uted surpluses of subsidiaries available for dividends to the Securities Co. as shown on the subsidiaries' books, but after deducting surpluses or deficits of subsidiaries at the time of their acquisition.

Question. And how were the figures for average capital employed obtained?

Answer. By adding together the amounts of capital employed at the beginning and end of the respective years and dividing by two. Question. What figures are used for earnings on average capital employed arrived at in the manner that you have described?

Answer. Net income of the Securities Co. before deducting interest on intercompany accounts, plus the increase in undistributed surpluses of subsidiaries available for dividends to the Securities Co.

Question. In computing the increase in surpluses of subsidiaries were any surplus adjustments eliminated?

Answer. Yes, sir; a credit to surplus and certain debits to surplus in 1930, all representing transfers from a reserve for amortization of war facilities account, were eliminated.

Question. What was the net of these debits and credits from the reserve for amortization of war facilities?

Answer. A net credit of $432,727.23 was shown.

Question. Why was this amount eliminated?

Answer. For the reason that the reserve account from which the transfers were made had been entered on the books prior to the period covered by the statement.

Question. In arriving at rates of earnings on capital employed, why were the surpluses of subsidiaries included in the capital employed and why were the increases in surpluses of subsidiaries included in the earnings, instead of using only capital employed and surplus, as shown on the books of the securities company?

Answer. This was done in order that the years covered would be on a comparable basis, since the major portion of the earnings of subsidiaries was allowed to remain with the subsidiaries during the period of Aluminum Co. of America control, whereas during the period of Niagara Hudson control the opposite policy was follows.

Question. In other words, the securities company owned all the outstanding common stocks of the subsidiaries, and the statement shows the same results as would have been shown had the subsidiaries declared out as dividends all earnings since the dates of acquisition of the subsidiaries by the securities company. Is that correct?

Answer. Yes, sir.

Question. In round figures, what does the statement show for average capital employed for the different years?

Answer. $23,150,000 for 1927, $27,776,000 for 1928, $31,257,000 for 1929, $27,987,000 for 1930, and $25,154,000 for 1931.

Question. And what does this statement show for earnings on average capital employed?

Answer. It shows, approximately $1,638,000 for 1927, $1,652,000 for 1928, $1,499,000 for 1929, $1,884,000 for 1930, and $1,627,000 for 1931.

Question. What rates of return on capital employed are shown for the years of Aluminum Co. of America control covered by the statement?

Answer. 7.08 percent for 1927, 5.95 percent for 1928, and 4.8 percent for 1929.

Question. What rates of return on average capital employed are shown for the years of Niagara Hudson control?

Answer. 6.73 percent for 1930, and 6.47 percent for 1931.

Question. What does the statement indicate as reasons for the decrease of 1.13 points in the rate of earnings for 1928 as compared with the rate for 1927, and the decrease of 2.28 points in the rate for 1929 as compared with the rate for 1927?

Answer. It indicates that the decrease in 1928 was due to an increase in capital employed without a corresponding increase in earnings, and that the decrease in 1929 was due to a further increase in capital employed together with a decrease in earnings.

Question. What does the statement indicate as the reason for the increase of 1.93 points in the rate for 1930 over the rate for 1929, and the increase of 1.67 points in the rate for 1931 over the rate for 1929?

Answer. In 1930 capital employed was less and earnings were greater than in 1929, and the same was true as regards 1931.

Question. What does the statement on page 143 of your report show?

Answer. It shows comparative earnings on common stock equity in St. Lawrence Securities Co. for each of the years 1927 to 1931, inclusive.

Question. What is included in common-stock equity as set forth in the statement?

Answer. The par value of the outstanding common stock of St. Lawrence Securities Co., the surplus of St. Lawrence Securities Co., and the undistributed surplus of subsidiaries applicable to the common stock of the subsidiaries held by the securities company.

Question. What is included as earnings on the common-stock equity?

Answer. The earnings recorded on the books of the securities company and applicable to its common stock and the increase in the surpluses of the subsidiaries.

Question. In other words, the statement shows earnings on a consolidated basis. Is that correct?

Answer. Yes, sir.

Question. How much earnings are shown for the different years? Answer. $1,296,460 for 1927, $1,331,664 for 1928, $1,357,904 for 1929, $1,348,319 for 1930, and $1,271,516 for 1931.

