In retrospect, David M. Owens says he may have made a mistake six months ago when he merged his company, Terminals Unlimited Inc., with Duke of Energy Inc.
"If I knew then what I know now, no way would I do it," he says, though he adds that he thinks the merger still makes good business sense.
What Owens says he knows now is the state of Duke of Energy's financial records. According to Owens they were a mess--so much so that outside accountants still haven't completed their audit of the company's 1982 books. As a result, the company's annual earnings report filed with the Securities and Exchange Commission lacks the auditors' endorsement required by law.
But the former head of Duke of Energy, Rockie Smith, says his company's books were not in the condition accountants claim.
Owens himself faces charges of questionable bookkeeping from Terminals' former chief financial officer, who quit the company after seven weeks on the job and later filed a suit charging Owens and his company with defrauding him about the financial condition of the company when it hired him.
Owens vehemently denies the charges, calling them "totally groundless."
These charges and countercharges have created a lot of confusion and attention for the 6-year-old Falls Church computer equipment firm that was a relatively little-known concern until six months ago.
The company jumped into the limelight last December when Inc. magazine declared Terminals one of the nation's fastest-growing private companies, growing at a compounded annual rate of 212 percent between 1977 and 1981.
That assessment helped attract the attention of Texas financier Rockie Smith, who was trying to turn Duke of Energy into a major computer firm. Initially a mineral leasing concern, Duke of Energy began acquiring companies that make computer hardware and software. Smith says he believed Terminals' distribution and marketing system would be a perfect complement to these subsidiaries.
Confident that the merger would also be beneficial to his company, Owens moved quickly to consummate the corporate marriage. After about seven weeks of study, Owens agreed to a stock deal that Smith and Owens said was worth $21 million. Terminals subsequently became part of Duke of Energy, a publicly owned firm whose shares are traded in the over-the-counter market.
It appeared to be quite a coup for the 44-year-old Owens, a former computer equipment salesman who started his company with $1,000 of his savings in 1976. Not only did the merger mean a handsome paper profit for Owens, but it also meant that his company would be able to go public quickly and easily in order to obtain more equity capital.
Owens said that under federal securities law, he would have had to wait for another year to sell stock to the public, because his company didn't have the three years of audited financial statements the SEC requires for new issues.
But at the time, Owens said he felt he couldn't wait that long. Terminals' credit lines had been capped by its banks because the company had just borrowed heavily for two real estate purchases. The banks had told Owens that no more loans would be possible without more equity, he explained. And without more credit, Terminals would not be able to meet all of its orders and continue to grow at its record rate.
"I went into it without a lot of research," Owens now says. "I was looking at the opportunities and relying on the fact that Smith had a CPA firm" looking over his financial sheets.
After the acquisition, Owens' accountants at Arthur Andersen & Co. began to audit Duke of Energy's books.
According to the company's financial statement filed at the SEC, Owens' accountants concluded that the accountants at Duke of Energy had incorrectly classified an earlier acquisition. "Had proper accounting been followed, the results of the operations reported by the company for the quarter ended September 30, 1982, would have reflected signficant losses instead of the profit recorded," says the company's financial statement filed with the SEC.
Additionally, the statement says, "the company was operating without adequate accounting controls and without regard to revenue and expense considerations." With the exception of Terminals, all of Duke of Energy's subsidiaries "were experiencing significant operating losses and little action had been taken to curtail those losses," the report to the SEC says.
Because of the company's financial outlook, Owens says he "insisted" that he take personal control over the company, becoming president and chief executive officer and subsequently chairman. Smith, noting his health was deteriorating, says he stepped aside willingly, having decided before the merger that Owens was the right man to replace him.
"There was no way for Owens to insist," Smith says. "I had outright control. If I had not believed in Dave Owens, no power on earth would have moved me."
Smith is still a major stockholder but Owens has now become the majority stockholder, holding about 60 percent of the stock of the company, which has been renamed TU International Inc. to reflect the fact that Terminals is the company's largest and most thriving holding.
Ever since taking control, Owens says, he and his accountants have been trying to sort out the company's books.
The auditor, Walton E. Bell III of Arthur Andersen, said the auditor's statement was omitted from the financial statement submitted to the SEC because his examination of the company was not yet complete. Bell declined to say when the examination would be finished.
SEC officials say that the omission of an auditor's certification letter from a company's financial reports would almost certainly lead to a thorough review of the statement. SEC spokesman Andrew L. Rothman said there are only a very limited number of cases where exceptions are allowed. These exceptions are granted through "no action letters" from the commission.
"No 'no action letter' was issued to the Duke of Energy," Rothman said.
Smith, in turn, says that the statement, which details a number of personal transactions, contains numerous inaccuracies.
For example, Smith disputes the report's statement that Duke of Energy loaned $209,000 to a stockbroker for Smith's father's account. "The fact is that my father loaned the company, not the other way around, the $209,000. And he has not been paid back," Smith said in a recent interview.
Smith says that the financial statement is false and damaging to his reputation and has demanded that changes be made. "They imply that . . . somehow I am a shady character when in fact . . . something extremely different took place. The basic problem, in my opinion, that we have with Arthur Andersen is that they could not comprehend that it was conceivable that I had genuinely altruistic motives for a public company." The transactions with related firms were to put money into the company, not to take money out, Smith says.
