successful, however, the price having broken from $66% to $5934. This price break was followed by even heavier selling pressure-1,151,900 shares on October 24, 976,700 shares on October 28, and 1,105,900 shares on October 29. During the whole course of the stock-market crash in the latter half of October 1929 the securities company spent more than $138,000,000 in the purchase of 2,372,101 shares of Cities Service Co. common stock; but, as these amounted only to about two fifths of the total quantity of that stock thrown onto the market, they were not sufficient to uphold the market price, which broke to a low of $20 on October 29. During October the se rities company sold, exclusive of the shares taken by warrant-exercising debenture holders, 3,401,462 shares, the contractual proceeds of which, after certain adjustments, amounted to $180,314,663.10 as against purchases during October of 3,080,392 shares at a cost of $181,825,808.

The rapid changes in market quotations during this period resulted in numerous price adjustments to the customers for Cities Service Co. common stock. By the end of the year these amounted to $10,605,811.52 on sales effected through the syndicate and to $2,168,658.55 on sales effected by Henry L. Doherty & Co.'s organization.

As a result of the relatively low market quotations prevailing for Cities Service Co. common stock after the stock-market crash of October 1929, the pro-rata subscription offer to the stockholders was abandoned and modifications were made in the syndicate distribution group agreement. A new special offering to dealers was announced in February 1930. During 1930 the sales of this stock through all channels amounted to 7,382,696.16 shares, with a gross invoice value of $210,441,088.86. The company made market purchases aggregating 7,337,1564 shares at a cost of $218,803,730.37. There was a period of upward trend in the market price of the stock-from a low of $2574 on December 20, 1929, to $41% on May 1, 1930. But during this period, the securities company's market purchases exceeded its total sales through all distribution channels. A market decline set in in May 1930 during which the sales exceeded 1,000,000 shares and exceeded the market purchases by nearly 279,000 shares; and a fluctuating decline continued throughout the remainder of that year, the market price at the very end being $14% per share.

On January 17, 1930, Cities Service Co. provided the securities company with 600,000 common shares with which to make deliveries to customers. Although the market price at the time was about $28 per share, the gross proceeds available from accumulated sales averaged only $15.91 per share to be provided; and the price to the securities company for these shares was $12.50, which left the latter a margin of about $3.41 per share with which to cover commissions and expenses. As of December 31, 1930, Cities Service Co. provided the securities company with another 633,879,206 shares at $10 per share. This price left the securities company with a margin of about 53.82 cents per share with which to cover commissions and expenses.

The securities company's accounts represented that company as selling to the holders of Cities Service Co. debentures the common shares that were issued to them when they exercised the warrant options carried by their debentures, and as obtaining the requisite shares from the issuing company at prices from $5.50 to $7 per nonpar share less than the prices paid by the debenture holders. As the securities company had no function to perform in the issuance of these shares, this resulted in counting for it a gross profit of $18,429,723.23 for which it did not render service. However, this made no difference in the ultimate proceeds to Cities Service Co. because the securities company's net deficits from these operations were charged back to it.

As of December 31, 1929, the securities company wrote down the book cost of its “Trading purchases” of Cities Service Co. common stock, $21,121,097.98. This was not an inventory adjustment, as the company had no unsold shares, its aggregate sales up to that time having exceeded its aggregate purchases by 1,946,941 shares. Such bookkeeping enabled the securities company a year later to count on certain classes of sales of this stock a gross profit of $99,642.39 instead of an actual gross loss of $21,021,455.29. Profits and losses made by trading in securities are not, however, taken into earnings but are treated as more or less capital procceds from the securities of new original issue, which treatment is represented on the company's books by carrying them, not to surplus, but to an account called "Reserve for cost of distribution."

After counting profits and losses on December 31, 1930, the securities company emerged with a deficit in its "Reserve for cost of distribution" of $1,956,775.71. This was charged back to Cities Service Co., as also was $12,518,998.55 of uncollectible balances of breached partial payment contracts.

[For release afer the full report of which this is only the summary, has been introduced in the offiical record which

will probably be Tuesday, March 20, 1934. Federal Trade Commission, Washington. Investigation of power



This report covers the activities of the principal securities company of the Associated System from its incorporation, April 18, 1925, to December 31, 1929, for the most part. However, certain aspects of the securities situation respecting the Associated Gas and Electric System are discussed as of later dates.

