is reflected in Schedule I-A, and it appears also in a segregation of the surplus account as "unrealized appreciation arising from revaluation of capital assets," 23 although it is not disclosed on the asset side of the balance sheet.

The revaluation was based entirely upon an appraisal of the assets of the company made in August 1934, upon consummation of the reorganization. In this appraisal deferred development was valued solely on a basis of reproduction cost new. The unrealized appreciation represents the difference between a value of $167,400 which was allocated to this item in the appraisal 24 and a cost figure of $31,202.25.25 Neither the independence nor the competence of the appraiser has been questioned in this proceeding. Nor was any question raised respecting the representation of $167,400 as the cost of reproducing deferred development new.

As stated above, however, the registrant, although its properties have been operated since May, 1935, is concededly still in the development stage. It has no blocked-out ore. And, although it has shown a small operating profit at the mine for the year 1936 and for the period from January 1, 1937, to April 15, 1937, it has never shown a net profit after deduction of general and administrative expenses and interest on notes payable, even before depreciation.28

The Commission has recently stated its position with respect to write-ups by promotional companies based solely upon replacement

23 The surplus account is segregated as follows: Paid-in surplus-premium on stock.. Deficits__

$73, 406, 61

12, 588. 38

Unrealized appreciation arising from revaluation of capital assets____ 136, 197, 75 24 The figure for deferred development in Schedule I-A of the amended balance sheet is $201,328.42. The difference between this figure and the $167,400 at which deferred development was appraised in 1934 is $33,928.42. To the extent of $32,100.38 this latter figure represents development operations conducted by the registrant since 1934 and listed at cost. The remaining $1,828.04 is listed in Schedule I-A as depreciation of deferred development for the period between 1934 and April 15, 1937, but is added to deferred development instead of subtracted from it. No explanation is given for this treatment of depreciation.

25 Newland, the registrant's assistant secretary-treasurer, testified that this cost figure of $31,202.25 had been computed by deducting from the total cost to the registrant of all the assets of the old Unity (i. e., $44,712.25, including the unpaid balance of $14,866.88 on the Katinka properties, as appears from notes 1 and 3, supra) the valuation of the property items acquired from it other than deferred development. This derivation of the cost figure should also have been explained in a footnote to Schedule I-A of the balance sheet.

28 The figures for the registrant's profit or loss, both operating and net, as they appear on its amended comparative profit-and-loss statement for the years 1935 and 1936 and the period between January 1, and April 15, 1937, are as follows:

value. The statement (Accounting Series Release No. 8, May 20, 1938) was as follows:

In connection with a registration statement, an industrial company in its promotional stages with no record of business or earning capacity, filed a balance sheet in which property, plant, and equipment, acquired in an arm's length transaction at a cost of $200,000, was carried at $720,042.81 which represented its "sound value" derived from an independent appraisal of the estimated "replacement value new less (observed) depreciation." Thus the balance-sheet figure exceeded cost by $520,042.81, which excess was carried as "surplus arising from revaluation of property."

In the appraisal report filed, the term "sound value" was qualified by the appraiser as being "The value for use by a going concern having prospects for the profitable use, at normal plant capacity, of the properties appraised."

The registrant was required to amend its balance sheet to eliminate the surplus and to show the fixed assets at cost.

It is immaterial for our present purposes to what extent under existing law reproduction cost new need be considered as an element of value in rate and similar cases.27 We are concerned here with a valuation in a balance sheet to be used for the purposes of selling shares of stock under the Securities Act of 1933. It is likewise immaterial to what extent, if any, reproduction cost new may under these circumstances be used as an element of value to support a write-up of the assets of a going concern with a demonstrated earning capacity. The fact here is that this basis of valuation is used as the sole justification for an increase from $31,202.25 to $167,400 in the valuation of certain assets of a company in the development stage which has no blocked-out ore and which in over 2 years of operation has not shown a net profit. The inclusion of this valuation in the balance sheet translates mere future hopes for the success of the enterprise into terms of present fact.28 Moreover, Gow testified that in his opinion and in the opinion of other engineers the develop

