Latino-Owned Firm Profits From Loopholes : Minorities: Santa Ana-based Infotec has skillfully made use of provisions in the minority contract set-aside program. Its pact with the Air Force could become the biggest ever in the program’s history.

In a little more than two weeks, Infotec Development Inc., Orange County’s largest Latino-owned business, will graduate from the Small Business Administration’s minority contract set-aside program.

The program qualifies small businesses that are at least 51% minority-owned for no-bid government contracts. But Santa Ana-based Infotec, which has won more than $550 million in such contracts in the past decade, now has grown too old for the program under SBA rules.

But luckily for Infotec, the Air Force gave the company a big graduation gift. In August, the Air Force announced Infotec won a contract to supply computers to the military intelligence community. And although only $8.1 million is guaranteed, the sole-source contract could be worth $397 million to Infotec over five years--making it potentially the biggest award ever under the program, known as Sec. 8(a).

As such, the contract illustrates the success Infotec has had in making use of some of the legal loopholes in the Sec. 8(a) program, which was reformed by Congress in 1988 in the wake of the Wedtech scandal.

Consider the following:

* The contract limited participation to Sec. 8(a) companies with fewer than 750 employees. At times during the past year, Infotec appears to have exceeded that number. The SBA said it does not keep track of employment, but relies on annual work force averages submitted by companies. Infotec’s annual averages were below 750 workers.

* Although it’s been nearly a year since a law took effect requiring competitive bidding among Sec. 8(a) companies in their latter years of participation--and more than two years since Congress passed that law--Infotec still got the contract on a sole-source basis. The reason? The SBA exempted Infotec from the rule because negotiations began on the Air Force contract in June, 1989--four months before the law took effect. But the final contract award was not made until August, 1990.

* The Air Force classified the contract as a “communications-manufacturing” award. This was a key decision since this category does not limit participation based on sales. If it had been labeled “computer services”--a part of the Air Force contract--Infotec would have been ineligible, since that category limits participation to firms with sales under $7 million.

* Under the amended law passed by Congress in 1988, companies were limited to nine years participation in the Sec. 8(a) program. The SBA, however, allowed firms already in the program an 18-month transition period. Thus, Infotec has been able to stay in the program an additional eight months, enabling it to win its largest contract ever.

* Sec. 8(a) is designed to help small, minority-owned businesses gain a share of government work while learning to compete effectively. Under the amended law, the aim is to have 75% of a participant’s contracts awarded on a competitive basis at the time of graduation. Infotec was not covered by the new law, and only 30% of its contracts were won on a competitive basis this year.

Infotec officials say their success has simply been the result of hard work.

“We have been very conscientious about pursuing these (Sec. 8(a)) opportunities and put a lot of effort into securing the contracts and delivering to the customer the services that we contract for,” said J. Fernando Niebla, chairman and majority owner of Infotec. “That has given us a good reputation.”

SBA and Air Force officials said that Infotec has complied with the law and received no special favors. Erline M. Patrick, associate administrator for the SBA and overseer of the Sec. 8(a) program, said any criticism of Infotec is tantamount to attacking the program for being too successful.

“That’s totally barking up the wrong tree,” she said.

Not everyone agrees.

“Nothing has been done illegally,” said one knowledgeable source, who is familiar with the Sec. 8(a) program and the Infotec case, who asked not to be identified. “Still, this is not what Congress had in mind when it wrote this law. By any stretch of the imagination, $400 million is not small business. We know that minorities need assistance, but is it a wise use of taxpayer money to give this amount of money without competitive bidding?”

“The dependence on the program is the type of thing most of us don’t want to see exist,” said John Motley, spokesman for the National Federation of Independent Business in Washington. It is a case of good intentions gone wrong.”

With 700 employees today and an estimated $64 million in sales, Infotec has grown well beyond the level of most companies that qualify for favored status as minority contractors.

Under the award from the Air Force Electronic Systems Division at Hanscom Air Force Base in Massachusetts, Infotec will customize computer workstations and provide technical service for the military intelligence community. Only $8 million of service-related revenue is guaranteed. But both the Air Force and Infotec officials said the company should receive the bulk of the $389-million delivery part of the contract over the next five years.

For several years, Infotec has been on the verge of “graduating” from eligibility for the Sec. 8(a) program because of its large work force. The size limitations vary, depending on the type of contract.

The Air Force contract was limited to Sec. 8(a) firms with fewer than 750 employees, under the SBA rule for communications manufacturing contracts, said Al Hart, Air Force deputy director for small business at Hanscom.

