Mr. LAKE. I think it was $350 to May 1, and $5,000 to December 15, I think, and $7,500 from there on.

The CHAIRMAN. All these contracts you have are negotiated contracts?

Mr. LAKE. That is right.

The CHAIRMAN. The higher you run your costs, the less excessprofit tax you have to pay. Isn't that right?

Mr. LAKE. It depends on what you consider the cost of the contract. The CHAIRMAN. That is right. All these items, this $27,000 plus these other bonuses, a monthly bonus, are all charged against the cost of the article, aren't they?

Mr. LAKE. It is charged against the cost of the article. It is either charged against the cost of the article or thrown into administrative expense.

The CHAIRMAN. All of that administrative expense goes into the cost of the article?

Mr. LAKE. That is right.

The CHAIRMAN. Let's get right down to business. Isn't it a fact that the more your administrative expense and the more your cost of producing the article, the less excess-profit tax you have to pay? Mr. LAKE. But, on the other hand, bonuses or any other compensation is a deductible item for income tax.

The CHAIRMAN. I am not talking about income tax.

Mr. LAKE. As I understand it, they don't permit the administrative expense in the cost of the contract; regardless of how much you paid out as far as administrative was concerned, it would still be allowable for income-tax purposes.

Mr. TOLAND. Let me state for the record that this witness received during the year 1941 a total amount of salary, including bonuses, of $26,261.65. Let me further state for the record that the bonuses paid on December 20, 1941, by this company amounted to $255,512.69; that special bonuses paid by this company during 1941 amounted to $153,766.88; that the regular earnings, including production bonuses, amounted to $530,770.05, making the total compensation $940,049.62; that, in addition, 144 employees received a bonus of $600, 117 received a bonus of $550, 95 received a bonus of $500, 57 received a bonus of $450, 27 received a bonus of $400, 19 received a bonus of $350, 35 received a bonus of $300, 19 received a bonus of $250, 18 received a bonus of $200, 89 received a bonus of $150, and 85 received a bonus of $100. The total bonuses paid to these employees on December 20, 1941, amounted to $537,312.69.

I offer that excerpt from the Navy audit in evidence.

(The excerpt referred to was received in evidence, marked "Exhibit No. 35" and is printed in the appendix of this volume.)

The CHAIRMAN. All that is charged against the cost of your contract?

Mr. TOLAND. It all came out of money received from the Government of the United States on contracts this company has.

The CHAIRMAN. All that is charged against the cost of the contracts? Mr. LAKE. That is right.

The CHAIRMAN. Just answer my question.

Mr. LAKE. When you say that money came from the Government of the United States, we are permitted to make a percentage of that.

The CHAIRMAN. There is no limitation on that; that is what this hearing is for.

Mr. LAKE. I object to saying it all came from the Government of the United States.

The CHAIRMAN. How much money did the Government advance you to establish the plant?

Mr. LAKE. I don't know, offhand.

The CHAIRMAN. You are comptroller. How much did it take?
Mr. LAKE. I think it was about $4,000,000.

The CHAIRMAN. What other business do you have besides the Government contracts?

Mr. LAKE. None at all.

Mr. MAAS. Then every dollar comes from the Government.

The CHAIRMAN. Then where did your money come from if it didn't come from the contracts and advancements?

Mr. LAKE. The Government says that we are permitted to make a certain percentage of profit. We can do with that profit what we please the company can.

The CHAIRMAN. What profit do you seek to make?

Mr. LAKE. Our legitimate profit.

The CHAIRMAN. What do you term a legitimate profit?

Mr. LAKE. Twelve percent.

The CHAIRMAN. And to keep your profit down you give these large bonuses, isn't that it?

Mr. LAKE. Not necessarily.

The CHAIRMAN. Isn't that what has happened?

Mr. LAKE. Not necessarily.

The CHAIRMAN. If you hadn't given these bonuses, what would your profit be?

Mr. LAKE. As near as I can figure, it was around 20 percent.

The CHAIRMAN. Exactly; and your whole objective to make these bonuses available to the people there was to show on your capital invested that you were making a very normal profit. Isn't that the whole objective of giving the bonuses?

Mr. LAKE. No, it isn't.

