oversight

Management of the Seminole Employment Economic Development Corporation

Published by the Government Accountability Office on 1977-09-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                         DOCUMENT RESUME

03664 - [A2493625i ,D-3s ~                  -   i-/       77
Management of the Seminole Employment Economic Development
Cotporation. RD-77-103; B-163922. September 2, 1977. 30 pp. + 2
appendices (2 pp.).
Report to Sen. Lawton Chiles, Chairmar, Senate Committee on
Governmental Affairs: ederal Spending Practices and Open
Government Subccmmittee; Rep. Lou Prey, Jr.; Rep. Richard Kelly;
Rep. William V. Chappell, Jr.; by Elmer B. Staats, Comptroller
General.
Issue Area: Domestic Housing and Community Development: Fconomic
    Development in Rural areas (2103).
Contact: Human Resources Div-
Budget Function; Community and Regional Development: Community
    Development (451).
Organization Concerned: Community Services Administration;
    Department of Commerce; Department of Health, Education, and
    Welfare; Seminole Employment Economic Development Corp.,
    Sanford, FPI.
Congressional Relevance: Senate Committee on Governmental
    Affairs: Federal Spending Practices and Open Government
    Subcommittee.. ep. Lou Frey, Jr.; Rep. Richard Kellyi Rep.
    William V. Chappell, Jr.
Authority: Economic Opportunity Act of 1964, as amended (42
    U.S.C. 2982; 42 U.S.C. 2763). Public Works and Economic
    Development Act of 1965 (42 U.S.C. 3246). Health Maintena.nce
    Crganization Act of 1973 (42 U.S.C. 300e-2 (Supp. IV)).

         The Seminole Employment Economic Development
Corpcration in Seminole County, Florida, is designed to help
low-income communities cope with problems such as chronic
unemployment and community deterioration by providing financial
and technical assistance to business and social ventures serving
them. Findings/Ccnclusions: Through June 1976, the corporation
received Federal grants of about $4.3 million: $3.2 million from
the Community Services Administration (CSA), $1.1 million from
the Department of Ccommerce, and $50,000 from the Department of
Health, Education, and Welfare (BEV). Over $1.50 million from
the CSA was invested in or loaned to a credit union, a
property-hclding company, and eight businesses. The corporation
and its businesses were providing employment for 67 people,
temporary employment for 103 people, and seasonal employment for
up to 160 people. Tree of the eight businesses were dissolved;
none made a profit ver an extended period; and only three
appeared to be progressing toward profitability. The
corporation's inability to develop profitable businesses
included the need for improvements in preparing feasibility
studies, estimating business cash requirements, selecting
m&nagers,and establishing management information systems. Some
corrective actions have been taken. (Author/HTW)
                                      Accounttin Of lice er it :; t1. b:i:Ji b' spsi    -ci   a   r'uva
                                      by the Offeice f Cnis  ssoni Heoar           __

. 0                                    .


      's''   ~REPORT          OF THE                                                    -G7
                       COMPTROLLER GENERAL
       ',N,,"          OF THE UNITED STATES



                       Management Of The Seminole
                       Employment Economic
                       Development Corporation


                       During its 5-year existence, the corporation
                       has been organizationally stable, but it has
                       been unable to develop profitable businesses.

                       Recent improvements in the management of
                       businesses could improve their prospects for
                       success.




                       HRD-77-103                                      SEPTEMBER 2, 1977
               COMPTROLLER GENERAL OF THE UNITED STATES
                          WASHINFGTON. D.C.   2054




B-1G6922


The Honorable Lawton Chiles, Chairman
Subcommittee on Federal Spending
  Practices and Open Government
Committee n Governmental Affairs
United States Senate

The Honorable Lou Frey, Jr.
House of Representatives

The Honorable Richard   elly
House of Representatives

The Honorable William V. Chappell, Jr.
House of Repreentative;

     As requested by .ou, this report discusses
of our review of the Semi.nole uEployment Economicthe results
                                                    Development
Corporation's use of Federal funds in promoting economic de-
velopment opportunities and creating jobs for disadvantaged
and unemployed individuals in Seminole County, Florida. It
also discusses our findings regarding several questions
raised by the Orlando news media about the effectiveness
of the corporation's efforts.

     As arranged with your offices, we are sending a copy of
the report to the Subcommittee on Manpower and Housing,
Hous Committee on Government Operations, and will provide
copies to others on request.




                                          mptoer General
                                        of the United St&tes
  REPORT OF THE                       MANAGEMENT OF THE SEMINOLE
  COKPTROLLER GENERAL                 EMPLOYMENT ECONOMIC
  OF THE UNITED STATES                DEVELOPMENT CORPORATION
                                      Community Services Administration

               DIGEST
               The Seminole Employment Economic Development
               Corporation in Seminole County, Florida, is
               designed to help low-income communities
               cope with problems such is chronic unemploy-
               ment and community deterioration by providing
               financial and technical assistance to busi-
               ness and social ventures serving them.
               Are the corporation's activities and ap-
               proaches consistent with established Federal
               objectives and priorities? The corporation
               has met the organizational requirements of
               the Community Services Administration, which
               funds the corporation. However, it has had
               serious management weaknesses that prevented
               it from choosing and developing profitable
              businesses.
              ACTIVITIES AND ACHIEVEMENTS
              Through June 1976, the corporation received
              Federal grants of about $4.3 million--$3.2
              million from the Community Services Admin--
              istration; $1.1 million from the Department
              of Commerce; and $50,000 from the Depart-
              ment of Health, Education, and Welfare. It
              spent about $3.2 million.
             Over $1.5 million from the Community Serv-
             ices Administration was invested in or loaned
             to a credit union, a property-holding com-
             pany and eight for-profit businesses. Pri-
             vate stockholders invested about $248,000 in
             the businesses, and local lending institu-
             tions loaned them about $565,000. As of
             June 30, 1976, the businesses had property
             valued at about $656,000.
             The corporation and its businesses were pro-
             viding full-and part-time employment for
IToeA L5.   Uon removal, the report
cover date should be noted hereon.                        HRD-77-103
                                                          RD-77-103
67 people, temporary employment for 103
people, and seasonal employment for up to
160 people.
Three of the eight businesses had been dis-
solved at a loss of about $407,000 to the
corporation. None of the eight businesses
made a profit over an extended period,
and only three appeared to be progressing
toward profitability. Recent improvements
in the management of the remaining businesses,
along with additional funding, may give them
a better chance for success.  (See pp. 9
through 12.)

The grant of $1.1 million from the Depart-
ment of Commerce included

-- $262,000 for providing management and
   technical assistance to socially disad-
   vantaged businessmen and

-- $829,000 tor funding 103 emergency jobs
   for about 1 year beginning in February
   1976.

The grant of $50,000 from the Department
of Health, Educatio.i, and Welfare was for
studying the feasibility of having a health
maintenance organization for Seminole County.
The study showed that such an organization
was needed but was only marginally feasible
because of inadequate support from local
physicians.

DEVELOPMENT OF BUSINESSES

The corporation's inability to develop pro-
fitable businesses cannot be attributed to
a single cause. All of its businesses had
common problems, which indicates the need
for improved ways of

-- preparing feasibility studies,

-- estimating business cash requirements,

-- selecting managers, and


                      ii
              -- identifying and establishing needed manage-
                 ment information systems.
              Weaknesses in these areas contributed to
              losses, slowed development, and prevented
              corporation officials from being aware of
              problems.
             The feasibility studies for the eight busi-
             nesses suffered from errors, omissions and
             overoptimism. Complete, accurate feasibility
             studies for two terminated businesses and
             two active businesses might have prevented
             or minimized losses.
             The corporation, in many cases, underfunded
             businesses by underestimating the cost of
             facilities and equipment and by overesti-
             mating sales and profits. As a result,
             businesses did not have cash available when
             it was needed.   The lack of cash disrupted
             operations, curtailed development, and con-
             tributed to inefficiencies and losses. Ex-
             cessive optimism also obscured the real
             investment required for business develop-
              tnent and precluded realistic evaluations
             of feasibility.
             Inadequate management information systems
             have been a persistent problem. Weaknesses
             in the systems have prevented identifica-
             tion and correction of inefficient opera-
             tions, timely identification of large
             operating losses, and computation of re-
             liable profit and loss amounts. Raw mate-
             rials were purchased without knowing whether
             the prices paid would allow for adequate
             profit margins.
             Of the eight ventures, five released one
             or more managers. One business had four
             managers, three of whom were unqualified.
             This business failed.
             GAO found little evidence that the corpora-
             tion investigated and verified claimed
             qualifications of prospective managers.


