Comments on earnings.—From the condensed comparative statement of income and expenses submitted by the applicant, operations for the 10-months period ended August 31, 1947, show a loss of approximately $1,321,000. As shown by the analysis of surplus for that period, surplus account was charged with a write-off of account receivable considered to be of no value of $1,340,094.48 and further charge for adjustment in equipment account of $174,173.98. This loss was sustained on a gross income of approximately $2,306,000.

Operations for the fiscal year ended August 31, 1948, show a small profit of $17,000 after depreciation of approximately $820,000.

Operations for the first 5 months of the present fiscal year ended January 31, 1949, reflect a net profit of approximately $172,000 after depletion and depreciation of approximately $419,000.

As shown by the above statements, the earnings record of the company is not very satisfactory, however this is not of too much importance, since the proposed loan, if approved, would be more or less of a self-liquidating loan to be paid from assignment of oil and gas payments from the pledged properties.

We have not been furnished figures with reference to the operations of the other entities concerned, except the Petroleum Reserve Corp. which shows a loss of $56,667.77 for the 6-months period ended January 31, 1949.

The applicant has stated that, if necessary and required, statements covering the operations of Swiss Oil Co. and Midway Oils, Inc., would be submitted at a later date.

Credit and/or Dun & Bradstreet report.-Dun & Bradstreet report on applicant company dated March 18, 1949, received and as shown by said report, no rating is quoted.

The report indicates that this concern started business in 1946 and chartered as a Texas Corporation October 23, 1946, with capital stock of $100,000; no par value and $25,000 paid-in surplus.

The company was originally organized with Roger E. Morse as its president and John L. Crawford as secretary and treasurer; however, these officers were succeeded by the following officers and directors on March 1, 1949: Albert W. Smith, president; Morris A. Porter, secretary-treasurer; with the following directors: John P. Chase, Forrester A. Clark, Adelbert W. Smith, John Rauscher, and M. A. Porter.

As further shown by the Dun & Bradstreet report, complete financial details have not been made available, but it is stated that operations were believed to be

profitable and that indebtedness was confined to current trade obligations. Payment record shows as being prompt.

With reference to the other entities concerned in connection with this application, reference is made to the files for Dun & Bradstreet reports on those concerns and history of operations.

Management

Comments as to management.-A. W. Smith, who is president of the applicant company, is a native of Oklahoma, however, has made his residence in Boston, Mass., for a number of years and is president of A. W. Smith Co., Inc., Boston, which company is reported to be investment brokers.

Forrester A. Clark, director, was born in Boston in 1908, and is connected with H. C. Wainwright & Co., Ltd., as well as other concerns located in and around · Boston.

John P. Chase is also a director; is president and treasurer of John P. Chase, Inc., of Boston; a graduate of Harvard University and formerly employed by Lee Higginson & Co., former bankers and brokers of Boston.

William C. Chick, a director, is president of John H. Pray & Sons, Co. of Boston, and for the greater part of his life, was connected with the banking firm of Estabrook & Co., of Boston, until his father's death in 1929.

Morris A. Porter, a director, is also secretary and treasurer of the applicant company, and was reared in and around Dallas, Tex. He does not appear to have any other business connection. Porter is the only officer, director or stockholder drawing a salary and he receives $7,200 per year.

The only person owning stock in the applicant company is R. E. Morse, who is a partner in the firm of James F. Morse & Co., renderers, Boston, Mass. He holds 200 shares of the outstanding capital stock of the company.

Applicant company is a Texas corporation, which was chartered October 23, 1946, with H. W. Snowden as its president; C. P. Porter, vice president; Thomas G. Pollard, secretary; and A. W. Smith, treasurer. The original directorate consisted of Forrester A. Clark, J. Dudley Clark, Henry I. Harriman, A. W. Smith, H. W. Snowden, Gordon D. Harriman, and C. P. Porter.

In 1944 H. W. Snowden formed a partnership with Dudley Clark and Dudley Millikin, of Boston, and adopted the name of C. M. & S. Oil Co. This company proceeded until Henry I. Harriman, of Boston, entered the picture, at which time the aforesaid partnership was dissolved and the Mass-Tex Oil & Gas Co., Inc., a Massachusetts corporation with Harriman, Clark, Millikin, and Snowden as principal stockholders and operators, was incorporated. At a later date, Snowden, Clark, Millikin, and Harriman organized the Snowden Oil & Gas Co., Ltd., with Snowden acting as the sole general partner. In forming the Tex-Mass Petroleum Co. in 1946, substantially all of the assets of Mass-Tex Oil & Gas Co., Inc., and the partnership of Snowden Oil & Gas Co. were transferred to the applicant company.

It is proposed, should subject loan be favorably considered, that the common stock held by the applicant will be sold for perhaps $5 per share and likely will be distributed as follows: 10 percent of the stock to the investor group, 10 percent of the stock to the syndicate group, and the remaining 80 percent of the stock to be divided equally between H. W. Snowden, E. H. Hatcher, and A. W. Kincaid. It is contemplated that E. H. Hatcher, general counsel for National Cooperative Association, Topeka, Kans., and president of Midway Oils, Inc., will be the operating head of the company as consolidated. He has had wide and varied experience in the operation of all properties and is favorably known in oil and financial circles in the Midwest. He would be given a free hand in the selection of all personnel.

