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Karcher Seeks Control of Fast-Food Chain : Business: Hamburger magnate challenges board of directors’ strategy to revive O.C.-based firm.

TIMES STAFF WRITERS

Hamburger magnate Carl N. Karcher has declared war against his handpicked board of directors over control of the 648-restaurant chain that carries his name.

Karcher, who built a hot dog wagon into a multimillion-dollar fast-food empire, has seen his personal fortune sag with the California economy and now, at age 76, is rebelling against a board that has selected a new chief executive and has begun charting a different course.

“Carl would like to get back in the business. . . . He’d like to kick those guys out,” said former company executive Ray Perry.

The new Carl’s Jr. strategy calls for lower prices and eliminates the chain’s husky founder from his role as advertising pitchman. It appeared that Karcher had acquiesced as the Anaheim-based company prepared for life without a Karcher at the helm.

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But the company stock price continued to languish and a plan to bolster the Karcher family fortunes by having the corporation buy $10 million worth of the family’s stock fell through in July. Then the board rebuffed Karcher’s proposals to revive the chain.

So Karcher--whose family trust owns 34% of the company--late Tuesday night leveled an ultimatum: Adopt my suggestions or face an embarrassing boardroom coup.

Loren Pannier, Karcher Enterprises’ chief financial officer, said Wednesday that a committee of outside directors will evaluate Karcher’s statements and will probably meet with him to attempt to resolve their differences.

The apparent catalyst for Karcher’s uprising was the board’s rejection of a radical joint marketing proposal for the Carl’s Jr. fast-food chain. Karcher wants the hamburger chain to start selling Mexican-style entrees supplied by GB Foods’ Green Burrito restaurants and carrying the Green Burrito name. He sees the plan as essential to restoring the value of company stock as well as his own flagging fortunes.

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In an unusual move capping weeks of heated behind-the-scenes debates over the company’s future, Karcher issued a statement threatening to seek the ouster of Carl Karcher Enterprises Inc. directors who don’t agree with him. That he made it a public ultimatum to the seven-member board underscores the growing financial pressures he faces.

It is also a classic example of the turmoil that can accompany a poorly planned management transition, says Eric Flamholtz, a professor of management at UCLA’s Graduate School of Business.

“In most of these situations,” Flamholtz said, “you have an individual who says: ‘This is my company, and going public is irrelevant . . . (The officers and directors) are simply there to assist and advise me. If you get in my way, I’ll replace you.’ ”

This is Karcher’s second attempt in 10 months to regain control of the company he created 52 years ago. In November, 1992, he teamed with a Los Angeles investment group in a $172-million bid to buy up all of the company’s outstanding stock at $9.50 a share. Karcher directors rejected the bid as too low, shunted Karcher aside and hired a president.

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Flamholtz likened the situation at Karcher Enterprises to the highly publicized falling out between Apple Computer founder Steve Jobs and its current chairman, John Scully--who wrested control of the company from Jobs after the founder recruited him.

Karcher’s public outburst “seems out of place,” said restaurant industry consultant Janet Lowder. “But if he’s fighting with his board, what other means does he have? . . . He’s at least got some people’s attention.”

Karcher also believes the company can do better than it has in recent months, said banker Stanley Pawlowski, a longtime friend. Any improvement would also enhance Karcher’s personal fortunes.

Like many wealthy Southern Californians, Karcher invested in real estate, often using his company stock as security for loans. He has seen his wealth threatened by the region’s lengthy recession. Karcher’s personal attorney even advised him to consider bankruptcy as a way of resolving problems that include recent defaults on a bank loan secured by much of his company stock. Bankruptcy, however, was a move Karcher rejected immediately.

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“I think he got involved in some bad investments. Now he has to stand behind them and pay them back,” said Pawlowski, chairman of Corporate Bank in Anaheim.

Karcher family financial adviser Edward Pasquale said Karcher’s main goal “is to preserve and enhance shareholder value. If he can do that, then he’s a beneficiary.”

Pasquale tied Karcher’s financial woes to “a lot of factors all going bad at one time. If one of them had happened (alone), this wouldn’t even be a short news story.”

The latest problems are not the first to tarnish Karcher’s business reputation. In 1988, the Securities and Exchange Commission charged Karcher with providing insider information to several family members. Karcher, a prominent civic figure and philanthropist, fought the case for months before paying a penalty without admitting or denying wrongdoing.

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One of Karcher’s brothers, Frank, sued the company earlier this year, alleging he was misled about profit potential when he bought a Carl’s Jr. franchise in Tucson.

Then in May, Wells Fargo Bank sued Carl Karcher for defaulting on a $575,000 loan. The lawsuit subsequently was settled, said Andrew F. Puzder, Karcher’s personal attorney. Earlier in the year, the Carl N. & Margaret M. Karcher Trust defaulted on a loan secured by a vacant tract near the company’s Anaheim headquarters. Karcher also was forced this year to refinance a $4.3-million personal loan secured by Karcher Enterprises’ corporate headquarters building, which his family owns.

Karcher’s financial difficulties deepened in late July when he backed out of a previously announced agreement to sell $10 million of his family’s stock to the company. The deal collapsed because the price of Karcher Enterprises stock fell substantially in the weeks after it was announced, making the sale financially unattractive, Pasquale said.

