Report based on hearings and inquiries conducted on the Small Business Administration involving abuses in the 8(a) progr...

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Title:
Report based on hearings and inquiries conducted on the Small Business Administration involving abuses in the 8(a) program and irregularities concerning minority business
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vi, 182 p. : ill. ; 24 cm.
Language:
English
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United States -- Congress. -- Senate. -- Committee on Governmental Affairs. -- Subcommittee on Federal Spending Practices and Open Government
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Washington
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Minority business enterprises -- United States   ( lcsh )
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federal government publication   ( marcgt )
non-fiction   ( marcgt )

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Statement of Responsibility:
prepared by the Subcommittee on Federal Spending Practices and Open Government of the Committee on Governmental Affairs, United States Senate.
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Issued Feb. 1978.
General Note:
Reuse of record except for individual research requires license from Congressional Information Service, Inc.
General Note:
At head of title: 95th Congress, 2d session. Committee print.

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University of Florida
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All applicable rights reserved by the source institution and holding location.
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aleph - 022547363
oclc - 03946682X
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lcc - KF49
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AA00024066:00001

Full Text


95th Congress COMMITTEE PRINT 2d Sessions






REPORT BASED ON HEARINGS AND INQUIRIES CONDUCTED ON THE SMALL BUSINESS ADMINISTRATION INVOLVING ABUSES IN THE 8(a) PROGRAM AND IRREGULARITIES
CONCERNING MINORITY BUSINESSES





PREPARED BY THE

SUBCOMMITTEE ON FEDERAL SPENDING
PRACTICES AND OPEN GOVERNMENT OF THE

COMMITTEE ON GOVERNMENTAL AFFAIRS
UNITED STATES SENATE






~jMAR 1 q78

FEBRUARY 1978k ->



Printed for the use of the Committee on Governmental Affairs

U.S. GOVERNMENT PRINTING OFFICE 21-491 WASHINGTON : 1978

For sale by the Superintendent of Documents, U.S. Government Printing- Office Washington, D.C. 20402
















COMMITTEE ON GOVERNMENTAL AFFAIRS
ABRAHAM RIBICOFF, Connecticut, Chairman
HENRY M. JACKSON, Washington CHARLES H. PERCY, Illinois
EDMUND S. MUSKIE, Maine JACOB JAVITS, New York
THOMAS F. EAGLETON, Missouri WILLIAM V. ROTH, JR., Delaware
LAWTON CHILES, Florida TED STEVENS, Alaska
SAM NUNN, Georgia CHARLES McC. MATHIAS, JR., Maryland
JOHN GLENN, Ohio JOHN C. DANFORTH, Missouri
JIM SASSER, Tennessee H. JOHN HEINZ III, Pennsylvania
MURIEL HUMPHREY, Minnesota

RICHARD A. WEGMAN, Chief Counsel and Staff Director
PAUL HOFF, Counsel CLAUDIA T. INGRAM, Professional Staff Member
ELI E. NOBLEMAN, Counsel ELLEN S. MILLER, Professional Staff Member
PAUL C. ROSENTHAL, Counsel THEODORE J. JACOBS, Counsel (Regulatory Reform)
CLAUDE E. BARFIELD, JAMES M. GRAHAM, Counsel (Regulatory Reform)
Professional Staff Member ETHEL Z. GEISINGER, Special Assistant (RegulatorjL
Reform)
MARILYN A. HARRIS, Executive Administrator and Professional Staff Member ELIZABETH A. PREAST, Chief Clerk JOHN B. CHILDERS, Chief Counsel to the Minority BRIAN CONBOY, Special Counsel to the Minority HAROLD C. ANDERSON, Staff Editor


SUBCOMMITTEE ON FEDERAL SPENDING PRACTICES AND OPEN GOVERNMENr
LAWTON CHILES, Florida, Chairman SAM NUNN, Georgia H. JOHN HEINZ III, Pennsylvania
HENRY M. JACKSON, Washington JACOB K. JAVITS, New York
WILLIAM V. ROTH, JR., Delaware RONALD A. CHIODO, Chief Counsel and Staff Director ROBERT F. HARRIS, Deputy Staff Director PETER F. ROMAN, Professional Staff Member ROBERT E. COAKLEY, Professional Staff Member J. BRIAN WALSH, Professional Staff Member JANET R. STUDLEY, Counsel STEPHEN COLE, Professional Staff Member CHRISTINE SHERIDAN BETTS, Chief Clerk DEBRA P. ALTMAN, Staff Assistant MIssY ALDEN, Staff Assistant
(II)









LETTER OF TRANSMITTAL


U.S. SENATE,
COMMITTEE ON GOVERNM.ENTAL AFFAIRS,
SUBCOMMITTEE ON FEDERAL SPENDING PRACTICES
AND OPEN GOvERNMENT,
Washington, D.C.
Hon. ABRAIHAm RIBICOF,
Chairman, Committee on Governmental Affairs, U.S. Senate, Vashington, D.C.
DEAR AIR. CHAIRM:AN: The Subcommittee on Federal Spending Practices and Open Government of the Governmental Affairs Colnmittee, conducted investigations and inquiries into the irregularities of the Small Business Administration's 8 (a) program to help minority businessmen.
It was our desire to use victims of SBA contracts as case studies to hopefully provide valuable insight on the problems that have arisen all over the country. The subcommittee heard allegations that the Small Business Administration provided inadequate management assistance, inadequate initial funding, and inadequate monitoring of progress for many firms. This agency is self -regulatory and completely independent of meaningful criteria for operation with regard to this vital program.
This study provides basic information about the SBA 8(a) program and includes testimonies indicating questionable spending practices and inconsistencies in program objectives. In addition, it expressed the subcommittee's concern about some of the problems arising in this spending area.
In anticipation of further congressional action in this matter, I am hereby transmitting for publication as a committee print the report by the subcommittee on the Small Business Administration's 8 (a) program.
Sincerely,
LAWTON CIITES.
(IIr)























Digitized by the Internet Archive in 2013
















http://archive.org/details/reportbasedonheaOOunit













CONTENTS

page
Letter of transmittal ----------------------------------------------- III
General findings and 2
Problems in program 3
Ambiguous criteria for establishing eligibility in the 8 (a) program 4 SBA's requirement for a detailed but overly defined business plan has
added to the present confusion ------------------------------------ 6
Conclusion: 6
SBA's utilization of a quota system that gave emphasis only to dollars
"let" in contracts not totals for the involvement of disadvantaged
7
SBA's failure to properly match contracts to the proper contractor- 8
The Question of 12
Current 13
Organization of the 14
A view from the 14
The independent 15
Some are more equal than 10'
The Office of Business Development ----------------------------- 16
Standard operating 16
Oversight 17
Special 18
Findings and 19
A final 25
The sponsorship program ------------------------------------------- 26
Special problems in defining 42
Special problems in defining 44
Case studies involving SBA irregularities in minority/disadvantaged firms
relationships (8(a) and/or loans)
No. 1 Robert Singleton/Singleton Construction ------------------- 47
No. 2 Joseph Harris/Atlantic 54
No. 3 John Kyle/Kyle 62
No. 4 Rodney Albert/General Maintenance----------------------- 7 2
No. 5 William Green/Quality Maintenance----------------------- 74
No. 6 John Davis/Java 90
No. 7 Skinitis/Atlanta 96
No. 8 Ira Gelber/ Military Services of Georgia 96
No. 9 James Rice/Oklahoma 97
No. 10 John Duncan/Capitol Contractors------------------------ 97
No. 11 Raphael Vega/Cabrillo Food 98

APPENDIX
Statement of Senator 99
Statement of Parren J. Mitchell, a U.S. Representative in Congress from 101
Statement of A. Vernon Weaver, Administrator, U.S. Small Business 104
Letter to A. Vernon Weaver from Ronald A. Chiodo, chief counsel and
staff director, Subcommittee on Federal Spending Practices and Open
Government, August 30, 977 -------------------------------------- 105
Letter with enclosures to Senator Chiles from A. Vernon Weaver, July 29,
1977 ----------------------------------------------------------- 106
Letter to the subcommittee from John W. Conlon, Jr., Farmington, Conn.,
August 9, 109






V1

Letter to Senator Chles from Harold Wright, Seattle, Wash., July 26, Page 1977--------------------------------------- 110
Letter to Senator Chles from Morgan J. Hallmon, Washington, D.C.,
June 8, 197------------------------111
Letter to Senator Cliiles from L. A. Lucas, Dayton, Ohio, September 2,

Letter with enclosures to Ronald A. Chiodo, chief counsel and staff director,
from Lester A. Fettig, Administrator, Office of Management and Budget,
July 8, 197------------------------112
Letter with enclosure to Senator Chiles, from Juanita E. Wright, Titusyille, Fla. July 13, 17--------------------116
Letter with enclosures to Senator Chiles from Marvin D. Deuitch, Sarasota,
Fla., July 13, 17----------------------119
Letter with enclosure to Alan J. Gibbs, Assistant Secretary of the Army,
from Avis E. Holmes, Detroit, Mich., August 30, 1977 -----------------122
Letter to Senator Chles from William WV. Thomas, Miami, Fla., August 16, 1977-----------------------------------------123
Letter to Senator Chiles from Arthur C. Moseley, Austin, Tex., July 6, 1977-----------------------------------------123
Statement of Quentin S. Taylor, Deputy Administrator, Federal Aviation
Administration.------------------------124
Letter with enclosures to Bob Harris, deputy staff director of the subcommittee, from William L. Devries, Washington, D.C., September 15,
1977-----------------------------------------126
Letter with enclosures to Representative Phillip Burton from Gerald W.
Johnson, San Francisco, Calif., September 20, 17---------138 Statement by the President, September 12, 1977 ------------141
Selected provisions of controversy of the SBA 8(a) program-------------144
Letter to Senator Chiles from Robert L. Singleton, Jacksonville, Fla.,
July 2, 197------------------------165
Letter to Senator Chiles from R. L. Nissen, Hendersonville, N.C., July 14, 1977-----------------------------------------166
Letter to Senator Chiles from Mack Finley, Jr., Jackson, Miss., July 18, 1977-----------------------------------------166
Letter to Senator Chiles from Eugene E. Holbrook, Fort Lauderdale, Fla.,
July 13, 17------------------------167
Telegram to Senator Chiles from Leonard Simeock, Jacksonville, Fla.,
July 7, 197------------------------167
Article: "Too Easy for Rats To Get This Cheese," from the Tampa
Tribune, July 12, 197--------------------167
Article: "U.S. Senator May Investigate South Florida Organized Crime,"
from the St. Petersburg Times, by Charles Stafford, July 14, 1977 -- -- ----168 Letter to Senator Chiles from Martin Fridovich, Fort Lauderdale, Fla.,
July 12, 17------------------------169
Contract pricing proposal----------------------------------------- 170
Telegram to Senator Chiles from Jerry Davis, Jr., Washington, D.C.,
July 7,197------------------------175
Letter to Senator Chles from Everett 0. Post, Washington, D.C., July 8,
1977 -------------------------------------------------------- 175
Letter with enclosure to Senator Chiles from Arthur L. Harris, Miami,
hla., July 8, 1977---------------------------------------------- 176
Mailgram to Bob Harris and Peter Roman from William L. Devries,
Washington, D.C., August 17, 197---------------------177
Article: "The President's Message," by S. Peter Volpe, president, Associated General Contractors of America, August 197---------178 Letter with enclosure to Senator Chiles from Dallas Johnson, Bethesda,
Mld., August 29, 1977------------------------------------------ 178
Letter to Senator Chiles from David A. Antonio, Patchogue, N.Y., Decemher 6, 1977--------------------------------------------------- 180
Telegramn to Senator Chles from Taylor and Henderson, certified public accountants, Baltimore, Xld., July 8, 197-------------181
Telegram to Senator Chile-, from Mwarion 0. Greene, Jr., Washington,
LD C7 July 6, 1 7 --------------------181
Letter- to Senator Chles from Jim Swvain, Tituisville, hla., July 25, 1977-- 181 Dooncsb~ury, by Garry Trudcau, July 295 and 26, 1977 ----------------- 182











INTRODUCTION
The 8 (a) program takes its name from Section 8 (a) of the Small Business Act of 1953 which authorizes the Small Business Administration to enter into procurement contracts with Federal agencies and, in turn, subcontract the work to small businesses. In 1968, SBA began to use Section 8 (a) authority to obtain Federal contracts in order to promote jobs in underemployed areas.
The 8 (a) program has shown tremendous growth. In 1968, there were only eight awards worth a total of $10.5 million. By 1977, there were 1,377 subcontracts with approximately $307 million subcontracted under 8 (a).
Normally, a disadvantaged businessman will submit a business development plan, describing his business' history, management, equipment, and other essential items. The submission of a projected estimate of 8 (a) assistance needed is usually submitted to SBA at the same time. Accordingly the agency should know when a firm is a legitimately disadvantaged company and should have some idea of the level of assistance needed by the disadvantaged firm.
The chairman of the subcommittee, Senator Lawton Chiles, voiced his concerns about the thrust of the program in a Tampa, Florida hearing, when he stated:
The allegations that have been raised concerning mismanagement of the 8 (a) program are serious ones. American taxpayers have a right to demand that government programs are efficiently run and that they are carefully reviewed. Tax
dollars must be spent judiciously.
I said before that the allegations regarding irregularities
and mismanagement on the part of SBA are serious.
It's serious when the Small Business Administration
actively recruits businessmen to participate in a government project and then leaves that businessman near bankruptcy.
It's serious when SBA officials deliberately skirt congressional intent in regard to the surety bond guarantees.
It's serious when non-disadvaiitaged firms, through a
highly questionable sponsorship program, seek to rip off tax dollars by using disadvantaged persons to secure contracts that the non-disadvantaged firms could not (yet in the competitive marketplace.
And it's serious when allegations of misfeasance of office
and fraud are ignored by those in authority.
The allegations that ihe Small Business Administration
provided inadequate management assistance, inadequate initial funding and inadequate monitoring of progress for many firms raises major questions about the success of this agency
in dealing with the objectives of the 8 (a) program.
The concerns of this committee include allegations that
many minorities have actually lost faith in either the ability
(1)





9Iii

of SBA to administer the 8 (a) program effectively or confidence is the objectives of the 8 (a) program or both.
The committee is concerned about the conduct of government personnel in representing the government in the procurement proceedings.
And we are concerned about procedures and practices that
ought to be followed in disbursing 'taxpayer's money. Certainly, we should insure that a dollar's worth of goods and services are obtained for every dollar spent. However, official commitments must be kept, particularly in a situation involvin~ 8 (a) contract ing.
It seems to this committee that Congress should ask vital
questions of this and any other program we fund with tax
dollars.
First, is the intent of Congress being followed by government policy-makers and those who are entrusted to implement the programs?
Second, does the program achieve its stated objective? Is
the program doing what it was supposed to do?
Third, can proper reform measures re-orient and re-direct
a program without new legislation authority?
Fourth, have proper safeguards been maintained to protect the 8 (a) program against fraud, conflict of interest, conspiracy and the looting of fledging 8 (a) firms?
These are the questions that Congress must grapple with if
the objectives of the 8 (a) program are to be met successfully.
There are Congressional charges that the present programs of the Federal (2 ovePiment concerning set-asides for the disadvantaged are inadequate, ineffective, and uncoordinated.
Perhaps the time has come to rethink, revamp and reform
our present programs in procurement set-asides.

GENERAL FINDINGS AND CONCLUSIONS
The SBA initiated the 8 (a) program in 1968. Yet after nearly 10 years of operation its concept of the program is unsure and nondirective. The reasons for this absence are various and will be discussed later. That it exists is a certainty. SBA policy and action reflect a serious insufficiency of consistent, conceptual guidelines. One SBA official demonstrated the problem when lhe stated that the SBA must decide whether the 8 (a) program is a social program, procurement program, or a social/procurement program. He might be surprised to learn that decision was made 10 years ago at the program's inception. Regardless, his statement reflects a lack of consistent direction in the thrust of 8 (a) administration. Indeed, inconsistency has characterized SI3A'1s efforts from the progrram's outset and 8 (a) finds itself in dire need of program definition. i
To puit forth such a definitioii, one must touch base on several points. Th e initial objec-tives of the 8 (a) program direct that the program use thel pr-ocurement process to attain a spe-,cified social groal. That goal is the education, of the, small, socially or economically disadvantaged business sman. To achieve such an education a game plan was devised





3

by SBA. Certain government contracts would be withheld from the competitive procurement process and set aside for award to competent 8(a) companies. Thus, a sheltered environment would be created in, which the disadvantaged businessman could develop business skills until he attained the expertise to compete in the open market.
With this program, the SBA felt it could offer aid to people who for social or economic reasons had been denied entry into the business mainstream. Thus, the original concept of the program had merit. To the extent that it assists disadvantaged businessmen, it still does.
PRoBLFms iw PRocRAx ADMINISTRAnON
Several clear problems which have had a long-term effect on the
8 (a) program surfaced during the subcommittee's investigation.
These problems may well be of such magomitude that the SBA will need to have a clear management reorganization in order to deal with the problems.
The subcommittee noted that in the management of the program the following problems were evident:
SBA experienced difficulty in identifying the firms in the 8 (a)
portfolio.
The criteria for establishing program eligibility in the 8 (a)
program are ambiguous.
SBA's requirement for detailed but overly defined business
plan.
The absence of SBA standards to evaluate 8 (a) Is success.
SBA's failure to properly match contracts to proper contractors.
SBA's utilization of a quota system that gave emphasis only to
dollars "let" in contracts not totals for the involvement of disadvantaged firms.
This broad overview demonstrates that the 8 (a) program is on track. The reasons are as manifold as the program's directions. However, several definable problems consistently appeared in the investigation. Scratch the surface of any 8 (a) program and these problems will show:
Difficulty in identifying firms in the 8(a) portfolio;
Ambiguous criteria for establishment of eligibility for admission into the program;
Carelessly done business plans;
Unclear quota systems;
Absence of standards to evaluate 8 (a) Is success; and
Matching contracts to contractors.
These problems have no small effect on 8 (a). Notw withstanding, they are easily accessible to SBA. This is so because their origin and nature is within the SBA bureaucracy. To some degree this checks the growth of their roots and improves their visibility.
Lest this all sounds too abstract, an example is required. The problem of firm identification is typical of the others. SBA has a real
y determining who is in the program
problem in simpl- The reason is
there is no comprehensive,,, clearly identifiable 8 (a) portfolio largely because SBA has no corporate memory, and a deficient management information system. A or example, SB-A, runs a monthly printout of





4

names of the companies in the program and the name of its principal officer (usually the president of the firm).- There is no central list of the other officers of these firms. Businessmen who have used their eligibility once may still be in the program as vice presidents or other officers. It took a Defense Contract Audit Agency, (DCAA) investigation to turn up the interesting fact that Mr. Donald Dunlap, former chief of the 8 (a) program, had become an 8 (a) contractor himself and was collecting consulting fees from an 8 (a) firm.
SBA officials told us this was no problem, since SBA officers in the field were familiar with the names of 8 (a) businessmen in their area.
-Not addressed was the problem of SBA officials who retire or leave the agency and take part of the corporate memory with them. SBA Atlanta officials may know the names of their businessmen, but SBA Seattle surely doesn't know Atlanta's. Thus, in addressing the question of who is in the 8 (a) program, SBA will be forced to do some basic research to find out who their membership is.
The description of the portfolio problem further emphasizes the nature of the others. Common to all the problems is their position within SBA. These problems exist not from externally imposed conclitions, but from internal, administrative deficiencies. The 8 (a) program so requires efficiency in these areas that SBA cannot begin to effectively maaewithout scefulrsovneach problem area.. Indeed, these problem areas are the very starting points-the administrative cornerstones of the 8 (a) program. It is imperative that they are clearly understood. Toward that understanding, a close look at each problem is necessary. The following sections aim at providing that scrutiny.

AMNBiGUOUS CRITERIA FOR ESTABLISHING ELIGmILITY IN THE 8(at) PROGRAM

Before receiving any 8 (a) contracts, a prospective 8 (a) participant has to be declared "socially or economically disadvantaged" and have the firm's business plan approved.
"Social or economic disadvantage" is a phrase initiated by SBA's Office of the General Counsel to step around the constitutional questions raised by the 8 (a) program. In the early 1970's, several attacks were made on the constitutionality, of reserving government contracts for minority groups to the exclusion of all others. The courts, however, took the view that, by SBA's own regulations, no one was ineligible for the program except those who were not disadvantaged in any measurable way.
the "economic or social disadvantage" criteria circumistantially has enabled laco ubr fmnrt rups to enter the prog-ram. H-owe'er, the fact that the vast majority of persons in the 8 (a) program are members of minority groups does not mean that eligibility is based solely on minority status. The rationale behind the 8 (a) program has a strong basis in fact. Economic statistics consistently show that minority groups have lower incomes, live in less desirable neighborhoodIs and suffer crime rates which the average suburbanite would consider intolerable. Socially, blacks and other minorities receive





5
demonstrably poorer and briefer educations than their more advantaged white counterparts, and are still the victims of discrimination on a nationwide basis.
These disadvantages collect i vely forced upon thie minority business man make him eminently qualified under the social/economic d(isa:(lvantage criteria. However, that isn't to say that all minority group members are automatically disadvantaged. They are notl. Acrdinly, minority group eligibility for the 8(a) program is not autonmtatic; SBA's regulations prohibit categorical inclusion in the program. M r. Winford Smith, the Director of the Office of Business Developmnent, took exception to his agency's formal regulations in this regard declaring at the subcommittee hearings on July 6. 1977, that blacks slmould automatically qualify for the program despite personal income, education or other considerations.
In the early 1970's, SBA field officers, driven by the whips of (quof 1conscious senior officials in Washington (SBA) went out on the t reets to recruit as many minority businessmen as could be found. (Eligibility statements were standardized and distributed on inasse). In some cases, applicants were coached by SBA officials and told what the magic words were which would suddenly establish eligibility. In most cases involving the "stepped-up"' recruitment, sponsorships were the vehicle used to this "hard sell" scheme.
As a result of this hard-sell by the SBA, quotas steadily increased. The level of debate on the meaning of "disadvantaged" slowly died down. In this more relaxed atmosphere, SBA gradually loosened their oversight of the program. This spelled trouble for 8(a). Under looser supervision, "fronts" were able to enter the program: 8( a) "fronts" are minority group members with little or no educnatioli or business experience. They are posed as company officers to qualify a firm for the program. Although the front problem is discussed in detail later' it is mentioned here as evidence that the control mechanism was not running smoothly. Further evidence comes from the Atlanta region. Minority candidates there were rejected for entry into the program because a college education or solid business experience made them "over-qualified". At the same time on the west coast, businessmen of substantial means, whose companies were proven successes, were being certified for the same program.
With the number and cumulative nature of the problems SBA has, it would do well to start cleaning house by reducing things to their lowest common denominator. The 8(a) program cannot be made to run effectively unless every SBA official involved in the program has a clear understanding of who is, and who is not, eligible for the program's benefits. Obviously "social or economic disadvantage" is one criteria. But that presents a problem. "Social or economic disadvantage" is a nebulous phrase, thereby a hard-to-implement criteria, and ultimately a real burden for SBA field officers. While our recominendations on the topic are discussed later, it might be appropriate to note here that one possible solution might be to define persons who are not eligible for the program.
This approach has strong justification. As mentioned previously, the definition of social/economic disadvantaged encountered court tests in the early 1970's. The court's view suggested going at the prob-





6

lem back door, that is, specifying who is not eligible. The apparent assumption was that it is easier to say who is not eligible than to say who is.
SBA's REQUIREMENT FOR A DETAILED BUT Ovw-xY DEFINED
BusINEss PLAN HAS ADDED TO TIE PRESENT CONFUSION
For all the red tape involved in the 8(a) program, not much of it appears to be of any particular use. Probably the most discussed and most disliked part of the paperwork is the business plan. This, together with proof of eligibility for the program, are the two hurdles which the disadvantaged small businessman must overcome before he can be admitted to the program.
The business plan, in essence, sets out what a small businessman intends to do with his company over a period of years. It contains calculations of what financing is needed, what start up costs are involved, sales projections, projected overhead costs, and break-even points. Details of training and recruitment of staff, marketing plans and other data are also included. The plan must be updated on a regular basis to reflect the current situation and submitted to SBA under penalty of expulsion from the program.
The business plan is an essential part of the planning process for any business, large or small. It can be used as a control to measure success, and as a discipline to avoid emphasis being placed in the wrong areas. Unfortunately, business plans submitted to SBA are not, in general, crowded with factual materials. During the course of the investigation, we found the following:
1. Business plans were inaccurate. SBA regulations require that each business plan have a chart showing estimated fixed costs, overhead costs, and projected break even points. Oddly enough, many of these looked very much like tracings of an example contained in the SBA booklet, "How To Prepare A Business Plan." Serious doubts can be raised to the accuracy of that data, and whether it was valid at all.
2. Sales projection were conjecture. The 3-year sales plans submitted to SBA were not, as far as we could tell, based on any known data. (We received several assurances that we were correct; projected sales figures had been picked out of the air.) Especially in the service contract area, the estimates for commercial sales were deceptive.
3. Business plans were frequently not updated. SBA reports showed that a large percentage of business plans were not updated for years. Obviously, the businessmen themselves did not consider the business plan as a useful planning document.
4. Businmess plans went largely unread. There is considerable evidence that not many of the business plans were ever reviewed on any regul ar basis. One SBA report quoted a senior Atlanta official as saying, "Oh, we don't have time to read all that crap."

CONCLUSION: CONFUSION
It becomes clear from the discussion of the establishment of eligibility and the business plan that SBA had lost its grasp at the be(inning of its relationship with a disadvantaged contractor. Establishment of eligibility and the business plan were the cor-







nerstones for entry into the program. Their administration sooti degenerated into something other than the original purpose. Establishment of eligibility was not as a result of a reasonable interpretation of sound guidelines. Rather, eligibility waf~s a, series of individual judgments made in 100 district and 10 regional offices, by SBA officials who, in the main, were ill-equipped to miako thec do'finitive j ud gmients requ ired of them.
Equally, the business development plan was a conceptually sound approach to establish whether a given company had a, reasonable, chance of succeeding. It ended up as a perfunctory exercise in guessing, done only to get by the entry requirement. In the end, it may have been a wise decision on' the part of many SBA officials not to even. read. them.

SBA's UTILIZATION OF A QUOTA SysTEM.N THAT GAvE Emrn.Asis O-NLY
To DOLLARS "LET" IN CONTRACTS NOT TOTALS FOR THlE INVOLVEMENT
OF DISADVANTAGED Fnif 5
The quota system was the single most influential factor in causing the 8 (a) program to get off track. Combined with the other factors, and the strained relationships between SBA and the agencies a less than healthy environment was created. The specifics are discussed below.
From the first days of the program, the idea of channeling government contracts to minority groups was seen to have considerable political merit. The administration could not fail to note that, it would be easier to garner votes from the minority communities after a substantial infusion of government contracts to their businessmen. Added to the political realities was the normal bureaucratic instinct to establish quotas so that the important questions of community development could be reduced to bar graphs and thermometer charts.
Mr. Len Cole, former Director of the Office of Business Development, recited a tale 6f how the awarding of contracts was tied to the speech schedules of various senior Administration officials. In one instance, a multimillion dollar contract was awarded on 48 hours notice to coincide with a major address in Detroit. Cole wryly noted that this time Schedule meant that the niceties of proper administrative procedure were all but ignored.
As Ray Harshman of SBA was to discover in 'the winter of 1972, the service contract game was being placed so that 6 entrepreneurs controlled most of the 8 (a) service contracts (in the Southeast) through their minority "front" companies. SBA officials admit that the sponsors were endlessly amiable, and faithfully adhered to every change in SBA's rules and regulations. Still, the benefits seemed always to accrue to the sponsors. There appears to be a primary reason for this.
Most of the minorities selected to head the front companies were carefully chosen to make sure they did not have the education or experience to ever succeed by themselves and become a potential competitor to their sponsors. Accordingly, as of this writing, at least 18 8 (a) firms are known to be almost totally dependent on their former sponsors through management agreements and other devices, even after direct sponsorships were disallowed.





8

In a statement submitted for the hearing record, one senior SBA' official pointed to the quota system (called "goals" within the agency) as the proximate cause for the founding of the sponsorship program. In the Atlanta region, the average yeE rly quota runabout $50 million per year. It took no time to discover that contract awards in $34,15 million chunks involved much less paperwork, interviews and travel than the award of dozens of small contracts to small businessmen. However, there were no minority contractors in the'South at that time who were capable of being bonded for a multi-million-dollar contract. (If there had been, they could not have been considered disadvantaged by any reasonable piece of logic.)
Thus, the sponsorship concept was born.
The mostly white contractors who had controlled the service contract industry for years were naturally upset to see almost half of their business suddenly set aside for the 8 (a) program. When they went to Washington to protest, they received a rather surprising reception. As one contractor, who might. be considered the dean of the
-service contracting industry told usj White House officials made it quite clear that the Administration was indeed conunitted to the program. SBA officials were more precise. He was told, in essence: the 8 (a) program is the wave of the future, so . "get yourself a black and get on board." And that is precisely what happened. The contractor made no pretense of sponsoring 8 (a) firms for altruistic reasons. He said that his business was in danger, and upon being told that 8 (a) was the way the game was being played this season, he joined up with the others.
SBA officers assumed that success in the 8 (a) program meant getting as much of the taxpayers money out the door as possible. This, in turn, led to contract brokering which led to sponsorships. What got lost in this flurry of activity was the whole intent of the. 8.(a) program. A 1971 Michigan Bar Review article stated the original aim of the 8 (a) program;
In its simplest form, the 8 (a) program is nothing more
than a classroom for dispensing invaluable experience to those individuals who have been prevented from obtaining
the experience by normal methods.
If that was thejaim, it got lost in a welter of vague Iinstructions and ill-defined ob ectives of "business development" and in a maze of contract brokering. Although there is considerable, blame to be shared by all SBA officials in tl e failure of the 8 (a) program, it must be remembered that in the end, SBA regional and' district officials did precisely what they were told to do: get the money out the door by the end of the fiscal year.
SBA's FAILURE TO PROPERLY MATCH CONTRACTS TO THE PROPER CONTRACTOR
Closely allied with the problems of quotas and contract brokering is the problem of matching, available contract to the capabilities of the 8 (a) contractors. Again, Mr. Robert Singleton's case serves as a good example. He had been a successful masonry contractor who built single units or somewhat larger projects which never exceeded




9

$200,000 per project. The only SBA contracts available, however, were multi-million-dollar projects. As an SBA report noted, the Coast Guard had its own 8 (a) quotas to meet and wanted to "get on the board." Accordingly, Singleton was matched to a contract which was 10 times as large as anything he had ever attempted before. For a variety of reasons, he did not succeed. The principal cause of the failure, however, was that there was no mateh betweenn hIs aabilities and the size of the contract. (See case studies in this report.)
The basic, structural problems of the SBA in administering 8(a) tends to cause injury to fall upon 8(a) companies in similar ways. Singleton's case demonstrates another difficulty for the 8(a) contractor. The problem is maintaining a steady flow of work. Each, business has its built-in fixed costs which must be paid whether contracts are available or not. Yet SBA is in no position to guarantee that steady flow of work. It must deal with the agencies on a negotiation basis to secure whatever it can for the 8(a) program. The agencies, according to choice, are free to cooperate or resist. Predictably, the results are mixed; some agencies cooperate, some do not. Some SBA officials have complained bitterly to us that abrasive relationships between the agencies and SBA are a major factor in impeding the 8 (a) program. Yet, we are not aware that SBA has ever appealed to the Office of Management and Budget (OMB) or to OIB's Office of Federal Procurement Policy (OFPP) for assistance in forming a workable program.
The SBA, having obtained a contract, and awarded it one of the 8(a) firms in its portfolio, must determine what the price of the contract will be. Here the 8(a) contractor is at the mercy of an SBA negotiator who may, or may not, be competent at negotiating a "good" contract. The procuring agency, of course, wants the most value for the least money. The agency's procurement officer is judged by how much he can obtain at little cost to the government. His career will not be rewarded by being overly generous to a minority contractor.
If that competitive pressure is not enough to undermine fair contract negotiations, incompetence often is. The SBA contract negotiator often simply doesn't know what the value of the goods and services actually is. Hence. Mr. Singleton found a bid in at what has been estimated at $1 million under the going market value for the Coast Guard project. Mr. Singleton wrongly assumed that his negotiator would know what he was talking about. Similarly, Mr. John Kyle, an experienced electronics engineer, was overruled by a SBA negotiator who was admittedly incompetent as a negotiator. Mr. Kyle lost his company shortly thereafter.
On the other hand, sponsored companies did quite well in their contract negotiations. We were told by a Fort Benning procurement officer that Mr. James Rice, the sponsor of Best Services, negotiated the first food services at Fort Benning personally. "Negotiated" may not be the proper word, since the procurement officer says Mr. Rice stated a flat price at the beginning of the negotiations and refused to bargain. Shortly after the negotiator refused to accept Mr. Rice's offer, he received a call from an Assistant Secretary of the Army ordering him to accept Rice's price. He did. The price was $1 million over the procurement officer's estimate. Best Services made an $800,000 profit on the $3 million contract.





