Charter—Strategic extensions—Competitive extensions—Effect on finances—Raise in rate of dividend—Reorganization of 1889—Acquisition of the St. Louis & San Francisco and of the Colorado Midland—Income bond conversion—Receivership—English reorganization plan—Mr. Little’s report—Final reorganization plan—Sale—Subsequent history.
The Atchison, Topeka & Santa Fe Railroad has been reorganized twice, in 1889 and in 1893–5; the first time without, but the second time after a foreclosure sale. The keynote of its history has been extension. It was the enterprise of the men in control before 1889 which gave it the position and power it holds to-day, but it was also that enterprise which necessitated its first reorganization by imposing upon it heavier burdens than it could bear.
Chartered in Kansas in 1863, the Atchison spread west, southwest, south, and northeast. It received some aid from the state of Kansas in the shape of a grant of lands, but depended primarily on the investment of private capital. Kansas itself was not, in 1870, a very encouraging field for railroad building. It had been admitted as a state only in 1861, and could boast for the most part of less than two inhabitants to the square mile;—although settlement was pushing westward with considerable rapidity, and stores of mineral wealth had been discovered in Colorado. The railroad in those days had to create its own traffic, and population followed the means of transportation. The peculiarity of Kansas was a central position, which lent itself to schemes of the most far-reaching nature. A railroad reaching from one end of the state to the other might almost equally well have been extended to California, to Chicago, or to the Gulf; and could be sure in time, if it survived, of the carriage of a vast volume of traffic out in every direction from the Central West. The Atchison managers saw this opportunity, and courageously and persistently endeavored to realize it;—part of the project they announced, and part they kept back till the fitting time should come.
The systematic extension of the Atchison Railroad may be divided into four parts:
193 (1) The construction through Kansas to Colorado, to save the charter, then down the valley of the Rio Grande to Albuquerque.
(2) The securing of a connection with the Pacific Coast by construction, lease, or traffic agreement.
(3) The connection with the Gulf.
(4) The connection with Chicago.
As the system neared completion, and its territory came to be invaded by other roads, there were added to this systematic extension what may be called competitive extensions, consisting largely in the construction of branch lines, and multiplied beyond anything which the country could need for years to come. This sort of building was most prominent from 1884 to 1888 and will be considered in its place.
The first stretch of road was built with few difficulties or complications. It was commenced in 1869, and, after numerous delays, it reached the western border of the state of Kansas on December 28 of the same year; from this point it went on more leisurely, first west and then southwest, to Albuquerque.401 These early miles were paid for from the proceeds of both stocks and bonds. From Albuquerque a variety of routes presented themselves. The Southern Pacific had by that time built to El Paso, and it was feasible to extend the Atchison to that point and to rely on a traffic agreement for the handling of the western business. Or, building to Deming near El Paso, Atchison might have extended its line down the river valleys in the northwestern part of Mexico to Guaymas on the Gulf of California. Or, Atchison might have built directly west from Albuquerque. All three of these routes were considered, and all three were eventually carried out.402
The connection with the Southern Pacific was not a very difficult one to make, and the Atchison reached Deming in March, 1881. By the traffic agreement then concluded the Atchison secured the use of the Southern Pacific tracks from Deming to Benson, Arizona, and arranged to build south into Mexico from this point; while the Southern Pacific was allotted 51 per cent of the through rate on traffic passing over Southern Pacific lines.403 This formed the second through route from the East, and in September, 1881, it194 took one-quarter as much business as the Central Pacific. It was also the first of Atchison’s projected routes to be completed. The line to Guaymas was added by purchase. Instead of building, Atchison exchanged its stock for the stock of the already existing Sonora Railroad in the proportion of one to two, and guaranteed the interest on the Sonora first mortgage 7 per cent bonds.404 This made up for the lack of an independent line to the coast further north. The total of Sonora stock was $5,400,000, requiring $2,700,000 Atchison stock in exchange. The total first mortgage 7 per cent bond issue was $4,050,000. With the railroad came a subsidy of $2,608,200 (American gold), equal to $11,270 (Mexican) per mile. This subsidy kept cropping up in Atchison finance for some time, and was finally adjusted in 1896 by the transfer to the company of $1,159,800 in 3 per cent bonds of the Mexican Interior Consolidated Debt.
For the direct route President Strong sought the help of the St. Louis & San Francisco, and the use of the charter of the Atlantic & Pacific which it owned. The Atlantic & Pacific was a road incorporated in 1886, with a charter to build from St. Louis to California. In spite both of its charter and of its name it had never gone further west than Vinita, in the northeast corner of Indian Territory.405 President Strong and the Frisco now agreed to continue construction under the name of the Atlantic & Pacific, both from Vinita and from Albuquerque. The Atchison was to be given a half-interest in the charter, directors were to be chosen equally from the two companies, and the cost was to be met by a $25,000,000 loan, which the Atchison and the Frisco were to guarantee jointly but not severally.406 Before the new construction neared completion, however, the St. Louis & San Francisco fell under the control of Messrs. Gould and Huntington, who, as owners of the Texas & Pacific and the Southern Pacific respectively, naturally disapproved of the plan to extend the Atlantic & Pacific to the coast. The Atchison, therefore, agreed to build no further west than the Colorado River. At that point the Southern Pacific was to meet it with a line from Mojave. The Southern Pacific gave to the Atlantic195 & Pacific an interest guarantee on its bonds to the extent of 25 per cent of the gross earnings derived from Atlantic & Pacific through business, and the latter road retained all its rights for a line in California.407 This proved unprofitable, for the Southern Pacific persistently diverted traffic to Ogden and El Paso, and in 1884 still another arrangement was made. By this—
(a) The Atlantic & Pacific bought the Southern Pacific division between the Needles (the Colorado River) and Mojave, 242 miles, for $30,000 per mile, and, until such time as title could be given by the discharge of the mortgage upon it, took a lease at an annual rental of 6 per cent on the purchase price.
