IT'S A JUNGLE GYM OUT THERE
part 2 of 2
Perhaps because of the company's financial straits, Mack's lavish lifestyle began causing some discomfort in corporate headquarters. Harold Arnold, for instance, who sold Children's Enrichment to CCCNA and who remained on the company's board for a short time, says Mack's style made him uneasy.
"Sometimes you come in with champagne tastes and discover you're running with a beer-and-shot crowd," he says. Mack "just comes from a different school of business than Harold Arnold. It may work in New York, but it won't work in Colorado."
Adds Polevoy: "There were certain individuals, both in and outside the company, who had the opinion that Mr. Mack portrayed a certain image they didn't feel appropriate for someone in the child-care business."
Mack admits that his personal spending habits got him into trouble with his partners. But he brushes off the criticism. "They're self-righteous people," he says. "I have some Armani suits. I wear silk suspenders. I have nice Italian ties and shoes. So what? I've always dressed nicely, since I was sixteen years old. It's this lifestyle problem they have. Maybe because they never had it? I don't know."
Although Mack's business and personal style ruffled a number of investors, Polevoy hardly escaped criticism of his own, and some investors blame the current CEO for the company's disappointing performance. One is Tom Carey, a California money manager who helped raise CCCNA's second cash infusion in 1992.
Now, two years later and with little reason to feel optimistic that their investment will pay off, Carey says, his investors are getting antsy. "People are pissed--I can tell you that right now," he says. "It looks like Mr. Polevoy is going to take the company down the tubes, and all my clients' investments with him."
Yet Polevoy's biggest problems may come from a former employee. Early last year, CCCNA hired a tall, earnest-looking man named Rob Clauson on a short-term contract to develop corporate daycare--supervision for the children of employees of companies and other large organizations. In addition to his experience setting up similar centers, Clauson arrived at CCCNA with another important strength: He had the ear of a potentially big investor.
In July 1993, Clauson says, he pitched a well-known actor--whom he knew from setting up a center in Utah--with the idea of organizing a daycare center in a farm setting for Child Care Centers of North America. Although the two men never settled on anything firm, Clauson recalls that a $500,000 figure was tossed around as a possible investment.
Clauson says the actor seemed interested and asked him for a company financial statement, which Clauson requested from Polevoy and sent to the actor. According to Clauson, although the investor seemed impressed by the company's numbers, he noted the financial statement was not audited.
When Clauson asked Polevoy for an audited statement, however, he says it was markedly different from the one he had first been given. "The first statement showed the company very strong, with a high profit margin," Clauson recalls. "The other, audited one showed that the company was losing money every month. I mean, I was flabbergasted."
The actor backed out of the deal. Clauson called Polevoy: "I said, `Cary, you gave me stuff that doesn't make any sense.'"
Clauson quit the company last October--an action, he says, that made it all the stranger when he discovered his name listed as an executive officer on Child Care Centers of North America's application for a public stock offering with the Securities and Exchange Commission, filed six weeks ago.
"They're using my name to add credibility to the company," Clauson complains. "They're probably going to go belly up, and my name is all over that SEC filing."
Polevoy says the company is financially stable. He adds that he has never misled investors, and he insists that he has produced only one set of financial statements for CCCNA. "If Mr. Clauson says one set differed from another, I don't know what he's talking about," Polevoy says, adding, "If he would like to have his name removed from the SEC registration statement, I have no problem with that."
Nevertheless, this week Clauson filed a lawsuit against Polevoy and CCCNA. It alleges that the company was unjustly enriched by work Clauson did but was not paid for.
Although financial pressures caused some tension among the company's top officers, the partnership of CCCNA's founders didn't begin to disintegrate until the end of 1992. That is when Polevoy charges that an art deal Mack had attempted to cut intruded on the child-care business.
In February 1992, according to documents filed in Denver District Court, Mack agreed to pay $15,000, in three installments, for "540 pieces of art, both framed and unframed" from a local dealer. Unfortunately, his second $5,000 check bounced.