The CHAIRMAN. That is what happened in giving the bonuses.
Mr. LAKE. No, it is not what happened.

The CHAIRMAN. What happened in giving the bonuses?

Mr. LAKE. We distributed what we thought was our just profit.

in the organization.

The CHAIRMAN. But the effect of giving the bonuses operates to hold down what you have to pay in your excess-profit tax.

Mr. LAKE. So what, if we pay the excess-profits tax or the individual pays the tax?

The CHAIRMAN. There is a big difference because the individual tax is not as high. That is the difference.

Mr. LAKE. In this case it was more.

The CHAIRMAN. I grant you, you are paying your income tax, aren't you?

Mr. LAKE. Yes; that is right.

The CHAIRMAN. Exactly, on these bonuses. That won't amount to as much as if the corporation had paid the excess-profit tax instead. of giving out the bonuses.

Mr. LAKE. Well, I am inclined to think it would.

Mr. JACOBSEN. You said the Government advanced you four million.

Mr. LAKE. Approximately that much.

Mr. JACOBSEN. Do you pay interest on that?

Mr. LAKE. No.

Mr. JACOBSEN. That is just an advance to you?
Mr. LAKE. That is right.

Mr. JACOBSEN. Are these Government contracts that you have on a lump-sum-bid basis or negotiated?

Mr. LAKE. They are negotiated contracts.

The CHAIRMAN. What is the total of your contracts with the War Department and the Navy Department?

Mr. LAKE. I believe around $40,000,000.

The CHAIRMAN. What is the capital stock of the corporation?
Mr. LAKE. One hundred thousand.

The CHAIRMAN. When you got your first contracts, what was the capital stock?

Mr. LAKE. One hundred thousand.

The CHAIRMAN. And on that $100,000, you have what total?
Mr. LAKE. About fifty million.

The CHAIRMAN. How many people do you employ?

Mr. LAKE. We have approximately 1,300.

The CHAIRMAN. Are you up with your schedule?

Mr. LAKE. We are way ahead of our schedule.

The CHAIRMAN. What are you making for the Government?
Mr. LAKE. Aircraft starters.

The CHAIRMAN. Has there been any effort on the part of the Navy to renegotiate any of the contracts, or the War Department, since it was found out about these bonuses?

Mr. LAKE. Yes, sir.

The CHAIRMAN. What was the attitude of your company with regard to renegotiation of the contracts?

Mr. LAKE. I will leave Mr. Jack to answer that.

The CHAIRMAN. I am not asking Mr. Jack; I am asking you.

Mr. LAKE. I don't know what the effort has been. I only know the effort has been made and what the result has been. It has always been handled by Mr. Jack.

The CHAIRMAN. You have no information about it?

Mr. LAKE. No, sir. I do know this, that we have reduced the price of the starters.

The CHAIRMAN. Isn't it a fact you refused to renegotiate these present contracts?

Mr. LAKE. No, sir.

The CHAIRMAN. I thought you said you knew nothing about it. Mr. LAKE. I know this much about it, that I have seen correspondence in the file.

The CHAIRMAN. What does the correspondence disclose on the attitude of the company?

Mr. LAKE. It discloses that as soon as we know the cost, as soon as the contracts are concluded and we know the cost, we will renegotiate.

The CHAIRMAN. How can you determine the cost when you charge all these bonuses against the cost?

Mr. LAKE. You can't determine the cost until the contract is completed because you don't know what your contingencies are.

The CHAIRMAN. And you classify these bonuses as contingencies. Mr. LAKE. No; we don't.

The CHAIRMAN. Why haven't you been able to determine, when the War Department and Navy Department have been trying to get a renegotiation of these contracts, what the cost was?

Mr. LAKE. There is only one person in the organization who negotiates contracts, and that is Mr. Jack.

Mr. MAAS. I would like to ask in that connection, Mr. Toland, the original capitalization of this company when it was "Ltd.", was it $500?

Mr. TOLAND. No; the original capitalization of Jack & Heintz, Inc., was $500 on November 5. On November 7 they transferred the assets of Jack & Heintz, Ltd., to the "Inc." company at $99,500.

Mr. TOLAND. Along the line of the query of the chairman, when you say "with regard to costs," isn't it a fact that in the month of June 1941, you made a determination as to the unit cost price of the articles that you sell to the Government of the United States? Mr. LAKE. That is right.

