Front Matter

CFA Institute

Front MatterSource: Financial Analysts Journal, Vol. 30, No. 2 (Mar. - Apr., 1974), pp. 1-87Published by: CFA InstituteStable URL: http://www.jstor.org/stable/4529666 .

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Finacial 18 Let's not blame the institutions 23 An inquiry into trading in Levitz 30 GAAP and the life insurance companies 38 An integrated investment system 47 The impact of lease capitalization 53 Institutions and market liquidity 60 What investors need to know about Japan 68 An introduction to risk and return 93 FAF Newsletter

The magazine for investment management. Vol. 30, No. 2 March/April 1974 Price $3.00 per copy



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Journal at a glance MARCH / APRIL 1974

LET'S NOT BLAME THE INSTITUTIONS Roger F. Murray 18 In recent months institutions have found themselves accused of disrupting our traditional auction markets and frightening away individual investors. The fact is, however, that market activity of individuals doubled in share volume and increased 50 per cent in dollar volume between 1961 and 1971. The solution to the increasing importance of institutions is not a burgeoning auction market, but better dealer markets and better integration of dealer and auction markets. Romanticizing the role of the individual investor is no substitute for providing him with responsible guidance.

AN INQUIRY INTO TRADING IN LEVITZ David Clurman 23 The Director of the New York State Bureau of Securities and Public Financing reports to the Attorney General on certain activities of investment professionals "considered very detrimental to the public interest."

GAAP AND THE LIFE INSURANCE COMPANIES Abraham J. Briloff 30 Thanks to the adoption in December of '72 of the AICPA's audit guide for stock life insurance companies, and to the SEC's September '73 notice mandating the use of GAAP in preparing public statements, the 1973 annual reports of the stock life insurance companies will have a new look. Unfortunately, the new look conceals some booby traps waiting for the unsuspecting investor.

AN INTEGRATED INVESTMENT SYSTEM Edmund A. Mennis 38 The institutional portfolio manager requires projections of the economic outlook, interest rates and the general level of corporate profits and earnings multiples, as well as industry and company analyses. He also requires policy decisions on such matters as the investment objectives for his portfolio. The author describes an integrated system for supplying the portfolio manager with his requirements.

THE IMPACT OF LEASE CAPITALIZATION Richard D. Gritta 47 The domestic airline industry demonstrates the importance of long-term lease data to the financial analyst: when aircraft are capitalized, debt-to-net worth ratios increase by more than 50 cents per dollar of common equity.

INSTITUTIONS AND MARKET LIQUIDITY Marvin Rosenberg 53 An index constructed by the author confirms the widely-held impression that institutions tend to concentrate heavily in shares of large corporations, presumably because they seek liquidity. His calculations show, however, that institutions hold many times the annual trading volume of a number of large corporations. How will the prices of such corporations behave when the institutions holding their shares revise their investment opinions simultaneously?

2 LO FINANCIAL ANALYSTS JOURNAL / MARCH-APRIL 1974



WHAT INVESTORS NEED TO KNOW ABOUT JAPAN Barrett, Price and Gehrke 60

There are three reasons why reporting of Japanese earnings tends to be more conservative than repcrting of U.S. earnings: the tax law, which essentially requires that income reported to investors equal that reported to tax authorities; the use of a variety of reserve accounts, deductible under tax law, which are manipulated in accordance with public policy purposes; and a widespread preference for parent-company, as opposed to consolidated, reporting.

AN INTRODUCTION TO RISK AND RETURN Modigliani and Pogue 68

Portfolio theory deals with the selection of optimum portfolios by risk- averse investors. Capital markets theory deals with the implications for security prices of their selection decisions. Together, these theories provide a framework for measuring investment risk, for relating risk to expected returns, and for measuring performance of managed portfolios.

SECURITIES LAW AND REGULATION John G. Gillis 12

FAF NEWSLETTER 93

Letters to the Editor 8

Efficient Markets and Fundamental Analysis J.L.T. 14

Book Reviews Robert 1. Cummin 91

REPRINTS

Reprints of articles published in this and previous issues of the Journal are available at the following schedule of prices: A single copy of any reprint is $1.25. For additional copies add per copy:

1 to 4 pages .. $0.15 5 to 8 pages ............. ..... 0.25 9 to 16 pages ............ . 0.50

Reprints are prepared two weeks after publication; thereafter supplies are limited.

