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By Mr. CHANTLAND:

Question. The report which you have prepared is the one which has now been marked "Exhibit No. 5598 ", is it, Doctor?

Answer. Yes, sir.

Question. Consisting of two pages. Where did you get the material from which to prepare it?

Answer. The material from which I prepared this memorandum is the basic material to the report that was submitted as exhibit 5307. Question. And the discussion in here, of course, is your own? Answer. Yes, sir.

Question. And also the calculations?

Answer. Yes, sir.

Mr. CHANTLAND. We offer this report in evidence.

Examiner ADDISON. Received.

(The document previously marked "Commission's Exhibit Nɔ. 5598, Witness Stephens ", for identification was received in evidence.

By Mr. CHANTLAND:

Question. So that we may understand what we are going to talk about, will you make for the record now a brief general statement of what this agreement of October 30, 1930, is?

Answer. This agreement consists of the terms under which Hope Engineering Co. and its associates passed title to certain properties, among them being the American Fuel & Power Co. and other companies, to the Columbia Gas & Electric Corporation.

Question. You said "passed title." It is more accurate to say "transferred certain stock"; is it not?

Answer. That is true.

Question. All right. Now, I think the purpose of this supplemental report is to show the result of that contract. Is that correct? Answer. It is.

Question. Will you tell us what did result from the contract, in the way of profit to the sellers?

Answer. Under the terms of the contract the Hope Engineering Co. and its associates were to receive $350,000 in excess of their investment in the properties being purchased by Columbia Gas & Electric Corporation. This amount, together with the $453,600 received by the sellers in full settlement of the service provision of the contract, under which practically no service was rendered, makes a total profit to the sellers, so far as disclosed by records available to the Commission, of $803,600.

Question. In order to be perfectly fair in the record, it is apparently true that the Hope Engineering Co. stood ready to perform service under this contract?

Answer. That is right.

Question. But the fact is that they were called on for no substantial service?

Answer. That is true.

Question. And they did make a settlement giving them this sum of $453,600, in lieu of services and fees on them? Answer. That is correct.

Question. What did Columbia pay to the sellers for the capital stock of the companies purchased in excess of that which on the face of the record was invested by the original owners in that stock? Answer. In respect to the capital stock of the American Fuel & Power Co., the records made available to the Commission do not show that they ever received for the 898,711 shares of common stock (or voting trust certificates) outstanding immediately prior to March 22, 1930, more than $50,000 in cash, which sum was paid by Freeman, Smith & Camp Co. to the American for 200,000 shares June 27, 1929. Whether these shares were a part of the 450,000 for which Hope Engineering Co. had paid the holders thereof $100,000, the available records do not disclose. If so, Hope paid $50,000 in excess of the investment of the original holders; if not, $100,000 in excess. When Hope purchased its interest in the American, March 22, 1930, it paid $500,000 to the American for 1,000,000 newly issued shares. Since by the terms of the contract Columbia was to reimburse the Hope Co. and its associates for their investment, in addition to a bonus, it paid an amount in excess of that which, according to the records available to the Commission, was invested by the original owners, as follows: (a) $350,000 as bonus on the entire purchase; (b) $453,600 in full settlement of the service provision of the contract, under which practically no service was render the Columbia by the sellers; and (c) at least $50,000 of the $100,000 paid for 450,000 voting trust certificates, a total of $853,600. Payment of the $453,600 (item b) was made at some date following 1930.

Question. You used the term "at least $50,000 of the $100,000." It may have been up to what sum?

Answer. It may have been up to $100,000.

Question. So that, if that were true, the figure would be $903,600 total?

Answer. That is right.

Question. And, earlier in this last answer, you used the words "When Hope purchased its interest." Did Hope buy that loan or with its associates; do you know?

Answer. I am not sure that the records disclose whether Hope at that time had any associates or not. It had associates owning the property later on.

Question. And when you say "American", you mean the American Fuel & Power Co., which carried with it this subsidiary interest? Answer. I do.

Mr. CHANTLAND. I will ask Mr. Harvin if he has any questions he desires to ask.

Mr. HARVIN. No, sir. I think that at this point I might state, in connection with the contract of March 1930, where Hope got the million shares, the contract provided that Hope would associate itself with certain other interests; and I think that is how these came in.

Mr. CHANTLAND. So that by your statement, Mr. Harvin, it would appear then that, even though Hope bought it actually, itself, it was bought for the benefit of itself and associates to come in on it. Mr. HARVIN. That is my understanding of it.

Mr. CHANTLAND. I think that is all we have this morning, Your Honor, and I suggest that we adjourn, then, until 10:30 tomorrow morning.

Examiner ADDISON. Pursuant to the motion of the Commission's counsel, the hearing is hereby adjourned to reconvene in this room tomorrow morning at 10:30 o'clock.

(Whereupon, at 10: 43 a.m., Jan. 16, 1934, the hearing in the aboveentitled matter was adjourned to tomorrow, Jan. 17, 1934, at 10:30 a.m., at the same place.)

HEARING ROOM, FEDERAL TRADE COMMISSION,

Washington, D.C., Wednesday, January 17, 1934.

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

Appearances: Hon. Robert E. Healy, 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; Bernard F. Weadock, New York City; William J. Hagenah, Chicago, Ill., and Martin V. Callagy, New York City. Examiner ADDISON. The hearing will come to order, for the taking of further testimony under Senate Resolution No. 83, agreed to February 13, 1928.

Mr. CHANTLAND. I will call as the first witness Mr. J. W. Adams, who has been sworn and testified previously in these hearings.

