service, in addition to the direct salaries, included 93.2 percent of overhead? Answer. Yes, sir. Question. How is it possible to arrive at the actual overhead cost? Answer. After eliminating expenses applicable to investment holdings, which included its proportion of overhead, the balance of overhead would apply to the cost of rendering all services. After eliminating investment expenses the indirect charges were allocated on the basis of direct salaries. Using the percent of total indirect expenses to total salaries and applying it to the engineering department salaries gives the indirect expense applicable to the engineering department. Question. The answer that you have just given is based on some section of your report; is it not? Answer. It is. Question. What part-what section? Answer. Page 65. The actual computation is shown on page 64, table 15. Question. From your examination of the records, what do you say as to whether the overhead included in this calculation resulted in these services being rendered substantially at cost? Answer. I would say it was pretty close. Question. It is noted, however, that the overhead calculated in 1927 was 95.9 percent of the direct salaries? Answer. Yes, sir. Question. Whereas you calculated the actual overhead at 93.2 percent? Answer. Yes, sir. Question. Which leaves a small margin for profit? Answer. Yes, sir. Question. In 1931 the overhead added was 93.8 percent of the direct salaries, whereas your calculation of the actual overhead was 91.3 percent? Answer. Yes, sir. Question. That leaves a small margin for profit; but it all seems to sustain your conclusion that the services were rendered substantially at cost, does it not? Answer. Yes, sir. Question. Although your examination covered nothing after the year 1931, have you learned of a reorganization of the departmental set-up of this company as of a later date? Answer. Yes, sir; I have. Question. As of what date was the reorganization effected? Answer. There was a reorganization on March 1, 1933, and this reorganization was changed by a further consolidation of departments and became effective as of June 1, 1933. Question. What was the purpose of these two changes in organization? Answer. Primarily to enable the company, as well as others, to ascertain the cost applicable to the various classes of income. Question. If this reorganization had been in effect during the years 1927 and 1931, how would it have affected such an effort as you have made in this report to calculate the cost of rendering service? 102777-34-PT 62——4 Answer. Data as to the division of expenses would have been readily available, and very few, if any, estimates would have been necessary. Question. That is, it would have been possible to tell the cost in the investment department of the business? Answer. Yes, sir. Question. And also the cost of rendering management services? Answer. Yes, sir. Question. So that the profit, if any, in either of these divisions could have been readily ascertained without resorting to the calculations which you had to make? Answer. Yes, sir. Question. Now, if you will turn to page 44, there is one matter that I wish to inquire about. What is the table that appears at page 44 of this report, exhibit 5602, designed to show? Answer. It is a summary of amounts collected from supervised companies, classified by holding-company groups. Question. That is, in 1927 the companies in the American Power & Light group paid how much to Bond & Share? Answer. $1,062,088.02. Question. This represents management fees altogether, does it not? Answer. All fees. Question. All fees? Answer. Wait a minute, please. It is supervision fees only. Question. Supervision fees only? Answer. Yes, sir. Question. This amount in 1931 was what? Answer. $1,350,721.82. Question. The supervision fees in the Electric Power & Light Corporation group amounted to what in 1927? Answer. $975,148.85. Question. And in 1931? Answer. $1,222,619.71. Question. Supervision fees paid by the Lehigh Power Securities Corporation group amounted to what in 1927? Answer. $699,067.59. Question. And in 1931? Answer. $447,776.27. Question. The supervision fees paid by companies in the National Power & Light group were how much in 1927? Answer. $836,754.58. Question. And in 1931? Answer. $662,933.16. Question. The supervision fees collected from all companies in the Bond & Share group operating in the United States in 1927 amounted to what? Answer. $3,573,059.04. Question. And in 1931? Answer. $3,684,050.96. Question. The corporations operating in foreign countries and listed in the American & Foreign Power Co. group paid supervision. fees in 1927 that totaled how much? Answer. $593,880.36. Question. These companies paid a much larger amount in 1931, did they not? Answer. They did. Question. The 1931 amount was what? Answer. $2,055,283.13. Mr. MACLANE. Judge Healy. Mr. HEALY. Yes. Mr. MACLANE. May I interject the suggestion that you ask the witness whether the number of companies in the foreign group had not greatly increased between 1927 and 1931, which was responsible for the large increase in the amount of fees paid? Mr. HEALY. Yes. In fact, I was about to ask him for that. By Mr. HEALY: Question. Tell us, if you can, Mr. Meleen, why the supervision fees paid by companies in the American & Foreign Power group increased from something over $593,000 in 1927 to more than $2,055,000 in 1931. Answer. It was practically all due to two causes: (1) Fees collected from the holding company increased from $12,000 in 1927 to $173.460.47 in 1931, and this accounts for $161,460.47 of the increase? In 1927 a flat annual fee was paid, whereas the fee paid in 1931 was based on a certain percent of gross earnings; and, second, the gross earnings of operating companies, a certain percent of which was paid as a supervision