Please address your request to: Reprint Dept., Financial Analysts Journal 219 East 42nd Street, New York, N. Y. 10017. Telephone (212) 687-3882.

FINANCIAL ANALYSTS JOURNAL / MARCH-APRIL 1974 O 3



Engineers for the International Monetary Fund headquarters calculate savings of $45,156 each year-27%-on power and fuel oil bills with a computer-automated building control system by Robertshaw. Economies from this first commercial closed-loop computer- automated installation paid for the system in 25 months. A second Robertshaw system was installed in 1973 for IMF's newest structure.

Automatic control to conserve energy is our business. Other recent Robertshaw innova- tions: In Appliances-new gas range igniter eliminates pilot lights which can burn 40% or more of all gas used by home ranges. In Sewage Treatment-measuring devices which can reduce power requirements up to 28% for waste water treatment.

Robertshaw is in the top 100 companies for new patents, year after year. That's why we cover more controls markets than any other company. That's why we're growing.

* National Bureau of Standards report

The Energy Control Company.

ROBERTSHAW CONTROLS COMPANY*-. - Executive Offices. 1701 Byrd Avenue P. O. Box 26544, Richmond, Virginia 23261



FINANCIAL ANALYSTS JOURNALM Editor Jack L. Treynor

Associate Editors Fischer Black Robert R. Glauber Robert D. Milne, C.F.A. University of Chicago Harvard Business School Boyd, Watterson & Co. Chicago Boston Cleveland

Frank E. Block, C.F.A. Walter R. Good, C.F.A. Stanley A. Nabi, C.F.A. Model, Roland & Co., Inc. Lionel D. Edie & Co. Lazard Freres & Co. New York New York New York

Richard A. Brealey David L. Grove Stephen B. Packer Graduate School of Business International Business Machines Mobil Oil Corporation London New York New York

Glenelg P. Caterer, C.F.A. Godfrey G. Howard Gordon Pye New York The Boston Company, Inc. Standard Oil of California

James F. Cole Boston San Francisco Guardian Growth Fund Limited Irving Kahn, C.F.A. Beryl W. Sprinkel, C.F.A. Toronto Abraham & Co. Harris Trust and Savings Bank

Robert I. Cummin New York Chicago The Fidelity Bank Frank C. McLaughlin, C.F.A. Adolphe J. Warner, C.F.A. Philadelphia Fleming Berger Associates, Inc. Smith, Barney & Company, Inc.

M. Harvey Earp, C.F.A. New York New York Brittany Capital Corporation Edmund A. Mennis, C.F.A. Frank T. Weston, CPA Dallas, Texas Security Pacific National Bank Arthur Young & Company

Charles D. Ellis, C.F.A. Los Angeles New York Greenwich Research Associates Anthony H. Meyer Arthur Zeikel Greenwich Drexel Burnham & Co., Inc. Standard & Poor's/InterCapital

John Fountain New York New York White, Weld & Co., Incorporated New York

Journal Staff Production Manager / Irving Stachel Editorial Assistant / Mary C. Goodbody Circulation Manager / Mildred M. Hermann

Advertising Representative Sales Arm, Inc., 31 Union Sq. West New York, N. Y. 10003 / (212) 989-6780 Peter F. Besheer / National Sales

Vol. 30, No. 2 : March IApril 1974

FINANCIAL ANALYSTS JOURNAL M is published bi-monthly by REPRINTS of articles published in The Financial Analysts Federation, a non-profit corporation devoted the Journal are available at a to the advancement of investment management and security analysis. nominal cost. Payment must Neither the Federation nor its publication's editorial staff is responsible accompany orders of $10 or less. for facts or opinions contained in articles therein. Copyright C by Address requests to Reprint The Financial Analysts Federation, 1974. Printed in U. S. A. Department, FAJ. Articles may be reprinted only by permission of the Editor. Indexed in the Business Periodicals Index. Second class postage paid at the Post Office at New York, N. Y, and additional offices. SUBSCRIPTIONS. Domestic: one-year $16, two-year $28, three- year $36, single copy (prepaid only) $3.00; Foreign: one-year $18, two-year $30, three-year $38, single copy (prepaid only) $3.50; Educational Institutions: 10 or more annual subscriptions to the same address $8 each. Copies will be airmailed to foreign subscribers J at their request. They will be required, however, to prepay airmail- \ o postage (currently $3.57 per copy to Europe and Japan). c L>^t CHANGE OF ADDRESS. Send old label and new address with Zip Code six weeks before moving.

