaying, deferring or
preventing a transaction or a change in the control that might involve a premium
price for holders of the common stock or otherwise be in their best
interest.
The
Nasdaq Global Market
Our
common stock is listed on the Nasdaq Global Market under the symbol
“MDH”.
Transfer
Agent and Registrar
American
Stock Transfer & Trust Company is the transfer agent and registrar for our
common stock.
CERTAIN
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain U.S.
federal income tax consequences of the rights offering to holders of shares of
our common stock who hold such shares as a capital asset for U.S. federal income
tax purposes. This discussion is based on the Code, applicable
Treasury Regulations thereunder, laws, regulations, rulings and decisions in
effect on the date of this prospectus, all of which are subject to change
(possibly with retroactive effect) and to differing
interpretations. This discussion applies only to holders who are U.S.
persons, which is defined as a citizen or resident of the United States, a
domestic corporation, any estate the income of which is subject to U.S. federal
income taxation regardless of source, and any trust so long as a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more U.S. persons have the authority to
control all substantial decisions of the trust, or if it has a valid election in
place to be treated as a U.S. person.
This discussion does not address all aspects of federal
income taxation that may be relevant to holders in light of their particular
circumstances or to holders who may be subject to special tax treatment under
the Code, including holders of options or warrants, holders who are dealers in
securities or foreign currency, foreign persons (defined as all persons other
than U.S. persons), insurance companies, tax-exempt organizations, banks,
financial institutions, broker-dealers, holders who hold stock as part of a
hedge, straddle, conversion or other risk reduction transaction, or who acquired
stock pursuant to the exercise of compensatory stock options or warrants or
otherwise as compensation. In the case of a holder that is an entity
treated as a partnership for U.S. federal income tax purposes, the treatment of
its partners generally will depend upon the status of the partner and the
activities of the partnership.
We will not seek a ruling from the Internal Revenue
Service with respect to the rights offering. The Internal Revenue
Service could take positions concerning the tax consequences of the rights
offering that are different from those described here, and if litigated, a court
could sustain any such positions taken by the Internal Revenue
Service.
The following summary does not address the tax
consequences of the rights offering under foreign, state or local tax
laws. Accordingly, we urge each holder of our shares of common stock
to consult its own tax advisor with respect to the particular tax consequences
to such holder of the rights offering and the exercise of the subscription
rights, including state and local tax consequences.
Below is a summary of the U.S. federal income tax
consequences to a holder of common stock on the receipt of subscription rights
under the rights offering:
Distribution of
Subscription Rights.
Under
Section 305 of the Code, a
stockholder
who
receives a right to acquire shares will, in certain circumstances, be treated as
having received a taxable dividend in an amount equal to the value of such
right. A common
stockholder
who
receives a right to acquire shares of common stock generally will be treated as
having received a taxable dividend if such
stockholder
’s
proportionate interest in the earnings and profits or assets of the corporation
is increased and any other
stockholder
receives a distribution of cash or other property. For purposes of
the above, “
stockholder
” includes holders of warrants, options and convertible
securities. The application of this rule is very complex and subject
to uncertainty. We believe, however, that pursuant to Section 305 of
the Code and the Treasury Regulations issued thereunder,
the receipt of subscription rights will generally not be
taxable to a stockholder.
Stockholder Basis
and Holding Period of the Subscription Rights.
Except as provided in the following sentence, a
holder’s tax basis in the subscription rights that we distribute in the rights
offering will be zero. If either (i) the fair market value of the
subscription rights on the date such subscription rights are distributed is at
least 15% of the fair market value on such date of the common stock with respect
to which the subscription rights are distributed or (ii) the holder elects, in
its United States federal income tax return for the taxable year in which the
subscription rights are distributed, to allocate part of its tax basis in such
common stock to the subscription rights, then upon exercise of the subscription
rights, the holder’s tax basis in the common stock will be allocated between the
common stock and the subscription rights in proportion to their respective fair
market values on the date the subscription rights are
distributed. This election may be made pursuant to Section 307 of the
Code and the Treasury Regulations thereunder, and will be irrevocable once
made. We have not obtained, and do not currently intend to obtain, an
appraisal of the fair market value of the subscription rights. In
determining the fair market value of the subscription rights, a holder should
consider all relevant facts and circumstances, including any difference between
the subscription price of the subscription rights and the trading price of our
common stock on the date that the subscription rights are distributed, the
length of the period during which the subscription rights may be exercised and
the fact that the subscription rights are non-transferable.