10

It may have been just as well for Mr. Rice that he did his own negotiating. SBA officers were not hesitant to admit that many of the negotiators simply, "were not equipped to do what they were doing." "
It is clear from the contract negotiation process that there is crossbargaining and overlapping responsibility between SBA and the agencies. They are therefore in frequent confrontation. The resulting relationship is described as love/hate: loving by the Washington officials of SBA and the agencies who know least about the daily interactions; hateful by the regional organization officials.
The lack of cooperation between SBA and procurement officers ultimately work to the disadvantage of the subcontractor, the disadvantaged businessman.
Regional agency officials accuse SBA regional officers of being arrogant, incompetent and lazy. Regional SBA officials accuse agency officers of being bigoted and obstructionist. At the same time Washington offices of SB3A and the agencies say relationships are harmonious.
While this is, unfortunately, a typical reaction by government agencies who perceive another agency poaching on its bureaucratic turf, the depth of feeling expressed on both sides is disturbing. One reason for this hostility may be the imprecise nature of the triangu lar relationship between the contractor, SBA, and the agency. When trouble comes, the inexperienced contractor is told by the agency to seek help from SBA, and by SBA to seek help from the agency.
Normally, squabbles between agencies would be of little consequence to a congressional inquiry. However, interagency communication is essential to good program administration of the 8 (a) program. Thus, the fact that SBA field officials have little impact on procurement officials in other agencies is of major consequence to the program objectives.
The process by which an 8 (a) businessman establishes eligibility, is admitted to the program, and ultimately receives a contract, has been described. At this point, he is ready to begin the educational process which is designed to overcome his present disadvantage and to learn enough to permit him to graduate into the competitive world where he can compete on even terms.
For some businessmen, the 8 (a) program has been extremely beneficial. The businessman has found himself in a situation where the SBA would perform the following tasks:
1. Find his contracts for him;
2 Give him interest-free advances;
3. Give him no strings attached grants (called Business Development Expense by SBA) ;
Give him free management assistance, including free lawyers
and accountants (called 406 contractors) ; and
5. Occasionally intervene with another agency and fight his battles for him.
Given these sort of benefits some 8 (a) firms prosper rapidly, in fact, all should. During the hearings, we pointed out what appeared to be several likely candidates for graduation. One complex, owned by Mr. Raphael Vega, was actually an international mini-conglomerate, financed in part with taxpayers' money. Local SBA officials had been recommending for years that Mr. Vega be gra duated from the program on the grounds that neither he nor his conglomerate were socially or economically y disadvantaged.,(. There was also some question as to whether they ever had been. In late 1976, the regional director declined





11

to accept the recommendation on the grounds that 10 years after the program started, the region had no policy for determining who should be graduated. This spring, between the two sets of hearings, Mr. Vega was dismissed from the program, in part because of some highly questionable statements he furnished to SBA. During the July hearings, it developed that Mr. Vega had been reinstated into 8(a) by the regional director, Mr. Montanyo, and this time for no reason at all.
Given the services available to an 8(a) contractor, it would appear that almost any reasonably competent disadvantaged busi nessinan should be able to develop a successful company in short order. The principal reason that success does not occur is that few 8 (a) contractors receive, or even are aware, that a coordinated body of professional services is available to them. All too frequently, the professional service an 8 (a) contractor receives is limited to a last minute audit which shows that his firm is about to fail. That lack of follow-up assistance, combined with an erratic flow of contracts, poor bidding by SBA negotiators, red tape and the general neglect which 8(a) contractors receive from SBA officials, often makes their business lives as hard, or harder, than what they would experience in the normal competitive market.
The quality of SBA's "help" shows in the number of firms that have prospered enough to leave the program. That "help" has enabled only 70 firms to graduate from the 8(a) program. Considering there have been approximately 15,000 businesses in the program, 70 is a very weak figure for those prospering yet, one cannot fail to take notice of an obvious confusion. The number of graduates is low and indeed it should be with the burden of SBA's "help". The fact is, however, there are a number of extremely prosperous firms currently in the program. These firms should be graduated immediately. But, they continue to stay in the program and feed on SBA, thus distorting the identity between the number of graduated firms and the general success level of the program.
It is apparent that for a lucky, mainly non-disadvantaged few, the 8(a) program is a gravy train of impressive proportions.
Fortunately for them, SBA has little collective will to achieve the goal of the 8(a) program: to graduate successful minority small businesses into the mainstream of American society. Unfortunately there are no requirements that 8(a) contractors actively seek competitive awards; there are no threshholds for determining when a businessman is no longer disadvantaged, regardless of the state of his business.
Quite understandably, the lucky few have no intention of ever graduating if they can help it. Quite incomprehensibly, SBA has taken no steps to graduate successful businessmen and successful businesses from the program in order to make way for some of the thousands of genuinely disadvantaged people who are clamoring for entry.

GRADIuATIO/TERMIMINATION
Besides meeting dollar quotas, the other known criterion for judging the success of the 8(a) program is by "graduation." As noted above, one mark of the success of the 8 (a) program is by counting the number of businesses/businessmen who have grown and developed enough to go out into the competitive market. At last count, some 70 of the 15,000 businesses who have been in the 8(a) program at one time have suc21-491-78-----2





12

,cessfully "granted" from the program, for a success rate of 0.00566. However, even that woeful statistic is in question.
In April 1977, shortly after the subcommittee's investigation began, the Atlanta Regional Office suddenly "graduated" 26 8(a) firms. Not surprisingly, the graduates had been prominently mentioned in a newspaper series the previous fall. A number of the graduates appeared to be questionable success stories: one was dependent for 8 (a) contracts for over 99 percent of its business, another was still controlled by it sponsor, and a third had been at the edge of failure for years.
Prior to that a case was uncovered of a white doctor who had received over $1 million in 8 (a) contracts for no apparent reason. The SBA planned to terminate him, only to find that the Dallas regional office has just "graduated" him. Washington let the graduation stand. Thus, a success rate of one-half of 1 percent may be overstating the prosperity of the 8 (a) program. It may be as low as one-quarter of
1 percent.
One reasonable contention is that the graduation statistic may not be a valid mark of success in the program. The program was begun for the purpose of educating disadvantaged businessmen, not for creating satisfactory balance sheets (hopefully the two are casually related). 1,11"ith education as the goal a different set of criteria may be in order, a criteria of lowered expectations. Such criteria might include improvement in the debt to net worth ratios, successful estimation of a contract, or successful contract performance.

THE "QUESTION OF COMMITMENT"
The picture painted of 8 (a) Is organizational efficiency is a dismal one. One reasons and hopes that such waste is not inherent in the program-that it comes from a lack of commitment or competence by SBA administrators. Those hopes seem to be confirmed by the facts. SBA administrators readily confess their distaste for the 8 (a) program. Many of those in charge openly admit they are unhappy administering the program and wish they were elsewhere. Others admit they have no expertise in the required areas. How does this lack of abi ity and will manifest itself in operation? Perhaps the best answer comes from disadvantaged businessmen themselves.
Witnesses appearing before the subcommittee documented the feelinl(r of many minority/disadvantaged business persons have who deal with the SBA. In his testimony of July 8,1977, Mr. Leroy Tombs said:
Let me say that I felt from the very beginning that there
was definitely no -program, that there was very little information being held by the people I was dealing with, whereas they
could have helped me in very limited ways
Had I needed other than financial help, I don't think it
woi.il.(l have been there because I have never met anyone there that bad any technical skills or who had dealt with procurement agencies with the variety of attitudes and personalities, who had dealt with food people on a particular base, with
their many attitudes and motives and what have you.
I have seen very, very good operators who know the food
business quite well who did not understand the attitude of





13

government buyers, and governiewt IInSj we ors, gyet 0I hem.selves unnecessarily riddled, and many hiave enided up banikrupt.
In a hearing in Tampa, Fla., Mr. Fred Law, president of Mfinority Contractors Association of Florida, demonstrated this belief when hie stated:
W .Ne never got solutions f rom, SBA . The whole programL is designed to make you fail .. e feel that SBA in all their programs are designed to fail, because we haven't got
a successful businessman in the black community...
So what we are saying is this: If S BA reallIy intends to help
minorities and disadvantaged people they should get somebody who has some expertise in these various fields to really assist these people. To just give a man a loan and throw them out in the pool and say "swim" and he doesn't know how to swim, and walk away, and this is what has been happening to the minority contractors businessmen. They (the SBA) will
giv him enough money to let him stay in business for 30 days.
and after 30 days, it is all gone. And he has his home and all tied up and so forth, and then he has to go in bankruptcy. And Mr. Singleton is another case, another case, another fatality of
SBA.
-Later in his testimony, Mr. Law states the following:
We feel that the SBA has done quite a bit to hurt the minority, particularly in the black sector. As you know in the local Jacksonville area we have considered that to be SBA graveyard. We have had so many contractors and small businessmen fall by the wayside, hopingly trying to secure help from SBA, and I would say they got some help from SBA, but just
enough to really kill them in a sense.
The subcomm-ittee found that, among (minority) contractors, Mr. Law's statement was the rule and not the exception. The feeling that SBA field officials have little, if any, commitment to its 8 (a) program does tremendous harm to its public image. The charges advanced by minority small businessmen were considered to be meaningful by the subcommittee because public credibility is vital to any program.

CURRENT STATUS
As of July 8, 1977, the date of the last hearings on the 8 (a) program, the hearing record suggests that the following is the current status of the program:
a. SBA does not know the names of many, or most of the
minority businessmen in the program.
b. SBA has, -after 10 years, yet to determine what type of programn it is trying to run-whether it is to be a procurement program, a social program, or a combination of the two.
e. Many of the businessmen in the program are not eligible to
be there because they are not, or never were, economically of
Socially disadvantaged.





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d. SBA has no effective standard for determining who is eligible for the program.
e. SBA states that business development is the primary objective, but in general pays little attention to the poorly written business development plans which serve as the cornerstone of the
Program.
f. SBA has no effective method and little success with matching available contracts to the needs of its 8 (a) contractors.
g. Through inadequate negotiation procedures, many (a) contracts are significantly over or under the fair market price.
A. There are few criteria for determining when, if ever, an
8 (a) contractor should leave the program.
i. SBA has provided little guidance and almost no effective
means to evaluate successful contractors and encourage them to
compete outside the program.
j. SBA has no valid criteria for determining the success or
failure of the program itself-and graduations should not be
used unless the practice of "graduating" changes.
k. The process of handling eligibility, graduations, etc., on a
case-by-case basis will continue to spread controversy and inhibit
public acceptance and credibility of the 8 (a.) program.
ORGANIZATION OF THE PROGRAM
A VIEW FROM TM TOP
Compared to HEW or the Department of Defense, SBA appears to have a simple and straightforward organization chart. Because of a few subtle changes over the years, however, SBA is currently faced with a situation where no one seems to be in charge of special programs, such as 8 (a).
At the top, of course, is the Administrator and his deputy. Under them are a series of Associate Administrators for various activities. For purposes of this report, we need be concerned only with the Associate .ikdministrator for Operations (AA/0), and the Associate Administrator for Procurement Assistance (AA/PA). They are referred to below as Operations and Procurement Assistance.
At its simplest level, Operations is in charge of supervising the day to day operations of SBA's 10 regional offices and 100 district offices. The district offices are in turn subordinate to the regional offices.
Procurement Assistance, with a staff of 67, has a dual role. It is responsible for obtaining contracts for the 8 (a) program from other agencies at the national level, and for providing the regions and districts with policy and procedural guidelines for the 8 (a) program.
Under the headquarters staff--called Central office-lies the field staff which comprises more than 3,600 of SBA's 4,700 employees. Each of the 10 regions has a regional director, who holds the government rank of GS 16 ($39,629-$46,550 per annum). lIn 8 of the 10rTions, the regoJonal director is a political appointee. In the other two regionsAtlanta -,tncl Dallas--the positions are unaccountably rated as career Civil Service positions. In his own office, each regional director has an assistant regional director for procurement assistance (ARD/PA). Although these Assistants have other duties, the growth of the 8(a)





15

program over the years, combined with oiilya very small growth in the 8 (a) staff, means that the Assistant is mostly involved Nvith 8 (a) work.
Under the regional staff are the 100 District staffs. Each District Director in turn has his own Assistant Director for Procurement Assistance. The working staff at all levels are a mixture of procurement officers, business development specialists, and contract negotiators.
THE INDEPENDENT BARONS
In the early 70's, the Administration embarked upon a program loosely characterized as "tal6ng government to the people". In bureaucratic terms, it meant decentralizing the decisionmaking process and shifting more power and authority to recrional and district offices. Probably no agency took this directive as much to lie-art as did SBA. In the 8 (a) field, Regional Directors had almost total control of who was enrolled in the 8 (a) program, who received wliich contracts, and who was to be retained in the program, graduated or terminated. The Central Office, in reaction to a series of audit and investigative reports concerning the misuse of the 8 (a.) program, moved control of many major contracts (called "national buys") back to the Central Office, although most decisionmaking authority remained in the field.
In practice, Regional Directors are free to do what they please within the very loose constraints of the regulations. In many instances regional staffs have gone beyond the limits of the standard operating procedure (SOP) without being rebuked by the Central Office.

SOME ARE MORE EQUAL THAN OTHERS
In theory, Operations and Procurement Assistance are both of the same rank, and report directly to the Administrator and his deputy. All of the SBA officials interviewed by subcommittee staff said that theory and practice did not match. All correspondence between Procurement Assistance and the field must, by directive, be funnelled through Operations. Historically, Operations has turned a deaf ear to Procurement Assistance's policy pronouncements. Thus, Procurement Assistance at the headquarters level is not really in charge of its own program. Until very recently, Procurement Assistance's role has been to sit on the sidelines and nag. Operations ran the show.
With no operational line authority, Procurement Assistance became, an advisory staff who, whatever the ranking on organizational charts, reported to the Associate Administrator for Operations. This secondary role is of rather recent vintage, since, as the testimony shows, the 8(a) program was run in its early days straight out of the Central Office. As the record also shows, that procedure didn't work very well either. The failure, however, should not be taken as a blanket indictment of central policy control. The record shows that the failure liappened because, although the program was being run from the Central Office, there was no uniform methodology or policy as to how the program was to be run. In the early days, then, the 8 (a) program suffered the double disadvantage of a program bein run at arms length from the actual situation in the field, and having no central body of doctrine to support the organization and monitoring of the program.





16
THE OFFICE OF BUSINESS DEVELOPMENT
For the 8(a) program, the Associate Administrator for Procurement Assistance looks to his Office of Business Development (OBD) for policy and procedural guidelines. OBD was formed early in the program for the purpose of defining the scope and thrust of the 8(a) program and then turning those broad policy decisions into regulations and operating procedures which were to be followed by officers in the field. But, as was clearly illustrated in the hearings, OBD is still in the process of making the basic policy decisions. After 10 years of debating the issues, one might assume that there is a broad consensus on how the 8 (a) program is to be organized and operated. The assumption, unfortunately, is not correct.
One reason for this overlengthy contemplation is the frequent reorganization of the office. Mr. Len Cole's testimony outlines the near pandemonium in which OBD was born, with Mr. Cole interviewing a candidate for a position which was not vacated and then being introduced to the same candidate the following week as the new Director of the office. Since Mr. Cole was under the assumption that he was the oiuce director, his dismay at this introduction is understandable.
Nor was Cole the only victim of this game of bureaucratic musical chairs. In an organization of only 25 people, there is a finite number of ways in which an organization can be organized. Nearly all were tried. One OBD officer, who had been present through most of the (.a'mzes, spent the better part of a morning patiently outlining the ;..nior office, reorganizations and 30 major persommel changes of office C1Aief. This does not include changes of the line staff, which were plentiful. In several cases, division chiefs found themselves working for their former deputies, then sinking back into the ranks, only to rise again to a point where their former chiefs became deputies.
Adding to the confusion was a tendency to appoint politically connected job applicants to political positions throughout the agency and then transfer their position to permanent Civil Service status. Since the political appointees were without exception totally unknowledgable of small business and Federal procurement procedures, SBA ended up in a situation where the "career civil service" officers in several instances knew nearly nothing about their assigned duties.
Given the chaos and confusion within OBD and elsewhere, it is hardly surprising that the oifice's principal policy statement, the Standard Operating Procedure, is a rather mudded document.
STA NDARD OPERATING PROCEDURE
The Si andard Operating Procedure (SOP) is an inch thick instruction book for SBA officers in the field. It purports to tell them who is eligible for the program, how to go about the process of business development and how and when to graduate minority businessmen from the program. (Selected I)'ovisions of the SOP arc reprinted ill the Appendix.)
The present S()P, wltieh was first written in 1974 and amended severI ti Ws sinc fe, is a giant step forward from its predecessors. Prior to 71, the SOP*s, some of which were only two or three pages long, provided only nebulous exhortations to go out and award contracts





17

to whomever appeared worthy of such a privilege, as was deemed proper by the individual field officer. In contrast, instructions on how to fill out the various forms involved in 8 (a) operations were given in overgenerous detail. In essence, the 8(a) program came to look like a house which was constructed without using blueprints. The 8 (a) program, like a house, ended up with untrue walls, water in the basement, and doors that couldn't be opened.

OVERSIGHT MECHIANISM
For all the faults of OBD, much of the investigative work into tIe faults of the 8(a) program was conducted by individual Ol1) oflie(,,s. Ray Harshman, of course, was the first to discover and report I -e fronts and shams associated with the service contract area of the SI ) program. At the time, he was serving as an OBD division chief. After others had reported in more detail the depth to which the program had sunk, OBD formed its own group of management analysts in its rather dramatically named "Surveillance Team." The Team has since done dozens of analyses of firms in the 8(a) program and has faithfully disclosed to senior SBA officials much of the material which was subsequently exposed in the hearings.
As an institutional device, placing the surveillance team in OLD has certain drawbacks. While each report was faithfully passed up tlhe line. the surveillance team was essentially using its own chain of comiand to report some rather embarrassing information. Thus. pIro'ra:im officers responsible for the 8(a) program were being informed by thlir own subordinates that they were running a very shaky program. it is not surprising that no action was taken until the surveillance repov s were made public at Subcommittee hearings.
SBA's auditors and investigators had a much better arran,'mnt. They reported directly to the Administrator or his deputy, and were thus spared the embarrassment of reporting to their seniors concerning other seniors' own ineptitudes.
A principal point of the hearings was the fact that senior SBA officials were well aware of the problems in the program some 5v years before the subcommittee and the public were. The chronology of reports to the Administrator and his immediate subordinates is listed here:
December 1972.-Ray Harshman, OBD division chief discovers
8(a) contracts are being directed to front firms established by 6 major service contractors. In the following months, he reports his findings to the Administrator's Special Assistant and to SBA's
chief investigator.
May-October 1973.-SBA's External Audit Division confirms
Harshman's findings.
July 1972.-SBA's Internal Audit Division reports series of
problems in the administration of the 8(a) program.
April 1974.-H-ouse Subcommittee on Small Business (Conmmittee on Banking and Currency) holds series of major invest igative hearings. While primary emphasis is on loan fraud, some
8 (a) program deficiencies are exposed.
April 1975.-GAO publishes report entitled "Questionable Effectiveness of the 8 (a) Procurement Program".





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July-November 1975.-GAO gives SBA Dunn and Rice reports, which detail how sponsors manipulate front companies.
March 1976.-OBD Surveillance Team reports Atlanta office in
a shambles.
Summer 1976.-Miami Herald runs major series detailing fraud
and ineptitude in 8 (a) program.
October 1976.-Robert Singleton complains to Congress on 8 (a)
project.
November 1976.-SBA headquarters team reports Atlanta office
in a shambles.
November 1976.-Internal Audit Division reports 8(a) program out of control.
January 1977.-95th Congress convenes.
February 1977.-Senator Chiles orders Senate investigation
into 8 (a) program.
July 1977.-Hearings by subcommittee reveal collapse of program. Administration begins clean up.
In addition, the OBD surveillance team was reporting on an almost daily basis that ineligible persons were involved in the 8 (a) program, while the Security and Investigation Division brought Mr. Donald Dunlap. former head of OBD, and Mr. William Murfin, SBA District Director in New Orleans, up on charges of fraud, bribery and gratuities, and conflict of interest.
Nothing ever happened until public hearings were held. With the exception of the April 1975. GAO report, none of these reports were made public.1 And, since the GAO report coded the identities of the sponsors (e.g., Mr. Apple, Mr. Peach & etc.), only the Miami Herald series during the summer of 1976 attracted any attention.
When the scandal had become public, SBA was finally forced to take action. A special team was sent to the Atlanta office, the office which bore the brunt of the Herald expose, only to reconfirm what had been reported in March 1976: The Atlanta office was not in control of its program. Typically, no further action has yet been taken. The subcommittee found the same conditions in March, 1977, as had existed in November 1976. No remedial action had been taken. No SBA official had been dismissed, downgraded. transferred to a less sensitive position or even informally rebuked as a result of their mismanagement.
TWhile not perfect, it is quite clear that almost all the major defects, lunfles and some of the frauds associated with the 8(a) program had been reported to the Administrator and his immediate associates in considerable detail over a 5-year period. It is equally clear that very little was done to correct the situation. The auditors, investigators and surveillance team members did their jobs, and did them well. The rest of 0D131) a1nd thi field establishment did quite poorly; the senior managemient of SBA did nothing at all.

SPECIAL FINDING
Thlie subcommittee is of the opinion that disadvantaged and minority )usinessmen are forced to operate in a business climate that is not conducive to equitable opportunity for all. The subcommittee believes
The ITonse RSucommittee and GAO were given assurances that all defects noted could he corrected. Yet SBA's own November, 1976, report says that almost nothing was corrected.





19

that the 8(a) program can be an important and significant vehicle for the promotion of desirable economic goals through the procurement process.
The subcommittee fully endorses the concept of set-a-sid(,s for minority/disadvantaged small businesspersons.
The recent investigation and hearings have been important in underscoring the great need to have such programs. It is the recommiendation of the subcommittee that the necessary changes be instituted to make the set-a-side program viable and productive.

FINDINGS AND CONCLUSIONS

FINDING No. 1
The subcommittee found an absence of definitive criteria for entrance into the program. Firms were admitted to the program on a case by case evaluation and purely at the description of the appropriate SBA official.
The subcommittee fotmd that there were diverse methods used to quality persons/firms for the program and that, in the absence of definitive criteria, many firms were allowed into the program that defied any semblance of social or economic disadvantage.

CONCLUSION AND RECOMMENDATION
The subcommittee recommends that the Small Business Administration develop criteria for Business Development grants to business firms consistent with demonstrated needs.
The criteria should limit grants to those firms/persons having the following characteristics:
(a) The firm should not have a net worth above an amount to be determined by SBA. The President or controlling partner should not have a personal net worth in excess of an amount to be determined by the SBA.
(b) Criteria for acceptance into the Business Development portion of the program should be based on social and economic disadvantage. However, criteria for contracting opportunities should be majority owned (519) as well as controlled by members of minority groups. The absence of minority control of firms admitted to the program shall be reason for immediate termination of contract awards to the company in question.
Further, minority participation in a joint venture must also be based on the sharing of real economic interest and must include proportionate control over management, interest in capital and interest in earnings.
If the real economic interest in an enterprise or joint venture is represented by debt securities, leasehold interests, management contracts, or other interest owned or controlled by non-disadvantaged persons, SBA shall analyze the enterprise or joint venture closely to be sure that it is a legitimate minority or disadvantaged business and such determination will warrant immediate termination of the contract if the enterprise or joint venture is controlled by the non-ddvantaged group members.





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CHANGES IN THE SYSTEM
The Administrator of the SBA should, through the promulgation of agency regulations, provide for the implementation of this recommendation.
FINDING No. 2
Specific directive authority for orienting contracts to disadvantaged and/or minority contractors does not exist in current SBA regulations.
CONCLUSION AND RECOMMENDATION
The Office of Federal Procurement Policy, in cooperation with the Small Business Administration, should provide leadership and directive authority for executive agency targets in the procurement awards, where applicable.
CHANGES IN THE SYSTEM
Legislation should be passed by the Congress which would indicate the will of the Congress in set-aside stipulations, the procurement policy of the nation should be expressed in the appropriate procurement legislation. The OFPP under the Office of Management and Budget should have the capability of providing necessary regulations to implement the desired authority.

FINDING No. 3
That the Small Business Administration attempts to treat all 8(a) firms alike. SBA officials insist on providing like services for each firm, similar assistance, similar modes of operation, similar limitations on opportunities, etc.
CONCLUSION AND RECOMMENDATION
The Small Business Administration is debating whether its proper role in the 8 (a) program is pure procurement (contracting) or assistance so that businesses owned and controlled by disadvantaged persons can emerge competitive. The Subcommittee suggests that the 8 (a) program can be both.
The SBA should categorize firms according to their capabilities, levels of expertise, marketing capabilities and managerial skills. The S BA would then limit its level of participation with the 8(a) firm based on that level of sophistication.
Examples'
"A" Firms-Those companies that are able to market their
skills on their own. SBA would serve basically as a certification board. SBA would identify the firm as a properly disadvantaged firm and require a reporting procedure from the firm. "A" Firms would negotiate their own contracts, determine their own levels of
hirii n g, aceco utinug, and minimum SBA involvement.
BV Firms--Those companies that are able to market and negofiato contracts with moderate SBA involvement. These would be firms which had been in the program for at least a year but does





21

not have the resources to adequately conduct a full administrative
program for itself.
'6" Firms-Those companies require the full resources of
.SBA's Business Development Program.

CILANGES IN THE SYSTEM
The Administrator of the SBA should, through the promulgation of :agency regulations, provide for the implementation of this recommen,dation.
FINDING No. 4
That the lines of responsibility for policy, policy enforcement, adherence to regulations and program control are fragmented. The whole question of accountability in the national buy situation is cloudy.
Decentralization in its complete form has made Regional Directors totally independent and less accountable for their actions. Congres,sional committees virtually have to conduct "oversight" in each region.

CONCLUSION AND RECOMI]IENDATION
The agency needs a better staffing plan. Furthermore, if effective reforms are to be implemented, more staff will be required, particularly
-at regional level.
CHANGES IN THE SYSTEM
The Administrator of the SBA should, through the implementation of appropriate agency regulations, reassert control over the regions. Further, the Administrator should provide for more effective management utilization of the Associate Administrators so that they will have the necessary authority to effectively and efficiently enforce the agency regulations.
FINDING NO. 5
That in numerous cases disadvantaged businesses were not being properly prepared for entering the economic mainstream because the sole source set-asides did not involve competitive pricing.
The subcommittee also recognizes the small percentage of minority and/or disadvantaged set-asides make up only about three-tenths of
1 percent of all general government procurement.

CONCLUSION AND RECOMMENDATION
The disadvantaged procurement set-aside program should be expanded to include the proper flexibility which would provide for opportunities to permit competitive awards among disadvantaged businesses. Where competitive opportunities do not exist then sole source awards may be utilized. The modified competitive bid situation should be formulated to provide that only firms in similar tier structures are pitted against one another and should be so structured that presently entrenched firms do not dominate the competition/ award process.





22

CHANGES IN THE SYSTEM
Implementation of this recommendation can be accomplished by administrative regulation. The SBA Administrator has the authority to promulgate this regulation.
FINDING No. 6
That the concept, practice and advocacy of the sponsorship program by the Small Business Administration was not in the best interest of the government nor the disadvantaged business persons in the gram.
CONCLUSION AND RECOMMENDATION
The sponsorship program should be limited as a consideration for joining the program and should not be advocated nor advanced by the SBA.
CHANGES IN THE SYSTEM
This recommendation can be accomplished by the appropriate SBA administrative regulation. The Administrator should move promptly to promulgate this regulation and ensure immediate implementation by all regional and district officials.
FINDING No. 7
That many of the employees of the SBA who are charged with administering the 8(a) program have little commitment to the program nor any real desire to provide the necessary mechanics to make the program successful.

CONCLUSION AND RECOMMENDATION
The personnel presently involved with administration of the 8(a) program must be made aware that the leadership of the Administration supports the program. Those persons who harbor distaste for the program should be transferred to programs more suitable for their "talents".
CHANGES IN THE SYSTEM
A formal commitment by the White House and the SBA Administrator to fill sensitive positions in Regional Procurement Assistantships with persons who have a commitment to the 8(a) program.
An Interagency Review of hiring/promotion procedures be initiated to be sure that merit, not political influence, become the primary consideration for promotion and hiring.
That the Administrator of SBA establish a set of standards which will adequately provide for the removal or transfer of any agency person based on their failure to act in compliance with fulfilling the o-jectives of the program.
FINDING No. 8
That, there is framiuent nation of minority and disadvantaged business prols and that often the personnel are at variance with each (0]tr. If this is true of personnel it is doitbly tnrie of the agencies theinselves.





23

CONCLUSION AND RCMEDTO
There should be'a concerted effort made by the Congress to str-eamlline programs that deal with minority and disadlvantagred businesses. The procurement policy involving the 8 (a) program should be reasonably consistent with existing procurement laws and regulations.

CHANGES IN THEF SYSTEM1
Legislation should be enacted by the Congress to consolidate miinority business enterprise programs in either the Department of Commnerce or the SBA. There is current legislation making provisions for both agencies having primary jurisdiction.

FINDING No. 9
That the definition for "advantaged businesses" was not properly nor fully understood by those persons who are in charge of administering the program.
CONCLUSION AND RECOMMENDATION
The agency should clearly define who should be eligible for the program with careful consideration being given to whether the listed owner or president is in fact the person who controls the firm and makes all the meaningful decisions. Documentation should be given to ascertain lines of ownership and responsibility within the listed corporate structure.
The clear and definite limits of who is "disadvantaged" must be spelled out for the possible recipients so that they, too, will understand the implications and impact of the program.

CHANGES IN THE SYSTEM
Definitive guidelines developed by the agency.
The Administrator of the SBA should promulgate such guidelines in accordance with the stated goals and objectives of the 8 (a) program. The authorizing and oversight committees of the Congress should be consulted for appropriate input on such guidelines.

FINDING No. 10
That "graduation" criteria is not properly spelled out and recog-nized among those contractors who are in the program.
CONCLUSION AND RECOMMENDATION
That the agency should provide standards and regulations which
-would spell out terms of graduations and successful completion of the program by participating companies.

CHANGES IN THE SYSTEM
Administrative guidelines proposed by the Administrator of the SBA.





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FINDING No. 11
That the requirements and information as outlined in the current business plan is largely repetitious, somewhat irrelevant, and very often confusing. The detailed business plans are looked upon by many businesspersons as a means employed by SBA, to limit participation in the 8 (a) program.
CONCLUSION AND RECOMMENDATION
The extensive redtape that is required to do business with the Federal government prevails in every executive agency of the government, the SBA is largely no better or worse than the other agencies. The subcommittee, however, feels that the 8 (a) program is geared toward disadvantaged firms which often would not have the accounting, legal, and other expertise necessary to fill out long, detailed business plans.
The subcommittee believes that the necessary and pertinent information needed by the agency to effectively administer the program can be produced in one-third the paperwork now required by the SBA.

CHANGES IN THE SYSTEM
The Administrator of the SBA should promulgate the necessary agency regulations which would reduce the business plan to approximately six to eight pages. The applicability of such a business plan should involve each of the ten (10) regions.

FINDING No. 12
The opportunities for legitimate disadvantaged firms were not asreadily available as the Congress had been led to believe and that many of the smallest firms were not properly advised of Federal contracting opportunities. The SBA has a self-imposed limit on the number of firms that are kept in the portfolio.

CONCLUSION AND RECOMMI13ENDATION
The program should be expanded to include a widening of basic contracting opportunities for disadvantaged businesses. The subcommitte believes that there can be significant new procurement developed so that private small businesses in the contracting area may not be adversely affected. Also, the implementation of recommendation No. 4 would lend itself to the desired, orderly expansion of program entries.
CIHANGES IN TIIE SYSTEM
Implementation of this recommendation can be accomplished by administration regulation. The SBA Administrator has the authority to promulgate this regulation.

FIND NG No. 13
The su bcommittee found that many( disadvantag-ed business firms could not qualify for the full scope of surety bondig required fomany construction and service contracts.





25

CONCLUSION AND RECOMMENDATION
The Small Business Administration should have the capability to provide a measurable percent of the bonding requirement on behalf of the disadvantaged business person. The SBA should have the authority to provide from 10 to 50 percent of a disadvantaged firm's bonding.
The bonding percent would be considered a part of a company*s Business Development Expense.
CHANGES IN THE SYSTEM
Pursuant to this recommendation, Congress should legislate provisions under which this recommendation would be implemented. The resulting regulations promulgated by the Administrator of the SBA must be in accordance with Congressional intent.

A FINAL ASSESSMENT
Total minority ownership for the nation's business firms could not be established. However, it was learned by the subcommittee that blacks own approximately four percent of the firms in this country. Blacks also control about one percent of the nation's total business assets.
Minority entrepreneurs who attempt to enter the economic mainstream must come to grips with the following key facts:
The major government agency charged with assisting minority
business efforts-The Small Business Administration- has been consistently criticized in Congressional inquiries concerning the
agency's commitment to helping minorities.
The only congressional focus for minority business exclusively
is in the House of Representatives-the Subcommittee on Minority Enterprise and General Oversight.
The Office of Minority Business Enterprise (Department of
Commerce) the executive branch's other focal point was the subject of a recent very critical Government Accounting Office report.
The biggest government procurement dollar is spent by the
Department of Defense. DOD last year "let" approximately 40 billion in contracts but estimated that only about 100 million went to minority firms. (However, it was with DOD that many of the "front" firms did business so legitimate black firms got even less
than this quoted low figure).
The competitive market place is not color-blind and many white
firms have built-in factors in their favor which makes it virtually impossible for minority firms to get a "foot-in-the-door"
even on so-called competitive contracts.
Government contracts are only part of the solution to making
sure that minorities are included as significant contributors to
the national economy.
The restrictive industries, such as construction, and the hazards
of obtaining surety bonding, are barriers which minorities face in the free enterprise system. One minority contractor noted the problems faced in the construction industry are monumental for any small contractor who would go against the older established
firms but is doubly tough for minority firms.





26

The Small Business Administration conducted a full review of the ownership and control of all firms enrolled in the 8 (a) Business Development Program for the purpose of recertifying the eligibility of each company. The recommendations of the review committee were not available at the printing of this report. However,.the subcommittee feels strongly that program modifications by the SBA must deal in specific terms with eligibility and graduation criteria. The absence of clearly defined standards will ultimately lead the program back into the predicament discussed in the subcommittee's hearings.
Although the subcommittee's hearing generated sharp public awareness of problems that existed in 8 (a), the problems certainly were not altogether new. In 1974, the Small Business and Minority Enterprise Subcommittee first learned that the use of "fronts" to obtain 8 (a) contracts was widespread, however, the practice continued. In 1975, the United States General Accounting Office (GAO) conducted an extensive audit of the program and again related the p active employed by many white businessmen of luring blacks into joining dummy corporations and then bleeding the company dr .
A Miami Herald's investigative -reporter, Andrew Rosenblatt, revealed continued abusive practices in the SBA and raised doubts about SBA's official position on the "sponsorships". Mr. Rosenblatt's articles also called into question the competency of southeastern SBA officials in the Atlanta regional office. Allegations concerning the regional officials centered around the award of an 8 (a) contract to two minority contractors from Florida.
One of the contractors, Robert L. Singleton, President of Singleton Construction, Inc., contacted Senator Chiles and raised questions involving the government's responsibility as the prime contractor in the procurement award.
The Singleton case was thoroughly investigated by the subcommittee. Indeed, Singleton was the lead witness for the six days of hearings held by the subcommittee. The subcommittee felt that Mr. Singleton's testimony and presentation of facts should have led to efforts by the SBA to favorable resolve his case.
As the Committee's Report went to press, Singleton still had not had his case fully reviewed by the Administrator and now is on the verge of bankruptcy.
Mr. Singleton's plight was echoed by other minority contractors who did not find SBA's procurement leadership advantageous.
The 8 (a) program does have success stories. However, they are rare and probably involve individuals whose independent expertise were ('turning points" rather than SBA's.
The recommendations submitted by the subcommittee are intended as reform measures which will enhance the opportunities for minorities and other disadvantaged persons to compete effectively *!i the open mafl replace so that every business resource might be utilized.
THE SPONSORSHIP PROGRAM
'Tho sponsorship program, as created by the regulations promul(_Yfited I)y the SBA, was fully exploited by the sponsors to maintain coid rol over flie industry (mostly food and janitorial services) which In g f i rms had previously controlled.