Address all communications to: 219 East 42nd Street, New York, N. Y. 10017 / (212) 687-3882





Natural gas is in the Gulf. And our giant gathering system

will bring it home. We have requested It's going to take three

approval from the Federal years. And it's going to be Power Commission to extend expensive. The estimated cost our Stingray pipeline. By is about $150 million. adding a 300 mile gathering But it will eventually network which will reach handle one billion cubic feet of 120,000 acres of leaseholds, gas a day to help keep our at depths of up to 365 feet. customers supplied.

All this because the Gulf The Stingray project is of Mexico represents our best an answer. new source of natural gas. Gas But it's not the we need to meet an ever only answer. To keep our increasing demand. We're commitment to our undertaking this project in customers we must continue partnership with a subsidiary to search for new sources and of Panhandle Eastern Pipeline supplies of natural gas. Company. It's important to all of us.

Peoples Gas Company The Peoples Gas Light and Coke Company

North Shore Gas Company Natural Gas Pipeline Company of America

Harper Oil Company



We are pleased to make the following statement:

Consolidated Balance Sheets as of December 31

ASSETS 1973 1972 Cash and due from banks (including $1,461,965,800 in 1973, and

$968,639,400 in 1972, due from banks at interest) ............ . $2,411,118,300 $1,863,174,300

Investment securities: U.S. Government securities . . . . . . . . . . . . . . . . . . . . . . . . . 142,470,400 222,388,300 State and municipal securities ......... . . . . . . . . . . . . . . . . 470,791,800 360,583,600 Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,875,700 133,631,800

Total investment securities ....................... . 758,137,900 716,603,700 Trading account securities (valued at lower of cost or market) . . . . . . . . 217,789,600 118,244,300

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,047,800,400 2,962,717,800

Direct lease financing and equipment on lease . . . . . . . . . . . . . . . . . . 84,450,000 80,210,500 Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,658,000 309,755,000 Customers' liability for acceptances ........ . . . . . . . . . . . . . . . . 78,536,800 60,596,100 Premises and equipment ........... . .. . . .. . .. . . .. . . .. . . 110,804,300 108,067,400 Accrued interest receivable ............................. . 91,816,400 46,750,200 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,593,500 39,319,300 TOTAL ASSETS .................................. . $8,004,705,200 $6,305,438,600

LIABILITIES & STOCKHOLDERS' EQUITY Deposits:

Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,976,442,000 $2,029,608,200 Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,412,800 276,940,900 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,494,579,100 762,497,100 Overseas offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,508,374,900 1,554,829,400

Total deposits ......... . . . . . . . . . . . . . . . . . . . . . . . $6,179,808,800 $4,623,875,600 Federal funds purchased and securities sold

under repurchase agreement ......... . . . . . . . . . . . . . . . . . 584,446,000 554,434,100 Other funds borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,201,300 245,434,200 Acceptances executed less those held for investment ...... ......... 79,610,800 61,831,600 Accrued and deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 35,151,800 23,028,700 Accrued expenses and dividends payable . . . . . . . . . . . . . . . . . . . . . 128,213,600 48,582,400 Unearned income ............. .. .. .. .. .. .. .. .. .. . .. . 27,802,500 14,285,500 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,736,100 71,405,000 Notes payable ..................................... . 200,000,000 200,000,000 TOTAL LIABILITIES ............................... . $7,512,970,900 $5,842,877,100

Reserve for possible loan losses .......................... . 58,780,900 55,755,900

Stockholders' Equity Common stock ............ .. .. .. . .. .. . .. .. .. . .. . 75,468,400 75,000,000 Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,229,600 175,000,000 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181,255,400 156,805,600

TOTAL STOCKHOLDERS' EQUITY ........ . . . . . . . . . . . . . 432,953,400 406,805,600 TOTAL LIABILITIES, RESERVE & STOCKHOLDERS' EQUITY.. $8,004,705,200 $6,305,438,600

Principal subsidiary of First National Boston Corporation is The First National Bank of Boston. These consolidated statements include all offices, overseas branches, and majority owned subsidiaries of the Bank and the Corporation.