A holder’s holding period with respect to the
subscription rights that we distribute will include the holding period of such
holder’s shares of our common stock with respect to which the subscription
rights are distributed.
Lapse of the
Subscription Rights.
If a holder allows the subscription rights it receives
to expire unexercised, such holder will not recognize any gain or loss on the
expiration of its subscription rights, and the tax basis of the common stock
that such holder owns with respect to which such subscription rights are
distributed will equal the tax basis in such common stock immediately before the
receipt of the subscription rights in this rights offering. If a
holder made an election under Section 307 of the Code to allocate part of its
tax basis in the common stock to the subscription rights and subsequently allows
the subscription rights to expire unexercised, however, the holder will
recognize a capital loss upon the expiration of the subscription
rights.
Exercise of the
Subscription Rights; Basis and Holding Period of Common Stock Acquired Upon
Exercise.
A holder will not recognize any gain or loss upon the
exercise of the subscription rights. Such holder’s basis in the
shares of common stock acquired through exercise of the subscription rights will
be equal to the sum of the subscription price such holder paid to exercise the
subscription rights and its basis in such subscription rights, if
any. The holding period for the shares of common stock acquired
through exercise of the subscription rights will begin on the date the holder
exercises the subscription rights.
Distributions on
Common Stock Received Upon Exercise of Subscription Rights.
A holder will recognize ordinary income upon the
receipt of any dividend or other distribution on the shares of common stock it
acquires upon exercise of the subscription rights to the extent of our current
and accumulated earnings and profits for the taxable year in which the
distribution is made. Distributions paid out of our current and
accumulated earnings and profits are taxable at ordinary corporate tax rates,
subject to any applicable dividends-received deduction. A
distribution in excess of our current and accumulated earnings and profits will
constitute a non-taxable return of capital to the extent of a holder’s adjusted
tax basis in its shares of common stock acquired upon exercise of the
subscription rights, and thereafter will constitute capital gain from the sale
or exchange of such shares of common stock.
Sale of Common
Stock Acquired Upon Exercise of Subscription Rights.
If a holder sells or exchanges shares of common stock
acquired upon exercise of the subscription rights, it generally will recognize
gain or loss on the transaction equal to the difference between the amount
realized and its basis in the shares of common stock. Such gain or
loss upon the sale or exchange of the shares of common stock will be long-term
or short-term capital gain or loss, depending on whether the shares of common
stock have been held for more than one year. Under current law,
long-term capital gains recognized by non-corporate holders are taxed at a
maximum rate of 15%, and will be taxed at a maximum rate of 20% for taxable
years beginning after December 31, 2010. Long-term capital gains
recognized by corporations are taxable at ordinary corporate tax
rates. Short-term capital gains of both corporate and non-corporate
holders are taxed at a maximum rate equal to the maximum rate applicable to
ordinary income. The deducibility of capital losses is subject to
limitations.
Information Reporting and Backup
Withholding
Under the backup withholding rules of the Code, a holder
may be subject to information reporting and/or backup withholding with respect
to payments of dividends on and proceeds from the sale, exchange or redemption
of our shares of common stock unless the holder: (i) is a corporation or comes
within certain other exempt categories and, when required, demonstrates this
fact; or (ii) provides a correct taxpayer identification number and certifies
under penalties of perjury that the taxpayer identification number is correct
and that it is not subject to backup withholding because of a failure to report
all dividends and interest income. Any amount withheld under these
rules is allowable as a credit against (and may entitle a holder to a refund
with respect to) such holder’s federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service. We
may require a holder to establish its exemption from backup withholding or to
make arrangements satisfactory to us with respect to the payment of backup
withholding.
THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL
INFORMATION ONLY. ACCORDINGLY, HOLDERS OF OUR COMMON STOCK ARE URGED TO CONSULT
WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES OF THE RECEIPT OF SUBSCRIPTION RIGHTS IN THIS
OFFERING AND THE OWNERSHIP, EXERCISE AND DISPOSITION OF THE SUBSCRIPTION RIGHTS
APPLICABLE TO THEIR OWN PARTICULAR TAX SITUATIONS.
PLAN
OF DISTRIBUTION
On or
about __________, 2009, we will distribute the subscription rights, subscription
rights certificates and copies of this prospectus to individuals who owned
shares of common stock of record as of 5:00 p.m., New York City time, on October
12, 2009, the record date for the rights offering. If you wish to
exercise your subscription rights and purchase shares of common stock, you
should complete the subscription rights certificate and return it with payment
for the shares, to the subscription agent, American Stock Transfer & Trust
Company, at the following address:
If
Delivering by Hand:
American
Stock Transfer & Trust Company
Attn:
Reorganization Department
59
Maiden Lane
New
York, New York 10038
|
By
Overnight Courier or By Mail:
American
Stock Transfer & Trust Company
Operations
Center
Attn:
Reorganization Department
6201
15
th
Avenue
Brooklyn,
New York 11219
|
If you
have any questions, you should contact the information agent, The Altman Group,
at (866) 796-3419 or by email at
reorg@altmangroup.com
. The
subscription rights will not be listed on the Nasdaq Global Market or any other
stock exchange or market or on the OTC Bulletin Board. The shares of
common stock issuable upon exercise of the subscription rights we expect will be
listed on the Nasdaq Global Market under the symbol “MDH.”
We have
agreed to pay the subscription agent and information agent customary fees plus
certain expenses in connection with the rights offering. We have not
employed any brokers, dealers or underwriters in connection with the
solicitation of exercise of subscription rights. Except as described
in this section, we are not paying any other commissions, underwriting fees or
discounts in connection with the rights offering. Some of our
employees may solicit responses from you as a holder of subscription rights, but
we will not pay our employees any commissions or compensation for these services
other than their normal employment compensation. We estimate that our
total expenses in connection with the rights offering will be approximately
$_______.
LEGAL
MATTERS
The
validity of the subscription rights and the common stock issuable upon exercise
of the subscription rights will be passed upon for us by Baker & McKenzie
LLP.
EXPERTS
The
financial statements incorporated into this prospectus by reference from MHI’s
Annual Report on Form 10-K for the year ended December 31, 2008 have been
audited by Witt Mares, PLC, an independent registered public accounting firm, as
stated in their report which is incorporated herein by
reference. Such financial statements have been so incorporated
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
INCORPORATION
BY REFERENCE
The SEC
allows us to “incorporate by reference” information into this
document. This means that we can disclose important information to
you by referring you to another document filed separately with the
SEC. The information incorporated by reference is considered to be
part of this prospectus, and information that we file later with the SEC will
automatically update and supersede the previously filed
information. We incorporate by reference into this prospectus the
documents listed below as well as any future filings made by us with the SEC
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act (File
No. 1-32379), including all filings made after the date of the initial
registration statement and prior to the effectiveness of this registration
statement, and any filings made after the date of this prospectus until we sell
all of the securities under this prospectus, except that we do not incorporate
any document or portion of a document that is “furnished” to the SEC, but not
deemed “filed.” The following documents filed with the SEC are
incorporated by reference in this prospectus:
|
·
|
our
Annual Report on Form 10-K for the year ended December 31,
2008
|
|
·
|
our
Quarterly Report on Form 10-Q for the quarter ended March 31,
2009;
|
|
·
|
our
Quarterly Report on Form 10-Q for the quarter ended June 30,
2009;
|
|
·
|
our
Current Reports on Form 8-K filed with the SEC on February 13, 2009 and
February 25, 2009;
|
|
·
|
our
definitive Proxy Statement for our Annual Meeting of Stockholders held on
April 21, 2009; and
|
|
·
|
the
description of our common stock included in our Form 8-A filed with the
SEC on March 10, 2008.
|
You may
request a copy of any or all of the information incorporated by reference into
this prospectus (other than an exhibit to the filings unless we have
specifically incorporated that exhibit by reference into the filing), at no
cost, by writing or telephoning us at the following address:
MHI
Hospitality Corporation.