27

The abuses iii the sponsoishi) P)1rogramfi were do11 ientled by go)vernllmental ilvestigations carried on by the Ilouse of ReTresentaties a well as the General Account ing Office. II however the abuses cont inu I I
The abuses contained mainly because BA 's Regional and ( entral
Office "accepted"' the sp)oiiLso iip )program and m1iade little effort to propeily monitor the activities of the nondisadvantaged stockholders.
The rip-oiffs and exploitation of the disadvantage persons in tIle firms under (question raised grave doubts tliat tlhe SBA really tried to control this situation.
('Closely supervised "joint ventures" would very definitely be a viable alternative to sponsorships.
Mr. Len Cole, the former director of Business Development of the SBA testified on July 8, 1977 concerning the beginning of the sponsorship program and how his office had envisioned using large corporations to assist minority entrepreneurs.
Senator Chiles questioned Mr. Cole concerning the applicability and the original intent of the sponsorship program, as follows:
Chairman CHILES. I understand that you supported the original concept of sponsorship. Explain it for me. please.
Mr. COLE. Yes, sir, but not under the context in which it's been described in these hearings.
The original concept of the program was that we recognized at the onset that the big gap in minority enterprise development was the lack of management and technical knowhow in developing businesses, and that we had to turn to industry to provide those types of talents. We didn't have them within the government structure. And this should became an industry-government-minority joint effort.
We were at that time thinking about sponsors, but we were thinking about the giant corporations in the United States, not the type of companies that you've been discussing here.
In fact, one of the first actions that we did initially was call 18 of the largest company representatives-of 18 of the largest companies in the United Statestogether and presented our plans to them, and tried to get their cooperation in assisting us in the development of minority enterprise.
Chairman CHILES. Was that cooperation denied ?
Mr. COLE. No, the cooperation was not denied by industry. But very shortly thereafter the program really became feverish and got completely out of hand, as I described before, in getting contracts out. So that the type of planning and the time frame that would be necessary to do the type of work that we were talking about initially was simply not available to us.
Chairman CHILES. So the original concept of sponsorship-now this is interesting to me because I can understand it a little better now-the original concept of sponsorship was that you were going to deal with somebody like the Fortune 500 corporations, and you were going to say to them, or government was going to say to them, as a public service you should help these minority businessmen come into the mainstream. This is a public policy decision. This is something that needs to be done, and sort of a public service you should help that.
It was not to be sold to big corporations on a profit motive, was it?
Mr. COLE. NO, sir, it wasn't.
And the additional wedge that the government felt it had was that many of these same giant corporations were heavily involved in government contracts themselves, and that it wouldn't take too much of an inducement on tbe part of the government to get them involved in supporting us and assisting us in this program.
Chairman CHILES. As part of their sort of minority compliance or equal conmpliance, they would be willing to do this? Mr. COLE. Yes, sir.
Chairman CHILEs. And you say that cooperation appeared to be forthcoming hut it just was turned off when they went into the fever pitch of just getting the business out.





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Mr. COLE. Yes.
Chairman CHILES. And that's when the sponsorship, as we know it now, came into being.
In report released to the Congress in April of 1975, the General Accounting Office wrote of the sponsorship program:

CHAPTER 3. EXTENT AND EFFECT OF SPONSORSHIP IN THE 8(a) PROGRAM
SBA encourages nondisadvantaged businesses (sponsors) to provide management services, training, and capital to disadvantaged small businesses. However, the sponsors often retain control in 8(a) firms, which appears to he inconsistent with SBA's objective of helping small businesses become selfsufficient. SBA does not routinely review or monitor the activities of sponsored S (a) firms to determine if they control the business.
Also, SBA lacks criteria to define the extent to which sponsors can collect fees from 8(a) firms for services provided during the performance of a contract. For example, the sponsors included in our review charged their S(a) firms fees ranging from about 6 percent to about 17 percent of the firms' gross receipts. Also, SBA does not regularly analyze other financial transactions between each S (a) firm and its sponsor to insure they are proper and reasonable.
We reviewed files at the 10 SBA regional offices and identified 89 8 i a) firms which had sponsors. Our analysis showed that 77 of these firms received S (a ) contracts amounting to about $132.5 million. We evaluated 25 of the 89 firms (20 of the firms had receipts of about $40.2 million in 8(a) contrasts) and contacted the 7 sponsors of the 25 firms to determine:
How and why experienced non-8 (a) firms became sponsors.
What controls were exercised by sponsors.
What services and other items cost 8(a) firms.

HOW AND WHY EXPERIENCED FIRMS BECAME SPONSORS
SBA awarded large Government contracts, mostly service type (janitorial and military kitchen police), to sponsored 8(a) firms rather than award smaller contracts to smaller nonsponsored 8(a) firms. The latter action would have required more of SBA's manpower and other resources for monitoring, training. and management assistance. However, the practice of obtaining large contracts presented SBA with two problems:
The small disadvantaged firms usually lacked the capital and caliber of management required to successfully perform the large contracts.
The independent contractors that previously obtained and performed the contracts competitively realized that they would lose contracts to the 8(a) program and became highly critical of SBA and the program.
The seven contractors told us they generally were very much opposed to SBA's practice of using large contracts for the 8(a) program. The service contractors contacted SBA officials, sought solutions in the courts, contacted congressional representatives, and ultimately sent a delegation of representatives to the White House. Then, the contractors became aware of the profit potential in becoming sponsors and decided not to fight SBA but to join in SBA's effort to develop viable business.
Six of the seven sponsors we interviewed said they had become sponsors to make profits and to protect their livelihoods. Although six sponsors expressed a desire to develop viable businesses, five said they had very little incenitve to create viable businesses which would later become competitive and therefore preferred to establish a relationship of interdependency which would continue indefinitely.
The experienced contractors generally became sponsors by forming new corporations using former employees as stockholders and officers, getting the new corporations approved for the 8(a) program, and providing goo( ds and services to the new corporations for a fee. Six sponsors also obtained 40 plercentIl or less ownership in the new 8 (a) firms.

CONTROLS EXERCISED BY SPONSORS
All of the 25 firms we reviewed were influenced by their sponsors: were very dependent on them; and had, through various actions or inations delegiated a high degree of control to the sponsors.






29

The business plans and/or management agreements between the firms and their sponsors did not contain detailed descriptions of services to 1e provided by the sponsors or the fee to be charged for each service. Instead, thy rally stip)ulat(d that the sponsors would provide the S(a) firms t hose types of services customarily considered general and administrative iteins--training. a,,-unting, figuring taxes, filing management reports, and providing secretarial and clerical help. In addition. all of the sponsors generally represented the ( a) i rms in identifying and negotiating new contracts, dealing with SBA, dealing with union representatives, and locating and obtaining tinanicing.
The activities of the firms hich were must commonly influenced by the seven sponsors were:
Accounting: At one time the books of 20 items were maintained by the sponsors at the sponsors' places of business. At the completion of our review, the books of 18 firms were still maintained there.
Corporate records: At one time the corporate records of 20 firmnis ,~ re maintainled by thile sponsors at the sponsors' places of business. At the comlletion of our review. the corpol)rate records of 11 firms were still maintained tewre.
Cash expenditures: Six sponsors were authorized to make cash expenditures for 17 firms without obtaining signatures of officials of the firms.
Payroll: This function, provided by 6 sponsors to 19 firms included (1) computing gross pay and withholding, (2) writing the checks, (3) igning the names of thile firms' treasurers ) by machine, and (4) mailing checks to firms.
Contract negotiations: The 7 sponsors represented 20 of their firms in negotiations with contacting agencies.
Board of directors meetings: At one time 7 sponsors were on the boards of directors of 21 firms, and 3 of these sIponsors controlled the boards of 5 of these firms. At the completion of our review, three sponsors were still on the boards of six of the firms, and two sponsors still controlled the boards of three of the firms.
Stockholders meetings: Six sponsors held stock in 18 firms at some time and were in a position to influence thile stockholders' meetings. Althou;.h the other sponsor did not have stock ownership, it had similar influence through a partnership agreement. Stock in six firms is still owned by three of the sponsors.
Dealings with financial institutions: Four sponsors arranged for loans or lines of credit for 14 firms by arranging for assignment of contract receipts to banks. usually located near the sponsors' places of business. The banks paid no interest to the firms because their funds were maintained in checking accounts. Although the accounts were sizeable, there were no indicaitons that short-term investments were considered.
Leasing equipment: Two sponsors and a leasing company owned by a stockholder of another sponsor leased equipment to 10 firms. None of the firms had an option to buy the equipment.
Dealing with contracting agencies: All of the sponsors represented the firms in resolving problems arising from contract performance and in negotiating changes in contract specifications and any other items which would affect the successful completion of contracts.
SBA considers ownership of 51 percent or more of an 8 (a) firm by disadvantaged individuals as evidence of their control. In February and October 1973, SBA's External Audit Group reviewed five 8(a) firms with two sponsors and concluded that control of these 8(a) firms rested firmly in the hands of the sponsors.
Example of a sponsorship arrangement
The manner in which control is exercised by a sponsor is sometimes difficult to understand. A description of the business relationship between a sponsor and 8(a) firms and the extent to which the sponsor exercised controls is discussed in appendix IV. This case should not be viewed as being typical for all sponsors; however, it did closely resemble those cases we reviewed. The sponsor discussed in the example in appendix IV controlled two mess attendant firms in July 1974 in the following manner:
Incorporating the firms as close corporations.
Appointing its company personnel to key positions in the firms.
Completely controlling cash expenditures.
Controlling management policy through stock ownership.
Maintaining the firms' books and records.
Furthermore, an official of the sponsor told us that it was not intended that the 8 (a) firms become viable to the point where they would become competitors






3O


in the mess attendant services industry. He also stated that once the 8(a) firms became viable, he did not believe they could survive unless they diversified into other areas of the services industry, such as ground maintenance or janitorial, institutional food, or security guard services. Exam pies of controls based on interviews
The activities of the owners of sponsored 8(a) firms we reviewed were often limited to supervising, including keeping employee time records and keeping the sp)isors aware of any financial problems. Fourteen presidents were former employees of their sponsors.
We visited the business offices of the firms and interviewed 23 firm presidents to determine their familiarity with the operations of their businesses. Our interviews generally indicated that they lacked even a basic understanding of routine business matters and were not aware of very important matters specific to their own h.isinesses. Of those presidents interviewed
one did not know if he was on the board of directors;
two did not know who prepared their firms' financial statements;
three did not know if their firms were on a cash or accrual accounting
basis;
one did not know if his firm had paid dividends;
two did not know if the fees for the general and administrative services
provided by their sponsors were based on a percentage of gross income;
three did not know if their firms were drawing interest on the cash in their
bank accounts; and
six said they were weak in finance and accounting, nine said they were
weak in preparing contract bids, and two said they were weak in negotiating contracts.
One disadvantaged secretary-treasurer of an 8(a) firm signed corporate documents and checks with an "X." He stated that, as an officer of the firm, he cleaned up around the office. SBA external auditors reported that the officer's wife said le spent all of his time working on the sponsor's farm.
In 16 of the 25 firms, the disadvantaged owners had previous experience in janitorial and kitchen police work as managers for the sponsoring businesses, in the military, or elsewhere.

COST OF SPONSORS' SERVICES
Sponsors were paid for their services by management fees. Our review of 25 firms showed the following expenditures were made as of June 30, 1974.

Service fees
Paid to Percent of
8a) firms sponsors gross income
Sponsor Number Total income

A ---------------------------------------- 6 $16,094,000 $2,534, 000 15.7
B---------------------------------------1 388,000 64,000 16.6
U---------------------------------4 11,758,000 1,066,000 9.1
D---------------------------------------3 403,000 31,000 7.7
'E ---------------------------------------- 2 162,000 10,000 6.0
FT ----------------------------------------- 4 11,483,000 889,000 7.7
G . . . . . . . . . . .5 2 2 2
Total ---------- --------------------- 25 40, 288, 000 4, 594, 00 11.4


Amounts shown are for the 11-month period ended May 31, 1974. 2Not obtained.

SRA has not established criteria for determining the reasonableness of fees in(d other amounts paid to sponsors.
Il ilditioi to paying fees for services, 8(a) firms paid for other items provide(d b y their sponsors or for the sponsors participation in profits as stockhold(rs of S (a) tirns, as discussed below. Salries
Three sponsors received salaries from four firms.






31

Sale of owncrs8hip
SBA required two of the sponsors who acquired stock in eight 1f irls to sell their stock on or before a specified date. The sensors did so, and by agreeiet with the other stockholders of the firms, the sale )rice of the stock was based on the projected value of the stock at a future date. This increased the sale price of the stock and provided the sponsors with substantial capital gains. For example, one sponsor acquired 3,1(K) shares of an (a) firn's stock ill 1971 for $3,100. In January 1974 he sold that sto(k back to the firm for $263,5). Lcasc of equipment
Two sponsors and a leasing company owned by a stockholder of another sponsor r leased equipment to 10 firms. In one case a sponsor obtained a tooling inachine for $14,575 and leased it to an 8 (a) firm for about 9 months at a total charge of $45,000. In addition, the sponsor charged the firm $3,000 for tools associated with the machine and $3,000 for setting up the machine. The machine was never put into proper working order. The sponsor later sold the machine for $9,000 to a third party.
In another case, the leasing company owned by a stockhol!er of a spionsor charged an 8(a) firm about $17,000 for reconditioning and n(xifying aircraft refueling trucks to meet Government standards. The leasing company owned the trucks and intended that the 8(a) firm would bid on a refuelin, contract and, if successful, lease the trucks. The 8(a) firm was low bidder but was not awarded the contract because a preaward survey determined that the (on(lition of the trucks was unsatisfactory for performance of the contract. Although the 8(a) firm never used the trucks and although the condition of the trucks was responsible for the firm's loss of the contract, the leasing company never reimbursed the firm the $17,000 for the cost incurred in reconditioning and modifying the trucks. The firm did not have a written agreement specifying the terms of the lease.

CONCLUSIONS, AGENCY COMMENTS, AND OUR EVALUATION
Some experienced contractors became sponsors to make profits and to protect their livelihoods in the Government contracting industry. Their goal was accomplished by forming new corporations using former employees as majority stockholders and officers, securing minority stock ownership for themselves, getting the new corporations approved for the 8(a) program, identifying and negotiating contracts for the new corporations, and subsequently providing them with services and other items for a fee.
Subsequent subcommittee investimration discovered that acti ve sponsorships and arrangements were still in effect with many firms still in the 8(a) program. The subcommittee investigators concur-ed with the GAO 1975 findings that the SBA actively encouraged sponsorships.
During the cross-examination of Mr. Wiley Messiek, the regional director of Region IV (Atlanta) Senator Chiles said:
Then what you're saying is, that part of the 8(a) program having to do with service contracts, in which sponsorship was put in. was sort of a "sham" from start to finish? On the one hand, the SBA could talk to Congress and the public about the efforts being made in assisting black and other minorities into the mainstream of American society, while, in actuality, most of the money would continue to go to the same people it always had been to, the successful white contractors, and that the government would be paying more money for thise contracts than it had been in the past?
Later in the hearings in an effort to learn tme, origin of the sponsorship re elation, Senator Chiles stated:
Senator CHILES. Well. then, would you say. Mr. Messick, that you participated in the original deci4on to permit the big contractors to continue having the business, with the sort of minor annoyance of having to select a few black "fronts" and going through the game of filing business plans with your office, completed in many instances with phony descriptions of how well the disadvantaged participant was getting along?
Mr. MESSICK. Senator, I don't know that I would agree with all of your prefacing remarks in your question, but I will answer specifically that I had no part






32

in the policy-in fact, I was somewhat persona non grata in the Central Office at that time.
Also, ordinarily the field people aren't called on-Well, they may be called on at times for goal discussions, or called on for policy discussions. But the policies are made in the Central Office.
Senator CIHILES. Did you agree with these policies?
Mr. MESSICK. By "did I agree with them", do you mean
Senator CHILES. Well, you're one of the most senior officials in the SBA, and with the decentralization of the agency, you're pretty free to operate and manage your Region pretty well as you see fit.
Did you protest this action to the headquarters officials?
Mr. 2NESSICK. I may have at the time, but I don't recall protesting this action to the Central Office at the time.
Senator CHILES. Do you know whether those would have been written protests? Would you have any copies
Mr. MESSICK. Senator, I don't recall. The Agency, or agencies, setting up the program were calling the shots. As far as I recall, I didn't write any memoranda making protests of this fact.
Senator CHILES. Mr. Goodbout told us he only had one example of a sponsor company in his District, that he didn't like it but he didn't do any more. Yet Region 1V seems to have more than. I guess, more than anybody, right, more in number?
Mr. MEsSICK. Possibly. I'm not sure of that. But he didn't tell us why he was unhappy with this.
It is interesting to note-Senator, most of the sponsorships in the service area are in the Sun Belt. They start with Virginia in Region III, swing around through the Southeastern area into the Southwestern area, and I'm not sure whether California has any now or not. I'm not even sure that they ever had any. But my impression is they did have some, and Region VI had quite a few.
One of the reasons for this is that most of your military bases, particularly your Army bases, are in this area, and your big requirements for servicing an entire base are in this area.
As n. hator (hiles continued to press for answers on the sponsorship question, he read from the GAO report.
Senator CHILES. It says:
"None of the disadvantaged stockholders had taken the initiative to form an 8 (a) firm. This was done by the sponsors in all cases, and with the exception of a couple of the firms, the officers and directors were selected by the sponsors.
"The officers of the original group, the Dunn group, Marshall, Rupert and Jorgen (phonetic) enjoyed a high degree of influence over the operation of the 8(a) firms by placing themselves, their officers and their key employees, as officers, directors and key employees of the 8(a) firms. Marshall served as assistant secretary-treasurer and director of all of the firms, except AR&S."
It says. "Henry Ferguson, a former employee of Rupert's, was the secretarytreasurer and director of Technical and a stockholder in Palmetto, Versatile, and Service Enterprises.
"Ferguson, a black man in his seventies, worked on Rupert's farm. When appointed secretary-treasurer to Technical, Ferguson accepted the position by signing an 'x'.
"We note the minutes of Technical's directors and stockholders meetings stated that Ferguson acted as secretary at those meetings.
"Furthermore, in a progress report to SBA, Marshall wrote, 'Mr. Ferguson function : ,s secretary-treaturer under the direction but ever-lessening supervision (f the sponsoring company. HIe is somewhat behind other officers because he ha, nct ,been with the company as long, but he is progressing very well.' "
That's a man that has to sign his signature with an "x", who worked on a farm.
Would you say that's a minority businessman that we were helping out, that we were teach hing how to become a full-fledged businessman, to be able to operate on his own ?
Mr. MrssICg. Senator, I think the GAO concluded correctly that there was not much lielihood of Mr. Ferguson being a successful 8(a) contractor.
Let i- say this, that the Dunn group sponsorees began to break away as AR&S, T believe. and the Regional staff did what it could without violating the privity of contract to help and encourage the people to break away.
Incidentally, AR&S






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Senator CHIILES. You talk about privity of contract. That's a term I respect because I'm a lawyer. But you got a report on Dunn as early as 1973. What I want to know is what action did you start taking in 1973-and you got another report in 1974, and another report in 1975, and Dunn is still-we see in one of the last reports that we have that at least three of them are still in the program, and in one of the last reports that we have it says, to date, they're still exercising all kinds of control over the companies.
Mr. MESSICK. Well, Senator, it was my Impression that the relationship to the Dunn group had been severed.
The senator continued:
But what I want to get to is, from 1973 on, when you saw the Dunn groupand certainly, you were able to see from 1973 that this was set up strictly as a
**front." They selected all of the people, not only the people who were trying to go into business for themselves. They were exercising all of the control. They were siphonirng off in large measure all the funds. They've got an arrangement in which they're renting all the equipment out of one company; they're billing, all of the account ig services, out of one company, with horrendous-sized accounting bills.
All of that is going on, and you start talking about the privity of contract. They continued to get contracts after 1973, did they not?
Mr. MNESSICK. Yes, sir.
Senator CHILES. So the Dunn group continued to benefit financially since 1973?
Mr. MnssicK. Well, to some extent it did. The magnitude of the problem was
-I dont recall the exact date of the GAO report, but they went into it rather thoroughly and laid it out. After that time the companies began to break away, tried to break away, and we lent them encouragement.
Senator CHILES. One of the things you had them do, you had them purchase back the stock---or they started purchasing back the stock, because it appeared that you felt if you could get them out of the ownership, that would be the cha nge.
Wasn't some of this stock bought back at tremendous sums?
Mr. MFssicK. It was determined later it was, that unfortunately some of these companies, in buying the stock, improved their working capital situation.
Senator CHILES. Three-thousand percent ?
Mr. 1,x.ssici;. I'm not aware-three-thousand percent of what?
Senator CHILES. Of what they paid for the stock. They paid a buck for the stock, and some of it went as high as $3,000 a share, book value, just taking back the money the government put in there.
The )vernment contracts they got under the 8(a) program, and the poor minority people didn't get any of that. They got nothing. And they paid out the assets so the company is left flat.
Did you all have to consent to the stock arrangements, for the pay out?
Mr. M1ESSICK. I would need to ask some of the staff about that. I suppose there was implied consent.
If, after we found out about it, we continued-you started making the point, the statement, as if this arrangement was by us. I just don't think that was the case at all, Senator.
Senator CHILES. Who was the arrangement by?
Mr. MIzsslcx. Between the sponsors and those who were being sponsored.
Senator CHILES. But the '73 report tells you that the minority people didn't come to SBA and say, "Let's go get a contract." Now, that could have appeared to your office, maybe, if somebody didn't do any checking at all prior to the '73 report. But once you had the '73 report, you know these companies were organized by three entrepreneurs, that they organized each one of these comlpaniesTechni'eal Services. Services Enterprises, Inc., Expedient Services, Inc., Service Enterprises, Inc., Versatile Services, Inc., Gemini Food Services, Inc., and Palmetto Enterprises, Inc., AR&S Enterprises, Inc.-that they organized them and selected the participants they got a guy that worked on a farm, somebody else that worked in the office as a janitor, and they went around and got themselves some black participants, and then they started getting the bids. We know that in addition to getting the bids they siphoned off money, siphoned off money-this is a GAO report, now, which came out in '74. I don't know what l the '73 report said, but it says, "A review of the financial records of the seven firms sponsored by the Dunn group, all of which are maintained-" all the records were kept at Dynamic Enterprises, which is one of the Dunn parent companies "-discloses that $4.37 million, or 25 percent of the $16.48 million, the






34

combined gross income of these firms, 8(a) firms, in commercial sales from May 27, '71 to June 30. '74, was paid to the sponsors or employees, officers, and stockholders of the sponsor's corporation for management fees, leased equipment, salary, sales of stock ownership. and many other items.
"In contrast, the disadvantaged stockholders received a total of $734.000." So the three principals and the employees of their companies got 25 percent of $4.37 million. and all the disadvantaged employees got $734,000.
"As a result of our audit, we notice that numerous payments had been made to sponsors of the 8(a) firms. We identified total payments of $1.92 million which are considered questionable. Many of these payments are questionable because they were payments for items not covered by the management agreement resulting in duplicate payments: $170,000 in personal expenses of the sponsors: $2,689 for stock or sponsors held in the S (a) firms, although the valuation of the stock at the time of the sale was questionable; $1,066,600 for other reasons; $675,000." So they questioned $1,915,674.
Now, what happened to those items that GAO is questioning? Has this gone into the Renegotiation Board?
MIr. MESSICK. Senator. I don't think that the Renegotiation Board-and this is an impression-has moved on it.
Senator CHILEs. Did you send it into the Renegotiation Board?
Mr. MESSICK. No, sir, I have not personally sent it.
Senator CHILEs. It says the sponsors sold their stock back to the corporation, or individually to the disadvantaged stockholders, for $1,066,600, realizing a profit of 2.844 percent. That was a little high when I said 3000 percent.
So. 2.844 percent. The disadvantaged persons usually received only par value when they sold their stock. One disadvantaged stockholder sold his stock for more than he paid for it, one.
Now, my concern is. when this comes to your attention, in 1973 and 1974, and in 1975, why didn't you quit doing business with these people? Why didn't you quit giving contracts to these people, or why you didn't run them off?
Mr. MESSICK. Well, we didSenator CHILES. When you find out they've got a janitor-I mean, a fellow that works on a farm that signs with an "x", and the guy puts in the report he's making satisfactory progress, you don't think that gave you some excuse to run that fellow out?
Mr. MESSICK. Shortly after the GAO report was made on that, these companies did begin to break away.
Senator CHILES. They began to break away?
Mr. MESSICK. Yes.
Senator CHILES. Mr. Messick. that doesn't satisfy me because they began to break away by getting 2,844 percent profit.
In the last report that we have, April of 1977, it says that the internal auditors looked at fifteen firms in the Atlanta Region which appeared to be wholly controlled by white sponsors, and they found twelve of the fifteen owners did not appear to be actually managing the firm, although the fifteen had been formed solely for the purpose of entering the 8(a) program.
Five of the fifteen owners did not appear to have sufficient education or experience to become businessmen. In five of the fifteen cases, the 8(a) ownership salary was unreasonably low, as compared to the other officers' salaries.
In 10 of the 15 cases the 8(a) firm had the same address. shared the same office space, with the sponsoring firm. And in 10 of the 15 cases the initial capitalization of the firms was minimal, a thousand dollars or less.
So they concluded, "Our review discloses sponsorship arrangements were not in most cases beneficial to the 8(a) firm sponsors. Rather, the benefits accrued to the sponsors who controlled the 8(a) firms."
In some cases the benefits were considerable, but even in '77 they're concluding you've got 12 owners of the 15 that they looked at-they didn't look at all of them, but they took samples. But they didn't appear to be actually managing the firms. It's hard to say that you're graduating them up. Mr. M:ESSICK. Well, SePnator, their program started out with ownership, and we got no instructions at any time from Washington that sponsorships were forbidden or not to be used.
We went from ownership to try to go, in most cases, to management agreements, which should have been easier to determine, you know. in advance, what the sponsors and sponsorees were going to get. and what their rights would be.
As Pir a I know, in all of these cases., the people who were being sponsored :gred(l to the system for the contract involved.





35

One thing we need to remember is that very often the disadvantaged contractor brought only his willingness to be Involved in the program, and som1etimeWS SoniC1 experience as a foreman or managerSenator CHILES. In the Dunn case they didn't bring their willingness. Somnebodywvent out-these three entrepreneurs went out anld got them.
Mr. MESSICK. WVell, I think that's true in most of thosee cases. T don't klomv that it's true in all of them. I (10 think it's true in most of them.
Senator CHILES. True in most of the cases?
Mr. MESSICK. True in most of the Dunn cases, that's true.
In further discussion of the GAO's role, Senator Chles noted:
Well, in 1974 the General Accounting Office started the audit regarding the activities of the organization referred to as the "Dunn Group". To quote from a telegram sent by your Mr. Coker, (phonetic) your regional counsel. "GAO is extremely critical of the amount of money drained off by the sponsors by means of management agreements, lease agreements, stock sales, salaries and other devices." He noted GAO viewed the various contracts between the sponsors and] their front organizations as "an agreement to suit any occasion".
He also noted that, "Perhaps it would be possible for the agency to adopt a posture which will leave us looking somewhat better than I think we do today with regard to the 8(a) sponsorships."
That was April of 1975. The SBA didn't look very good then, and I don't think it looks very good now.
Mr. MESSICK. Well, SenatorSenator CHILES. And as a result of that, again of that audit, which told you at that time they were concerned about the ownership arrangements, they were concernied then about the stock sales, what corrective actions did you take?
Mr. MESSICK. Maybe other people could speak to the details better than I can. We attempted to assist them in breaking away from the Dunn group, these that were sponsored.
I was looking at some of the testimony here, in the '73-I mean in the '74 and '75 year-and Mr. Dabo (phonetic said, "Is there any intention or directive by your agency to eliminate such sponsors", and Mr. Kleppe said, "I would never say that would not happen, but at the present time I can tell you it is not under advise. At the present moment we continue to get complaints on both sides, some expressions, I should say, on both sides, but so far that's the way we're functioning."
We read his testimony, and the report that was put out subsequently, and. Senator, there was no clarion call-I think you would agree there was no clarion call on that for elimination of all forms of sponsorship agreements, although we had been trying to improve them to get a better break for the disadvantaged participants.
There was certainly no charge to the agency, however, that they were from that point on forbidden to try to improve the situation and get a better break for the people who were being sponsored. In fact, I think they have progressively drawn more benefits and they will not much longerSenator CJi-iLEs. You say there was no "clarion call". I don't think Congress, to my knowledge-maybe they did-but I don't think Congress ever got a copy of the GAO Dunn report.
Mr.".MESSICK. Yes, sir. Yes, sir, Senator.
Senator CHILES. The Dunn report, I mean on the Dunn group?
Mr. MESSICK. Oh, I'm sorry. The GAO did not distribute, for reasons of its own policy but there was enough in the previous reports, the details to put the Congress on notice of the problem areas, Senator.
Let me just say this: It would have been good if the Congress had taken note of this program in '71 and '72; it would have been good if the Committee had spoken and told the Administrator that there would be no more sponsors: if we would have had direction or guidance of policy, on the question, direct guidance. our people w-ould have followed it.
Senator CHIL.ES. Well, I'm really concerned as to how strong that direct guidance has got to be, because in light -of the '73 audit report, the '74 report, the reports of '75 and up to the reports in '77, 1 guess Congress is going to have to speak. because it appears to me nothing has changed.
You know, the pattern is quite clear: The big service companies, they knew a "turkey" when they saw one. They took former employees, generally janitorial or farm employees, and they gave them important sounding titles, and they





36

went to SBA and had their papers stamped, and they proceeded on with many companies, with various forms of management agreements, joint ventures and the like, and SBA, like an ostrich with its head stuck in the sand, ignored this for five years.
And during that time, 25 percent of all the SBA funds expended have gone to sponsored companies, for a total of $384 million, over $1.5 billion program that has gone to sponsor companies.
I guess Congress should be indicted, to, because they haven't gone into this before now.
The Harshman papers (named for the SBA officials who started
making connections on sponsorships) were in the hands of the SBA leadership in 1972. Mr. Harshman testified both in the Tampa hearings and in Washington. On July 8, 1977, Mr Harshman recounted his experiences in 1972 as Chief of the Requirements Division in SBA thusly:
At that time, the 8 (a) program was a centralized program being operated out of the Washington office. And the responsibility of the Requirements Division was to secure the necessary contracts from other agencies to support the firms that were coming into the 8 (a) program.
Chairman CHILES. So you had to go to the Defense Department and other agencies and locate or identify contracts that could be set aside for the program, the 8(a) program, and get them to agree that they would allow this contract to go for the program.
Mr. HARSHMAN. Yes, Mr. Chairman.
Well in carrying out that function my division would get requests from another division-in essence, here's a new company in the 8(a) program. This is a requirement. We need to support it-well it came to my--certain names, certain addresses, certain cities, certain coincidences kept croping up over and over and over again, and it appeared to be rather strange to me. I started to keep some records at random on certain names, certain companies, certain addresses, and from time to time I would see a new name or see the same name with a different company on it or connection; I pieced the mosaic together.
And basically what I pieced together is represented by that chart that you have over there on the wall, a series of sponsors who had, you know, companies underneath them that we were giving contracts to.
Chairman CHILES. Well then that wall chart is, I take it, a fairly accurate reproduction of what you came up with as a result of your findings. Is that correct?
Mr. HARSHMAN. Yes, it is. As a matter of fact, because things were fairly fluid, there were several charts. But that represents one of the several charts.
Chairman CHILES. I wonder if you would step over there and just kind of explain that. We have referred to it a number of times, but if you wo11d kind of tell us the difference between the squares and the circles and run through just quickly if you could what that chart does represent.
Mr. HARSH MAN. All right.
The companies at the top we call the group. For example, the Dunn group is from Dunn, North Carolina, which was represented by three different corporations and three different individuals. And either these individuals or one of the corporations had some connection-either a 49 percent ownership or management contract or some other relationship-with all of these firms that are in the circle.
So there was kind of like three parent corporations for the Dunn group, and they, in turn, one or most, had connections in each one of those other firms.
Cham irman CILES. Yes, sir.
Mr. lIARSiiMAr The non-8(a) corporate entities of the Dunn group were Pnviiamic International, Dynamic Enterprises and Dynateria. Incorpor ted. And the first non-minority pincipals were Eddie P. Droughan, George F. Marshall and Rob.rt F. Rupert.
And either one of the companies or one or more of the individuals had some coIWneO ion with the companies underneath it.
Not in every case was it a 49-51 percent relationship.
It might have been a management contract.





37

In some of them, they were businesses attempting to get approved for ( a) contracts that never did get approved.
The investigtaion showed, and from your report and further investigations. that, in fact, those three parent non-8(a) companies, which were basically owned by those three individuals, they were the geneses or they started each one of these other companies.
They selected the personnel, the front; they set them all up.
I saw some business plans that had been submitted for these comipanies hat were, for all intents and purposes, a xerox with a different name puit in ti:0m of the same business plan.
Chairman CHILES. So they just filled out the shell, and xeroxed the pine and they were off and running?
Mr. IIARSHMAN. Yes, sir.
Chairman CHILES. All right.
Do you have another? Just go through one more if you would, please?
Mr. HARSHMAN. Well, Worldwide Services is a non-minority company owned by Mr. James Rice from Smithville, Tennessee, and then these were the companies that he had a relationship with.
I see that these have gotten figures. And there were several charts that l)Ut in the figures at a point in time the amount of the contract that each of the companies got. And there's a later chart that shows the cumulative by year of the companies. As a matter of fact, there's more companies on a later chart that shows the cumulative amount of 8(a) contracts that went to the firm, and the sum total by year that were under the sponsors.
Chairman CHILES. Where the charts would show how much Rice actually got for each year out of that contract?
Mr. HARSHMAN. Yes, sir.
Chairman CHILES. The total at the time, as understand it, that you Iirs made up the chart was about $50 million of business was going to these lirms.
Mr. HARSHMAN. About 56 million.
Chairman CHILES. About 56 million.
All right. You may continue.
Now what time was that chart drawn? That was in 1972 when you drew that chart. Is that correct?
Mr. HARSHMAN. No. I believe that chart is later. Basically, there was another chart, not that chart, but essentially the same information that I put together in December of 1972. It didn't have the squares and the circles, but it had essentially the same-showed the same relationships.
Chairman CHILES. All right.
You might be interested to know that the amount of service contracts awarded to firms which SBA's auditors and investigators have said are still in the program now, has now risen to about $135 million.
Who did you take this information to?
Mr. HARSHMAN. Let me use this chart if I may.
Chairman CHILES. Yes, sir.
Mr. HARSHMAN. I was working at the time for Mr. Donald Dunl; p. and I attempted to take this information to Mr. Marshall Parker, who was the Associate Administrator for Procurement Associates.
I was unable, afte-- several weeks of trying, to get in to see Mr. Parker, so I took the information that I had to Mr. Loren Rivard. who was the special assistant to the Administrator. That was on December 21. 1972.
Chairman CHILES. What took place after you took this information to MIr. Ri vard?
Mr. HARSHMAN. I was asked, you know, to be prepared to go over this information with the Administrator the next day, and that I would be called. I was not called. And it is my understanding there was a meeting held, but I was not privy to the information that transpired in that meeting.
Chairman CHILES. Well. do you know what, if anything, happened as a result of this. your chart and the meetings that you had with Mr. Rivard? You later talked to Mr. Bollings about it I know, the chief investigator.
Mr. HARSIHMAN. Within about two weeks Mr. Dunlap was relieved of his responsibility in the Office of Business Development. He was transferred to a nother position. And Mr. John Patrick, who had been the assistant to Mr. Pa rker, took over as the Director of the Office of Business Development.
Chairman CHILES. Was the material that you gathered, was it sent to Tustice? Mr. HTARSHMAN. I have no knowledge that it was.






