U.S. Points Finger at Univox Owner : Minority-Held Defense Firm Blames Government for Woes

Univox-California once ranked among the most successful minority-owned defense contractors in the nation, but now the South Central Los Angeles firm is in shambles.

John N. Grayson, sole owner of the company, angrily claims that he was “mugged” by the U.S. government after promises that it would help him operate in the white-dominated defense industry.

But U.S. Atty. Robert Bonner said in federal court documents that Grayson’s control of the firm was one of “incompetence and gross mismanagement” and violated numerous provisions of a $2-million government loan made in 1984.

Univox sought protection last month from its creditors under Chapter 11 of the U.S. Bankruptcy Code, precipitated by the Commerce Department’s Economic Development Administration seeking accelerated recovery of the $2-million loan, Grayson said.

The bankruptcy action, which has included the appointment of a trustee to take control of Univox’s affairs, culminates the decline of a company that was held up as an example of successful government efforts to assist small minority-owned firms.

The Small Business Administration had helped Univox for 15 years by making it eligible for certain contract awards without competitive bidding under a program designed to help minority-owned businesses. That status expired for Univox in 1985, setting off a precipitous decline in business and a financial crisis.

The company has 100 employees, down from a peak of 250. It is bidding for new business, without which it is unlikely to successfully emerge from reorganization under Chapter 11.

The government view of Univox, contained in a report by the Commerce Department’s inspector general, is that Grayson engaged in improper activities in his control of Univox and lived high off the government hog.

The report, written in connection with the Economic Development Administration’s loan to Univox, found “substantial evidence of excessive and questionable expenditures of funds.” The report went on to say that “of these expenditures, a substantial proportion were found to be of direct benefit to John N. Grayson, president of Univox.”

The inspector general’s report alleges that Grayson personally benefited from the sale and lease of a Quantel computer. Univox owned the computer, which was mortgaged to Bank of America. In September, 1984, Grayson personally assumed the Bank of America loan on the computer.

When Univox received the EDA loan, Grayson used $275,000 of it to pay off the B of A loan that was now his obligation, the report says. He then leased the computer back to Univox but did not repay the company for the personal obligation, the report goes on.

“He pocketed revenues and created the possibility of a substantial personal income tax benefit through the investment tax credit and accelerated depreciation on the computer,” the U.S. attorney’s office contended in court documents.

The report said Univox paid $485,253 in consultancy fees in 1984 and $573,038 in 1985, and that those amounts included unspecified fees that went to a firm in which Grayson was a principal shareholder. It also found $520,302 in loans by Univox to Grayson and other officers of the firm. And it found obligations on leases for a Washington town house and a Rolls-Royce. While Grayson does not dispute all of the facts in the report, he said they have been twisted to create a false picture and one that plays on racial stereotypes, especially regarding his leased Rolls-Royce.

“The only thing I took out of this company were those loans, and it is my company,” Grayson said in an interview. “I didn’t take any dividends. In 1984, the profit was $6 million when I made these loans. They were modest.”

“The Rolls was there before the EDA loan and they knew it,” Grayson said.

Frank DeGeorge, deputy inspector general, rejected that explanation in an interview, saying: “All I know is that the company had a Rolls-Royce, and there were substantial expenditures that were not acceptable to a defense contractor.

“The fact that he was doing something acceptable before the loan was agreed to does not make it acceptable after he got the loan,” DeGeorge said.

‘Common Practice’

Grayson said the transactions involving the computer were required by the EDA. “The computer loan was a situation where I had bought a computer and leased it back to the company. It is a common and advised practice for a small company.

“EDA wanted a security interest in the computer. In order for EDA to have a security interest in the computer, we had to pay off the loan. They insisted upon it in order to release the money for the loan,” he added.

The town house rental was a necessary business expense for an office, he said, because he spends 50% of his time in Washington.

Grayson has received substantial assistance from his many political connections in Washington, including from Rep. Mervyn M. Dymally (D-Compton), to whom Grayson has long been a political contributor.

Dymally, along with House Armed Services Committee Chairman Les Aspin (D-Wis.), has written a series of letters to Pentagon officials objecting to the phasing out of a major contract that had been Univox’s principal source of business.

Under Army contracts, Univox produced water purification machines, called ROWPUs (Reverse Osmosis Water Purification Units). Univox has built $75 million worth of ROWPUs under Army contracts issued to it as a minority-owned firm, without competitive bidding.

Grayson contends that he was originally promised $200 million worth of Army contracts to build ROWPUs but was illegally cut short by the Army when top-level officials decided to seek competitive bids.

Univox has twice bid on ROWPU contracts competitively and lost on both occasions.

“Their bids weren’t even close to the lowest,” said Col. Craig McNab, an Army spokesman. The bids received by the Army in 1985 and 1986 on ROWPU units dropped the price from the $116,000 that Univox was charging for each unit to $65,000 each, saving the government $11 million, McNab said.

But McNab added, “The ROWPU units that Univox built for the Army were perfectly fine, and I stress that.” Indeed, interviews with other Univox military customers indicate that, whatever other problems the company may have had, it built products that met with customer acceptance.

McNab said the Army decided to open the ROWPU contracts to competitive bids after the Small Business Administration “graduated” Univox from its special minority status.

Claim of ‘Conspiracy’

Grayson, with strong support from Dymally, said the Army never fulfilled the SBA’s plan to divert $200 million worth of business to Univox.

In a letter to Army Secretary John O. Marsh Jr., Dymally alleged in February that Army officials at Ft. Belvoir, Va., were engaged in a “conspiracy” that broke the law in terminating Univox’s ROWPU work.

In fact, the halt in Army orders for ROWPU units created a financial crisis that contributed to the EDA loan problems and ultimately to the Chapter 11 filing.

Dymally is seeking to have a share of $250 million worth of future ROWPU production diverted directly to Univox. The Army is planning to open those contracts to competitive bids.

Assistant Secretary of the Army J. R. Sculley last month directed the auditor general of the Army to investigate Grayson’s allegations. A report is expected shortly.