1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [X]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))
[ ] Definitive Proxy Statement
[X] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
Suburban Lodges of America, Inc.
------------------------------------------------------------------
(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
------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
2
The following document was sent by Raymond A.D. French to certain shareholders
of Suburban Lodges of America, Inc. on May 16, 2001.
BUSINESS PLAN FOR SUBURBAN LODGES OF AMERICA, INC.
Prepared by Raymond A. D. French.
CONTENTS:
SECTION 1
- - Preface
- - Our role on the board
- - Note on proposals
SECTION 2
- - Background
- - Summary of Business and Turnaround Plan
- - Strategy
- - Operating Issues
1. Reduce Corporate Overhead
2. Control growth in Hotel Operating Expenses
3. Small, High Return Capital Investments in Existing Owned Hotels
4. HotelTools Internet Startup
5. Asset Sales
SECTION 3
- - Improved Corporate Governance, Transparency and Accountability to
Shareholders
1. Corporate Governance
2. Management Incentives Tied to Financial Performance
3. Transparency of Reporting
4. Solution to Return of Capital Problem
3
EXECUTIVE SUMMARY
This business plan lays out the strategy that we, Raymond French and Paul
Coulson, propose to follow in order to realize shareholder value at Suburban
Lodges of America, Inc. (SLAM), if elected to the board of directors.
The issues that we seek to address are a low return on equity caused by a
bloated cost structure, poor operating performance related to a management
that has not focused on its core business, poor investments in unrelated
businesses and a failure to execute on management's own plan to divest
low-yielding assets. This has all occurred under the supervision of a 5-member
board of directors which we believe includes only one independent director.
Our opponents, Mr. Kuse and Mr. McGovern, are longtime business associates of
Mr. Krischer. Mr. McGovern and Mr. Kuse's son, Michael, have sold over
$9,000,000 worth of real estate to the company since its IPO.
In order to address these issues, we develop and propose a clear issue by
issue plan below, based on straightforward actions which we believe could be
implemented within a 6 to 12 month time frame, and which would significantly
raise the return on equity (ROE) of the company from its current sub-3% level.
This plan focuses on cost cutting, targeted reinvestment in the core business,
a realignment of management incentives and an overhaul of corporate governance
so as to improve future executive and director accountability, and a
tax-advantaged solution for returning excess capital to shareholders.
OUR ROLE ON THE BOARD
We wish to stress that it is not our current intention to remove current
management or to "asset-strip" the company. We do propose to act independently
to encourage the board to act in shareholder's interests. The core of our plan
is to keep the Suburban Lodges brand intact and to improve profitability by
cutting expenses and improving management accountability to shareholders
through improved corporate governance.
We understand that if elected, we would only hold two out of total of five
company board seats. We would therefore not have the power or mandate to
enforce any of our proposals on the Company. However, we believe that a third
director, John Spiegel, (who is not up for re-election at the upcoming annual
meeting and is also the CFO at SunTrust Bank) is an independent director. The
board, thus constituted, would have a majority of independent directors and
could be relied upon to act in the best interests of shareholders.
If we are elected, the company will have, for the first time, a majority of
independent directors. We believe that independent directors are needed to
both supply oversight and to introduce new strategies for turning the
company's performance around. In this regard, the following plan outlines the
core proposals that we would submit to the full board for consideration.
NOTE ON PROPOSALS
We have tried to be brief here. This plan lays out our strategy. As outsiders
we have been limited to the use of publicly available information. This limits
the level of detail that we can provide in this report. However, the nature of
the company's business allows us to make direct comparisons with competitors
and, we believe, to clearly identify the areas where the company is failing to
perform to industry norms. If elected, we will obviously use our access to the
company's internal figures to further refine our proposals.
2
4
BACKGROUND
Suburban Lodges of America Inc. (SLAM) operates in the extended-stay lodging
business. At year-end 2000, the Company owned 65 hotels and franchised another
119 others under the Suburban Lodges and Guesthouse International brands.
SUMMARY OF BUSINESS AND TURNAROUND PLAN
The Business Plan addresses the company's problems, which are in three key
areas:
- - Clearly define a corporate strategy, with milestones.
- - Operating issues to improve returns.
- - Corporate Governance, management and director accountability, and
transparency.
