Pointe Precision, LLC, No. 4466 (December 18, 2001)
Docket Nos.  SIZ-2001-09-07-35 (RMD), SIZ-2001-03-30-09

                    UNITED STATES OF AMERICA
                  SMALL BUSINESS ADMINISTRATION
                 OFFICE OF HEARINGS AND APPEALS
                        WASHINGTON, D.C.


                                       )  
SIZE APPEAL OF:                        )     Docket Nos.  SIZ-2001-09-07-35 (RMD) [1]
                                       )                  SIZ-2001-03-30-09
                                       )
Pointe Precision, LLC                  )     Decided:     December 18, 2001
                                       )
     Appellant                         )
                                       )
Solicitation Nos.                      )
N68836-00-P-1527 and F34601-00-M-0719  )
                                       )
Defense Contract Management            )
Agency                                 )
DCM Rockford                           )
Rockford, Illinois                     )
                                       )


                                
                           APPEARANCES

                     Jenifer D. Binder, Esq.
                      First Law Group S.C.
                          for Appellant
                                
                   Christopher M. Curran, Esq.
                      Karie Jo Barwind, Esq.
                         White & Case LLP
            for Intervenor Woodward Governor Company


                             DIGEST

The  contractual relationships rule may be applied to a  totality
of the circumstances analysis even though the challenged firm and
its alleged affiliate have an arm's length relationship.

The contractual relationships rule is applicable to a totality of
the  circumstances analysis where sales to the alleged  affiliate
accounted  for  86% - 88% of the challenged firm's revenues  over
three years.

A  continued 26% ownership interest in a newly organized  concern
by  its  alleged affiliate clearly counters the argument  that  a
clear fracture between the two firms has taken place.

Where  the  challenged  firm  has status  as  a  newly  organized
concern,  is 26% owned by its alleged affiliate, has "contractual
relationships"   with  that  firm,  and  has   other   connecting
relationships  with it including a bailment of  equipment  at  no
charge, promised significant work, accelerated payment terms, and
"essential"   financial  guarantees,  the  challenged   firm   is
affiliated with its alleged affiliate under the totality  of  the
circumstances.

General  affiliation between two firms occurs where the operative
facts   relate   more   to  the  firms'  ownership,   management,
contractual relationships, or other factors, than to  a  specific
procurement,  although facts relating to a  specific  procurement
also may be relevant.

                                
                            DECISION

HOLLEMAN, Administrative Judge:

                          Jurisdiction
     
     This appeal is decided under the Small Business Act of 1958,
15 U.S.C. Section 631 et seq. and 13 C.F.R. Parts 121 and 134.
     
                             Issues

     Whether the contractual relationships rule may be applied to
a  totality  of the circumstances analysis, where the  challenged
firm and its alleged affiliate have an arm's length relationship.
     
     Whether the contractual relationships rule is applicable  to
a  totality  of the circumstances analysis, where  sales  to  the
alleged  affiliate  accounted for 86% -  88%  of  the  challenged
firm's revenues over three years.
     
     Whether  a  continued  26% ownership  interest  in  a  newly
organized concern by its alleged affiliate counters the  argument
that a clear fracture between the two firms has taken place.
     
     Whether  the challenged firm is affiliated with its  alleged
affiliate  under  the  totality of the circumstances,  where  the
challenged firm has status as a newly organized concern,  is  26%
owned  by  its alleged affiliate, has "contractual relationships"
with  that firm, and has other connecting relationships  with  it
including  a  bailment  of  equipment  at  no  charge,   promised
significant  work,  accelerated payment  terms,  and  "essential"
financial guarantees.
     
     Whether  general affiliation between two firms occurs  where
the   operative  facts  relate  more  to  the  firms'  ownership,
management, contractual relationships, or other factors, than  to
a specific procurement.
     
     
                         I.  BACKGROUND

                      A.  Procedural Facts

     On  November 21, 2000, the Contracting Officer (CO) for  the
Defense Logistics Agency, Defense Contract Management Agency,  in
Rockford,  Illinois, protested the small business size status  of
Pointe  Precision, LLC (Appellant).  The CO referred specifically
to  Contract Nos. N68836-00-P-1527 and F34601-00-M-0719, on which
Woodward Governor Company (Woodward) is the prime contractor  and
Appellant is a subcontractor.
     
     The  CO asserted that, notwithstanding Woodward's claim that
Appellant  is an independent small business subcontractor,  prior
Defense Contract Audit Agency (DCAA) reviews of Woodward indicate
Appellant  appeared to be Woodward's affiliate.  The CO  referred
his protest to the Small Business Administration's (SBA) Area  IV
Office  of  Government  Contracting in  Chicago,  Illinois  (Area
Office), for a size determination on Appellant.
     
     On  November 29, 2000, the Area Office informed Appellant of
the  protest,  and requested Appellant to submit a completed  SBA
Form  355,  a response to the CO's letter, and other information.
The  Area  Office  informed Appellant  that  it  would  determine
Appellant's  "current  size"  using  North  American   Industrial
Classification  System (NAICS) codes 332710, Machine  Shops,  and
332721,  Precision  Turned  Product Manufacturing,  each  with  a
corresponding  500-employee size standard.   Appellant  submitted
the requested information.
     
     On  February  27,  2001,  the  Area  Office  issued  a  size
determination that concluded Appellant is other than  small.   On
March 30, 2001, Appellant appealed the size determination to this
Office.   On  May 23, 2001, the Administrative Judge vacated  the
February 27th size determination and remanded this proceeding  to
the  Area  Office  for  further  investigation  and  a  new  size
determination  on  Appellant.  Size Appeal of  Pointe  Precision,
LLC, SBA No. SIZ-4434 (2001) (Remand Order).
     
