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about is likely to be profitable, in a few years down the road, they 

 are going to be out of business. 



So we put out a request for proposal and then we ask them to 

 develop their business plan. But before we fund the project, some- 

 body from the board and staff actually visits on-site to show that 

 this is legitimate. Job creation is very important, but before you 

 can have job creation, you have to have a profitable business. 



Mr. Penny. You also indicated that the design of the program 

 and the fact that it includes payback expectation? 



Mr. O'CONNELL. Right. 



Mr. Penny. Could you describe in more detail how that works 

 and whether it is universally true that the money forwarded to the 

 company is paid back based on the company's performance or 

 whether there are exceptions to that rule. 



Mr. O'CONNELL. As you are aware, we have just been in business 

 18 months. I have been too careful. 



Mr. Penny. I understand that we don't have like experience to 

 gauge, but I do think it is important that we clarify what the policy 

 is. 



Mr. O'CONNELL. We went through a long, deliberate policy in 

 looking at this, the board did, and also the lawyers in the Depart- 

 ment. We have two basic approaches. 



Our No. 1 concern is to make sure whatever company we have 

 gone into partnership with, that they succeed. So the one approach 

 that we have is — we have agreed on this mutually that when they 

 have attained a certain level of sales, let's say $1 or $2 million, 

 then over the next 2 or 3 years, they require a certain percent of 

 their sales, they pay back to the revolving fund. 



And it is not just to pay back the funds we gave them, it includes 

 at least 2 percent above a 10-year Federal Treasury note, so that 

 is a minimum. If it is a higher risk than that, we may even have 

 it higher than that. When it is paid back, it is more than it cost 

 the Government for the money. That is one approach. 



The other is where we take an equity position in the company. 

 We actually take an equity position up front with the company and 

 then if it is successful down the road, we would expect to sell that 

 stock back to the company. 



Mr. Penny. To recover the investment? 



Mr. O'CONNELL. To recover the costs plus, hopefully, if they are 

 successful and we could get up to three, four, or five times if they 

 are really successful. So we have x number of stock when we go 

 into it. Many of the small companies have chosen that option, be- 

 cause then they don't have to show that on the books. 



One of the experiences— I didn't anticipate this — when we first 

 started, we went through the review process, we selected projects 

 and then we require that they have 50 percent of the funds at 

 least. 



What happened was that with those — they didn't quite have the 

 commitment from the other funds at that point in time. They said 

 you can send us a commitment letter and we did that. And what 

 we said was that by the time we set up our agreement, you must 

 have that, but we are committing to you these funds and that pro- 

 vided the option for these small companies to go out and get other 

 investors to also come to the table. 



78-550 0-94-5 