(b) The Atlantic & Pacific secured trackage and traffic rights and facilities between Mojave and Oakland and San Francisco, as well as the use of terminals at the latter point.
(c) The Atchison (and the St. Louis & San Francisco likewise) agreed to buy from the Pacific Improvement Company first mortgage bonds and other securities of the Atlantic & Pacific of the par value of $3,096,768, at the actual cost to the Improvement Company, to wit, $1,524,356.
To complete the connection to the coast the Atchison built from Waterman, some seventy miles east of Mojave on the Atlantic & Pacific, to Colton on the Southern Pacific, and secured control of the California Southern from Colton to San Diego.408 In 1885 entrance was obtained to Los Angeles by lease of the Southern Pacific track between Colton and that city.409
The money for this rapid progress was obtained by the sale of both stocks and bonds, but on the whole stock predominated. The directors rightly considered it much more conservative to issue stock and sell it at par than to load the road down with a heavy debt in the shape of bonds; and what is more, they were able to make good their word, and to sell stock at or near par in spite of the risk incident to operations such as the Atchison was conducting and the frequent bonuses or stock dividends declared.
By 1884, then, Atchison had reached the Pacific coast. The next great steps were the extensions to Galveston and to Chicago. The196 year of entrance to Los Angeles the Atchison did not cross the southern boundary of Kansas. Certain of its stockholders were, however, unofficially interested in the Gulf, Colorado & Santa Fe, which ran from Galveston on the south to the Indian Territory on the north, roughly 200 miles. In 1884 a charter was obtained for the Southern Kansas Railway Company, a corporation organized solely to build south from Arkansas City. The same year the Gulf, Colorado & Santa Fe obtained permission to stretch north. The two roads met at Purcell in the summer of 1887.410 In 1886 the Gulf, Colorado & Santa Fe was formally brought in. Gulf stock then amounted to $4,560,000 and bonds had been issued to a limit of $17,000 per mile. For the entire capital stock, subject to the above encumbrance, Atchison agreed to pay $8000 a mile in Atchison stock, par value.411 The final move was to get into Chicago. “The Atchison Company has been much too conservative during the last few years,” said the Chronicle, “and thus has allowed its territory to be invaded.” The first intent was to build direct. There were incorporated, in Illinois the Chicago, Santa Fe & California Railway Company, and in Iowa the Chicago, Santa Fe & California Railway Company of Iowa. In 1887 the Atchison was able to purchase the Chicago & St. Louis Railroad, between Chicago and Streator, with a branch to Pekin,412 and to save itself construction between these points. The whole line was opened for traffic in May, 1888.413
This completed Atchison’s systematic extensions before 1889. From a local road in Kansas it had become a through route, taking freight over its own rails from Chicago to Galveston and to the Pacific coast. But especially in the latter eighties competition had become keen; and to its strategic extensions Atchison was obliged to add competitive building on an enormous scale. Of the 7000 miles in 1888, over 2700 had been added since January, 1886, and had been built, not to tap new sources of traffic, but to defend what was thought to be Atchison’s rightful territory by means of a desperate war of rates. “About three or four years ago,” said a competent observer, “a mania seized three great corporations (Atchison, Missouri Pacific, and Rock Island) to gridiron Kansas with railroad197 iron, and each tried hard to see which could cover the most ground, without regard to the character of the ground, the result [being that] railroads were built where they would not be required for ten years to come.”414 Such roads could not be expected to pay, and in fact did not. Even in the case of better planned extensions, the lines had to be built in an unopened territory, the traffic of which had yet to be developed. In Indian Territory, Oklahoma, and Arizona, the bulk of the country had less than two inhabitants to the square mile; in New Mexico and Lower California only one-half of the area was more thickly settled; and it was largely from this southwestern corner that local traffic for the Atchison had to be built up.
The method of financiering these competitive extensions varied: sometimes the parent company guaranteed the principal and interest of the branch-line bonds; sometimes it took these into its treasury and issued collateral bonds against them; sometimes, perhaps more frequently still, it leased new roads for a rental equivalent to the annual interest on their bonds. If the branches could have earned their fixed charges the burden on the Atchison would have been nominal, but as in large part they could not it was real and serious. In 1888 there were actually paid in rentals, interest on Sonora Railway bonds, and on sundry railway bonds, $2,361,300. Large sums were carried to capital account. In 1888 there was an accumulated account of “due from sundry leased, controlled, and auxiliary roads in construction and general account” (net) $13,558,678, including various cash current construction and other charges, which was carried as an asset, but which in reality consisted of advances from which there was little or no hope of return. Besides the claims for interest the parent company had in practice other claims to meet. Where a branch failed to earn operating expenses, as often happened, sums had to be advanced to keep the road and rolling stock in repair. Thus the item “due from auxiliary roads in current traffic and operation accounts” amounted in 1888 to $1,008,554. Bills and accounts payable the same year were $6,553,775, and accrued interest, taxes, and sinking funds totalled $915,337. The following table shows vividly the effect upon the system of the rapid extension of the years 1884 to 1888:
198
Total System
1884 1888 ?
Mileage ???? 2,799 ????? 7,010 ?
Bonds 48,258,500 163,694,000 ?
Stock (Atchison) 60,673,150 ?75,000,000 ?
Gross earnings 16,699,662 ?28,265,339 ?
Operating expenses ?9,410,424 ?21,958,195 ?
Net earnings from operation ?7,289,237 ??6,307,145 ?
Net profits, excluding dividends ?5,147,883 def. ??2,933,197 ?
Net profits, including payments for dividends and interest on floating debt def. ??5,557,323 ?
