June 24, 2001
Market Watch: An All-He-Can Eat Feast at a Steakhouse Chain
By GRETCHEN MORGENSON
the shareholders of Lone Star Steakhouse and Saloon,
there has been a lot more more fizzle than sizzle lately. During the biggest
bull market in history, the stock of Lone Star, the Wichita restaurant
chain, only sank. A shareholder who invested $100 in the stock in December
1995 had $22.08 at the end of 2000. The Standard & Poor's restaurant index
rose almost 52 percent during the period.
Despite a sizable stock buyback program, per-share earnings at Lone Star
fell 15 percent last year. Its stock, now at $12.89, trades 29 percent below
its book value.
One might expect Lone Star management to make nice to its shareholders.
Instead, it is poking them in the eye with a cattle prod.
Last year, the company more than tripled the salary and bonus of Jamie B.
Coulter, the chairman, to $977,000. Six months ago, Lone Star forged a
contract with Mr. Coulter that gives him a payment equal to 2.99 times one
year's annual compensation if there is a change in control at the company.
Lone Star has also been a serial repricer of its stock options, most of
which are held by its top executives. In 1997, it reduced to $18.25 the
price of options that had ranged from $19 to $32.63. Two years later it
repriced options of outside directors, and in 2000 it reduced the exercise
price on all outstanding options to $8.47. Mr. Coulter holds options
covering 2.6 million shares, accounting for 52 percent of his Lone Star
But even these excesses pale in comparison with the company's
over-the-top response to the candidacy of Guy W. Adams, 50, a Lone Star
investor of modest means who is running for an open board seat at the
company's annual meeting on July 6.
Last February, Mr. Adams, an independent analyst in Los Angeles, filed
proxy materials about the board seat. Two months later, Lone Star sued him,
contending that because he had filed misleading proxy materials he should be
prohibited from voting any proxies. But a judge ruled Friday that Mr. Adams
could proceed after correcting two errors.
In pursuing the suit, Lone Star obtained Mr. Adams's bank, brokerage and
phone records, combed through court proceedings in his 1999 divorce and
sought to depose his landlord.
Hardball tactics are de rigueur in corporate America. But another Lone
Star move is unusual: its subpoena and deposition of Ted White, corporate
governance director at the California Public Employees' Retirement System,
known as Calpers, owner of 372,000 Lone Star shares. Calpers said the
company had one of the five worst boards of those in its portfolio. In the
deposition, Mr. White said the fund would support Mr. Adams.
Lone Star said deposing Mr. White was necessary to determine whether Mr.
Adams, who owns 1,100 shares, was a stalking horse for the investment fund.
Mr. White denies this. "Their response to his candidacy was shameful," he
said. "It's fairly telling that an entrenched board feels the need to
protect itself with intense litigation."
Mr. Adams declined to comment, but said in court filings that the lawsuit
looked like an attempt by the company to use litigation to prevent
stockholders from being given a choice of candidates for the board seat.
Other investors agree. And the New York Society of Security Analysts'
Committee for Corporate Governance is sponsoring a forum on Lone Star, said
Gary Lutin, head of Lutin & Company in New York.
A spokesman for Lone Star said it was committed to shareholder value and
that it would not reprice options for executives without a stockholder vote.
The company is turning around, he said, and the stock, up 34 percent this
year, reflects it.
But that climb could also mean that investors think the Lone Star board's
days may be numbered. If that perception becomes a reality, it will come not
a moment too soon.
2001 The New York Times Company