It is further proposed, if subject loan is approved, that the applicant would be willing for all of its common stock to be placed in a voting trust for the life of the RFC loan. It is proposed that the stock in trust would be held by Ben Wooten, vice president of the Republic National Bank of Dallas, who has a distinguished career in banking circles; A. W. Kincaid, chairman of the board of the Fourth National Bank, Wichita, Kans., who has had much experience in connection with all loans and the operation of all properties; and R. L. Thornton, chairman of the board of the Mercantile National Bank at Dallas, who has had wide and varied experience in such matters over a long period of time.

It is stated that this arrangement has previously been discussed with these three gentlemen, who have agreed to act in this capacity and who would elect the board of directors and approve all of the operating personnel with one of said gentlemen actively in control of all the finances of the company. Such voting

trust agreement would be drawn in a manner satisfactory to the RFC.

It is believed, therefore, that under this arrangement the operation of the business and the affairs of applicant company would be in capable and efficient hands. Employment.-Number of employees at present time, 94.

Increase in number of employees if loan is granted, will require additional help, but unable to estimate.

General comments.-Application for subject loan was filed for the original amount of $22,500,000, of which it was proposed that $2,271,135 be used to pay notes payable; $11,782,062 for payment of mortgages payable; $1,050,830 to pay accounts payable; $3,386,973 to be used for acquisition of working interest in other properties; and $4,000,000 for working-capital purposes in reconditioning present properties, drilling proven locations, and developing and proving new leases to be acquired.

In originally discussing the filing of an application for the proposed loan, the applicant, through its attorneys and other interested parties, was advised that in all probability the Corporation would look with disfavor on any application for loan, the purposes of which the major portion of the loan proceeds would be used to pay existing indebtedness and especially those debts that did not represent lien interests in the property proposed to be pledged as collateral. After the application was filed and after making a preliminary analysis, the applicant was still advised that in our opinion the loan would not be favorably considered as presented.

The interested parties therefore decided to get together and see if matters could not be worked out on a different basis than formerly presented; and, as a result of such conferences, the interested parties agreed that the amount of proceeds requested to repay existing indebtedness could be reduced by $2,163,027 and the amount required originally to purchase acquisition of properties could be reduced by $1,386,973, or a total reduction in the amount of loan requested by $3,550,000. This is covered under "Purposes of loan" and comments thereto. Although debtpayment requirements were reduced under the amended proposal, it will still require $12,950,000 to pay existing debts and $2,000,000 for acquisition of interest in other properties. The debt-payment ratio still remains approximately 68% percent of the entire proceeds of the loan, which is not in line with the general practice of the Corporation.

Although it is stated that the financial condition of the applicant and the other interested concerns is of a serious nature, and it is necessary to obtain a loan in order perhaps to prevent financial difficulties and probably foreclosure against the properties, we have received no concrete evidence showing the seriousness of probable foreclosure of the properties since all of the applicant's properties, as well as some of the properties of the other concerns, are pledged to secure the life insurance company loans and bank loans, and the life insurance company loans are not yet due, although it is stated that these companies are "unhappy" with their present loans.

Although the properties proposed to be pledged show an appraised value, or net working interest, of approximately $41,000,000, it is doubtful in my opinion that the collateral offered, based on its present condition of the properties, is adequate. This value is based on the substantial expenditure of the loan proceeds as well as future income in rehabilitating present producing properties with no assurance that the expenditure of such funds would restore the reserves to their normal values.

The applicant shows that the income from the properties will be sufficient to cover the rehabilitation of the present wells, drilling of new wells, and reduce the amount of the loan over a 5-year period to approximately $8,119,711. This in

come was based on a 3 months' operation of the properties the latter part of 1948; and apparently, as shown by the income for January 1949, a substantial reduction in net income of the properties would be shown. This reduction in income was due in a great measure to further restrictions imposed by proper authorities, since the present production of oil and gas is now far ahead of supply and demand.

Also, there have been several price cuts in crude oil, and if over-production continues it can reasonably be expected that further price reductions may become necessary, and unless the applicant is able through drilling of new production to substantially increase its income to offset any further price reductions it is my opinion that the proposed payment of 50 percent of the oil and gas sales from the properties would not reasonably assure repayment of the loan under 10 to 12 years. It is not thought advisable to consider the proposed loan on a longer term basis other than 5 to 7 years, and on this basis and from present incomes the applicant cannot confidently expect to repay subject loan in full.

It is further noted, as previously pointed out, that $2,000,000 of the proposed loan is to be used for the acquisition of interest in properties proposed to be consolidated with those of the applicant, and in this connection it is not believed advisable that RFC funds should be used for this purpose.

The debt-payment requirements as proposed, together with the acquisition of properties and the expenditure of most of the working capital for the drilling of additional wells, acquisition of leases, etc., might place the RFC in an unfavorable position of being in the oil business should unfavorable conditions prevail in the future. Futhermore, the amount of actual investment in business by those concerned is far out of proportion to the amount of loan requested, even though the properties are appraised at substantially twice the amount of debt or more.

