included in the cost of rendering the services, thereby informing the Commission as to the propriety or reasonableness of the charges. The Senate Resolution 83 specifically ordered the Commission to inquire into and report upon expenses. A portion of that resolution reads as follows: [2] * * (4) * *, and the earnings and expenses of such holding companies and their associated, affiliated, and/or subsidiary companies: In view of the foregoing, the Commission issued subpenas for a number of officers and employees of the Electric Bond & Share Co. to come before the Commission and testify with respect thereto. Certain of these subpenas called for documentary evidence, including especially the operating expense ledger of the Electric Bond & Share Co. and pertinent vouchers and supporting records. This documentary evidence demanded was not produced, the witnesses refused to testify, and the legal questions involved in this dispute as to the jurisdiction and authority of the Commission were taken to the Federal court for the southern district of New York. At the first hearing before the court the respondents objected to the subpenas issued by the Commission. The court's decision is printed in Federal Trade Commission v. Smith et al. (34 Fed. (2d) 323). The parties subsequently entered into a stipulation of facts which, it was agreed, should stand in the place of evidence that might have been adduced before a master. Upon such stipulation the court again heard the case. Its decision is set forth in the opinion of Hon. John D. Knox, district judge, filed August 19, 1932, printed in First Federal Supplement 247. The last paragraph thereof reads as follows: "Accordingly, an order will be entered directing the individual respondents to answer all questions relating to the cost to Electric Bond & Share Co. of such services as it renders the operating companies in return for the payment of a fee based upon their gross earnings; to the cost of rendering purchasing services which result in interstate movements of materials, apparatus, and supplies [3] to or from any of its subsidiaries, for which a separate fee is charged; and to the cost of rendering any services to subsidiary companies engaged in the interstate transmission of electricity or gas, for which a sepa rate fee is charged." The order, referred to above, was never entered because at a conference held October 26, 1932, between counsel for petitioner and respondents, it was agreed that the Commission would be given access to all documents and records relating to the costs of rendering any services to associated or allied companies on which fees were collected. Subsequent to the above conference, an examination was made by the Commission's examiners upon which this report is based, and everything requested by the Commission's examiners was furnished. In addition to the year 1927, as originally requested, the same information was also obtained covering the year 1931 to bring this study closer to date. In allocating certain expenses as between the cost of servicing, as per service contracts, and the cost of handling investment holdings, estimates had to be made, using the best judgment of members of the company's staff as well as Commission's examiners. As of March 1, 1933, the Electric Bond & Share Co. reorganized its entire staff and this departmental reorganization will do away with estimates in the future, as referred to in the preceding paragraph, and the data similar to that obtained for the years 1927 and 1931 will be from March 1933 on, available with very little difficulty. A description of the reorganization of departments is also included as a part of this report. [4] Income, expenses, and surplus reconciliation of surplus for years 1927 and 1931.-As already stated the prime reason for the compilation of this report was to ascertain the cost to Electric Bond & Share Co. of rendering supervision and special services to associated and allied companies on which fees and commissions are collected. Certain of the special services are performed substantially at cost of fees collected. Hence, if the cost of such services is deducted from the total cost of servicing and the fees therefrom are deducted from the total servicing income the balance of cost and income, respectively, may be compared to show the profit from all other services. The following table shows the various sources of income in detail, total expenses and surplus reconciliation for the years 1927 and 1931: [5] TABLE 1.-Income, expenses, and reconciliation of surplus, calendar years 1927 and 1931 (see exhibits) [6] As will be noted, by the above table, total income amounted to $18,513.299.85 in 1927 and $23,962,762.86 in 1931, whereas expenses amounted to $6,613,973.47 and $7,510,398.86 respectively. The income has been divided into two sections: "Income resulting from contract services and income from investments, etc." The expenses are shown in total. 66 Fees The first subdivision of "Income resulting from contract services" is collected as per contract," amounting to $6,819,610.68 in 1927 and $9,335,445.54 in 1931, and the second, Special services (presumably at cost)", amounting to $2,553,561.39 in 1927 and $1,912,827.63 in 1931. The reason for this subdivision is that the expenses allocated to the cost of all supervision and special service income cannot be accurately divided between the various classes because, as later discussed, income derived from the second subdivision might be applied as a credit to the total cost of all servicing, the balance of expense being applicable to the first subdivision. The next step is the division of expenses between those applicable to investment holding and those applicable to fees collected for supervision and special services, dropping, for the time being, income items. Division of expenses between those applicable to fees collected and those applicable to investment holdings, also reconciliation of expenses as shown in table 1.