failure to file the required supplemental statement revealing said indictment and prosecution constituted a willful violation of Rule X-15B-2, and that it is in the public interest to revoke his registration as an over-the-counter dealer. It is therefore ordered, pursuant to Section 15 (b) of the Securities Exchange Act of 1934, that the registration of W. H. Totsch be, and the same hereby is, revoked. 6 S. E. C. [No. 934] IN THE MATTER OF WALNUT ELECTRIC & GAS CORPORATION and JOSEPH M. NELSON File Nos. 56-64 and 46–180. Promulgated December 11, 1939 SALE OF PUBLIC UTILITY SECURITIES BY REGISTERED HOLDING COMPANY. A registered holding company, having filed an application pursuant to Section 12 (d) of the Public Utility Holding Company Act of 1935 and Rule U-12D-1 promulgated thereunder, for approval of the sale of certain securities and indebtedness of two of its subsidiary companies, a part of the proceeds of $30,000, from the sale, to be used to reduce outstanding indebtedness and the balance to be retained as cash working capital, approval granted, the Commission finding that the consideration to be paid for the securities is not inadequate. ACQUISITION OF SECURITIES BY REGISTERED HOLDING COMPANY OR SUBSIDIARY. Application, having been filed pursuant to Section 10 of the Public Utility Holding Company Act of 1935 for approval of the acquisition of securities of two subsidiary companies of a registered holding company, the purchaser being a director and president of both of the subsidiary companies but owning no securities of any of the companies, approved, the Commission finding that upon the consummation of the sale, the two subsidiary companies will cease to be subsidiaries of a holding company and that there is little possibility that they will thereafter become involved in any problem under Section 11 of the Act. APPEARANCES: Frank J. Gillis and Lewis N. Evans, of the Public Utilities Division of the Commission, John J. Finn, for Walnut Electric & Gas Corporation and Joseph M. Nelson. FINDINGS AND OPINION OF THE COMMISSION Walnut Electric & Gas Corporation,1 (hereinafter sometimes referred to as "Walnut") a registered holding company, was formed in March 1937 for the purpose of liquidating certain utility securities and claims then owned by General Water Gas and Electric Company and American Equities Company, subsidiaries of International 1 Formerly called States Electric & Gas Corporation. 6 S. E. C.- -35-1835 2 Utilities Corporation. Among the securities and claims thus acquired and now held by Walnut are the following: $24,400 principal amount Vermont Lighting Corporation first $35,000 principal amount unsecured noninterest-bearing open- 2,970 shares common stock, par value $100, Vermont Lighting 1,000 shares capital stock, St. Johnsbury Gas Company. Vermont Lighting Corporation (hereinafter sometimes called "Vermont") owns and operates gas manufacturing plants and distribution systems in Barre, St. Albans, and Springfield, Vt. St. Johnsbury Gas Company (hereinafter sometimes called "St. Johnsbury") owns and operates a gas manufacturing plant and distribution system in the town of St. Johnsbury, Vt. There is no interconnection between the three properties operated by Vermont Lighting Corporation or between any of them and St. Johnsbury Gas Company. Walnut now proposes to sell the aforesaid securities and indebtedness to Joseph M. Nelson, of Barre, Vt. The consideration to be paid for the Vermont Lighting Corporation securities and indebtedness is $6,000 and, for the capital stock of St. Johnsbury Gas Company, $8,000 plus an amount by which the current assets of St. Johnsbury will exceed its current liabilities. This amount is presently estimated at $16,000, making a total consideration of $24,000 for the St. Johnsbury stock. 5 Out of the proceeds, Walnut proposes to pay $25,000 to International Utilities Corporation to reduce outstanding indebtedness. This indebtedness bears interest at the rate of 62% per annum of which amount 6% is fixed and the remaining one-half of 1% per annum is contingent and noncumulative, payable only to the extent that consolidated net earnings are available. An annual saving of $1,500 in fixed interest and $125 in contingent interest, or a total of In the matter of States Electric & Gas Corporation, 2 S. E. C. 392 (1937). These bonds were not part of the securities acquired from American Equities but were purchased on the open market by Walnut at a net cost of $5,875. Walnut also proposes to sell certain appliance installment accounts receivable aggregating $2,654.75 on August 31, 1939, for a consideration of $2,256.64, less amounts collected before the closing date. The accounts were acquired by Walnut from Vermont Lighting Corporation in 1937. 