During 1969, Railroad was given permission by the ICC to discontinue 27 intercity passenger trains and petitions filed in 1969 to discontinue 14 additional east-west passenger trains are still pending. Railroad is now operating approximately 1,280 daily passenger trains and in March, 1970 petitioned the ICC for discontinuance of 34 more of these trains on long distance routes in east-west service comprising substantially all its long-haul passenger service west of Buffalo and Harrisburg. In November, 1969 a memorandum of agreement was signed with the states of New York and Connecticut, under which certain of the former New Haven facilities will be sold or leased by Railroad to government agencies so that the New York and Connecticut suburban service can be improved with funds supplied by the federal government and the two states. Railroad, directly and through subsidiaries, controls various separately operated railroad companies, including DT&I, The Pittsburgh and Lake Erie Railroad Company and Lehigh Valley Railroad Company. Railroad is under an order of the ICC to offer Lehigh Valley Railroad Company for inclusion in another railroad system and unless and until it is so included in another railroad system, Railroad is obligated to continue the operations of Lehigh Valley Railroad Company. Such operations incurred a loss of $7.1 million in 1969. Legal Proceedings The order of the ICC effective November 28, 1968, in Increased Freight Rates, 1968, Ex Parte No. 259 permitted freight rate increases which approximated $68 million annually for the Railroad and is under attack in three separate cases. All of these cases have been decided favorably to the Railroad and two of them are on appeal to the United States Supreme Court. The order of the ICC effective November 18, 1969 in Increased Freight Rates, 1969, Ex Parte No. 262 permitted freight rate increases which approximated $80 million annually for Railroad and is presently under investigation by the ICC. Such order is under attack in a suit pending before the District Court for the District of Columbia. The Railroad is a party to a petition for a 6% increase in freight rates, now pending before the ICC in Increased Freight Rates, 1970, Ex Parte No. 265. If the proposed increase is permitted to become effective, it is expected to produce approximately $84 million annually in additional freight revenues for the Railroad. Railroad is constantly engaged in negotiations with one or more of the approximately 20 railroad labor organizations which represent its employees. Such negotiations are subject to the provisions of the Railway Labor Act which require the parties to go through mediation and other processes before resorting to self-help. Employee requests for substantial wage increases are presently the subject of labor negotiations. At the present time all such labor negotiations, whether handled by Railroad individually or jointly with other railroads on a national basis, are still subject to Railway Labor Act prohibitions against strike action. A three-judge Federal court in New York City set the purchase price for the assets of New Haven, purchased by Railroad on December 31, 1968, at approximately $150 million. The reorganization court at New Haven, Connecticut, however, decided that the price should be $28 million higher, and the bondholders of New Haven are asking for an even higher purchase price. Appeals by Railroad from the reorganization court's decision and by the bondholders from the decision of both courts are pending before the United States Supreme Court. See Note 5 to Financial Statements of Pennco and Note 4 to Financial Statements of Penn Central for information with respect to certain income tax proceedings. TRANSACTIONS WITH AFFILIATED COMPANIES Pennco applied the proceeds from the sale of $35,000,000 principal amount of its 84% Collateral Trust Bonds due 1989 to the purchase in July, 1969 from the Railroad of the following securities at the prices indicated: Security 1,462,109 shares Common Stock of Mad- Warrants to purchase 500,000 shares of Pennsylvania Railroad General Mortgage Price $16,197,243 ($11.078 per share) $ 6,776,000 (100% of the principal amount) $ 2,661,000 (100% of the principal amount) $ 4,700,000 $ 4,666,000 (100% of the principal amount) This note was subsequently surrendered to Strick, Inc. in exchange for 67,760 shares of Series A Preferred Stock, bearing dividends of $5 per share per annum commencing 1974, and a warrant, expiring December 31, 1978, to purchase 250,000 shares of Strick, Inc. Class A Stock at prices declining from $20 to $14 per share over a period of 9 years. In the past three years Pennco has sold approximately $1.5 million principal amount of the Railroad's General Mortgage Bonds, Series F, 3% %, due 1985 and $7 million principal amount of the Railroad's General Mortgage Bonds, Series H, 44%, due 1986 to the Railroad at their principal amount. In December, 1968, Pennco sold 30,428 shares of 42% Preferred Stock of Wabash to another