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varying values as high as $7.26 per share, the latter value being based on the highest recorded trading in class A stock of 725s on the New York Curb Exchange.

There was issued and/or distributed to December 31, 1929, a grand total of 10,170,741 shares of the recorded value of $474,775,738.78. Of this total, however, 5,661,789 shares were reacquired, leaving 4,508,952 shares actually outstanding at December 31, 1929, with a stated value of $148,878,745.60. The majority of the class A stock sales occurred in 1929. The principal sales of class A stock were for cash and a combination of cash and securities. These shares were sold largely in public offerings through dealers, for subscriptions on “rights", and as the result of sales through the “redistribution plan" in 1929. Three principal “rights" offers were made to certain security holders of Associated Gas & Electric Co. In addition, certain debentures of Associated Gas & Electric Co. were sold with detachable warrants entitling holders to subscribe for class A stock at stated prices. In the latter part of 1928 and the first half of 1929, the Associated management put on a "redistribution" campaign handled through over 500 dealers with the Securities Co. as distributing group manager. In the operation of this plan, the Securities Co. acquired most of the class A stock appearing on the market and sold it through the participating dealers in an attempt to put it in the hands of permanent investors. This was accomplished by giving special concessions to dealers whose clients held their stock for a period of at least 4 months. A report of the campaign made by a company representative indicates it to have been 60 percent successful, that is, an average of 60 percent of the sales under the plan remained in the hands of the permanent investor (judging permanence by the standard of the plan).

About 1,553,000 shares of class A stock were issued in conversions and exchanges. By exchanges is meant the issuance of class A stock in exchange for other securities of Associated Gas & Electric Co. and for securities of subsidiary companies thereof. By conversions is meant the issuance of class A stock to holders of Associated Gas & Electric Co. debentures, pursuant to rights pertaining thereto to convert said debentures into class A stock, etc., upon designated bases. This applies particularly to such debentures as 472's of 1948 and 5'4's of 1977. Some 540,000 shares of class A stock were issued as dividends on class A, class B, and certain preferred stocks of Associated Gas & Electric Co. Over 3,000,000 shares of class A stock were sold to affiliated or associated companies, many of which shares were later reacquired therefrom. Included among the foregoing were sales to Associated Securities Corporation (controlled by Associated Gas & Electric Properties, owned jointly by H. C. Hopson and J. I. Mange), Public Utility Investing Corporation, and International Public Utility Investing Co., Ltd., both of the latter being owned or controlled by H. C. Hopson, president and treasurer of the Securities Co. and vice president and treasurer of Associated Gas & Electric Co. In connection with certain of these transactions, it was found that profits were made by the Hopson-owned companies. Two examples of this are given here. The report indicates others.

In October 1929 there were issued to International Public Utility Investing Co., Ltd., of St. Johns, Newfoundland (pursuant to call thereon granted that company upon sale by it to the Securities Co. of 444's of 1948) 62,175 shares of class A stock at $50 per share, or a total consideration of $3,108,750. In the same month International Public Utility Investing Co., Ltd., sold this stock to General Gas & Electric Corporation, and Associated System subsidiary, at $68 per share or a total consideration of $4,227,900, a profit of $1,119,150 going to International Public Utility Investing Co., Ltd., and used the proceeds to purchase junior securities from Associated Gas & Electric Co.

On September 5 and 11 and October 4, 1929, the Securities Co. sold to Associated Securities Corporation 37,700 shares, 225,000 shares, and 222,181 shares of class A stock at 567, 50 and 50 per share, respectively, (the last two items being pursuant to a call thereon granted that company upon sale by it to the Securities Co. of 442's of 1948) Associated Securities Corporation turned right around and sold these shares to General Gas & Electric Corporation (mentioned above) at 66, Associated Securities Corporation recording a profit of approximately $12,500,000 on the deal, with which were purchased from Associated Gas & Electric junior securities of Associated Gas & Electric Co.

The profits arising from the two foregoing transactions were, to a certain extent, rescinded in 1933 and the securities (principally class A and class B stock of Associated Gas & Electric Co.) purchased with said profits were returned to Associated Gas & Electric Co. without requiring return of the cash.

Two examples are given in the report whereby Associated Securities Corporation and Public Utility Investing Corporation, both Hopson personally owned corporations (Associated Securities Corporation being jointly owned with J. I.

Mange) sold class A rights to the Securities Co., thereby profiting to the extent of some $3,400,000, the proceeds being invested in junior securities of Associated Gas & Electric Co.

