Accordingly, in the computation of charges prior to income-bond interest, there need be included in respect of the additions and betterments fund only such part of the fund as is payable out of available net income. On the assumption that the credits to the reserve for depreciation on roadway and structures will be about $68,000, as estimated by the trustee, the amounts payable into the fund out of available net income will be approximately $62,000 a year through May 1, 1950, and approximately $17,000 a year thereafter.

We believe that some additional recognition should be given in the capital structure to the earning possibilities of this railroad. The debtor's trustee has made a commendable record in reducing the past and probable future operating expenses and in the development of traffic possibilities. Although the savings in operating expenses are not of themselves assurances of future traffic, we think that in the light of all the circumstances, including the possible savings through increases in the use of Diesel power, the conclusion of division 4 that the reorganized company's expectable earnings available for interest and other corporate purposes in a normal year are from $600,000 to $700,000, is somewhat too low. Upon further consideration we find that such earnings may be expected to range from $700,000 to $775,000. Under all the circumstances, we conclude that the amount of income bonds issuable at reorganization should be increased to $4,000,000 and that the amount of other securities should remain as approved in the prior report. Stating the 35,000 shares of common stock at $100 a share, the resulting capitalization will be $15,952,844. We will modify the plan accordingly.

In connection with these revisions of the plan we have reviewed the provisions relative to the so-called security-retirement fund, which require the payment into a fund for the retirement of income bonds and, after all of those bonds have been retired, for the retirement of the preferred stock of amounts equal to 50 percent of dividends on the common stock. Such a fund is essentially a sinking fund intended in part as contributing to the compensation to the senior security holders for the loss of their senior rights. The payment of common stock dividends of $3 a share, amounting to $105,000 (the initial prior charges being $621,623 as shown in appendix B hereto), with an accompanying contribution to the security-retirement fund of $52,500 would require an earnings level of approximately $779,123, and dividends of $1 a share on the common stock, amounting to $140,000 with an accompanying contribution of $70,000 to the fund would require an earnings level of approximately $831,623. Under the capital structure which we here approve we do not believe that a required contribution to the fund of an amount equal to 50 percent of the common stock dividends is warranted or necessary, and we conclude that the

purposes of the fund will be accomplished by requiring that the amounts set aside for the fund be equal to 20 percent of the amounts paid in common-stock dividends. We will modify the plan accordingly.

We have also reviewed the provisions of the plan relative to the sinking fund for the retirement of the new Terminal bonds, and, after the retirement of all of such bonds, for the retirement of the first and consolidated mortgage bonds. That sinking fund is $20,000 a year, with provision that as bonds are purchased or redeemed through it they shall be canceled. The trustee under the Terminal mortgage, in view of the ample security for the Terminal bonds under earnings tests, the long term for the bonds, and the reduced rate of interest which is provided in the plan approved in the prior report, requests, in effect, that the bonds purchased or redeemed by the use of this fund shall be deposited in the fund and continue to draw interest, which interest shall be added to the fund and used for the purposes thereof. Such a provision would enhance the value of the Terminal bonds and improve the position of all securities junior thereto through the earlier purchase or redemption of the senior securities. We conclude that it should be substituted in the plan for the existing provision, with the qualification that after all the Terminal bonds shall have been purchased for the benefit of the reorganized company or redeemed, through the operation of the fund or otherwise, the Terminal bonds deposited in the fund shall be canceled.

The $4,000,000 of income bonds should be distributed among the holders of the Midland and refunding bonds according to the plan initially proposed by the insurance group as described in the prior report and shown in the appendixes hereto. The $3,000,000 of preferred stock should be distributed between the holders of the refunding and the second-mortgage bonds, including, in the case of the lastnamed bonds, those pledged under the general mortgage, as initially proposed by the insurance group and shown in the appendixes.

These allocations result in satisfying the claim of the Midlands 37.97 percent in fixed-interest bonds and 62.03 percent in income bonds. The only charges between fixed interest and income bond interest are the charges out of available net income for the additions and betterments fund and the sinking fund, both of which we deem to be financially required. Thus, the relative lien position and the relative claim on earnings of the Midlands is effectively preserved. The claim of the refundings is satisfied 24.23 percent in fixed-interest bonds, 21.80 percent in income bonds, and 53.97 percent in preferred stock. Their lien position is preserved to the extent that new mortgage securities are available and their claim on earnings is sub

stantially preserved, as they are required to share with the seconds in earnings on the preferred stock only to a comparatively small extent, and the several advantages to them under the new capital structure more than compensate for that slight disadvantage. In these allocations there is sufficient preferred stock to satisfy approximately 20 percent of the claim of the seconds, including those pledged. Common stock only is available to satisfy the remaining 80 percent of their claim and that of the generals not satisfied through the preferred stock and other common stock allocable to them with respect to the pledged seconds.

The second-mortgage trustee, while conceding that a separate issue of securities to give recognition to the lien position of the seconds would not be justified, contends that the plan should provide sufficient preferred stock so that the holders of the seconds, including those pledged, could be offered 50 percent of their claim in such stock. In the alternative, it suggested a somewhat involved method of determining the distribution to the seconds and the generals of the common stock that would be available for them. We need not describe the suggested method, for the reason that we are not persuaded of its soundness and the distribution to the seconds which we find proper is somewhat more favorable to the seconds than would result from the application of this trustee's method, as we understand it, to the amount of common stock available for the seconds and the generals under the capitalization which we here approve.

