In November 1969, a new minority enterprise program was launched. It is designed to create venture capital for minority businesses through Minority Enterprise Small Business Investment Companies (MESBICS) to be organized in all parts of the country.

SBA is promoting, licensing, financing, and regulating MESBICs in the same manner as regular SBICS. At year's end three MESBICs were in operation, with 15 more expected to be licensed

soon.

A MESBIC is expected to invest only in small business concerns in which at least 50 percent of the ownership represents disadvantaged persons.

They offer direct, localized venture capital and long term loans, plus competent management and marketing assistance.

Funding

About $9.8 million of Government funds was invested in the SBIC program during the SBICS fiscal year ended March 31, 1969. Only $1.5 million in Government funds was utilized during calendar year 1969.

Although SBA stands ready, with concurrence of the Bureau of the Budget and the Treasury Department, to guarantee private funds invested in SBICs, the allowable interest rate of 81⁄2 percent per annum was not sufficient to attract private funds in any significant degree.

During the year, the Congress enacted Public Law 91-151, signed by the President on December 23. This Act provided $70 million of direct funding for the SBIC program for the remainder of fiscal year 1970.

Major Regulatory Changes

During the year SBA won an important round in its efforts to eliminate dual regulation of publicly-held SBICs. Following a hearing, a Securities and Exchange Commission examiner held that public SBICs should be exempt from parts of Section 17 of the Investment Company Act of 1940, governing transactions between investment companies and their affiliates. The examiner also held that under certain conditions public SBICs could issue stock options to their officers. The decisions are subject to review by the Securities and Exchange Commission.

Changes in SBIC regulations were made during 1969. These included authority for short term financing by SBICs to assist small businesses owned by disadvantaged people, and SBIC financing to accomplish a change of ownership of a small firm.

SBIC Performance in 1969

During the year SBA received reports from SBICs, which, while not sufficient to provide statistically adequate samples of the entire population of SBIC-financed concerns, could be considered fairly representative.

These reports show increases in employment, gross revenues, total assets and profits of small businesses financed by SBICs.

For example, SBA estimates that the reporting SBICs created additional employment at the rate of nearly 47,000 jobs per year.

Utilizing a sample of approximately 55 percent of the 4,956 small business concerns having outstanding financing from reporting SBICs as of March 31, 1969, the following estimated data for all of the 4,956 SBIC-financed companies were developed :

SBICS

Of the 373 SBICs reporting to SBA as of March 31, 1969-the close of the SBIC fiscal year-159 had private capital of $300,000 or less; 156 were capitalized from private sources at between $300,000 and $1 million; 45 had private capital of between $1 million and $5 million and 13 had private capital of over $5 million.

Total net worth of reporting companies increased by $3.5 million during the SBIC fiscal year ended March 31. The improved earnings of the reporting companies more than offset the capital withdrawn by companies quitting business during that period. Combined retained earnings grew from $4 million to $25.1 million, reflecting an exceptionally good year.

Among the companies reporting to SBA at the end of the 1969 fiscal year were 44 registered under the Investment Company Act of 1940, 26 wholly owned by banks and 35 partially owned by banks.

Total assets of the SBIC industry as reported by 373 companies as of the close of the SBIC fiscal year were $630.1 million. Average total assets per SBIC increased from $1,445,000 to $1,689,000 during the fiscal year.

Liabilities decreased by $10.7 million.

During the calendar year, the total number of SBICS was reduced from 498 in December 1968, to 455 in December 1969.

This shrinkage is expected to stop in the near future, leaving an estimated 350 effective companies. Thus there will be a stable number of quality-type companies in the program.

A net gain on investments of $39.1 million for the 373 reporting companies, combined with net operating gain amounting to $900,000 resulted in a net return of 9.5 percent on invested capital. This does not include the return realized by SBIC stockholders who received portfolio securities distributed as dividends.

The 83 SBICs ranking highest in net return on invested capital showed great profitability for the fiscal year. Those capitalized at $300,000 or less had a net return on invested capital of 15.3 percent; those with $300,000 to $1 million of private capital had a net return of 24.2 percent; those having between $1 million and $5 million of capital showed a net return of 38.8 percent, and those with more than $5 million capital reported a net return of 31.3 percent.

Activities of SBICS

During the SBIC fiscal year, the 373 SBICs reporting disbursed $182.4 million to small business concerns in 3,090 financings.

These disbursements, made in 53 states and U.S. territories, included $76.9 million in loans; $53.7 million for debt securities with equity features, and $51.8 million for capital stock and stock rights.

This revealed a significant shift from loans to the purchase of debt securities and stock and stock rights. Total equity financing disbursements moved upward from 46 to 57.8 percent. The larger companies were primarily responsible for this change.

Nonmanufacturing concerns obtained $103.5 million during the fiscal year, while manufacturers received $71.3 million. The remaining $7.6 million was unclassified.

This represents a distribution of classified disbursements of 59 percent to nonmanufacturing and 41 percent to manufacturing, as compared to 62 percent to nonmanufacturing and 38 percent to manufacturing in the previous fiscal year.

Loss Experience

Approximately $5.8 million of principal and interest of investment company loans had been charged off by June 30. All but about $60,000 was charged off during fiscal year 1969.

Established reserves for losses of principal totaled $30.7 million by March 31, 1969-or a decrease of $7.4 million from the $38.1 million of such reserves by September 30, 1968.

It is estimated that chargeoff actions in fiscal year 1970 will total $10.4 million.

Legislative Reports

Reports required by the Small Business Investment Act Amendments of 1967 appear in 12-B of the Appendix.

SBIC Industry "Review" and "Trends"

In addition to the "SBIC Industry Review" published annually at the end of the SBIC fiscal year, SBA issues the "SBIC Industry Trends," as of September 30. The "Trends" is based on SBIC data at the mid-point of the fiscal year.

Both publications measure and analyze the growth of SBICs and their impact on the small business sector of the economy. Copies may be obtained upon request from all SBA offices.

The Agency also publishes the "SBIC Digest"a newsletter which presents current information about the SBIC program. It includes statistics showing the program's progress, legislation and regulations, news about individual companies, and listings of new licenses issued, licenses surrendered, transfers of control and relevant court decisions. It is sent to all interested parties.

The Agency's efforts to remove undesirable companies from the program while providing maximum protection to the portfolio companies (small business concerns) are meeting with increasing

success.

During 1969 action was completed on 33 cases, eight of which were paid in full and two were "no asset" situations which produced no recovery to creditors. Debts due the Government from these 33 companies total $10.5 million and recovery amounted to $5.2 million, or 49.5 percent.

By the end of the year, only 93 SBICs assigned for litigation and/or liquidation proceedings were not completed. Eighteen of these cases were in the "litigation pending" category for which SBA either attempts settlement agreement or awaits a court order.

Of the remaining 75 SBICs in active liquidation, SBA was appointed receiver for 37 companies; third party receivers had been named for 18 companies; money judgments were obtained against six others; two companies were in bankruptcy; one was an operating receivership; one voluntarily assigned the assets to SBA, and 10 SBICS were the subject of settlement agreements which are now in process of collection leading to payment in full.

Debts due the United States totaled $27.2 million for the 75 cases in active liquidation.

In SBIC liquidation proceedings SBA is relying less on receiverships and placing more emphasis on alternative courses of action which are faster and less costly to the Government.

The settlement agreement procedure has proved most appropriate and has shown the greatest increase in use.