     On  August  6,  2001,  the Area Office  issued  a  new  size
determination  in  response to the Remand  Order.   It  concluded
Appellant  is  affiliated with Woodward  under  the  totality  of
circumstances  and  therefore  is other  than  small.   Appellant
received the size determination on August 14, 2001, and,  through
counsel,  filed  the instant appeal, together with  a  motion  to
admit  attached new evidence, on September 7, 2001.  On September
27,  2001, Woodward, through counsel, moved to intervene in  this
matter in support of Appellant.
     
                            B.  Facts

     The Area Office file includes Appellant's completed SBA Form
355,   its   response  to  the  protest,  its  audited  financial
statements  for 1999 and 2000, its Operating Agreement,  and  its
employee  census; Woodward's Form 10-K for 2000, the  DCAA  audit
report,  Woodward's response to that report; and other documents.
This  information shows Appellant, by itself, is well  below  the
applicable size standard, and that its alleged affiliate Woodward
exceeds the size standard.
     
     Appellant  was  organized as a Wisconsin  limited  liability
company  in  1995,  after Woodward's decision, made  sometime  in
1994,  to  cease  operations  at its  Stevens  Point,  Wisconsin,
facility,  and  to  outsource the parts  it  manufactured  there.
Woodward  designs,  manufactures,  and  services  energy  control
systems  and  components for aircraft and industrial engines  and
turbines.
     
     Among  the  Woodward employees who worked at Stevens  Point,
and would lose their jobs there in the restructuring, were Joseph
Kinsella,  the general manager of the aircraft controls  division
and  support  facilities in Stevens Point; Jeffery Lemmenes,  the
accounting  and  production support manager  for  the  hydraulics
turbine   control  division;  and  Thomas  Osowski,  manager   of
rotational manufacturing operations.  Messrs. Kinsella, Lemmenes,
and  Osowski prepared a business plan for a new company in  early
1995  and,  with Woodward's representative, established Appellant
on June 9, 1995.  Appellant's Operating Agreement also references
a  May 19, 1995, Memorandum of Understanding (MOU) among the four
parties.
     
     Under   the   Operating  Agreement,  Woodward  and   Messrs.
Kinsella, Lemmenes, and Osowski became Appellant's Members,  each
with  one  vote  on the Management Committee.  In  the  event  of
deadlock,  the  vote  would be weighted  in  proportion  to  each
Member's  ownership  interest.   The  Operating  Agreement  vests
authority  for  matters  in the ordinary course  of  business  to
Messrs.  Kinsella,  Lemmenes, and Osowski, but  certain  actions,
such as borrowing money, admitting new Members, and amending  the
Operating  Agreement  require unanimous  approval.   Each  Member
shares profits and losses according to ownership interest.
     
     In  exchange  for  their ownership interests  in  Appellant,
totaling 74%, Messrs. Kinsella, Lemmenes, and Osowski made  their
capital  contributions in cash.  Woodward's capital contribution,
for the remaining 26% interest, was in property and services.
     
     Woodward's services to Appellant included guarantees to  the
financial   institutions  providing  Appellant's  financing,   as
described  in  the MOU, to be maintained for not less  than  five
years, commencing July 1, 1995.  The MOU refers to these as  "the
essential financial guarantees necessary to establish" Appellant.
One  guarantee  was of a $250,000 note payable  to  the  City  of
Stevens Point Community Development Authority (CDA).
     
     In  light  of  these financial guarantees, the  MOU  forbade
Appellant   from   undertaking  long-term   commitments   without
Woodward's  permission,  limited  Appellant's  indebtedness,  and
required  certain performance and asset standards.  If  Appellant
fails to meet these standards, Woodward has the right to step  in
and  manage Appellant and, during the first two years, to buy out
the  other  Members'  interests.  These rights  cease  after  the
installment  contract  is  paid, Woodward's  financial  guarantee
expires, and an equipment lease expires.
     
     Also under the MOU, Woodward would sell to Appellant certain
machines and equipment, payment to be made over three years, with
a  balloon  payment at the conclusion of the term.  In  addition,
Woodward  would bail to Appellant certain other machinery  at  no
charge,  unless Appellant uses it to produce parts for  customers
other than Woodward, in which case Appellant would pay Woodward a
market-based hourly charge.  The bailment would be for two years,
with an automatic one-year renewal.  The book value of the bailed
machinery was over one million dollars in 1995.
     
     Also  under  the MOU, Woodward would guarantee  Appellant  a
significant  number of hours of work over its first  three  years
(130,000, 110,000, and 80,000 hours, respectively, for the first,
second,  and  third years), contingent on Woodward's attaining  a
certain   level   of  sales  in  its  aircraft   business,   with
proportionate adjustments according to actual sales.   Appellant,
in return, promised to provide those hours, and accepted the risk
of a downward change in Woodward's aircraft component sales.  For
the  first  two  years,  Woodward would  pay  for  work  done  by
Appellant under accelerated payment terms.  Woodward also offered
to lease to Appellant the Stevens Point facility.
     
     Mr.  Kinsella  became  Appellant's president,  Mr.  Lemmenes
became its vice president of finance and administration, and  Mr.
Osowski   became   Appellant's  vice  president  of   production.
Appellant  hired approximately 90 of Woodward's former employees,
leased  approximately  25%  of the Stevens  Point  facility  from
Woodward,  and  began production of manufactured component  parts
for Woodward's aerospace activities, on an ongoing purchase order
basis.  Appellant also has been developing other product lines.
     
     Significant  events  following the  formation  of  Appellant
include the following:
     
     (1)   By February 1998, Mr. Kinsella had bought out Mr.
     Lemmenes's  and Mr. Osowski's interests and since  then
     has owned 74% of Appellant, with Woodward continuing to
     own  the  remaining  26%.  Mr.  Osowski  is  no  longer
     involved in Appellant.
     
