Mr. CHANTLAND. I accept the statement. Mr. MACHOLD. All right. By Mr. CHANTLAND: Question. And we now next pass to the return on capital actually in utility operations? Answer. That is correct. Question. And you have those returns on the same basis as you had before, one above with the Federal income-tax deduction, and one without it being deducted? Answer. Yes, sir. Question. Will you read what the capital employed for these several years returned before the Federal tax is deducted? Answer. For the year 1925, 7.56 percent; 1926, 7.43 percent; 1927, 6.87 percent; 1928, 6.53 percent; 1929, 6.91 percent; 1930, 6.69 percent; 1931, 6.45 percent. Question. And after the Federal income tax has been taken out? Answer. The return was for 1925, 7.12 percent; 1926, 6.95 percent; 1927, 6.45 percent; 1928, 6.04 percent; 1929, 6.45 percent; 1930, 6.38 percent; 1931, 6.17 percent. Question. Now, on the next page, you have a table and figures and percentages of the return to the income on common-stock equity, the last 4 years of which we have already called attention to in connection with the average revenue per kilowatt hour? Answer. Yes, sir. Question. However, I think at this point we will put in these together, this percentage of earnings to the total average book value on the stock equity for each year. Answer. For 1925, 12.26 percent; 1926, 14.89 percent; 1927, 8.64 percent; 1928, 6.81 percent; 1929, 9.49 percent; 1930, 8.87 percent; 1931, 7.57 percent. Mr. CHANTLAND. I think those are all of the questions that I want to ask Mr. Taylor. Do the representatives of the company have any questions that they would like to ask? Mr. MACHOLD. This is off the record. (There was a discussion off the record.) Mr. CHANTLAND. Are there any further questions then at this time? Mr. MACHOld. No. Mr. CHANTLAND. Let the record show this: Mr. Examiner, there seems to be some question as to the phraseology in the summary that is a part of exhibit no. 5337, Commission's exhibit no. 5337, and I think it would be proper for you to let the record show that the original copy which has already been introduced into the record may be changed to accord with any agreement that may be reached by representatives of the company and Colonel England, these changes being made in ink. Examiner BENNETT. Yes. This is an agreement as to the wording and the facts? Mr. CHANTLAND. Yes; it is not changing it in substance. Examiner BENNETT. All right; it is so agreed. Just note in the record that this hearing is adjourned subject to the call of the examiner as to reassembling as to time and place. (Whereupon, at 12 noon, further proceedings in the above-entitled matter were adjourned subject to the call of the presiding examiner.) HEARING ROOM, FEDERAL TRADE COMMISSION, Met, pursuant to adjournment, at 10 a.m. 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 Commission. Messrs. Bernard F. Weadock and Lewis J. Weadock. Examiner BENNETT. You may proceed, Judge Healy. Mr. HEALY. In the discharge of our duties under Senate Resolution No. 83 we return today to the Central Public Service Corporation group. We will present a report on Southern Cities Public Service Co., a subsidiary holding company of that group. My witness will be M. C. Steele, who has been sworn. He has testified heretofore and has shown his qualifications and training as an accountant. is employed by the Federal Trade Commission, attached to the economic division. M. C. STEELE, recalled as a witness, and having been previously sworn, testified further as follows: Direct examination by Mr. HEALY: Question. Mr. Steele, have you made an examination of the books of account and financial records of Southern Cities Public Service Co.? Answer. Yes, sir. Question. Where did you make the examination? Answer. At the offices of the company in Chicago, Ill. Question. Were you allowed access to all of the books and records you desired to see? Answer. All that were available; yes, sir. Question. Have you prepared a report based on these records? Question. Is the report here? Answer. Yes, sir. Question. Does it accurately reproduce and reflect the facts as you found them on the records referred to? Answer. Yes, sir; in my opinion. Mr. HEALY. I offer this report as an exhibit. Examiner BENNETT. It is received as Commission's exhibit 5340. (Said report so offered was received and marked "Commission's Exhibit No. 5340, Witness Steele.") By Mr. HEALY: Question. Of what does this report consist? Do we find in it first a narrative or textual report accompanied by certain exhibits? Answer. Yes, sir. Question. In how many chapters does the narrative report appear? Answer. Five chapters. Question. Read the titles of them into the record, please? Answer. Chapter 1, Organization, Control, and Operations; chapter 2, Growth of Investments; chapter 3, Growth of Capital Liabilities; chapter 4, Other Assets and Liabilities; and chapter 5, Income and Surplus. Question. Are the exhibits included within this same volume, exhibit 5340? Question. How will they be referred to during the course of your testimony? Answer. By their numbers. Question. That is, if we refer to exhibit 1 we will say exhibit 1 within exhibit 5340, will we not? Answer. Yes, sir. Question. When was the Southern Cities Public Service Co. incorporated? Answer. It was incorporated on April 5, 1929, in Maryland, under the name of Southern Public Service Co. Question. When was its name changed to Southern Cities Public Service Co.? Answer. On April 13, 1929. Question. That was 8 days after its incorporation? Answer. Yes, sir. Question. By whom was it organized? Answer. It was organized by the officers of Central Public Service Corporation. Question. At that time do you know who controlled the Central Public Service Corporation? Answer. Central Public Service Co. Question. Was that controlled by the Peirce interests at tnat