Tear Sheet                        iii
Apparently, managers were accepted on their
word.

CORRECTIVE ACTIONS
The corporation has taken, or is taking, the
following actions to improve the management of
its businesses and enhance its chances for de-
veloping profitable businesses.

It:
-- Placed monitoring of businesses under an
   Executive Advisory Committee consisting of
   the corporation's Controller, Director of
   Operations and Monitoring, and Director
   of Business Development and Marketing.

-- Started developing management information
   systems at two businesses and is planning
   a system at another business.

-- Studied the operations of two businesses
   in-depth to identify and correct inefficien-
   cies. Both were altered greatly.

COMMUNITY SERVICES
ADMINISTRATION COMMENTS

The Community Services Administration said
that the report identified problems with
corporation and business management. It
agreed with our appraisal of the corporation.




                      iv
                           CHAPTER 1

                          INTRODUCTION
     As requested by Senator Lawton Chiles, Chairman,
Subcommittee on Federal Spending Practices and Open Govern-
ment Senate Committe, on Governmental Affairs, and
Representatives Lou Frey, Jr., Richard Kelly, and William
Chappell, Jr., we reviewed the manaqenent of the Seminole
Employment Economic Development Corporation (SEEDCO) from
June 1970 through August 1976. The requests were prompted
primarily by community concern over newspaper reports that
SEEDCO was not being managed effectively and that Federal
funds were not being used as intended by the Congress.

     SEEDCO is a community development corporation located
in Sanford, Seminole County, Florida. It was formed in
June 1970 through the combined efforts of seven local anti-
poverty agencies to promote economic development and create
jobs for disadvantaged and unemployed people in Seminole
County.

      Since September 1972 SEEDCO has been funded primarily
through grants from the Community Services Administration
(CSA) or its predecessor, the Office of Economic Opportunity,
under part A, Special Impact Programs, title VII of the
Economic pportunity Act of 1964, as amended (42 U.S.C.
2982).   The act authorizes grants for programs

     -- which try to solve the critical problems of areas
        having substantial numbers of low-income people;

     -- which are of sufficient size, scope, and duration to
        have an appreciable impact in arresting tendencies
        toward dependency, chronic unemployment, and community
        deterioration;

     -- which hold forth the prospect of continuing to hata
        such impact after Federal financial assistance is
        terminated; and

    -- which provide financial and other assistance to start,
       expand, or locate enterprises in or near the area to
       be served so as to provide eploymernt and ownership
       opportunities for its residents.

Previously, such grants were authorized under part D, title
I of the the act, as amended 42 U.S.C. 2763).
     Through June 1976 SEEDCO received Federal grants totaling
$4.3 million--$3.16 million from CSA or the Office
                                                    of Economic
Opportunity; $1.09 million from the Department of
                                                   Commerce;
and $50,000 from the Department of Health, Education,
Welfare--and had spent $3.24 million.                  and
                                       Chapter 2 cntains
additional information on funding.

SCOPE OF REVIEW

      We reviewed all records maintained by CSA
SEEDCO activities and interviewed CSA officials concerning
                                                 responsible
for both funding and monitoring the activities of
                                                    SEEDCO
and its business ventures. We also reviewed management
and financial records of SEEDCO and its ventures from
inception through August 1976, and interviewed their SEEDCO's
officials. The records included minutes of board of key
                                                       directors'
meetings, grant documents, feasibility. studies and
                                                     plans,
expenditure vouchers and supporting documents, financial
statements, audit and evaluation reports, and incoming
outgoing correspondence.                                 and




                             2
                          CHAPTER 2

             SEEDCO ACTIVITIES AND ACHIEVEMENTS

     The purpose of the Special Impact Program is to achieve
an appreciable and lasting impact in arresting tendencies
toward dependency, chronic unemployment, and community
deterioration and to have such impact continue after Federal
financial assistance ends. SEEDCO's progress must be viewed
in terms of the policies and priorities which CSA has set
for community development corporations. These policies and
priorities are broadly stated and do not provide tangible
methods for measuring either the extent-or the reasonableness
of a community development corporation's achievements and
progress. It is clear that CSA views achieving an appreciable
and lasting impact as a difficult and long-range goal and
does not expect significant progress during the first few
years.
     SEEDCO has met CSA's criteria for a stable community
development corporation as an initial indicator of progress
toward achieving appreciable impact and its activities appear
to .e representative of actions necessary for accomplishing
appreciable impact as measured by CSA's indicators.
     Although SEEDCO has invested and loaned over $1.5
million in business ventures, no venture has become profitable.
SEEDCO recently acted to improve the business management c
its ventures. If these actions result in profitable ventures,
SEEDCO will have taken a major step toward achieving the
goals of the Special Impact Progr,%m.
     In September 1975 an Orlando newspaper began a lengthy
series of articles questioning SEEDCO's activities. It
questioned the conformity of SEEDCO's programs and approached
with 'objectives and priorities established for community
development corporations, the use of Federal funds purportedly
to benefit SEEDCO's officers and employees, the propriety
of investments in business ventures, and the qualifications
and sincerity of management.
     Our findings generally do not support the image of SEEDCO
conveyed by the articles. We found no evidence of illegal
activities or lack of dedication to SEEDCO's objectives and
priorities. However, we identified serious management weak-
nesses in venture feasibility and development which had
persisted from venture to venture. Our findings are dis-
cussed in greater depth in this chapter and in the following
chapter on venture management.


                             3
CSA POLICIES AND PRIORITIES

     CSA policies state that the ultimate goal of the Special
Impact Program is to achieve parity between impact areas and
areas surrounding them and hat the legislative objective of
"appreciable impact" should not be equated with this ultimate
goal. That is, appreciable impact will not occur when parity
is achieved--when the ultimate goal of eliminating poverty
is attained--but when current economic, social, and institu-
tional trends have bean reversed.
     CSA cites as the initial indicator of progress toward
appreciable impact the establishment of a stable community
development corporation, measured by the presence of an
active and representative board, a competent and responsive
staff, and broad-based support in and ties to the impact
area. Increases in jobs and income, establishment of pro-
fitable ventures and property developments which attract
private capital, increased numbers of skilled managers and
workers, and reductions in unemployment and public assistance
rolls in the impact area are considered to be indicators of
appreciable impact. These are seen as giving the community
development corporation and its effort visibility and
creditability and are expected to result in increased private
capital investment.
     Community development corporations are expected (1) to
make the services and resources available which the
community needs for planning and coordinating activities
related to the purposes of the program, providing equity and
debt capital, generating employment, and increasing wages;
(2) to develop profitable business ventures; and (3) to
operate and sponsor social programs with financial assis-
tante from Federal agencies, State and local governments,
and private sources.
A STABLE COMMUNITY DEVELOPMENT CORPORATION
     As previously indicated. CSA considers the establishment
of a stable community development corporation to be an
initial indicator of progress toward achieving appreciable
impact. Such a corporation is identified by an active and
representative board, a competent and responsive staff, and
broad-based support in and ties to the impact area. SEEDCO
has made progress toward this objective.




                              4
Active and representative board at SEEDCO

     CSA requires a community development corporation to have
a board of directors which includes representatives from the
'ow-income, busiiness, and financial communities. The majority
of members must be selected from the low-income comunity.
SEEDCO's bylaws provided for a 25-member board composed of

     -- the Director of Seminole County's community action
        agency;

     -- 12 persons elected by members of Seminole County's
        6 antipoverty agencies;

     -- 6 members elected by the 'Friends of SEEDCO, an
        advisory committee of community residents; and

     -- 6 members elected by the board as at-large members
        from the civic, professional, and community
        leadership.

