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Suburban Lodges of America, Inc.
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(Name of Registrant as Specified In Its Charter)
Raymond A.D. French
Paul R. Coulson
Sharwell Securities Trading Ltd.
Kappa Alpha Ltd.
Hibernian Investment Managers
Yeoman International Holdings S.A.
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Raymond A.D. French
350 West 50th Street
New York, NY 10019
May 4, 2001
Dear Suburban Lodges Shareholder:
Paul Coulson and I are running for the board of Suburban Lodges
at the May 17 shareholders meeting against two incumbent
directors who are supported by management.
As large investors in Suburban Lodges, we are dissatisfied with the
Company's performance. We believe Suburban Lodges needs new independent
directors to lead the effort to improve operating results and find opportunities
to sell the Company or engage in other strategic transactions.
This envelope contains:
1. A Letter to Shareholders that describes our program for Suburban
Lodges,
2. The proxy statement that we filed with the SEC, and
3. A GOLD proxy card that you must date and sign in order to vote for
us as directors.
By the time you receive this letter, the shareholders meeting will be
about a week away. We urge you to act promptly to be sure that your vote is
counted.
Please sign the enclosed GOLD proxy card, put it in the enclosed UPS
envelope and send it back to us.
YOU CAN VOTE FOR US EVEN IF YOU HAVE ALREADY SENT A PROXY CARD TO
MANAGEMENT. THE LAST DATED PROXY IS THE ONE THAT COUNTS.
If you have any questions, require assistance in voting your proxy or
would like to fax in your vote, please call MacKenzie Partners, Inc. at (800)
322-2885 (TOLL FREE) or (212) 929-5500 (CALL COLLECT). Thank you for your
support.
Yours truly,
Ray French
Non-Management Shareholders Respond to Krischer's Letter
. Since its IPO in 1996, Suburban Lodges' stock is down 60%.
. It has never paid any dividends.
. The current board of Directors has presided over the Company's capital
allocation and strategic decisions during this entire period.
. We believe that our opponents are not independent because of their business
relationships with the Company.
. It is now time to elect directors whose only interest in the Company is to
increase the price of its stock.
May 4, 2001
Dear Fellow Non-management Shareholder,
We (Ray French and Paul Coulson) are seeking your support in our effort to
get elected to the board of directors of Suburban Lodges of America at the
company's Annual Meeting on May 17. We believe that the result of this election
will have a direct and long-lasting effect on the value of your shares.
Like you, we are non-management shareholders. Our interests are exactly the
same as yours--our single purpose in seeking these board seats is to increase
the value of the shares for all shareholders. Our opponents have sat on the
Suburban Lodges Board since the Company went public and are longtime business
associates of its CEO, David Krischer. If they are reelected, we believe there
is no reason to expect any change in the Company's policies.
Management has already sent you a letter with a description of our candidacy
that, in our opinion, is unbalanced and highly prejudicial. Therefore, we are
writing to you now to set the record straight and explain why we believe a
change is required in the Suburban Lodges Board.
The driving force behind our candidacy is our dissatisfaction with the
performance of the Suburban Lodges stock and the Company's operating results
since it went public. During this time the Company has had only one director who
we consider independent. Our opponents hold positions on the Audit and
Compensation Committees that should go to independent directors. But in fact
they or members of their family have close business relationships with the
Company. That could make them beholden to Mr. Krischer and give them a conflict
of interest in considering a sale of the Company that would take control away
from Mr. Krischer.
A Company that has performed as poorly as Suburban Lodges can not afford to
have a Board of Directors dominated by insiders. In exploring a sale of the
Company or other strategic transactions, it needs a majority of directors who
only have shareholder interests at heart. That is what you can get by electing
us to the Board.
How Has Suburban Lodges Performed under Current Management?
The current board and management has presided over the Company's capital
allocation and strategic direction decisions since the Company's IPO in 1996.
Over this period eroding operating margins and rapidly growing corporate
overhead have led to very low returns on equity that have taken a toll on the
Company's stock./1/ In May 1996, Suburban Lodges of America did an initial
public offering at $17 per share. In November 1996, the company did a second
equity offering at $18.75 per share. In October 1997, the company did a third
equity offering at $25.50 per share. Since these offerings, the stock has not
paid any dividends or distributions. Yesterday, the stock traded at $6.75.
__________________
/1/ From 1997 through 2000 Suburban Lodges has never achieved, in any single
year, a return on equity capital (ROE) above the average Yield available
on 1-Year T-bills in each of those years. Between 1997-2000, the Company's
ROE averaged 2.93%. In addition, the ROE of 2.53% generated by the Company
in 2000, excluded approximately $8,000,000 of losses generated by
HotelTools, an Internet startup whose capital requirements are entirely
funded by loans from Suburban Lodges.
We believe that the market is discounting the value of the Company's stock
because of the track record of the Company's current management and board.
Decisions made by the current board and management led to a loss of $10,440,000
on an interest-rate-lock gone wrong in 1998. Since early 2000, the same board
has spent $10,192,000 of your equity capital on the HotelTools Internet startup.
