have been asked to testify, as well as SBA officials in charge of the Investment Division. The committee is expected to look closely at the operations of the SBIC's it calls with emphasis on such matters as types of client companies, interest rates, percentage of equity, and working relationships between the licensee and the borrower. Witnesses will also be asked to make suggestions for means of improving the program. According to the committee staff, the first 2 days of hearings in Washington are likely to be followed by further testimony-perhaps taken in the field. [SBIC Newsletter, Mar. 15] HOUSE SMALL BUSINESS COMMITTEE SCHEDULES 2-DAY SBIC HEARING The House Select Committee on Small Business will take a detailed look at the SBIC industry this week when it holds a 2-day hearing, Tuesday and Wednesday, March 17 and 18. Although it is obvious that many witnesses have been called to cover specific areas and problems, the general trend of the hearings will deal with ways to help smaller small businesses obtain financing. Several witnesses were selected by the committee because they have records of successfully financing the smaller companies. The committee is alarmed over a growing industry trend toward larger loans because, "it takes as much time and money to handle a small loan as a large one." It is not difficult after reviewing the witness list to determine the committee's other interests. Listed for Tuesday appearances are R. Lee Davis, president of L. Davis & Associates, Inc., Nashville, Tenn., organizer of Tennessee Investors, Inc., which evolved into Southeastern Capital Corp.; Allen K. Ruvelson, First Midwest Capital Corp.; Nelson Puett, Jr., Austin, Tex., leader of a proxy fight to take over Gulf Southwest Capital Corp.; B. H. Burlage, SBIC of Norfolk; George McCurrach, Florida Capital Corp., and Peter Bezanson, Iowa Growth Investment Co. Wednesday's testimony will come from Milton Cummings, president of Brown Engineering Co., Huntsville, Ala.; T. Eugene Smith, Potomac Small Business Funds; Robert H. Pratt, Virginia Capital Corp.; Grogan Lord, Texas Capital Corp.; and SBA Administrator Eugene Foley and Deputy Administrator for the Investment Division, Richard Kelley. Puett, who wants Gulf Southwest to either merge or liquidate because of what he considers poor company management, will not discuss the proxy battle. The committee is not interested in becoming a sounding board for proxy fights, but wants more information on the charges that Puett has made, including a claim that Gulf Southwest has excessive operating and salary expenses and gives special treatment for business interests of company officers and directors. The committee called Pratt because it is interested in the recent merger between Virginia Capital and Southside Capital. The committee wants to know the effects of the merger on both the old and new companies. Cummings, whose company has quickly jumped to a top position in the defense contracting field, will probably discuss the problems a company faces in attempting to obtain financing and Smith, president of the Mid-Atlantic RASBIC and NASBIC treasurer, is expected to deal in an incentive program for companies that handle loans at the lower end of the financing scale, a concept that several committee members favor. The committee also wants to study the continuing rise of real estate financing, particularly to find out if SBIC's are concerned with real estate speculation or bona fide equity financing. The hearings, which will be held in room 356 of the Old House Office Building beginning at 10 a.m., were originally scheduled for later in the month but had to be moved up because of other committee obligations. There is a strong possibility that additional SBIC sessions will be held later in the spring with a new set of witnesses. Most likely candidates for a later appearance are large companies with a considerable amount of uninvested funds. The CHAIRMAN. The committee stands recessed until 10 o'clock tomorrow. (Whereupon, the hearing recessed, to reconvene at 10 a.m., Wednesday, March 18, 1964.) SMALL BUSINESS INVESTMENT PROGRAM WEDNESDAY, MARCH 18, 1964 HOUSE OF REPRESENTATIVES, SELECT COMMITTEE TO CONDUCT STUDIES AND Washington, D.C. The committee met, pursuant to recess, at 10:10 a.m., in room 356, Cannon House Office Building, Hon. Joe L. Evins, chairman, presiding. Present: Representatives Evins, Multer, McCulloch, Robison, and Harvey. Also present: Bryan Haskell Jacques, staff director; Richard L. Mitchell, general counsel; Myrtle Ruth Foutch, clerk; and John J. Williams, minority counsel. The CHAIRMAN. The committee will come to order. Is Mr. Milton Cummings present? Mr. Cummings has not arrived. Mr. Eugene Smith? Mr. SMITH. Yes, sir. The CHAIRMAN. Mr. Smith, will you come forward, please! I believe you represent the Potomac Small Business Funds, Inc. Mr. SMITH. Yes, sir, Mr. Chairman. The CHAIRMAN. We will be