-The total expenses to be allocated, exclusive of Federal income taxes, amounted to $5,375,757.95 in 1927 and $6,870,877.69 in 1931. These amounts are shown after a few minor adjustments by the Commission's examiners. The following table shows the reconcilation and division of total expenses between those applicable to "Contract services" and "Investment holdings": [7] TABLE 2.-Division of expenses applicable to contract services, "Earnings received from associated companies for supervision, engineering, construc tion, auditing, and special services" and "Earnings of investment holdings", calendar years 1927 and 1931 31,350.88 30, 169. 26 Rent.. 89, 595. 94 Telephone. Telegraph. 27, 720.77 Cable. Salaries Traveling expense. $3, 594, 121. 98 $3, 394, 121. 98 $200, 000. 00 $5, 001, 478. 25 $4, 715, 478. 25 $286, 000. 00 Alterations and mainten 77, 821.89 18, 207.84 27,970. 42 60, 833. 21 43, 722.89 468, 761. 11 2,000.00 11, 541. 13 904. 71 1,217. 10 Registrar and transfer agents 8,406. 60 Advertising. 23, 882.95 Insurance. 15, 259. 97 21, 517. 66 8,406, 60 Contributions and dona tions.. etc. Books, periodicals, papers, Dues and memberships. Health department.. Miscellaneous. Special studies.. Directors' fees.. Commissions on call loans.. 9,750.70 251.83 47, 722. 22 24, 934. 73 5, 017. 00 5, 195. 42 Commissions paid on sale of preferred stock.. [7] TABLE 2.-Division of expenses applicable to contract services, “Earnings received from associated companies for supervision, engineering, construc tion, auditing, and special services" and "Earnings of investment holdings", calendar years 1927 and 1931—Continued Total (excluding Federal income tax).. Federal income tax.. Total Adjustments (see below).... Total expenses as per company.. ADJUSTMENTS Alterations (Two Rector Street Building): $546.26 45,364. 89 $546. 26 45, 364. 89 5, 375, 757.95 $4, 403, 722. 77 972, 035. 18 $6, 870, 877. 69 $5, 547, 509. 83 1,323,367.86 1926.. 1927 151, 506. 03 177, 479. 23 [8] The above table shows that total expenses as per company books amounted to $6,613,973.47 in 1927, and $7,510,398.86 in 1931, which includes Federal income taxes of $1,097,470.55 and $653,800, respectively, and minor adjustments by the Commission's examiners of $140,744.97 in 1927 and $14,278.83 in 1931. This leaves a balance to be allocated between expenses applicable to investment holdings and those applicable to fees collected for supervision and special services, as per contracts, of $5,375,757.95 and $6,870,877.69, respectively. The adjustments, amounting to $140,744.97 in 1927, were due to the company charging off all office alteration costs incurred during 1927 amounting to $177,479.23, which, together with alterations made in 1926 of $151,506.03, should be charged off over a 20-year life, because, when the company occupied the 2 Rector Street building, it took a lease for that period of time. The annual rate allowed amounts to $16,449.26 per annum, based on the 20-year life of the lease. The depreciation adjustment is based on a 10-year life on the value of furniture and fixtures. The lunch-room expense in 1931 has been eliminated because the income is included in miscellaneous income. Salaries constitute the largest item of total expense, being considerably more than half of the total expense. The salaries, as compared to other expenses, The above shows that in 1927 salaries amounted to 66.86 percent of total expenses, and in 1931 they amounted to 72.79 percent. Of the expenses allocated to contract services, salaries, in 1927, amounted to 77.07 percent and in 1931 to 85 percent of the total. This high percentage of salaries is due to the nature of the company's business as a personal-service organization. Allocation of total expenses between those applicable to investment holdings, and contract services (as per service contracts).-Two bases have been used in allocating expenses between the investment holdings and contract services: (1) Direct charges to either, which have been made (a) directly from journal entries and vouchers of $100 or more, and (b) certain classes of expenses wholly applicable to the investment holdings and charged to it in total; and (2) allocation of the balance of expenses, not charged directly, based on various estimates. [10] The first of the above divisions (1), subdivision (a), has been made from vouchers and journal entries jointly by the Commission's examiners and a member of the staff of the Electric Bond & Share Co. In practically every instance the allocations, as made, were agreed on. In some instances, where the facts were very apparent, the total of the individual vouchers or journal entries was allocated to either the investment holdings or contract services, whereas in other cases the individual vouchers or journal entries were divided between the two. These allocations for the years 1927 and 1931 were as follows: The following table shows the details by classes of expenses and the amounts, by classes, allocated to either investment holdings or contract services and whether allocated or charged directly to either. The statement also shows what percentages each class is of the total expense allocated to contract services: |