fee, increased from $22,875,066.81 in 1927 to $66,550,136 in 1931, which accounts for practically all the increase in fees received from operating companies. This increase in fees collected from operating companies accounts for $1,299,942.30 of the total increase. The increase in fees received from the holding company, of $161,460.47, plus the increase in fees received from the operating companies, of $1,299,942.30, accounts for the total increase of $1,461.402.77. Question. Is it also true that between 1927 and 1931 the number of subsidiary companies in the American & Foreign Power group increased? Answer. Yes, sir. Question. The detail regarding these fees appears in exhibit no. 8. if I remember correctly. Answer. That is correct. Question. That is found at page 98 of your report? Answer. For the year 1931; yes, sir. Question. That is, by turning to page 98 and looking at exhibit 8 within this report, we find the supervision fees collected from companies in this group in 1931? Answer. Yes, sir. Question. They are listed company by company, are they not? Question. But we do not have a similar exhibit showing the companies paying fees in 1927. Have you that information elsewhere? Answer. Yes, sir. Question. Where is it? Answer. It is contained in Senate Document No. 92, parts 23 and 24. Question. That is the Senate print of our investigation? Answer. Yes, sir. Question. At what page will we find the names of the companies which paid the fees in 1927? Answer. On page 670 of the Senate document referred to. Question. How many companies do you find listed in the Senate print? Answer. Sixteen; including the holding company. Question. Did the holding company pay a fee in 1927? Answer. It did. Question. Of what amount? Answer. $12,000. Question. Now, turning to page 98, exhibit no. 8, of the present report, we find how many companies listed as paying fees in 1931? Answer. Thirty-seven; including the holding company. Question. And the holding company paid a fee, if I understand this table correctly, of $173,460; is that correct? Answer. Yes, sir. Question. In addition to what total of fees paid by subsidiary companies in the group? Answer. $1,881,822.66. Mr. HEALY. Judge MacLane desired it pointed out that the number of companies had grown from 1927 to 1931, and I think we have pointed it out. Mr. MACLANE. Thank you. By Mr. HEALY : Question. In connection with this reorganization that took place in 1933, has there been a further revision of the rates of fees charged by Bond & Share companies to subsidiaries in this group? Answer. There has. Question. At what rate or what rates are the fees now calculated? Answer. Graduated from 114 percent to a quarter of 1 percent of gross earnings. Question. When did this new scale of rates become effective? Was it April 1, 1933? Answer. It was. Question. Did this represent a reduction from the rates that were in effect in 1931? Answer. It did. Question. Tell us in detail, please, how the present supervision fees under this new revision are calculated. Answer. The fees charged are based on gross earnings, as follows: On the first $1,000,000, 114 percent; on the next $1,000,000, 1 percent; on the next $1,000,000, three-fourths of 1 percent; on the next $1,000,000 one-half of 1 percent; and on all additional, one-quarter of 1 percent. Question. These rates amount to what decrease in fees for operating companies? Answer. They amount to a decrease in fees for operating companies of 20 percent on gross earnings of $5,000,000 and 31 percent on gross earnings of $10,000,000. The decrease on all gross earnings over $5,400,000 aggregated 50 percent. Question. It is my understanding that since this Commission began its investigation there have been two reductions in fees paid Electric Bond & Share one effective January 1, 1929, and the second effective April 1, 1933. Is that correct? Answer. Yes, sir. Question. It is my understanding that in 1927 the range of fees was from 2 percent to 1.6 percent; that under the reduction effective January 1, 1929, the range of fees was from 1.6 percent to 0.5 percent; and effective April 1, 1933, the range of fees was from 1.25 percent to 0.25 percent. I note, by referring to page 59 of this report, that in 1931 we have what appears to be a different kind of fee than any appearing in 1927 or theretofore; that is, we find fees collected in 1931 aggregating $167,689.72, which are labeled "acquisition fees." Were there any such fees collected in 1927 or earlier years, to your knowledge? Answer. Not to my knowledge. Question. You know that there were none in 1927, do you not? Answer. Yes, sir. Question. From whom were these acquisition fees of more than $167,000 collected in 1931? Answer. Foreign companies, I think. Question. No; look at page 60 of your report. Answer. American & Foreign Power Co. Question. Do you know for what these fees were collected? Answer. For services in connection with the acquisition of foreign properties for that company. Mr. HEALY. Off the record. (There was a discussion off the record.) By Mr. HEALY : Question. In 1927, what did the total advertising expense of this company amount to? Answer. $23.882.95. Question. How much of this was charged to investment in your allocation, and how much to servicing? Answer. To investment, $2,365.29, and to servicing, $21,517.66. Question. How much of this was charged to the investment side of the business by you? Answer. In 1931? Question. In 1931. Answer. $4.401.18. Question. How much was allocated to the servicing side of the business? Answer. $25.507.84. Question. How does it come about that so much of this advertising was charged to the cost of rendering service, and so little of it to the cost of conducting the investment business? Answer. The major portion of the advertising was for the benefit of allied and associated companies. |