Longform

IT'S A JUNGLE GYM OUT THERE

part 1 of 2

On a recent sunny day in the beginning of March, Donald Mack relaxes in his Greenwood Village house, a brick-and-wood affair that sprawls over a couple acres off Belleview Avenue. An Arabian mare moves slowly in the side yard (the stallion is kept in Parker). A red Ferrari sits under the garage roof. His other vehicles--a 1937 Cadillac LaSalle, a 1963 Corvette and a Mercedes 560SL--are tucked away.

Inside, hung behind Mack's desk, are two Japanese wood-block prints dating to the 1800s. "They're supposed to be by someone famous," he says. "I don't know. I picked them up at a gallery about a year ago." To his left sits a bronze sculpture titled "Sport of Kings" that depicts four mallet-wielding polo players astride their straining mounts.

In front of him, on the top of Mack's desk, are models of a Ferrari and a Porsche Carrera, both cherry red. Mack wears a purple designer shirt and pressed black pants. His gold watch catches the light. Ostrich-skin boots poke out from beneath his pant cuffs.

Donald Mack, transplanted New Yorker, 37 years old this summer and clearly enjoying all the trappings of success, is in the lucrative business of...child care?

Until recently, that is. Five months ago Mack was booted from his position as chief executive officer of Child Care Centers of North America Inc. The reasons for Mack's departure range from what his critics describe as lousy and deceptive business practices to Mack's showy displays of wealth in a business that frequently pays its help less than $5 an hour.

Mack, who founded the company and who continues to own a bit over one-fifth of it, replies that he is a victim of sneaky corporate maneuvering. He has not taken his pink slip without a fuss. Early on he moved to recover the company by rounding up support among its shareholders, and he still says he wouldn't mind bouncing CCCNA's current board. He says he is preparing a lawsuit against Child Care Centers for canning him and, he adds, for allegedly spreading malicious information about his business tactics.

"This was kind of like a child of mine," Mack explains. "I spent four years of my life developing this. For someone to snatch this from under your arms and say, `Now I'm keeping it' and claim his successes as your own--it really made me mad."

Current CEO and president Cary Polevoy, a former securities analyst for the now-bankrupt and discredited Blinder Robinson & Co. penny-stock firm who engineered the coup that deposed Mack, prefers a different industry metaphor to explain Mack's actions. "I liken it to a ten- or eleven-year-old mad at a friend," he says, "who instead of taking his toys home decides to destroy all the toys in the house."

Both men insist that the high-level spat has not affected the quality of child care at the company's centers. (A recent survey of centers by 5280 magazine evaluated a CCCNA facility and found it average.) But the fracas has thrown a spotlight on the company's current financial woes, which are significant. And it has amplified what recently had become a low rumble of discontent among those involved with the company.

To all outward appearances, CCCNA is a phenomenally successful concern. Since 1992 it has exploded from literally nothing to an ever-expanding company that owns and operates fourteen centers that plan the days of thousands of children in the Denver area. The company is pursuing mergers with, or acquisitions of, corporations that do everything from producing videos to cashing checks to staging musical revues. At one time it owned more than $1.5 million worth of real estate in the metro area.

But in the process, Child Care Centers cut a wide swath through Denver's financial and child-care communities. It is a company built almost entirely on debt and, so far, unfulfilled promises. Left in its wake are nervous and angry investors who say they either were misled or simply cheated. Some of them fear that CCCNA is teetering on the brink of a spectacular financial failure.

On one level, the story of Don Mack, Cary Polevoy and Child Care Centers of North America represents nothing more or less than the upheavals that occur dozens of times every day in the world of start-up business, and it's a reminder of how those businesses are shaped by the personalities of their founders. Yet it also provides a cautionary tale for what promises to be the future of the private child-care business.

Analysts predict that as the number of working parents grows, and as the spending capacity of the government shrinks, the business of watching kids is poised to swell. But for it to do so will require the kind of big bucks and money-maneuvering that only suits and deal-makers can provide. The story of Child Care Centers of North America--whose founders had everything to do with money and not a lot to do with child care--illustrates what can go wrong when the high-flying culture of capital runs into the culture of Crayola.

If a deal-maker had to construct the perfect pitch to sell a potential investor, private child care might be it. The concept is warm and fuzzy. And although anyone who works in the field and still makes only pennies more than minimum wage may find it difficult to believe, it has become big business.

Early last year, for instance, La Petite Academy, the country's second-largest child-care provider, was purchased for $170 million. The year before, the company enjoyed revenues of about one-quarter of a billion dollars. Experts calculate the industry generates $20 billion annually.

The juicy numbers play out locally as well. In 1986 Colorado supported 688 child-care centers, according to the state's Office of Child Care Services. By the beginning of 1994 that number had exploded to just under 1,000. Six hundred of those are in the metropolitan area alone.