Arthur Andersen says that if the financial statement is inaccurate, it is not the auditors' fault. "That's the company's financial statement, not ours," said Bell. "Our opinion has not yet been rendered."
TU's general counsel Gregory Nucci says that the company believes that the statement "as filed, accurately reflects all information as of the date of the filing. We are reviewing items which Mr. Smith claims may be inaccurate but are not yet in a position to state definitively whether any amendments will be necessary."
Meanwhile, Albert D. Nemecek Jr., Terminals' former chief financial officer, is seeking a $7.5 million award in a lawsuit he filed last February in U.S. District Court in Washington. Nemecek charges Owens with using false financial data to lure him to Terminals last fall and accuses Arthur Andersen of failing to use proper accounting standards to uncover the false data in its audit.
During his seven weeks at Terminals, Nemecek says in his lawsuit, it "became obvious to him that Owens and others working with him were engaging in fraudulent financial manipulations calculated to convey to existing and potential creditors, including vendors and lenders, that Owens' operations were financially sound and thriving."
However, Nemecek charges, "businesses of Owens were then and are now in financially precarious conditions as the result of his financial manipulations and the illegal applications of money belonging to his businesses to himself and others."
A tax expert, Nemecek worked for 13 years as secretary, treasurer and vice president of Garfinckel, Brooks Brothers, Miller & Rhoads Inc. before it was taken over by Allied Stores. He has been unemployed since he left Terminals in late November.
"I have no idea where the charges are coming from," said Owens in a recent interview during which he denied Nemecek's charges. "Arthur Andersen is a well-respected Big Eight accounting firm. If fraud was there, wouldn't they have found it?"
Owens' lawyer Eugene M. Propper adds that after Owens learned of Nemecek's charges, he asked Arthur Andersen to go over the books again--"with a fine-tooth comb." After having brought in a full team of fraud experts, Arthur Andersen officials said, " 'We will stake our reputation there is no fraud--zero--there isn't anything being done illegally or immorally,' " according to Propper.
Also, Propper points to Owens' legal response to Nemecek's suit in which Owens alleges that Nemecek's charges are merely sour grapes. Saying that Nemecek was hired for a 90-day probationary period, Owens' response states that Nemecek's "relationship with Owens . . . did not work out satisfactorily and he resigned from the company without ever obtaining an employment contract."
Andersen's Bell also denies Nemecek's charges but declines to respond to the suit's specific allegations, saying he would only respond to the suit's specific allegations in court.
Among Nemecek's specific charges:
* Owens engaged in financial transactions that "violated corporate and individual provisions of the Internal Revenue Code." Among other things, Nemecek said the company failed to withhold tax on commission and bonus payments and improperly reported employe sales commissions on Internal Revenue forms.
* Officials for Terminals told United Virgnia Bank and other lending institutions that gross revenue for the fiscal year that ended June 30, 1982, would total $23 million, "a figure approximately $10 million higher than gross revenues as reported in Andersen's audit report," for the same period.
* Terminals failed to include at least two wholly owned affiliates in its consolidated federal income tax filings.
* Andersen failed to note two Terminal affiliates--TU Leasing Inc. and Terminals Unlimited International Inc.--in its audit 1982 fiscal year audit report.
* The company's financial and distribution records were in poor shape. Records of shipments leaving Terminals' warehouse were absent and the company's bank books weren't reconciled for over 12 months.
* Owens received two payments--one for $4,000 and another for $7,000--from Terminals' purchasing account in May and June 1982.
Owens disputed these charges in a recent interview. Owens said any difference between the projected revenues and the real ones would be due to the change in accounting methods as a result of Andersen's audit. As an example, Owens said that before Andersen's audit, the company recorded multiyear service contracts as immediate income; however, Owens said Andersen spread the income over the full life of the contract, even though all the money was paid at the beginning.
Owens said the international subsidiary was omitted from the Andersen audit report because it "is not an active company. It has had zero business." Although it was registered with the state of Virginia, "it has never been activated."
Additionally, he said, Terminals Unlimited Leasing Inc. was listed in the report. "There is no difference" between that company and TU Leasing, Owens said. In some case, it has been abreviated, in others, it has been spelled out, he said.
Owens also said it is not unusual for a private company to make payments to its chairman to reimburse him for buying products out of his own pocket. That was what Owens said was involved in the $4,000 and $7,000 transactions Nemecek raised in his lawsuit.
"It happens all the time in a proprietorship," said Owens, because the company and the chairman "are essentially one and the same." Before Terminals merged with Duke of Energy, Owens owned 98.5 percent of Terminals' stock.
As far as Nemecek's charges about poor recordkeeping, Owens replied: "You can't do an audit unless your books have been reconciled," Owens said.
Lawyers for both Owens and Arthur Andersen have asked the judge to hold a speedy hearing on their motions to dismiss.
Owens' lawyer Propper says his client is eager to get on to what he considers more pressing business--restoring the financial health of TU International.
Saying he has already managed to turn all of TU's subsidiaries into profitable ones, Owens says he is "no longer in the defensive mode. We are now in the offensive mode--ready to go again" to become a company with tremendous growth opportunities.
"We've addressed more of a range of problems than most people since the end of February. With our experience, we could do anything," he adds, confident that the merger will ultimately be beneficial to him and his company. CAPTION: Picture, TU International President David M. Owens, a former computer salesman, started his company in 1976 with $1,000 in savings. By Lucian Perkins -- The Washington Post