In connection with the proposed loan, it was contemplated that there will in all probability be a change in the official family of the applicant company and it is stated that any such changes made in this connection will, of course, be subject to the prior approval of all parties concerned, as well as the RFC.

Favorable factors.-1. Although the affairs of the applicant company in the past indicate a serious lack of proper management, it is contemplated that if this loan is favorably considered, that the future operations of the business will be capably and efficiently managed by men of honesty, integrity, and business ability, and such management to be acceptable to all parties concerned and RFC. 2. Loan, if granted, will tend to promote the economic security of the country. 3. Number of employees at present is 94 and if loan is approved, additional employment will be needed, but applicant was unable to estimate the additional number that will be required.

Unfavorable factors.-1. The purposes for which the proceeds are to be used do not conform with the policies of the Corporation with respect to loans to business enterprises, inasmuch as too large a portion of the loan (approximately 68%1⁄2 percent is to be applied to repayment of existing indebtedness.

2. Properties offered as collateral security are widely scattered over six States which will tend to greatly increase the cost of servicing the properties and from a collateral standpoint would be rather unsatisfactory.

3. The loan value which could be assigned to the collateral tendered, is not, in my opinion, of sufficient amount to reasonably secure the loan requested, or for a loan of an amount which would meet applicant's requirements and it is doubtful that the assignment of one-half income from the properties would amortize the loan under 10 to 12 years and it is felt that the loan should not run for a longer period than 7 or 8 years in the extreme.

4. A substantial portion of the proceeds of the loan will benefit directly or indirectly present officers of applicant company, as well as former associates connected with the various companies.

Recommendation. It is recommended that this application for a direct loan of $18,950,000 to be made to Texmass Petroleum Co., Dallas, Tex., be declined for the following reasons:

1. The purposes for which the proceeds are to be used do not conform with the policies of the Corporation with respect to loans to business enterprises, inasmuch as too large a portion of the loan (approximately 681⁄2 percent is to be applied to repayment of existing indebtedness.

2. The loan value which could be assigned to the collateral tendered, is not, in my opinion, of sufficient amount to reasonably secure the loan requested, or for a loan of an amount which would meet the applicant's requirements.

C. E. HERRINGTON, Examiner.

AGENCY EXAMINER'S SUPPLEMENTAL REPORT ON APPLICATION FOR LOAN TO BUSINESS ENTERPRISE

Applicant: Texmass Petroleum Co., Mercantile Bank Building, Dallas, Tex. Agency No: LBE-2192.

Date of application: March 30, 1949.

Date of supplemental report: June 24, 1949.

The original application dated March 30, 1949, formally presented by this applicant, was on the basis of a request for a loan of $22,500,000, of which $18,500,000 was to be used for debt payment and acquisition of oil interests.

The original application was amended by letter, dated June 7, 1949, reducing the request to $18,950,000, of which $14,950,000 of the proceeds would be used for debt payment and acquisition of oil interests, thereby reducing the original request by $3,550,000. On the basis of the amended application, the undersigned examiner prepared a report, and as shown under "Purposes of loan, pages 3, 4, and 5 of the report, schedules as to the use of funds, were shown under the amended reduction in the amount of the loan requested. Under this amended schedule of payment was included an indebtedness of the applicant of $400,000 to the Second National Bank, Boston, Mass., of which the full amount was to be paid out of the proceeds of the loan; a note due by applicant to John P. Chase, trustee for certain investors, in the amount of $975,000, of which $500,000 was to be paid from loan proceeds; a note due by Petroleum Reserve Corporation to First National Bank in Dallas, Tex., for $250,000 of which $125,000 was to be paid from loan proceeds; a mortgage debt of $1,446,454 due by applicant to Republic Steel Corp., of which $1,000,000 was to be paid from loan proceeds; $2,000,000 would be assumed by the applicant for acquisition of oil interests of the investors group, of which $1,000,000 was to be paid from loan proceeds. The remaining portion of these debts, along with other obligations, were to be satisfied by applicant through the issuance of subordinated debentures designated as series A, B, C, and D with preferential rights in order of the series as set out in my original pro forma statement.

In the regular advisory committee meeting, held June 22, 1949, the committee and the agency manager decided that certain debt payments from proceeds of the loan should be excluded and that such debt-payment reductions be satisfied by the issuance of additional debentures, the following debt payments to be reduced:

By this reduction of debt payment, the loan requirements would, therefore, be reduced from $18,950,000 to $15,925,000, and the advisory committee and agency manager decided to recommend a loan for this amount.

In veiw of the decision of the advisory committee and agency manager to recommend a loan of $15,925,000, the undersigned examiner has prepared an amended pro forma statement giving effect to a loan of $15,925,000, of which $11,925,000 is to be used for debt payment and acquisition of interests and $4,000,000 for working-capital purposes.

On the basis of a loan of $15,925,000, as favorably recommended by the advisory committee and agency manager, the terms and conditions for a loan in that amount as shown by the attached Addenda A, Terms and Conditions, should apply. C. E. HERRINGTON, Examiner.