$1,300,000,000, and its gros searnings from all sources in 1931 amounted to over $177,000,000.

In its gas business Cities Service Co. serves a population of approximately 3,300,000 people and in its electric business, 1,900,000. The Cities Service Co. through its subsidiaries operates in 37 different States and as a public utility it operates in 20 States and in the Dominion of Canada. So far as we have been able to learn, it has no close alliance with any other group in the utility field.

Further information as to Cities Service Co. will appear when we present the report on that company. An examination is being made and reports are being prepared on the following companies in the Cities Service group: Cities Service Co. itself, Cities Service Power & Light Co., and the Public Service Co. of Colorado; Arkansas Natural Gas Corporation and its subsidiaries, Arkansas-Louisiana Pipe Line Co., Little Rock Gas & Fuel Co., Public Utilities Corporation of Arkansas, Reserve Natural Gas Co. of Louisiana, and Southern Cities Distributing Co.; also of Lakeside Construction Co., the Gas Service Co. and its subsidiary, Kansas Gas Co.; also of Cities Service Gas Pipe Line Co. and Cities Service Gas Co. It may be found necessary to include one or two more to which reference has not yet been made.

As I have already stated here this morning, our hearing will relate to Cities Service Securities Co., a wholly owned subsidiary of Cities Service Co. I will call Dr. Thomas W. Mitchell, who is employed by this Commission and attached to the Economic Division. He has been previously sworn.

THOMAS W. MITCHELL was recalled as a witness and, having been previously sworn, testified further as follows:

Direct examination by Mr. HEALY:

Question. Dr. Mitchell, I wish you would tell us your education, training, and experience in connection with accounting and economics and also with matters pertaining to holding corporations, utility companies as well as with reference to matters involved in the marketing of securities?

Answer. I took the degree of bachelor of arts from the University of Washington State in 1900; the degree of doctor of philosophy in economics from the University of Pennsylvania in 1905.

I was instructor in accounts and finance in the Wharton School of the University of Pennsylvania for 4 years; assistant professor of accounts and finance at the New York University, School of Commerce, Accounts and Finance for 2 years; assistant professor of business administration at the University of Minnesota 8 years; I spent about 18 months studying the Taylor system of management in factories and was personnel

Mr. MOORE. May I ask that the witness speak a little louder. I cannot hear at this distance.

The WITNESS. I was personnel manager of the Acme Wire Co., New Haven, for about 16 months during the war. I was consulting engineer for the Clothing Manufacturers Association of New York for 1 year. I was consulting production engineer for the B. Kuppenheimer & Co. in Chicago for about 7 months. I was connected with the American Engineering Council's Committee on Elimination of Waste in Industry. I was statistician to the President's conference on unemployment in the fall of 1921.

I entered the service of the Federal Trade Commission in March 1922, and have been on that staff ever since. I have been conducting economic investigations for the Federal Trade Commission during the period of my service with it. I planned and directed the investigation that resulted in the Commission's report on the control of power companies.

By Mr. HEALY:

Question. That is the report that was presented in 1927 under what was commonly called the Norris Resolution?

Answer. Yes, sir; the General Electric investigation. I was assigned to duty on this investigation known as "the power and gas inquiry or public-utilities inquiry" in 1928 and have spent my time on that investigation ever since, investigating one large holding company and directing the investigation of several of its subsidiaries.

Question. Have you prepared a report based on an examination of accounts and ledgers of Cities Service Securities Co.?

Answer. Yes, sir.

Question. From what sources did you get the information upon which this report is based?

Answer. The information with reference to Cities Service Securities Co. was obtained from the books and records of Cities Service Securities Co. and from members of the staff. The information with reference to Cities Service Co. I obtained officially from the Commission's examiners who were concerned with that company. The information with reference to the volume of trading on the New York Curb Exchange I obtained from the files of the New York Times and the Wall Street Journal.

Question. Does this report accurately reproduce and reflect the facts and figures which you found on the various records to which you have made reference?

Answer. To the best of my knowledge and belief, it does.

