had any other source of money at any rate, and this is the real advantage. And in a great many instances, certainly, most of the instances so far as the private borrowers are concerned, availability is the important thing. This is why, generally, they support this bank bill at higher interest rates.

Mr. KLEPPE. What Mr. Dole and I are trying to get at, I am sure, is that there is a difference between the going bank rates, if this were passed, let us say that it would be 6 percent versus the 2 percent, that somebody has to be getting the benefit of it, and what you are saying is that the somebody is the subscriber.

Mr. LUCIER. Yes, sir.

Mr. KLEPPE. It is not the purchaser-it is not the seller?

Mr. LUCIER. The seller only in the sense that he had the funds available to him where he might not have had any funds available to him, but that is not related to the interest rate.

Mr. KLEPPE. All right. Thank you. That is all.

Mr. MYERS. If you will yield?

Mr. DOLE. Yes.

Mr. MYERS. Mr. Lucier, you have been talking about these companies. How do you keep them within your corporation, Continentalhow are they held, are they holding companies, do you keep them as subsidiaries, or how?

Mr. LUCIER. The companies we purchase are subsidiaries of Continental, which is a holding company.

Mr. MYERS. Then you operate them as separate corporations? Mr. LUCIER. Yes, sir. Many of them, for instance, the majority-I think we have purchased five or six small Georgia companies, small separate corporations, all of which were financed by the REA. In that instance, in Georgia, it was partly for our benefit in consolidating those into one corporation-that was to our advantage. For instance, the REA rightfully required a separate certificate from a CPA at the end of each year. That would cost about $2,000 for the certificate. When we consolidated them we only had to have one certificate, instead of six certificates. It is true in that instance, and it is generally true that the Georgia Service Commission, I should say, was insistent that they be consolidated. We now have one larger, better company, with a lot of economies, a lot of efficiencies, a better coordinated company, certainly, better cash flow benefits. So we have one company in Georgia where there were six individually owned companies. These have all been consolidated into one company. So that now we have but the one Georgia subsidiary and for a moment in time we had six. Mr. MYERS. Then the REA loan was refinanced into one loan? Mr. LUCIER. Yes, sir. They were just simply consolidated, no terms changed.

Mr. MYERS. The loan was not rewritten?

Mr. LUCIER. I am sorry, I cannot answer that question. I do not know whether there was.

Mr. MYERS. Something was entered into?

Mr. LUCIER. Yes, sir.

Mr. MYERS. How do you happen to acquire all of these companies? Do you have people looking for them, or do the companies come to you?

Mr. LUCIER. Both ways, sir. All of the companies in the United States are listed in several directories. Everybody has knowledge of every company.

Mr. MYERS. Then some approach you and you approach some of the companies that you purchase?

Mr. LUCIER. Yes, sir.

Mr. MYERS. Do you have the figures of how many companies you have purchased in the last 5 years?

Mr. LUCIER. Roughly, 350.

Mr. MYERS. How many of those had REA loans?

Mr. LUCIER. About one half or a little less-45 percent of our total telephones in service are financed by the REA.

Mr. MYERS. You spoke a moment ago about the rate of return on the investment.

Mr. LUCIER. Yes, sir.

Mr. MYERS. When you go out to purchase a company, about how many times annual earnings do you pay for the company? Do you have those figures?

Mr. LUCIER. Sir, that would vary in the 350 instances.

Mr. MYERS. Give me a couple of extremes.

Mr. LUCIER. Some of the companies that were purchased had a loss. If this were true, how many times losses would we be paying? In a loss company, there would, obviously, be opportunities there in the way of increased service; and, therefore, increased revenues that the local company had not been able to have foreseen or chosen to take advantage of. We look to the future and not to the past. I would say that, by and large, and, historically, when we are talking about a small company, the lower the earnings the higher we would pay in terms of historical earnings. But the least that we would pay would be in terms of their foreseeable earnings in the near term future.

Mr. MYERS. That does not answer my question exactly, does it? Mr. LUCIER. I do not know how else to answer it.

Mr. MYERS. You do not know how many times you might buy a bankrupt company then for some reason?

Mr. LUCIER. What I am saying is that if it had a loss and there have been some that were in a loss position-if you paid anything for it, how many times earnings is this? If the company is extremely well run, has taken advantage of all of its opportunities, then the price in relation to its earnings would be lower, perhaps 10, 15, perhaps 20 times earnings.