410 W.
Francis Street
Williamsburg,
Virginia 23185-4046
Attention:
Investor Relations/Scott Kucinski,
Telephone:
757-229-5648
You
should rely only on the information contained in this prospectus, any prospectus
supplement, any applicable free writing prospectus and the documents that are
incorporated by reference. We have not authorized anyone to provide
you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. We are not
making an offer to sell, or soliciting an offer to buy, securities in any
jurisdiction where the offer and sale is not permitted. You should
not assume that the information in this prospectus, any prospectus supplement,
any applicable free writing prospectus or any incorporated document is accurate
as of any date other than the date of the document.
WHERE
YOU CAN FIND MORE INFORMATION
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You can read and copy any materials we file with the
SEC at its Public Reference Room at 100 F Street N.E., Washington DC,
20549. You can obtain information about the operations of the SEC
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
also maintains a website that contains information we file electronically with
the SEC, which you can access over the Internet at
http://www.sec.gov. General information about us, including our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, proxy statements and amendments to those reports, is available free of
charge through our website at http://www.MHIHospitality.com as soon as
reasonably practicable after we electronically file them with, or furnish them
to, the SEC. Information on our website is not incorporated into this
prospectus or our other securities filings and is not a part of these
filings.
This
prospectus does not contain all of the information included in the registration
statement. We have omitted certain parts of the registration
statement in accordance with the rules and regulations of the
SEC. For further information, we refer you to the registration
statement, including its exhibits and schedules, which may be found at the SEC’s
website at
http://www.sec.gov
. Statements
contained in this prospectus and any accompanying prospectus supplement about
the provisions or contents of any contract, agreement or any other document
referred to are not necessarily complete. Please refer to the actual
exhibit for a more complete description of the matters involved.
We have
appointed The Altman Group as information agent for the rights
offering. Any questions regarding the rights offering or requests for
additional copies of documents may be directed to The Altman Group at
(866)796-3419 (toll free) Monday through Friday (except bank holidays), between
10:00 a.m. and 4:00 p.m., New York time, or by email at
reorg@altmangroup.com
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 14.
Other Expenses of Issuance and
Distribution
The
following table sets forth the costs and expenses to be incurred by us in
connection with the issuance and distribution of the securities being registered
hereby. With the exception of the SEC registration fee, all fees and
expenses set forth below are estimates.
SEC
registration fee
|
|
$
|
|
|
NASDAQ
filing fee
|
|
$
|
|
|
Accounting
fees and expenses
|
|
$
|
6,000
|
|
Legal
fees and expenses
|
|
$
|
|
|
Subscription
Agent fees
|
|
$
|
25,000
|
|
Information
Agent fees
|
|
$
|
6,500
|
|
Printing
and engraving expenses
|
|
$
|
10,000
|
|
Miscellaneous
expenses
|
|
$
|
9,100
|
|
Total
|
|
$
|
|
|
Item 15.
Indemnification of Directors and
Officers
The
Maryland General Corporation Law permits a Maryland corporation to include in
its charter a provision limiting the liability of its directors and officers to
the corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) bad faith or active and deliberate dishonesty
established by a final judgment and which was material to the cause of action.
Our charter contains a provision which limits the liability of our directors and
officers to the maximum extent permitted by Maryland law.
Our
charter permits us, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer or
(b) any individual who, while a director and at our request, serves or has
served another real estate investment trust, corporation, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a trustee,
director, officer or partner of such real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
from and against any claim or liability to which such person may become subject
or which such person may incur by reason of his status as a present or former
director or officer of our company.
