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plan, once the word spread to the employees that they were, in fact, partial owners of the company, our volume doubled over a 3-year period. We went from a $1 million a year sales volume to over $8 million in 3 years' time.
I think anybody would consider that a significant accomplishment. It was not my accomplishment. It was the accomplishment of the individuals in our company, the company owners.
Senator, I also had another company, Metro Contract Services, and it was basically a Government support service contract company. It performed base maintenance services for NASA at Langley Research Center, Johnson Space Center in Houston, and Huntsville, Ala. As a result of the tremendous results we received as a result of ESOP in Metropolitan, the decision was made that we should afford Metro employees at the Government centers this same opportunity.
So therefore, on January 1, 1977, Metropolitan acquired all the stock in Metro, and those Metro employees also became participants in the employee stock ownership plan. This is where we had our problems.
It seems that was a proven, good business judgment and practice in our commercial business world was received with rejection by the Government itself through NASA and through the DCAA auditors.
They said we had to get our stock valued by an independent appraiser. We hired the most reputable and oldest New York Stock Exchange company in Houston, Tex., to come in and provide an independent evaluation of our stock.
We did the same thing in January 1977–Underwood Newhouse & Co. evaluated our stock. It seems that even though the cost increased to our commercial customers when we put our ESOP program in, our production costs went down to such an extent that they put it in business in Arizona and Nevada and California, because even though it cost the commercial customers the contributions to the trust, what they saved in production costs more than offset that. They were tremendously pleased to have an ESOP participating company handling their trucking and delivery operations.
Well, the Government took a different approach; when auditors come in, the DCAA auditors, they started evaluating the evaluator of our stock, this New York Stock Exchange company, and they said that our stock was going to be valued at 10 percent of what this New York Stock Exchange company said it was worth.
I am not an evaluator, you know, but I know how to add and subtract and I could have closed the doors in that business and written a check to all the people, myself included, and received over $130 a share, and this DCAA auditor said our stock was worth $22 a share. It was the most incredible thing I had ever seen.
We could not reason with him at all. We hired the biggest bank in Texas to handle the trust for the stock of these employees. This man went down there to the bank and talked to those people to make sure they were following every rule and regulation laid down by the IRS and the Department of Labor. The banks did not know that the DCAA had the authority to do this.
During that time, Senator, our company was up for recompetition at our Langley contract, and we had negotiated with the union the benefits of our ESOP trust. NASA went to the Department of Labor
to try to get them to remove the ESOP from the DOL wage determination as a fringe benefit and the Department of Labor twice refused to do that. NASÅ went down and talked to the union at Langley to try to get them to withdraw from the ESOP. This is unprecedented in my history of over 15 years doing business for the Government.
Needless to say, we did not get the contract. We lost it. There are all kinds of reasons, I guess, why, but we had performed that job for over 3 years in a satisfactory manner. They said we were doing a good job, in writing, during all of our evaluations.
This represents over 30 percent of our volume of our corporation. By taking the contract away from us, NASA is reducing the value of the company and its stock, and hurting the employees.
The other company, Metro Contract Services, I sold to Sal Esparza, a Mexican American individual, and I understand he is having the same problems with the Government, and he can relate his experiences with NASA and the DCAA.
I have had to hire over four different law firms since the implementation of this plan to represent our company, and spent almost $100,000 in legal fees just to defend this program that, Senator, I believed inand I still believe in. I started out driving a truck, as I said, and I know what it can mean to have ownership of a company. And I know these 730 employees in our organization know what it means, because the record and the success of our company speaks for itself.
I would like to request that my statement be entered into the record, if I might.
Senator, the result of NASA's antagonism toward ESOP is this: we have had to terminate the ESOP for all of our people at the Langley Research Center. We are going to buy that stock back—at the value determined by the New York Stock Exchange, I might add, not the DCAA audit. These people are out of the ESOP program. The ESOP is basically frozen; I do not intend to sell any more stock until we can work this thing out. Nobody has told me that we have violated any regulation or anything.
We have done everything that we knew to do to make this ESOP program go, and make it successful. I can only add that this honorable committee, and you, Senator, could help all ESOP companies if you could just reaffirm that it is a viable vehicle for employee ownership, this ESOP program. I am not asking for any new laws or regulations or anything, but just that the Government itself, through its agencies like DCAA and NASA, could be made to understand that this is a justifiable program.