     At the time of our review, SEEDCO'  board of directors
had 24 members and one vacancy. The board was structured
in accordance with the bylaws and included both business and
professional representatives. It generally met once each
month with a quorum present and participating.

Staff at SEEDCO

     Between 1970 and June 30, 1976, SEEDCO's full-time staff
increased from 2Tto 19. DuLing that period 56 persons were
hired and 37 employees were terminated. SEEDCO's current
staff is comprised of the following positions.

               President                           1
               Vice President                      1
               Administrative Assistant            1
               Director, Resource Development      1
               Director, Business Development      1
               Community Resource Aide             1
               Control]ler                         1
               Bookkeeper                          3
               Financial Business Analyst          1
               Senior Venture Monitor              1
               Junior Business Analyst             2
               Secretary, tyypist, Receptionist    5

                                                  19




                              5
     All but one member of SEECO's pfessional staff have
college degrees. In addition, their experience and back-
grounds are varied and appear to qualify them for the positions
they occupy. The education and experience of several key
members of the professional staff are ummarized below.

     -- President:  Education includes a achelor of Science
        degree in aiation education aid administration and
        graduate studies in education, administration, sociology,
        psycnology, tort law, and public schools law. Experi-
        ence includes teaching; consultant services to various
        community groups and the Civil Rights Division,
        Department of the Treasury; management positions
        with two community action agencies7 and a program
        management position with SEEDCO.

     -- Director, Business Development:   Education includes
        undergraduate work in electrical engineering and
        business law. Experience includes supervisory and
        management positions with sveral large corporations,
        service as a consultant to several companies in
        marketing and financing, part owner of a designing
        and manufacturing company, and positions as an under-
        writing ;.Kent with two insurance cmpanies.

     -- Financiai Business Analyst: Education includes an
        undergraduate degree in biology and a master's degree
        in business administration. Experience includes a
        chemist position with a corporation, director of a
        personnel consulting service at a large college, and
        an investment analyst position with a large insurance
        company.

     -- Senior Venture Monitor:  Education includes an under-
        graduate degree in product design.  Experience includes
        positions as program manager, plant manager, plant
        superintendent, engineering supervisor, and'vice
        president with a number of private businesses.

     -- Controller:   .Education includes an undergraduate
       degree in accounting. Experience includes positions
       as finance officer and assistant controller in State
       government and in private industry.
     The president of SEEDCO said that development of a
capable staff has been a very difficult and lengthy process
and that the turnover in personnel was part of the process.
He said that SEEDCO's location, noncompetitive salaries,
and uncertainty about its future contributed to the difficulties


                                6
in recruiting high quality people. He said that, among other
things, a downturn in the economy eased the problem and made
it possible to develop the current staff, which he believes
will hasten SEEDCO's success.
Broad-based support in Seminole County
     SEEDCO's support in anC ties to Seminole County are
evidenced by its origin as well as by the current board
of directors and private contributors.
     SEEDCO was formed in une 1970 through the combined
efforts of the following community and neighborhood anti-
pcverty agencies:
           Seminole Comumunity Action, Inc.
           Oviedo Citizens in Action, Inc.
           South Seminole Committee for Progress, Inc.
           Midway Economic Action Team, Inc.
           Bookertown Community Improvement Association, Inc.
           Westside Community Improvement Association, Inc.
           Georgetown Community Improvement Association, Inc.
These organizations represent and serve low-income communities
throughout Seminole County. They have a combined total of
over 1,150 members. Of SEEDCO's 24 board members, 14 were
also officers or members of these organizations.
     SEEDCO has a program where individuals above the low-
income guidelines can become members of the "friends of
SEEDCO." It had about 180 "friends" during 1976, 5 of whom
were members of the board of directors.
SEEDCO ACTIVITIES AND ACHIEVEMENTS

     As indicated, CSA has not developed criteria for
evaluating a community development corporation's progress;
but it has determined that appreciable impact is indicated
in the area by (1) a net inflow rather than outflow of jobs
and income, (2) the establishment of profitable ventures and
property development which will attract private capital,
(3) an increase in the number of skilled managers and workers,
and (4) reductions in unemployment and public assistance
rolls. SEEDCO's activities appear to be consistent with the
course of action necessary to achieve an appreciable impact.




                             7
 Basic operations
      Through June 30, 1976, SEEDCO received $3.2 million in
 grants from CSA or its predecessor, the Office of Economic
 Opportunity, for basic operations. over $2.8 million had
 been spent for the following purposes.
        Description                 Expenditures    Percentages
Personnel                             $   833,000       29.6
Consultants and contractual
  services                                193,000        6.8
Travel                                     63,000        2.2
Space costs and rental                     41,000
Consumable supplies and                                  1.5
  other costs                             127,000        4.5
Rental, lease, or purchase
  of equipment                             30,000        1.1
Investments in and loans to
  ventures                            1,531,000         54.3
                                     $2,818,000        100.0
The remaining $350,000 was not spent; it was invested in
certificates of deposit in a local bank and a local savings
and loan association.
Grants secured from other Federal agencies
     SEEDCO secured grants from other Federal agencies totaling
$1.14 million to improve the employment prospects of the
residents of the impact area and the delivery of health
services to them.
     Department of Commerce

     Grants totaling $262,000 were obtained from the Office
of Minority Business Enterprise under provisions of title
III of the Public Works and Economic Development Act of 1965
(42 U.S.C. 3151).     These funds are being used to operate
Local Business Development Organization and a Constructiona
Contractor Assistance Center for the purpose of providing
management and technical assistance to socially disadvantaged
businessmen.
     On June 30, 1976, the Local Business Development Organ-
ization had three employees, but the Construction Contractor
Assistance Center had nt been staffed. SEEDCO plans for
these offices to have a combined total of eight employees.



                                8
     The Local Business Development Organization provides a
number of specific services to socially disadvantaged
businessmen, including accounting systems development and
management and market analyses.

     A grant of $829,000 was obtained from the Economic
Development Administration under title X of the Public Works
and Economic Development Act of 1965 (42 U.S.C. 3246) to fund
103 emergency jobs for about 1 year beginning in February
1976. People hired for these jobs had been unemployed, and
many were on public assistance. They have been assigned to
SEEDCO, to ventures being developed by SEEDCO, and to
projects of the local community action aaency--such as a
community cannery and a home winterization and energy con-
servation project. SEEDCO's goal is to provide permanent
employment for 61 percent of these people.

     Department of Health, Education, and Welfare

     A grant of $50,000 was secured from the Department of
Health, Education, and Welfare under provisions of the
Health Maintenance Organization Act of 1973 (42 U.S.C.
300e-2) (Supp. IV, 1974) to study the feasibility of a
health maintenance organization for Seminole County.   The
study showed that such an organization was needed but only
marginally feasible because of inadequate support from
local physicians.

Development of ventures

     SEEDCO had invested (including loans) over $1.5 million
of CSA grant funds in eight business ventures, one credit
union, and one property-holding company. Private stock-
holders had invested cash, property, and equipment valued
by SEEDCO at about $248,000 in four of the ventures.  In
addition, the business ventures had borrowed over $565,000
from local lending institutions. The nature and status
                                                        of
SEEDCO's investments s of June 1976 was as follows:




                             9
                                                                Percent of
     Description                 Investments          Loans       equity
Active business ventures
     Ornamental plant nursery    $     175,000   $     52,500       100
     Fruit harvesting and
       packing                         100,000        150,000        60
     Bakery products                    51,000          -            60
     Winch manufacturing               200,000          -            44
     Manufacturing and
       marketing material
       handling and
       packaging equipment              50,000          -           51
Tnactive or discontinued ventures:
     Landscaping, lawn
       maintenance, and plant
       nursery                     217,600              -          100
     Citrus juice processing
       plant                        75,000             55,000      100
     Motel development             215,500              -          100
Credit union                         a/ 15,000          -
Prop, rty holding                      139,000          -          100
         Total                   $1,274,100          $257,50"
a/Represents grant to credit union used exclusively for
  administrative salaries and not considered as equity by
  SEEDCO.

