HASKINS & SELLS Certified Public Accountants 30 Broad Street, New York, May 24, 1909. MESSRS. J. P. MORGAN & COMPANY, 3 Broad Street, New York City. Gentlemen-In accordance with our arrangement with you we have made an examination of the books, records, and accounts of the following named companies: Hahne & Company, Newark, N. J. The Wm. Hengerer Company, Buffalo, N. Y. The Stewart Dry Goods Company, Louisville, Ky. The general purpose of our examination was to determine the value as of April 30, 1909, of the assets of these companies in respect to real estate, buildings, store fixtures, delivery equipment, and merchandise on hand, and to study and report on the organization. From our examination of the various properties and of the books and records relating thereto, and from the appraisals and estimates which have been furnished us by competent real estate dealers and engineers, we are of the opinion that the value of the real estate and buildings is conservatively stated. We are also of the opinion that the store fixtures and delivery equipment are conservatively valued. Regarding the merchandise, from the tests made by us in several departments at each of the stores we estimate that the trading stock is undervalued below wholesale cost from 2% to 4%, and that 3% is a conservative estimate of such undervaluations of the stock as a whole. It was noted that while two of the companies carry certain of their miscellaneous store supplies as assets, as a general rule all purchases of this nature, including fuel and feed, and in some cases insurance premiums and interest paid in advance, were charged to expenses as incurred. We are of the opinion that a detailed audit of the accounts of each of the companies would show assets of this nature on hand which are not reflected in the statement attached hereto, amounting in the aggregate to $75,000 or more. This amount, in connection with the excess of the cost of the merchandise on hand over the book cost heretofore referred to, makes total additional assets of approximately $200,000, which, in our opinion, might reasonably be added to the total of the assets shown by our statement to determine the real value of such assets. All of the companies have a very large good-will value which is not included in the statement of the assets. The loss from uncollectible accounts has been very low, averaging only a small fraction of one per cent. of the amount of the total sales. A uniform system of periodical reports is maintained in all of the department stores controlled by Mr. Claflin. These reports show the result of operation in each department of each store by days, weeks, months, seasons, etc., and its aid to the executives and consequent effect on the results of operation can scarcely be overestimated. Such a system enables comparisons to be made which are of the highest value in determining and locating specifically the primary sources of any variation in profit or loss. A system of reports is also maintained in each store which shows at once the nature and amount in detail of all slow-moving stock in each department. It appeared to us that these reports were receiving consideration and attention by the executives, and only about 3% of slow-moving stock existed in the stores examined. The management and organization of the business throughout impressed us as being capable and efficient, with a spirit of earnest co-operation existing between the general officers, the store managers and all other employees. We were particularly impressed with the interest taken by the managers of the different stores in the success of the business as a whole, and the prosperity of their own store in particular. In the various companies controlled by Mr. Claflin, the general supervising organization consists of Mr. Claflin, at its head, Mr. Louis Stewart, his principal associate and adviser, Mr. John C. Eames, Vice-President of The H. B. Claflin Company, and about a dozen of the most able executives among the store managers. These gentlemen comprise a board of council which considers and decides upon all important questions involving policy, management and operation of the various stores controlled. Few organizations possess so capable a managing force or give so great attention to the training of their employees, with a view to their future usefulness. This policy assures in large measure the continuance of successful operation of the business. The system of checks and reports maintained throughout is thorough and complete, and the reports are advantageously used in the administration of the business. The results of each store and each department therein are compared with the results of the other stores and the same departments in such stores. The employees who show themselves most efficient are moved forward from department to de partment, and from store to store, and the inefficient are relieved. The organization is strengthened by this system and a spirit of interest among the employees is developed. The men charged with the administration in the various stores impress us as being broad-minded business men, capable of successfully assuming larger responsibilities. Yours truly, HASKINS & SELLS, Certified Public Accountants. $10,000,000 JONES & LAUGHLIN STEEL COMPANY FIRST MORTGAGE THIRTY-YEAR SINKING FUND 5% GOLD BONDS1 Dated May 1, 1909. Due May 1, 1939. Authorized issue $30,000,000. Issued $25,000,000. Interest payable May 1st and November 1st at First Trust and Savings A letter from the President of the Company on file at our office emphasizes the following statements: 1. Secured by an absolute first mortgage on all the property now owned by the Company and additional property acquired by these bonds. 2. The property consists of real estate, furnaces, steel mills, including the new modern plant of the Company at Aliquippa, which is recognized as one of the most modern, convenient and economical plants to be found in the country. 3. Through its subsidiary companies, whose stocks are pledged to secure these bonds, it controls ore lands, coal lands and limestone property sufficient to supply the Company many years beyond the term of the bonds. 4. During the last two years the Company has invested twenty million dollars in the new plant and additions and betterments to its former property. 5. The Company is required to keep net quick assets of eight million dollars as long as a like amount of bonds remain outstanding. 6. A sinking fund is provided which will approximately retire the bonds at maturity. 7. The average yearly earnings for the last ten years were more than four times the interest payment on the outstanding bonds. 1 Bond house circular, issued by Blair & Co.. announcing the Jones & Laughlin Steel Co. Bonds. See Jones & Laughlin Steel Co. Mortgage, pp. 183 et seq. Having sold a large part of these bonds, the undersigned offer the remainder at 102 and accrued interest. We regard these bonds a desirable investment. FIRST TRUST & SAVINGS BANK Gentlemen: Chicago BLAIR & CO. THE JONES & LAUGHLIN STEEL COMPANY Pittsburgh, June 16, 1911 Referring to the $10,000,000.00, 5% First Mortgage Bonds of this Company recently purchased by you, these bonds are part of an authorized issue of $30,000,000.00, dated May 1, 1909, of which $25,000,000.00 has been issued, and $24,487,000.00 are outstanding, the balance having been retired by the operation of the sinking fund. They are secured by an absolute first mortgage on all the property of the Company now owned, and on additional property which may hereafter be acquired by the proceeds of these bonds. They are further secured by the pledge of bonds and stocks of subsidiary companies, whose property consists of coal mines, ore lands and railways; all used in connection with this business in a general way. The security behind these bonds is: First: The real estate, furnaces, steel mills, finishing mills, plants of various kinds, located largely in the City of Pittsburgh, and the new and modern plant of the Company at Aliquippa, twenty miles from Pittsburgh, which plant has been constructed by the Company during the last three years, and is recognized as one of the most complete, modern, convenient and econom ical plants to be found in this country. Second: Through its subsidiary companies it controls ore lands, coal lands and limestone properties in fee or under lease, containing sufficient ore, coal and limestone to supply the Company's furnaces, at their present capacity, for many years beyond the term of these bonds. During the last two years the Company has invested, approximately, twenty million dollars in new plants or additions or betterments to its former property, and the proceeds of the ten million dollars of bonds sold you will be largely used to reimburse the Company for such expenditures, and when their proceeds are absorbed, will leave the Company practically free of debt other than these first mortgage bonds. Among the covenants of this trust deed, I might mention that the Company is required to, at all times while an equal amount of their bonds is outstanding, have net quick assets to the amount of eight million dollars, and further, a sinking fund is provided, equal yearly to one-fifteenth of the amount of bonds outstanding, which sinking fund is applied to the payment of interest on the outstanding bonds and to the retirement of principal. The sinking fund, it is figured, will approximately retire the bonds at their maturity. The Audit Company of New York, before the investment of the twenty million dollars above referred to, made a careful examination of the property, from which it is safe to say that the net value of our property is over three times the bonded debt. It has been the policy of the Company, for many |