Question. The rate of earnings on the average common stock equity is also shown for each year, is it not?

Answer. Yes.

Question. How were the figures for average common-stock equity obtained?

Answer. By adding together the common-stock equities at the beginning and end of the respective years and dividing by 2.

Question. What were approximate average equities obtained in this manner?

Answer. $11,000,000 for 1927, $12,500,000 for 1928, $13,500,000 for 1929, and $18,250,000 for 1930 and 1931.

Question. What were the rates of earnings on the average common stock equity for the years of Aluminum Co. of America control covered by the statement?

Answer. 11.75 percent for 1927, 10.86 percent for 1928, and 10.05 percent for 1929.

Question. What were the rates of earnings for the years of NiagaraHudson control?

Answer. 7.20 percent for 1930, and 6.78 percent for 1931?

Question. How do you account for the great variation in the rates as between the years of Aluminum Co. control and the years of Niagara-Hudson control?

Answer. During the years of Aluminum Co. control the financing was more through the medium of borrowed money than was the case during the years of Niagara-Hudson control, and such interest as was paid on the borrowed money was at the rate of 6 percent per annum.

Question. We will go back now to the question of dividends paid. What has been the aggregate amount of dividends declared by St. Lawrence Securities Co.?

Answer. $4,057,820.

Question. How much of this total was declared to Aluminum Co. of America and how much was declared to Niagara-Hudson Power Corporation?

Answer. $1,212,523.79 was declared to the Aluminum Co. and $2,845,296.27 was declared to Niagara-Hudson Power Corporation. Question. What was the nature of dividends declared to Aluminum Co. of America?

Answer. $134,126.73 represented the book value of capital stock of the Massena Terminal Railroad Co. turned over by the Securities Co. to the Aluminum Co. The remaining $1,078,397.06 of dividends were in the nature of cash dividends, but as a matter of fact were credited to open account with the Aluminum Co., which open account was ultimately cleared by the issuance to the Aluminum Co. of capital stock of the Securities Co.

Question. What was the nature of the dividends declared sro Niagara-Hudson Power Corporation?

Answer. They were in the nature of cash dividends, $1,244,817.27 having been paid in cash and $1,600,479 credited the open account with Niagara Hudson.

Question. Now, Your Honor, I want to clear up certain matters that were passed over yesterday. I would like to ask a few questions regarding the items set forth on page 7 of your report.

What does the information set out on page 7 of your report show? Answer. It shows a comparative balance sheet for St. Lawrence Securities Co. as at June 30, 1929, and January 30, 1930.

Question. St. Lawrence Securities Co. was under control of Aluminum Co. of America on June 30, 1929. That is true, is it not? Answer. Yes, sir.

Question. Do the figures shown on page 7 for January 30, 1930, represent assets and liabilities of the Securities Co. after control had been acquired by Niagara-Hudson Power Corporation?

Answer. Yes, sir.

Question. Under the liabilities, what decreases are shown as of January 30, 1930, as compared with June 30, 1929?

Answer. Decreases aggregating $10,425,320.68 are shown in accounts payable to affiliated companies, and a decrease of $1,163,809.72 is shown in the surplus account before giving effect to $227,515.64 of capital surplus shown under the increases.

Question. What items make up this total decrease of $10,425,320.68 in the payables?

Answer. Account payable to Aluminum Co. of America, $4,806,794.74; account payable to the St. Lawrence River Power Co., $5,413,753.06; and account payable to St. Lawrence Water Co., $204,772.88.

Question. What happened to the $5,413,753.06 payable to the St. Lawrence River Power Co.?

Answer. Cash to the amount of $334,126.73 was paid the company on account. The balance of $5,079,626.33. was assumed by Massena Securities Corporation as part consideration for the capital stocks of the St. Lawrence River Power Co., Pine Grove Realty Co., and account receivable from Pine Grove Realty Co. as already testified to. Question. What happened to the $204,772.88 payable to St. Lawrence Water Co.?

Answer. The full amount was transferred to open account with Aluminum Co. of America.

Question. How was the account payable to Aluminum Co. of America disposed of?

