Richmond & Danville—East Tennessee, Virginia & Georgia—Formation of the Southern Railway Security Company—Growth and Combinations—Failure and reorganization of the East Tennessee—Reversal of position between the Richmond & Danville and the Richmond & West Point Terminal—Acquisition of the Central of Georgia—Failure and reorganization of the whole system—Subsequent development.
At the present time there are in the South five great railway systems: the Atlantic Coast Line; the Seaboard Air Line; the Southern Railway; the Louisville & Nashville Railroad; and the Illinois Central Railroad, which cover, in the order named, the territory between the Atlantic Ocean and the Mississippi River.
The backbone of the Southern Railway is formed by the old Richmond & Danville and East Tennessee, Virginia & Georgia companies: of which the first formerly stretched with its subsidiary lines from Washington and Richmond on the north to Atlanta, Georgia, and Greenville, Mississippi, on the south and west; and the second reached from Bristol, Tennessee, in a great half circle to the ocean at Brunswick, Georgia, and by means of the Mobile & Birmingham straight to the Gulf at Mobile.
The Richmond & Danville was opened in 1856 between Richmond and Danville, Virginia. It was largely aided by the state of Virginia. Three-fifths of its stock were owned by the state in 1867, there was a state loan of $400,000, and a state guarantee of $200,000 besides.286 In natural consequence the state elected three of the six directors. It was not long, however, before the state was able to relieve itself of a large part of its investment. On the 31st of August, 1871, all of the state shares were taken over by the147 Pennsylvania Railroad Company.287 The money sunk in the company’s bonds still remained. From Danville the Richmond & Danville steadily pushed south in the years following 1856. Under the leadership of the Pennsylvania it became its ambition to open direct rail communication from the great Northern cities to the heart of North and South Carolina and Georgia. To obtain a ninety-mile extension to Charlotte the company leased the North Carolina Railroad, 223 miles in length.287 To get into Atlanta it allied itself with the Atlanta & Richmond Air Line Company, projected to construct a line between Atlanta and Charlotte.288 In 1878 it bought a controlling interest in the Charlotte, Columbia & Augusta Railroad and secured entrance to the latter city.289 The Pennsylvania aided the new enterprise by advances from time to time, and when the current liabilities became unmanageable took $1,000,000 of a new refunding mortgage.290
Meanwhile the East Tennessee, Virginia & Georgia Railroad had been established to the west of the Richmond & Danville, in the heart of the southern Appalachians.291 This company was a consolidation in 1869 of the East Tennessee & Virginia Railroad, from Bristol, on the boundary between Virginia and Tennessee, to Knoxville, Tennessee; and the East Tennessee & Georgia Railroad, from Knoxville, Tennessee, to Dalton, Georgia. Both roads were aided by the state of Tennessee. In 1870, however, the new company extinguished its debt to the state by the payment of $4,117,761 in state bonds. Not long after the completion of its line from Bristol to Dalton, the East Tennessee fell under the control of the Pennsylvania Railroad, which already dominated its neighbor148 to the east. To facilitate the control and to unify the interests of the Pennsylvania south of Washington a “Southern Railway Security Company” was formed, with a capital of $5,000,000. This company was entrusted with a majority of the stock of the Richmond & Danville and of the East Tennessee. It also controlled the Coast Line railroads from Richmond to Charleston, and the Memphis & Charleston from Chattanooga to Memphis.292 Unfortunately the financial results of the combination were disappointing. Of the subsidiary roads the East Tennessee managed to pay at least 3 per cent on its capital stock from 1872 to 1876; but the Richmond & Danville paid nothing, the Coast Lines nothing, and the Memphis & Charleston barely earned the 3 per cent guaranteed under its lease. In 1873, therefore, a special meeting was held at the office of the Southern Railway Security Company to consider the propriety of making sale of certain properties of the company.293 In 1874 the lease of the Memphis & Charleston was surrendered,294 and in 1876 the bulk of the securities held, outside of the Richmond & Danville stock, were disposed of.295
The retirement of the Southern Railway Security Company marked the beginning of the withdrawal of the Pennsylvania from investment in the South. For the rest, it left the lines north of South Carolina in three main competing groups. There were the Coast Lines from Richmond south, the Richmond & Danville, and the East Tennessee, Virginia & Georgia properties. And stretching from west to east was the Memphis & Charleston, which was already in financial difficulties of a serious nature. All three of these groups were now thrown upon their own resources; and two of them, at least, took vigorous measures in self-protection. The policy of the East Tennessee was the most aggressive. Shut up in the narrow valley between the Clinch and the Great Smoky Mountains, and flanked by hostile roads, it conceived it to be necessary for it to acquire connections to the south, to the east, and to the west. Accordingly, it leased the Memphis & Charleston in 1877 and obtained an outlet upon the Mississippi River.296 In149 1878 it bought the Georgia Southern and the Selma, Rome & Dalton and provided itself with a line as far south as the Flint River in Alabama.297 In 1881 it bought the Alabama Central, extending some 96 miles west from Selma. The same year it secured control of the Macon & Brunswick in Georgia, and began construction from Macon to Rome to complete a line to the South Atlantic coast.298 In the north it made an alliance with the Norfolk & Western, which opened that company’s line from Bristol to Norfolk,299 and arranged with the Louisville & Nashville and the Kentucky Central for construction to a connection at the Kentucky-Tennessee state line which should open to it the business of the Central West.300
The Richmond & Danville fell under the control of a group of capitalists who already controlled the Atlantic Coast lines and held an interest in the East Tennessee, and who now bought the 24,000 shares of Danville stock still held by the Pennsylvania Railroad.301 Like its rival, it enlarged its system. It leased the Atlanta & Charlotte Air Line in 1881,302 with certain minor roads in the Carolinas and in Georgia. In 1882, under the charter of the Georgia Pacific, it began construction westward from Atlanta to the Mississippi. It did not stretch out, as did the East Tennessee, but it secured a very complete control of the territory between150 Richmond in the north and Augusta, Savannah, and Atlanta in the south. In 1881, also, the Richmond & Danville took a step destined to have important consequences. Since it desired to acquire certain railroads, and since its charter allowed it to hold stock in none but connecting lines, it caused to be incorporated a so-called Richmond & West Point Terminal Railway & Warehouse Company, with authority to acquire stocks and bonds of railroad companies in North Carolina, South Carolina, Tennessee, Kentucky, Georgia, Alabama, Mississippi, and other states. This company increased its stock by October, 1881, to $3,000,000; of which the Richmond & Danville then owned $1,510,000. The most important acquisition which it made at the time was the Virginia Midland Railway, from Alexandria, Virginia, to Danville; but other additions were to follow.
The independent action of the Danville and East Tennessee companies was followed by a new consolidation which reunited most of the lines dominated by the old Security Company. In response to queries in August, 1883, Mr. Calvin S. Brice admitted that a syndicate in which he was interested had bought control of the Richmond & Danville.
“We have secured,” said he, “about 28,000 of the 50,000 shares of stock issued by the Richmond & Danville Company. Our syndicate controls, besides our new purchase, the East Tennessee, Virginia & Georgia Railway and the Chesapeake & York River line of steamers that ply between West Point, on the Chesapeake, and Baltimore, and has close traffic arrangements with the Clyde steamers, which run between New York and Philadelphia and all Southern points. Our purpose is to confine all our railroad and steamship lines under one management, and to equip and operate the system in the best possible manner.”303
It appears from this statement that the capitalists who controlled the East Tennessee now again consolidated with the leading interests of the Richmond & Danville and lines east, albeit changes in personnel and transfers of holdings occurred. Return to the old combination was made desirable by the more intimate connection of the two groups of roads. The Western North Carolina had been opened across the mountains of North Carolina in 1882. This had151 made practicable the diversion of the western traffic of the East Tennessee from the Norfolk & Western to the Richmond & Danville; a traffic which the northern connections of the East Tennessee promised largely to increase. Consolidation was doubtless also prompted by the desire to save the East Tennessee from serious financial difficulty which threatened it. It had become apparent that this company, at least, had severely taxed its strength in the rapid extension of mileage which had followed 1876. Before that time its position had been secure. It had possessed a monopoly of the somewhat limited local traffic between Chattanooga and Bristol, and had formed part of the most direct route between New York, Philadelphia, Baltimore, and Washington, and towns in Tennessee, Northern Alabama, and Mississippi. Its extensions had changed the situation. They had brought it into touch with the Mississippi River and the Atlantic Ocean, and had increased its fighting power; but they had also endowed it at large cost with a group of poorly equipped, unprofitable lines located in a keenly competitive territory. The Selma, Rome & Dalton had been purchased just after a foreclosure sale. The Macon & Brunswick had never been able to earn much more than working expenses. The Alabama Central had not seen fit to publish its financial figures after 1878, while the Memphis & Charleston, as we have seen, had turned to the East Tennessee only to escape bankruptcy.
