tions, or may have power to contract, and to issue in exchange for said stocks, bonds and other evidences of indebtedness its own stock, bonds or obligations." According to the statement of the officers, the capital stock of this company, 300,000 shares of $100 each, par value, aggregating $30,000,ooo, was issued for property consisting of stock and contracts, and for cash provided, out of which cash the $4,000,000 guarantee fund under the Brooklyn City lease was furnished and deposited. The total amount of cash paid in was $4,500,000, and in addition to the controlling ownership of the stock of the Brooklyn Heights Company, the Long Island Traction Company also owns all of the stock of the Brooklyn, Queens County and Suburban Railroad, except such as is held by the directors to enable them to qualify. Lease of The Brooklyn City Property. On February 14, 1893, the Brooklyn City Railroad Company executed a lease of all its properties, including franchises, rights of way, real estate and equipment to the Brooklyn Heights Railroad Company for 999 years, the consideration being the payment by the Brooklyn Heights. Company of a ten per cent. dividend on the capital stock of the Brooklyn City Railroad Company and all other fixed charges, including interest on its bonded indebtedness and organization expenses. By the terms of this lease the Brooklyn City Railroad Company was to expend in the conversion of its various systems from horses to electricity all of the moneys it received from the sale of $3,000,000 of capital stock and $3,000,000 of bonds, authorized but unissued at the time of the lease, and was to reserve to itself whatever surplus moneys resulting from previous operation there remained on hand at the time the control of the property was assumed by the Brooklyn Heights Company and whatever premiums were realized from the sale of its stock and bonds. All accrued obligations at the time of taking possession were to be paid by the Brooklyn City Company. The cost of such construction as remained uncompleted and such extensions as are from time to time necessary or desirable is to be paid for by the Brooklyn Heights Railroad Company and is to become a contingent charge against the Brooklyn City Company, to be adjusted at the termination of the lease, or at such time and in such manner as may be agreed upon by the lessee and lessor corporations. To guarantee the faithful performance of the conditions of the lease, the lessee company agreed to deposit and did deposit in various trust companies and banks a guarantee fund of $4,000,000, the income of which is to be paid to the lessee company. In case of default in the payment of any of the fixed charges of the lessor company, the lessee company is authorized to use $250,000 of the guarantee fund, but no part of the guarantee fund can be impaired to an extent which shall reduce such fund below $3,750,000. The lessee company took possession of the property of the Brooklyn City Company and began operation of the same on June 6, 1893, and has since continued to operate said system. On June 30, 1894, the Brooklyn City Railroad Company reported a total construction and equipment account of $18,839,934.13. Since that date all of the funds of the Brooklyn City Railroad Company, except its surplus, have been expended in construction expenses, and the completion of the conversion, together with extensions and the construc tion of new roads, is now carried on by the Brooklyn Heights Company, under agreements and conditions provided for in the lease. The total length of all tracks and sidings owned by the Brooklyn City Company and operated by the Brooklyn Heights Company, at the date of the last report, June 30, 1894, was 199.02 miles. It is proper to state that every facility for a full examination of the books and accounts of the Brooklyn City and Brooklyn Heights corporations, was afforded your examiners by the officials of the respective roads. The accounts of the Brooklyn City Company were examined back to September 30, 1889, the date of the last examination by a representative of your Board. In the case of the Brooklyn Heights Company, it having been operating the lines of the Brooklyn City system only a year, a verification of its last annual report and of its quarterly statement rendered September 30, 1894, was deemed sufficient. The method of accounts and the bookkeeping of the Brooklyn Heights Company are admirably adapted to its purposes as lessee of the Brooklyn City system. The statements of its receipts are in such form and are so protected by checking devices and detailed reports, as to set forth the total income of the company for each day in a complete and correct manner, and also so as to place before the president on the succeeding morning an exhibit of the gross earnings upon each line operated, together with the number of cars in operation, the number of trips, the mileage of cars, the wages of of employes and the net earnings after deducting wages. The expenditures of the corporation are controlled by requisitions, orders, audits and certifications by the various officers and employes through whose hands these accounts pass. By the auditing system in use, each entry upon the books or the corporation is certified to, first, by the auditing committee of the board of directors, then by the president, secretary and treasurer, and by each employe through whose hands the voucher passes. This elaborate and comprehensive system of accounting was devised by W. A. H. Bogardus, the secretary and treasurer of the company, and is so complete as to deserve notice and commendation. The Brooklyn City books are the same as those used at the time of the organization of the road in 1853, the same ledger being still in service. No fault can be found with their accuracy, but more elaborate methods should have been adopted when the change of motive power was made from horses to electricity in order that there could have been a more intelligent division of the items of expense. The present secretary of the company, Mr. Swin, appreciates the necessity for a change in system to more nearly conform to the system of the lessee road, and a new set