At Wednesday’s closing price of $9.63 a share, the Karcher family holdings are worth $59.6 million. In April, when the buy-back plan was first disclosed, the stock was selling at $8.38 a share, meaning Karcher would have had to sell about one-fifth of his 6.2 million shares. But by the end of July, the price had fallen to $7, the Karcher stock was worth $43 million and he would have had to give up nearly 230,000 additional shares.

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With his stock sale abandoned, Karcher turned up his efforts to promote the joint marketing proposal with GB Foods in Anaheim. He believed the arrangement would boost sales and profits by drawing additional customers.

But the proposal was squelched by a group of directors led by company President Donald E. Doyle.

Doyle, who was brought into the company late last year after a stint as president of Kentucky Fried Chicken’s U.S. operation, declined comment Wednesday.

Former Karcher executive Ray Perry, now chief operating officer of the El Pollo Loco chain in Irvine, said he introduced GB Foods’ chairman, Willy Theisen, to Karcher about two weeks before Doyle arrived at Karcher Enterprises’ unassuming headquarters complex on Harbor Boulevard late last year.

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Perry, who ran a chain of coffeehouses at the time, said Theisen asked him for an introduction to Karcher to discuss combining Green Burrito and Carl’s Jr. at several locations. GB Foods has experimented with a so-called dual use at an Arby’s Roast Beef outlet in Long Beach.

Perry said that several Carl’s Jr. franchisees endorsed the experiment. Carl’s Jr. has a strong lunch business and a weaker dinner business. Green Burrito, in contrast, does better at dinner time.

Ironically, Karcher Enterprise launched an ill-fated Mexican food chain, Taco de Carlos, in the early 1970s.

Karcher reportedly developed support among company executives to test the idea of offering Green Burrito items, but the formal proposal was rejected by the board this summer--several months after Doyle took the helm.

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Karcher and the board split as Doyle moved to impose his stamp on the business. He lopped off unwanted corporate functions, laid off about 70 headquarter staffers and set about simplifying menus.

“What they’re doing right now is the right thing,” said Douglas Christopher, a Los Angeles-based food industry analyst with Crowell, Weedon & Co. “They’ve got some good 99-cent offerings on the menu, they have attractive-looking food, it looks like they’re building volume. . . . It seems like the company is on a very consistent, well thought-out plan.”

But one Carl’s Jr. franchisee, who spoke on condition that he not be identified, said he and other franchise owners are upset about the new management’s policies.

In particular, he said, they fear that plans are being hatched for a deep-discount menu, similar to Taco Bell’s 59-79-99-cent menu, that would destroy profits at the independently owned franchise locations that account for about one-third of all Carl’s Jr. locations.

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Karcher endorses Doyle’s cost-cutting attempts and the new, lower prices on the menu, said financial adviser Pasquale. “But we need to be more aggressive in what we’re doing.”

Proxy Battle Looms

After a plan to buy back 10 million shares of Carl Karcher Enterprises stock unraveled in July, founder Carl N. Karcher threatened a proxy battle if board members do not support his strategy to revitalize the ailing fast food restaurant chain.

MEMBERS OF THE BOARD Member: Carl N. Karcher Age: 76 Elected: 1966 Shares: ** 6,193,441 Percent: 34.2% Background: Single hot dog stand that opened in 1941expanded into nationwide chain Member: Donald E. Doyle Age: 46 Elected: 1992 Shares: 17,121 Percent: * Background: Former president of Kentucky Fried Chicken Member: Daniel W. Holden Age: 58 Elected: 1966 Shares: 21,966 Percent: * Background: Heads Holden & Fergus, an Anaheim law firm Member: Carl L. Karcher Age: 44 Elected: 1992 Shares: 65,546 Percent: * Background: Son of Carl N. Karcher; president of CLK Inc., a Karcher Enterprises franchisee Member: Peter Churm Age: 67 Elected: 1979 Shares: 11,824 Percent: * Background: Chairman emeritus of Furon Co. Member: Kenneth Olsen Age: 74 Elected: 1980 Shares: 16,750 Percent: * Background: Retired president of the Vons Companies Inc. Member: Elizabeth A. Sanders Age: 47 Elected: 1983 Shares: 4,950 Percent: * Background: Head of the Sanders Partnership, management consulting firm; former general manager of Nordstrom Inc. CARL KARCHER ENTERPRISES Business: Parent of Carl’s Jr. fast food restaurants

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Founded: 1941

Headquarters: Anaheim

President: Donald E. Doyle

1993 revenue: $502.6 million, down 7%

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1993 net income (loss): -$5.5 million, contrasted with $13-million profit in 1992

Outlets: 648

Employees: 14,000

STOCK PERFORMANCE

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For the past five years, Carl Karcher Enterprises stock value has been relatively flat. The following are the high and low prices of common stock for fiscal years 1988 to 1993:

52-week high 52-week low 1988 $11.06 $5.19 1989 13.00 7.25 1990 17.75 9.75 1991 11.00 5.50 1992 9.63 6.25 1993 11.13 6.75

* Yesterday’s close: $9.63

* Less than 1%

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** Including 6,160,186 Karcher Trust shares

Sources: Carl Karcher Enterprises Inc.; Bloomberg Business News; Times reports; InvestNet

Researched by JANICE L. JONES / Los Angeles Times


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