The East Tennessee had hoped to make profitable the lines which it had so rapidly acquired. Unfortunately the company was poorly equipped for such a task. Its finance had been extravagant. In 1875, on 269 miles of lines there had been $7317 in stock and $15,620 in bonds per mile. In 1883 the mortgage bonds and car trusts outstanding per mile owned amounted to $23,444, the income bonds to $15,404, and the capital stock to $41,079. A grand total of $79,927 as compared with the $22,937 of eight years earlier, and an average of almost $100,000 in securities per mile of new line acquired! Ninety-nine per cent of net income was being absorbed in paying interest on all classes of securities, although maintenance figures were kept as low as $630 per mile of line. This large volume of stocks and bonds made improvement from earnings impossible, and prevented conservative management by taking from the stockholders any chance of dividends, and by reducing the quotations of common152 stock to less than $5 per share. And though in some respects the location of the system was good, the route which it offered to much of its business was indirect, the competition which it had to meet was severe, and its Atlantic terminal, Brunswick, was of small importance compared with the thriving cities of Savannah and Norfolk. The result was a failure to secure the gains from consolidation which had been expected. Surplus earnings were continuously small, and current bills were left to run; until by 1883 the floating debt had become so large that an issue of $1,200,000 in debenture bonds was required to take care of it.
The failure of the East Tennessee to weld its connections into an efficient transportation system left it helpless in face of the panic of 1884. Earnings fell off in that year, a directors’ committee was appointed,304 and the resulting report revealed a plain inability on the part of the company to meet its charges.
“The interest charges proper for the calendar year 1885 are,” said the committee, $1,476,505.85 ?
“To this must be added the principal due on car trusts and debentures in 1885, 280,954.11 ?
“Or a total of $1,757,459.96 ?
“The payments on similar account will be— ?
in 1886, $1,739,196.28 ?
in 1887, 1,720,932.60 ?
gradually decreasing until the debentures and car trusts being paid off in 1894, the total fixed charges for the year 1895 will be $1,295,970.00 ?
“The net revenue for the year 1883–4 was 1,699,925.84 ?
“The net revenue for 1885 and 1886, allowing for the decrease in earnings following the panic, and supposing the road to be operated for 60 per cent, may be estimated at $1,400,000.00 ?
“This will leave,” said the committee, “an annual deficit of $350,000, to which must be added a total of $1,000,000 required by the general manager for steel rails, iron bridges, and other needed improvements.
“The sums for covering these expenses should not be raised by temporary loans, as this would not relieve the company of its embarrassments nor place its finances upon a sound footing. It cannot be raised by an additional mortgage, on account of the provisions of the mortgage securing the income bonds. It must and can be153 raised from a funding of coupons which shall leave the earnings of the company sufficiently free to meet the demands upon them. The committee therefore recommends:
(1) “That the holders of the consolidated 5 per cent bonds be asked to fund four coupons, being those maturing January and July 1, 1885, and January and July 1, 1886, by depositing said four coupons with the Central Trust Company of New York, as trustee, and receiving instead the company’s funded coupon bond dated July 1, 1885, and bearing 6 per cent interest per annum from that date, ... which bond shall run ten years from its date and be redeemable at the pleasure of the company at par and accrued interest after three years, on three months’ notice; such funded coupon bond to be secured by the coupons so deposited, the lien of which will be in all respects preserved.
“The total extensions under this clause would be $1,467,400.
(2) “That the holders of the $2,000,000 of the Cincinnati & Georgia Division first mortgage 6 per cent bonds be asked to fund four coupons, ... being those maturing March and September 1, 1885, and March and September 1, 1886, ... and accepting in lieu thereof a funded coupon bond ... dated September 1, 1885.
“The total amount extended under this clause would be $240,000.
(3) “That the holders of the debentures be asked to extend for ten years such of the debentures as fall due during the years 1885 and 1886, and to accept similar debentures running from five to ten years, for the interest....
“The total amount extended under this clause would be $373,200.
(4) “That an arrangement be made with the holders of the car trust certificates of the company, series A, for an extension for ten years of all the payments of principal falling due in 1885 and 1886, being $100,000 in each year.
“The total amount extended under this clause would be $200,000.”305
The committee had an apology to offer for the state in which the company was placed. “The actual cost of the 190 miles of the new roads constructed by the company has largely exceeded,” said they, “the estimated cost. The physical condition of the roads purchased by the company necessitated the expenditure of large sums in the154 improvement of roadway and track; the construction and reconstruction of bridge masonry and bridge superstructure. The facilities for the conduct of the company’s business were entirely inadequate to the requirements of its increasing traffic and had to be enlarged. Unfortunately the company did not fully provide for these expenditures, and the shrinkage of the value of its securities greatly aggravated the evil.” This much was very true. In its criticism of existing facilities the committee was on sure ground. In its suggestions for relief it was less well advised. It seems to have felt that the East Tennessee’s difficulties were due to a temporary inability to raise cash for the improvement of its roadbed and equipment, and that the suspension of certain charges for a few years would allow the expenditure of liberal sums from income, ensure the improvement of the road, and bring about a condition of permanent prosperity. The truth was that the East Tennessee was in too bad a shape to be re?stablished by such means. The heavily burdened and physically defective lines which made up the system were past being restored from income even with the aid of a funding of a few years’ coupons. They required a definitive surrender of portions of the claims against them, extensive new charges to capital account, and a correspondingly complete reconstruction of their whole operating plant.306 The practical service which the committee rendered was not in suggesting an adequate remedy for existing troubles, but in making plain how serious these troubles were. So imminent, in fact, did they show collapse to be, that the management determined to forestall hostile action by themselves asking for the appointment of a receiver; and on January 7 the Circuit Court appointed Henry Fink to that position.307 The committee’s funding scheme fell of its own weight.155 The decrease in the earnings of the company, a truer appreciation of its condition, and, it may be surmised, the influence of New York banking houses, forced it to make room for a thorough plan of financial reconstruction.
Action looking toward reorganization of the East Tennessee, Virginia & Georgia began with the year 1886. In January Mr. Nelson Robinson,308 who had held proxies for a controlling stock interest at the previous election, returned from Europe; and after a conference with certain large bondholders agreed with them to draft a plan for the reorganization of the property. A reorganization committee was chosen from members of large banking firms,309 meetings were held, and in the first part of February, 1886, a scheme was put forth. This plan comprised the following points:
(1) Reduction of fixed charges;
(2) Exchange of new bonds and preferred stock for old bonds;
(3) Assessment on the junior securities;
(4) Foreclosure.
