Question. By a corresponding entry to what, a corresponding credit to what?

Answer. Capital surplus arising from revaluation of capital stock.

Question. In other words, this investment was written up $6,204,000; is that correct?

Answer. Yes, sir.

Question. And the additional shares acquired in September 1931 at a cost of slightly in excess of $100,000 made a total write-up, did it not, of the $6,200,000, less that amount; I will withdraw the question.

That makes the total ledger value of the investment $100,000, plus the amount of the write-up?

Answer. That is correct.

Question. What became of these 36,000 shares of stock in December 1931?

Answer. They were transferred to Broad River Power Corporation, a subholding company of General Gas.

Question. Leaving still, as additional cost of Broad River Power Co. stock, the $5,000,000 you have testified to; is that right?

Answer. Yes, sir. There is one point, Mr. Austin, I should like to call attention to, and that is if this 10,800 shares of Lexington stock was purchased from Murray & Flood, who were apparently outsiders, for $100,000, it is interesting to compare that 3 percent of all of the stock outstanding at a value of $100,000, with the investment recorded at a value of $6,204,000.

Question. Whereas had the $100,000 been the approximate value of the number of shares received from Murray & Flood, what would the total investment properly reflect?

Answer. According to that, less than $500,000.

Question. Precisely. Now, during 1927 and subsequently General Gas acquired certain bonds and notes of the Lexington Co. for funds advanced for construction purposes, did it not?

Answer. Yes, sir.

Question. What was that amount at 1930, at the end of 1930 ? Answer. A little over $9,700,000.

Question. Now, that represented notes, did it, for funds advanced for construction?

Answer. Notes and bonds.

Question. Were bonds acquired from other sources than for funds advanced for construction?

Answer. Yes, sir.

Question. Directly from the company that issued the bonds?

Answer. They were acquired largely through other holding companies of the Associated Gas & Electric System through open

account.

Question. At what price?

Answer. At prices ranging from 100 to 110 per $100 principal amount of bonds.

Question. Now, in December 1931 what was the principal amount of the investment of General Gas in the bonds of Lexington Water Power Co.?

Answer. $4,585,100.

Question. And what was the cost of these bonds to General Gas? Answer. $4,940,670, representing a difference between principal amount and cost of $355,570.

Question. What was the ultimate disposition of these bonds!

Answer. They were transferred to Broad River Power Co. as of December 31, 1931, through open account.

Question. In connection with the acquisition by General Gas through affiliated companies of Lexington Water Power Co. bonds, were any intercompany profits recorded?

Answer. Yes. An intercompany profit of $192,962.50 was recorded by the Associated Gas & Electric Securities Co., Inc., on the acquisition of $2,407,300 principal amount of these bonds.

Question. Were you able to trace whether or not similar profits were made on other transactions affecting bonds of these issues?

Answer. I was able to trace out only a few of the transactions through the affiliated companies' records and in addition to the profit just stated, I found that Associated Gas & Electric Securities Co. recorded an additional $135,320 profit on certain 52-percent bonds which were acquired by General Gas & Electric Corporation. (There was a discussion off the record.)

Examiner DIGGS. We will recess until 10 o'clock tomorrow. (Whereupon, at 4:25, Sept. 27, 1934, the hearing was adjourned until tomorrow, Friday, Sept. 28, 1934, at 10 a. m.)

ROOM 2030-C, FEDERAL TRADE COMMISSION,

Washington, D. C., September 27, 1934. Met, pursuant to adjournment, at 10 a. m., before Henry P. Alden, examiner.

Appearances: Col. William T. Chantland, counsel, Thomas J. Tingley, associate counsel; Dr. Francis Walker, chief economist; and Col. William H. England, associate chief economist, on behalf of the Commission. Bernard F. Weadock, New York City; William J. Hagenah, Chicago, Ill.; and Martin V. Callagy, New York City. W. T. Crawford, 90 Broad Street, New York City, for various Stone & Webster companies.

Examiner ALDEN. All right, gentlemen.

Mr. TINGLEY. Your honor, please, we wish to take up this morning a report on the examination of the accounts and records of Stone & Webster, Inc., management division, a division of Stone & Webster, Inc., the Massachusetts corporation, and also a report on Stone & Webster Service Corporation, subsidiary of Stone & Webster, Inc., of Delaware, both the reports being by Thomas A. Thibodeau, a Federal Trade Commission examiner.

Examiner ALDEN. I see.

Mr. TINGLEY. I would like to call Mr. Thibodeau to the stand. Examiner ALDEN. Mr. Thibodeau, have you been sworn? Mr. THIBODEAU. I have.

Examiner ALDEN. You have testified in these hearings before? Mr. THIBODEAU. I have.

Examiner ALDEN. The record will show that Mr. Thibodeau has been sworn.

THOMAS A. THIBODEAU, recalled as a witness on behalf of the Commission, having been duly sworn, testified as follows:

Direct examination by Mr. TINGLEY:

Question. Mr. Thibodeau, your qualifications are already a matter of record in these proceedings, are they not?

Answer. Yes, sir.

Question. Did you make an examination of the accounts and records of Stone & Webster, Inc., management division?

Answer. I did not personally make the examination. The examination was made by Examiner Frank Hale, of the Commission. Question. Did you write a report pursuant to that examination? Answer. Yes, sir.

Question. When was that examination undertaken, if you know? Answer. That was in the year 1933, in the summer period of the year 1933.

