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[H.A.S.C. No. 108–41]







JULY 21, 2004

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CURT WELDON, Pennsylvania, Chairman
W. TODD AKIN, Missouri
JEB BRADLEY, New Hampshire
HOWARD P. ''BUCK'' McKEON, California
WALTER B. JONES, North Carolina
JIM RYUN, Kansas
ROB SIMMONS, Connecticut
ED SCHROCK, Virginia
JOE WILSON, South Carolina

JOHN SPRATT, South Carolina
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LANE EVANS, Illinois
ADAM SMITH, Washington
MIKE McINTYRE, North Carolina
ROBERT A. BRADY, Pennsylvania
JOHN B. LARSON, Connecticut
JIM COOPER, Tennessee

Bill Lautrup, Professional Staff Member
Bill Natter, Professional Staff Member
Jesse Tolleson, Research Assistant




    The Department of Defense Small Business Innovation Research Program and the Development of Innovative Technology
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    Wednesday, July 21, 2004




    Abercrombie, Hon. Neil, a Representative from Hawaii, Ranking Member, Tactical Air and Land Forces Subcommittee

    Weldon, Hon. Curt, a Representative from Pennsylvania, Chairman, Tactical Air and Land Forces Subcommittee


    Broderick, Bill, Chief Financial Officer, Analytical Graphics, Inc.

    Cuda, Tom, Vicer President of Operations, Vista Controls, Inc.

    Enriquez, Enrique, President, Locust USA Inc.
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    Harper, Charles, Executive Chairman, Sierra Monolithics

    Hollis, Richard, President and CEO, Hollis-Eden Pharmaceuticals

    Jacobus, Heidi, Chairman and CEO, Cybernet Systems Corporation

    Karangelen, Nick, President and CEO, Trident Systems, Inc.

    Mulligan, Anthony, Presiendt, Advanced Ceramics Research

    Peterson, Greg, Chairman and CEO, Securimetrics, Inc.

    Stoyen, Alexander, Founder and CEO, 21st Century Systems, Inc.

[The Prepared Statements can be viewed in the hard copy.]

Broderic, William
Enriquez, Enrique
Harper, Charles
Hollis, Richard
Jacobus, Heidi
Karangelen, Nick, together with Heidi Jacobus, and William Broderic
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Mulligan, Anthony
Peterson, Greg
Stoyen, Alexander
Weldon, Hon. Curt

[There were no Documents submitted.]

[The Questions and Answers can be viewed in the hard copy.]

Mr. Weldon


House of Representatives,
Committee on Armed Services,
Tactical Air and Land Forces Subcommittee,
Washington, DC, Wednesday, July 21, 2004.

    The subcommittee met, pursuant to call, at 3:05 p.m., in room 2118, Rayburn House Office Building, Hon. Curt Weldon (chairman of the subcommittee) presiding.

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    Mr. WELDON [presiding]. The hearing will come to order. This morning, the Tactical Air and Land Forces Subcommittee will receive testimony from a series of small, innovative U.S. companies that are developing leading-edge technologies and proposing military applications of those technologies that address a variety of defense modernization needs.

    The work of these companies will demonstrate to Members of the subcommittee and the American people that small businesses are capable of producing vital defense products rapidly, at potentially lower costs and, in some cases, providing new capabilities. We tend to focus on the big companies here; today, we focus on the small companies. In the new defense era, it has become imperative that small, innovative companies are afforded adequate opportunity to make their innovations available to the defense acquisition system.

    The Department of Defense (DOD), in light of the events of September 11, 2001, has elevated efforts to transform our armed services to meet the Nation's needs in the century ahead. Many have concluded this transformation will depend, in large part, on making better use of innovative technologies being generated throughout the private sector, including both defense and non-defense companies.

    Meanwhile, the defense industry has experienced its own transformation over the last decade, and one of the unfortunate consequences of the numerous mergers and consolidations is the continued consolidation and disturbing shrinkage of the innovative research and development base within those remaining companies.

    Our witnesses today will demonstrate that small companies are often capable of producing leading-edge technologies that offer great advantages for defense programs. However, companies not already part of the recognized defense industrial base often experience difficulty penetrating defense markets and dealing with the complex regulations and procedures that are required by the Department of Defense.
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    Each of you here today have experiences relating to this problem, and we look forward to discussion of your technologies but more importantly your suggestions that might make it simpler for non-defense companies to deal with the Department of Defense. That is our goal, and we are committed to make that happen, not just for all of you here today, but for all of those other entrepreneurs and small companies out there that want to be a part of the dynamics of transforming our military.

    Before we get started and before I turn to my good friend and ranking Member, I have to introduce one of our former colleagues in the audience who was one of my mentors when I first came to this committee. He sat on the top row. I never thought I would be up there, because I thought it was filled with the old guys, the old bulls. Now he is out in the audience making the big bucks.

    Dave, it is great to have you here. Stand up and take a bow. Dave Martin from New York. Thank you, Dave, for being here.


    And also a dedicated Marine veteran for this great Nation. It is good to have you here.

    Now, I want to turn to my good friend and ranking Member, Neil Abercrombie, for any comments he would like to make.

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    [The prepared statement of Mr. Weldon can be viewed in the hard copy.]


    Mr. ABERCROMBIE. Thank you, Mr. Chairman. Just for purposes of the record, the statement made by Chairman Weldon is, in effect, and for all practical purposes, is a joint statement representing both of us. And it remains for me to add only that—to emphasize and to reiterate his final commentary with respect to legislation.

    We intend to develop legislation that will implement the consequences of the hearing held today, and I believe that I can say safely that we have Chairman Hunter's, not necessarily his acquiescence to the legislation we put forward but his commitment is equals to ours, as is Mr. Skelton.

    So I think I can assure those who are here today, not only as witnesses but those who are interested in the subject including our good friend, Representative Dave Martin, that we will carry through on this.

    Mr. WELDON. I thank my good friend and ranking Member for that statement.

    Before we begin the hearing today, let me explain the ground rules. I would encourage each witness to submit your prepared statements for the record, and they will be accepted in their entirety as a part of the record of this hearing, rather than read them, and to simply speak to us directly about issues or points that you want to make to us. That will allow more time for us to have a dialogue with you, a back and forth question and answer session.
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    Some of you have brought demonstrations, and, unfortunately, the chairman was clumsy and did some damage to one of them. I hope you don't hold that against me. But we look forward to seeing your demonstrations.

    We are continuing to plow new ground today by holding an innovative hearing where we have a direct interactive dialogue with some of our country's leading entrepreneurs, and I hope you all bear with us as we try to make it run as smoothly as possible with a number of witnesses.

    We have two panels, and the first panel is going to set the tone for the Department of Defense Small Business Innovative Research (SBIR) program and talk to us about their feelings on this process. And they have all been a part of this. The second panel are going to be, I believe, seven companies from across the country doing absolutely astounding work that really is cutting edge, opening new doors. We want to encourage that, and we want to build upon that.

    Now, in identifying seven companies, which staff did a fantastic job, there are other companies that could have and should have been here, and I know one of our good friends and colleagues has such a company. I would like him to say a few words and perhaps introduce that person who is not going to be a witness but let the record show that he is here with us today.

    Jim Cooper, I recognize you.

    Mr. COOPER. Thank you, Mr. Chairman. I appreciate your holding this hearing, because it is a very important topic. We need to be doing all that we can to help small business and to help create jobs in this country.
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    I hadn't realized it prior to this hearing but a long-time friend of mine, Bob Pap is in the audience who leads a company called Accurate Automation in Chattanooga, Tennessee. He pointed out to me that there are some three companies in Tennessee—Bob, if you would stand and be recognized—that there are three Tennessee companies who have been unfairly disadvantaged by the current process, so we are very interested in curing that.

    Bob and his wife, Reba, have run a great company for many years now, been the recipient of numerous SBIR grants, it has got remarkable state-of-the-art technology, and they were $31 million cheaper than any other bidder in the recent process and yet still were not able to get the contract. So we want to make sure that it is a level playing field, that small businesses are fairly treated. We are not asking for any special treatment here, but just so that all businesses in America get a fair shake. That is what we are interested in.

    Bob brought a statement. I would like to ask unanimous consent that it be inserted in the record, and——

    Mr. WELDON. Without objection, so ordered.

    Mr. COOPER [continuing]. We look forward to working with all the companies here today to get a fair deal from the Pentagon.

    Mr. WELDON. We appreciate you being here. We appreciate your work in the SBIR program. We want your input, so we will accept your statement as it is written, for the record. Any other comments you would like to make we would welcome, because the record will be open, and you have got a great advocate here in your Member, and I am sure he will make sure that we are listening to the reasons why you weren't successful in this most recent bid.
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    Would my good friend from California like to make any opening statement? You also have a company here.

    Mr. MCKEON. Thank you, Mr. Chairman. I too want to thank you for holding this hearing. I think I have had some real concern the last few years about the consolidation in the industry, and the large number of companies have become a small number of companies. And a lot of the innovation comes from small companies who have been kind of squeezed out of the picture.

    And I know we have a company here from my district represented. Tom Cuda's here from Vista Controls, and they are a company that was bought by a little bit larger company, but they are still a small company doing great things.

    And when the president came into my office a few years ago, he said he had been to another person here on the hill and wanted to talk to him about what they were doing and the person—I am not going to mention any names—had kicked him out of her office and said, ''You know what you are doing is shameful.'' And, actually, what they were doing was helping our armed services who are helping defend our freedom. So when he came to me I said, ''I would love to come and talk to your people,'' and I have watched them grow and they are doing an outstanding job.

    I have another friend in the audience here that I just met a couple of weeks ago that has something that will really help protect the lives of our services, our people serving in the services, and he flew overnight to be here this morning to meet with Chairman Hunter, and I am just happy that he is here and happy that the people in the audience representing these companies are doing the outstanding things to help, again, defend the—help the people that are defending our freedoms.
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    Thank you, Mr. Chairman.

    Mr. WELDON. I thank our friend and colleague, and that kind of summarizes why we are having this hearing.

    The companies that are here represent literally thousands of small companies and entrepreneurs across the country who are looking for an opportunity to help us reduce costs, deliver better products in a more timely manner. And oftentimes they get squeezed out by the large primes. We work with the large primes all the time, and they do good work, but, in my opinion, they don't have the hunger, they don't have the desire, they don't have the ability to go out and do the kind of innovation with the low overhead that the kind of companies we are going to see today have.

    And so today we are here to tell your story. When you speak, all of you who are witnesses, you are not just speaking for yourself. You are speaking on behalf of all of those other entrepreneurs out there, all those other SBIR contract awardees, all those people who would like to be here to tell their story. So we would ask you to think not just in your own parochial terms but in the terms of all those other people who have those great ideas who didn't get to come to the table today but who we want to encourage and we want to assist.