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Chairman CHILES. As one of Mr. Dunlap's division chiefs, did you work in close contact with him?
Mr. HARSHMAN. Yes, I did.
Chairman CHILES. Mr. Dunlap's actions have been characterized as being political. Did you find that to be the case?
Mr. HARSHMAN. I found it to be unbelievably political, very, very political.
Chairman CHILES. In what way?
'Mr. HARSHMAN. There was a great deal of-well, if I recall, that was a political summer just before the '72 elections in November. And Mr. Dunlap was attempting to get contracts out to minority firms around the country that would make the Republican Party look very, very minority oriented.
Chairman CHILEs. Mr. Dunlap has said that you're the kind of fellow that if you don't get your way you try to take it out on everybody. 'Do you have some kind of vendetta for Mr. Dunlap? Mr. HARSHMAN. No, I have no vendetta for Mr. Dunlap. I did not respect Mr. Dunlap, however.
Chairman CHILES. You might be interested to know how some of the companies that you identified fared in the program. The Rice group that you've mentioned up there that operated out of Smithville, Tennessee, the GAO report noted that Mr. Rice personally received, or received through Worldwide Services, $2.15 million of the $12 million received through 8 (a) contracts.
Mr. Rice and his associates received 24 percent of the gross sales for providing bookkeeping and other management services.
As late as 1973, Mr. Rice claimed to have acted on the advise of Mr. Thomas Kleppe. then the Administrator of SBA, he divested himself of ownership in Best Services.
!Under the terms of that divestiture agreement he received a return of 7.977 percent on invested capital. That's a pretty good investment if you can get 7,000 percent.
The GAO report noted that this loss of assets almost destroyed the company and was contrary to the aims of the 8(a) program.
The disadvantaged-I am reading again from their report-took no part in running the company. The president and vice president of Best Services were working as janitors in Washington, D.C., 600 miles from the corporation headquarters.
The front companies during 1974 and 1975 maintained nearly half a million dolla rs in deposits interest free in Mr. Rice's bank.
Mr. Rice, by his own admission, got into the 8(a) business--and this is a quote from him-"solely to protect his own business interest."
As is the case with Mr. Franklin, Mr. Rice was asked by SBA to be a sponsor.
GAO's conclusion was that sponsors use their influence not to protect the interest of 8 (a) firms but to benefit themselves.
A separate SBA audit said much the same thing. Best made a profit of '$886,000 on a $2.6 million contract at Fort Benning. This was after the sponsorswhich is again Mr. Best-had dipped into the till for $440,000 for accounting and ma Mgement fees.
The minority owners, including a man who worked in a military commissary and wasn't really sure what Best did or why he received some dividend, and a man who mows Mr. Rice's lawn and does other odd jobs for him. That was the 51 percent minority owners.
Mr. Rice. who owns a bank in Smithville transferred $63;000 from Best's naccount into his bank so that--this is again a quote from his statement-"the bank would show a better cash position at the end of the year."
lie (could do that because hlie had control of the rubber stamp with the minority president's name on it.
The SBA report also accuses Mr. Rice of diverting $15,000 of Best money into his own account.
Mr. Rice responded that that action was legal, in the fact that the transfer was reported as heing management services when he admitted he had performed no uch srvi e through a clerical mniistake.
Mr. Rice noted that "what he got out of the deal was of no concern to Best."
I'm sorry that no one listened to you, Mr. Ilarshman. I know, and I think evryvone, else ought to know, tfhait in the course of piecing together the service contract puzzle you've made a lot of enemies. Instead of getting a medal, you see t 1 have got ten a lot offlak.






39

I'm sorry that some people have referred to you as "that damned border pat rol agent" instead of admiring you as a good investigator.
I think what you did was of service, and I think now some I, pt a 'e lieginning to listen to you.
I might just say that the Mr. Rice that I'm talking aIout here, s, we ke(p the record straight, is not the Mr. Rice of Oklahoma. That's another Ric I Lt \ e were discussing yesterday and was in several of the wire stories yest erday.
Mr. Harshman, again I want to thank you for your services. You c(ertainlly have opened our eyes up by your report. And I think from what you started (ut, you're beginning to open up a number of other eyes. And we thank you very much.
Mr. Leroy lonibs (liscussed the arrangementss" tlat norinally exist between a sponsor and the persons sponsored when lie related a personal experience in his background prior to his owning a janitoI'aI firm. In testimony before the subcommittee on July 6, 197T, Mr. Tombs said:
Senator CHILES. Mr. Tombs, we are glad you came before the Committee. You are a success story and we want to put on a success story here. My understanding is-how did you first come in contact with the SBA or 8(a) program?'
Mr. ToMBs. I got a telephone call from the regional director asking me to come to his office in Kansas City, Missouri, that there was a gentleman there who would like to talk to me about something that could be beneficial to both of us.
I was to be there the next morning at 8 :00 o'clock. The next morning at 8:00 o'clock I was at the regional office in Kansas City, Missouri. I met with the lawyer of a company who was offering me a chance to participate in the 8(a) program, that at that time I knew nothing of.
Senator CHILES. At that time you knew nothing of the program and they were offering you a chance to participate. What was going to be the basis of the participation, what kind of business was it going to be?
Mr. TOMBS. They explained to me that I would be the president and I would own 51 percent, and they would own 49 percent, and they would get jobs for this corporation. And they would fund this corporation and they would manage this corporation.
They estimated that my share for the first year would be roughly $100,0(.00.
Senator CHILES. Your share of the profits?
Mr. TOMBS. My share of the profits.
Senator CHILES. What were you supposed to do for that?
Mr. TOMBS. It wasn't too clear. They said own 51 percent and be president. That's what I left with.
Senator CHILES. Were you to have any management responsibilities?
Mr. TOMBS. I was told they would assist me in management programs, that they would supply the funding and they would also find the jobs that the corporation was to perform.
Senator CHILES. Did you get the impression that you were really going to have some duties there?
Mr. TouMs. No, sir, it was really very little for me to do outside of accept $100.000.00 a year.
Senator CHILES. Why do you think they selected you?
Mr. TOMBS. They said that I was one of the people that they were looking at at this time.
Senator CHILES. What was the color of these people's skin?
Mr. ToMBs. They were pretty white.
Senator CHILES. So there was a contrast between them and you, and they wanted you to have 51 percent of the stock.
Mr. ToMBs. It was a salt and pepper arrangement.
Senator CHILES. What did you decide to do about that, Mr. Tombs?
Mr. ToM.Bs. It was a very difficult situation. I was between jobs and I had two kids in college. I knew quite a bit about the industry. I became quite nervous and quite concerned.
I went home and discussed it with my children. They were excited about their father making $100,000.00 a year when he had made hardly over $10.000.00 prior to that. Naturally they were quite anxious to find out what decision I had made.
They were a little bit disappointed when I said, for some unexplainable reason. I said, no. To go a step further, one of my daughters, who was in college at the






40

time and having a very difficult time paying her rent and tuition, asked me if I didn't think I didn't need to see an analyst or a psychiatrist or something.
Senator CHINES. You have had some pretty valuable experience, it seems like, as an old navy chief. What did you decide, chief, did you decide you could do that yourself or they could do it?
Mr. TOMBS. I had been doing it for other companies, doing the whole thing, other than making the payroll for quite some time up to that point. I had been in competition with this same company by being a project manager and a troubleshooter, for a competitive company.
Senator CHILES. Who was this company who made this offer to you?
Mr. TOMBS. This was World Wide out of Smithville, Tennessee.
Senator CHILES. Is that the Rice group?
Mr. TOMBS. That's the Rice group, yes.
Senator CHILES. They are in-they sponsor a number of companies, or have, have they not?
Mr. TOMBS. I am told they have. I have met people that said they were being a sponsor, but to make a statement that I could support with facts, I could not do that.
According to the newspapers, and according to some of the people they have sponsored, I would say the answer was yes.
Senator CHILES. Are they in the National Service Contract Association?
Mr. TOMBS. Mr. Rice was in the National Service Association up until this year. We got a letter from Mr. Rice, I am president of the association this year, we got a letter from Mr. Rice stating that he was getting out a government contract, period, out of the sponsoring program, and that he was going to go into the fast food business.
If at any time in the future he was going to enter into the industry, he would certainly like to be a member of our association.
In his appearance before the subcommittee on July 6, 1977, Mr. Winford Smith, Director of the Office of Business Development, (OBD), did not flatly repudiate the sponsorship arrangements that the OBD had approved.
Senator CHILES. What are your current views on sponsors?
Mr. SMITH. I think the concept of sponsorship is a very good one. I think there is a void for management backup, maybe some cash.
But it has to be controlled.
Senator CHILES. Has it been controlled?
Mr. SMITH. The appearance is that it has not.
(Emphasis added.)
In a memorandum dated February 18, 1977, from Mr. Smith to Mr. Raymond F. Randolph, Director of Audits and Investigations, Mlr. Smith outlined one section of that memo and dealt with the "sponsorship" controversy in the following:
(3) To say that an individual must remedy all defects in his management skills before being admitted to the 8(a) program eliminates a mjor objective of the program, namely business development. OBD has strived to give each 8(a) fi rum the benefit of SBA's full agency concept-management, financial technical, and procurement assistance.

OWNERSIIIP AND CONTROL
Requlireimnts and Conditions:
(a S01' 60-41-2 states: "eligible person (s) are expected to be engaged full time in the day-to-day business operations and management. This precludes 'absentee ownership' of 8(a) concerns."
Sponsorsihips and/or arrangements where day-to-day control of a firm is tentporfrily vestel elsewhere can be extremely helpful in getting a sall disadvantaged busines1man on his feet and on the road to competitiveness.
We realize that in the past non-disadavntaged individuals have taken advantage
-Of both (distlvantaged individuals and the 8(a) program through sponshorships divestiture agreements, management agreements, and joint ventures. Part of thhi has been caused by a lack of oversight at Central Office and a lack of unifformity among the ten regions. Since February 1976, when SOP 60-41-2 became







41

effective, al sponsorships, divestitures, and management agreements mustt be approved by the AA/PA. Also, since January 1976, the OBD Surveillance 'eanis have taken extra care to determine which 8(a) firms do in fact participate in these types of adventures. The problem of uniformity is currently being addressed as OBD is in the process of developing a standard format for divestiture, management, and joint venture agreements. It is our intent that once these standard formats are developed their use would be strictly enforced. We have recently sent our proposal to the field asking for their comments and suggestions.
(b) In many instances, non-disadvantaged firms have proven to provide valuable support-management, financial, and equipment to newly developing 8(a) firms. To preclude this would greatly reduce the already limited resources availa ble to 8 (a) firms. We do feel, however, that this situation must be closely monitored to prevent abuses.
(c) Many 8(a) firms have been established with the assistance of non-disadvantage< persons who were former employers of the disadvantaged individuals. This is a very natural occurence which is advantageous to the disadvantaged individual. If a disadvantaged person cannot get help from a former employer or firm in a similar line of business, there would be few places to turn for help. To force the disadvantaged individual to turn to some person or firm in an unrelated area could cause more problems than now exist. We feel that the non-disadvantaged owners are currently subordinate to the disadvantaged owner as the disadvantaged is responsible for the ownership, control and actual day-to-day operations of the firm.
(d) Again to require that non-disadvantaged owners cannot give, sell or rent l)roIperty, equipment, supplies, services, financial assistance or other resources other than their own personal services is entirely unrealistic. It again severely limits !lie resources to which a disadvantaged person has access to. What SBA must do is more closely monitor these arrangements to insure that the arrangenients are to the primary benefit of the disadvantaged owner.
c) We agree that the compensation received by the disadvantaged owner should normally exceed that of any other employee. We can, however, see an exceI)tion to this statement in those cases which require persons possessing high technical competence, or where the cash flow situation of a firm may require the owner to restrict his salary for a period of time.
(2) To restrict management agreements between 8(a) firms and firms in unrelated lines of business would in effect eliminate management agreements. An :. agreement between two firms in unrelated lines would be detrimental to the 8 (a) firm. In an extreme case, what assistance could an electronics firm give to a food service firm? More control must be exercised by SBA with regards to management agreements but let's not eliminate them.
(3) SOP 60-41-2 states that joint ventures "must be fair and equitable to, and for the substantial benefit of the 8(a) concern(s), and must be approved by the regional director, or his designee. As you know, we have attempted to revise the SOP to require all joint ventures to be approved by the AA/PA, as is the case with divestiture, sponsorship, and management agreements. We have not, however, yet gotten the AA/O to concur with this change.
1i-rina" the investigation by the subcommittee staff M1r. Smith continually expressed that allegations concerning sponsorships were "unproven" and that minorities usually "got something" out of the
arrangements. The subcom mittee surmised that what minorities usually grot was "ripped off."
Clearly, whenever the SBA changed the rules governing sponsorships, the sponsors merely changed their actions to get around the new regulations.
The subcommittee discovered in some cases the SBA introduced the "sponsors" to the "sponsored." Further the SBA's Office of Business Development infers with its approval of sponsorships that 8 (a) business persons that 'are not "sponsored" have little chance of succeeding. The simple fact is many 8(a) companies are not sponsored and never were. Neither has OBD demonstrated that sponsored firms have a higher success rate than unsponsored firms.
The subcommittee is extremely concerned that the Office of Business Development (OBD) of the central office of SBA defended the







42

sponsorship program from investigation through the hearings phases.
Perhaps the best articulated attack on the sponsorships came from Congressman Parren Mitchell (D-Md.) in testimony before the Subcommittee on July 7, 1977, Representative Mitchell said:
Make no mistake about it; non-minority businesses, both large and small, using bogus front operations to siphon the pittance of Government Procurement dollars labeled for the minority business community are neither new nor are they confined to the 8(a) program. Tragically, rather such spurious activities tend to be found where legitimate minority businesses seek inclusion in the economic benefits of Government spending.
Following the initial series of contracts and subcontracts and based on information which I had received from the Maryland minority business community, I urged both the State Secretary of Transportation and the United States Secretary of Transportation to investigate the legitimacy of "minority firms" receiving awards. Already, the Maryland Mass Transit Administration has disqualified three front minority businesses which were slated to receive a total of $1.9 million of subcontractual work.
The most blatant abuse involved an electrical firm which was created on April 7. 1977, just weeks before the awarding of contracts, and was headed by a sixty-five year old Black man who had retired on April 29th as a warehouse manager for one of the largest white-owned electrical companies in the region. The so-called minority firm had no assets and no record of performance. In fact, the only thing that the minority firm had was the identical address of the white-owned electrical business and a subcontract to receive well over $350,000 in electrical work.
Back in 1974, during the 93rd Congress, I served on the Small Business and Minority Enterprise Subcommittee of the, then, House Committee on Banking, Currency and Housing. At that time, now some three years ago, investigative hearings into the SBA demonstrated that there were non-minorities which formed dummy companies, just simply bringing together some Blacks and other minorities in name only who knew nothing about business, and reaped enormous benefits. The hearing revealed where one or two large or corporate interests simply broke themselves up into smaller corporate interests and moved into the 8(a) area securing contracts and really rooking the Government out of substantial sums of money. The hearings even identified interlocking patterns which had been developed between some banks and some of the more unscrupulous operators who abused and misused the 8 (a) program.

SPECIAL PROBLEMS IN DEFINING ELIGIBILITY

The subcommittee raised several questions regarding the entire eligibility situation with the knowledge that revisions of the current SBA 8 (a) Standard Operating Procedures should be revised. Eligibility quest ions raised in the hearings included the following:

INCONFE LEVELS
T1he subcommittee raised a concern rewarding the eligibility of persoiis who entered t he program as "economicalVly disadvantagged." The dialone between Senator Chiles and Mr. John Scruggs developed during the stid{oun) itte hearings in May 1977 explored the issues il tim following manner :
Senator CmiuI.S * How in the world would we consider a guy earning $15,.500, born in this country to be disadvantaged? 11ow does he get to be con sidered disadvan taged ?
Mr. SeneOGs. As I recall, I (id not engineer that but I am aware of it. As I reui 11. the person came in the business as a minority stockholder. Fhe minorities lipid the controlling interest at the outset. So later on, after they had gotten s tarted on the Fort Bragg contract-






43


Senator CiiILES. You testified before a house Government ()I)erations Silicommittee in 1974 that your brother-in-law introduced you to Mr. llhar(. \V .< that Mr. Gardner or another brother-in-law'? Mr. SCRUGGS. You didn't ask me that. I told the Stevens' n Co ittee-iiSenator CHILES. You said you weren't there whei Mr. Pharo's dl ertulil:-Iti)o was made.
Mr. SCnUGGS. No; I said I did not engineer the inecianics of I)Uti i ig his I ,i( lage together in SBA after they applied for the 8(a) assistance. I im saiL i the outsetSenator CHLES. Were you introduced to him originally by one of you rw nt leiin-laws?
Mr. SCRUGGS. Yes, sir.
Senator CiiiiEs. Was that Mr. Gardner?
Mr. SCRUGGS. I cant say for sure if it was hiiii, I have several bn .1)hh~r-ii-Ia \\s in the Kingston area.
Mr. Pharo later wrote in and asked if he could be considered disadlva iii agd and he felt he was under the criteria. The $15,000 he was making w.as, as I recall. at the Holiday Inn. That job there was only a temporary arranag'e lle. The motel was up for sale so his restaurant want bankrupt because they changed the highway and took all of his parking area so his restaurant just (los(ed tip, he had to liquidate everything be had.
After 25 years of working in the restaurant, lie ended up just as he si art(. with nothing. He had no assurance that the new owners of the Holiday Inn would need his services or keep him.
Senator CHILES. He had a job worth $15,500, but he did not have any long term contract. He could have been fired the next day or he could have worked on for that job, too.
Mr. SCRUGGS. I didn't say that, I said the hotel was up for sale when he Avent to work there and he had no assurance that the new buyers, whoever they might be, would continue his services *
He wrote in and asked and gave the reasons why he thought he was disadvantaged. Based on what our General Counsel has put out, his rationale of whether he was disadvantaged, his rationale of what is disadvantaged and we have a dictionary and all this. I passed that on to our legal counsel and asked them to review to see whether in their opinion they could make a recommendation, did they consider Mr. Pharo disadvantaged or was he not disadvantaged.
The reply that I got back was that in their opinion, he was disadvantaged and the same could be defended in a court of law. Now when you say disadvantaged. you can ask 15 people what their version is and you would get 15 answers. This is something that has never been defined, it is difficult to define and because a man makes $15,000, what is $15,000 in this day and time?
Senator CHILES. What's $29 million? That's how much he got in 8(a) setaside contracts. His company now has a net worth of a million dollars. If lie was disadvantaged then, we sure did a good job for him.
Subcommittee Summary ow Income Lere.s
The discussion concerning the proper level of income for applicants continues between the Congress and SBA.
The subcommittee concedes that some other factors might be inNolved but that a total picture be developed before an entrepreneur is certified. However, the subcommittee explored other situations where "economically disadvantaged" businessmen got questionable aid. One
recipient owns or has substantial involvement in five firms including a factory in Mexico. Another person allegedly turned down a Presidential appointment to the U.S. Import-Export Bank cause he wanted to continue in his business.
Tt-e "underscored" position of the subcommittee was that many persons who had been deemed "economically disadvantaged" were evidently not, nor were they able to fit concurrently in other definitional categories.



21-491-78-4






44

RACIAL OR ETHNIC IDENTIFICATION
In presenting the case for a contract award, Mr. Winford Smith., Director of SBA's Office of Business Development, stated:
Mr. Chairman, I think that just going to Harvard Business School and having a job in the government * does not take away from a black's disadvantage.
Later, in his testimony, Mr. Smith said:
I think that most blacks recognize that there are a lot of public officials, black, who are unemployed in this city today who do not have an opportunity * *.
SPECIAL PROBLEMS IN DEFINING GRADUATIONS
The subcommittee found many instances where firms which had achieved a high level of proficiency and profits were still participating in the 8 (a) program.
M'. Leroy Tombs, President of Tombs and Sons, explained during
Lsubcom Tombs
an interview session with subcommittee staff
When firms become self-sufficient and able to effectively manage themselves independently then and only then should they be "graduated".
In testimony before the subcommittee on July 6, 1977, Mr. Tombs said:
My itn graduated in 1974. after two years in the program because I thought I should make way for someone else. It, 8(a), is a good program if it's administered properly.
Continuing, Mr. Tombs asserted:
* This program was put here to help disadvantaged people get into the mainstream of business and to make a contribution to the American people and to the government. If the program is going to do that then a lot of hard work is going to have to be done and a very serious attitude is going to have to be adopted. This can't be a program where people are going to have squatter's rights.
During the conduct of its investigation, the sub-committee examined SBA files which indicated the following:
A company in Region IV had at one point received contracts
in excess of 20 million dollars and was still linked to the 8(a)
program.
A firm in Region IX. a single proprietorship, got more than a
Million six hundred thousand in contracts, never met program
eligibility requirements and had not been "graduated."
A firm in Texas pays its President more than forty thousand
annually. The company has a net worth of a quarter of a million
dollarss but the firm hasn't graduated.
A janitorial company in Region IV that had more than $8
million in 8(a) contracts, was evaluated as a "front" company
but wasn't "graduated".
By "'graduation" SBA labels a company as being independent and ale to compete in the economic mainstream on an equal basis with other firms. The actual situation is that often 8(a) firms are "graduated" without. being viable and competitive. The lines between graduation and termination should be clearly spelled out so that Congress






45

and the public can adequately determine when firms have succeeded or f ailed under the program.
In the haigonJuly 6, 1,977 Senator Chiles and~ Mr. Sithd had the following discussion concerning terminations and graduations:
Senator CILES. in March of 197-7, about a week after my staff first visited the Atlanta office, Atlanta s'mlddenly sent out g-raduation letters to more thanl 20 8(a) firms in the Region.
Graduation, we are told, is a mark of success inl the 8(a) program. It means that the company has progressed to the point where it is ready to go off on its ownv without government support.
I would like to cite three of those success stories. East Coast Construction Company on March 14, 1977, graduation notice. 'March 17th, three days later. surveillance report: "Company totally depenidenit on 8 (a) support, recommend termination if they do not seek commercial business.
First the total services, February 17th, 1977, "1'he company is totally deCpendent on 8 (a) support, recommend no new commitments. March 14th, graduate by Atlanta. H. I. Douglas. and Associates, February 8th, 1977, "Recommend termination, companies, not viable, has no current 8(a) contracts, company ill the hand of nondisadvantaged.
The March response from Atlanta graduation for having exceeded business plan. Mr. Smith, how can a company which is failing and which holds no 8 (a) contracts possibly be -given the accolade of being a successful graduate of 8(a) programs?
Mr. SMITH. That's a good question, I don't know. i$enator CHILES. I think it is a good question, how do we get the answer? Mr. SMITH. I think that proper action is being taken on all of the companies you have cited. The appeals committee is going to be meeting in Atlanta to review all of the actions that have been taken to date. In those instances where the region took credit for a graduation when it should have been a termination, those adjustments will be made.
Senator CHILES. Is the appeals committee going to meet where a company has been certified as being graduated?
2Mr. SMITH. Wherever the companies have appealed our decisions, certainly they have the right to be heard. This gives them a vehicle to be heard.
Senator CHILES. I wonder what kind of message we are sending to our minorit y businessmen when we are saying, well, we graduated these companies when in fact our own surveillance report shows that they should be terminated because they have been failures.
Mr. SMhITH. That is certainly misleading and we should do something about it.
Senator CHILES. Mr. Messick, Atlanta regional director, gave us a statement at the end of the last field hearing. He said in brief that the causes of failure in the 8(a) program was that the program was pushed too hard in its early stages.
He ascribed that blame to 'Mr. Knnsick of GSA, and Mr. Stalls of the Commierce Department. The pushing plus the total lack of 8(a) firms who could handle $1 million plus service contracts, led to the creation of the sponsorship program.
Sub conMittee 8 urnmary on eligib ility
The opinions and position of the Director of the 8 (a) program, Mr. Smith, are in direct contradiction to the Office he supervises (see section (a) b on page 31 and the SOP).
The subcommittee points up this situation to illustrate the inconsistencies in the subjective case-by-case evaluation and determination of eligibility:
Excerpts from SBA's Standard Operating Procedures (SOP):

18. ELIGIBILITY DETERMINATION
(a) When an application is made for assistance under the 8(a) program, the regional director, his designee, or district director where delegated authority, shall make an evaluation and determination of eligibility using the criteria con-






46

tained in chapter 2, paragraph 4. Such an evaluation and determination constitutes an administrative finding by the appropriate SBA official named herein, and, is based upon information obtained from the applicant. There is no requirement for an affidavit or written statement from the applicant supporting his or her claim to disadvantage. There are requirements that all applicants, to include in the case of corporations, each officer, director, and holder of 10 percent or more stock of the applicant corporation, shall be required to submit SBA Form 912, "Personal History Statement" and SBA Form 413, "Personal Financial Statement."
(1) The administrative finding should disclose that the individual falls within the eligibility category of socially or economically disadvantaged. The facts behind this finding can include such matters as depicted in the following examples which, alone or together, might justify the finding; there are other situations which undoubtedly would also apply:
(a) Because of his social background, the individual has been unable to
obtain n technical assistance, business assistance or financing of a quality or quantity similar to that available to the average entrepreneur in the economic mainstream (where possible, exclusions of this nature should be confirmed by specific examples).
(b) Because of past practices of discrimination, the individual has been
impeded from normal entry into the economic mainstream (this example should be based upon specific facts applying to the individual involved and should not be based upon a generality applicable to a group, e.g., although many individual Blacks are "disadvantaged" and therefore eligible, it is insufficient to state that all Blacks are eligible simply because they are
Black).
(c) Previous failures to compete effectively for government contracts
could be traced, in .significant part, to tendencies of regular financing and commercial agents to restrict their services to established businesses (specific instances of contract or financing "turn downs" would be helpful here).
(d) The individual is a long time resident of urban areas with high concentrations of unemployed or low income persons.
(e) The individual has been frequently unemployed or marginally employed due to his residency in depressed areas or due to past practices of
discrimination.
(I) The individual has been in a low income status chronically.
(2) In making the administrative finding, care should be exercised to preclude any implication that eligibility is based principally upon the race, creed or ethnic background of the individual.
(a) Provide a copy of detailed profit and loss statements for the preceding
3 years. For new businesses, proforma balance sheet and projected profit and
loss statement shall be submitted.
(b) Indicate, in detail, the firm's financial needs for additional:
(i) Real property and capital equipment.
(ii) Working capital.
(iii) Other needs, such as product and marketing development, debt
refinancing, etc.
(c) Explain and estimate the cost of the specific expenses which can be
attributed to attaining the primary business developmental objectives inherent in the business plan; i.e., those specific one-time expenses necessary
to develop competitive production and marketing capabilities.
(d) Explain how the firm proposes to finance performance of the S(a) subcontract (s).
(c) Indicate, by amount and duration, how much of the following the firn
plans to utilize"
(i) Comnmercial and/or 51BA financial assistance.
(ii) Contract progress payments.
(iii) Contr'act a(vance payments.
(M) Provide nlm)ntlly cash flow projection for the first 1 2-month period
covered bky the business plan and annual projections thereafter. Break out Ihe income ho be derived f'onm 8(a ) sulontracts separately from other inc(ofe. If multiple product (s) or servicess, show income projections of each.
(g) Compute the firm's projected lreak-even point. m iid include the





47

rationale and details supporting the fixed and variable cost projections. (See
Figure 2.)
(h) Provide a copy of the firm's chart of accounts, identifying each line
account to the appropriate overhead pools, where applicable or pertinent.

C SE STUDIES INVOLVING SBA IRREGULARITIES IN MLNORITY/DIS.\I)VANTAGED FIR IS RELATIONSIIPS (8 (A) AND/OR LOANS)

The cases of agency irregularities were explored in detail by Senator Chiles during the 6 days of hearings by the subcommittee. Moreover, the investigative staff of the subcommittee spent -considerable hours with the investigative staff of the SBA in examining cases which had similar circumstances.
The cases contained herein are examples of widespread irregularities and in the opinion of the subcommittee do not constitute isolated, one-time occurrences.
CASE STUDY No. 1
ComIpany-Singleton Construction, Inc. President-Robert Singleton.
Location-Jacksonville, Fla.
Re: 8(a) program.
(;rcti mtances
The Singleton Construction Company is owned by Robert L. Singleton, a black general contractor.
Mr. Singleton was recruited by the Small Business Administration to become a part of the agency's 8(a) program. Mr. Singleton took )art in the program and received two 8(a) "set-aside" contracts. After completing the contracts Mr. Singleton is virtually bankrupt after losing hundreds of thousands of dollars.
Appearing before the Subcommittee in Tampa, Florida, on April 12. 1977, Mr. Singleton terminated his testimony by saying--"I wish I had ne ver heard of the SBA and the 8(a) program,
As the first witness, Mr. Singleton stated:
My name is Robert Lee Singleton. I reside at 1165 West Ninth Street. Jacksonville, Florida. I am 59 years old and a Florida licensed general contractor. I am the president of Singleton Construction Co., Inc. I have been in the contracting business in the Jacksonville, Florida area for 32 years.
As I will outline here, I became involved in the SBA 8(a) Minority Contractors program in June 1972. Prior to that time my construction experience consisted primarily of concrete and masonry work. As a general contractor, my largest job was the construction of a single story concrete block and masonry office building approximately 60' x 85' of total contract price of approximately $250.000. In addition, as a general contractor, I built small warehouses, small stores of the convenience store variety, and a number of single and duplex family residences.
I have an 8th grade education but have been assisted in )y business by my wife, Grace Singleton, who hold a masters degree in so(iology and who retired as an associate professor at Edward Waters College in Jacksonville. Grace had also been the supervisor of public education of Suwanee County, Florida.
I have served as the chairman of the board of trustees of Bethel Baptist Institutional church in Jacksonville, Jacksonville's oldest and largest Ba ptist Church. I continue to serve on the board of trustees. I have also been a member of the Jacksonville Mayor's Council and have been active in Jacksonville civic affairs for many years. I am also a member of the Minority (ontractors Association of Jacksonville.






48

I have been invited here by your Senator Chiles and I appreciate the opportunity to tell this committee my story and hope that this committee will be of assistance to me in my efforts to save my company.
I have prepared a statement which has been submitted to this committee and which deals with my involvement in the Minority Contractor's program administered by the SBA. In short, I wish I had never heard of the program or the SBA since it has brought me to the brink of financial ruin and has adversly affected my health and that of my wife.
Ini the first week of June 1972, I was invited by John Peyton to a meeting at the offices of Economy Electric Company in Jacksonville, Florida. John Peyton was an employee of Economy Electric Company. Present at the meeting besides myself were William Mitchell of Economy Electric, John B. Peyton, and William S. Matlock, Jr. of the Small Business Administration, Atlanta office. The apparent purpose of this meeting was for Mr. Matlock to inquire whether I would be interested in the award of an 8(a) contract. Prior to this meeting, I had no contact of any nature with the 8(a) program. I did not solicit this meeting but was asked to attend by John Peyton who informed me that he had been requested by Mr. Matlock of the SBA to arrange the meeting.
At the meeting, Mr. Matlock asked me if I would be interested in getting a contract for two and one-half million dollars to expand and modernize the air route traffic control center at Hilliard, Florida for the FAA. I replied that I had been ill and had recently undergone an operation on my eyes and was in no position to handle a technical job of this size. I stated that I could recommiend some young black contractors who might be interested in the job. Mr. Matlock stated that hlie had already investigated my work and my dealings with business people in Jacksonville. He considered that I would be an excellent prospect for the 8(a) program and that hlie was satisfied with the reports he had received on me. Mr. Matlock stated that the FAA job at Hilliard was set aside for the 8(a) program which is designed to help minority contractors to be coim)etitive with large established contractors in government work. He also stated that the SBA woulI give technical, administrative and financial assistance to contractors under this program. He told me that there was enough money in thle job to hire competent help in view of my physical condition. I thanked Mr. Matlock for the opportunity anid said I would be in touch with him after I had had time to discuss the project with my wife.
In the third week of June 1972 a second meting was held at the Economy Electric Shlop in Jacksonville. Present at this meeting in addition to myself ul my wife. Grace L. Singleton, William Mitchell, John Peyton, William Matlock and William A. McBride, a local mechanical contractor. The purpose of the meeting was to further discuss the possibility of awarding the contract to a black
(*0)ntra ctor.
In the course of this meeting Mr. Matlock told me that I could qualify for the job if I could get a letter of credit from my bank in the amount of $130,000. I told Mr. Matlock that while I had satisfactory dealings with my bank, I didn't know whether they would be willing to extend such a large line of credit. Mr. Matlock then told me that I would make a 10 percent profit over and love the estinmated(l job costs if I would accept the job. He said this is the way the prograin worked. I would be guaranteed the profit.
Mr. Matlock made it clear that if I didn't accept this job under the 8(a) prograinm I would be setting my race back 50 years. I was finally convinced that I h!,d no alternative except to take the job in order to set an example and establish a precedent for my race. Mr. Matlock set up qn appointment for me to be intervliewed in Atlanta by the SBA. It was suggested before the meeting broke up that Mr. Mitchell and Mr. McBride would be the electrical and mechanical contractor for the FAA job.
On June 22, 1972. John Peyton accompanied me to see Mfr. Roland Kennedy, Vie President of the Barnett Bank in Jacksonville, Florida. The purpose of our visit was to secure a line of credit for $150,000. In my presence, Mir. Kennedy :ad a conversation with Mr. Matlock and his supervisor, Jolhn Scruggs. in Atlanta to find out more about the 8(a) program. Mr. Kennedy made it clear in his telephone conversation with these SBA representatives that he would let me have a!1 the money that I needed provided thle 8(a) program was a sound one. The SBA officials assured Mr. Kennedy that it was a sound program dewigned to help the d( isadvantaged minority contractor to be a successful busimissmanll. After discussing thoroughly with thle SBA. John Perton and myself,





49

and discussing the 10 percent profit guarantee, Mr. Kennedy agreed to gi #. lihi line of credit for $150,000.
During the last week of June 1972, John Peyton accompaimid me to Atlata for an interview with SBA and FAA officials. I made it clear to both the SBA and FAA representatives that I had never (one a job of this size anl complexity before and named several of the jobs that I had satisfactorily completed. Fir example, my gross business at this time was around $200,i annually and I informed everyone of this. During the meeting they seemed satisfied that I had the ability by virtue of my reputation and past experience. The SBA representatives, Messrs. Matlock, Richard Simmons and John Scruggs helped I4) persuade the FAA to award the contract to me.
At a later date Mr. Matlock and Simmons (SBA) recommended that I scure the services of John Peyton to negotiate the contract and handle estimattin costs. I tok their advice and hired John Peyton to represent me in the nemtiations and to estimate the job. In the first week of July 1972 plans and specifications were mailed to me by the FAA.
On July 13, 1972, Mr. Matlock wrote a letter requesting me to su-iit a proposal for the expansion and modernization (Phase II) of Jacksonville ARTCC to the SBA office by August 4, 1972.
During August 14 through August 22, 1972. several meetings were held in the Atlanta FAA office to negotiate the contract on the FAA job. The following pe)ople were presenting these negotiations: Mr. Charles Leigh, the FAA cozntracting officer; Wilbur Jarman, the project engineer for the FAA; John T. Sruggs. contracting officer of the SBA; Richard P. Simmons, contract negotiator fre the SBA; William S. Matlock, Jr., my own representative, Mr. Peyton: Mr. McBride, myself and several others. Mr. Peyton submitted an estimate for the FAA job in the amount of $2.9 million dollars. The FAA and SBA representatives, however, did not accept this proposal and they finally reduced it to $2,455,366. This reduction was not reached until after several days of dis-ission.
During the discussions which got up to the contract figure, Mr. Jarman called several manufacturers and suppliers to inquire about the prices on vairiou-s items of work in order to reduce the dollar amount of the proposal. Mr. Jarman and Mr. Leigh relied on the estimate of the Ralph M. Parsons Company which had been prepared for the government as a guideline for negotiating the j()I without giving any consideration to the fact that the job was to be contracte(l to a minority contractor. On several occasions where the prices quoted were not in line with government estimates, the FAA negotiators cut the estimate prepared by Mr. Peyton. At that time Mr. Scruggs of the SBA stated that I Iltd to make a 10 percent profit on the costs of the job and that the negotiations might as well be suspended if the FAA did not intend to honor that commitment. In the final analysis the SBA assured me that I would be making a 10 percent profit on the job and so, at this time, the contract price did not have much significance for me. On August 23, 1972, I signed the FAA contract for $2,455.366. Mr. Matlock told me I had a $250,000 profit. The representatives of the SBA and FAA told me that the contract would be renegotiated if I would provide them with the documentation to justify future cost increases. The job estimate itself. however, did not reflect a contingency for any unforeseen items.
During the negotiations, the SBA representatives became impressed with John Peyton and recommended to me that I hire him as my manager on the FAA job. Matlock and Simmons set his salary at $33.000 per year. Basl upoil Matlock's recommendation, I hired John Peyton as a manager of the job. Peyton handled all my negotiations with the SBA and especially with Mr. Matlock.
At some point in the negotiations, I was made aware of the necessity to provide a performance and payment bond. I originally was informed by John Peytoln that McBride Mechanical Contractors, who was going to do the mechanical work. would arrange for the bond. During the negotiations, MNcBride*s price was determined to be too high and when I signed the contract, I did not have a mechanical subcontractor. After the contract was signed, John Peyton arranged for The Poole and Kent Company to take the mechanical work at the price in the estimate and The Poole and Kent Company also agreed to indemnify the bondiing company but I had to indemnify The Poole and Kent Company in turn.
On August 30, 1972, I was notified by the SBA that I had been approved for contract awards not to exceed a total of 3 million dollars per year over the next three years.
I was given notice to proceed on the FAA job on November 28, 1972, and immediately began preparations on that day.





