Karcher: Cloudy Chapter in Horatio Alger Success Story

Carl Karcher’s rags-to-riches story is as all-American as a hamburger and fries.

From his start as a farm boy in the Midwest, Karcher has parlayed a $326 investment in a hot dog cart into a major fast-food chain. On Thursday, only one day after Anaheim-based Karcher Enterprises announced record earnings, the Securities and Exchange Commission filed a lawsuit accusing Karcher and members of his family of illegal insider trading in Karcher stock.

In a prepared statement, Karcher said the SEC allegations “are totally false.�

The lawsuit was a major blow to a company that had only recently pulled itself out of several years of hard times. It was an even harsher blow to the 71-year-old entrepreneur whose life has been a classic success story.

In fact, the Horatio Alger aspect of Karcher’s life is frequently mentioned by those who know him. It is reprinted on paper place mats in his Carl’s Jr. restaurants. And Karcher received the Horatio Alger Award in 1979 from a private foundation of the same name.

“I never thought of being anything but a farmer,� Karcher told The Times in an interview several years ago. That plain-speaking approach is typical for the big, blustery man who dropped out of school, then went on to make a name as Orange County’s Hamburger King.

It all began in Upper Sandusky, Ohio, where Carl Nicholas Karcher grew up as one of eight children of German parents. Admirers point to his Depression-era childhood as evidence that Karcher learned firsthand the value of a hard day’s work. Karcher dropped out of school after eighth grade to work on his family’s 300-acre farm.

When an uncle asked Karcher, then 20, to move West to work in his Anaheim feed and seed store, Carl took him up. He started at $18 a week. In 1939, he married Margaret Heinz--a staunch Catholic, like himself--and got a job wrapping and delivering bread for a bakery.

Once married, Karcher decided to strike out on his own. In 1941, he borrowed money to buy a hot dog push-cart and set up shop in what is now Los Angeles’ garment district while he continued to run his bakery route. The single cart was soon parlayed into three run by Karcher and his wife, who stood underneath bright red umbrellas selling hot dogs at 10 cents apiece.

Just for Effect

Within four years, Karcher had quit the bakery business and added hamburgers to his growing chain’s menu. He did well with a one-third pound, 49-cent burger called the 49er and gradually expanded his business after returning from a 19-month stint with the Army.

The first Carl’s Jr--named after Carl, but the “Jr� was added for verbal effect--was opened in 1956. At about that time, younger brother Don Karcher asked to join the company and started at the bottom rung, washing dishes in the kitchen.

Growth of the chain came slowly because Karcher was opposed to franchising and going public. But eventually, Don--by now out of the kitchen and into management--convinced Carl that Karcher Enterprises had to grow if it wasn’t to be gobbled up by larger competitors.

The company went public in 1982 and signed its first franchise agreement two years later.

At the time, Karcher displayed the staunch paternalism that friends say is characteristic. The father of 12, he gave each of his children 67,500 shares worth about $1 million when the company went public.

According to the company’s last proxy statement, Karcher received a salary of $436,544 in fiscal 1987 and owned 5 million shares of company stock. The company grew steadily until the early 1980s, when an overly aggressive expansion program and hard times in the restaurant industry caused Karcher Enterprises to close 20 company-owned restaurants and abandon plans to become a nationwide chain.

The company launched an austerity program that included a series of layoffs and tossed out several unsuccessful menu items. By late 1986, the company had gone “back to basics� by emphasizing burgers, Cokes and lower prices--and was on its way to recovery.

Today, the company has 449 restaurants in four states. Earlier this week, Karcher Enterprises reported record earnings and sales for fiscal 1988, posting a $16-million profit for the year after losing $7.1 million in fiscal 1987. The fiscal year ended Jan. 25.

Karcher is proud of the company and its growth. His trademark is keeping a pocketful of free coupons for Carl’s Jr. burgers in his pocket, and he hands them out to just about everyone he meets.

A self-made man with an enormous ego, Karcher likes publicity and attention. He regularly appears in the chain’s commercials. He described at length how the company got started in “Making It Happen. The Story of Carl Karcher Enterprises�--a 143-page book published by his company and that is handed out to VIPs who visit the company.