Whatever may be said as to the necessity of extension, it is evident that the position of the system by 1888 had changed for the worse. This last-named year was a bad one, it is true, but certain evils of which the directors then complained were permanent, and should have been permanently allowed for. Some realization of the fact that the Atchison might be going too fast appeared in the financial journals of the time. “Were these undertakings less solidly backed,” said the Railway Age, “there might be apprehension that enterprise was being pushed too far and too fast.”415 But on the whole the rapid growth and enormous extent of the system seem to dazzle beholders. “The career of this company,” said the Railway Age again, “has been one of the marvels of railway enterprise, and it would be unsafe now to attempt to fix a limit to its extension or to the ambition of its Napoleonic president and its bold and enterprising directors.”416
In 1887 the directors increased the rate of dividend from 6 to 7 per cent.417 The action was thoroughly unjustifiable, and the rate199 was speedily again reduced. By the end of 1888 the main company was liable to be called on any year to the extent of $8,625,365, which was the amount of interest on auxiliary roads either guaranteed or payable as rentals. In four years the mileage of the Atchison system had increased 150 per cent; its bonded indebtedness 239 per cent; its fixed charges 216 per cent; and its gross earnings only 69 per cent; while the deficits on its branch lines were obviously not matters of bookkeeping, and the value of interchanged business was not equal to the increased burdens which the subsidiary lines imposed. The floating debt mounted up, as is usual in times of trouble. From a total of $3,317,446 in 1884 it increased to $8,076,059 in 1888. To offset it the directors secured in October, 1888, subscriptions to a $10,000,000 issue of “guarantee fund,” three-year notes. Not all of the amount authorized was to be sold at once, but from time to time Atchison was to call on subscribers to take part of their subscription, and the notes were to bear 6 per cent from the time they were put forth.418 For the rest, the directors economized as much as possible. Salaries were cut 10 per cent in every branch of the service, beginning with the president, and the unlucky 7 per cent rate of dividend was reduced to 6 per cent, to 2 per cent, and then to nothing at all in successive quarters. None of these expedients proved sufficient. In fact, the situation was so critical that nothing short of a general reorganization could probably have secured the radical reduction in fixed charges which the company required.
In September, 1889, accordingly, Messrs. Libby, Abbott, Peabody,200 and Baring were appointed a committee to consider the broad question of financial and general reorganization,419 and in October a plan for the complete rehabilitation of the company was brought forward. The obligations with which the plan had to deal are indicated in the following table:
Obligations of the Atchison Company in 1889
Principal Interest ?
Bonds, guarantee fund notes $160,786,000 ?$9,203,620.00 ?
Contingent issue of additional bonds ???? 775,000 ???? 38,750.00 ?
Car trusts ???1,445,660 ???? 86,739.60 ?
$163,006,660 ?$9,329,109.60 ?
Less interest on bonds and guarantee
fund notes owned by the Company ??? 253,340.00 ?
?$9,075,769.60 ?
Sinking Fund ??? 359,000.00 ?
Taxes ??1,221,000.00 ?
Rentals ??? 502,000.00 ?
$11,157,769.60 ?
Of the bonds outstanding $56,498,000 were direct loans upon the Atchison’s main lines, bearing anywhere from 4? to 7 per cent, and $104,288,000 were bonds upon some of the thirty-two subsidiary corporations for whose obligations the Atchison was responsible.
The dealing of the Libby Committee with this situation was intelligent and comprehensive. It proposed an increase and simplification of securities, a decrease in fixed charges, and a cancellation of the floating debt. In place of the forty-one classes of bonds outstanding it suggested that two grand issues be put forth, one of 4 per cent general mortgage bonds to the amount of $150,000,000, and one of 5 per cent income bonds to a total of $80,000,000. From these issues $13,750,000 should be used to provide for cash requirements,420 and the remainder should be employed in direct201 retirement of old obligations. The exchange of some $216,000,000 of new bonds for $163,000,000 of old was to mean an increase in securities outstanding, but since interest on only part of the new bonds was to be obligatory fixed charges were to be less than they had been before. The managers figured on what the property could earn, good times or bad, and capitalized this sum into 4 per cent general mortgage bonds. They then calculated the difference between this and the former return to bondholders, and capitalized the difference into income bonds.421 Each individual bondholder, therefore, was offered a chance to receive the same return which he had previously enjoyed, although his right to demand an annual payment was limited to an amount which the road could earn.
A few points deserve to be specially noticed. The reduction in interest was sufficient to have transformed the deficit for the whole Atchison system for 1888 into a respectable surplus, providing that no dividends had been paid; but this reduction was dependent on the retention of the income bonds as optional obligations. There was no cash assessment. Had the reorganization taken place in a time of general depression, the sale of securities for cash would probably have been impossible, but the days of depression had not yet arrived. The stockholder suffered in the introduction of the principal of some $67,000,000 additional indebtedness between him and his property, although he was not called upon directly; but it should not be forgotten that for a long while the Atchison stockholders had received very liberal dividends, both in stock and in cash, and could not well complain of the moderate loss now necessary. There was no voting trust, although one was proposed, and the bonds were not even temporarily given voting power. The situation seems to have been that the securityholders thought it more to their advantage to reduce voluntarily the rate of interest than to force a foreclosure sale and take their chances; for the directors, in submitting the plan, said that they felt it necessary “to state in the strongest terms that the non-success of this proposal will inevitably result in foreclosure, with all its attendant misfortunes.”422
202 By the end of November, although the plan had not been promulgated until well into October, more than one-half of the outstanding bonds had assented, and the directors were enabled to announce success. Certain changes in the management had already taken place. President Strong had resigned in September, and had been succeeded by Mr. Allen Manville, general manager of the St. Paul, Minneapolis & Manitoba Railway.423 Mr. Reinhart was credited with a large part in the construction of the new plan of 1889, and his later promotion may have been connected therewith.