FIRST NATIONAL BOSTON CORPORATION The First National Bank of Boston * Bank of Boston International * Boston Overseas Financial Corp. * Cobbs Allen & Hall Mortgage Co. * FNB Financial Co. * FNB Services Inc. * First Capital Corp. of Boston * First National Boston Clearance Corp. * First Venture Capital Corp. of Boston * Firstbank Financial Corp. * Massachusetts Tankers, Inc.



Bell System offers you the services your business needs.

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Thsi us atoftewde ait eofr ___~~~T ics tetosnso osil obntosaaial oyu ~ T I ~~~calyuBelSse Commniaon Coslat t TTadyu

Bell Copn,w nwwhtyu-uiesned.W eryu



evaluation in the "Eighth Biennial Study report, the pluses and the negatives Conducted Among Financial Analysts (yes, there were a few), write First in 1973" by a major research organiza- Pennsylvania Corporation at P.O. Box tion. We've never made the results of 13570 Philadelphia, Pa. 19101. Or call this continuing research public before. 215-786-8700.

First Pennsylvania Corporation



I . ~ ~~~~ a

the1 plastics indlustr

Plastics are the rags to riches i _ < _ material of our century. Im-

mediately following World 4t War 11, the total U.S. con-

sumption of all types of plastics was little more than one

Z _i billion pounds. And plastics had a bad image. Consumers and industry frequently cate- gorized plastics as a cheap,

RICHARD A. RILEY, President low quality substitute for more and Chief Executive Officer desirable materials. Today,

TheFirestoneTire&RubberCo. the U.S. consumes nearly 27 billion pounds of plastics that are generally recog- nized as primary manufacturing materials possessing unique, highly specialized qualities unobtainable in any other form.

Few manufactured products today are not de- pendent on plastic technology - from the family car to NASA's Skylab. In medicine, plastics are essential to everything from the instant bandage for family first aid to open heart surgery.

Plastics are doing the job not because they are cheaper, but because they are better. As a result, the industry is enjoying a phenomenal growth rate as the chart below shows.

The future for plastics is very promising in a number of key industries and consumer markets.

PLASTICS INDUSTRY GROWTH VS. TOTAL U.S. MANUFACTURING

200 Indexes: 1967=j00

1 75

150 -Plastics Industry

125 - 100 U.S. Manufacturing- 7E

ource: Federal Reserve Board' 0 I _ _ _

56 58 60 62 64 66 67 68 70 72

BUILDING AND CONSTRUCTION -A BIGGER ROLE FOR PLASTICS

In commercial, home and industrial construction, applications for durable, economic, structurally superior plastics are increasing. By 1980, the demand for plastic pipe and conduit alone will con- sume an estimated 4.8 billion pounds.

Wall coverings and siding will increasingly be made of colorful, weather-resistant vinyl plastic.

Energy conservation requirements for more and better insulation means continued growth for urethane foam.

Floor coverings will continue to rely heavily on vinyl, urethane and synthetic rubber for plastic tile, sheet goods, and foam-backed carpeting. And, increasingly, imprinted woodgrained vinyl films will be used to surface moldings, trim and cabinetry.

More and more plastics will be used in all types of building and construction and vinyl is one of the fastest growing.

AUTOMOTIVE -THE CURVE CONTINUES TO CLIMB

Plastics are making it big in automobiles and trucks as manufacturers search for materials to provide greater safety, pollution control, lightweight structural strength and corrosion resistance. Major items are urethane foam for interior padding and seating, for energy absorbing bumpers and for interior and external impact protection; Vinyl for upholstery and ABS, Nylon and other high impact strength, thermally resistant plastics for a wide range of structural and mechanical parts. In 1960, the average U.S. car contained 21 pounds of plastics. Today, it's 130 pounds; and by 1980 that figure will rise to 300 pounds.

MORE GROWTH IN HOUSEWARES, FURNITURE AND APPLIANCES

The American homeowner is one of the world's biggest users of plastics and is using more each year. In the past year, houseware and appliance items manufactured in this country required nearly two billion pounds of plastics, much of it high impact polypropylene and ABS.

Most furniture produced for the U.S. market utilizes plastic materials in great quantity, particular- ly urethane foam for cushioning and vinyl for a variety of upholstery materials. In 1972 the furniture industry consumed a billion pounds of plastics. By 1980 that figure probably will be over 21/2 billion pounds.