They say, well, you received money from the sale of your stock. Well, I could have received money from the sale of my stock to the company I originally started negotiating with and not have had any
I of these problems. Ít was only when the ESOP got involved that NASA started giving me such a hard time.
Even that, over half of the money that I would receive on the profit of the sale on my stock goes back to the Treasury through taxes.
Senator, I appreciate your letting me appear before this committee. Thank you very much.
The CHAIRMAN. Thank you very much, sir. Does one of your associates wish to say something?
Mr. CUNNINGHAM. Yes, sir. Mr. Personette is our executive vice president and CPA.
STATEMENT OF DAVID PERSONETTE, METROPOLITAN CONTRACT
SERVICES, INC. Mr. PERSONETTE. Yes, sir. I am executive vice president for Metropolitan Contract Services. I came to work April 1, 1978.
One of the most pressing problems Metropolitan had when I went to work for the company was $300,000 in accounts receivable from the Federal Government. I promptly got on an airplane and flew to Langley Research Center at Hampton, Va., to have a conference with the contract officer, with his legal counsel, and with the head of procurement at Langley to discuss that $300,000.
They told me at that time that the best way for me to get that money was to ask them for a token disallowance, but before I could do that, I had to prepare a cash-flow analysis for our cash needs for the coming year to prove to them that we needed that $300,000. They told me that that cash analysis should be submitted to the Defense Contract Audit Agency for their review and comments on it, and after that time I could come back to the people at Langley and ask for our moneyagain, on a token disallowance basis.
I went back to Houston, Tex., and called the Defense Contract Audit Agency and talked to Mr. Eugene Ballard, who is the head of all of the audits done on Metropolitan through the time-frame period. I asked for an appointment with him, so I could come down. He said I would be wasting his and my time.
He had never questioned who it was who had bought those products and never questioned who was involved in the training programs relating to the project.
As a related point, I got a decision the other day from Judge Dykus, administrative law judge, where those costs were awarded to the contractor.
I have talked to our bankers in Houston, Tex., who administer our employee stock option trust. They tell me that their experience with the DCAA has been that the auditors came out there and conducted their audit in a very unprofessional and unorthodox manner, and that they felt that at times they were being harassed by these auditors.
I feel like the DCAA is biased toward employee stockownership programs, or biased to our company, and I feel that they have con veyed that bias to all of the people at NASA, and anyone else that will give them audience.
I have made a thorough and complete study of NASA's disallowance of our $300,000 and all other costs relating to our employee stock option program. NASA's stated reason for disallowing our money: No. 1, they said that our agreement, our collective bargaining agreement, was not entered into as a result of arm's-length bargaining. Even though the Department of Labor has twice said it was entered into as a result of arm's-length bargaining, they requested a hearing from the Department of Labor. The Department of Labor went to all of the trouble to grant this hearing.
We showed up with our attorneys. The Department of Labor showed up. The labor unions showed up with their attorneys, only to find that NASA did not seem to have time to come to that hearing. NASA, in its continued harassment of our firm, has called a variance hearing on
our current wage determination with our union. Here we are, spending money since March 25, 1978, based on a new union agreement; we are off the job next Friday, and we do not even know if we are going to get reimbursed for those costs.
I think the NASA's challenge to our wage determination to the Department of Labor is unfounded and frivolous, and it creates a hardship on our company. NASA and the DCAA have challenged the stock value of our company as another reason for disallowing our costs in ESOP.
I personally feel it is outside of the scope of a DCAA auditor to determine or should even care—what price our employee stockownership trust pays for the stock it buys. I think he should maintain the scope of his audit to whether or not the company actually put the money in trust for those employees on an undiscriminating basis as to other employees.
But, since they did challenge our stock evaluation, I think that that challenge should be answered. They said that our earnings, our PE ratio of 8.9 times as opposed to 5.5 times, and other people in our industry were way in excess of the 5.5.
I personally challenge the qualifications of the DCAA and NASA to say why 8.9 is far in excess of 5.5.
They said our 1976 PE ratio, our 1976 per-share earnings, were only $4.24. What they failed to say in that report was that that earnings per share was $298,000 contribution to the employee stockownership trust. If they had included that contribution back into earnings, our earnings per share would have been $33 per share, much more in line with the stock evaluation by Mosely.