50

I must now move to the Coast Guard job since that job came to my attention at this point.
Within a week of the Atlanta FAA negotiations, and before we were able to get the FAA job fully organized, Mr. Matlock called me and asked me to meet him in Miami, Florida the next morning. On arriving in Miami, I was told that the SBA was negotiating to build a project for the Coast Guard. We met in the Coast Guard office with Matlock. Fred Gardner and a black man from Kingston. North Carolina who was with Mr. Gardner. There was another black man there who was John Copeland, a general contractor from Miami. There were also Coast Guard representatives present.
Mr. Matlock explained that the Coast Guard wanted 100 apartment style housing units designed and constructed. Mr. Garner who is white, explained that his company was not interested in the job and Mr. Matlock stated that Singleton and Copeland should joint venture the job. Mr. Copeland was another 8(a) black contractor who had been given the construction contract for the FAA project at the Miami airport. I had been told that the Miami FAA project and the Jacksonville project were basically the same.
I understood that the Coast Guard project required the contractor to actually designed the work which was something I was not familiar with. Mr. Matlock explained that Copeland and I would have available whatever design and technical skills were necessary to do the job. Mr. Matlock again stated that we would have a 10 percent profit in this work and even though we did not have complete plans and specifications, we agreed to sign the contract for approximately 2.2 million dollars. All of the estimating was done by the SBA and to this day I have never seen the estimate. Mr. Matlock and Richard Simmons handled all of this.
We had very difficult problems obtaining a bond for these projects. The SBA introduced us to various bonding agents who wanted money in addition to bond premiums. We were told we would have to pay anywhere between $31,000 and $71.000 in addition to the bond premiums for the bond. Finally, we got a bond for a flat 2 percent premium but we each had to supply a $100,000 irrevocable letter of credit and each buy a life insurance policy for $100.000. The policy was never given to me although I paid for it. When I tried to force delivery of the policy through the Florida Insurance Commissioner's Office, Mr. Matlock told me to drop the matter.
We obtained a price form Barred and Cobo Contractors in Miami, to do the engineering, design and inspection work for $43,000. Mr. Matlock told us that he had a very good friend in Atlanta who badly needed the engineering and architectural work for the project. He identified this man as Virgil Pinnell who had an office in Mr. Matlock's building in Atlanta. We agreed to do this and this work cost the joint venture $9.,000 by using Mr. Pinnell.
We started work on the Coast Guard job in about October 19(73. We immediately ran into very serious construction problems. Mr. Pinnell's plans were drawn to standards more than required by the Miami Building Code and they contained many errors. We often had to pay Mr. Pinnell's travel expenses to Miami to corret errors in the plans.
We lal orisite supervision problems, we ran out of money since, as the job went on. we did not know whether we were making or losing money, but we kept being assured that we would receive our 10 percent profit.
I will nowv return to the FAA Jacksonville job, which you should understand w\ s proeeding at the same time as the Coast Guard job.
As I said (rlier. John Peyton was running the FAA job which started in early .1~ nuol ry 197:. We encountered rain delays. Our electrical subcontractor defaulted 1 :! tI he FAA was issuing change orders. In August 1973, Mr. Matlock instructed me to trmin;ate, John PIeyton because he was not cooperating with the SBA. Chrles Leigh of the SIA t(old me thtt everything would work out fine if we let .1oh 1 Peytn 1o and so I did. My brother. Iloward, took John Peyton's place l11-vin I v company with no one who could handle change orders and time extemouon requests.
The j1ob fell behind schedule anid the FAA threatened to terminate the contract. Tli schedule was (:lled a ('PM. or critical path method of scheduling. I had never worked with one before and it never worked on this job.
()ur financial problems started to surface in D)ecember of 1973 when we were hit I' incased nuat erial costs, increased labor costs and change order work whi chI we performed with out reaching agreement on the price of the change orders a d1 we realized in .1annuary 197 1 hat1 several items of work had I)been omitted from tI lhe ot1 inuite. Vhen IIwe told Mr. Matlock of the financial problems, he told us








our information was wrong and we would not have any financial difficult ies on this job.
As the job progressed the SBA hecamne harder to reach on the telepho e when we needed money to pay for window walls, siding and ot her construct in materials which had to paid for upon delivery. Finally. inll May 1974. Mr. Matlock c:alied and asked what additional monies over the contract amount would he necessary to finish the job. I estimated that about $150,000 in addition to change order increases had to be added to the contract.
I understand that what caused Mr. Matlock's call was pressure from John Copeland and the C(oast Guard since both of those jobs were in trouble.
Mr. Matlock said he would get me the $150,000 imninediately on the FAA job and $550,000 on the Coast Guard job and that Copeland would get $351,000 for his job and that Mr. Leigh would process all of the change orders. In this conversation (May 1974), Mr. Matlock said hlie was sending his secretary to MAliami on Sunday morning. He said she would not have time for me to read these papers since she had to return to Atlanta on the next flight. On Sunday morning we met I his young woman on Miami Beach in a hotel lobby. She had a stack of papers, almost one foot high. She gave these papers to us and told us to sign them. We a 0ked to read the papers but she explained that time would not permit reading the papers and she had to return to Atlanta. She told us that we would get copies from Mr. Matlock. I never received a copy of those papers and I did not discover until later in the year that the papers signed reflected a loan of $130,000 to me by the SBA. When I discovered the true nature of the papers I was told by the SBA, a Mr. Zemeki, that I should not worry about it and when the job was 95 percent complete, the loan would be written off.
I should add that prior to my signing these papers, the SBA auditors came to my office in Jacksonville and conducted a complete audit of the FAA job. I should also say that the SBA has always had unrestricted access to every re(-nrd on these jobs. I was not told the results of this audit until this year when I discovered that the SBA audit showed that the FAA project would lose money.
Anothr audit was conducted by the SBA in July 1974 which reflected a $165,000 loss on the contract and during 1974. I had at least two meetings with the SBA in which I was assured that I would come out of the job in good shape and that the SBA would make me whole.
I continued on the FAA job and in December 1974 I was told that the SBA would not permit the FAA to make any more payments on the contract to me. I was told by Mr. Matlock to declare bankruptcy and let the bonding company take care of the losses. This was unacceptable to me since I felt I was entitled to a profit and, besides, I was at the end of the line so-to-speak as the last indemnitor.
I thought matters were brought to a head in March 1975 at a meeting in Washington, D.C. between the FAA, SBA. Copeland, Singleton, various creditors and the Copeland-Singleton joint venture.
By March 1975 the Coast Guard was threatening to terminate the joint venture for default. The joint venture's bonding company was in receivership. At this meeting, the SBA said it would advance 1 million dollars to complete the Coast Guard job and all that was needed for the FAA Jacksonville job and that job would be no problem.
I am not certain about what additional monies were put into the Coast Guard job by the SBA because I was not involved in it. Mr. Matlock required the joint venture to hire Richard Gardner to be the project manager and run the job. I was told that the joint venture would be defaulted if Copeland and I would not agree to permit Richard Gardner to complete the job. When this threat was made, Richard Gardner was present with his brother, Fred Gardner, who I understand is the owner of Lenoire Construction Company. This wa< the same Fred who had declined to become involved in the Coast Guard job at the outset. I felt I had no choice but to agree to the SBA's demand.
I cannot, at this point, say how much was spent on the Coast Guard contract. what the losses were, and what if anything is due the venture. I have asked for an accounting but have not received one. I know, however, that there was what was called a "controlled account" into which contract monies had been deposited and on which the SBA was a signatory. Although this account contained sufficient monies, the SBA refused to permit the payment of payroll taxes du tlhe I.R.S. This resulted in penalties and interest and I believe the I.R.S. levied on the joint venture contract balance with the Coast Guard.






52

Althoiuugh I do not know what occurred on the Coast Guard job, I do know the status of the FAA job. I have total losses of approximately $215,000 on this job of which the SBA has confirmed direct losses of at least $157,000 by an audit completed in February 1976.
These losses have been the subject of an ongoing discussion with Messrs. Matlock, Scruggs, Zemecki and Bullock of the SBA. These discussions have centered about the $150,000 which remains in the FAA contract and how that money can be disbursed to me to off-set, in part, these losses. This started when I was told by Messrs. Scruggs, Zemecki and Matlock that the $150,000 contract balance on the FAA project had to be used to repay the $150,000 advanced to me in May of 1974. I was informed that the $150,000 advance could be handled in the form of a grant to me of Business Development Expense funds in the amount of 8150,090. I was told that the $150,000 was the largest grant of these funds which coumld le made available under SBA regulations. The vehicle through which I was to get this money to make me whole on the loss I suffered on the FAA job was to be another 8(a) contract. As part of this contract, the Business Developmient Expense money (BDE) would be paid to me and I could use the funds to )pay (off the outstanding expenses which I had incurred on the FAA project. Several projects were suggested through which the payment of BDE funds could be accomplish lied including proposed construction projects in Biloxi, Mississippi and Savannah, Georgia.
The first job offered was a job in Biloxi, Mississippi. Mr. Matlock called me and told( me that he had a way to help and that I would be given a job in Biloxi, Mississippi. He stated that I would have a joint venturer in the form of Mr. Fred Gardner and his company, Lenoir Construction Company. Mr. Matlock explained that I would be required only to travel to Biloxi and pick up the $150,000 BDE money as soon as the contract was signed. I would not be required to provide any bond or be responsible for the progress of the job in any respect. Mr. Gardner was to provide all of the money and supervise the project. I refused to agree to this proposal and, after several discussions with Mr. Gardner and the SBA officials, the matter was dropped. The reason I refused to go along with this proposal \was my belief that I could not sign a contract by which I agreed to perform work without at the same time being responsible for that work.
I was next offered a very similar proposition in connection with a barracks renovation project at Ft. Benning, Georgia. After many telephone conferences, I met with Mr. Matlock, Mr. Gardner, an estimator from Mr. Gardner's company and the Corps of Engineers in Savannah, Georgia. The prices were negotiated on this project on February 18, 1976. At the conclusion of those negotiations there were three items on which Mr. Gardner and the Corps of Engineers could not
-Igree. I was told to come back on February 24, 1976 to complete the negotiations.
By this time I had become very concerned about the SBA's desire to place me in joint ventures with Lenoir Construction Company and Mr. Gardner. I contactedi Mr. William Thomas of The Poole and Kent Company in Miami, and asked( if they would be willing to assist me on the Ft. Benning job. The Poole Iand Kent Company was the mechanical subcontractor on the FAA project and was owed money by me. It was understood that the only realistic prospect that The I'o!1e -nd Kent Company had for payment of its account on the FAA project was to assist me in obtaining the BDE monies. I also asked attorney William Frye who \Vas representing The Poole and Kent Company to attend the next negotiating session and advised the SBA that he was representing me and Singletn ('ust ruction Company in these matters. At the next negotiating session in ISavaeniI, Mr. Frye advised the SBA that he wanted to review all contracts befre I signedd them. In a few minutes, Mr. Gardner, Mr. Matlock and the Corps of Lngine"vs took a coffee break. When they returned they announced that agreeinent nould not he reached with the Corps of Engineers and the Ft. Benning negot iat ionls terminated.
Th 11 1ut h 11 0es, negot t011 I 111 and th0Iouhout our negoitions in connection \vith 111, ire Crash & Resue Stalion contract which is presently in construction hy a ii0 :t vmire lt xvn Si 1glell C(onstirultion Co., Inc. and le Poole and lzt (o any, I was repeaw:tdly advised by the SBA that $150,000 of BDE 2.m.oney wiub I0 nmdo nvil:aile uIlon miy entering another (a) contract. Indeed, I \\: a 1! y Mr. W!tor hillock of the SBA that the SBA ha(1 so refined its I,,< t'res in c\~ ne in with ti ho 1I)E funds that within a few days of signing I e contr:Mt fb r l Fire ('r:sh & tes~ne Stnlion, I would receive the $150,000. Mr. lr h:1,; r 'will 111ide Ih, e mnnittee with 11a mtlinle of his involvement ill i'e I i:lin l it i l he siA i1 : esflt lives *,,Ir Ilie $150,000 1I)E Imoney, in-






53

(.-I ulil Sii ,fi:)e 27 separate (O'lLft5Conisisting of 'nrsJ~ullee al 111 nIclnrf l a whlih efll!ect toecolitiact Is. it wvas not until Auut17,well aft er thte corninlenceiw~eitt of work o)n H ie F'ire Crash & Rescue Statiiw project that esrs Mat Ilock. Zieli. S uisantd Chrisi ansonli fin 11'advi sed t li t Ihey Wvere experiellci ug om pI'Lblden- I'lS i) obainig the $1,50,000 BIJ f E7 mc01V 11ii. 'I'le advised iobat various SBA. i-ie-ula tions appeared to pr'veh(- I!,(,e S) 'A tfom p ;tvyi ug t li $ISO0A to me. sugested ho\\ever, that Ifhe $1750,009' liability hc thiey i)iied ( thiat I still owed,( tile SBA I'loiln the FAA 1pro(Ject h e I Im is (Irvde(l the Fiti'e ('rash & Rescue Staition job). I insisted that I haId alrc'aoy beenl promised the $150400G BDE money (and that wvas why I centered inito thev Eire ('rash kResciie ctil contract. I \Na promi'(Iiised at this inflit g f id: t the matter wNould be& itnd~' Washington alid ill Selpteliber 19761, r. Mtloc informned ine that Illy files w~ere being transferred from the Atlanta S B'A office to H le WVashiiiig)ton S BA olc-we for further hia dli iig.
I ami iot- suire \ihetlher 1-he SAcan be persuaded to bonor it s coiflit inenit to 11ee w\A-!rsh~ to the BI E ini~ey. If not, I expect I will be required to litigate the niatter. I am sure, howVeN-er. that before ibecollling ilIvf)l vod in fi e 8 (a) pro,irain. I was a moderately sucfcessful contractor. In tej'mns of 1,1.tlac contractors, I Avas a very successful cont raptor. At this p~oinit, hiowe%,er. Sinigletoni Construction Comnipy is onl the brink of financial ruin. My contrat-ting buiesand my responsibilities have been reduced to those of a joint venturer. I no longer have l~ie authority to direc-t tim manner in which my construction work will lbe performed. I have no bonding capacity. My family's personal financial resources have been ebxhaiusted and m~y health and the health of my wife, Grrace, have 1een great lv thireatelied by the ,Anxieties and pressures created by the FAA and Coast
Gur.
I c'an tell vou in all sincereliv that I wish I never had become involved in the SI a) I roar-lin.
SINGLETON CONSTRUCTION CO., Ixe7.,
By ROBERT L. SINGLETON.
k 'uitcommittee eiraiuaton
After hearing the testimony of Robert Singleton, Diane Costarakis, b bookkeeper for the Singolet on Construct ion Coip any, John Peyt on, former project manager for Singleton Constriictio, 'William Thomas, Vice President of Poole and Kent Company, W1iley Messick, Regional Adm-inistrator of Region IV in Atlanta, John Scrugrgs, -Assistant Regional Director for Procurement Assistance and W1illiam MNatlock,
Deputy Assistant for Procurement Assistance, the subcommittee notes the following conclusions:
1. Singleton Coiistruiction Company did not seek out the Small
Business Administration for contracts. Instead the SBA souoht Singleton. The SBAX became the prime contractor without assumliing the primary responsibility for the projects.
0. Singeto Construction was a viable solvent small business
before engaging in th B a proorarn.
3The contract on th e Federal Aviation AdministrationSma,,ll Buisiness Admninistrtton job was negotiated at a rate virtiiailly designed to los e m-oney for the contractor (Singleton Construlctiofl, Inc.). Alleg(,ations were made that the initial contract was punt out for competitive bid and the lowest bid was $2.8 milti1011. If the SBX)'% ofilcjals, in agreeing to a$ __-t million negotiated Lid. know that the lowest competitive bid for that job was $400,O0 above the negotiated bid then they (the SBJV) should have so
informed its subcontractor, Singleton. (See hearing- record.)
4. The technical, managerial, assistance that was available to
Singleton was wholly in adequate.
a. The joint venture of two cdisad-lvanta '(e1 contractors (as was;
the situation with the Singrleton Construction/tCoel and Con-





54

struction, Inc.) on a single job usually works to the disadvantage of both, particularly when SBA must then be the sole source of
proper management procedures.
6. The Small Business Administration should recognize a
moral and perhaps legal justification for assisting the Singleton Construction Company to regain solvency. The basic faults for the failure of the Singleton Construction Company's project rests
with the SBA.
CASE STUDY NO. 2

companyy : Atlantic Materials.
President: Joseph Harris.
Location: Richmond, Va.

Re: Minority "front"' involvement to obtain SBA consideration. Cb eu~rasta nees

Joseph Harris, a black orphanage superintendent, ,was a))pproached by several white businessmen who made him president of a rock quarry in order to seek SBA funds and possible 8(a) contracts.
Harris testified before the subcommittee on July 6, 1977 and stated:

STATEMENT OF JOSEPH HARRIS, FORMER PRESIDENT, ATLANTIC MATERIALS, INC., PETERSBURG, VA.
Mr. TITAlus. My name is Joseph Harris. I live at 2(603 Matoaca Road, Petersur. Virg'nia. Mr. Chain, I am here today because I know of your desire to expose situations where minority persons have been exploited in SBA prograims. I have knowledge of such a situation.
It happened to me. In the summer of 1970 I was approached by Mr. John Williams of Petersburg, Virginia. I had known Mr. John Williams about 15 to, 17 years.
When Mr. Williams told me about the opportunity to purchase land and start a sand and gravel company, I thought that this was an opportunity which was too good to turn down.
I wish now I had turned it down. Mr. John Williams and his brother. Dr. Louis Williams. asked me to approach the SBA in Richmond about an SBA loan to get the business started.
We later hired a black attorney, a Mr. Sheffield. to compile a loan package and organize a company and act as the registered agent for the company.
Later we hired Mr. Richard (Obenshain and George Hinnert as the agent after Mr. Sheffield left the firmi. Mr. Obenshain helped us to obtain a 90 percent SBA ;uraniteed lafn under a minority program, which was Mr. Sheffield's loan package.
Nothing was changed, other than one new name submitted in the package was Dr. IHarold Williams. It was made clear to me that I was the President of the company, but later I found that the Williams brothers actually controlled the company and the decisions.
I had the understanding that I was 51 percent stockholder in both the company and the land, due to the SBA loan. Let me make it clear that part of the SBA loan was for the purchase of the land which the Williams brothers had tliu- option on, made a down payment on, I think.
The breakdown on the loan was $130,000 for land purchase; $131,000 for the pliant equipment: the rest was for plant operations.
'I'he fact that the company was minority-owned set it off from its competition. In fact. it was the only minority-owned sand and gravel company in the country.
Before the lon was agreed to) by the SHA and my company. the Williams brothers were friendly toward me, but after we got the loan and went into business their whole attitude changed.
In oine meeting at the house of Dr. Louis Williams in Richmond, Virginia. I was cursal and had to run out of the house because I was asking too many qulestinMs it the meeting.







The SBA told me that I had to quit lily job at the opag an vwrk for Ih1 company. I was the only officer that the S BA aIpproved a salary for.
I was the Sales I directorr for the Com1ny. A after the loan %as made I was cal lI into a meeting by the Williamses in .Joh0n Williams' basement.
I was told that I would be paid $1,000 per month and a ilonus at the end of the year. I mentioned that the SBA contract called for no bonus.
John Williams said the SBA contract was for blacks ; that they, the WiIliamses. could do anything they wanted to. This was mid-Deceiuner of 1)71 t)bor any work had started.
This meeting was on a Sunday night, and I reported Ilie whole affair 1o Mr. Tom Rc-,gan on Monday morning, who was the Director of SBA, Richiond, hut nothing was said or done about the matter.
There were certain things that went on regarding the company's operation which I (lid not agree to. For instance, although I was the company's President I did not have an office nor even toilet facilities at the plant site.
The other company officers did have both offices and facilities. New transportation, using the company funds, was purchased for the white employees, hut the blacks, including myself, had to do whatever they could to get to and from work.
The business opened on January 1st. Clearing and preparation began in January of 1972. Plant construction began in March of 1972.
Plant operation began in August of 1972. Whenever I went to the SPA office in Richmond to tell them about some of the things that were going on, the Director. Mr. Tom Regan, would tell me not to worry, that nothing could be done without SBA's consent.
The company was taken over completely by the corporate attorney's and the Williams brothers. I asked to see the company records several times, including the check book for items bought by the company, but I was told that this was none of my business.
So I never saw the records. I think the records were kept at Attorney Obenshain's office. When I heard that the company was going to be sold I went to the SBA and told them that the Williams brothers were trying to sell my company.
SBA encouraged me to try to buy them out and they gave me SBA approval and suggested an attorney. Mr. George Robinson of the central office came down to Richmond with an attorney who had funds available for me to buy them out and ordered a hold on the company.
Also, Mr. Robert Tar of EET Institute with funds to help buy the Williams brothers out came down. My attorney, the one SBA suggested, took my case. Mr. Doug Wilder. He and I met with the Williams' in early November of 1972 and we attempted to settle the situation by buying them out.
I turned all of th3 dealings to the attorney. Five months later my attorney learned the company was sold and I never knowingly agreed to do so.
Senator, I will answer any questions you have.
Senator CHILES. Mr. Harris, in your statement you say you were approached by Mr. John Williams. Exactly what did he say to you, and did he tell you how much money you would be required to put in in joining in the business?
Mr. HARRIS. Senator, he said that he and his brothers had bought an option on one piece of land and paid down on another piece.
They were having problems meeting their obligations and if I would pay for putting the loan together I would not have to put in anything, other than the expense of putting the loan together.
Senator CHILES. Why do you think they wanted you to come into the business. Mr. Harris?
Mr. HARRIS. At that particular time I thought it was because of friendship. Now I see it was because I was black.
Senator CHILES. Then you were going to try to get an SBA minority loan?
Mr. HARRIS. Well. this was one of the conditions that John Williams suggested, that I would go to SBA and get a minority loan.
Senator CHILES. That was the condition under which you were coming into the company. You were not going to have to put up any money, but you were going to have to be successful in getting the loan?
Mr. HARRIS. Yes, sir.
Senator CHILES. Did SBA officials or your partners mention the possibility of getting any 8 (a) contracts, 8 (a) set-aside contracts?
Mr. HARRIS. At that time they were calling the 8(a) contracts set-aside contracts, and this was mentioned.




56

Senator CHILES. Can you recall who first brought this up?
Mr. HARRIS. John Williams.
Senator CHILES. Did the SBA officials talk about this also?
Mr. HARRIS. Yes. The SBA officials talked about this also.
Senator CHILES. On the package prepared by the SBA specialist, was that prepared with an eye towards gaining an 8(a) or set-aside contract, because you would be a minority firm?
Mr. HARRIS. Yes, it was.
Senator CHILES. When you first went to SBA, and they put the package together for you as the 51 percent stockholder, did the officials give you a market rating for your company?
In other words, did they project your sales as good, average, poor, very good, excellent? Did they give you any market rating?
Mr. HARRIS. Well, in several conversations, I would hear them talking, and they said that this company would have a 1000 percent chance to survive, the only black company in the country of this sort.
Senator CHILES. You would have been the only black sand and gravel company in the country, and that would have allowed you to qualify for set-aside contracts?
Mr. HARRIS. Yes, it would have.
Senator CHlLES. From your statement you indicate that you found yourself in a situation where your partners did what they wanted to, as far as running the business, since they controlled the checks and the records, but every time you would go to SBA they would tell you that you were the President?
Mr. HARRIS. Right. Well, my name became a household word at the SBA, because I was there about once or twice a week, reporting something that had gone wrong.
Also, I was attending a class there, learning about the quarry business. Each time I would go there I would have something new to report of some wrongdoings.
Each time I met with the Director or persons involved, they would say, "Harris, you have nothing to worry about; SBA has control of this company. You are the major stockholder and so you cannot do anything about it."
Senator CHILES. You said you did not have an office space. Did you have a desk at the company?
Mr. HARRIS. No. We built a new office building and I could take my clients out behind the house, behind the building, under the shed, and just the laborers had an office.
I had no office. The toilet facilities, I had to take my company down into the woods.
Senator CHILES. You were not allowed to use the desks that were in-you did not have a desk in the building that was built? You did not have facilities there?
Mr. HARRIS. At that time the white workers were resentful, and John Williams had told me that the Superintendent, which I was paying 51 percent of his salary, had asked him for me to stay away from the business as much as possible.
Senator CHILES. But you were President of the company?
Mr. HARRIS. Yes, I was President of the company.
WASHINGTON METROPOLITAN AREA TRANSIT AUTHORITY,
Washington, D.C., September 7, 1971.
Re. Fredricksburg, Va., project.
Mr. JOSEPH HARRIS,
A flantie Material, Inc.,
Petersburg, Va.
DEAR MR. HARRIS: In my position as Equal Employment Opportunity for Washington Metropolitan Area Transit Authority, (WMATA). I think that Mr. Harris endeavor has great potential as a minority owned sand and gravel supplier for Met ro construction. The operation of Mr. Harris will help implement the policy of WMATA. Please, see attachments.
Within the year, it appears that the materials that Mr. Harris will have to offer will be in short supply. I is company will be in the position not only to implement the policy of WMATA, but to satisfy the objectives of the Washington Plan of U.-S. Department of Labor.
Tle Authority will assist within its legal capabilities your attempt to become a minority supplier.






57

We wish success in your endeavor and, please, contact us if we can be of any help in the future.
Thanking you for your concern.
Sincerely yours,
PETE BaRo\ N.

ATLANTIC MATERIALS, INC., PCttC1V'l'btllj Va., October 2j, 1972.
Mr. THOMAS REGAN,
District Director, Small Business Admin istration, Richmond, Va.
DEAR MR. REGAN: This is in reference to Atlantic Materials, Inc. At i recent board meeting of the corporation, one of the officers presented a propws:tI front a concrete company in Washington that was interested in buying Atlamitic Materials for $1,000,000.00.
The three other board members that own 49'% of stock of the covpooation agreed to sell, however I was not in agreement to selling the company. (ii, other three board members then notified me that they would sell their inter-,! to me. for the same price. I am now in process of trying to locate funds to purci:,see their interest, with the assistance of my attorney, John J. Carmody and Mr. J. Reginald Harris, Sr., and Mr. Robert H. Tarr.
I feel that some consultation from the Small Business Administration is needed in order to protect my interest in the corporation. I would hope that you would give this request your usual prompt attention.
Yours truly,
JOSEPH HARRIS, President. P.S.-Mr. Regan-I was offer for my 51 percent of this $14 million c(:tipany $35,00.00.
PETERSBURG, VA., Novem ber 27, 1972. Re Atlantic Materials, Inc. Mr. THOMAS REGAN,
District Director, Small Business Administratioi, Richmond, Va.
DEAR MR. REGAN: This is in reference to the conference held in your police in early October, concerning Atlantic Materials, Inc.
I stated that I would purchase the 49 percent interest from the stoctkholders for the sum of $30,000. I wish to continue with the company, if it is at all possible, as it is the only Black Sand and Gravel Company in the State of Virginia. I also stated that I would contact Attorney Wilder to assist with the lea! settlement. Since that time, I have acquired the services of Attorney Wilder, both for the legal settlement and financial arrangements.
Subsequently, I have contacted a company which has verbally agreed to purchase all the material I can produce during the year. This company has also agreed to assist with the financing, management and record keeping of my operation. A contract to this effect is being prepared, which will be sent to you -,Ind the bank of Fredericksburg, for approval.
I sincerely hope that these arrangements are satisfactory. Again, thank you for your cooperation.
Sincerely,
JOSEPH HARRIS.

COMMONWEALTII OF VIRGINIA, OFFICE OF THE GOVE T:', Richmond, Va., November 2. 1972.
Mr. JOSEPH HARRIS,
Petersburg, Va.
DEAR JOE: I have talked with SBA officials in Richmond and Washington, D.C. They intend to stand behind you and your interest as far as your business venture is concerned.
However, as I understand it, the advice given to you was to secure a lawyer who perhaps could help you clear up some of the problems which now exist. Senator Douglas Wilder was the person most recommended by SBA officials.




58

At this particular time letters from me won't do you that much good because all of the people to whom I would be writing these letters are familiar with the problems. Therefore, I think it would be in your best interest to secure an attorney from this area to assist you in clearing up the existing situations.
I am not exactly certain what it will cost, but with you, an attorney and the Small Business Administration working together I am almost certain that thes-e matters can be resolved.
If you would like for me to assist you in explaining the situation to an attorney, whether it be Senator Wilder or some one else, I will be most happy to do so.
After consulting with parties involved, I am almost certain that this is the natural course you should be taking.
Respectfully,
WILLIAM B. ROBEIRTSON,
Special Assistant.
ANSCOTIC DEVELOPMENT CORP.,
Washington, D.C., March 18, 1972.
Re Atlantic Materials Inc.
Mr. GEORGE II. ROBINsoN,
Office of Programn Development and Supervision Minority Enterprise, Small
Business Administration, Washington, D.C.
D)EAR GEORGE: As a result of further investigation into the feasibility of Atlantic Materials, Inc. establishing a branch location in the Washington, D.C., area as opposed to slhing through a marketing or sales firm to other sand and gravel suppliers we have reached the following conclusions:
(1) That the cost of selling wholesale to area major sand and gravel suppliers through an agent, the sales group, and paying the resultant commission would be greater than the cost of transporting sand and gravel from Fredericksburg by railroad car to the company's proposed site in D.C. and selling the product directly to contractors on a retail markup.
(2) That the existing market for sales to contractors is very lucrative in the Metropolitan area due to the fact that two of the largest sand and gravel suppliers, Baltimore Sand and Gravel and Potomac Sand and Gravel, have been forced to suspend most of their digging operations for sand and gravel.
(3) That the prime consideration made by SBA in granting a 90 percent loan guarantee to Atlantic Materials, Inc. was its sales projections and, consequently, there is much greater assurance that the firm will be able to repay its financial debts if it is able to make sales on a retail basis as projected rather than on a wholesale basis to other sand and gravel suppliers.
(4) That if it is decided that a marketing or sales group be located in Washington, D.C. to sell to other sand and gravel suppliers rather than the company establishing its own retail sales location in the area, then it is strongly recommended that the sales or marketing group be a subsidiary of Atlantic Materials, Inc. This would enable Mr. Harris to maintain a 51% interest in the sales company and consequently, he would be able to continue to meet his financial responsibilities in controlling 51% of the firm.
In closing, it is also strongly recommended that SBA maintain a close and periodic surveillance of Atlantic Materials, Inc.'s internal operations in order to protect its guarantee and its requirement that Mr. Harris remain in control thereby assuring minority control of the firm.
Sincerely,
DARRYL A. ITLL,
Executive Director.

WVASHINGTON AREA CONTRACTORS ASSOCIATION, W11ashtington, D.C., Septcmiber 6, 1971.
Mr. JTesm, ni I ARRIS,
I thiWntic Ulnterials. Inc.,
P0t rsbitry. IVa.
DEAR Mn. HAAnRIS: The Washngton Area Contractors Association is proud to know of .1 minority owned sInd and gralvel supplier in our area. We as a minority buibling cor tncto4rs' association will be more than delighted to encourage memjw shiI p l at i oi) [i, whenever p )ssiIOle.








We Strongly feel a need for such a business as yours. In the District of Columbia where the construction industry is at its peak, Atlantic Materials, Incorporated has a great potential and should reap many benefits.
Kindly let us know if We can be of any direct assistance in the near future. Best wishes for much success.
,Sincerely yours,
EDWARD L. FEGGANS,
Executive Director.

