PHILADELPHIA & READING
Early history—Purchase of coal lands—Funding of floating debt—
Failure—Struggles between Gowen and his opponents—Reorganization
—Second failure and reorganization.
The Philadelphia & Reading Railroad has been peculiarly unfortunate.
Although serving a region of abundant traffic, it failed three times
between 1880 and 1895, and was in the hands of receivers ten years.
It was reorganized after each failure, and each reorganization was
marked by bitter struggles between contending parties, due in part to
divergence in financial interests, and in part to personal rivalries.
In 1833 the Philadelphia & Reading Railroad was chartered by the
Legislature of Pennsylvania to build a road from Philadelphia to
Reading, a distance of 58 miles. Its early history does not concern
us. In 1862 it leased, owned, and operated 437.4 miles of track,
equivalent, roughly, to 119.4 miles of line; and derived $2,879,419
out of its gross earnings of $3,911,830 from the carriage of coal.
Its capitalization was extremely high, roughly, $193,417 per mile
of line,[155] and the necessary payments each year, not including
dividends, took up $1,454,635. At this time the road owned no coal
lands, but, like the Lehigh Valley Railroad and the Schuylkill Canal,
remained a common carrier, and relied upon the advantages of its
position in respect to the Southern coal fields to secure the tonnage
which it required.
From 1862 to 1865 inclusive the Reading enjoyed a period of extreme
prosperity. The Navy Department, during the war, required large
quantities of fuel, and in the revival of business after the conclusion
of peace the Reading took its part. Merchandise earnings increased from
$523,416 in 1862 to $1,165,277 in 1865; coal earnings from $2,879,419
to $8,627,292; and though expenses also increased, yet net earnings
grew from $2,375,247 to $5,236,655, and the balance of earnings, after
all charges had been paid, from $920,612 to $2,632,566. Dividends
meanwhile ranged from 14 per cent on the preferred stock in 1862 to 10
per cent on both preferred and common in 1866, though the majority of
the distributions were made in stock. On the whole, during the Civil
War and for a whole year afterwards, the Reading was able to carry
without difficulty the burden of an enormous capitalization. What
increase in capital occurred at this time was in stock, and did not
add to the load, although the desire to pay dividends on the increased
stock led to the piling up of new issues.
In 1869 an entirely new departure in Reading policy occurred. Whereas
the road had previously owned no coal lands, with the advent of Mr.
F. B. Gowen to the presidency it began to purchase on an enormous
scale. “The repeated and serious interruptions of the business of the
company,” said the annual report for 1871, “caused by strikers in the
coal regions during the last few years, and the many fluctuations
in the coal trade, produced by alternate periods of expansion and
depression resulting therefrom, have attracted the attention of the
managers of the company to the necessity of exercising some control
over the production of coal, so as to prevent a recurrence of the
difficulties heretofore experienced; and it was believed that the best
way to accomplish this result, without injuriously affecting individual
interests, was for the company to become the owner of coal lands
situate upon the line of its several branches.”[156] Further, it was
felt that some steps were necessary to retain for the Reading even the
coal tonnage which it enjoyed. In 1871 every rival carrier had invested
large sums in coal properties, and all the fields but the Schuylkill
and Mahanoy (western middle) were occupied, while carriers had begun to
enter the Mahanoy district, and it was reported to be their intention
to build lines straight through to the Schuylkill fields.
The anthracite coal regions of Pennsylvania lie in four main districts:
the Northern or Wyoming; the Southern or Schuylkill; and two smaller
intermediate fields known respectively as the Eastern Middle or Lehigh
region and the Western Middle or Mahanoy and Shamokin basins. The
Northern field is the more easily worked, and the Southern field is
the richer.[157] Between 1869 and 1881 the Reading Railroad and its
alter ego, the Coal & Iron Company, formed for the purpose, spent
$73,326,668 for lands in the Schuylkill and Western Middle districts,
securing 142 square miles, or 60 per cent of all the anthracite
lands of these districts, and 30 per cent of all in Pennsylvania. Of
the purchase money $69,816,204 were supplied either by the Railroad
Company or by sale of Coal & Iron Company bonds which the Railroad
Company guaranteed. The Coal & Iron Company incurred non-guaranteed
liabilities for the rest.[158] This gave ample resources for the
permanent supply of coal tonnage to the railroad, and was sufficient
also to give a considerable measure of control over production in the
Southern district. Independent operators did continue, however, and
the Reading coal was subject to the competition of coal from other
fields. More important still, in attaining control, “all kinds of coal
properties, good, bad, and indifferent, were purchased without regard
to original cost, location, or revenue producing capacity.”[159] In
1880 an engineer of reputation was appointed to evaluate the Reading
coal lands, and recommended the surrender of five properties that
originally cost $5,207,167, upon which there were encumbrances of
$5,015,000. “But little weight,” said he, “should be given to the
fear that rivals will possess the surrendered property; most of it
is not a tempting investment.” Exorbitant prices were paid for the
lands purchased. By 1881, as noted, there had been expended in all by
the two Reading companies $73,326,668. This same report said that,
“assuming the profit on the future coal product to be 30 cents per ton
of coal shipped, that the company will be able to reduce the rate of
interest on the money needed to hold and develop the property from 7
per cent to 6 per cent per annum, and that the development will be at
the rate just stated [outlined earlier in the report], the whole estate
has a value of $32,394,799: the company’s interest in the estate is
worth $30,630,648, and, including colliery improvements belonging to
the company, but situate on lands owned by others, the whole of the
company’s property is worth $31,197,484.”[160]
It is unquestionable that the Reading did acquire an enormously
valuable property in the decade succeeding 1870. It seems just as clear
that it paid more for this than was necessary; but what is perhaps
more to the point is the fact that the Reading paid more than it could
afford. Whatever the ultimate advantages to be gained by exclusive
possession of any considerable section of the coal fields, the Reading
was not large enough nor financially strong enough to make such vast
purchases within so short a space of time. The prosperity of the Civil
War had disappeared, net profits were fluctuating without marked
tendency to increase, the figures for 1870 being actually less than
those of 1863, while the interest on bonds had more than doubled since
1867, and the sum required for dividends had increased. To advance
$54,886,647 to the Coal & Iron Company under these conditions, and to
become responsible as guarantor for $14,929,557 more, would have been
ill-advised even had the prices paid by the company been in strict
accord with the commercial estimate of the time. Under the best of
circumstances returns from much of the property acquired could not
be secured for many years. The parts of the coal fields which were
worked yielded an income, though it was seldom that the collieries were
allowed to run to their full capacity; but those districts which were
bought for the sake of controlling the coal situation, or in order to
secure a future reserve, and which in many cases could not be worked at
existing prices, occasioned a drain upon the company to the amount of
interest on the purchase money, with no return of any kind. Moreover,
the purchase of the coal lands put the Reading in the anomalous
position of a railroad corporation interested in industrial lines. It
could no longer be content with encouraging the transportation of its
main source of revenue (coal), but had to care as well for the price at
which this coal was sold. When depression in the coal trade came, the
Reading lost both as producer and as carrier, for less was transported,
and that amount was sold at a lower price; but when good times came,
from which as a simple carrier it might have profited largely, it
struggled with conditions of over-production which should rightly have
been none of its concern. There was, finally, a peculiar fatality in
the time which the Reading chose for its expansion. The year 1873 will
always be remembered as one of the most disastrous in the history of
the United States. Commencing with the failure of Messrs. Jay Cooke &
Co. on the 18th of September, the panic spread with such rapidity as to
lead to the closing of the New York Stock Exchange on September 30. All
railroad securities were exceedingly depressed, call loans were high,
and it was nearly impossible to secure new capital. Business the next
five years was very dull, and the Reading actually earned less gross in
1879 than in the year before the panic, and this at the very time that
its liabilities were so largely extended. The natural result was the
financial difficulty which can be detected as early as 1876. In June it
appears that, owing “to the continued depression in the iron and coal
trades and the consequent falling off in transportation,” the road was
obliged to reduce its working force. In July the usual dividend was
passed; salaries were lowered in September, and still later a temporary
loan was secured to tide over the floating debt, which then amounted
to $8,272,359. By the next year the matter had become serious enough
to necessitate a formal proposition to creditors for the postponement
of interest payments and of payments on the floating debt. The company
professed itself able to carry out the following:
(_a_) To pay the interest on prior liens in full.
(_b_) To pay one-half the interest on the general mortgage bonds and
on the Perkiomen sterling mortgage bonds for three years in cash, and
one-half in five-year interest-bearing scrip, with the option to the
holder of receiving instead scrip for the three coupons first maturing
and cash for the rest.
(_c_) To pay for five years in scrip the interest on the debenture
bonds of both the Railroad and Coal & Iron Companies; the convertible
bonds of the Railroad Company, the bonds due in 1885, 1902, and 1918 of
the Tidewater & Susquehanna Canal Company, and so much of the rent due
to the Schuylkill Navigation Company as was applicable to the payment
of dividends to stockholders of the Company and to the interest upon
its mortgage loan of 1895.
(_d_) To suspend the drawings for the payments of sinking funds and of
the improvement and general mortgage bonds for a period not exceeding
four years, if so long a time should be required for the payment of the
floating debt.[161]
“The relief to be obtained from the above,” said President Gowen, “will
undoubtedly enable the managers, even with no improvement in traffic
or increase of rates, to meet the fixed charges on all obligations
of both companies other than those above named, and to pay off the
entire floating debt within such time as will be satisfactory to the
holders thereof.” Certain modifications were suggested by the London
securityholders, providing for trustees with some power to protect the
creditors,[162] and the plan went quietly into effect.