Infotec’s employment numbers are murky. When first questioned, Jim Cradduck, Infotec’s senior vice president for corporate business development, said the company has had as many as 850 employees.

But in September, 1989, and March, 1990, Infotec laid off 180 employees in Colorado Springs. The employees were working on an expiring contract in which they trained Air Force officers to operate satellite systems. Infotec thus went under the 750-employee limit.

The SBA said Infotec qualified, based on average annual employment reports the company submitted when it applied for the contract. The SBA said it does not monitor the work force on a current monthly basis. And a company may still receive a Sec. 8(a) award even if it exceeds the employment limit at the time of an award as long as its average annual employment--going back a year from the award date--is under the employment limit.

After the question of employment levels was raised, Niebla contradicted Cradduck and said the company has never had more than 750 employees. Niebla declined to provide monthly reports on employment.

Infotec also benefited from another ruling--the contract’s classification. Since the project involved the integration of computer hardware, the contract was labeled as communications manufacturing rather than computer services, Hart said. The guaranteed portion of the contract is computer services.

Under computer services, the SBA limits awards to companies with sales under $7 million, but there is no dollar limit to the level of sales a company can have under communications manufacturing and still be eligible, Hart said.

Hart said that if the Hanscom contract were awarded now, it would have to go through competitive bidding, as required under the amended Sec. 8(a) law. But Infotec escaped that requirement because it first began negotiating the deal in June, 1989, when sole-sourced contracts were still allowed by the SBA.

He said the Air Force evaluated another Sec. 8(a) company, Network Solutions Inc. in Herndon, Va., before deciding on Infotec on May 31, 1989. But he said the award was a sole-source contract for which Infotec did not have to compete under sealed bids.

“It is unusual for a contract to be this large,” said Hart. “Sole-source awards were eliminated by Congress last session. We could not award this if it were proposed now.”

Niebla contended that the contract is competitive, despite its sole-source label. Niebla said the Air Force can decide it does not want to buy Infotec’s equipment for future portions of the contract and put them out to bid.

“There’s no guarantee it will be given to us,” Niebla said. “It’s wrong to say we have gotten a $400-million contract. We are going to compete for every check. The Air Force doesn’t have any obligation to buy from us. They have the choice to come to us if our price is competitive, or they can put it out to bid. I don’t have a lock on anything. All I have is the opportunity to try to sell individual computer systems piece by piece. “

Niebla acknowledged that the company will have a marketing edge in winning the Air Force’s business related to the contract. He also said the company plans to book about half of the $397 million as expected revenue.

Patrick said the SBA wanted to leave contractors time to plan for a transition to the new regulations regarding competition, so she decided to allow sole-source contracts under negotiation before Oct. 1, 1989, to proceed with awards. Since Infotec began negotiations in June, 1989, it was allowed to complete the contract negotiations.

“There are a number of large firms that participate in the program. Infotec has not violated anything, and they should be proud they have won this award,” she said. “The negotiation procedure takes a long time to complete. Had we not put in place the Oct. 1 deadline, the number of awards this year would be far less. “

On June 9, 1980, Infotec joined the Sec. 8(a) program, and in March, 1981, it received its first Sec. 8(a) award from the Department of Interior. Infotec’s original graduation date under the old law was in 1986, and the company received the maximum extension of three years for a graduation date in April, 1989.

The new law limited program participation to nine years. But it included a provision that allowed those already enrolled to remain in the program another 18 months. Thus, the SBA allowed Infotec a transition period ending on Oct. 16, 1990. At the time, Infotec will have been in the program nearly 10 years.

Infotec hasn’t always enjoyed advantages. When Niebla mortgaged his house and co-founded Infotec Development Inc. 12 years ago, he knew what the fledgling defense engineering and consulting company would be up against.

“At the outset, there was a sense of disbelief that a minority company could work in the high-technology area, and that turns into not getting the opportunity to compete,” he said. “But once we started getting a track record, that changed.”

Niebla, an 18-year veteran at Rockwell International Corp., saw a niche for a company that could help aerospace companies and government agencies run mission-control centers for space satellites.

The company’s first breakthrough contract was a $10,000 consulting contract to help International Business Machines Corp. bid for a contract to build a satellite control center. IBM won the contract, and Infotec’s share was $4 million.

Only after it was established for two years did Infotec join Sec. 8(a) in 1980, Niebla said. “(Sec. 8(a)) was a useful marketing tool when we joined it,” he said. “It gave us the opportunity to present our technical credentials where we otherwise would not have had the opportunity.”