    The first panel will discuss the Small Business Innovative Research program and offer their thoughts on how it might be improved. We welcome our first panel members. The panel has a combined opening statement which will be entered into the record without objection. In order to be most efficient, I would like to withhold questions until this panel has completed its opening remarks.
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    We will begin with Mr. Nick Karangelen, president and CEO of Trident Systems. We will move to Ms. Heidi Jacobus, chairman and CEO of Cybernet Systems Corporation, and then to Bill Broderick, chief financial officer of Analytical Graphics. Thank you for your testimony.

    Nick, the floor is yours. If you can hold it to five minutes, we would appreciate it.


    Mr. KARANGELEN. Thank you, Mr. Chairman.

    Mr. WELDON. And we will try to do the same.

    Mr. KARANGELEN. Thank you, Mr. Chairman. Mr. Abercrombie, distinguished Members of the committee, it is an honor for us to be here today to represent small business and to give you some of our perspectives from the small business community that serves the Department of Defense. I am here with Heidi and Bill, and actually we have a number of other Small Business Technology Coalition (SBTC) members here, but we are members of the board, and we represent——

    Mr. WELDON. Can you explain that when you say you are members of the board? Can you explain that?
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    Mr. KARANGELEN. The Small Business Technology Coalition is an industry association that is non-partisan, non-profit, businesses that is dedicated to the formation and the growth of technology-focused, research-oriented small businesses. And the board of directors, there are about 11 of us or 12 of us total. Three of us are actually on a special committee to address the topic that we are here to discuss today, which is the phase III transition of SBIR technology.

    And I would like to begin this afternoon by expressing our deep appreciation for all the things that you do, each Member of this committee, the outstanding efforts that you have made to support our men and women across the globe that are defending our freedoms and raging a war on terrorism. Thank you.

    As you know, small business is really widely seen as the engine of innovation in America, and there have been a number of studies that show that over half of people in this country are employed by small businesses, but did you know that over a third of the engineers and degreed scientists and engineers in this country are employed by small business? Fourteen percent of all non-federally funded research and development (R&D) expended by small business, a large percentage of patents that are awarded are done by small business. And yet only about four percent—those same studies report consistently that about four percent of federally funded R&D is expended by small business.

    And we think that there is a—your efforts to try and broaden that base are really well served and will serve the DOD as well as the small businesses that are involved.
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    And as you know also, the SBIR Program has three phases. The first two phases are funded by the set-aside that is in legislation, which focuses on R&D on topics that the major programs are interested in. Phase III is the area where we take those successful phase Is and phase IIs and we transition them into the programs, and this is the area that we think needs attention, needs your committee's attention.

    Several years ago, the Congress clarified the phase III contracting and data rights issues, which really opened the door for managers across the board in DOD to let contracts and to bring these technologies. And a number of them, a small number, a small cadre have done this. In fact, one of them, the program executive officer for submarines in the Navy, has awarded over $700 million in phase III contracts since 1995.

    This one small part of the Navy, which is of course a small part of the whole DOD, has taken the SBIR Program as a crucible for testing small business capability, and he is used it in a way to vet these companies' technologies and to vet their management as well—do they have accounting that supports the standards that we need to do government contracting? And from that he is awarded hundreds of millions of dollars in contracts.

    And so we submit that by that example there is an awful lot of SBIR technology that is not being transitioned, because if so much is being transitioned by so few, then we stand here to tell you that there is a lot more to be done. And we really resonate with the language that you put in your fiscal year 2005 authorization bill that suggests and that requires the Department of Defense to look at how to do more of this phase III work. And we think that that merits a follow up in fiscal year 2006, and I appreciate Mr. Abercrombie's commitment to do something more next year.
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    So we have a couple of suggestions for you. The first one is that nearly every program manager in DOD has to go through the Defense Acquisition University course, and while they have had some guest lecturers to talk about SBIR in transition, in fact, Mr. McNamara, who is a champion of this, has spoken there. We believe that a permanent sizable portion of that course could be focused on small business, not just SBIR but the transition of small business technology into these programs, because their focus, of course, is big program, big company, big product.

    The second suggestion that we have is one involving an incentive program, and the idea is that there are a number of bright and forward-thinking program managers that are awarding phase III contracts, but I think we could get a large number of other program managers over the edge, if you will, to awarding more phase IIIs if there was an incentive that maybe eclipses some of the cultural issues about that today.

    And our idea is to provide some matching funds so if a program manager said, ''Gee, there is a promising technology, but I am a little worried about spending all these program funds or that it would be a one-to-one match or maybe some other match,'' that we would arrange—and of course there would be some limit. We wouldn't want Dick McNamara to get $127 million. We are trying to incentivize a broader base. But there would be a limit.

    And we think that on a temporary basis or on a trial basis this would get sort of the juices flowing, if you will, to get more and more government program managers to make those investments in the transition of what we know now is good phase III technology.

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    And Heidi and Bill are going to take a few minutes and tell you a little bit about their experiences and some of the examples that they have that are parallel to this SBIR.

    [The prepared statement of Mr. Karangelen can be viewed in the hard copy.]

    Mr. WELDON. Thank you.

    Ms. Jacobus, the floor is yours.

    Ms. JACOBUS. Thank you.

    Mr. WELDON. You are welcome to give a statement. And we have been joined by Dr. Gingrey from Georgia.


    Ms. JACOBUS. Thank you, Chairman Weldon and Ranking Member Abercrombie, subcommittee Members, for this opportunity to testify about the importance of SBIR. I appreciate the opportunity to talk as a woman-owned business.

    Mr. WELDON. Can you move the mike a little closer to you——

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    Ms. JACOBUS. Oh, I am sorry.

    Mr. WELDON [continuing]. So the stenographer can get your statement?

    Ms. JACOBUS. How is this? Okay. I appreciate the opportunity to talk about my experiences as a woman-owned business working within the Department of Defense. My name is Heidi Jacobus, and I am the founder and chief executive officer of Cybernet Systems in Ann Arbor, Michigan.

    The SBIR program provided me the opportunity to start my own company, and I am confident this company would not exist without the program. I am an unlikely entrepreneur. My family had no background in business, my immigrant mother could not speak English when I was born; in fact, neither of my parents finished high school. Both worked, sometimes two jobs, in factories, but they valued education. And thanks to their hard work I was able to pursue an advanced engineering degree.

    Before I finished my Ph.D. in computer science at the University of Illinois, I found a near-perfect match for my Ph.D. thesis topic and an SBIR topic from the Defense Advanced Research Projects Agency (DARPA). I can still remember the day 15 years ago when an Air Force colonel called me to tell me that my proposal was, quote, the best he had ever read, so I was thrilled and energized and Cybernet began in my daughter's bedroom after I moved her in with her younger brother.

    So today, Cybernet has won over 200 SBIR contracts, making us the most successful winner in Michigan, in fact in the entire Midwest. My small company employs nearly 50 engineers and scientists. We have been granted 22 U.S. patents. Under SBIR, we developed a telemedicine device called MedStar, which has earned SBA 510(k) certification and has received national awards.
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    Recently, MedStar was inducted into the Space Foundation Hall of Fame in Colorado Springs where Buzz Aldrin gave five of my engineers medals. In addition, they also honored the SBIR program managers from National Aeronautics and Space Administration (NASA), DARPA and National Institute of Health (NIH) who together had the foresight to fund the foundation work years before.

    I am sure the committee's heard this before but SBIR is about the only avenue for small high-tech businesses like mine to do R&D work for the Department of Defense. Without it we would not exist. This program's vital to us because it is tough out there for us. Every day, my small company with 50 people competes against $30 billion defense giants for work.

    In the technology areas we care about, we have seen a trend in government contracting toward very, very large contracts. Realistically, these can only be performed by very large contractors. The opportunity for small, innovative firms to bid on these contracts is very small. Even though we might well have more technical expertise in a specific area, we have to compete with the prime.

    What we found is unfortunate. They rarely have it in their best interests to carve out critical pieces of the work for us. I would add that a woman-owned small business has even more daunting obstacles. We have strong skills, but we lack the network of connections, military experience and access necessary to break through. There are currently no mentoring programs that reach out to women, and that is why this program is so fantastic for high-tech businesses. It is crafted brilliantly by Congress to provide people like me a pathway to perform this advanced R&D.
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    We have developed a host of technologies ranging from telemedicine to gesture recognition to state-of-the-art robotics, and all were stimulated by SBIR. But winning these contracts is tough. The competition's fierce, and in 2002, there were 14 phase I proposals for every one awardee.

    A few of our technologies have progressed to phase III. We have just started a contract that should result in a product delivered to Iraq in just a few months time. The basis is an Army phase II contract for Picatinny Arsenal where we are using a computer vision and sensor system to identify different kinds of ammunition in a warehouse setting. The war created an immediate need for a system that could inspect large quantities of ammunition in the field.

    An engineer at McAlester Army Ammunition Center read about our project and called us. We demonstrated that we could quickly produce a system to meet his specs. And following this there was a real urgency to get us on contract, and under SBIR rules it is possible to sign a phase III immediately. But the McAlester contracting office had never done this; they were hesitant. But, fortunately, we found another office that was willing to take the paperwork over.

    Our contract began just last week, and we expect to deploy a working system to Iraq in three months. And I don't know any other acquisition path other than SBIR that could make this quick deployment possible.

    I commend the Congress because it was your reauthorization of SBIR that clarified and strengthened the program with regard to phase III contracts, making it far easier in these situations. So that is why I believe a proposal to create a phase III incentive program could be so important. It could provide momentum to move promising technologies forward and provide a path to get them to the end users, to the field. And we are aware that this could be contentious, but the small additional set-aside can have a revolutionary impact on the DOD.
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    I gave the example of how we are delivering our ammunition inspection device in months, not years. We need to be able to respond rapidly with affordable solutions that can be put in the hands of military personnel. The SBIR program and small high-tech businesses are one means to accomplish this. Making these changes in thinking is tough, but the incentives will encourage the Department of Defense to draw more heavily on the innovation that we provide. This proposal is a tremendous first step, and I believe the benefits could be truly transformational. Thank you.

    [The prepared statement of Ms. Jacobus can be viewed in the hard copy.]

    Mr. WELDON. Thank you for your statement, and thank you for your leadership and tenacity.

    Our third witness is Bill Broderick, Analytical Graphics. Bill, welcome.


    Mr. BRODERICK. Chairman Weldon, Congressman Abercrombie and the Members of the subcommittee, I would like to thank you for this opportunity to testify about small business participation in the DOD.

    The key question I pose for today's hearing is this: How can DOD find contractors, adopt best-of-breed technologies in small businesses when, for the most part, the current acquisition environment has disincentives to use lower cost, commercially available technology?
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    In the short time we have, I hope to provide some insight into the critical role of small businesses——

    Mr. WELDON. Can you pull that closer to you, please, the mike?

    Mr. BRODERICK. Sorry. Is it on? Okay. I hope to provide some insight into the critical of small businesses in supplying innovative and affordable technologies to the defense community and the challenges with insertion of these technologies into DOD mainstream programs. Despite the demonstrated benefits of our technologies, many small businesses continually face opposition to the insertion of proven technological innovations into DOD programs.