Question. And when was it completed, if you know?

Answer. It was completed, I believe, in July or August of that year.

Question. I hand you herewith the original of a volume entitled "Report on the Examination of the Accounts and Records of Stone & Webster, Inc.-Management Division (a division of Stone & Webster, Inc., the Massachusetts corporation)", and ask you if that is the original of the report which you prepared pursuant to that investigation?

Answer. It is.

Mr. TINGLEY. I ask that that be introduced in evidence and marked with exhibit no. 6129.

Examiner ALDEN. This will be received in evidence as Commission's exhibit 6129. It is entitled "Report on the Examination of the Accounts and Records of Stone & Webster, Inc.-Management Division."

(The book referred to was received in evidence and was marked "Commission's Exhibit 6129, Witness Thibodeau.")

By Mr. TINGLEY :

Question. Mr. Thibodeau, on what date was Stone & Webster, Inc., incorporated, referring to the Massachusetts corporation?

Answer. June 1, 1920.

Question. What business entity did that succeed?

Answer. It succeeded Stone & Webster, the partnership.

Question. Immediately prior to June 1, 1920, the partnership had been rendering management services and other special services to client companies provided for in its management division, had it not? Answer. It was.

Question. By what agency were those functions continued after

June 1, 1920?

Answer. They were continued by the management division of Stone & Webster, Inc., the new company incorporated under the laws of Massachusetts.

Question. What other activities did that company engage in?

Answer. It also had an engineering division, a securities division, and a general division. The engineering division attended to engineering matters, the securities division to certain classes of financial

matters, and the general devision attended to matters not strictly applicable to any one particular division of the company.

Question. How long did the management division continue to function in that manner?

Answer. It continued functioning until July 1929.

Question. What happened then?

Answer. Its activities then were taken over by Stone & Webster Service Corporation.

Question. When was that company organized?

Answer. That company was incorporated on July 6, 1929, but in the records the taking over of the business of the management division of the old company was made effective as of July 1.

Question. How did the management division keep its accounts? Answer. It kept its account in a manner such as might be kept by a separately organized company.

Question. In other words, it maintained separate accounts, even though it was part of an incorporated company?

Answer. That is correct.

Question. What was the form of management contract in use throughout the existence of the management division of the incorporated company?

Answer. The standard form used was that known as "form A-937."

Question. That is going to be put into the record in connection with the Stone & Webster Service Corporation report, is it not? Answer. Yes, sir.

Question. Now, on page 3 of this report there are two tables. What do those show?

Answer. One shows the assets of the management division. The other shows the liabilities.

Question. The assets of the management division consisted almost entirely of cash and accounts receivable, did they not?

Answer. That is correct.

Question. Were there any fixed-capital assets?

Answer. No, sir.

Question. How about liabilities?

Answer. The liabilities were largely capital advanced the division by Stone & Webster, Inc., also earnings not transferred-that is, to the Stone & Webster, Inc., from the management division-and accounts payable.

Question. Both the assets and the liabilities might be termed as being of a current nature, might they not?

Answer. Except for capital advanced and earnings not transferred, they might be regarded as of a current nature.

Question. What does the table on page 6 of your report show! Answer. It shows revenues, operating expenses, and net earnings by years, 1920 to 1929, inclusive.

Question. What does it show as to any increase in revenue from management services from the period in 1920 to 1929? Is there an increase or decrease?

Answer. There is an increase.

Question. Roughly, how much does it consist of? There is some difference in the periods.

Answer. Eliminating the year 1920, for which the earnings are shown for the 7 months of operation during that year, and eliminating the year 1929, for which the earnings are shown for 6 months of that year, then there is an increase of approximately $800,000 in earnings.

Question. What percentage is that, roughly?

Answer. Roughly, 65 percent.

Question. Was there the same proportionate increase in revenue from special services in that period?

Answer. No, sir; not the same proportionate increase. Somewhat less.

Question. Somewhat less. What was the trend in percent of net earnings to operating expenses during that period?

Answer. The percentage of net earnings to operating expenses fluctuated during that period.

Question. There could not be said to be a trend?

Question. And the percentage in 1925?

Answer. 64.7 percent.

Question. In 1926?

Answer. 66.1 percent.

Question. Have you any further comment to make on that table? Answer. I might say that the yearly average for the revenues for the approximately 912-year period was $1,725,064 per year. The average operating expenses per year amounted to $1,093,064. The average net earnings per year averaged $631,952, and the percentage of the average operating expenses to the average revenues for the period was 57.8 percent.

Question. How did the ratio of earnings to costs compare with that which was found for Stone & Webster Service Corporation?

Answer. The report on the Service Corporation shows net earnings before deduction of Federal income taxes as having amounted to nearly 6312 percent of costs for the last 6 months of 1929, nearly 63.6 percent of costs for 1930, 36 percent of costs for 1931, and about 33.2 percent of costs for 1932.

Question. What does the table on page 9 of your report purport to show?

Answer. That table shows aggregate revenues derived from management services by years, 1920 to 1929, inclusive.

Question. What comment have you to make on that table?

Answer. The table shows that revenues derived from management services comprised from 91.4 percent to 96.8 percent of the total revenues of the management division for the different years. It also shows that the bulk of these revenues from management services were derived from public-service companies.

Question. What percentage was derived from industrial companies?

Answer. The percentages derived from industrial companies ranged from 3 percent to 5.7 percent of the total revenues of the company shown for the different years.