From now on matters went from bad to worse. The year 1878 showed a
falling off in almost every source of revenue, while expenses and
charges remained very nearly the same. Depression in the coal trade and
connection with the Coal & Iron Company, general dulness of business
after 1873, troubles with employees, over-capitalization, all had their
share in pushing the company still further into the mire. It became
unable to keep its share of the existing business, and the percentages
of the Schuylkill output carried by it steadily decreased from 83.49
in 1877 to 75.45 in 1881, while its percentage of the aggregate output
from all the anthracite region diminished from 32.82 to 24.44. “It
appears, therefore,” said the annual report for 1881, “that while
other companies have steadily increased their capacity of production
by regular and judicious expenditures for new openings, breakers,
machinery, and other facilities for mining and delivering coal, the
Reading Company has apparently remained stationary.... For this policy
the local officers in charge are not probably responsible, as it
was undoubtedly forced upon them by the management, because of the
impoverished and embarrassed condition of the company’s finances.”[163]
Throughout 1879 there was trouble over the payment of wages, perhaps
as good a sign of financial difficulty as can be desired. Employees
were paid in scrip, not cash, and even scrip wages were left overdue.
President Gowen went to Europe toward the middle of the year, but not
at all, as he carefully explained, in order to place a new loan, or to
transact any business except a little in relation to some railroads for
the company; in fact, the condition of the Reading was an open secret,
and new loans were impossible to obtain. In May, 1880, the New York and
Philadelphia banks began to refuse further accommodations. At the same
time the period during which, according to the agreement of 1877, cash
payment of general mortgage coupons was suspended, drew to a close, and
on May 21 the Philadelphia & Reading announced its inability to meet
its obligations. As was said at the time, the company did not fall with
a crash because it had not far to fall.
The failure occurred on May 21, and on May 24 Messrs. F. B. Gowen
(president of the company), Edwin A. Lewis, and Stephen A. Caldwell
were appointed receivers. Their resources were scanty and they had
to do with them as best they could. On the one hand they applied to
the court for authority to borrow $1,000,000 to pay the wages of
employees and interest falling due July 1, and on the other they cut
down expenses by reducing the working force in the repair shops, by
putting the shops on short time, by discontinuing many of the trains on
different lines, and by ceasing all dead work at the collieries.
Before any plan could be proposed for the rehabilitation of the
company the condition of its finances had to be known, and this again
the receivers took in charge. Their report in June, 1880, showed
a sufficiently serious state of affairs. The floating debt of the
Railroad Company had mounted up to $10,254,766, besides $1,900,482
more for the Coal & Iron Company. This represented an increase
of $3,604,000 as compared with November 30, 1879, and an English
bondholders’ committee declared that only $2,930,000 of it were
represented by value.[164] The rest had apparently been incurred in
desperate attempts to preserve the solvency of the company. The total
liabilities of the Railroad and Coal & Iron Companies, including
mortgage, debenture debt, floating debt, and miscellaneous items, but
excluding stock, were $152,436,890. The deduction from these figures of
the Coal & Iron bonds held by the Railroad Company, which would have
constituted a duplication of indebtedness, left a total of $106,215,830.
The stock of the two companies amounted to $42,278,175, and the
stock in the hands of the public to $39,278,175. The grand total of
liabilities was thus the enormous sum of $145,494,005. The charges for
interest and sinking funds were $7,542,094, and the annual payment of
$5,629,764, due on $87,558,482 of railroad bonded indebtedness, shows
that the rate of interest upon the bonds was high. The net revenue was
$5,494,979, and there was therefore a deficit of $2,047,115. Meanwhile
the Coal & Iron Company had reported a regular deficit up to 1880,
which, though not significant in itself, because of close relations
with the Railroad Company and the impossibility of determining how
much the Coal Company’s rightful profits were reduced by exorbitant
transportation rates, yet made it very clear that from this source the
Railroad Company could expect no aid toward the cancellation of the
railroad deficit revealed.
The combined companies were unable to earn their fixed charges: the
continuation of the struggle to do so was sure to mean, as it had in
the past, merely a piling up of the floating debt. The coupon-funding
scheme of 1877 had shown the inevitable result of temporary measures of
relief; and though business in 1880 was rapidly improving, there was
need for a radical reduction in the burden resting upon the company.
Pending action, a bill for foreclosure was introduced under the general
mortgage of 1874.[165] A valuation of the Reading coal properties, to
which reference has already been made, was started. It was entrusted at
first to Mr. S. B. Whitney, chief engineer of the Coal & Iron Company,
and to Mr. Frank Carver, the land agent; but was later given over to
Mr. Joseph S. Harris, chief engineer of the Lehigh Coal & Navigation
Company, in order to have the opinion of an unprejudiced expert.[166]
The first suggestion for a plan of reorganization came from England.
The consolidated mortgage, prior to the general mortgage, was to be
foreclosed; general mortgage bonds were to be deprived of their right
to sue or to foreclose; all unsecured bonds and junior mortgages were
to be exchanged for preferred stock; and a $15 assessment was to be
levied upon the stock, for which collateral trust 7 per cent bonds were
to be given. This assessment was relied on to pay off the floating
debt, and the new company was to start free, with but $33,564,000 of
mortgage indebtedness.[167]
This plan was a step in the right direction. It recognized the validity
of prior liens, followed a sound principle in providing for the
floating debt by assessments upon the stock, and relieved the company
from the likelihood of a future failure by its treatment of the general
mortgage bonds; but it was weak in that it reduced the general mortgage
to the anomalous position of a bond entitled to a fixed return without
the power to enforce it. Stockholders, moreover, objected strenuously
to the assessment, maintaining that business conditions were now such
as to make milder measures sufficient.
In October, 1880, Mr. J. W. Jones, formerly vice-president of the
Reading Company, urged that an assessment on the stock was not
necessary, and proposed the following:
(1) To convert the income, debenture, and convertible bonds and scrip
into second preferred stock bearing 5 per cent interest if earned;
(2) To issue $15,000,000 of first preferred stock, with which to retire
the floating debt;
(3) To scale the Coal Company mortgage bonds $200,000 per annum,
which could possibly be done by consent of holders, if not, then by
foreclosure.[168]
The main difference between this and the English scheme lay in the
treatment of the floating debt. It is improbable, however, that the
substitute which this plan offered would have been sufficient, and that
the preferred stock could have brought $66, at which price alone it
would have covered the floating debt. Reading common stock was selling
in the middle of the month at 16⅜; general mortgage 6s were bringing
only 74¼, while debentures and convertible 7s were being quoted at 28
and 37 respectively.
In October a representative of the English bondholders arrived in
Philadelphia for the purpose of examining into the condition of the
company, and the following month agreed with the board of managers
upon a reorganization committee to act in the United States. “The
probabilities are,” said this gentleman (Mr. Thomas Wilde Powell),
“that it will be found that the bondholders in London will be willing
to do as they did in the case of the Erie, that is, fund a reasonable
number of coupons ... for the purpose of setting at liberty a portion
of the revenue to pay unfunded claims.”[169] The next move in the
reorganization of the company came, however, not from this committee
but from President Gowen, the man who had led the Reading into the
purchase of coal lands, and who still remained in office in spite of
the hostility shown toward him. His scheme comprised two parts: the
first an issue of income bonds with which to pay off the floating debt
(together with $5,000,000 mortgage bonds); the second a grand general
mortgage to retire existing indebtedness. The plan in more detail was
as follows:
(1) The company was to create $34,300,000 deferred income bonds, on
which interest was to be deferred to a dividend of 6 per cent on the
common stock. After this amount had been paid the bonds were to take
all revenue up to 6 per cent and were then to rank _pari passu_ with
the common shares for further dividends. The debentures were to be
issued at 30 per cent of their par value, or $15 per bond; and before
selling or disposing of said bonds in the market the option of taking
a _pro rata_ share was to be first offered to the stockholders of the
company.[170]
(2) A more permanent relief for the company was to be obtained
from the proposal to issue a new long time or perpetual 5 per cent
funding mortgage of $150,000,000, divided into two classes, A and B,
of $75,000,000 each: class A having priority of lien and interest
charge over class B. With this issue it was proposed, by purchase or
exchange, to retire all outstanding indebtedness, and to acquire by
purchase the securities of the companies owning the leased lines. It
was estimated that $140,000,000 of the new issue would provide for all
of this, the total interest on which would be $7,000,000, as against
fixed charges for interest, sinking funds, and rentals, of $10,657,116,
making an annual saving of $3,657,116.[171] Mr. Gowen did not expect
to secure so large an annual reduction, owing to the impossibility of
purchasing the higher securities and the probable appreciation in value
of the lower ones; but he did expect to realize in all a saving of some
$2,700,000.
In part this plan was commendable; in part it was inadequate, and
in part it relied on a mere juggling with words. The proposal to
unify all classes of indebtedness by a grand consolidated 5 per cent
mortgage was a good one, both in the simplification of accounts which
was to be expected, and in the reduction in fixed charges so far as
this reduction went; but on the one hand a reduction of $2,700,000
in charges was too little for a company which had reported for that
very year a deficit of $2,000,000, and on the other hand too little
allowance was made for the difficulty of forcing securityholders
without a foreclosure sale to submit to a definitive scaling down
of their holdings, with not even a preferred stock to show for the
sacrifice. In its handling of the floating debt, the plan was a
second edition of Mr. Jones’s stock-selling scheme, with all the good
points left out. What justification there could have been for calling
securities, such as the deferred incomes, “bonds,” which were to
be issued for no definite time, ranked even after the common stock
for dividends, and were of such doubtful character that Mr. Gowen
himself proposed to sell them for one-third of their face value, does
not appear; unless it be that the lack of voting power, itself a
disadvantage, entitled them to the more respected name. The deferred
income bonds were a device for saddling the holders of the unsecured
debt with a worthless certificate which they might be induced to accept
because of its name, and to which not even the Reading stockholders
could object. Furthermore, even if the creditors had been eager for
this new issue, in itself it would not have been sufficient. The issue,
if taken up, would have yielded $10,200,000. It was proposed besides
to sell $5,000,000 of unissued general mortgage bonds, which, after
the success of the deferred income bonds, it was presumed would sell
at par. Income bonds and general mortgage together promised a total
of $15,200,000, or more than $1,000,000 over cash requirements after
commissions had been paid.[172]
However poor the prospect, there was no lack of syndicate guarantee.