Our
bylaws obligate us, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director who is made a
party to the proceeding by reason of his service in that capacity or (b) any
individual who, while a director or officer of our company and at our request,
serves or has served another real estate investment trust, corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise and
who is made a party to the proceeding by reason of his service in that capacity,
against any claim or liability to which he may become subject by reason of such
status. Our charter and bylaws also permit us to indemnify and advance expenses
to any person who served a predecessor of our company in any of the capacities
described above and to any employee or agent of our company or a predecessor of
our company. Maryland law requires us to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity.
The
Maryland General Corporation Law permits a Maryland corporation to indemnify and
advance expenses to its directors, officers, employees and agents. The Maryland
General Corporation Law permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be a party by reason of their
service in those or other capacities unless it is established that (a) the act
or omission of the director or officer was material to the matter giving rise to
the proceeding and (i) was committed in bad faith or (ii) was a result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, a Maryland corporation may not
indemnify for an adverse judgment in a suit by or in the right of the
corporation or if the director or officer was adjudged to be liable for an
improper personal benefit. In accordance with the Maryland General Corporation
Law and our bylaws, our bylaws require us, as a condition to advancing expenses,
to obtain (a) a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification and
(b) a written statement by the director or officer or on his behalf to repay the
amount paid or reimbursed by us if it shall ultimately be determined that the
standard of conduct was not met.
Item 16.
Exhibits
The list
of exhibits in the Exhibit Index to this registration statement is incorporated
herein by reference.
Item 17.
Undertakings
The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933;
(ii) To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent, no more than a 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement; and
(iii) To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
Provided
,
however
, that paragraphs
(1)(i), (ii) and (iii) above do not apply if the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed with or furnished to the Securities and Exchange
Commission by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in
this registration statement, or is contained in a form of prospectus filed
pursuant to Rule 424(b) that is part of the registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser, if the registrant is subject to Rule 430C, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement relating to an
offering, other than registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and
included in the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first use,
supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
(5) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the securities, the
undersigned registrant undertakes that in a primary offering of securities of
the undersigned registrant pursuant to this registration statement, regardless
of the underwriting method used to sell the securities to the purchaser, if the
securities are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a seller to the
purchaser and will be considered to offer or sell such securities to such
purchaser:
(i) any
preliminary prospectus or prospectus of the undersigned registrant relating to
the offering required to be filed pursuant to Rule 424;
(ii) any
free writing prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the undersigned
registrant;
(iii) the
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided
by or on behalf of the undersigned registrant; and
(iv) any
other communication that is an offer in the offering made by the undersigned
registrant to the purchaser.
The
undersigned registrant hereby further undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant’s annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan’s annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the provisions described in “Item 15. Indemnification of
Directors and Officers” above, or otherwise, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Williamsburg, Commonwealth of Virginia, on September
28, 2009.
|
MHI
Hospitality Corporation.
|
|
|
|
|
By:
|
/s/ Andrew M. Sims
|
|
|
Andrew
M. Sims
|
|
|
President
and Chief Executive Officer
|
POWER
OF ATTORNEY
KNOW ALL
PEOPLE BY THESE PRESENTS, that each person whose signature appears below hereby
appoints Andrew M. Sims and William J. Zaiser, and each of them severally,
acting alone and without the other, his true and lawful attorney-in-fact with
full power of substitution or re-substitution, for such person and in such
person’s name, place and stead, in any and all capacities, to sign on such
person’s behalf, individually and in each capacity stated below, any and all
amendments, including post-effective amendments to this Registration Statement,
and to sign any and all additional registration statements relating to the same
offering of securities that are filed pursuant to Rule 462(b) of the Securities
Act of 1933, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorneys-in-fact, or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Act, this registration statement has been
signed by the following persons in the capacities and on the dates
indicated:
Name
and Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Andrew M. Sims
|
|
President and Chief Executive Officer and Chairman of the
|
|
September
28, 2009
|
Andrew
M. Sims
|
|
Board
of Directors
(
Principal
Executive Officer
)
|
|
|
|
|
|
|
|
/s/
William J. Zaiser
|
|
Executive
Vice President, Chief Financial Officer and Treasurer
|
|
September
29, 2009
|
William
J. Zaiser
|
|
(
Principal
Financial Officer
)
|
|
|
|
|
|
|
|
/s/
Anthony E. Domalski
|
|
Chief
Accounting Officer
|
|
September
29, 2009
|
Anthony
E. Domalski
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Gen. Anthony C. Zinni
|
|
(Director)
|
|
September
29, 2009
|
Gen.
