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R245a 1946/47 cop.2 RECONSTR~CTION FINANCE CORPORATION AND SIJBSmIARIES Annual Report and Finaneial Statement s .lane 30. 1947 JAN 1 2 1948 UNJVEiEIT'! :: . ....:.,.. Digitized by , Google , Digitized by Google n (,·-) _,___ ' •/ • . · , . . _1· , - I RECONSTRUCTION FINANCE CORPORATION 811 Vermont Avenue W a&hington 25, D. C. :.~,} . '2-> BOARD OF DIRECTORS ,, JoHN HENRY ---., T. D. GooDLOE, Chairman BODMAN HARLEY HISE HARVEY J. GUNDERSON HENRY A. MULLIGAN OFFICERS D. GooDLOE ••••.••••••••••••••.•..••••• • Chairman of the Board A. T. HOBSON ••••••...••••.•..•..•••.•••.•••.••• • ••••••• • Secretary WILLIAM C. BECK, Ja...................................... Treasurer JAMF.S L. DouoHERTY ••.••.•• • ••••.•..••.•••••..•.•. General Coumel .../" HAROLD W. H. Bumwws .. ........ . ........... . .......... . Controller JOHN SUBSIDIARIES AT JUNE 30, 1947 Federal National Mortgage Association War Damage Corporation U. S. Commercial Company Directors and Officers as of December !6, 1947 Digitized by Google • • TABLE OF CONTENTS Page Letter of transmittal : Comments on financial statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Comments on creation and purpose of R.F.C.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lending activities: 4 Direct business loans and participation with banks in business loans. . . . . . . . . . . . . . . . . . . . . . . . 5 Public agency loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Catastrophe loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Other loans and purchase of securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Federal National Mortgage Association. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Purchase of surplus property for resale to small business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Lending activities: 7 Production and sale of tin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Production and sale of synthetic rubber. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Purchase and sale of other commodities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Guaranteed market agreements covering prefabricated houses and new type building materials. . 9 Direct subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 U. S. Commercial Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Defense plants and equipment............... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Fiber plantations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Loans, leases, plants and equipment of Small War Plants Corporation. . . . . . . . . . . . . . . . . . . . . . . 11 War Damage Corporation................... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . 11 Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Consolidated balance sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Schedule 1-Net income from lending activities. . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Schedule 2-Net income from war damage insurance program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Schedule 3-Unrecovered costs and net expenses of, and estimated future recoveries to be realized from, non-lending activities for national defense, war and related purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Notes to financial statements............................................... . . . . . . . . . . . . . . . . . . . 2 Digitized by Google 19 RECONSTRUCTION FINANCE CORPORATION WASHINGTON r: To The President, The President Pro Tempore of the Senate, and The S-peaker of the Home of Representatives: On June 30, 1947, Reconstruction Finance Corporation had completed more than fifteen years of continuous operation. This report outlines some of the major activities and programs that the Corporation and its subsidiaries have engaged in during that period with emphasis being placed on those responsibilities which the Congress has authorized the Corporation to continue in the future at least until June 30, 1948. The report also includes a consolidated balance sheet of the Corporation and its subsidiaries at June 30, 1947 and consolidated statements of operating results for periods ended at that date. FINANCIAL STATEMENTS The accompanying financial statements have been prepared in accordance with sound accounting principles applicable in the circumstances and, taken in conjunction with the related notes, should be found to be generally self-explanatory. It will be noted from the consolidated balance sheet that the Corporation expects to realize $2,839,868,439 from the assets which it owned at June 30, 1947 after making allowance, by way of reserves and otherwise, for potential losses or non-recoverable cost elements which may be experienced in the future. Of the foregoing total, net assets amounting to $2,158,846,427 were acquired primarily in connection with our regular lending programs; the remainder of $681,022,012 represents the projected cost recoveries which we expect to realize from assets and equities acquired principally in connection with our non-lending activities for national defense, war and related purposes. Net income from the regular lending programs of the Corporation and its subsidiaries for the cumulative period from inception of the Corporation to June 30, 1947 has amounted to $551,901,483 after charging off losses on loans, investments and other receivables in the amount of $52,706,210 and absorbing as an operating cost a provision of $96,013,949 for potential future losses on the loans, investments and other receivables which were owned at June 30, 1947. Net income from the lending programs for the single fiscal year ended June 30, 1947 amounted to $19,836,143. Further details pertaining to the net income of the Corporation from its lending programs are shown in the accompanying Schfdule 1. The war damage insurance program administered by the Corporation's subsidiary War Damage Corporation, has produced net income of $209,827,810 for the cumulative period from December 13, 1941 to June 30, 1947, further details pertaining to which are shown in the accompanying Schedule 2. By direction of Congress, this amount has been paid into the Treasury of the United States subsequent to June 30, 1947 to be applied in reduction of the National debt. As shown in some detail in Schedule 3, the non-lending activities of the Corporation and its subsidiaries for national defense, war and related purposes have resulted in unrecoverable costs of $8,632,714,519 to June 30, 1947, after deducting future recoveries expected to be realized by the Corporation on the assets held in connection with these programs at that date. All of these programs were engaged in under authority of law. For many of them it was known, even before the programs were undertaken, that there either could be no recovery of the amounts expended {such as for direct subsidy payments of $3,089,434,043) or that the potential of sustaining substantial losses was inevitable. Procurement of strategic and critical materials in foreign countries at whatever costs were involved and their subsequent sale in the United States subject to ceiling price limitations; preclusive procurement abroad primarily for the purpose of denying strategic materials to enemy countries; and inflated construction and acquisition costs during the war period for plants, equipment, facilities and inventories that were destined to become surplus after hostilities had ended are some examples of the loss potential involved in these latter programs. _ In addition, the Corporation has elected on its own initiative, pursuant to permissive provisions of law - ,. and in the interest of overall economy of administrative expense in the Government, to forego the sales proceeds from plants, equipment, facilities and inventories which it has declared or expects to declare surplus to War Assets Administration and has directed that such proceeds be paid into the United States Treasury for credit to Miscellaneous Receipts account by that Administration. 3 Digitized by Google Of similar consequence, insofar as the potential of cost recovery to the Corporation is concerned, are the provisions of Public Law 364, 80th Congress, whereunder the Corporation is directed to transfer to the Departments of the Army and the Navy without further reimbursement such of certain plants, equipment and facilities as the Secretaries of those departments may determine to be essential in the national interest. Circumstances and conditions such as those outlined in the three preceding paragraphs substantially account for the fact, as determinable from Schedule 3, that the Corporation anticipates that net unrecoverable costs with respect to its outlays for property, plant and equipment will amount to $4,855,748,781 and with respect to the production or procurement of strategic materials and supplies will amount to $266,743,502. These two amounts, together with the $3,089,434,043 in direct subsidy payments previously referred to, account for $8,211,926,326 of the $8,632,714,519 of unrecoverable costs and net expenses arising under these special programs for national defense, war and related purposes as shown in the balance sheet and Schedule 3. It will be observed that the unrecoverable costs on the Corporation's outlays for property, plants and equipment and in connection with the production or procurement of strategic materials and supplies, as referred to in the preceding paragraph, represent costs which the Corporation does not expect to recover in its accounts. This, however, does not mean that the Government as a whole has experienced or will experience losses in the foregoing amounts. Offsetting these unrecoverable costs to the Corporation in substantial but presently undeterminable amounts will be, for example, the sales proceeds which War Assets Administration has realized or will realize for the Government's account from disposition of these assets and the value of the benefit which will accrue to the Departments of the Army and the Navy by way of having the ownership of plants and facilities which are essential in the national interest transferred by the Corporation to the United States Government without further cost to the Government and continued in operation under the supervision of those Departments. The funds involved in these programs, and to a certain extent in the Corporation's regular lending programs, were borrowed from the Treasury Department, the outstanding notes for which aggregated $10,009,704,982 at June 30, 1947, including accrued interest thereon of $43,564,132 to that date. It is obvious that the Corporation is not in a position to absorb the unrecoverable costs incurred in connection with these special programs and also make full payment to the Treasury Department in settlement of its outstanding note obligations. Accordingly, consistent with the provisions of Public Law 248, 79th Congress, the Corporation has recommended that the Congress be requested to authorize the Secretary of the Treasury to cancel outstanding notes of the Corporation as of June 30, 1947, in the amount of $9,313,736,531, representing the unrecovered costs of these special programs to that date; subject, however, to a requirement that the Corporation pay into the Treasury for credit to Miscellaneous Receipts account all recoveries, less applicable expenses, realized by the Corporation under the special programs subsequent to that date. The form and content of the accompanying financial statements and the related explanatory notes have been approved by the Controller of the Corporation and by each member of the Board of Directors. CREATION AND PURPOSE The Reconstruction Finance Corporation was organized and began operations February 2, 1932 following its creation by Act of Congress approved January 22, 1932. The Corporation was created primarily for the purpose of establishing in government a source of credit which could be used to assist in strengthening the Nation's economic and credit structure which had suffered severely as a result of the violent depression of that era. In its early years the