SPECIAL PROBLEMS -OPPORTUNITIES Increasing concern for the problems of con-

sumer safety, ecology, energy conservation and en- vironment create special opportunities for producers of plastics. In response to these opportunities, resins and compounds are being developed that are par- ticularly flame retardant, energy absorbing, recy- clable and bio-degradable and easily molded or extruded into larger sections and shapes with shorter cure cycles. Assuming that petroleum raw material will be available in sufficient quantity, the future for growth in plastics is assured.



the plastics industry

NOW

Firestone -a major supplier of plastics. Firestone's dollar volume in plastics alone, if sepa- rated from the parent corporation, would position our plastics operations among the country's largest industrial concerns. Firestone plants in 13 U.S. cities produce vinyl, nylon, urethane foam and a full range of synthetic rubber polymers.

Vinyl-Firestone is now one of the world's largest producers. For 25 years, Firestone Plastics Company has produced vinyl and only vinyl, thus accumulating the experience and manufacturing capability that today places Firestone in position to capitalize on the expanding vinyl market.

Firestone is one of the largest suppliers of vinyl resins and compounds for the manufacture of vinyl floor coverings, rigid pipe, footwear, wire and cable insulation, non-woven fabric, coatings, containers and closures and scores of other items. Firestone alsa is a major supplier of vinyl film and sheeting used in the manufacture of luggage, conventional and pressure sensitive wall coverings, furniture, automotive interiors, woodgrain panels and protective coverings for industrial and consumer markets.

Firestone's vinyl capacity expands. FPC Plants in Perryville, Md. and Pottstown, Pa. now manufacture almost half a billion pounds of vinyl resins and compounds a year. That figure will increase as new capacity, now under construction, comes on streamn. More than 75 million yards of vinyl film and sheeting annually flow from FPC facilities in Pottstown; West Caldwell, N.J. and Salisbury, Md.

'U

Firestone Foam Products-the market grows. The growing use of urethane foam for insulation, impact protection, deep seat cushioning in automotive and furniture applications, carpet backing, and other home and industrial jobs has increased foam demand an average of 12% annually. Firestone is helping meet this demand with plants in Milan, Tenn., Corry, Pa., Elkhart, Ind., Conover, N.C. and Thomasville, Ga.

New developments, new opportunities. Firestone has developed a new process by which small manufacturers using Firestone materials can produce ABS right in their own plants easily and eco- nomically. Also, Firestone plastic manufactured by the continuous rather than batch process should be ready by 1974. And we're closing in on ways to shorten cure cycles with electron beam radiation.

As we see it, plastics holds one of the brightest promises of future growth at Firestone.

For a copy of our annual report, write to Firestone Dept. B, 1200 Firestone Parkway, Akron, Ohio 4431 7



An aggressive team of professionals who know the Florida market and its banking needs. Technical experts drawn from major banking centers of the country to balance and broaden this team. Strength of management is a major part of the First at Orlando story. One reason earnings per share have increased an approximate average of 20% for the past five years. For the whole story, write our Chairman of the Executive Committee, Billy Dial.

First at Orlando Corporation Write to: William H. IDial, First at Orlando Corporation,

MEMBERS FDIC P.O. Box 2848- F2, Orlando, F'la. 32802. Or call: 305-849-4585.



Here we ares UTAH

in Ihe center ol an area lick in 1mw lulplhur Emil ini Uthur EmirIw "u~rcs. . .

...And our shareowners, at their last annual meeting, approved an amendment to our Certificate of Organization to expand and clarify the company's right to engage in the business of obtaining, using, and selling a variety of fuels and energy sources.

With superior resources, and fewer problems providing power for a growing area, we are a unique utility offering an attractive investment opportunity.

_luo For more information,

l e

~write Mr. D. L. Broussard, Vice President and Treasurer,

t L ~Dept. 112, P.O. Box 899, Salt Lake City, Utah 84110.



I I ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- --

Areport about how U.S. Steel is uncovering new markets.)

Suppose a gasoline tank manufacturer is looking for a way to reduce emissions to zero and increase impact safety in the bargain. Suppose an appliance maker wants to debug a new design for vibration and noise before going to the expense of building a prototype. Suppose an apartment builder wants to cut his framing costs. Any one of them can find an answer by calling U.S. Steel's Marketing Department.

Those are just three of some 150 marketing programs in the works at U.S. Steel, each of which is designed to uncover a new market for steel, or expand an existing market.