In November, 1880, a London syndicate agreed to deposit with an
American bank, to be named by the company, the sum of $2,058,000,
to be forfeited in case they failed to take at the issue price all
deferred income bonds not taken by the shareholders. This syndicate
further agreed that the company might retain, up to $1,000,000, out
of the deposit money, whatever might be necessary to make up a second
instalment of $4 on such neglected bonds.[173] Nothing was asked from
the company in return except the chance to sell the bonds purchased
at a premium. “As long as the bond- and shareholders find the money,”
remarked the London _Times_, “there is nothing to be said. In all
probability, however, these deferred bonds will become a medium for the
very worst kind of gambling, and their chances for a dividend appear to
us to be very small.”[174]
In December Mr. Gowen’s plan received the approval of the American
committee and of the board of managers of the company. Bondholders were
in no way injured by the worthlessness of the deferred income bonds,
and only the most far-sighted could be expected to have demanded a
larger reduction in their claims. The same month a meeting of London
bond- and shareholders passed unanimously a resolution expressing
confidence in President Gowen, and adopting his scheme.[175] Opposition
came from the influential London banking firm of McCalmont Bros., and
the struggle centred about the annual election set for January 10,
1881. The last of November or first of December President Gowen issued
a circular in which he said: “As I am about to visit Europe on business
of the company, and as it is possible that I may not return until the
first week in January, I think it proper to call your attention to
the fact that it is highly important that all shareholders who can
possibly do so should attend the annual meeting in Philadelphia on
the second Monday in January. An effort will undoubtedly be made at
the next election to control the management of the company in the
interest of rival lines, and if the effort is successful the future
of the Philadelphia & Reading Railroad Company will be little, if
any, better than that of the Philadelphia & Erie Railroad Company, or
of the Northern Central Railroad Company.”[176] In Europe, or, more
strictly speaking, in London, Gowen busied himself in placing his
deferred income bonds, with apparently a very considerable measure
of success. As to the result of the coming election he professed
absolute confidence. It made little difference, said he, which way
the McCalmonts decided to vote their shares. He could be elected
without any English votes at all, and with the backing of the English
bondholders who had resolved to support him, the matter was not at
all in doubt.[177] On January 4, six days before the date set for the
election, Gowen actually issued a prospectus for his new income and
mortgage loans, and cabled to Vice-President Keim that he was satisfied
that he could dispose of the general mortgage A bonds at 110 and the
general mortgage B bonds at par.[178]
Meanwhile in America both parties had recourse to the courts: the
McCalmonts, to prevent the issue of the deferred income bonds, and
the friends of Mr. Gowen to get the election postponed in order to
give the president time to return from Europe. The latter suit was the
first decided. Judge McKennan, of the United States Circuit Court,
refused to grant an order, but unofficially advised postponement. The
board of managers therefore withdrew the notice of the annual meeting,
and on January 12 voted to postpone it indefinitely. Counsel for the
McCalmonts then made application to the Court of Common Pleas in
Philadelphia for a mandamus to compel the board to call a meeting. They
obtained a peremptory mandamus on January 24, but accepted the date of
March 14 as satisfactory, and forbore further proceedings.
The matter of the deferred income bonds was complicated by a full and
complete authorization which Mr. Gowen had before obtained from the
Circuit Court for the issue of his bonds. The request of the McCalmonts
was twofold: the court was prayed to revoke the previous decree, and
to enjoin any further action in the negotiation or consummation of the
said scheme; or, failing this, to direct the officers of the company
and the receivers to refrain from the issue of the bonds until the form
thereof should have been settled by the said court, and also until
deposit with the receivers should have been made of the $2,058,000
provided as a guarantee.[179] The first request sought a prohibition
of the issue; the second attempted to delay the negotiation of the
bonds until the annual election should have passed and the McCalmonts
should have had a chance to obtain control. The immediate result was
the transference to Philadelphia of the $2,058,000 guaranteed, from
its place of deposit in London. In February the McCalmonts obtained a
revocation of the original grant of authority for the deferred income
bonds, a continuance of the suit for a preliminary injunction, and
an order restraining the respondents from “making any agreement or
ordering any act by which the Philadelphia & Reading Railroad Company
[might] be definitely bound touching the deferred bond plan or the
proposed mortgage loan of $150,000,000.”[180]
In January the Coal & Iron Company quietly held its annual election,
and chose Mr. Gowen president. As the time for the postponed election
of the Railroad Company came round, the activity of both sides became
intense. Both Gowen, who was still in London, and the McCalmonts issued
calls for proxies. The former appealed to the shareholders to save
the property from passing into the hands of the Pennsylvania Central
Railroad Company, which he said was believed to be the ruling power
behind the McCalmont litigation. The latter objected vigorously to this
charge, and pointed out that the Reading managers held only 16,500
shares of the company’s stock, and that some of them had barely enough
to qualify them for the positions which they held.[181] The McCalmonts,
furthermore, applied to the courts for an injunction to prevent Gowen
from voting on the shares pledged as collateral for the floating
debt. They maintained with some justification that these shares could
not legally be voted, and that it was particularly illegal for the
president to use them to elect himself.[182]
On March 12 the Court of Common Pleas issued a decree regulating the
conditions under which the election should be held, providing for the
separate count of votes of shares transferred three months before the
election, and for the ultimate reference of all disputed points to
the Court. By this time Mr. Gowen had become alarmed at the apparent
strength of the McCalmonts, and had come to realize that a possible
disenfranchisement of a part of his own holdings on the ground of too
recent transference might lessen his chances of retaining control. He
recalled, however, that the annual meeting had been postponed from
January 10 to March 7, and finally to March 14. This, it occurred to
him, might transform it from a regular to a special meeting, and might,
according to the terms of the company’s charter, make necessary the
presence and vote of a majority of all the shares outstanding, instead
of a simple majority of all the shares on hand. If this should be true
a disenfranchisement of his holdings would be of less importance; for
whether disenfranchised or not, these would form part of the total
shares outstanding, of which an absolute majority would be required.
On March 12, two days before the appointed date, Mr. Gowen issued a
letter to the shareholders. “I hold,” said he, “up to the present time,
the proxies of 1921 shareholders of the company, owning 359,500 shares
of the capital stock, being very considerably more than a majority of
all the shares.... Of the shares for which I hold proxies, so large
a proportion, however, may possibly be disenfranchised by failure to
register, that if the legal meeting of the stockholders is held on
Monday next, and it should subsequently be determined by the Court
that three months’ prior registry is essential to confer the right of
voting, it may be possible that the wishes of the great majority of
_bona fide_ shareholders may be overruled by a minority.... I have
determined to abstain from attending the meeting, and I earnestly
request all shareholders who support the present management to absent
themselves from the meeting on Monday, and thus to give legal effect
to their wishes by making it impossible for the minority to secure the
attendance of a quorum....”[183]
Mr. Gowen’s friends, English and American, followed his suggestion;
and at the meeting on Monday but 211,095 out of 687,663 registered
shares appeared to vote. The immediate result was the almost unanimous
election of Mr. Bond, the candidate of the McCalmonts, which was
followed by litigation on the part of Mr. Gowen, disputing the legality
of the election. By the terms of the decree under which the election
had been held, the matter came first before the Court of Common
Pleas, which, on April 9, decided that the meeting had been a legal
one, and that the officers then voted for by the McCalmonts had been
duly elected. With the above court ranged against him, Mr. Gowen took
appeal to the Supreme Court of the state, and meanwhile declined to
surrender his position. On April 11 the new board proceeded to the
Reading offices in Philadelphia, made formal demand for admittance, and
were refused. On April 22 President Bond issued formal notice of his
election. An injunction was asked against Mr. Gowen, but was held back
until the Supreme Court should have taken action. Meanwhile the old
board of managers announced that if a decree supporting the decision of
the Court of Common Pleas should be rendered they would make no further
opposition; and the transfer agents of the company in Philadelphia
and New York refused to transfer any stock until the dispute should
have been settled. On April 19 an order of the United States Court
interfered with Mr. Gowen’s exclusive possession, and compelled him
to furnish to Messrs. Frank S. Bond, etc., suitable accommodations
in the offices of the Philadelphia & Reading Railroad Company, with
free access to all books and papers. In May the Supreme Court rendered
its decision, holding the meeting of March 14 to have been a regular
meeting, and a majority of all the stock outstanding not to have been
required for a quorum. Gowen asked for a rehearing, which was denied,
and in June, nearly four months after the election, he grudgingly
acknowledged Mr. Bond and his associates as the legally elected
president and board of managers.
During all this time the deferred income bond scheme had not remained
untouched. In April, 1881, on application of the McCalmonts, the
United States Circuit Court at Philadelphia had granted a preliminary
injunction against it. “Whatever power the defendant has in the
premises can only be found in the general authority to borrow money,”
said Judge McKennan, and went on to state that the issue did not
constitute a loan, because a loan implied reimbursement, and the income
bonds were redeemable at no special time.[184] Mr. Gowen promptly
proposed to make them redeemable, and insisted that this made them
still more desirable. A week later the $150,000,000 general mortgage
was also enjoined.[185]
Once out of the presidency Mr. Gowen endeavored to induce the
McCalmonts to accept his plan. If they would adopt the deferred income
bond scheme, he said in an address to shareholders, he would resign the
receivership of the road at once, give bonds never to stand for the
presidency again, and further coöperate with them in selecting a new
board of directors. As an alternative he offered to buy the McCalmont
shares at $40 each, and threatened to beat that party at the next
election if it refused.[186] In September he assured the stockholders
that he could without difficulty put the road upon its feet. “If Bond
and his colleagues will resign and reinstate the old management,” he
cabled from London, “and advise me by cable of the change, I can,
before sailing on Saturday, procure sufficient advances against the
proceeds of preferred [deferred?] income bonds and new 5 per cent
consols to pay the floating debt, receivers’ certificates, and all
arrears of interest.”[187] Finally, appealing to Mr. Bond direct, Gowen
made formal application that the new board should adopt his plan after
changing the form of the proposed obligations by making them payable in
100 or 200 years.[188] Bond refused. He pointed out that the deferred
income bondholders would be in constant conflict with the management
in their endeavor to secure dividends on their holdings, and would
attempt to prevent proper and necessary expenditures upon the property
from current net revenues. He declared that it was questionable whether
the company had authority to sell its unsecured obligations below par,
and that in any case the process would be enormously expensive; and,
further, that the language of the obligation did not limit the payment
of interest to the source of net revenue only, but might be construed
to compel the declaration of 6 per cent on the income bonds whenever
6 per cent should be paid on the common stock.[189] Failing in his
attempts to win over his opponents, Gowen turned his energies toward
securing their defeat.