Foreclosure was to take place under the consolidated mortgage. A new 5 per cent seventy-year consolidated mortgage was then to be created. Enough of the bonds under this mortgage were to be reserved to retire the liens prior to the existing consolidated mortgage as they should mature, and the balance was to be used for taking up the outstanding consolidated mortgage bonds, the Cincinnati & Georgia division bonds, and the ten-year debentures. It was estimated that the exchanges would reduce the annual interest charge from $1,757,460 to $994,737.310 This necessitated considerable demands upon old securityholders. Thus the old consolidated mortgage bonds bearing 5 per cent received only 60 per cent of their face value in new consolidated bonds with the same rate of interest; and the old 6 per cent Cincinnati & Georgia division156 bonds received only 48 per cent in consols, besides suffering a decrease in interest rate from 6 to 5 per cent. The difference was made up by the allowance of preferred stock, to which, moreover, was given the right for five years to elect a majority of the board of directors, unless before that time the new company should have paid out of its net earnings 5 per cent dividends on such preferred stock for two full successive years. To the Cincinnati & Georgia division bonds were given 62 per cent in new first preferred besides the 48 per cent in bonds,—a total of 110 per cent; upon which the yield in prosperous times might exactly equal the yield on the securities which they surrendered. To the consolidated bonds were given 50 per cent in new first preferred, making possible a total return greater than that which they had formerly enjoyed. For the debentures was made the same provision as for the divisional bonds. In order that net earnings might go first of all to the prior liens and to the above securities, new second preferred and common stock was issued for the benefit of the old income bonds and stock. Of these the income bonds received 100 per cent in new second preferred; while the old preferred received 100 per cent and the old common stock 40 per cent in new common. Only in return for their assessments did the income bonds receive first preferred stock, and even for their assessment the common stock took second preferred. Cash assessments were 5 per cent on the income mortgage and 6 per cent on the new common stock. This was expected to yield $2,475,000, which, with a surplus of new securities in the treasury of $1,534,000, was thought sufficient to liquidate outstanding car trusts and to provide the company with a fund available for future use.311
The plan may be criticised in some respects. It made no adequate provision for future capital requirements. Two millions and a half of cash and two millions of securities were considerable sums in hand, but of these over half a million was in the form of stock, and from the rest had to be deducted at least a million and a half for the liquidation of car trusts. This left, it is true, enough for existing needs,312 but it did not allow for constantly recurring157 and legitimate demands for improvements out of capital in future years. Moreover, the securities given for the consolidated, the Cincinnati & Georgia division, and the debenture bonds exceeded by 10 per cent the nominal value of the bonds retired by them. But on the whole the reorganization plan was an excellent attempt to solve a difficult problem. It proceeded on a sound principle, it laid the burden on the proper parties, it avoided a funding of current liabilities, and even in respect to the volume of securities outstanding it accomplished a much needed reform by wiping out 60 per cent of the almost worthless common stock.313 It was accordingly accepted by the securityholders. On March 18, the reorganization committee obtained a decree of sale.314 By May 1, practically all the consolidated and income bonds, with a majority of the preferred stock, had assented;315 and on May 25, 1886, the East Tennessee, Virginia & Georgia Railroad was sold for $10,250,000 to a representative of the reorganization committee. Previous to this the opposition committee, which had been formed by the minority stockholders, had disbanded.316 The final step was the organization of the East Tennessee, Virginia & Georgia Railway,158 which on July 1 took over the title to the East Tennessee, Virginia & Georgia Railroad and branches, a controlling interest in the stock of the Knoxville & Ohio, and a controlling interest in the stock of the Memphis & Charleston Railroad Company.317
During this time the Richmond & Danville had not been standing still. It will be remembered that in 1883 the capitalists who dominated the East Tennessee and the Coast Lines had purchased a controlling interest in this company, with the purpose, according to Mr. Brice, of confining all their railroad and steamship lines under one management and of operating the system in the best possible manner. These gentlemen had found the earnings of the Richmond & Danville sufficiently unsatisfactory and the need for improvements sufficiently great to lead them to pass the interest on its debenture bonds in October, 1883. The net earnings for 1882, out of which this dividend would have been paid, they found had been fully taken up by the fixed charges and the expenses for new equipment and betterments. The net earnings for 1883 they believed sure to show large gains, but still not likely to be equal to necessary expenditures.318 Strict economy was to be the order of the day. In the three previous years the company had accumulated a large floating debt. This the new management reduced more than one-half by the end of 1885. The funded debt it allowed to increase largely, but the earnings it managed somewhat to improve. In general, however, it secured no very striking gains. union in interest with the East Tennessee and the Coast Lines modified the severity of competition, but the panic of 1884 checked business, and the real saving in operating cost was very slight.319
In their search for means to reduce expenses the owners of the Richmond & Danville came across the Richmond & West Point Terminal Company. By 1884 this company was in peaceful possession159 of 1815.8 miles of railroad, which included all the important branches of the Richmond & Danville except the North Carolina Railroad, from Goldsboro to Charlotte, and the Atlanta & Charlotte Air Line, from Charlotte to Atlanta. It had been obliged to issue notes to retire its floating debt in 1883,320 but had no earnings apart from dividends on the stock which it held, and no expenses other than its cost of administration and the interest on the notes above mentioned and on its floating debt. There was a possibility, nevertheless, that the maintenance of the company involved the Richmond & Danville in unnecessary outlay, and caused a certain loss of efficiency through indirectness of control. The Terminal Company had originally been necessary because the Richmond & Danville could by its charter hold stock in none but connecting lines. By 1885 this prohibition had been removed, and there was open an opportunity to consolidate the system.
Early in 1886 the directors of the Richmond & Danville appointed a committee to report a plan of union with the Richmond & West Point Terminal.321 Apparently this committee recommended the elimination of the Terminal Company; for in April it was known that the Richmond & Danville was trying to buy from the Terminal the stock of certain of the more important branches which it had formerly controlled.322 In that month the Richmond & Danville leased the Virginia Midland Railway323 and the Western North Carolina; in May it took over the Charlotte, Columbia & Augusta and the Columbia & Greenville; in June the Northeastern of Georgia; and in October the Washington, Ohio & Western, or a total of 1483 miles out of the 1839 held by the central corporation.324 At the same time the Richmond & Danville transferred into its own treasury $13,617,400 in stock and bonds of subsidiary companies, giving in return 25,000 shares of the Terminal’s own stock, and a guarantee of the Virginia Midland’s general mortgage bonds. This done, the Danville Railroad threw the rest of its holdings of Terminal stock upon the market;160 where they were bought by investors who knew nothing of the above transactions. The operation left the Terminal high and dry. It was of no further use to the Richmond & Danville, for that company had made arrangements with its branch lines direct; and it could not launch upon an independent existence, because the greater part of its mileage was in its rival’s hands.
Fortunately for the small Terminal holders it so happened that men of large wealth and resourcefulness were interested with them. Under the leadership of these capitalists the Terminal Company began in its turn the purchase of Danville stock. It may have been that the East Tennessee group who had acquired a majority in 1883 had meantime parted with their holdings, or members of that syndicate may have sold in 1886 to take advantage of a favorable price.325 At any rate, 25,000 shares were rapidly acquired, and the control of the company obtained. This done the new Terminal interests turned to the East Tennessee, Virginia & Georgia. Negotiations were at once begun, and culminated in an agreement in 1887 by which the Brice-Thomas group sold 65,000 shares of East Tennessee first preferred for $4,000,000 in cash and 50,000 shares of new Terminal common. Since the Tennessee first preferred elected a majority of the directors this ensured control. At the same time the Richmond Terminal provided for its floating debt, and for the purchase of the balance of the Richmond & Danville shares outstanding.326
161 Thus was the Richmond & West Point Terminal Company saved, and the principal railroads east and west of the southern Appalachians still kept under common control. The new grouping was weaker than the old, however, in that it did not include the Coast Line railroads. It was also imperfect as regards the nature of the control possessed over the East Tennessee, Virginia & Georgia. It has been said that the Richmond Terminal held a majority of the first preferred stock of this latter road.327 By the terms of the Tennessee reorganization of 1886 this stock was to have the right for five years to elect a majority of the directors, unless before that time it should have received 5 per cent dividends for two successive years. This gave control to the Terminal Company; but it plainly made a control precarious which rested, as this did, on ownership of first preferred alone. In 1887 4 per cent was paid in dividends, and in 1888 5 per cent. In 1888, accordingly, a lease was drawn up, and the Richmond & Danville took the operation of the road for ninety-nine years. For four years it agreed to pay over 33? per cent of the gross earnings; for five years more 35 per cent; and so on until 37 per cent should be reached. And, further, it guaranteed that the percentage allowed should be sufficient to pay all the East Tennessee’s fixed charges, including 5 per cent annually on the first preferred shares outstanding.328
It cannot be denied that the ethics of the Tennessee’s lease were questionable. The East Tennessee reorganization had invested the first preferred stock of that company with temporary authority. To use this to bind the property for years to come was neither fair to the other stockholders, nor in accordance with the spirit of the reorganization plan. We need not, therefore, be surprised at the prompt application for an injunction and for the appointment of a receiver which occurred.329 In a circular to the second preferred and junior stockholders the opponents of the lease urged that its consummation would constitute an abuse of power on the162 part of the existing board; that it was entirely in the interests of the first preferred stockholders; that under no circumstances could the junior stockholders derive any income from the lease; that it failed to provide other safeguards and was in many respects improvident and imperfect. In one suit before State Chancellor Gibson at Knoxville, Tennessee, emphasis was laid on the statutory prohibition of the consolidation of competing lines. In another, petition was even made that the holders of the first preferred stock be enjoined from electing a majority of the board of directors at the approaching meeting.330 Chancellor Gibson handed down two vigorous opinions. He refused to enjoin the voting of the first preferred stock, on the ground that the plaintiffs had been in possession for two years of stock certificates which bore on their face the conditions and agreements under which they were issued, and that the complaint was not justified, either in law or equity.331 But he held that the East Tennessee had no power under its charter to lease its road as it had done; that the combination of the East Tennessee and the Richmond & Danville was forbidden by the law of Tennessee against the consolidation of competing lines; and that similar prohibitions in the laws and constitution of Georgia were so stringent as to imperil the East Tennessee’s charter in case the lease should be carried through.332 This effectually checked the lease. After Chancellor Gibson’s first opinion the East Tennessee election had been held and the arrangement with the Richmond & Danville approved.333 After his second the lease was cancelled, and the management of the East Tennessee restored to its own officers.334 The Richmond Terminal was still left in control of the property. It was forced, however, to secure a majority of all the East Tennessee stock outstanding if it wished to make its control permanent, and it was prevented from using the power temporarily given a section of the stock to bring about a ninety-nine-year arrangement distasteful to the majority.