    Employing more than 120 engineers and scientists, and some of them the best in the world at what they do, AGI has developed more than 3 million lines of commercially available code, which provides national security and space organizations with unparalleled and cost-effective capabilities that can be rapidly deployed.

    As we speak, our software is in use at the Pentagon, remote commands in Iraq, Qatar, Kuwait, Afghanistan, United States Central Command (CENTCOM) and elsewhere providing battle space situational awareness for our war fighters. This software capability fuses together the exact position of assets that are in theater as well as intelligence and threat data into a single common operating picture in 3D, in real time.

    Sounds almost conceptual but it is not. It is already deployed and being utilized to assist our war fighters every day. Yet time and time again, we see programs attempt to reinvent our technology at excessive cost. 4
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    Based on AGI and other small business experiences, there are two acquisition practices that create unnecessary challenges for the small business community: One, the traditional cost-plus award fee contract system, and, two, consolidation of contract. While the cost-plus mechanism is appropriate in many instances, it does not work when software and other technologies are available in the marketplace. Cost-plus has increased the difficulty of offering proven innovations to the DOD by inadvertently rewarding high expenditures and reducing incentives to cut costs.

    Furthermore, industry consolidation and contract bundling significantly reduce defense marketplace competition by reducing small business access to programs and DOD's leverage over prime contractors. Consequently, true capitalistic market forces are not prevalent in the defense marketplace to promote healthy competition resulting in the most affordable and capable technology being brought to bear on our national security.

    We don't want adversary relationships with major DOD contractors and program officers, rather we prefer to have a healthy working environment that fosters innovation between small business and large DOD contractors in a truly competitive marketplace, not an environment where DOD contractors feel threatened by proven technologies that are disruptive to their business interests.

    We are well aware that this problem is complicated and multifaceted and that some progress has been made. Through corrective actions, we can work together to realize health competition and technical innovation in the U.S. defense marketplace. We believe that the current transformation may offer appropriate vehicles to further collaborations between small, innovative businesses, large defense contractors and DOD.
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    AGI applauds Congress, DOD and industry's efforts in recent years to more closely examine the application of commercially available technologies in DOD programs. However, we would urge the Department of Defense to go one step further, make the information collected available to Congress through a progress report in order to facilitate an open dialogue on the implications of commercialized technology insertion into DOD programs.

    We believe putting the facts on the table open for review by Congress and businesses alike would facilitate a more productive dialogue. Ultimately, this collaboration would illuminate a path to which Congress, the DOD and industry could foster greater inclusion of proven small business technologies. This would help reduce program costs and improve our national security.

    This industry has done some amazing things technologically, but in order to push the technology envelope far beyond the capabilities of our adversaries, we need to be better at embracing available best-of-breed technologies. Without finding a solution to the question I posed earlier, our national security will not be able to leverage the small business brain power embedded in the innovative technologies they have developed nor will the government be able to effectively leverage investments made in the SBIR Program.

    We are grateful to the subcommittee for holding this hearing on topics vital to the health of DOD and for the opportunity to testify. We are also available at your convenience to discuss in greater detail any initiatives discussed in this testimony. I welcome your questions, and, again, thank you.

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    [The prepared statement of Mr. Broderick can be viewed in the hard copy.]

    Mr. WELDON. Thank you. Thank all three of you for outstanding statements and, more important, for your work and your innovation.

    I will start off by asking has the Small Business Technology Coalition provided for us a series of recommendations of actions that you think we could take? You have mentioned some of them here. Have you consolidated that into a series of recommendations?

    Mr. KARANGELEN. We haven't but we certainly could. We would be delighted to provide you with something, a white paper with that.

    Mr. WELDON. That would be very helpful because you have given us some good ideas, and we will be asking you about those ideas. If you could give us actually a list of suggestions that you think we should be taking and working with our staff director, Bob Lowtrip, who is very much into this issue, I think we can be very helpful to you. We want to be helpful, and I would say virtually every member of not just this subcommittee but the full committee wants to try to encourage more of what you all are doing.

    Nick, I would start off with you. The percentage of phase II SBIR projects that transition to phase III, how much do you think that percentage would increase if we had matching fund incentives available?

    Mr. KARANGELEN. I think that is a very good question, because you don't expect every single SBIR to produce an outstanding technology that is ultimately going to transition. And if we look back, actually, we have—I saw John Williams here, our Navy SBIR program manager who has done a really outstanding job in promoting small business phase——
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    Mr. WELDON. Why don't we give him another plug? Do you want to introduce him again?

    Mr. KARANGELEN. Yes. John Williams from the Navy——

    Mr. WELDON. John, stand up. Thank you for the great work you do. Thank you.

    Mr. KARANGELEN. —SBIR program manager. He is done a really awesome job. And in fact the numbers show it. Eighty percent of the DOD Fiscal Year 2003 phase III SBIRs came from the Navy across the entire DOD. And so I take the Navy as an example. Because if we say they are doing a pretty good job, one in 11—and I just looked at 1998 and 1999, and I am sure John will correct me downstream if we get some better data—but if you look at 1998 and 1999, one in 11 of the successful phase IIs was transitioned to phase III. One out of 11, so that was about 25—in 1998 and 1999, in the 2 years, about 25 phase II SBIRs in the Navy got transitioned to phase III.

    We don't have the statistics for the rest of the DOD, but since we know that the Navy did 80 percent, you can see that since they are one-fifth of the total DOD and they are 5 times the rest of the DOD, it is about—the rest of the DOD is about one in 200 or maybe one in 180, and that is a gross sort of extrapolation.

    But the point is we don't even think the Navy's maxing out, so we probably could go from somewhere like one in 100, if you look at the current DOD, to more like one in 10. And, again, if you look at the way the program executive officer summaries, Mr. Dick McNamara has done it, just since 1995 he is awarded $700 million in phase III contracts. That is non-SBIR money. That is program money that has saved him hundreds of millions of dollars. And, again, if we had time, we could tell you some of those stories.
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    Mr. WELDON. Thank you. I have one other question before I turn to my colleagues, because we have so many witnesses, and it ties into something that, Ms. Jacobus, you mentioned about you are somewhat at a disadvantage because this industry is so heavily dominated by men and men who have been in the service who come back and work the process very well. I know that and see that all the time.

    And you suggested there is no mentoring program for women. And I know all you want is a level playing field, so how do we give you a level playing field? Do we provide a mentoring program for women? What suggestions do we have that you could think would help other women have the same kind of American success story that you have? And if you could pull the mike up to you when you respond.

    Ms. JACOBUS. Well, I did a very thorough study of Cybernet's technology areas and found that in the description of our contracts that the contracting officers give us called FSC, Federal Supply Code. The areas that we work in we, Cybernet, are unique. In many cases, we are the only woman-owned business in the entire Nation getting contracts under that FSC code. There exists contracting rules which allow contracting officers to give a sole source contract if there are two or more women-owned businesses presenting their technology, but in this case it can't be implemented; I am the only one. So it is a catch–22 for me.

    I know, for example, last year I was one of 20 women recognized in the State of Michigan by the Association of Women in Computing as one of the outstanding Michigan women in computer science. And if you look at the register of those women, I am the only one who is an entrepreneur. Everyone else works at universities, for the state, for gigantic Fortune 10 companies.
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    So I am very much alone in this, and I don't need to be; there is a lot of talent out there. But, obviously, the obstacles that we deal with every day maybe make the choice of hanging up a shingle and starting a company more difficult than taking a job at a large business.

    Mr. WELDON. Well, we would appreciate giving you more time to think about this and coming back with some very specific ideas——

    Ms. JACOBUS. I would like to. Thank you.

    Mr. WELDON [continuing]. Of what you think we could do to help create more people like you doing what you are doing, again, not because we want to give you some special advantage; we want to give you a level playing field. And what you are saying is you don't have that right now, and we want to find a way to level that, so that we can get more people like you to be successful.

    Ms. JACOBUS. Right. The data I have gathered doesn't suggest that we have a level playing field.

    Mr. WELDON. Mr. Abercrombie?

    Mr. ABERCROMBIE. I have a question that goes to Mr. Broderick, and then it will go back to you, Ms. Jacobus—is it Jacobus?

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    Ms. JACOBUS. Pardon me?

    Mr. ABERCROMBIE. Am I pronouncing your name correctly?

    Ms. JACOBUS. Jacobus, but that is fine. Thank you.

    Mr. ABERCROMBIE. Jacobus. Thank you.

    Mr. Broderick, you mentioned, if I heard you correctly, contract consolidation. Is that the same thing as contract bundling?

    Mr. BRODERICK. Yes, it is.

    Mr. ABERCROMBIE. Are you familiar—can you pull that mike over?

    Mr. BRODERICK. Yes, it is, Congressman.

    Mr. KARANGELEN. If I could add something to that. It has the exact same effect, but in technical terms, contract bundling is the bundling of existing contracts. What I think we are addressing here is something that is a little more insidious, which is there are no existing contracts to bundle, but they are just bundling up the——

    Mr. ABERCROMBIE. I understand that—when I said it is the same thing I really didn't mean it literally it is the same thing, but we are talking about the same kind of process here where, in effect, you go to globalize or giantize the contract award, which, in effect, cuts out the small. In other words, you can compete, good luck, you won't get it. It is not going to happen. I can try out for the Green Bay Packers too. I can be a walk-on for a scholarship or something like that. Those things aren't going to happen, so they become, in effect, a dodge, and we all wink and pretend that it is happening.
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    Now, this is something that has been going on in the Pentagon I am going to say about the bundling here, so you get it at both ends, that which involves initiative and innovation at the start, contract consolidation, or where you have existing contracts and they are consolidated, if you will, and bundled, and service may not be put forward.

    We have had arguments in here about freight forwarding, for example, and what happens is is you get these relocation companies come in and they are able to get these contracts. Of course, then they subcontract it out to people who should have gotten it in the first place so that you end up with somebody having their furniture all busted up and who do they complain to? Some regional office of a relocation company who could care less, and then the subcontractors get screwed on payment.

    Do you find yourself or do you find businesses with whom you are associated, particularly members of your board, in a position where they subcontracted after a consolidation contract is awarded?

    Mr. BRODERICK. In a lot of cases, and I will just name the Future Combat Systems (FCS) as an example, where FCS is a very, very large contract for the Army. There have been strong language to say, okay, there will be a certain amount of small business subcontractors against this big prime. And a lot of times with very good intentions program offices and even prime contractors start out with that intent, but it is just human nature, if you are a big horizontally-integrated company——

    Mr. ABERCROMBIE. And we legislate to get rid of human nature. [Laughter.]
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    That is why we are holding this hearing.

    Mr. BRODERICK. Thank you very much. We are delighted that you are in that mode. And in fact we think we can help you break that culture.

    Mr. ABERCROMBIE. So the answer is, yes, that you find yourself then being subcontracted to?

    Mr. BRODERICK. Not enough.

    Mr. ABERCROMBIE. Not enough, but——

    Mr. BRODERICK. We would like to be subcontracted.

    Mr. ABERCROMBIE. Help me here. Does that happen?

