•Exclusive of $528,734 due in less than 12 months from Dec. 31, 1956. 1, 161, 637 8.6 3,066, 208 22.8 4,227,845 31.4 13, 469, 322 100.0 As indicated, the indenture for the New Bonds will provide, in addition to the initial sinking fund payment of $528,000, for annual sinking fund payments begining May 31, 1958 of the greater of 25% of defined net earnings or $240,000. Thus, by 1971-the year preceding the maturity of the New Bonds-a minimum of $3,648,000, or 43% of the original principal amount, will have been retired through the sinking fund; the aggregate retirements will be greater to the extent, if any, that 25% of the defined earnings of the reorganized enterprise in any year or years during the life of the New Bonds should exceed $240,000. We conclude that the Joint Plan provides an appropriate capital structure for Surface Transit. The feasibility of the Joint Plan involves also a consideration of Fifth Avenue's capability of performing the obligations undertaken by it under the Joint Plan without detriment to its continued financial integrity. As indicated, Fifth Avenue has undertaken to pay, in consideration of all the new common stock of Surface Transit, $4,881,090 cash and 336,088 shares of its own common stock. As at June 1, 1956 Fifth Avenue had cash and "free securities" ("cash") on hand aggregating $3,353,000; the company estimates that 37 S. E. C. on December 31, 1956 its cash will aggregate approximately $4,657,000 after giving effect to estimated cash receipts and disbursements in the ordinary course between the two dates. To provide in part for the required cash payment under the plan, Fifth Avenue has obtained a bank loan commitment under which it may borrow up to $3,500,000 at any time on or before May 28, 1957; such loan will bear interest at the rate of 42% per annum and will mature in 12 equal quarterannual installments. Giving effect to such borrowing and to the cash payment under the Joint Plan, Fifth Avenue's pro forma cash balance at December 31, 1956 will amount to approximately $3,276,000. It thus appears that Fifth Avenue will have sufficient funds on hand to enable it to make the required cash payment, and that its pro forma cash at December 31, 1956 will remain at approximately the actual level of June 1, 1956. As for repayment of the loan, Fifth Avenue has estimated its cash for the period January 1, 1957 to December 31, 1960, giving effect to the Joint Plan, to show that during the period of repayment its cash would not fall significantly below the actual cash of June 1, 1956. The assumptions underlying such cash forecast include: (i) net income from operations of $1,650,000 in each of the years 1957 through 1960; (ii) annual dividend income from Surface Transit of 50 cents per share, aggregating $530,000 per annum after taxes; (iii) the purchase of a total of 200 new buses in 1958 to 1960, inclusive, financed by 10% down payments and equipment obligations; and (iv) cash dividends on Fifth Avenue's increased number of shares at the present rate of $2 per share plus 50¢ extra. 10 9 The cash forecast shows that compared with the actual cash of $3,353,000 at June 1, 1956, the cash balances at the end of each of the years 1956 through 1960 will be as follows: The above cash forecast and underlying assumptions appear reasonably to assure Fifth Avenue's ability to repay the bank loan as it falls due. The terms and conditions of the bank loan commitment This compares with actual net income of $1,558,000 in 1955, and estimated net income of $1,701,000 in 1956 (5 months actual). 10 The bank commitment permits continuation of dividends at this rate on Fifth Avenue's increased stock. appear to be such as to raise no substantive questions of feasibility. We have already stated that the Joint Plan provides an appropriate capital structure for Surface Transit. In addition we are satisfied that no substantial question of feasibility is raised under the Joint Plan in respect of either Fifth Avenue's ability to perform its obligations or its continued ability to function on a sound basis. Under all the circumstances, we conclude that the Joint Plan is feasible. II. FAIRNESS Chapter X of the Bankruptcy Act requires that in order to receive the approval of the Court, a plan must be found to be fair and equitable to the Debtors' security holders and creditors, in the order of their priorities. 11 11 (1) Fairness to Refunding Bondholders The Refunding Bonds, maturing January 1, 1960, are secured by a first lien on virtually all the assets of Third Avenue and Surface, subject to the prior lien of the outstanding equipment obligations which, as previously stated, will be assumed by the reorganized companies. Appropriately computed, the Refunding Bondholders as a class have a claim of $14,256,142 as at January 1, 1957, or $961.27 per $1,000 original face amount of bonds. We conclude that the allocation to Refunding Bondholders under the Joint Plan of $575 principal amount of Surface Transit's new 6% bonds plus $424 cash, in respect of each $1,000 face amount of Refunding Bonds, accords fair treatment to that class. 