Master of the Richmond & Danville, the East Tennessee, and their allied lines, the Richmond Terminal now took one step further; it acquired the Central Railroad & Banking Company of163 Georgia. The importance of this was very great. The Central Company owned the most considerable of the lines in Georgia and Eastern Alabama. It stretched from Savannah and Port Royal on the Atlantic coast to Spartanburg, South Carolina, on the north; to Atlanta, Birmingham, and Montgomery on the west; and to Albany, Georgia, and to Columbia on the south. Its system had been formed by a consolidation in 1872 of the Central Railroad from Savannah to Macon with the Macon & Western from Macon to Atlanta,335 and was compact, ably managed, and profitable. Previous to June, 1847, the Central Railroad Company had paid seven dividends aggregating 10.68 per cent. From June, 1847, to June, 1889, the Central Railroad and the Central Railroad & Banking Company which succeeded it, had paid seventy-five dividends aggregating 337.5 per cent,336 besides stock dividends of 8 per cent in 1854 and 12 per cent in 1861, and a dividend of 40 per cent in certificates of indebtedness in 1881. It was paying 8 per cent in 1888 when the Richmond & Danville was paying 5, and the East Tennessee was congratulating itself on the 5 per cent which it was able to turn over to its first preferred stock.337
So fruitful a piece of railroad property was naturally looked on as desirable, especially since its acquisition was to free the East Tennessee from one of its most dangerous competitors. From a traffic point of view, nevertheless, the advantages of a consolidation were doubtful. The local business of the Central was likely to be little increased by a merger. The through business was in danger of being decreased. The Central lines ran on the whole east and west. It was to their interest to carry freight from Georgia, Alabama, and the West to Savannah, and thence to send it north by way of the Ocean Steamship Company which they controlled, and from which they obtained in 1889 one-fifth of their total net earnings; while the Richmond Terminal’s interest was to send164 this traffic north by land so as to secure for its own railroads the long haul. The advantages to the Terminal of a union depended on the price at which the Central Railroad could be acquired. The purchase was made, and the price was a high one. And this price was paid, it was freely charged, not in pursuance of an honest though mistaken judgment, but in order to allow a large personal gain to individual capitalists who were interested in both the Central and the Terminal Companies.
Among the most prominent owners of Central of Georgia stock at this time were members of the Logan-Rice group of financiers, who had begun to accumulate holdings at least as early as 1886. The average price which these parties paid was later estimated at 130, and their holdings were apparently secured with a view to resale at a higher figure. At any rate, when 40,000 shares had been purchased, a double operation was put through. The shares bought were turned over, with $400,000 cash, to a newly formed “Georgia Company,” and for them $4,000,000 in 5 per cent trust bonds and $12,000,000 in Georgia Company stock were received in exchange. And, second, a vigorous campaign was entered upon to secure control of the Richmond Terminal. Sully resigned the Terminal presidency in April. For his vacant place the Logan-Rice people offered General Alexander of the Central of Georgia, and the Terminal management supported John H. Inman. The struggle which ensued was most extraordinary. The existing board of directors charged the Central group with trying to unload their Georgia Company’s stock upon the Terminal system; and the Logan-Rice party insinuated that the purchase of the East Tennessee Railroad had been the occasion of fraudulent profits to the Terminal directors.338
165 “We understand,” declared the directors, “that a majority of the names thus far proposed by the parties soliciting proxies to be cast for directors and president of this company are gentlemen who are well known to be the owners of a majority of the stock of the Georgia Company, which owns railroads whose business and interests are at all points of our system in competition with and antagonistic to the business and interests of this Company; any diversion of traffic, or exercise of influence favorable to the Georgia Company at the numerous competitive points would work incalculable injury to your prosperity.... If on the other hand the preponderance of the Georgia Company’s interest in this Company should result in a sale to and purchase by your Company of the Georgia Company stock owned by these gentlemen, it would necessitate the issue of many millions of your common stock, or some kind of obligation taking precedence of that stock, the effect of which upon the value of your property you are fully competent to judge.”339
The general election of the Terminal was held on May 31, and Mr. Inman was elected president for the remainder of the unexpired term.340 The Rice party was apparently overwhelmingly defeated. In reality its activity and the presence of its friends in the councils of the victors resulted in the successful sale of the Georgia Company securities. In October, 1888, little over five months after the directors’ circular of April 6, the Richmond Terminal took over the Georgia Company stock at $35 a share and allowed its owners to withdraw successfully from their speculation. Subsequently it also took the Georgia Company bonds from the bankers who had purchased them.341 This left Inman, Hollins, and the rest a profit of $60 a share on their original investment. It meant for the Richmond Terminal a direct annual loss which there was very little prospect166 of making good. To provide for the $4,000,000 in bonds and the 120,000 shares of stock acquired, this latter issued approximately $8,200,000 of 5 per cent collateral bonds bearing an annual interest charge of $410,000. Now both the stock and the $4,000,000 of bonds were a lien on 40,000 shares of Central of Georgia stock and depended altogether upon the dividends declared on these by the Central Company. The Central never paid over 8 per cent, or a total of $320,000 on 40,000 shares. The difference between this and $410,000, or $90,000, constituted a direct loss which the Terminal pledged itself to meet each year. If the victory of the friends of the company in May is to be considered a genuine one, one wonders what price the owners of the Georgia Company would have charged had the election gone the other way.
With the Central of Georgia, the East Tennessee, and the Richmond & Danville under its control the Richmond Terminal could look for still further extension. In 1890 it acquired control of the Erlanger group of roads from Cincinnati in the north to Chattanooga, thence to Meridian, Mississippi, thence to Vicksburg, Mississippi, and to Shreveport, Louisiana. At the same time it took in the Louisville Southern, which joined Louisville with the Cincinnati lines.342 In 1888 the Richmond & Danville had concluded a close alliance with the Atlantic Coast Line,343 and arrangements had been made for terminal facilities at Norfolk.344 In 1889 it leased the Georgia Pacific, and two years later, when this road reached Arkansas City, it executed a traffic agreement with the Missouri Pacific.345 In 1891 the Georgia Pacific leased the Central Railroad & Banking Company167 of Georgia for ninety-nine years at 7 per cent on its capital stock.346 This immensely improved the connection of the East Tennessee with the North and West, did away with the competition of a parallel line, and afforded another outlet upon the Mississippi.
Here, then, was the Richmond Terminal system in 1890. Three great north and south lines: one from Cincinnati through Birmingham to York, over the Erlanger system; one from Bristol through Rome to Selma, over the East Tennessee, Virginia & Georgia; and one from Alexandria and West Point through Danville, Charlotte, and Atlanta to Montgomery. One of these took business from Indiana, Illinois, and the North and Central West; one from Baltimore, Philadelphia, and the East; one from both West and East; and all three opened upon the Gulf over the Mobile & Birmingham to Mobile. In addition, three parallel east and west lines: from Chattanooga to Memphis, from Birmingham to Arkansas City, and from Meridian to Shreveport in Alabama; outlets on the Atlantic coast at Charleston, Port Royal, Savannah, and Brunswick; and dominance of the local traffic of the whole territory east of Alabama, south of Kentucky and Tennessee, and north of Florida. It was by all odds the leading system in the South. It had a mileage of 8558.5 as compared with the 2383.4 of the Louisville & Nashville, and gross earnings, exclusive of the Erlanger lines, of $41,361,095, or more than twice those of its greatest competitor.
And yet, for all its size, the Terminal group was perilously near collapse. Its physical condition was poor and much of its mileage was unprofitable; its capitalization was tainted with dishonesty; and the legality of its recent combinations had not been tested in the courts. Let us quote from the results of an examination made by a well-known banking firm three years later.
“While in a general way the main lines of the Richmond & Danville [West Point and Alexandria to Atlanta],” said this firm in its report, “are in fair condition—better than those of the East Tennessee, excepting parts of its main line between Bristol and Chattanooga, the Cincinnati, New Orleans & Texas Pacific, and the Alabama Great Southern—nearly all the rail in both systems is too light (50 to 60 lbs. while on the main lines it should be 70 to 75 lbs.), many of the trestles need renewing, and a large number of the168 bridges, principally on the East Tennessee system, are not sufficiently strong to warrant the use of heavy engines, which are essential to hauling long trains and operating with economy. To a very large extent ballast is altogether lacking or insufficient in quantity. Excepting that portion of the equipment represented by equipment bonds or notes, the engines and cars are generally small and weak and unsuitable for main-line service, and are also insufficient in quantity for any considerable enlargement of business. Other appointments, such as shops, yards, etc., are, with but few exceptions, crude and uneconomical.
“On the branches and secondary lines, especially those of the Richmond & Danville system, the condition is even worse, little or no effort having been made to maintain them at proper standard, even for a moderate traffic. About 700 miles of the Richmond & Danville secondary lines and branches (including about 200 miles of narrow-gauge lines) are still laid with iron rails. On July 1st, 1892, there were 72 miles of iron rails in the main lines of the East Tennessee.
