ance with sound accounting practice) all fixed interest and other charges properly deductible from income available for fixed charges in determining income after fixed charges, and all interest on bonds bearing contingent interest, which became a fixed obligation during such calendar year by reason of the maturity by acceleration or otherwise, of the bonds to which it pertains.

Available income is to be determined for each calendar year from the accounts as stated on the books of the applicant without adjustments, except that (a) operating expenses will not include any amounts for retirements of nondepreciable property not replaced, (b) any adjustment necessary to correct the income account for prior years will be made by appropriate entries, in the accounts of the year in respect of which available income is being determined, or in the discretion of the board of directors, subject to our approval if required, in the accounts of any subsequent year or years, and such entries will be treated as income items for the year in which entered on the books, (c) gains or losses on the sale of securities or other property and profits realized upon acquisition by the applicant or any of its subsidiaries, of system securities will be excluded, and (d) if available income in any calendar year is a deficit, the amount of such deficit will be carried forward and deducted in determining available income for the succeeding calendar year or years until such deficit is extinguished.

Available income for each calendar year is to be allocated in the order indicated to the following purposes:

(1) A capital fund of $5,000,000 or 22 percent of the railway operating revenues in such calendar year whichever is the greater, less depreciation and amortization (except of equipment) charged against income in such year, plus any amount by which the available income for the preceding year, beginning with 1945, was insufficient therefor.

(2) A sinking-fund payment equal to one-half of 1 percent of the total amounts issuable as of the dates of purchase and exchange of the trust bonds and of each series of new bonds to be issued in exchange for the applicant's first-mortgage bonds, Southwestern division bonds, Pittsburgh, Lake Erie and West Virginia bonds, and Toledo-Cincinnati division bonds, plus the amount by which available income for the preceding calendar year or years, beginning with 1945, may have been inadequate for such payment, to the extent not previously made up. Upon the refunding or retirement in full of all of the trust bonds or of any series of other bonds, this sinking-fund payment may be reduced by one-half of 1 percent of the total amount of such trust bonds or other bonds issuable as of the respective purchase or exchange dates thereof.

(3) If on the date available income is determined for any year, emergency bonds of any issue or issues have been outstanding or pledged for 2 years, an amount is to be allocated to the sinking fund equal to 10 per cent of the aggregate of the maximum amounts of emergency bonds of such issue or issues or loans secured thereby at any one time outstanding since the last time no emergency bonds of such issues were outstanding or pledged, plus the amount of any deficiency in available income for such purpose in previous years to the extent not previously made up, provided, however, that the available income to be allocated under this provision on account of emergency bonds of any particular issue is not to exceed the amount of emergency bonds of that issue which has then been outstanding 2 years or the amount of loans secured by emergency bonds of that issue, which then have been pledged for 2 years, or both instances.

(4) To the payment pro rata of secured contingent interest on outstanding bonds bearing such interest up to the total amount thereof accrued to the end of such calendar year and remaining unpaid.

(5) To the payment pro rata of unsecured contingent interest on bonds bearing such interest up to the total amount thereof accrued to the end of such calendar year and remaining unpaid.

(6) To a sinking-fund payment equal to 50 percent of the available income then remaining; provided, however, that for any year in which the total system charges for fixed and contingent interest and guaranteed dividends were less than $22,000,000, the amount to be allocated under this provision need not exceed $750,000.

(7) Except as hereinafter set forth any remaining available income may be applied to any other proper corporate purpose.

Capital fund. The capital fund is to be applied to capital investments, or used to reimburse the applicant's treasury for such investments, the cost of which is chargeable under our accounting classifications to accounts Nos. 701, Road and equipment property, 702, Improvements on leased property, or 705, Miscellaneous physical property, including such capital investments made, through advances by the applicant, in the property of a subsidiary, the operating results of whose property are reflected in the applicant's income account. The income allocated to the capital fund for any calendar year may be applied, however, in respect of equipment, only to that part of the aggregate of initial and other payments of the principal made during the year for equipment acquired under equipment trust and conditional-sale agreements that remains after deducting therefrom all amounts of depreciation, amortization, and retirements of equipment charged against income in such year; and in respect of other property, only the difference between the aggregate cost of capital investments

in such property made during the year, and the aggregate charges against income made during the year for retirements of such property not replaced. To the extent that capital expenditures are financed out of the capital fund, they may not thereafter be made the basis for the issue of bonds or other evidences of indebtedness, but they may be used to supply any excess of expenditures necessary for certification to the trustee under any indenture over the principal amount of bonds or other obligations which may be issued on the basis of such expenditures.

Any part of the available income allocated to the capital fund for any calendar year, which is not expended or appropriated to meet liabilities incurred before the end of that year, is to be added to the available income for the next calendar year and allocated as if it were a part of the available income for such year.