very pleased to hear you, Mr. Smith. The committee appreciates very much your coming to give us your views and your testimony. Mr. SMITH. Mr. Chairman, this is Mr. Carrington Williams, who is the counsel for Potomac Small Business Funds, Inc. The CHAIRMAN. Mr. Williams, glad to see you. Mr. WILLIAMS. Thank you, sir. The CHAIRMAN. Mr. Smith, are you an official of the company? Would you give the title and the name of your company? And you may proceed. Do you have a prepared statement? Mr. SMITH. Yes, I do, sir. I am Eugene Smith. I am the executive vice president of Potomac Small Business Funds, Inc. TESTIMONY OF T. EUGENE SMITH, EXECUTIVE VICE PRESIDENT, ACCOMPANIED BY CARRINGTON WILLIAMS, COUNSEL, POTOMAC SMALL BUSINESS FUNDS, INC., ANNANDALE, VA. Mr. SMITH. Mr. Chairman, Potomac Small Business Funds Inc., was licensed by the Small Business Administration on December 20, 1960. Our financial structure may be summarized as follows: Initial capitalization, $302,000, composed of, private capital of $180,400; and subordinated debentures to the Small Business Administration of $121,600. Our present capitalization-and the capitalization was increased in November of 1961-is $692,144, composed of: Private capital of $348,316 and subordinated debentures to the Small Business Administration of $343,828. We have borrowed funds from the Small Business Administration under section 303 totaling $346,000. The original officers and directors of the company were: Philip M. Talbott, chairman of the board; James L. McIlvaine, president; T. Eugene Smith, executive vice president; Vincent A. Sweeney, secretary-treasurer; Carrington Williams, counsel; Bernard Steinberg, director; Edward M. Bostick, director; F. Carbery Ritchie, director; and Douglas R. Smith, director. Subsequently, Mr. Douglas R. Smith and Mr. Edward M. Bostick resigned from the board because of other business commitments. Mr. Bostick was replaced on the board of directors by Mr. Arthur M. Weid. The board now consists of eight members. In just over 3 years of operations, Potomac has invested $1,350,000 in 30 small business concerns. Currently we have approximately $1,050,000 invested in 25 companies. Our individual investments in dollar amounts have ranged from $6,000 to $120,000. In eight of our investments we have participated with other small business investment companies. However, the aggregate amount of the largest of these participation investments was approximately $360,000, with the exception of an investment by a large group of participating SBIC's, in which we invested $25,000, in the Washington-Baltimore Helicopter Airway, Inc., for which prior approval was obtained from the Small Business Administration. Our investments may be tabulated by groups as follows: Construction: Four investments in homebuilding companies. They total $156,500. Land development: Four investments totaling $200,000. Miscellaneous: Seven investments, totaling $193,400. The miscellaneous investments are broken down as follows: (1) A $60,000 participation in a loan of $200,000 to a community television antenna system in western Pennsylvania. (2) $35,000 to a grain storage concern. (3) $15,000 to an automatic carwash. (4) $20,000 to a drycleaner. (5) $7,650 to a retail men's store. (6) $43,750 to a small manufacturing concern. These aggregate $1,352,400. If you combine the construction, land development, and real estate categories, you will note that we have made 17 investments aggregating $963,000, or 71.4 percent of our total investments, in this field. This concentration is because of our management background in mortgage lending and real estate development. We are very pleased with the contribution these companies have made since our investment. We estimate that they have been responsible for approximately $7,750,000 in new construction to date. We feel that our investments in this industry have returned large dividends in terms of total economic activity. Potomac Small Business Funds, Inc., has been able to operate profitably since March 31, 1961. A résumé of our operations follows: As of the 31st of March 1961, in which we had been in operation 3 months, we had total investments of $113,232, income of $3,336, operating expenses of $5,853, for a loss of $2,487. As of March 31, 1962, our total investments had been increased to $652,418, we had income of $45,998, we paid interest to the Small Business Administration and others of $7,820, we had other operating expenses of $27,373, and we had a net profit before provision for loss of reserves of $10,804. As of the end of March 1963, we had $970,936 invested, our income. was $79,166, we paid interest to the SBA and others of $24,259, other operating expenses of $36,713, and a profit before reserves of $18,194. We estimate that, as of the end of this month, we will have $1,050,000 invested, that our income for the year will be $133,000, our interest expense to the SBA $35,000, other operating expenses $39,000, and we anticipate a profit before provision for reserves of $59,000. This $59,000 includes a $25,000 capital gain. To date no dividends have been declared or paid by this company. (The résumé as submitted in tabular form by Mr. Smith is as follows:) Mar. 31, 1961. Mar. 31, 1962. Résumé of operations of Potomac Small Business Funds, Inc. Mar. 31, 1963. Mar. 31, 1964 (estimated). 