Mr. HEALY. I offer this report, which, as indicated, is entitled "Report on Examination of Accounts and Records of Cities Service Securities Co."

Examiner BENNETT. The report is received as Commission's exhibit 5334.

(The document so offered was received in evidence and marked "Commission's Exhibit No. 5334, Witness Mitchell.")

Mr. HEALY. A few words by way of general description of the plan of the report.

By Mr. HEALY:

Question. First of all, of how many chapters does your narrative or text consist?

Answer. It consists of four chapters and a summary.
Question. What are the titles of the four chapters, please?

Answer. The title of the first chapter is Origin, Formation, Control, Functions, and Organization.

Question. Chapter 2?

Answer. The title to chapter 2 is Supervising the Market for Public Utility and Natural Gas Corporation Securities.

Question. Chapter 3?

Answer. The title of chapter 3 is How the Securities Co. Functioned with Reference to Securities of Cities Service Co.

Question. And chapter 4?

Answer. The title to chapter 4 is Rates of Return not Significant for These Operations.

Question. Is this part of the report followed by a number of exhibits?

Answer. It is.

Question. By how many exhibits?

Answer. Ten exhibits.

Examiner BENNETT. They are incorporated in the report?

Mr. HEALY. Yes, sir; they are part of exhibit 5334.

By Mr. HEALY:

Question. When you have occasion to refer to these exhibits will they be designated as exhibit 1 and so on within exhibit 5334? Answer. They will.

Question. Does the report contain certain appendices?

Answer. Yes, sir. The report contains two appendices.

Question. Further, does the report contain a number of so-called tables which are scattered throughout the narrative section of the report?

Answer. Yes, sir.

Question. These are how many in number?

Answer. There are 24 of them.

Question. And numbered from what to what?

Answer. From 1 to 23. One of the tables being numbered 161⁄2. Mr. HEALY. Can we suspend for about 10 minutes at this point? Examiner BENNETT. Yes. You may have a recess of 10 minutes. (At this point a recess was taken after which proceedings were resumed as follows:)

By Mr. HEALY:

Question. When and under what laws was Cities Service Securities Co. incorporated?

Answer. It was incorporated on March 17, 1927, in Delaware.
Question. To whom were its shares issued?

Answer. The original qualifying or organization shares were issued to three incorporators who transferred them immediately to other parties.

Question. Well, omitting the shares issued to the incorporators, to whom were all of the other shares of the corporation issued?

Answer. After the conclusion of the organization proceedings and of the succeeding business transaction which will be taken up presently all shares were transferred at the instance of a nominee, C. M. Shepherd, to Cities Service Co.

Question. Does that mean that one, C. M. Shepherd, indicated to whom the shares should be issued?

Answer. Yes, sir.

Question. Who has owned all of the shares of Cities Service Securities Co. from this time, very soon after its organization, down to the latest date of which you have any information?

Answer. Cities Service Co.

Question. Has anybody else owned any interest in Cities Service Securities Co.?

Answer. Not to the best of my knowledge and belief.

Question. Who were the original directors elected?

Answer. Henry L. Doherty, W. A. Jones, L. F. Musil, J. M. McMillin, R. C. Russum, Ernest H. Johnston, Paul R. Jones, Charles A. Frueauff, and Charles I. Carter.

Question. Who were elected officers?

Answer. Henry L. Doherty, president; W. A. Jones, L. F. Musil, J. M. McMillin, and R. C. Russum, vice presidents; E. H. Johnston, treasurer; P. R. Jones, secretary, E. E. McWhiney and C. B. Wedum, assistant secretaries; and James T. Pathe, assistant treasurer.

Question. Were all of these directors and officers connected with Cities Service Co.?

Answer. All with one exception.

Question. That is, were all of these directors and officers of Cities Service Securities Co. either directors or officers of Cities Service Co.?

Answer. Yes, sir; with one exception.