This report was required for two general reasons: First, to show the activities of this Securities Co. and certain other securities companies in the Associated Gas and Electric System; and their functions and relations to the Associated Gas & Electric Co., second, to complete the record of security issues and reacquisitions by Associated Gas & Electric Co. as set forth in the report of this examiner on Associated Gas & Electric Co.,' due to the fact that many of the security transactions recorded on the books of the latter company were open account entries between Associated Gas & Electric Co. and the securities company. During the examination of Associated Gas & Electric Co., the examiner was denied access to the records of the securities company, which was the only source of information with respect to such transactions. Therefore, in chapter II of this report there are set forth detailed explanations of the original issues, reacquisitions and other dealings in eight issues of stocks, debentures, etc., of Associated Gas & Electric Co. of varying types, as being representative of the numerous issues.

This report is in three chapters, the first dealing with its organization and functions. The second covers the issuance and reacquisition of certain selected typical securities of Associated Gas & Electric Co. and the third chapter deals with the results, as shown in surplus accounts, including under such title the Reserve for premiums, discounts, etc.” account.

The securities company was organized in 1925 and at first its activities were somewhat limited. It was about this time, too, that Associated Gas & Electric Co. really began to put out securities in volume. Prior to that year, Associated Gas & Electric Co. handled its own security transactions, such as they were, its own forces carrying on customer-ownership campaigns and its officials dealing with bankers or dealers in the issuance of major financing through the latter channels. With the organization of the securities company, this condition gradually changed and the securities company took over more and more of the dealings in securities for the Associated Gas & Electric System. Even so, it should be borne in mind that the securities company has always been nothing more than a department of Associated Gas & Electric Co. In many cases, its officers, directors, and employees occupied similar positions with other companies of the Associated System. Although a separate entity, the securities company has been nothing more than an agent of Associated Gas & Electric Co.

In this report the securities company has been treated as a separate entity. Its functions, in effect those of a securities department, have been the following:

(a) To act as agent of Associated Gas & Electric Co. in the sale of certain securities of Associated Gas & Electric Co. and other Associated Gas & Electric System companies through Nation-wide campaigns and otherwise.

(b) To handle numerous exchange offers made by the Associated Gas & Electric System to underlying company security holders, including the payment of commissions to dealers for their participation in the exchanges.

(c) To handle the various conversions of Associated Gas & Electric Co. securities into class A and common stock of the latter and other Associated Gas & Electric System securities.

(d) To conduct customer-ownership campaigns.

(e) To act as agent of Associated Gas & Electric Co. in the payment of dividends on Associated Gas & Electric Co. class A, class B, and preferred stocks, in class A stock.

Certain special functions have also been noted:

(A) It has underwritten at least two security issues of subholding companies of the Associated Gas & Electric System and performed numerous other duties pertaining to system securities.

(B) The securities company has purchased on the open market over 3 millions of shares of class A stock of Associated Gas & Electric Co. in what has been in large part an effort to support and maintain the market in that stock. Similarly, the 1 Federal Trade Commission, utility corporations, pt. 45, S. Doc. 92, 70th Cong , 1st Sess. (exbibit 5157). securities company has bought and sold thousands of shares of preferred and common stocks of Associated Gas & Electric Co. and numerous other underlying companies in open-market transactions.

The securities company has actively engaged in promoting wide distribution of class A stock of Associated Gas & Electric Co. and to that end has participated in an extensive campaign to place this stock in the hands of permanent investors. To this end it has acquired large quantities of stock on the open market for redistribution through a group consisting of several hundred dealers throughout the United States.

In the original disposition of the securities of Associated Gas & Electric Co. there has been no fixed procedure. In certain cases Associated Gas & Electric Co. sold entire issues to bankers or syndicates and in other cases the securities company disposed of the entire issue. Among the principal securities of Associated Gas & Electric Co disposed of almost exclusively by the securities company were the following:

Class A Stock.
Convertible 442 gold debentures, due 1948.
Gold debenture bonds, consolidated refunding 5-percent series, due 1968.
572 percent convertible investment certificates.

$8 interest-bearing allotment certificates. In the sales of Associated Gas & Electric Co. securities, the securities company adopted several methods. Large amounts of securities have been sold in Nation. wide campaigns by direct offers to its security holders, through the issuance of rights or privileges to buy at less than the market. Large amounts have been sold to and bought from affiliated and related companies. Sales have also been made to or through nonaffiliated dealers throughout the United States and in foreign countries and stated commissions have been paid these dealers for subscriptions received through them. Sales have also been made through customerownership campaigns in which the company's own salesmen and employees have been active, the latter being paid stated commissions. The company had none of its own dealer offices except those located in New York and at the headquarters of the various operating companies and these can hardly be strictly termed dealer offices. At these offices, salesmen were at hand to take subscriptions for the particular security being sold, and to assist security holders in connection with exchanges, conversions, etc. Such offices did not, however, function as dealer offices in the sense that both buying and selling took place therein. The action was one way; sales only were made. No attempt was made to create & trading mart at which security holders could dispose of their securities. Holders could turn in their securities, under stated conditions, as consideration for subscriptions to other associated system securities, but they were seldom able to sell them back to the company.

