purchase of blocks of SBIC stocks permits subsequent changes of operating methods and different treatment of the borrowers and stockholders for the benefit of the controlling group.

8. Limit the size of the board of directors requiring each director to own a minimum investment of some amount so that they will assume a larger responsibility for carrying out the program. Outsiders would be less likely to undertake to purchase control of such a

company.

9. Watch for changes or modifications made in the private SBIC for the purpose of making a public offering of its stock. See that such changes are not made primarily for the purpose of selling the stock, but for operating the company for the purposes intended in the act.

10. Finally, I strongly recommend the tax legislation presented in H.R. 583 and S. 297. Most of this is very technical, but means a great deal in the operation of an SBIC and avoids the possibility of frequent rule changes by the Internal Revenue Commissioner.

Mr. Chairman and gentlemen, I appreciated very much this opportunity of expressing my opinion on these matters and I'll be very happy to answer any questions.

The CHAIRMAN. Thank you, Mr. Davis. Thank you for a very fine statement. The list of investments approved in 1960 by Tennessee Investors, Inc., which you have submitted with your statement, will be received into the record at this point.

(The list referred to follows:)

Investments approved in 1960 by Tennessee Investors, Inc., prior to changing to Southeastern Capital Corp.

1. Beech Creek Homes, Inc., Rome, Ga...

Real estate development of 600 acres; bank participation, $100,000, 6 percent, 1st mortgage 5 years; $75,000, convertible debentures, 6 percent, 2d mortgage 10 years; convertible into 49 percent stock.

2. Communications Service, Inc., Nashville, Tenn..

3. Dr. R. L. Horton, hospital and clinic, Camden, Tenn..

4. W. H. Wooten Transports, Inc., Covington, Tenn...

5. Clinchfield Supply Co., Inc., Kingsport, Tenn...

Radio, telephone sales and service; debentures convertible into 25 percent stock, 7 percent 5 years.

65,000

Bank participation $10,000, 1st mortgage, 6 percent 10 years.

Bank participation $25,000, chattel mortgage, 6 percent, 10 years.

Wholesale and retail building supplies; bank participation, $15,000, mortgage notes $50,000, 6 percent, 10 years; convertible debentures, $20,000, 6 percent, 10 years; convertible into 15 percent stock. 6. Robert Craft & Sons, Inc., grain elevator, Memphis, Tenn.

Convertible debentures, 10 percent, 5 years; convertible in 25 percent stock.

7. Space Missile Materials Corp., Cleveland, Ohio.

Convertible debentures, metal manufacturing; participation with 3 SBIC's in $300,000 for contracts with Red Stone, Huntsville, Ala., and Avco, Nashville, Tenn.

The CHAIRMAN. You certainly are a man of experience and you are a pioneer in this field. I noticed by your statement that while you have had some losses and disappointing experiences you have not lost faith.

Mr. DAVIS. No, sir.

The CHAIRMAN. Tennessee Investors, Inc., as you pointed out, was one of the first small business investment companies started in the Nation, I believe.

Mr. DAVIS. Right. It was the first chartered but not the first licensed.

The CHAIRMAN. It was the first

Mr. DAVIS. I will have to yield to Mr. Ruvelson for the

The CHAIRMAN (continuing). But the first charter was issued to the Tennessee Investors, Inc.

Mr. DAVIS. Yes, sir.

The CHAIRMAN (continuing). A State corporation charter.

Mr. DAVIS. Yes, sir.

The CHAIRMAN. Why did Tennessee Investors, Inc., subsequently change to Southeastern Capital Corp. after being launched with such ceremony and promise?

Mr. DAVIS. AS I indicated here, in connection with trying to sell stock to the public, the underwriters said that this does not have much appeal on a localized basis.

Our stockholders were Tennessee stockholders practically in every case. Fifty-four banks in Tennessee had bought stock and about 20 individuals. So we had more than the $300,000 necessary.

But the underwriters said we ought to broaden this base, that it will look better if we have a wide area of operation and the stock will sell better and I am sure it did.