“An expenditure of several million dollars should be promptly made on these properties for equipment alone, but it is no use to do so, even if it were possible, unless additional track and yard facilities are also provided, nor unless such enlargements of engine and car shops be made as will permit of the equipment being kept in order.”347
This verdict was only reinforced by the characterization in detail of a number of the subsidiary lines. Thus the Columbia & Greenville was termed “a collection of weak lines of constantly decreasing value”; the Mobile & Birmingham “of no value whatever to the East Tennessee”; and the Memphis & Charleston “valuable, but in a condition totally unsuited to modern requirements.” How the capitalization of the system was tainted with fraud has already been pointed out. The legality of the recent combinations had not been tested in the courts. In January, 1889, counsel for certain unnamed parties had a plea for a quo warranto presented to the Attorney-General of Virginia.348 The petition alleged that the purchase of the169 control of the East Tennessee, Virginia & Georgia Railway and of the Virginia Midland was an abuse of the powers of the Richmond & West Point Terminal ... a violation of public policy, and an usurpation to the great damage and prejudice of the constitution and laws of Virginia. This petition the Attorney-General dismissed on technical grounds. The legality of the various mergers was soon, however, to be attacked again, and in 1889 the question was decidedly unsettled.349
The storm broke in August, 1891. On the eighth of that month the New York Herald published a vigorous onslaught upon the company. It maintained that the Richmond & Danville system had failed to earn its fixed charges by $526,560 in the year ending 1890; that this fact had been concealed by deceptive or false entries on the books which made a fictitious profit emerge by covering up the losses on auxiliary lines; that the 8 per cent dividends which had been paid on the Central of Georgia had not of late years been earned, and that the price paid for the Georgia Central stock had been grossly excessive; that the East Tennessee was just about paying its way; and, finally, that the other recent acquisitions were either just paying their way or were showing annual deficits.350 Color was given to the charges by the trouble caused by the floating debt. Though denied by the officials of the company, the sale of 2000 shares of Baltimore & Ohio stock held in the Terminal treasury;351 the negotiation of a short time loan at 6 per cent and 2? per cent commission for the Central of Georgia and the extension of another170 loan;352 the placing of $500,000 at 6 per cent for the Richmond & Danville; and the active financial support which General Thomas felt obliged to render the East Tennessee showed the anxiety which it occasioned.
On November 25 the directors held a meeting and appointed Messrs. Eckstein Norton, late president of the Louisville & Nashville; Wm. Solomon, of Speyer & Co.; Jacob H. Schiff, of Kuhn, Loeb & Co.; Chas. S. Fairchild, president of the New York Security & Trust Company; and Louis Fitzgerald, president of the Mercantile Trust Company, a committee to carefully inquire into and examine the condition of the Terminal properties and to aid the company in perfecting a plan of readjustment. Owing to the financial depression, they explained, “the company has been unable to sell securities based upon engagements they had made prior to the period of depression and to pay for necessary equipment and improvements. A large floating debt has in this way been accumulated, but each of our important railroad systems is solvent.... After maturely considering the whole situation, we felt it wise to invite the gentlemen whose names appear ... to aid us in perfecting the best plan for a permanent adjustment of our affairs.”353
The committee reported provisionally on December 8. It then stated that it was essential to the proposed plan of relief that the elections of all the subordinate companies in the Richmond Terminal system should be postponed till after the Richmond Terminal affairs were settled, and requested that financial provision be made for the employment of an expert or experts in the examination of the properties and accounts. It was understood that the committee’s plan was to make a considerable assessment on the stockholders. The board of directors refused to respond and the committee therefore withdrew.354
171 The next day the stockholders selected Mr. F. P. Olcott to appoint a new committee to take up the work.355 They were not in favor of radical action, and Mr. Olcott expressed the opinion that there was no necessity for measures so stringent as those which the Schiff-Norton Committee had had in mind. It was but natural that at this point there should have been some delay. Meetings were held, expedients for raising cash discussed, and a reorganization plan was gradually whipped into shape. It was not, therefore, until March 19, 1892, that the public were informed what Mr. Olcott and his backers did consider that the situation required. The main points of the elaborate scheme which was then proposed were as follows:
First, a consolidation of the Richmond Terminal, Richmond & Danville, and East Tennessee properties. The Central of Georgia and the Erlanger systems were not to be included in the reorganization, but the interest of the Richmond Terminal and the East Tennessee in their stock was to be made subject to a new mortgage.
Second, a reduction in fixed charges.
Third, the sale of securities to pay off the floating debt.
Consolidation of properties was found advisable for several reasons. “While some of the companies show a surplus of earnings,” said the committee, “in many instances it has been impossible to apply such surplus earnings to make up deficiencies arising from the operations of other companies. The committee finds that the various systems have not been operated throughout for the common benefit of the controlling interest, but that they have competed among themselves for business, each system maintaining separate organizations for obtaining business.... In the judgment of the committee the only adequate remedy which can be adopted is to unite the several corporations, as far as practicable, in one system under one management, and to consolidate their obligations.”
In order to unify the system the committee proposed three great issues of new securities as follows:
$170,000,000 four per cent first mortgage 35-year gold bonds, to be issued by a new corporation representing the consolidation of the172 Richmond & Danville Railroad Company and the Richmond & West Point Terminal Railway & Warehouse Company.
$70,000,000 five per cent non-cumulative preferred stock.
$110,000,000 common stock.
In general, the new bonds were to exchange for old bonds and the new common stock for old common and preferred, while the new preferred stock was to be joined in varying proportions with each of the other issues to make the exchanges look attractive. Thus, for the Richmond & Danville consolidated 6s were offered 120 per cent in new bonds and 45 per cent in new preferred; for the East Tennessee first mortgage 7s 120 per cent in new bonds and 45 per cent in new preferred stock; for the Richmond Terminal common stock 100 per cent in new common and 50 per cent in new preferred. This arrangement was not rigidly adhered to. Some of the poorer of the outstanding stocks received new common only, and the Richmond Terminal preferred was given par in new bonds besides a bonus in preferred. These were, however, exceptions. The principle which determined the various ratios of exchange is more difficult to discover. It was not that of equivalence of return. The plan did not attempt to allow to each holder a chance at the same receipts which he had formerly enjoyed while reducing the amount which he could demand, but gave sometimes more than this and sometimes less. And the variations from what might be called a normal ratio did not always correspond with the relative security of different issues as indicated by their market quotations. For instance, the East Tennessee first 7s sold in December, 1891, at 113? and the Richmond Terminal collateral 6s at 83; yet the former received 120 per cent and 35 per cent and the latter 120 per cent and 40 per cent in new bonds and preferred stock respectively. Again, the Atlanta & Charlotte first 7s sold in October, 1891, at 118? and received under the plan 120 per cent in bonds and 40 per cent in preferred stock; the Richmond & Danville consolidated 6s sold at 109 and received 120 per cent and 45 per cent. It is clear that the committee desired to reduce the interest which the various classes of bonds should have a right to demand, and that it expected to make compensation by means of preferred stock on which payments should be made if earned. So much of its scheme was commendable. On the other hand, the rates of exchange of old securities173 for new were in many cases ill-advised. The reduction in fixed charges was to be $1,819,837, although by the exchanges alone the capitalization was to be increased by over $50,000,000. The charges on the system had amounted in 1891 to $9,474,837.356 Net earnings had been $8,744,736. Fixed charges under the plan were to amount to $7,666,000. As a matter of fact they would have been greater than this, for some of the old bonds would have remained outstanding, and the estimate did not include interest on any bonds issued for improvements. The floating debt was to be retired by the sale of new securities, namely, $18,235,800 new first mortgage bonds and $6,382,530 preferred stock. These were to net $14,588,640, or sufficient to cancel a debt of $6,310,000 and car trusts of $2,369,564 and to provide a balance for miscellaneous uses. A syndicate guaranteed the sale, but holders of stock or of collateral trust 5 per cent bonds were to be allowed to subscribe up to 16 per cent of their holdings at the rate of $800 for one new mortgage bond and $350 in new stock. New bonds to a maximum of $10,000,000 were to be issued only for the acquisition of additional property, while beyond this the vote of a majority of preferred stock was to be required to authorize any additional mortgage on property covered by the first mortgage.357
Such was the plan laid before securityholders. It proposed a considerable reduction in fixed charges, though probably not enough to put the company out of danger, and a large increase in new securities. It failed because it imposed losses upon the wrong parties. As between the various classes of bonds its terms were frequently inequitable. As between the bonds and the stock it altogether favored the latter. It levied no assessment, it compelled no subscription to new securities, and in three cases only did it announce an intention of reducing the nominal value of the stockholders’ holdings.358 The original time limit for deposits was set at April 14,174 1892. This was subsequently extended, but without effect, and on May 16 the Olcott Committee announced that the plan had failed.359
The collapse of this attempt at readjustment was a blow to those who had hoped for a speedy and amicable reorganization of the Richmond Terminal system. On the same day that failure was confessed the stockholders met and appointed Messrs. W. E. Strong, Samuel Thomas, and W. P. Clyde a committee to confer with the Olcott Committee to ascertain what had best be done. A week later General Thomas reported a plan for the reorganization of the Richmond & Danville alone. The Richmond Terminal Company, he said, should be wound up and be succeeded by a new company with $43,000,000 of preferred stock and $70,000,000 of common. The present 6 per cent bonds should be given 170 in new preferred stock; the present 5 per cent bonds and preferred stock par in new preferred stock; and the present common should receive par in new common and be compelled to subscribe for $8,000,000 collateral trust two-year 6 per cent notes at 92?.360 This amounted to an assessment of 10 per cent upon the common. It was not proposed to pay off the floating debt with the proceeds of this assessment, but to buy the claims held by bankers, and, if necessary, foreclose these claims and take possession for the stockholders. If the full amount should not be subscribed by the stockholders the preferred stock was to have the right to make subscription for the balance, and to take the securities that would have gone to the non-paying common stock; and the common stock not subscribing was to have no rights to the common stock of the new company.361
That this scheme was much more radical as well as more limited than the Olcott plan appears upon its face. No serious attempt was175 made to carry it into effect. On suggestion of General Thomas the stockholders’ meeting voted that a consulting committee of fifteen be appointed by the chair to confer with the committee of three, and then adjourned subject to call.362 The enlarged committee found that application had been already made to Messrs. Drexel, Morgan & Co. by a number of prominent banking firms, asking that they enter upon the work of reorganization. It therefore dropped the Thomas plan and joined in the petition. Drexel, Morgan & Co. on their part agreed to undertake an examination of the Terminal property,363 but four weeks later replied that while in their opinion a reorganization was feasible, the lack of assurance of support from Mr. Clyde made them unwilling to undertake the task.364
At this point efforts at reorganization were checked. One plan had failed, one had been formulated but not pushed forward, and the task of creating a third had been refused by the banking firm which was apparently best able to carry a plan to a successful conclusion. For a time now the field was left to the disputes between members of the Richmond Terminal family, which made up in bitterness for what they lacked in the matter of valuable result. Mention will be made only of the wrangles between the Central of Georgia and the other parts of the system.