    Mr. BRODERICK. It happens.

    Mr. ABERCROMBIE. Okay. Now, when that happens, is there an overhead sum that is taken out by the larger company then when you do their work for them?

    Mr. BRODERICK. A considerable one. It is the cost to the government.

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    Mr. ABERCROMBIE. And each time the contract is awarded, they take their overhead out, don't they?

    Mr. BRODERICK. Absolutely.

    Mr. ABERCROMBIE. And they are running you. You end up working for them doing the work that you did in the first place, and they take an overhead rake off at the same time.

    Mr. BRODERICK. That is true.

    Mr. ABERCROMBIE. Okay. That is what it is. They are not doing anything, but they are taking it off the top. Doesn't that add to the cost?

    Mr. BRODERICK. It does add to the cost.

    Mr. ABERCROMBIE. Okay.

    Mr. BRODERICK. In some cases, integration is necessary, but in a lot of cases they should be contracting with the small businesses, yes.

    Mr. ABERCROMBIE. Okay. But when it gets awarded in the first place, okay.

    Now, Ms. Jacobus, on the question of—see, I don't have the same difficulty Mr. Weldon has with affirmative action. We can't use the word—I can use it, you see. As you can see, I represent Hawaii, and I don't look like Don Ho, so I am affirmative action in Hawaii. [Laughter.]
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    I do look like Don Ho; we are both short. I don't have the same number of families he has, though.

    But on this question then, the same thing on women-owned businesses. It is ironic—I won't say it is amusing, but it is ironic that you are having difficulty here. We already have affirmative action with DOD contracts when it comes to women-owned businesses and services coming in and services coming in because there are certain set-asides, what we call set-asides, for minorities and women-owned businesses.

    If you were in the construction business, you would probably have an easier time getting a contract as a small business, woman-owned business, if you were a contractor doing electrical work, let's say, as opposed to doing what SBIR traditionally handles. Are you familiar with that side of things?

    Ms. JACOBUS. I am absolutely familiar with it. In fact, in the Department of Transportation, there is a program called, Disadvantaged Business Enterprise, and in fact Joanne Payne is here who is one of the thought leaders in putting that program into place. And she had to struggle for years in order to get women in the construction industry contracts in a Federal program——

    Mr. ABERCROMBIE. Be put in by law. My point is——

    Ms. JACOBUS. I am sorry.

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    Mr. ABERCROMBIE [continuing]. Then one of the suggestions I hope you will take a look at is that we have something similar with respect to high tech or traditional SBIR research activity that would be a set-aside for minority-owned businesses or women-owned businesses. And I don't have any problem doing that at all. I don't have the statistics in front of me, but I will bet there are damn few female contract officers.

    Ms. JACOBUS. I think that that is true, but I don't think there is a set-aside for women in the Department of Defense. There are goals, just as there are goals for—but the goals are not reached.

    Mr. ABERCROMBIE. Yes, but then there are some of us, though, in Congress who chase the Department of Defense to try and make them live up to their goals.

    Ms. JACOBUS. Right.

    Mr. ABERCROMBIE. We shouldn't have to do that. I agree with you, so maybe one of the things you need to take up, and my suggestion, is get rid of the goals and get something settled that they have to give us a reason why they can't do it as opposed to whether or not that is a goal. My goal is to be six feet tall and dunk a basketball. I am 66. What do you think my chances are? I don't give a damn about goals. What I want to accomplish is specific paths set forward in law, in legislation that will require them to do things or give a reason why they can't.

    Ms. JACOBUS. And I agree with the specificity that you point out because even when large prime contractors say they are meeting their goals in working with small business, when you shine light on what they mean by that, it turns out they are sending subcontracting money on travel expenses by buying their travel through a small business travel agency. I have a——
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    Mr. ABERCROMBIE. There are all kinds of tricks.

    Ms. JACOBUS. Right. I have a pitch that General Yakovac made early in the Future Combat Systems, which sounded—it was the key tenets of the program, and there are three little things he said that heartened me. It is going to create an opportunity for the best of industry. Well, we think we are amongst the best. It maintains and shapes the industrial base of the future. We think we are the future. And to retain competition. Well, more is better. We are competition. And we don't see that that happens in this program, in the end.

    Mr. ABERCROMBIE. So when you put forward the suggestions to the chairman that he is requested, could you take these things into account?

    Ms. JACOBUS. Absolutely.

    Mr. ABERCROMBIE. And don't hesitate—when we say suggestions, you don't have to write legislation. We have experts in here to do that. You have got to outline to him those things that you believe would be necessary to go beyond feel-good legislation that doesn't have any teeth in it and will not end up actually accomplishing what we want to do. We want to get beyond goals and aspirations, okay?

    Ms. JACOBUS. Thank you.

    Mr. ABERCROMBIE. Thank you.

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    Mr. WELDON. Thank you. And if you have an entrepreneur who can tell us how to grow Neil to six foot, include that in your recommendations. [Laughter.]

    Ms. JACOBUS. Genetic engineering.

    Mr. WELDON. Mr. McKeon is recognized.

    Mr. MCKEON. Thank you, Mr. Chairman, and thank you again, witnesses, for being here today and for the things that you are doing to help this program.

    Mr. Karangelen, would you please review again for the committee your recommendation for providing a funding incentive to the program managers to encourage them to give greater consideration to the small defense businesses?

    Mr. KARANGELEN. Yes, sir. What we are suggesting is that some money be set aside so that a program manager who wishes to transition a phase II, a successful phase II technology into his program and maybe hasn't done it before, we could put some caveats on it of some type, and was hesitant, and let's say that that cost was going to be $2 or $3 million. Well, if it was a $3 million cost over a year and a half or two years and he could get matching funds, meaning he would only put up $1.5 million of program funds and then receive a $1.5 million from this separate pot, that would be a strong incentive for him, and it would counter the cultural barriers which exist today like, ''Well, gee, our program's really on track, isn't it, and our prime contractor can do that, can't he,'' which in a lot of cases may be true, but as we have seen in a number of examples, often disruptive technologies that really change things, like in the submarine force where a single prop sub was built for one-hundredth the cost of the one the prime was developing. That doesn't come unless it comes out from the outside.
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    Mr. MCKEON. So a manager then would see his money go twice as far——

    Mr. KARANGELEN. That is correct.

    Mr. MCKEON [continuing]. Under an outline the way you suggest. What are the potential sources for funding for this incentive that we might look at?

    Mr. KARANGELEN. I think you have the sort of traditional from the congressional point of view. We could make an appropriation. Appropriation could be made, I should say, that was for a fixed amount of money to fund this kind of activity, or a set-aside, much like the SBIR program is set aside today. Two and a half percent of all R&D funds are set aside for the SBIR program. And I don't think it would be a stretch to say that 1 percent or half a percent—an additional half a percent or 1 percent of R&D set-aside could be created for this incentive.

    And I think, ultimately, you might even be able to retire that part of the SBIR program, because as soon as you got a cultural change—it might take years, but as soon as you got the cultural change and as soon as you had more Dick McNamaras running around really bringing small business in and testing their technology across the board, you wouldn't need that incentive, because they would have the real incentive, which is value in schedule and cost and performance.

    Mr. MCKEON. I don't think I will be here long enough to see a program once started phased out. So if we were to set aside an additional 1 percent for this, you could phase that in because you probably wouldn't be—as a new program, you are probably not equipped to handle the full 1 percent the first year; it would have to be phased in.
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    Mr. KARANGELEN. Yes, sir. We have got the experience of the SBIR program behind us, and that is exactly what we need to do. Because if you have this 1 percent, which represents a large amount of resources with respect to the overall program, it wouldn't catch up fast enough in the first year, so we maybe did a quarter percent, then a half. We phase it in. That would match the Department of Defense ability to really use it efficiently.

    Mr. MCKEON. Where would the opposition come from for this?

    Mr. KARANGELEN. I think it would be very similar to what you saw in the SBIR program in the beginning, not that any one organization or group of people is opposed to this. I mean you might think the primes are opposed, but they are really not. I think there are lots of people that believe that small business has a lot to offer, but it is sort of the status quo. I mean we have a—we are a bureaucracy and people don't like change, and so I think we would see resistance from Members in this committee all the way through to the Pentagon and the primes. But just like the SBIR program, which is authorized and the GAO has studied over the years and Harvard has reported on the huge contribution it really makes, I think we would see the same thing a few years down the road.

    Mr. MCKEON. Thank you very much.

    Thank you, Mr. Chairman.

    Mr. WELDON. I thank the gentleman. Just one follow up. If you could provide for the record, so I don't put you all on the spot, some other examples of comparisons of what our entrepreneurs have done versus what that same product would cost from a large prime. And you don't have to put any names on it so we don't get any of you in trouble. Give us a white paper list of some examples that we can include in the record. And, again, we won't attribute to any one company so that the primes don't come after you.
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    Any other questions? We will give you some questions for the record. If you could answer them for us with more time, and we would appreciate you getting back to us so we can put your responses that we have asked for into the record for further discussion by the full committee and by staff. We are definitely going to move on these ideas legislatively, so we want to have the full input of your advice and consent.

    We want to thank you for your testimony but more importantly for the great work you are doing under sometimes difficult conditions. This committee wants to be your friend, and sometimes it is hard pushing against the bureaucracy, but we do that well here, so we want to be your advocates.

    Thank you all, and you are dismissed, and we will look forward to calling our next panel. Let us take a few moments to set up because we have so many panelists. In fact, I think the whole audience is a part of the next panel. [Laughter.]

    Mr. BRODERICK. Thank you, Mr. Chairman.

    Mr. WELDON. Let me acknowledge Jesse Tolleson and Claire Dunne who actually did all the organization for this hearing. They are both very capable staffers on the committee. I want to thank them for their outstanding work. Thank you both.


    Mr. WELDON. Panel two, what we are going to do is have each company make a presentation on their own and then I guess we will bring everyone up at one time, and we will save our questions, I guess, till the end. Is that what you are suggesting Bob? Okay.
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    We will start with Richard Hollis, president and CEO of Hollis-Eden Pharmaceuticals. The floor is yours. If you can, again, limit your statement. We will put your statement in the record as it is written, but give us the verbal so we can have an interaction as we had with the first panel. The floor is yours.


    Mr. HOLLIS. Mr. Chairman, Members of the subcommittee, thank you for the opportunity to testify today.

    The Armed Forces Radiobiology Research Institute, known as AFRI here in Washington, in 1997 began testing Neumune, the Hollis-Eden drug candidate, as a potential medical countermeasure to a nuclear or radiological attack. Shortly after 9–11, AFRI urged us to develop Neumune for the syndication. They did so based on pre-clinical findings shown here on this chart before you, demonstrating that up to 100 percent of the animals treated with Neumune survived following lethal radiation exposure, while all the untreated animals died.

    These results and the fact that early intelligence after 9–11 indicated that al Qa'ida had considered nuclear power plants in their list of targets and their obsession to acquire nuclear material made this a priority for AFRI to develop as a medical countermeasure.

