PRELIMINARY STATEMENT

The bankruptcy proceedings before this Court culminating in the present reorganization and approval of the joint plan as submitted, represent the most complex reorganization proceeding in which the Securities Exchange Commission has participated over the last twenty-five years.

An understanding of the interplay of the economic forces that brought about this business catastrophe, as well as the benign and constructive forces which led to the present joint plan of reorganization, necessarily entails a brief review of the record.

GENERAL OUTLINE OF PROCEEDINGS

The records and proceedings delineate the acquisition by the former management of a vast complex of disassociated entities without a central theme or common pattern. The original direction of the company under John McGara as President seemed destined for success. However, the trend of his management, diverse corporate acquisitions and too rapid expansion soon made it apparent that undercapitalization with a heavy debt structure and consequent insolvency would be the inevitable and costly result.

On September 6, 1961, the debtor filed its petition for arrangement pursuant to Chapter XI of the Bankruptcy Act. The Securities Exchange Commission’s motion to dismiss the'proceeding pursuant to Section 328 of Chapter XI was granted on March 15, 1962, and the Debtors’ Amended petition under Chapter X was approved on March 21, 1962.

The Commission’s motion was met with considerable resistance, particularly from certain larger creditors who desired immediate liquidation.

The efforts made and the industry exhibited by C. J. Odenweller, Jr., Esq., trial attorney for the Securities Exchange Commission, and his then able assistant, Stuart H. Kaplan, Esq. should be commended for, as a result of their efforts, the Court was placed in possession of the factual and economic background and data which provided the predicate for granting the motion.

The Court appointed Frank T. Andrews as Trustee on March 21, 1962. He encountered an almost hopeless situation with all of the concomitants of insolvency present. The complete dedication, talent and industry of the Trustee in directing the affairs of the company, planning its financial program, hiring key employees, together with a complete command of the accounting aspects, in large measure made the result possible which the company presently enjoys.

Also, recognition should be given to the team of lawyers headed by Burton J. Goldstein, Esq., including Ralph Golub, Esq., Austin C. Clapp and Joseph B. Purteet, representing the Trustee. The litigation which they encountered was vast, complex and demanding and required the highest degree of industry and talent. They discharged their obligation in the finest tradition.

Brief reference should be made to the statutory proceedings conducted by the Trustee, particularly his report and notice under Section 167(5) and 167(6) of the Bankruptcy Act:

THE SEVERAL PLANS OF REORGANIZATION

The Trustee’s initial plan of reorganization was filed on October 20, 1964. The submission of this plan was preceded by an intensive investigation conducted by the Trustee, as well as by the firm of Booz, Allen & Hamilton, Inc. (Booz-Allen), management consultants appointed by the Court to report on the feasibility of reorganizing the debtor. The elaborate report recommended the reorganization of the company. Lengthy hearings were conducted and the several analysts who participated in compiling the report on feasibility of reorganization were examined by all of the interested parties. This report, in part at least, afforded the Trustee a basis for a comparative analysis, as well as for certain basic findings and conclusions.

The hearing on the Trustee’s plan commenced on November 23, 1964, and continued thereafter. During the course of the proceedings the Creditors’ Committee, the Debentureholders’ Committee and the Judson Steel Corporation, finally joined him in the presentation of a joint plan of reorganization, the original of which was filed on February 16, 1965. Extended hearings were conducted on the joint plan, including an intensive examination of the Trustee concerning his conduct in office and the manifold corporate duties cast upon him.

In addition, during the course of these hearings, the Debentureholders’ Committee presented Mr. Ross J. Cadenasso, a security analyst employed by Blyth & Co.

It is significant to note that the close cooperation between the attorneys for the Trustee and the attorneys representing the Creditors’ and Debentureholders' Committees and Judson Steel Corporation resulted in the- achievement of the plan presently submitted to this Court and denominated “Joint Plan of Reorganization of Trustee, Creditors and Debentureholders (Second Revised).”

At the conclusion of the hearings referred to, the Court found the Joint Plan of Reorganization worthy of consideration and referred it to the Securities Exchange Commission for an advisory report. This report filed May 4, 1965, is now before the Court for all purposes under Section 172, Chapter X, of the Bankruptcy Act. ( 11 U.S.C. § 572 )

The conclusion, in part, reached by the Commission in the report is as follows:

With respect to the all-important problem of going-concern value and the essential ingredients forming a part thereof, the Commission observes:

TABLE VII

(000 omitted)

BoozAllen Trustee Cadenasso Commission

Capitalized earnings $(6,400 $ 7,836 $ 8,487 $ 8,148

(6,800

Tax Savings 1,295 1,660 1,660 1,660

Excess working capital 158 1,050 1,050 1,600

Capital expenditures (446) (455) (455) (455)

Gold Fields earnings 1,044 1,288 1,288 1,288

Gold Fields Properties 714 714 1,642 714

Yuba Development Properties 118 173 118 173

Other properties — 270 270 270

Total $(9,283

(9,683 $12,536 $14,060 $13,398”

(Advisory Report, pp. 25, 26)

The sifting, grinding and processing of the mass of figures and relevant data heaped into the judicial hopper requires resolution. This final resolution on the part of the Court does not represent absolute mathematical certitude. An educated appraisal of the future based upon an informed judgment is the criterion.