The financing methods, and the types of securities issued by Associated Gas & Electric Co., have been among most complicated. The numerous conversion features of the securities and the thousands of exchange offers made by Associated Gas & Electric Co., the securities company, and other system companies, to the holders of Associated Gas & Electric Co. and underlying company securities have made a vast amount of detail work for the securities company. In this respect “securities company" is used in a collective sense in that there were a number of securities companies within the system, most of which, except the one which is the subject of this report, and its partial successor, the Associated Corporation, were more or less bookkeeping units in order formally to comply with various State laws. Some brief outline of these related functions are in order at this point.

Until December 31, 1929, the entire sales of securities, the effectuation of exchanges and conversions, payment of dividends in stock, customer ownership activities, etc., were carried on throughout the system with brokers and with the public, in the name of Associated Gas & Electric Securities Co., Inc., the subject of this report. After December 31, 1929, these functions were split up and Associated Gas & Electric Securities Co., Inc., the subject of this report, became a dealer company, distributing securities of Associated System, carrying on customer ownership campaigns, etc., in all States of the Union excepting New York, Pennsylvania and the New England States. In the last-named States, companies organized respectively in New York, Pennsylvania, and Massachusetts carried on the distribution of associated system securities, customer ownership campaigns, etc., within those States.

The consummation of exchanges and conversions, the payment of dividends in stock, etc., formerly carried on by Associated Gas & Electric Securities Co., Inc., the subject of this report, were, after December 31, 1929, carried on by The Asso

ciated Corporation, which at that date took over the assets and liabilities of Associated Gas & Electric Securities Co., Inc. Following the last-named date, the wholesaling of Associated System securities was done through General Utilities Securities, Inc. (Del.).

The several securities companies within the system have all been controlled directly or indirectly by Associated Gas & Electric Co. through sole ownership of their capital stock. At December 31, 1929, Associated Gas & Electric Securities Co., Inc. (Del.), was controlled by Associated Utilities Investing Corporation (Del.), which also controlled Associated Public Utilities Corporation (name changed Feb. 13, 1930, to Associated Gas & Electric Securities Co., Inc.), a Pennsylvania corporation referred to above, and a number of other subholding and operating companies. Associated Utilities Investing Corporation (Del.) was in turn controlled by Associated Gas & Electric Co. Only the Pennsylvania Securities Co. and this company were active prior to the early part of 1930, and in fact, the Pennsylvania corporation was merely a bookkeeping unit, recording each month, entries showing purchases and sales of certain securities and offsetting amounts of commissions received and expenses paid, all of which were open account entries with its holding company.

At March 31, 1932, the situation as to control and intercorporate relationships of the several securities companies in the Associated Gas & Electric System to Associated Gas & Electric Co. and to each other, is reflected by the following table. The indentations indicate the steps in corporate ownership. Associated Gas & Electric Company. Associated Gas & Electric Corporation

Associated Corporation
General Utilities Securities, Inc. (Del.).

Associated General Utilities Co. (Del.).
General Utilities Securities, Inc. (N.Y.).
Associated Gas & Electric Securities Co., Inc. (N.Y.).
Associated Gas & Electric Securities Co., Inc. (Del.).
Associated Gas & Electric Securities Co., Inc. (Pa.).
New England Gas & Electric Securities Co. (Mass.).

The selling forces of the securities companies: 1928.

52 1929.

226 1930.

193 1931

172 1932

133 About 15 percent of the foregoing employees were sales managers. In addition, there were the officers and directors of the company and its New York accounting staff, all of whom are officers and/or employees of other Associated System companies or of H. C. Hopson's staff. The services of this latter class of employees are billed to the securities company by H. C. Hopson in lump-sum amounts. Salaries, commissions, etc., of sales managers, salesmen, and other employees of the several securities companies are paid by the general system fund at Ithaca, N.Y., and apportioned to the appropriate companies.

In its several campaigns and at various other times the associated system has made extensive use of the facilities of the press for advertising purposes; and booklets and pamphlets were distributed through the mails to security holders by dealers, company salesmen, employees, and with monthly bills to consumers. Large placards were posted in company offices and salesrooms and in various other ways the advantages of certain securities were brought to the attention of the public. Most of the advertising matter, whether of a financial nature or on general utility topics, inserted in newspapers, magazines, etc., was handled through the agency of Daniel Starch and staff, of New York City. During the year 1929, the Securities Co., alone, paid Daniel Starch and staff about $500,000, principally for financial advertising. This amount represented the cost of insertion of advertising matter in newspapers, etc., out of which the Starch agency received the usual commission of 15 percent.