The Central of Georgia had been placed under a receiver of its176 own some two weeks before the publication of the Olcott plan. Some months later this receivership was made permanent, and the Richmond Terminal was enjoined from voting the 42,200 shares of Central stock which it held. It can scarcely be said that the withdrawal of the Central of Georgia from the Terminal system was unwelcome to the latter. Already the Richmond & Danville had refused to carry out its guarantee on the Central’s stock unless that company should deposit bonds to cover an alleged sum due from it,365 and President Oakman had hastened to inform General Alexander, the temporary Central receiver, that the Richmond & Danville would not operate the Central of Georgia after the end of the temporary receivership.366 When, however, the Central not only insisted on withdrawal, but asked Judge Speer, of the District Court of Macon, Georgia, to appoint a receiver for the Richmond & Danville Railroad on the ground that that company was insolvent and was indebted to the Central in the sum of $2,459,670,367 prompt action was made necessary. Application was made to Judge Bond of the Circuit Court for the Eastern District of Virginia, and on June 16 this magistrate appointed Messrs. F. W. Huidekoper and Reuben Foster receivers of the Danville road.368
“This appointment of receivers by Judge Bond,” explained the parties responsible,369 “is not only not inimical to nor in opposition to any plan for the financial reorganization and rehabilitation of the Danville system, but will be found to greatly facilitate and aid any plan of reorganization, while if the Georgia court had obtained possession of and jurisdiction over the Danville system this would have been rendered practically impossible.... The necessity for such action,” they continued, with a touch of pathos, “will be further appreciated when it is known that for some weeks past the Richmond & Danville Company has not been able to keep either a dollar in bank or in its safes within the state of Georgia, because every such dollar has been attached or garnished by parties alleging claims177 against the company, and even the money sent by express for the liquidation of pay-rolls has been attached in the hands of the express company, and in every instance enormous bonds have been required to release such moneys....”370
The temporary securing of their position by the receivership allowed the Danville people to hit back at the Central in its weakest point—the details of the sale to the Terminal of the Georgia Central Company. On August 19 the Advisory Committee of Seventeen of the Terminal securityholders declared that the investigations of their sub-committee showed that certain trustees of the company, with their friends, had profited to the extent of between three and four million dollars in this operation.371 Toward the end of the year tender of the Georgia Company stock and bonds was made back to the original vendors and was refused.372 In December suit was begun to set aside the purchase on the ground that there had been no ratification sufficient in law or equity to bar the stockholders from cancelling the transaction. The plaintiff charged that “the said combination and plan so formed by and between its president and divers of its directors [referring to the purchase of the Georgia stock], confederating with the other syndicate defendants for the purpose of selling their unsalable and discredited securities to the plaintiff at such prices as yielded them an enormous profit and necessarily imposed on plaintiff a heavy yearly loss, was contrary to equity and good conscience, and that the pretended contract dated October 26, 1888, ... and all the acts done in pretended purchase of the stocks and bonds of said Georgia Company ... and the taking from the assets and money of the plaintiff of over $7,000,000 cash ... to put into the pockets of the said faithless directors, the syndicate defendants, and their confederates, were all acts planned ... and performed178 by said Inman, or under his direction, in the execution of such original fraudulent scheme, combination, purpose, and confederacy....” And so the plaintiff prayed the court to decree the contract of purchase void.373
These accusations and counter-accusations, justified though many of them were, had little direct bearing on reorganization. In this progress had completely ceased. At the same time some progress was urgently required. The Richmond Terminal, the Richmond & Danville, and the Central of Georgia were in the hands each of a different set of receivers, unpaid interest was piling up, and the year 1893 was to show a marked decline in earnings. Necessity and mutual distrust dictated a second appeal to Drexel, Morgan & Co. to undertake the rehabilitation of the property. On February 2, 1893, the following letter was addressed to the firm in question:
Messrs. Drexel, Morgan & Co.,
Gentlemen: Since the time you were previously requested to take up the reorganization of the Richmond Terminal system much time and thought have been devoted to its affairs, and we realize that adverse financial conditions and also the present general distrust of all plans for the restoration of this system require that, to be successful, its reorganization must be undertaken by parties possessing the confidence of both the securityholders and the public, and also the financial strength sufficient for its accomplishment. We therefore ask you to take up this reorganization of the Richmond Terminal and its allied properties, each pledging you our personal support and aid in full confidence that the securityholders will support us in this request.
We appreciate the labor and responsibility connected with this undertaking, and are therefore willing to do all in our power to give you full control of the reorganization, as suggested in your letter of June 28,374 and to advise our friends and the securityholders generally to deposit their securities, without requiring the assurances customary in such cases.
Very respectfully,
Wm. P. Clyde,
Geo. F. Stone,
Wm. E. Strong,
J. C. Maben,
Thomas F. Ryan.
179 This letter was accompanied by a letter from F. P. Olcott, president of the Central Trust Company, pledging his support. Inasmuch as lack of the assurances contained in this correspondence had alone prevented Drexel, Morgan & Co. from undertaking the task proposed the previous year, their prompt though conditional acceptance was not surprising. A definitive engagement to attempt the work followed on April 12.375 The enlistment of Drexel, Morgan & Co. in the reorganization provoked general satisfaction. Mr. Hollins, of the Central of Georgia reorganization committee, expressed his pleasure in having responsible parties to deal with not connected with any past differences.376 The directors of the Richmond Terminal urged all classes of securityholders to deposit, and the Clyde Committee was emphatic in its recommendation. It was recognized that the situation was the most favorable which could be hoped for. No group of Southern railroad financiers seemed capable of producing a fair reorganization plan, and it was also probable that no plan from such a source, however fair, would have received a sympathetic welcome. Drexel, Morgan & Co., on the other hand, were both capable and sure of a hearing.
There was remarkably little delay in making public the Drexel-Morgan plan. Less than three weeks after their final acceptance of responsibility, though about three months after the correspondence of February 2, the firm published a comprehensive plan, to the examination of which the next few pages may be devoted. The principles of this plan of May 1, 1893, were simple, and were clearly and convincingly set forth. The property to be considered was to be that of the Richmond Terminal, the Richmond & Danville, and the East Tennessee. The Central of Georgia was to be omitted. The imperative needs of these properties the plan declared to be two:
First, the provision of a large sum for the physical improvement of the system;
Second, the reduction of fixed charges to an amount which the companies could earn.377
180 The physical condition of the above roads in 1893 was extremely bad. “One obvious trouble ... is,” said the plan, “that their maintenance and repairs have been neglected. Another is that, while nearly all the lines in the United States have been steadily substituting solid roadbeds, heavy equipment, and other modern facilities for the light and ineffective appliances formerly in use, these lines, because of the constant drain to which they were subject for the obligations assumed, and from the necessities of the Terminal Company for the payment to it, as dividends, of every available dollar with which to meet its own obligations, have not been in a financial condition to keep up to the times in this respect, and now they find themselves so far behind as to be, to a considerable extent, unqualified to handle business with economy, or to compete successfully with other lines.”378 The financial condition was little better. The absolute fixed charges of the Richmond Terminal, the Richmond & Danville, and the East Tennessee systems, viz., interest on bonds held by the public, rentals, equipment notes, and sinking funds, and interest on floating debts, receivers’ certificates, etc., the plan declared to amount annually to about $9,900,000. The entire net earnings for the fiscal year ending June 30, 1893, were estimated at $7,000,000. The result was a deficit for the year of about $2,900,000. This state of affairs required serious sacrifices from somebody. The Olcott plan had illustrated the folly of laying the burden largely on well-secured senior bonds. The Drexel plan proposed to demand the necessary concessions from the junior bonds and from the stock. “About $74,000,000 of the bonds and guaranteed stocks of the Richmond & Danville and the East Tennessee systems held by the public,” it continued, “are on181 properties which are believed for the most part to afford adequate security, and for this or other reasons this plan has not sought to disturb them. About $50,000,000 (mostly recent issues) are junior liens, inadequately secured, or else are on new or branch lines of uncertain earning capacity, and the holders, in self-preservation, must make such reasonable concessions as the situation necessitates, taking compensation therefor in preferred or common stock of the new company....”