STRATEGY
Our strategy is simple. We believe that the optimal structure for Suburban
Lodges going forward is as a hotel franchiser and operator; this is business
with high potential profitability and low capital requirements. We believe
that appropriately managed this business could generate attractive returns on
equity. To this end we propose the refurbishment of the company owned hotels
and an improvement in operating procedures. Importantly, we believe that
reductions in owned-hotel operating expenses would have a positive effect on
the values of those properties. These actions should allow the company hotels
to be sold to existing franchisees subject to standard company franchise
agreements. This asset sales proposal is the same strategy as management has
proposed in their public filings. However, we believe that this strategy will
not be successful at achieving a satisfactory level of earnings and cash flow
unless it is accompanied by an aggressive program of expense reduction. By
shutting down the HotelTools Internet Startup and cutting corporate level
overhead we believe the Board can bring about a major improvement in earnings
and cash flow. In addition, we propose to "clean up" assets before selling
them in order to increase realizations. We would get management to set
specific milestones for the achievement of improvements in earnings and cash
flow and would tie management compensation to achievement of these goals and
we would introduce a more shareholder friendly corporate governance structure.
OPERATING ISSUES
Suburban Lodges stock is currently trading at 38% of book value. The company's
return on equity capital (ROE) has averaged 2.93% between 1997-2000. We
believe that these two statistics are correlated and that the key to the
market awarding the stock a higher price to book ratio is for the company to
consistently generate a higher return on equity. It should be noted that in
regard to return on equity, the company ranks sixteenth out of the twenty
hotel companies covered by Salomon Smith Barney's lodging analyst, according
to a recent report by that analyst.
We believe that improvements in ROE can be achieved in the following areas:
- - Reduction in Corporate Overhead.
- - Controlling of the growth in owned-hotel operating expenses (preferably at
a rate within a tight range around inflation).
- - Small investments in upgrading the existing company hotels.
- - An end to further funding of the HotelTools Internet startup, unless a
buyer can be found in a short period.
- - Divestiture of lower-yielding assets and focus on improving returns on
equity in the core businesses of hotel operating and franchising.
- - Tie all senior management cash bonuses and option awards to pre-defined
improvements in the firms return on equity capital (see section 3).
3
5
1. REDUCE CORPORATE OVERHEAD
We believe that there is significant potential to reduce corporate overhead.
The company's corporate overhead is much higher, in relation to total revenue,
than that of its closest public peers. In 2000, the company's overhead was
14.6% of total revenue. This ratio has been consistently rising over the last
several years.
In contrast, the company's closest publicly traded peers, Extended Stay
America (NYSE: ESA) and Candlewood Hotel Company (NASDAQ: CNDL), had corporate
overhead to total revenue ratios of 8.6% and 4.8% respectively in 2000. If the
Company's overhead to total revenue ratio had been the same as that for ESA in
2000, pre-tax earnings would have been $4,524,000 higher. Since the Company's
actual 2000 pre-tax earnings were $8,483,000, these savings alone would have
increased pre-tax earnings by 53.3%. We believe there is no good reason for
the Company's corporate overhead to be so much higher than it's closest public
peers.
We believe that not only is this ratio high, but that the problem has been
steadily getting worse over time. In 1997, the Company's corporate overhead of
$2,254,000 equated to 9.72% of the Company's total revenues. For year 2000,
corporate overhead had climbed to $10,998,000, or 14.6% of total revenue. We
believe this trend strongly indicates a lack of a corporate culture focused on
expense control. We believe this problem is more likely to be addressed by a
board with an independent majority than by a board dominated by insiders with
significant conflicts of interest.
We are clearly somewhat restricted in our estimates of where excessive
corporate overhead lies, since we have been allowed access to only publicly
available information. This is one of the areas where access to the corporate
accounts as an independent director would allow for greater scrutiny of what
are currently unexplained cost increases. Two obvious examples are the
company's lavish headquarters and its sponsorship of a NASCAR race car.
