holders, numerous of them, who stated that they did buy the stock because Governor Shivers was on the board of directors and also because they thought that it had some sort of Government or quasiGovernment status, and it was like a bank.

And that's why I think a lot of the people bought it, which is several hundred thousand of them bought it, and they are universally-practically universally dissatisfied with it today, because they have tremendous losses.

Mr. HARVEY. That is all.

Thank you, Mr. Chairman.

The CHAIRMAN. Mr. Puett, we hope it will work out for you yet, and we thank you for coming and giving us your testimony, and we appreciate your recommendations.

We hope you can catch your plane.
Mr. PUETT. Thank you.

The CHAIRMAN. Thank you again.

The committee will call the representative of the Small Business Investment Corp. of Norfolk, Va., Mr. D. H. Burlage.

TESTIMONY OF D. H. BURLAGE, PRESIDENT, SMALL BUSINESS INVESTMENT CORP. OF NORFOLK, NORFOLK, VA.

Mr. BURLAGE. First of all, maybe I can be a silver lining in the dark cloud that just passed overhead.

The CHAIRMAN. Some of us have read your statement, and it appears that you have a successful operation.

You may proceed.

Mr. BURLAGE. First, I would like to say, with regard to the previous witness' general widespread testimony on self-dealing, that this is not the case with our company. We have none.

And our officers do not benefit. We only spent a total of $400 obtaining our license and we were in business with that expenditure. Getting to my statement, SBIC of Norfolk is a subsidiary of Norfolk Industrial Loan Association, a licensed, State-supervised industrial loan association-referred to as an industrial bank in most other States operating under and subject to examination by State examiners of the Bureau of Banking, State Corporation Commission, State of Virginia.

NILA purchased the entire original issue of 22,500 shares of common stock of the SBIC of Norfolk for a cash consideration of $300,650.50. A license was issued by the Small Business Administration, Washington, D.C., on February 5, 1962; and business operations were commenced immediately. In February 1964 the company completed the sale of 5,000 shares of preferred stock ($20 par value) for $100,000 cash, giving it a total capital and paid-in surplus of $400,605.50.

To date, the company has drawn $300,000 in 302 funds (20-year subordinate debentures) and ($150,000 in 303 funds). At this time, SBIC of Norfolk has applications pending for disbursement of SBA funds as follows: $150,000 in 303 funds and $100,000 in 302 funds. These funds have already been invested or committed through short-term (30- to 90-day) bank borrowings until such time as funds are received from SBA.

In addition, the company expects to make application for $100,000 in 303 funds on or about April 15, 1964. Simultaneously, SBIC of Norfolk will request permission to amend its charter to provide for an increase of $300,000 in its authorized capital stock. This increase in capitalization to $700,000 is motivated by my confidence in and our company's intention to avail itself of all facets of the SBIC program that fit into its method of operation, including such benefits soon to be made available under the 1964 amendments of the Small Business Investment Act.

Listed below are some of the facts and figures regarding our operations as of February 28, 1964, which I feel would be of particular interest in this committee.

(a) SBIC of Norfolk lends primarily to small, small business concerns in Virginia and Florida.

(b) We had a total of $1,102,765.27 in funds invested. That was as of February 28.

(c) Of our funds, 84 percent were invested in Virginia corporations, and 16 percent in Florida corporations.

(d) We made a total of $1,656,439.21 loans since commencing operations on February 5, 1962. The dollar amount of the average loan made was $13,577.37.

(e) Our loans had an average maturity of 5.4 years.

(f) All of our loans are secured by collateral; 87 percent were secured by first mortgage liens on real estate, 1112 percent by accounts receivable.

(g) Loans made to date are divided by industry as follows: (The table referred to follows:)

Mr. BURLAGE. (h) SBIC of Norfolk has not had any losses to date, and does not expect any in the foreseeable or predictable future. (i) The small business concerns which our company invested in had assets on an average of $133,600 each.

(1) They had an average of 6% employees.

(k) Our company has made a total of 122 loans to 45 separate small business concerns. Three of these loans provided for stock options. On the equity situation to Florida Citrus Industries, Inc., Orlando, Fla., we sold our stock options back to FCI for $5,000 profit within

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7 months. The second equity situation to Lake County Investments, Inc., Tavares, Fla., has appreciated substantially in the first 12-month period. The third equity situation did not materialize due to problems beyond the control of the borrower; however, SBIC of Norfolk will not suffer any loss.

Our company receives numerous applications and inquiries from small business concerns which have no basis whatsover for a loan or an investment, unless we become inclined to attempt to make Santa Claus a reality. The mortality rate among small businesses during the first 5 years is very high. According to my research, it appears that only one out of four survive the first 5 years. Business is becoming more and more complex due to Federal, State, and local laws and regulations.

In addition, taxes, both sales and withholding, are becoming somewhat of a problem to the small businessman just starting out. Longterm financing is almost nonexistent if he does not have acceptable collateral. Even short-term bank loans are extremely difficult to obtain.

It is my judgment that small SBIC's ($300,000 or less) can be operated at a profit providing the management is qualified. There is no question that it is a problem to locate and keep executives who possess the abilities to create profits on their own.

Investment success is not a matter of casual good fortune. Rather, it is the end result of careful planning, thorough research, and a penetrating interest in the investment business. This, in general, is coupled with years of experience and application of exacting standards applied in their proper perspective.

Small SBIC's, which have been and those that are being formed by doctors, lawyers, accountants, et cetera, with the idea of contributing a few hours a week to the affairs of the company and with no permanent qualified full-time management, have very little chance of success in this field. It is my prediction that most of these companies will either merge with the more successful SBIC's or turn their licenses back to SBA after suffering some losses. I don't think SBA will lose any sizable amount of funds by these actions.