It was also found that Associated Securities Corporation subscribed in October 1929 for class A stock on stock-purchase warrants, at $40 per share, the stock having a market value of $50 per share at that time. In August 1930, when the stock had a market value of $30 per share, Associated Securities Corporation canceled its subscription to over 33,000 shares of class A stock and 18,000 shares of common stock, thereby saving itself a loss of in excess of $500,000. A like transaction occurred between the Securities Co. and Public Utility & Financial Securities Corporation, another Hopson-owned company, whereby the latter made a similar subscription to 120,170 shares of class A stock and 67,600 shares of common stock in October 1929. In August 1930 the subscription was practically canceled. By the cancelation of the subscription, Public Utility & Financial Securities Corporation saved itself a loss of in excess of $1,800,000.

On the other hand, both of those companies simultaneously took back from the Securities Co. at 23, stock-purchase warrants quoted on the market at the time at 37, thus relieving the Securities Co. of losses aggregating $984,500 and $5,000,000, respectively.

The principal reacquisitions of class A stock were from dealers on the open market for cash or on account. These aggregated over 3,100,000 shares at a cost of more than $176,000,000. Of these, over 2,500,000 shares were bought in 1929 at a cost of $152,000,000. Comparison of these purchases with the total trading on the exchange for the 4 years 1926 to 1929 indicates that nearly 70 percent of all trading on the New York Curb represented purchases by the Securities Co. as set forth in the following table: Percentage and year of purchases by the Securities Co. to total curb trading

Percent 1926.

65 1927

75 1928

66 1929

68

Simple average-

69 In connection with the issuance of class A stock it has been shown that the Securities Co. made a series of conversions in its treasury with the result that subsequent depositors of Associated Gas & Electric Co. 544's of 1977 for conversion into class A and common stock were required to pay approximately $750,000 more for these stocks.

In its varied dealings in class A stock the Securities Co. has recorded adjustments in its value, profits and/or losses in the sale and other disposals thereof of over $32,000,000. This amount has chiefly arisen from the fact that the stock has been received from Associated Gas & Electric Co. at certain stated prices generally much less than the issuing prices. This resulted in large profits to the Securities Co. Only the complete control of the Securities Co. by Associated Gas & Electric Co. could permit of this method of disposing of class A stock. If no securities company were interposed between Associated Gas & Electric Co. and the purchaser of class A stock, the foregoing adjustments of value, profits, etc., would represent additional capital to Associated Gas & Electric Co., instead of surplus to the Securities Co.

Class A stock showed a fairly steady increase in price from its original issue in January 1925 at 2074 to a high of 72% in late September 1929. The following table shows, by years, this price range.

Associated Gas & Electric Securities Co., Inc.

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1929, however, there has been a gradual recession and the stock now sells for around $1 per sbare.

After 1929, however, there has been a gradual recession and the stock now sells for around $1 per share.

The next three sections of chapter II deal with three securities convertible into class A stock and considered by the Securities Co., for all practical purposes, equivalent to the issue of class A stock. The principal item of this class was the series styled "Convertible debenture certificates, convertible into class A stock." Of these certificates, the principal amount of nearly $49,000,000 was issued, over $19,000,000 principal amount reacquired, principally through conversion into class A stock, leaving something less than $30,000,000 principal amount outstanding at December 31, 1929. This class of debenture certificate is, in effect, a delayed form of issuance of class A stock. It takes the form of a debenture providing for interest at 6 percent per annum or, optionally, an amount equal to the dividends on the class A stock into which it is convertible. The certificates were convertible at the option of the holder at any time after 6 months from date thereof, and by the Associated Gas & Electric Co. at any time after 30 days from the date thereof, into 2 shares of class A stock for each $100 principal amount. The debenture certificates were issued principally in connection with the numerous exchange offers made by the Associated System to underlying security holders and for cash. Nearly $47,000,000 principal amount was issued in exchanges and over $2,000,000 principal amount sold for cash. No calculation of the effective interest rate of this class of debenture is made due to the convertible features, whereby the company might convert them into a common stock within 30 days.

The next section deals with the issuance of $6 dividend series preferred stock of Associated Gas & Electric Co. From 1925 to December 31, 1929, a total of 254,529 shares was issued for the consideration of $22,694,264.90. Of this total, 198,506 shares were reacquired at a cost of $19,160,761.03. There were issued 158,237 shares for cash and the majority of the remainder in exchanges for other Associated System securities. Reacquired shares were received principally for cash and in exchange of other Associated System securities therefor. This stock gives an example of one of the characteristics of Associated financing-namely, the constantly putting out and taking in of securities. The Associated System has sent out thousands of exchange offers to its security holders, and in many cases the security offered for exchange was itself a year or so later called in or other securities offered in exchange therefor. Thus there has been a constant turnover in security issues and an ever changing corporate financial structure. In the case of the $6 preferred stock, it was found that at least three series of debentures of Associated Gas & Electric Co. contained provisions for conversion into this class of stock. This report also quotes several offers to turn in the preferred stock to the company and receive class A stock, debentures, investment certificates, etc., therefor. It would seem that a constant stream of mail must have been received by $6 preferred stockholders in which exchange after exchange was offered.