J. W. ADAMS, recalled as a witness for the Commission, being previously duly sworn testified as follows:

Direct examination by Mr. CHANTLAND:

Question. Mr. Adams, on January 17, 1933, you presented a report on the properties and operations of the North American Light & Power Co. and subsidiaries, which was offered and received in evidence as exhibit 5241; did you not?

Answer. Yes, sir.

Question. At that time, I believe, I asked you to prepare a supplemental report going a little further into the matter of the operating results of the Iowa properties and something about certain items of intangibles of the Missouri properties. Is that the situation?

Answer. That is correct.

Question. And have you now prepared such a report?

Answer. Yes, sir.

Question. Will you pass it to the reporter, please?

Answer. Yes, sir [handing document to the reporter].

Mr. CHANTLAND. That will be exhibit 5599.

(The document referred to was marked "Commission's Exhibit No. 5599" for identification.)

By Mr. CHANTLAND:

Question. The report which has now been marked for identification by the reporter as "Exhibit No. 5599" is the report that you have prepared in response to that request?

Answer. Yes, sir.

Question. From what sources did you obtain the material from which this report is written?

Answer. It is based on balance sheets and profit-and-loss statements furnished by the North American Light & Power Co. Question. The calculations are your own?

Answer. Yes, sir.

Question. And have you accurately reflected or used the basic facts that you obtained from their records? Answer. Yes, sir; as shown by the books.

Mr. CHANTLAND. We now offer exhibit 5599.
EXAMINER ADDISON. Received.

(The document previously marked "Commission's Exhibit No. 5599, Witness Adams ", for identification was received in evidence.)

By Mr. CHANTLAND:

Question. Mr. Adams, at page 76 of exhibit 5241 and the following pages, over to page 80, you give a brief description of the physical properties called the Iowa properties of the North American Light & Power Co.; do you not?

Answer. Yes, sir.

Question. So that we may know, for the record, at this time just where these properties are located, will you step to the map here [indicating] that was introduced at that time, and which is exhibit 4992, and just tell us generally where these Iowa properties that we are going to talk about are located?

Answer. Those properties are located in the area immediately surrounding Des Moines. The principal cities in which the properties are located consist of Des Moines, Oskaloosa, Iowa, on the southeast and Adel, Iowa, on the west, and intervening properties, including small towns, both north and south of the main lines connecting Adel, Des Moines, and Oskaloosa.

Question. And extending as far east as Grinnell?

Answer. The company's properties do not extend to Grinnell. The company's lines extend only to Newton, where they interconnect with those of another company.

Question. These properties serve what? What service do they furnish?

Answer. In Des Moines and the greater part of the territory just described, electric service is given by the Iowa properties; also, in Des Moines and Valley Junction and other territory adjoining Des Moines, gas service is given. Likewise, gas service is given in Oskaloosa, and bus service in Oskaloosa.

Question. And is there heating service given in Oskaloosa?
Answer. Yes, sir.

Question. Now, let us get the corporate structure fixed before we go further. These companies are direct subsidiaries of the North American Light & Power Co.?

Answer. Yes, sir; through the Illinois Power & Light Corporation. Question. Sub-subsidiaries?

Answer. Yes, sir.

Question. Now, you have made use, for this purpose, of what kind of calculations; that is, what basis for the calculation of returns?

102777-34-PT 62- 2

Answer. The first calculation is based on a consolidated balance sheet and consolidated profit and loss statement of the Des Moines Electric Light Co. and its subsidiaries which constitute the Iowa properties. Two showings of investments and rates of return are made; the first based on average total investment and the second based on total fixed property investment as shown by the consolidated balance sheets, plus an allowance for working capital. Question. Exhibit I shows what?

Answer. Exhibit I within exhibit 5599 is a consolidated balance sheet for the Des Moines Electric Light Co. and subsidiaries, covering the years ending December 31, 1929, and December 31, 1930. Question. Following that, exhibit II is what?

Answer. That is a consolidated income statement for the Des Moines Electric Light Co. and subsidiaries, for the same 2 years. Question. In exhibit I, your second item is "Adjustment arising from the elimination of inter-company-held securities ", amounting to how much?

Answer. $867,531.40 for the year 1929.

Question. And what does that mean-the fact that that figure comes in on that side of the balance sheet?

Answer. I am not fully informed as to what that figure is from the data that I have at hand and I did not ask the company. I assume, however, that it is the difference between the value at which the securities of subsidiaries are carried on the books of the Des Moines Electric Light Co. and on the books of the subsidiary companies.

Question. It goes in here [indicating exhibit] as an assets figure? Answer. Yes, sir.

Question. The same as fixed assets, on the same side with property accounts, rights, franchises, and other assets?

Answer. Yes, sir.

Question. And you say that you do not know what, if any, tangible asset that represents?

Answer. No, sir.

Question. Have you a judgment as to what it probably is?

Answer. I assume and tried to indicate in my previous answerthat it represents the difference between the amounts carried on the books of the two companies and is probably the excess cost to the Des Moines Electric Light Co. over the book value of the securities on the subsidiary companies' books.

Question. Going back to exhibit II for a moment, the interest charge amounts to how much for 1929?

Answer. $965,094.08.

Question. Do you know what part of that is on funded debt, as distinguished from that on current commercial loans or borrowings? Answer. No; but I could approximate that very closely from the funded debt data in the balance sheet. I have not made that analysis, however.

Question. The funded debt of the Des Moines Electric Light Co. and subsidiaries amounts, for the year 1929, to practically $18,000,000; does it not?

Answer. Yes, sir.

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