The CHAIRMAN. Was the purpose of this expansion to sell more stock only or was the purpose to aid and serve small business?

Mr. DAVIS. Well, of course, our purpose was to get more money to do a bigger job.

We started out with that program and that was our sales pitch to all the people in Tennessee, that this $350,000 we would start with and then we increased that slightly before we went public.

The CHAIRMAN. What was the initial capitalization of Tennessee Investors, Inc.?

Mr. DAVIS. It was $350,000 and then we increased it to about $400,000 before we went public.

The CHAIRMAN. Did you find in your earlier experience that that was insufficient capitalization to really do an effective investment loan job?

Mr. DAVIS. Yes, sir; and to stand the expenses of the overhead of an independent company.

You see, we being independent and having a lot of bank investors, nobody was willing to absorb the expense of the management. So it had to come out of the income off of whatever leverage we could use with the initial money.

The CHAIRMAN. After you went public and changed to Southeastern Capital Corp., what, then, ultimately became the capitalization of the company?

Mr. DAVIS. It was a little under six and a half million, about six million four.

The CHAIRMAN. You have had a rather good record I would suggest in loan investments.

Mr. DAVIS. This sheet is attached, that you referred to, with the investments made by Tennessee Investors, Inc., prior to the public underwriting

The CHAIRMAN. Would you say that experience was a good one?

Mr. DAVIS. Yes, sir. Of course, as I say again, you always have some trouble. We did not lose any money in this first group. They did not all turn out like we expected.

You will notice that we made some commitments on here that we did not disburse which, again, was a help to the small business because they took our pattern and got the money somewhere else.

The CHAIRMAN. Are you telling us that you made money as an initial small business investment company but after you changed to Southeastern Capital Corp. and had a larger capitalization your stock declined and you did not make as much money

Mr. DAVIS. I would not say we made as much money because all during the time of these investments in 1960, we were spending money trying to get the underwriting. So the actual operation here was very nominal.

I doubt if the income on these was sufficient to say that we actually made a profit in this earlier period.

The CHAIRMAN. Mr. Davis, was this action to merge with Southeastern Capital Corp. entirely within your recommendations?

Mr. DAVIS. Yes, sir; I went along with the underwriters. Incidentally, it was not a merger. We used the same corporate structure and changed the name.

And we expanded the corporate capital but we used the same original Tennessee charter. But I went along with the underwriters on the basis that the changing of the name would not make any difference if we could get the capital to do a better job.

The CHAIRMAN. Are you now affiliated with Southeastern Capital Corp. as an officer, an active officer today?

Mr. DAVIS. No. Today-well, not since last July 15, at the annual meeting.

I am a member of the board and vice chairman of the board and a consultant to Southeastern through my own firm, Lee Davis & Associates, Inc.

The CHAIRMAN. You operate Lee Davis & Associates as a private consulting firm

Mr. DAVIS. Yes, sir.

The CHAIRMAN (continuing). To aid small business and to counsel small business?

Mr. DAVIS. Yes, sir.

The CHAIRMAN. Any type of business management?

Mr. DAVIS. Right.

The CHAIRMAN. And you are on the board of this corporation but you are not one of the official managing directors?

Mr. DAVIS. I am not now on the executive committee of Southeastern.

The CHAIRMAN. Well, can you tell this committee how the new company is succeeding at this time?

Mr. DAVIS. They seem to be slowing down so far as investments are concerned.

The semiannual statement of September 30 showed they had made two additional investments of about $200,000 since their stockholders' meeting last July, and at the time that the new directors were elected and the new officers were elected

The CHAIRMAN. They are not making as many investments and the investments they are making are larger at the present time?

Mr. DAVIS. No, not necessarily larger. One of them was a $50,000 loan and it was altogether stock.

Now, I don't know anything about the details of that. It was a Georgia company but it was a small business and they just bought $50,000 worth of stock in that company.

The other loan was $150-odd thousand that they have made since the new management took over.

The CHAIRMAN. Well, why, in your judgment, is the new company not more active today?

