Answer. Yes, sir; during the period of December 1, 1930, to December 1, 1935, inclusive. Question. The price at which new common stock of Cities Service Co. was issuable in such conversion was what? Answer. They are stated on page 262 of the report. Question. At what rate? Do not read all of them. Answer. $27.50 per share from December 1, 1930, through June 1, 1931, and then at increasing prices up to the price of $38.75 per share for the period from June 2, 1935, to December 1, 1935. Question. On what basis were these debentures offered to the common-stock holders of Cities Service Co.? Answer. They were offered at par for pro-rata subscription at the rate of $4 face value of debentures per share of stock. Question. In this connection, was there an underwriting syndicate? Answer. Yes, sir; of which Harris Forbes & Co. and Halsey Stuart & Co. were managers. Question. For what face amount of debentures did the stockholders subscribe? Answer. They subscribed for $48,045,087 face amount. Question. What did the syndicate take? Answer. $70,070,541 face amount. Question. Was the Securities Co. a participant in the distributing group that was gotten together and managed by Harris Forbes & Co. and Halsey Stuart & Co.? Answer. Yes, sir. Question. What else did it do? Answer. It also actively engaged in an endeavor to build up and maintain a market for the new debentures. Question. Are these activities evidenced in a text table? Answer. Yes, sir; in text table 23, which appears on page 263 of the report. Question. This table shows that the Securities Co. helped the syndicate distribute what face amount of the debentures? Answer. $1,294,050 face amount. Question. Indicated as purchased from whom? Answer. Indicated as purchased from Harris Forbes & Co. account syndicate participation. Question. What did the Securities Co. pay for these debentures? Answer. An average price of a little over $993.23 per $1,000 debenture. Question. Did the Securities Co. sell pursuant to the terms of a special offer certain of these debentures? Answer. Yes, sir; it sold $5,398,697 face amount for $5,768,257.81 proceeds, or an average of $1,068.45 plus, per thousand-dollar debenture. Question. Does this text table show that the Securities Co. purchased these debentures at high premiums? Answer. Yes, sir; it does. Question. When did they commence purchasing them on the exchange? Answer. It commenced in May 1930; that is, before the debentures were issuable. During that month it purchased $569,000 face amount of them at an average of $1,228.28 plus, for thousanddollar debenture. Question. During June what did it purchase? Answer. It purchased on the exchange and over the counter $9,667,526 face amount of them at an average of $1,046.48 plus, per thousand-dollar debenture. Question. During May did the Securities Co. sell certain of these debentures? Answer. Yes, sir; it sold these debentures over the counter in an average of $1,290 per thousand-dollar debenture. Its regular sales averaged $1,237.90 plus, and special offering sales $1,212.96 plus, per thousand-dollar debenture. Question. Were the June sales effected at such high prices? Answer. No, sir; the company's trading sales of $412,376 face amount were effected at 102.61 percent of face. The regular sales, amounting to $1,327,620 face amount, were sold at an average of 106.11 percent of face. The $4,898,097 principal amount of special offering sales were effected at 105.36 percent of face. Question. What prices were the trading sales effected at during July 1930? Answer. During July the price was $1,000.46 plus, per thousanddollar debenture. The regular sales were at $1,004.36 plus, per thousand-dollar debenture. Question. Were there certain days during July 1930 when the cancellations exceeded the sales? Answer. Yes, sir; to an aggregate extent for all those days amounting to $982,249 face. Question. At what price did the Securities Co. purchase these debentures on the market in July? Answer. It purchased them at an average price of $1,002.22 plus, per thousand dollar debenture. Question. When was the syndicate period definitely completed? Answer. It was completed at the end of August 1930. Question. During that period what amount did the Securities Co. sell? Answer. Its total sales, after deducting cancelations, amounted to $9,419,569 face and the proceeds to $9,888,496.24, or an average of $1,050.34 per thousand-dollar debenture. Question. How did the market purchases during June alone compare with the total sales during the entire syndicate period? Answer. They exceeded the total sales during the entire syndicate period. Question. What were the total purchases during the syndicate period? Answer. The total purchases during the syndicate period amounted to $12,027,754 at a total cost of $12,606,877.95, or an average of $1,048.15 per thousand-dollar debenture. Question. During the syndicate period, then, I understand you to say, the Securities Co. sold of these debentures a face amount of $9,419,559 but purchased a total face amount of $12,027,754? Answer. That is correct. Question. Then the total purchases during the period exceeded the sales by about how much? Answer. By about $2,600,000 face. Question. The total amount spent for purchases was how much? Answer. $12,606,377.95. Question. And the avails of the total sales during the same period? Answer. $9,888,496.24. Question. The sales were made at what average price per $1,000 debenture? Answer. $1,050.34 plus. Question. The purchases were made at what average price per thousand-dollar debenture? Answer. $1,048.15. Question. What were the total profits which the Securities Co. counted? Answer. On the aggregate of its sales that were effected during the syndicate period, the company counted a gross profit of $18,856.19. Question. On its trading sales? Answer. On its trading sales it counted a loss of $23,231.75, and on its regular sales they lost $66,700.27. It counted a profit of $108,788.21 on its special offering sales. Question. Putting all of these figures together, we get a gross profit counted by the company on all types of sales during the syndicate period of how much? Answer. $18,856.19. Question. However, is it true that after the close of the syndicate period the trading by the Securities Co. in these debentures went on? Answer. Yes, sir. Question. After the close of the syndicate period did the Securities Co.'s market purchases exceed its trading in regular sales? Answer. Yes, sir; it exceeded them greatly. That, however, is brought out in a tabular statement that appears on page 266 of the report. Question. What total does that table show for the months of September, October, November, and December 1930 