Answer. To the $4,806,794.74 as shown in the balance sheet for June 30, 1929, was added to the amount of $204,772.88 transferred from open account with the St. Lawrence Water Co., and an additional amount of $23,134.68, representing the consideration for the outstanding stock of Ogdensburg Street Railway Co., was credited to the account. A debit to the account of $241,333.33, covering the selling price to the Aluminum Co. of the outstanding stock of the St. Lawrence Water Co., left a credit balance of $4,793,368.97. All but $68.97 of that balance was paid off in 1929 by the issuance to the Aluminum Co. of $4,793,300 par value of capital stock of the Securities Co.

In January 1930 the account was credited $1,028,397.07 for dividend declared by the Securities Co., and it was also credited $5,000.46 for cash received from the Aluminum Co., which left a credit balance of $1,033,466.49. In settlement of this balance, and for $933.51 in cash, the Securities Co. issued to the Aluminum Co, 10,344 shares of its own capital stock, of $1,034,400 par value.

Question. Does the amount of $1,028,397.06, which you state was credited to open account with Aluminum Co. of America for dividend declared, form part of the amount of $1,162,523.79 shown on page 7 as the decrease in surplus?

Answer. Yes, sir.

Question. What about the additional decrease of $134,126.73 in surplus?

Answer. That represented a charge to surplus on account of the stock of the Massena Terminal Railroad Co., valued at that amount on the books and turned over to the Aluminum Co. of America as a dividend.

Question. How is the decrease of $3,894,212.66 in investment in subsidiaries accounted for?

Answer. Stocks of the St. Lawrence River Power Co. and Pine Grove Realty Co., valued on the books at $3,482,371.62 and $36,380.98, respectively, together with $1,690,000 of accounts receivable from the Pine Grove Realty Co., were turned over to Massena Securities Corporation for $129,126.27 in cash and the assumption by Massena Securities Corporation of $5,079,626.33 of payables to the St. Lawrence River Power Co.

The stock of the St. Lawrence Water Co., valued on the books at $241,333.33, was sold to the Aluminum Co. of America and charged to the open account with that company. The stock of the Massena Terminal Railroad Co., valued on the books at $134,126.73, was turned over to the Aluminum Co. of America as a dividend and charged to surplus.

Question. You have stated that $1,690,000 of the decrease in accounts receivable represented the receivable of that amount from the Pine Grove Realty Co. turned over to Massena Securities Corporation. What about the remaining $200,000 of decrease in receivables?

Answer. $200,000 in cash was received in settlement.

Question. Now let us consider the increases. What have you to say concerning the increase of $12,203,700 in capital stock?

Answer. $5,827,700 of the amount, as already stated, represented stock turned over to Aluminum Co. of America in settlement of open account and for $933.51 in cash. The balance of $6,376,000 represented stock purchased by Aluminum Co. of America, and on account of which the item of $6,603,515.64 is shown as an increase under the assets for subscription to capital stock.

Question. The difference between this amount of $6,603,515.64 and the $6,376,000 par value of the stock purchased represented what? Answer. This excess of $227,515.64 represented the amount over par paid for the stock, and it accounts for that amount of increase shown under the liabilities for capital surplus.

Question. The $23,134.68 of increase shown under the assets for rights to stock of Ogdensburg Street Railway Co., you have already testified, represents the purchase price of these shares from Aluminum Co. of America and that the open account with the Aluminum Co. was credited to the amount. Is that correct?

Answer. Yes, sir.

Mr. RHODES. That is all.

Examiner ADDISON. Have you another witness?

Mr. RHODES. No.

Examiner ADDISON. We will take a recess for 5 minutes.

(At this point the hearing in the matter of the St. Lawrence Securities Co. was concluded, and the Commission proceeded to consideration of other public-utility companies.)

HEARING ROOM, FEDERAL TRADE COMMISSION,

Washington, D.C., Tuesday, May 2, 1933.

Met, pursuant to adjournment, at 10:30 a.m.
Before John W. Addison, examiner.

Appearances: Hon. Robert E. Healy, chief counsel; Dr. Francis Walker, chief economist; Col. William T. Chantland, associate counsel; Col. William H. England, assistant chief economist; J. Butler Walsh, associate counsel; and C. F. Rhodes, associate counsel, on behalf of the Federal Trade Commission. Messrs. Bernard F. Weadock and Lewis J. Weadock. Messrs. LeBoeuf and Winston, 15 Broad Street, New York City (By Messrs. Randall J. LeBoeuf, Jr., and Earl J. Machold).

102777-34-pt. 53--18