The Commerce Department's Economic Development Administration has signed an agreement with a Washington area entrepreneur to provide what amounts to a 22-year, $2.9 million loan to one of his companies at a 2 percent interest rate.
Besides saving the government from having to write off its repayment as guarantor of a defaulted loan, the agreement appears to benefit Jack R. Taub, the entrepreneur who engineered the original loan, and the Readers Digest Association, which last month became Taub's business partner.
Among other things, the agreement that was signed last week by EDA officials and Taub and his brother Bertram forestalls any claim by the government against a home computer network called The Source. It is this potentially lucrative asset that the Readers Digest Association believed it was acquiring when it bought 51 percent of the stock of a company called Source Telecomputing Corp. in late September. The ownership of the Source is the subject of a legal dispute, however.
The concept of the Source was developed by another company now controlled by Jack Taub called Digital Broadcasting Corp. In 1978 Taub persuaded EDA officials to provide a 90 percent guarantee on a loan to Digital Broadcasting Corp. EDA, which ostensibly exists to channel money into job-creating enterprises, became involved because the company agreed to set up a manufacturing facility in an inner-city location.
DBC later defaulted on the $6 million loan. The government paid $3.2 million to the bank which made the loan under its guarantee. According to the government, the loan was secured in part by a security interest in The Source. The security interest was transferred to the government.
In exchange for a promise by the Taubs to pay $300,000 of the $3.2 million by Nov. 21, and subject to a host of conditions, the EDA agreed to allow DBC to repay the remaining $2.9 million balance "at the rate of 2 percent per annum" under a schedule that provides for minimum annual payments of $50,000 beginning in 1982, with minimum payments rising to $100,000 by 1993. The agreement calls for DBC to pay either the minimums or 10 percent of its net operating profits after taxes. DBC is currently virtually dormant.
"The government gets a good deal," said Taub. "They get 100 cents on a dollar and get their money back faster if I'm able to do something with the company."
Jack Taub guaranteed the payments with a pledge of stock in two companies, including whatever stock he owns in DBC. A former partner is claiming in court to own 31 percent of DBC's stock which Taub contends he purchased. Taub also has pledged a 49 percent interest in STC as assurance to the government, but Readers Digest may have a prior claim to that stock under certain circumstances.
"The agreement appears to be a Readers Digest protection act," said Michael Nussbaum, an attorney who represents Taub's former business partner, William Von Meister, who developed the concept of the Source. Von Meister claims he still owns a 31 percent block of DBC stock and that The Source was improperly transferred to STC. Taub disputes both points.
EDA officials, who had refused to disclose the details of the agreement with the Taubs and who so far have not responded to a request for disclosure under the Freedom of Information Act, also refused to comment on the agreement after a copy was obtained by The Washington Post from another source.
"No comment," said a spokesman. "When things get into litigation, we clam up."
Although the interest rate on the $2.9 million debt is extraordinarily low -- the prime rate is now 14 1/2 percent and the original loan carried an interest rate of 2 percent above prime -- banking sources said it was not unheard of to treat a bad debt in the fashion of the EDA-Taub agreement. Interest on such debts is sometimes written off in an attempt to recover the money.
"The question is to work out some kind of reasonable solution where you recover something rather than nothing," said one banking official. "While it sounds like they're giving it away, they already did that. They already made their mistake with the original loan."
According to documents on file in federal court, Taub read about Von Meister and his plans for Digital Broadcasting in 1977 and called Von Meister offering to help raise money for the firm. Among other things, Taub said he told Von Meister he probably could raise money from the government.
Taub previously had been involved in an EDA direct loan to a Washington-based company called Percy Williams that was set up to be a Washington area supplier of prewrapped gift boxes marketed by a Taub firm. "I didn't go to EDA for the loan -- that was all set between EDA and Percy Williams," said Taub. Taub said that EDA officials introduced him to Williams, who once worked for the agency.
As a supplier to Percy Williams Ltd., Taub's company received more than half of the funds almost as soon as the loan was made in exchange for having guaranteed delivery. Percy Williams Ltd., to which one of Taub's companies was supposed to provide management assistance, defaulted on the loan and the money was never collected.
"It was his loan, his business," said Taub. "We couldn't make him do anything. We couldn't do anything but advise," he said. Williams has attributed the failure of the business in part to problems with Taub's company.
When Taub began seeking a loan or loan guarantee for DBC, he began in Washington.Those efforts later took him to the Philadelphia regional office of the EDA before he finally ended up dealing with the EDA's Atlanta office, securing a government-guaranteed loan from North Carolina National Bank.
DBC of North Carolina opened a manufacturing facility, which has since closed, in an inner-city area of Charlotte.
Taub took control of DBC's operations from Von Meister in October 1979, claiming that Von Meister had drained the company's resources through sloppy management. Through a series of moves, The Source ended up in the hands of STC. Taub was quoted in Business Week in September saying that STC was reasonably current in its payments to contractors. In late September, when Readers Digest acquired 51 percent of the stock of STC, however, the company had approximately $3 million in debt.
That was the amount that Readers Digest paid to take over what a Readers Digest official described as a foundering company.