After the reorganization Atchison resumed its policy of expansion, its new directors being apparently as “bold and enterprising” as the old. In 1890 it took in the St. Louis & San Francisco, a road running from St. Louis west and southwest through Missouri, Kansas, Arkansas, and Indian Territory, connecting at Paris, Texas, with the Gulf, Colorado & Santa Fe, and through half-ownership of the Atlantic & Pacific connecting Albuquerque in New Mexico with Barstow in Southern California. The total length of the Frisco system, exclusive of jointly owned roads, was 1329 miles, and this constituted the largest single acquisition that the Atchison had ever made. The terms of the purchase were highly favorable to the Frisco shareholders, but the benefits to the Atchison were less than was expected. Although the consolidation removed certain difficulties experienced from the joint ownership of the Atlantic & Pacific, and although the united roads were in a better position to compete for transcontinental and Gulf traffic than either of them had been before, the Atchison directors were forced to announce in 1891 that, “with every opportunity given it to work with advantage, the property (Frisco) has failed to demonstrate its ability to carry itself financially and to liquidate its debts; nor could it hope to obtain such results without the provision of New Capital.... This is due largely to the absence of complete and proper facilities and machinery with which to conduct operations in the nature of Round Houses, Machine Shops, Stations and other buildings, improved Bridges and Equipment.”424 A bond issue was needed, and was in fact put forth,—the Atchison taking a goodly share.
203 Less important than this was the purchase, in 1890, of the Colorado Midland, a road 346 miles long in Colorado, valued chiefly for its ore traffic. In August, 1890, the Mexican Government resumed payment of the Sonora subsidy, on which nothing had been paid for eight years.425 It does not seem as if at any time after 1889 the Atchison enjoyed unalloyed prosperity. The year 1890 showed an increase in net earnings of 48 per cent according to the figures given, and the directors were unhappy until they had increased the fixed charges to match, but the year 1891 recorded a falling off, and 1892 showed a comparatively slight gain over the figures of 1891. There was obviously nothing in the reported figures to cause alarm, but there was nothing which justified the payment of more than 2? per cent any year on the income bonds, or of any dividends on the stock.
Toward the end of 1891 the guarantee fund notes fell due. They had been issued, it will be remembered, to protect the property in 1888, and were secured by an equal amount of general mortgage 4s; but now the directors, disliking to put these 4s on the market at 83?, decided to extend the notes for two years at par with a cash commission of one per cent.426
Extension of the guarantee fund notes did not increase the fixed obligations, it merely postponed a reduction; but the conversion of the income bonds of 1889 acted as a positive increase. There were $80,000,000 of these incomes, and it was in the optional character of payments upon them that the saving of fixed charges by the reorganization of 1889 had consisted. They had been issued instead of preferred stock probably because more acceptable to the bondholders; but it was early found that their use involved difficulties which had not been sufficiently regarded. By the conditions of their indenture no bonds could be inserted between them and the general mortgage 4s; they held a second lien for all time. But similarly it was difficult to put bonds after them. Their lien was on income,—interest was payable only when earned; any regular mortgage would of necessity have taken precedence. The hindrance to new issues was real and serious, and although some check on an aggressive management was salutary, yet the system required additions and improvements from time to time which could not204 be supplied from current income. Under these circumstances the Atchison directors decided within three years to sacrifice the reduction in fixed charges secured in 1889 in order to obtain new capital with greater ease. “It is the opinion of the Management,” said the annual report for 1892, “that the time has now arrived when all the obligations of the Company can be returned to a Fixed Basis, sufficient funds provided to take care of all Improvements ... required for at least four years, and at the same time the junior Bonds and Capital Stock be restored to a more permanent market value with assured returns on the first, and probable balances for the latter.”427 “The Atchison plan of conversion,” said Mr. Reinhart, “... is the completion of the reorganization plan put in effect October 18, 1889, and returns the obligations of the company ... to a fixed and stable basis....”428
The plan so cordially referred to provided for the issue of a new, second mortgage, 4 per cent bond, and the exchange of this security for the outstanding income bonds. The second mortgage was to be issued in two classes:
(a) $80,000,000. These were to exchange for income 5s, par for par, and bore a rate of interest which increased from 2? per cent in 1892 to 4 per cent in 1896, and then remained at 4 per cent until maturity.
(b) $20,000,000. These bore 4 per cent and were to be issued in no greater sum in any year than $5,000,000 for specific improvements on the Atchison exclusive of the Colorado Midland or the St. Louis & San Francisco. There was reserved to the company the right, when all the above should have been exhausted, to issue more bonds of the same sort as in class B for the same purposes and on the same mileage, up to a limit of $50,000,000.429
The conversion plan was approved at the annual meeting in 1892, and was put into effect. The result was most unfortunate. The annual burden on the company was increased at the very time when the panic of 1893 was about to reduce railroad earnings, while the advantages of freer issues of new bonds were of little account in a year when the sale of new securities was practically impossible. Moreover, a new light was soon to be thrown on the whole operation205 by disclosures of dishonest manipulation of figures in the Atchison reports.
In 1892 and 1893 rumors of trouble were afloat, and were repeatedly and vigorously denied by Mr. Reinhart, president of the Atchison Company. Thus in June, 1893, this officer declared that “the Atchison, Topeka & Santa Fe Railroad Company, strictly speaking, has no floating debt. Its current liabilities are more than equalled by its current cash assets.”430 In December Mr. Reinhart said again: “The interest on the General Mortgage Bonds of the Atchison Company, due January 1, will be paid. It seems hardly necessary to make this statement, because doubts as to its payment have, in my judgment, been created solely by speculators who have no substantial interest in the property.” These official denials did not carry conviction, but opinions varied as to the seriousness of the situation. The Boston News Bureau cheerily insisted that all the Atchison needed was “days of grace” during the existing depression,431 while in England it was thought that the rumors of a receivership were at most but premature.432
At the end of the year President Reinhart went to Europe to float a loan. On his return, after a failure to obtain subscriptions, a receivership was applied for and granted. It had been hoped up to the very last moment that the January interest could be met; but the refusal of English bondholders to subscribe additional capital, the failure to place a third mortgage loan in the United States, and the death of Director Magoun, one of the strong influences in Atchison’s affairs, made a crash inevitable. Current obligations had mounted to over $10,000,000, credit had disappeared, and the railroad necessarily succumbed. The Atlantic & Pacific, the Colorado Midland, the Gulf, Colorado & Santa Fe, and the Southern California lines were not included in the Atchison receivership, though the Atchison receivers were given like office in respect to the Atlantic & Pacific.433 The Gulf, Colorado & Santa Fe announced that it would continue to operate its own line, and was prepared to pay its current obligations as before.434
206 No sooner was failure announced than committees of bondholders sprang up. In Boston a committee was formed with six members, including J. L. Thorndike and H. L. Higginson. In New York the union Trust Company, the Mercantile Trust Company, the New York Life Insurance Company, Baring, Magoun & Co., and Giddes & Smith got together in a committee, with Edward King as chairman. A second New York committee, R. Somers Hayes, chairman, was formed by express invitation of the road. A directors’ committee was organized, of which E. B. Cheney, Jr., was chairman. The London holders of the second mortgage class A bonds themselves formed a committee. Even before 1888 Englishmen had invested heavily in Atchison, attracted perhaps by glowing stories of the business to spring up across the western plains. It was said that not only had they been influential in shaping the reorganization of 1889, but that from that date to 1893 the management had been controlled by a board elected by proxies entrusted to representatives of English interest. In particular Englishmen had become interested in the second mortgage bonds of 1892, successors to the income bonds of 1889, holding about one-half of the total issue, and they now fought for the protection of this issue as against the stock.