     (2)   Woodward sold the Stevens Point facility  at  the
     end  of  December, 1998.  Since January 1999, Appellant
     has leased it from the new owners.
     
     (3)   The  bailment expired on June 1,  1998;  however,
     according to Note 5 to Appellant's financial statements
     for  the  year ending December 31, 2000, Appellant  and
     Woodward  continue to operate under it  pending  formal
     renewal.   Appellant  has never made  any  payments  to
     Woodward under the bailment.
     
     (4)  Sales to Woodward accounted for 88% of Appellant's
     receipts  in  1998, and 86% of Appellant's receipts  in
     1999 and 2000.
     
     (5)   At  the  time  of  the February  27,  2001,  size
     determination, Woodward's guaranty of the CDA loan  was
     still  in  force.   Woodward's guaranty  of  this  loan
     expired on March 29, 2001.
     
     
  C.  The Original Size Determination, Appeal, and Remand Order
                                
     In  its  February  27,  2001, size determination,  the  Area
Office  concluded Appellant is affiliated with Woodward and  thus
other than small.  The Area Office found Woodward has the ability
to  control  Appellant under the totality of  the  circumstances,
despite  its  small  ownership  interest  in  Appellant,  because
Woodward owns Appellant's production equipment, accounts for  86%
of  Appellant's  sales, and provides Appellant with  a  financial
guarantee.  The Area Office also determined the two firms do  not
have  an  arm's  length relationship because: (1) Woodward  never
required payment under the bailment, and; (2) there has  been  no
clear  fracture  between  the  firms  since  Appellant  is  still
dependent on Woodward for sales and continued economic viability.
     
     On  appeal,  Appellant  presented evidence  clarifying  that
Woodward  owns 12%, not all, of Appellant's production equipment,
and  that  Appellant  never made payment to  Woodward  under  the
bailment  because  Appellant had never used the bailed  equipment
for any other customer's work.  Further, all of Appellant's sales
to  Woodward  resulted  from competitive bidding,  and  Appellant
failed to win Woodward work at least 18 times (approximately $1.5
million of work) between April, 2000, and April, 2001.  Moreover,
Woodward's  financial guarantees expired on March 29,  2001,  and
Appellant has obtained a new loan without Woodward's guarantee.
6

     The Administrative Judge concluded the Area Office had erred
(1)  in  its  finding Woodward owns all of Appellant's production
equipment;  (2)  in its determination, based on  the  absence  of
payments  under the bailment, that the two firms do not  have  an
arm's  length relationship; and (3) in its conclusory affiliation
analysis.   Therefore,  the  Administrative  Judge  vacated   the
February 27, 2001, size determination, and remanded the matter to
the  Area  Office  for  further  investigation  and  a  new  size
determination.  Size Appeal of Pointe Precision, LLC, SBA No. SIZ-
4434 at 5-6 (2001).
     
     D.  The August 6, 2001, Size Determination (on Remand)
                                
     On   August  6,  2001,  the  Area  Office  issued  its  size
determination  on remand, and again concluded that  Appellant  is
affiliated  with  Woodward and thus other than small.   The  Area
Office based its affiliation determination on the totality of the
circumstances   rationale.    Referring   to   the    contractual
relationships  rule,  the  Area Office  determined  Appellant  is
economically dependent on Woodward because Woodward accounts  for
86%  of Appellant's receipts, a percentage that has varied little
over the past three years, despite Appellant's having to bid  for
Woodward work.
     
     The  Area  Office  also determined that the newly  organized
concern  rule was applicable.  In support, the Area set  out  its
findings  that Appellant and Woodward are in the same or  related
industry, that Messrs. Kinsella, Lemmenes, and Osowski  had  been
key  employees of Woodward and became key employees of Appellant;
and that Woodward had a 26% ownership interest in Appellant since
its  creation, owns 12% of Appellant's production equipment,  and
has  furnished Appellant with subcontracts.  The Area Office also
found  Woodward's  sale  of the Stevens Point  facility  and  the
recent  expiration  of  Woodward's financial  guarantee  did  not
create a clear fracture between the firms.
     
     The  Area  Office noted that, while neither the  contractual
relationships between the firms nor Appellant's status as a newly
organized   concern,   by  itself,  is  sufficient   to   support
affiliation,  when  viewed together, under the  totality  of  the
circumstances,  there  is  a sufficient  basis  for  affiliation.
Finally,  in  Footnote 6, the Area Office stated its "other  than
small"   determination  "stems  from  an  out-right  finding   of
affiliation-not   an  affiliation  based  on  'contract-specific'
facts."  Thus, the size determination applies to all contracts in
which Appellant is engaged.
     
                     F.  The Instant Appeal

     Appellant received the August 6, 2001, size determination on
August  14,  2001,  and filed its appeal on  September  7,  2001.
Appellant  asserts the size determination is based on  errors  of
fact and law, and should be vacated.
     
