The total annual dividend requirements on the $3.50 and $1.75 preferred and on the class A stock outstanding as of December 31, 1939, are as follows:

• Represents "ordinary" dividend. After payment of the "ordinary" dividend of $3.50 and after pay. ment of $1.00 per share on the class B, the class A then participates up to $1.50 per share with the class B.

Adjusted net income for 1939 and the average adjusted net income for the past 3 and 4 years, without taking into account the dividend requirements on the $7 preferred, since retired, was sufficient to meet the dividend requirements on the $3.50 and $1.75 preferred, but fell far short of meeting the additional dividend requirements of $308,441 on the class A stock. The average adjusted yearly earnings on a 2-, 5-, 6-, 7-, or 8-year basis would, however, have been inadequate to meet the requirements on the $3.50 and $1.75 preferred. Adjusted net income, it must be emphasized, is exclusive of net capital losses. In some years during the period from 1932-1939, International was not able to earn even the full dividend requirements on the $7 preferred (since retired) and $3.50 prior preferred. No dividends have been paid on the class A stock since 1931. According to the records, no dividends have been paid on the class B stock since its issuance in 1924. The following table indicates the dividends which have been paid by International

6 S. E. C.

during 1939:

$7 preferred stock (since retired), Jan. 5, 1939, $2 per share_‒‒‒ $3.50 prior preferred stock:

$6, 654.00

344, 895. 26

16,600. 25

а

a 37, 356. 96

87, 155. 21

438, 704. 47

Total_

Approved by this Commission. See In the matter of International Utilities Corporation, 5 S. E. C. 403 (1939) and 6 S. E. C. 29 (1939).

The net income of International for the year 1939 amounted to $476,436.15 as compared with dividends paid during the same period of $438,704.47, or a difference of $37,731.98. Since the total amount of the proposed dividend payment is $86,597.88, and since the record indicates that the first income of International, for the year 1940, will not be received until March or April of 1940, it will be necessary to draw on anticipated future earnings to the extent of $48,865.90 in order to have sufficient earnings to cover the proposed dividend on the $3.50 prior preferred stock.

It is estimated by International that its earnings for the 4 months ending April 30, 1940, will amount to $171,717, and that for the year 1940 they will total $517,958. This is $171,567 in excess of the annual dividend requirements on the $3.50 prior preferred stock. In view of the applicant's large cash resources and the other circumstances of this case, the payment, judged by the standards of Section 12 (c), does not appear to impair the financial integrity of the applicant nor does the record disclose any basis for a finding that the payment will impair the financial integrity of companies in the International holding company system or prejudice the working capital of public utility companies. The $3.50 preferred is the senior security of the applicant, and, since justified by current earnings, it appears to be in the best interest of the security holders of the corporation to avoid default.

CONCLUSIONS

The Commission finds that the proposed regular quarterly dividend at the rate of 8712¢ per share to the $3.50 prior preferred stock is not unreasonable under the standards of Section 12 (c). With respect to the proposed payment of the $1.75 preferred stock, there are additional factors to be considered and the record is not yet complete.

The Commission reserves jurisdiction as to its approval of this payment.

An appropriate order will issue subject to the following conditions:

(1) That the proposed dividends on the $3.50 prior preferred stock shall be charged to capital surplus, and that the amount of such dividends so charged shall be restored to capital surplus from the first available earnings after December 31, 1938, after providing for 1939 dividends heretofore declared and paid;

(2) That International Utilities Corporation shall notify the $3.50 prior preferred stockholders concurrently with the receipt of dividends that the dividend payment received is subject to the above condition; and

(3) That the Commission reserve jurisdiction as to its approval of the declaration and payment of the proposed dividend to the $1.75 preferred stock.

By the Commission: Commissioner Henderson dissenting and Chairman Frank (who was absent at the time of Commission action herein) not participating.