It has been recapitalized. It has more funds brought into the capital structure. It has gone public and yet it seems not to be as successful as when it was a smaller company under your direction.

Mr. DAVIS. I think-this is purely an opinion-I think there is some indecision on the part of the present management, that is, the directors. The staff has been reduced so that they are not looking at many new investments.

They are looking at some, I have understood.

The CHAIRMAN. Is the principal office of the corporation still in Nashville, Tenn.?

Mr. DAVIS. The office is still in Nashville.

The CHAIRMAN. I understand there is some plan to move it to Atlanta, Ga.

Mr. DAVIS. They made the statement in one of their public notices to stockholders that they wanted to and intended to.

The directors and stockholders, I believe, or the directors passed a resolution authorizing them to request permission from SBA to move their office to Atlanta, but no action has been taken on it.

The CHAIRMAN. Well, are most of the investments or loans being being made locally in this area or are they over a widespread area in the Southeast?

Mr. DAVIS. They are over a widespread area. And I don't know from the standpoint of servicing the loans whether that would make a lot of difference.

The CHAIRMAN. Is there a plan underway to liquidate the company or is it being operated just for stock profits in your judgment today? What is the situation?

Mr. DAVIS. That would be difficult for me to say. I don't believe they have in mind at this time a request or an undertaking of liquidation.

They do have $2.5 million of cash that has never been invested.

The CHAIRMAN. I understand that they did make a request to purchase some of their own stock as a partial liquidation?

Mr. DAVIS. That is right. They asked SBA to let them go into the open market and buy in about 10 percent of the shares. There were 568,000 shares sold to the public.

33-440-64

And under the SBA ruling I think there is some provision to make some reduction in the number of shares but they wanted to buy it in the open market at the lowest possible price up to a figure.

I have forgotten what the price was. I believe it was $7.50 and then they wanted to just retire that many shares, thus increasing the book value of the remaining shares.

SBA said that was a reversal or backward step. They had already got the cash to carry out this program and they wanted to go ahead. So this was denied.

That word went out to the stockholders with their September statement saying that the SBA would not permit them to buy that stock in the open market.

The CHAIRMAN. What is the average investment that is being made today under the present capitalization?

Mr. DAVIS. On Southeastern?

The CHAIRMAN. Yes, sir.

Mr. DAVIS. Well, if you take the average on the new ones it would be $100,000. They have only made two since last July, almost a year. The CHAIRMAN. That is practically a nonoperating

Mr. Davis. It has been very inactive. I think it is primarily on a matter of indecision from the standpoint of the board as to what direction they want to go.

The CHAIRMAN. What is the present capitalization again today? Mr. DAVIS. About $6,200,000.

The CHAIRMAN. Now, here is a $6.5 million SBIC and they make two investments over a period of many, many months.

Mr. ROBISON. May I inquire at that point?

The CHAIRMAN. Congressman Robison.

Mr. ROBISON. You say that the SBIC only made two investments. Mr. Davis. Between July and their September 30 statement. And as far as I know they have not made any since then.

Mr. ROBISON. Do you have any idea how many applications for other loans had been received during that same period and had been refused, or withdrawn, or not made in any event?

Mr. DAVIS. My answer to that would not be accurate but my understanding is that they have been screening all inquiries pretty harshly. I mean it must be a mighty goodlooking situation.

They have looked at some investments. Generally, when you say an application, it is really an inquiry until you get down to the point where you are ready to start processing it in detail and then you take an application. You may work on an inquiry for a good long while. I do not think they have taken any of what we might think of as a formal application but I am sure that they have considered some in the executive committee and talked about this in discussion asking, "Do we want to go further with that?"

I have raised the question several times because in my business as Lee Davis and Associates, Inc., and as a consultant I get inquiries and I say, "Do you want to look at this? Are you interested?""

And the answer has generally been, "No; not unless it is an extremely unusually attractive situation."

Of course, I think this, too. As anybody would assume, any corporation that has some investments and also has better than a third of its capital in cash is a right attractive corporation to outsiders.