Our DCAA auditor says our stock is worth $22 a share. Well, sir, I can tell you as a certified public accountant that liquidating value of that company was in excess of $100 a share, and I will tell you, that is far in excess of $22 a share.
I think that NASA was biased, and they took that contract away from us because of that bias.
I will not take up any more of your time, sir. I would request that the rest of the discussion be entered as part of the record.
Thank you very much.
Mr. GUILD. Senator, we appreciate the opportunity to appear before the committee. I am Tom Page Guild, Jr., counsel for Metropolitan Contract Services.
Even though we are disillusioned at the loss of our contract resulting from an attitude, we feel, of bias by a Government agency, we are enheartened by this committee and its attitude, for the future of ESOP's, and for the future as having employees, such as Mr. Cunningham once was himself, owning his own company and subsequently remembering the other employees of his company and providing them an opportunity to be shareholders, and have a piece of the action. The CHAIRMAN. Well, gentlemen, we can pass laws up here. We have
, passed several of them now seeking to encourage employee stockownership. It should be clear on the face of it to anybody in the bureaucracy that when Congress passes at least five laws to encourage employee stockownership, the Government policy favors that. The Government looks with favor on it, and seeks to encourage it.
For any Government agency to penalize a company because they have an employee stockownership, or to shape its programs so that it works out that way, seems to clearly be in conflict with the legislative intent of Congress.
Now, most of these laws have a lot of latitude, giving the agency contracting officers some discretion as to what they are going to do and what they are not going to do. You can be sure that insofar as this Senator has any influence, we are not going to have the bureaucracy discriminating against companies because those companies have employee stockownership plans.
I thank you very much for your testimony here today.
[The prepared statements of Messrs. Cunningham and Personette E follow:]
STATEMENT OF KENNETH R. CUNNINGHAM METROPOLITAN CONTRACT
SERVICES, INC., HOUSTON, TEX. Honorable Chairman and Members of this distinguished Committee, I am honored and pleased to have this opportunity to appear before you and to present my experiences with the Employee Stock Ownership Plan.
My Company, Metropolitan Contract Services, Inc., started from a trucking and delivery contract with a major retailer in Houston, Texas in 1956. It prospered and grew to its present scope of serving customers in 20 cities and operate 327 trucks and trailers and employs 730 persons, and performs the Base Maintenance services for NASA-Langley Research Center.
Early in 1975, I had entered negotiations with a company to acquire my stock in Metropolitan. It was about this time that I was introduced to the Employee Stock Ownership concept by my Accountants and Attorneys. After careful review and consideration, it seemed that this was a good deal for everyone. I would receive cash for my stock over a period of years, the employees would receive beneficial ownership of the Company, and most important, I believed that the Company would accelerate its growth by better customer service and increased productivity. As the record will clearly show, this was exactly what happened.
I also owned and operated another Company, Metro Contract Services, Inc. Metro was engaged in government support services and served three NASA instal'ations at Johnson Space Center, Houston, Texas, Langley Research Center, Hampton, Virginia, and Marshall Space Flight Center, Huntsville, Alabama. Metro started from a contract at the Johnson Space Center, also in 1963, and grew and prospered along the same lines as Metropolitan.
July 1, 1975, Metropolitan set-up and implemented its Employee Stock Ownership Plan and appointed the Allied Bank & Trust Company, a large Texas chartered bank, to act as Trustee for the stock and the employees. We hired Rotan Mosle, Inc. to perform an independent evaluation of the value of our stock and to present their findings to our Board of Directors for action.
I would like to point out, at his time, that prior to this time I had never had any association, business relationship, or contact whatsoever with Rotan Mosle, Inc. My first experience with them and contact with them was at this time.
I was advised that Rotan Mosle, Inc. was highly professional and competent in their field and Members of the New York Stock Exchange, and therefore, one of the most qualified companies we could find to value our stock.
We also applied for, and received after making negotiations and making certain changes, an Internal Revenue Service determination that our Plan had been approved and was ready for implementation.
Senators, as the news spread that the employees were in fact partial owners of the Company, a marked improvement was noticed by all of our management personnel. We seemed to be getting a sprightful core to the organization, from the truck drivers all the way up to the Managers themselves. I suppose this was so because each one was an owner of the Company on a fair and impartial basis. Metropolitan, in fact, gained new contracts in Arizona, Nevada, major contracts in California. In fact, our volume since the implementation of this Employee