Corporation's major functions comprised the extension of credit to agriculture, commerce and industry through loans to banks and other financial institutions, insurance companies, agricultural agencies and railroads. From time to time as economic conditions shifted and there was indicated a need for expansion of government credit, the authority of the Corporation was broadened by amendatory and supplemental legislation to include the purchase of capital stock of banks, insurance companies, agricultural credit corporations, and national mortgage loan associations, loans to business enterprises, mining interests, agricultural improvement districts, and loans to assist in the financing of public works and self-liquidating projects. During the national defense and war periods Congress further augmented the Corporation's functions to enable it to assist in carrying out various programs essential to the national defense and war effort, such as the financing of plant conversion and construction, providing war production facilities, acquiring critical and strategic materials, and other diversified undertakings. The Corporation originally had succession for a period of ten years, later extended to fifteen years and by Public Law 132, 80th Congress, approved June 30, 1947, it was extended to June 30, 1948. Under the provisions of this Act the Corporation's lending powers were substantially curtailed and its wartime func4 Digitized by Google tions were terminated except with respect to the production of tin and synthetic rubber and the payment of premiums on building materials for use in the Veterans Housing program. The Corporation was authorized however to carry out all contracts and commitments outstanding as of June 30, 1947. This legislation confines the Corporation's lending functions to the purchase of obligations of, and the extension of loans to business enterprises, including railroads and air carriers, financial institutions, public bodies and agencies and instrumentalities of public bodies, and the making of catastrophe loans. LENDING ACTIVITIES Direct Business Loans and Participation with Banks in Business Loans The RFC's normal peacetime activity is its loan and investment program, and loans made to business enterprises directly and in participation with banks constitute its principal lending operation. During the fiscal year 1947 in excess of ninety per cent of the number of all'loans made by the Corporation were business loans. The Corporation is not in competition with private sources of credit, but in order to assist the banks of the nation in supplying credit to business it will participate in such loans in cases where banks are unable or do not desire to undertake the entire risk on their own account. The Corporation may make loans to business enterprises only in instances where credit is not otherwise available on reasonable terms, and provided such loans are so secured or are of such sound value as reasonably to assure repayment. A Small Loan Participation program was inaugurated by RFC in early 1947 for the purpose of making longer term credit more readily available to small business concerns through regular banking channels. The plan provides that at the request of a bank the Corporation will consider taking a participation of not more than seventy-five per cent in business loans up to a maximum of $100,000. The program is designed to be of service in those instances where loans would not be made without such assistance. Under this arrangement the facilities of the Corporation become more conveniently available in the small communities of the country at less cost than would be possible otherwise, and the potential demand on the government for direct loans is reduced. The participation agreements provide that the Corporation receive a fee based upon a graduated scale for the contractual liability represented by the agreement. Since inception of the program in January 1947 to June 30, 1947, the Corporation bad agreed to participate in 1,639 small loans amounting to $40,300,000. Including the Small Loan Participation commitments, 10,500 business loans in the aggregate amount of $393,800,000 were authorized during the fiscal year 1947 and approximately $91,000,000 had been disbursed. Recorded business loan disbursements of $142,000,000 in the fiscal year 1946 include one large loan, $102,788,000 of which was applied in settlement of the unpaid principal balance of a national defense loan made by the Corporation to that borrower in a prior fiscal year. If the foregoing amount from this particular loan is excluded from the 1946 fiscal year disbursement total for business loans, the 1947 fiscal year disbursements of $91,000,000 would represent more than two and a half times the amount of the remaining business loan disbursements made in the 1946 fiscal year. · RFC was given authority to make loans directly to business enterprises more than thirteen years ago, and since that time it has made commitments for 29,800 loans totalling $1,400,000,000 for a wi(ie variety of purposes and to many types of industry. These loans have ranged from a few hundred dollars to many millions, but approximately ninety per cent of the total number of business loans authorized have been to small business concerns. The following chart shows by fiscal years for the ten-year period, July 1, 1937-June 30, 1947, the amount authorized by the Corporation for business loans as well as the amounts disbursed, collected and outstanding. 5 Digitized by Google RECONSTRUCTION FINANCE CORPORATION LOANS TO BUSINESS ENTERPRISES EXCLUDING NATIONAL DEFENSE :tt~: =-.::= Fiscal Ytara 1938-1947 400,--------------------------------------400 2001------------------------------+----------1200 ·.·:.·.·.·:::::::. AUTHORIZED150 t--------,r-----------------------+-----i--1----E::;~: : : :!;':';: : :·:~:;.¾---t 150 : izT:i: :m:::::rrt lil@l ',, @lMMfa ··:•:-:-:-:-:-:-:•:·:· 1oot----+,f;;'f.::~t-W-~i:':':t--f'ii-'i+'-'f't------..-------------f--➔~~-~~~--t100 DISBURSED 1938 1939 1940 1941 1944 1947 Public Agency Loam The demand for loans and the purchase of obligations in connection with projects authorized under federal, state or municipal law has been comparatively small since the war. Such loans were authorized in the 1947 fiscal year in the amount of $1,115,000. The demand for loans to assist in financing this type of enterprise is determined largely by the availability of essential manpower and materials and consequently it tends to increase with the economic need for promotion of employment by the federal government, states and municipalities. In past years the Corporation has assisted in financing numerous public agency projects such as the Pennsylvania Turnpike in the amount of $37,400,000; the Knickerbocker Village, New York amounting to $8,000,000; the 240-mile aqueduct to carry water from the Colorado River in Arizona to Southern California, costing $208,500,000; the San Francisco-Oakland Bay Bridge, representing an investment of $73,000,000; and many others. From the beginning of this activity the Corporation's investment has amounted to $768,600,000, the major portion of which was advanced during the period 1937 to 1942. Public Law 256, 80th Congress, approved July 29, 1947, provides that the aggregate of the unpaid balances of such loans for construction purposes plus outstanding commitments may not exceed $125,000,000. Catastrophe Loans In the 1947 fiscal year 83 catastrophe loans amounting to $383,000 were approved by the Corporation. These loan commitments were made for rehabilitation of property damage by the tornado which swept across the Oklahoma-Texas Panhandle area; the destruction resulting from the series of explosions at Texas City, Texas; and devastation caused by floods and tornadoes which occurred in Pennsylvania, Arkansas, Missouri, Illinois, Iowa, Ohio and Nebraska. The Corporation-either directly or for a period from 1937 to June 30, 1945 through its affiliate, Disaster Loan Corporation-has been authorized since 1933 to make catastrophe and disaster loans. From 1933 to June 30, 1947 approximately 24,900 such loans aggregating $54,000,000 have been approved. 6 Digitized by Google More than $8,600,000, representing 7,500 loans, was authorized as a result of the Ohio River flood in 1937. Following the hurricane which caused widespread damage in the New England States in September 1938, a total of 1,880 loans was authorized involving approximately $4,062,000. Other Loans and Purchase of Securities By Public Law 656, 79th Congress, approved August 7, 1946, the Corporation was authorized to furnish a market for veterans home loans made pursuant to the provisions of the Servicemen's Readjustment Act of 1944, as amended. The purpose of the legislation was to assure originating mortgagees such as banks, building and loan associations, and other private lending institutions, a secondary market for such investments at par and thus encourage the extension of credit to assist veterans in financing the purchase of homes. As of June 30, 1947, when the Corporation's authority to carry on this function expired, it had purchased 11,800 such mortgages in the gross amount of $67,080,000 and had commitments outstanding to purchase 13,200 additional loans amounting to $81,200,000. Other authorizations during the fiscal year 1947 included: for loans to manufacturers of prefabricated houses and building materials in connection with the Veterans Emergency Housing Program in the amount of $41,460,000; for loans to railroads and air carriers aggregating $88,000,000; for real estate mortgage loans involving construction of new buildings, remodeling existing buildings, and refinancing distressed properties amounting to $4,200,000; for loans to the Rural Electrification Administration and to the Secretary of Agriculture in the total amount of $470,000,000; and for loans to the Government of the Philippines for $70,000,000. Under Public Law 266, 80th Congress, the Corporation's authority to advance funds to other governmental agencies was withdrawn and its authority to make national defense loans expired June 30, 1947, except as to commitments outstanding as of that date. Federal National Mortgage Association The Corporation, through its subsidiary, Federal National Mortgage Association, may purchase mortgages on homes and rental housing projects insured by the Federal Housing Administration. However, during the fiscal year 1947, the demand upon the Association to buy such mortgages was light. Federal National Mortgage Association was organized under the provisions of Title III of the National Housing Act, as amended, for the purpose of assisting in establishing and maintaining a market for this type of paper so as to encourage the construction of housing accommodations and investment in such mortgages by private lending institutions. Since organization of the Association in 1938 more than 66,000 mortgages aggregating $271,600,000 have been acquired and over that period of time 49,000 of such mortgages with an unpaid principal of $165,600,000 have been sold for a consideration of $171,800,000. Effective January 1, 1948, the Association will purchase mortgages insured under sections 203 and 603 of the National Housing Act as amended (except farm mortgages), which are delivered to the Association within one year after the loans have been insured by the Federal Housing Administration. The Association is not authorized by law to make real estate loans insured under sections 203 or 603, or to make or purchase insured or uninsured second mortgage loans. PURCHASE OF SURPLUS PROPERTY FOR RESALE TO SMALL BUSINESS RFC first undertook the purchase of surplus property for resale to small business as a result of the transfer of this function from Smaller War Plants Corporation by Executive Order 9665 effective January 28, 1946 and from that date through June 30, 1947 over 17,000 sales covering surplus property having a value in excess of $57,000,000 have been consummated. The acceptance of applications for the purchase of such property was temporarily discontinued on March 11, 1947 due to a ruling of the Comptroller General; however, under the provisions of Public Law 132, 80th Congress, the Corporation was authorized to re-engage in this program. During the fiscal year 1947 approximately 13,200 small business priority applications were processed and surplus property in the approximate amount of $40,600,000 was acquired and resold. More than 19,000 priority applications were canceled during the year because the material desired was not available and funds received with such applications were returned to the applicants. 