12 (2) Fairness to Adjustment Bondholders The question of fairness to the Adjustment Bondholders involves primarily a determination whether the 333,240 shares of Fifth Avenue common allotted to them under the Joint Plan fairly compensates them for their interest in the Debtors' enterprise. In this connection, we deem it appropriate to compare the income expectancy of the Adjustment Bondholders in a reorganized Third Avenue with their income expectancy as stockholders of Fifth Avenue under the Joint Plan. It is clear that before the Adjustment Bondholders can receive the benefit of the earnings of a reorganized Third Avenue the prior claims of the Refunding Bondholders must be fairly and equitably treated. We have found to be fair the treatment accorded to Refunding Bond "The Court has found that the Debtor is insolvent, and that therefore common stockholders of Third Avenue are not entitled to participate in the reorganization. "Such allocations are exclusive of 35% of principal amount heretofore paid to Refunding Bondholders by the Trustee. holders under the Joint Plan, namely, the issuance to them of all the New Bonds plus cash of about $6,300,000. Of the cash, over $4,000,000 must originate outside the Debtors' treasury. Under the Trustee's prior proposal, the additional funds were to be supplied by the Adjustment Bondholders through a rights offering, whereupon they were to emerge with substantially all the new common stock and thus a claim on substantially all the net income of the reorganized enterprise. Under the Joint Plan, without the making of any further cash investment, the Adjustment Bondholders will receive substantially all of the Fifth Avenue common stock to be distributed representing approximately 38% of the total of 882,575 shares of Fifth Avenue's common stock to be outstanding pro forma. Based on our finding of $1,800,000 as the long range maximum reasonably expected average gross income, the net income of Surface and Third Avenue, applicable to the new common stock, for the years 1957 through 1960, would be as follows: 13 Over the same four-year period, Fifth Avenue estimates average net income of $1,650,000 from its own operations-giving combined average net income of $2,609,658 or $2.96 per share on Fifth Avenue's pro forma common stock. The portion of this combined average net income applicable to the 336,088 shares of Fifth Avenue common issuable under the Joint Plan would be $994,584. Thus on the basis of $1,800,000 gross income for Surface and Third Avenue, the Adjustment Bondholders would receive a claim on somewhat less than $1,000,000 of earnings under the Joint Plan without any further cash investment on their part; absent the Joint Plan, they would have a claim on somewhat more than $1,000,000 of earnings after making a further investment of over $4,000,000. Should the shorter-range period 1957-60 be assumed to produce larger average gross income for Surface and Third Avenue of, for example, $2,000,000 or $2,500,000, the comparisons corresponding to the above would be as follows: 13 As previously stated our finding of $1,800,000 excluded the operations of the Westchester subsidiaries which the Trustee estimated would result in a loss of over $300,000 for 1956. Inclusion of the Westchester operations would result in projected system earnings commensurately smaller than the figures hereinafter shown, with a corresponding effect on the various earnings comparisons. While we have set forth these computations for illustrative purposes, we believe that such short-range comparisons based on gross income of $2,000,000 or $2,500,000 for a separate Surface and Third Avenue operation are unrealistic in light of our conclusion that the maximum long-range expectancy is $1,800,000. Considering all these factors, and taking into account the important consideration that realization by the Adjustment Bondholders of Surface and Third Avenue's earnings would require a cash investment by them of over $4,000,000, we conclude that the Adjustment Bondholders' share of the combined earnings, through their ownership of Fifth Avenue's common stock, is not unfair.11 Furthermore, considering the fact that the Adjustment Bonds are widely held in bearer form, we believe the Joint Plan affords Adjustment Bondholders a sounder means for the realization by them of their substantive interests in the enterprise. In connection with a rights offering, which as under the Trustee's earlier plan would be required to raise the $4,000,000, each Adjustment Bondholder who acted promptly to gain possession of his subscription warrants would be faced with the immediate choice whether to make a further cash investment in the enterprise or to dispose of his warrants in the open market before their expiration; and Adjustment Bondholders who failed to act promptly to secure the warrants could, at best, only be assured of the cash proceeds of the forced sale of their warrants by the Trustee before the close of the subscription period. Under the Joint Plan, on the other hand, no Adjustment Bondholder will suffer through failure to take all steps necessary, within the relatively brief time of a subscription period, to preserve his investment. On the contrary, Adjustment Bondholders would be assured that within the period for exchange 14 It has been contended that economies are likely to be effected from joint operation of the two companies. To the extent that such economies may be realized, the earnings comparisons shown in the text are even more favorable to Adjustment Bondholders under the Joint Plan. In this connection, Fifth Avenue has indicated its intention to merge the two companies some years hence after substantial reduction of the bonded indebtedness; the full benefits of joint operation are not expected to be achieved until merger. 37 S. E. C. |