SMALL BUSINESS ADMINISTRATION

AMORTIZATION

Authorization approvi??,q bank's request for SRA guaranty

THE NATIONAL BANK or FREDERICKSBURG, Fredericksburg, Va.
(Attention of Mr. Stuart H. Payne, President).
Your request on SBA by letter dated September 15, 1971 for SBA to guarantee 90 percent of a Loan in the amount of $350,000 to be made by Bank to Atlantic Materials, Inc., % James Edward Sheffield, Attorney, 12 West Leigh Street, Richmond, Virginia 23220, and guaranteed by SBA to the extent provided in the Guaranty Agreement between Bank and SBA, is hereby approved pursuant to section 7 (a) of the Small Business Act, as amended, subject to:
(a) Provisions of the Guaranty Agreement herein referred to, and
(b) First disbursement of the loan being made not later than six months, and no disbursement being made later than twelve months, from the date of this Authorization, unless such time is extended pursuant to prior written consent by SBA, and
(c) Provisions set forth on reverse side hereof.
The following forms are herewith enclosed:
(1) Three partially completed copies, executed by SBA, of Guaranty Agreement (SBA Form 597). At the time of execution of note and loan agreement by borrower, and prior to first disbursement on account of the loan, Bank shall complete the details of the Guaranty Agreement, execute and date the same and forward two copies to the appropriate SBA office.
(2) Three copies of SBA Form 147 "Note," one to be executed by the Borrower, the other two to be conformed. The original executed copy is to be retained by you, one conformed copy to be sent to SBA, and the other copy, may be delivered to the Borrower.
(3) A supply of SBA forms for your use in reporting transactions (including the initial disbursement) in connection with the loan. Immediately upon disbursement, please forward to this office the original of SBA Form 740, original of the Certification of Use of Proceeds and SBA copies of SBA Form 172.
THOMAS S. KLEPPE,
Adn?4nlstrator,
(By Kenneth P. Bowe, Chief, Financing Division.) September 29, 1971.
SBA Form 529B (8-66) edition of (4-66) will be used until stock is exhausted.

PROVISIONS
1. Completion of loan on basis of, and subject to requirements or conditions set forth below. Bank or holder of Note (hereinafter referred to as "Bank") may, from time to time, impose any other conditions which it may consider desirable, and which are not inconsistent with this Authorization nor with the Guaranty Agreement (SBA Form 597), provided that such conditions do not establish any preference in favor of Bank.
2. The Bank may, without the prior written consent of SBA, (A) extend any of the scheduled payments thereon for a period not exceeding three months, or
(B) release from the collateral securing the loan real or personal property upon the substitution of other collateral or like character and of equal or greater value, or (C) release from the collateral securing the loan real or personal property for cash sale at fair market values prevailing at the time of sale, provided

21-491-78-5






60

(a) the proceeds of such sale are applied on the loan in inverse order of maturity and (b) the remaining collateral adequately secures the loan.
3. (a) Repayment Terms, Interest Rate (s), and Maturity.
Note payable ten years from date of Note, with interest at the rate of eight and three-quarters percent (8% %) per annum, and installments, including principal and interest, each in the amount of $4,387, payable monthly, beginning one month from date of Note, and the balance of principal and interest payable ten years from date of Note. With the further provision that each said monthly installment shall be applied first to interest accrued to date of receipt of said installment, and the balance, if any, to principal.
(b) Use of proceeds of loan as follows: (show specific uses for which loan is authorized).
1. Approximately $130,000 for land acquisition.
2. Approximately $131,000 for purchase of machinery and equipment.
3. Balance solely for operating expenses of Borrower.
(c) Loan conditions imposed by Bank/SBA.
1. First deed of trust on 176 acres of land located in King George County.
2. First security interest in and to all furniture and fixtures, inventories and accounts receivable now owned and hereafter acquired or created.
3. Security interest in and to all machinery and equipment (excluding automotive equipment) now owned and hereafter acquired subject to prior lien.
4. Guaranty of the following:
(a) Dr. Louis H. Williams and wife.
(b) Dr. Harold Williams and wife.
(c) John Williams and wife.
(d) Joseph Harris and wife.
6. No dividends (stock or cash) or bonuses to be paid without prior approval of SBA/Bank.
7. Financial statements from audit shall be furnished annually beginning with year ending December 31, 1971.
8. Hazard insurance, including flood insurance if available, to be furnished in minimum amount of 60 percent of value, taking into consideration applicable co-insurance clause.
9. Corporate salary scale to be approved by SBA/Bank. In all cases, before Bank effects a change in the provisions of the loan pursuant to the authority contained in paragraph 2, above, Bank shall first receive a written opinion from its attorney stating that no rights of Bank or SBA are or will be impaired, limited, or adversely affected by such proposed action. Unless expressly authorized herein, inventory or accounts receivable are not to be substituted for other collateral or accepted as additional collateral without prior written consent of SBA.
Except as expressly permitted by this Authorization, the loan shall be administered as provided in paragraph 5 of the Guaranty Agreement (SBA Form 597). Any changes made should be reported immediately, to SBA by the holder of the Note.
SMALL BUSINESs ADMINISTRATION.
FEDERAL BUILDING,
Richmond, Va., April 1, 1974;.
Reply to Attention of : CED.
Subject: 7(a) Loan-Atlantic Materials, Inc.-Paid, Possible Irregularities. To: Rush Crain, Acting District Director.
Attached is the latest edition of the Afro-American which is sold in the newsstand of the Richmond Federal Building. You will note that SBA is mentioned in three separate, front page articles.
The purpose of this memo is to call to your attention certain allegations made by a Mr. Joseph Iarris. of Chesterfield County, Virginia relative to his $10 million lawsuit against his former partners who were guarantors to this SBA insured loan which I understand has been paid.
As my memory serves mne (without consulting the paid file) this $350,000 loan was originally filed as a IDirect-ME loan. After reviewing the file and after a PIersonal interview with IMr. HIarris, I explained to him that I didn't think it was appropriate for our Agency to place $350,0(00) of direct, minority designated money into this situation.
During the course of the conversation, it became very obvious that Mr. Harris., while a nlice individual personally, was merely being used as a "minority front."






61

I would also like to state that I never met with any of the other three individuals mentioned in the article as "wealthy Virginia Republicans." nor was I ever aware that Mr. Richard D. Obenshain, State Clairman of the Virginia Republican Party and an attorney here in Richmond, formerly represented Atlantic Materials (borrower) as the article alleges.
The exact timing of events as they unfolded is unclear to me now; however, I remember a series of ineetings with Mr. Harris in our office. Iuring one of the visits, Mr. Harris made the remark to me, "I understand that you personally feel that $350,000 is too much money for any black man to have." I believe my response was something like, "I think you are going to be getting into deep problems in view of your total lack of experience in this field and that you really have no visible managerial function in this particular enterprise."
Mr. H1arris persisted in this "anti-black" line of conversation and I told ill I was sorry but I wouldn't be a party to granting this loan under the guise of a 51% minority owned business when it was quite obvious to me what his purpose was in the management, which was to obtain a "cheap" loan at 5 % interest.
Mr. Harris continued his pressure in varying degrees. Many of the interviews which later took place were in the District Director's Office and in his presence. During the many interviews at which Mr. Regan was present, I believe ie (Mr. Regan) took the same point of view I did.
If my memory is correct, our former Minority Enterprise Representative, Mr. Jerry Carter, had a series of interviews with Mr. Harris in his office as well as being present on many occasions when Mr. Harris, Mr. Regan and I would meet in Mr. Regan's office.
It is my belief that Mr. Carter shared the opinions of Mr. Regan and myself that the entire situation vas not appropriate for direct SBA minority earmarked monies to be consumed in this type of a "black front."
Events are unclear from that point on; however, I remember a banker in Fredericksburg, Virginia getting in touch with our Jones Lawson, L/O, who was acting in the capacity of Bank Relations Officer. The banker (I believe his name was Stuart Payne) expressed an interest in making the loan under SBA's 90% guaranty program.
A conference was held in Mr. Regan's office and the general decision made that we could go along with a 90% guaranty since no government funds would be used in the project, purely our guarantee secured by the personal guaranties of the management of the SBC (all of whom had the capacity to guarantee except Mr. Harris who had little in the way of tangible assets) and a first mortgage oin the land which appraised for an amount more than sufficient to cover the loan.
It should be noted that Mr. Harris was exerting his own form of pressure upon all SBA personnel, concerned which was primarily his endless series of visits to the office and the fact that we would go over the same material again and again.
Mr. Harris insisted that he truly was needed in the business and that his particular skill in management would be in the sale of sand and gravel to the purchasing agents who represented the construction company that was building the Washington, D.C. Subway. It was his feeling that the fact that Atlantic Materials was minority owned would be his entree' to the D.C. contractors.
My personal feeling was that the contractors would purchase materials from anyone who could deliver at a price since the construction of the subway would consume vast quantities of sand and gravel. Mr. Harris contended his gravel yard was the closest to the construction site and, therefore, he could give the best price.
After the bank guaranty loan was made, Mr. Harris again began to visit our office to complain that he was not being considered when Atlantic Materials was making management decisions. He complained further that funds would flowv through the corporation without his ever being told where they came from or where they were going. Mr. Regan, Mr. Carter and I advised him to consult with an attorney of his choice as the problems he was having were the same problems we had attempted to protect him from. In any event, these were legal problems and did not relate to the loan itself or the administration of that loan since the bank was handling the case and we were the guarantors of a current loan.
I believe Mr. Harris made a visit to the Central Office a few times during 1973 and as a result of those visits the Philadelphia Regional Office sent Mrs. Harriet Warfield to Richmond. During Mrs. Warfield's visit I was interviewed and I gave the same set of facts to Mrs. Warfield who seemed to be satisfied that here was a case of SBA attempting to guide and protect a minority individual who would not listen to our advice.




62

CONCLUSION
In view of the fact that our guaranty loan is paid in full, you may not see the need for any further involvement on our part or for any additional investigalion. However, there are allegations being- made in the article that this loan was made for political reasons which include involvement of high ranking members of the Virginia Republican Party.
Unfortunately, Mr. Carter is no longer employed by the Agency and neither is Mr. Regan, so that the other two SBA employees who handled this matter are unavailable to verify the contents of this memorandum.
However, I would like to emphasize that I did not, at any time during any of the interviews with Mr. Harris, ever become aware of the political affiliations of the other officers nor did I ever, to the best of my knowledge, ever meet with them.
I would also like to state that the only time I have ever met Mr. Obenshain was once about two years ago when I had lunch with Mr. Regan at the John Marshall Hotel in Richmond. Present at the table of four (including myself) was Mr. Goodling, State Director, Farmers Home Administration.
I was invited to the short luncheon by Mr. Regan on the spur of the moment and was not aware of who the others at the table would be until we arrived at the hotel. Other than pleasant conversation, I do not remember anything of any great significance taking place at the meeting.
Prior to reading the article, I was never aware that Mr. Obenshain allegedly represented Atlantic Materials, Inc. at any time nor was his name ever mentioned to me in connection with the processing of the case.
KENNETH P. BowE:,
Acting Chief, CED.
Sub committee evatuettion
The Harris/Atlantic Materials situation offered the subcommittee a classic study of how "fronts" were formed and how they functioned. As the subcommittee got involved with the Harris case, it became increasingly clear that although no 8(a) program contracts were issued, Joseph Harris' sponsors had counted on some type of "seta-side" or minority "consideration" procurement for Atlantic Materials, Inc.
The central characteristics were true in many 8(a) fronts were similarly true in Mr. Harris' case. The common characteristics included:
1. The establishment, by monied interest, of a minority as
president of a firm for the sole purpose of having the firm designated "minority owned".
2. The management and control of actual company operations,
being taken over by non-minority stockholders who supposedly own1 less than fifty percent of the firms' stock, but who, in reality,
control the company.
.3. The recruitment of a minority "president" who is not familiar
with corporate management and operations.
4. Full knowledge by SBA a "front"~ existed and minority or
disadvantaged persons were not in actual control.

CASE STuD~Y No. 3
Name:.John Kyle
Company: Kyle Engineering Co.
Location: Los Angeles, Calif.
RE: 8 (a) contract award
Ciramrr.f1a, Ce
MNr. Jo]hn Kiye of Kyle Engineering Company, entered into an 8 (a) subcont nact, with the inall Butsiness Administration to manufacture cabinets, auxiliary tables, electrical distribution boxes, and terminal board product ions.






63

Mr. Kyle contends that the SBA did not treat him fairly, negotiated a terrible contract, repossessed his company's equipment and effectiv-ely put him out of business.
Mr. Kyle has generated concern for his plight and has enlisted the assistance of Congressman Glenn Anderson.
The contending points made by Mr. Kyle are basically these:
Contract No. SBA-0129-8 (a) 70, provide for the fabrication
of various components of a Electronic Work Bench 63Az114J2 was9
negotiated by SBA.
The original quote of $180,2297 was presented to the SBA by
Mr. Kyle but was downgraded to $166,440.
M~r. Kyle sought and received financial assistance from a Gulf
Oil Corporation consultant who advised Mr. Kyle that "it is highly probably that this contract would lose money at $160,440."
However, Mr. Kyle felt that because the contract would product jobs in a deprived community and the SBA assured him of their
support, the risk of loss was minimal.
The following information was taken from files provided by Mr. Kyle:

MOTION FOR STAY PENDING DISPOSITION BY THIS COURT OF PETITION FOR WRIT OF MAN DAMUS
Comes now petitioners, Kyle Engineering Co. and John E. Kyle, Sr., by their attorneys, and hereby move this Court for an order staying the transfer of that action entitled Kyle Engineering (Co., etc., et al., v. Thoma8s ElKeppe, Admin. trator of the Small Business Administration, United States District Court Central District of California, Civil No. 73-8-R, to the Court of Claims, under an order entered May 2, 1974, pursuant to 28 U.S.C. 1406(c), said order was stayed for 30 days from its entry, and in support of said motion alleges:
1. On April :15, 1974, the respondent Judge orally announced that the above. entitled action should be transferred to the Court of Claims pursuant to 28 U.S.C. 1406 (c).
2. On May 2, 1974, a written order of transfer was entered. By stipulation and order said transfer was stayed for 30 days from entry to allow further motions to be filed.
3. Among other motions, a motion to reconsider said transfer was filed and was denied on May 24,1974.
4. On May 31, 1974, a Petition for Write of Mandamus was served by mail upon the respondents and forwarded to this Court's Clerk for docketing. Said Petition seeks issuance of a Writ of Mandamus directing the respondent Judge to reconsider and vacate his order whereby petitioners' action was ordered transferred to the Court of Claims.
5. On June 3, 1974, respondent Judge granted an order shortening time for filing and hearing of petitioners' motion for a stay pending disposition of this Court of the Petition for Writ of Mandamus filed herein. Respondent Judge then granted a stay of the transfer of this action to the Court of Claims for a period of only 10 days. The respondent Judge gave no reasons as to why he limited the stay to only 10 days.
6. The reasons that a stay should be granted are that if a stay is not granted and the action is transferred, as a practical matter this Court may have lost its appellate jurisdiction and in the event the Writ sought is issued the fie and action will be in Washington, D.C. Petitioners incorporate hereat by reference the contents of their Petition for Writ of Mandamus.
7. For the facts and circumstances relative to the need for a stay of transfer of this action to the Court of Claims, please refer to the allegations in the Pet!Hion for Writ or Mandamus and Exhibits attached thereto, which Petition Is on file with this Court.
Respectfully submitted,
CLENDENTNC AND) MURRAY,
By JA3,fEs D. MTURRAY.
Attorneys for Petitioners.
Kyle Engineering Co., anT .Iohn E. Kyle, Sr.
Datedl: June 4.,1974.








PROOF OF SERVICE
I hereby certify that on June 4, 1974, I served the foregoing Motion for Stay Pending Disposition By This Court of Petition For Writ of Mandamus on the respondents named therein and the petitioners listed below by placing a copy thereof in an envelope addressed to each of the following and depositing it fully postpaid in the United States mail at Santa Monica, California:
Hon. Manual L. Real, U.S. district judge, U.S. Courthouse, 312 North Spring
Street, Los Angeles, Calif. 90012.
William D. Keller, U.S. attorney; James R. Dooley, assistant U.S. attorney,
first assistant, civil division; Donald J. Merriman, assistant U.S. attorney, Suite 1100, U.S. Courthouse, 312 North Spring Street, Los Angeles, Calif.
90012.
David Kyle, attorney at law, Suite 670, 610 South Main Street, Los Angeles,
Calif. 90014.
Dated: June 4, 1974.
DONNA HATTAWAY.
PETITION FOR WRIT OF MANDAMUS
Comes now, Kyle Engineering Co., a California corporation, John E. Kyle. Sr.. David Kyle, and Georgia Mae Kyle. petitioners who petition this Court to issue a Writ of Mandamus directing the Honorable Manual L. Real, Judge of the United States District Court for the Central District of California to reconsider and vacate his order which was entered on May 2, 1974, whereby petitoners' action was ordered transferred to the Court of Claims pursuant to 2S U.S.C. 1406(c) and to proceed to judgment in this action.
1. This Court has jurisdiction of these proceedings under 28 U.S.C. 1651. Relief is here sought in aid of this Court's appellate jurisdiction.
2. The facts supporting this petition are as follows:
That petitioner, Kyle Engineering Co., is a corporation existing under and by virtue of the laws of the State of California, with its principal place of business located within the territorial jurisdiction of this Court. Said petitioner is a small business concern as defined in 15 U.S.C. 632 and a minority contractor entitled to the assistance, advise, counseling, and preference as prescribed by 13 U.S.C 631, et seq.. and the orders and regulations promulgated thereunder or relevant thereto.
Respondent, Thomas S. Kleppe is the Administrator of the Small Business Administration, and is sometimes hereinafter referred to as the respondent Administrator. Said respondent is sued in his official capacity only.
On or about November 7, 1968, Kyle Engineering Co. borrowed $80,000 from the Bank of Finance, Los Angeles, Calif., the repayment of which sum was partially guaranteed by the Small Business Administration (SBA). On or about July 10, 1970, Kyle Engineering Co. borrowed $60.000 from the Bank of Finance. Los Angeles. Calif., the repayment of which sum was partially guaranteed by S BA. Kyle Engineering Co. executed a security tgreement covering virtually all of its assets and the individual petitioners personally guaranteed the repayment of a portion of said sums borrowed by Kyle Engineering Co. Among othlier assets pledged by the individual petitioners was the residence of petitio(,ers. )David Kyle and Georgia Mae Kyle.
()n or about April 29, 1970. petitioner Kyle Engineering Co. entered into a written agreement with the Small Businesws Administration (SBA) pursuant to 15 U.S.C. 637(a)(2). Thereafter, on or about October 6. 1970, Kyle Engineering Co. entered into a second written agreement with SBA pursuant to 15 U.S.C. G37(a ) (2). These contracts are commonly referred to as set-aside 4,et rats and SBIIA in its program to aid minority small business concerns negotiaIted these contracts with iptitioner Jolni E. Kyle, Sr., on behalf of Kyle Engineering C o., an d represented that the contract price on the first contract waS, 10 percent of the price of prior procurement and that the price on the sco(nid N mraet was 120 )erc(nt of the price of prior procurement.
Kyle Engineering Co. undertook to perform these contracts, but soon found that certain drawings furnished by SBA were illegible and some delay ocen rred. 'Thereafter, Kyl- e Engimeeri nig Co. found that the cost of performance was exceeding the contract prices anid brought this to SBA's attention. No adjustment was made. Kyle Engineering Co. also submiittedl its claim for excess easts caused by the illegible drawings. Discovery has disclosed that in some insfanc(,es the prices for items in the contracts. were less than prior procureiliment






65

by competitive bidding and overall the contract prices were not as represented by SBA.
Based upTon information and belief, petitioners allege : That without nfotice to petitioners, the respondent Administrator or his agents and emloyees,,, sometime between July 1971, and approximately November 1971, took steps whereby SBA would be in a position to foreclose upon all the property of petitioner. Kyle Engineering Co. The first knowledge lwehtiomiers had of Such intent and( procedure was from a newspaper advertisement of November 21, 1971, which gave notice of a sale to be conducted of all petitioner Kyle Engineering Co.'s assets on November 24, 1971. On November 24, 1971, SBA caused to be sl petitioner Kyle Engineering Co.'s plant, work in process, materials, and even some per!-onal property of third persons located at said plant, all for scrap prices. The respondent Administrator and his agents and employee-s failed to follow prescribed procedures for inventory and liquidation of said property which wvas sold. On or about November 29, 1971, by telegram, petitioner Kyle Engineering Co. was advised that SBA was terminating the aboveinentioned contracts, allegedly ba sed upon petitioner Kyle Engineering Co.'s "defaulit."
Not until onl or about December 29, 1971, was petitioner Kyle Engineering Co. notified of its right to appeal from such termination. Petitioners were never advised of S BA's decision regarding intent to default prior to the sale of November 24, 1971, nor was petitioner Kyle Engineering Co. given a cure letter or a notice of default, as required by applicable law, regulations and due proce,-5. prior to the sale as aforesaid.
Onl or about November 20, 1972, petitioners JIohn E. Kyle, Sr., and Kyle Engineering Co. filed an action in the Superior Court of the State of California for the County of Los Angeles against the Administrator of SBA, four individual employees o4f SBA, the Bank of Finance, and Does I through XX. The Government. filed its Petition for Removal and the action was transferred to the Uniited States, District Court for the Central District of California.
On October 3, 1973, the undersigned attorneys for petitioners, Kyle Engineering Co. and John E. Kyle, Sr., substituted into this action and pursuant to stipulation and order thereon filed the First Amended Complaint which is attached hereto as Exhibit 1. In their First Amended Complaint, petitioners rely uponl 15 U.S.C. 634(b) (1) and the Fifth Amendment to the U.S. Constitution for jurisdiction.
This is more than an action based upon contracts. Petitioners seek a declaration of their rights and obligations relative to the security pledged and loss of their property and profits, past and future. Petitioners have moved to file a Second Amended Complaint which acids 28 U.S.C. 1331 (a) and 5 U.S.C. 7017106 as additional jurisdictional statutes. On May 24, 1974, the respondent Judge declined] to rule upon petitioners' motion to file their Second Amended Complaint since he has ordered this case transferred to the Court of Claims.
Oil April 15, 1974. incident to hearing the respondent Administrator's Motion to Dismiss petitioners' First Amended Complaint, the respondent Judge ruled that the causes of action alleged in said Complaint are within the exclusive jurisdiction of the Court of Claims and ordered that the action be transferred to the Conrt of Claims pursuant to 25 U.S.C. 1406(c). A true copy of said Order is attached as Exhibit 3. On May 1. 1974. petitioners filed a Motion to Reconsider said Order. At pages 5 through 7, line 16 of Exhibit 2 attached hereto, petitioners set forth case authorities which clearly establish that the United States District Court has jurisdiction of this action pursuant to 15 U.S.C. 634(b) (1) and is not dependent upon the Tucker Act. 28 U.S.C. 1346(a) (2). Respondent Administrator filed his Memorandum In Opposition, a true copy of which it qttqehedI hereto as, Exhibit 5. Petitioners filed a Reply Mlemorandum aqttachied ais Exhibit 6, which supports petitioners"' contention that no conflict exists between Circuits as the respondent Administrator contends in Exhibit 5.
Petititiners' Motions for leave to File a Second Amended Complaint and to Reconsider the Order to Transfer this Action to the Court of Claims were heard on Mlay 24.,1974. and the Court denied both.
3. The issue herein presented is as follows: Is the Order of the resp)ondenlt Judg-e to transfer this action to the Court of Claims pursuant to 28 U.S.C.

Exhibits attached to and Incorporated In said Complaint are voluminous (112 pg~ and have been omitted from Exhibit 1 hereto.





66

1406(c) clearly erroneous in that the United States District Court has jurisdiction under 15 U. S.C. 634 (b) (1) ?
4. The relief sought by this petition is.* That this Court issue a Writ of Mandamus directing the respondent Judge to reconsider and vacate his order which was entered on May 2, 1974, (Exhibit 3) whereby petitioners' action wag ordered transferred to the Court of Claims pursuant to 28 U.S.C. 14W(c).
a. The reasons why the Writ should be issued are: The United States District Court for the Central District of California has jurisdiction of -petitioners' action under 15 U.S.C. 634(b) (1). Transfer to the Court of Claims pursuant to 29 U.S.C. 1406(c) deprives petitioners of their appellate rights which otherwise exist to this Court as a matter of right. Transfer to the Court of Claims would de-Drive Detitioners of their right to a jury trial relative to issues of fact; the relief available in the Court of Claims is limited and would leave issues which could be resolved by declaratory relief or otherwise in the District Court, unresolved. On or about November 21, 1973, petitioners filed claims under the Federal Tort Claims Act, 28 U.S.C. 2671, et seq., relative to the facts involved in the pending action. To date, petitioners have not been notified of SBA's disposition of said claims. Accordingly, since six months have recently passed from the date of filing of said claims, petitioners are now eligible to file an action in the United States District Court relative to said claims. 28 U.S.C. 1346(b),, 267-. While discovery is not complete, it has been underway, depositions have been taken, and petitioners await the answers of the respondent Administrator to some 77 Interrogatories and 20 requests for admissions.
This is more than an action for breach of contracts. Petitioner Kyle Engineering Company, a minority owned and operated small business was summarily liquidated, without proper notice to petitioners. An industrial building and lot pledged and owned by petitioner John E. Kyle, Sr., was lost by forecolsurer due to the actions of SBA, which were lacking in procedural due process. Presently, the principle exposure of SBA is for loss to petitioner John E. Kyle, Sr., of his wholly owned business, assets, credit, income and profits, and not for breach of contracts.
This case could reasonably be completed in the District Court on or before January 1, 1975. In addition to the vital aspects of this action of which the Court of Claims has no jurisdiction, there would undoubtedly be much delay and additional expenditure of time and money if this case were transferred. Petitioners have limited financial resources and they should not be required to go through a trial in the Court of Claims where relief will be incomplete and where any appellate right they possess relative to the pending order for transfer will be so expensive and long delayed that it is useless and meaningless.
Wherefore, petitioners pray that a Writ of Mandamus issue out of this Court directing the respondent Judge to reconsider and vacate his order which was entered on May 2, 19T4, (Exhibit 3), whereby petitioners' action was ordered transferred to the Court of Claims pursuant to 28 U.S.C. J 1406 (c).
GLENDENING AND MURRAY#
By JAMEs D. MURRAY,
Attorneys for Petitioners,,
Kyle Engineering Co., and
John E. Kyle, Sr.
DAVID KYLE,
In Propria Per8ona
and as Attorney for Petitioner,
Georgia Mae Kyle.








67



a:.oc b9%?ASO AWARD/CONTRACT

1~4tC~ -14 101 -450Golen ate vnu
SailNe Frano#c. CA10 940 6110 1i u WOPIN.. OTHIEISDPltH~~fe 4101VM#
L*RGI AhDo IALL No.n ___(S450 Gode Gl~ae Avenue lc D snte Iakmn f0
Sa Fracico, iA 9102



L 1 0 Seeubmittices Tfo c

II.515407UE.U Sot 12. esgae Payments Oilffimdeby


Le Continuationtavy IeioalFianecenersi
IL SH 099MAR o1104 Codi~ e m i

Sheet and/or C ode 612. Building 122 1 109 S.es, Cleil Un~ a rI
Schedule Gre'at Lakes, Illinois 60088 I Pata and finance Management 0f'f ce



1 Accounting and Appropriation Data AON
See Continuation Sheet ....... SeBok2
l Ca N%'RACUR REPHE5SNTS (To be completed by Contractor it block 22i is5 checked j
1. Tha*t iLC3 lSEJ IS VICT, a small business concern. Generally. a small business concern for the purpose of Govern.
mcii procurement is a cosicern that (1 is not dominant in.j~s field of operation and. with its affiliates. employ
fewer than 500 employees, or (2) is certified as a small ba..inoess concern by the Small Business Administration.
GSe Cde of Federal Regulations, Title 13. Part 103. saedd ,c otistedtie emilo ~ e
1 td procedures.).If Contractor is a small business concern and is nor the manufacturer of the supplies covered
bythis contract, it also represents that all supplies to be furnished hereunderD M 1ILLAM V ILL N~OT, be manufctured or produced by a small business concern in the United States, its Territories, its Posseasionil, or The
Commsonwealths of Puerto Rico.
2. That irt-isa a [ HEGUI.AR f'EAI.EP IN,D MA.NUFACTUYIER OF, the suppl ies covered by thisa contract.
3. (a) Tha t iD C3H..C3HAS NO3T, emplIoy ed o r re ta ined any company o r Person (o the r than a fulIl- fime bonea f Ide emp loyor working solely for to.c contractor) to solicit or secure this contract, and (b) 'that itCD HAS.=: ILAS NOT, paid or agreed to pay arsy colspany or person (other than a full-fit bana; fide employee working solely for the con$rector) any fee. commasslior, percentage or brokerage fee, continent upon or resulting from the award of this
contract; and agrees to fusos'n information relating to (a) and (b) above as requested by the Contracting Officer
(For interpret at ion of the representation, including the Cte 'bona fide emloyee.' see Code of Federal Regule.
lions, Title 64 Part 150.)
4. That it operates aaf s M l NDVIIIll' PARTNTF.R IPD 07.1VRA1TI, incrporated in the State of_______14h EAL OPPUR1100TY WP 1TFl%'4TATI0NS ID BIE F~LJlIlW1K) Ift (AIA1JID (Aoplicable it block 2 is checked.)
I e bidderr reprcernts that fie ( ) has, ( ) has not, participated in a previous contract or subcontract asbject
t either the REQIAM. fN4AX1t1fiJIY" clause or the clause originally contained in Section 301. of Executive Order 10925 that he ( ) has, I[ ) has not, filed all required compliance reports; ;nd that representations indicating submiassion of required compliance reports, signed by proposed subcontractors wil Ibe obtained prior to subcontract awards.
(The above representation need pont be submsitted in connection with contracts or subcontracts which are exempt from
the clause.)"
Blocks 15 thru 20 See Continuatimn Sheet

1.5. ITE #t0. 1 16. &.JPPL IESISERV ICES UNI PRIC 20._____21. TOTAL AMOUNT OF CO5T1ACT01
j CONIRfAC'elJG OFFICER WILL COMJPLTE BL.OCK 22 OR 26 AS AFPLUCABLE
22. [@ ONTtAC1T2'1 NGOIATED AGAtCMLNT ,'Coafr,,ei. is ,yqUirrd to iqW IC. 0 AWARD I'Csftafa is not rviyucrcd 04 s.Za Oil duaineffl) Tow SO
dAis diseew and vtr i ve,. ..IUL. toApeu I. affile 4c.) C .006mcse o"Mm a. Seticiistiaa. N99,bs, _____________________ saw S so "v,,if da,.o. all t.0 a. w*:* all the is,.,,.. f..il a. ,Ak,,,.,e edSj.0.00 C." d -es.ewd by in ,eh skidt s or 41i ne~w eto ass l ts ie
j d&.r'd esbe.. a"d a. eny .e~...,,io, so-#*, #a. the .a..,st,ated h.ef., obe. Is ,6 zoped a. ~t 0.a n Cod e.-., e,.d as wX awntw.5Q the
U'Pi$ -.4~ OU1004d oft,. fkt Vct.. $.in. th's 9toa.0. ..-1 be twbqed toen..d an- VN. sper-d 4os,,t-.A. $Iv.c., 4.h... 4;: f1h 1*11-4, le ... ees, is)
le .ab~,C *sl r 4 .1Ce..sn 0. p..se, a"e tv"emse tCcoiMal1u EtVV#%eM "i *esnman7
a.i.wpaeeed by metf-,. ke,*i.. (Alitileve,#.i art liitgd Awcm.'.)

C: N c7A 008 27. UITEDW SlA'S V-PAMilC ma )usiness Administration

AP fuOFSGNR 71Vo #ig) 2.DATf SAGNM 21. NAAE o CC*...cL.nNo O1Kn orsfialw) C's.. SK

10-6-70r;Z ;rAT I Coritracti~ig Officer l-9~
larv. -o




68



swene0 POWe aS. ANY It" so. No. me Ocan WHe WA
neWs.RAs sera AIRAflO.o CONTINUATION SHEET .
1W. ISoc.a. ps t a-sale

MARK ALL PACKAGES AND PAPERS WITHNCONTRACT AND/OR ODER NUMBER
THF CLAUSES SET FORTH HFREINAFTER THAT ARE MARKED WITH AN *1' IN THE SPACE PROVED
THEREPOR SHALL FORM A PART OF THIS CONTRACT.
cenera Provisions comprise additional General Provisions (ESO) 9ND-7655 (current
edition) consisting Of pages 1 thru 2, and General Provisions incorporated by refor
once in the contract schedule continuation sheet.

E7 FOR NAVY USE ONLY: Itea(sL4) Mid (is) (are) included in the Interservice
Supply Support Program and r uired Interservice Screening has been accomplished.

C7SUPERSEDURF OF PRELIMINARY CONTRACT:
(a) Supersedur. This contract supersedes the prelimiinary contract consumated on
-by exchange of telegrams/written messages/lotteru/ combination of such documents, between the parties hereto, bearing the same number
and date of conuiwmabt3n, made in anticipation of the execution hereof, and constitutes the entire agreement between the parties with respect to the subject matter hereof. (b) Time of Delivery. The time of delivery set forth herein.in terms of
specified timm "after receipt of contract" means such specified time after the
consiumation date (set forth in paragraph (a) above) of the preliminary contract
superseded by this contract.

This material contains information affecting the National Defense of the United
States within the meaning of the Espionage Laws, Title 18, U.S.C. Sections 793 and
794, tbe tranrmianion or revelation of which in an manner to an unauthorized person
is prohibited by law.

[r:7 DISCOUNT: (a) Discouits will be allowed by the Contract for prompt payment as
follow -percent, 10 calendar days; percent, 20 calendar
da4~y; pcent, 30 calendar days. (b) In connection with ary such discoit, time will be computed from date of delivery of the supplies to carrier when delivery wnd acceptance are at point of origin, or from date of delivery at destination or port of embarkation when delivery and acceptance are at either of
th2se point-%. or from date the correct invoice or voucher is received in the office
to ii'h invvoco are to be submitted under this contract if the latter date is
l.atr than ;he date of delivery. Payment is deemed to be made, for the purposes of
-rem.ing the diecount, on the date of mailing the government check.

L7 WI7NT.: The comnignee(s) will furnish six (6) copies of the DD Form 250, one (1)
properly cer;tifled, directly to the DCASR designated as the Paying Office prvpkUt
after receipt. dvi acceptance of the supplies.

&9 NOTF TO CONTRACTO AND/OR CONTRACT ADMINISTRATION SERVICE COMPONENT REPREL\TATIVE:
All Phippine papors shall include the billed amount for each shipment.

/ NOTE TO CONTRACTOR: In the event that partial shipments are made, the following
pemc'Ince shall apply: (1) Ship to all consignees in order of priority, i.e..
priorities 1,2,3,4, etc. in descending order, (2) Where all consignees for stock are liatec as priority 20 ship first quantities to NS: Charleston (#612-NRZ) or
FSC Puget Sound (#406-NUZS if these activities are among the consignees, and (3) Ship
to all Other priority 20 consignees in descending order of size of quantities, *.9.,
largest quantity fire, second largest second, etc.
9 WOT. 1T CORTRACTOR/ADMINISTRATTYE CONTRACTING OFFIRM: If the Contractor or the ACO
'vishcs to coritact Electronics Supply Office regarding this award, call Code 1020
(Contract Ataidnist ration Branch), Telephone Number(s) 32-688-6798/6867.






69



Gtk*UUVIS "ONOTRAMn CONTINUATION Wr 2A
00W JOCU 41 081I 1-1110Vo1
M"M 0 09o OWO CO IN1AXIOR



The Small Business Admionistrationt (ber!inoater cle Z)b nee e
contract No. 9'0126-71-C-0509_(hereinafter call 4d theq rl 2a Contract) vi h the
h vy electronics Ji jpply fice (heri ia ^t e -al,4 2~3o) t c fti gh, V

conitract Is attached here a0rnd made L 'r.-rt hereof.