7 Digitized by Google NON-LENDING AcrIVITIES Production and Sale of Tin The Corporation purchased $54,988,000 of tin, tin ores and concentrates during the period July 1, 1946 to June 30, 1947. Its sales of tin amounted to $89,716,000 for the same period. In early 1941 RFC entered into an agreement for the construction of a tin smelter in Texas City, Texas, and the plant was completed in April 1942 at a cost of $6,638,000. This government-owned plant, operated for the account of RFC, is the only such facility of importance in the Westem Hemisphere and was built to insure a domestic supply of tin in the United States, which prior to the war had not produced as much as one per cent of its requirements. There is no adequate source of tin ores in this country and during the war the Texas City smelter was fed with ores obtained primarily from Bolivia. From 1942 to June 30, 1947 the plant has produced 377,343,000 pounds of tin at a cost of $204,428,000 of which 359,840,000 pounds have been sold for $202,318,000. These data do not include certain direct purchases and sales of refined tin during the metals procurement program which were not involved in the tin smelter operations. Under the provisions of Public Law 125, 80th Congress, RFC was authorized to continue the purchase and sale of tin and to operate by lease or otherwise the government-owned tin smelter at Texas City until June 30, 1949, or until such earlier time as the Congress shall otherwise provide. RECONSTRUCTION FINANCE CORPORATION TIN SMELTER - TEXAS CITY PRODUCTION AND SALES MILLION ,OUNDS Fiscal Ytara 1942-1947 IIIWON IIOUNDS 1 5 0 , - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - , 150 Production and Sale of Synthetic Rubber In the fiscal year 1947 there was produced for the account of the Corporation 1,531,000,000 pounds of synthetic rubber in 44 government-owned plants at a cost of $214,000,000, exclusive of interest, depreciation, administrative overhead, etc. During this period the Corporation sold 1,504,000,000 pounds of synthetic rubber for $279,800,000. The synthetic rubber program was started in 1940 and at that time, for all practical purposes, there was no commercial production of the product in this country. RFC financed the construction of 51 plants and related facilities for synthetic rubber production, which, exclusive of discontinued projects, engineering sur8 Digitized by Google veys, etc., represented upon completion a total investment of $666,217,000. By the close of 1945 these plants were producing at the rate of over 1,000,000 tons of synthetic rubber annually. Since the beginning of the program to June 30, 1947, approximately 6,363,000,000 pounds of synthetic rubber have been produced at a cost of $1,417,033,000 and 6,252,700,000 pounds have been sold for $1,263,000,000, excluding war order premiums. Pursuant to Public Law 24, 80th Congress, the Corporation is authorized to continue the manufacture and sale of synthetic rubber until March 31, 1948 and to carry on essential research in connection with the development of the synthetic rubber industry. It remains for the Congress to determine the ultimate disposition of this operation, i.e., whether it shall be placed in private industry or continued as a government function. RECONSTRUCTION FINANCE CORPORATION . SYNTHETIC RUBBER PRODUCTION AND SALES IIWON Fiscal Years 1943-1947 BILLION POUNDS 2.5r------------------------ ---------------, 2.5 POUNDS ----------------~2 2..----------------;;~~~-.-.-.·::::::: PRODUCTION .. }: ,.5 1 - - - - - - - - - - - - - - - - - r:: .:.:·:•:.:•::::;:::~:::?::::'.i:::::/·l:4-# .._----➔:•:.- • . ~ ._._. :}: II - Ii ;;;J, ········:···· · ;;t . . :i;: 0 .5 :f :•: I--------J1:::•::•i:: : : •: r: : •:r : ::::: wI .:~: : :- :::it ; ; ; ; : '~ . . ., ,==. . . •· " :li!!l!ii "'·" llf :;: : :;:) ._:(}I):}J-::::::::::::::\::::: : ;: :il11 /: : :;: : : : 1lll1 iII:iliI::f: 11lHl ,. . . . :. :, :.- .: !J!!Jfj!. _!!!!IflUl!1!!fil- ,., I ···········•·L_______[••:•:•:•:•:::• : : It ,i . Ji i 5 :.--! l~i. l~ l~!•~•=1-~l~ l~ l~ l l~ }~~-[-:=J~ ••~~ ::_.~;~~= "~~H~·· ~~~~=~~";1~~::~:~ 1~.~ ~ 0 0 ~, 1943 J944 1945 1946 1947 Purchaae and Sale of Other Commodities During the fiscal year 1947, RFC continued the purchase and sale of certain other strategic materials and supplies which it had bought and sold during the war. In the fiscal year approximately $535,000,000 of BUch commodities were purchased representing principally natural rubber, alcohol, molasses, and copper. Sales in the same period amounted to $884,300,000. The Corporation began accumulating stockpiles of strategic minerals and metals and other critical or strategic supplies in 1940 and, on a cumulative basis, it had expended approximately $9,681,000,000 for this purpose to June 30, 1947. Sales of such commodities and materials amounted to $9,505,000,000 during the same period. More than fifty categories of strategic and critical minerals and metals were purchased in thirty-eight states of the nation, and from Alaska, the Philippines and fifty-one foreign countries and territories. It also purchased over that period approximately 200 categories of critical or strategic supplies including Cuban sugar and molasses, drugs, wool, cordage fibers, rubber, pig and hog bristles, shellac, hides, aviation gasoline, alcohol, chemicals, fats and oils, forest products, and other miscellaneous items. Guaranteed Market Agreements Covering Prefabricated Houses and New Type Building Materials Public Law 388, 79th Congress, authorized the RFC to guarantee markets for new type building materials and prefabricated houses to the extent that the Housing Expediter found this necessary to assure a sufficient supply for the Veterans Emergency Housing Program. 9 Digitized by Google At the request of the Housing Expediter, RFC during the fiscal year 1947 entered into market guarantee contracts with 21 manufacturers of prefabricated houses covering approximately 62,500 units and authorized the execution of contracts with 6 manufacturers of new type building materials. Direct Subsidies The Corporation recorded claims in the amount of $109,000,000 from July 1, 1946 to June 30, 1947 under the several direct subsidy programs. The principal commodity items involved were copper, lead, zinc, livestock, stripperwells, and building materials for veterans housing. With the exception of the clearance and settlement of subsidy claims which were pending at June 30, 1947, the Corporation's activities in connection with these programs are virtually completed. The subsidy programs were instigated as a war measure for the purpose of stimulating production of materials and supplies essential to the national defense and war effort. From the inception of the programs to June 30, 1947, the Corporation had expended in direct subsidy payments an aggregate amount of approximately $3,090,000,000. Some of the principal items involved were meat, petroleum, flour, butter, zinc, copper, excess transportation costs, coffee, lead, wood pulp, and nitrate of soda. U. S. Commercial. Company At the request of the President and pursuant to arrangements made with other interested government departments, RFC through its subsidiary, U. S. Commercial Company, engaged during the 1947 fiscal year in selling merchandise made available to it in Germany, Japan and Korea by the United States military authorities. The primary purpose of the program is to provide dollar exchange for use in facilitating administration of those areas under direction of the military authorities. Products imported included wines, toys, silk, textiles, metals, rubber, and other manufactured products and raw materials. Sales for the fiscal year, primarily silk and other merchandise imported, together with textiles sold in foreign countries, amounted to approximately $109,400,000. From the commencement of the program to June 30, 1947, $111,600,000 of sales have been made as a result of this activity. The Corporation also performed, through U. S. Commercial Company, various functions on Pacific Islands administered by or under direction of the United States military forces. These operations were assumed at the request of the Department of the Navy and comprise such enterprises as a dairy farm, a hog farm, and fishery projects. Primarily, the activities were intended to develop island resources and to supply troops and military hospitals with fresh vegetables and other foodstuffs. In addition a number of trade stores are operated throughout the islands to which native products are sold and in tum the civilian population purchases from the stores small agricultural tools, fertilizer, fishing equipment and other articles intended to develop a subsistence economy. The volume of business transacted in the native stores has averaged approximately $125,000 per month. Millions of pounds of vegetables, more than one thousand quarts of milk per day, several hundred thousand pounds of pork, and a large tonnage of fish have been produced and delivered for use by the armed forces and the naval hospitals located on the islands. RFC is not at this time associated with the local food production program on the Pacific Islands. However, it is continuing the operation of approximately one hundred native trade stores. It is expected that responsibility for these latter operations will be assumed by the Department of the Navy not later than December 31, 1947. It is also contemplated that responsibility for the importation and sale of merchandise available for exports in Germany, Japan, and Korea will be taken over by the United States military authorities not later than December 31, 1947. Defense Plants and Equipment RFC declared surplus to War Assets Administration in the fiscal year 1947 defense plants and other facilities in which it had an aggregate investment of $2,074,000,000. As of the close of the fiscal year the Corporation held (in addition to the synthetic rubber plants, the Texas City tin smelter, and fiber plantations in Central America and Haiti) defense plants and equipment with a book value of $1,245,000,000. In due course, the majority of these plants and other facilities will be declared surplus to War Assets Administration for disposal although a number of them will be transferred to the Department of the Army, Navy or Air Corps. During the national defense and war period, the Corporation constructed or equipped more than 2,000 industrial plants for use in war production, 62 flying schools and 150 other facilities essential to the war effort. The gross recorded cost and related expense, applicable to the land, plants, machinery and equipment and other such facilities amounted to approximately $7,800,000,000. These plants were leased to private industry for the manufacture of war material and supplies, with the exception of the synthetic rubber plants, the Texas tin smelter, the magnesium and aluminum facilities and a few others, which were operated by private organizations under a management arrangement for the account of the Corporation. They included facilities to produce aircraft, engines and parts, aviation gasoline, chemicals, machine tools, guns, tanks, Digitized by Google shells, bombs and other ordnance, ships and parts, steel and pig iron, industrial machinery, medical supplies, and numerous other facilities. It has been estimated that these facilities represent over 10% of the value of the entire production facilities of the country, and in particular industries these facilities account for as high as 90% of industry capacity in magnesium metal, 71 % in aircraft manufacture and