If common stock were allotted to the seconds at the rate of 11.5 shares for each $1,000 bond, they would receive 1 share for approximately each $91.5468 of the 80 percent of their claim not satisfied by the preferred stock allotted to them, or about 1.092 shares for each $100 of such remaining claim. The total amount thus distributable with respect to the outstanding and pledged seconds would be $1,150,000. On common-stock dividends of $2.75 and $3.75 a share, respectively, the seconds would receive about $3.00 and $4.09 with respect to each $100 of claim represented by such stock.

As may be computed from appendix B hereto, common-stock dividends of $2.75 a share could initially be paid at an earnings level of approximately $737,123 after setting aside an amount equal to 20 percent of the dividend for the security-retirement fund. This is within the range of probable earnings which we find may be expected in a normal future year and is about $58,000 greater than the estimate of the debtor's trustee of earnings in a normal future year, made before the purchase of the additional eight Diesel locomotives was authorized. The trustee's estimate of the operating savings from that purchase has been stated herein.

As may also be computed from appendix B, after the reduction beginning in 1951 by $45,000 of the amount payable from available net income into the additions and betterments fund, a common-stock dividend of $3.75 a share and the required amount for the securityretirement fund could be paid at an earnings level of about $734,123. The total dividends on the common and preferred stock thus allotted to the seconds upon the payment of a dividend of $3.75 a share on the common stock would amount to approximately $4.28 for each $100 of total claim of the seconds. The right to participate in higher dividends on the common stock is, of course, an element in compensating the seconds in respect of the securities which they would surrender.

The requirements prior to dividends on the common stock will be further reduced as income bonds are retired through the securityretirement fund. The retirement of $24,500 of such bonds in connection with a dividend of $3.50 on the common stock, for example, would reduce the prior charges about $1,100 a year. The $20,000 cumulative sinking fund will permit the purchase or redemption of the $2,000,000 Terminal bonds bearing interest of $80,000 a year in approximately 41 years. While the charges prior to dividends will not be actually reduced until the cancelation of those bonds at the end of the period, the potential equity of the stock will increase from year to year through the operation of that fund for the ultimate retirement of all fixed-interest bonds.

Under the existing capital structure, interest could be paid on the principal of the existing securities to and including the outstanding and the pledged seconds at the contract rates at an earnings level of $526,273. At the same rates, interest on the principal and the accumulated interest on the same securities amounts to $669,223. No sinking funds or funds to meet capital expenditures are included therein. If to the $669,223 were added $17,000, corresponding to the portion of an additions and betterments fund payable out of available net income after 1950 under the plan herein approved, a $20,000 sinking fund, and $26,250 for a security-retirement fund (corresponding to the amount payable into that fund based on a $3.75 dividend on the common stock under the approved capitalization), all of which funds we deem to be financially required, the resulting amount would be $732,473. This is only slightly less than the earnings level of $734,123 at which, as above indicated, dividends of $3.75 a share might be paid on the common stock after 1950. As above shown, that amount, $734,123, under the capitalization approved and under the assumed distributions, would be sufficient to service, beginning in 1951, all new securities, including the requirements of the additions

and betterments fund, the sinking fund, the security-retirement fund, and earnings of $4.28 per $100 of total claim of the seconds. This comparison, we think, clearly indicates, in view of all the advantages of the new capital structure, that the seconds would not be required to sacrifice their earnings position even though they would be required to share earnings with the generals.

In the prior report $215,199 of common stock was allotted to the Paterson Extension bondholders in payment of the $215,199 of their claim remaining after deducting from the total claim the appraised value of $55,634 with respect to noncarrier assets to be conveyed for the benefit of these bondholders. This exchange of a debt security for stock must be considered in connection with the several facts discussed in regard to the Extension properties in the prior report, and in the light of the value of the common stock and the advantages of the organization, more specifically discussed elsewhere herein.

Upon further consideration and in view of the modification of the capitalization herein approved, we think that somewhat better treatment should be given this class of bondholders than was accorded them in the prior report. If common stock were allotted to them at the rate of 12 shares for each $1,000 bond, they would receive approximately 1.115 shares for each $100 of the $215,199 of claim remaining after deducting from the claim the appraised value of the noncarrier lands. With dividends of $3.75 a share they would receive approximately $4.18 with respect to each $100 of remaining claim. This allocation we find will accord them fair and equitable treatment of their claims and will afford them the equitable equivalent of the rights which they now hold. It will fully satisfy their claim and consequently they will not be entitled to share in the unmortgaged assets. In connection with the conveyance of noncarrier lands, it will represent all values in the Extension properties and will leave nothing therein for distribution to the holders of junior liens thereon. We will modify the plan as indicated. We see no reason for disturbing the conclusions of the prior report as to the value of the unmortgaged assets or the findings that the equity of the existing classes of preferred and common stockholders has no value.

After deducting from the 3,500,000 total amount of common stock the assumed allocation of $1,150,000 to the seconds, $240,000 to the Paterson Extensions, and $400,000 assigned to the unmortgaged assets, there would remain $1,710,000 for distribution to the generals with respect to mortgaged assets. This distribution would be at the rate of 1 share for each $155.14 of claim remaining after deducting the allotments to them with respect to the pledged seconds, or approximately 0.644 share for each $100 of such remaining claim. Common-stock dividends of $3.75 a share on the portion of the claim represented by this