     First,   regarding   contractual  relationships,   Appellant
asserts  the  Area  Office erred by neglecting to  consider  that
Appellant's  sales  to  Woodward resulted from  an  arm's  length
competitive  bidding  process, and not  a  continued  contractual
relationship.  Appellant asserted that, in 2000, it bid  for  and
did  not  win some $1.5 million in Woodward work.  Thus,  despite
the fact that Woodward accounted for 86% of Appellant's receipts,
Woodward does not have the power to control Appellant.  Appellant
further  asserts that the Area Office erred in finding  Appellant
economically dependent on Woodward because, unlike the challenged
firm  in  Size Appeal of J & R Logging, SBA No. SIZ-4426  (2001),
Appellant  is  not in the position of a "captive" small  business
that has no alternative market for its products. [2]
     
      Second,  regarding Appellant's status as a newly  organized
concern, Appellant asserts the Area Office erred in finding  that
Messrs. Kinsella, Lemmenes, and Osowski had been key employees of
Woodward.   Appellant  also  asserts the  Area  Office  erred  in
characterizing  the  subcontracts it performed  for  Woodward  as
having  been "furnished" to Appellant by Woodward, because  those
subcontracts  had  been competitively bid.  Therefore,  Appellant
asserts,  the  Area Office erred in applying the newly  organized
concern   rule   because  there  are  only  two  relevant   facts
(Woodward's 26% ownership interest in Appellant and its ownership
of  12%  of  Appellant's  production equipment),  and  these  are
insufficient to support the application of that rule.

     Alternatively,  Appellant asserts that  even  if  the  newly
organized  concern  rule  were  applicable,  the  presumption  of
affiliation  created  by that rule has been  adequately  rebutted
because there is a clear line of fracture between the two  firms.
In  support,  Appellant asserts Messrs. Kinsella,  Lemmenes,  and
Osowski ended their employment with Woodward and do no consulting
for  it,  Woodward's financial guarantees have expired, Appellant
no  longer leases space from Woodward, and Appellant has expanded
its  business into new areas, including the manufacture of  parts
for other industries in which Woodward was never involved when it
operated  the  Stevens  Point  facility.   Therefore,  under  the
totality  of the circumstances, Appellant is not affiliated  with
Woodward.
     
     Finally, Appellant asserts the Area Office erred in applying
its affiliation determination to all contracts in which Appellant
is engaged, rather than to just the two contracts under protest.
     
      As  new  evidence, Appellant submits an affidavit from  its
president,  Mr. Kinsella, supporting the assertions made  in  its
appeal.  In his affidavit, Mr. Kinsella states that his work  for
Woodward  was  under  the  direction and  control  of  Woodward's
corporate  officers,  including the vice  president  of  aircraft
controls and the vice president of facilities support.   He  also
states  Appellant  has expanded its component machining  business
into  medical,  paper,  fluid power,  and  the  lawn  and  garden
markets.

     Intervenor Woodward supports the appeal and asserts the size
determination was based on errors of fact and law.  Specifically,
the  Area  Office  erred  in  not  considering  that  Appellant's
contracts  with Woodward resulted from arm's length bidding,  and
it  erred  in finding Messrs. Kinsella, Lemmenes and Osowski  had
been "key" employees of Woodward.  Woodward also asserts that the
Area  Office improperly attempts to apply the outcome of the size
determination retroactively to contracts other than the two  that
were  the subject of the size determination, and states that most
of the work under those two contracts has already been performed.
     
     
                         II.  DISCUSSION
                                
                     A.  Threshold Questions

     Appellant  filed  the  instant  appeal  within  30  days  of
receiving the size determination, and the appeal does not concern
a  pending  procurement.  Therefore, the appeal  is  timely.   13
C.F.R. Section 134.304(a)(2).
     
     As  the  prime contractor on the subject contracts, Woodward
has  a  direct  interest in the instant appeal.   Therefore,  the
Administrative Judge GRANTS Woodward's motion to  intervene.   13
C.F.R. Section 134.210(b).
     
     After   reviewing   the  Appellant's   new   evidence,   the
Administrative Judge concludes that this evidence is relevant  to
the  issues  on  appeal and does not unduly  enlarge  the  issues
because  it  deals with questions of Appellant's relationship  to
Woodward.   Further,  it clarifies the facts  in  the  issues  on
appeal.  Accordingly, the Administrative Judge GRANTS Appellant's
motion    for   admission   of   new   evidence.     13    C.F.R.
Section  134.308(a)(2); Size Appeal of Bend Research,  Inc.,  SBA
No. SIZ-4369, at 5 (1999).
     
                           B.  Merits

     Appellant  has the burden of proving, by a preponderance  of
the evidence, all elements of its appeal.  Size Appeal of Rebmar,
Inc., SBA No. SIZ-4173, at 4 (1996).  Specifically, it must prove
the  Area Office size determination is based on a clear error  of
fact  or  law.   See 13 C.F.R. Section 134.314;  Size  Appeal  of
Procedyne Corp., SBA No. SIZ-4354, at 5 (1999).  It is undisputed
that Appellant, by itself, is below the applicable size standard,
and  that  Woodward exceeds the size standard.   Thus,  the  only
substantive  issue  raised in this appeal  is  whether  the  Area
Office erroneously found Appellant affiliated with Woodward.
     
               1.  Contractual Relationships Rule

     The  Area  Office  found the contractual relationships  rule
applicable  in  determining whether Appellant is affiliated  with
Woodward  under  the  totality of the  circumstances.   Appellant
asserts  the  Area Office erred in finding this rule  applicable,
specifically because: (1) the Area Office neglected  to  consider
that  Appellant's sales to Woodward resulted from an arm's length
competitive  bidding  process, and not  a  continued  contractual
relationship; and (2) Appellant is not economically dependent  on
Woodward  because  Appellant is not a  "captive"  small  business
lacking an alternative market.
     
     The  Administrative Judge finds Appellant's  arguments  lack
merit,   and  concludes  the  Area  Office  correctly  considered
contractual relationships in its analysis of the totality of  the
circumstances.
     