The next section of this report covers transactions in Associated Gas & Electric Co. convertible 42 percent gold debentures due 1948. These were 20-year debentures convertible at the option of the holder into two shares of class A stock for each $100 principal amount. This issue was sold in 1928 exclusively through the agency of the Securities Co. to stockholders and holders of registered convertible securities of Associated Gas & Electric Co. at 97, and a minor amount sold to others at 10472. The total principal amount of $63,000,000 of these debentures was sold. An underwriting fee of $500,000 (1 percent of $50,000,000 principal amount) was paid by the Securities Co. to Harris, Forbes & Co., bankers, although that company was not called on to take any of these debentures under its underwriting contract. The Securities Co. was allowed two points commission out of which to pay all expenses, underwriting fee and commissions. At the close of the selling campaign, the excess of the two points commission allowed the Securities Co. over the actual expenses incurred was turned back by the latter to Associated Gas & Electric Co. In connection with commissions paid by the Securities Co., it was found that Associated Securities Corporation and Public Utility Investing Corporation, the Hopson-owned companies, received a total of over $280,000 in commissions on their own subscriptions.

Net proceeds realized from the original sale of this class of debentures were approximately 95 percent, which resulted in a cost of 5 percent on the money thus realized. This calculation, however, is based on the assumption that the entire principal amount would remain outstanding to maturity. This did not happen. The Securities Co. began the reacquisition of the debentures almost immediately, and at December 31, 1929, less than 2 years after their original issue, only some $4,000,000 of the $63,000,000 principal amount originally issued remained outstanding. Of the reacquired debentures, over $43,000,000 principal amount was bought for cash and more than $16,000,000 principal amount was received in conversions for class A stock, pursuant to the convertible provisions of the debentures. In explanation of the large amount of cash purchases it was stated that the Securities Co. took advantage of the difference in market prices of class A stock and 4%2's of 1948 to acquire the latter for the purpose of converting in the treasury and issuing class A stock. This was occasioned largely by the redistribution plan already discussed. Due to the convertible features of 414's of 1948 the debentures were considered by the Securities Co. as the equivalent of class A stock, to be taken off the market pursuant to the object of the redistribution plan. However, the cash purchases confuse any calculations of effective rate of interest due to the extremely short actual life of the debentures. The report shows three calculations covering over 70 percent of the entire reacquired debentures. These show effective interest rates, on an annual basis, of 11%, 29, and 28 percent, respectively.

The next section deals with gold debenture bonds consolidated refunding 5 percent series, due 1968, of Associated Gas & Electric Co. This is one of the very few Associated Gas & Electric Co. debentures having no conversion features or other rights whereby it might be changed into some other form of security. This, of course, did not preclude the Associated management from circularizing the holders of this class of debenture and persuading a number of them to accept other securities. It was found, among other things, that at least $8,993,000 principal amount of 5's of 1968 was issued in exchange for 5'4's of 1977. The 5's of 1968 were partially issued by Associated Gas & Electric Co. and in part by the Securities Co. A net total of $56,812,200 principal amount was outstanding at December 31, 1929. The major portion of this was an issue of $35,000,000 principal amount for refunding certain underlying bonds, the remainder being issued to an affiliated company. A calculation of the effective interest rate on the $35,000,000 principal amount of 5's of 1968 shows 5.54 percent. This principal amount replaced bonds and stocks with interest or dividend rates of from 5 to 7 percent with one small item at 4 percent. However in almost every case a premium was paid for the refunded securities so that little, if any, savings in interest may be shown.

The next section deals with Associated Gas & Electric Co. 542 percent convertible gold debentures, series of 1977. This is another convertible security, in this case convertible into units consisting of 2 shares of class A and I share of common stock of Associated Gas & Electric Co. upon bases varying with the amount of debentures converted, The entire principal amount of $10,000,000 of these debentures was sold by Associated Gas & Electric Co. to Harris, Forbes & Co., directly, at 9034, the transaction not passing through the Securities Co. After payment of expenses, etc., Associated Gas & Electric Co. realized about 904 on this issue. On this basis, and assuming that the debentures would be outstanding to maturity, an effective interest rate of a little over 634 percent is reflected. However, as in practically every security issue of Associated Gas & Electric Co. of the past 10 years or so, studied by this examiner, the reacquisition of 574's of 1977 began almost immediately. A total of $63,417,000 principal amount was reacquired, of which $31,436,000 principal amount was resold, leaving the principal amount of $8,019,000 outstanding at December 31, 1929. The principal acquisitions were: For cash..