Hard Worker

These days, Karcher is chairman and chief executive, but he largely has stepped out of the day-to-day operations. Instead, he spends his time traveling around the chain’s units, delegating to his officers and involving himself in industry affairs and philanthropy.

“He’s in there every day, very much aware of what’s going on. He can tell you the gross of every store--who’s losing and who’s making money, how much they paid for land in 1939,� said one corporate insider. “He’s got the kind of mind that can click out those figures.�

A charismatic, likeable man, Karcher is a hard worker, who insiders say is the driving force behind the company’s success. He rises at 4 or 5 a.m. He starts every day by attending mass at St. Boniface in Anaheim, then goes into the office. Four out of five days a week, there’s a civic or charity event in the evening.

Those who know Karcher said he’s an affable, jovial man devoted to his business and his family. “He’s very powerful--a big, German farmer type of guy who’s not intellectual,� said one former employee. “He’s a hail fellow, without pretenses, who has sort of an Abe Lincoln background.�

Brother Donald, 60, is younger, slighter, with a milder personality and, by all accounts, the complete opposite of his brother.

He has been the company’s second-in-command, running day-to-day operations for eight years. But unlike Carl, Don is rarely heard from. He’s soft-spoken and shies away from the press at official functions, leaving it to his older brother to draw the limelight and the attention.

“He’s never made a point of competing with his brother on psychological terms,� said the company insider. “He started off as his brother’s employee and is still his brother’s employee. He runs the company, but as Carl’s proxy.�

A key to both brothers’ personalities is a strong attachment to their closely knit families and flag-waving patriotism. Carl has worn an American flag on his lapel and for years has driven only Cadillacs because they are American-made. Three of his brothers (including Don) and two sons are employed by Karcher Enterprises or own franchise operations, and his wife is corporate secretary.

The government’s insider trading lawsuit cites instances of Karcher advising his family, loaning his children money and meeting frequently with family members.

According to acquaintances, Don and Carl confer several times a day and live within doors of each other in Anaheim.

Known for Contributions

Carl has a large, unpretentious home within walking distance of his firm’s headquarters. He has enlarged the home to accommodate his family and their children--a mob of about 70--during the holidays. There’s a second family home in San Clemente that he keeps mostly as a retreat.

“If I had to guess what he’d do with more time, it would be spend more time with his family,� said Merritt Johnson, president of United Way of Orange County and a close friend of Karcher.

The reason there isn’t more time is that Karcher is well known for his contributions--in money and time--to literally scores of political and social causes. Johnson said that he has donated millions to the United Way over the years. He has provided funding to the Lestonnac Free Clinic in Orange and to the Providence Speech and Hearing Clinic in Orange. The list goes on.

“He’s one of those people who has trouble saying no. We’ve talked about how much is humanely possibly, and he spreads himself too thin,� said Johnson. “He recognizes that sharing his wealth, sharing his influence truly changes the lives of people who need it, and that gives him great satisfaction.�

He was unable to say no this month to the Reagan Presidential Library Committee, which received a $100,000 donation, for which Karcher and his wife met with the President and others at Orange County developer William Lyon’s estate.

A staunch Republican, he is equally generous with his support of what he considers the right political causes. Several years ago, Karcher was honorary chairman of the campaign for arch-conservative John G. Schmitz in the 40th Congressional District Republican primary.

Recently students at the University of California at Irvine unsuccessfully protested the addition of a Carl’s Jr. restaurant on campus because of what some view as Karcher’s opposition to gays, women and minorities.

Paradoxically, one of the few criticisms heard about Karcher also involves his treatment of people--his employees.

One former employee recalled how Karcher Enterprises rebuffed his suggestion that the company embrace an increase in the minimum wage and legal restrictions on polygraph exams for private companies.