subsidiary of the Railroad in exchange for $2,468,000 principal amount of Pennco's Collateral Trust Bonds, 54%, due 1985. In December 1969 Pennco loaned to Railroad the proceeds from the sale of $50,000,000 principal amount of its 9% Sinking Fund Debentures Due 1994 and received from the Railroad a 94% promissory note due 1994 in the amount of $49,000,000 payable in installments related to the sinking fund for such Debentures. In December 1969 Pennco received 1,400,610 shares of Common Stock of Great Southwest in settlement of $25,210,978 of advances and receivables due to Pennco from Great Southwest. See "Introduction" and "Use of Proceeds" for information concerning certain other recent and proposed transactions with affiliates. See also Note 2 to Financial Statements of Pennco. DESCRIPTION OF DEBENTURES The following statements with respect to the Debentures are summaries of the detailed provisions of an Indenture dated as of June 1, 1970 (the "Indenture") between the Company and Manufacturers Hanover Trust Company, Trustee (the "Trustee"). Wherever particular provisions of the Indenture or terms defined therein are referred to, such provisions or definitions are incorporated by reference as a part of the statements made, and the statements are qualified in their entirety by such reference. The Debentures are to be issued under the Indenture and will be direct obligations of the Company limited to $100,000,000 principal amount. The Debentures will be delivered only in fully registered form in denominations of $1,000 or any multiple of $1,000. Debentures in the several denominations are interchangeable without service charge. Principal and interest will be payable at an office or agency of the Company in the Borough of Manhattan, The City of New York. Interest will be payable semiannually on June 1 and December 1, commencing December 1, 1970, to the registered holders of Debentures of record at the close of business on May 15 or November 15, as the case may be, preceding the interest payment date. Debentures may be presented for registration of transfer at an office or agency of the Company in the Borough of Manhattan, The City of New York. The Debentures mature on June 1, 1995 or, at the option of the holder, on June 1, 1975. The holder of each Debenture shall have the right, to be exercised within the 45-day period ending on March 1, 1975, to have the principal of his Debentures, or any portion thereof which is a multiple of $1,000, mature on June 1, 1975. Notice of such right and instructions regarding its exercise will be sent to each holder not more than 90 days and not less than 60 days prior to March 1, 1975. Certain Covenants In the Indenture the Company covenants to maintain at all times Net Tangible Assets having a Fair Value, determined as set forth below, equal to not less than 300% of the principal amount of the Debentures and all other outstanding funded debt of the Company which is not subordinated in right of payment to the Debentures. In the case of listed securities, the Fair Value shall be the average of the last reported sale prices per share on each day the security was traded in each of the last three calendar months ending prior to the date of determination. In the case of securities traded in the over-the-counter market, the Fair Value shall be the average of the latest reported bid prices per share on each day the security was quoted in each of the last three calendar months ending prior to the date of determination. In the event that the Fair Value of listed and over-the-counter securities, taken together, is not sufficient to satisfy the 300% test, the Fair Value of other tangible assets shall be determined by three appraisers, one such appraiser being appointed by the Company, one by the Trustee and the third by the two so appointed. In any case, if the Company has contracted to sell certain assets, the Fair Value cannot exceed the contract price, taking indebtedness exchangeable for such assets at the principal amount thereof and stocks at the greater of their par or stated value or their involuntary liquidation preference. "Net Tangible Assets" is defined as total tangible assets less current liabilities. The Indenture also provides that the Company will not (i) declare or pay any dividend (other than dividends payable in Common Stock) or make any distribution on, or redeem or acquire for value, any shares of "Restricted Stock" (defined as Common Stock of the Company and any other Capital Stock owned by Railroad or any Affiliate or which is issued for Railroad Investments), (ii) transfer any tangible assets other than Railroad Investments to any Affiliate or (iii) make or acquire any Railroad Investment for a consideration other than Subordinated Debt, Capital Stock or another Railroad Investment, unless, after giving effect thereto, Non-Rail Assets equal or exceed 250% of the Funded Debt of the Company. Notwithstanding this limitation, however, dividends on Restricted Stock are permitted in an amount not in excess