    In a nuclear attack, the vast majority of the victims would die from radiation sickness, not the actual blast. This chart, based on an article from the New England Journal of Medicine, published in 2002, shows what would happen in New York City if a 10 kiloton device went off. Fifty thousand would die from the blast immediately, and roughly 200,000 would die from radiation sickness, and another 700,000 would get ill from radiation sickness.
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    So radiation sickness kills and injures by damaging the body's bone marrow, which leads to depletion of white blood cells, known as neutrophils, and clouding elements, called platelets and red blood cells, which are critical for carrying oxygen to tissues. This damage leaves the victim vulnerable to opportunistic infections, bleeding episodes, severe anemia and eventual death.

    So our product, Neumune works by boosting the body's immune system, and we believe, as many radiobiology experts in the field believe, that a drug like Neumune is needed to minimize the devastating medical consequences or loss of lives that would result from a nuclear or radiological incident.

    There is currently no available drug that can provide this type of protection. These charts show preliminary testing done on non-human primates exposed to doses of radiation. Our product was able to protect these animals. This data is very important because this is the data we are going to be using to get Federal Drug Administration (FDA) approval here in the United States.

    Prior to 9–11, Hollis-Eden was focused on other applications and infectious diseases, but we chose to develop Neumune as we shifted the company's focus to developing a nuclear antidote. First, we focused on developing Neumune because we thought it was the right thing to do for our country. This is a medical countermeasure that is necessary. Both President Bush and democratic Presidential candidate Senator Kerry have both stated that this is the Nation's top priority.

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    So based on these concerns, today we conduct many trials and designs to try to negate the consequences of a nuclear attack, and we have teams of medical professionals drilling to face the casualties numbering in the tens or hundreds of thousands. But the vast majority of these victims, we believe, absent a medical countermeasure like Neumune, there will be little hope for them.

    So in these exercises, we prepare to send the National Guard and civil support units and emergency first responders into these scenes to save lives. However, today, we can't adequately protect these brave men and women against radiation exposure. So a critical element in saving their lives in the event of a nuclear attack is through an effective medical countermeasure. In other words, we can conduct all the drills we want, but unless we have a medical countermeasure that is effective and practical, there is not much we can do.

    Second, we focused on developing this product because, quite frankly, we couldn't live with ourselves if we didn't develop it in case there was a nuclear attack. We at Hollis-Eden are doing everything we can to get this product to the marketplace, but the decisions to deploy this drug are exclusively in the hands of the Department of Health and Human Services, the Department of Homeland Security and the Pentagon. So these agencies have to determine how they will deploy and buy this drug.

    Lastly, and third, we focused on this because it made smart business sense. We can get this drug developed quicker through the animal efficacy rule than we could on a normal development FDA pathway. Unlike most drugs, there is a marketplace, so bioshield today now has created a marketplace for these particular drugs. And today I was privileged to be in the Rose Garden when the President signed the Bioshield legislation, which is intended to rectify the market failure of no market.
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    So the purpose of Bioshield is really to provide the private sector with the necessary incentives to encourage development in this area. So the promise of Bioshield is really great American legislation that calls on the ingenuity of the private sector to respond to our Nation's call to develop medical countermeasures against weapons of mass destruction. And on analysis, the combination of a purchase contract, defined markets and the expedited approval process made this a wise business decision for us to pursue.

    That said, it is taking much too long to get Bioshield legislation passed, as was originally anticipated. That delay and uncertainties about how the program will be implemented is causing the financial community to be skeptical of investing in companies like ours.

    A major uncertainty about Bioshield implementation concerns will be how contracts are implemented. So what we would like to have is criteria for Bioshield purchase contracts clearly defined, and these criteria should be based on the impact of weapons of mass destruction, the current scientific intelligence regarding the possibility of the risk, the lack of current treatments and the potential success of new countermeasures and a company's ability to deliver on that promise.

    Weapons of mass destruction threats need to be identified, treatments prioritized. For example, it is our view that the nuclear threat, the greatest threat to our Nation, is now lost amongst a plethora of biological threats that are significant but not of the same magnitude as a nuclear 9–11.

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    I would like to offer Members a sampling of recent reports depicting the nuclear threat and the impact it would have on the United States. These reports are very recent, and I would just quickly like to read a quote from one of these studies titled, ''Securing the Bomb,'' published May 2004, from Harvard University, John F. Kennedy School of Government, commissioned by the Nuclear Threat Initiative.

    Beginning a quote, this report debunks in detail a series of myths that have led policy makers around the world to downplay this danger. The facts are the amount of inadequately secured bomb material in the world today is enough to make thousands of nuclear weapons that terrorists are actively seeking to get these materials and that with such material in hand, a capable and well-organized terrorist group plausibly could make, deliver and detonate at least a crude nuclear bomb capable of incinerating the heart of any major city in the world.

    In conclusion, we can't expect to win today's unconventional war using conventional weapons and tactics. You can't eliminate a virus with a stealth bomb or an aircraft carrier. A flack vest is of little protection against a nuclear or dirty bomb. However, medical countermeasures can literally take these weapons out of the hands of terrorists.

    So the only question is will we take the necessary steps to develop these medical countermeasures now by stimulating the capital markets and the pharmaceutical industry to respond to this Nation's security needs?

    So, last, we need the government to fully implement Bioshield and provide the leadership to make this legislation a remarkable success story of government and industry working together to secure our Nation's safety and freedoms against terrorist threats.
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    Mr. Chairman and Members of the committee, thank you for the opportunity to appear before you.

    [The prepared statement of Mr. Hollis can be viewed in the hard copy.]

    Mr. WELDON. Thank you for your excellent statement. We are going to ask you to sit there, and I am going to ask Tony Mulligan to come up. Tony is the president of Advanced Ceramics Research.

    And, Tony, feel free to address the committee. We will accept your statement as a part of the record, and we are going to ask questions after all of you have a chance to make your opening presentation. Tony, the floor is yours.


    Mr. MULLIGAN. Thank you, Mr. Chairman, Ranking Member Abercrombie and members of the committee. It is a great honor to be here.

    My name is Anthony Mulligan, and I am the CEO of Advance Ceramics Research of Tucson, Arizona. I am also a former board member to the Small Business Technology Coalition, and I would just like to throw out a plug that I think very highly of the coalition. I think they are very accurate on the needs and viewpoints of the small high-tech companies. I myself was one of the original founders to the coalition eight years ago.
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    My company, Advanced Ceramics Research, is a successful, small high-tech company. We were originally founded through the support of the Department of Defense and other Federal agencies, primarily the Office of Naval Research (ONR) with Admiral Cohen, and also with DARPA, with Tony Tether, on developing a magnitude of technologies. But, primarily, what I would like to talk about today is our technologies for rapid manufacturing processes.

    Under the support of ONR and DARPA, we have developed a number of technologies that enhance the ability of how do you make things cheaper, better, faster, that perform better. Through the SBIR program, we have received multiple manufacturing process technologies, including funding from NAVAIR on SBIR technology, called Water Soluble Tooling. We have had DARPA funding for a technology for Extrusion Free Form manufacturing, and ONR technology called, Solid Free Form manufacturing.

    What I would like to do is show you some example of these technologies. First, I want to do a demonstration, and I am going to show you how one of the core technologies works, and then I will show you the kinds of parts that can be made from it.

    The water soluble technology, developed on our Naval Air System Command (NAVAIR) funding, which is a phase II program that is now going to a phase III, is a material that looks like these cubes. And you can form it and shape it however you want, and then you use it to make the tool or the mold and you put your composite material around it and then you can cure that in the oven or fabricate it. And then with simple water, I have some drinking water here, these tools, which are pretty hard and strong, in most cases, Mr. Chairman——

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    Mr. WELDON. Is that a slap at the chairman, Tony? [Laughter.]

    Mr. MULLIGAN. I didn't mean that, sir. And so now I have poured the water in, and now it has just turned to a horrible slush.

    And what do you do with this? Well, one, another aspect is it is very green. The materials are made out of materials that the FDA has approved for food packaging. Examples of things that you can make, this is a wing section on the NAVAIR programs which was made in one piece that has ribbed sections built into it, stiffeners, strengtheners, and it even has a global positioning system (GPS) antenna. And so this was made in one piece, and what we believe is we can build an entire unmanned aerial vehicle (UAV) using this technology in one piece. And then when you have fabricated your part, your whole part, you wash away everything inside, and then you are left with your final component.

    This technology, combined with the other manufacturing technologies, we believe, also would let you build things like torpedoes and unmanned underwater vehicles (UUVs) and even missile casings, complex-shaped parts in one single component, greatly reducing the cost affiliated with all the individual pieces that have to be fastened together and attached. And it also lets you make parts that are much stronger and much more reliable.

    Another defense example is this is a component that connects to the T-valve that connects three different lines, and it is made with a water soluble tool where the composites are wrapped around it. It is cooked in the furnace, and then you wash it out and you are left with a part that looks like this that would have previously required three tools to make.

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    What does this mean dollar-wise? We built one part for a defense contractor, a large inconel steel tooling part—it is a large rocket motor part that would have normally required a large inconel steel tooling. Using this process, our entire cost——

    Mr. WELDON. I couldn't hear what you said. It requires a what kind of——

    Mr. MULLIGAN. It would require steel or metal tools to fabricate the part. Using this process, our total cost was about $15,000. The large defense prime, they told us afterwards that if they had used their conventional manufacturing methods, it would have cost them nearly $1 million to make that part.

    Then in another case of a Navy aircraft component part, we took tooling that had cost $150,000 to produce the part, and with only $5,000 we were able to produce tooling using this method that could make parts that were of the same quality as the parts that were made with the metal tooling.

    Another example of what you can do with the technology is because it works off whatever you draw in the computer, you generate a part, this is an artificial bone component, and it is a process we call PlastiBone. And what happens is if you are—and this funded by ONR—but if you are a soldier and your right arm has taken an injury where it has been blown up, we CAT scan your left arm and superimpose that over what is left on your right arm. The computer image then generates a computer image of that, and the machine fabricates, directly fabricates the bone segment that you are missing.
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    The material that is used in there is a calcium triphosphate with a polymethylmethacrylate compound that basically is bone food. And what happens is your bone will start growing into this, and then after a few months you can take your cast off and use your arm. In a period of a year to a year and a half, you now have all natural bone. Your bone will have grown through and eaten the entire scaffolding and you are left with a solid bone segment. The parts are very accurate. It will generate it to within a few thousandths of an inch of what the actual size is.

    The same technology in another application, this is a hydrogen scramjet injector for a hydrogen motor, and the previous way it was made is many thousands of sheets of copper foil diffusion-bonded together and then cooked in a furnace and costing sometimes, the first products, hundreds of thousands of dollars. Using this technology, we are able to build these high-temperature ceramic components where hydrogen fuel comes in one end, goes through complex channels inside, and comes out in a very specific way so that it can work correctly in the motor.

    In another application, we have a mold here off the corner of the table, which is a heart valve mold, which allows the people who build artificial hearts to make a much better assembly that doesn't fall apart. Every now and then they have had problems where the casings would separate. Now this cures that problem.

