CKE's CEO Doyle blasts Karcher's proxy threat; board nixes founder's dual-use plan despite his risk of financial ruin - Carl Karcher Enterprises CEO Donald Doyle, Chairman Carl N. Karcher - includes related article on duel marketing plan analysis

Board nixes founder's dual-use plan despite his risk of financial 'ruin'

ANAHEIM, Calif. -- Carl Karcher Enterprises chief executive Donald Doyle and others in a board majority have renounced the threatened proxy fight for company control by its financially troubled chairman, Carl N. Karcher, who was angered by the board's veto of a dual-brand marketing plan that would reward him with a $6 million loan.

Doyle and another CKE director said that Karcher -- whose plan to test-market Green Burrito-brand foods in Carl's Jr. burger outlets was shot down after an analysis -- told the board that rejection of the deal with the burrito chain's parent, GB Foods, would force him into bankruptcy and "ruin" him financially.

Two banks demanding repayment of $30 million in loans made to the 76-year-old burger magnate are threatening to take control of Karcher Enterprises stock he pledged as collateral -- shares amounting to nearly three-fourths of the Karcher family trust's 34-percent stake in the company he founded 52 years ago and took public in 1981.

Karcher's financial adviser and spokesman, Edward Pasquale, insisted that the burger chain pioneer's "dynamic" Green Burrito proposal was intended to revitalize Carl's Jr. and was not offered solely for his personal financial salvation.

Karcher has requested, and been refused, the resignations of three of the outside directors opposed to his dual-branding proposal. He wants one of those seats on the seven-person board to be filled by Godfathers Pizza founder William Theisen, controlling shareholder of GB Foods, who offered Karcher a $6 million personal loan as part of the proposed GB-CKE alliance.

Theisen's proposal to Karcher also called for CKE to give Theisen options for 1 million shares at $8 each -- about 5.5 percent of the company -- and for GB Foods to give Karcher options on 1 million GB shares at $12 each. Theisen originally sought the title of vice chairman but later dropped that proposal, a spokesman for Karcher said.

Doyle called the proposed swapping of stock warrants "premature."

In meetings that the parties agreed would remain confidential, CKE board members sought explanations from Karcher about a purported $40 million in loans that he would receive if the GB deal closes -- loans that a Karcher spokesman deny were proposed. The directors also wanted to know whether the Karcher family's stake in CKE would transfer if the deal closes and who the other new directors might be that Karcher would try to install if a proxy fight ensues.

The directors who oppose Karcher's plan "firmly believe that what Carl is trying to do is not in the best interest of our shareholders," said Doyle, the former KFC-USA president who last year was hand-picked by Karcher to become CKE's president and chief executive officer.

Referring to Karcher's financial difficulties, Doyle said he and other board members "want to help Carl and have listened to his requests for help." But those requests "had to meet the test of being in the best interest of all shareholders, not just one shareholder."

"The board hasn't suddenly turned adversarial," said Betsy Sanders, a management consultant and former Nordstrom executive who said she and most of the other board members have enjoyed friendships with Karcher dating back 20 to 30 years.

In May the board agreed to repurchase $10 million of Karcher's stock to assist him with debts that are said to be linked to real-estate investments gone bad. But the deal collapsed in July when the company's share price fell, requiring Karcher to give up more shares than he intended, and because he refused to consent to the board's condition that he relinquish strategic voting rights on his remaining shares.

Doyle said the subsequently proposed deal with GB Foods contained "elements that were solely for Mr. Karcher's personal benefit" and failed a five-week-long quantitative study of the plan's consumer, financial and strategic ramifications.

Speaking on Karcher's behalf, financial consultant Pasquale disputed Doyle's conclusions and questioned whether his bias against the dual-brand proposal influenced the negative outcome of the company's study. "Mr. Doyle did not hide the fact that he was opposed to the plan from the start," Pasquale said, adding that proposed initial market testing was to be financed by GB Foods at no cost to CKE.

"To say that Carl is solely driven by personal motives is ludicrous," Pasquale commented, pointing out that the $10 million stock sale he rejected was bigger than Theisen's $6 million loan offer.

Citing the near doubling of sales reported by a Long Beach, Calif., Arby's franchise after it underwent a tandem-brand conversion with Green Burrito, Pasquale pointed to the 9-percent same-store sales decline at Carl's Jr. in the quarter ended Aug. 9 and said, "The company needs to do something more dynamic" than just cut costs and reduce menu prices.

Karcher has previously endorsed Doyle's cost- and price-reduction turnaround strategy for the 648-unit Carl's Jr. chain, which aims to reverse last year's $5.5 million net loss on a 7-percent dip in revenues, to $502.6 million.

Although CKE's second-quarter net profit of $2.1 million was down 34 percent from the year-ago period and included $4.4 million primarily from interest and investment income, Doyle cited unspecified "dramatic" gains in customer counts and sales improvement in the quarter from a nine-unit test of a new pared-down, value-style menu.

Despite the fact that franchisees are "very nervous," Doyle said plans are under way to expand tests of the revised menu, which still exploits Carl's Jr.'s "premium quality niche" but reduces total choices from 70 options to 40 and cuts many prices by about 25 percent or more.

Doyle said the board's Aug. 18 vote against the Green Burrito plan was a "very pro-active decision," not a vote against Karcher. "It was very difficult to see any benefit to CKE," Doyle said.

Nonetheless, after going public with his threat to call a special shareholders meeting to challenge the board, a "very upset" Karcher hired a New York law firm that specializes in mergers, acquisitions and proxy fights.

Despite the recommendation of his personal attorney and some CKE directors that Karcher consider a personal bankruptcy filing to resolve his problems, the entrepreneur who built Carl's Jr. into an international chain from a single hot-dog cart "does not view [bankruptcy] as an option," Pasquale said.

Although he declined to discuss specifics, Pasquale added that Karcher and his advisers "are working with the banks" to forestall threatened loan default proceedings that could undermine his proxy battle plan.

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