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less profit, because we want to keep our contract, even though, we know, we might be able to do it at a more expensive price, we want to keep it.

And even with that fact, as I say, it makes it entirely and completely suspicious, Senator, when they make those kinds of decisions. And I appreciate your allowing me to come on over here and visit with you and I hope you will allow me to come back sometime.

The CHAIRMAN. It seems to me that the answer is fairly obvious. But if Metropolitan in this case had put the stock in for the employees at an inflated price, that should have just been corrected by an IRS audit.

Representative Matrox. The IRS should have done that.

The CHAIRMAN. The Internal Revenue Service should have simply imposed its "prohibited transaction” rules insofar as the value of the stock exceeded what IRS decided what the stock was worth.

But for NASA to take the contract away from them, in my judgment, would be an utter outrage when it is the low bid.

Representative Mattox. That is right.

The CHAIRMAN. And that is something that I think we need to get into.

Now, if every time a company bids on a piece of Government bid, the company with the low bid-if they are afraid that NASA is prejudiced against companies which establish an employee stock ownership plan and give their employees a piece of the action—then I would see why they would be afraid to have a stock ownership plan.

That really places the thing in a light that, minus your testimony, I would not have understood, and I want to thank you very much for bringing that to our attention.

Representative Matrox. Thank you.

The CHAIRMAN. I regret that there is nothing that we can do at this point to rehabilitate the company for what they have lost by this conduct, but maybe-assuming that they are right about the matter after we further study it—that we can prevent that same mischief from happening in the future.

Representative Mattox. I think we can prevent that. I think that NASA has an obligation to this company now to take a little closer look and see if they had better not reevaluate some of the bids that have taken place on some of these other jobs and I think, frankly, that you and I have a responsibility to take a closer look at NASA's budget, too, if they can afford to waste this $400,000.

The CHAIRMAN. Well, now, I am familiar, Mr. Mattox, with situations where corporations who did not think that the employee stock ownership idea was a good thing at all, but who decided that since the Government was providing a tax credit to encourage it, they would go along and give it a try, where they were not enthusiastic.

You heard, at least yesterday we have testimony by Mr. Reed Thompson testifying for the utility companies and stating that they like the idea of employee stockownership plans. They think it is good. It is a constructive forward movement and it improves relationships between management and labor.

Now, with all of the support employee stockownership has received in the past 2 days, it is very discouraging to find a Government agency like NASA sitting there and saying they can throw people's bids out because they have a stockownership plan—they don't admit it is because of the plan, mind you, but they look at the plan to see if they can find some minor technicality to quarrel about and justify a decision to throw the bid out because they do not like the plan, or the way it is being administered, and that was never intended by Congress.

appreciate your testimony. Representative Matrox. Thank you.

The CHAIRMAN. Next, we will hear from Mr. Jim Rice, president of Oklahoma Aerotronics, Inc.


INC. Mr. Rice. Mr. Chairman, I very much appreciate the opportunity to appear before you this morning. I would like to introduce, if I may, Mr. Art Miller at my right who is the President of Met Fab of Texas, Inc., and he has seen fit to associate his company with ours.

Our use of the ESOP over the past 7 years, I think, demonstrates quite well the very special use of the ESOP and its value to a small company which is owned and controlled by disadvantaged people—by people who are socially and economically disadvantaged.

Oklahoma Aerotronics was founded in 1964 with experienced management working within a total community effort to try to overcome the chronic social and economic deprivation of our entire area. This area had been spiraling downward socially and economically ever since our once very-prosperous coal mines closed down in 1929 to 1932 and a big depression that hit about that same period.

We have had, toward this effort, $280,000 of local equity, capital. We had $512,000 of loans and loan guarantees through the Economic Development Administration—which, incidentally, is paid off in full this year—and we have had the absolutely vital and essential assistance of the Small Business Administration in their 8(a) program.

From the introduction of the ESOP in 1971 up to the present, our company has shown a change in total asset increased from $750,000 to $1 million. Net worth has gone from $500,000 negative to $2.5 million positive.

Retained earnings from $1 million negative to $1.25 million positive. Long-term debt from $1.25 million reduced now to less than $50,000.

In 1971, we were a marginal operation. Today, the operation is profitable. We have gone from 35 employees in 1971 with a quarter of a million payroll to 340 employee-owners today with approximately $3.3 million payroll.