'International Utilities Corporation, as a result of merger with American Equities Company, is present holder of the $200,000 note originally issued by Walnut to the latter company at the time of its acquisition of these securities. The St. Johnsbury Gas Company stock which is pledged as security for this note will be released by International. $1,625 will be effected. That part of the consideration in excess of $25,000 is to be retained by Walnut as cash working capital. The matter is before us on an application by Walnut for approval of the sale pursuant to Rule U-12D-1 and on application by Nelson pursuant to Section 10 (a) (1) for approval of the acquisition. Regarding the application by Walnut, Rule U-12D-1 provides that the Commission shall approve such application if it finds that the terms and conditions of such sale with respect to the consideration to be received for such sale, maintenance of competitive conditions, fees and commissions, accounts, disclosure of interest and similar matters, are not detrimental to the public interest or the interest of investors or consumers and will not tend to circumvent the provisions of the Act, or any rules, regulations, or orders of the Commission thereunder. The first point that requires our scrutiny is suggested by the fact that the purchaser, Nelson, is presently a director and president of both St. Johnsbury and Vermont. However, he owns no securities of either of these companies or of Walnut or of International Utilities Corporation. His interest is that he is engaged in the active operation of Vermont and for this he is paid a salary. He receives no remuneration from St. Johnsbury, although he exercises some supervision over its operation. This employment long antedated the acquisition of the Vermont securities by either Walnut or American Equities Company. There is evidence that some efforts were made to sell these securities to other utilities operating in the State of Vermont, although no offers were received. The record shows that Nelson was first approached by officers of Walnut and there is nothing to indicate that he utilized his position to secure better terms than an outside purchaser could get. No fees or commissions are to be paid in connection with the sale except expenses which are estimated not to exceed $500. The St. Johnsbury stock, the only outstanding security of that company, is carried on the books of Walnut at an assigned value of $12,500. The underlying book value of this stock as of August 31, 1939 amounted to $152,922, and after eliminating $56,109 due from Vermont Lighting Corporation, the adjusted underlying book value of the stock amounts to $96,813. The earnings of the company have declined to a point where they are in no way commensurate with the carrying value of St. Johnsbury's assets. Therefore it is necessary that we estimate the value of the capital stock on the basis of its earning power. Following are income statements of St. Johnsbury for the years 1932, 1934, 1936, 1938 and for the year ended August 31, 1939: As of August 31, 1939, property, plant and equipment was stated in the balance sheet at $132,900.14, and the reserve for renewals and replacements at $53,737.10, or a net amount of $79.163.04. ⚫ For the years, 1934 and 1932, a break-down of "operating revenue deductions," other than depreciation, did not appear in the record. According to the testimony of witnesses, the decrease in gross operating revenues is due primarily to competition with electric power and oil burners which necessitated voluntary rate reductions. Nelson testified that he expects to effect savings of approximately $1,700 annually but this is predicated partly on his belief that a tax reduction can be secured. There is no indication that such savings can or will be effected by the present management. Gross income for the year ended August 31, 1939, amounted to 8.8 percent on the proposed purchase price of $8,000 (no consideration being given to the additional amount to be paid for net current assets). If an amount were added to the $8,000 for normal working capital,' this rate of return would be reduced accordingly. In view of the present earnings of St. Johnsbury and the general outlook for small manufactured-gas companies, we do not find that the consideration to be paid for the capital stock of St. Johnsbury is inadequate. The problem of evaluating the securities of Vermont Lighting Corporation for the purpose of determining the fairness of the consideration is complicated to some extent by the fact that at the present time the company is in reorganization under Chapter X of the Bankruptcy Act in the United States District Court for the District of Vermont and no plan of reorganization has been approved by the court or by this Commission. Ordinarily the uncertainties inherent in a reorganization proceeding, the number and variety of possible plans, and the unpredictability of the reactions of security holders * Current assets amounted to $20,299 (including cash in the amount of $12,932) as of August 31, 1939, as compared with current liabilities of $2,251 as of the same date. A plan of reorganizaion was filed with this Commission on April 7, 1939, by the trustee, Harry Shurtleff, pursuant to Section 11 (f) of the Act. 6 S. E. C. |