aircraft engine industry, 58% in aluminum metals and 50% in the aluminum fabrication industry. Fiber Plantations Production of fiber during the fiscal year 1947 amounted to 26,905,000 pounds on the Corporation's six plantations located in Costa Rica, Guatamela, Honduras, Panama and Haiti. The production cost of this commodity was $5,213,000 and 23,866,000 pounds were sold during this period for $4,034,000. Prior to the war the Philippines were the principal source of supply for the type of fiber grown on these plantations. This source was cut off when the Japanese invaded those islands. Fibers being essential to the war effort, RFC in early January, 1942, arranged to finance the planting and processing of fiber on these plantations, in which it now has an investment of approximately $13,280,000. From the beginning of the program to June 30, 1947, the plantations have produced 71,587,000 pounds of fiber at a cost of $17,065,000 of which 67,216,000 pounds have been sold for $8,366,000. The agreements under which these projects were established and the plantations operated do not expire until the latter part of 1948. However, steps have been taken to bring about disposition of the properties as soon as this can be accomplished. Loans, Leases, Plants and Equipment of Smaller War Plants Corporation Pursuant to Executive Order of December 27, 1945, RFC acquired for liquidation certain assets and liabilities of the Smaller War Plants Corporation, including plants, equipment and outstanding loans receivable. Public Law 132, 80th Congress, directed RFC to continue this liquidation program. During the fiscal year 1947, RFC disbursed on loan commitments theretofore made by Smaller War Plants Corporation, and for refinancing purposes in connection with such loans, approximately $5,358,000, and collections on Smaller War Plants Corporation loans amounted to $12,336,000. During this same period, RFC declared surplus to War Assets Administration equipment, formerly the property of Smaller War Plants Corporation, representing an investment of approximately $1,700,000. At the close of the fiscal year the investment in such facilities amounted to $4,349,000. The remaining lands, structures and equipment will be declared surplus as expeditiously as practicable. War Damage Corporation RFC continued the liquidation of the affairs of its subsidiary, War Damage Corporation, during the fiscal year 1947. Such activities consisted in the main of settling 866 claims requiring an expenditure of approximately $893,400 and carrying on the audit of those companies which acted as fiduciary agents for the Corporation. As of June 30, 1947, the Corporation had paid out an aggregate amount of $73,000 in settlement of 279 claims under the war damage insurance policy program; and under the so-called "free" war damage insurance program, $1,201,000 was expended in settlement of 1,503 claims for loss arising prior to July 1, 1942. War Damage Corporation, which was created December 13, 1941, originally provided financial protection without payment of premium against loss of or damage to property as a result of enemy attack. Such coverage was continued until July 1, 1942 when the Corporation made available policies at uniform premium rates throughout the United States, its territories and possessions. Through the facilities of 546 fire and 88 casualty and surety insurance companies which acted as fiduciary agents of War Damage Corporation in receiving applications and premiums and issuing policies, more than 8,700,000 policies or renewal certificates were issued representing a potential liability of approximately $140,000,000,000. Aggregate premiums collected amounted to almost $250,000,000. The fire insurance companies had a 10% participating interest, up to a limit of $20,000,000, in the operating profits or losses of the program, and the casualty and surety insurance companies had a like interest, limited to $5,000,000, in the program of insurance on money and securities. 11 Digitized by Google PERSONNEL The following chart indicates the number of RFC employees as of the end of each fiscal year over the ten-year period 1938-1947. R.F.C. EMPLOYEES Fiscal YIOfl 1938-1947 HO. OF EMPLOYEES HO, OF EMPLOYEES 15,000 l~<>qO ~ - - ---rn :•:•:•:;;:;:; ·:•:•::•:;.;; •:•:•:•:•;:;:;if - ~ ......~ .......~ ......~ ..... r-------112,ooo 1 2 p o o i - - - - - - - - - - - - - - - - - - - - - - - -- = ::::.:::::::: •.:•.::.~.·:.:.I...I.·l.i.: ::.:.:l.i.l.:.i.l.:.l...: 9 , o o o i - - - - - - ~ . . . . . _ - - - - - - - - - - - - - - - - - - - ~~ ~--t~~t--------+tpoo ~ :············: e,ooo t - - - - - - - - - - - - - - - - - - -~ ~ r ~ ............ ............ ----.: ..-.... .... .............,......... 3,0001---1"""""""' ,:.:;:··,:;:,:; ···:;.:;:· ···~···1--#. ::::;.:;: :::.~·::::;.:;: :1--1-............. .......... ...;..; ............-l:;..::§:·.-.-§:·:.::§ .: ·.=·1--- = ~ .·:.·:·.=.·:··:··:.•·•.·=.·:..:.·:· ::::::::::::::::::::::::· :.::.:_:,::_:_:_:_:_:,: ......................... ---1~ ~f -~~i!it------i~ ~t---t\! ...'-.... '-:!:~ ..•f!: ...1--1 ,,ooo :-:-:-:-:-:-:-:-:-:-:-:-: ············ :.:.:.:.:.:.:.:.:.~:.:.: .:.:.:.:.:.:.:.:.:.:-~:. .... . ....... · ···· ··· · ·· ·· :.=.=.=.=_:_=.=.:_:_:_:_: .............. ;:::\:\:::::::=: .fi#.i§.4----+.~ ~ - - E ~~---1;;;:;.;;;~f ---fi!:;~~---i~ ....§......!i!' .....~ ... 1---i 3,000 0~~il.-..Jii.~~!~~a........lii:~~-~~--~;~;~;~.; _~~~~:~~~~-~-·-.·-. oi-~·~ I~~~ I._~-~i~ ·-····_·· _ . a ···_····_···~·• .......... : _~;:_· ;_~ ____ ~ _~ _~ _ __~0 1938 1939 1940 1941 1943 1942 1944 0 1947 1948 1945 At the close of the fiscal year 1938, RFC had 3,277 employees, including both the Washington Office and the Field. During the ensuing several years, the Corporation found it necessary to increase its personnel from time to time as its functions were added to and expanded. The largest number of employees during the life of the Corporation was reached in February, 1946, when for a short period there were more than 35,000 RFC employees just prior to transfer of the surplus property disposal functions, and the employees engaged therein, to War Assets Administration. The peak employment in the fiscal year 1947 was 12,299 in July, 1946, and by June 30, 1947, the number stood at 7,718, a reduction of more than one-third. Substantial reductions in personnel are projected for the 1948 and 1949 fiscal years. Respectfully submitted, JOHN D. GOODLOE, Chairman of the Board December 26, 1947 12 Digitized by Google I! I Digitized by Google CONSOLIDATED BALANCE SHEET June 30, 1947 ASSETS CASH............................................................................................. I 265,621,685 INVESTMENTS IN AND RECEIVABLES FROM OnlER U.S. GoVERNMENT AGENCIES-NOTED Investments, at cost, and loans (including accrued interest and dividends): Rural Electrification Administration-loans .................................... . I 510,848,904 Federal home loan banks-<:apital stock ....................................... . 123,186,105 Secretary of State-advances for European aid programs ......................... . 175,000,000 Secretary of Agriculture-loans ............................. , ... . ............. . 40,367,816 Defense Homes Corporation-loans ........................................... . 43,041,944 Federal Housing Administration-debentures ......... . ...... . .................. . 1,735,784 I 894,180,553 Accounts receivable, Iese reserve of 1207,943 ........................................ . 0rHER INVESTMENTS AND RECEIVABLES-NOTE 8,764,829 902,945,382 E Investments, at cost, and loans: Industrial and commercial enterprises ........ . ............. . ................... . I 276,422,299 Financial institutions ........................................................ . 163,407,332 Railroads ..•................................................................ 146,886,898 States, territories and political subdivisions ..................................... . 120,265,175 United Kingdom of Great Britain and Northern Ireland, leBB prepayments of 112,798,666 ..............•.......•........................................ 181,683,888 Republic of the Philippines ................................................... . 60,000,000 Mortgagee (including 16,807,060 principal amount fully insured by F.H.A. and 167,076,941 subject to partial guarantees by Veterans Administration) ........... . 80,965,564 Properties and securities acquired by foreclOBUre or in liquidation of loans, lees collections ...•............................................................. 21,867,845 Other loans ..••............................................................. 1,435,992 Accrued interest and dividends ............................................... . 21,096,191 Less reserve for loBBeB .......................................................• 11,074,031,184 100,000,000 I 974,031,184 Accounts and other notes receivable, Iese reserve of 1120,000 . ........................ . 4,735,366 978,766,550 LAND, BUILDINGS AND EQUIPMENT-NOTE F Used in administrative operations, Iese reserve for depreciation of 12,777,071............ I Not used in administrative operations, Iese reserve for depreciation of 16,000 ........... . Machinery and equipment transferred from Smaller War Plants Corporation for administration and diepoeition, leBB reserve of 17,627,587 ...............•.................. 10,653,672 319,422 539,716 11,512,810 12,158,846,427 PROJECTED CoST RECoVERIES UNDER SPECIAL PROGRAMS F..stimated recoveries to be effected from diepoeition or liquidation of properties, facilities, inventories, receivables, etc., arising out of non-lending activities for national defense, war and related purposes-Schedule 3 and Note G .................................... . 681,022,012 12,839,868,439 Digitized by Google RECONSTRUCTION FINANCE CORPORATION AND SUBSIDIARIES LIABILITIES PUBuc Trade accounts payable ......................................................... . LIABILITIES TO THE Accrued subsidy payments ...................................................... . Other accounts and claims payable ............................................... . Trust and deposit liabilities ..................................................... . Deposits against future 88.les .................................................... . Accrued liabilities .............................................................. . Liability to insurance companies for participation in war damage insurance program ...•• Provision for claims arising under war damage insurance program .................... . Demand advances by commercial banks under letters of credit ....................... . Deferred income and other deferred credits ........................................ . LIABILITIES TO U. • 63,051,480 17,016,181 19,089,849 22,964,814 24,212,984 41,894,329 20,016,460 637,000 2,576,768 197,901 I 211,657,766 S. GoVERNMENT AGENCIES Accounts payable, principally to Departments of the Army and Navy for 88.les proceeds of commodities from occupied areas and for net receipts from 88.les of gasoline. . • . . . . . . . . I Trust and deposit liabilities ....................................................•. Accrued liabilities .............................................................. . Accountability for: Undistributed net receipts from dispoB&l of securities acquired from Public Worka Administrator, Federal Worka Agency ...................................... . Net proceeds from liquidation of assets of Smaller War Plants Corporation ......•.. Unexpended balances of appropriation allocations .............................. . 73,228,653 11,290,341 829,280 45,719,335 25,565,238 1,174,522 REs.EllVE FOR EMPWYEES' EARNED ANNl.JAL LEAVE .•..••...•..•.•••..••••.••••.••.•• EQUITY OF U. S. 157,807,369 6,683,548 TREASURY DEPARTMENT Capital stock, less 1175,000,000 retired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I 325,000,000 Notes payable to Treasury Department and accrued interest thereon of 143,564,132Note H ............... _....................................................... 10,009,704,982 Net income from lending activities-Schedule 1. ................................... . 