The Parties hereto a&rat that Shm~iqq!ria 02antcm- 50,BubD.rd

brerc4Ue. Ide Succrtrcon;F, t- riA1A for and in taid3 of B1A fulfill and perform all. of th~e rtquireacats of the prim*l~ contract focr t~e coaideration stated therein. The Subcantraict.- 6cknol,4es that it hr r4& d Is f liar
with each and tver7 xart of tb.t prize co 4Lmct.f
Payments viii be wz.de directly tc the subcoatracj or by C loft Arer-lies. ce1U
The *rabcmttractor further understads atA ag~reesttba~t the reA iii'i
administering this subcontract has bet'i c1&ot, to the ICAS Installati
In Pare 6 above and that the subcontractor viii onor dir.Fzti4 j and requ to
for cbangcs by tt~it installation in like mannerl~s if isa y SBA.


NOITE: IV7ORPYATIONI FMOWMM JXI GUE ON! {

Noth prime and sub-contract prepared in accord-,n e vith rkfonie Procures t
Circular' No- 76 dsted 2 Jan. 1970, now~ ASPR 1-74-.5


























CONGRESS OF THE UNITED STATES, HOUSE OF REPRESENTATIVES,

Hon. A. VERNON WEAVER, Washington, D.C., April 18, 1977.
A dm ixistrat or. ,Smrall Business Admnistra tion,

DEAR MR. WEAVER: This letter is in reference to a pending Appellate Court case involving Thomas S. Kieppe in his former role of Small Business Adininiqtration's Administrator, as defendant to John E. Kyle, former President of Kyle Engineering Corporation.
Pursuant to Section 8 (a) of the Small Business Act, Kyle Engineering entered into a subcontracting agreement through SBA in 1970, with the Department of the Navy. This contract was terminated by SBA in November, 1971.





70

The judicial proceedings that resulted from this action are still continuing. I have been informed that Mr. Kyle is regarded as having an excellent chance of winning his suit. This however could take several years, years of inconvenience for all those involved.
It is his hope, and mine, that you will exercise your prerogative of reviewing the circumstances surrounding this unfortunate situation, and negotiate a consiliatory agreement with Mr. Kyle. After rebriefing the situation, my belief is once again affirmed that Mr. Kyle's case deserves the attention from a fresh perspective that you alone are in a position to render. Mr. Kyle would be most happy to discuss the issue with you at your convenience.
Certainly, this action would be in line with the spirit of co-operation that has returned to Washington with the new Administration.
Sincerely,
GLENN M. ANDERSON,
Member of Congress.

U.S. GENERAL ACCoo0rN OFFC,
Washington, D.C., March 14, 1977.
B-132740.
CED7-302.
lon. GLENN MX. ANDERSON,
House of Representatives.
DEAR MR. ANDERSON : Your letter of February 16, 1977, asked us to review the case of Kyle Engineering Company, a former Los Angeles small business contractor who was assisted under the Small Business Administration's section 8(a) procurement program. The file enclosed with your letter indicates that Kyle Engineering has a dispute with the Small Business Administration which it is litigating in the Federal courts. According to information in the file, the case is currently on appeal to the U.S. Court of Appeals for the Ninth Circuit, after being dismissed by the U.S. District Court for the Central District of California.
It has long been the policy of our Office not to become involved in issues which are in litigation in the courts because, once an issue is before the judiciary for determination, it is for that branch of the Government to resolve. Our Office has no authority to intervene in such proceedings. Further, once an issue is before a court, neither party to the suit would be bound by a decision by our Office. Therefore, we think it would be inappropriate for us to comment on this matter at this time.
We are returning herewith the case file enclosed with your letter of February 16, 1977.
Sincerely yours,
HENRY EsCIwEGE.
Director.
Enclosure.
CONGRESS OF THE UNITED STATES,
HOUSE OF REPRESENTATIVES.
on. TIOfAS W. KLEPPE, askington, D.C., August 19, 1975.
lion. THOMAS S. KLEPPE,
A dm inistrator, Small Business Administration, Washington, D.C.
DEAR MR. KLEPPE: This is in further reference to the Kyle Engineering Company, last doing business at 15407 S. Broadway, Gardena, California, with an 8(a) contract with your agency.
Your letter of .Tune 3rd advised as follows:
"We have learned that Mr. Kyle has appealed the dismissal of his case against the Small Business Administration by the United States District Court. Central District of California, to the 9th Circuit Court of Appeals. This being the situation, we cannot comment on the case at this time since it is subject to future hearing. We can say, however, that Kyle Engineering Company was given full consideration by theI Small Business Administration and the Board of Contract Appeals before any action was taken against the firm."
In your letter of June 26th, 1975, you advised as follows:
"I have since learned, however, that Mr. Kyle did not take his case to the Board of Contract ApJ)peals and, therefore, could not have received consideration from that body."






71

Mr. Kyle has advised me that he has not appealed the dismiissal of iis, case against the Small Business Administration by the United Statte's District Court, Central District of California, to the 9th Circuit Court of Appeals, and that the Small Business Administration appealed the case. (Meaning, I aSSume1, the Department of Justice.)
I would appreciate further comments and a reply from you relative to the case, and as to the date the case was appealed by the Government, as reported by Mr. Kyle.
(Sincerely,
GLENN M. ANDERSON, M.C.

SMALL BusiNEss ADMINISTRATION,
Washing ton, D.C., May 9, 1977.
Hon, GLENN M. ANDERSON,
House of Representatives,
WVashington, D.C.
DEAR~ CONGRESSMAN ANDERSON: This is in reply to your letter dated April 18V 1977, requesting my review of a claim made by the Kyle Engineering Company against the Small Business Administration. The claim, presently in litigation, arises out of certain services performed by Kyle Engineering for the Department of Navy at Los Angeles, California, during 1970 and 1971.. The three Navy contracts under dispute were entered into pursuant to subcontracts with the Small Business Administration under authority of Section 8(a) of the Small Business Act.
The plaintiffs have alleged in the litigation that they were induced by fraudulent representations of SBA employees to enter into the contracts. They also allege that SBA employees negligently advised them regarding the contracts. Damages in the amount of $920,000 are sought against the SBA. On March 15, 1975, the United States District Court for the Central District of California dismissed the suit on grounds that the Court lacked jurisdicion over the subject matter. An appeal was taken by plaintiffs to the United States Court of Appeals for the Ninth Circuit and on March 14, 1977, the appeals were dismissed, affirming the holding of the lower Court. We do not know if this litigation is concluded inasmuch as further motions or appeals may be filed.
The files in this matter have been reviewed by our Office of General Counsel. I1 am advised that the SBA does not have authority to negotiate a settlement of this claim. The General Counsel ascribes two reasons for this. First, the Department of Justice possesses sole responsibility for presenting the Government's interests in pending litigation. Therefore it would not be appropriate for the SBA to conduct independen t negotiations with the plain tiffs -while litigation is pending. Any offer of settlement Of the claim should be directed to, the Department of Justice through plaintiffs' counsel. Secondly, my authority as Administrator of SBA does not extend to the settlement of claims founded upon breach of contract or tort. Such claims must be brought before an appropriate judicial or administrative proceedings. Plaintiffs' choice of forum should be made by their counsel.
I regret my inability to be of greater service in this matter.
'Sincerely,
A. VER NON WEAVER,
Administrator.
Sub committee Evaluzation
The SBA's participation as the prime contractor with the U.S. Navy is the normal relationship which is undertaken in 8 (a) procurement. This practice consists of assuming the role of prime contractor while not also assuming the risk that a "normal" prime contractor would assume. The 8(a) firm in its role as the "subcontractor" assumes all of the risk but often has to yield to SBA on vital management matters which also include final pricing on contracts.
The implications of faulty management advice given by the SBA to Mr. Kyle should be sufficient cause for the SBA to review the cir-cumstances involved with the bankruptcy of the Kyle Engineering Company.





72

CASE STUDY No. 4

Company: General Maintenance, Inc. President: Rodney Albert.
LocIation: Orangeburg, S.C.
Re: 8(a) Contract Awards.
C irc~u stances
General Maintenance. Incorporated is a janitorial and supply firm and has experienced difficulties in dealing with the Regional office of the SBA in Atlanta, Georgia.
Mr. Albert submitted the following statement to the committee:

STATEMENT
JuNE 10, 1977.
Early in the first quarter of 1977 I submitted documents to the SBA regional office in Atlanta for continuation of my eligibility requirements under the 8(a) assistance program. On 21 March 1977 I received a reply, signed by Mr. Wiley S. Messick, Regional Director of the SBA, indicating that the performance of my company up to this time in terms of development had not been sufficient for me to be graduated from the program; and, as a result of this, I would be continued under the 8(a) program. Hle also indicated that if there were any problems which might arise as a result of this to contact Ms. Loraine S. Stoval, who was serving as the SBA Region IV Contract Negotiator.
On 12 April 1977 I received a letter from Ms. Stoval inviting me to submit a proposal for the project that we were currently operating, that is the Veterans' regional office building in Columbia. We proceeded to comply with her request and submitted the proposal to her office on 29 April 1977. It was our understanding that the contract would lbe awarded in May 1977, and would have to be received by her office by 6 May 1977. There was also an addenda that we submitted to her office along with the contract, on 29 April 1977.
Having not heard from Ms. Stoval after submitting the proposal, I contacted her office during the week of the 20th of May 1977. She was out of the office, and some person, whose name I don't recall, indicated that a price had been fixed for this particular project: I think it was about $51,500.00, and I would have to get back in touch with Ms. Stoval if we wanted to negotiate, or just what we wanted to do in terms of that price.
On 23 May 1977 I contacted the Regional SBA Office again and was able to speak with Ms. Stoval, and she indicated that she had my proposal before her at that time and that she was re-working it, but she would need additional information from me to justify the costs of some of the items she had. She gave me a list of the items-she wanted to know exactly how much the fringe benefits as far as the holdings for each particular worker that we had. She also wanted to know, and could I document and substantiate the amount of the figure we had down for supplies and equipment: I told her yes, this could he done, but I would have to get back in touch with her the next day because I didn't have all of the information she needed. So vhe proceeded to give me a further list of things I would need to do to assist her in justifying this.
On the following day we were in touch again and she was supplied with the information which she had requested. On the twenty-third she indicated that she had been in touch with the people at General Services and had found that the person who was negotiating the contract was an individual who had been negotiating one, who she thought was no longer with General Services and no problemis would be presented because he would understand the kinds of things which we were trying to present. It was her feeling at that time, with mine, that the figure which we came up with was adequate, because wve pointed out to her that she should make mention to the negotiating people, whoever they were in General Services, that the difference in the contract from last year and this year included an additional person; that is 4 additional hours per day.
Also, if they would include this figure, those additional 4 hours and the overall cost of supplies and equipment, fringe benefits, over the previous year, they would see that this would be jiustified(l. She felt the sanmle way. She was in touch





13


with people at the SBA, and on Thursday of this week she was able to pull all of the figures together and said that she would present it to them.
It was her and my feeling at that time that the only thing that was necessary to negotiate the differences, which at this time was downii to about $6,000.0. AL no time was I given the impression that she had the feeling or impression t ht the contract would be taken from us and put on the street. She said that she was going over on Friday the 27th and talk with the people in SBA. and she would have a couple more days in which to have everything straightened out, and we could get together on the final figure. She would not be back in the office, because the following Monday would be a holiday for that ollice. So, I didl not hear from her on the 31st, that was the day after the holiday, so I called her on Wednesday. June 1, 1977. asking just what the status of the negotiations was. She indicated that she had bad news, that it had been decided to take the contract and put it on the street.
Now you can imagine my shock and disappointment as to why this would be done without contacting me. It just seemed that in all fairness, that if this decision was going to b)e m1ade or had been made, that I would have the opportunity to accept whatever they considered the top price they could pay. or I could reject it. I was not given this alternative, and as a result it has put me in a very vulnerable position, because I have people who were already notified that we had the contract for another year, and they were anticipating, and my business also depends to a great extent on the income from, as small as it is, this particular job.
My concern is. that I don't see how General Services. SBA, or whoever is responsible for the negotiating, can make a decision on my behalf without me being brought in at some level to at least give my impressions as to whterher I will go along with what they say or if I decide to do something else. I think that is one of the most serious breaches of faith committed in this whole negotiating process. Certuily I was on my way, carrying on my business as usual with that behind me because I had already been told that the contract was S(a), I was to negotiate it. I was the S8(a) contractor, it was just a matter of negotiating the price. This has left me in a very very bad situation in terms of the operation of my business.
When I made inquiries to Ms. Stoval as to her feelings to why GSA would just break off negotiations, or would make a decision as they did, she said, "To be honest with you Mr. Albert. I feel that there are people in the organization who do not like the idea of 8(a), and they are doing everything they can to sabotage the whole 8(a) project." Naturally I was very shocked to learn that we had people in government, who had been committed to helping minority contractors, that would resort to this kind of action. She also indicated to me then that she had gotten a complaint directly from the Columbia General Services Office, on May 23rd, a letter dated, just a general statement saying that it had been brought to their attention that some unauthorized person was using office equipment, i.e. Xerox machines and typewriters.
Now, even though this letter was mailed to me and my company, signed by Mr. Jack Terry, the building manager, in no instance did he specifically say or accuse any of the people employed by me as being responsible for what he had alleged. So. as far as we're concerned, we aren't going to take credit for this unless some particular or specific charge is brought against us. We also realize that up until this point we had never for the whole time this project had been in operation, at no time had we received written or verbal complaint about anything like not performing well as far as the contract was concerned, misuse of the building or office equipment. All of this seemed to have transpired within the week when the negotiations were beginning to take place.
We also had a verbal, I understand that the supervisor had some verbal, received some verbal complaints from the people downstairs in SBA, saying that the floors were not kept as well as they had been in the past and a few other minor things. Notwithstanding the fact that construction is going on around the building. The new Federal building, the Strom Thurmond Building is being built right on the grounds of this particular building. And as a result of that our people have had to put in extra time in order to keep the dust down and also to deal with the traffic of people who normally do not use the building-the cafeteria, the workers come in with their dirty boots in the hallways-so this is an added expense we have had to absorb and didn't pass on to the GSA. We've also noticed almost double the number of handtowels and toilet tissue, that we




74

have had to supply because of the increase in population and use of this particular building.
We felt that as contractors, it was our obligation to do the best we could under the circumstances. This was brought to the attention of the buildingservice people, but for some reason their impression was that we were just supposed to absorb it as part of the over-all contract, rather than as an additional expense. I assure you that at no time has the level of performance, that is in terms of upkeep, has been reduced to where complaints could havebeen justified. And all one would have to do would be to look back at the reports written up by the building service people themselves.
One complaint that we have against the building service people is that they have no particular time to inspect their buildings. They would come in sometimes during the middle of the day, or come in the mornings after people would, have arrived, and say that maybe a coffee spill might have been on the floor, or paper in the wastebasket, or something very very insignificant-not realizing that work had been previously done, in the previous night, and we could not be responsible for things that happened after we had left the building, and the building secured. Most of these things were minor, but yet it's the kinds of things we receive from them. I'm sure that anyone would understand that if you do. not have control of the building that people frequently use it, that you cannot be responsible for what happens whenver you have left the building and it haw been secured.
The last thing I would like to mention is that I felt that we have been dealt a severe blow and a great injustice and it has caused me serious concern, mentally and otherwise, to sit down or to talk with people over the telephone with people in good faith, and to find out that some decision had already been made or i& going to be made, and we were not involved in that process.
RODNEY ALBET,
General Maintenance, Inc.
Subcommittee Evaluation
Mr. Albert's situation was very similar to other cases heard by th& subcommittee staff. The entire communications aspect of the contract process is confused by the infusion of the Small Business
Administration.
The bulk of the information received by Mr. Albert concerning th& janatorial contract was first passed through the SBA.
During the field interview sessions, many minority contracts expressed a belief that they would be able to deal with procurement; officers of the various executive branch agencies on a better basis tham the SBA has been able to do.

CASE STUDY No. 5

Company: Quality Maintenance Service. President: William Greene.
Location: Charleston, S.C.
Circumstances
Mr. Greene, a black Vietnam veteran, has encountered many problems in tiing to gain 8 (a) certification for his janitorial firm. He has; not been successful.
William Greene was initially recruited by the SBA because of his l)Usiness background and because he could easily be considered "dis-a(1 w l t a e(1."
The Charleston, South Carolina area would present many oppor-tuinities for the Greene firm to have participation opportunities, in fact, ot er firms have had muchli success in the area.
IHowever, there were firilis with "sponsorships". Mr. Greene has Thovn a willingness to mralket" for lis firm in an effort to gain 8(a),






75

In a field interview with subcommittee staff, 'Mr. Greenie supplied the following information about his firm, Quality Akinteniiane Service. The information, though lengthy and exten~sv-e Is wh.a is normially required of an 8 (a) applicant.
)Lk( LTD.,
QUALITrY 'MAINTENANCE SEI-',XIVCEt Charleston, S.C., June 20, 1977.
To: Senator Lawton Chles.
(Attention of Mr. Robert F. Harris, Committee on Government Affairs, Wash.
ington, D.C.).
MR. HARRIS: Per our conservation I am enclosing a copy of my application and business plan as submitted to SBA in November of 1975. Also enclosed you will find copies of correspondence and other documents forwarded to and received from the Atlanta Regional Office. On one of four visits to the Regional Office, I spoke to Mr. Ivy personally as to what was required for SA certification. SB3A letter dated 8 April 1977, shown as Enclosure 5, states that my application was held in suspense since 7 November 1973 because of (1) Mr. Ivy did not receive requested information and (2) nonreceipt of requirements at the SBA Office suitable for my firm. Attached to Enclosure 5 are documents to show that I did provide required information as requested. (See MAG, Ltd. Letter dated 290 May 1976). Since my last contract with the Regional Office, I have knowledge of one, contractor who has been certified and provided a contract here in the Charleston area.
Enclosure 7 is provided to show when and how I was made aware of the 8A contracting program. Enclosure 8 is provided to show some of my qualifications. to handle a contract (s) that may be deemed suitable for my firm.
I sincerely hope this information will prove to be of some assistance in your investigation. If I can be of further help, in anyway possible, please feel free to. contact me at the above office number or at home (803) 795-4671.
Sincerely,
WILLIAM J. GREENE,
President, MAG, Ltd.
Enclosures.
U.S. SMALL BUSINESS ADMINISTRATION, REGION IV,
Atlanta, Ga., February 2j, 1974.
Mr. WILLIAM GREENE,
813 Piccadilly Circle,
Charleston, S.C.
DEAR MR. GREENE: Per our telephone conversation of February 22, 1974, I amr enclosing additional forms for your information. Please furnish the following information:
1. A Business Plan, an outline is enclosed.
2. A Financial Statement, if you are unable to furnish a firm financial statement, please supply a personal statement.
3. Complete the eligibility questionnaire.
4. Supply copies of any Corporation Charter, Articles of Incorporation and By-laws, if applicable.
Also enclosed is an excerpt from SBA policy for your information. If you should have any questions or if we can be of any further assistance, please feel free to contact this office at any time, telephone A/C 404-526-3683.
Sincerely,
DONNA H. GLENN,
PA/S (a) Division.

U.S. SMALL BusiNESS ADMI-NISTRATION, Atlanta, Ga., December 16, 1974.
MINORITY DEVELOPMENT AND MANAGEMENT ASSOCIATION, Charleston, S.C.
(Attention of Richard Wigfall).
DEAR MR. WIGFALL: We appreciate your interest in the Small Businecss Administration 8(a) Program and hope we can be of some assistance to your client, Mr. William J. Greene. As per our telephone conversation, we are enclosing a copy of the business plan, articles of incorporation for MAG, and a list of equipment.
21-491-7S-0




76

In order for this office to fully evaluate the firm's eligibility we will require the following":
1. S-A Form 413, one for each key person in the firm.
2. An expanded Business Plan. including MAG, Ltd.'s participation in the firm.
3. By-laws for MAG, Ltd.
4. Art icles oif Incorporation must be amended to include service oriented work.
5. Fui rnish a copy of the firm's most recent financial statement. If you should have any questions or if we can be of any further assistance, please feel free to contact this office at any time.
Sincerely.
HAROLD WY. MUIR,
Business Development Specialist.



U.S. SMALL BUSINESS ADMINISTRATION, Atlanta, Ga., October 20,1975.
Mr. ('IA;LES II. BRowN, li uines .\ Dtloper
('horle ston, 8.('.
Di.u: Mu. Bawo: The business plan as submitted for Quality Janitorial Service w:ie received October 16. 1975. Your cover letter indicated we should contact you f( dditi onal information.
We have reviewed your business plan and find it to be completed in detail. However, our regulations require the business plan to be submitted on an updated form. This form is enclosed for your review and consideration. When completed, return i1 to t his office Further, enclosed is a Small Business Administration Form 912 fwr ipersoall history. Upon receipt of the updated business plan and SBA Form 912 for Mr. William Green?, the business plan will be reviewed.
If we -n b of assistance. please advise.
Repectfully.
RICHARD B. IVEY,
Business Developnint Specialist.


U.S. SMALL BUSINESS ADMINISTRATION, Atlanta, Ga., November 7 1975.
,Ir. ('i'ALES II. BROWN, Busin5:-s IDercloper
('hark. DEAI Mu. U wN: We received the business plan for Quality Janitorial Service on o( tl r 31, 1975. With the use of the original plan and the one received on the proper form we have sufficient information on hand to review the business plan.
Our review disclos(l the papers for incorporating Quality Janitorial Service relates t- a former company MAG, Ltd. It makes no reference to Quality nor does it inch.lud j.lnitorial work. It refers to buying, selling, rental of real estate, operating a trailer park and other like businesses.
Acerding1ly, we will require documentation and papers showing the inclusion (f Quality and/or documentation incorporating Quality Janitorial Service.
Further, should the papers for MAG, Ltd. be used, we will require By-Laws, 'ertificale of Inc. and SBA Forms 912 and 413 for Virvatine G. Manigault and (;eorget. IGreene.
Pleae advise if we can be of assistance.
Hoespect fully,
RICHARD B. TVEY,
Industrial Engineer, B.D.S.
MAG, LTD.,
Charleston, S.C., May 20, 1976.
Mr. IN I : i Mu. IvErY: Per our telephone conversation of yesterday, enclosed you will find a vopy of my by-laws and a document showing the resignation of George H. (riel, from the organizations.
Itespect fully,
WILLIAM D. GREENE, President.








U.S. SMALL BUSINESS ADMINISTRATION, RieION IV, A lunta, Ga., Aprill ,8 1977.
Mr'. W LIAM J. GREENE,
Quality Janitorial Service
Clarl(ston, S.(C.
DEAR MR. GREENE: AS YOl know, the aIl)lie'tial :t~r business s plan subsmitlmed in your behalf by Charles II. Brown. business I Developer, has been held in suspense in our files since November 7. 175. Our Mr. Richard H. Ivey requested illformaitiol relative to Quality Service and its parenvit organiizatiolm. MAG, Ltd. To date we have not received required informna t ion.
In add(lition, there has not been requirements submitted to this office suitable for your firm. Indications are that the availability Iof suitable requirements are highly unlikely in the foresee atide future. Therefore. we are returning your appli(a 1tion alld buIsiness plan wit hout action.
Sincerely,
WI.LIAM S. MAT.LOC K, Jr1..
1)1pu ty As i. N i Iti ion a l D) i-ector for I'0 c tII rute I As. 'is a lce.
Enclosure.
QUALITY .JANITORIAL SERVICE(; l1MSINElsS PLAN
1. Quality Janitorial Ser\ice, 1S70 Freedom Drive, (Charlehston, S.('. 29407. 556-9153.
2. Description of Business: Type-Janitorial Service; purpose-To() provide a completed cleaning service for the Charleston market; goals-To organize and operate a sound profit-making business and expand to the extent most practical.
Company History-New.
4. Ownershi;p--Sole Proprietorship.
S5. Service-Complete domestic and commercial cleaning services to ()tices. hospitals, factrories, clubs, homes, government facilities, etc.
(. Management-none.
In addition to management of business by owner, two assistants will be salaried both having long experience janitorial service. One assistant is presently enmployed as a salesman of janitorial supplies and equipment.
7. Marketing-The market shows a great demand for janitorial services in the Charleston, S.C. area. Greatest competition will be felt from the few large businesses that tend to dominate the market by underbiddiig. Quality work, which appears not be the norm, is to be the salvation for the smaller businesses and, also, one of the best means of advertising. Other advertising will be through the yellow pages, local news media, etc. Assistance is required in obtaining sizable contracts that will enable this company to be ome stable and self-sufficient.
8. Production-An old army barrack will be relocated from Fort Jackson and placed on a five acre track of privately owned property to provide office and warehouse space for the business. Supervisors have been identified for the initial operation and will, in the future, be identified from employees coming from a ready labor source, which could possibly be 100% disadvantaged. Following is a list of equipment currently available for use in the business: Description : Quantity
Sander, Floor (each) 2--------------------------------------------Cleaner, Vaccum (Household) (each) ..2---------------------------Heater, Furnace------------------------------------------------- 1
Cleaner, Floor, Auto--------------------------------------------- 1
Machine, Floor -------------------------------------------------- 4
Machine, Shampoo ----------------------------------------------- 1
Cleaner, Vaccum (Commercial)------------------------------------ 5
Squeegee, window----------------------------------------------- 9
Ladders (Extention & Step)-------------------------- 5
Scaffolds w/Rollers (sets)---------------------------------------- 2
Cord, Extension ------------------------------------------------- 7
Mop Head, Dust------------------------------------------------- 7
Buckets --------------------------------------------------Wringers------------------------------------------ 7
Additional equipment is available as required.




7 8

9. Financial-Accounting services will be provided by General Business services, Charleston, S.C.
Fixed assets:
Land (5 acres)---------------------------------------------- $8, 000,
Equipment------------------------------------------------- 5, 300'
Mobile home (office) ----------------------------------------- 3,000O
1971 Ford wagon-------------------------------------------- 2,500,
1968 Dodge economy ----------------------------------------1,0000.
Working Capitol-Profits generated from current small contracts will be utilized to assist in expanding the existing business. It is also the intent of this company to utilize local banking community development programs for advancemoney to cover commitments on any sizable contract until assistance can be received through the SBA 8A contracting program.
Projection-See Enclosure 1.
WILLIAm J. GREENE,
Owner-Manager.

QUALITY JANITORIAL SERVICE PROFORMA BALANCE SHEET-OPENING DAY OFBUSINESS
Assets
Current Assets:
Cash on hand and bank------------------------------------ $1, 000
Supplies-office---------------------------------------------- 34
Supplies-operating------------------------------------------ 43

Total current assets -------------------------------------- 1, 077

Fixed Assets:
Shop equipment ------------------------------------------- 12,000
Reserve for depreciation------------------------------------ (1, 500)
Auto----------------------------------------------------- 2,500
Reserve for depreciation------------------------------------- (833)
Home and comm. window waslig. and acct.---------------------- 5.000
Reserve for depreciation------------------------------------- (333)

Total fixed assets --------------------------------------- 16,843
Total assets--------------------------------------------- 17, 911

Lialkilitie and capital
Liabilities:
.Account payable ------------------------------------------- 250
Long term notes (loans) ------------------------------------ 8, 5W0
Total liabilities------------------------------------------ 8, 750
Capital ------------------------------------------------------ 9,161

Total liabilities and capital -------------------------------1,1







79

QUALITY JANITORIAL SERVICE
Pro jected income statement for first 12 miounts of operation

Sales ------------------------------------------------------- $72, 00. 00

{)peratiiig expenses:
Gross Wages--------------------------------------------- 24, 000. 00
Operating Supplies----------------------------------------- 900). (0
Repairs & Maint --------------------------------------------900. 00
Auto & Truck (gas)----------------------------------------- 960.00
Advertising---------------------------------------------- 1, 200. 00
Taxes & Licenses------------------------------------------- 174. 96
Administrative & Legal------------------------------------- 480. 00
Utilities -------------------------------------------------- -40. 00
Insurance------------------------------------------------1, 20.0
Depreciation ---------------------------------------------- 2, 400.00
Telephone ------------------------------------------------- 240. 00
Office Supplies---------------------------------------------- 180. 00
Payment (loan)------------------------------------------- 1,104.00
Miscellaneous---------------------------------------------- 480. 00

Total operating expense---------------------------------- 34, 158. 96

Net profit before taxes ---------------------------------------- 37, 841. 04
Less tax (48 percent) ------------------------------------------ 18, 163. 70

Net Profit--------------------------------------------- 19,6077. 34
Net profit per month: $1, 039. 78.

APPLICANT'S HISTORY RESUME
1. Full name: William J. Greene (Jonathan).
2. Present address: Hq. 34th Medical Battalion, Fort Benning, Ga. 31905.; 813 Piccadilly Circle, Charleston, S.C. 29412. 803-795-57729.
3. Home phone number:
4. Marital status: Married.
5. Children: Three (3) ages: 13, 11, and 10.
6. Race: Negro.
7. Childhood family background: Born the youngest of nine (9) children to Bessie and Mitchell A. Greene of Georgetown, S.C. Mly father was self employed in the construction (carpentery) business. My mother died when I was at an early age and my three older sisters became instrumental in my development. By high school, the members of my family had left home for reasons such as military duty, personal careers, marriage, etc., to include my father, who had remarried. Remaining at home was one sister, a school teacher, and myself.
S. Date and place of birth: 12 January 1,938, Georgetown, S.C.
9. Education: BA Degree in sociology from Morgan State College, Baltimore, Md .-1960.
10. "Military status: Will separate from the military in the grade of Major 0M8C) on 31 March 1974.
11. Work experience: My work experience is primarily military where I have served for approximately six (6) years as a unit commander. M.Ny career field is that of M-Nedical operations and I have worked as the Chief, Plans Operations & Training at General Hospitals. For the past three (3) years I have served as the Executive Officer of a Medical Battalion consisting of ten (10) subordinate units.
'NOTE.-Items 7 anud 11, please be as detailed as possible.






80

NOVEMBER 27, 1974.

The following is a listing of equipment and vehicles on hand with Quality Janitorial Service as of the date indicated above.
Equipment description and quantity:
Sander, floor-3.
Cleaner, vacuum (household)-3.
Heater, furnace-1.
Cleaner, floor auto-2.
Machine, floor-7.
Machine, shampoo-2.
Cleaner, vacuum (commercial)-7.
Squeegee, window-13.
Ladder, (extension and step)-11.
Scaffolds, with rollers-2 sets.
Cord, extension-11.
Mop head, dust-22.
Buckets-12.
Wringers-12.
Edger, floor-1.
Additional equipment available as required.
Vehicles: 1971 Ford Wagon, 1969 Ford Van, 1968 Chevrolet Van, and 1968 Chevrolet Sedan.

QUALITY JANATORIAL SERVICE BALANCE SHEET YEAR ENDED APRIL 1975

Assets
Cash ------------------------------------------------------$1,000. 00
Accounts receivable -------------------------------------------- 300. 00

Building and land -------------------------------------------18, 500. 00
Less depreciation ------------------------------------------(8530. 00)

16, 650. 00

Equipment, janitorial ----------------------------------------15, 106. 00
Less depreciation ----------------------------------------(1,510. 60)

13,595. 40

Auto-truck ----------------------------------------------------7, 800. 00
Less depreciation---------------------------------- (685. 42)

7, 114. 58

Total assets ..----------------------------------------- 38, 659. 98

Liabilities
Accounts payable:
Note-Falcon Capitol Corp --------------------------------13, 000. 00
Andrews Bank and Trust 4,---------------------------------- 100. 00

Total liabilities ---------------------------------------17, 100. 00
Shareholders' equity:
Shareholders, capital ------------------------------------21, 5G9. 98

'Total liabilities and capital -------------------------------38, 659. 98






81

QUALITY JANITORIAL SERVICE INCOME

Year chided A pril 30, 1977
Revenue: service fees ------------------------------------------- 5

Expenses:
Salary expense ---------------------------------------------Auto-truck expense ------------------------------------------ A. T,,-,(;.
Depreciation expense ---------------------------------------- 4.M.-I. ()2
Notes expense ----------------------------------------------- :2. 550. (q)
Operating supplies expense ----------------------------------- 2, (" 0. -14
Insurance expense ------------------------------------------- 7 1-,' -, : ,0
Tax expense ------------------------------------------------- 7()9.:'),-,
Advertising expense ----------------------------------------- 660. 00
Telephone expense ------------------------------------------- 75
Office supplies expense --------------------------------------- 196. 2
Rent expense ------------------------------------------------ 100. 00
Bank expense ----------------------------------------------- 2 0. 4,1
Water expense ---------------------------------------------- 15. 00

Total expense --------------------------------------------- 468. 96

Net loss --------------------------------------------------- 1, 058. 61

Quality Janitorial Service profit and los. statement
Sales ---------------------------------------------------------- 72,000.00

Operating expenses:
Gross wages ------------------------------------------------- 2 4. 000. W
Operating supplies ------------------------------------------ 900. 00
Repairs and maintenance ------------------------------------ 600. 00
Auto and truck (gas) --------------------------------------- 960.00
Taxes and licenses ------------------------------------------ 17 4. 19 6
Advertising ------------------------------------------------ 1. 200.00
Administrative and legal ------------------------------------- 4,1- O. 00
Utilities ---------------------------------------------------- 240.00
Insurance -------------- ------------------------------------ 1,200.00
Depreciation ------------------------------------------- 91400.00
Telephone -------------------------------------------------- 240. 00
Office supplies ----------------------------------------------- 180.00

Payment (loan) --------------------------------------------- 1,104.00
Miscellaneous ----------------------------------------------- 480.00

Total operating expense ----------------------------------- 34, 158. 96 )

Net profit before taxes ------------------------------------------- 3T,841.04
Less tax (48 percent) ------------------------------------------- 18, 163. 70

Net profit ------------------------------------------------------- M677.34
Net Profit per Month ($1,639.78)






82

QUALITY JANITORIAL SERVICE
Pro-former balance sheet
Current assets:
Cash on hand and bank -----------------------------------$1,000.00
Supplies--Office --------------------------------------------34.00
Supplies-Operating ----------------------------------------43.00

Total current assets -------------------------------------1, 077. 00

Fixed assets:
Shop equipment ----------------------------------------- 12,000.00
Reserve for depreciation ---------------------------------- (1, 5W.00)
Auto --------------------------------------------------- 2,500.00
Reserve for depreciation ------------------------------------(833. 00)
Home and commercial window washing account -------------5, 000. 00
Reserve for depreciation -----------------------------------(333. 00)

Total fixed assets -------------------------------------16, 843.00

Total assets ------------------------------------------7,911. 00

Liabilities and capital:
Liabilities:
Accounts payable -------------------------------------- 250. 00
Long-term notes (loans) -------------------------------8, 500. 00

Total liabilities -------------------------------------8, 750. 00
Capital -------------------------------------------------9, 161.00

Total liabiliites and capital -----------------------------17, 911.00
IV. Company history
(Narrative of purpose, chronological development, problems and successes): Quality Janitorial Service was organized in April 1974 as one of two businesses started by a corporation, MAG Limited. Because of a shortage of funds, management assistance, and adequate controls, MAG Limited relinquished controls of the other operation and continued with Quality Janitorial Service as a single entity.
Since the beginning of this venture, Mr. Greene, the owner and manager has been successful in obtaining a number of small contracts. These contracts have not been sufficient to sustain the venture on a profitable basis. Funds used to start the business were exhausted as efforts to obtain sizeable contracts for services failed.
V. Product or service
(Narrative of characteristics, uses and applicability to commercial market. Nature of work performed with own forces, area of operations) :
The Charleston area is dotted with military bases and a number of U.S. Govermient installations. The area is growing with large businesses, office buildings, apartments, and a variety of opportunities for a business of this type.
The company offers complete domestic and commercial cleaning services to offlees, hospitals, factories, clubs, homes, and governmental facilities. It is centnilly located ad accessible to all main highways in the target area.
With increased contract responsibilities, work crews and supervisors will be brought aboard to handle the same.
VI. A. M1aniagcment
(A copy of this form must be completed by all directors, officers, and senior manaigemient personnel. )1. Name : William J. Greene
2. Age" :
4. Marital St atuis" Married.
5. Soial secitty nituber: 219 :5-1.96.
;. Mili lry serial numl)er: 05210137.