     Contractual  relationships existed as a separate  basis  for
affiliation before 1996.  Under this rule, affiliation  generally
arises where one firm is dependent upon another for contracts and
business to such a degree that its economic viability would be in
jeopardy   without  such  contracts  or  business.    13   C.F.R.
Section  121.401(k)  (1995);  Size Appeal  of  Defense  Logistics
Agency,   SBA   No.  SIZ-3974,  at  7  (1995).   In   eliminating
contractual  relationships as a separate basis  for  affiliation,
the  SBA noted it still would be "referenced as a factor that may
cause affiliation under the totality of circumstances."  60  Fed.
Reg. 57982, 57985 (Nov. 24, 1995) (preamble to proposed 13 C.F.R.
Section 121.103).
     
     The contractual relationships rule centers on the challenged
firm's  dependence  on the alleged affiliate  for  contracts  and
business.   Thus,  it  may be found when the alleged  affiliate's
business  accounts  for  a  large part  of  a  challenged  firm's
receipts.  See Size Appeal of J & R Logging, SBA No. SIZ-4426, at
3-4  (2001).   Although  the absence of  a  normal  arm's  length
relationship between the firms strengthens the case for  applying
the  contractual  relationships  factor,  see  Defense  Logistics
Agency,  SBA No. SIZ-3974, at 7, the presence of an arm's  length
relationship is not sufficient, by itself, to preclude a  finding
of   contractual  relationships.   Thus,  a  firm  may  be  found
economically dependent on one customer for business, even  absent
evidence that their dealings are not at arm's length.  See, e.g.,
J  &  R Logging.  Therefore, the Administrative Judge must reject
Appellant's argument that the contractual relationships  rule  is
inapplicable  here merely because its relationship with  Woodward
is at arm's length.
     
     Although the Administrative Judge agrees with Appellant that
J & R Logging is an extreme case of contractual relationships, he
notes  that  this Office also has found 62% and 70%  of  receipts
sufficient to support conclusions of economic dependence and thus
contractual  relationships affiliation.  Size Appeal of  Supreme-
Technology,  Inc.,  SBA  No.  SIZ-4092  (1995);  Size  Appeal  of
Wireless Technology Equipment Co., Inc., SBA No. SIZ-4204 (1996).
Here,  Appellant  does  not dispute that its  sales  to  Woodward
accounted  for 88% of Appellant's receipts in 1998,  and  86%  of
Appellant's  receipts  in 1999 and 2000.  These  percentages  are
well   above   this  Office's  Supreme-Technology  and   Wireless
precedents.   Therefore, the Administrative Judge  concludes  the
Area  Office did not err in finding the contractual relationships
rule applicable in its totality of the circumstances analysis.
     
                2.  Newly Organized Concern Rule
                                
     The  Area  Office  found  the newly organized  concern  rule
applicable  in  determining whether Appellant is affiliated  with
Woodward  under  the  totality of the  circumstances.   Appellant
asserts  the  Area  Office  erred  in  doing  so.   Specifically,
Appellant  asserts  the Area Office erred: (1)  in  finding  that
Messrs. Kinsella, Lemmenes, and Osowski had been key employees of
Woodward;   (2)  in  characterizing  the  subcontracts  Appellant
performed for Woodward as having been "furnished" to Appellant by
Woodward;  and (3) in applying the newly organized  concern  rule
because  only  two  facts (Woodward's 26% ownership  interest  in
Appellant  and  its  ownership of 12% of  Appellant's  production
equipment),  are relevant and these are insufficient  to  support
application  of that rule.  Alternatively, Appellant asserts,  if
the  newly  organized concern rule applies,  the  presumption  of
affiliation  has  been rebutted because there has  been  a  clear
fracture between the firms.
     
     The Administrative Judge finds each of Appellant's arguments
lacks  merit, and concludes the Area Office correctly  considered
Appellant's  status as a newly organized concern in its  totality
of the circumstances analysis.
     
     The newly organized concern rule existed as a separate basis
for   affiliation  before  1996.   Under  this  rule,  firms  are
affiliated    when   former   officers,   directors,    principal
stockholders, or key employees of one firm organize a new firm in
the  same or a related industry or field of operation, and  serve
as   its  officers,  directors,  principal  stockholders  or  key
employees, and the one concern is furnishing or will furnish  the
other   concern   with  subcontracts,  financial   or   technical
assistance,  bid  or performance bond indemnification,  or  other
facilities,   whether  for  a  fee  or  otherwise.    13   C.F.R.
Section   121.401(j)  (1995);  Size  Appeal  of   Field   Support
Services.,  Inc.,  SBA  No. SIZ-4176, at 8  (1996).   Under  this
Office's  caselaw, affiliation under the newly organized  concern
is  rebutted if the challenged firm can demonstrate a clear  line
of fracture between itself and the other firm.  See Field Support
Services, SBA No. SIZ-4176, at 8.
     
     The  purpose  of  the  newly organized concern  rule  is  to
prevent  circumvention of the size standards by the  creation  of
spin-off  firms which appear to be small, independent firms,  but
are  really affiliates or extensions of large firms, even  absent
evidence  the  new firm was formed to circumvent the regulations.
Id.  In 1996, the SBA eliminated the newly organized concern rule
as   a  separate  basis  for  affiliation,  reasoning  that   its
elimination as a separate affiliation ground "would not eliminate
the underlying reasons for finding affiliation on other grounds."
60  Fed.  Reg. 57982, 57985 (Nov. 24, 1995) (preamble to proposed
13  C.F.R.  Section 121.103); see Size Appeal of  American  Guard
Services,  SBA No. SIZ-4397, at 5-6 (2000).  The newly  organized
concern   rule  also  remains  useful,  pursuant  to  13   C.F.R.
Section  121.103(a)(2), which requires SBA to consider  "previous
relationships with or ties to another concern."  Size  Appeal  of
Lyons Security Service, Inc., SBA No. SIZ-4264, at 6-7 (1997).
     
