DESCRIPTION OF NATIONAL

National, a New Jersey corporation, is one of four subholding companies in the holding company system of Electric Bond and Share Company ("Bond and Share"). National's capitalization consists entirely of common stock, of which Bond and Share holds 46.5%. National's present subsidiaries, in addition to Transit and its subsidiaries, are Memphis Generating Company and its subsidiary, Memphis Street Railway Company.

DESCRIPTION OF TRANSIT

Transit, a Pennsylvania corporation, and its three subsidiaries, Lehigh, Easton, and Bethlehem, operate an electric railway and motor coach transportation system in Lehigh, Northampton, Bucks, and Montgomery Counties, Pennsylvania, serving 56 communities having a population of approximately 340,000. Transportation service is supplied in the cities of Allentown, Bethlehem, and Easton, Pennsylvania, and adjacent territories, and two interurban lines are operated which provide connecting service between Allentown and Philadelphia. Transit also has two other subsidiaries, Norristown Transit Company, which owns certain rail trackage used by Transit, and Allentown Bridge Company which owns and operates a toll bridge in Allentown, Pennsylvania.

The record indicates that Transit intends to convert its transportation system to rubber-tired operation which change will involve complete abandonment of its present street railway lines. Subject to the availability of materials and equipment the program provides for the completion of the conversion program by the end of 1950. Transit is subject to the jurisdiction of the Pennsylvania Public Utility Commission and the Interstate Commerce Commission.

Table I below sets forth the outstanding securities of Transit, indicating the amounts of each class held by National and the public, respectively:

* Accumulated and unpaid dividends on the preferred stock as of December 31, 1947 aggregated $8,059,765 or $81.83 1/3 per share.

Appendix A presents a condensed consolidated balance sheet of Transit as of December 31, 1947. Appendix A also presents condensed consolidated balance sheet as of June 30, 1947 (which is the proposed date of reorganization for accounting

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purposes) together with a pro forma balance sheet as of that date to reflect the transactions proposed in the plan. Appendix B sets forth condensed consolidated statements of income for the 12 years, 1936 to 1947, inclusive. Appendix C presents a condensed consolidated income statement for the 12 months ended June 30, 1947, and pro forma to reflect the plan.

BACKGROUND OF THE PLAN

As previously noted, the Commission, on August 23, 1941, entered an order pursuant to Section 11 (b) (2) of the Act requiring that the existence of National be terminated, and that National proceed with due diligence to submit a plan or plans for its prompt dissolution. The organization and history of National up to the time of said dissolution order are described in detail in our findings and opinion accompanying that order. Subsequent to the dissolution order, National filed an application for approval of a "plan dated as of May 7, 1942 for compliance with Section 11 (b) (2) of the Public Utility Holding Company Act of 1935", which plan as amended, outlined a program for the dissolution of National. Thereafter, on November 9, 1942, the Commission entered an order pursuant to Section 11 of the Act requiring National, among other things, to amend its plan of May 7, 1942 to set forth the extent and manner in which it is proposed that Transit shall (a) restate its plant, surplus, capital and other accounts so as to segregate, dispose of, or eliminate write-ups and intangibles in such plant account; (b) set up adequate reserves for depreciation of plant and property; (c) make such other accounting adjustments as may be deemed necessary to meet the requirements of the Act; and (d) revise and simplify its capital structure and take such other steps as may be deemed necessary to effectuate a fair and equitable redistribution of voting power among its security holders.

On November 9, 1942, when the last order mentioned above was issued, National had the following principal subsidiaries:

National also had 15 additional subsidiary companies in its system which were not public utility companies within the meaning of the Act. Since November 9, 1942, National has ceased to be a holding company with respect to all of the above companies except those previously mentioned, i.e., Memphis Generating Company, Memphis Street Railway Company, and Transit and its subsidiaries. Since the dissolution order, National has also simplified its corporate structure by eliminating therefrom its senior securities consisting of $18,104,500 principal amount of long term debt and 279,716 shares of $6 preferred stock.

On January 7, 1944, as a further step in its program of dissolution, National, Penn, and Transit filed an application requesting, among other things, approval of the proposed sale by Transit to Penn of 15,469 shares of the Penn $7 preferred stock and the Allentown Electric generating station, together with certain other properties. That application which, as filed, was not acted on by the Commission, stated that the proceeds to be received from such sales were to be used to retire Transit's outstanding First Mortgage Bonds, and the remainder of the proceeds was to be used for the purchase and cancellation of the Refunding and Improvement Mortgage Bonds, which were junior to the lien of the First Mortgage Bonds.

Thereafter, pursuant to a further order of the Commission,' and in connection with the refinancing of Penn's preferred stock, Transit exchanged 13,769 shares of the Penn $7 preferred stock for the same number of shares of 4% cumulative preferred stock and received $187,000 for the 1,700 shares redeemed. The securities so received were pledged with the trustee under the Refunding and Improvement Mortgage and the cash received was deposited with the trustee under that mortgage. Prior to the consummation of the exchange and redemption of the Penn preferred stock, Transit retired all of its outstanding First Mortgage Bonds in the principal amount of $1,781,250. This was the remainder of Transit's first mortgage bonds which had matured in 1935 and concerning which an agreement was reached with the bondholders and ordered enforced pursuant to Section 77 (b) of the Bankruptcy Act," whereby a part of the bonds was retired and provision was made for extension of the maturity to 1945. Upon the retirement of the First Mortgage Bonds, the Refunding and Improvement Mortgage Bonds succeeded to the lien of the First Mortgage Bonds.