Question. What were their relations to Henry L. Doherty & Co. which were acting as fiscal agent for the Cities Service Securities Co.? Answer. It was evident to the examiner from the numerous items of evidence that passed before his eyes that the individuals who made up the list of stockholders, directors, and officers were members of the staff of Henry L. Doherty & Co., fiscal agent for Cities Service Co. and its subsidiaries.

Question. What have you meant in this report by the expression "Doherty management"?

Answer. It means management by Henry L. Doherty & Co. or management by that staff of engineers, managers, economists, and so forth, who are members of the staff of Henry L. Doherty & Co.

Question. In general, what were the purposes of the incorporation? That is, what rights did the articles of incorporation claim?

Answer. They are rights that are typical of the articles of incorporation of holding companies incorporated in Delaware in recent years; that is, they not only claimed for the company the right to buy, own, pledge, and sell securities and to exercise all of the rights of an owner of such securities while owning them, but they also claimed the right to enter into, make, perform, and carry out contracts of every sort and kind, for any lawful purpose, without limit as to amount, with any person, firm, association, or corporation.

Question. In April of 1927 was there presented to the board of directors an offer made by C. M. Shepherd to whom reference has already been made?

Answer. Yes, sir. This offer was made on April 19, 1927, and the board of directors accepted the offer.

Question. What was the principal import of the offer?

Answer. C. M. Shepherd offered to sell, transfer, execute, and deliver to the company certain assets as of March 31, 1927. These were listed in three schedules. One was a schedule of securities having an aggregate book value of $33,736,032.12. Another was a schedule of assets and accounts aggregating the sum of $13,676,924.87 and the third was a schedule of liabilities aggregating $23,277,896.65. Shepherd offered the assets for and in consideration of the issuance to him or his nominee of $14,999,000 par value of the capital stock of the Cities Service Securities Co. and $1,000 in cash and the assumption of the liabilities that were listed in the third schedule.

102777-34-pt. 53——2

Question. What was the book value of the assets which Shepherd offered to convey?

Answer. The aggregate book value of all of the assets was $47,412,956.99.

Question. May I understand, then, that Shepherd was to transfer to Cities Service Securities Co. assets of the total book value of $47,412,956.99?

Answer. Yes, sir.

Question. That these were to be transferred subject to liabilities amounting to how much?

Answer. $23,277,896.65.

Question. So the net of the assets to be transferred was how much? Answer. $24,135,060.34.

Question. In consideration for the transfer of these assets what was Cities Service Securities Co. to do?

Answer. It was to issue to Mr. Shepherd or his nominee $14,999,000 par value of the capital stock of Cities Service Securities Co. and $1,000 in cash.

Question. As you have stated Cities Service Securities Co. was to assume the liabilities?

Answer. Yes, sir

Question. Now, you have said that these assets and liabilities had a book value of the amount you have given. Do you know from what books these valuations were taken?

Answer. My conclusion is that they were the values at which those assets and liabilities stood on the books of Henry L. Doherty & Co., fiscal agent.

Question. Did Mr. Shepherd act as an intermediary in this transaction?

Answer. Yes, sir.

Question. Did he act between Henry L. Doherty & Co., fiscal agent for Cities Service Co. on one side, and Cities Service Securities Co. on the other?

Answer. To the best of my knowledge and belief, he did.

Question. What total assets did the opening balance sheet of Cities Service Securities Co., show at March 31, 1927?

Answer. As shown on page 14 of Commission's exhibit 5334, the total assets amounted to $47,394,624.34.

Question. How were these items disposed of on the other side of the balance sheet?

Answer. There were accounts payable amounting to $1,348,508.58; amounts payable to the parent company-that is Cities Service Co.$21,721,175.42.

Question. Does that mean that among the liabilities which Cities Service Securities Co. assumed in this transaction was a liability of Henry L. Doherty & Co., fiscal agent, to Cities Service Co., amounting to more than $21,000,000?

Answer. Yes, sir; I so interpret it.

Question. All right. Go on.

Answer. Contract liability, $189,880; capital stock outstanding, $15,000,000 at par value; reserve for cost of distribution, $4,135,060.34 and capital surplus of $5,000,000.