The financial statements presented with this report indicate the total assets at December 31, 1925, to have been $12,117,405.86; at December 31, 1926, $6,334,111.61; at December 31, 1927, $8,510,231.44; at December 31, 1928, $18,362,605.72; and at December 31, 1929, $100,000. The principal assets were

I Controlled in turn by Associated Securities Corporation, controlled by Associated Gas & Electric Properties (a Massachusetts trust).

accounts and notes receivable (from affiliated companies) and security investments. Cash balances were small, the company receiving funds, as needed, from Associated Gas & Electric Co. and turning over to that company funds received from the sales of securities, etc.

The principal liabilities consisted of accounts payable to Associated Gas & Electric Co., and obligations for the delivery of securities sold or to be exchanged. All of the assets and liabilities of the company at December 31, 1929, were transferred to a new company of the same name as the subject of this report, but which in March 1930 changed its name to the Associated Corporation. Temporarily the Securities Co. became inactive, but subsequently resumed certain activities as already outlined.

The capital stock of the Securities Co. consisted of 1,000 shares of the stated value of $100,000 which were sold to Associated Gas & Electric Co. in 1925, through open account.

The report contains a discussion of the rate of return on capital invested, but it is shown that due to the peculiar relationship of the Securities Co. and Associated Gas & Electric Co. and the fact that the factors which are required to make such a calculation are not readily ascertainable, no calculation is practicable. The capital invested in this company has consisted of that represented by the capital stock of the company and the earned surplus remaining in the company. The sum of these is comparatively small, and if the nature of the business of the company allowed the segregation of what is normally considered income, the return on the above class of capital would be relatively small. However at December 31, 1929, the company had piled up a huge “ Reserve for premiums, discounts, etc.” aggregating nearly $40,000,000. While thousands of entries were required to build up this “reserve", it consisted largely of profits recorded on the sale to the general public and others of class A stock of Associated Gas & Electric Co. Such profits were possible only because Associated Gas & Electric Co. issued this class of stock to its subsidiary, the Securities Co., at arbitrary prices bearing little or no relation to ultimate sales prices. Had Associated Gas & Electric Co. issued its class A stock directly without the agency of the Securities Co., what was recorded as profit to the latter would have been additional paid-in capital to Associated Gas & Electric Co. Thus it has been deemed inappropriate to attempt to calculate a rate of return on capital invested.

This summary, thus far, covers chiefly matters discussed in the first chapter of this report. The second chapter covers the issuance and reacquisition of certain selected securities of Associated Gas & Electric Co.

One of the chief purposes of this report was to record the final consummation of security issues or the origin of security reacquisitions. It was impracticable to do this for all the numerous security issues of Associated Gas & Electric Co., and accordingly certain representative issues were chosen for presentation. These were as follows:

Class A stock; convertible debenture certificates, convertible into class A stock; class A transferable subscription receipts; debenture receipts for class A stock; $6 dividend series preferred stock; convertible 42 percent gold debentures due 1948; gold debenture bonds, consolidated refunding 5 percent series, due 1968; 572-percent convertible gold debentures, series of 1977.

The Securities Co., it should be noted, has issued no securities of its own besides capital stock. In the following discussions, regarding security issues and reacquisitions, Associated Gas & Electric Co. and the Securities Co. are treated as nearly as possible as a unit, with intercompany transactions eliminated.

The most important individual security (if it might be so termed) and the greatest single source of funds for Associated Gas & Electric Co. has been class A stock. A careful study of all the ramifications of this class of stock was made, and the results set forth in section 1 of the second chapter of the report. This stock was originally authorized January 3, 1925, in the amount of 300,000 shares. Numerous increases in the authorized amount were made from time to time and at December 31, 1929, there were 7,000,000 shares authorized. The stock was of no par value, but had a liquidation value of $35 per share. An amendment to the certificate of incorporation of Associated Gas & Electric Co. in June 1933 changed it to one of par value of $1 per share. Dividends on this class of stock (until Aug. 1, 1931, the last date upon which a cash option was given) were payable in cash or class A stock. During the period covered by this report, it was found that the majority of the dividends paid were on class A stock. This was undoubtedly because the cash dividend during that period was $2 per share, whereas the stock dividend equivalent was 10 percent. Thus the stock dividend had

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