“It’s a problem of the restaurant industry,� the ex-employee said. “But they really have a (unfair) way of dealing with people--like they’re a bunch of galley slaves. They have the young kids in a low-wage business, and they’re not an innovator in terms of giving scholarships or things like that. In terms of what they do for their own people, it’s like 18th-Century capitalism.�

Most, however, recall Karcher’s support of charities, and they characterize him as exemplifying the company credo.

The framed scroll describes how customers should be treated and food prepared, then concludes: “Personal integrity is the primary qualification for successful management.�

WHO’S WHO

The U.S. Securities and Exchange Commission lawsuit accuses Carl N. Karcher, his brother and some members of his family of exchanging non-public information about a sharp earnings drop at Carl Karcher Enterprises in October, 1984. Before the information was made public, the government says, some family members sold company stock or bonds and avoided losses totaling at least $310,000. The defendants have denied doing anything illegal.

Here is a partial family tree that includes those family members and relatives named in the lawsuit, their occupations in 1984 and the amount of losses they avoided, according to the SEC. Also named in the lawsuit is the company’s general accounting director Alvin DeShano, who is accused of using non-public information to avoid a loss of at least $9,367.

Carl N. Karcher and his wife Margaret M. Karcher. He is chairman of the board of Carl Karcher Enterprises; she is a company director. They live in Anaheim and have 12 children. The lawsuit charges they directly or indirectly conveyed information to some family members, but there is no accusation that they sold company stock themselves to avoid losses.

Carl Leo Karcher, a son and vice president of manufacturing and distribution at Carl Karcher Enterprises. The government said he learned of the earnings report at work before it was made public. Sold bonds and avoided losses of $8,000.

Margaret J. LeVecke, a daughter. Sold stock and avoided losses of $74,750.

Jerome Karcher, a son and associate pastor at St. Norbert’s Church in Orange. Sold stock and avoided losses of $55,000.

Catherine Karcher-Everly, a daughter who operated a catering business, and her husband Daniel, sold stock and avoided losses of $25,625.

Barbara Karcher Garrett, a daughter, sold company stock, avoiding losses of $46,373.

Son-in-law Donald E. Fergus Jr., who is married to the Karchers’ daughter Janelle E. Fergus. She is not named in the lawsuit. Donald Fergus, an attorney, is a member of the law firm of Holden, Fergus & Celio, the senior member of which is director and general counsel for Carl Karcher Enterprises. Donald Fergus sold company stock and avoided losses of $46,373.

Donald F. Karcher, Carl’s brother is president of Carl Karcher Enterprises and lives in Anaheim with his wife Dorothy Karcher. The lawsuit accuses him of telling his wife, daughter and son-in-law about the earnings report and accuses his wife of passing on the information to her sister and, indirectly, her husband. They are not accused of selling any securities themselves.

Doneta Ann Thomason, the daughter of Donald and Dorothy Karcher, was employed in 1984 at the payroll department at Carl Karcher Enterprises while her husband David R. Thomason was employed as a manager of a Carl’s Jr. franchise in Orange County. Sold stock and avoided losses of $34,000.

Rosemary Bruns, the sister of Dorothy Karcher, lives in Ohio, with her husband Williams T. Bruns. Sold stock they owned or controlled and avoided losses of $11,468.

Main story, Part I, Page 1

CARL KARCHER ENTERPRISES AT A GLANCE

Carl Karcher Enterprises in Anaheim owns or franchises 449 Carl’s Jr. restaurants in California, Arizona, Nevada and Oregon. On Sunday, the company announced its purchase of 13 Los Angeles-area Wendy’s restaurants for $3.4 million in cash from a Wendy’s franchisee. Last week, Karcher signed an agreement with Friendly Corp. of Osaka, Japan, to introduce its fast-food hamburgers to Japan, with at least 30 Carl’s Jr. restaurants to open during the next five years in the Osaka region.

1988 1987 1986 1985 Revenue (millions) $370 $317 $327 $335 Net income (millions) $16 -$7.1 $5 $11.6

Assets $277.8 million (Nov. 2)

Employees 11,900

Shares outstanding 10.7 million

12-month price range $22.125 - $9

Book value $9.26 per share (Nov. 2)

Thursday close (OTC) $15.50 - $.875