Mr. MYERS. Do you have any figures at all as to what you have been paying for these companies?

Mr. LUCIER. Well, sir, we have historical records, but most of them99 percent of them-have been acquired for stock, so that you are not paying any cash at all. And the times earnings factor happens to be what the stock market happens to be at the time. All listed telephone companies, generally, are at lower levels than they were, say 6 months ago. If we concluded a transaction 6 months ago, taking the Continental price at $33, now it is $28, as against $33 when we signed the agreement, and then concluded the transaction now, what did we pay for it? The stock went down 10 percent or so, which is generally true of all telephone companies. So that when you give them stock, all you are saying to the individual is, "You can have, roughly, the same

multiple in times earnings as we enjoy in the stock market." And these small telephone companies say, "My stock may not be a listed security, but why should my stock be worth any less than your stock which has a known multiple?" And, generally speaking, all listed telephone securities have had generally high multiples for the last four

years.

Mr. MYERS. When you buy a company, you are interested in that? Mr. LUCIER. That is right. That is why we relate their income to our stock, that the number of shares that we give, not in terms of what our shares are worth.

Mr. MYERS. You would know something about the annual income, I think.

Mr. LUCIER. What their income can be, yes--not what it has been. Mr. MYERS. You know what it has been.

Mr. LUCIER. That is not the only thing that we know at all. We know very well what it can be.

Mr. MYERS. Then the interest rate you are paying for it does have something to do with it. You say that you are anticipating. And the only way to anticipate is to know what the expenditures will be. And one is overhead. Another is interest paid on the money.

Mr. LUCIER. Well, the rate of return under regulations is by and large based on the cost of the money. For instance, you may be allowed 3 or 4 percent return if you are financed by the REA and 6 or 7 or 7.5 if you are not. But it all comes down to the return on your equity which is substantially the same, which will be 10 to 15 percent. We turn on equity. So under regulations, if you get a lower interest rate, if you have to pay a lower interest rate, it does not flow to the stockholdersit flows to the subscribers.

Mr. MYERS. I have been in the banking business for a few years. We always look at the earnings. That is one way you establish what something is worth. I do not know anything about the telephone business and I still do not.

Mr. LUCIER. This is not only true of ourselves, but of others. We make a judgment as to what the future returns can be-not what it has been historically. Small companies, for instance, if they are family owned corporations, they may conceivably have no earnings at all. They take it all out in salaries. If the owners are retiring-and, again, in a small company it may go from zero earnings to 10 or 15 per cent earnings, simply by the change of one thing. So that we apply what we know about the business. We estimate the economies and the savings that can follow and determine what this company can earn in the future. Obviously, for the commercially financed companies, United Utilities has, for instance, paid 40 times earnings-they are not buying it on its historic basis, but on the future.

Mr. MYERS. That is how you really make your money, by consolidation into a larger operation?

Mr. LUCIER. It is one of the elements, yes, sir.

Mr. MYERS. Then finances also might be beneficial?

Mr. LUCIER. The availability of funds.

Mr. MYERS. Refinancing, yes.

Thank you, that is all.

The CHAIRMAN. Mr. Zwach?

Mr. ZWACH. Lucier is French?

Mr. LUCIER. French Canadian.

Mr. ZWACH. How much of the REA 2-percent money do you have within your company?

Mr. LUCIER. $132 million.

Mr. ZWACH. What is the amount?

Mr. LUCIER. $132 million. I can give you the figure as of June 30. It is $132 million out of, roughly, $360 million, sir.

Mr. ZWACH. About one-third?

Mr. LUCIER. Yes, sir.

Mr. ZWACH. So that your blend interest rate has been reduced to the extent that 2-percent money is lower money than the money borrowed on the market?

Mr. LUCIER. Yes, sir.

Mr. ZWACH. I think the committee is interested in this to learn to what extent you serve urban centers. What part of your service is urban centers, and big centers?

Mr. LUCIER. Well, I do not know exactly what your definition of "urban centers" is.

Mr. ZWACH. Let us say municipalities, towns, cities.