Thereafter, this Commission on January 31, 1947 approved the amended application of Transit proposing the sale of the Allentown electric generating station to Penn for a cash consideration of $1,500,000. This transaction was consummated in February 1947, and the proceeds were deposited with the

'Pennsylvania Power & Light Company, et al., 21 S. E. C. 143 (1945).

4Matter of Lehigh Valley Transit Company, D.C.E.D., Pa., (1936) Docket No. 18,957.

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trustee under the Refunding and Improvement Mortgage. The amended application in connection with this transaction stated that the proceeds from the sale of the Allentown electric generating station were to be deposited with the trustee to be used for the retirement of the Refunding and Improvement Mortgage Bonds of Transit in accordance with a plan to be filed with this Commission.

THE PLAN

The plan as amended proposes the following steps:

(1) Transit will retire all of its $4,915,000 principal amount of Refunding and Improvement Mortgage 5% Bonds, due June 1, 1960, at principal amount plus accrued interest, in cash, through the use of treasury funds, or at the bondholders' option, with a combination of cash and preferred stock of Penn as described in Paragraph (2).

(2) Prior to the consummation date of the plan, Transit will offer for a period of thirty days, to bondholders who wish to receive a part of their claim in Penn preferred stock, an option to deposit their bonds with the trustee under the mortgage. For each $500 principal amount of bonds so deposited the bondholders will receive one full share of Penn 4% preferred stock plus the maximum number of additional full shares of such stock as may be available after pro rating on a full share basis the 13,769 shares of such stock owned by Transit among the total number of units of $500 principal amount of bonds so deposited. In addition, the bondholders will receive an amount in cash equal to the difference between the principal amount of the bonds so deposited plus accrued and unpaid interest to the consummation date, and the aggregate value of such shares of preferred stock received computed on the basis of an assigned value of $112.50 per share.

(3) Transit proposes to discharge all claims with respect to the preferred stock and arrearages thereon and to retire such stock by (a) exchanging 545,610 shares of new common stock of a stated value of $2 per share for the 98,350 shares of such stock held by National and (b) paying the holders of the publicly-held preferred stock cash in the amount of $90 per share for each of the 141 shares of such stock so held.

(4) National will surrender to Transit for cancellation the 58,255 shares of the latter's common stock owned by it. The owners of the 454 shares of publicly-held common stock of Transit will receive in exchange therefor new common stock of Transit on a share-for-share basis.

5 National Power & Light Company, et al., 25 S. E. C. 242 (1947).

(5) Transit and its subsidiaries will make certain accounting adjustments, including a restatement of its property account as of June 30, 1947 to eliminate therefrom $7,260,776 of known intangibles. Transit will also create a "Reserve for Proposed Railway Abandonments and Possible Loss on Investments" in the amount of $5,831,803. In making the foregoing adjustments, Transit will utilize its present earned surplus and the capital surplus to be created as a result of the transactions described in Paragraphs 3 and 4 above.

(6) National proposes to distribute to its common stockholders the 545,610 shares of new common stock of Transit to be issued to National on the basis of 1/10 of a share of Transit's new common stock for each of the 5,456,100 shares of National's common stock outstanding.

The applicants have requested the Commission to apply to an appropriate United States District Court, pursuant to the provisions of Sections 11 (e) and 18 (f) of the Act, to enforce and carry out the terms and provisions of the plan.

PROPERTY ACCOUNT AND RESERVES

As shown in Appendix A the consolidated property account of Transit as of June 30, 1947 was stated at $16,239,366. The record shows that $15,493,218 represented street railway property and $746,148 bus property. The company states that the bus property is carried at "historical cost" and that the carrying value of the street railway property is $7,260,776 in excess of the company's estimate of such "historical cost". Transit proposes to adjust its street railway property account to the estimated historical cost" of $8,232,442, by charging the aforementioned excess earned surplus.

The consolidated property retirement reserve of Transit as of June 30, 1947 was stated at $3,329,401 of which $2,658,187 was applicable to retirement reserve for street railway property and $671,214 to retirement reserve for bus property. In connection with its proposed conversion to bus operation, Transit proposes to create a "Reserve for Abandonment of Street Railway Property and Possible Loss on Investments'' in the amount of $5,831,803.

Table III below presents the consolidated gross property account of Transit as of June 30, 1947 per books and pro forma to reflect the plan.

6 The company states that the term "historical cost" as used by it is, in the case of Transit, synonymous with original cost of Transit's property when first devoted to the public service. The record indicates that the excess of $7,260,776 represents the difference between the carrying value of property acquired by Transit at organization in 1905 through the issuance of securities, and the estimated historical cost of such property as subsequently determined on the basis of an engineering study.