Meanwhile President Bond brought forward a plan of his own. He had
grasped three points of weakness in Gowen’s scheme, namely,—
(1) The issue of a mass of worthless obligations in the deferred income
bonds;
(2) The high level of fixed charges which a $150,000,000 5 per cent
mortgage entailed;
(3) The lack of any security which had a right to interest only when
earned, and which might be given to the bondholders in return for
sacrifices which they would otherwise refuse to make.
He proposed, therefore, to create a general consolidated mortgage
to cover all the property of the Reading Railroad and Coal & Iron
Companies, together with the interest of both companies in all other
corporations and property, whether owned or controlled by lease or
otherwise. This mortgage was to be junior to the consolidated and
to the improvement mortgages only, but was to contain a provision
by which, as bonds under these senior mortgages should be retired,
additional bonds might be issued under the new mortgage, which was
eventually to become a first lien upon all the properties of both
companies.[190] The total was to be $150,000,000, to be divided into
two series: of which series A, for $90,000,000, was to run for fifty
years, and was to have a prior lien over series B upon the revenues
for interest at the rate of 4½ per cent, with a right to enforce
foreclosure in case of a twelve months’ default; and series B was to
run sixty years, and was to carry interest at 3 per cent, with a right
to enforce foreclosure in case of a three years’ default. In prosperous
years series B might receive more than 3 per cent: thus the mortgage
provided that from current net revenue applicable to dividends it
should get 1½ per cent additional interest before any dividend should
be paid on the stock of the company; after that 3 per cent might be
paid on the capital stock, and then 1½ per cent additional might be
paid on series B; it being understood that the interest in excess of
3 per cent should not be cumulative, but was to be paid only from
current net revenues of the company otherwise applicable to dividends.
These two issues of unequal worth were to be used for different
purposes. Series A was to be in part reserved to retire the senior
obligations, and in part to be sold to pay off the general mortgage
bonds, the general mortgage scrip, the income bonds, the floating debt
of the Railroad and Coal & Iron Companies secured by collateral, the
receivers’ obligations, and the mortgages on real estate that could be
paid off. Series B was to be exchanged for the junior obligations, such
as the debenture or convertible loans, or was to be held in reserve
for subsequent acquisition of the guaranteed stock or obligations of
affiliated corporations of the Railroad and Coal & Iron Companies.
What this meant for the immediate future was that all prior liens
were to remain untouched, while everything from the general mortgage
down was to be funded into the new obligations. In some ways this
resembled the earlier scheme of Mr. Gowen, since in each case there
was to be a $150,000,000 general mortgage in two parts, of which one
part was to have priority over the other, and in each case this grand
mortgage was to be used ultimately to retire all previously existing
indebtedness. An innovation was now made, however, in the difference
introduced between the two series. In Gowen’s scheme the amount of
each series was to be the same, and each was to fare alike, except
for the priority of series A; in that of President Bond, series A was
to be half again as large as series B, and was to bear a higher rate
of compulsory interest; although, a point of extreme importance, the
return upon series B was to run from a minimum of 3 per cent to a
maximum of 6 per cent whenever the road should earn it. Thus President
Bond gained two things: he reduced the rate of interest which his
new bonds could claim in any year from 5 per cent (as under Gowen’s
scheme) to an average of something under 4 per cent, which would yet,
in prosperous times, net them as much as the old bonds surrendered; and
as a still further concession, he gave to the 3 per cent bonds a term
of sixty instead of fifty years, raising their value to that extent.
As the various existing issues of bonds had different market values,
he thought it proper to equalize these values in the exchange by the
grant of a bonus in stock, for which the capital stock of the company
was to be increased one-third. Here were two of Gowen’s problems in a
fair way of solution: the reduction of fixed charges was accomplished,
while some incentive was given to the junior bondholders to assent.
Scarcely less from the point of view of sound finance was the gain
from the abandonment of the anomalous deferred income bond scheme,
with its $34,300,000 of worthless speculative securities. Instead,
the floating debt, under President Bond’s plan, was to be cared for by
the sale of series A bonds, not at one-third their face value, but as
near par as possible; by the best of the company’s new securities, in
other words, and not by the worst. And, finally, the acquisition of
the securities of subsidiary roads was provided for rather ingeniously
by the conversion into series B bonds of $10,527,900 convertible 7 per
cent bonds, against which had perforce been reserved an equal amount
of stock. Conversion released the stock, which became a free asset
available for any uses to which the company saw fit to apply it.
Yet while the advance which the plan of President Bond marks over
that of President Gowen may be recognized, its defects must also
be observed. It was, in the first place, in common with all other
schemes suggested, too mild, too little drastic in its operations.
The condition of the Reading companies was desperate in the extreme.
By President Bond’s own figures the previous five years had shown a
deficit of $11,479,217, or an average loss per annum of $2,295,853.
The net earnings for 1881 by the same computation had been $8,418,009,
and the fixed charges $11,265,666.[191] What was needed was a radical
scaling down of indebtedness, to take effect not in the far distant
future but at once. President Gowen, face to face with a similar
situation, had evolved a reduction in fixed charges from about
$11,000,000 to about $7,000,000, but had explained that, owing to
the impossibility of retiring all of the prior liens at once, the
actual figures would be approximately $7,957,000. President Bond, less
optimistic, or more honest, stated that the ultimate charge under
his plan would be about $6,000,000; but that the immediate reduction
would be to about $8,339,000 only, scarcely more than $100,000 below
the net earnings of the current year. Both estimates would probably
have been under the mark; but the relief which President Bond proposed
was utterly inadequate even on his own showing. A margin of surplus
earnings which could be wiped out in a single month was no answer to
the demand for a restoration of the Reading companies to solvency.
In regard to the floating debt, too, Bond’s plan left something to
be desired, in that it provided for no assessment, but cared for the
floating obligations by the sale of bonds. The danger in relying
upon the sale of securities to supply the cash requirements of a
bankrupt road has been mentioned in connection with Mr. Gowen’s
scheme, as indeed at other times before. At best it is advisable only
in prosperous times, and when the bonds offered are of high grade;
and though the series A bonds might perhaps have been considered high
grade, the prosperity of 1880 was not repeated in 1881, and a year of
bankruptcy and litigation had not improved the Reading’s credit. That
the plan failed, however, was due neither to its inadequacy nor to its
method of dealing with the floating debt; but rather to the resolute
and uncompromising opposition of Mr. Gowen and his friends, and to the
determination of the junior securityholders to stand out for better
terms. This twofold resistance caused a syndicate of bankers, which had
been relied upon to place the new loan, ultimately to reject it, and
the plan fell through.[192]
To return now to Mr. Gowen. This gentleman had been strengthening his
following in every possible way, and had secured one ally of particular
importance in the person of Mr. Vanderbilt, who in October, 1881, was
reported to be buying largely of the company’s stock. Early in November
Mr. Gowen and President Bond both issued addresses to the shareholders.
The former maintained that although the present management had been
in power for over four months it had done nothing to extricate the
company from its difficulties, and promised that if elected he would
“retain the office long enough to place the company in a good financial
condition, by completing the issue of deferred income bonds and by
issuing and selling the 5 per cent consolidated mortgage bonds, the
result of which will be the resumption of dividends upon the company’s
shares.”[193] The business prospects of the company were never better,
he continued, and the wisdom of the purchase of the great anthracite
coal estate was being demonstrated. Bond, on the other hand, alluded to
the failure of Mr. Gowen’s many promises, to the wasteful expenditure
of money, to the coal speculations in which the road had been engaged,
to the payment of unearned dividends, and to other points of Gowen’s
policy, actual or alleged;[194] and his statements were repeated by the
McCalmonts in spite of Mr. Gowen’s vehement denials.[195]
The election was held from January 9 to January 14, 1882. There were
cast 493,601 votes, of which Gowen received 270,984 and Bond 222,617; a
result mainly due to the 72,000 Vanderbilt shares voted for Mr. Gowen.
The same meeting approved by resolution Gowen’s financial plans, and
called on the incoming board of managers to carry them into effect. To
clear the way a test suit was brought in the Supreme Court of the state
of Pennsylvania, and a close decision obtained favoring the issue.[196]
Counsel for the McCalmont Bros. petitioned in the Circuit Court for
leave to withdraw their complaint, stating that the McCalmonts had
disposed of almost all their holdings, and the Circuit Court vacated
the injunction which it had previously granted.[197]
Gowen’s plan was now triumphantly brought forward, with the few
alterations which time had suggested. There was to be as before a
deferred income bond issue of $34,300,000, which was to retire the
floating debt; the general mortgage was to be increased in amount
from $150,000,000 to $160,000,000, but was still to be divided into
two series, equal in amount, and differing in privileges only on the
point of priority of lien; of which series A was ultimately to exchange
for the senior, series B for the junior obligations of the company.