     Active business ventures

     SEEDCO had five business ventures under development at
June 30, 1976.  These ventures had been under development for
periods ranging from 10 months to 3 years and had 33 full-
time employees, 13 part-time employees, 32 seasonal employees
(the number of seasonal employees can range as high as 160),
and 58 employees hired under the title X grant from the
Department of Commerce. SEEDCO had made capital investments
of $576,000 in these ventures.  It had also loaned the ventures
3202,500, had guaranteed loans of $75,000 from private sources,
and had requested additional investment authority from CSA.

      None of the active business ventures had made a profit
over an extended period and all had deficits as of June 30,
1976.   Some of the ventures appeared to be making progress
toward becoming profitable, but most had experienced or were
experiencing management problems. Recently, SEEDCO took


                            10
 strong corrective measures which, along with additional
 funding, may enhance the prospects for their success.
 (See ch. 3 for detailed information on venture development.)

     Inactive and discontinued business ventures

     The landscaping, lawn maintenance, plant nursery company,
SEEDCO's first venture, was terminated for lack  of economic
feasibility after about 3 years of operation. Motel devel-
opment efforts were discontinued for lack of economic
feasibility by CSA during the planning phase, but after
purchase of land and a franchise.  The citrus juice processing
plant was terminated for lack of economic feasibility after
the purchase of land and equipment and construction of
facilities.  SEEDCO's net loss on these ventures
about $407,000. Land and buildings purchased by will   be
                                                  these ventures
are being retained for future use,

     Experiences with its first venture (the plant nursery)
significantly changed SEEDCO's philosophy about venture
development.  When the venture was started, SEEDCO
vis. ned ventures that would employ a large number en-
                                                   of people
and that would be staffed at all levels by the area's low-
income residents who had been appropriately trained. From
the beginning, this venture had problems, largely attributable
to management weaknesses, the need to train virtually the
entire work force, and higher-than-average wages to accommodate
a permanent work force instead of casual labor as used by
competitors. As a result of this experience, SEEDCO de-
emphasized training as a basic role of venture development
and decided to seek expert venture managers and to emphasize
profit rather than employment in developing future ventures.
These concepts are consistent with CSA's policies and
priorities.

     It is CSA's policy for community development corporations
to initially emphasize the development of profitable ventures
rather than the creation of jobs for impact area residents.
The rationale for this policy is that employment goals will
be better served by a successful business image which solid-
ifies the community development corporations' institutional
standing and attracts outside capital for new and expanded
ventures. Also, according to CSA, community development
corporations' efforts to train venture managers rather
tnan to employ expert managers has been a major cause of
venture losses.




                             11
     Property-holding venture
     SEEDCO organized a property-holding venture in October
1974 to acquire and hold real property which would then be
leased to other SEEDCO ventures. Land and buildings from
inactive ventures in which SEEDCO had invested about
$139,000 (valued at about $198,000) were being held by the
property-holding venture as of June 30, 1976. Several other
properties valued at $453,000 were being retained by or
held in trust for other operating ventures.
     Credit union
     SEEDCO formed a credit union in AugLst 1974 to promote
thrift among members, to provide members with an opportunity
to accumulate savings, and to provide members with a source of
credit. The credit union has one full-time and one part-time
employee hired under a grant from SEEDCO and two temporary
employees hired under the title X grant from the Department
of Commerce.
     Through July 1976 the credit union had received deposits
of $42,030 and had made 268 loans totaling $87,000. Credit
union records show a profit of $1,100, exclusive of personnel
costs, for the first 7 months of calendar year 1976.
Obviously, there has to be a significant increase in deposits,
loans, and profits before the credit union can become self-
sufficient.
Summary of employnmant generated
     At June 30, 1976, SEEDCO and its ventures were providing
full-time employment for 53 people, part-time employment for
14, and seasonal employment for up to 160. In addition,
SEEDCO had secured grants from other Federal agencies (1)
for providing employment to 103 people for 1 year and. (2)
for operating offices, which at the time had 3 employees,
to provide management and technical assistance to minority
businessmen.
NEWSPAPER QUESTIONS ON SEEDCO OPERATIONS
     An Orlando newspaper raised several questions concerning
the necessity of certain SEEDCO loans and expenditures
incurred for consultant services, office space and furnishings,
training, and salaries. A question was also raised about a
loan to a local ambulance service.




                             12
 Consultant services

      For the 12-month period ending February
 spent $54,000 for consultant and professional 29, 1976, SEEDCO
 services included assistance and advice        services.  These
                                         in (1) determining
 venture feasibility, (2) performing public
                                            relations for
 SEEDCO, and (3) preparing grant applications.
 supporting documentation for $30,000            We examined
                                      of these expenditures
 and found no questionable transactions.

 Office space and furnishing

      SEEDCO occupies about 5,600 square feet
World War II temporary building which          of space in a
                                       once
quarters for the Sanford Naval Air Station.  served as head-
                                               The space is
leased from the Sanford Airport Authority
foot including repairs, maintenance,        for $3.21 a square
                                      utilities, and
janitorial services.   SEEDCO's space and furniture are ade-
quatet for its operations, but not ostentatious.
has aneling, carpeting, and central                The building
                                      air
the furniture is within the medium price  conditioning,  and
                                          range. An official
of the Airport Authority said that comparable
area would cost from $5 to $6 a square          space in the
                                        foot.
Training expenses

     One newspaper article asked why $175
fornia State University for "employee      was paid to Cali-
payment represented the registration   development."   This
employee's attendance at a conference fee for a SEEDCO
                                       on venture capital for
5 days in December 1972.

Salary expenses
     Another newspaper article asked why a
                                             check as made out
to .L. Orr, Inc., and then voided.
                                      The article also asked
who or what is H.L. Orr, Inc. H.L.
of SEEDCO.                           Orr  is the president
             n September 1972 SEEDCO's bookkeeper
vertently made Mr. Orr's salary check               inad-.
                                       payable to "H.L. Grr,
Inc." The erroneous check was immediately
corrected check issued on the same date.     voided and a
erroneous check and verified that it        We examined the
                                      was voided and not paid.
Ambulance service
     One of the newspaper articles asked why
                                             SEEDCO loaned
$4,000 t:o an ambulance service.




                               13
     We found that on August 17, 1972, SEEDCO agreed to loan
$5,000 to an ambulance service to help the owner secure a
loan of $15,000 from the Small Business Administration.
As a condition of its.loan, SEEDCO was to assume management
control over the ambulance service, including proceeds from
both its loan and the loan from the Small Business Adminis-
tration.   .

     SEEDCO never intended for its loan to be used by the
ambulance service. Instead, it intended for the loan to be
returned to SEEDCO after it had served its purpose in securing
the Small Business Administration loan. However, an official
of the Small Business Administration told SEEDCO that the
conditions of its loan did not meet the Small Business
Administration's requirements. In add tion, SEEDCO learned
that the ambulance service and its owr   were in a worse
financial position than previously believed. As a result,
SEEDCO withdrew its support of the ambulance service. The
proceeds of SEEDCO's loan were redeposited in its bank account
on November 9, 1972, and checks received from the Small
Business Administration were returned on November 28, 1972.




                            14
                          CHAPTER 3

                       SEEDCO VENTURES

     As of June 30, 1976, SEEDCO had invested and loaned
$1,377,100 to eight business ventures (excluding a property-
holding company and a credit union), five of which were
active at tie time of our review. Although none of
the five active ventures had become profitable, three were
making progress toward this end. Continuation of the other
two appeared questionable without additional funds from SEEDCO.