If we are given the necessary 2 more years to complete the Small Business Administration's approved 8(a) business plan that we have, we will then have a $5 million payroll into 500 employee-owners. That is 500 families who will no longer be disadvantaged. They will be in the American mainstream of our economy.

Our employee ownership, exercised through the ESOP, has grown from 55 percent over the fiscal years 1971 to 1976 period to 61 percent in fiscal year 1977, 68 percent in fiscal year 1978, and, the Lord and SBA being willing, it will be approximately 100 percent before 1987.

Like every developing company, whether it is disadvantaged or not, Oklahoma Aerotronics has had to recognize and to cope with some real hard, solid facts. For example, No. 1, it normally requires 10 to 20 years

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to develop a competent manager. He is hard to find. He can ask for and get good jobs at good pay and by any generally accepted definition, a presently competent manager is not presently disadvantaged.

No. 2, a presently competent management is prerequisite to the future success of every company. Again, disadvantaged or not.

So this means, No. 3, that the disadvantaged 8(a) company, owned and controlled by socially and economically disadvantaged people must, just like every other company, have presently competent, hence, presently nondisdavantaged management before it has any hope of future success.

Now, SBA has failed to really understand these facts, I think. And this, in considerable measure, may account for the less than one-half of 1 percent success rate which has been experienced by disadvantaged companies in the 8(a) program. I think that SBA's recognition of the problem is indicated by its report to the Congress in 1975 that "The few 8(a) companies meeting with success are precisely those owned and controlled by 'disadvantaged persons having characteristics, attributes, and economic and social backgrounds found among the nondisadvantaged."

Further, by the statement in the same report, that any attempt to limit ownership in the 8(a) companies to persons who were both socially and economically disadvantaged would "tend to limit the participation in the 8(a) program to those with little, if any, true possibility of success in the marketplace."

But this observation apparently merely suggested to SBA that the 8(a) eligibility requirements be changed to include enough "affluent disadvantaged." That is, enough so-called disadvantaged people who actually have the characteristics of the nondisadvantaged.

And this, hopefully, would raise the 8(a)'s success rate.

Well, it has not worked of course, and on the other hand, I think it has contributed, in part at least, to the abuses so widely criticised and publicized by the Subcommittee on Federal Spending Practices.

But SBA's response to these criticisms again seems, I think, largely cosmetic. For example, to increase business development expense, to strengthen management assistance all very good, of course, but it does not change the harsh fact that management actually requires a 10- to 20-year incubation period before you can have a company with any hope of success.

And of course, again, the renewal of the old efforts to change eligibility requirements, this time by setting up some hereditary post hoc categories of disadvantaged which are labeled presumptive disadvantaged, such as black, female, veteran.

Now, such categorization by group violates the dignity and the integrity of an individual, and historically there simply is no other political action that is no divisive. It splits splinter group against group in bitter fratricidal quarrels and, meantime, the ESOP concept offers a perfectly valid, widely applicable and now a proved methodology--proved by Oklahoma Aerotronics—for dealing with this precise problem.

Disadvantaged ownership and control as exercised through the ESOP allows for competent, nondisadvantaged management while, at the same time, providing full opportunity for the disadvantaged employee-owners to acquire management skills at affordable com

pany costs and then to compete on an equal footing for the management jobs in their own company.

In Oklahoma Aerotronics for example, 38 percent of our management and professional jobs today are held by people who have come up from the hourly paid ranks in Oklahoma Aerotronics.

Now, certainly this pilot project staged by us over this last 7 years, I think it demonstrates the powerful leverage of a carefully designed ESOP. However, Oklahoma Aerotronics had highly vocal opposition from a minority in the Small Business Administration when we first introduced the SBA to this concept back in 1970.

This opposition has subsequently increased. It has increased in direct proportion, actually, to the increasing success of our demonstration.

Really, I suppose that this is not surprising, bcause the ESOP is innovative and it is a characteristic of every bureaucracy, I think, to oppose to the death anything which is contrary to preconceived conventional notions or different, or upsetting to habitual routine. As a matter of fact, the more ineffectual a given program, as unfortunately 8(a) has been so far, the more violent and more vocal the opposition to any change. And, most especially, also, if any suggestion for change originates outside the bureaucracy.

Oklahoma Aerotronics' successful demonstration of the ESOP has actually placed its own survival now in dire jeopardy. This foreshadows a tragedy for our 340 families and a tragedy for the hopes and plans, the initial progress, of our entire community. Our people in Oklahoma simply cannot understand it. Oklahoma Aerotronics is theirs—it is their company. It is their hope for the future.