A plan of reorganization was early matured after the English influence substantially as follows: Either the general mortgage or the second mortgage bonds were to be foreclosed and a new company was to be formed. If the foreclosure should be under the general mortgage, overdue interest on that mortgage was not to be paid, and new securities, similar to the existing bonds, were to be issued, bond for bond. If the foreclosure should be under the second mortgage, the company was to provide for past due interest, and was to assume the payment of principal and interest on the general mortgage bonds. The capital stock was to remain as before. There was to be a new income mortgage to the amount of $115,000,000, of which $84,000,000 were to go for the existing second mortgage A bonds, and $5,600,000 for the existing B bonds; the surplus to be given for assessments, or for the securities of such auxiliary companies as it should be thought advisable to acquire. These income bonds were to bear 5 per cent and were to have voting power. There was to be a second mortgage, to amount eventually to207 $35,000,000; of which $5,000,000 were to be used at once to retire the floating debt and for other purposes, and $3,000,000 were to be used each year for improvements. The new stock was to be held in trust until 5 per cent per annum should have been paid in cash on the new income bonds for three consecutive years. Finally there was to be an assessment of $12 per share upon the stockholders, the proceeds of which were to go as far as necessary to pay the debts of the old company, including interest on the general mortgage.435
On the whole, the scheme was to put the Atchison back to the condition of 1889, and to regain the margin of safety afforded by the income bonds. So far it was acceptable enough. Conservative officers had looked askance at the income bond conversion in 1892, and this was a simple acknowledgment of the mistake. The old difficulty as to future capital requirements, moreover, was evaded by a provision for an annual increment of second mortgage bonds to take precedence of the incomes. The notable part of the scheme was the anxious care of the bondholders to protect themselves. Since their bonds had been converted from income bonds less than two years before they could not claim a large allowance for the reconversion; but as a condition of their assent to this and to the introduction of a second mortgage for $35,000,000 before their lien they demanded not only a bonus of 5 per cent in the new incomes for their holdings, but the grant of voting power to the income bonds, a stock assessment of $12 per share, and the interposition of an additional $5,000,000 of bonds between the stock and the property of which it was nominally the possessor. “It is true,” said the Railway Review, “that the scheme contemplates the issue of income bonds which shall be given to assenting stockholders at par in return for the cash assessment, but it is a little difficult to see wherein such bonds are of very much more value than the stock of the company except that they are not subject to assessment.”436 The reception of the plan was what might have been expected. On July 30, in London, the London bondholders’ committee met and passed a resolution in its favor. Having now secured, they said in substance, the substantial features for which they had contended, and although the plan was not altogether what they could have desired, they considered, after very prolonged and anxious208 negotiations, that a plan had been arrived at which was the best obtainable in the interests of bondholders.437 Meanwhile meetings of stockholders were held in New York in protest. Resolutions were adopted condemning the plan, and a stockholders’ committee was chosen.438
Debate was stopped by the publication in August of the report of an expert who had been selected to examine the books of the Atchison Company. Few more disgraceful instances of the juggling of figures have been brought to light in the history of American railroad finance. Whereas the reports of the company had shown net earnings steadily increasing from $7,600,000 in 1890 to $12,100,000 in 1893, being ample to meet existing charges and to pay from 2 to 2? per cent on the income bonds besides to the time of their conversion, Mr. Little, the expert, reported that the net earnings had never exceeded $8,085,608; and maintained that an annual deficit had occurred each year from 1894, which reached the portentous amount of $3,000,000 for 1891 alone. The condition of the company was far worse than had been imagined, and all plans had to be thoroughly recast. The following is an abstract of the report in question:
“I have already advised you verbally,” said Mr. Little, “that income was, in my judgment, overstated in these several years (since ’89), to the extent of $7,000,000 or more, and I now confirm this specifically. These overstatements may be classified as follows:
“(1) Rebates. For the four years ending June 30, 1894, the debits for rebates to shippers on the Atchison system aggregated $3,700,776, and on the St. Louis & San Francisco system $205,879, or a total of $3,906,656.
“This sum was charged, not to the earnings from whence it came, as it should have been, but to an account entitled, ‘Auditor’s Suspended Account-Special,’ and was reported from year to year as a good and available asset, while in fact it had no value whatsoever.
“(2) Additions to Earnings and Deductions from Expenses. Next in order of importance to the rebate account comes an aggregate of $2,791,000, which, on instructions from the East, was credited from time to time to the earnings and expenses respectively, but which credit has no foundation in fact. Of this aggregate $2,010,000 was209 added to earnings and $781,000 deducted from operating expenses, the sum of the two being debited to ‘Auditor’s Suspended Account.’