It is noteworthy, however, that the Supreme Court has repeatedly declared-even in cases of valuation of public utilities for rate-making purposes, where it has held it essential that reproduction cost be considered as one factor among others-that reproduction cost does not furnish an exclusive test of value where it has been employed, as in this proceeding, independently of all other factors. Georgia Railway & Power Co. v. Rr. Comm. of Ga., 262 U. S. 625, 630 (1923); Brooks-Scanlon Corp. v. United States, 265 U. S. 106, 125 (1923) (valuation of ship requisitioned by Emergency Fleet Corporation), and cases cited; Standard Oil Co. of N. J. v. Southern Pacific Co., 268 U. S. 146, 159 (1925); Los Angeles Gas & Electric Corp. v. Rr. Comm. of Cal., 289 U. S. 287 (1933); Rr. Comm. of Cal. v. Pacific Gas & Electric Co., 302 U. S. 388, 398 (1938). See also Dodd, Stock Watering (1930) 117; cf. 1 Bonbright, Valuation of Property (1937) 150 et seq.

28 Cf. Atlantic, Birmingham & Coast Railroad Company v. United States, 298 U. S. 33, 39 (1935); In the matter of Arkansas-Missouri Power Corporation, 2 S. E. C. 413 (1937). In the hearing before the Public Service Commission of Wisconsin on April 22, 1935, in the matter of the registrant's application for a registration of its shares in that state, a transcript of which was introduced into evidence by counsel for the Securities and Exchange Commission in the hearing under Section 8 (d), Professor E. B. Bean, state geologist, testified with respect to the registrant's appraisal: "I do not consider that [reproduction cost] a proper method of establishing the valuation of a mine, because if there isn't ore there, if there isn't ore that is worth development, that development work is of no value to the prospective buyer."

ment had not been done properly. As a consequence, in the future this development might even prove to be a disadvantage to the company rather than a benefit. Under these circumstances the valuation is perforce misleading. It represents to prospective security holders a present appreciation which in fact is non-existent. We find the registrant's financial statements materially misleading."

In sum, we find the answers to Items 18, 20, 25, 31, 34, 36, 38, 46, and 54 deficient under Section 8 (d) of the Act for the reasons stated above.30 We find also that the answers to Items 3, 11, 27, 30, 50, and 55, together with Exhibit D (re-entitled Exhibit H by the proposed amendment of November 1, 1937), were deficient at the effective date of the registration statement, although these deficiencies would be cured by the proposed amendments if these amendments could be and were declared effective. We likewise find the prospectus deficient insofar as it reflects these deficiencies. We reject, however, without further extending this opinion, the trial examiner's findings that Item 53 and Exhibit F were defective, either as of the effective date of the registration statement or as they were proposed to be amended.

A stop order will issue in accordance with this opinion.

By the Commission: Commissioner Healy was absent at the time of the Commission's consideration of this case and did not participate therein.

Cf. In the matter of Great Dyke Gold Mines, Inc., 1 S. E. C. 621, 624 (1936); In the matter of Consolidated Mines Syndicate, 2 S. E. C. 316 (1937).

30 We note also that the answer to Item 32, while it may be literally true, is materially misleading in stating that "North Butte Mining Company through its present or contemplated holding of stock of Unity Gold Corporation does not control the stock of the issuer." Since, however, this item was not cited to be considered at either hearing, we cannot find it deficient at this time.

3 S. E. C.

[No. 531]

IN THE MATTER OF

LAWRENCE GAS AND ELECTRIC COMPANY

File No. 32-95. Promulgated July 22, 1938

EXEMPTION OF SECURITY ISSUE OF REGISTERED HOLDING COMPANY OR

SUBSIDIARY.

