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ticipated in its financing. Its principal officers and a majority of its directors have always been officers and directors of applicant. Montgomery is president and chief executive officer of United States Hat Machinery Corporation. Tibbals is its vice president and a director. J. H. Miller, treasurer and a director of applicant is secretary and treasurer of United States Hat Machinery Corporation. The record indicates that applicant actively participates in the management and operations of United States Hat Machinery Corporation.

Applicant derives practically all of its income from Hat Corporation of America and United States Hat Machinery Corporation. For the year ended 1940, Hat Corporation of America accounted for 66 percent and United States Hat Machinery Corporation for 19 percent of applicant's gross income. In addition to its activities in connection with Hat Corporation of America and United States Hat Machinery Corporation, applicant operates a retail hat and haberdashery store in New York, which serves, to a large extent, as an outlet to Hat Corporation of America for the disposal of returned merchandise and excess inventories. Its income from this source amounted to 8 percent of its gross income for the year ended 1940.

It is our conclusion, based on the record in this matter, that applicant controls Hat Corporation of America and United States Hat Machinery Corporation within the meaning of the Act. We find further that, through these companies which are engaged in a similar type of business, applicant is primarily engaged in the manufacture of hats and hat machinery and is not primarily engaged in the business of investing, reinvesting, owning, holding, or trading in securities. Applicant is, therefore, entitled to an order declaring that it is not an investment company within the meaning of Section 3 (a) (3), and consenting that its registration under the Act be withdrawn and cease to be in effect. Our order, however, will provide for its revocation should applicant subsequently become engaged or hold itself out as being engaged primarily in the business of investing, reinvesting, owning, holding or trading in securities.

An appropriate order will issue.

By the Commission: (Chairman Purcell and Commissioners Pike and Burke) Commissioners Healy and O'Brien being absent and not participating.

manufacture of hats.

The retail store is located in a building owned by applicant formerly used by it in the remainder of applicant's gross income for the year 1940, amounting to approximately 7 The remaining space in the building is leased to others. The percent of such income, was derived from rentals received under these leases and from certain nonrecurring items.

'Cf. The M. A. Hanna Company, 10 S. E. C. 581 (1941); United Stores Corporation,

10 S. E. C. 1145 (1942).

11 S. E. C.

[No. 1597]

IN THE MATTER OF

COMMUNITY POWER AND LIGHT COMPANY

GENERAL PUBLIC UTILITIES, INC. SOUTHWESTERN PUBLIC SERVICE COMPANY, ET AL.

Filed July 17, 1942

REPORT OF THE COMMISSION ON A PLAN OF REORGANIZATION This is a report of the Commission on a plan of Community Power and Light Company, and its subsidiaries including General Public Utilities Company, Inc., and Southwestern Public Service Company,1 designed to comply with both the geographic integration and the financial simplification requirements of Section 11 of the Public Utility Holding Company Act of 1935.

The principal feature of the plan is the merger of Community and General into Southwestern Public Service Company, one of General's subsidiaries. This merger is subject to obtaining affirmative votes of two-thirds of the outstanding common stock of Community and General in favor of the plan. The plan also contemplates the disposition of certain properties, and the acquisition, from an unaffiliated holding company system, of properties which the Commission has found will bear proper relation to the presently owned properties of Community and General which are to be retained. In connection with these matters the plan provides for the issuance of new securities (a) to pay for the properties to be acquired, (b) to refund presently outstanding senior securities of the system, and (c) to obtain additional urgently needed capital.

This report is made pursuant to the requirements of the Public Utility Holding Company Act of 1935 to assist security holders in

1 The several corporations, to which we will have occasion to refer in the course of this report, will, for convenience, hereafter be designated as follows:

Community Power and Light Company-Community.

The Kansas Utilities Company-Kansas.

Texas-New Mexico Utilities Company-Texas-New Mexico.
Southwestern Electric Company-Southwestern Electric.

General Public Utilities, Inc.-General.

Gulf Public Service Company-Gulf.

Southwestern Public Service Company-Southwestern.

Royal Palm Ice Company-Royal Palm,

11 S. E. C.-35-3677

determining whether to vote for or against the plan. The plan was submitted to the Commission by the companies pursuant to Section 11 (e) of the Act, which authorizes the filing of voluntary plans for compliance with its integration and simplification requirements. Public hearings on the plan have been held, after appropriate notice, and on the basis of the record made at these hearings, the Commission has approved the plan as necessary to effectuate the provisions of Section 11 of the Act and as fair and equitable to the persons affected. In approving the plan, the Commission has reserved jurisdiction as to certain of its features, as to which the record could not be completed until a later date. The most important of these reservations was as to the terms and conditions upon which the proposed refinancing of the merged company should be effected. A copy of the Commission's findings and opinion approving the plan, 11 S. E. C. 702 (1942), will be furnished without charge upon request addressed to the Secretary, Securities and Exchange Commission, 18th and Locust Streets, Philadelphia 3, Pa.

