PuzzleMasters Ready to Test Stock Game by Going Public : Contests: The company, which runs mail competitions with cash prizes, is seeking to raise $2 million.

PrizeMasters is an obscure Burbank company that runs puzzle contests such as “Animal Trivia Safari,” which challenges paying participants to “Track Down Your Share of $15,325 Total Cash Prizes” by identifying animals from pictures and finding the names of the animals in a grid of letters.

Now the 3-year-old company is playing another type of game--going public. PrizeMasters is offering 333,333 units--consisting of one share of common stock and two warrants each--for $6 a unit, in its first stock offering that could raise $2 million for the company.

Money raised in the offering will be used to increase the size and frequency of the company’s contests, expand its customer base and start a new division that will develop television game shows, according to documents filed with the Securities and Exchange Commission.

Some of the principals behind PrizeMasters have had unusual backgrounds. According to the SEC filing, PrizeMasters’ vice president, co-founder and a director is Avram Freedberg, a Stamford, Conn., owner of several direct-mail marketing companies who was recently under federal indictment for the transportation of pornography.

Freedberg and his former company, Consumers Marketing Group Ltd., which also conducted business in Connecticut as Dirty Dick’s Dynamite Discount Den, Expose Theatre and Private Showcase Video, was indicted in 1988 by the U.S. Department of Justice for mailing obscene videos and magazines. Freedberg said the charges have since been dropped in exchange for his agreement to stop selling pornographic material. Freedberg is still in the mail-order business, selling more conventional films and instructional videos.

Another PrizeMasters director is Barry Goldwater Jr., the former California congressman who lost a Senate bid in 1982.

PrizeMasters markets contests such as “Scrambled States,” “Hidden Hollywood Trivia” and “Animal, Vegetable and Mineral,” in newspapers and magazines, on matchbook covers and by direct mail and pays out cash awards of up to $10,000 to the winners. In contrast with lotteries, which are based on luck, puzzle contest players compete based on their ability to complete series of word puzzles that grow more difficult as players are eliminated.

Each PrizeMasters contest has several phases, and each phase has entry fees ranging from $1 to $10. The contests can last up to two years, and a contestant could spend $100 in total entry fees, the company said. The size of cash awards depends on the number of final winners and how much each of those winners paid in entry fees. A player who pays $1 initially might compete for a $500 prize, while a $5 entry fee might qualify for a $5,000 prize.

Since it was founded in November, 1986, the company says, it has started eight contests and completed two, paying out more than $57,000 in prize money. After recording a loss in its first full year of operation, PrizeMasters earned $65,567 on $2.3 million in revenue in 1988. In the first half of 1989, it earned $108,117 on revenue of $1.2 million.

PrizeMasters says it reaches 7.5 million homes through direct mail, and its puzzles appear on more than 60 million matchbook covers a year. Most of its contestants are lower- and lower-middle income Americans, ages 45 and up, the company said.

PrizeMasters was co-founded by puzzle-buff-turned-businessman Steven Faber, 45, who is chairman, president, chief executive, chief operating officer and chief financial officer, and Freedberg, 42.

Faber designs the PrizeMasters contests using computer software he developed, while Freedberg, who remains based in Connecticut, oversees the financial and marketing operations.

Faber would not answer specific questions about the business while the stock offering is in registration. RAF Financial in Denver, PrizeMasters’ stock underwriter, said it expects the offering to be completed in February.

Faber did say, however, that he got the idea for PrizeMasters because he had won several contests run by other companies and had worked for another, now defunct puzzle contest firm. He and Freedberg met in 1986 when Faber was seeking investors to start his own puzzle contest company. Freedberg said he was looking for new investments in the mail-order business when he was introduced to Faber by a mailing-list broker.

Faber and Freedberg each initially invested $100,000 in PrizeMasters. After the offering is completed, each will own between 31% and 39% of the company’s stock.

Attempts to contact Goldwater, 51, were unsuccessful. According to the SEC filing, Goldwater has been “self-employed as an investment banker and business consultant” since leaving the House of Representatives in January, 1983. Goldwater became a director of PrizeMasters last June, Freedberg said, after serving as a consultant to Freedberg’s mail-order businesses.

When the offering is completed, the 17 investors who now own PrizeMasters’ stock will own between 66% and 84% of the company’s stock. If the maximum number of units aren’t purchased in the offering, the SEC documents say, PrizeMasters’ stock might trade on the “pink sheets,” where low-priced, thinly traded stocks that receive little attention from large investors are listed.

Puzzle contests date back to the early part of the century and their heyday was in the 1930s and 1940s, said David S. Robinson of Los Angeles, a retired aerospace engineer who has competed in puzzle contests for 42 years and has written a book on the subject. Although a small core of puzzle enthusiasts still enter contests regularly, the business is dogged by a somewhat shady reputation because “a lot of bad people have gotten into it over the years,” Robinson said.

Sham outfits have been known to collect entry fees, then disappear, never distributing the prize money, Robinson said. Others would mail faked results, featuring non-existent winners, he said.

Because of such scams, federal and state laws have been adopted to regulate these contests. In California, companies must disclose how many entrants it expects for a contest based on the number of entrants in previous contests; how many contestants are expected to solve each puzzle, and how much a contestant can expect to pay in entry fees by the time he reaches the final puzzle.

Despite these laws, abuses occur. For example, puzzle contest operator Direct American Marketers Inc. of Irvine was the target of a civil suit filed in 1988 by the San Diego district attorney’s office in San Diego Superior Court. The suit alleged that the company violated puzzle contest laws and was misleading in its promotional material. That suit has since been resolved, a company spokesman said.

In addition to a handful of small companies across the country that market puzzle contests, many contests are run by individuals out of their homes, Robinson said. One such individual is Frank Rubin of Wappingers Falls, N.Y.

“There’s the potential to make serious money in this business,” Rubin said. The key, he said, is a mailing list that targets people who are known to be regular mail-order buyers and would therefore be more receptive to entering contests by mail. Such a list can also be used to sell books, videos, jewelry or other products by mail, Rubin added.

A list can also be rented to other mail-order companies. In the SEC filing, PrizeMasters said it took in $140,724 in rental fees during the first half of 1989, and it expects to expand its list by targeting a broader range of consumers.