Sinking fund.-On or before May 1, 1946, and of each year thereafter so long as the plan is in effect, the applicant will pay into a sinking fund out of the available income for the preceding calendar year the amounts indicated in the foregoing paragraphs numbered (2), (3), and (6). Except as otherwise permitted, the available income allocated to the sinking fund in accordance with paragraph (2) will be applied to the retirement of the trust bonds, first-mortgage bonds, series A and B, Southwestern division bonds, series A; Pittsburgh, Lake Erie & West Virginia bonds, series A; Toledo-Cincinnati bonds, series D, and refunding-mortgage bonds, series G, J, K, and M, in proportion as nearly as possible to the amount of trust bonds as of the date of purchase, and the amounts issuable for outstanding bonds as of the dates of exchange of each series of other bonds provided, however, that in the case of the refunding bonds, the amount will be apportioned on the basis of the aggregate principal amounts of Pittsburgh, Lake Erie & West Virginia bonds, and Toledo-Cincinnati bonds held on their respective exchange dates by the trustees of the refunding mortgage. The portion so allocated will be applied to the retirement of the series G, J, K, and M bonds in proportion to the amounts thereof issuable as of the exchange dates for outstanding series A, C, D, and F bonds, respectively. In the discretion of the board of directors, the portion of the sinking fund applicable to the retirement of trust bonds or other bonds of any particular series may be applied to the retirement of other bonds or obligations issued to refund such bonds.

All or any part of the sinking-fund payment applicable to the retirement of any particular series may be used, in the discretion of the board of directors, to retire bonds of another series issued under the same mortgage to finance improvements or betterments to the property

subject to such mortgage; or to the payment of loans used to pay for not more than 75 percent of the cost of improvements and betterments which could have been made the basis for the issue of bonds under the mortgage, such improvements not thereafter to be bondable under the mortgage.

The portion of any sinking-fund payment applicable to the retirement of the trust bonds or any particular series of other bonds may be applied, to the extent such bonds are not available for purchase at not more, as to principal, than par, to the purchase of trust bonds or any of the other bonds of any other series listed in the second preceding paragraph, which can be purchased for less than par. As the refunding bonds are among the bonds listed in the second preceding paragraph, and the testimony shows that it is the applicant's intent that only the first-lien bonds may be so purchased, we are of the opinion that the language should be modified, for the sake of clarity, by inserting an appropriate limiting phrase or words so as to restrict such purchases to first-lien bonds,

The portion of the sinking fund resulting from the issue of emergency bonds is to be applied to the retirement of first-mortgage, Southwestern division, Pittsburgh, Lake Erie & West Virginia or ToledoCincinnati emergency bonds as have been outstanding for 2 years on the date of allocation of available income, or to the payment of loans secured by emergency bonds which have been pledged for 2 years, in the same proportion that the emergency bonds and loans were taken into account in determining the amount of such sinking-fund pay

ments.

The sums payable into the sinking fund as allocated under the other provisions of the plan relating to such allocations are to be applied to the retirement of such obligations of the applicant, other than equipment obligations, as the board of directors may determine, provided, however, that not more than one-half of any such sinking-fund payments may be applied, in the discretion of the board, to the creation and maintenance of net working capital or to the cost of capital investments within the limitations prescribed for use of the capital fund, or to both of these purposes; but for any year for which total system charges for fixed and contingent interest and guaranteed dividends exceeded $22,000,000, not more than $619,000, or one-fifth of the portion of each such sinking-fund payments remaining available for retirement of obligations, whichever is less, and for any year for which such charges were less than $22,000,000, not more than two-fifths of such portion may be applied to the retirement of convertible bonds.

All money paid into the sinking fund is to be applied within 2 years from the date of payment, but the redemption of bonds of any par

ticular issue or series will not be required if the amount in the sinking fund applicable to their redemption is less than $25,000. All sinking-fund payments are to be made in cash, but a credit against any sinking-fund payment is to be allowed in an amount equal to the cost to the applicant, exclusive of accrued interest and any premium, of obligations retired by the applicant after May 1, 1945, other than with sinking-fund moneys. At any time prior to the sinking-fund payment date in question, eligible obligations so acquired may be designated by the applicant as the basis of credit against such sinking-fund payment. All obligations retired with sinking-fund moneys or tendered as a credit to sinking-fund payments are to be delivered to the appropriate trustee or trustees and canceled.

The provision, as stated in the preceding paragraph, for credits to be allowed on account of bonds purchased with other than sinkingfund moneys does not appear sufficiently specific as to the allocation of such credits. To clarify this provision, it should be modified by inserting after the words "other than with sinking-fund moneys" an amplifying clause to provide that the credit against any sinkingfund payment on account of any issue or series of eligible obligations so certified is not to exceed the amount which could have been applied to the retirement of that issue or series if the amount payable had all been paid in cash.

The supplemental indentures to be executed in pursuance of the plan will provide that no obligations may be issued to refund obligations retired through the sinking fund or to capitalize or reimburse the applicant's treasury for that part of the cost of capital investments paid with sinking-fund money, and that accrued interest is to be paid out of the general funds of the applicant.

Until the dates of issue of the trust bonds and the other new bonds, the notes and bonds affected by the plan and any obligations issued to refund any thereof will, for the purpose of applying sinking-fund money, be regarded as trust bonds and other new bonds respectively. Upon the redemption of all the bonds of any issue or series, all the moneys then in the sinking fund which are not specifically applicable to the retirement of other obligations may be used to pay the call premium, if any, on such bonds.

Contingent interest.-Secured contingent interest is to be fully cumulative and will accrue as an absolute obligation of the applicant, contingent only as to the time of payment, to the extent the available income in any calendar year is sufficient therefor after provision is made for the purposes having priority in the allocation of available income, and will be declared payable and paid on or before May 1 of the following year. All payments of secured contingent interest will be apportioned among the several issues or series of bonds bearing such