Did you invest in Suburban Lodges to have it fund an Internet startup?
What's wrong with the current board?
The Company currently has five board members. The first two directors, Mr.
Krischer and Mr. Berman, are both senior executives of the Company who receive
extremely generous compensation as employees of the Company. Two other
directors, Mr. Kuse and Mr. McGovern (our opponents in the upcoming proxy
contest), and Mr. Kuse's son, Michael, have been long-time close business
associates of Mr. Krischer and have had extensive dealings with the Company both
before and after the Company's IPO. According to disclosures in the Company's
SEC filings, Mr. McGovern and Mr. Kuse's son, Michael, or corporations they
controlled, borrowed money from the Company or sold properties to the Company in
every year from 1997 through 1999 and received total sales proceeds, including
debt assumption, of over $9,000,000.
Mr. Kuse and Mr. McGovern are the only directors serving on the board's
Compensation Committee. For year 2000, they awarded Mr. Krischer, as CEO, a 116%
increase in his cash bonus--a year in which Net Income, even excluding
approximately $8,000,000 of losses at HotelTools, fell by 35%. In addition, Mr.
Kuse and Mr. McGovern both serve on the board's Audit Committee. Under the
NASDAQ rules, the Audit Committee is supposed to be comprised entirely of
independent directors, and the Board is supposed to have determined that the
members of the Audit Committee are free from any relationships that would
interfere with the exercise of independent judgment in carrying out the
responsibilities of a director. Although Nasdaq has not adopted guidelines that
deal with relationships like Mr. Kuse's and Mr. McGovern's, we believe that Mr.
Kuse and Mr. McGovern do not have the requisite independence to serve on the
Audit Committee.
Shareholders should consider whether they are comfortable with these four
directors together holding four out of five of the Company's board seats.
Suburban Lodges recently rejected or decided not to pursue at least two
opportunities to sell or merge the Company. Should these four directors, with
their apparent conflicts of interest, be making these decisions for Suburban
Lodges' shareholders? We believe that when there is a sharp decline in the
market price of a public company stock over a number of years, shareholders
should demand that the board have a majority of independent directors whose only
interest is in maximizing the value of the Company's shares.
What is going on at HotelTools?
At the end of the first quarter 2001, the Company's loan to the HotelTools
Internet startup stood at $10,192,000 (at year-end 2000, there was a further
$1,400,000 potential liability for Suburban Lodges in the form of a guarantee on
an equipment lease for HotelTools). Even ignoring the equipment lease, the
current size of the loan equates to $0.85 per Suburban Lodges share. This means
that the personal share of this commitment for a shareholder, with say 10,000
shares, now stands at $8,472. If HotelTools fails, and if current management
carry through their intention to pour up to an aggregate of $15,000,000 into
HotelTools through year-end 2001, the total potential loss to Suburban Lodges'
shareholders could amount to $1.25 per share.
While Mr. Krischer first talks about finding an investor, and then talks
about finding a buyer, the bleeding of cash continues at HotelTools. Making this
even worse, is the fact that our equity has been ploughed into HotelTools with
almost no disclosure about what all of this money has been spent on. The
management proxy statement reveals that Mr. Krischer has options to purchase
250,000 shares of HotelTools stock and four other Suburban Lodges executives
have options to purchase 50,000 shares each. In our opinion, these options
create a serious conflict of interest for Mr. Krischer and his colleagues in
deciding whether the Company should continue providing financial support to
HotelTools.
If elected we intend to take a very close look at what has been going on at
HotelTools and advocate shutting it down promptly unless there is convincing
evidence that a sale is feasible. You can rest assured that
you will be kept informed of our findings. Shareholders should consider whether
they can trust the current board to make the correct decisions about further
funding for HotelTools if the sales process fails.
What is different about our Proposals for the Company?
. Interests aligned with the other non-management shareholders. Our interests
are aligned completely with other non-management shareholders. Our only
stake in this proxy contest is to make the Company's stock more valuable.
Indeed, if you elect us, we will not accept any fees or other remuneration
for serving on the Board.
. Reduce Corporate Expenses. If elected, we will work to turn the Company's
performance around. Besides ending the HotelTools cash drain, we will seek
to reduce the Company's large corporate overhead. The Company's corporate
operating expenses have increased by 388% between 1997 and 2000. As an
example, we believe it is completely inappropriate for a small hotel company
with sub-par profitability to have its headquarters office located in one of
the most expensive office towers in suburban Atlanta.
. Action not just talk in sale of the Company or asset sales. While management
talks about realizing shareholder value through asset sales and talks about
selling HotelTools, they have so far failed to do either. Early in 2000 Mr.
Krischer told shareholders that he had a goal of achieving significant asset
sales in 2000. The reality has fallen far short of this goal. In fact,
proceeds from asset sales were a small fraction of the amount that was
invested in HotelTools.