Mr. LUCIER. Relatively few of our total exchanges exceed 5,000 telephones. Perhaps, roughly, we would be serving about 1,500 towns or have that many exchanges. I would say probably less than 25 of them would exceed 5,000 telephones in any one exchange.

Mr. ZWACH. What is the biggest exchange?

Mr. LUCIER. Probably De Kalb or Sycamore, Ill.

Mr. ZWACH. How big a community is that in population?

Mr. LUCIER. The population would be roughly 25,000 to 35,000. Mr. ZWACH. How many of your companies in these areas have 2percent money?

Mr. LUCIER. Well, in our larger exchanges we do not have any REA financing. It depends on the circumstances, but by and large

Mr. ZWACH. You perhaps have an overall interest plan?

Mr. LUCIER. No, sir, no, sir. Each one of these are separate companies, separate areas, and only on a combined balance sheet would there be any blending. Each company, from the standpoint of regulation and earnings, has to stand on its own.

Mr. ZWACH. Except that you would have an advantage over other companies that perhaps pay 5 percent for all of their borrowings? Mr. LUCIER. We do not have any advantage in Continental. We have purchased companies that have lower interest rates.

Mr. ZWACH. You mean that rate regulatory groups give the rate reduction to the customer?

Mr. LUCIER. Yes, sir. That is true.

Mr. ZWACH. Which helps you to pick up new growth?

Mr. LUCIER. By and large, because of the thinness of the areas where the REA financing has been used, the actual dollars are about the same. What you are saying is that it would have cost those customers a lot more had they not had available to them through the REA the 2-percent money.

Mr. ZWACH. I should say to you that I am on a farm. I have this telephone service. I also have the REA electric service. It is in our interest to see that all have this service. In the overall picture I would like to know how you might have an advantage over other companies. because of this low interest rate.

Mr. LUCIER. It is very difficult to make a generality, because the areas served are different. For instance, we are converting some 15 exchanges this year to 100 percent single-party service. All of these are areas that are strictly rural areas. And yet we are not using in those companies-and it is partly coincidence-any REA funds.

Mr. ZwACH. Are you doing that because of the regulatory requirement or REA requirements? Or are you doing that on your own? Mr. LUCIER. It has nothing to do with the REA. We are doing it because the more service we sell-and there is a demand for the service the more revenue we get, and the more money we make. Mr. ZWACH. And the 2-percent money makes it easier for you to do this?

Mr. LUCIER. Well, in this instance that I am talking about we have no 2-percent money. This is strictly conventional financing in those exchanges that we are converting to single-party service.

In the area of what we are talking about, remember that nine out of 10 of all of the companies sold are sold in the competitive atmosphere. We do not wander in, unfortunately for us, and buy a company without the owner's soliciting and seeking out other bids. Certainly, in the total number of telephone companies that we have purchased, I am sure that there are some exceptions where we have not had competitive bidding, but every time we buy a telephone company somebody else is also trying to buy it.

Mr. ZWACH. Somebody wants to sell, too.

Mr. LUCIER. Somebody wants to sell. A great number of people want to buy.

Mr. ZWACH. You do not think that this 2-percent setup gives you an undue advantage that you have for the one-third?

Mr. LUCIER. Two percent is there already. Any advantage or no advantage exists. And anyone bidding on the property has the same set of circumstances to bid on it. It happens that we bought mostly small companies, because we were small. We only started 6 years ago, and we cannot go out and buy something 10 times as big as we are. So we kind of made a specialty of small companies, because we were small. In spite of that, we have competition from other holding companies and other local companies and will continue to have competition, but it is a part of the game, and many companies that we bought did not have REA financing that were small companies. Anybody who owns a small company and wants to sell it is going to have a lot of people knocking at his door, whether or not he has REA financing. It is just not otherwise. We bought small companies because we were small.

Mr. ZWACH. Thank you, Mr. Lucier.

That is all, Mr. Chairman.

The CHAIRMAN. Mr. Jones?

Mr. JONES of Missouri. I have two questions. One, after you buy these companies have you ever had any REA loans made to Continental or to the companies that you buy?

Mr. LUCIER. Three, sir, which total about $2.5 million, out of, roughly, $132 million. That is not wholly correct, because we actually have not received the funds on one of those three loans that we made. That is 1.5 percent of the total money outstanding owed to the Government by the subsidiaries of Continental which were applied for after we