Upholstered furniture, for example. There's an enormous market out there for steel framing that only U.S. Steel is doing something about. The furniture industry itself is growing and manufacturers are having their troubles keeping up with demand. Wood prices have risen, and steel framing could be the biggest innovation in upholstered furniture technology since the switch from the tack to the staple.

For one thing, steel is eminently engineer- able, which is a fancy way of saying there's no better material for mass production. It is structurally sounder than wood because it can't warp, chip, or crack, and puts more strength to work in thinner sections. For fabrication and assembly, it offers an "erector set" simplicity including a commonality of parts that is impossible with wood.

Thafs the way U.S. Steel marketing people see it, and the furniture manufacturers who see

promise in steel framing are a "Who's Who" of the industry. Projects in various stages of develop- ment include convertible sofas, recliner chairs, stationary furniture, and all-steel box springs... and U.S. Steel started it.

What ingredients does U.S. Steel marketing add, other than the idea in the first place? The first step is a close look at a manufacturer's production line and costs. Then come design and engineering concepts from U.S. Steel for a framing system combining parts reduction with aesthetics, fol- lowed by prototype construction of a volume leader model.

Finally, the toughest thing of all: a production facilities analysis which is an operational plan from "how the steel comes in" through finished assembly, including production line layout, ma- chinery specifications, handling, stocking, and in some cases, decentralized fabrication recom- mendations.

Then comes the marketplace, and whafs in it for whom? For the furniture manufacturer, its a way to be more productive. For the consumer, ifs a more reliable piece of furniture. For U.S. Steel, ifts a new market.

Helping to create products that offer the consumer greater dollar-for-dollar value is another way U.S. Steel is contributing to increased productivity. United States Steel, Pittsburgh, Pa. 15230.

) We're involved.

TRAD A RE



Bendix Update

Autolite addition fits Bendix bausiness plans. "The world," said Wordsworth, "is too much with us." Well, that may have been true for the poet, but it's not true for us. Our impression is rather that the world is not with us enough.

By us, I mean The Bendix Corporation. As chief executive officer of one of the world's great business institutions, I share the feeling of most chief executive officers, namely that the world too little notes nor long remembers what we do. In the case of other companies, this is regrettable, but-for me, at least -understandable. In the case of Bendix, it's down- right unjust.

Why? Because in the past few years a dynamic new Bendix has been emerging. Bendix in 1973 employed 87,700 people in 20 countries to provide $2.23 billion worth of excellent products and services. Our financial results for the past 1 2 consecutive quarters have bettered those of the corresponding period of the preceding year.

Results like these have prompted these Updates, as we call them, on what is happening in the world of Bendix. This is the first of a series. It is devoted to our acquisition of the Autolite spark plug plant and trademark, which was formally completed on Novem- ber 30, 1 973.

Autolite, as you may have heard, was owned by the Ford Motor Company. From its plant in Fostoria, Ohio, it supplied much of Ford's North American original equipment and aftermarket needs-some 200 million plugs annually. When Ford complied with a court order to divest, they looked not merely for a high bidder, but also for a supplier of proven com- petence, a supplier on whom they could rely. So they turned to Bendix.

This is what pleases us most. To be sure, we feel no pain at the prospect of

adding $40 million worth of profitable sales to our excellent automotive parts business. We think the $27 million cash purchase price was fair. And we are happy to have a contract to supply 100 percent of Ford's U.S. original equipment and aftermarket requirements, as well as Ford's Canadian original equipment requirements, for at least five years.

This will give us a leg up as we fine tune our engineering and marketing to make Bendix Autolite the best-if not the biggest-manufacturer of spark plugs in the automotive world.

The worldwide aftermarket business is not de- pendent on the number of new cars built each year. It tends, in fact, to grow more steadily than new car production, about 7.5 percent annually in this country. Our domestic aftermarket business has been growing

at about 10.8 percent annually. And overseas our growth rate has been even more dramatic.

Already about one-third of our worldwide automotive business-that is, one-third of more than $1 billion in fiscal 1 973-is in the aftermarket, the most profitable segment of the business. Autolite, of course, will increase the percentage.

Certainly, the energy crisis will reduce driver mileage and new car production in 1 974, but we will continue to see an increased number of vehicles on the streets and highways of the world-all of which require replacement parts sooner or later-and Bendix will be there.