Even with the industry's recent spectacular growth, Jeff Aarons, a stock analyst who follows child care for Delaware Bay Co. of New York, predicts that the business will expand even more. As evidence, he points to the increasing number of children needing care while their parents work. "Simply from a demographics standpoint," he says, "the numbers are there."

The future of the business most likely lies in far-flung chains--the KinderCares, La Petites, Children's Worlds and other future McDonald's of the child-care world. The reason is that, while national and regional chains already seem to be everywhere, the vast majority of child care still takes place either in private residences (3,700 licensed homes in the Denver metro area), or in individual mom-and-pop centers operating on a shoestring.

Many of those centers are caught between ever-increasing government restrictions and a business that has never enjoyed hefty profit margins. More and more often, owners are looking to bail. "Every year there are more government regulations; every year things get more expensive," says Mary Jane Murdoch, who operates four centers, including one at the University of Colorado Health Sciences Center. "The temptation is there to just say, `No more.'"

That leaves a wide opening for companies looking to expand by snapping up small centers. "The future," summarizes Aarons, "lies in big companies. Standardized care is the way to go."

Despite the seemingly unbeatable appeal of the raw numbers, the business is not a financial gimme. The government pays only a fraction of the actual cost of child care when families on welfare place children in private facilities. Tuition increases to offset those losses can quickly scare off parents. A recent industry association survey found that 75 percent of centers nationwide either lose money or break even.

"You almost have to have a charity mentality to run these centers," says Harold Arnold, who until recently owned part of the Children's Enrichment chain of centers in the Denver area. "If we had all the money I made in child care, it wouldn't buy us two or three lunches."

Don Mack is the first to admit that he has certain business skills. "I'm an entrepreneurial kind of guy," he says. "I have a knack for selling and raising money. I've been in a lot of different businesses." For example, he adds, "I've got a truckload of adjustable beds I'm selling right now."

He says he developed the art of the deal as early as his high school days in Nyack, a suburb of New York City. "Even back then I was buying and selling cars," Mack says. "I would wholesale cars out of New York City. I would make 500, 1,000 bucks a car. When I was sixteen years old, I had five cars less than a year old."

He accompanied a friend to Colorado the day after his high school graduation in 1975. Over the next several years he dabbled in everything from restaurants to roofing to antiques. (Several lawsuits filed in Arapahoe County District Court suggest that loans he took out during this period were not always paid back on time.)

In 1988, after one of his restaurants floundered, he recalls, "I thought, I really need to get into something more stable. So I got my [securities] broker's license." After only a year of working for a couple of local brokerages, however, he broke off on his own because "I got tired of raising money for other people's deals."

In late 1989 Mack was hired as a consultant by two Colorado Springs child-care centers looking to expand into a regional business and then go national. "They were looking at KinderCare and La Petite and seeing big things," he recalls.

He raised about $50,000 for the venture from private investors. But in the summer of 1990 the deal collapsed. The reason, Mack explains, is that the partners "didn't quite understand what it takes to accomplish these things."

Zan Smith, who owned one of the strings of centers in Colorado Springs looking to expand, and who became the first president of what would later be known as Child Care Centers of America, remembers it differently. He says he came to believe that child care and high finance just didn't mix.

"After working for them for six months, I just decided I didn't like the feel of how things were going," he explains. "We felt that [Mack] was going through the money without doing anything with it. Most of us were small-business people used to using money to pay the bills. And every cent that was raised was going out the door in office costs and salaries."

Although the Colorado Springs deal fell apart, Mack walked away with a company name, Child Care Centers of North America, and he was convinced there was a huge opportunity to make money in the kid-watching business. "My concept," he says, "was simply to find mom-and-pop operators who get a high degree of burnout in the industry, and they're almost begging you to please take their center away." Once the project was together, CCCNA would go public, the company's shares would be vigorously traded and the original investors would make a bundle of money.

The idea, he discovered, was not hard to sell. "When you take a company public, you've got to have some pizzazz," Mack explains. "You've got to have a story to tell, or why else would people invest? The child-care industry--now that's a positive story to tell."

Four years ago Cary Polevoy was running a not-very-busy public-relations company after a stint as a securities researcher at the ill-fated Blinder Robinson brokerage house. In the spring of 1990 he hired Don Mack as an account executive. Although Mack almost immediately began pitching him on the idea of a new child-care chain, Polevoy says the idea grew on him slowly.

Over time the vision of a new child-care giant came into focus. Polevoy spent more and more time on the project until, in late 1990, he gave up his public-relations company altogether and became chief financial officer of Child Care Centers of North America.

As Mack seriously began setting about raising money for the project, Polevoy, who had established the securities-research department at Blinder Robinson, tagged an acquaintance from the penny-stock brokerage, Harvey Cohen, to join them. Together the three men raised about $110,000. And they began shopping.