                        a.  Key Employees
                                
     The Administrative Judge rejects Appellant's first argument,
that   the   Area  Office  incorrectly  found  Messrs.  Kinsella,
Lemmenes,  and  Osowski  to  have  been  Woodward's  former   key
employees.  A key employee is an employee who, because of his/her
position,  "has  a  critical influence in or substantive  control
over  the  operations  or management of  the  firm."   13  C.F.R.
Section  121.405  (1995). [3] Under this  Office's  precedent,  a
manager  who has substantial control over a portion  of  a  large
firm's  operations and management is a key employee.  Size Appeal
of  Wireless Technology Equipment Co., Inc., SBA No. SIZ-4204, at
6-7  (1996).   Further, this Office has found a  program  manager
responsible  for  the  manufacture  of  one  product  was  a  key
employee.  Size Appeal of Plasmaco, Inc., SBA No. SIZ-3139, at  6
(1989).
     
     Here,  Mr.  Kinsella  had been the general  manager  of  the
aircraft  controls  division and support  facilities  in  Stevens
Point;  Mr.  Lemmenes  had  been the  accounting  and  production
support manager for the hydraulics turbine control division;  and
Mr.   Osowski   had  been  manager  of  rotational  manufacturing
operations.   Each  held  a  managerial  position  at  Woodward's
Stevens  Point  operations, which was subsequently  spun  off  as
Appellant, despite the fact that, as Mr. Kinsella stated, he  was
under the direction and control of Woodward's corporate officers.
Appellant's argument is meritless, since all corporate  employees
(except  presidents  and  CEOs)  work  under  the  direction   of
corporate officers.  Thus, under this Office's precedent, Messrs.
Kinsella,  Lemmenes, and Osowski all had been  key  employees  of
Woodward.  Therefore, the Administrative Judge concludes the Area
Office  correctly  found all of them had been  key  employees  of
Woodward prior to Appellant's establishment.
     
                   b.  Furnished Subcontracts
                                
     The   Administrative   Judge  rejects   Appellant's   second
argument,  that  the  Area Office incorrectly  characterized  the
contracts  as  having  been  "furnished."   The  newly  organized
concern  regulation itself used the term "furnish" in  connection
with  subcontracts,  financial or technical  assistance,  bonding
indemnification,    and    other    facilities.     13     C.F.R.
Section  121.401(j) (1995).  Appellant does not dispute  that  it
has  performed  subcontracts for Woodward.   Therefore,  for  the
purpose of analyzing whether the newly organized concern applies,
the  Administrative Judge finds that Woodward has furnished those
subcontracts to Appellant.
     
  c.  Application of the Newly Organized Concern Rule and Clear
                            Fracture
                                
     The Administrative Judge rejects Appellant's third argument,
that  the  Area  Office  incorrectly  concluded  that  the  newly
organized   concern  rule  applies  in  its   totality   of   the
circumstances  analysis.   The  newly  organized   concern   rule
contains four elements:
     
     (1)      former    officers,    directors,    principal
     stockholders, or key employees of one firm  organize  a
     new firm;
     
     (2)    these  individuals  serve  as  the  new   firm's
     officers,  directors,  principal  stockholders  or  key
     employees;
     
     (3)   the new firm is in the same or a related industry
     or field of operation; and
     
     (4)   the one concern is furnishing or will furnish the
     other concern with subcontracts, financial or technical
     assistance, bid or performance bond indemnification, or
     other facilities, whether for a fee or otherwise.
     
13 C.F.R. Section 121.401(j) (1995).

     Here,  Messrs. Kinsella, Lemmenes, and Osowski had been  key
employees  of  Woodward, as discussed, supra.   Thus,  the  first
element  is  satisfied.   At Appellant's  establishment,  Messrs.
Kinsella, Lemmenes, and Osowski became its members/owners,  along
with  Woodward.  Thus, the second element is satisfied.  Although
Messrs.  Lemmenes and Osowski subsequently sold  their  ownership
interest in Appellant and Mr. Osowski left the firm, their former
ownership interests now reside in Mr. Kinsella, Woodward's  other
former  key  employee  who  became Appellant's  other  individual
owner.
     
     Although  Appellant  has expanded its line  of  business  to
include  manufacturing  parts for additional  markets,  the  fact
remains that over 85% of its product consists of component  parts
for Woodward's aircraft business.  Under this Office's precedent,
where  two  firms  produce  a  continuum  of  product,  they  are
considered to be in the same or related industry.  Size Appeal of
Frontier  Applied  Sciences, Inc., SBA  No.  SIZ-4316,  at  12-13
(1998)  (citing Size Appeal of Agrigold Juice Products,  SBA  No.
SIZ-4136, at 14 (1996)).  Thus, Appellant and Woodward are in the
same or related industry, and the third element is satisfied.
     
     Finally,  since  Appellant's  establishment,  Woodward   has
furnished  Appellant  with a continuous supply  of  subcontracts,
amounting  to over 86% of Appellant's total production  over  the
past  three  years, and also has continuously provided  Appellant
with  machinery  and  other equipment  needed  to  perform  those
subcontracts,  at no charge under the bailment agreement.   Thus,
the  fourth element of the newly organized concern rule  analysis
is satisfied. [4]
     
     Therefore, the Administrative Judge concludes that the  Area
Office   correctly  found  the  newly  organized   concern   rule
applicable,  and  correctly considered Appellant's  status  as  a
newly  organized  concern in its totality  of  the  circumstances
analysis.
     