The small- and medium-size SBIC's which do have fairly qualified full-time management will have difficulty succeeding, to any large degree, in the equity capital field due to the fact that very few small businesses (net worth $25,000 or less) can produce any excess net income after paying the owners a reasonable return on their time and investment. These SBIC's can best serve small businesses through long-term (5 years or more) loans. Even these loans will have to be secured to some degree. The reason being that most of the owners of small businesses lack the ability for one reason or another to run their own business in a manner which would create maximum profit. Money and loans will not generally change their business acumen. Far more small businesses fail because of lack of ability and effort than lack of capital. Many of these businessmen fail to operate within the framework of the capital available to them regardless of the amount.

Regardless of the above, it is still possible to succeed in a small business. Our companies are a prime example. We started in business in 1940 with $2,000 cash. Last year SBIC of Norfolk and its

parent invested $1,811,907 without losses. In fact, since August of 1959 our companies invested more than $5,500,000 with less than $800 in net bad-debt chargeoffs. This is a loss ratio of one-sixty-eighth of 0.01 percent of the total volume of loans and investments made.

With regard to the large SBIC's, I consider myself unqualified to go into their operations to any extent. However, I feel that their opportunities for acceptable equity situations are greatly increased over that of small SBIC's. It is also my recommendation that SBA should proceed cautiously in the recommending of any expansion of benefits or funds for the largest SBIC's. I say this even though it is our intention to become a large SBIC ($1 million in capital and over).

I am satisfied with the program (Small Business Investment Act) as it is. In fact, one of my regrets is that we did not apply for a license in 1958 or 1959. This act is tailormade for our consolidated operations. I am particularly pleased with the degree of cooperation extended to the SBIC industry by Federal and State regulatory agencies. I predict a continuance of this favorable legislative climate and can foresee no insurmountable regulatory obstacles to the program's orderly development.

Our company is also very pleased with its relationship with SBA and their representatives. We have found them to be very helpful and considerate at all times.

If Congress or this committee has any intention of expanding the program, I would suggest that the expansion provide extra funds or benefits for those licenses that actually lend to the smallest of small businesses.

It is my prediction that the overall program will succeed. However, many licensees will merge and others will dissolve and surrender their licenses. I also feel that the licensees that survive and have capable management, will post a highly successful record for both helping small businesses (assets $5 million or less) and earnings for their stockholders.

The CHAIRMAN. Thank you, Mr. Burlage, for a very fine statement. I think I should add that this is a phenomenal statementMr. BURLAGE. Thank you.

The CHAIRMAN (continuing). For the degree of successes that your company has had.

Many have had the impression that a truly small business investment company or a very minimum-sized company could not succeed, but the testimony that you have given us here indicates that yours is doing extremely well.

Do you attribute some of your success to the fact that you are tied in with or identified with the Norfolk Industrial Loan Co. and that the two of you are working together?

Has that been helpful?

Mr. BURLAGE. Yes, it has. We have the same employees for Norfolk Industrial Loan that we have with SBIC of Norfolk.

SBIC of Norfolk is a wholly owned subsidiary, with the exception of some preferred stock.

The CHAIRMAN. Do they assume some of your management and operating expenses?

Mr. BURLAGE. They do not. Regardless of this, we have posted a net profit picture on SBIC of Norfolk in the first 2 years of operation of $41,586 before reserve for losses.

The CHAIRMAN. You emphasize the theme that I have often repeated, that it is not so much capital but it is management that makes anything succeed.

Someone will say, "How will a small business succeed?" You find the right man, who is dedicated to his business, and he will generally make it succeed.

You recommend no further amending of the law with respect to a loan for assistance to the larger SBIC's.

Yours is an example of an SBIC that is making loans to the small businessman on the local level, and of a relatively large size and number.

Mr. BURLAGE. The only thing that I would like to point out is that I think the SBA and this committee and Congress should be very, very careful with these companies that do get involved in self-dealings. There is nothing that will give this whole industry a black eye quicker than self-dealing, because that opens the door to some terrible pictures.

The CHAIRMAN. No charge of self-dealing can be leveled at your

company

Mr. BURLAGE. No, sir.

The CHAIRMAN (continuing). And none of your directors are engaged in businesses to which your company makes loans?

Mr. BURLAGE. Our attorneys represent these companies, but they get no fees

The CHAIRMAN. Tell us about the interest charges of your company. Mr. BURLAGE. Our company charges an average interest of about 111% to 12 percent.

Now, the reason for this is that about 40 percent of our loans are construction loans. These are loans that we make for 5 years but the people generally pay us out in about 6, 7, or 8 months, and we do not charge them a penalty except interest to the next anniversary date.

The CHAIRMAN. You are more interested in making the interest loans rather than the equity type of loan?

Mr. BURLAGE. I think it is unreasonable to assume the small business companies can find qualified equity situations that will succeed in small or smaller businesses.

I do not think there is such a thing.

The CHAIRMAN. Mr. Multer?

Mr. MULTER. Mr. Burlage, how many employees and officers does your SBIC have on its payroll?

Mr. BURLAGE. We have four.

Mr. MULTER. And none of the loan association employees render any part-time services to the SBIC?

Mr. BURLAGE. It is possible but, on the other hand, the SBIC also renders some part-time services for the loan association.

We share adjoining office space.

Mr. MULTER. Well, then actually the employees are interchangeable. When the job is done in one place they go to work in the other?