The weeks and months of effort expended by the Court and all of the interested parties ultimately contributes to a judgment which must be viewed in the realities of the corporate reorganization. Realistic findings conservative enough to be in consonance with future undetermined factors and corporate vicissitudes justify the Court in finding and adopting the computations attributed to the Trustee on value as adjusted in the total amount of $12,536,000.

On the basis of the record the parties adopted the Trustee’s forecast of earnings of $679,000 per year. For the purpose of determining the appropriate rate of capitalization and the price-earnings ratio, the Trustee and Booz-Allen used marketing prices of common stocks as related to the earnings of four companies. Booz-Allen obtained average price-earnings ratios ranging from fourteen to fifteen times, while the Trustee obtained an average of 14.42 times. The Trustee, after applying a 20% discount rate, obtained a ratio of 11.54 times. Cadenasso, it appears, selected a group of twenty-four companies engaged in the manufacture generally of capital goods and, as disclosed by his cross-examination, these companies were not as directly comparable to the reorganized debtor as were those of the Trustee whose selections engaged in manufacturing operations generally comparable to Yuba. Cadenasso selected 12.5 times as the ratio applicable to the earnings forecast of $679,000 per year.

Frank T. Andrews, the Trustee, since his assumption of the responsibilities of office has lived with the corporate problems and crises as they have arisen, including the hiring of top personnel, complicated financing, marketing, mark-up and market acceptability; all viewed in the environment of a bankruptcy proceeding.

He was and is able to view the future in the light of the past, by intensive personal application. Under these circumstances his conclusions are entitled to great weight and consideration as an informed judgment of all the facts.

The Trustee has adopted a reasonable and conservative basis for his calculations, including the Gold Field properties and excess working capital. In the main, these conclusions are fortified by his own experience in the management and control of the enterprise since his appointment. The court in In re Childs Co., D.C., 69 F.Supp. 856 , adopted the going-concern value arrived at by the Trustee over the figure submitted by the Securities Exchange Commission. The Trustee’s figure was somewhat more conservative ($9,980,000 as against $10,300,000) due to the adoption of a lower capitalization rate figure. The Court said:

Having arrived at a basic figure of total value in the amount of $12,536,000, it is now incumbent upon the Court to consider the Joint Plan of Reorganization (Second Revised) and to apply the tests regarding the feasibility of the plan and whether it is fair and equitable.

With the valuation data established, the Court is in a position to exercise the informed, independent judgment which appraisal of the fairness of a plan of reorganization entails/

THE PLAN IS FEASIBLE, FAIR AND EQUITABLE

In determining the feasibility of the plan, the Court has had before it competent, definite, concrete, and reliable evidence from which was acquired a knowledge of the history of the Debtor, the extent of the assets and liabilities, of present, past and probable prospective earnings and expenses. These factors afford a predicate in concluding that the plan offers a reasonable prospect of success and is workable.

The Securities and Exchange Commission in considering the Joint Plan of Reorganization and in summarizing the plan, observed:

It should be observed that since the filing of the Advisory Report by the S.E.C. the Trustee, Creditors and Debentureholders have filed in open Court their Second Revised Joint Plan wherein they adopted the recommendations made concerning the amendment and clarification of the plan as embraced in the said Report commencing at page 29 thereof, excepting the recommendation made that dividends on the preferred stock should be cumulative, whether earned or not (Advisory Report, p. 30). It is to be observed that the Advisory Report recommended “the issuance of a common stock of no par value.” This recommendation has been adopted. It is further observed that the reorganized company will adopt the name Yuba Industries, Inc.

THE COURT’S FINDINGS

Since the very threshhold of the bankruptcy proceedings, including those taken under Chapter XI, it has been manifest that there was and is no equity for the stockholders and that they must necessarily be excluded from any participation in the reorganization. In Spitzer v. Stichman, 2 Cir., 278 F.2d 402 at 405 , the Court said:

The claims of the three classes of creditors which are uncontested and allowed as of May 24, 1965, total $13,310,449, including interest to September 6, 1961, exclusive of contingent, unliquidated or disputed claims and interest of $3,972,266. The Trustee has established a reserve for contingent, unliquidated or disputed claims and liabilities. (Advisory Report p. 5)

Since the total claims allowed and approved and uncontested exceed the total value of the Debtor as hereinabove found by the Court, the Debtor is insolvent. Additionally, in computing liabilities for this purpose, there would be added additional interest on the allowed claims, accrued during the proceedings, which would be approximately another $4,000,000.