“(3) Improvements. The sum of $488,000 was in the period under consideration transferred, improperly as I contend, from Operating Expenses to Improvements or Capital Account, these Improvements being finally closed into the account of Franchises and Property, which represents the cost of the road and property.
“(4) Traffic Balances. It further appears that a traffic agreement for a division of business was formed in November, 1890 (running to July, 1891), between the Atchison Company and certain other companies, whereby such other companies were charged with a balance of $305,843, which the Atchison Company was unable to collect, and which is absolutely uncollectable, and should have been heretofore written off, though it still stands as an asset, and hence must be written to the debit of profit and loss.”439
Two facts appear from these charges on which emphasis was laid from different points of view: (1) That for four years the Atchison had been persistently violating the law by the granting of rebates. (2) That to conceal these rebates, and for other purposes, the books had been so systematically falsified as to defy detection, and to deceive not only the investing public but the whole railroad world. The report was handed to Mr. Reinhart, and an answer was requested by the following day. The answer was made, and proved inadequate; for though Mr. Reinhart pointed out some half-dozen items which he argued that Mr. Little had wrongly excluded, he explained no one of the charges directly brought against him.440 There is no doubt at the present time that Mr. Reinhart was guilty, though perhaps because of the difficulty of fixing legal responsibility he was never prosecuted for falsification of the books. He resigned, of course, and Major Aldace F. Walker was appointed receiver in his stead. Two months later he was indicted with other officers of the company and certain shippers, not for falsifying the books, but for the illegal granting of rebates. His defence was that he had been, at the time the rebates were given, only the general auditor at Boston, and had had no part in the fiscal or executive210 business of the road.441 The Government failed to prove connection, and the case fell through.
All this completely altered the requirements to be met by a reorganization plan. A more sweeping reduction in charges, and a more general distribution of losses was needed than before had been the case. Old proposals were laid aside once and for all, and a new scheme was built up from the beginning. The mortgage indebtedness of the Atchison in 1895 was $233,595,247, of which the first and second mortgage bonds comprised $217,258,276. The reorganization of 1889 had done its work in one respect at least, and the reorganization managers were able to concentrate their attention on two issues. The annual net earnings, according to the company’s reports had been:
1890 $7,632,348 ?
1891 7,631,598 ?
1892 10,953,896 ?
1893 12,126,866 ?
but as corrected in Mr. Little’s report were:
1891 $5,204,880 ?
1892 7,853,173 ?
1893 8,085,608 ?
1894 5,956,615 ?
Inasmuch as Mr. Little had discovered annual deficits of
1891 $1,964,285 ?
1892 60,938 ?
1893 134,825 ?
1894 3,008,242 ?
it was very evident that a reduction in interest charges was called for. As in 1889 the salvation of the company was sought in the substitution of securities on which payment was optional for securities bearing an obligatory charge.
Soon after Mr. Little’s final report in November three of the existing committees, namely, the General Reorganization Committee, the London Committee, and Messrs. Hope & Co. of Amsterdam, joined in a Joint Executive Reorganization Committee, with Edward King as chairman.442 With these now worked a committee chosen by the directors themselves. The result was a reorganization211 plan under date of March 14, 1895. The purposes announced were:
(a) To reduce fixed charges to a safe limit;
(b) To make adequate provision for future capital requirements, subject to proper restrictions as to issue of bonds for this purpose;
(c) To liquidate the floating debt, and to make adequate provision for existing prior lien indebtedness shortly to mature;
(d) To reinstate existing securities upon equitable terms in their order of priority;
(e) To consolidate and unify the system (so far as practicable) and thus to save large annual expense.
It was proposed to foreclose the Atchison general mortgage ... and to vest in a railway company the bonds, stocks, and other properties of the existing company, acquired at foreclosure sale or otherwise. The new company was to issue:
(a) Common Stock $102,000,000 ?
(b) Five per cent non-cumulative preferred stock ?111,486,000 ?
(c) General mortgage 4 per cent bonds ??96,990,582 ?
(d) Adjustment 4 per cent bonds 51,728,310443 ?
Of the above the interest on only the general mortgage bonds was to be a fixed charge;—the stock obviously got a return only when earned, and the adjustment bonds were income bonds in fact if not in name. Additional issues to a comparatively small aggregate were provided for, but no mortgage, other than the general and adjustment mortgages, was to be executed by the company, nor was the amount of preferred stock to be increased, unless the execution of such mortgage, or such increase of preferred stock, should have received the consent of the holders of a majority of the whole amount of preferred stock at the time outstanding, given at a meeting of the stockholders called for that purpose, and the consent of the holders of a majority of such part of the common stock as should be represented at said meeting. The securities mentioned were to retire all previously existing issues. Old common stockholders were to receive share for share in the common stock of the212 new company. They were to be assessed $10 per share, and to receive for the assessment $10 in new preferred stock, while a syndicate guaranteed payment of assessments by engaging to take the place of non-assenting or defaulting stockholders. The general mortgage bondholders were to get 75 per cent of their holdings in new general mortgage 4s and 40 per cent in adjustment 4s. The second mortgage and income bondholders were to be assessed 4 per cent and were to get new preferred stock.444 The prior lien bondholders were dealt with separately, and were to be paid either in general mortgage 4s of the additional issues (over the $96,990,582) mentioned, or in the new prior lien bonds. If in the latter, the general mortgage bonds which would otherwise have been issued were to be held for the ultimate retirement of these bonds. Provision was made for future construction and additions by the allowance of $3,000,000 general mortgage bonds, to be issued each year to a limit of $30,000,000, and then of $2,000,000 adjustment bonds, to be issued each year to a limit of $20,000,000. Additional new general mortgage bonds, up to $20,000,000, might be issued and used in such amounts respectively and in such proportions as the Joint Executive Committee might determine, for the acquisition of the Atlantic & Pacific, the St. Louis & San Francisco, and the Colorado Midland; and for like purposes $20,000,000 preferred stock. The lien of the new general mortgage was to cover all properties which should be vested in the new company, and also any other property which might be acquired by use of any of the new bonds, but the Joint Executive Committee might, in its discretion, except from the new general mortgage the stocks and bonds deposited under the existing general mortgage, representing branch lines, the operation of which should be found to be unprofitable and an unnecessary burden to the system. A voting trust was considered, but was rejected as unsatisfactory; and the213 committee confined its efforts to the securing of the best possible management.