$13,500,000 of the first series and $10,000,000 of the second series
were to be put out at once, and $4,000,000 convertible adjustment
scrip were to be issued to settle back coupons. Time had apparently
made more modest Mr. Gowen’s estimate of the saving to be secured; for
instead of not more than $7,000,000 as before, he now hoped for fixed
charges of not more than $8,000,000; but with undaunted optimism he
made up for this admission by glowing pictures of what the company in
the future was going to earn. “Net earnings last year” (1881), said
he, “were over $10,000,000—in 1882 they may be expected to reach
$11,000,000, and they will before long be over $12,000,000. With net
earnings of $12,000,000, and fixed charges of $8,000,000, there will
remain a dividend fund of $4,000,000, equal to 6 per cent on the share
capital, and 6 per cent upon the par, or 20 per cent upon the issue
price, of the deferred income bonds. “In order to get the property out
of the hands of the receivers an earnest effort was made to sell the
$13,500,000 series A bonds of which mention has been made, but at the
minimum price of 98 subscriptions for but $723,500 were received, and
the company was obliged to have recourse to the $5,000,000 unissued
general mortgage 7 per cent bonds, which it fortunately had at its
disposal. Even before this the management had been forced to abandon
any immediate attempt to retire the old general mortgage bonds,[198]
and had been compelled to answer inquiries as to the reasons for a
decline in the price of the deferred income bonds. On February 28
the receivers of the Railroad and Coal & Iron Companies formally
surrendered the control of the property to the officers of those
corporations.
One of the first acts of the reconstructed company was the lease for
999 years of the Central Railroad of New Jersey. This road in many
ways formed a natural complement to the Reading system. Like it, it
was a coal road, carrying something less than half as great a tonnage
as the Reading itself, and owning extensive coal lands in the Wyoming
region; while in location it supplied the necessary connection between
the Reading lines and New York. At a later date Mr. Joseph S. Harris
testified that all the business of the Reading coming from the South or
Southwest went to New York over the Central; while, on the other hand,
business from the Northwest was carried by the Jersey Central from
Scranton, where its lines began, to Bethlehem, and was there handed to
the Reading for transportation to Philadelphia.[199] The advantages
of the Central to the Reading were thus enumerated by General Traffic
Manager Bell in 1885: “The joint traffic with the Central Railroad,
outside of coal, and outside of passengers, adds $1,500,000 to the
revenue of the old Reading system. By means of the Lehigh & Susquehanna
division of the Central Road we extend from Phillipsburg to Scranton
or Green Ridge through the entire Lehigh Valley; that system feeds
our North Pennsylvania line; it is our connection for the Catawissa
system by way of Tamanend and Tamaqua; it is the connecting link in
the cross line or Allentown system; it creates the shortest line from
interior Pennsylvania, and from Northwest Pennsylvania to New York
waters. Through the operations of the lease we reach the largest slate
territory in Pennsylvania, and the largest iron producing furnaces
anywhere in this country, with the exception of Pittsburg.”[200] In
1883 the Central was bankrupt with no immediate prospect of recovering
from its difficulties, and had therefore an incentive to accept any
arrangement by which interest on its obligations should be paid; while
Mr. Gowen, with misplaced confidence in his scheme of reorganization,
was ready to put fresh burdens on his road in the hope of future gain.
Rumors of a lease were abroad in 1882, and after the termination of the
Reading receivership the operation was pushed to a speedy conclusion.
The Reading undertook to assume all the obligations of the Central,
and to pay 6 per cent on its capital stock then outstanding, as well
as $18,000 annually for maintaining the corporate organization of the
lessor. In case any of the Central bonds should be retired, or rentals
or interest reduced, the rental to be paid by the Reading was likewise
to be reduced. The roadbed and rolling stock of the Central was to be
maintained undiminished, but if the Reading should make any additions
or improvements, or if from its own funds it should pay off any of
the Central’s obligations, it was to receive equivalent bonds with
interest not exceeding 6 per cent from the Central Company. The lease
was terminable on 60 days’ notice in case the lessee should fail at any
time to carry out its provisions.[201] This involved something more
than a nominal obligation. The net earnings of the Jersey Central in
1882 had been $5,091,072, while the sum due for rentals, interest, 6
per cent dividends, etc., had mounted up to $5,898,087, not including
payments on car trusts or certain contingent obligations. Broadly
speaking, the Reading proposed to guarantee 6 per cent on the stock of
a road which had failed because unable to meet its fixed charges; and
however great the ultimate advantages, it is apparent that the prospect
of a drain upon the Reading Company was real. In order to get the road
out of receivers’ hands, the Reading had further to take care of a
floating debt of $2,062,000, and to compromise with certain creditors
by settling back interest on their bonds. This was done, and on May
29, 1883, possession formally passed over. The same day was concluded
another arrangement, whereby the Central of New Jersey leased the
coal and railroad companies comprised in the Lehigh Coal & Navigation
Company for one-third of their gross receipts, and the Philadelphia
& Reading Railroad became liable for the faithful execution of the
contract. The Reading agreed that the Lehigh coal lands should be
developed _pari passu_ with its own, so that the product of the two
estates should be constantly as 28 to 72 until the Lehigh production
should reach 3,000,000 tons. The rental of the road was not in any year
to be less than $1,414,400, nor more than a sum rising from $1,728,700
before 1887 to $1,885,800 from 1887 to 1892, and $2,043,000 after 1892,
plus certain minor payments; and there was provision for arbitration of
any disputes which might arise.[202]
The year 1883 now seemed to find the Reading imbued with new life.
Earnings increased, both gross and net, fixed charges as reported
rose less rapidly, and the net profits for the year, or balance on
all operations, showed a threefold increase. “The company,” said Mr.
Gowen, “has now surmounted the difficulties of the last four eventful
years.”[203] The annual meeting in January was a genuine love-feast,
marked by the presentation of resolutions highly flattering to Mr.
Gowen. “We trust,” said one, “we thankfully appreciate your herculean
efforts in our behalf, in the face of unparalleled difficulties and
obstacles, in rescuing our property from bankruptcy against the
malignant and determined efforts of its enemies and conspirators to
foreclose and wreck it.” “As citizens of this great commonwealth,” said
another, “we beg to add our gratitude and admiration for your untiring,
brave, honest, and able devotion, which has preserved the Philadelphia
& Reading Company intact, and has fairly started it on a broader
career of usefulness.”[204] Not less extraordinary was the further
action of this harmonious meeting. In the first place, it authorized
the creation of a collateral trust loan of $12,000,000 for the purpose
of paying the floating debt, the balance due upon the purchase of
Central Railroad Company of New Jersey stock, and the retirement of the
outstanding income mortgage bonds. What, may be inquired, had become
of the deferred income bonds of which Mr. Gowen had been so proud,
and the $5,000,000 additional first series consols which with them
were to cover the floating debt, if a new collateral loan was needed
for the purpose for which they had been considered ample? As for the
purchase of Jersey Central shares, an account would require a chapter
in itself. The intent had been to secure more complete control of
this subsidiary road. The purchase had been made on margin in May. By
January, 1884, more funds were necessary to carry the stock; and as
the business depression grew acute, the Reading was obliged to seek a
time loan from Mr. Vanderbilt, and to pledge the purchased securities
as collateral therefor. When the loan matured Reading was no better off
than it had been before, and Vanderbilt, who seldom mixed philanthropy
with business, sold the stock. The original purchase had been at 78;
the prices obtained when the stock was thrown on the market ranged from
57 to 50, and the Reading lost the difference, besides those advantages
which it had expected to gain.
In the second place, the meeting proposed a dividend of 21 per cent
on the preferred stock, representing arrears due, and of 3 per cent
on the common; both cash, and to be paid in case the collateral loan
should succeed.[205] In order to give shareholders time to consider,
an adjournment was taken for two weeks, after which the dividend on
the preferred stock was approved, though that on the common was not.
It seems almost superfluous to insist upon the folly of this dividend.
The Reading had not, in reality, “surmounted the difficulties of the
last four eventful years.” Scarcely any of the benefits promised by Mr.
Gowen’s plan of reorganization had been secured; fixed charges had not
been reduced, because it had been found impossible to get creditors to
take new securities in exchange for the old, and equally impossible to
sell any considerable amount of the new securities for cash. While old
charges had remained unabated, new charges had been added through the
lease of the Jersey Central, new car trusts, and the like, and the very
gain in earnings which might have been construed as favorable was due
to increased mileage, and was not proportional to the growth of the
system.[206] A fitting sequel to Mr. Gowen’s words and acts was the
scrip payment for labor and supplies which took place in May, 1884, and
the accompanying fall in the prices of the company’s securities. On
June 2 the company again passed into receivers’ hands. The same judges
were applied to as in 1880, and the same receivers were appointed,
except that Mr. Gowen, who had given up the presidency of the company,
was replaced by Mr. George de Keim, his successor.[207]
The various creditors had now to do what should have been done before,
and, by lightening the charges upon the road, to put it in a position
where its solvency could be maintained. The chances for obtaining
radical action from the bondholders were somewhat brighter, since
even the most obstinate were being forced to realize that no halfway
measures would avail; and a reasonable solution was even thus early
hinted at in the suggestion that some of the bonds under which the road
was staggering should be replaced by stock. Nevertheless, we shall
find in this reorganization a slow working out of the requirements for
a plan, and a slow process of at least partial reconcilement to the
inevitable.
The receivers’ report was issued in October, but contained little
not known or suspected before. From November 30, 1883, to June
2, 1884, there had been a net loss in operation for the Railroad
Company of $2,322,282, and for the Coal & Iron Company of $1,049,702,
showing conclusively the condition of the companies. The total
bonded indebtedness was $94,613,042; a total to be compared with
the $78,101,894 of four years previous. The total floating debt
was $16,549,968 as compared with $10,254,766 at the beginning of
the previous receivership. Including the Central of New Jersey,
the total fixed charges for the Railroad and Coal & Iron Companies
were $18,241,051; a sum which certain offsets, however, reduced to
$16,584,732.[208]
The first suggestion for a reorganization came from a committee
primarily representing the general mortgage bondholders, though
including other interests as well. The chairman was Mr. Townsend
Whelen, and the committee may be taken to represent the views of the
management. “The present fixed charges of the company,” said Mr.