Issue Solely for Purpose of Financing Business of Subsidiary.

Application for exemption of issue and sale of bonds by subsidiary of registered holding company, for purpose of redeeming outstanding bonds, being expressly authorized by the state commission, granted pursuant to Section 6 (b) of Public Utility Holding Company Act of 1935 as being solely for purpose of financing the business of applicant.

Condition on Exemption.

Exemption of issue and sale of securities pursuant to Section 6 (b) of Public Utility Holding Company Act of 1935, granted upon condition that the issue and sale of such securities shall be effected in accordance with the terms, conditions, and purposes represented by application.

Condition on Exemption.

Certificate of Notification Required.

Exemption of issue or sale of securities pursuant to Section 6 (b) of Public Utility Holding Company Act of 1935, granted upon condition that applicant file with Commission, within 10 days after any issue or sale of the securities exempted, a certificate of notification showing that such issue or sale has been effected in accordance with the terms, conditions, and purposes represented by application.

Condition on Exemption.

Effect of Subsequent Action by State Commission.

Order exempting issue or sale of securities pursuant to Section 6 (b) of Public Utility Holding Company Act of 1935, granted upon condition that the exemption shall terminate without any further action by this Commission if state commission revokes or otherwise terminates its authorization.

FINDINGS OF THE COMMISSION

Lawrence Gas and Electric Company, a subsidiary of Massachusetts Power and Light Associates, in turn a subsidiary of New England Power Association, a registered holding company, has filed an application pursuant to Section 6 (b) of the Public Utility Holding Company Act of 1935 for exemption from the provisions of Section 6 (a) of the Act, of the issue and sale of $1,500,000 principal amount of first

mortgage bonds, series A, 3% %, due July 1, 1968. The bonds are to be dated July 1, 1938, and are to be issued under an indenture of trust and first mortgage made with Boston Safe Deposit and Trust Company of Boston, Mass., as trustee.

Section 6 (b) of the Act provides that the Commission shall exempt from the provisions of Section 6 (a) of the Act, “. . . subject to such terms and conditions as it deems appropriate in the public interest or for the protection of investors or consumers," the issue or sale of any security

by any subsidiary company of a registered holding company, if the issue and sale of such security are solely for the purpose of financing the business of such subsidiary company and have been expressly authorized by the state commission of the state in which such subsidiary company is organized and doing business . . .

Hearings on this application, as amended, were duly held after appropriate notice. No member of the public appeared or requested an opportunity to be heard at such hearings. After examination of the record in this matter, the Commission makes the following findings:

Applicant is a public utility company organized under the laws of the Commonwealth of Massachusetts and conducts its business entirely in that state. The business of the applicant is principally that of production, purchase, and sale of electricity for light, heat, power, resale, and other purposes and the manufacture and sale of gas for general use, and incidentally of the sale of electric and gas appliances. The applicant distributes electricity and gas to customers in Lawrence, Methuen, Andover, and North Andover, and electricity is supplied to customers in Boxford. There are authorized and outstanding 188,000 shares of capital stock of the par value of $25 a share, of which New England Power Association owns 11.490 percent and Massachusetts Power and Light Associates own 78,936 percent. There are outstanding in the hands of the public 17,998 shares or 9.574 percent of the total.1

The presently outstanding funded debt of the applicant consists of first mortgage 42%, 20-year gold bonds, series B, due August 1, 1940, in the principal amount of $1,500,000. The balance sheet of the applicant as of March 31, 1938, shows property, plant, and equipment carried at $10,625,958 which is stated to represent cost. The reserves for depreciation are shown as $1,903,051 resulting in a net book value of the property, plant, and equipment in the amount of $8,721,807.

In compliance with the Massachusetts statutes an invitation for bids for the purchase of the bonds concerned herewith was made

1 New England Power Association owns 81.271 percent of the voting power of Massachusetts Power and Light Associates.