     SEEDCO's inability to develop profitable ventures cannot
be attributed to a specific cause or causes. All of its
business ventures have experienced some common problems, which
indicates that the corporation needs to improve its methods
for preparing feasibility studies, estimating venture cash
requirements, selecting venture managers, and identifying
needed management information systems   Weaknesses in these
areas have contributed to venture losses, slowed venture
development, and prevented SEEDCO officials from being aware
of venture problems. Recently, however, it acted to improve
the management of its ventures.  The actions taken are
discussed in chapter 4.

     An Orlando newspaper raised a number of questions con-
cerning the propriety of SEEDCO's investments in several
ventures.  In most cases these questions were raised on the
basis of partial information. We developed additional
information necessary to resolve the questions.

FEASIBILITY STUDIES

     The feasibility studies for the eight ventures contained
errors, omissions, generalizations, overstatements, or
overoptimism which contributed to development problems.
Complete, accurate feasibility studies for the two terminated
ventures and for two of the active ventures might have pre-
vented, or at least minimized, SEEDCO's losses. Examples
of these problems and information relative to the newspaper's
questions are summarized below.
Landscaping, lawn maintenance, plant nursery
     SEEDCO's first venture, a landscaping, lawn maintenance,
plant nursery business, was terminated for lack of economic
feasibility after about 3 years of operation and losses of
about $218,000. SEEDCO officials said that because of a
slowdown in the area's economy, the venture was unable to


                             15
obtain landscaping and lawn maintenance work. From its
beginning, the venture experienced problems involving low
quality products, untimely performance, and high costs.
One of the cornerstones of this venture was SEEDCO's plan to
hire and train all personnel--including management--from among
the areas's poor; but the feasibility study did not consider
the effect this might have on the quality, timeliness, and
cost of the venture's product. Further, the feasibility study
contained no specific information about the (1) nature and
amount of operating costs, (2) availability of customers,
(3) extent of competition, or (4) the business volume necessary
to make a profit.

Citrus juice processing plant

     A venture to produce and market fresh citrus fruit juice
was terminated in May 1976 before beginning operations because
its projected production costs exceeded the retail price at
which competitors were selling their products.

     The feasibility study for the plant was prepared primarily
by SEEDCO staff members who had no experience in producing
and marketing citrus juices. Some assistance was provided
by the venture manager and a consultant, both of whom report-
edly, had some experience. The study contained no provision
for inflation and significantly overstated proceeds from the
sale of waste products. More importantly, however, the feasi-
bility study discounted the possibility and effects of com-
petition from large companies and projected production 12
months a year from a seasonal raw maerial.

     SEEDCO officials knew that one nationwide company was
marketing fresh juice in the northeastern United States and
said that an official of the company told them in the early
part of 1974 that the company was not planning to enter the
central Florida market. SEEDCO officials also concluded
that another nationwide company would not enter the fresh
juice business because of the required investment.

     On this basis, SEEDCO officials discounted future compe-
tition from the two major companies. The officials further
concluded that if unforeseen competition did develop, their
venture could compete. They thought its small size would
permit production and marketing flexibility not available to
large companies, and that its product would be better because
it would use fruit fom small orchards which produce higher
quality fruit. Within about 1 year, however, both of the
large companies whose competition SEEDCO had discounted were



                            16
selling fresh fruit juices in central Florida at prices lower
than the projected production costs of the venture's product.

      The feasibility study for the plant provided for the
Production of fresh orange juice 12 months a year even though
  :rvesting oranges is seasonal, covering about 9 months a
 ear.   The 12-month operation was to be accomplished by
maintaining a sufficient supply of oranges in cold storage.
However, neither the feasibility study noi the facility actually
constructed provided for cold storage of unprocessed fruit.
The inability to sustain production on a year-round basis was
a major factor in the decision to discontinue the plant. '

     Part of the plant's projected income was to be derived
from the sale of citrus rind and pulp for $65 a ton. The
income from this source was overstated by a factor of six
because projections were based on wet weight instead of dry
weight. This error overstated income for the first year
of operations by $2,200, for the second year by $25,500, and
for the third year by $46,300.

     SEEDCO officials said that the cost of leasing cold
storage space was included in projected product costs.   They
also said that the processing plant's competitors put their
products on the market at discounted prices and that the prices
have not changed even though production costs have increased
significantly. However, the officials did not furnish docu-
mentation supporting these positions.

     Newspaper questions juice processing equipment

     A March 1976 newspaper article indicated that SEEDCO
had invested a substantial sum in the "wrong equipment" for
the juice processing plant which was approved by the Office
of Economic Opportunity in May 1974.

     Between May 1974 and June 1975, SEEDCO purchased land and
juice processing equipnment and started construction of a
building and associated facilities. By June 1975, however,
the venture was not operable, and SEEDCO did not have suffi-
cient cash to complete it.   In addition, SEEDCO had come to
the conclusion that the venture, as planned and being developed,
would be a marginal operation and that a capability for pro-
ducing reconstituted juices from concentrates should be added.
It decided to suspend further development, other than comple-
ting work-in-process, until additional funding could be
secured and to dismiss the plant manager.




                             17
     A new manager was hired in October 1975. He concluded,
based on a detailed study, that the original equipment bought
for $92,000 was adequate for the venture as it had ben planned
but that the venture as planned could not be profitable because
production capacity as limitea and the production of fresh
juice would be restricted to about 9 months a year (because
of the seasonal availability of fruit).  By this time, venture
development costs and competition from other producers of
fresh fruit juice had significantly exceeded SEEDCO's original
estimates. The new manager recommended that the plant be
converted to produce reconstituted juices from concentrates
to permit operations 12 months a year, and he estimated that
to convert and begin operations would cost about 200,000.
The conversion involved some new equipment and modifications
to the building and associated facilities.

     However, by April 1976 the new manager revised his con-
version estimate and concluded that it would cost $450,000
to make the plant operational as a producer of reconstituted
juices. This made profitability of the venture marginal at
best. Also, a consultant to the citrus industry advised
SEEDCO against continuing development efforts. Based on
these recommendations, SEEDCO stopped development of the
plant in May 1976.

     In summary, the quipment originally purchased for the
plant was rnt "the wrong equipment" for the venture as it
was initially planned. The problem was that the venture could
not be competitive in its market and could not be economically
expanded or modified.

     Although the venture has been terminated, there has not
been a final liquidation and settlement of all assets and lia-
bilities. As a result, final cost and loss figures are not
available. Through December 1976 approximately $338,000 had
been      t on the venture, including $155,000 for land and
a building, $92,000 for machinery and equipment, and $91,000
for other assets and operating expenses. At that time, it
appeared that SEEDCO would lose at least $139,000--its direct
cash investment. The loss could be decreased by proceeds from
the sale of the machinery and equipment but such proceeds
are not expected to exceed a bank loan of $44,000 for which
these items serve as collateral.

     The land and building are being retained for future use.
In commenting on our report, SEEDCO officials said that they
were considering a joint venture with a food processing com-
pany which would use the land and building and possibly some
of the machinery and equipment.



                             18
Winch manufacturer

     In December 1974 SEEDCO invested $200,000 in a company
which manufactured and retailed winches used by the fishing
industry.  SEEDCO owns 44 percent of the company's stock, but
has voting control over 80 percent. The reasonableness of
the investment was questioned by an Orlando newspaper.

     A SEEDCO official said that the company was brought to
their attention by the Institute for New Enterprise Develop-
ment, a firm employed by CSA to help community development
corporations locat-. prospective ventures, and that SEEDCO's
investment was based primarily on a feasibility study jointly
prepared by the company's officers and a representative of
the Institute. The officials said that, because of the Insti-
tute's participation, SEEDCO's investigation was limited pri-
marily to a small market survey, which generally included
interviews with two or three of the company's customers and a
-ouple of shipbuilders and users o winches. SEEDCO's pro-
posal to CSA, a combination of the feasibility study and
SEEDCO's survey, showed that the company was in trouble
because of undercapitalization but that significant sales
had been made, the product was excellent, and a good market
existed. Subsequently, SEEDCO discovered that prior sales
were negligible, that the winch was defective and unreliable,
and that competition was stronger than anticipated.