Anthony C. Zinni
|
|
|
|
|
|
|
|
|
|
/s/
Kim E. Sims
|
|
(Director)
|
|
September
28, 2009
|
Kim
E. Sims
|
|
|
|
|
|
|
|
|
|
/s/
Christopher L. Sims
|
|
(Director)
|
|
September
29, 2009
|
Christopher
L. Sims
|
|
|
|
|
|
|
|
|
|
/s/
Edward S. Stein
|
|
(Director)
|
|
September
30, 2009
|
Edward
S. Stein
|
|
|
|
|
|
|
|
|
|
/s/
James P. O’Hanlon
|
|
(Director)
|
|
September
29, 2009
|
James
P. O’Hanlon
|
|
|
|
|
|
|
|
|
|
/s/
J. Paul Carey
|
|
(Director)
|
|
September
28, 2009
|
J.
Paul Carey
|
|
|
|
|
EXHIBIT
INDEX
Exhibit No.
|
|
Description of Exhibit
|
|
|
|
3.1
|
|
Articles
of Amendment and Restatement of MHI Hospitality Corporation (filed as
exhibit 3.1to the Registrant’s Pre-Effective Amendment No. 1 to its
Registration Statement on Form S-11 filed with the Securities and Exchange
Commission on October 20, 2004. (333-118873) and incorporated by
reference herein)
|
|
|
|
3.2
|
|
Amended
and Restated Bylaws of MHI Hospitality Corporation (filed exhibit 3.2 to
the Registrant’s Pre-Effective Amendment No. 5 to its Registration
Statement on Form S-11 filed with the Securities and Exchange Commission
on December 13, 2004. (333-118873) and incorporated by reference
herein)
|
|
|
|
3.3
|
|
Amended
and Restated Agreement of Limited Partnership of MHI Hospitality, L.P.
(filed as exhibit 3.3 to the Registrant’s Pre-Effective
Amendment No. 4 to its Registration Statement on Form S-11 filed with
the Securities and Exchange Commission on November 29, 2004.
(333-118873) and incorporated by reference herein)
|
|
|
|
4.1
|
|
Form
of Common Stock Certificate (filed as Exhibit 4.1 to the Company's
Pre-Effective Amendment No. 5 to its Registration Statement on Form
S-11 filed with the Securities and Exchange Commission on
December 13, 2004. (333-118873) and incorporated by reference
herein)
|
|
|
|
4.2
|
|
Form
of Subscription Rights Certificate*
|
|
|
|
5.1
|
|
Opinion
of Baker & McKenzie LLP
|
|
|
|
23.1
|
|
Consent
of Witt Mares, PLC, Independent Registered Public Accounting
Firm*
|
|
|
|
23.2
|
|
Consent
of Baker & McKenzie LLP (included in Exhibit 5.1)
|
|
|
|
24.1
|
|
Power
of Attorney (included in signature page)*
|
|
|
|
99.1
|
|
Form
of Instructions for Use of MHI Hospitality Corporation Subscription Rights
Certificates*
|
|
|
|
99.2
|
|
Form
of Letter to Stockholders who are Record Holders*
|
|
|
|
99.3
|
|
Form
of Letter to Brokers and Nominees*
|
|
|
|
99.4
|
|
Form
of Letter to Clients of Nominee
Holders*
|
* Filed
herewith.
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