The dealer sued. Mack responded that the bungled deal was the dealer's fault because she had promised him that the art had a retail value of more than $70,000, when it actually was worth less.
In order to close the dealer's lawsuit--and help avoid a costly settlement payment--Mack sold the remainder of the art collection to Child Care Centers. Many of the pieces subsequently were donated to Channel Six Public Broadcasting in exchange for advertising during the station's annual art auction/fundraiser.
Mack defends the deal: "The company got a lot of television exposure, almost two years of exposure on Sesame Street, which ended up being free." Polevoy responded that, given the company's financial straits at the time, the money could have been put to better use. "My argument is with the appropriate use of the company's funds at a time when those funds could have been put to more important use," he wrote in a recent letter to shareholders.
Three months later, Polevoy charges, Mack raided the company's bank account to repay himself another old loan worth tens of thousands of dollars. Mack points out he was merely repaying himself a legitimate debt. Again Polevoy contends that at a time when the company was bouncing paychecks, was delinquent in repaying its first set of loans and was in the process of borrowing another $600,000 from new investors, Mack should not have been standing first in line.
"Clearly, the other investors should have received their money first," Polevoy says. "It was totally unethical. It wasn't as though he called the other investors and asked if he could pay himself first."
He continues: "That was really the start of our concerns regarding the longevity of the company and Mr. Mack's desire to see the company succeed versus the desire to see himself succeed."
Mack defends his commitment to child care, and adds that the blame for Child Care Centers' financial problems falls equally--at the least--on Polevoy. As the guy who handled the company's finances, he says, Polevoy hardly did a crackerjack job.
"Center directors would call me and tell me that their phone service was being cut off," he recalls. "I found out that we hadn't paid rent for three or four months to the school system, where the `before and after' programs were. Stupider yet, we hadn't even billed the school for the child care. I mean, what's going on in accounting? Hello? Hello?"
He concludes: "It's amazing how a guy can claim the title of chief financial officer and, after three years, claim that all the problems are a result of me."
Mack wrested control of the company's books from Polevoy in July. He says he discovered that "the problems were worse than I ever imagined." He claims, for instance, that the company was $90,000 behind in paying its bills. Worse, Mack says he discovered that the company hadn't paid payroll taxes for the past year. The bill to the IRS came to just under $200,000.
Polevoy replies that he never ran the checkbook in the red, and that to suggest otherwise "is patently false." As for the unpaid taxes--on which he says CCCNA is attempting to settle up--he insists he doesn't know how it happened. "Ask Don," he says. "He's the one who had the checkbook."
The animosity between the two company founders intensified last fall. Acutely aware of the company's declining cash flow, Polevoy recommended that the company's officers take a pay cut (both he and Mack were paid about $75,000 a year). Mack, he says, refused.
"Donald informed me he could not accept the reduction," Polevoy wrote to shareholders. "His mortgage payment is approximately $2,600, according to his statements and, combined with all of his other household expenses, he needed $6,500 a month to live. I asked Donald if he had considered moving into a more affordable house and he said, flatly, `no.'" (Mack hotly disputes the account; he says he readily agreed to a pay cut.)
Polevoy says he also came to believe that what he calls Mack's bridge-burning business tactics were hindering the company's growth. He claims that at least two companies backed away from merging with Child Care Centers because they refused to negotiate with Mack. (Timber Dick, general manager of one of the companies, Safeline Children's Products, which manufacturers a line of car seats that convert into strollers, says only that Mack "made me uncomfortable...")
The tension came to a head last November. At a hastily called meeting of CCCNA's directors, two members of the company's three-person board--Polevoy and his wife, Chris Bogard-Reynolds--voted to can Mack. Mack voted against the idea.
"In my opinion," Polevoy says today, "child care was not his priority. A change had to be made." (Mack responds that Polevoy is correct--that his primary job description entailed raising money to qualify for the public stock offering.)