83

7. Present position (Include description of duties) Owner/manager-Quality
Janitorial Service; Duties: To provide overall supervision of the service
and all personnel employed by the compay.
8. Other jobs and positions held and salaries: Resume attached.
9. Formal schooling: BA Degree in Sociology 1960, Morgan State College,
Small Business Management, 1972, Columbus College. 10. Technical training and qualifications: 11. Management training: Small Business Management-Columbi s College, 1972 ; Medical Operations Officer Course, 1971. 12. Military experience:
(a) Branch of service, place, period of service, MOS, and rank:
U.S. Army, Ft. Lewis, 1961-1963, Platoon leader, Lt.
U.S. Army, Hanau, Germany, 1963-1964, Commander, Lt.
U.S. Army, Stuttgart, Germany, 1968-1971, Commander, Captain.
U.S. Army, Ft. Benning, Ga., 1971-1974, Chief Operation, Major.
(b) Service schools attended and date of attendance: AMED Officer Basic, Ft. Sam Houston, Texas, 1961; Air Transportability Planning School, 1363; AMED Officer Advanced School, Ft. Sam Houston, 1966-1967; Medical Operations Off. Course-Denver, Colo., 1971; and DOD Race Relations Institute, 1972.
B. List professional, management and technical resource support to be received by your company. (Attach copies of all Management and Technical Support Agreements.)
Name, address, phone, service, and compensation: Charles H. Brown, 854 Rutledge Avenue, 577-3727, Business Development, $250.00; Robert Martin, 6 Ranger Drive, 747-5177, Accounting, $4.00/hr.
C. Diagram organization chart of firm:













VI. Marketing
A. Market area: Charleston-Berkeley-Dorchester County Area.
B. Market potential: Any area within 100 miles of main plant location. Many Military and other Governmental facilities in target area.
C. Commercial customers: Tri-County area is growing with new business, office complexes, shopping centers, etc.
D. Government customers (include name and phone number of contracting officers and/or small business specialist contacted) : Minority Development & Management Assistance-Ms. Olga Burke, Charleston Naval Shipyard.
E. Competitors: Bachelor Building Maintenance Company; Imaculate Janitorial Services; Farrco Janitorial Services; Gean's Janitorial Services; and Petit Janitorial Services.
F. Advantage over competitors: We believe in quality and reliable services using dedicated crews for maximum performance.
G. Pricing and bidding procedures (attach sample of pricing and bidding documents) : Attached.
H. Sales forecast by product or service category: Services performed $72,000/ year.
I. Sales and distribution plan (including advertising, pricing, credit terms, etc.) : Advertising cost projected $1,200.00; Contract Pricing 180 percent; Credit terms-Regular monthly billings.
J. Business Plan Graph (reflect commercial and non 8(a) Government sales, 8(a) projected support and break even point) :





84

Sales
Dollars
1(000) I Production Capacity
$ 4

$3

$2

$1



Ist yr. 2nd yr. 3rd yr. 4th yr.
Period of Program Participation

K. Break Even Chart (reflect income from sales, fixed cost, variable cost and break even point)
Cost
ir
t-O Do1 a .









D 1- .. 100
50 )

I"III. Production
A. Plant (Include location, total square footage, and layout and sketch of office and storage areas. Also include copy of lease deed or proposed lease.) Located on Meeting Street in the heart of Charleston, South Carolina. The office is in front of a building which has approximately square feet of space.
B. Eluipmient-OQuantity, Description, Age, Buy/Lease, and Cost: List attached to origi alo proposal all equipment are considered new.
C. Equipment layout and production flow plan: NA.
I. Sn uprvisory personnel (names and responsibilities) : Melvin Ancrum-Job Supervisor; William Greene-Owner/Manager; Robert Martin-Administration: and J oseph Frasier-Job Supervisor.
E. Labor skill and source (detailed list by classification, number and pay rate: Supervisor, 2, $vweek; Laborers, 6, 2.10/hr.; Secretary, 1, 2.10/hr.; Bookkeeper, 1, 4.00/hr.
F. Materials used, source of supply, and average delivery time: Janitorial supplies, BuT Janitorial Supply Company, One day delivery; cleaning supplies, Charleston Chemical Company, One day delivery; wax and cleaners, Southern Chemical Comnipany, One day delivery.
G. Shipping failities and accessibility to transportation: This business is located in the heart of Charleston. It is readily accessable to the Tri-County area of e rkele-(Charleston-and Dorchester Counties. Located on the main artery.
II. (Quality control system: A control system for use of supplies and equipment is in use to insure maximum use and efficient operations.
I. Workforce classified as disadvantaged and training programs: Allof the work fjr(ce is classified as minority, disadvantaged. A continuous (OJI) training program is il effect rendering new emIployees effective inii our methods of operations.






85

J. Expansion capability: There is plenty of room for expansion in this venture. We have a tremendous amount of floor space for storage and have identified sources of additional trained employees when needed. IX. Operational Plan:
The company seeks to offer complete domestic and coniinercial cleaning service< to offices, hospitals, factories, clubs, homes, and government facilities. To offTer these services, crew supervisors and other personnel have b)en identified. Others will be available when contracts become available. This venture will afford an opportunity for full employment for low income minority, disadvantaged individuals in this community.
X. Financial:
Attach year-end and current business balance sheet on applicant and affiliates, year-end and current profit and loss statements on applicant and affiliates, aging of accounts receivable and payables on applicant, monthly cash flow for twelve months on applicant and annual detail projection for two years on applicant.
A. Sales history (applicant) :
Year-end to date as of April 30. 1975:
Commercial ------------------------------------------- $1 S10
Government 8(a)-----------------------------------------------Government other --------------------------------------------- 600
Total ---------------------------------------------------- 135, 4104)
B. Profits and losses (applicant) : Not available.
('. Projection (applicant:

1st year 2d year 3d year 4th year

8(a) projected support------------------------------- 0 $400,000 $300, 003 I100, 000
Commercial sales ...------------------------------ 514, 810 58, 400 75,000 200, 000
Other Government ---------- -------. 600 13,600 25,000 50,000
Total... -----------------------------------. 15, 410 472,000 400, 030 350, 000
Note: Projected 8(a) support should decline with each progressive year. Commercial and other Government sales should .ncrease.

D. Condensed Balance Sheets (applicant) :

Current as of 1975
Current assets -------------------------------------------------$1, 077
Fixed assets ---------------------------------------------------16, 843
Other assets

Total ----------------------------------------------------17, 911

Current liabilities -----------------------------------------------1, 550
Long-term liabilities ---------------------------------------------7, 000
Net worth ....

Total 8, 5530
E. Sales history: (affiliate) : Not available.
F. Condensed balance sheets (affiliate) : Not available. XI. Other pertinent information
A. Contracts or jobs in-house.
Customer and representative, description, amount, percent completed, and scheduled completion :
Charleston Air Force Base, general cleaning, $1,035 per month, 80 percent,
November 1975.
Sea Land, general cleaning, $371 per month, continuous.
Minority Management, general cleaning, $600 per month, continuous.
AVCO, general cleaning, $840 per month, continuous.
Motherhood Maternity, general cleaning, $200 per month, continuous.
Home Security Life, general cleaning, $96 per month, continuous.
Triest & Sholks Ins., general cleaning, $110 per month, continuous.





86

B. Average monthly billings: $2,500.00.
C. Record of surety and fidelity bonds: Bonding is available for jobs which require bonding.
D. Contracts or jobs completed within the last two (2) years-customer, description, and amount:
Medical University of S.C., general cleaning, $7,280.
Benton's Ba r-B-Q, general cleaning, $660.
Conklin's Women Wear, general cleaning, $420.
Minority Development Management, general cleaning, $600.
AVCO Finance Company, general cleaning, $840.
Community Builders Corp., general cleaning, $11,269.
Motherhood Maternity Shop, general cleaning. $200.
E. Schedule of insurance-company, contractors and manufacturers, amount, expiration date, agent or agency:
American Mutual, Liability Workmen's Compensation, $325,000, continued,
Trust & Sholks.
American Mutual, Employers Liability, $100,000, July 15, 1976, Trust &
Sholks.
American Mutual, Combination Automobile, $85,000, September 18, 1976,
Trust & Sholks.
F. Bank and trade references: Name and address-Ist National Bank of South Carolina; contact person and position-Mr. Russell.
G. Availability of credit and financial assistance: None.
H. List of loans or loan guarantees provided by the Small Business Administration: None.
I. Outline of business goals (necessary to become competitive):
Annual sales $72,000; current ratio to .
Annual profits $20,000; debt to net worth ratio 1 to 2.
Bondability $300,000 estimated number of years to become competitive3 to 5 years.
J. Additional equipment necessaryy to conduct competitive business-description, purchase cost, and lease cost.
Three commercial vacuum cleaners, $1,125, none.
Two floor machines, $400, none.
Two machine shampoo, $700, none.
Total, $2,225, none.
K. Other resources needed to become competitive-type, amount, and anticipated source:
Advertising. $1.200, newspapers and other media.
Shop equipment, $12,000, industrial suppliers.
L. Licenses and certificates in effect-type, amount, and place of issue:
Chartered by the State Business, not available, Charleston, South Carolina.
City license, $5, Charleston, South Carolina.
Other licenses to be purchased as needed.
M. List trade association and other organizations of which company is a member: None at present: Chamber of Commerce.
N. Labor agreements in effect: None.
O. Contracts with suppliers: All of the suppliers deliver needed Janitorial Supplies on a one day delivery schedule. All supplies are charged to the companies account.
P. List law suits in force or pending: None.
Q. Patents, royalties, etc.: None.
IR. Product research and development.
S. Annual sales volume in dollars required for company to break even: $72,000.
VIT. Statement of cooperation
I understand that if approved for participation in the 8(a) program I will assume certain obligations as listed below. I understand and agree that if I (1do not meet these obligations. Small Business Administration may, in its sole
dsretioI remove m from further '110pa ticipation. I further understand that SBA cannot assure the availability of 8(a) contracts to my company, either now or in tl future.
I pledge to use my best efforts to develop my business by actively soliciting business eitherr commercial or competitive Federal) in accordance with the projections made in Iy business plan.






S7

I pledge to provide SBA with timely and accurate financial Information which will consist of at least quarterly profit and loss statements and quarterly balance sheet. The income from 8(a) contracts is to be shown separately from other income. If requested, I will provide such other Information as may be required.
To the best of my ability, I will put into practice the business methods and advice provided to me by the Small Business Administration. I will discuss with appropriate SBA personnel any major changes or long-term commitments prior to entering Into such commitments.
I will conduct my business affairs in an ethical manner.
I hereby certify that I have not paid fees to third parties, whether directly or indirectly, in the process of obtaining 8 (a) subcontract. If such fees have been paid, or contracted to be paid, I attach full details of such agreement.
I further certify that the statements contained in this application and attachments are true and correct to the best of my knowledge and belief. Signature of Authorized Officer of Firm: Title: Owner/manager.
Date: October 30, 1975.
Technical and Management Assistance Agreement:
The undersigned requests the SBA to provide technical and management assistance in connection with this Business Plan and Qualifications Resume. It is understood that said assistance shall be performed free of charge. I thereby authorize SBA to furnish information and data contained in the Business Plan and Qualifications Resume to those persons providing this company with technical and management assistance. All information will be treated In strict confidence.
In consideration of this assistance, I hereby waive all claims arising therefrom against SBA and aforereferenced persons. Signature of Authorized Officer of FIrm: Title: Owner/manager.
Date: October 30, 1975.












Kit..fo 5:P 3A Use Wuy

PERSON150AL FIANCIAL ST ATEENT Small Business Admnstration $A Lais.

As II Aiua~it ;>P@ 'ig925 It.2-M.

fiamet and Address. Incluidisg ZIP Code (osf pers Do and apse This statIInGnt Is submitteld in' c necton with S.B5A. loan reQuested suatittiia Slattameu at granted to "e Individual at firat. who& aiite copeerz below:
Willian J. Greene ai WAieso liaorBroe.fv1irig'Itdr
813 Picadilly Circle 'AreSoApicrl orw.IcIdm IPCd
Charleston, South Carolina 29412 SOCIAL SECURITY wo. 249-58-8196
Business (of person airbmunitlal Statement)
Quality Janitorial Services ___________________Please answer all questions using "No" or "Nane" whers necessary

ASSETS LIABILITIES

Cash on Hand 11,In Banks............. S--150Acut Payable to8c.................. S NF
U. S. Govern-ment Bonds.....................I C'0 (Describe below Section 2)
Accounts 4, Notes Receivable ..... ir Notes Payable to Others................ 'Nn
Life Insurarnc*-Cath Surrenlier Vslue Only ln (Describe below Section 2)
Other Stocks and Sands.................. ~ Installment Account fAuto). .......... .5
(Oescribe reverse side Section 3) Monthly Payments s....22............
Real Estate.........................~ Installmnt Accounts (ther ............. 5&
(Descirlbe reverse side Section 4) Monthly Payments S 8
Automobile.- Pesent Value.............. -AIOD Loan~s on Life Insurance................... ,Tnnfa
Other Personal ParoPeirty.................... 2, 5n Moirttaes, on Real Estate................ upm
(Describe reverse aide Section 5) (Describe reverse aide Section 4)
Other Assets................................... Unpaid Taxes........................
(Describe reverse side Section 6) (Describe reverse s let Section 7) 'oe
Other Liabilities............................ Ioz
(Describe reverse side Section 8) -,4)
Total Liabilities...................... 5 9
Net worth...........................

Total ...........S8,10Ttl...............~ 888,150_____Section I. Source of Income CONTINGENT LIASILITIES
(Describe below all iters fit~ted In this Section)____________________________________________Sft. ........................ S ___-________ As Endorser or Co-Maker................ S ___ ___Net lnvestumert Income ................................Legal Claims and Judgments..............
Real E state Income.....................__________ Provision for Federal Income Tax .........
Other income (Describe) .. . . lOther Special Debt ..................Description of items listed In Section I________________________________________________t 20:000 e e~ftA o.





Life insurance Held fCc ace amount of policlies .name ot company *Ad bmneficiaries)












SUPPLEMENTARY SCI4F00LES -__________Section 2. Notes Pay able to banks and Others Amount of Loan Trms of Maturity N~ow Endorsd. Cua:snteed,
Name Old dresof Holdler of Note OrIgpl Sal9. Presen% (I al, PWP@ -7! .7La r eue



_ _ _ _ _ _ _ _ _ _ _ _ -_ _ I L o an__ o r_ _ _ _ _ _
--A T~ li i ~ ps~i I~~~.O A~S Ou. -ao5 5 11av~g fthoPU-Eit








89




Socs ;on 3. Otne, Stocks ad~da: Give 1isted en wiisf Stocks and bondes (fist seveal#i Ike.I "to If*,a' titaket ValifIC $* Mt 0.
NOil of Shares Nsne.s of Secuilties Cost_______ Q uOtatIa., A- 0a I







5tctionil4. Ike.? Esate Owned. (L0st each Parcel separately. Use saiplteniente Sheels Iff .ectaaary. Eachi shot,~ -. df,,m1rjqled esg supplement to thts statement end siredd). (Also ediis whilther Proert covered br title rasuroenC@, obs'lcT 01 "0 or' &:Ohl Title Is to names of W lim .GresType of Property Re i nta

Addiest of ptopercy (Ccv and State) original Cost to (me) (us) 6 32-4O 2OA0P

Charlesaton,, South Carolina Dote Purchased tei r _1 J 4 4
Present Market Valve s3Dafil....CI
Tax Assessment Volvo ______________Naine and Addicza of Holder of mortgage (City and State) Daeo otsi BE v p MIMI r -1Y3

First Federal Savings and Loan B~alc AmountV le

Charleston, Sotua Carolina Satilanc -3W Yearsd

___________________Terms___ oPament Kobntliy $262.00
Status of Mortgage. I.. Current or delinquent. If delinquent describe delinquenrcIes


Current
Section S. Other Personal4 Property. (Describe arnd It any 1s mortgaged. stole home ond address of mortgage Aordef *^:f *-0.n 0( inortsagF, terms of payment end If deflingvent. describe defiriquency.j














Section 6. other Assists. (Describe) I














Section 7. Ur~aid Taes. (Describe in detail. as to type, to whom payable. when dve. amount. end what, If orf1. W.oprty a 'al lien, if.
aniy, attaches)










Section 4. Other Liabilities. (Descr.be in detolfl










(1) or (We) certify the ab;cwe &aid the statements Contained In the schedSule& herein Is a true and accvrate statement of (my) or (ou'i ftranc..ai Condition as of the date stated-herein. This statement Is given fer the purpose of, (Check one of the following)
Q Inducing S.S.A. to grant a loan as requested In application. of the Individual at firm whose name appears "*gein. In 8
Connection with which this statement Is submitted.

OFurishirig a statement of (my) or Cowr) financial condition, Pursuant to the terms of the guaranty exet~uted i. me) or
(us) at the tine S.S.A. granted a loan to the Individual or firm, whose name appears herein.




Signature Data .
Page 2 n.-.






90

Enclosure 7, not available at the time of typing, is a certificate showing the completion of a Small Business Management Course sponsored in 1972 by SBA, The Urban League and Columbus College in Columbus, Ga. Subcommittee evaluation
Mr. William Greene first made application to the Small Business Administration early in 1974 in April of 1977, the regional office of the SBA (Atlanta) returned Mr. Greene's business plan to him noting that there were no present opportunities available for his business. The regional office also noted that no contracts were anticipated which Mr. Greene could participate in.
A subcommittee staff visited the Charleston area. The available government market for competition on 8(a) contracts abound in the Charleston area through and abundance of military installations as well as other government buildings.
As was noted earlier, large sponsorships were the recipient of many of the earlier 8(a) contracts in this area. If the SBA moves to implement a modified competitive bid system then the agency would
necessarily need to expand its certification.

CASE STUDY No. 6

Company-Java Associates, Inc.
President-John L. Davis.
Location-Columbia, South Carolina.
Re amount of collateral required for minority loan.
Circumstances
The primary concern expressed by Mr. Davis centered around providing collateral that far exceeded the loan request. The other concern generated around the Java Company to enter the "8 (a) arena".
The following information was supplied by Java Associates, Inc. to the Committee.
U.S. GOVERNMENT SMALL BUSINESS ADMINISTRATION, Columbia, S.C., October 5, 1976.
Mr. JOHN L. DAVIS,
President, Java Associatcs, Inc.,
Columbia, S.C.
DEAR MR. DAVIS: We are pleased to advise that your loan has been approved by this Administration (pursuant to Section 7(a) of the Small Business Act, as amended) in reliance upon your Application dated September 15, 1976, Loan Case No. L-ME-816485 10 07-Cola in the amount and upon the conditions as follows:
1. Amount: Twenty-four thousand dollars ($24,000.00).
2. Note payable: Five (5) years from date of Note with interest at the rate of six and five-eighths percent (6%%) per annum, in installments, including princip:al and interest, each in the amount of $499.00 payable monthly, beginning four
(4) months from (late of Note, and the balance of principal and interest payable five (5) years from date of Note: with the provision that each said installment shall Ie applied first to interest accrued to the date of receipt of said installment, and the balance, if any, to principal.
3. Collateral
(a) First security interest in all equipment, fixtures and accounts receivable (excluding leased and automotive equipment) now owned and hereafter acquired, and proceeds therefrom.
(b) Collateral assignment of premiums on renewal rights on written insurance busineed.
(c) Guaranty on SBA Form 148 of John L. & Aim B. Davis secured by a mortgage on their personal residence located at 155 Boulters Lock Road, Colum-






91

bia, S. C., subject only to existing lien in approximate ainowit (if $30,%,(). 00 held by Standard Savings and Loan Associatimi, Columbia, S. C.
4. Use of proceeds of loan:
(a) Approximately $12,600.00 for working capital to pay overhead and operating expenses.
(b) Approximately $11,400.00 to reimburse Borrower for first, four (4) months salary expenses for each of the following:
(1) General Solicitor $3,600.00 at .9,9,00.00 per month.
(2) Senior Solicitor $2,800.00 at $7 00.00 per month.
(3) Staff Solicitor $2,200.00 at $550.00 per month.
(4) Administration Assistant $2,800.00 at $700 per month.
Proceeds under b, above, to be disbursed only upon receipt by SBA of certiflcation of payment by Borrower. Also, disbursement under b, above, to be made only upon receipt of monthly balance sheet and profit and loss statement not more than 30 days old.
5. Other conditions:
(a) Lessor to provide letter or written agreement that in event Lessee defaults in terms of lease that Lessor will notify Lender in writing and permit Lender thirty (30) days in which to remove any collateral as signed against any of Lessee's outstanding notes to Lender or the right to correct such default.
(b) Borrower to maintain adequate accounting records and provide annual financial statements (to includebalance sheet and profit and loss statement) beginning December 31, 1976, prepared by a qualified outside public accountant, licensed by the State of South Carolina.
(c) Borrower to maintain satisfactory hazard insurance on collateral securing this loan, with long form mortgage loss payable clause showing SBA as loss payee, said insurance to be the lesser of : (1) amount of the loan; (2) insurable value of the property; or, (3) maximum limit of coverage available.
(d) Agreement of Borrower that at any time during the life of the loan when Borrower's location is designated, falls within the boundaries of a special flood hazard area, and Federal Flood Insurance becomes available, he will purchase and maintain Federal Flood Insurance in amounts and coverages equal to the lesser of: (1) amount of the loan; (2) insurable value of the property; or, (3) maximum limit of coverage available.
(e) Borrower to pay closing fee of $30.00 prior to, or concurrent with, loan closing.
(f) Assignment of life insurance in amount of $24,000.00 to be obtained on life of John L. Davis. This shall. be reducing term insurance or assignment of existing insurance.
(6) Such other conditions as District Director or District Counsel may Impose pursuant to outstanding general requirements and instructions of this Administration.
(7) Disbursement of the Loan shall be made in the discretion of District Director in accordance with the provisions of this Authorization and the applicable general requirements and instructions of this Administration, provided that no disbursement shall be made later than six months from the date hereof.
Instructions for disbursement of the Loan are enclosed. Your prompt compliance with these will help to speed disbursement.
Sincerely yours,
MITC11MI, P. KoBELINSKI,
Administrator.
By W. C. GRIMES,
Chief, Financing Ditqsion,
,Small Business Administration.


SBA LOAN NO. L-ME-816485 10 07-COLA.

SMALL BUSINESS ADMINISTRATION (SBA) GUARANTY
OcToBFR 14, 1976.
In order to induce Small Business Administration (hereinafter called "Lender") to make a loan or loans, or renewal or extension thereof, to Java Associates, Inc. (hereinafter called the "Debtor"), the Undersigned hereby unconditionally guarantees to Lender, its successors and assigns, the due and punctual payment when due, whether by acceleration or otherwise in accordance with the
21-491-78-7






92

terms thereof, the principal of and interest on and all other sums payable or stated to be payable, with respect to the note of the Debtor, made by the Debtor to Lender, dated 10-14-76 in the principal amount of $24,000.00 with interest at the rate of 6% percent per annum. Such note, and the interest thereon and all other sums payable with respect thereto are hereinafter collectively called "Liabilities." As security for the performance of this guaranty the Undersigned hereby mortgages, pledges, assigns, transfers and delivers to Lender certain collateral (if any), listed in the schedule on the reverse side hereof. The term "collateral" as used herein shall mean any funds, guaranties; agreements or other property or rights or interests of any nature whatsoever, or the proceeds thereof, which may have been, are, or hereafter may be, mortgaged, pledged, assigned, transferred or delivered directly or indirectly by or on behalf of the Debtor or the Undersigned or any other party to Lender or to the holder of the aforesaid note of the Debtor, or which may have been, are, or hereafter may be held by any party as trustee or otherwise, as security, whether immediate or underlying for the performance of this guaranty or the payment of the Liabilities or any of them or any security therefor.
The undersigned waives any notice of the incurring by the Debtor at any time of any of the Liabilities, and waives any and all presentment, demand, protest or notice of dishonor, nonpayment, or other default with respect to any of the Liabilities and any obligation of any party at any time comprised in the collateral. The Undersigned hereby grants to Lender full power, in its uncontrolled discretion and without notice to the undersigned, but subject to the provisions of any agreement between the Debtor or any other party and Lender at the time in force, to deal in any manner with the Liabilities and the collateral, including, but without limiting the generality of the foregoing, the following powers:
(a) To modify or otherwise change any terms of all or any part of the Liabilities or the rate of interest thereon (but not to increase the principal amount of the note of the Debtor to Lender), to grant any extension or renewal thereof and any other indulgence with respect thereto, and to effect any release, compromise or settlement with respect thereto;
(b) To enter into any agreement of forbearance with respect to all or any part of the Liabilities, or with respect to all or any part of the collateral, and to change the terms of any such agreement;
(c) To forbear from calling for additional collateral to secure any of the Liabilities or to secure any obligation comprised in the collateral:
(d) To consent to the substitution, exchange, or release of all or any part of the collateral, whether or not the collateral, if any, received by Lender upon any such substitution, exchange, or release shall be of the same or of a different character or value than the collateral surrendered by Lender;
(e) In the event of the nonpayment when due, whether by acceleration or otherwise, of any of the Liabilities, or in the event of default in the performance of any obligation comprised in the collateral, to realize on the collateral or any part thereof, as a whole or in such parcels or subdivided interests as Lender may elect, at any public or private sale or sales, for cash or on credit or for future delivery, without demand, advertisement or notice of the time or lace of sale or any adjournment thereof (the Undersigned hereby waiving any such demand. advertisement and notice to the extent permitted by law), or by foreclosure or otherwise, or to forbear from realizing thereon, all as Lender in its uncontrolled discretion may deem proper, and to purchase all or any part of the collateral for its own account at any such sale or foreclosure, such powers to be exercise only to the extent permitted by law.
The obligations of the 'Undersigned hereunder shall not be released, discharged or in any way affected, nor shall the Undersigned have any rights or recourse against Lender, by reason of any action Lender may take or omit to take under the foregoing powers.
In case the Il )ebtor shall fail to piay all or any part of the Liabilities when due, whether by accelertion or otherwise, according to the terms of said note, the Undersigned. innediatlely upon the written demand of Lender, will pay ta Lender the amount due and unpaid by the Debtor as aforesaid, in like manner as if such amount constituted the direct and primary obligation of the Undersigned. Lender shall not he required, prior to any such demand on, or payment by, the Undersigned, to make any demand upon or pursue or exhaust any of its rights or remedies against the Debtor or others with respect to the payment of any of the Liahilitlies, or to pursue or exhaust any of its rights or remedies with respect to any pnrt of the collateral. The Undersigned shall have no right of






93

subrogation whatsoever wit Ih respect to t ihe Liabilities or th e collateral unless and until Lender shall have received full payment of all the Liabilities.
The obligations of the Undersignied hereunder, and the rights of LInder in the collateral, shall not be released, discharged or in any \ay affected, nor sha:ill the Undersigned have any rights against Lender: by reason of the fact that any of the collateral may be in default at the tile of acceptance thereof by Lender or later; nor by reason of the fact that a valid lien in any of the collateral may not be conveyed to, or created in favor of, Lender; nor by reason of the fact that any of the collateral may be subject to equities or defenses or claims in favor of others or may be invalid or defective in any way : nor by reason of the fact that any of the Liabilities may be invalid for any reason whatsoever; nor by reason of the fact that tihe value of any of the collateral, or the financial condition of the Debtor or of any obligor under or guarantor of any of the collateral, may not have been correctly estimated or may have changed or may hereafter change; nor by reason of any deterioration, waste, or loss by tire, theft, or otherwise of any of the collateral, unless such deterioration, waste, or loss be caused by the willful act or willful failure to act of Lender.
The Undersigned agrees to furnish Lender, or the holder of the aforesaid note of the Debtor, upon demand, but not more often than semiannually, so long as any part of the indebtedness under such note remains unpaid, a financial statement setting forth, in reasonable detail, the assets, liabilities, and net worth of the Undersigned.
The Undersigned acknowledges and understands that if the Small Business Administration (SBA) enters into, has entered into, or will enter into, a Guaranty Agreement, with Lender or any other lending institution, guaranteeing a portion of Debtor's Liabilities, the Undersigned agrees that it is not a coguarantor with SBA and shall have no right of contribution against SBA. The Undersigned further agrees that all liability hereunder shall continue notwithstanding payment by SBA under its Guaranty Agreement to the other lending institution.
The term "Undersigned" as used in this agreement shall mean the signer or signers of this agreement, and such signers, if more than one, shall be jointly and severally liable hereunder. The Undersigned further agrees that all liability hereunder shall continue notwithstanding the incapacity, lack of authority, death, or disability of any one or more of the Undersigned, and that any failure by Lender or its assigns to file or enforce a claim against the estate of any of the Undersigned shall not operate to release any other of the Undersigned from liability hereunder. The failure of any other person to sign this guaranty shall not release or affect the liability of any signer hereof.
JOHN L. DAVIS,
ANN B. DAvIS.
NoTE.-Corporate guarantors must execute guaranty in corporate name, by duly authorized officer, and seal must be affixed and duly attested; partnership guarantors must execute guaranty in firm name, together with signature of a general partner. Formally executed guaranty is to be delivered at the time of disbursement of loan.

SBA LOAN NUMBER L-ME-816485 10 07-COLA.
NOTE
COLUMBIA, S.C., October 14, 1976.
$24,000.00.
For value received, the undersigned promises to pay to the order of Small Business Administration at its office in the city of Denver. Colorado. or at holder's option, at such other place as may be designated from time to time by the holder twenty-four thousand dollars, with interest on unpaid principal computed from the date of each advance to the undersigned at the rate of 6% percent per annum, payment to be made in installments as follows:
Four Hundred Ninety-Nine Dollars ($499.00). payable monthly, beginning four months from the date hereof and Four Hundred Ninety-Nine Dollars (,$499.00) on the same day of each month thereafter, until the principal with interest to accrue thereon is fully paid; provided, however, unless sooner I aid. the entire indebtedness shall be due and payable five years from the (late thereof. Each said monthly installment, or any portion thereof, to be applied first to the pay-




94

ment of interest accrued to the date of receipt of said installment and the balance, if any, as a credit to principal.
Payment of any installment of principal or interest owing on this Note may be made prior to the maturity date thereof without penalty.
The term "Indebtedness" as used herein shall mean the indebtedness evidenced by this Note, including principal, interest, and expenses, whether contingent, now due or hereafter to become due and whether heretofore or contemporaneously herewith or hereafter contracted. The term "Collateral" as used in this Note shall mean any funds, guaranties, or other property or rights therein of any nature whatsoever or the proceeds thereof which may have been, are, or hereafter may be, hypothecated, directly or indirectly by the undersigned or others, in connection with, or as security for, the indebtedness or any part thereof. The Collateral, and each part thereof, shall secure the Indebtedness and each part thereof. The covenants and conditions set forth or referred to in any and all instruments of hypothecation constituting the Collateral are hereby incorporated in this Note as covenants and conditions of the undersigned with the same force and effect as though such covenants and conditions were fully set forth herein.
The Indebtedness shall immediately become due and payable, without notice or demand, upon the appointment of a receiver or liquidator, whether voluntary or involuntary, for the undersigned or for any of its property, or upon the filing of a petition by or against the undersigned under the provisions of any State insolvency law or under the provisions of the Bankruptcy Act of 1898, as amended, or upon the making by the undersigned of an assignment for the benefit of its creditors. Holder is authorized to declare all or any part of the Indebtedness immediately due and payable upon the happening of any of the following events:
(1) Failure to pay any part of the Indebtedness when due; (2) nonperformance by the undersigned of any agreement with, or any condition imposed by, Holder or Small Business Administration (hereinafter called "SBA"), or either of them, with respect to the Indebtedness; (3) Holder's discovery of the undersigned's failure in any application of the undersigned to Holder or SBA to disclose any fact deemed by Holder to be material or of the making therein or in any of the said agreements, or in any affidavit or other documents submitted in connection with said application or the indebtedness, of any misrepresentation (or the making of any agreement therefor) without the prior written consent by, on behalf of, or for the benefit of the undersigned; (4) the reorganization (other than a reorganization pursuant to any of the provisions of the Bankruptcy Act of 1898, as amended) or merger or consolidation of the undersigned of Holder; (5) the undersigned's failure duly to account, to Holder's satisfaction, such time or times as Holder may require, for any of the Collateral, or proceeds thereof, coming into the control of the undersigned; or (6) the institulion of any suit affecting the undersigned deemed by Holder to affect adversely its interest hereunder in the Collateral or otherwise. Holder's failure to exercise its rights under this paragraph shall not constitute a waiver thereof.
Upon the nonpayment of the Indebtedness, or any part thereof, when due, whether by acceleration or otherwise. Holder is empowered to sell, assign, and deliver the whole or any part of the Collateral at public or private sale, without demand, advertisement or notice of the time or place of sale or of any adjournmient thereof, which are hereby expressly waived. After deducting all expenses incidental to or arising from such sale or sales, Holder may apply the residue ''f the proceeds thereof to the payment of the Indebtedness. as it shall deem proper. returning the excess. if any, to the undersigned. The undersigned hereby wa ves all right of redemption or appraisement whether before or after sale.
ITolder is further empowered, to collect or cause to be collected or otherwise to be converted into money all or any part of the Collateral, by suit or otherwise, and to surrender, compromise, release, renew, extend, exchange, or substitute any item of the Collateral in transactions with the undersigned or any third party, irrespective of any assignment thereof by the undersigned, and without prior notice to or consent of the undersigned or any a,signee. Whenever any item of the Collateral shall not be paid when due, or otherwise shall be in default, whether or not the indebtedness, or any part thereof, has become due, Holder shall the same rights and powers with respect to such item of the Collateral as are granted Is respect thereof in this paragraph in case of nonpayment of the Indebtedness, or any part thereof, when due. None of the rights, remedies,