and January 1931? Answer. It shows a total of market purchases, purchases account cancelations of partial-payment subscriptions, and so forth, amounting to $21,856,629 face at a cost of $19,413,606.02. It shows trading and regular sales amounting to $13,285,890 face, with proceeds of $11,133,761.68. Question. Then during these 5 months, if I understand you, the total purchases by the Securities Co. exceeded its total sales by approximately $8,000,000? Answer. By approximately $8,600,000. Question. In November 1930 did the Securities Co. trade certain of these debentures with the Union Trust Co. of Cleveland, Ohio? Answer. Yes, sir; it traded $653,000 face amount of them along with $929.25 of cash to that company for certain bonds of certain subsidiaries. Question. Who were the subsidiaries? Answer. I do not have the names of the subsidiaries. Question. This exchange was made under an agreement providing what? Answer. An agreement whereby the recipient of the debentures was bound not to resell in excess of 5 percent of the total principal amount in any one 30-day period, or at any time within 30 days after any previous sale of any such debentures. Question. Were all of the sales that you have reported as having been made by the company of these debentures enforceable? Answer. No, sir. In January 1931 the Securities Co. effected settlements with defaulting purchasers whereby they were relieved of their liability with reference to $149,000 face amount, for which they were allowed $173,295. Question. In effect were these treated as cancelations of sales? Answer. Not as cancelations of sales but as "arbitration purchases." Question. By treating them as arbitration purchases, what was the effect? Answer. The effect was just the same as if they had been treated as cancelation of sales at that value. Question. When did the Securities Co. close out its sales accounts with reference to these debentures? Answer. It closed them out as of January 31, 1931. Question. You speak in your report of the average cost of its unapplied purchases up to that time. What is meant by that expression? Answer. The company in its account did not count its profits and losses every month, but carried down the accumulated totals, and I referred to these accumulated totals and the recorded purchases as unapplied purchases; that is to say, they had not been set over against sales. Question. What was the effect? What is the result of the Securities Co. losing money on the turn-over of its investments in these debentures? Did they lose money? Answer. Yes, sir. It lost approximately $939,446. Question. Did the Securities Co. count itself as having made a loss? Answer. No, sir; it did not. Question. How was that avoided? Answer. By deducting the shares sold from the shares purchased at their sales value instead of at their cost, thereby automatically leaving the loss in the account as the book value of the remaining debentures. Question. Is this in effect carrying the loss of $939,000 plus over as an asset? Answer. Yes, sir. Question. However, since you wrote your report and saw the accounts, has there been some change made in this entry? Answer. I was informed by a representative of the company that these bonds were later disposed of and the amount in question was taken out of this account and applied against the reserve for cost of distribution. Question. On January 31, 1931, what balance of these debentures remained in the Securities Co.'s possession? Answer. $9,329,934 face amount. Question. These were carried on the books at what amount? Question. In this valuation, however, was the $939,000 we have heard about included? Answer. Yes, sir. Question. Eliminating that, the proper book value of the debentures remaining on hand was how much? Answer. $8,597,301. 102777-34-pt. 58—12 Question. In reports that we have presented in these hearings, has it been customary to present data on the average investment in the company's business on the net income of the business and the rates of return on the investment for the respective years in the period under review? Answer. Yes, sir. Question. In preparation for the presentation of this data, did the Commission's examiners obtain from the company the balance sheet as of the beginning and end of each year? Answer. Yes, sir; and also an income statement for each year, and with the exception of one item of negligible importance, the examiners reconciled those statements with the Securities Co.'s ledger account. Question. Are data on investments, income, and rates of return presented in this report? Answer. They are not. Question. Why not? Answer. For certain controlling reasons. The whole thing might be summed up in this manner, that the function of the Securities Co. was not that of carrying on of operations but with that of raising new capital funds, and the major portion of any profits and losses that it made pertained to its operations in buying and selling securities, and they pertained to the results in capital funds raised. They did not represent current income or loss from operations. Therefore, it did not seem advisable to present data on investment and rates of return. In other words, this was a capital function. Question. Was it also true that there was a great fluctuation in the amount of the investment, not only from year end to year end and month end to month end but from hour to hour? Answer. Yes, sir; and that was due to the fact that whenever the Securities Co. needed additional cash capital it was forthcoming from Henry L. Doherty & Co., fiscal agent, not only for the Securities Co. but for the entire group of Cities Service companies. Whenever cash was collected it was collected by Henry L. Doherty & Co., so that the capital actually invested in the Securities Co.'s business was fluctuating at a very rapid rate. Mr. HEALY. The next subject for discussion is supervising the market for public utility and natural gas corporation securities. The first instance of this kind relates to the Public Service Co. of Colorado. May we defer that until 2 o'clock? Examiner BENNETT. Yes. We will recess until 1:30 o'clock. (At this point a recess was taken until 1:30 p.m. of the same day.) AFTER RECESS The hearing was resumed at 1:30 p.m., pursuant to recess. THOMAS W. MITCHELL resumed the stand for further examination and, having been previously sworn, testified further as follows: Direct examination (continued) by Mr. HEALY: Question. The subject is the supervision of the market in connection with certain securities of the Public Service Co. of Colorado. That company is a subsidiary of the Cities Service Co. The opening balance sheet of the Securities Co. as of April 1, 1927, showed the |