Barry Minkow, a whiz kid entrepreneur who built a small carpet-cleaning business into a multimillion-dollar enterprise, needed money desperately last year.
So he turned for help to 56-year-old Jack M. Catain Jr. Their relationship, however, turned into extortion, in the words of a federal prosecutor. In fact, law enforcement authorities have long speculated that Catain is a major organized crime figure, and on Nov. 7, he was convicted in a counterfeiting scheme.
Now Minkow, 20, wants to raise money in the stock market. His Reseda-based ZZZZ Best Co. hopes to gross $11 million to $13 million in a securities offering next month that is supposed to remedy the fast-growing firm's chronic cash shortage--and allow for more expansion.
Raising money in the stock market is likely to be a lot cheaper than working with Catain, if Minkow's assertions in court papers are true. Minkow contends that Catain arranged loans for him at interest rates of 2% to 5% a week and also was to get a share of the profits for jobs he helped finance.
"My company was in desperate need of financial assistance," Minkow says in court papers by way of explanation.
Suits Disclose Deals
Minkow's dealings with Catain were disclosed in lawsuits filed by Catain, who claimed that Minkow owed him money for arranging financing for ZZZZ Best. Catain denies being a mobster or an extortionist, and also denies collecting any interest from Minkow.
Minkow is the much-publicized chairman, president and founder of ZZZZ Best, which he started five years ago. He has since gained national exposure for turning his carpet-cleaning business into a public company with millions in sales.
He gives lectures on business, has written a book about his life, and in March, 1985, even received a commendation from Mayor Tom Bradley, who said Minkow "has set a fine entrepreneurial example of obtaining the status of a millionaire at the age of 18. . . ." His publicity agent churns out press releases about Minkow's gifts to charity, his decision to impose drug testing on his employees and other activities.
ZZZZ Best's preliminary prospectus, along with mentioning the dealings between Minkow and Catain, portrays a company that has grown fast and is extremely profitable. For its first quarter ended July 31, it earned $896,000 on sales of $5.4 million. A year earlier, it made $131,000 on sales of $638,000.
For the year ended April 30, earnings were $946,000 as sales rose fourfold, to $4.8 million.
Minkow was paid $300,000, plus $20,000 worth of company-owned car use, for the fiscal year ended April 30. The prospectus also says that in May, ZZZZ Best signed a three-year agreement worth $520,000 with a financial consultant, whose duties were not disclosed. Minkow's securities lawyer, Mark Moskowitz, said the consultant is Richard Charbit of Beverly Hills, and that he will get $220,000 in cash and the rest in stock.
Meanwhile, ZZZZ Best has taken on a lot of debt. The Oct. 23 offering document said the company had $6.2 million in short-term debt and $933,000 in long-term debt, compared to $3.1 million in shareholders' equity.
And the preliminary prospectus notes that Minkow's company got 86% of its business from a single source during the first quarter ended July 31, contrasted with 45% during the preceding year. The company says that this big customer, a Van Nuys-based independent insurance appraiser called Interstate Appraisal Services, is not obligated in any way to keep the work coming.
ZZZZ Best, however, apparently would rather take that risk than turn away Interstate Appraisal.
"You got to get into business somehow," said Robert Grossman, director of West Coast research for Rooney, Pace Inc. of New York, which is underwriting ZZZZ Best's securities offering. Grossman added that, after the offering, ZZZZ Best "will be in a very attractive situation."
The offering will not be affected by sanctions imposed on Rooney, Pace last week by the Securities and Exchange Commission in connection with charges that the investment banking firm defrauded customers in a 1981 underwriting. The sanctions were stayed pending appeal, and the ZZZZ Best offering would not be blocked in any case, an SEC lawyer said.
ZZZZ Best went public in January by merging with a Utah shell corporation, and now has 7.8 million shares outstanding. Minkow owns 77%, according to the prospectus, and will own 55% after the offering of one million units. Each unit consists of 3 common shares and one warrant. The stock is traded over the counter.
In response to allegations in Catain's suits, Minkow says in court records that he met Catain around June, 1985, and that he agreed to pay Catain a percentage of the profits for jobs that Catain helped finance as well as make interest payments on the loans. Minkow's statement does not say what percentage of the profits Catain was to receive, but Catain says in court papers that it was half.