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Lone Star Steakhouse stockholder shoots for board seat

By MARK DAVIS - The Kansas City Star
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.

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 officer.

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 investors.

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 plunged.

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 Amalgamated Bank.

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.


Bad business

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 two-year stretch.

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 Lone Star.

"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.


Option pricing

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 said.

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 suffered.

"Shareholders can't reset the price at which they bought shares," Hitchcock said.

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 repricings.

"If they have independent directors, they're not doing a good job," Pacheco said.

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 Lone Star.

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 who's qualified."


Coulter campaign

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 interest.

Hitchcock remained skeptical.

"Is it a campaign promise or something they really plan to do?" he said.


To reach Mark Davis, call (816) 234-4372 or send e-mail to

All content © 2001 The Kansas City Star






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