1 Corrected to agree with testimony. 2 Includes capital gains of $25,000. NOTE. To date, no dividends have been declared or paid. Mr. SMITH. Our modest earnings during the fiscal years prior to and ending March 31, 1963, were placed in a loss reserve, and we were able to charge off a loss of $24,500 on the small manufacturing concern during fiscal 1963. We are now nearing the end of our third full year of operations, and all of our portfolio companies are operating profitably and successfully. All of our loans are current with the exception of a loan to a small nursery concern, which has been in default for over a year. Our remaining investment in this company is less than $10,000, and we do not anticipate a loss. Prospects for fiscal year 1965 appear equally good. We expect to realize capital gains from a number of our investments within the new few years. We plan to accumulate a loss reserve in the maximum amount permitted under the new Internal Revenue Service regulations. We feel that a loss reserve of this amount is reasonable, but by no means excessive, in view of the nature of our business. In summary, we believe that Potomac Small Business Funds, Inc., after 3 years of operation, is a sound concern. We feel that we have gained some of the experience necessary to serve the small business community and at the same time make a profit for our stockholders. We also believe that, with the passage of the new amendments to the Small Business Investment Act, additional progress can be made. We hope to grow by retaining earnings and by, perhaps, the sale of additional capital stock to our present stockholders. We believe that a small business investment company with an investment portfolio in the range of $2 to $3 million, specializing in one or two industries in which its management has particular expertise, cannot only be successful but can make a real contribution to the economy. Indeed, we believe that unless an SBIC does specialize in one or two industries in which its management has experience and extensive contracts, the staff necessary to place and service investments in diverse industries would be uneconomical for all but the larger SBIC's. We also feel that the interests of the small business concerns are themselves best served by this specialization, because the specialized SBIC can give them sound guidance with their business problems. For example, our first investment was in a small manufacturing concern in a surplus labor area-caused by the closing of railway shops in the Valley of Virginia, approximately 120 miles from Washington. When they needed expert help with management, production, and sales problems, we were unable to give it to them due to our inadequate experience in the field. We took a $24,500 loss on this investment which, as I mentioned, we were able to write off out of earnings. On the other hand, when one of our homebuilding borrowers was hard hit by the removal of a nearby defense installation-this was in the Newport News area, moving NASA to Texas-we could and did give them advice and refinancing assistance which enabled them to survive a threatened mortgage foreclosure, and they are now prospering. In effect, then, by specializing in real estate we have been able to subsidize our SBIC by low salaries, partially based on less time required in management. It may also be noted in passing that on the question of self-dealing, we have not yet had to ask the Small Business Administration for a waiver on any investment. There are two areas of the act or regulations that we feel need clarification or change. (1) We think that small business investment companies should be permitted to purchase limited partnership interests, because of the increasing use of partnerships, and (2) We feel that the act should be clarified so that if the capital structure of a small business investment company is increased by way of stock dividends from undivided profits, matching section 302 funds would be available on the same basis as they would be for paid in capital. We fail to see a proper differentiation between capital paid into the program and capital retained in the program. I appreciate very much the opportunity to appear before you. If there are any questions, I will be most happy to try to answer them. Thank you very much. The CHAIRMAN. Well, very fine, Mr. Smith. Thank you for a very nice, very concise statement. Your company, Potomac Small Business Funds, Inc., has been operating now into its third year? |