Since then the two men have waged a war of memos for the hearts, minds and continued financial support of the company's shareholders and investors. In one letter, mailed three months ago, Polevoy wrote that ever since Mack was canned, the company has "been engaged in major damage control efforts." He added that the former CEO had demanded an outlandish severence package--including hundreds of thousands of dollars in cash, additional stock, and free child care for his son for the next three years--that could drain the company.
"What you have is someone who is suffering from sour grapes, a former CEO who is no longer getting a salary sufficient to support his $400,000 home and Mercedes Benz," Polevoy charges. "Well, I'm sorry."
Last month Mack fired back a shareholder letter of his own. In it he denied that he demanded any such severence; he says Polevoy freely offered the package to him. And he not-so-slyly implied that there were some closet skeletons among the company's current directors.
"In retrospect," he wrote, "it appears that the events created by Cary Polevoy, Chris Bogard-Reynolds and Harvey Cohen are reminiscent of what occurred in their past association with Blinder Robinson, where they were all in senior management positions."
(Blinder Robinson declared bankruptcy in 1990 after an SEC lawsuit and several shareholder judgments against the company. Two years later, its founder, Meyer Blinder, was convicted of racketeering and securities fraud. All three CCCNA directors did work for the firm; however, only Cohen has been disciplined by the National Association of Securities Dealers. In 1991 the State of Delaware fined him $9,000 and revoked his securities registration for "dishonest and unethical practices.")
Mack summarized his letter to investors (a letter that Polevoy characterizes as "libelous from line one to the last line"): "It is indeed unfortunate that your investment has been jeopardized by numerous errors, omissions and falsehoods."
Today Mack insists he has given up any thought of leading a takeover of Child Care Centers of North America. "I went through a lot of headache in November and December, thinking, `Now I've got to start from scratch.' But that's behind me. I'm onto something much bigger, worth $150 million in assets." Although he won't get specific, he says the new venture involves real estate in Las Vegas, and that he soon expects to raise $750,000 to finance the project.
For his part, Polevoy insists that he never envisioned himself as the top dog of CCCNA. "It was never my intention to be CEO of this company," he declares. "I never wanted to run it. I just came in to help and got deeper and deeper." Now that he's there, though, Polevoy says he is committed to the business.
What's the future of Child Care Centers of North America? Polevoy says he is confident of success. The company seeks outside experts to help it regain its financial balance, and Polevoy says he is pursuing mergers or acquistions with nine companies, including several video-production firms and the check-cashing chain.
But when contacted, several of the targets say they are nowhere near signing an agreement. And the one big company that CCCNA did merge with recently, Branson Entertainment, is an uncertain commodity. The corporation apparently has an option to purchase or lease a theater in Branson, Missouri, where it intends to put on Forever Plaid. In exchange for part of the potential revenue from the production, CCCNA handed over millions of shares of its stock, plus some cash it hopes to raise from the second public offering.
"We can't really figure out what [Branson] has, except some company name and some options," says Steve Ketcham, a Littleton real estate broker who sold Child Care Centers a four-acre site in Jefferson County in exchange for shares of the anticipated public offering. "Anybody can do that."
CCCNA's real estate holdings are not looking especially solid, either. Ketcham says he is on the verge of repossessing the Jefferson County site. The remainder was never very desirable, according to Miles Wynn, who says CCCNA hired him to acquire more land (and who is suing for back wages). "They didn't have anything that was prime, or even close to it," he says. "They didn't seem to understand real estate, or care, or something."
Finally, while Polevoy insists that Child Care Centers' underwriter for the public stock offering, VTR Capital Inc., is solid, some cracks in their relationship have appeared. In a February 10 letter, VTR pointed out that CCCNA's filing with the Securities and Exchange Commission did not meet its requirements, and instructed Polevoy not to use VTR's name until all the conditions were met. Even Polevoy concedes that if the public offering doesn't go through, CCCNA will spend some time in bankruptcy court.
The uncertainty has led Ketcham, for one, to draw some lessons from Child Care Centers of North America. For the moment, he says, "It doesn't appear as though deal-making and child care are very compatible."
end of part 2
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