$11, 591, 400 In conversions for class A and common stocks..

29, 208, 000 In exchanges for other Associated Gas & Electric Co. securities.. 11, 013, 600

Some calculations of the effective interest rate have been made for the cash reacquisitions, based on the actual period outstanding. These give a weighted average of over 22 percent per annum. As to debentures reacquired in conversions and exchanges, no cost of money is given.

This summary has previously shown that in connection with this series of debentures conversions were made whereby outside debenture holders, later converting their debentures were required to pay about $750,000 more for their stock.

The last chapter of the report deals with results as stated in surplus accounts. Four general surplus accounts have been carried by the Securities Co., as follows: Corporate surplus, securities loss and gain, capital surplus, and reserve for premiums, discounts, etc. Considerable regrouping and reallocations of these accounts has taken place and at December 31, 1929 (prior to the transfer of all assets and liabilities to the new company and liquidating dividends), the first

a last accounts were the only ones with open balances.

Corporate surplus has partaken largely of ordinary income or earned surplus. The remaining accounts resulted principally from gains and losses derived from sales, exchanges, and conversions of securities. The combined balances in the several above accounts, at December 31, 1925 to 1929, inclusive, were as follows: 1925.

$79, 960 1926 (deficit)

136, 627 1927.

63, 793 1928.

89, 406 1929.

17, 023, 229 The main account discussed in this chapter (as to amount) is the reserve for premiums, discounts, etc., which was begun in April 1929 as a continuation of the account securities loss and gain. This reserve account built up a balance, at December 31, 1929, of nearly $40,000,000. Of this amount over $22,000,000 was transferred to Associated Utility Investing Corporation (Delaware) as a liquidating dividend and over $17,000,000 passed on to the new company upon the latter taking over the assets and liabilities of the Securities Co. at December 31, 1929. The principal items entering into the creation of the reserve have been adjustments in value of, and gross profits from the sale of class A stock of Associated Gas & Electric Co., aggregating nearly $38,000,000; profits, aggregating nearly $8,000,000, in transactions of other system securities; and profits, aggregating nearly $7,000,000, from the sales of stocks and bonds of Associated Gas & Electric Co., and underlying companies to Associated Gas & Electric Co. and other Associated System companies. The latter class of profit arose principally from the sale, sometimes at par, sometimes at their redemption value, to Associated Gas & Electric Co. and other Associated System companies, of stocks and bonds received by the Securities Co. in exchanges or conversions or purchased for cash in the open market. Numerous instances are shown whereby cash purchases from outside dealers' etc., were immediately passed on to Associated Gas & Electric Co. at a profit. Likewise, it was common practice to pass on to Associated Gas & Electric Co. (and by that company transferred to subholing companies), at the redemption (call) price, securities of Associated Gas & Electric Co. and underlying companies acquired by the Securities Co. as the result of exchange offers, conversions, etc.' Throughout the entire discussion in this report of the reserve account there are shown typical examples of this class of profit to the Securities Co.

Deductions from the reserve consist principally of premiums and commissions paid, losses on class A stock and other securities, and various security and general expenses, such as advertising, H. C. Hopson, legal and other services, salaries, and miscellaneous general expenses.

Mr. MARLAND. Judge, may I interrupt you?
Mr. HEALY. Yes.
Mr. MARLAND. Pardon me, Mr. Chairman.
The CHAIRMAN. Mr. Marland.

Mr. MARLAND. Would it not be exceedingly valuable to the Commission if they had authority to demand an analysis of the surplus of any corporation?

Mr. HEALY. I think that that is absolutely necessary.

Mr. MARLAND. I do not see how they can understand the surplus accounts of the company without a complete analysis.

Mr. HEALY. They cannot; no one can.

A surplus in a balance sheet means nothing, unless you know its content.

Mr. MARLAND. An analysis of the surplus would show how much of their surplus came from paid-in capital?

Mr. HEALY. Yes, sir; there are many of these companies, I feel confident, that have been paying dividends out of capital. They have been charging dividends against surplus accounts which were not made up from earnings.

Mr. MARLAND. May I call your attention to this? I think that this is rather important at this time. I am not a lawyer, but a great

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