6 S. E. C.

[No. 971]

IN THE MATTER OF

PHILADELPHIA COMPANY

File No. 43-271. Promulgated January 30, 1940

ALTERATION OF RIGHTS OF HOLDERS OF OUTSTANDING SECURITIES. Declaration, having been filed pursuant to Section 7 of the Public Utility Holding Company Act of 1935 regarding the reduction of the stated value of its common stock from $10 per share to $7.25 per share, the creation of a reserve for revaluation of assets, and the transfer to said reserve of the balance of its unsegregated surplus account as of December 31, 1939 and the capital surplus created by the reduction of the stated value of the common stock, and certain changes in the voting rights of declarant's preferred stock, permitted to become effective, subject to certain conditions.

Where company proposed to create a reserve for the revaluation of assets, and reserve appeared to the Commission to be inadequate, and if so would result in an interruption of dividends on the company's preferred and common stock, the Commission, in view of safeguards attached to its order found no occasion for affirmative action under Section 12 (c) of the Act, if suggested adjustments providing for the above contingency would be made by the declarant within a reasonable time.

APPEARANCES:

Carl S. Stern and David K. Kadane, of the Public Utilities Division of the Commission.

Reed, Smith, Shaw & McClay, by H. E. Hackney and John Frazer, for Philadelphia Company.

A. Louis Flynn, J. R. Clerkin, and Abner Goldstone, for Philadelphia Company.

FINDINGS AND OPINION OF THE COMMISSION

Philadelphia Company, a registered holding company and a subsidiary of Standard Gas and Electric Company, also a registered holding company, has filed a declaration pursuant to Section 6 (a) (2) of the Public Utility Holding Company Act of 1935. The declaration covers (1) a reduction of the stated capital of declarant from $48,008,140 to $34,805,901.50, or $13,202,238.50, through the reduction in the stated value of its 4,800,814 shares of common capital stock from $10 to $7.25 per share; (2) the creation of a reserve for revaluation of assets by the transfer to said reserve of (a) the surplus balance of

6 S. E. C.-35-1905

declarant on December 31, 1939,1 and (b) the paid-in surplus created by the reduction of the stated capital (except not to exceed $5,000,000 of such paid-in surplus), so that the reserve would total $23,000,000; (3) certain changes in the voting rights of declarant's preferred stock, as set forth later.

CAPITALIZATION

The capitalization and surplus of declarant at September 30, 1939, on both an actual and a pro forma basis, are summarized below (as reported by declarant):

The surplus balance of $13,001,224.12 at September 30, 1939, is unclassified as between capital and earned surplus, and includes undetermined amounts originating from revaluations of property, amounts arising from revaluations of investments, and $1,431,250 designated as invested in capital stocks reacquired ($1,426,600 in reacquired preferred stock which is proposed to be canceled and $4,650 in reacquired common stock The latter amount will be reduced to $3,371.25 as a result of the reduction in the stated value of the common and the restriction of $1,426,600 will be removed when the treasury stock is canceled).

The consolidated undistributed surplus of declarant's subsidiaries at September 30, 1939, is $29,851,511.45 of which $15,043,549.59 represents surplus arising from appraisal of property, $12,391,475.60 represents con solidated earned surplus of Duquesne Light Company and its subsidiaries and the balance of $2,416,486.26 represents net unsegregated surplus of other subsidiaries after giving effect to consolidation eliminations. The total reduction in capitalization and surplus is $23,000,000 which is equal to the reserve proposed to be created.

• Cash on deposit for payment.

4 This amount will be reduced by $1,451,944.63 as a result of our conditions requiring declarant to eliminate stock discount and expense included in a separate caption on the balance sheet in the amount of $787,176 and included in property, plant, and equipment in the amount of $664,768.63. The balance ($1,747,456.26) of capital surplus will not be available for dividends.

1 The surplus of declarant is not segregated as between earned and capital surplus: On September 30, 1939, the surplus balance was reported to be $13,001,224.12, including $1,426,600 invested in preferred stock and $4,650 invested in common stock of declarant. The $4,650 of surplus invested in common stock would not be transferred to the reserve. $588.27 of capital surplus will also be created by the reduction in stated value of scrip.