The company's headquarters is located at 300 Galleria Parkway in Atlanta. This
is a high-rise, class A office tower with one of the highest market rents in
suburban Atlanta. We believe that as a small public company with sub-par
profitability that Suburban Lodges should instead be located in a low-rise,
office park building with significantly lower rental costs. If elected, we
would propose such a move. The savings, based on market rents, could be in the
range of $7-$10/sq. ft. per year. Further, we believe that the decision to be
located in such an expensive headquarters location may be indicative of the
current board's choices relating to many other undisclosed expenses. This may
explain the wide discrepancy between the Company's overhead and that of its
public peers.
2. CONTROL GROWTH IN HOTEL OPERATING EXPENSES
We intend to benchmark hotel operating expenses against the competition.
Unfortunately, operating margins have declined consistently at the company's
owned hotels since the IPO in 1996. . We believe that while same property
revenues have grown at a rate slightly above inflation over the last several
years, hotel operating expenses have grown at a much faster rate causing
operating margins to consistently deteriorate. Our research leads us to
believe that growth in hotel operating costs could be held within a tight band
around inflation, without compromising the customer experience. Given that
same property annual revenue increases have averaged between 3-4% over the
last several years, we believe that it is critical to operating margins (and
therefore property values) to control hotel operating expenses.
3. SMALL, HIGH RETURN CAPITAL INVESTMENTS IN EXISTING OWNED HOTELS
It is our belief that hotel revenues and hotel values for existing company
owned properties could be increased through the expenditure of a minimal
amount of additional capital. For example, several rival chains operate small,
but profitable, food stores in their hotels. We intend to conduct a cost
benefit analysis on such investments before looking at further hotel sales.
4. HOTELTOOLS INTERNET STARTUP
HotelTools is an Internet startup whose capital requirements are entirely
funded through loans from Suburban Lodges, and which generated a loss of
approximately $8,000,000 in 2000. However, these losses don't appear on
4
6
Suburban Lodges' income statement because the investment is structured as a
loan-plus-warrants rather than as a fully owned subsidiary. If they had been
consolidated, they would have almost entirely wiped out the company's earnings
for 2000. Suburban Lodges shareholders have been given minimal disclosures on
HotelTools financials. Five senior executives of Suburban Lodges have
personally been issued with 450,000 options in HotelTools for services
supplied outside of company time. We believe that this represents a serious
distraction to management. Further, we believe that the options award
represents a serious conflict of interest in making decisions about further
funding of HotelTools by Suburban Lodges.
The company's current CEO has unsuccessfully attempted to find an investor or
buyer for HotelTools over the last year. He has stated that Suburban lodges
may have funded up to $15,000,000 to HotelTools by year-end 2001. Current
funding requirements are running at approximately $2,000,000 per quarter.
We believe that unless current management can indeed find a buyer for
HotelTools within a short period of time (three months), then no further
funding should be given to HotelTools. We believe that by stemming this cash
flow drain, capital that would otherwise have gone into this investment (which
has never produced any return), could instead be allocated into projects that
are capable of earning the company's cost of capital. For example, this
capital could be used to expand the company's franchise business more
aggressively, pay down corporate debt or to invest in high-return additions to
existing owned hotels (as discussed above).
We believe the significant capital expenditure on HotelTools without any
return to date, combined with the serious conflicts of interest created by the
HotelTools option awards to senior Suburban Lodges executives, demonstrate the
critical need for increased board oversight of management at the Company. We
believe that only a board with a majority of independent directors can provide
the requisite oversight.
5. ASSET SALES OR SALE OF THE COMPANY
The company's current stated strategy is to sell its real estate assets over
time. In fact the third quarter 10Q states that it, "will sell its own
operating hotels with a long-range objective of owning no real estate". Based
on our extensive research, due diligence and conversations with operators in
the industry we are confident that the sale of assets would make significant
funds available to both allow faster growth in the expansion of the
high-return franchise business and to allow the company to return significant
capital to shareholders. We believe this strategy particularly makes sense in
relation to lower-yielding hotels and excess land parcels.
The Company recently completed a strategic review with Salomon Smith Barney,
which included exploring a possible sale of the company. The current board
concluded that there weren't any opportunities they were willing to accept. We
believe the results of any such study, conducted under the supervision of a
Board or committee a board with conflicts of interest, is suspect. Therefore,
we would review Salomon Smith Barney's study to see if there were
opportunities worth pursuing to maximize value for shareholders.