551,901,483 Net income from war damage insurance program-,Schedule 2 and Note I. ............ . 209,827,810 Lesa unrecoverable costs and net expelll!eS of non-lending activities for national defense, war and related purpoaes-Schedule 3........................................... 111,096,434,275 8,632,714,519 2,463,719,756 Thia balance aheet ill subject to the accompanying "Notes to Financial Statements". 12,839,868,439 11 Digitized by Google RECONSTRUCTION FINANCE CORPORATION AND SUBSIDIARIES For the cumulative period from dates of incorporation to ' SCHEDULE I-NET INCOME FROM LENDING ACTIVITIES June 30, 1947 F'---• year ended June 30, 1946(1) June 30, 1947 INCOME Interest and dividends on loans and investments ....................... . Excess of proceeds over cost realized on sale o(other:disposition:or mortgages and other investments ............................................ . Income from acquired collateral. .................................... . Commitment and participation fees, and other income .................. . Sl,160,192,784 $1,109,956,190 $50,236,594 51,802,772 12,878,129 49,647,501 12,076,231 5,244,665 6,918,575 2,155,2711 801,898 1,673,910 Sl,231,792,260 Sl,176,924,587 $54,867,673 ExPENSES AND LoSSES Interest expense: On funds borrowed from Treasury Department, less interest on notes canceled and interest redistributed as an expense of non-lending activities for national defense, war and related purposes ........... . On funds held for War Damage Corporation ..............•........• On funds borrowed from the public .............................. . On funds held for others (including U.S. Government agencies) ...... . Administrative expenses-Note M ................................... . Fees paid for servicing mortgages .................................... . Expenses on acquired collateral ....... , .............................. . Other expenses .................................................... . Nm INCOME BEFORE LossEs AND RESERVE PRov1s10Ns ..... LosSES AND RESERVE PROVISIONS-NOTE N Investments, loans and other receivables charged off .................... Provision for losses on investments, loans and other receivables ............. Nm INCOME ........................................... SCHEDULE 2-NET INCOME FROM WAR DAMAGE INSURANCE Net premiums collected .................................................. Interest earned and miscellaneous income .................................. Less: Lo111 and damage claims paid and provided for ......................... Commissions and administrative expenses-Note M ..................... Provision for payments to participating insurance companies of their agreed percentage of the net profits of the program .......................... • • •s • •s 354,138,276 158,902,303 8,642,818 5,691,665 3,795,556 • • 52,706,210 96,013,949 • • • 148,720,159 s 531,170,618 700,621,642 551,901,483 • 232,519,339 S 2,853,379 7,687,978 2,296,384 86,466,912 -021,040,658 1,273,626 347,714,887 S 6,423,389 144,708,918 14,193,385 8,511,964 130,854 5,611,763 79,902 3,642,815 152,741 510,190,347 $20,980,271 666,734,240 $33,887,402 44,065,592 S 8,640,618 90,603,308 5,410,641 134,668,900 $14,051,259 532,065,340 $19,836,143 PROGRAM • •s 246,042,270 9,986,236 256,028,506 1,911,744 24,257,813 • • • 20,031,139 s NET INCOME ........................................... 235,372,718 9,984,362 86,466,912 22,314,284 • 46,200,696 209,827,810 246,042,270 7,688,608 -02,297,628 253,730,878 S 2,297,628 2,493,482 23,735,826 • • • 46,259,544 581,738· 521,987 903 20,030,236 • 58,848· 207,471,334 S 2,356,476 (1) After applying adjustments made in the fiacal year ended June 30, 1947 but applicable to prior periods. • Credits. Thelle achedulee are subject to the accompanying "Notes to Financial Statements". i6 Digitized by • Google See Note L. RECONSTRUCTION FINANCE CORPORATION AND SUBSIDIARIES SCHEDULE 3-UNRECOVERED COSTS AND NET EXPENSES OF, AND ESTIMATED FUTURE RECOVERIES TO BE REALIZED FROM, NON-LENDING ACTIVITIES FOR NATIONAL DEFENSE, WAR AND RELATED PURPOSES For the period from inception of programa to June 30, 1947 U nrecovered Costs and Net Expenses F..stimated Future Recoveries to Be Realized (1) LoANS, ADVANCES, RECEIVABLES AND SECURITIES Loans in connection with the acquisition of materials (including accrued interest) ....................................................... . I Advances for the construction and equipment of plants ................ . Advances in connection with the procurement of materials ............. . Accounts receivable from Treasury Department for strategic materials transferred under Public Law 520-79th Congress (to be paid by cancellation of RFC notes payable to Treasury Department) ............ . Accounts receivable from other U. S. Government agencies, arising principally from sales of strategic materials, and reimbursable services r::ti?rr:e~ ~~ -~~~~~t~~~ ~~~ -~~~~~i-~~ ~~-~ ~-~~~~-~-~~ ~~'.~~1 -~t-~ Receivables from others, arisi~ principally from sales of strategic materials and rentals from leased facilities .................................. . Miscellaneous securities, principally those of enterprises operating in foreign countries in connection with the production or procurement of strategic materials and supplies ........................................... . 16,813,804 1,995,700 22,888,325 I 16,742,404 187,898,259 187,898,259 50,273,741 50,273,741 102,573,985 68,371,853 242,728 14,507,633 4,215,218 PLANTs, EQUIPMENT AND RELATED FACILITIES AND CosTS Property, plant and equipment a substantial part of l'hich has been or will be declared surplus-Notes Oand P ............................... . 16,551,503,411 Excess of cost over proceeds from sales and other disposals of plant and equipment ..................................................... . 360,339,945 Expenses, principally for servicing and administering leases, standby, plant c1earance, protection and maintenance ............................. . 154,540,038 Development and experimental costs for special design aircraft ......... . 15,338,247 Utility connection charges ......................................... . 4,349,653 Write-off of investment occasioned by transfer of Hotel Empire, San Francisco, California to Public Buildings Administration without reim2,137,869 bursement ..................................................... . 114,856 I 386,659,032 $338,151,474 PROPERTY, I 31,447,667 (1) --0--0(1) --02,299,683 --0- I 33,747,350 17,088,209,163 Less: Payments received from other U.S. Government agencies under agreeme~ts pro~~ng for contingent reimbursement of costs of wartime capital facilities ............................................. . 11,379,877,783 816,702,310 Rentals and other income ...................................... . Carrying value of properties acquired without cost ................ . 2,132,939 12,198,713,032 I --0--0--0- I --0- 4,889,496,131 I 33,747,350 PRODUCTION OR PROCUREMENT, AND DISPOSITION OF STRATEGIC MATERIALS AND SUPPLIES Inventories of strategic materials and operating supplies held for disposal, declaration as surplus or transfer to national stockpile-Notes P and Q: Metals and minerals (including 115,248,795 declared surplus). . . . . . . . I 171,709,834 Rubber and related commodities ................................ . 169,443,028 38,814,066 Other strategic materials (including 16,071,735 declared surplus) .... . Operating and other supplies (including 120,730,304 declared surplus) .. 36,551,155 I 416,518,083 Net cost of handling, proceseing and manufacturing strategic materials (in• cluding settlements and expense of $47,993,790 on termination of eontracts and lees expended appro1_>riated funds of 116,302,375 received from other U.S. Government agencies): Metals and minerals ........................................... . I 118,132,716 Natural, synthetic and scrap rubber ............................. . 69,168,917 Other commodities, _principally alcohol, aviation gasoline, petroleum, 278,263,652* foodstuffs, hides, fibers and their products, and chemicals ........ . I 90,962,019* 17 Digitized by Google 1151,045,767 116,762,583 30,015,493 4,638,170 $302,462,013 I --0--0- I --0- --0- (1) (1) (1) (1) RECONSTRUCTION FINANCE CORPORATION AND SUBSIDIARIES SCHEDULE 3-UNRECOVERED COSTS AND NET EXPENSES OF, AND ESTIMATED n.JTURE RECOVERIES TO BE REALIZED FROM, NON-LENDING ACTIVITIES FOR NATIONAL DEFENSE, WAR AND RELATED PURPOSES For the period from inception of pro,rama to June 30, 1947 ( Continued) PRODUCTION OR PROCUREMENT, AND DISPOSITION OF STRATEGIC MATERIALS AND SUPPUES (CoNTINUED) Estimated Future Recoveries to Be Realized (1) Unrecovered Costs and Net Expenses Cost of strategic materials transferred to national stockpile, leBB accounts receivable from Treasury Department of $187,898,259 (to be paid by cancellation of RFC notes payable to Treasury Department} for materials transferred subsequent to June 30, 1946 ..................... . Cost of inventories declared surplus to, and accepted by disposal agenciesNote P ........................................................ . Reimbursement to producers of aluminum for exceBS power costs ........ . Development and experimental costs in connection with procurement of strategic materials .............................................. . Cost of {)reclusive procurement and related o_perations abroad, including activities conducted jointly with United Kingdom Commercial Corporation ....................................................... . s s 62,763,962 35,250,370 26,039,420 --0--0--0- (1) 1,365,511 (1) 3,420,597 117,540,613 --0570,571,026 $303,827,524 DIRECT SUBSIDH'.S TO PRODUCERS AND OniERS Livestock-to slaughterers ................................... ·• .... . Petroleum transportation compensatory adjustments-net ............. . Flour-to producers ....... ·........................................ . Butter-to producers .............................................. . Copper, lead and Binc-to producers who exceeded quotas ............. . Sl,547,148,094 353,232,488 348,431,265 181,617,850 349,969,942 Ot!~~ ~r=~~ ~~~~~~i~. ~~~~-s.t~~~~ ~~ -~~~l~•. ~~~ -~~ ~~~~~~ 309,034,404 s --0--0--0--0--0--0- 3,089,434,043 S --0- OniER COSTS AND ExPENSES Interest expense (including $352,820,230 on funds borrowed from Treasury Department) ................................................... . Administrative expenses-Note M .................................. . Miscellaneous costs and deferred charges ............................ . s s 354,134,288 108,802,885 11,476,421 --0--05,295,664 474,413,594 S 5,295,664 $9,410,573,826 $681,022,012 LEss OniER INCOME Net proceeds of renegotiation settlements-Note R ................... . Discount and interest earned ....................................... . Service fees ...................................................... . Miscellaneous income ............................................. . s s --0--0--0--0- 96,837,295 S --0- 83,936,935 7,611,753 3,051,253 2,237,354 CosTS AND NET EXPENSES ......•.•....••.....••.......• 19,313,736,531 EsTDIATED FUTURE RiccoVERIES TO B11 REALIZED...................... 681,022,012 $681,022,012 UNRECOVERED UNRECOVIIBABLII CosTS AND NET ExPl:NSEs .•••..•.••......••.•.••...•. $8,632,714,519 (1) This column sets forth only the estimated future recoveries to be realized by Reconstruction F"mance Corporation and its subsidiaries. In addition to the amounts shown herein, the Government has realized or will realize additional recoveries, in substantial amounts1 with respect to property, plant, equipment, facilities and inventories declared or to be declared surplUB to War Assets Administration, the sales proceeds from which will not be returned to the Corporation but, instead, will be covered into the Treasury as Miscellaneous Receipts by War ABBets Administration. • Excess of income over costs. This schedule is subject to the accompanying "Notes to Financial Statements". 