The proposed fixed charges amounted to $4,528,547 ?
Net earnings according to Mr. Little had been in 1891 ?5,204,880 ?
1892 ?7,853,173 ?
1893 ?8,085,608 ?
1894 ?5,956,615 ?
Thus the new charges appeared well within the earning power of the road. The plan made the following, provision for cash requirements:
Assessment on Atchison stock at $10 per share $10,000,000 ?
Assessment on second mortgage and on income bonds at 4 per cent 3,567,644 ?
$13,567,644 ?
The estimated cash requirements were:
For receiver’s debt, preferred or secured floating debt of the Atchison Company, estimated as of January 1, 1895 $7,793,875 ?
Leaving for receivers and floating debt, accrued interest and undisturbed securities, etc., 773,769 ?
$13,567,644445 ?
This reorganization had certain interesting features. As before remarked, it sought, as did the reorganization of 1889, to replace securities, the interest on which was a fixed charge, by securities on which payment of interest or dividends should be optional. But whereas the earlier reorganization had depended on income bonds, this plan included both income bonds and preferred stock. There are several reasons why preferred stock is preferable to income bonds, and it will be remembered that a peculiar difficulty experienced from the income bonds of 1889 had arisen from the impossibility of putting other mortgages ahead of them; yet that this was not the chief obstacle sought to be avoided by the use of preferred stock at this later date appears from the current use of adjustment bonds. Provision for future capital requirements was in fact made in another way, and the question was not here involved. So far as the acceptability of the income bonds and the preferred stock respectively to the old bondholders was concerned, it should be noted that the men who received the greater part of the new issue were the holders of the old income and second mortgage214 bonds; that is, Englishmen who had already shown their preference for income bonds as opposed to stock. The chief reason for the new expedient seems to have been the desire to retain for the general mortgage holders a priority of lien, while reducing part of their holdings to the level of an optional obligation. If income bonds or preferred stock alone had been used, these would necessarily have been given to the owners both of general mortgage and of second mortgage or old income bonds; so that the former might have received a larger amount, but not any lien different in kind. By the scheme proposed, all possible interest on the securities given for old mortgage 4s was to be met before anything was to be paid on the equivalent of issues which had been inferior before the reorganization took place. Abundant provision was made for future capital requirements. That lesson had been learned once for all. Cash requirements were met by an assessment. In speaking of the reorganization of 1889 the rule was laid down that the disposal of securities for cash is impossible except at an enormous sacrifice in a time of general depression. There was widespread depression in 1895, and the reorganization managers wisely made no attempt to negotiate a sale. The amount of the assessment on the common stock was very considerably above the quoted price of the shares, but it was correctly figured that the hope of future increase in value would be sufficient to induce stockholders to furnish the sums required. Not to tax them too heavily call was made also on the junior securities. On the whole, the decrease of $5,000,000 in fixed charges more than compensated the stockholders for the additional obligations put between them and their property; their claim on the road itself was made more remote, but their chances for dividends were improved. Examination of the plan shows clearly that nothing was taken from either bonds or stock which those securities had a right to retain. The bondholders could not, in any case, have received more than the earnings of the road; and an amount equal to the return previously due them was assured, whenever the road should earn it, by the new combination of mortgage and income bonds and preferred stock. As it was, in return for an assessment they retained the right to participate in any future prosperity, a right which has proved of extreme value.
215 The plan was underwritten by Messrs. Baring Bros. & Co. and other strong foreign and American bankers, who assumed the liability of paying the assessment and of taking the stock.446 The comment at the time was favorable. “On the whole,” said the Railway Age, “we do not believe that any one who is acquainted with the properties could have expected a more satisfactory plan than that which the committee has evolved.”447 The London bondholders promptly accepted the plan. “We are disposed,” said the Railway Times of London, “to regard the latest of Atchison reorganization schemes as a praiseworthy attempt to grapple with a very thorny problem.”448 Such opposition as there was came from a minority of the stockholders, and was directed at two points: the prevention of foreclosure, and the inauguration of an entirely new administration. It was asserted that certain old members of the board of directors who had been forced to resign by the earlier disclosures, had nevertheless secured the election of successors to perpetuate their policy and to protect their interest. With a directory so constituted, it was maintained that the stockholders would have no guarantee of important changes in the executive offices, financial policies, or business methods of the company.449 Sharp criticism was directed to a statement of the existing board which referred to the “mistakes and misfortunes of the previous management.” “Only those who believe,” said the Stockholders’ Protective Committee, “that gross irregularities, if not worse, have been perpetrated ... may be relied upon to probe to the bottom the acts of the former officers of the Atchison.”450 On the other hand, the accusations of the committee were asserted by the directors to be unqualifiedly false.451 It soon became apparent that the opposition could not muster enough votes to control an election, and although their fight had been begun in August, they had proxies by November for only 250,000 out of the 1,020,000 shares of stock. Recourse was had to the courts, and an attempt was made to secure at least a minority representation on the coming board by the enforcement of a provision for cumulative voting embodied in a Kansas law of 1879. This failed in November, 1894, and no further obstacle to reorganization was encountered.