     The    Administrative   Judge   also   rejects   Appellant's
alternative argument that if the newly organized concern rule  is
applicable,  the  presumption  created  by  that  rule  has  been
rebutted  because  there has been a clear  fracture  between  the
firms.   In this regard, Appellant asserts that Messrs. Kinsella,
Lemmenes,  and Osowski ended their employment with Woodward  when
Appellant  was  organized, Woodward's financial  guarantees  have
expired,  Appellant  no longer leases space  from  Woodward,  and
Woodward has expanded its business into new areas, including  the
manufacture  of parts for other industries in which Woodward  was
never involved when it operated the Stevens Point facility.
     
      All of these assertions are meritless.  First, even without
Woodward  employment for Messrs. Kinsella, Lemmenes, and Osowski,
all  elements of the newly organized concern rule were  satisfied
at Appellant's establishment.  Therefore, employment there or not
is irrelevant to the clear fracture analysis.  Second, Woodward's
financial guarantees did not expire until well after the issue of
affiliation  arose in connection with the two subject  contracts,
and  after  the  Area Office issued its first size determination.
Because SBA determines a firm's size as of the date of its  self-
certification,  submitted  with the  firm's  initial  offer,  the
subsequent expiration of the guarantees is irrelevant  here.   13
C.F.R.  Section  121.404.  Third, the fact  Appellant  no  longer
leases  its  space from Woodward is negated by  the  other,  more
important connections that persisted.  Finally, the percentage of
Appellant's sales accounted for by its expansion into  new  areas
is  less  than  15%,  a  small fraction of  its  aircraft-related
business with Woodward.

     Moreover,  Woodward  retains its 26% ownership  interest  in
Appellant,  a  fact  which clearly counters Appellant's  argument
that  a  clear  fracture between the two firms has  taken  place.
Therefore,  although  the Administrative  Judge  recognizes  that
Appellant  and  Woodward have reduced their connections  to  each
other over the past several years, he concludes there has not yet
been  a clear line of fracture between the two firms as to negate
Appellant's  status as a newly organized concern and  thus  rebut
the applicability of the newly organized concern rule.
     
     3.  Affiliation under the Totality of the Circumstances
                                
     Two  firms  are  affiliated for size determination  purposes
when one firm controls or has the power to control the other,  or
a  third  party  controls or has the power to  control  both.  13
C.F.R.  Section  121.103(a)(1).  SBA considers  factors  such  as
ownership,  management, previous relationships,  and  contractual
relationships in determining whether two firms are affiliated. 13
C.F.R. Section 121.103(a)(2).
     
     Even  absent  a  single  factor  sufficient  by  itself   to
constitute  affiliation, where "connecting relationships  between
firms  are  so  suggestive  of  dependence  as  to  render   them
affiliated," SBA will find them affiliated under the totality  of
circumstances.  Size Appeal of Inland Dredging Company, LLC,  SBA
No.  SIZ-4350,  at 6 (1999) (citing Size Appeal of Field  Support
Services, Inc., SBA No. SIZ-4176, at 10 (1996)).  This Office and
its  predecessor,  the Size Appeals Board, have  long  determined
whether  firms  were  affiliated  under  the  totality   of   the
circumstances  rationale.   See,  e.g.,  Size  Appeal   of   Diaz
Contracting, Inc., SBA No. SIZ-1871 (1984); Size Appeal of Savini
Construction Company, SBA No. SIZ-477 (1971). [5]
     
     Here,  in  addition  to the "contractual relationships"  and
Appellant's status as a newly organized concern, there are  other
indicia  of affiliation, or connecting relationships,  both  past
and  present,  between  the two firms that  contribute  to  their
affiliation  under  the  totality of the circumstances.   One  of
these  indicia is ownership interest.  A minority owner may  have
the  power to control a challenged firm under the totality of the
circumstances,  notwithstanding  the  presence  of   a   majority
shareholder,  where  other indicia of affiliation  are  involved.
Size Appeal of Pacific Treatment Analytical Services, SBA No. SIZ-
4073,  at  4  (1995).   Here, Woodward has had  a  26%  ownership
interest in Appellant since its establishment in June 1995.
     
     Among  these  other indicia of affiliation this  Office  has
considered, is a parent firm's establishment of a challenged firm
as  a  spin-off.  Such a relationship indicates a greater, rather
than a lesser, connection between the two firms.  Size Appeal  of
Frontier Applied Sciences, Inc.,  SBA No. SIZ-4316, at 12 (1998).
Here,  the  parent  firm,  Woodward,  clearly  was  an  essential
participant  in Appellant's establishment because it  contributed
equipment  and  services, including what the  MOU  refers  to  as
"essential   financial   guarantees   necessary   to   establish"
Appellant, in return for an ownership interest.
     
     Other  indicia  of affiliation are provided under  the  MOU,
under  which  it is clear that the parties intended  to  and  did
establish  many  contractual connections between the  two  firms.
These  connections  lasted for many years and shaped  Appellant's
development  as primarily a regular supplier to Woodward.   Under
the  MOU,  Woodward bailed to Appellant over a  million  dollars'
worth  of  machinery at no charge when used to  produce  Woodward
parts.   Although the bailment contract formally expired on  June
1, 1998, the two firms have continued to operate under it.  Thus,
Appellant has had the free use of this equipment since 1995.
     
     Also  under  the  MOU, Woodward promised  Appellant  320,000
hours  of work over its first three years, with actual number  of
hours  based on Woodward's aircraft sales.  Moreover,  under  the
MOU,  Woodward gave Appellant accelerated payment terms  for  its
work  for  the  first  two years.  The free  use  of  the  bailed
equipment,  the large amount of promised aircraft work,  and  the
accelerated  payment  terms  clearly factor  into  the  resultant
development  of  aerospace  parts  as  its  Appellant's  dominant
product line, and Woodward as its one major customer.
     