    And then in yet a third application, showing the versatility of this capability, this is what you might recognize as the face plate of a cell phone. Our material is used for these handles that hold these cell phone plates because of its low-cost function to allow an operator to hold it so they can polish the cell phone. Oddly enough, what this has resulted in is the very large company that we sell these to has been able to maintain their workforce here in the U.S. instead of shipping abroad for low-cost labor, simply because it is a low-cost tooling and the versatility of this material that they have access to.
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    On the far end over here, I would like to show you, this is the mold that was cast out of silicone. Its value is only a couple dollars in raw materials. It has been damaged several times before today. No one has a monopoly. And, in general, you would wet the pieces if you broke it and you would stick it back together, and half an hour or an hour later it will be strong. So if you damage your tool, you can repair your tool.

    But on this picture we have on the easel here, what they made from this, and it is in production in Europe, is a one-piece carbon fiber wheel that has hollow spokes, has a hollow hub, and the wheel is about a third the weight of its competition, yet it is much stronger and it demonstrates how you can build very complex parts very inexpensively, opening the doors for a lot of opportunities and what the Department of Defense needs.

    The last part I would like to show is this is a small ceramic piston and cylinder, which is manufactured on one of our manufacturing plants on the Tohono O'odom Reservation in Tucson, Arizona. And these parts were made also using the same processing, with the ability where you use water soluble tooling to cast the parts, it uses a computer-generated placement of that tooling, and except for a final machining operation, it is pretty much a near net-shaped part. And what this does at very low cost, actually a lower cost than the metal component, allows small UAV engines to operate with heavy fuel, such as diesel fuel or JP–8 fuel, which is important for our war fighters.

    The last sample, this very last sample is a metal component which can actually be made directly from the tooling material. So you make your part out of the water soluble tooling directly generated from the computer, so you don't actually have to use hands, and then you can place the material, and here's a large nickel chrome part. And then you just wash away the tooling and you are left with a metal part. Before you would have to had to take a sheet of metal, had very head-duty steel tooling that would stamp these parts out, and then you would have your part. With this process, it is very simple and very low cost.
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    So in closing, what I would like to say is our company, Advanced Ceramics Research, is just one of many, many small businesses that do amazing things, that do these types of things, and they are succeeding because of the congressionally mandated SBIR program.

    I believe Congress established the SBIR program because it recognizes that small businesses create most of the new jobs, and they are the source for most innovation, as we have heard today from the others who have been on the panel. This is because small businesses are not risk adverse. Basically, we have no choice. We have to take risks. It is the only way we can survive in order to stay competitive in today's climate.

    Our current times demand that the Department of Defense be willing to take more risk by investing in small businesses. I believe that the members of this subcommittee can assist the Department of Defense by providing adequate support personnel to the offices administering the SBIR funds, encouraging the expanded use of the deliverable and definite quantity contracts for small business innovative research programs and remove the disincentives which defer the acquisition community from dealing with small businesses.

    Specifically, my last comment I would like to make is if a program officer picks a large prime and the project fails, that is okay, but if the program officer picks a small company, that could easily be a career-limiting move. And if the company succeeds, he gets a nice pat on the back. If the company fails, it may have a great effect on this career for the future. So it is very difficult for the regular program manager out there to take the chance and move forward with small businesses.

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    Thank you for the opportunity to talk here today.

    [The prepared statement of Mr. Mulligan can be viewed in the hard copy.]

    Mr. WELDON. Thank you, Mr. Mulligan. That was outstanding testimony and outstanding products. If you would sit there, our third witness is Mr. Enrique Enriquez, president of Locust USA, Incorporated.

    We are pleased to have you here, Enrique, all the way up from Florida. Welcome, and the floor is yours. We will enter your statement as part of the record.


    Mr. ENRIQUEZ. Thank you, Mr. Chairman, Ranking Member and Members of the committee. It is an honor to be here. I am going to give this my best shot. Can you hear me there? Okay.

    Over the past 20 years, I was head of engineering development for Rolls Royce in Miami. We worked in very advanced programs like Star Wars, and I had the honor of being a project manager and making the structures for it. During my career, I have come across wonderful people that we used to talk about the potential of UAVs in the future in automation, and we were just waiting for the days when computers would come to the position that you can put it inside a small plane and fly it.

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    I want to talk a little bit about my company, Locust USA, which is a combination of two companies, basically: Pegasus Engineering in June Beach, which is made of retired Pratt & Whitney top-level engineers. These are the people that have built and designed the engines that we are flying today in commercial and also military. And a little company in Miami called Mark Two Engineering, which is a leading manufacturer of biomedical equipment that we double in doing the prototypes for the UAV engines that we are presently manufacturing for DARPA and the Army.

    I guess that the real point that I want to make here is that one thing that I have been very fortunate to take advantage of is that I have found a tremendous amount of talent of retired people out there that I have been able to bring together. These are retired folks from Pratt & Whitney, Sikorsky, and they are developing the same quality of products that they were doing for all their life, except that we are doing it in a very low-cost fashion.

    I just want to give a real quick example. We are developing a little engine for DARPA that is going to produce roughly about 4 kilowatts of power. And this is the motor. This is the little thing that makes about 4 kilowatts power. This is enough power to possibly be a backup to most homes. So the technology that is being developed will weigh approximately 10 pounds. In existing technology, what you have out there in the field today weighs hundreds of pounds. So, in essence, what we are doing is we are lightening the force for our armed forces, and I think I opened questions.

    I think this technology has an incredible amount of potential. You can find it in UAVs, you can find it in power generation, it can power cars, it can power a lot of things. It is going to open many, many avenues. I think it is as revolutionary as the personal computer was 20 years ago. So I encourage this committee to find small companies and especially those that revive that wonderful talent that is retired out there that is completely capable of doing great things all over again.
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    [The prepared statement of Mr. Enriquez can be viewed in the hard copy.]

    Mr. WELDON. Thank you. We have some questions for you but we are going to ask you to sit there until we get the others up. Outstanding work, Enrique, and I appreciate seeing you again. You were here once before we met. I was impressed then, I am impressed now.

    Mr. ENRIQUEZ. Thank you, Mr. Chairman.

    Mr. WELDON. Our next witness is Tom Cuda, vice president of Operations for Vista Controls. Tom, if you would come forward and give us your statement. Welcome, it is good to have you here.


    Mr. CUDA. Thank you. We are working on the signal.

    Mr. WELDON. I promise, Tom, I didn't touch your system before the hearing started. Neil may have, though.

    Mr. CUDA. There we go. Thank you. Mr. Chairman, Congressman McKeon and other committee Members, thank you for inviting me here today. My name is Tom Cuda. I am vice president of Operations at Vista Controls, Incorporated, a Curtis-Wright company. I am here today to talk about the advantages of using commercial off-the-shelf products, also called COTS products.
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    Vista Controls is a DOD small business success story. We were founded in 1985 in a Santa Clarita, California garage. Today, we have two facilities: A 52,000 square foot facility in Santa Clarita, California and a similar facility in Littleton, Massachusetts, with a total of 250 employees. Vista Controls was acquired by Curtis-Wright Controls in November 2001. At Curtis-Wright, we are proud in our company's history with roots back to Kitty Hawk and man's first powered flight.

    We specialize in providing boards and systems based on rugged commercial off-the-shelf, open architecture electronics. Since Vista's start-up in the founder's garage in 1985, we have provided COTS products that are deployed in a number of military platforms. COTS saves money by fostering competition and reducing life-cycle costs. It reduces development of risk and time to market. It provides economical technology insertion capability, and our COTS products are built specifically to meet the rugged high-reliability requirements of the defense industry and have been a success for both DOD and the war fighter.

    COTS in motion. On the right hand side of the screen, there are two very short videos. The first one is a low-sat system in action, and the second one is a striker mobile gun system, both successfully developed with COTS content.

    Industry and government agree the COTS business model works. The COTS business mode works because market pressures compel economically rational decisions, resulting in constant innovation and little waste. Open market success brings competition and lower prices, and a competitive market creates broader choice. A commercial developer is motivated to minimize costs and shorten development cycles.
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    COTS works across multiple surface platforms. Development costs are spread across all the users. One single board computer, as indicated on this screen, can apply to many applications. Vista Controls' R&D funded single board computer services ground mobile, sea and air platforms. Open standards-based architectures allow faster, lower-cost technology insertion.

    COTS represents a solution for electronic component obsolescence. We manage obsolescence levels, designing long life into our products and providing modular, upgradable products. We address obsolescence at the component board subsystem, managed systems level. We use commercial technologies to develop rugged, reliable building blocks, as demonstrated by our product content on the Global Hawk Program.

    Our COTS products include a perimeter intrusion detection system for protecting the war fighter at home and abroad. We called it QUPID. QUPID stands for Quick-Reaction Perimeter Intrusion Detection system. QUPID is a unique beyond-the-fence perimeter system that looks beyond the defensive perimeter, allows for early warning before the attack, keeps the threat away from the asset, inexpensive, uses an ultra wideband radar system. It is currently deployed at U.S. Air Force facilities.

    What I want to leave here today is that Vista's COTS products have been successfully deployed on many military platforms, and COTS is a good answer, a good solution for both government and industry, from Kitty Hawk to Global Hawk.

    Thank you again for inviting me here today.

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    [The prepared statement of Mr. Cuda can be viewed in the hard copy.]

    Mr. WELDON. Thank you, Tom, for that great presentation and for your great technology overview.

    We would ask you to sit there as we invite Greg Peterson, chairman and CEO of SecuriMetrics, up to make a presentation on behalf of his company.

    Greg, welcome. Your statement will be entered into the record. Feel free to make whatever comments you would like or show whatever demonstration you have.


    Mr. PETERSON. Chairman Weldon——

    Mr. WELDON. You have to pull that mike up close, Greg. That is good.

    Mr. PETERSON. Can you hear me now?

    Mr. WELDON. No. It must not be on.

    Mr. PETERSON. There we go. Chairman Weldon, Ranking Member Abercrombie and Members of the subcommittee, good afternoon. My name is Greg Peterson. I am the CEO of SecuriMetrics, Incorporated, and I consider this opportunity to testify before the committee a great honor, and I thank you for inviting me.
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    SecuriMetrics is a small business located in Martinez, California, and we employ 16 highly trained professional hardware-software engineers and program managers. We are going to be increasing our size of the company to 25 people very shortly, primarily due to a contract that we signed just a couple of weeks ago with a government agency. I will be addressing that a little bit later.

    Our general area of business is biometrics, which is the process of identifying a person by some physical characteristics. Our primary focus is in iris recognition and most particularly in portable iris recognition. This device right here is the only one of its kind in the world. It is a full XA6 computer and storage system and can hold the iris templates for a quarter of a million people and search them in a matter of seconds for positive identification.

    The scope of our expertise runs directly toward portability. This device here to my left is a multi-modal system, which incorporates this device, the PIER, Portable Iris Enrollment Recognition system, as well as a fingerprint recognition system and a face recognition system. This iris portion is our personal technology. We have used third-party technology for the other two modalities and combined them into this portable system.