18 Digitized by Google RECONSTRUCTION FINANCE CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS June 30, 1947 A. The succession and certain of the functions of Reconstruction Finance Corporation were extended for one year through June 30, 1948 under the provisions of Public Law 132-80th Congress. Pursuant to this law, the Corporation is authorized to make loans, investments, purchases, and commitments beginning July 1, 1947 not exceeding $2,000,000,000 outstanding at any one time, and to borrow from the Secretary of the Treasury sufficient funds for that purpose and for the purpose of carrying out any of its commitments lawfully entered into as of the close of business June 30, 1947. Other legislation pertaining to the powers and functions of Reconstruction Finance Corporation and its subsidiaries is referred to later herein. B. The accompanying consolidated balance sheet sets forth the financial position at June 30, 1947 of Reconstruction Finance Corporation, which commenced operations on February 2, 1932, and its active subsidiaries. The active subsidiaries at the balance sheet date, together with their dates of organization, are as follows: Federal National Mortgage Association-February 10, 1938 War Damage Corporatiol\-December 13, 1941 U. S. Commercial Company-March 27, 1942 C. The related statements identified as Schedules 1, 2 and 3 set forth the consolidated operating results of Reconstruction Finance Corporation and, to the extent appropriate, of its subsidiaries from their dates of organization to June 30, 1947, including subsidiaries which had been dissolved or inactivated at that date. These latter subsidiaries, together with their dates of organization and their dates of dissolution or inactivation, are as follows: Rubber Reserve Company-organized June 28, 1940; dissolved July 1, 1945 Defense Plant Corporation-organized August 22, 1940; dissolved July 1, 1945 Defense Supplies Corporation-organized August 29, 1940; dissolved July 1, 1945 Metals Reserve Company-organized June 28, 1940; dissolved July 1, 1945 Disasl,er Loan Corporation-organized February 11, 1937; stock transferred to Secretary of the Treasury against cancellation of notes; dissolved pursuant to Public Law 109-79th Congress, approved June 30, 1945; net assets acquired by Reconstruction Finance Corporation in cash settlement with Treasury Department July 1, 1945. (The operating results of Disaster Loan Corporation prior to July 1, 1945 have not been included in the accompanying financial statements.) War Assets Corporation-organized as Petroleum Reserves Corporation on June 30, 1943, with change in name as of November 15, 1945; dissolved June 30, 1946 Rubber Development Corporation-organized February 16, 1943. The assets and liabilities of this subsidiary were transferred to Reconstruction Finance Corporation July 1, 1946 and its charter expired June 30, 1947. The RFC Mortgage Company-organized March 14, 1935. The assets and liabilities of this subsidiary were transferred to Reconstruction Finance Corporation June 30, 1947, pursuant to the provisions of Public Law 132-SOth Congress, and it thei eupon was inactivated. Distinction has been made in the accompanying statements as between those operating results of the Reconstruction Finance Corporation and its subsidiaries (hereinafter collectively referred to as the Corporation) which pertain to lending activities and those which pertain to non-lending activities for national defense, war and related purposes. In general, the non-lending group of activities commenced during the fiscal year beginning July 1, 1940 and has continued, actively or in liquidation, during the subsequent period to June 30, 1947. D. (a) Pursuant to provisions of legislation enacted by the 80th Congress, the Corporation was directed to transfer to the Secretary of the Treasury, against cancellation in appropriate amount of the Corporation's notes payable to the Treasury Department, its investments in and loans to the following U. S. Government agencies the amounts of which, including principal and accrued dividends on the stock of the Federal home loan banks, were as follows at June 30, 1947: Rural Electrification Administration-Loans. . . . . . . . . . . . . . . . . . . . . . . . $510,848,904 123,186,105 Federal home loan banks-Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . . 40,367,816 Secretary of Agriculture-Loans................................... The transfers directed by this legislation and the related cancellation of the Corporation's notes were effected subsequent to June 30, 1947. 19 Digitized by Google NOTES TO FINANOAL STATEMENTS--Continued (b) Advances in the amount of $175,000,000 made by direction of the 80th Congress to the Secretary of State prior to June 30, 1947 in connection with European aid programs were repaid to the Corporation subsequent to that date from appropriations made by Congress in furtherance of those programs. (c) In addition to the investments in and receivables from U. S. Government agencies separately set forth in the balance sheet, reference is made to Schedule 3 in which are included additional accounts receivable, from the Treasury Department in the amount of $187,898,259 representing the value of materials transferred to the national stockpile subsequent to June 30, 1946 and other governmental receivables of $50,273,741. These receivables represent a part of the unrecovered costs at June 30, 1947 arising in connection with the Corporation's non-lending activities for national defense, war and related purposes. It is anticipated that subsequent to June 30, 1947, the Corporation will recover the $187,898,259 in full by way of cancellation of its notes payable to the Treasury Department and will receive cash reimbursement with respect to the $50,273,741. E. (a) Prior to the fiscal year 1947, it had been the Corporation's general practice to carry in its accounts, as loans receivable, the deficiency balances of loans remaining after application of the assigned value of collateral acquired through foreclosure or otherwise; and to carry as an asset not only the assigned value of the collateral so acquired but also certain costs incurred by the Corporation arising out of its interest in or ownership of such cellateral or the related loan, less any income received from or in connection with the collateral. In general, these deficiency loan balances and the related collateral were carried in the accounts until final realization had been made on the collateral at which time any remaining balances were recognized as losses and charged off. During the fiscal year 1947 this practice was revised and deficiency loan balances together with unrecovered balances of related costs have been recognized as losses, by charge-off to operations, as at the time the collateral was foreclosed or otherwise acquired; furthermore, any subsequent expense incurred or income realized in connection with the collateral so acquired has been charged to or taken into income as of the period in which incurred or realized. Profits or losses on disposition of acquired collateral similarly have been taken into or charged to income as of the period in which realized subsequent to acquisition. The foregoing change in policy has resulted in corresponding revisions in the amount of reserves theretofore provided for losses on loans and investments, including the deficiency balances, acquired collateral, and related deferred net costs referred to herein. (b) In addition to the amounts stated in the balance sheet under the caption "Other Investments and Receivables," reference is made to Schedule 3 in which are included additional investments, receivables and inventories, representing a part of the unrecovered costs at June 30, 1947 arising in connection with the Corporation's non-lending activities for national defense, war and related purposes. With respect to these additional items Schedule 3 also includes an estimate of the recoveries which will be realized by the Corporation subsequent to June 30, 1947 from disposition or liquidation of the additional investments, receivables and inventories referred to herein. F. (a) Pursuant to legislation enacted by the 80th Congress, title to land and buildings owned by the Corporation in the District of Columbia was transferred to the United States in July, 1947. The depreciated cost at June 30, 1947, of the facilities used in administrative operations for which title was transferred pursuant to this law is included in the balance sheet in the amount of $9,252,295. This law further provides that settlement will be made with the Corporation, by cancellation of its notes payable to the Treasury Department, to the extent of the value of the facilities so transferred as determined by the Secretary of the Treasury subject to final determination by the Administrator of the Federal Works Agency if the Corporation does not concur with the valuation determined by the Secretary of the Treasury. As of the date of this report title to these facilities has been transferred to the United States, as previously stated, but determination has not been made as to the values involved for purposes of effecting cancellation of the Corporation's notes payable to the Treasury Department. It is not anticipated that the values to be applicable to this transfer, and the consequent amount of notes to be canceled, will be less than the depreciated cost of the facilities involved as of the date of transfer. (b) In addition to the land and buildings used in administrative operations in the District of Columbia, to which reference is made in the preceding paragraph (a), it is possible that other of the Corporation's property, primarily land, in the District of Columbia which was not used in administrative operations at June 30, 1947, but was originally acquired for that purpose, may be subject to transfer of title to the United States under the requirements and provisions of the same law. At the date of this report, legal counsel for the Corporation and for Public Buildings Administration are examining the applicability of the law to this property, which is included in the balance sheet at depreciated cost in the amount of $319,422. 20 Digitized by Google NOTES TO FINANCIAL STATEMENTS-Continued (c) Machinery and equipment transferred to the Corporation from Smaller War Plants Corporation for administration and disposition is included in the balance sheet in the net amount of $539,716 after deducting a valuation reserve in the amount of $7,627,587. Substantially all of this reserve represents 100% of the cost of those facilities which have been or, it is anticipated, will be declared surplus for disposition by War Assets Administration and from which the Corporation will not receive the surplus sales proceeds. In this connection, reference is made to Note P in which are set forth the arrangements whereunder sales proceeds from surplus property, plants and equipment disposed of by War Assets Administration will be covered into the Treasury as Miscellaneous Receipts and will not be returned to the Corporation. (d) In addition to the amounts stated in the balance sheet under the caption "Land, Buildings and Equipment," reference is made to Schedule 3 in which are included additional property, plants, equipment and related facilities, representing a part of the unrecovered costs at June 30, 1947 arising in connection with the Corporation's non-lending activities for national defense, war and related purposes. With respect to these additional items Schedule 3 also includes an estimate of the recoveries which will be realized by the Corporation subsequent to June 30, 1947 from disposition of the additional property, plants, equipment and facilities referred to herein. G. The assets acquired by the Corporation in connection with its special programs for national defense, war and related activities are in process of substantial and accelerated liquidation. Particularly with respect to the defense plants and related facilities involved in these programs, and to a lesser extent with respect to inventories of strategic and critical materials, a substantial proportion of the assets involved have been or will be declared surplus to War Assets Administration under arrangements whereby the subsequent sales proceeds will be paid into the