Of course, this approval by us should not deter each individual stockholder from analyzing for himself the provisions of the plan, of which the merger concerning which he is asked to vote is a part, and from reaching his own conclusion in respect thereof.

Historical Background for the Plan.—Community and the predecessor of General were formerly subsidiary holding companies of American Community Power Company, which was in turn a subsidiary of American Commonwealth Power Corporation. The unsound financial practices pursued by the former management of that holding company system resulted in receiverships in 1931 of both American Commonwealth Power Corporation and American Community Power Company, the subsequent liquidation of both of these companies, and the reorganization of General in 1935. All of these events occurred prior to the time when Community and General registered as holding companies and became subject to the provisions of the Public Utility Holding Company Act. In the meanwhile, the liquidation of American Community Power Company and American Commonwealth Power Corporation had resulted in a change of management for Community. The new management was confronted with the necessity of solving the problems which it had inherited from the promoters of the holding company system, including complex security structures, impaired credit, poor public relations and the fact that the operating properties of the system were widely scattered. Steps already taken to meet these problems have included the simplification of the stock structure of the parent, as described in our opinion in Community Power and Light Company, 6 S. E. C. 182 (1939), the disposition of the interests of Community and General

11 S. E. C.

in a number of subsidiaries 2 whose retention could not be economically justified, and the application of the proceeds to reduction of debt.

THE COMMUNITY SYSTEM AS IT PRESENTLY EXISTS

There is listed below an outline statement of the relationship of Community to its various subsidiary companies, and the nature and location by states of the business of such subsidiaries. Immediately following Community are its direct subsidiaries, including General (indicated by indentation). Immediately following General are the three direct subsidiaries of General (indicated by further indentation), including Southwestern Public Service Company, which in turn has four subsidiaries (indicated by further indentation).

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• Also owns, but does not operate, electric generating facilities in Louisiana and New Mexico.

A chart is appended to this report as "Appendix A" which sets forth graphically the present structure of the Community system and the corporate structure of the individual companies constituting that system.

It will be noted from this chart that the last tier of operating companies (Arizona, Flagstaff, Holbrook and Southwestern Ice) has superimposed upon it three layers of "holding companies," namely Southwestern, General and Community itself. Both General and Southwestern are holding companies and operating companies.

In addition to the senior securities, i. e., debt and preferred stock, of the three holding companies, Community, General and Southwestern, there are outstanding senior securities of certain of the opons, except where they are owned inst the pr of the respecs of the hold

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387 (1941).

ing companies represented by ownership of the common stock of such operating subsidiaries. Thus Southwestern, Gulf and TexasNew Mexico have debt securities outstanding in the hands of the public. Texas-New Mexico also has two classes of preferred stock which are publicly owned.

The financial structure of the system is further complicated by the fact that many of the securities of the constituent companies are pledged to secure indebtedness of their parent company, or companies.

As a result of this highly complicated financial structure, there are as many as seven classes of securities which evidence claims against the assets of certain subsidiaries prior to that of the common stockholders of Community and as many as four classes of securities, in the same instances, which represent claims prior to those of the common stockholders of General, despite the fact that all of the common stock of each of the operating companies, except that of General, is owned by its immediate parent. In effect, this structure sets up an elaborate system of separate claims against the small and scattered properties of the Community system. The burden of maintaining it appears obvious. Furthermore, the indentures or agreements under which the obligations of the parent companies were issued contain restrictions the practical effect of which are to prevent the raising of capital urgently needed for additional facilities in connection with the war effort, except by the sale of holding company securities. The credit of the holding companies is such that it would be difficult if not impossible to obtain this much needed additional capital.

As we have developed more fully in our findings and opinion with respect to the plan, substantial changes are plainly necessary to eliminate these complexities, to strengthen the system's financial structure and to bring about conformity of the holding company system with the simplification and integration standards of the Act. These are the objectives sought to be achieved by the plan now being submitted to you for your approval.

SUMMARY OF PLAN

Briefly stated the plan calls for the taking of the following action: 1. The merger of Community, General and Southwestern into a single company with the retention, only temporarily, of certain isolated subsidiary companies and properties;

2. The elimination of certain unnecessary companies, namely, Community, General, Southwestern Electric and Texas-New Mexico;

3. The recapitalization and partial liquidation of one isolated company, Gulf, as an aid to its future disposition:

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