of (i) Available Net Income from the first day of the calendar year in which a dividend was last paid on Restricted Stock which did not cause Non-Rail Assets to fall below 250% of Funded Debt, plus $25 million, over (ii) the amount of dividends paid on Restricted Stock since such date. "Available Net Income" is defined as net income determined in accordance with generally accepted accounting principles, excluding provisions for deferred taxes and adding or subtracting net gain or loss from sale or revaluation of securities up to 25% of net income before such sale or revaluation, minus all dividends or distributions other than on shares of Restricted Stock; provided, however, that Available Net Income is never to be a negative number. "Railroad Investments" are (i) investments in, advances to or similar interests in Railroad, Lehigh Valley Railroad Company or any Leased-Line Subsidiary of either of them and (ii) investments in, advances to or similar interests in any Person if at the date of determination more than 25% in value of the gross assets of such Person consists of Railroad Investments. "Non-Rail Assets" is defined as Net Tangible Assets minus the Fair Value of all Railroad Investments included therein. The term "Leased-Line Subsidiary" is defined as a subsidiary which owns or operates railroad properties or equipment and which in its most recent fiscal year derived 25% or more of its revenues from rentals paid to such subsidiary under leases of such railroad properties or equipment to Railroad or to Lehigh Valley Railroad Company. At May 8, 1970, the Company had $100.8 million, in market or estimated value, of Railroad Investments. The Fair Value of the assets of the Company is to be determined annually and at any time upon request by the Trustee or the holders of 25% in principal amount of the outstanding Debentures. Compliance with these covenants must be certified to the Trustee before the Company may declare more than $50 million of dividends, other than dividends payable in Common Stock, on Restricted Stock in any period of 12 consecutive months and, in the event there is an existing default on any funded debt of Railroad at maturity or which would entitle the holders thereof to accelerate the maturity thereof, before declaration of any dividend, other than dividends payable in Common Stock, on Restricted Stock or any transfer of assets to an Affiliate. Redemption Subject to the limitations referred to below, the Debentures may be redeemed at the option of the Company in whole or in part at any time, on not less than 30 days' notice, nor more than 60 days' notice, at the following redemption prices for the periods indicated (expressed in percentages of the principal amount): together, in each case, with accrued interest thereon to the date fixed for redemption; provided, however, that prior to June 1, 1980, no such redemption may be made, directly or indirectly, as a part of, out of the proceeds of, or in anticipation of, any refunding operation involving the incurring of indebtedness having an interest cost (computed in accordance with generally accepted financial practice) of less than % per annum. The Debentures are also redeemable, on like notice, for the sinking fund referred to below, on June 1, 1976 and on each June 1 thereafter to and including June 1, 1994, at the principal amount thereof, together with accrued interest to the date fixed for redemption. Sinking Fund The Indenture provides that prior to June 1, in each year, commencing in 1976, the Company will pay to the Trustee as a mandatory sinking fund a sum sufficient to redeem a principal amount of Debentures equal to 5% of the aggregate principal amount of Debentures outstanding (including Debentures held uncancelled by the Company) at the close of business on June 1, 1975. At its option the Company may make an additional sinking fund payment on or before the date of any mandatory sinking fund payment in an amount which does not exceed the amount of the mandatory sinking fund payment applicable to such year. The option to make such an additional sinking fund payment is not cumulative and to the extent not exercised shall terminate. At its option the Company may credit against any mandatory sinking fund payment the principal amount of Debentures redeemed or acquired by it other than pursuant to the sinking fund, but may not credit the principal amount of Debentures which matured on June 1, 1975 or which were cancelled prior to such date. Events of Default, Notice and Waiver The Indenture provides that, if an event of default specified therein shall have happened and be continuing, either the Trustee or the holders of 25% in principal amount of the Debentures then outstanding may declare the principal of all Debentures to be due and payable. Events of default are defined in the Indenture as being: default for 30 days in payment of any interest or sinking fund instalment when due, and default in payment of principal and premium, if any, when due ; default for 90 