time? Answer. Yes, sir. Question. For what purposes was the corporation created? Answer. Among various other things, "To subscribe for, underwrite, purchase, receive, and otherwise acquire and to sell, negotiate, exchange, transfer, assign, mortgage, pledge, and otherwise dispose of, and to own, hold, trade, and deal in securities of every kind, character, and description." Question. You have said the corporation was created on April 5, 1929? Answer. Yes, sir. Question. On April 24, 1929, was there a proposal made to the Southern Cities Public Service Co. relating to the transfer of investments? Question. What did Central Public Service Corporation propose to transfer? Answer. It proposed to transfer investments in a number of public utility operating companies located principally in the southeastern part of the United States. Question. Was the transaction consummated? Answer. Yes, sir; on May 1, 1929. Question. What did the Southern Cities Public Service Co. pay for the investments it acquired? Answer. It issued 200,000 shares no par value common stock and $17,500,000 principal amount 6 percent convertible debentures at 94. Question. At what were the investments received set up on the books of the Southern Cities Public Service Co.? Answer. A total of $35,161,272.22. Question. How much of this was represented by common stock? Answer. $25,193,779.25. Question. How much by preferred stock? Answer. $1,339,693.33. Question. How much by bonds? Answer. $2,207,158.45. Question. How much by notes receivable? Answer. $3,321,053.03. Question. How much by accounts receivable? Answer. $1,186,564.74. Question. How much of the $35,000,000 was represented by surplus of the subsidiaries whose stock had been acquired? Answer. $1,883,989.26. Question. You have accounted for all of the $35,000,000 and something at which these investments were set up, save a small item of interest accrued on the bonds of about $29,000. Against these investments did the Southern Cities Co. issue debentures of a face value of $17,500,000? Answer. Yes, sir. Question. These debentures were delivered not at the face amount but at 94 percent thereof; is that correct? Answer. Yes, sir. Question. And the debentures at 94 percent of their face value amounted to what? Answer. $16,450,000. Question. That left how much of the amount at which the investments were set up to be disposed of? Answer. $18,711,272.22. Question. Was that amount set up on the books of the Southern Cities Public Service Co. as the value of the 200,000 shares of common stock issued to the Central Public Service Corporation in this transaction? Answer. Yes, sir; that is correct. Question. Let us be sure that we understand that. The Central Public Service Corporation transferred these investments to the Southern Cities Public Service Co. on May 1, 1929; is that it? Answer. Yes, sir. Question. The Southern Cities Co. set them up at $35,161,000, of which over $25,000,000 was common stock; is that right? Answer. That is correct. Question. In payment for these investments the Southern Cities Co. issued to Central Public Service Corporation bonds of a face amount of $17,500,000 which, being taken at 94 percent of their principal amount, were set up at $16,450,000. Answer. That is correct. Question. The balance of the value assigned to the investments was allocated to the book value of the 200,000 shares of common stock; is that it? Answer. Yes, sir. Question. That is, 200,000 shares of common stock of the Southern Cities Co. that was issued in the exchange? Answer. Yes, sir. Question. From what you have said, it appears that in this transaction the Southern Cities Co. issued these convertible debentures of a face amount of $17,500,000. What was the principal asset of the Southern Cities Co. which stood behind these debentures? Answer. The investments in the common stock, preferred stock, and bonds of its subsidiaries. Question. Did not the common stocks represent by far the largest proportion of the investments which stood behind the debentures? Answer. Yes, sir. Question. That is, out of the $35,000,000 assigned as the value of the investment received, over $25,000,000 was value assigned to common stock; is that correct? Answer. Yes, sir. Question. Does it not follow, therefore, that the principal items or the principal assets standing behind the Southern Cities debentures of $17,500,000 were common stocks? Answer. Yes, sir; that would be correct. Question. In arriving at the value at which these investments were set up on the books of the Southern Cities Co., did the Southern Cities Co. capitalize the surplus of the subsidiaries which were acquired from the Central Public Service Corporation? Answer. It reflected on its books the surplus of the subsidiaries at date of acquisition. Question. You told us that the Southern Cities Co. set up investments at $35,161,000? Answer. That is correct. Question. How much of this was represented by the surplus of the subsidiaries acquired? Answer. $1,883,989.26. Question. Did the Southern Cities Co. then capitalize in its investment account the undistributed surplus of the subsidiaries. which it acquired? Answer. Yes, sir. Question. The common stock which the Southern Cities Co. issued in this exchange was no par stock, was it not? Answer. That is correct. Question. How did the Southern Cities Co. arrive at the $18,711,272.22 which was set up on its books as the stated value of this no par common? Answer. It represented the difference between the total cost of the investments received and the issuing value of the debentures. Question. How did you determine the total cost of these investments to the Southern Cities Co.? Answer. The total cost was in accordance with the contract which in turn represented the ledger value of the investments on the books of Central Public Service Corporation. Question. What did the Southern Cities pay for these assets? |