But Sec. 8(a) became a marketing liability after a national scandal befell the program in 1986. Wedtech Corp., a South Bronx defense company, was caught posing as a minority-owned business and bribing members of Congress so it could win millions of dollars in no-bid government contracts.

The scandal spawned a number of criminal fraud convictions, stained the reputation of the SBA, and led Congress to overhaul the Sec. 8(a) program in 1988. The new law set standard time limits for program participation, requires competitive bidding where possible in the latter years of a company’s participation, and imposes stiffer fines for fraud.

“Wedtech made it very difficult for the other companies (in Sec. 8(a)),” said Cradduck. “We had to justify everything we did to everybody after Wedtech.”

In contrast to Wedtech, SBA officials point to Infotec as a one of Sec. 8(a)’s best small-business successes. Infotec won the SBA’s award for Prime Contractor of the Year in 1986, and a wide range of sources familiar with its work praise the firm’s technical competence.

“Wedtech did undue, unfair damage (to the program’s image.) But there are many fine firms like Infotec that are succeeding,” said Patrick, the No. 2 official within the SBA.

Patrick said Infotec will continue to face obstacles unique to minority contractors, and she noted that it will continue to compete with defense contractors that are much larger than it rather than other small businesses. In 1986, about one in five Sec. 8(a) graduates were going out of business because they could not make the transition to competitive bidding.

“One disparity in the public’s perception of these Sec. 8(a) firms is that once the firms become too large for the program, they are huge companies,” she said. “But even after they get out, they are still not as big as their competitors and they can have a harder time getting financing.”

Ralph Thomas, executive director of the National Assn. of Minority Contractors in Washington, D.C., a 3,500-member trade association, also defended Infotec and the Sec. 8(a) program.

“The majority community gets upset whenever it looks like a minority contractor is making it, but we don’t want small minority contractors to remain small,” he said. “The point of minority contracting is to bring minority contractors into the mainstream. Getting this contract will make this company a competitor with the big boys. It’s an investment in the future.” Still after a decade in the program, only 30% of Infotec’s business comes from non-Sec. 8(a) competitive bidding. It should be higher, said Michael Beltramo, a defense consultant and president of Beltramo & Associates in Los Angeles.

The new law requires that firms in their last year of participation in the program position themselves for competition after graduation by winning a minimum of 75% of their revenues from non-Sec. 8(a) sources. The requirement applies only to new participants, not Infotec.

Niebla said the company competed without government help for two years before joining Sec. 8(a), and it can do so again. Nearly all of the contracts the company is bidding upon now are competitive, company officials said.

The company periodically receives acquisition offers, but Niebla said he has no qualms about keeping the company independent and he hopes to take Infotec to $250 million in sales.

Revenues for the year ending Sept. 30 will be about $64 million, up 20.7% from $53 million a year earlier. Though he declines to disclose specific net income figures, Niebla said earnings are in the 3% to 6% range and the firm has been profitable since its inception.

But Niebla knows the firm will be facing tough competition in years ahead in the defense business. In the transition, the contract from the Air Force will provide some relief.

“We think it’s going to be a lot more difficult in the whole business environment,” Niebla said. “We expect to work hard for any work we get.”

INFOTEC DEVELOPMENT INC. AT A GLANCE Headquarters: 3611 S. Harbor Boulevard, Santa Ana Business: Customized off-the-shelf computer systems for military applications; designs and develops engineering software and satellite mission control systems; trains personnel to use computer systems; engineering systems for aerospace and military weapon systems. Top Official: J. Fernando Niebla, CEO Employees: 700, including 100 in Orange County Founded: 1978 Revenues: Estimated $64 million for years ending Sept. 30, 1990 Revenue: In millions of dollars (fiscal year ends Sept. 30) ‘86: $19.8 ‘90: $64.0 Source: Infotec development Inc., U.S. Small Business Administration INFOTEC’S MAJOR CONTRACTS 1990

A SBA Section 8(a) contract from the Air Force that could be worth up to $397-million over five years. The award is to supply computer equipment and services for the military intelligence community.

A $10-million competitive contract from the Department of Interior to provide a geographic coordinates database. 1989

An $11.4-million competitive contract to develop hardware, software and test equipment for Rockwell International’s military global positioning satellite program. 1988

A $30-million Sec. 8(a) contract to provide the Navy with electronic warfare software support. 1987

A $14-million Sec. 8(a) contract from the Department of Interior for mapping and information services. 1985

A $47-million Sec. 8(a) contract to train Air Force officers to operate a satellite control center.

A $12-million Sec. 8(a) contract to develop a computer center and software for the Department of Energy.