Whelen, “are in round numbers $16,650,000, while the earnings of the
past fiscal year are, in round numbers and after proper deductions,
$12,900,000. The objects sought to be accomplished by the committee are:
“(1) To reduce fixed charges to the limit of last year’s earnings;
“(2) To preserve the proper order of priorities of each class of
securities, so that no income applicable to any senior security that
remains unpaid can by any possibility be diverted to paying the
interest on a junior security;
“(3) To provide a method of paying the floating debt.”
The plan was, roughly, to leave the prior liens untouched, to fund
one-half the coupons upon the general mortgage for three years, and to
convert all of the other obligations into income bonds. Preferred stock
was to be changed from cumulative to non-cumulative; rents of leased
lines, including the Central of New Jersey, were to be reduced to the
amounts which the properties had earned; the canal leases were to be
reduced; the interest on some of the divisional coal land mortgages
was to be reduced, and on some was to be paid in full. In regard to
the floating debt the committee decided to postpone any attempt to
raise money for its extinction. If the bondholders should accept
the scaling down of their indebtedness, the company might have no
difficulty in procuring cash by a collateral loan; if this should prove
impossible, the duty of providing funds would devolve upon the junior
securities.[209] The committee found it impossible to prepare within
the short time at their disposal a complete plan of reorganization
with exact figures of present and proposed fixed charges; and it is
therefore impossible to ascertain how great was the saving which they
expected to secure.
The plan marks sufficiently well the advance which had been made since
the reorganization of 1880–3. The best that could then be imagined
had been the creation of a grand general mortgage for which the old
bondholders might, but mostly did not, exchange their holdings; while
now the very first suggestion endeavored to retain for all bondholders
a chance for the same return as before, and found the salvation of
the company in the transformance of certain bonds from mortgage to
debenture obligations. The general criticisms which may be made are
three: first, that it was unwise to defer all provision for the
floating debt; second, that the new income bonds might better have been
replaced by stock; and third, that the probable reduction in fixed
charges would have been insufficient. So far as the committee suggested
any action in relation to the floating debt, it favored a funding of
it. This funding might have been either into mortgage or into income
bonds: if the former, the fixed charges of the company would have been
increased, or else the other mortgage bondholders would have been
compelled to accept a lower rate of interest; if the latter, the volume
of securities of slight value would have been increased, or the junior
securities would have had to take less for their holdings. The action
taken would have gone far to determine what classes of securities
would assent, while in the absence of definite declaration it was on
the whole likely that all classes would hold off. As for the income
bonds, it is in general true that they are an unsatisfactory sort of
security, and likely to hinder the legitimate increase of capital. Most
important was the question of fixed charges. It will be remembered that
of the first and second series 5s of the previous reorganization only
$23,500,000 had been intended for immediate sale, and that of these but
a portion had been disposed of; and yet these consols were the only
securities the nature of which was really changed by the Whelen plan.
Interest had been optional before on the income bonds, the convertible
bonds, the convertible adjustment scrip, debenture and deferred income
bonds; interest was not made optional on the general mortgage or prior
liens. The result would not have been, in spite of the reduction in
rents and the scaling of the divisional coal mortgages, any sufficient
lessening of the fixed requirements. This fact was, moreover,
perceived. The board of managers, to whom the scheme was reported,
concluded a favorable opinion with the declaration, “to conclude, we
are satisfied that the large economies already in operation, with those
which are still being introduced, should be regarded as a margin to
meet adverse contingencies.... That the revenue we reckon on, though
reasonably certain under such reorganization, will surely not be
realized in case the property should be torn asunder by foreclosure
sale.”[210] In other words they relied, much as Mr. Gowen had done
two years before, on a subsequent increase in earnings to ensure the
solvency of the company. A final objection made at the time was that
the plan asked too little of the junior securities.
The Whelen plan was reported to the general managers’ committee, and
was approved by them. Some slight modifications were made, and a large
number of signatures was secured. Opposition was not slow to spring
up. In February a meeting of general mortgage bondholders elected a
committee, known as the Bartol Committee, to prepare a plan more suited
to their interests. This body conferred with the Whelen Committee, and
two members from each were selected to construct a new reorganization
plan.[211] In March it reported to its constituents that it had made
all the concessions which were possible without sacrificing the
interests of the general mortgage bondholders, and that in spite of
this, the negotiations had not proved successful.[212]
In April, ten months after the beginning of the receivership, the
Reading managers evolved a plan for dealing with the floating debt.
Holders were to agree to accept renewals at intervals of three months
for three years, with interest at the rate of 6 per cent, paid at the
time of each renewal, and to hold the collateral pledged as security
until the whole of the debt should have been discharged. In case the
Philadelphia & Reading should fail at any time punctually to pay the
interest on any of the obligations agreed to be renewed, or should
fail to cause the same to be renewed, or in case nine-tenths of the
floating-debt holders should not assent to the plan, or in case an
adverse judicial sale should be made, the obligation to accept further
renewals should immediately cease.[213] The scheme deservedly fell
through. Creditors were asked to tie up their assets for three years,
with no concession in return except the payment of interest quarterly
in advance; while the unofficial suggestion that the Reading pay ¼ per
cent commission on each renewal was felt to be too expensive for the
company to entertain.
The following month the Whelen and Bartol committees came out with
a new edition of the Whelen plan, which introduced an assessment on
the junior bonds and stock, but preserved the same method of dealing
with the old securities as before.[214] Assent to the plan was to be
on the condition that sufficient money should be raised to pay off
the floating debt. Interest on such debt was not to have priority of
payment over interest on the general mortgage for longer than three
years; and during those three years the preference was to be limited to
that part of the floating debt secured by collateral yielding income
to cover interest, or important for other reasons to be retained.
There were to be seven reorganization trustees to receive the assents
of parties in interest, and to receive and hold the securities and
assessments thereon pending reorganization, and when accomplished to
return such securities duly stamped to their respective owners.[215]
The trustees were further to decide whether the assents to the plan in
question should be considered adequate, and if they should conclude
on or before May 1, 1886, by a vote of six of their number, that the
assents were not sufficient, they were to call into a council the
managers of the Philadelphia & Reading Railroad Company, the receivers
of that company, and the committees of the general mortgage (Bartol)
and income mortgage bondholders; and this council, by a vote of four
of the five interests therein represented, was to formulate a plan of
reorganization adapted to the circumstances, and involving no larger
contribution in money to be paid than under the plan as then modified;
and under such power the trustees were to proceed to foreclose under
such mortgage or mortgages as they might deem advisable.[216] The
plan was obviously a compromise whereby the Whelen Committee clung to
the main lines of its previous proposition, and the Bartol Committee
secured modifications which benefited the general mortgage at the
expense of the junior securities. Criticisms which applied to the
earlier plan largely apply to this also; but it is to be noticed that
at last the idea of funding the floating debt was abandoned for the
sounder scheme of paying it off in cash. The reorganization trustees
were an innovation, but were destined to be a useful one. On the whole
the compromise was a step forward; and yet it was not more successful
in obtaining assents than the scheme which had preceded it. Although
the directors approved it, as was to have been expected, the bulk of
the bondholders held off.
Matters now went on in much the same old way. The seven reorganization
trustees, representing the principal interests concerned, held meeting
after meeting with no apparent result. The courts became impatient;
bondholders clamored for their interest; but after the failure of
the earlier plan the way out seemed harder and harder to find. In
September, 1885, Mr. E. Dunbar Lockwood addressed an open letter to
Mr. John B. Garrett, one of the trustees, in which the following points
were made:
(1) “The trustees should recognize promptly and unequivocally that the
Reading Railroad is bankrupt, and has not sufficient available assets
to meet its obligations.
(2) “Two dollars of obligations cannot be paid with one dollar and a
half of assets, and the sooner all persons interested ... recognize
this fact, and agree to scale both principal and interest sufficient to
meet the obligations of the company and put it upon a strong financial
basis, with sufficient working capital to enable it to conduct its
future business economically, the better it will be for all concerned.
(3) “The trustees should look only at the facts as they exist ...
and while endeavoring to rehabilitate the road, also bring it into
harmonious relations with its adversaries.
(4) “The trustees should consider the problem ... precisely as business
men consider the matter of the settlement of a bankrupt firm. The
question at once presents itself, is it best that the company should
continue in business, or should it be wound up?”[217]
In his reply Mr. Garrett pointed out the difficulties to be overcome,
and concluded by saying that in his judgment no reorganization would be
final that did not ensure the establishment of credit, the entrusting
of the management to an interest having an actual equity in the
property, and just expectation of pecuniary return from it, and harmony
with competing lines, coupled with due regard for the rights of the
public.[218]
The reorganization trustees by this time appeared discouraged, and
the following month called a conference of creditors at which a
resolution was passed looking toward foreclosure. In November a suit
was actually begun, supplementary to a similar suit instituted a year
before. It was during the pendency of these proceedings that the plan
of reorganization devised by the reorganization trustees themselves
came out, and marked a third effort to rehabilitate the road. The first
plan proposed, it will be remembered, had suggested the conversion
of all of the junior securities into income bonds, plus a funding of
one-half the general mortgage coupons for three years; and the second
had introduced an assessment on the junior bonds and stock. This third
plan, while preserving the assessment, and making it more severe,
added a provision for the conversion of general mortgage liens into
3 per cent bonds, and of junior liens into preferred stock. For the
ultimate retirement of the prior liens a new fifty-year 5 per cent
mortgage was to be created; for both the prior and general mortgage
liens the difference between the return from the old bonds and that
from the new was to be adjusted by the use of 5 per cent preferred
stock, so that bondholders in prosperous times would not find their
incomes diminished. Preferred stock was to be of two kinds, of which
the first was to go to satisfy the general mortgage bondholders and
for assessments, while the second was to exchange at varying rates for
the junior securities above the second series 5s. Everything below the
second series 5s was to receive common stock instead. Under the scheme
the company’s obligations would have been reduced to $60,731,000, of
which $33,400,000 prior liens and $24,686,000 new 3 per cents; while
its stock would have been increased to the very considerable figure
of $96,516,282. The total cash assessments, if all paid, would have
amounted to $13,506,620; and, joined with the balance of stock, were
expected to be sufficient to cover the floating debt. The new fixed
charges were to be $7,064,830.[219]
Various points in the plan deserve mention. For the first time since
the failure of 1880 it was proposed to use two kinds of securities,
of which interest on one should be fixed, and interest on the other
optional. For the retirement of senior bonds President Bond had
suggested a bond on which half the interest should be fixed and the
other half variable, but his plan had been inferior in flexibility to
the one now proposed. The junior securities received less favorable
treatment than before; but the general mortgage itself did not escape,
and was required to accept 3 per cent plus preferred stock instead of
a mere funding of its coupons. The increase in the amount of stock was
very great, and naturally so, in view of the new uses to which it was
put.[220] Assessments were made heavier, and for the first time the
management frankly excluded from their calculations the Central of New
Jersey, foreshadowing the abandonment of the lease. To repeat, the
first two plans described had developed the idea of an assessment and
the conversion of the junior bonds into income obligations. To this
the reorganization trustees added the use of preferred stock, and, more
important still, the combination of two securities, respectively with
obligatory and optional liens, which were to be given for the general
mortgage bonds. In principle the result was excellent, in practice the
degree of reduction was somewhat too slight from the point of view of
the company, although it seemed more than the creditors were willing
to accept. The general mortgage bondholders in particular were loud in
their protest. “The truth of the matter is this,” said one of them,
“while the plan of the trustees has much to commend it, and is based
on an excellent theory, it fails to cover the whole ground, and falls
terribly short of meeting our reasonable demands.” Thus, although the
Bartol and Whelen committees accepted the plan, matters again stood
still for a while, while the financial powers talked and wrote and
threshed the question out.