We mean business and will do more than just talk. If elected we will insist
on the board reviewing whether or not it is feasible to sell the Company in a
transaction that would give stockholders a significant premium over the current
market value of the stock. If no such transaction is possible, then a properly
structured, fairly priced, program of asset sales should be undertaken. We
believe that there should be asset sales made at appropriate prices and not on a
fire sale basis. It is, however, equally important that the company sets
reasonable price targets for its assets. If the targets are set too high, then
no value will be realized.
Mr. Krischer has claimed that if we pursue an aggressive program of asset
sales, we will alienate franchisees--we disagree. We believe that some
franchisees would be interested in buying hotels. We believe they would be happy
with a board that wanted to sell hotels at realistic prices and we further
believe that given their loyalty to the brand, that they would make excellent
buyers. We will not, as the Company claims, engage in any fire sales of the
Company's assets.
. Get value to shareholders without giving management a blocking position. We
would distribute the asset sales proceeds to stockholders in a way that is
both fair to all stockholders and tax-efficient. We do not rule out a stock
repurchase program as one of the ways to distribute sales proceeds to
stockholders. However, there is a danger in stock repurchases that must be
avoided. Management, which already owns 30% of the Common Stock, is close to
owning so much stock that it will become impossible, as a practical matter,
to wage a successful proxy contest to elect directors opposed by management.
If management does not participate as sellers in a stock repurchase program,
every share that is bought by the Company increases management's percentage
ownership of the Common Stock and brings management closer to a blocking
position Therefore, we would closely scrutinize any proposed stock
repurchase program to be sure that it would not have the effect of
immunizing management against a change in control.
Mr. Krischer has tried to convince you that his interests are aligned with
yours by pointing out that he is the Company's largest shareholder and arguing
that he benefits the most from actions that produce a higher stock price. That
would be true if he were a seller who was planning to sell his shares along with
the other stockholders. It is not true if he is a buyer who wants to use Company
money to buy the shares at currently depressed prices and build a blocking
position that would immunize current management against a change in control. No
one but Mr. Krischer knows his true intentions; but given his conflicts of
interest, we believe that stockholders need a majority of independent directors
to make decisions about a sale of the Company and supervise any stock repurchase
program.
Better Corporate Governance.
The Company's management has not addressed any of our concerns regarding
corporate governance. We will ensure that there are proper independent Audit and
Remuneration Committees. We will also push to give shareholders a stronger voice
in deciding the future of the Company through an elimination of the staggered
board so as to give shareholders the right to elect the entire Board at every
annual meeting.
. In its letter to shareholders of April 26th, management makes much mention
of both the age of Ray French and the domicile of the investors which form
the French Group. We believe that management is raising these points to
distract you from the real issues in the proxy contest: the performance of
Suburban Lodges management, the strategic choices facing the Company, and
the conflicts of interest of the existing directors. Regardless of age, Ray
French is an experienced real estate analyst and investor, and Paul Coulson
is a prominent and well-respected member of the Irish business community who
has an extensive range of corporate and real estate investment interests.
The group of investors who have nominated Mr. Coulson and Mr. French
includes a subsidiary of CGNU, one of the leading insurance companies in the
world.
Shareholders have a very clear choice.
We believe that shareholders are now faced with a very clear choice. If the
management's nominees are elected, we think you can expect little to change at
Suburban Lodges: in effect, a business-as-usual plan for the Company. For a view
of what we believe this could mean for your shares in the future, look at a
chart of the Company's share price over the last several years while the current
board has presided.
We offer an alternative that, we believe, would for the first time give the
Company's board a majority of independent directors. As independent directors
who neither receive salaries nor sell properties to the company, we will make
our decisions based purely on what is best for all shareholders. We will demand
that management treats your equity with the respect it deserves. We will insist
that excessive overhead is reduced and that the bleeding of cash at HotelTools
is halted. We will push for all shareholders to share in the proceeds from any
asset sales, and will oppose using such funds to fund a stock repurchase program
that unfairly benefits the largest shareholder, current management. If you elect
us, Ray French and Paul Coulson, you will have a board that you can trust to put
your best interests, and only your best interests, first. We will work
diligently with one purpose in mind--to unlock the maximum shareholder value for
all of the Company's shareholders.
Feel free to contact us.
Lastly, given management's large shareholding, even if we achieve a majority
of the votes cast by outside shareholders, the vote may be close and every
single share will count--your votes could make all the difference. Given the
short amount of time left before the annual meeting on May 17, we urge all
shareholders to contact Ray French personally to discuss the issues. It is very
important that we have your contact phone number, mailing address, the number of
shares that you owned on the record date (March 29) and at which bank or
brokerage you hold those shares. Unlike the Company in its recent conference
call, we will be accessible for such conversations to all shareholders, no
matter how large or small their stake in the company. Ray French can be
contacted at (212) 582-0900 or (516) 924-1176. Or you can contact our proxy
solicitors, Mackenzie Partners, at (212) 929-5239 (attention: Larry Dennedy).
We are grateful to the shareholders who have already contacted us, and we
look forward to hearing from those of you who have not yet called.
Yours sincerely,
Ray French
Paul Coulson