EXHIBIT C SEPTEMBER 23, 1963. Subject: Senate bill 298. Senator JOHN J. SPARKMAN, U.S. Senate, Washington, D.C. DEAR SENATOR SPARKMAN: This corporation, with the essential help of SBIC financing, has grown in 2 years from a 20-employee company to a 75-employee company and now has annualized sales nearing $1.5 million. Original financings were made through Virginia Capital Corp. in Richmond, Va., and early this year a considerably larger financing was made with Capital Southwest Corp. in Dallas. Any operator of a small growth company lacking large personal resources of his own will recognize the large gap between the type of financing that is feasible for commercial banks or small groups of individuals and that which is feasible through registered public offerings. SBIC's are filling this gap. It would have been next to impossible for Houston Instrument to accomplish its past growth from aftertax earnings. A high portion of our past earnings has been plowed back into developing broader lines of technical products. If a principal concern is economic growth in the United States, I can think of no way that funds can better be applied than to strengthen the SBIC program. Very truly yours, HOUSTON INSTRUMENT CORP., The CHAIRMAN. Mr. Pratt, you started out as a small Virginia investment company; later you increased your capital structure; then you merged with Southside Virginia Capital Corp.; and now you have a capitalization of $2.5 million. Mr. PRATT. Our basic capitalization is $1.25 million. Our total assets are $2.5 million. We have $1.25 of private capital to work with, yes. The CHAIRMAN. What do you consider the capital structure? You have $2.5 million in assets? Mr. PRATT. Assets, that is total assets. The CHAIRMAN. A million and a half is your capital structure? The CHAIRMAN. And you have disbursed loans and investments in excess of $3 million? Mr. PRATT. Approximately $3 million, but we now have, based on the original cost of our present portfolio, $2.6 million devoted to 30 companies. The CHAIRMAN. You are very active and there is a lot of turnover. You operate a small business investment company of this size with a staff of three or four? Mr. PRATT. We have four men and a secretary. The CHAIRMAN. I believe you have described why you thought the merger was necessary. Is it your view that the pattern in the future will be more and more investment companies will be merging? Mr. PRATT. I would think that the smaller SBIC's would have to attract or acquire additional capital through such an approach. The CHAIRMAN. Were each of them operating successfully prior to merger? Mr. PRATT. NO, Southside Capital was not operating at any more than the breakeven point, and even then it was operating with one man who was providing part-time services. Virginia Capital was operating successfully, but with only nominal profits, and the earning power was limited. We have found in this business that simply investing in small businesses without knowing the small business management or being able to help the small business managers in their problem areas is really extremely difficult, much more risky than the general program with management assistance added. Therefore you have to have a sufficient number of people to help the small businesses. The difficulty of it is that Virginia Capital, with a capitalization of a million and a quarter, has 30 investments. Boston Capital, with 20 times as much capital to work with and hence more earning power to pay the staff, has 30 investments. The relative size of the two SBIC's is immaterial, when it comes to assisting these small businesses. Their problems are common. You need the same devotion to this task, and yet we don't have anything like the earning power. The leverage is attractive, if you are successful, but on the other hand a substantial amount of private capital must be used to produce satisfactory earnings and provide for a staff of personnel to help these small companies. We have taken what we feel is a bare minimum approach by creating a private capital base which will allow production of nominal operating earnings, and still permit us to afford a four-man staff. We look to the long-range appreciation opportunities and hope that in the interim we don't incur disproportionate losses. The CHAIRMAN. The percentage-percentagewise what proportion of your investments are of the equity type as contrasted to loans? Mr. PRATT. We have two-thirds of our total invested capital in the form of equity-type financing, either through purchase of straight common stock or using debt securities. In other words, convertible debentures or notes with warrants. The other third is in straight loans. The CHAIRMAN. In connection with your merger, did you encounter a great deal of difficulty in operating, in dealing with the SEC? You talk about dual regulation, dual control. Mr. PRATT. We had no difficulty with either administrative agency on the merger. We are of course subject to their jurisdiction, and the SBA. It was extremely refreshing to us that they expedited this merger consideration and worked in a realistic, effective way, because we did have a time factor involved. They just couldn't have done a better job. The SEC did not take primary jurisdiction. They reviewed it under their 1940 act jurisdiction, and they raised a few questions. I would say that both agencies were extremely helpful in expediting the merger. The CHAIRMAN. Mr. Multer, do you have any questions? Mr. MULTER. Mr. Pratt, is your organization affiliated with any other financial institutions? Mr. PRATT. We have as I stated, it was begun with the assistance of the six largest banks in Virginia who provided us with a small amount of capital. Each one put about $25,000 to $35,000 into the company to get it started, plus the Norfolk & Western Railway Co. We have representatives of five of the banks that serve on our board, and a representative of the Norfolk & Western. The rest of the board is made up of individuals in their own capacity. 33-440-64- 9 Mr. MULTER. The stock then, the initial stock subscriptions were taken by the banks and the railroads? Mr. PRATT. The banks supplied about half of the initial private capital, and individuals supplied the balance for our initial $350,000 to $375,000. Then we went to the public with a small public offering, and raised the capital to approximately $950,000. Mr. MULTER. Have the banks retained their stockholdings? Mr. PRATT. Yes; they have today. Mr. MULTER. What is the par value of the stock? Mr. PRATT. The par value is $1. Mr. MULTER. And what was the-what was it originally sold for when you were first organized? Mr. PRATT. You mean to the organizers? Mr. MULTER. Yes. Mr. PRATT. It sold for $9.69. Mr. MULTER. And the difference between the $1 and the $9.69 was put into a surplus account? Mr. PRATT. Paid in surplus. Mr. MULTER. Paid in surplus? Mr. MULTER. When you went public did the par value remain the same? Mr. PRATT. Yes. Mr. MULTER. And what was it sold for when you went public? Mr. PRATT. $10.50 before brokerage commissions. We realized $9.50 from the offering. Mr. MULTER. The difference then again between par and the $9.50 was added to your capital and surplus? Mr. PRATT. Added to the capital and surplus; yes, sir. Mr. MULTER. Your operating statement shows you pay a sum of almost 50 percent in salaries and consulting fees. What is the nature of those consulting fees? Mr. PRATT. They are fees paid to part-time consultants. There are people in the community that we feel have the capability of helping these small businesses. Four people, if you work 24 hours a day, can't help 30 companies on a consistently effective basis. So we have tried to gather a group of people together that can, from time to time, be utilized for this purpose, and we do it through Virginia capital, so that it will have an official status. We collect management fees from the small business where there is an opportunity to collect some nominal fee from the small business and compensate the advisers. Mr. MULTER. Are any of those consultants employed by the banks who are stockholders? Mr. PRATT. The banks? Mr. MULTER. Yes. Mr. PRATT. No. Mr. MULTER. Is it fair to say, then, that you would not have built up your loss reserve of $67,000 except for the tax advantages given to you by the Small Business Administration Act? Mr. PRATT. The tax advantages in our situation, we hope, will one day be useful. But, no, our loss reserves are based on our valuations. This is a problem that we are having a great deal of difficulty with as |