The tools of the reorganization were to be the following new issues:
$140,000,000 first consolidated mortgage and collateral trust 100-year 5 per cent bonds, secured by mortgage and pledge of all the property of the new company. This total might be subsequently increased to acquire the whole or part of the Georgia Central system, or to acquire the ownership of the Cincinnati Southern Railway or any other line as a substitute therefor.
$75,000,000 5 per cent non-cumulative preferred stock.
$160,000,000 common stock.
“The general theory of adjustment of disturbed bonds,” said the plan, “is to substitute for them the new 5 per cent bonds to such an extent as is warranted by earnings and situation of the properties covered by the present mortgages, and the new preferred stock for the remainder of the principal. In some cases, where the bonds are on properties of no actual and little prospective earning capacity, a more severe reduction is necessary. In several instances, where the bonds are on properties which are likely to improve more rapidly than other disturbed parts of the system, this fact is recognized, and an extra allowance is made in compensation. Finally, in one or two cases, where the bonds are on properties the loss of which would adversely affect the rest of the system, a proper recognition is made of this fact.” In practice not only bonds and preferred stock, but preferred and common stock, or even common stock alone were exchanged for old securities of little value.
This provided for old securities but not for cash requirements. To raise cash three devices were resorted to, all of which bore entirely on the junior securityholders or on the stock. The most direct was the levying of an assessment. Terminal common stock was assessed $12.50 per share, East Tennessee first preferred $3,182 second preferred $6, and common stock $9; new preferred stock being in each case given in return. This distribution was based on the idea that the stockholders of each railroad should provide for its floating debt. The floating debt of the Richmond & Danville was about $7,000,000, that of the East Tennessee about $3,000,000, and that of the Richmond Terminal about $100,000. But since the last named held practically all of the Richmond stock and a considerable proportion of the East Tennessee, its stockholders were saddled with a total of $8,300,000 or an equivalent of $12.50 per share, while the East Tennessee was taxed proportionately. The rest of the cash requirements were covered by the sale of $8,000,000 new bonds at 85, and $33,333,000 new common stock at 15. Depositors of all classes of Terminal securities and of all classes of readjusted securities of the other systems were allowed to subscribe to the extent of $1000 in a new bond and $4000 in new stock trust certificates for each $22,000 par value of stocks or bonds deposited. The balance of the issues was looked after by an underwriting syndicate.379
Future capital requirements were provided for mainly by new bonds. $35,383,000 in new 5 per cents were set aside to be used only for new construction, betterments, purchase of rolling stock, and extensions and additions to the system. Not over $2,500,000 of these were to be used in any one calendar year; except that, in addition to this annual appropriation, a total of $3,000,000 in bonds might be specifically appropriated with the unanimous consent of the stock trustees, for the building of branches or extensions, if undertaken within three years after the creation of the new mortgage. All property acquired with these bonds was to be brought under the lien of the new mortgage. $8,000,000 of the cash raised by assessment and sale of securities, moreover, were to be available183 for new construction and equipment on the Richmond & Danville and the East Tennessee. And, finally, there was provision for the limitation of new bond issues, for a voting trust and for the consolidation of the Terminal system.
“The ultimate object of the reorganization,” said the plan “(excluding the Georgia Central Company from consideration), is to have the new company acquire, so far as practicable, the ownership of the Richmond & Danville and East Tennessee systems, including the various securities now owned by the Terminal Company ... and the securities pledged for the Richmond & Danville and East Tennessee floating debt....
“Both classes of stock of the new company ... are to be issued to three Stock Trustees, who shall be appointed, on or before completion of reorganization, by Messrs. Drexel, Morgan & Co. The stock shall be held by the Stock Trustees and their successors, jointly, for five years, and for such further period (if any) as shall elapse before the preferred stock shall have paid 5 per cent cash dividend in one year, although the Stock Trustees may, in their discretion, deliver the stock at an earlier date....
“No additional mortgage shall be put upon the property to be acquired hereunder by the new company, nor shall the authorized amount of the preferred stock be increased without the consent in each case of the majority in amount of the preferred stockholders.”380
The result of all these provisions was to be a cancellation of the floating debt, a reduction in fixed charges, and a decrease in mortgage bonds; though inevitably also an increase in stock outstanding. The plan proposed to disturb $49,117,900 of outstanding bonds, or, including the Richmond Terminal 5s and 6s, a total of $65,617,900. But the new bonds which it offered in exchange amounted to $19,806,700 only. On the other hand it took $111,819,550 in stock from the hands of the public, and offered $165,559,514 new stock in the course of the exchanges.381 This was very conservative, since the increase in total capitalization through these exchanges was less than 4? per cent; and less too than the cash assessment for which preferred stock was allowed. Somewhat greater increase in securities184 appears if we consider, not only the exchanges, but the provisions of the plan as a whole; for here we must include $33,300,000 new common stock and $8,000,000 new bonds issued to retire in part the $12,900,000 of floating debt and for other purposes. Even so the net increase was only 6 per cent.382 The natural result was a considerable reduction in fixed charges. The absolute fixed charges of the system in 1893 the plan stated to be $9,900,000. The fixed charges under the plan were to be $6,789,000. This was certainly a step in the right direction. It was the point, nevertheless, at which the plan was weakest. The clauses which have been outlined made abundant and conservative provision for cash requirements; and the sums which they allowed for future development were not on their face inadequate; but the reduction in fixed charges was less than should have been ensured. The net earnings for the year ending June 30, 1892, were $7,725,000, and those for 1893 were estimated by the plan itself as not likely to exceed $7,000,000. This would have left $936,000 over the proposed fixed charges in 1892 and $211,000 in 1893:—or a surplus of some 3 per cent in the latter year. This was altogether insufficient. It not only put out of the question dividends on the $200,000,000 of stock, but it precluded the partial improvement of the road from earnings, and left the system at the mercy of the slightest decrease in the annual returns. Compared with previous fixed charges the plan proposed noteworthy reductions; compared with the earnings of the lines involved it did not go far enough.383
The reception of the Drexel-Morgan plan was, nevertheless, satisfactory. Certain concessions were made to various classes of bonds, and by June 17, over 95 per cent of the securityholders had given their assent.384 Unfortunately the earnings of the property now steadily decreased. The gross receipts of the Richmond & Danville proper were 15 per cent less in 1893 than in 1892; and Terminal system lines which had earned $6,100,000 in 1892 earned $5,300,000 in 1893, and promised to earn some $4,250,000 only in 1894. This decrease was common to the country at large. It was of peculiar185 importance, however, in emphasizing the weak point in the Drexel plan. From January 1 to July 1, 1893, the Terminal floating debt, exclusive of car trusts, increased $2,600,000. From July 1 to March 1 it increased at least a million more. The reorganization plan had been prepared “on the assumption that, during reorganization, the receivers of the various properties could provide for the interest charges on the undisturbed securities, as well as accumulate a sum sufficient for the interest accruing on the ‘disturbed securities’ as readjusted.”385 As it turned out, the receivers were obliged to make many defaults among the undisturbed securities, and saved nothing for the disturbed. Some modification of the published plan had perforce to be arranged.
These modifications were detailed in a pamphlet dated February 20, 1894. They comprised three proposals:
(1) To exclude from the reorganization certain unprofitable properties which had previously been included. Certain alterations had already been made toward this end in the exclusion of the Erlanger line, the Memphis & Charleston, and the Mobile & Birmingham. Further modification was to exclude the Northeastern Railroad of Georgia, the Macon & Northern, and five other subsidiary lines.
(2) To fund for a year or two the coupons on new bonds given for certain securities, and to provide in other cases that the new bonds should not bear interest till 1895 or 1896.
(3) To lighten the assessment on Richmond Terminal and East Tennessee common stock, and to allow to all assessed securities one-quarter of their assessment in bonds and three-quarters in preferred stock instead of all in preferred stock.
At the same time a few other modifications allowed to some bonds a more liberal grant of new securities than they had obtained in May. It was hoped by these means to raise the average earning ability of the system, while reducing the new securities to be issued.386186 The temporary funding of coupons further lightened fixed charges until business should have had time to revive. “Under the plan as now modified,” stated Drexel, Morgan & Co., “and assuming that one-half of the new bonds to be sold are used in 1894 and the other half in 1895, the fixed charges are estimated at about
$4,100,000 in 1894,
?4,700,000 in 1895,
?5,400,000 in 1896.387
“The depression in the South began in 1890–91. There would appear to be no reason why in a comparatively short time these properties should not very easily earn, gross, as much as and more than they earned in that fiscal year, viz., over $21,000,000. Operated at 70 per cent ... there would remain, say $6,600,000 net against an interest charge of $5,400,000.”387
The reduction in assessments was made possible by the decrease in mileage. Although the floating debt had increased $2,600,000 from January 1, 1893, and the equipment notes recorded were greater by $1,048,000,388 yet the debt to be provided for by the modified plan of 1894 was estimated at only $12,200,000. Besides this the cash to be reserved for new construction was reduced $3,000,000, and the surplus for expenses and contingencies $1,380,000. Assessments were therefore set at $10 a share on Richmond Terminal common instead of $12.50; $7.20 on East Tennessee common instead of $9; and $3 and $6 on East Tennessee first and second preferred as before. The new securities to be sold were reduced correspondingly to $8,000,000 of bonds and $25,000,000 of common stock. Finally, the bonds to provide for new construction, betterments, and additions were reduced from $35,383,000 to about $19,000,000, of which not over $2,000,000 (instead of $2,500,000) were to be used in any calendar year. Other provisions of the earlier plan were to remain unchanged.