     Woodward  also  provided financial guarantees to  Appellant.
Through  the  MOU, Woodward forbade Appellant to  make  long-term
commitments   without   its   permission,   limited   Appellant's
indebtedness,   and  required  certain  performance   and   asset
standards  to avoid having Woodward step in to manage  Appellant.
Woodward's  guarantees, and the restrictions on Appellant,  under
the  MOU,  did  not  cease until Woodward's  financial  guarantee
expired  on  March 29, 2001, that is, one month after  the  first
size determination.
     
     Considering  all of these indicia of affiliation,  including
Appellant's    "contractual   relationships"    with    Woodward,
Appellant's  status as a newly organized concern, Woodward's  26%
ownership  interest,  and  the connecting  relationships  created
under  the MOU, including the bailment of equipment at no charge,
Woodward's  promise of significant work, the accelerated  payment
terms,  and  Woodward's  "essential"  financial  guarantees,  the
Administrative   Judge  concludes  the  Area   Office   correctly
concluded  Appellant  is  affiliated  with  Woodward  under   the
totality of the circumstances. [6]
     
    4.  General Affiliation and Contract-Specific Affiliation
                                
     Appellant  and  Intervenor assert the Area Office  erred  in
applying its affiliation determination to all contracts in  which
Appellant  is  engaged,  rather than just  to  Solicitation  Nos.
N68836-00-P-1527  and F34601-00-M-0719, the two  contracts  under
protest.   The Administrative Judge must reject this argument.
     
     A   contract-specific  affiliation,  such   as   under   the
ostensible  subcontractor rule, occurs where the  affiliation  is
peculiar to a specific small business set aside procurement.  See
13   C.F.R.  Section  121.103(f)(4);  Size  Appeal  of   InfoTech
Enterprises,  Inc.,  SBA  No. SIZ-4346  (1999).   Analysis  of  a
contract-specific  issue focuses largely on  how  the  contractor
proposes to perform that procurement.  Id.  Because a finding  of
contract-specific affiliation is meaningless outside the  context
of  that  procurement, a finding of contract-specific affiliation
does  not require the challenged firm to become recertified as  a
small  business  before it may self-certify on another  set-aside
procurement.   13  C.F.R.  Section  121.1010(b);  see  13  C.F.R.
Section 121.1009(g)(3).
     
     On  the  other hand, general affiliation between  two  firms
occurs  where  the  operative facts relate  more  to  the  firms'
ownership,  management,  contractual  relationships,   or   other
factors,  than to a specific procurement, although facts relating
to  a  specific procurement also may be relevant.  See 13  C.F.R.
Section 121.103(a); Field Support Services, SBA No. 4176, at  10.
A firm found other than small because of general affiliation with
another firm may not self-certify as a small business again until
either  this Office has reversed that size determination  or  the
SBA  has  recertified the challenged firm as  small.   13  C.F.R.
Section   121.1009(g)(3),  (g)(1);  see  Size  Appeal  of   Evans
Cooperage Co., Inc., SBA No. SIZ-4023, at 4 (1995).
     
     Here,  the  issues concern the general relationship  between
Appellant  and Woodward, including such points as Woodward's  26%
ownership   interest  in  Appellant,  the  MOU,  and  Appellant's
historic level of sales to Woodward, facts which are not affected
by  the  subject  procurements.  Thus,  the  affiliation  between
Appellant  and  Woodward is general, not contract-specific.   The
CO's  designation  of these procurements is merely  a  matter  of
compliance with the requirement that a size protest must  pertain
to  a particular procurement to be acted upon by the Area Office.
13  C.F.R.  Section 121.1007(a); Size Appeal of  Encore  Computer
Corporation,  SBA  No.  SIZ-4227, at 4  (1996).   Therefore,  the
Administrative  Judge  concludes that the Area  Office  correctly
determined, in footnote 6, that the affiliation between Appellant
and Woodward is not contract-specific.
     
      Accordingly,  the Administrative Judge concludes  Appellant
has  failed  to meet its burden of showing the Area  Office  size
determination on remand is based on a clear error of fact or law.


                        III.  CONCLUSION

     For  the above reasons, the Administrative Judge AFFIRMS the
Area Office's size determination on remand and DENIES the instant
appeal.
     
     This   is   the   final  decision  of  the  Small   Business
Administration.  See 13 C.F.R. Section 134.316(b).




                         ________________________________________
                         __
                         CHRISTOPHER HOLLEMAN
                         Administrative Judge
                         
_________________________

       [1]   Because this Decision is on remand, this Office  has
assigned this case a new docket number to distinguish it from the
original Remand Order.
       [2]   Appellant uses the phrase "a single source."  Appeal
Petition at 6.  The Administrative Judge presumes Appellant means
"a single market."
       [3]   The size regulations first defined "key employee" in
1990.   52  Fed. Reg. 32870,  32872 (Aug. 31, 1987) (preamble  to
proposed  Section 121.405).  Although SBA omitted this definition
in  the  1996  regulatory  revisions,  it  remains  valid  as   a
constituent part of the newly organized concern rule analysis.
       [4]    Woodward  also furnished a portion of  the  Stevens
Point  facility under a lease until December, 1998, and furnished
financial  assistance in the form of loan guarantees until  March
2001.  Thus, in the past, there were even more facts pertinent to
this element.
       [5]    Savini  was a decision of the Size  Appeals  Board.
This  Office  has adopted the body of cases decided by  the  Size
Appeals  Board as valid precedent, pursuant to the rule of  stare
decisis. See Size Appeal of Mota Construction Co., Inc., SBA  No.
SIZ-2061 (1984).
        [6]    The  Administrative  Judge  finds  the  fact  that
Appellant  did  not win 18 Woodward contracts over  one  year  is
irrelevant to the totality of the circumstances analysis.

                                            Posted: January, 2002