5
7
IMPROVED CORPORATE GOVERNANCE, TRANSPARENCY AND ACCOUNTABILITY TO SHAREHOLDERS
These issues fall into four areas:
1. A shareholder vote on anti-takeover provisions and a restructuring of
corporate governance to improve accountability.
2. Revamp management incentive structure.
3. Transparency of Management reporting.
4. Policy on return of capital.
1. CORPORATE GOVERNANCE
If elected, we will propose to the board that shareholders be allowed to vote
on the current raft of anti-takeover tools currently in place. These include:
- - The staggered board
- - The poison pill
- - The opt-in to the Georgia anti-takeover statute
We believe these measures all serve to preserve the current management and
make it virtually impossible for a potential acquirer to buy the company
without the acceptance of that offer by the board. This has the effect of
disenfranchising shareholders from any decision regarding such an offer, and
makes them beholden to a board dominated by individuals with vested interests
in maintaining the company's independence.
We seek to give shareholders a greater say in the way the company is governed,
and to incentivize management and the board to perform better by making them
more accountable to shareholders. In particular, we believe that by replacing
the staggered board terms with a board where all directors must be re-elected
each year, that directors will be more accountable and therefore incentivized
to produce better returns for shareholders.
In addition, with the company's existing poison pill in place, it is virtually
impossible for a potential acquirer of the company to make a successful offer
for the company without that offer being accepted by the board, regardless of
shareholders' opinions. By removing the more onerous aspects of the current
pill, we believe decisions about the company's future will be, at least
partially, in the hands of shareholders. As things stand, a board with serious
conflicts of interest essentially has a veto on any such transaction.
2. MANAGEMENT INCENTIVES TIED TO FINANCIAL PERFORMANCE
Unfortunately, we believe that the company's current incentive system does a
very poor job of linking pay to performance. For example, in year 2000, David
Krischer, the Company's CEO, was awarded a 116% increase in his cash bonus,
while net income fell 35% (even excluding the $8,000,000 of losses at
HotelTools). It should be noted that the compensation Committee that made this
award was made up of our opponents in the proxy contest, Mr. McGovern and Mr.
Kuse, both of whom are long-time business associates of Mr. Krischer.
We strongly believe that the company's management incentive program should
directly tie cash bonuses and option awards to return on equity capital
improvements. Indeed, with regard to cash bonuses specifically, we would favor
such incentives running throughout the organization. If the company is to
achieve a level of return on equity that would be required by the market in
order to price the stock at a level closer to its book value, each and every
employee will need to be incentivized correctly. Improvements in return on
equity can be achieved through both income statement improvements and through
the efficient use of net assets. In this regard, hotel managers could be
incentivized to generate higher returns on the equity at their disposal, by
not just finding ways to maximize revenue and minimize expense but also
through the elimination of excess under-performing capital.
3. TRANSPARENCY OF REPORTING
In order to improve management performance and improve investor confidence, we
propose to increase the level of operating performance detail divulged in the
public filings. This would include detailed disclosures on HotelTools,
management options and hotel operating data as well as corporate overhead
costs. This will allow
6
8
investors to better gauge the performance of management in achieving industry
norms in terms of operating performance.
4. RETURN OF CAPITAL
While current management's favored method of returning capital to shareholders
is through share repurchases, we favor the direct payment of distributions to
all shareholders. While we are very supportive of share repurchases at many
other companies in which we own stock, there are unique considerations here.
Management insiders currently own 30% of the company, up from 24% two years
ago. The increase over this time has almost entirely resulted from the company
itself repurchasing shares from non-insiders. If this trend continues, the
insiders will at some point achieve a blocking position. Given the staggered
board, poison pill and lack of independent directors, we believe that such a
blocking position held by management will essentially disenfranchise the
non-management, outside shareholders. It will at that point become impossible
to elect independent directors and management may loose any remaining
accountability to outside shareholders.
Further, we critically believe that the degree of management accountability to
shareholders will have a direct influence on their performance. Our proposal
to use distributions rather than repurchases avoids this creeping
privatization problem and ensures that all shareholders share equally in any
asset sales proceeds. We believe that the taxation of distributions to
shareholders from a major asset sale program would be favorable to
shareholders since a large portion of such distributions could be a return of
capital which would be taxed as a capital gain, much of this a deferred
capital gain, depending on the shareholder's basis.
7