Mr. TOLAND. I show you a photostat copy and ask you if that isn't a correct copy of your estimate?

Mr. LAKE. That is right.

Mr. TOLAND. In addition, Mr. Chairman, this company has borrowed or has contracts with the Defense Plant Corporation for the expansion of plant facilities, to the extent of $3,357,949.53; a quarter of this loan has been awarded in bonuses and increases of salaries.

The CHAIRMAN. And yet they are asking the Government to put up $3,000,000 for expansion of their plant; is that correct?

Mr. LAKE. What is that?

The CHAIRMAN. You are asking the Government for a loan of $3,000,000 for the expansion of your plant?

Mr. LAKE. Absolutely.

The CHAIRMAN. And yet the record shows that the bonuses that you have given amount to about $900,000?

Mr. LAKE. Can we take our profit and turn it into the capital assets of the corporation?

Mr. TOLAND. Mr. Chairman, the witness has identified this cost estimate, and I offer it as an exhibit. It was made on June 1, 1941. Is that correct?

Mr. LAKE. That is right.

(The cost estimate was received in evidence, marked "Exhibit No. 36," and is printed in the appendix of this volume.)

Mr. TOLAND. I will show that the Navy Department attempted to get these people to reduce the price, the unit price, of the article that they sell to the Navy Department, and they declined to do so. Mr. IzAC. What was the unit price?

Mr. TOLAND. $600, and the cost is established by the witness as $272.63, and the audit made by Mr. Ryan, who used the last 3 months of 1941 because of the condition of the records of the company, is $271.77; that is his computation as to the cost.

to.

I offer a memorandum showing the respective cost analyses referred

(The memorandum was received in evidence, marked "Exhibit No. 37," and is printed in the appendix of this volume.)

The CHAIRMAN. And the unit cost established by the estimate they made and the computation that the Navy Department made is how much, $200?

Mr. TOLAND. $272.63, by the company.

The CHAIRMAN. What is the contract price?
Mr. TOLAND. $600.

The CHAIRMAN. There is a spread of $400.

Mr. TOLAND. Not quite.

Mr. FLAHERTY. Was that unit price established before they started distributing the bonuses?

Mr. TOLAND. Yes, but the fact of the matter is that they refused the request of the Navy Department on additional orders to reduce the price, the unit price of these articles.

Mr. MAAS. Mr. Toland, did your investigators check the assets of the company whose assets were transferred at $99,000?

Mr. TOLAND. We are going to ask the next witness.

Mr. HESS. Were any additional orders given after the audit was made?

Mr. TOLAND. Yes, sir.

Mr. HESS. At $600 per unit?

Mr. TOLAND. Let me get the record to be sure.

Mr. MAAS. Do they have a patented article?

Mr. TOLAND. They have the patent and nobody else, and the letter of the Navy Department in connection with the bid in this case said. there was no use in any competitive bidding because of the fact that they had the patent on this starter.

Mr. MAAS. Then it is time we seized that patent.

Mr. TOLAND. It is time that some consideration should be given. to a granting of a license.

Mr. Izac. To other firms?

Mr. TOLAND. Right.

Mr. MAAS. We have the right to do that.

Mr. SUTPHIN. Did I understand you got that money from the Defense Plant Corporation without interest?

Mr. LAKE. No; not from the Defense Plant Corporation.

Mr. SUTPHIN. Didn't you answer Mr. Jacobsen that you paid no interest?

Mr. LAKE. We pay interest to the Defense Plant Corporation. Mr. SUTPHIN. Then you have another loan of four million from the Government that you pay no interest on?

Mr. LAKE. It is an advance payment for the purchase of material and labor.

Mr. JACOBSEN. What rate of interest do you pay on the amount you are paying interest on? What is the rate of interest?

Mr. LAKE. One percent a month on machinery; 12 percent a year. Mr. TOLAND. I would like to read for the record the contracts they have. The total defense contracts awarded by both the Army and Navy to March 1, 1942, was $58,191,899.35, divided as follows: The total Navy contracts, $2,928,770.50; experimental, $93,400; production, $2,835,370.50. The total Army contracts are $55,263,128.85, with a total of $58,191,899.35.