The company sprouted like a teenager during adolescence. A letter of intent to purchase six metro centers operating under the name Children's Enrichment was signed in early 1991; the deal was completed in January 1992. (Mack claims he brought the deal to the table; Polevoy says the deal "never would have been done without my involvement.")

The company snatched up other deals in quick order. A center called Creative Hands was purchased in November 1991. Regatta Day Care Center joined the fold three months later and, several months after that, Happy Day Learning Center and Tower Road Learning Center signed up. In the summer of 1992 the company added two "Before and After" centers, housed in public schools. Today it operates fourteen facilities.

Despite CCCNA's stunning growth, not everyone jumped at the chance to join the company. Lee Thomas, an Aurora dentist who owns a half-dozen child-care centers in the Denver area, says Mack approached him in 1991 and talked to both him and Polevoy over the next several months.

Thomas says he was left cold by what he describes as Child Care Centers' big-money attitude. "I felt that their primary focus was corporate, as opposed to quality care," he recalls. "As we had discussions, they liked to bring up scenerios of La Petite and the stock offering, and how much money people could make."

Another center owner, who refused to sell and who asked to remain anonymous, agrees. "They made me an offer to purchase the company--and they never set foot in one of my centers. For all the talk about good, quality child care, they just liked my balance sheet."

Thomas says the bad vibes were confirmed after he declined to sell his centers to Child Care Centers of North America. Soon after he backed out of joining CCCNA for good, he recalls getting a call from an acquaintance who informed him that Polevoy promised to "bury" Thomas and his centers. ("That's absurd," Polevoy says. "We don't want to bury anybody.")

The emerging daycare company did not stop with merely adding more sites. To qualify for listing on a publicly traded stock exchange, a company must have a minimum amount of assets on its books. In an attempt to grow more quickly and meet the requirements, Mack went on a real estate buying spree. The company quickly absorbed a half-dozen properties in the area, he says, including a 21,000-square-foot office building and an empty lot on Arapahoe Road.

Other companies, some of which had only loose links to child care, were courted by Child Care Centers as well. JSP Productions, a video company, was approached for a merger, as was a Denver-based baby-stroller manufacturer. CCCNA also began negotiations aimed at acquiring Branson Entertainment, a Scottsdale, Arizona, company that intends to stage a production of Forever Plaid in Branson, Missouri, and Check-Mart, a string of check-cashing outlets.

Each time Child Care Centers of North America purchased something, it turned to the same low-cost financing. The company offered little or no cash, but promised stock from when the company began trading publicly, which Mack and Polevoy said would be in early 1992. As a result, CCCNA rapidly ballooned in size while spending virtually no money.

Despite its cash-light acquisition approach, CCCNA soon ran into money problems. As 1992 progressed, it became apparent the public stock offering that Mack and Polevoy promised their investors would happen in the spring was not going to appear anytime soon.

By the beginning of the year the company was forced to raise more money and, in exchange, promise more stock to investors. In early 1992, Mack says, he convinced private investors to pony up another $140,000. Toward the end of the year the company scared up $600,000 more in what was described to investors as short-term financing.

The financing has turned long-term, however, and many investors remain bitter toward Mack. "He was always ready and willing to make a promise and then, promise made, boom, he's off and running," says one investor. "I don't care to do business with Mr. Mack anymore."

Another investor, engineer Gary McKay, says an acquaintance convinced him to contribute $25,000 to the short-term financing by promising high returns and the lure of lucrative stock in the company. "It was," McKay says today, "one of the worst decisions I ever made."

Like Lee Thomas, McKay says he had bad feelings from the beginning, especially about Mack. Unlike Thomas, McKay went ahead and, in November 1992, signed over his money. He says that in exchange for the one-year loan, the deal called for him to receive a piece of the company's real estate as security--something he's still waiting for.

"I naively walked away from the table without that security, with their promise to do it later," he says. To make matters worse, when it came time to be repaid, McKay claims that Mack became scarce. "I had to call him and say, `Well, Don, I'm ready to get my money back now,'" he recalls.

Today McKay, who still hasn't seen his short-term loan repaid, says he's not optimistic about the future of Child Care Centers of North America. "If these guys had stuck to the knitting and done child care, they'd be okay," says McKay. "But they're deal men, and they continuously ran around trying to do deals and acquisitions that have nothing to do with child care. They've talked about more damn deals in the past year than there are on the planet."

Mack replies that McKay lacks the fortitude to stick out his investment. "He's one of these wishy-washy investors who got nervous," he says. He adds that when McKay agreed to lend the $25,000, there was no mention of securing the loan with any real estate.

end of part 1

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Eric Dexheimer
Contact: Eric Dexheimer