Treasury as Miscellaneous Receipts by War Assets Administration and will not be returned to the Corporation in further reduction of the unrecovered costs of these assets as shown by the Corporation's accounts at June 30, 1947. In view of the current and projected status of these liquidating programs and the relatively restricted recoveries that the Corporation may expect to realize thereunder subsequent to June 30, 1947 it has been considered desirable, for purposes of clarity, to exclude the unrecovered costs at June 30, 1947 of the assets involved in these special programs from the regular balance sheet categories. Instead, they have been included in significant detail in Schedule 3, together with the estimated future recoveries which the Corporation expects to realize thereon, and the aggregate of such recoveries from all assets involved in the special programs has been included as a separate item in the balance sheet. This treatment of the projected cost recoveries under these special programs in the balance sheet has the further seemingly desirable effect of emphasizing in the balance sheet, under appropriate categories and in reasonable detail, the assets involved in the regular lending programs which, for the future, will constitute the primary concern and responsibility of the Corporation. H. (a) Certain of the notes of the Corporation were canceled by the Secretary of the Treasury prior to June 30, 1947 pursuant to provisions of Public Law 432-75th Congress and Section 602 of the National Housing Act, as amended. These notes evidenced funds obtained by the Corporation by direction of Congress. The aggregate amount of notes canceled to June 30, 1947 was $2,785,673,281, and accordingly the following programs have not been reflected in the accompanying financial statements: Allocations to other Government agencies for relief and other purposes $2,469,670,094 Advances for relief under Emergency Relief and Construction Act of 1932 to States, territories and political subdivisions............. 282,825,767 Interest expense on the foregoing funds. . . . . . . . . . . . . . . . . . . . . . . . . . . 33,177,420 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,785,673,281 (b) Under provisions of Public Law 132-SOth Congress obligations of the Corporation to the Treasury Department for funds borrowed to carry out its lending functions subsequent to June 30, 1947, will bear interest at a rate determined by the Secretary of the Treasury, taking into consideration the current average rate on outstanding marketable obligations of the United States. In this connection it is noted that the "current average rate on outstanding marketable obligations of the United States," due to the inclusion of long term obligations, is higher than the rate of 1 % per annum which is applicable to the Corporation's notes payable to the Treasury Department outstanding at June 30, 1947. A substantial portion of the outstanding notes payable to the Treasury Department represents funds borrowed to finance the Corporation's non-lending activities for national defense, war and related purposes, the unrecoverable costs and net expenses of which, as appearing in the 21 Digitized by Google NOTES TO FINANOAL STATEMENTS-Continued accompanying consolidated balance sheet, amount to $8,632,714,519. In view of the anticipated recognition by Congress of the impairment of the Corporation's capital by way of authorizing cancellation of notes payable to the Treasury Department and of the fact that application of the higher rate of interest to such notes payable would only serve to increase the capital impairment and the amount of notes to be canceled, the Secretary of the Treasury has agreed to continue at least until July 1, 1948, the 1 % rate on the outstanding notes payable as at June 30, 1947. Obviously the increased rate of interest on new borrowings will significantly increase the cost of the Corporation's future lending operations. (c) Prior to July 1, 1947, the Corporation, pursuant to provisions of then applicable laws, was authorized to borrow up to stated amounts for general purposes, specific purposes and, in certain instances, such amounts without limitation as might be necessary for specific purposes. Such laws have been superseded by Public Law 132-SOth Congress. Notes payable to the Treasury Department as shown in the accompanying balance sheet represent the aggregate unpaid balance at June 30, 1947 of notes issued by the Corporation under authority of the laws which have been superseded. Segregation by the categories or purposes applicable at the times the notes were issued is felt to have no further significance. I. Pursuant to the provisions of legislation enacted by the 80th Congress, the Corporation subsequent to June 30, 1947 has paid into the Treasury of the United States the net income in the amount of $209,827,810 realized under the war damage insurance program to June 30, 1947. J. It is the general policy of the Corporation to act as self-insurer with respect to loss risks, except that blanket commercial fidelity bond coverage of $100,000 was in effect at June 30, 1947 in addition to commercial coverage for certain public liability and maritime risks. Lessees of plants and facilities owned by the Corporation generally are required to carry fire and extended coverage insurance in accordance with the provisions of the lease agreements. K. The Corporation is a party defendant in legal proceedings involving contingent liabilities of approximately $580,000 with respect to lending activities and of approximately $10,170,000 with respect to wartime activities; also claims not approved by the Corporation involving contingent liabilities of approximately $13,000,000 have been received from various contractors, operators and others. The Corporation has outstanding commitments relating to the procurement of strategic materials not delivered at June 30, 1947 and to operation of wartime facilities in amounts aggregating $554,240,182; and has outstanding contracts in the amount of $493,060 for the procurement of commodities for export to foreign countries. Unused commercial letters of credit were outstanding in the amount of $132,400. Under agreements with other lending institutions, the Corporation may be called upon to participate to the extent of $310,170,568 in loans carried by those institutions. The Corporation also has commitments outstanding to make loans aggregating approximately $306,000,000. The Corporation also may be liable for refunds in connection with the net proceeds of renegotiation settlements of contractors' excess profits taken into income. The amount of such refunds, which is dependent upon the outcome of certain contractors' claims for rebates pending in tax courts and other actions, is not expected to be substantial. The Corporation may be liable to a limited extent for additional wages to employees of contractors or agents for "portal to portal" time under applicable provisions of law. L. It will be observed by reference to the published financial statements as at June 30, 1946, that the net income from lending activities for the period from dates of incorporation to June 30, 1946 was stated therein as being $527,051,017. It also will be observed from the accompanying Schedule 1 that the net income from lending activities for the same cumulative period to June 30, 1946, after applying adjustments made in the fiscal year ended June 30, 1947 but applicable to prior periods, is stated in the amount of $532,065,340, an increase of $5,014,323 as compared with the former amount. The principal adjustments made during the fiscal year ended June 30, 1947, affecting prior periods and accounting for the increase of $5,014,323 are as follows: Adjustments resulting from change in policy with respect to treatment of deficiency balances of loans, related receivables, collateral acquired and income and expenses on acquired collateral as explained in Note E (a) herein: Deficiency balances of loans and related receivables at June 30, 1946 charged off ...... $22,237,841• Provision for losses on investments, loans and other receivables at June 30, 1946 decreased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,237,841 Increase in investments, loans and other receivables charged off due to the reclassification of income on acquired collateral previously credited in reduction of deficiency balances charged off. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,540,287• 22 Digitized by Google NOTES TO FINANOAL STATEMENTS-Continued Decrease in investments, loans and other receivables charged off due to the reclassification of expenses on acquired collateral previously charged as additions to deficiency balances charged off......................................................... 1,816,557 Income from acquired collateral to June 30, 1946: Reclassified from losses as above. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,540,287 Reclassified from acquired collateral asset account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,535,944 Expenses on acquired collateral to June 30, 1946: Reclassified from losses as above............................................. 1,816,557• 3,795,206• Reclassified from acquired collateral asset account.............................. Net adjustment resulting from change in policy .............................. S 6,740,738 Adjustment resulting from establishment of reserve for employees' earned annual leave at June 30, 1947, representing amount of reserve required at June 30, 1946............... 2,045,496• Adjustment resulting from reversal of previously established reserve for self-insurance in lieu of additional commercial fidelity bond coverage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325,000 5,919• Miscellaneous adjustments-net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net adjustment to net income from lending activities June 30, 1946 ........ S 5,014,323 M. Administrative expenses, as separately set forth in the accompanying statements of net income and net cost, represent salaries and other expenses which, under provisions of applicable law, have not been construed to be properly chargeable to specific construction or operating programs or projects. In accordance with permissive provisions of law, additional salaries, wages and other expenses, in substantial amounts, particularly as to national defense and war programs have been directly charged to specific projects or activities. Accordingly, the amounts separately classified in the accompanying operating statements as administrative expenses do not purport to represent all the salaries, wages and other expenses incurred by the Corporation during the periods covered by the financial statements. N. (a) Reserves for losses on investments, loans and other receivables as stated in the accompanying balance sheet are as follows: Reserve for losses on accounts receivable from other U.S. Government agencies .... S 207,943 Reserve for losses on investments, at cost, and loans ............................ . 100,000,000 Reserve for losses on accounts and other notes receivable ..................... . 120,000 $100,327,943 These reserves have been provided from the following sources: By charge to operations pertaining to lending activities as shown in Schedule 1 ..... $ 96,013,949 By charge to the liability account "Accountability for net proceeds from liquidation of assets of Smaller War Plants Corporation" ............................... . 3,836,841 By application of remaining balance of reserve for losses and contingencies on Disaster Loan Corporation loans and receivables as acquired by Reconstruction Finance Corporation on July 1, 1945 ....................................... . 