W. Michael Blumenthal Chairman, President and Chief Executive Officer

ANNUAL EARNINGS PER SHARE

$3.37

EARNINGS I I EARNINGS |$32.3 | $42.1 1 $56.0 | $69.3_] (Millions) I I I

Bendix is moving up. Sales and earnings for the fiscal year ended September 30, 1973, made it the best year in our history. Figures exclude a non-recurring credit and extraordinary items.

Bend



Northern Natural Gas Company, Home Office, Omaha, Nebraska, Divisions and Subsidiaries: Consolidated Natural Gas Limited, Calgary, Alberta, Canada;

Consolidated Pipe Lines Company, Calgary, Alberta, Canada; Weskem of Canada, Ltd., Calgary, Alberta, Canada; Consolidated Gathering System Limited,

Calgary, Alberta, Canada; Norlands Petroleums Limited, Calgary, Alberta, Canada; Energy Systems Division, Omaha, Nebraska; Hydrocarbon Transportation, Inc., Omaha, Nebraska; Northern Gas Products Company, Omaha, Nebraska; Northern Helex Company, Omaha, Nebraska; Northern Propane Gas Company,

Minneapolis, Minnesota; Northern Systems Company, Omaha, Nebraska; Peoples Natural Gas Division, Omaha, Nebraska; Protane Corporation, Minneapolis, Minnesota, Dominican Republic, Jamaica, Guatemala, Venezuela, Puerto Rico; United Petroleum Gas Company, Minneapolis, Minnesota, Weskem Division, Amarillo, Texas; Northern Petrochemical Company, Des Plaines, Illinois, Polymers Division, Des Plaines, Illinois, Automotive Chemicals Division, Des Plaines, Illinois, Industrial Chemicals Division, Des Plaines, Illinois, Canton Containers Division, Canton, Ohio, Marine Plastics Division, Clinton, Massachusetts, National

Poly Products Division. Mankato. Minnesota:

were also a

Liquefied propane is imported by Northern's UPG, Inc., and sold to residential and commercial- industrial customers by another of our subsidiaries, Northern Propane Gas Company. UPG's anticipated sales for 1974 show an increase of 9% with a com- parable increase expected in the volume imported.

Propane importation and sales -just one example of the wide range of Northern's services and products. Finding new and better

uses for natural gas products and by-products has led us into plastics, packaging, color resins, synthetic rubber, printers' ink and much more to help make life a little bit better.

You see, for many years we were just a natural gas pipeline company. Then we began looking at additional opportunities for growth potential. Today, by squeezing the most we can from the natural gas available, we're providing service far beyond what

you'd expect from a "traditional" gas pipeline company. And we continue to develop in areas where major growth is possible. It's good for us, our investors and customers.

Yes, we still do what you'd expect a gas company to do. Like serving 1.5 million customers through 76 utilities in eight states, maintaining over 31,000 miles of natural gas pipeline, and continuing our constant search for new gas reserves.

NI orthern The gas company that's something else.



With a world-wide shortage of wood fiber in the offing, it would seem any traditional forest products company ought to be buying up all the timberland it can afford. In fact, many companies right now see complete self-sufficiency as the ideal.

That's fine. But at Louisiana-Pacific, we are fiber merchandisers who don't want to own one more tree than is necessary. At today's stumpage prices, we're not about to make speculative purchases that may tie up our capital, subject the company to rapidly increasing taxes and limit our flexibility to move quickly and surely in any direction

"You don't have So we are meeting our raw material needs by balancing to o w~vn the tree fee timber ownership in a 40 percent self-sufficiency range,

then controlling another 15 to 20 percent through long term lq *L . cutting contracts, timber deeds and barter arrangements. to 0 itse tu 61 rn This 55-60 percent controlled ownership then gives us

sufficient leverage to buy Forest Service or private timber a harndsorrie only when the price is right. And we protect our profit

margins and cash flow by harvesting our higher cost timber when the price of L-P's end products is high. If the price for our end products drops, we simply shift back to cutting our

pr ofit' lower-cost timber holdings and buying standing timber on a more favorable basis.

4J 'iFntSoPresident So we are balanced. Yet flexible. And we are also turning a handsome profit on every tree we process. The reason

_ S _ _ | _ ~~~~~~~~~~~~~~~~~~~is simply that Louisiana-Pacific is

an unusually efficient manufacturer. We know how to

4 w streamline plants, integrate them one

to another, making certain the right log

is sent to the right mill. So we virtually eliminate waste and recover far more usable product per log than the industry does generally. And because our costs are held to an absolute minimum, we are also realizing greater profit margins.