We are not unmindful of the unfortunate and irreparable loss suffered by many innocent stockholders. The Court should observe that from the inception of the proceedings able counsel representing the respective parties have been vigilant and alert in seeking to conserve and preserve the rights of the stockholders. Every legitimate activity has been pursued by the Court and counsel in attempting to further their interests. The Court accordingly specif ically finds that the plan, insofar as it excludes former stockholders from any participation in the reorganization, is fair.

In Consolidated Rock Co. v. Du Bois, supra, Mr. Justice Douglas in this landmark decision, observed (312 U.S. pp. 525, 526, 61 S.Ct. p. 685):

The standard therein set forth has been met in the case at bar.

The Second Revised Joint Plan of Reorganization of the Trustee, Creditors and Debentureholders, the Court finds is feasible, and provides fair and equitable treatment among the several classes of creditors. Their classification as particularly set forth in Paragraph II-A (p. 3), is fair, equitable and just. In this regard, the Court concurs in and adopts the specific findings embraced in the Advisory Report of the Commission (pp. 28, 29):

CONCLUSION

In view of the specific findings of the Court hereinabove set forth, the Court has concluded that the Joint Plan of Reorganization of Trustee, Creditors and Debentureholders (Second Revised) is fair, equitable and feasible and the said plan is approved.

Any and all objections either orally or in writing heretofore filed, presented or urged to the plan, including the memorandum of objections of John Lucas, Jr. filed May 20, 1965, are, and each of them is, overruled.

In submitting the said plan to the Creditors for their consideration and acceptance the Trustee is authorized and directed to include in the plan as approved, by way of an appendix thereto:

Such other and additional orders and decrees may hereafter be made and entered herein as may be meet, proper and just in order to accomplish an early acceptance and confirmation of the said plan by the Creditors, and the ultimate consummation of the plan.

. Proceedings of March 10, 1965, Tr. p. 1977, 1. 13-16. . It is felt that if a decision must be made now, it is the position of the Creditors’ Committee that no fair or equitable reorganization is presently feasible and that the interest of creditors could be served best by an orderly liquidation under the control of a trustee in bankruptcy. (Tr. p. 13, 1. 5, Motion to Amend Proceedings) . The manifold duties of the Trustee are set forth in extenso commencing p. 45, Vol. I, Hearing on Plan for Reorganization) . The provision for tax savings as discounted in the amount $1,660,000 is valid. The availability of net operating loss carryovers to Tuba after reorganization under Chapter X, is borne out by the facts. It affirmatively appears that the tax loss carry-over is available to the reorganized corporation as a continuing enterprise and should be capitalized. The all-important question whether there has been a continuity of interest has been adequately preserved in the recognition and classification of creditors. The following authorities give recognition to this principle: Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179 , 62 S.Ct. 540 , 86 L.Ed. 775 ; Helvering v. Cement Investors, Inc., 316 U.S. 527 , 62 S.Ct. 1125 , 86 L.Ed. 1649 ; Atlas Oil and Refining Corp. v. Commissioner, 36 T.C. 675 ; Maxwell Hardware Co. v. Commissioner, 41 T.C. 386 , reversed in 343 F.2d 713 (1965) (9th Cir.). . (Tr. p. 1519, 1. 14-18; Vol. 14) The 20% discount was based upon certain historical data provided by the S.E.C. . See examination conducted by attorney Walter Hoffman, Esq. of Mr. Cadenasso; Tr. p. 1640, et seq.; Vol. 16. . The Supplemental Advisory Report of the Securities and Exchange Commission, filed June 10, 1965, provides in part: “On May 3, 1965, we submitted an Advisory Report on the plan for the internal reorganization of the Debtor proposed jointly by the Trustee and unsecured creditors, in which we concluded that the plan is feasible and would result in fair and equitable treatment among the creditors on the basis of our valuation of the Debtor. We noted, however, that the plan should be clarified and modified in several respects. The plan, as since amended, complies substantially with our suggestions. The principal amendments provide that the common stock of the reorganized company will have no par value, and that, commencing January 1, 1971, the reorganized company, at its option, may redeem the preferred stock at $10.-50 per share plus accumulated dividends. The plan still provides that the 5% dividend on the preferred stock is to be cumulative only if earned. In our Advisory Report we stated that we had no objection to this provision for approximately the first three years after consummation of the plan, but suggested that thereafter, since earnings are expected to reach a higher long-range level, dividends should be made cumulative whether earned or not and that the 2% participating dividend should then be discontinued. We urge again the adoption of such provision.”