In February, 1886, the reorganization trustees received a letter signed
by J. Pierpont Morgan and John Lowber Welsh, which is important enough
to be quoted in full.
“A syndicate has been formed,” said these gentlemen, “composed of
leading bankers and capitalists here and in Europe, together with
corporations or their representatives controlling large transportation
and coal producing interests, who have agreed to subscribe in the
aggregate $15,000,000 for the purpose of aiding in the reorganization
of the Philadelphia & Reading Railroad Company and its affiliated
lines. The syndicate has no commitment of any kind with any other
railroads or corporations upon this subject beyond securing a
management in harmony with the principle that capital invested in
internal improvements should be so managed as to result in a fair
return in the way of interest and dividends. Their object and purpose
is to secure the reorganization on business principles for the
Philadelphia & Reading bondholders, stockholders, and creditors without
prejudice to the relative position of either, and in their interest
only.
“To do this effectually there must be suitable arrangements made
with the Pennsylvania Railroad and other kindred coal interests for
harmonious relations, in order that suitable prices may be obtained for
coal produced and shipped. These objects we shall endeavor to secure,
and we now enclose you a copy of a correspondence with Mr. Roberts,
president of the Pennsylvania Railroad, on these subjects, which seems
to us sufficient to warrant the syndicate in placing reliance upon the
assurance given by that company.
“As the reorganization shall proceed our effort and expectation will be
to bring about satisfactory arrangements with all the anthracite coal
roads, and also the trunk lines, which shall secure to the Philadelphia
& Reading Railroad Company, when reorganized, its just share of the
business at remunerative rates.
“The syndicate have believed that your plan was, in the main, suitable
for the purpose of reorganization, and that your board was composed of
gentlemen who would command the confidence of all parties in interest.
“They therefore prefer to make an arrangement with you and to aid you
in working out a plan.
“But they also think that there should be certain modifications as to
your organization, and also as to your plan, as follows:
“(1) The syndicate would wish two persons, to be named by them, added
to your board.
“(2) Your plan should be made so flexible that it could be modified
hereafter in such respects as may be found necessary to success.
“(3) There should be an executive committee of five to take charge
of the foreclosure proceedings, the purchase of the property, the
organization of the new company, and generally of whatever may properly
appertain to reconstruction under the plan. There should be five voting
trustees who should vote on the stock when deposited under the plan,
and to whom the power of voting on the stock in the reorganized company
should be confided for five years after reorganization. These two
committees should be composed of parties satisfactory to the syndicate
and the trustees, and shall fill their own vacancies. But in case the
syndicate and trustees cannot agree upon the five, then, and in that
case, three shall be named by the syndicate and two by the trustees,
and each class shall fill any vacancy occurring in its own number.
“(4) The compensation to be allowed to the syndicate shall be 5 per
cent on the amount of the syndicate capital.
“(5) The syndicate to be allowed interest at the rate of 6 per cent
upon any amount they may advance the company in the course of the
process of foreclosure and reorganization.
“(6) Proper provision must be made for securing to the syndicate the
refunding of the money they may advance on account of interest not
exceeding 4 per cent per annum on the general mortgage bonds during
reconstruction, and also for the substitution of the syndicate in the
place of any creditor or stockholder who may abandon his holding and
refuse to pay his assessment, it being the purpose of the syndicate to
pay 4 per cent per annum interest on the general mortgage bonds during
reconstruction, and also to pay the assessments of such parties as may
abandon their holdings or right to take the securities to which they
may be entitled under the plan.”[221]
The correspondence with Mr. Roberts referred to contained the
assurance that the Pennsylvania Company would not hold aloof from
an understanding with the Reading either in respect to the coal or
transportation business, and would, moreover, “cordially unite in the
arbitration of all differences.”[222] This could not, of course, force
distasteful terms upon the Reading bondholders, but it could and did
supply sufficient capital to ensure the success of any plan adopted,
and it infused confidence and vigor into the action of the nearly
discouraged reorganization trustees. The executive committee which they
were to name was perhaps a useful tool, but the suggestion of a voting
trust was a genuine contribution, and aided powerfully in securing
necessary backing for future schemes.
It is to be remarked that the syndicate appeared with no panacea,
was without a plan of its own, and at first merely adopted that of
the trustees, with a few modifications which it thought advisable;
but that by March, 1886, it had so worked over the proposals of the
reorganization trustees as to make in many respects a new plan;
which retained the assessments, likewise the combination of fixed
and optional charges and the use of preferred stock, but reserved
4 per cent bonds against prior liens, gave 4 per cent bonds with
preferred stock in exchange for the general mortgage instead of 3 per
cents, and created four classes of stock instead of three. Somewhat
more in detail this plan was as follows: The Reading was to issue a
new 4 per cent general mortgage for $100,000,000, and four kinds of
stock: a preferred, income, consolidated, and common. Of the general
mortgage $9,792,000 were to be for future use in the improvement
of the railway; of the remainder $38,422,000 were to be reserved
against prior liens; $24,686,000 were to exchange for the general
mortgage if such should not be paid off in cash; $15,000,000 were
to take up shares or bonds of leased lines, and $10,000,000 were to
exchange for or to redeem Coal & Iron Company divisional mortgages.
The total amount issued was to be $90,208,000, and no mortgage in
addition was to be placed on the Reading properties for five years
after the reorganization without the consent of a majority of the
preferred stockholders. Of the different classes of new stock the
preferred was to be given dividends up to 5 per cent non-cumulative,
and then the income and consolidated stocks were to have up to 5 per
cent non-cumulative. Generally speaking, the preferred stock was to
go for assessments; the income stock for the income mortgage and
convertible adjustment scrip; the consolidated stock for the first
series 5s and one-quarter of the principal of the second series
5s; the common stock for the rest of the second series 5s, for the
convertible debentures, deferred income bonds, and for old preferred
and common stock. New fixed charges were estimated at $6,971,687, which
dividends on the preferred stock would raise to $8,198,636. There was
to be a voting trust for five years, consisting of J. Lowber Welsh,
J. P. Morgan, Henry Lewis, George F. Baer, and Robert H. Sayre; and
a syndicate was to advance necessary expenditures and disbursements
pending reorganization, including unpaid assessments. The syndicate
compensation was to be 6 per cent on its advances, plus a commission
of 5 per cent upon its $15,000,000 of subscribed capital. The property
was to be sold at foreclosure sale, and a new company was to be
organized.[223]
A comparison of this with the plan of the reorganization trustees at
first announced will show the changes made. Nothing of value which
previous reorganizations had worked out was cast aside. The fixed
interest allowed the general mortgage bondholders was raised in the
hope that they might support the plan, and more care was taken to
follow the order of priority in the advantages offered to the various
classes of junior securityholders; an end to which the four classes
of stock were admirably adapted. The voting trust was altogether new,
and was doubtless intended to ensure a policy in accord with the
syndicate’s wishes for a series of years, and to prevent a renewal
of the vagaries of Mr. Gowen’s administration. The provision for
foreclosure was to be expected in view of the extreme difficulty of
obtaining the assents of so many conflicting interests; but with a
net revenue of $12,026,309 (both companies) and fixed charges of
$6,971,687, the task of maintaining the solvency of the companies in
future did not seem an impossible one.
In opposition to the plan the Lockwood Committee urged that the scheme
was unjust to certain classes of bonds; that it was cumbersome,
expensive, conferred power on the trustees which should have been
reserved for the direction of the new company, and that the reserved
powers to change any part of the plan, and the uncertainties connected
with the settlements under it, involved risks which creditors should
not accept.[224] The objections were not weighty. If the Lockwood or
any other committee had proved itself able to formulate and carry
through a plan, or if the syndicate arrangement had been proposed at
the very beginning of the receivership, bondholders might fairly have
criticised its expense. In point of fact numerous attempts to reconcile
divergent interests had failed, and what with Messrs. Lockwood, Bartol,
Whelen, Gowen, and their respective followings, the future offered no
more promising result. Meanwhile bondholders were going without their
interest, and costs of the receivership were mounting up; so that a
greater expense than that of which Mr. Lockwood complained was being
incurred by delay. As for the general mortgage bondholders, they were
given a chance at their old interest whenever the road should earn
it, and could fairly ask no more; while that it was inequitable to
ask income bondholders to accept a reduction to $50 in their annual
interest, or holders of the first series 5s to wait for their interest
until liens before theirs had been satisfied, are conclusions to which
few will agree.