    A prime area of focus for us currently is supplying hardware and software to the U.S. military. This is partly because of the support and interest the military has shown to our company. A couple of years ago, we were discussing our plans to be building this portable device with the battle command, Battle Lab at Fort Huachuca, Arizona. And the lab said they were quite interested in using this technology if we could just form factor it differently for them so it would fit into a cargo pocket of a soldier's uniform.
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    We did so and sold them a number of units that we redeveloped in about three months, and since that time this unit is now in Afghanistan, Pakistan, Bosnia, Cuba, Iraq and with special forces and with other sensitive applications in the field. We are continuing to sell units to the military and different agencies and have had a virtually flawless experience in the field with it.

    Over the past five years, our company spent almost all of our time and our internal funding to develop these products, and, as I said a couple weeks ago, we received a contract that was sponsored by the military and extended by a consortium of other government agencies. And the interest that they are showing is in taking this multiple system here and bringing it down to near the size of this portable system that we have done for ours alone.

    The project is a one-year project. We believe that we will finish development, based on our history of the PIER development, in probably nine months. At that time, that system, we believe, will be deployed worldwide.

    If you would like, Mr. Chairman, I can do a very quick demonstration of how this system works. I have a victim in the audience here. Where did he go? He is hiding. Mr. Thompson.

    Mr. WELDON. Mr. Thompson. He is well known to the committee. But do his eyes work? I mean we often wonder. If eyes are okay to work?

    Mr. PETERSON. Well, he is suspicious.
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    Mr. WELDON. Okay.

    Mr. PETERSON. We enrolled him in a system, it takes only a few moments, previously, and now we are going to—using the device, we will take a digital photograph of his eye, and he was identified absolutely in that amount of time. There is a small database unit at this time that, as I said, it can go up to a quarter of a million individuals, and its speed would be only a few seconds slower than you saw.

    The multi-modal system——

    Mr. WELDON. It says known criminal on all post office walls. [Laughter.]

    Mr. PETERSON. Should I go forward?

    Mr. WELDON. Yes. Go right ahead.

    Mr. PETERSON. The contract that we just signed originated in the Fiscal Year 2004 Department of Defense Appropriations Act, and some funding was given to us through our sponsor at the Battle Lab, and additional funds were offered through a consortium of other agencies. We recently heard, actually I heard just before this meeting started that in the Fiscal Year 2005 Defense Appropriations Act we are once again granted funding to take this system into full deployment.

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    We are very grateful for the interest of the military, the U.S. military. We believe that our success is directly due to the government's interest, and it has helped us to launch this company. For five years, it was a fairly lonely process. Again, like many prototypical hardware and software technology companies, this company started in a spare bedroom in our house and taxed the forbearance of my lovely wife for many years as I depleted our personal funds to zero and kept the company alive, and we were literally saved by the interest of the government to let us go forward.

    When I found the company five years ago, I never dreamt that our products would be of potential help even in a small way in securing the safety of our troops or of our country. The possibility that this is true is, to me, one of the most gratifying parts of my career and is and will always be I think one of the highlights of my life.

    Mr. Chairman, Ranking Member Abercrombie, Members of the committee, thank you for this opportunity.

    [The prepared statement of Mr. Peterson can be viewed in the hard copy.]

    Mr. WELDON. Thank you, Greg, and we appreciate your outstanding presentation. And I see Steve over here. Steve is a former committee professional staff member. You have very capable representation. He is excellent, an excellent person. So thank you for being here.

    Our next witness, if you would stay at the table, please, is Dr. Alexander Stoyen, chief executive officer of 21st Century Systems, Incorporated.
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    Welcome, Dr. Stoyen. Again, we will accept your statement for the record, and you make whatever verbal comments you would like.


    Mr. STOYEN. Thank you very much, Mr. Chairman and, of course, Mr. Ranking Member, Members of the subcommittee. I will do my best. I am the last speaker without any props. I apologize.

    Mr. Chairman, I would like to reflect on some of the experiences of 21st Century Systems as a small business, innovative research, active participant and as a Navy SBIR program success story. We have 100 percent commercialization index across the programs that we do, and every one of our phase II SBIRs has gone to phase III in the Department of the Navy.

    Twenty-first Century Systems builds decision support technology. Let me just explain very, very briefly. I have some screen captures in my written testimony to illustrate, but in a nutshell it has been known for a long time some of the limitations of computer software acting alone in an automated fashion. There are some theoretical limits that are well known to us in computer science.

    It has also been well known that there are limits on human cognition and human ability to make decisions, and some of these limits, of course, have prevented perhaps better command and control executions under time-critical and mission-critical constraints with floods of data from multiple sources, overwhelming the war fighter within a command and control situation.
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    So what 21st Century Systems has done is develop intelligent, proactive software, which both fuses scales, interprets the massive amount of data which comes in from various sources and then intelligently prioritizes and delivers in a timely manner to the war fighter and acts in an assistive capacity; that is, the software intelligently interacts, presents possible courses of action, provides a rationale why to follow a particular course of action and then pays close attention to how the war fighter is reacting.

    And this technology, Mr. Chairman, is very adaptable, generic and scaleable. We have applied it in a great number of mission areas. It has been used in a number of DOD programs, ranging from the dismounted foot soldier and force protection type of mission areas, to command and control aboard Navy ships and submarines, to space control and other areas, as well as intelligence.

    Now, just to say a few more words about our technology, in general, it is useful to do technology that is very scaleable and can be applied in great many areas. One of the things that we believe very strongly in information technology that you build a generic set of tools, components, sole source components once and then you extend it and you apply it to as many areas as possible. And one of the broader issues that we have with the way some of the information technology contracts have gone there has been a proliferation of stovepipes, very expensive one-time solutions which to me defy what information technology is all about.

    Information technology, to me, as a former member of IBM research staff and having gone through successful career in academia and now running a small business, I believe IT innovation firms should be small. They should never get too large, in my mind, because then they are really doing technical services, not software innovation anymore. That is what my firm believes.
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    Now, just to reflect a little bit on the small business innovative research, one of the examples that we have of a great success story in the small business innovative research is our work with the submarine fleet on the Consolidated Undersea Situational Awareness System. This is work that has been strongly advocated by submarine force specifics out of Pearl Harbor.

    And this is a tool which looks at information which really comes in very sketchy. They have a lot of data coming in, it is highly uncertain, highly hard to interpret. Either full automated interpretation or human interpretations is often faulty, time-consuming, error-prone, but working together, software and humans, much better aboard the submarines. And that is a great program. And that is a phase III effort through the Department of the Navy.

    I would like to give a lot of credit, first of all, to the Office of Naval Research and the Navy Small Business Innovative Research Program, which has been at the forefront. Now, we have SBIR phase IIIs with other departments of the DOD, but the Navy is clearly the forefront, as has been stated by some of the other speakers. We work with other services as well. I believe they are catching up. Hopefully, one day this will work across services very, very well.

    One of the observations that I think may be useful to the subcommittee and the full committee is that the Office of Naval Research made it a priority to work with the Navy acquisition commands, such as the Naval Sea Systems Command (NAVSEA), and others, and so they have fostered that relationship between ONR and the program executive officers (PEOs), at NAVSEA and the position commands, and we have been a huge beneficiary of this work, and that is why everything we do with the Department of the Navy does go to phase III, every single project that we have done.
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    I think the SBIR program, looking at it again broader and with the benefit of the program, I think it accomplishes a number of things very, very positive for the American economy and not only those of us in the business community but those in academia and of course from the government, and for us, the fighting men and women in uniform are the end user of what we do, so that is extremely important.

    The SBIR program is by far the fastest, least expensive and most effective way to bring technology from inception, conceptualization, to product type system and into the hands of the end user. As the subcommittee undoubtedly knows, it takes two to four to six years to form a major acquisition program in the Department of Defense, and then they are two to four to six years out funding it.

    Well, that works very well if you are building hulls and propulsion and things of that nature, air frames. It does not really work well in information technology. One of my recommendations, just based on our own experience, is for the subcommittee and the committee to perhaps facilitate further acceleration of this process for technology that cannot wait two to four to six years, such as information technology.

    Another observation is that information technology, by far and large, if it is appropriately managed, does not have to be very expensive. One should not mistaken innovation and software products, COTS and otherwise, with technical services. It is very easy to take a perfectly inexpensive, well-working software system and load it with hundreds and hundreds of people where the only purpose, frankly, is to drive the cost up, because the innovative technology is already delivered into the hands of the end user.
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    So these would be the two sort of broad remarks. Not being an expert in procurement and acquisitions, it is hard for me to navigate that jungle, but I think whatever you can do to simplify the process and tell them what I have just said and others have said today.

    I think your committee, to me, is doing an exceptional job, not only keeping the SBIR at the forefront of our innovative community everywhere, small business, large business, academia, but also making it a priority that it be run directly—that the dollars be actually spent as intended.

    The committee knows that the two words—everyone understands small business, but there are also the words, ''innovation and research.'' And it is very important, again, I stress, not to mistaken that with technical services and some of the later piles of money that do get spent and will predominantly be spent on the larger integrated companies irregardless.

    I think as far as the RDT&E, the bulk of the innovation comes from small businesses today. I am former IBM research, I was in academia, and I know how many of us left to form small businesses. And that I cannot stress enough.

    I would like to thank the committee for doing an outstanding job, and I am available for any questions. Thank you so much for inviting me. I am honored.

    [The prepared statement of Mr. Stoyen can be viewed in the hard copy.]

    Mr. WELDON. Thank you, Dr. Stoyen, for your outstanding presentation. Our final witness, if you all will stay at the table, is Mr. Charles Harper, the executive chairman of Sierra Monolithics.
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    Charles, we welcome you, and your statement, again, will be entered in the record, and feel free to make whatever verbal comments you would like to make. And following this we will attempt to do some questions, although we expect a series of votes at five, so we will go and ask questions until then, and then we will go vote, and we will allow you all to intermingle and the audience can also come up and ask you questions or whatever. But we will have a series of votes at approximately 5 p.m., so we will have to leave, it looks like, at approximately 5:10 to go over to do a series of votes on the house floor.

    Mr. Harper, the floor is yours.


    Mr. HARPER. Mr. Chairman, Congressman McKeon and other Members of the subcommittee, thank you for allowing me to come and tell you this story of Sierra Monolithics. These little devices here I will tell you a little bit about in a few minutes, but a little bit of story of Sierra Monolithics.

    We are located in Redondo Beach, California. I started the company in 1987, two of us did, and then we also form an 8(a) company, and currently today we are a venture-backed firm. We have 2 venture capitalists that we raised over the last 4 or 3 years about $30 million. We also have a strategic partner investment from IBM as well. We have got permanently two product lines, one would be aerospace defense where we are supplying data links, UAV data links, millimeter wave transceivers.
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    We also have what is considered a commercial integrated circuit product line. And the integrated circuit product line is one that we are looking at eventually to allow us an opportunity to initial public offering (IPO) and become a public company. Obviously, most businesses when you start out the way we have started off, you would like to start off and grow your business and have a going concern and eventually become a public company. And that is what the intent is today.

