Lone Star Steakhouse stockholder shoots for
By MARK DAVIS - The Kansas City
Date: 07/02/01 22:15
A shootout is coming Friday to Lone Star Steakhouse & Saloon Inc.
Stockholder Guy Adams and his posse are gunning for Chairman Jamie
Coulter's seat on Lone Star's board of directors will be at stake when
shareholders choose between the two men at the company's annual meeting in
Austin, Texas. Never mind that Coulter also is Lone Star's chief executive
Adams has the backing of the California Public Employees Retirement
System and the Amalgamated Bank in New York, both of which own
shares. His candidacy has won support from two services that issue proxy
vote recommendations to pensions, mutual funds and other institutional
Even if Coulter survives Adams' bold challenge, he will have hardly
ended the fight.
Lone Star management has alienated some owners by taking big pay
raises, double discounts on their stock options and plump severance
agreements even after the company's sales growth, profit and stock price
Management topped that by rebuking an overwhelming shareholder vote
last year to put all five directors up for re-election this year. Only
Coulter faces a vote Friday.
"How do you have a conversation with a company that ignores 70 percent
of the shareholders?" said Con Hitchcock, a lawyer representing
The answer for at least some owners is to get the company's attention
by trying to kick its chief executive off the board of directors.
Kansas City area investors might remember Lone Star as a local
darling on Wall Street. Shares in the Wichita-based company first traded
in March 1992. They soared for more than four years.
Growth-oriented investors such as the American Century and
Janus mutual fund families snapped up shares. Lone Star consistently
ranked near the top of The Kansas City Star's Star 50 rankings of
publicly traded companies in Missouri and Kansas.
It was all too much.
So says management now, looking back after the stock's five-year slide.
A June 14 report by Lone Star management said they expanded the
steakhouse chain too quickly, opening a restaurant a week during one
Coulter did not respond directly to requests for an interview.
Executive Vice President John White, who also is a director and worked for
Coulter's business services company before Lone Star, spoke for Lone Star
and its directors last week.
Adams declined an interview and referred questions to documents he
filed with the Securities and Exchange Commission and with a federal court
in Wichita, where Lone Star had sued Adams.
White said the rapidly expanding Lone Star couldn't hire skilled
managers fast enough to govern its growth. He said the problem partly was
that its pay wasn't competitive.
It got worse once management put the brakes on expansion. White said
recruiters who had been helping the company find new managers turned on
"They came and started picking off our best people," White said.
The company foundered. Sales growth fell flat. Profits plunged from $60
million to less than $6 million. And the stock price, once reaching $45,
dropped below $9.
Adding insult to injury, Wall Street enjoyed an unparalleled bull
market as Lone Star investors took a bath. Even other restaurant stocks
were doing well.
Despite the weak stock price, shareholder William Steiner in New York
wants to put Lone Star up for sale. Friday's agenda includes a shareholder
vote on his proposal to sell the company promptly "to the highest bidder."
Lone Star's directors oppose the plan, saying it would be tantamount to
accepting fire sale prices just as business and the stock are beginning to
recover. Others aren't saying how they'll vote on Steiner's proposal.
As Lone Star shares tumbled, new managers received options to buy
stock at the lower recent prices. But they worked beside longtime managers
whose options allowed them to buy shares at painfully high stock prices
from better days.
In April 1997, directors cut the prices on everyone's stock options to
$18.25 a share, which was the company's stock price at the time.
White said they had to do it. The options had become divisive among old
and new managers. Rivals were luring away longtime Lone Star employees
with stock options at their companies' current prices.
"The real reason for the repricing was to retain the people," White
The event passed without much controversy.
But then, in January 2000, directors repriced Coulter's, White's and
other executives' options again, this time to $8.47 a share. Other
employees already had been offered repricing earlier.
Some of Coulter's options originally allowed him to buy stock at $32.63
a share. More than a million of his options were priced at $28.38 a share.
After the second repricing, Coulter wound up with options to buy 2.6
million shares of Lone Star -- enough to double his ownership of the
company -- at $8.47 a share. The discounts from his original option prices
ranged from 55 percent to 74 percent.
Because the options were always priced at prevailing stock market
prices, Coulter's discounts were a good measure of how much investors had
"Shareholders can't reset the price at which they bought shares,"
Lone Star's top management also got big raises last year. Coulter's
salary more than doubled, and he collected his first bonus. His total pay
of $1 million, not counting the options repricing, was more than three
times his pay the year before. White's pay nearly tripled.
White said the pay raises were catch-up for seven years of below-grade
pay for the top executives. The company had done compensation surveys and
found huge gaps in pay and bonuses.
Executives also got severance agreements, Coulter's being worth nearly
three times his pay in the event of a change in Lone Star's control. Under
some circumstances, he could collect even without losing his job.
Such transactions on top of Lone Star's damaged stock put the company
on radar screens at Calpers, the $158 billion California state pension
system. Calpers doesn't consider its 292,900 shares of Lone Star a bad
investment. It ranked Lone Star among its 10 worst investments.
Spokesman Brad Pacheco said the problem wasn't just that Calpers was
losing money. He said Lone Star's board of directors had fallen down on
the job, citing the compensation, severance agreements and options
"If they have independent directors, they're not doing a good job,"
Enter Adams, who in February nominated himself for Coulter's seat on
the board of directors.
Any guy will do
Coulter's nemesis posed the question himself in materials he sent
to shareholders: "Who is Guy W. Adams?"
On the surface, the Los Angeles resident is a Lone Star shareholder who
is as unhappy as any investor about the searing losses in the company's
stock. He has claimed to have spent $50,000 to campaign for Coulter's
director's seat, though he spent only $10,000 to buy his 1,100 shares of
The irony is that Adams isn't losing money on his shares. He paid a bit
more than $9 for them in February and Lone Star closed Friday at $12.99.
As unlikely a hero as Adams seems to be for long-suffering
shareholders, he's about all they need.
Throughout corporate America, directors routinely run for election
unopposed. Unhappy owners can withhold support, but it's not likely to
change the outcome.
Adams, however, has given them someone to vote for.
"It doesn't have to be Guy Adams; it could be anybody," said Pacheco,
who added that Calpers will vote for Adams.
Adams doesn't have any experience as a director or in the restaurant
industry. But his supporters say his independent mind-set would be good
for the board at Lone Star.
"He would be a breath of fresh air," Hitchcock said.
Current directors see Adams as dangerous.
"We think he intends to be a disruption," White said. "If a large group
of shareholders want to put someone on the board, let them get someone
The obvious message in Calpers' and Amalgamated's support for Guy
Adams may not be lost on Lone Star's directors.
"We hear that," White said.
At the same time, however, other Lone Star executives have campaigned
for Coulter on recent and comparatively modest recoveries in the stock and
in the company's earnings.
They point to a new standard for independent directors, but all three
met the standard before it was embraced. They adopted a proposal to
require shareholder approval of future repricings of executives' options.
But that came after Amalgamated submitted such a proposal for a vote at
this year's shareholders meeting and after management's options had been
repriced twice and were below prevailing market prices.
Finally, as Friday's meeting nears, Lone Star management is saying it
will "strongly consider" adding directors to the board and requiring all
directors to be elected each year. But it added a caveat, and White said
last week that he still believed that would not be in shareholders' best
Hitchcock remained skeptical.
"Is it a campaign promise or something they really plan to do?" he
To reach Mark Davis, call (816) 234-4372 or send e-mail to