It was this modified plan which was carried to a successful conclusion. In principle it did not mend the weak spot in its predecessor187 of May. That plan had contemplated a surplus of $211,000 over fixed charges for 1893. This estimated charges at $4,100,000 for 1894 and net earnings at $4,250,000 on a somewhat reduced mileage. There was not to be more left for dividends and improvements than there had been before, while the cash and bond provisions for improvements were notably reduced. The concession of bonds to stockholders for one-quarter of their assessments was unsound financiering, as was, on the whole, the funding of coupons on the new mortgage bonds. The success which the modification had, nevertheless, in restoring the company to solvency, was due to the improvement in earnings which soon took place. The original plan had based its calculations on the first year of depression; the amended plan kept charges down till three years had elapsed. By that time business had begun to mend, and all danger of bankruptcy was past. Other points in either plan leave little to criticise.
The modifications to the original plan were issued on February 20, 1894. Over 75 per cent of the system bonds had assented by March 24. At one foreclosure sale after another the reorganization committee now bought in the portions of the old system covered by the plan. Suits against the Richmond Terminal had been brought under the two collateral mortgages, and on July 13, 1893, the reorganization committee bid in the pledged securities. On February 6, 1894, it bought the remaining assets of the Terminal Company; on June 15 it bought the Richmond & Danville, and on July 7 the East Tennessee, Virginia & Georgia. Two trustees’ sales, one receivers’ sale, ten foreclosure sales, and six conveyances without foreclosure had occurred by September, 1894, and more minor sales were in progress.389 On June 15 the Southern Railway Company was organized with a charter from the state of Virginia, and took over in succession properties to the extent of 4607 miles.390 Samuel Spencer was elected president. Some thirty corporations were swept away and thirty boards of directors abolished; for the Southern Railway was an operating company, and, unlike the Richmond Terminal and the Richmond & Danville, controlled but an inappreciable fraction of188 its mileage through the ownership of stock. The new securities were issued at the proper times, and according to the plan the common and preferred stock was turned over to three voting trustees,391 who issued trust certificates in their stead.
This completed the reorganization of the Richmond Terminal Company so far as the principal part of its mileage was concerned. The portions of the system excluded from the plan have been to some extent bought back in later years. Control of the Alabama Great Southern was bought in 1895; the Memphis & Charleston was acquired in 1898; the Richmond & Mecklenburg was leased in 1898 and the Mobile & Birmingham in 1899; and the Northeastern of Georgia was bought in 1899. The system has not yet, however, fully regained its old position. The most important loss has undoubtedly been that of the Central of Georgia. We left this company engaged in active disputes with the Terminal management. During 1892 and 1893 efforts to reorganize it were made under the leadership of Hollins & Co. The principal difficulties were the large floating debt and the money required to put the property into good physical condition.392 A plan was actually prepared at the beginning of 1893 and submitted to securityholders, but failed because of that same decline in earnings which had caused the modification of the Terminal reorganization plan. A second plan, prepared in 1894, had a better fate,393 and in modified form was put into effect. The Railroad was sold at auction in 1895, the Central of Georgia Railway was organized to take its place,394 and the corporation entered upon a new career which we have not space to follow.395
As for the Southern Railway, the years from 1895 to 1907 have brought it prosperity. It has extended considerably in mileage. Besides reacquiring lines which formerly were part of the Richmond189 Terminal system, it has grown south to Jacksonville and Palatka, east to Charleston and to a more direct connection with Norfolk, and west from Louisville to East St. Louis. It has further joined its Louisville-East St. Louis line to Chicago by acquiring a half-interest in the Monon, and to the rest of its system by a half-interest in the Cincinnati, New Orleans & Texas Pacific; and it has bought control of the Mobile & Ohio, which stretches through four states from East St. Louis to Mobile. Instead of 4392 miles as operated on June 30, 1895, it now reports 7546. The earnings of the system have increased more rapidly than its mileage. The revival of business after 1897 occurred with singular force in the South, and seems to have introduced there a new industrial era. As a result, the Southern’s gross earnings have trebled and its net earnings have been multiplied by two. Passenger receipts, which were $4,329,499 in 1895, have become $14,683,006 in 1907. Freight receipts have increased from $10,816,024 to $37,368,095.
It has been this increase in earnings which has at last allowed some of that margin for improvements which the reorganization plans weakly attempted to secure. And accordingly, large sums have been expended. Maintenance of way charges are now over $1000 per mile instead of $630. Expenses per locomotive mile have increased from 4.19 cents in 1895 to 7.54 cents in 1907; expenses per passenger car mile from .83 to 1.03 cents; and expenses per freight car mile from .47 to 2.18 cents. It is true that locomotives and cars are larger to-day and that rails are heavier, but this fact is far from accounting for the difference. Not only has the existing plant been kept in good repair from earnings alone, but distinct improvements have been made. New rail has been laid, additional ballast put in, wooden trestles filled or replaced with steel. It was estimated in 1906 that $5,000,000 had been spent in betterments and charged against income up to that time, besides some $15,000,000 more paid for equipment out of earnings. Meanwhile considerable sums had been spent from capital account. The reorganization plan allowed for some $19,000,000 of new bonds to be sold at the rate of $2,000,000 per year.396 Of these the company had sold $13,000,000 for improvement of the property by February 1, 1906, besides disposing of some $23,000,000 of equipment obligations.
190 The appreciation of the need for still more liberal expenditure led in 1906 to a comprehensive plan for the issue of new capital. Under date of February 1, the company submitted to its voting trustees397 a scheme for a $200,000,000 mortgage, of which $15,000,000 were to be issued at once and the rest were to be reserved. Of the immediate issue $4,962,774 were to refund payments for equipment hitherto made and charged to capital; $3,501,000 were to refund investments in securities of, and advances to, subordinate companies, as well as to be used for the acquisition of property not heretofore funded; and $6,536,226 were for double track, revision of grades, new yards, shops, etc. Of the securities reserved, $65,164,000 were for refunding purposes: $20,000,000 for certain subsidiary lines: and $99,834,000 to go, first, for betterments and improvements on the entire system and for new equipment in amounts not exceeding $5,000,000 in each year; and second, in exchange for first mortgage bonds not exceeding in amount the actual cost of railroads and terminals hereafter to be acquired. In other words, about one-half of the total issue is to go, sooner or later, for improvements, and the rest for refundings and for new acquisitions.398 It was believed that the Southern could readily pay the interest on the increased immediate issue without endangering dividends on its preferred stock, and that the subsequent increases in earnings would more than provide for whatever additions to charges might occur. Negotiations for the placing of the new securities were concluded with J. P. Morgan & Co. at a reported price of 96?.
The results of the expenditures for improvements have been remarkable. In 1895 the Southern Railway had in use 623 locomotives; in 1907 the number was 1536. In the former year there were 487 passenger cars and 18,924 freight cars; in the latter there were respectively 995 and 56,225.399 Only 370 miles of track in 1895 were over 65 pounds in weight per yard; more than 3100191 surpassed that limit in 1907. It is nevertheless in its inability to handle the business offered it that the Southern has provoked sharpest criticism. Over 3600 miles of its system still have rails weighing 62 pounds or less to the yard;—that is, rails incapable of meeting modern operating conditions. Only 206 miles of double and 1981 of side track exist. Equipment appears to be still inadequate. Signals are imperfect, and speed and promptness seemingly impossible to attain. The late tragic death of Mr. Spencer was a forcible illustration of the deficiencies of the road which he had done so much to improve.
The earning power of the system cannot yet, therefore, be said to be secure. Moreover, the capitalization of almost $72,000 per mile,400 as well as the less dense railroad business in the South, the slight construction of many of the Southern Railway lines, the lack of adequate facilities which compels an operating ratio of 76 per cent, and the absorption of minor roads less prosperous than the main stem,—all these factors have kept down the net surplus from operation. On the other hand, the management is making an earnest attempt to raise the standard of the property. Bonds and notes to the par value of over $32,000,000 have been sold to provide for additions and improvements during the past year, and a very great change for the better has taken place. Dividends on the preferred stock have been paid since 1897. As the country develops, and as the sums spent upon improvements come more and more to have their effects, a dividend upon the common stock will be paid. The near future is more likely to witness the cessation of dividends upon the preferred.