216 Practically all of the assessments were paid in by September 21. On November 25 Mr. E. P. Ripley was elected president, and in the first week of December, 1895, Mr. Aldace F. Walker was elected chairman of the board of directors of the new company. On December 10, 1895, the property and franchises of the Atchison were sold at foreclosure, and were purchased for $60,000,000 by Edward King, Charles C. Beaman, and Victor Morawetz, representing the reorganization committee.452 The Atchison, Topeka & Santa Fe Railroad Company was then organized by the purchasers pursuant to the laws of Kansas, under a certificate of incorporation dated December 12, 1895. A board of directors was elected, and by-laws were adopted. The entire estate embraced in the foreclosure sale was duly conveyed by deed of the same date as the incorporation of the company, in consideration of which the company executed a delivery to the Joint Executive Reorganization Committee of the securities acquired under the plan of reorganization. Certain subsidiary roads were subsequently foreclosed and bought in, notably the Atlantic & Pacific and the Chicago, Santa Fe & California. The St. Louis & San Francisco was not so bought in. “The question of retaining the St. Louis & San Francisco as a part of the Atchison system,” said the annual report of 1896, “received very careful consideration from the Directors.... A series of conferences was held, which resulted in the matter ultimately presenting the alternative of the sale of our existing interest upon favorable terms, or the purchase by us of all other outstanding interests upon terms involving the outlay of a very large amount of both cash and securities. While the future control of that road was regarded as important, the financial considerations affecting the situation prevailed, and the sale was decided on the whole to be more prudent than the purchase.” “With the acquisition of the Frisco,” said Mr. Fleming of the Joint Executive Committee, “the fixed charges on the Atchison system of 7780 miles would have been increased from $7000 to $9000 per mile. Atchison is financially much stronger without Frisco.”
This ends that part of the history of the Atchison Company which can be connected with either of its reorganizations. From 1895 to the present time the Atchison has enjoyed a rapidly increasing prosperity, due in part to the lightening of the charges upon it, in part217 to able management, and in part to the great increase in volume of business which has been a characteristic of the time. One or two things may be noted. A final settlement has been made of the relations between the Southern Pacific and the Atchison in the Southwest. It will be remembered that the final result of the negotiations in 1882 had been the purchase of the former Mojave division from the Needles to Mojave, but that since title could not be acquired until the maturity of the outstanding mortgages, Atchison had leased this track at an annual rental of 6 per cent on the purchase price. In 1897 this rental was cancelled. The Southern Pacific could not even then give a clear title, but exchanged a long time lease of the Mojave division against a similar lease of the Sonora Railway, the Atchison branch which reached from Deming to Guaymas. The rentals cancelled each other, and the actual transfer is eventually to take place.453 The arrangement is mutually advantageous. On the one hand the Mojave division formed a spur of the Southern Pacific, and on the other the Sonora Railway was totally disconnected from the Atchison, so that the latter company was obliged to use the Southern Pacific’s tracks to reach the property at all. In 1898 Chairman Walker of the Executive Committee was able to announce the substantial completion of negotiations for the purchase of the San Francisco & San Joaquin Valley Railroad, running from Bakersfield to Stockton, California; the former town being sixty-eight miles from Mojave and the latter something less than that from San Francisco.454 Atchison at once began building at the Stockton end, and reached San Francisco the following year. The Santa Fe Terminal Company was then incorporated with a capital stock of $1,000,000, Atchison secured a traffic contract with the Southern Pacific, and through freight trains were run from Chicago to San Francisco on May 1, 1900, through passenger trains following two months later. Besides this there have been important extensions in Arizona and New Mexico. In 1901 the Atchison purchased two-thirds of the bonds, and practically all of the capital stock of the Pecos Valley & Northeastern Railway Company, stretching 370 miles from Texico through the southeastern corner of New Mexico to Pecos City, Texas. In July of the same year it bought the Santa Fe, Prescott & Ph?nix Railroad, from Ash Fork, Arizona, to Ph?nix, Arizona,218 some 195 miles. Construction has been practically completed between Belen, New Mexico, a few miles south of Albuquerque, and Amarillo, Texas, to afford an alternative and somewhat shorter route from California to Eastern Kansas. A still more noteworthy project is under consideration for a road to join the Gulf, Colorado & Santa Fe at Brownwood with the Belen line at Texico, and to open direct connection over the Atchison from California to the Gulf.
Briefly stated, the Atchison’s mileage has increased from 6479 miles in 1897, to 9273 in 1907. Its gross earnings have grown from $30,621,230 to $93,683,407; its net earnings from $7,754,041 to $32,153,692; and its surplus above all charges from $1,452,446 to $21,168,724. This marvellous showing has been accompanied by heavy expenditures for improvements, so that the physical condition of the system is much better than before. Operating expenses, fixed charges, and taxes took less than 77 per cent of gross income in 1907, and a decline of over $21,000,000 can be suffered in net before interest on even the adjustment bonds becomes imperilled. It is not to be wondered at that Mr. Harriman saw fit to invest $10,395,000 of union Pacific money in Atchison preferred stock in 1906,455 nor that dividends of 5 per cent on preferred, and 5 per cent on common stock are being paid. The Atchison owns 1791 locomotives instead of 953 as in 1897; 1135 passenger cars instead of 622; 49,770 freight cars instead of 26,776. There has been a large increase in the capacity and power of rolling stock. The average freight train load has increased from 131 to 320 tons. Freight train mileage has grown but 35 per cent, while ton mileage has more than tripled. Thus, although the average length of haul has increased and the average receipts per ton mile have diminished, the earnings per freight train mile are actually more than double in 1907 what they were in 1897. And, finally, the Atchison is not dependent for its revenue upon any single kind of business. Coal, ore, and other mineral products yielded but 30.87 per cent of its tonnage in 1907; products of agriculture 25.34 per cent; manufactures 17.37 per cent; and products of the forest 12.12 per cent.
219 The capital account, meanwhile, has been kept from undue expansion. The funded debt has increased from $174,196,750 in 1897 to $284,171,550 in 1907, but the capital stock has decreased somewhat, and the greater part of the new bond issues have been convertible serial debenture bonds, which occasion no permanent increase in charges. It is within the last two years only that Atchison stockholders have authorized the issue of new capital on a scale commensurate with the growth of their property. In 1906 $26,060,000 in 4 per cent convertible bonds were offered to them at par, and this last year they have authorized the issue of $98,000,000 of common stock for improvements, extensions, and the like. This provides ample facilities for the future without endangering the solvency of the road.