In April Messrs. Whelen and William H. Kemble, representing the
Reading consolidated mortgage bondholders, announced that they had
determined not to accept the syndicate plan. Even before this Mr.
Gowen announced that he was organizing a syndicate and would soon be
able to pay off overdue coupons on the general mortgage bonds, and
to prevent any foreclosure under that mortgage.[225] It is scarcely
necessary to say that he had a plan of his own. He proposed to issue
$100,000,000 4 per cent 70-year consolidated mortgage bonds much as did
the syndicate, part of which should go to redeem the general mortgage
and the floating debt; but second to this he suggested a cumulative 4
per cent first preferred income bond, to take the place of the income
and consolidated stock under the syndicate plan, and to be exchanged
for the first series 5s, a portion of the second series 5s, and some
of the leased canal securities; while finally he planned a second
preferred cumulative 4 per cent income bond, to be exchanged for those
securities down to the deferred income bonds, which under the syndicate
scheme were to receive common stock. The surplus of income offered by
the old general mortgage was to be made good by first preference bonds.
The existing preferred and common stocks were to remain as they were,
and the deferred income obligations were to remain untouched. Finally,
the New Jersey Central was to be retained in friendly alliance, either
under a modified lease at a rental equal to earnings, or under a
special traffic contract.
A comparison of this with the syndicate plan shows that Mr. Gowen gave
up the idea of an assessment; provided for the floating debt through
first preference bonds; swept away three of the four classes of stock,
replacing them by two kinds of income bonds; and retained the deferred
income bonds which the syndicate proposed to retire. His plan was to be
carried through without foreclosure, but outside of this its advantages
are rather difficult to ascertain. The abandonment of the assessment
was distinctly bad; the retention of the deferred income issue was also
bad; the reduction in the number of kinds of securities tended towards
simplicity, but made impossible the nice distinction of priority on
which the syndicate had relied; while even the replacement of stock by
income bonds must be condemned, substituting as it did an obligation
without any very distinct character of its own for a stock which
represented frankly only a share in the profits of the enterprise.
These things were realized, and the plan received no serious support;
but as every plan so far proposed contributed something to the final
product, so Mr. Gowen’s income bonds and his aversion to foreclosure
were not without influence upon the scheme which ultimately attained
success.
The next few months saw active hostilities between Mr. Gowen and the
syndicate; the former taking the position that he would never consent
to foreclosure, nor to the placing of the property for five years under
the management of a board of trustees named by his adversaries.[226]
To Mr. Garrett, chairman of the reconstruction trustees, he wrote
suggesting that the board should substitute his plan for that of the
syndicate, and that seven reconstruction trustees should be appointed
by the managers of the company to carry it through. “Upon this being
done,” said he, “I will engage that the plan shall be underwritten by
an association of capital sufficient for the purpose of paying off all
the general mortgage bonds which do not voluntarily accept the new
securities provided by the plan, and I will agree that the financial
responsibility of these subscribers to this fund shall be determined by
the presidents of the Bank of North America, the Farmers’ & Mechanics’
National Bank, the Pennsylvania Company for Insurance of Lives, etc.,
and the Union Trust Company....”[227] Mr. Garrett naturally refused.
As in many cases before, the struggle ended in a compromise. The
new agreement was as follows: The syndicate was to be enlarged by
$4,000,000 additional subscriptions, and the reconstruction trustees
increased to thirteen by the addition of certain friends of Mr. Gowen,
one of whom was also to be given place upon the executive committee.
The syndicate plan was to be carried through without foreclosure,
providing sufficient assents could be obtained, and was to be modified
by the substitution of first, second, and third 4 per cent income bonds
for preferred, income, and consolidated 5 per cent stock. Dividends
on the bonds, like those on the stock, were to be payable from net
earnings only; but net earnings were defined as the profits derived
from all sources after paying operating expenses, taxes, and existing
rentals, guarantees and interest charges, _but not fixed charges of the
same sort subsequently created_. All third preference bonds issued for
convertible bonds were to have the right to be converted into common
stock; and the company was to have the privilege of increasing the
issue, subject for five years to the approval of the voting trustees.
As finally worked out, the first preference bonds were to be given for
assessments; the second preference for all securities which had been
promised income or consolidated stock; and the third preference for the
second series 5s, convertible and debenture bonds, and preferred stock
to which common stock had before been allotted. Somewhat more emphasis
was laid on the possibility of paying off the general mortgage. It was
proposed to reduce the aggregate of rentals and guarantees (exclusive
of the Central of New Jersey, the Schuylkill Navigation Company,
and the Susquehanna Canal Company) to an annual charge of less than
$2,350,000 by direct negotiation with the companies affected. And to
deal directly with the three companies above named upon the basis of a
continuance of their respective leases at rentals involving no fixed
liability beyond the earning power of the leased line, or on the basis
of a surrender of the said leases, and the cancellation of the traffic
agreement with the Schuylkill Navigation Company for a consideration.
The voting trust was to be composed of three representatives of the
syndicate and one friend of Mr. Gowen, which four should elect a
fifth who should be satisfactory both to the syndicate and to the
reconstruction trustees. A united effort was to be made by the company,
the reconstruction trustees, and the syndicate to secure the immediate
appointment of Mr. Austin Corbin as an additional receiver; and, if Mr.
Corbin would take the position and legally qualify himself to fill it,
it was understood that the presidency of the company would be offered
to him. The other provisions of the syndicate plan were to remain
unchanged.[228]
The total capital and charges under the plan were to be as follows:
_Est’d Capital_ _Fixed Charges_
Prior mortgage liens, $85,807,920 $4,233,055
Annual rental of leased lines 2,350,000
not to exceed ----------
$6,583,055
First preference income mortgage, 24,410,822 1,220,542
------------ ----------
$110,218,742 $7,803,597
Second preference income mortgage, 26,140,518 1,307,026
------------ ----------
$136,359,260 $9,110,623
Third preference income mortgage, 14,956,016 747,800
------------ ----------
$151,315,276 $9,858,423
Common stock, 38,369,076
Deferred incomes, 6,225,327
$20,751,090 at issue price, ------------
$195,909,679
We have now the reorganization in its final shape, and it will be
interesting to review briefly the gradual way in which this shape was
fashioned. With the company plunged anew into bankruptcy after a
reorganization insufficient to afford any genuine relief, the proposal
was made to fund one-half the general mortgage coupons for three years
and to convert all junior claims into liens on income. This scheme
failed because plainly inadequate to meet the needs of the situation,
and a modified version was presented providing for an assessment with
which to pay the floating debt. The assessment was approved, but not
the plan, and an ensuing scheme supplied an altogether new method
of treatment, whereby on the one hand the assessment was made more
heavy, and on the other two classes of preferred stock were proposed,
with one issue of bonds at 3 per cent. This plan failed, not so much
because of its inadequacy, although it was inadequate, but because
general mortgage bondholders felt that a 3 per cent bond was less than
they could reasonably expect for their holdings, and insisted on a
security with a higher obligatory rate of interest. The next plan took
note of these objections: it raised the interest on the bonds which it
proposed from 3 to 4 per cent; and in the endeavor to please the junior
bondholders as well, created four classes of preferred stock, by means
of which the relative priority of different issues was carefully and
completely recognized. Assessments were retained, and a guarantee by
a syndicate and a voting trust for five years was suggested. In the
discussion that followed, a new scheme was introduced, which replaced
the preferred stock by two classes of income bonds, and forced the
managers to realize the desire of the old bondholders for some new
security with at least the name of bond. As a result, the syndicate
which had fathered the previous plan consented to substitute for
three of their classes of stock first, second, and third preference
bonds. Meanwhile the fixed charges estimated for the successive plans
steadily decreased. The first looked for $12,911,000, or $14,266,051
as variously reckoned; the second for $14,143,384, or, deducting the
Jersey Central, for $8,223,177; the third for $7,064,830; the fourth
for $6,971,687; and the sixth for $6,583,055. Thus each plan took over
what was most satisfactory in its predecessor; and there was on the one
hand a steady decrease in the fixed charges proposed, and on the other
a continuous effort to discover some plan which might be satisfactory
to all concerned.
That the compromise plan last mentioned succeeded was in part due to
the feeling of all contending parties that concessions must be made;
it was due also to endorsement by the leaders of the more important
interests; and, finally, to an appreciation that the plan was after
all a good one, reducing largely the fixed charges which the company
would have to pay, while depriving no one of a return which, under the
circumstances, he could fairly expect to receive. Mr. Corbin proved
willing to undertake the new responsibilities put upon him. He was
therefore appointed receiver in October, and elected president in the
January following.
Nevertheless, it would be a mistake to suppose that the plan was
unanimously accepted from the start. The Lockwood Committee of general
mortgage bondholders were prompt in their disapproval, pronouncing it
“unjust, uncertain, and indefinite”; saying that reorganization under
it would be unduly expensive, and that it was more objectionable than
the plans which had preceded it.[229] Equally decided was a small
group of capitalists which held a majority of the first series 5s
outstanding, the members of which were said to have agreed to hold
their bonds and to abide the result.[230] The original time limit for
deposits expired on March 1, 1887; it was then extended to March 15,
and again to March 31, and deposits of $110,409,464 out of a total of
$117,972,859 were secured. By October certain other bondholders had
been induced to come in, and the trustees declared the plan operative.
Holders of $3,348,000 of first series 5s stayed out, and forced an
arrangement by which they were practically paid off in cash.[231]
Arrangements were made with some of the subsidiary Reading lines, but
the lease of the Central of New Jersey was not renewed. Only odds
and ends now remained to be cleared up, and all through the rest of
the year the managers were busy paying off receivers’ certificates,
floating debt, overdue interest, etc. On January 1, 1888, without
formalities, the Reading passed out of receivers’ hands and into the
control of the stockholders.