477,153 $100,327,943 (b) In addition to the reserve provisions charged to operations pertaining to lending activities as noted above, actual charge offs to operations of investment, loan and other receivable balances have amounted to $52,706,210, as shown in Schedule 1. Losses on other accounts acquired in connection with special programs also have been charged off for the cumulative period to June 30, 1947 as follows: Losses, less recoveries, arising in connection with loans and receivables of Smaller War Plants Corporation, charged to the liability account "Accountability for net proceeds from liquidation of assets of Smaller War Plants Corporation" .......... $1,704,784 23 Digitized by Google NOTES TO FINANCIAL STATEMENTS-Continued Losses, less recoveries, arising in connection with loans and receivables included in net assets of Disaster Loan Corporation acquired by Reconstruction Finance Corporation July 1, 1945, charged to reserve established at that date ................... . 76,272 $1,781,056 (c) The foregoing provisions for and charge offs of losses on investments, loans and other receivablea pertain only to the lending programs of the Corporation and are not inclusive of actual or anticipated losses involved in the non-lending activities for national defense, war and related purposes. All actual and potential losses, costs and expenses in connection with the non-lending programs are incorporated in the accompanying Schedule 3. O. A preponderance of the property, plant, facilities and equipment acquired by the Corporation in connection with its program for national defense, war and related activities were sponsored by other agencies of the Government, principally the Department of the Army and Navy, Department of Agriculture and Maritime Commission, under agreements whereby the sponsoring agency generally contributed a part of the estimated costs involved to the Corporation and undertook to request appropriations from Congress at a future date to the extent of any unrecovered costs of the facilities which should be then remaining. The unrecovered costs of the facilities subject to these arrangements, after allowing credit for any realized or potential income or sales proceeds, are substantial in amount. During the 1947 fiscal year it became increasingly apparent that there was little likelihood that the Congress would make appropriations to the sponsoring agencies, even if so requested, merely for the purpose of permitting those agencies to make settlement with the Corporation. Accordingly, the Corporation unilaterally determined to recognize what appeared to be the realities with respect to the potentiality of further recoveries from the sponsoring agencies under these agreements and to waive its contingent right to any further reimbursement thereunder. This decision also had the effect of permitting certain economies in the Corporation's accounting and operating procedures with respect to costs and expenses which technically were contingently recoverable under the terms of the agreements but which had no significance in relation to the value or capital cost of the facilities involved. The Department of the Navy, Department of Agriculture and Maritime Commission have concurred in the position taken by the Corporation with respect to the contingent reimbursement provisions of these agreements; however, the Corporation has received no indication of the position of the Department of the Army with respect to this action. In this connection the Department of the Army is the sponsor of by far the largest number and the largest dollar amount of facilities subject to contingent reimbursement agreements. P. (a) The provisions of the Surplus Property Act authorize, but do not require, the Corporation to receive payment of the sales proceeds resulting from disposal of property, equipment, facilities, materials and supplies which it declares surplus to Government disposal agencies, principally War Assets Administration. Prior to the current fiscal year the Corporation had elected to have such sales proceeds returned to it and, under such arrangements, had received in excess of $449,000,000 to June 30, 1947 from the disposal agencies involved. In order to implement the then existing arrangements between the Corporation and War Assets Administration and its predecessors as to disposition of surplus sales proceeds, it was necessary for the disposal agency to continuously maintain certain physical segregations of equipment, materials, etc., so as to be in a position to identify subsequent sales proceeds to items declared surplus by the Corporation. It also was necessary for the Corporation and the disposal agency to maintain duplicating accounting and other records all arising in connection with these special arrangements pertaining to the return of surplus sales proceeds. Accordingly, in the interest of eliminating this duplicating and nonproductive expense insofar as the Corporation, War Assets Administration and the Government as a whole were concerned, the Corporation during the fiscal year 1947 authorized and directed War Assets Administration to pay into the Treasury as Miscellaneous Receipts all subsequent sales proceeds arising from surplus declarations made by the Corporation. As a result of these revised arrangements the Corporation will realize no further recovery from the substantial amount of property, plants, facilities, equipment, materials and supplies which it has declared or will declare surplus to War Assets Administration. In this connection, however, it will be noted that the sales proceeds which otherwise would have been returned to the Corporation will, instead, go directly into the Treasury without loss of any benefit insofar as the Government as a whole is concerned and, in fact, with additional economies being realized to the extent of the duplicating nonproductive operating and administrative costs which this revised procedure has eliminated. The revised procedure also is consistent with the disposition required to be made by law of surplus sales proceeds arifling from surplus declarations made by substantially all other agencies of the Government. Subsequent to 24 Digitized by Google NOTES TO FINANOAL STATEMENTS-Continued June 30, 1947 the Corporation's potential sources of realization on assets which it acquired in connection with its programs for national defense, war and related purposes will be limited, subtantially, to sales of defense property, plant and equipment to lessees in possession, sales or transfers of inventory materials and supplies to commercial users or to the national stockpile and surplus sales proceeds in minor amount arising from the disposition of surplus facilities, equipment, etc., outside the continental United States. (b) Consistent with the revised arrangements as to the disposition of future surplus sales proceeds referred to in paragraph (a) above, the Corporation also determined during the 1947 fiscal year that all surplus sales proceeds which theretofore bad been returned to it by War Assets Administration and its predecessors should be covered into the Treasury as Miscellaneous Receipts and should not continue to be retained by the Corporation. Accordingly, on June 30, 1947 the Corporation paid into the Treasury a total of $445,000,000, being substantially all the surplus sales proceeds which it had received from War Assets Administration or its predecessors to that date. The additional surplus sales proceeds, $4,072,785, which had been returned to the Corporation prior to June 30, 1947 were paid into the Treasury subsequent to that date at the conclusion of the reconciliation of the aggregate amounts shown in the accounting records of the Corporation and those of War Assets Administration. Q. Due in part to the volume and nature of the materials and commodities involved, it has not been the general practice of the Corporation to take periodic physical inventories of the commodities and materials acquired for resale or other disposition in connection with the national defense and war programs and, in general, no such physical inventories were taken in connection with the preparation of the accompanying financial statements as of June 30, 1947. However, based on the Corporation's experience to date with the complete or partial liquidation of inventories of many of these commodities, through sales, surplus declarations and otherwise, the dollar amount of differences in quantities between physical inventories, were they to be taken, and book records would not be significant in terms of the volume handled and related circumstances. In connection with these materials it is observed that the majority are warehoused or stored in commercial or agency facilities and are covered by warehouse receipts and other independent documentation evidencing ownership by the Corporation. The Corporation is generally satisfied that these arrangements, together with other arrangements relating to the physical control or custody of the materials and commodities involved, substantially safeguard the interests of the Government with respect thereto. R. (a) The Corporation has taken into income an amount of $83,936,935 representing renegotiation settlements of contractors' excess profits recovered under a provision of law which authorizes the retention of such settlement proceeds by the Corporation. In the determination of the net excess profits to be recovered, income tax credits aggregating $227,962,743 have been allowed to the contractors involved in accordance with applicable provisions of law. The Corporation has construed that the application of tax credits in determination of the net excess profits to be recovered represents only one of the factors in measuring the extent of such recoverable excess profits. Accordingly, the Corporation has taken into income only the net amount of such excess profits. In this connection the Treasury Department has advised the Corporation that there is no provision of law whereunder the amount of such allowed tax credits could be available as income to the Corporation, and the Corporation concurs in this finding. (b) In addition, the Corporation has recorded receivables and collections in the amount of $9,607,402 representing renegotiation settlements of contractors' excess profits recovered under a provision of law which requires that the proceeds of such settlements shall be paid into the Treasury as Miscellaneous Receipts. The Corporation has construed that the excess profits settlements under this particular provision of law do not constitute income to or any equity of the Corporation. S. In addition to the assets set forth in the accompanying financial statements, the Corporation held the following assets at June 30, 1947 in a custodial or agency capacity: (a) Imports from occupied territories valued at an estimated amount of $49,252,517 held under agreements with the Department of the Army pursuant to which the Corporation is obligated to pay to that Department or other interested Government agency the proceeds of disposal less the expenses of the program. (b) 408,951,222.87 fine troy ounces of silver loaned by the Treasury Department for use in manufacturing processes used in national defense, war and related operations, which the Corporation is obligated to return. 25 Digitized by Google NOTES TO FINANOAL STATEMENTS-Continued (c) Materials and equipment in foreign areas having an estimated value of $444,634 received principally from the Department of the Navy and used in the economic development of Pacific Ocean islands. The Program pertaining to the economic development of the islands is to be transferred to the Department of the Navy prior to January 1, 1948. T. The accompanying financial statements, and the underlying records of the Corporation, are subject to audit by the Corporation Audits Division of the General Accounting Office under the provisions of the Government Corporation Control Act (Public Law 248---79th Congress). This audit has not been completed for the period ended June 30, 1947, and during its course or when completed may disclose the necessity for adjustments or revisions in the accounting treatment of certain of the Corporation's financial transactions. It is felt, however, that any such revisions or adjustments will not result in significant changes in the financial position or operating results of the Corporation as set forth in the accompanying financial statements. 26 Digitized by Google