    But the way we have actually started in some of the commercial activities that we are doing, primarily the WiMAX transceivers, we are one of the leading companies I think in the world in the WiMAX transceiver area. We are developing automotive radar integrated circuits (ICs), satellite receiver ICs as well.

    But the expensive technology, actually, when we started out in 1987 actually came from the SBIR program. So we actually started off with SBIR. For 10 years we were quite heavily involved in this.

    When I came out of Magnavox, the research labs and went out to determine starting this business, I went to the same agencies that I was at at Magnavox. And when you went in there—and I went to the Air Force Wright-Patterson Lab and the Naval research labs, and once you walked in there, they kind of looked at you as if you would left your complete brain at Magnavox. And so that was one of the first times that I became kind of afraid, ''What am I doing?''

    So we reverted to something that was tried and true, which was an SBIR program. Although there were competitive, what we ended up doing is in the 10 years we won 10 phase Is, 6 phase IIs, and only won 1 phase III. And the agency for the phase III was United States Special Operations Command (SOCOM), and one of the interesting things about SOCOM, which was a little bit different than the other SBIRs, there was actually a transition from phase I to phase III. And a lot of the other SBIRs that we had you went through phase I, phase II, and the potential for phase III was very, very difficult. But here there was a transition.
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    And this is TPN–19 beacon. This was what we were supposed to do as part of our SBIR program to develop the next generation. So this is the base unit here, and this is the battery. So now the battery looks like this, and that is the unit there. So what we have done is taken technology here, and this is an IDIQ contract, phase III at SOCOM, and what this is used for currently is for some dropping for offset bombing.

    But what we are finding now is a lot of the troops are actually using this as a counterfracticide device. And so what we ended up also doing as part of a phase I, we actually ended up developing an X band—this is a dual band—an X–band and KU band.

    And the way this thing works is if it gets interrogated by an aircraft, an F–15, F–16, AC–130's, gun ships, it will interrogate this in sleep mode and then it will respond. But this is an X-band, that is an X-band and KU-band because the V–22 was also a KU-band as well as the links radar is at KU band as well.

    But this is an X-band version that is quite—and so we ended up doing this one in phase I. We actually did this in phase I, delivered an X-band version then in phase II that we delivered this one. We have actually shipped, of both versions of these, somewhere in the neighborhood of about 1,400 to 1,500 of these.

    And now what is happening currently we are actually getting phone calls kind of on a weekly or every few week basis from the Marine Corps, from the Air National Guard wanting to have some of these, because they have been training with the Special Ops and going out in the field. In the zone, in certain war zones, they would like to carry these with them. And so some of the troops have indicated, they call this like American Express—they don't want to leave home without it.
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    And so we have been—the unfortunate part about it is that we actually end up developing this under an SBIR, but getting onesies and twosies is kind of hard as a business, as a going concern to have a flow of manufacturing. And so being an SBIR phase III and an IDIQ contract, although it is the feeling on our IDIQ contract it is somewhere in the neighborhood of 18 million, and we have actually shipped those now for about 15 months. And, actually, over 15—about 18 months, we have shipped somewhere in the neighborhood of 6 million product.

    Currently, the Guard has a requirement for about 130 of these, but I think they have got funding for roughly about 50. SOCOM has an unfunded requirement also for roughly about 336 of these, but the total requirement's somewhere in the neighborhood of about 900.

    If you think about technology and we are really a technology firm, so where do you end up from these products, going from this product to this product? The next product we are looking at is a little bit smaller than that product there. And then where do you really go where really technology really forwards it? And as part of our integrated circuit technology, we are able to, as you can see, this little chip set will actually end up replacing this whole box here eventually with a little small integrated circuit.

    And that is where the technology is really going to move, and we are considered one of the top companies in the world—this is a silicone germanium technology which IBM is at the forefront of this, and so we are designing circuits in this technology.

    So what this does is affords one to be able to potentially put these on individual troops, being able to track individual troops and the like. So this is really for counterfracticide this is one of the products that exist today. And we are, as a small business, currently in manufacturing.
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    The only concerns, again, is, as we talked about earlier, for an IDIQ phase III funding, it is funding, the funding has to come from the particular agencies, and the agencies, to a large degree, as you know, in the global war on terrorism, the companies that are being impacted—I mean my company is being impacted now because we are trying to—you have got a product line that is set up that is manufacturing these, but in the past there has been year-end funds available to procure some of these things, but now we are finding it very, very difficult.

    But that is kind of to give you an idea on the kind of things that we are doing and some of the technology that we are doing on both the aerospace side as well as applying the commercial technology that would be also used there.

    But, again, I wanted to thank you for allowing me the opportunity to present to you today. Thank you.

    [The prepared statement of Mr. Harper can be viewed in the hard copy.]

    Mr. WELDON. Thank you, Mr. Harper, for your presentation and for the excellent work you are doing.

    Well, I think, as my colleagues and I can see, the work you are doing is really unbelievable, and this is just a small sampling of what is happening nationwide and all the more reason why we in the Congress have to continue to do what we have been doing and that is to push this SBIR process and to correct whatever needs to be done to allow it to even be more successful.
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    Your technologies not only are helping our military by giving us faster, cheaper, more versatile capabilities, but in almost every case, you have a dual-use capability for the technology that can assist us in solving the other problems that we have as a people, and that is just amazing.

    I want to move to my colleagues for questions anticipating votes, and then I will come back. So I will go to Mr. Abercrombie first for any statement or questions he might have.

    Mr. ABERCROMBIE. Mr. Harper, let me go back to you. You said you formed—did you say you formed yourself as an 8(a)? HARPER: Yes. Actually, we started out as an 8(a) company in 1989, and we spent nine years as an 8(a) company.

    Mr. ABERCROMBIE. What would you think—and anybody else can—are the rest of you familiar with the 8(a) concept? Okay. Any of you 8(a) programs?

    Yes, Mr. Cuda?

    Mr. CUDA. For about two years, we were a minority woman-owned company.

    Mr. ABERCROMBIE. Okay. My thought here is—and you don't need to comment in detail—but we asked the first panel about submitting to us possible suggestions—I think we are going to get hit right now with this vote. Would it be useful for us to develop legislation to try to implement an 8(a) program, not something to mimic it but along what the 8(a) was set out to accomplish for innovation and research? Do you have a reaction? We want to go to phase III SBIR, but would it be useful for us to look at the idea of developing an 8(a) program for research?
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    Mr. HARPER. I think that would be actually a very good idea.

    Mr. ABERCROMBIE. I am not sure how to do it. It is just an idea that I have.

    Mr. HARPER. Well, one of the critical issues in case in point with us is at least with the—is the funding for phase IIIs. I mean with the IDIQ concept——

    Mr. ABERCROMBIE. Excuse me for interrupting here because our time is so short, just if you don't think it is off the wall, then think about it and submit any ideas you have to the chairman. What I am thinking about here primarily when I say the 8(a) is a way—see, we have the 8(a) program. There are certain things when the Defense Department has to go to an 8(a) entity, and they get preference, really, in that regard.

    And what I am thinking here is is there a way for us to take entrepreneurial research and development and make it mandatory for those companies to be considered when certain specifications come up, vis-a-vis everything from individual force protection to Harper spectra work to the work that Dr. Stoyen's doing, which I am most familiar, those kinds of things? That is my—not my question but that is what I am putting out to you folks. If you can get back to the chairman with that and think about it, would you?

    And then perhaps using your own experiences see if you were writing legislation for us—this is my bottom line question—if you were being asked and you are being asked, to suggest legislative approaches that we could use the 8(a) concept for research and development, how would you do that, what would you suggest to us?
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    Okay, Mr. Chairman? Is that all right? That is the principal thing I want to bring up in this short period.

    Mr. WELDON. Absolutely. I thank the distinguished gentleman.

    I would turn now to Mr. Cooper for any questions or comments.

    Mr. COOPER. Thank you, Mr. Chairman. The technologies are truly fascinating. It is amazing what individual genius can come up with in a small business context. I would like to broaden my colleague, Mr. Abercrombie's, question and help us understand what bureaucratic barriers we need to knock down, whether it is in the Pentagon or other Federal agencies. Because on the one hand, the government has done well with the SBIR program to encourage innovation, but it seems like it is hard to get some of the technology commercialized.

    So if you could just help us in specific terms understand what barriers you have run up against that we could knock down, we would love to try to help you knock them down.

    Thank you, Mr. Chairman.

    Mr. ABERCROMBIE. Would the gentleman yield?

    Mr. COOPER. I would be delighted.

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    Mr. ABERCROMBIE. Yes. Following up on that, if you heard the first panel, and I think the chairman asked, and I think I reiterated or hope I did anyway, we asked them to come up with ideas about are there problems here with bundling or consolidation of contracts, the way in which procurement is handled right now that need to be addressed? Is it the contract officer idea, does that need to be taken a look at in terms of how we can have some innovation there on that side? So if you could follow up on the questions to the first panel in conjunction with what Mr. Cooper's just said, I think that would be useful, Mr. Chairman.

    Mr. WELDON. Absolutely. I want to thank all of you for coming in and my colleagues for sticking through this entire——

    Mr. ABERCROMBIE. Excuse me, Mr. Chairman. In other words, can you do our work for us? [Laughter.]

    Mr. WELDON. And thank the Members for sticking around. We have a very busy day today as we end the session this week for a month or seven weeks, and members are pulled all over. I apologize for not having more members here.

    But the message that we heard loud and clear today will get out, not only among the subcommittee but among the full committee, and I can guarantee you that your testimony will result in legislative action since the Congress writes the laws that govern the programs. We will in fact put together a package that will be ready for probably the next session of Congress beginning in January and beginning of our markup with the defense authorization bill.

    As we did with the first panel, and as Neil has said, any suggestion you have that were not in your written statement you need to get to us. The record is open for how many days, Bob? A couple of weeks. You have a couple of weeks to get your information back to us before the record is closed so that we have copies of your information on the record for our colleagues to read and share.
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    Truly, you are doing amazing work, and we appreciate that, and you can tell by the tone of this committee that we are committed to expand the opportunity that all of you are taking advantage of to entrepreneurs like you all across America. The future of our ability to control the defense budget with limited resources and increasing demand lies in people like yourselves and your ability to continue the entrepreneurial spirit that you all exemplify.

    So I want to thank you all. I want to thank Bob Lautrup who put the whole subcommittee hearing together. Bob is outstanding and is just a very dynamic leader. I want to thank the minority for cooperating with us, Mr. Natter, for your support in this effort and let you all know that your testimony will have a direct impact on the way this program is developed and modified for the next fiscal year by us here on the committee.

    So thank you. You all can feel free to mingle. We apologize but we have a series of votes. We will be gone for a while, so this hearing stands adjourned.

    [Whereupon, at 5:09 p.m., the subcommittee was adjourned.]