of books will be opened forthwith. FINANCIAL CONDITION. The following statements, tables and comparisons fully explain the financial condition of the companies under examination, the annual report of the Brooklyn Heights Company being analyzed first, as it is the operating company. The criticisms of Mr. Thompson may be briefly summarized as follows: Brooklyn Heights: Rentals paid, $1,434,941.50, no details to show what is included; differences in other fixed charges deducted from income; renewals of horses, $11,160; trucking credit, $134,311.39; re pairs of roadbed, $141,570.53, "no repairs of consequence would be required on a well-constructed electric road for five years." Brooklyn City: Interest charged to construction, $152,345.78, "not a proper charge, should be against income;" this amount also includes $90,000, dividend on stock, charged to construction, which Mr. Thompson inquires about; reconstructing roadbed, general criticism on charges. to construction; rentals, fixed charges and dividends "do not correspond with payments by Brooklyn Heights Company;" general criticism of construction account of the company. BROOKLYN HEIGHTS RAILROAD COMPANY. Annual Report for the Year Ending June 30, 1894. Among the various items of property received by the Brooklyn Heights Company, as lessee from the Brooklyn City Company, were the horses which had been used in the operation of the Brooklyn City Company. Concerning these horses the two companies made a special arrangement, fixing upon them a price of $185,920, with the condition that the Brooklyn Heights Company should make payments on this account as fast as it sold the horses, or in proper proportion as the horses died. Such payments were to be credited by the Brooklyn City Company to its equipment account. The books show that these credits have been properly made, and the item of $53,118.81 is the inventoried value of the horses now in the possession of the Brooklyn Heights Company. The Brooklyn City Company has received $151,896, leaving $31,024 still due to it upon. this account. INCOME. The income statements of the two roads must be considered together in order to arrive at an intelligent understanding of the transactions involved. The year ending June 30, 1894, was the first under the operation of the lease. The Brooklyn Heights Company had been in possession of the property during part of the month of June, 1893, but there was no adjustment or settlement of the accounts between the two roads until the construction fund of the Brooklyn City Company was exhausted. During the greater part of the year, therefore, the Brooklyn City was expending money on account of its own construction, and the Brooklyn Heights was also expending money on account of Brooklyn City con struction, for which it was from time to time reimbursed. The Brooklyn Heights Company opened a set of books differing in many respects, as to the division of charges, from those of the Brooklyn City Company, going more into detail, in order to meet the requirements of the new business, in respect to which the Brooklyn City books were inadequate. At the outset it was assumed that all charges for taxes and interest should be paid directly by the Brooklyn Heights Company, and this method prevailed for a time. Then it was decided that as the Brooklyn City Company was the owner of the property, it should have the original receipts for all payments, and thereafter the rental for these purposes was paid to and distributed by the Brooklyn City Company. The result of this complication and the fact that charges and counterclaims were sometimes adjusted by charges and credits without the actual transfer of money, caused much confusion, and the further fact that the Brooklyn City Company was not always prompt in adjusting the accounts so far as the entries on its books were concerned, some of which were still unadjusted at the time of this examination, led to discrepancies in the rental statements. The net difference in dispute, however ($281.03), is so small as to be unworthy of attention, and the accounts would probably have balanced had the blank issued by this Board, upon which the report was made, been more comprehensive in its requirements, and the necessity for prompt adjustment thus been called to the attention of the officers of the two companies. Unless the form of the blank is changed, there will be apparent discrepancies each year between these two companies and between all other companies similarly related to each other, for the reason that the lessor road can only report its actual cash transactions in its rental account, while the lessee road will report in total, not only the amounts it paid for rental (including all charges), but the amounts due and accrued, and the interest and tax charges upon its own property. In the future, however, the Brooklyn Heights Company, in compliance with the suggestions of your examiner, will report annually in detail the total amount paid to the Brooklyn City Company, and on what account; the charges due and accrued deducted from income, and on what account, and also will separate such payments from the payments and charges upon its own property. The Brooklyn City Company will report its rental in detail and its disbursements as now required by the blank, and its report should in future balance with the amounts in the Brooklyn Heights account reported to have been paid. A thorough examination of the books and vouchers of the Brooklyn Heights Company relative to its income account, warrants the statement that the income account of that company is a correct showing of its payments to and on account of the Brooklyn City Company. A new set of books, which will be more in harmony with those of the lessee company, will be opened by the Brooklyn City Company as soon as final adjustment is made of the minor disputed items. The following are the statements in detail with analysis and explanation of the income accounts of the two companies for the year ending June 30, 1894: Income Account. Gross earnings from operation.... Less operating expenses (excluding taxes). Net earnings from operation... $4,303,117 45 2,673,391 73 $1,629,725 72 |