     A SEEDCO official said that during the first 20 months
of operations (Dec. 1974 through July 1976) most of the cor-
poration's efforts were directed at redesigning the winch
and satisfying customers of the previous company. They
told us that the winch has been redesigned successfully,
that some sales have been made, and that inquiries from poten-
tial customers are increasing.  As of August 1976, eight
winches had been sold for a total of $49,000.

     When our review was completed in August 1976, the com-
pany was without operating funds and had no paid employees.
A company stockholder was being retained as a salesman but
was not being paid. At that --me, SEEDCO was studying the
company's potential and was making plans to seek $40,000
from stockholders to pay existing debts and to pay for a
sales program.

     SEEDCO officials furnished information showing cumulative
sales of about $69,000 through December 1976 including one
for $16,200 for delivery of   winch in February 1977.  The
officials said that the company was unable to get additional




                            19
funds from private stockholders and that SEEDCO had invested
an additional $10,000 to start a sales program. They expressed
cautious optimis:a about the company's chances but said that
additional funding would be required.

Motel project

     On March 8, 1973, SEEDCO exercised an option taken on
Ncvember 27, 1972, and purchased, or $201,500, a 5.45-acre
tract of land which it intended to use for a motel. In
December 1973 SEEDCO learned, through an appraisal of this
and other property, that the party it had bought the land
from had purchased it for $105,000 on November 7, 1972--just
20 days before SEEDCO took its option on the property. The
Orlando newspaper questioned how this could have appened.

     The president of SEEDCO said that to avoid the cost of
an appraisal--about $1,600--the option price was based on an
appraisal SEEDCO obtained in September 1572 on a similar piece
of land it was considering for the motel venture. Although
this appraisal was made about 2 months before SEEDCO's option
and dealt specifically with other property, it appea.ed to jus-
tify the price paid by SEEDCO for the tract it bought. A
December 1973 appraisal of the purchased property also sup-
ported the purchase price. Based on these appraisals of
comparable properties in the community, it appears that the
party SEEDCO bought the land from may have acquired it for
an unrealistically low price.

     SEEDCO ultimately invested about $250,000 in the project
for the land, the franchise, and other general expenses. The
project had been approved by CSA and a commitment of mortgage
funds had been obtained from a mortgage company. However, in
November 1973 the mortgage company canceled its commitment
because of the energy crisis. Subsequently, SEEDCO began to
pursue the idea of a motel-office complex to be constructed
on the purchased land and adjoining land, but CSA disapproved
initial proposals on this project. Also, by 1974 substantial
motel and hotel construction had been completed in the Orlando-
Disney World area which is adjacent to SEEDCO's impact area.

     In late 1974 SEEDCO was offered a 1-year-old Sheraton
motel which had not proved profitable. An Orlando newspaper
questioned SEEDCO's rationale for considering this option.
SEEDCO was also interested in about 26 acres of adjoining
land owned by the owners of the motel. SEEDCO perceived
this as an ideal location for a motel-industrial park-
community center complex.  Negotiations were begun and an



                             20
agreement was finally reached in which SEEDCO would buy the
motel and a 51-percent interest in the adjoining land for
joint venturing with the previous owners. An individual
SEEDCO employed to operate the motel project when it became
operational conducted a feasibility study with some outside
consulting assistance. The study showed the project to be
feasible, but SEEDCO's attempts to obtain private financing
were unsuccessful.

     CSA disapproved the project in January 1976, questioning
the feasibility study on the following basis:

     -- Assumptions that the motel under SEEDCO direction could
        transcend the prevailing market and a relatively high
        break-even point.

     -- A $1.2 million acquisition price was too high in light
        of appraisals at $942,000.

     -- SEEDCO had materially underestimated initial develop-
        ment costs.

CASE FLOW PROBLEMS

     SEEDCO has consistently underfunded ventures as a result of
underestimating the cost of facilities and equipment and by over-
estimating sales and profits. As a result, ventures have
experienced cash flow problems which disrupt operations, cur-
tail development, and contribute to inefficiencies and losses.
Moreover, excessive optimism obscures the real investment
required for a venture and precludes a realistic evaluation of
venture feasibility.  Examples of cash flow problems are sum-
marized below.

Ornamental plant nursery

     SEEDCO started an ornamental plant nursery in August 1973
with an initial investment of $72,500. Within 16 months the
venture was in debt and did not have sufficient cash for its
payroll. In January 1975 CSA authorized an additional $25,000
investment, but not before purchases of nursery stock and
productive operations had essentially stopped.  Shortly there-
after, SEEDCO determined that a greatly expanded operation
was necessary for making a profit.  In January 1976 CSA ap-
proved $130,000 for the expansion. Almost 3 years after
operations started, the venture was not making a profit, and
SEEDCO's investment had increased from $72,500 to $227,500.



                             21
     The initial investment in the nursery was based on a
7-month-old feasibility study showing that the venture should
be profitable during the third year of operations. However,
the feasibility study was based on a bedding plant operation
(small outdoor plants, such as petunias, marigolds, and
geraniums) whereas the venture actually started as an orna-
mental plant operation (foliage and indoor plants, such as
philodendron and neanthabella palm). Bedding plants require
shade and a growing period of 2 to 3 months. Ornamental
plants require a growing period of 4 to 8 months and a
greenhouse. A SEEDCO official said they changed to an orna-
mental plant operation on the advice of persons experienced
in the nursery business, but they did not make a new feasi-
bility study because they believed a new study was not needed.
Manufacturing and marketing of material handling
and packaging equipment
     In August 1975, SEEDCO started a manufacturing and mar-
keting company for material handling and packaging equipment
with $60,000 ($50,000 from SEEDCO and $10,000 from a private
stockholder). Sales and profits of $398,000 and $117,00,
respectively, were forecast for the first year of operations.
The sales and profits did not materialize, and within 8
months the venture had a cash shortage. SEEDCO provided a
loan guarantee for >nxadditional $15,000 to prevent a serious
liquidity problem. About 3 months later, SEEDCO notified CSA
that another $65,000 was required immediately for continuation
of the venture. It reported that a cash flow problem had
resulted in lost sales of $35,000 and was preventing comple-
tion of current orders. In about a year, requirements for
cash investments in this venture had increased from an initial
estimate of $60,300 to an estimate of $140,000.
     Sales and profits forecast for the venture were largely
based on assumptions, speculations, and inaccuracies. Com-
panies identified as customers were, in fact, only ideas of
potential customers. Moreover, $70,000 in rofits were based
on plans to manufacture winches for the winch company,
another of SEEDCO's ventures.   At that time, mid-1975, SEEDCO
knew that the winches were not marketable because of inherent
design and safety problems. Even with an acceptable winch
it knew the market would be marginal because of competition
from established companies.




                              22
Fruit harvesting and packing

     In April 1975 SEEDCO formed a fruit harvesting and packing
business from an existing business with an initial investment
of $200,000--$100,000 for a 60-percent ownership interest and
a $100,000 loan for working capital. An Orlando ewspaper
questioned SEEDCO's investment in this venture.

     At the time of SEEDCO's investment the company was essen-
tially bankrupt because of significant operating losses during
the previous 2 years. The feasibility study and proposal to
CSA showed that SEEDCO invested in the company because it
believed that (1) it could be made profitable, (2) it repre-
sented the largest minority-owned business in the area, and
(3) it provided permanent or part-time employment to as many
as 132 people. The original investment of $200,000 and a
planned bank loan of $100,000 (which was never secured)
represented SEEDCO's estimate of the cash needed to put the
company on a profitable basis.

     Five months after the initial investment, SEEDCO requested
CSA approval to invest an additional $50,000. By that time,
the venture was operating on advances from customers and on
funds borrowed against accounts receivable. Eight months
later, SEEDCO requested approval from CSA to invest an addi-
tional $25,000 to allow the venture to generate sufficient
revenues to make a small profit. About the same time, it
discovered that losses were much higher than expected; and
in August 1976 it requested CSA to authorize an additional
investment of $190,000 to save the venture. Therefore,
within 16 months after this venture started, SEEDCO's invest-
ment had increased from 200,000 to $275,000 and an additional
$190,000 was needed.