This action, SBA, truly it is the taking and the slaughter of the poor man's only lamb for the rich man's table and it is not right.

Perhaps even more, the implications of this attitude, of this mindset for future ESOP applications for the entire 8(a) program and most especially for the newly proposed, and I think extremely vital and important Minority Business Enterprise Act, these implications, in the long-run, may be even more tragic.

Mr. Chairman, I do deeply appreciate the opportunity to appear before you and I will try to answer any questions which you may have.

The CHAIRMAN. It just occurs to me that there may be some reason why SBA is antagonistic toward your company and want to get rid of it and might see the ESOP as an excuse to do it. But I must say that, if that is the case, I am simply not in sympathy with SBA on that. I thought I liked SBA and thought it was doing some good work. As a matter of fact, I helped establish the Small Business Administration.

But what you are trying to do with your employee stock ownership plan is inspiring—the idea of trying to give disadvantaged people an opportunity to be productive and to participate fully in this economy of ours is inspirational and we ought to be helping you. We should not be doing anything to make life more difficult for you. I am one Senator who is going to continue to push for employee stock ownership and prevent agencies like SBA from negating our efforts in this regard.

Mr. Rice. We cannot understand it, Senator, but of course, we have appealed this SBA action, but unfortunately, regulatory law is a little different from criminal law. A criminal, you know, if he appeals his case, there is a stay of execution until the appeal takes place. However, under the regulatory law, you are executed first, and then if the court appeal is in your favor, this is a legal justification then for an attempt to resuscitate

you. The CHAIRMAN. Thank you very much, sir. We will look into this and try to be as helpful as we can.

Mr. Rice. Thanks a lot.
[The prepared statement of Mr. Rice follows:]


Utilization of an Employee Stock Ownership Program by a Disadvantaged

Business Concern


1. This report discusses the role of the Employee Stock Ownership Program (ESOP) in helping disadvantaged firms—i.e., firms majority owned and controlled, by socially and economically disadvantaged people to become selfsupporting and competitive. The experience of Oklahoma Aerotronics, Inc. (OAI) is cited, a 7-year pilot project demonstrating : (a) The advantages which the ESOP offers for this purpose. (b) The opposition to the ESOP concept within some Government agencies.

2. OAI was founded in 1964, with competent professional management coopted into a total-community effort to overcome the chronic (since 1930) social and economic deprivation of the area.

3. The OAI Employee Trust was established in 1971. Employee ownership through the ESOP has grown from 55% for FY 71-76 to 61% for FY 77; it will be 68% for FY 78, substantially 100% before 1987.

4. Since 1971, OAI has grown from a marginal to a profitable operation : from 35 employees to 340 employee/owners; from $0.25 to $3.30 million payroll. Given two more years, it will have a $5.0 million payroll, into 500 employer/owners and their families who are no longer disadvantaged, having joined the advantaged main stream.

5. The ESOP is uniquely designed to provide, for employee/owners having adequate drive and ability, an inside fast-track-up in management. To date, 38% of OAI management and professionals have moved up from OAI hourly ranks. Increasingly, employee/owners at all levels accept individual responsibility for company performance.

6. Disadvantaged companies, like all others, must face these hard and unavoidable facts:

(a) It normally takes a minimum of 10–20 years beyond high school to make a competent general manager. By generally accepted definition, presently competent managers are presently nondisadvantaged.

(b) Presently competent management is prerequisite to future success.

(c) Therefore, a company owned and controlled by the disadvantaged, must have non-disadvantaged management before having any hope of success.

7. Disadvantaged ownership, exercised through an ESOP, allows for competent non-disadvantaged management from the beginning, while providing full op. portunity for willing and able disadvantaged employee/owners to acquire management skills and compete for management jobs in their own company.

8. SBA failure to cope with (6) above largely accounts for the less-than32-of-1% success rate of the 8(a) Program. It explains the limitations for 8(a) of short term “management assistance”. I projects the futility of current efforts to diddle the 8(a) eligibility requirements.

9. OAI has demonstrated the value of the ESOP to a disadvantaged firm. But the concept is innovative, upsets routines, hence is anathema to the bureaucratic mind-set.

10. SBA has elected to reject the ESOP concept and to “terminate with extreme prejudice” the ESOP demonstrator. The consequences, for OAI and for Hartshorne, Oklahoma, are tragic. The implications for the entire 8(a) Program, and for the newly proposed Minority Business Enterprise Act, are equally serious.

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