But we know that wood fiber can be made even more valuable if it's freed from the ups and downs of the U. S. housing market. That is why Louisiana-Pacific has structured growth to allow for distribution to Far Eastern and European markets. In short, we pick and choose our best opportunities.

No, we are not a traditional forest products company. Rather than own all the fiber, at unreasonable cost levels, we simply want to control its flow. Then merchandise it. That may be a highly unconventional strategy, but for L-P it has proved to be the proper one. Because it's working. Beautifully.

I/p Louisiana Pacific I,umber * Plywood * Pulp * Chips * Particleboardl * Building Prodlucts

For L-P's 1973 Annual Report, write G. RI. Griffin at L,ouisiana-Pacific, 130)0 5.W. Fifth Avenue, Portland, Oregon 9720)1



Consolidated Freightways reports record 1973 operating profits,

but lower net income due to investment writedown. (Excerpts from the President's Letter to Shareholders)

Despite an excellent year by each of our at a satisfactory level. own operating components, your company's On the plus side, there is the possibility reported net income for 1973 must be called dis- that need for greater efficiency in the trucking appointing. We found it necessary to establish a industry may stimulate the demand for new provision for loss on our investment in Pacific White-Freightliners. Also, the energy crisis may Far East Line in the amount of $14,380,000. be the alarm we need to awaken Congress and This we did in the third quarter by writing the the state legislatures to a need to modernize and carrying value of the investment down to standardize the statutes governing the size and $3,000,000. When added to the $5,407,000 repre- weight of our vehicles. The vital necessity of senting our equity share of losses suffered by truck service to the economy has been amply PFEL in the first nine months, the writedown demonstrated. reduced our reported 1973 net income by $19,787,000, or $1.67 per share. Our final net Capital Expenditure Budget Increased income of 74 cents per share was thus far below We are budgeting a substantial increase in the reported 1972 result of $1.98 per share. our capital investment program, up from $46

tmilion in 1973 to $67 milion in 1974. Actual CF Revenues and Operating Income expenditures will be subject to the business

Wer the

Up her hand, each of our own operat- conditions encountered as the year unfolds, but

On the other hand, each of our own operat- we think this is a good time to further upgrade ing groups-motor carrier, manufacturing, and our carrier fleet by adding more new equipment air freight forwarding-enjoyed record revenues. than usual. Each also compared favorably with the previous year in operating income, despite a noticeable The Outlook Is Challenging squeeze on profit margins resulting in large part Economists disagree on their estimates of from the Presidential price freeze and Phase IV business activity in the year ahead. Even with- price regulations. out the uncertainties posed by the energy

In brief, revenues advanced from problem, we would not expect 1974 to show the $591,114,000 to $706,151,000. Net income from rate of gain in sales and revenues that was these continuing operations amounted to possible in the vigorously expanding economy $28,605,000, or $2.41 per share, as compared of 1972-73. On the other hand, we are by no with $25,211,000, or $2.15 per share, in 1972. means pessimistic. We are confident the nation

These are the figures we should weigh to can solve its problems without serious disrup- evaluate the future, since they represent the tion of its economic life. Our company has the earning power of our trucking, ability to adjust quickly to manufacturing and air freight CONSOIDATED FREIGWWAYS, MN. 1973 ANNUAL REPOI-T changing business conditions. operations unaffected by the ;- We will concentrate on obtain- investment in Pacific Far East C ing a larger share of the avail- Line. able market, both in trucking Effects of Fuel Shortage service and in heavy duty Remain a Question X - 4 l g trucks, and on improving the

The current allocation pro- $ efficiency of every operation. gram allows motor carriers 110% of 1972 diesel fuel usage, plus the right to apply for more W. G. White if their 1973 growth exceeded Chairman and President

T% It doesq not.qi rssure us of_ 1 . ~~~~~~~~~~~~~~~~~For the complete story in our 1973

those amounts, but I am per- annual report, write Consolidated sonaLl.y OptimIStiC thzat we WiLl._ Freightways, Inc., 601 California be able to maintain operations .^ Street, San Francisco, CA 94108.

CONSOLIDATED FREIGHTWAYS INC. r



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