     A consultant hired by SEEDCO said that cash flow problems
were a major factor in losses incurred by this venture, pri-
marily because they made it necessary to seek advances from
customers at discounted prices. The company had lost about
$102,000 as of May 31, 1976.

     The remaining 40-percent interest in the fruit harves-
ting and packing business is held by the owners of the pre-
decessor business. Their interest was based on an assess-
ment of their equity in the predecessor business, but it
appea s that their equity may have been significantly over-
stated in order to support the 40-percent interest in the
new business.




                               23
     In January 1975, during negotiations for SEEDCO's
investment in the business, SEEDCO and the owners of the
existing business agreed that the owners would receive no
less than a 40-percent interest and no moi e than a 49-percent
interest in the new business for their eqLity in the existing
business. At that time, the existing business had estimated
assets of $228,080 and liabilities of $125,750, a net equity
for the owners of $102,330.  Incorporation with SEEDCO on the
basis f these figures would have provided the owners with a
45-percent interest in the new business.

     However, in April 1975 when the new business was formed,
the financial condition of the existing business had deterior-
ated to the point that the owners' equity could support no
more than a nominal interest in the new business. The presi-
dent of SEEDCO said that, as a result, assets were transferred
from the existing business at a value higher than 'agreed to in
January in order to provide the owners with the negotiated
minimum interest of 40 percent in the new business.

     SEEDCO did not fully document the changes in the value
of assets contributed by the owners of the existing company.
However, available information indicates that the assets
included fixed assets valued at $287,164. Just 3 months
before incorporation, SEEDCO and the owners had agreed that
the same assets were worth $203,967, or 83,197 less than the
value assigned to them at the time of incorporation.

     Most of the valuation increase was associated with land
and buildings which were transferred to the corporation at
$162,000 rather than the previously agreed upon amount of
$92,500. SEEDCO justified this increase on the basis of a
January 1975 appraisal estimating their value at $163,000.
At the same time, however, SEEDCO had a second appraisal
which valued the assets at $167,000 and a third appraisal
which valued them at $75,400.  In addition, it had a Ma ch
1975 letter written by the owners to a certified public
accountant which showed that, based on the average of two
appraisals, the assets were valued at $92,500 as security
for a mortgage loan. SEEDCO did not attempt to reconcile
the differences.

     In addition to the potentially inflated, fixed-asset
values, the owners were given credit for $30,275 in good-
will and $13,474 in receivables from a corporate officer.

     Ten thousand dollars of the amount shown as receivable
from a corporate officer represented cash the owners had



                             24
borrowed from their business to retire personal debts.
Although the transaction occurred a few days before SEEDCO's
investment in the business, SEEDCO officials said that they
approved it and they also approved a bank loan secured in
the existing company's name from which the cash was taken.
The remaining $3,474 shown as receivable from a corporate
officer was established in order to justify the 40-percent
interest in the new corporation.

     The goodwill of $30,275 was also established to justify
the 40-percent interest in the new corporation. At the same
time, $13,697 of the existing business' accounts receivables
was treated as bad debts and not accepted as an equity trans-
fer to the new business.  It was agreed that any future col-
lections of the receivables would be treated as a reduction
in the goodwill.  After SEEDCO's investment, $6,675 of the
receivables was collected, and goodwill was decreased
accordingly.

     On the basis of agreements reached with SEEDCO in
January 1975, the owners of the existing business had no
real equity in assets transferred to the new corporation
because their liabilities exceeded their assets. Their
equity in the new corporation was achieved by increasing
the value of their assets by possibly as much as $127,000,
excluding consideration of accounts receivables which were
considered uncollectible at the time.

     Funds which SEEDCO invested in the corporation were
comingled with funds from other sources, such as sales. As
a result, we could not identify the specific uses of Federal
funds. However, SEEDCO's preinvestment investigation and
an audit (made by a certified public acountant) of the
existing company disclosed that the owners had intermingled
business and personal finances and that a reasonable separ-
ation could not be achieved because of inadequate records.
SEEDCO tried to separate the personal and business trans-
actions but ecognized that some of the assets and liabili-
ties assumed by the new corporation could be nonbusiness.
However, excluding the exception discussed below, our examina-
tions of disbursements and supporting vouchers and canceled
checks for the new corporation's first 16 months of operations
(April 1975 through July 1976) did not disclose any trans-
actions which we could identify with'personal debts of the
owners.

     SEEDCO's president furnished us with information
showing that corporate funds had been used to maintain and



                             25
operate the private automobile of a corporate official's
                                                         son.
This situation had been reported to the president by the
venture monitor. The president said that the corporation's
records hae been reviewed, and he furnished evidence showing
that $92 h,   een recovered from the corporate official.
ADEQUACY OF MANAGEMENT INFORMATION SYSTEMS

     As summarized below, inadequate management information
systems have been a persistent problem with SEEDCO ventures.

Landscaping, lawn maintenance, plant nursery

     The landscaping, lawn maintenance, plant nursery, SEEDCO's
first venture, did not have a system for estimating the
landscaping jobs or for evaluating the profit or loss   cost of
                                                      status
jobs at various stages of completion. As a result, managementof
did not know whether job bids had adequate profit margins
had no information for use in identifying and correcting and
efficiencies during job performance. As indicated on      in-
                                                      page 15,
SEEDCO lost about $218,000 on this venture.

Ornamental plant nursery

     SEEDCO's second venture, a plant nursery, had been opera-
ting 3 years in August 1976 but did not have historical
information or a cost accounting system that permitted cost
                                                        accurate
inventory valuation. As a result, reliable profit and
                                                        loss
computations were not possible. For example, for the
                                                      fiscal
year ended September 30, 1975, the venture valued its
tory at 80 percent of its retail value. This produced inven-
                                                        a
negative cost of goods sold and a profit of $25,700 for
yeaL. SEEDCO's certified public accountant would not      the
                                                      accept
this method of inventory valuation. Instead, using a unit
cost figure which he developed, the accountant computed
                                                          a
loss of $8,700.

      In July 1976 a SEEDCO official said that a certified
public accountant with experience in the nursery business
would be employed to install an appropriate cost accounting
system.

Fruit harvesting and packing

     A fruit harvesting and packing business, SEEDCO's sixth
venture, was formed in April 1975 from an existing business.
For the first several months of operations, it operated
                                                         with
a cash basis accounting system.  That is, income was not



                               26
recorded until it was received, and expenses were not recorded
until they were paid. An audit by a certified public accoun-
tant revealed that during this time the company did not have
an adequate system for determining what price it could profitably
buy fruit on the tree.  In November 1975 the venture hired an
accountant who, in the process of reconstructing the accounting
records, found major losses--about $90,000--of which SEEDCO and
venture management were not aware. These losses have put the
venture on the verge of failure.

MANAGERIAL QUALIFICATIONS

     Five of SEEDCO's eight ventures have had one or more
managers released. Three of four managers of one of the ter-
minated ventures were found to be unqualified. The first
manager of one of SEEDCO's active ventures was released because
he grossly misrepresented the company's success and potential
before, and at the time of, SEEDCO!s investment. Managers
of other ventures have been released because they did not
have adequate production and marketing backgrounds.

     A SEEDCO official attributed its failure to develop pro-
fitable ventures primarily to managerial problems. H said
that SEEDCO could not attract top managers during its early
years because of noncompetitive salaries, uncertainty about
SEEDCO's future, and other factors. He said that although
these problems still exist, conditions were improving.

     Salaries and job security have probably limited SEEDCO's
ability to attract good managers or to attract joint ventures
with qualified individuals. We believe, however, that the
problem also resulted because SEEDCO did not adequately inves-
tigate and verify the managerial qualifications of the indivi-
duals involved. We found little evidence of efforts by SEEDCO
to investigate and verify the claimed qualifications of past
and current venture managers. For the most part, it appears
these individuals were accepted on the basis of their own
representations.