days after written notice to the Company by the Trustee or by the holders of 25% in principal amount of the outstanding Debentures in performance of any covenant in the Indenture; default resulting in acceleration of any indebtedness of the Company which acceleration has not been rescinded or annulled within ten days after written notice shall have been given by the Trustee or by the holders of 25% in principal amount of the then outstanding Debentures; and certain events of bankruptcy, insolvency and reorganization. The Indenture provides that the Trustee shall, within 90 days after the occurrence of a default. give to the Debentureholders notice of all uncured defaults known to it; provided that, except in the case of default in the payment of principal and premium, if any, or interest on any of the Debentures or the making of any sinking fund payment, the Trustee shall be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interests of the Debentureholders. The term default for the purpose of this provision only shall mean the happening of any of the events of default specified above except that any grace period shall be eliminated. The Indenture contains a provision entitling the Trustee, subject to the duty of the Trustee during default to act with the required standard of care, to be indemnified by the holders of the Debentures before proceeding to exercise any right or power under the Indenture at the request of Debentureholders. The Indenture provides that the holders of a majority in principal amount of the outstanding Debentures may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee. The Indenture includes a covenant that the Company will file annually with the Trustee a certificate of no default, or specifying any default that exists, and a certificate as to defaults on funded debt of Railroad. In certain cases, the holders of a majority in principal amount of the outstanding Debentures may on behalf of the holders of all Debentures waive any past default or event of default except, unless theretofore cured, a default in payment of the principal and premium, if any, or interest on any of the Debentures. Modification of the Indenture The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of 66% in principal amount of the outstanding Debentures, to execute supplemental indentures adding any provisions to or changing or eliminating any of the provisions of the Indenture or modifying the rights of the holders of Debentures, except that no such supplemental indenture may (i) extend the fixed maturity of any Debentures, impair the right of a holder to elect maturity at June 1, 1975, reduce the principal amount thereof or any premium thereon, or reduce the rate or extend the time of payment of interest thereon, without the consent of the holder of each affected Debenture, or (ii) reduce the aforesaid percentage of Debentures, the consent of the holders of which is required for any such supplemental indenture, without the consent of the holders of all Debentures then outstanding. Concerning the Trustee Manufacturers Hanover Trust Company is trustee with respect to certain railroad bond issues and equipment financing agreements and has provided approximately $14.5 million of equipment financing to Railroad and its affiliates. It participates with other banks in a Credit Agreement with Railroad under which it has loaned $16.7 million out of a maximum commitment of $20 million. See "Introduction". In addition, it has participated in other loans to Railroad to the extent of $10.5 million, and has loaned $6 million to Pennco under a commitment for a total of $10 million which loan will be repaid upon the sale of the Debentures. See "Use of Proceeds". LEGAL OPINIONS Legal matters relating to the issuance of the Debentures will be passed upon for the Company by Edward A. Kaier, Esq., Edwin K. Taylor, Esq. or David L. Wilson, Esq., special counsel to the Company employed by the Railroad, and for the Underwriters by Messrs. Sullivan & Cromwell, New York, N. Y. Messrs. Sullivan & Cromwell have from time to time rendered legal advice and services to Pennco and its affiliates and are currently representing Pennco and Railroad in certain pending proceedings. EXPERTS The financial statements and schedule of investments and advances of Pennsylvania Company (company only) and the financial statements of Pennsylvania Company and consolidated subsidiaries, of Penn Central Company and consolidated subsidiaries, and of Penn Central Transportation Company (company only) have been examined by Peat, Marwick, Mitchell & Co., independent certified public accountants, for the respective periods indicated in their reports and are included herein in reliance upon such reports and upon the authority of said firm as experts. All narrative statements of interim results of operation for the first quarter of 1970 compared to the first quarter of 1969 include all adjustments (comprising only normal recurring accruals) necessary to a fair presentation of such results. |