     SEEDCO officials agreed that available documentation
does not show that the venture managers' claimed qualifica-
tions were investigated and verified. The officials said,
however, that SEEDCO does independently investigate and verify
the qualifications of venture managers. The officials con-
ceded that their efforts have not always produced good
managers; but they indicated that the results achieved repre-
sent the social and financial conditions under which SEEDCO
has operated instead of a lack of diligence on their part.



                              27
                            CHAPTER 4

                     CSA AND SEEDCO ACTIONS
CSA

     During 1976 CSA's Office of Economic Development, Office
of the General Counsel, and Office o the Controller each com-
pleted reviews at SEEDCO. One was a regularly scheduled review
of SEEDCO's overall operations.  The other two reviews were
prompted by, and dealt primarily with, previously discussed
questions raised by an Orlando newspaper about SEEDCO's
operations.

     Generally, the findings and conclusions reported by CSA
are consistent with the results of our review; therefore,
their findings and conclusions are not repeated in detail
in this report. One of the reports concluded that SEEDCO
has functioned "fairly well" and has attempted to fill the
function for which it was created but that it was too early
to judge SEEDCO's accomplishments in employment because
of its ventures have been operating longer than the time none
frame suggested by CSA for the Special Impact Program. The
reports also contained the following findings and conclusions.

      -- Overly optimistic feasibility studies and forecasts
         appear to have caused cash flow problems and under-
         capitalization of ventures. Significant amounts of
         additional capital will be required to alleviate
         cash flow problems.

      -- Venture managers do not have managerial autonomy under
         SEEDCO's monitoring procedures. Venture monitors are
         involved in daily operations to the point that
         decisionmaking and responsibility are shared.

      Among other things, CSA's reports recommended that:

      -- Venture monitors not be permitted to become involved
         in the daily operations and decisionmaking process
         of ventures.

      --Venture managers be provided the latitude and
        autonomy to seek and build working relationships
        with financial institutions of their choice.

      -- SEEDCO conduct in-depth reviews of all of its
         ventures.



                               28
    -- SEEDCO periodically evaluate venture rmonitoring
       procedures to assure that ventures are being provided
       with all necessary assistance.

     In January 1977 CSA initiated efforts to improve its
present oversight and enployed a consultant to improve its
system for monitoring ai.d awarding grants and for deriving
effective program performance measures against stated goals.
As of July 1977 the consul tant's work was still in progress.
We will be assessing CSA's progress in improving the system
as part of an overall review we are making of the Economic
Development Program.

SEEDCO

     At te conclusion of our fieldwork, we discussed in-
formation in this report with responsible SEEDCO officials
and considered their views in preparing our report. At the
time SEEDCO had taken, or was in the process of taking, the
following actions to improve the business management of its
ventures and to enhance its chances for successfully develop-
ing profitable ventures.
     ---An Executive Advisory Committee was created to monitor
        venture activities and to provide venture managers
        with recommendations for maintaining or accelerating
        venture progress. The Committee consists of SEEDCO's
        Controller, Director of Operations and Monitoring,
        and Director of Business Development and Marketing.

     -- Needed management information systems were started
        at the bakery and at the fruit harvesting and packing
        company, and a system was to be developed at the orna-
        mental pla;nt nursery.

     -- In-depth studies were made of the operations at two
        ventures to identify and correct inefficiencies.
        At the fruit harvesting and packing company packing
        operations were discontinued, harvesting operations
        were restricted to areas within 75 miles of the
        company, and detailed procedures were adopted for
        establishing the purchase price of on-the-tree fruit
        and contracting for it. At the bakery, inventory
        controls were installed, one wo.k shift was elimin-
        ated, two excess employees were terminated, retail
        operations were modified, and purchase of efficiency-
        improving equipment was recommended.




                              29
     An individual hired from private industry in late 1975
was instrumental in bringing about the above actions. He
was hired originally to manage SEEDCO's venture for proc-
cessing citrus fruit juices His evaluation of the feasi-
bility of that venture resulted in its termination. He also
made the two venture studies mentioned above and is a member
of the Executive Advisory Committee. Our review of his studies
and rcommendations indicates that he has both considerable
business versatility and some of the business expertise SEEDCO
needs to avoid the venture development problems discussed in
chapter 3.
CSA COMMENTS
      In commenting on our report on July 1, 1977, the CSA
Director stated that we had identified a number of problems
with SEEDCO and its ventures and that our report reflected a
thorough and objective appraisal. The Director also stated
that CSA had been aware of the principal problems with SEEDCO
and its ventures through trip reports, monitoring reports,
audits, and other available data and that corrective actions
had been initiated to resolve these problems.




                             30
APPENDIX I                                                     APPENDIX I



       Community                   WASHINGTON D.C. 20506
       Services Administration I

     JUL O I1

    Mr. buegory J. Ahart
    Dixector
    Maian asouces Division
    U.S. Gearral Acouting Off ie
      shingmto , D. C. 20548
    Dear Mr. Ahart:

    We have re idewd the GRO draft report an the Seninole MMPloyzent
    Ecnomic ivelient Crporatim (M)            and we have ncr subtan-
    tive disagrsents or qustions relative to its findings and
    cnclusions. The fi.dings did not bring to light anything of
    mIaseuen: that had not been included in trip reports, mznitoring
    reots, dits or other informtion available in our files,
      e report cited a number of probl     with ventures, including
    questinable venture mnagsn t, uder capitalization of ventures,
    inadequate nnitoring aniss,        etc. However, it also noted
    that correc ive actions had been initiated in these areas.
     few report stated that although GAO found mnagment weaknesses
    relating to enture ard feasibility development, it did not find
    evidene of illegal activities or any lack of dedication to         s
    objectives ad priorities s. It ws further irdicated that .m
    now had a well-educated professional staff with experience and back-
    grod whii appeared to qualify then for the positions which they

    It is or belief that the report reflects a thorough, objective
    appraisal of       and the progren.




                (Grace) Olivarez




                                         31
APPENDIX   I                                           APPENDIX II



                     PRINCIPAL CSA OFFICIALS
               RESPONSIBLE FOR THE ADMINISTRATION
                         OF ACTIVITIES
                    DISCUSSED IN THIS REPORT
                                           Tenure of office
                                           From         To

DIRECTOR:
     Graciela Olivarez                  Apr.    1977    Present
     Robert Chase (acting)              Jan.    1977    Apr.  1977
     Samuel Martinez                    Apr.    1976    Jan. 1977
     Bert A. Gallegos                   Dec.    1974    Apr.  1976
     Bert A. Gallegos (acting)          July    1974    Dec. 1974
     Alvin J. Arnett                    Sept.   1973    July 1974
     Alvin J. Arnett (acting)           June    1973    Sept. 1973
     Howard Phillips (acting)           Jan.    1973    June 1973
     Phillip V. Sanchez                 Sept.   1971    Jan. 1973
     Frank C. Crlucci                   Dec.    1970    Sept. 1971
     Donald Rumsfeld                    May     1969    Dec.   1970

ASSISTANT DIRECTOR FOR PROGRAM
  DEVELOPMENT (note a):
     Theodore M. Jones (acting)         Aug.    1972    Oct.   1972
     Carol M. Khosrovi                  July    1971    Aug.   1972
     Alfrec. H. Taylor (acting)         June    1971    July   1971
     Joseph P. Maldonado                Aug.    1970    June   1971
     Marvin J. Feldman                  Jan.    1970    Aug.   1970

ASSOCIATE DIRECTOR FOR ECONOMIC
  DEVELOPMENT:
     Gerrold K. Mukai                   June    1977    Present
     Gerrold K. Mukai (acting)          May     1977    June 1977
     Louis Ramirez                      Oct.    1972    May   1977



a/In October 1972 this position was terminated and responsi-
  bility for the Special Impact Program was transferred to the
  Office of Economic Development.




01370


                                32